10-Q 1 valeantq32017.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-14956
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
British Columbia, Canada 
(State or other jurisdiction of
incorporation or organization)
98-0448205 
(I.R.S. Employer Identification No.)
2150 St. Elzéar Blvd. West, Laval, Québec 
(Address of principal executive offices)
H7L 4A8 
(Zip Code)
(514) 744-6792
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer 
o
Non-accelerated filer
(Do not check if a smaller 
reporting company)
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common shares, no par value — 348,591,928 shares outstanding as of November 2, 2017.





VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
INDEX
Part I.
Financial Information
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II.
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


i



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
Introductory Note
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (this “Form 10-Q”) to the “Company”, “we”, “us”, “our” or similar words or phrases are to Valeant Pharmaceuticals International, Inc. and its subsidiaries, taken together. In this Form 10-Q, references to “$” or “USD” are to United States (“U.S.”) dollars, references to “€” are to euros and references to CAD are to Canadian dollars. Unless otherwise indicated, the statistical and financial data contained in this Form 10-Q are presented as of September 30, 2017.
Forward-Looking Statements
Caution regarding forward-looking information and statements and “Safe-Harbor” statements under the U.S. Private Securities Litigation Reform Act of 1995:
To the extent any statements made in this Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities legislation (collectively, “forward-looking statements”).
These forward-looking statements relate to, among other things: our business strategy, business plans and prospects, forecasts and changes thereto, product pipeline, prospective products or product approvals, product development and distribution plans, the timing of product launches, the timing of development activities, anticipated or future research and development expenditures, future performance or results of current and anticipated products, our liquidity and our ability to satisfy our debt maturities as they become due, our ability to reduce debt levels, our anticipated cash requirements, the impact of our distribution, fulfillment and other third party arrangements, proposed pricing actions, the anticipated timing of completion of our pending divestitures, anticipated use of proceeds for certain of our divestitures, exposure to foreign currency exchange rate changes and interest rate changes, the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings, general market conditions, our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes, our ability to meet the financial and other covenants contained in our Third Amended and Restated Credit and Guaranty Agreement, as amended (the "Credit Agreement") and senior note indentures, potential cost savings programs we may initiate and the impact of such programs, and our impairment assessments, including the assumptions used therein and the results thereof.
Forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “should”, “target”, “potential”, “opportunity”, “tentative”, “positioning”, “designed”, “create”, “predict”, “project”, “forecast”, “seek”, “ongoing”, “increase”, or “upside” and variations or other similar expressions. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have indicated above certain of these statements set out herein, all of the statements in this Form 10-Q that contain forward-looking statements are qualified by these cautionary statements. These statements are based upon the current expectations and beliefs of management. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding the items outlined above. Actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:
the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our distribution, marketing, pricing, disclosure and accounting practices (including with respect to our former relationship with Philidor Rx Services, LLC ("Philidor")), including pending investigations by the U.S. Attorney's Office for the District of Massachusetts, the U.S. Attorney's Office for the Southern District of New York and the State of North Carolina Department of Justice, the pending investigations by the U.S. Securities and Exchange Commission (the “SEC”) of the Company, the request for documents and information received by the Company from the Autorité des marchés financiers (the “AMF”) (the Company’s principal securities regulator in Canada), the pending investigation by the California Department of Insurance, a number of pending putative securities class action litigations in the U.S. (including related opt-out actions, including the recently filed securities and RICO claims by Lord Abbett)

ii



and Canada and purported class actions under the federal RICO statute and other claims, investigations or proceedings that may be initiated or that may be asserted;
the impact of the changes in and reorganizations to our business structure, including changes to our operating and reportable segments;
the effectiveness of the measures implemented to remediate the material weaknesses in our internal control over financial reporting that were identified by the Company, our deficient control environment and the contributing factors leading to the misstatement of our previously issued results and the impact such measures may have on the Company and our businesses;
potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the recent public scrutiny of our distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor, including any claims, proceedings, investigations and liabilities we may face as a result of any alleged wrongdoing by Philidor and/or its management and/or employees;
the current scrutiny of our business practices including with respect to pricing (including the investigations by the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York, and the State of North Carolina Department of Justice) and any pricing controls or price adjustments that may be sought or imposed on our products as a result thereof;
pricing decisions that we have implemented, or may in the future elect to implement, whether as a result of recent scrutiny or otherwise, such as the decision of the Company to take no further price increases on our Nitropress® and Isuprel® products and to implement an enhanced rebate program for such products, our decision on the price of our Siliq™ product, the Patient Access and Pricing Committee’s commitment that the average annual price increase for our prescription pharmaceutical products will be set at no greater than single digits and below the 5-year weighted average of the increases within the branded biopharmaceutical industry or any future pricing actions we may take following review by our Patient Access and Pricing Committee (which is responsible for the pricing of our drugs);
legislative or policy efforts, including those that may be introduced and passed by the U.S. Congress, designed to reduce patient out-of-pocket costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions);
ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the "FDA") and the results thereof;
any default under the terms of our senior notes indentures or Credit Agreement and our ability, if any, to cure or obtain waivers of such default;
any delay in the filing of any future financial statements or other filings and any default under the terms of our senior notes indentures or Credit Agreement as a result of such delays;
our substantial debt (and potential additional future indebtedness) and current and future debt service obligations, our ability to reduce our outstanding debt levels in accordance with our stated intention and the resulting impact on our financial condition, cash flows and results of operations;
our ability to meet the financial and other covenants contained in our Credit Agreement, indentures and other current or future debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, prohibitions on incurring additional debt if certain financial covenants are not met, limitations on the amount of additional debt we are able to incur where not prohibited, and restrictions on our ability to make certain investments and other restricted payments;
any further downgrade by rating agencies in our credit ratings, which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances;
any reductions in, or changes in the assumptions used in, our forecasts for fiscal year 2017 or beyond, which could lead to, among other things, (i) a failure to meet the financial and/or other covenants contained in our Credit Agreement and/or indentures, and/or (ii) impairment in the goodwill associated with certain of our reporting units (including our Salix reporting unit) or impairment charges related to certain of our products or other intangible assets, which impairments could be material;

iii



changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units or impairment charges related to certain of our products or other intangible assets;
the pending and additional divestitures of certain of our assets or businesses and our ability to successfully complete any such divestitures on commercially reasonable terms and on a timely basis, or at all, and the impact of any such pending or future divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on sale, including any resultant write-downs of goodwill, or any adverse tax consequences suffered as a result of any such divestitures;
our shift in focus to much lower business development activity through acquisitions for the foreseeable future as we focus on reducing our outstanding debt levels and as a result of the restrictions imposed by our Credit Agreement that restrict us from, among other things, making acquisitions over an aggregate threshold (subject to certain exceptions) and from incurring debt to finance such acquisitions, until we achieve a specified leverage ratio;
the uncertainties associated with the acquisition and launch of new products (such as our Siliq™ product), including, but not limited to, our ability to provide the time, resources, expertise and costs required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges;
our ability to retain, motivate and recruit executives and other key employees, including subsequent to retention payments being paid out and as a result of the reputational challenges we face and may continue to face;
our ability to implement effective succession planning for our executives and key employees;
the challenges and difficulties associated with managing a large complex business, which has, in the past, grown rapidly;
our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;
our ability to effectively operate, stabilize and grow our businesses in light of the challenges that the Company currently faces, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our pricing, distribution and other practices, reputational harm and limitations on the way we conduct business imposed by the covenants in our Credit Agreement, indentures and the agreements governing our other indebtedness;
the success of our fulfillment arrangements with Walgreen Co. ("Walgreens"), including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, pharmacy benefit managers ("PBMs"), third party payors and governmental agencies), the continued compliance of such arrangements with applicable laws, and our ability to successfully negotiate any improvements to our arrangements with Walgreens;
the extent to which our products are reimbursed by government authorities, PBMs and other third party payors; the impact our distribution, pricing and other practices (including as it relates to our former relationship with Philidor, any alleged wrongdoing by Philidor and our current relationship with Walgreens) may have on the decisions of such government authorities, PBMs and other third party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products;
the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith;
our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries, including the impact on such matters of the proposals published by the Organization for Economic Co-operation and Development ("OECD") respecting base erosion and profit shifting ("BEPS") and various corporate tax reform proposals being considered in the U.S.;
our recent shift in business strategy as we are seeking to sell a variety of assets, some of which may be material and/or transformative;
the actions of our third party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor;

iv



the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations);
adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in the countries in which we do business (such as the current or recent instability in Brazil, Russia, Ukraine, Argentina, Egypt, certain other countries in Africa and the Middle East, the devaluation of the Egyptian pound, and the adverse economic impact and related uncertainty caused by the United Kingdom's decision to leave the European Union (Brexit));
our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property;
the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights;
if permitted under our Credit Agreement, and to the extent we elect to resume business development activities through acquisitions, our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis;
factors relating to the acquisition and integration of the companies, businesses and products that have been acquired by the Company and that may in the future be acquired by the Company (if permitted under our Credit Agreement and to the extent we elect to resume business development activities through acquisitions), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, the risks associated with the acquired companies, businesses and products and our ability to achieve the anticipated benefits and synergies from such acquisitions and integrations, including as a result of cost-rationalization and integration initiatives. Factors impacting the achievement of anticipated benefits and synergies may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions;
the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, reviews and regulatory proceedings against us or relating to us and settlements thereof;
our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays;
the disruption of delivery of our products and the routine flow of manufactured goods;
economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;
interest rate risks associated with our floating rate debt borrowings;
our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our arrangements with Walgreens;
our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements;
the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market;
the mandatory or voluntary recall or withdrawal of our products from the market and the costs associated therewith;
the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third party insurance or self-insurance;
the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings

v



and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others;
the results of continuing safety and efficacy studies by industry and government agencies;
the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as other factors impacting the commercial success of our products (such as our Siliq product), which could lead to material impairment charges;
the results of management reviews of our research and development portfolio (including following the receipt of clinical results or feedback from the FDA or other regulatory authorities), which could result in terminations of specific projects which, in turn, could lead to material impairment charges;
the seasonality of sales of certain of our products;
declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control;
compliance by the Company or our third party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations;
the impacts of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”) and potential repeal or amendment thereof and other legislative and regulatory healthcare reforms in the countries in which we operate, including with respect to recent government inquiries on pricing;
the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance that apply to the Company and its business and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products;
the impact of changes in federal laws and policy under consideration by the new administration and Congress, including the effect that such changes will have on fiscal and tax policies, the potential repeal of all or portions of the Health Care Reform Act, international trade agreements and policies and policy efforts designed to reduce patient out-of-pocket costs for medicines (which could result in new mandatory rebates and discounts or other pricing restrictions);
illegal distribution or sale of counterfeit versions of our products;
interruptions, breakdowns or breaches in our information technology systems; and
risks in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017, and risks detailed from time to time in our other filings with the SEC and the Canadian Securities Administrators (the “CSA”), as well as our ability to anticipate and manage the risks associated with the foregoing.
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found in our Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017, under Item 1A. “Risk Factors” and in the Company’s other filings with the SEC and CSA. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update or revise any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect actual outcomes, except as required by law. We caution that, as it is not possible to predict or identify all relevant factors that may impact forward-looking statements, the foregoing list of important factors that may affect future results is not exhaustive and should not be considered a complete statement of all potential risks and uncertainties.

vi



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
(Unaudited)
 
September 30,
2017
 
December 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
964

 
$
542

Restricted cash
928

 

Trade receivables, net
2,229

 
2,517

Inventories, net
1,071

 
1,061

Current assets held for sale
16

 
261

Prepaid expenses and other current assets
736

 
696

Total current assets
5,944

 
5,077

Property, plant and equipment, net
1,398

 
1,312

Intangible assets, net
16,023

 
18,884

Goodwill
15,573

 
15,794

Deferred tax assets, net
166

 
146

Non-current assets held for sale
718

 
2,132

Other non-current assets
152

 
184

Total assets
$
39,974

 
$
43,529

Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
407

 
$
324

Accrued and other current liabilities
3,396

 
3,227

Current liabilities held for sale

 
57

Current portion of long-term debt and other
925

 
1

Total current liabilities
4,728

 
3,609

Acquisition-related contingent consideration
345

 
840

Non-current portion of long-term debt
26,216

 
29,845

Pension and other benefit liabilities
198

 
195

Liabilities for uncertain tax positions
265

 
184

Deferred tax liabilities, net
2,237

 
5,434

Non-current liabilities held for sale
461

 
57

Other non-current liabilities
102

 
107

Total liabilities
34,552

 
40,271

Commitments and contingencies (Note 18)


 


Equity
 
 
 
Common shares, no par value, unlimited shares authorized, 348,582,556 and 347,821,606 issued and outstanding at September 30, 2017 and December 31, 2016, respectively
10,086

 
10,038

Additional paid-in capital
368

 
351

Accumulated deficit
(3,239
)
 
(5,129
)
Accumulated other comprehensive loss
(1,888
)
 
(2,108
)
Total Valeant Pharmaceuticals International, Inc. shareholders’ equity
5,327

 
3,152

Noncontrolling interest
95

 
106

Total equity
5,422

 
3,258

Total liabilities and equity
$
39,974

 
$
43,529


The accompanying notes are an integral part of these consolidated financial statements.

1



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Product sales
$
2,186

 
$
2,443

 
$
6,462

 
$
7,168

Other revenues
33

 
36

 
99

 
103


2,219

 
2,479

 
6,561

 
7,271

Expenses
 
 
 
 
 
 
 
Cost of goods sold (excluding amortization and impairments of intangible assets)
650

 
649

 
1,869

 
1,917

Cost of other revenues
9

 
9

 
32

 
29

Selling, general and administrative
623

 
661

 
1,943

 
2,145

Research and development
81

 
101

 
271

 
328

Amortization of intangible assets
657

 
664

 
1,915

 
2,015

Goodwill impairments
312

 
1,049

 
312

 
1,049

Asset impairments
406

 
148

 
629

 
394

Restructuring and integration costs
6

 
20

 
42

 
78

Acquired in-process research and development costs

 
31

 
5

 
34

Acquisition-related contingent consideration
(238
)
 
9

 
(297
)
 
18

Other (income) expense, net
(325
)
 
1

 
(584
)
 
(20
)
 
2,181

 
3,342

 
6,137

 
7,987

Operating income (loss)
38

 
(863
)
 
424

 
(716
)
Interest income
3

 
3

 
9

 
6

Interest expense
(459
)
 
(470
)
 
(1,392
)
 
(1,369
)
Loss on extinguishment of debt
(1
)
 

 
(65
)
 

Foreign exchange and other
19

 
(2
)
 
87

 
4

Loss before recovery of income taxes
(400
)
 
(1,332
)
 
(937
)
 
(2,075
)
Recovery of income taxes
(1,700
)
 
(113
)
 
(2,829
)
 
(179
)
Net income (loss)
1,300

 
(1,219
)
 
1,892


(1,896
)
Less: Net (loss) income attributable to noncontrolling interest
(1
)
 
(1
)
 
1

 
(2
)
Net income (loss) attributable to Valeant Pharmaceuticals International, Inc.
$
1,301

 
$
(1,218
)
 
$
1,891

 
$
(1,894
)
Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc.:
 
 
 
 
 
 
 
Basic
$
3.71

 
$
(3.49
)
 
$
5.40

 
$
(5.47
)
Diluted
$
3.69

 
$
(3.49
)
 
$
5.38

 
$
(5.47
)
 
 
 
 
 
 
 
 
Weighted-average common shares
 
 
 
 
 
 
 
Basic
350.4

 
349.5

 
350.1

 
346.5

Diluted
352.3

 
349.5

 
351.4

 
346.5

The accompanying notes are an integral part of these consolidated financial statements.

2



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
1,300

 
$
(1,219
)
 
$
1,892

 
$
(1,896
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustment
81

 
(4
)
 
227

 
(37
)
Pension and postretirement benefit plan adjustments, net of income taxes
(3
)
 
(1
)
 
(4
)
 
(2
)
Other comprehensive income (loss)
78

 
(5
)
 
223

 
(39
)
Comprehensive income (loss)
1,378

 
(1,224
)
 
2,115

 
(1,935
)
Less: Comprehensive loss attributable to noncontrolling interest
(1
)
 

 
(3
)
 
(3
)
Comprehensive income (loss) attributable to Valeant Pharmaceuticals International, Inc.
$
1,379

 
$
(1,224
)
 
$
2,118

 
$
(1,932
)

The accompanying notes are an integral part of these consolidated financial statements.

3



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Nine Months Ended
September 30,
 
2017
 
2016
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
1,892

 
$
(1,896
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangible assets
2,039

 
2,159

Amortization and write-off of debt discounts and debt issuance costs
100

 
89

Asset impairments
629

 
394

Acquisition accounting adjustment on inventory sold

 
38

Gain on disposals of assets and businesses, net
(695
)
 
(11
)
Acquisition-related contingent consideration
(297
)
 
18

Allowances for losses on trade receivable and inventories
71

 
96

Deferred income taxes
(2,985
)
 
(310
)
Additions (reductions) to accrued legal settlements
112

 
(32
)
Insurance proceeds for legal settlement
60

 

Payments of accrued legal settlements
(221
)
 
(68
)
Goodwill impairment
312

 
1,049

Loss on deconsolidation

 
18

Share-based compensation
70

 
134

Foreign exchange gain
(83
)
 
(15
)
Loss on extinguishment of debt
65

 

Payment of contingent consideration adjustments, including accretion
(3
)
 
(27
)
Other
(24
)
 
(12
)
Changes in operating assets and liabilities:
 
 
 
Trade receivables
338

 
(31
)
Inventories
1

 
(166
)
Prepaid expenses and other current assets
32

 
118

Accounts payable, accrued and other liabilities
299

 
30

Net cash provided by operating activities
1,712

 
1,575

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Acquisition of businesses, net of cash acquired

 
(19
)
Acquisition of intangible assets and other assets
(146
)
 
(48
)
Purchases of property, plant and equipment
(118
)
 
(181
)
Reduction of cash due to deconsolidation

 
(30
)
Purchases of marketable securities
(4
)
 
(1
)
Proceeds from sale of marketable securities
2

 
17

Proceeds from sale of assets and businesses, net of costs to sell
3,063

 
131

Net cash provided by (used in) investing activities
2,797

 
(131
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of long-term debt, net of discount
6,231

 
1,220

Repayments of long-term debt
(9,249
)
 
(1,917
)
Borrowings of short-term debt

 
3

Repayments of short-term debt
(8
)
 
(3
)
Proceeds from exercise of stock options

 
33

Payment of employee withholding tax upon vesting of share-based awards
(4
)
 
(9
)
Payments of contingent consideration
(34
)
 
(94
)
Payments of deferred consideration

 
(517
)
Payments of financing costs
(39
)
 
(96
)
Other
(18
)
 
(8
)
Net cash used in financing activities
(3,121
)
 
(1,388
)
Effect of exchange rate changes on cash and cash equivalents
39

 
6

Net increase in cash and cash equivalents and restricted cash
1,427

 
62

Cash and cash equivalents and restricted cash, beginning of period
542

 
597

Cash and cash equivalents and restricted cash, end of period
$
1,969

 
$
659

 
 
 
 
Cash and cash equivalents, end of period
$
964

 
$
659

Restricted cash, end of period
928

 

Restricted cash included in Other non-current assets, end of period
77

 

Cash and cash equivalents and restricted cash, end of period
$
1,969

 
$
659

The accompanying notes are an integral part of these consolidated financial statements.

4



VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
DESCRIPTION OF BUSINESS
Valeant Pharmaceuticals International, Inc. (the “Company”) is a multinational, specialty pharmaceutical and medical device company, continued under the laws of the Province of British Columbia, that develops, manufactures, and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (“OTC”) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices) which are marketed directly or indirectly in over 100 countries.
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
The accompanying unaudited consolidated financial statements have been prepared by the Company in United States dollars and in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, which do not conform in all respects to the requirements of U.S. GAAP for annual financial statements. Accordingly, these notes to the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements prepared in accordance with U.S. GAAP that are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the U.S. Securities and Exchange Commission (the “SEC”) and the Canadian Securities Administrators (the “CSA”). The unaudited consolidated financial statements have been prepared using accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2016. The unaudited consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s results of operations and financial position could be materially impacted.
Principles of Consolidation
The unaudited consolidated financial statements include the accounts of the Company and those of its subsidiaries. All significant intercompany transactions and balances have been eliminated.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
To enhance the comparability of its asset impairments, the Company has made reclassifications to the consolidated statement of operations for the three and nine months ended September 30, 2016 to include all asset impairments in the single line Asset impairments. Charges for asset impairments were originally reported in multiple lines within the consolidated statements of operations for the three and nine months ended September 30, 2016; Amortization and impairments of finite-lived intangible assets and Acquired in-process research and development impairments and other charges. The effects of the reclassifications on the statements of operations for the periods presented are as follows:

5

   

 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
(in millions)
As Initially Reported
 
Reclassification
 
As Reclassified
 
As Initially Reported
 
Reclassification
 
As Reclassified
Amortization of intangible assets
$
807

 
$
(143
)
 
$
664

 
$
2,389

 
$
(374
)
 
$
2,015

Asset impairments

 
148

 
148

 

 
394

 
394

Acquired in-process research and development costs
36

 
(5
)
 
31

 
54

 
(20
)
 
34

 
$
843

 
$

 
$
843

 
$
2,443

 
$

 
$
2,443

During the third quarter of 2016, the Company changed its reportable segments to: (i) Bausch + Lomb/International, (ii) Branded Rx and (iii) U.S. Diversified Products. Effective for the first quarter of 2017, revenues and profits from the Company's operations in Canada, previously included in the Branded Rx segment in prior periods, are now included in the Bausch + Lomb/International segment. Prior period presentations of segment revenues, segment profits and segment assets have been recast to conform to the current segment reporting structure. See Note 19, "SEGMENT INFORMATION" for additional information.
Adoption of New Accounting Guidance
In October 2016, the Financial Accounting Standards Board (the “FASB”) amended the guidance as to how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amended guidance was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this amended guidance as of January 1, 2017 which did not have a material impact on the presentation of the Company's results of operations, cash flows or financial position.
In November 2016, the FASB issued guidance which requires entities to include restricted cash in cash and cash equivalent balances on the statement of cash flows and disclose a reconciliation between the balances on the statement of cash flows and the balance sheet. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company early adopted this guidance during the interim period ended June 30, 2017 on a retrospective basis. The impact of the change was not material to the Company’s cash flows for the prior period presented.
Recently Issued Accounting Standards, Not Adopted as of September 30, 2017
In May 2014, the FASB issued guidance on recognizing revenue from contracts with customers. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity will: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition to these provisions, the new standard provides implementation guidance on several other topics, including the accounting for certain revenue-related costs, as well as enhanced disclosure requirements. The new guidance requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued an amendment to clarify the implementation guidance around considerations whether an entity is a principal or an agent, impacting whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued an amendment to clarify guidance on identifying performance obligations and the implementation guidance on licensing. The guidance is effective for annual reporting periods beginning after December 15, 2017. Early application is permitted but not before the annual reporting period, including adoption in an interim period, beginning January 1, 2017. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. The Company continues to make progress on its project plan for adopting this guidance, which includes a detailed assessment program and a training program for its personnel.  Pursuant to the project plan, the Company conducted a high level impact assessment and has substantially completed an in-depth evaluation of the adoption impact, which involved the review of selected revenue arrangements. Based on the assessment completed to date, the Company did not identify any area that may result in a significant adoption impact.  The Company will continue to monitor the revenue transactions in the fourth quarter of 2017 to finalize the adoption assessment.  The Company is also in the process of assessing the impact to its existing controls and disclosure. The Company preliminarily concluded that it will adopt the new guidance using the modified approach, under which the new guidance will be adopted retrospectively

6

   

with the cumulative effect of initial application of the guidance recognized on the date of initial application (which is January 1, 2018).
In February 2016, the FASB issued guidance on leases. This guidance will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions. Current off-balance sheet leasing activities will be required to be reflected on balance sheets so that investors and other users of financial statements can more readily and accurately understand the rights and obligations associated with these transactions. Consistent with the current lease standard, the new guidance addresses two types of leases: finance leases and operating leases. Finance leases will be accounted for in substantially the same manner as capital leases are accounted for under current U.S. GAAP. Operating leases will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with operating leases under existing U.S. GAAP. However, as it relates to the balance sheet, lessees will recognize lease liabilities based upon the present value of remaining lease payments and corresponding lease assets for operating leases with limited exception. The new guidance will also require lessees and lessors to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities. The new guidance is effective for annual reporting periods beginning after December 15, 2018. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and disclosures.
In June 2016, the FASB issued guidance on the impairment of financial instruments requiring an impairment model based on expected losses rather than incurred losses. Under this guidance, an entity recognizes as an allowance its estimate of expected credit losses. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company is evaluating the impact of adoption of this guidance on its financial position, results of operations and cash flows.
In August 2016, the FASB issued guidance which adds or clarifies the classification of certain cash receipts and payments in the statement of cash flows (including debt repayment or debt extinguishment costs, contingent consideration payment after a business combination, and distributions received from equity method investees). The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on cash flows.
In October 2016, the FASB issued guidance which removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company believes the impact of adoption will result in a material increase in deferred tax assets and equity and continues to evaluate the impact of these increases on its financial position, results of operations, cash flows and disclosures.
In January 2017, the FASB issued guidance which clarifies the definition of a business with the objective of assisting with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company will apply the new definition to future transactions when adopted.
In January 2017, the FASB issued guidance which simplifies the subsequent measurement of goodwill by eliminating the “Step 2” from the goodwill impairment test. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company will continue to evaluate the potential impact of this guidance when adopted, which could have a significant impact on its financial position, results of operations, and disclosures, particularly in respect of the Salix reporting unit in which its carrying value exceeded its fair value as of the date of the annual goodwill impairment test in 2016. See Note 8, "INTANGIBLE ASSETS AND GOODWILL".
In May 2017, the FASB issued guidance identifying the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The guidance is effective for annual periods beginning after December 15, 2017. The Company has not modified any outstanding awards, and therefore, does not have modification accounting. The adoption of this guidance will not impact its financial position, results of operations, cash flows and disclosures.

7

   

3.
ACQUISITIONS
There were no business combinations during the nine months ended September 30, 2017 and one business combination in 2016 that was not material. The measurement period for all acquisitions has closed.
Licensing Agreement
On February 21, 2017, EyeGate Pharmaceuticals, Inc. (“EyeGate”) granted a subsidiary of the Company the exclusive worldwide licensing rights to manufacture and sell the EyeGate® II Delivery System and EGP-437 combination product candidate for the treatment of post-operative pain and inflammation in ocular surgery patients. EyeGate will be responsible for the continued development of this product candidate in the U.S. for the treatment of post-operative pain and inflammation in ocular surgery patients, and all associated costs. The Company has the right to further develop the product in the field outside of the U.S. at its cost. In connection with the licensing agreement, the Company paid an initial license fee of $4 million during the three months ended March 31, 2017 and is obligated to make future payments of (i) up to $34 million upon the achievement of certain development and regulatory milestones, (ii) up to $65 million upon the achievement of certain sales-based milestones and (iii) royalties. Based on early stage of development of the asset, and lack of acquired significant inputs, the Company concluded this was an asset acquisition.
4.
DIVESTITURES
The Company has divested certain businesses and assets and has identified others for potential divestiture, which, in each case, was not aligned with its core business objectives.
CeraVe®, AcneFree™ and AMBI® skincare brands
On March 3, 2017, the Company completed the sale of its interests in the CeraVe®, AcneFree™ and AMBI® skincare brands for $1,300 million in cash (the “Skincare Sale”). The CeraVe®, AcneFree™ and AMBI® skincare business was part of the Bausch + Lomb/International segment and was reclassified as held for sale as of December 31, 2016. Included in Other (income) expense, net is the Gain on the Skincare Sale of $316 million, as adjusted, for the nine months ended September 30, 2017.
Dendreon Pharmaceuticals LLC
On June 28, 2017, the Company completed the sale of all outstanding equity interests in Dendreon Pharmaceuticals LLC (formerly Dendreon Pharmaceuticals, Inc.) (“Dendreon”) for an initial sales price of $820 million in cash (the “Dendreon Sale”), subject to certain working capital provisions. Dendreon was part of the Branded Rx segment and was reclassified as held for sale as of December 31, 2016. During the three months ended June 30, 2017, the Company initially reported a Gain on the Dendreon Sale of $73 million. During the three months ended September 30, 2017, a working capital adjustment was provided and the sales price was adjusted to $845 million. Accordingly, the initially reported Gain on the Dendreon Sale has been adjusted to $98 million and is included in Other (income) expense, net for the nine months ended September 30, 2017.
iNova Pharmaceuticals
On September 29, 2017, the Company completed the sale of its Australian-based iNova Pharmaceuticals (“iNova”) business for $938 million in cash (the “iNova Sale”), as adjusted, subject to certain working capital provisions. iNova markets a diversified portfolio of weight management, pain management, cardiology and cough and cold prescription and over-the-counter products in more than 15 countries, with leading market positions in Australia and South Africa, as well as an established platform in Asia. The Company will continue to operate in these geographies through the Bausch + Lomb franchise. The iNova business was part of the Bausch + Lomb/International segment and was reclassified as held for sale as of December 31, 2016. Included in Other (income) expense, net is a $306 million gain on sale related to this transaction.

8

   

ASSETS AND LIABILITIES HELD FOR SALE
Obagi Medical Products, Inc.
On July 17, 2017, the Company announced that certain of its affiliates had entered into a definitive agreement to sell its Obagi Medical Products, Inc. (“Obagi”) business for $190 million in cash (the “Obagi Sale”), subject to certain working capital provisions. Obagi is a global specialty skin care pharmaceutical business with products focused on premature skin aging, skin damage, hyperpigmentation, acne and sun damage which are primarily available through dermatologists, plastic surgeons and other skin care professionals. The Obagi business was part of the U.S. Diversified Products segment and was reclassified as held for sale as of March 31, 2017. The carrying value of the Obagi business, including associated goodwill, was adjusted to its estimated fair value less costs to sell and an impairment of $103 million was recognized in Asset impairments during the nine months ended September 30, 2017. Obagi net assets included in held for sale as of September 30, 2017 are $187 million. The Obagi Sale is expected to close in 2017, subject to customary closing conditions.
Sprout Pharmaceuticals, Inc.
On November 6, 2017, the Company announced it had entered into a definitive agreement to sell Sprout Pharmaceuticals, Inc. (“Sprout”) to a buyer affiliated with certain former shareholders of Sprout (the “Sprout Sale”), in exchange for a 6% royalty on global sales of Addyi® (flibanserin 100 mg) beginning May 2019. In connection with the completion of the Sprout Sale, the terms of the October 2015 merger agreement relating to the Company's acquisition of Sprout will be amended to terminate the Company's ongoing obligation to make future royalty payments associated with the Addyi® product, as well as certain related provisions (including the obligation to make certain marketing and other expenditures). In connection with the completion of the Sprout Sale, the current litigation against the Company, initiated on behalf of the former shareholders of Sprout, which disputes the Company's compliance with certain contractual terms of that same merger agreement with respect to the use of certain diligent efforts to develop and commercialize the Addyi® product (including a disputed contractual term with respect to the spend of no less than $200 million in certain expenditures), will be dismissed with prejudice. Upon completion of the Sprout Sale, the Company will issue the buyer a five-year $25 million loan for initial operating expenses. Addyi®, a once-daily, non-hormonal tablet approved for the treatment of acquired, generalized hypoactive sexual desire disorder in premenopausal women, is the only approved and commercialized product of Sprout. The Sprout Sale is expected to close in 2017, subject to certain closing conditions, including the approval of the requisite portion of the former shareholders of Sprout to the amendments to the original merger agreement. The Company classified the assets and liabilities of the Sprout business as held for sale at September 30, 2017 and were previously included in the Branded Rx segment. The carrying value of the Sprout business, including associated goodwill, was adjusted to its estimated fair value less costs to sell and a $352 million impairment was recognized in Asset impairments at September 30, 2017. The net assets of Sprout classified as held for sale as of September 30, 2017 are $71 million.
At September 30, 2017, included in assets and liabilities held for sale are the assets and liabilities of Obagi, Sprout, and other smaller businesses. At December 31, 2016, included in assets and liabilities held for sale are a number of small businesses formerly included in the Bausch + Lomb/International segment.
Assets held for sale were as follows:
(in millions)
 
September 30,
2017
 
December 31,
2016
Current assets held for sale:
 
 
 
 
Cash
 
$

 
$
1

Trade receivables
 

 
86

Inventories
 
14

 
147

Other
 
2

 
27

Current assets held for sale
 
$
16

 
$
261

 
 
 
 
 
Non-current assets held for sale:
 
 
 
 
Intangible assets, net
 
$
717

 
$
680

Goodwill
 

 
1,355

Other
 
1

 
97

Non-current assets held for sale
 
$
718

 
$
2,132


9

   

Liabilities held for sale as of September 30, 2017 of $461 million consists of non-current deferred tax liabilities of $293 million and the non-current contingent consideration of $168 million. Current and Non-current liabilities held for sale as of December 31, 2016 of $57 million and $57 million, respectively, consists of deferred tax liabilities and other liabilities.
5.
RESTRUCTURING AND INTEGRATION COSTS
On April 1, 2015, the Company acquired Salix Pharmaceuticals, Ltd. (“Salix”), pursuant to an Agreement and Plan of Merger dated February 20, 2015, as amended on March 16, 2015 (the “Salix Merger Agreement”), with Salix surviving as a wholly owned subsidiary of Valeant Pharmaceuticals International (“Valeant”), a subsidiary of the Company (the “Salix Acquisition”).
In connection with the Salix Acquisition and other acquisitions, the Company implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings. These measures included: (i) workforce reductions company-wide and other organizational changes, (ii) closing of duplicative facilities and other site rationalization actions company-wide, including research and development facilities, sales offices and corporate facilities, (iii) leveraging research and development spend and (iv) procurement savings.
Salix Acquisition-Related Cost-Rationalization and Integration Initiatives
Cost-rationalization and integration initiatives relating to the Salix Acquisition were substantially completed by mid-2016. Total costs incurred primarily include: employee termination costs payable to approximately 475 employees of the Company and Salix who have been terminated as a result of the Salix Acquisition; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs. Since the acquisition date, total costs of $273 million have been incurred through September 30, 2017, including: (i) $153 million of integration expenses, (ii) $105 million of restructuring expenses and (iii) $15 million of acquisition-related costs.
Salix Integration Costs
Salix integration costs were $0 and $17 million, and payments were $1 million and $21 million for the nine months ended September 30, 2017 and 2016, respectively. The remaining liability associated with these activities as of September 30, 2017 was $6 million.
Salix Restructuring Costs
Salix restructuring costs incurred were $6 million and $7 million, and payments were $13 million and $29 million for the nine months ended September 30, 2017 and 2016, respectively. The remaining liability associated with these activities as of September 30, 2017 was $2 million.
Other Restructuring and Integration-Related Costs (Excluding Salix)
During the nine months ended September 30, 2017, in addition to the Salix restructuring and integration costs, the Company incurred $36 million of other restructuring and integration-related costs. These costs included: (i) $17 million of integration consulting, transition service, and other costs, (ii) $11 million of facility closure costs and (iii) $8 million of severance costs. The Company made payments of $58 million for the nine months ended September 30, 2017 (in addition to the payments related to Salix). The remaining liability associated with these activities as of September 30, 2017 was $32 million.
During the nine months ended September 30, 2016, in addition to the Salix restructuring and integration costs, the Company incurred $54 million of other restructuring and integration-related costs. These costs included: (i) $37 million of integration consulting, duplicate labor, transition service, and other costs, (ii) $8 million of facility closure costs, (iii) $8 million of severance costs and (iv) $1 million of other costs. These costs primarily related to restructuring and integration costs for other smaller acquisitions. The Company made payments of $52 million for the nine months ended September 30, 2016 (in addition to the payments related to Salix).
The Company continues to evaluate opportunities to improve its operating results and may initiate additional cost savings programs to streamline its operations and eliminate redundant processes and expenses. The expenses associated with the implementation of these cost savings programs could be material and may include, but are not limited to, expenses associated with: (i) reducing headcount, (ii) eliminating real estate costs associated with unused or under-utilized facilities and (iii) implementing contribution margin improvement and other cost reduction initiatives.

10

   

6.
FAIR VALUE MEASUREMENTS
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
 
December 31, 2016
(in millions)
 
Carrying
Value
 
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Carrying
Value
 
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
481

 
$
450

 
$
31

 
$

 
$
242

 
$
179

 
$
63

 
$

Restricted cash
 
$
928

 
$
928

 
$

 
$

 
$

 
$

 
$

 
$

Other non-current assets
 
$
77

 
$
77

 
$

 
$

 
$

 
$

 
$

 
$

Liabilities:
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration
 
$
(390
)
 
$

 
$

 
$
(390
)
 
$
(892
)
 
$

 
$

 
$
(892
)
Cash equivalents include highly liquid investments with an original maturity of three months or less at acquisition, primarily including money market funds, reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
Restricted cash includes $923 million of proceeds from the iNova Sale.  Under the terms of the Third Amended and Restated Credit and Guaranty Agreement (as amended, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), the Company is required to use the net proceeds of asset sales above a certain threshold to repay its debt obligations. On October 5, 2017, the Company used this restricted cash to repay a portion of its Series F Tranche B Term Loan Facility. The carrying value of Restricted cash reflected in the balance sheet are cash balances.
Other non-current assets includes restricted cash of $77 million deposited with a bank as collateral to secure a bank guarantee for the benefit of the Australian Government in connection with the notice of assessment received on August 8, 2017 from the Australian Taxation Office, as discussed in Note 16, "INCOME TAXES". The Company disagrees with the assessment and continues to believe that its tax positions are appropriate and supported by the facts, circumstances and applicable laws. The Company intends to defend its tax position in this matter vigorously. The carrying value of the restricted cash reported within Other non-current assets reflected in the balance sheet are cash balances.
There were no transfers between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2017.

11

   

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The fair value measurement of contingent consideration obligations arising from business combinations is determined via a probability-weighted discounted cash flow analysis or Monte Carlo Simulation, using unobservable (Level 3) inputs. These inputs may include: (i) the estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factor(s) on which the contingency is based; (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows; and (iv) volatility of projected performance (Monte Carlo Simulation). Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.
The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2017:
(in millions)
 
 
 
 
Balance, January 1, 2017
 
 
 
$
892

Adjustments to Acquisition-related contingent consideration:
 
 
 
 
Accretion for the time value of money
 
$
48

 
 
Fair value adjustments to the expected future royalty payments for Addyi®
 
(312
)
 
 
Fair value adjustments due to changes in estimates of other future payments
 
(33
)
 
 
Acquisition-related contingent consideration
 
 
 
(297
)
Reclassified to liabilities held for sale
 
 
 
(168
)
Payments
 
 
 
(37
)
Balance, September 30, 2017
 
 
 
390

Current portion
 
 
 
45

Non-current portion
 
 
 
$
345

During the nine months ended September 30, 2017 and prior to identifying the Sprout business as held for sale, the Company recorded fair value adjustments to contingent consideration to reflect management's revised estimates of the future sales of Addyi®.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The following fair value hierarchy table presents the assets measured at fair value on a non-recurring basis:
 
 
September 30, 2017
 
December 31, 2016
(in millions)
 
Carrying
Value
 
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Carrying
Value
 
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-current assets held for sale
 
$
706

 
$

 
$

 
$
706

 
$
38

 
$

 
$

 
$
38

Non-current assets held for sale of $718 million included in the consolidated balance sheet as of September 30, 2017, includes held for sale assets of $706 million which were remeasured to estimated fair values less costs to sell. The Company recognized impairment charges of $456 million, in the aggregate, in Asset impairments for the nine months ended September 30, 2017 in the consolidated statement of operations. The estimated fair values of these assets less costs to sell were determined using a discounted cash flow analysis which utilized Level 3 unobservable inputs. The remaining balance of Non-current assets held for sale as of September 30, 2017 reflect the historical carrying value of those assets which do not exceed fair value less costs to sell.
Long-term Debt
The fair value of long-term debt as of September 30, 2017 and December 31, 2016, was $26,476 million and $26,297 million, respectively, and was estimated using the quoted market prices for the same or similar debt issuances (Level 2).

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7.
INVENTORIES
The components of inventories, net of allowances for obsolescence were as follows:
(in millions)
 
September 30,
2017

December 31,
2016
Raw materials
 
$
281

 
$
256

Work in process
 
140

 
125

Finished goods
 
650

 
680

 
 
$
1,071

 
$
1,061

8.
INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The major components of intangible assets were as follows:
 
 
September 30, 2017
 
December 31, 2016
(in millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization,
Including
Impairments
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization,
Including
 Impairments
 
Net
Carrying
Amount
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Product brands
 
$
20,768

 
$
(8,512
)
 
$
12,256

 
$
20,725

 
$
(6,883
)
 
$
13,842

Corporate brands
 
934

 
(161
)
 
773

 
999

 
(146
)
 
853

Product rights/patents
 
3,273

 
(2,290
)
 
983

 
4,240

 
(2,118
)
 
2,122

Partner relationships
 
172

 
(154
)
 
18

 
152

 
(128
)
 
24

Technology and other
 
212

 
(143
)
 
69

 
252

 
(160
)
 
92

Total finite-lived intangible assets
 
25,359

 
(11,260
)
 
14,099

 
26,368

 
(9,435
)
 
16,933

Acquired IPR&D not in service
 
226

 

 
226

 
253

 

 
253

B&L Trademark
 
1,698

 

 
1,698

 
1,698

 

 
1,698

 
 
$
27,283

 
$
(11,260
)
 
$
16,023

 
$
28,319

 
$
(9,435
)
 
$
18,884

Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment charges associated with these assets are included in Asset impairments in the consolidated statement of operations. The Company continues to monitor the recoverability of its finite-lived intangible assets and tests the intangible assets for impairment if indicators of impairment are present.
Asset impairments for the nine months ended September 30, 2017 include: (i) an impairment of $352 million related to the Sprout business classified as held for sale, (ii) impairments of $115 million to other assets classified as held for sale, (iii) impairments of $86 million, in aggregate, to certain product/patent assets associated with the discontinuance of specific product lines not aligned with the focus of the Company's core business, (iv) impairments of $73 million reflecting decreases in forecasted sales for other product lines, and (v) impairments of $3 million related to acquired IPR&D. The impairments to assets reclassified as held for sale were measured as the difference of the carrying value of these assets as compared to the estimated fair values of these assets less costs to sell determined using a discounted cash flow analysis which utilized Level 3 unobservable inputs. The other impairments and adjustments to finite-lived intangible assets were measured as the difference of the historical carrying value of these finite-lived assets as compared to the estimated fair value as determined using a discounted cash flow analysis using Level 3 unobservable inputs.
In connection with an ongoing litigation matter between the Company and potential generic competitors to the branded drug Uceris® Tablet, the Company performed an impairment test of its Uceris® Tablet related intangible assets. As the undiscounted expected cash flows from the Uceris® Tablet exceed the carrying value of the Uceris® Tablet related intangible assets, no impairment exists as of September 30, 2017. However, if market conditions or legal outcomes differ from the Company’s assumptions, or if the Company is unable to execute its strategies, it may be necessary to record an impairment charge equal to the difference between the fair value and carrying value of the Uceris® Tablet related intangible assets. As of September 30, 2017, the carrying value of Uceris® Tablet related intangible assets was $619 million.

13

   

Estimated amortization expense, for the remainder of 2017 and each of the five succeeding years ending December 31 and thereafter is as follows:
(in millions)
 
 
October through December 2017
 
$
584

2018
 
2,275

2019
 
2,059

2020
 
1,966

2021
 
1,781

2022
 
1,641

Thereafter
 
3,793

Total
 
$
14,099

Goodwill
The changes in the carrying amounts of goodwill during the nine months ended September 30, 2017 and the year ended December 31, 2016 were as follows:
(in millions)
 
Developed Markets
 
Emerging Markets
 
Bausch + Lomb/ International
 
Branded Rx
 
U.S. Diversified Products
 
Total
Balance, January 1, 2016
 
$
16,141

 
$
2,412

 
$

 
$

 
$

 
$
18,553

Acquisitions
 
1

 

 

 

 

 
1

Divestiture of a portfolio of neurology medical device products
 
(36
)
 

 

 

 

 
(36
)
Goodwill related to Ruconest® reclassified to assets held for sale
 
(37
)
 

 

 

 

 
(37
)
Foreign exchange and other
 
47

 
(12
)
 

 

 

 
35

Impairment to goodwill of the former U.S. reporting unit
 
(905
)
 

 

 

 

 
(905
)
Realignment of segment goodwill
 
(15,211
)
 
(2,400
)
 
6,708

 
7,873

 
3,030

 

Impairment to goodwill of the Salix reporting unit
 

 

 

 
(172
)
 

 
(172
)
Divestitures
 

 

 
(5
)
 

 

 
(5
)
Goodwill reclassified to assets held for sale
 

 

 
(947
)
 
(431
)
 

 
(1,378
)
Foreign exchange and other
 

 

 
(257
)
 
(5
)
 

 
(262
)
Balance, December 31, 2016
 

 

 
5,499

 
7,265

 
3,030

 
15,794

Realignment of segment goodwill
 

 

 
264

 
(264
)
 

 

Balance, January 1, 2017
 

 

 
5,763

 
7,001

 
3,030

 
15,794

Goodwill reclassified to assets held for sale
 

 

 
(31
)
 
(63
)
 
(76
)
 
(170
)
Impairment
 

 

 

 
(312
)
 

 
(312
)
Foreign exchange and other
 

 

 
262

 
(1
)
 

 
261

Balance, September 30, 2017
 
$

 
$

 
$
5,994

 
$
6,625

 
$
2,954

 
$
15,573

Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company estimates the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs.
The discounted cash flow model relies on assumptions regarding revenue growth rates, gross profit, projected working capital needs, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and terminal growth rates. To estimate fair value, the Company discounts the expected cash flows of each reporting unit. The discount rate the Company uses represents the estimated weighted average cost of capital, which reflects

14

   

the overall level of inherent risk involved in its reporting unit operations and the rate of return a market participant would expect to earn. To estimate cash flows beyond the final year of its model, the Company estimates a terminal value by applying an in perpetuity growth assumption and discount factor to determine the reporting unit's terminal value.
The Company forecasts cash flows for each of its reporting units and takes into consideration economic conditions and trends, estimated future operating results, management's and a market participant's view of growth rates and product lives, and anticipates future economic conditions. Revenue growth rates inherent in these forecasts were based on input from internal and external market research that compare factors such as growth in global economies, recent industry trends and product life-cycles. Macroeconomic factors such as changes in economies, changes in the competitive landscape including the unexpected loss of exclusivity to the Company's product portfolio, changes in government legislation, product life-cycles, industry consolidations and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets. Accordingly, if market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future.
2016
Prior to the change in operating segments in the third quarter of 2016, the Company operated in two operating and reportable segments: Developed Markets and Emerging Markets. The Developed Markets segment consisted of four geographic reporting units: (i) U.S., (ii) Canada and Australia, (iii) Western Europe and (iv) Japan. The Emerging Markets segment consisted of three geographic reporting units: (i) Central and Eastern Europe, Middle East and Africa, (ii) Latin America and (iii) Asia.
March 31, 2016
Given challenges facing the Company, particularly in its dermatology and gastrointestinal businesses, management performed a review of its then-current forecast under the direction of the new Chief Executive Officer (“CEO”). As a result of that review, management lowered its forecast which resulted in a triggering event requiring the Company to test goodwill for impairment as of March 31, 2016. Although management lowered its forecast, which lowered the estimated fair values of certain business units, including the former U.S. reporting unit, the step one testing determined there was no impairment of goodwill as the estimated fair value of each reporting unit exceeded its carrying value. In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company applied a hypothetical 15% decrease in the fair value of each reporting unit as of March 31, 2016. For each reporting unit, this hypothetical 15% decrease in fair value would not have triggered additional impairment testing as the hypothetical fair value exceeded the carrying value of the respective reporting unit.
Realignment of Segment Structure
Commencing in the third quarter of 2016, the Company operates in three operating segments: (i) Bausch + Lomb/International, (ii) Branded Rx and (iii) U.S. Diversified Products. This 2016 segment structure realignment resulted in the Bausch + Lomb/International segment consisting of the following reporting units: (i) U.S. Bausch + Lomb and (ii) International; the Branded Rx segment consisting of the following reporting units: (i) Salix, (ii) Dermatology, (iii) Canada and (iv) Branded Rx Other; and the U.S. Diversified Products segment consisting of the following reporting units: (i) Neurology and other and (ii) Generics. As a result of these changes, goodwill was reassigned to each of the aforementioned reporting units using a relative fair value approach. Goodwill previously reported in the former U.S. reporting unit, after adjustment of impairment as described below, was reassigned, using a relative fair value approach, to the U.S. Bausch + Lomb, Salix, Dermatology, Branded Rx Other, Neurology and other, and Generics reporting units. Similarly, goodwill previously reported in the former Canada and Australia reporting unit was reassigned to the Canada and the International reporting units using a relative fair value approach. Goodwill previously reported in the remaining former reporting units was reassigned to the International reporting unit.
In the third quarter of 2016, goodwill impairment testing was performed under the former reporting unit structure immediately prior to the change and under the current reporting unit structure immediately subsequent to the change. Using the forecast and assumptions at the time, the Company estimated the fair value of each reporting unit using a discounted cash flow analysis. As a result of its test, the Company determined that goodwill associated with the former U.S. reporting unit and the goodwill associated with the Salix reporting unit under the current reporting unit structure were impaired. Consequently, in the aggregate, goodwill impairment charges of $1,077 million were recognized as follows:
Under the former reporting unit structure, the fair value of each reporting unit exceeded its carrying value by more than 15%, except for the former U.S. reporting unit whose carrying value exceeded its fair value by 2%. As a result, the Company proceeded to perform step two of the goodwill impairment test for the former U.S. reporting unit and determined that the carrying value of the unit's goodwill exceeded its implied fair value. However, as the estimate of fair value is

15

   

complex and requires significant amounts of time and judgment, the Company could not complete step two of the testing prior to the release of its financial statements for the period ended September 30, 2016. Under these circumstances, accounting guidance requires that a company recognize an estimated impairment charge if management determines that it is probable that an impairment loss has occurred and such impairment can be reasonably estimated. Using its best estimate, the Company recorded an initial goodwill impairment charge of $838 million as of September 30, 2016. In the fourth quarter of 2016, step two testing was completed and the Company concluded that the excess of the carrying value of the former U.S. reporting unit's unadjusted goodwill over its implied value as of September 30, 2016 was $905 million and recognized an incremental goodwill impairment charge of $67 million for the fourth quarter of 2016. The goodwill impairment was primarily driven by changes to the Company's forecasted performance which resulted in a lower fair value of the U.S. businesses, mainly the Salix business.
Under the current reporting unit structure, the carrying value of the Salix reporting unit exceeded its fair value, as updates to the unit's forecast resulted in a lower estimated fair value for the business. As a result, the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit and determined that the carrying value of the unit's goodwill exceeded its implied fair value. However, the Company could not complete step two of the testing prior to the release of its financial statements for the period ended September 30, 2016. Using its best estimate, the Company recorded an initial goodwill impairment charge of $211 million as of September 30, 2016. In the fourth quarter of 2016, step two testing was completed and the Company concluded that the excess of the carrying value of the Salix reporting unit's unadjusted goodwill over its implied value as of September 30, 2016 was $172 million and recognized a credit to the initial goodwill impairment charge of $39 million for the fourth quarter of 2016. As of the date of testing, after all adjustments, the Salix reporting unit had a carrying value of $14,066 million, an estimated fair value of $10,409 million and goodwill with a carrying value of $5,128 million.
In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company compared the carrying value of each reporting unit to its fair value as of August 31, 2016, the date of testing. The fair value of each reporting unit exceeded its carrying value by more than 15%, except for the Salix reporting unit as discussed above and the U.S. Branded Rx reporting unit. As of the date of testing, goodwill of the U.S. Branded Rx reporting unit was $897 million and the estimated fair value of the unit exceeded its carrying value by approximately 5%.
Annual Goodwill Impairment Test
The Company conducted its annual goodwill impairment test as of October 1, 2016 and determined that the carrying value of the Salix reporting unit exceeded its fair value and, as a result, the Company proceeded to perform step two of the goodwill impairment test for the Salix reporting unit. After completing step two of the impairment testing, the Company determined that the carrying value of the unit's goodwill did not exceed its implied fair value and, therefore, no impairment was identified to the goodwill of the Salix reporting unit. As of the date of testing, the Salix reporting unit had a carrying value of $14,087 million, an estimated fair value of $10,319 million and goodwill with a carrying value of $5,128 million. The Company's remaining reporting units passed step one of the goodwill impairment test as the estimated fair value of each reporting unit exceeded its carrying value at the date of testing and, therefore, impairment to goodwill was $0. The Company determined that no events occurred or circumstances changed during the period of October 1, 2016 through December 31, 2016 that would indicate that the fair value of a reporting unit may be below its carrying amount, except for the Salix reporting unit. During the period of October 1, 2016 through December 31, 2016, there were no changes in the facts and circumstances which would suggest that goodwill of the Salix reporting unit was further impaired.
In order to evaluate the sensitivity of its fair value calculations on the goodwill impairment test, the Company compared the carrying value of each reporting unit to its fair value as of October 1, 2016, the date of testing. The fair value of each reporting unit exceeded its carrying value by more than 15%, except for the Salix reporting unit, as discussed above and the U.S. Branded Rx reporting unit. As of the date of testing, goodwill of the U.S. Branded Rx reporting unit was $897 million and the estimated fair value of the unit exceeded its carrying value by approximately 8%.
2017
As detailed in Note 2, "SIGNIFICANT ACCOUNTING POLICIES", the revenues and profits from the Company's operations in Canada were reclassified. In connection with this change, the prior-period presentation of segment goodwill has been recast to conform to the current reporting structure, of which $264 million of goodwill as of December 31, 2016 was reclassified from the Branded Rx segment to the Bausch + Lomb/International segment. No facts or circumstances were identified in connection with this change in alignment that would suggest an impairment exists.

16

   

As detailed in Note 4, "DIVESTITURES", as of September 30, 2017 the Sprout business was classified as held for sale. As the Sprout business represented only a portion of a Branded Rx reporting unit, the Company assessed the remaining reporting unit for impairment and determined the carrying value of the remaining reporting unit exceeded its fair value. After completing step two of the impairment testing, the Company determined and recorded a goodwill impairment charge of $312 million during the three months ended September 30, 2017. Together with the $1,077 million impairment charges from 2016, accumulated goodwill impairment charges to date are $1,389 million.
No additional events occurred or circumstances changed during the nine months ended September 30, 2017 that would indicate that the fair value of any other reporting unit may be below its carrying value, except for the Salix reporting unit. As the facts and circumstances had not materially changed since the October 1, 2016 impairment test, management concluded that the carrying value of the Salix reporting unit continues to be in excess of its fair value.  Therefore, during the three months ended March 31, 2017, June 30, 2017 and September 30, 2017, the Company performed qualitative assessments of the Salix reporting unit goodwill to determine if testing was warranted.
As part of its qualitative assessments, management compared the reporting unit’s operating results to its original forecasts. Although Salix reporting unit revenue during the three months ended March 31, 2017, June 30, 2017 and September 30, 2017 declined as compared to the three months ended December 31, 2016, each decrease was within management's expectations. Further, the latest forecast for the Salix reporting unit is not materially different than the forecast used in management's October 1, 2016 testing and the difference in the forecasts would not change the conclusion of the Company’s goodwill impairment testing as of October 1, 2016. As part of these qualitative assessments, the Company also considered the sensitivity of its conclusions as they relate to changes in the estimates and assumptions used in the latest forecast available for each period.  Based on its qualitative assessments, management believes that the carrying value of the Salix reporting unit goodwill does not exceed its implied fair value and that testing the Salix reporting unit goodwill for impairment was not required based on the current facts and circumstances.
If market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future.
9.
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities were as follows:
(in millions)
 
September 30, 2017
 
December 31, 2016
Product rebates
 
$
1,039

 
$
897

Product returns
 
815

 
708

Interest
 
385

 
337

Employee compensation and benefit costs
 
258

 
198

Income taxes payable
 
163

 
213

Legal liabilities assumed in the Salix Acquisition
 
52

 
281

Other
 
684

 
593

 
 
$
3,396

 
$
3,227


17

   

10.
FINANCING ARRANGEMENTS
Principal amounts of debt obligations and principal amounts of debt obligations net of discounts and issuance costs consists of the following:




September 30, 2017

December 31, 2016
(in millions)

Maturity

Principal Amount

Net of Discounts and Issuance Costs

Principal Amount

Net of Discounts and Issuance Costs
Senior Secured Credit Facilities:













Revolving Credit Facility

April 2018

$


$


$
875


$
875

Revolving Credit Facility

April 2020

425


425





Series A-3 Tranche A Term Loan Facility

October 2018





1,032


1,016

Series A-4 Tranche A Term Loan Facility

April 2020





668


658

Series D-2 Tranche B Term Loan Facility

February 2019





1,068


1,048

Series C-2 Tranche B Term Loan Facility

December 2019





823


805

Series E-1 Tranche B Term Loan Facility

August 2020





2,456


2,429

Series F Tranche B Term Loan Facility

April 2022

5,800


5,685


3,892


3,815

Senior Secured Notes:










6.50% Secured Notes

March 2022

1,250


1,235





7.00% Secured Notes

March 2024

2,000


1,975





Senior Unsecured Notes:

 








6.75%

August 2018





1,600


1,593

5.375%

March 2020

2,000


1,988


2,000


1,985

7.00%

October 2020

690


689


690


689

6.375%

October 2020

2,250


2,235


2,250


2,231

7.50%

July 2021

1,625


1,615


1,625


1,613

6.75%

August 2021

650


647


650


647

5.625%

December 2021

900


895


900


894

7.25%

July 2022

550


544


550


543

5.50%

March 2023

1,000


993


1,000


992

5.875%

May 2023

3,250


3,223


3,250


3,220

4.50% euro-denominated debt

May 2023

1,772


1,757


1,578


1,563

6.125%

April 2025

3,250


3,221


3,250


3,218

Other

Various

14


14


12


12

Total long-term debt

 

$
27,426


27,141


$
30,169


29,846

Less: Current portion of long-term debt and other
 
 

925





1

Non-current portion of long-term debt

 
 
 
 
$
26,216





$
29,845

Covenant Compliance
The Senior Secured Credit Facilities and the indentures governing the Company’s Senior Secured Notes and Senior Unsecured Notes contain customary affirmative and negative covenants and specified events of default. These affirmative and negative covenants include, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers, acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates. The Revolving Credit Facility also contains specified financial maintenance covenants (consisting of a secured leverage ratio and an interest coverage ratio).
During the nine months ended September 30, 2017, the Company completed several actions which included using the proceeds from divestitures and cash flows from operations to repay debt, amending financial maintenance covenants, extending a

18

   

significant portion of the Revolving Credit Facility, and refinancing debt with near term maturities. These actions, described below, have reduced the Company’s debt balance and positively affected the Company’s ability to comply with its financial maintenance covenants. As of September 30, 2017, the Company was in compliance with all financial maintenance covenants related to its outstanding debt. The Company, based on its current forecast for the next twelve months from the date of issuance of these financial statements and the amendments executed, expects to remain in compliance with these financial maintenance covenants and meet its debt service obligations over that same period.
The Company continues to take steps to improve its operating results to ensure continual compliance with its financial maintenance covenants and take other actions to reduce its debt levels to align with the Company’s long term strategy. The Company may consider taking other actions, including divesting other businesses and refinancing debt as deemed appropriate, to provide additional coverage in complying with the financial maintenance covenants and meeting its debt service obligations.
Senior Secured Credit Facilities
On February 13, 2012, the Company and certain of its subsidiaries as guarantors entered into the Credit Agreement with a syndicate of financial institutions and investors, as lenders. As of January 1, 2016, the Credit Agreement provided for: (i) a $1,500 million Revolving Credit Facility maturing on April 20, 2018, which included a sublimit for the issuance of standby and commercial letters of credit and a sublimit for swing line loans and (ii) a series of term loans maturing during the years 2016 through 2022.
On April 11, 2016, the Company entered into Amendment No. 12 and Waiver to the Credit Agreement (“Amendment No. 12”), which addressed the Company's delay in delivering its Annual Report for the year ended December 31, 2015 on Form 10-K (the “2015 Annual Report”). Amendment No. 12 extended the deadlines to deliver the Company’s 2015 Annual Report and its Quarterly Report for the period ended March 31, 2016 on Form 10-Q (such requirements, the “Financial Reporting Requirements”) and waived, among other things, any cross-default under the Credit Agreement to the Company’s other indebtedness as a result of the delays. These Financial Reporting Requirements were subsequently satisfied as extended.  In addition to these waivers, Amendment No. 12 (i) modified certain financial maintenance covenants, (ii) amended certain financial definitions and (iii) imposed a number of restrictions on the Company and its subsidiaries’ ability to incur additional debt, make additional acquisitions, make investments, distribute capital and make other capital allocations until such time that the Financial Reporting Requirements were satisfied and the Company attains specific leverage ratios. Amendment No. 12 also increased each of the applicable interest rate margins under the Credit Agreement by 1.00% until delivery of the Company's financial statements for the quarter ending June 30, 2017. Thereafter, the interest rate applicable to the loans will be determined on the basis of a pricing grid tied to the Company's secured leverage ratio. Amendment No. 12 was accounted for as a debt modification, and as a result, payments to the lenders were recognized as additional debt discounts and were being amortized over the remaining term of each term loan.
On August 23, 2016, the Company entered into Amendment No. 13 to the Credit Agreement (“Amendment No. 13”) which (i) reduced the minimum interest coverage maintenance covenant under the Credit Agreement, (ii) permitted the issuance of secured notes with shorter maturities and the incurrence of other indebtedness, in each case to repay term loans under the Credit Agreement and (iii) provided additional flexibility to sell assets, provided the proceeds of such asset sales are used to prepay loans under the Credit Agreement. Amendment No. 13 also increased each of the applicable interest rate margins under the Credit Agreement by 0.50% until delivery of the Company’s financial statements for the quarter ending June 30, 2017. Thereafter, the interest rate applicable to the loans will be determined on the basis of a pricing grid tied to the Company's secured leverage ratio. Amendment No. 13 was accounted for as a debt modification, and as a result, payments to the lenders were recognized as additional debt discounts and were being amortized over the remaining term of each term loan.
On March 3, 2017, the Company used proceeds from the Skincare Sale to repay $1,086 million of outstanding debt under its Senior Secured Credit Facilities.
On March 21, 2017, the Company entered into Amendment No. 14 to the Credit Agreement (“Amendment No. 14”) which (i) provided additional financing from an incremental term loan under the Company's Series F Tranche B Term Loan Facility of $3,060 million (the “Series F-3 Tranche B Term Loan”), (ii) amended the financial covenants contained in the Credit Agreement, (iii) increased the amortization rate for the Series F Tranche B Term Loan Facility from 0.25% per quarter (1% per annum) to 1.25% per quarter (5% per annum), with quarterly payments starting March 31, 2017, (iv) amended certain financial definitions, including the definition of Consolidated Adjusted EBITDA, and (v) provided additional ability for the Company to, among other things, incur indebtedness and liens, consummate acquisitions and make other investments, including relaxing certain limitations imposed by prior amendments. The proceeds from the additional financing, combined with the proceeds from the issuance of the Senior Secured Notes described below and cash on hand, were used to (i) repay all outstanding

19

   

balances under the Company’s Series A-3 Tranche A Term Loan Facility, Series A-4 Tranche A Term Loan Facility, Series D-2 Tranche B Term Loan Facility, Series C-2 Tranche B Term Loan Facility, and Series E-1 Tranche B Term Loan Facility (collectively the “Refinanced Debt”), (ii) repurchase $1,100 million in principal amount of 6.75% Senior Unsecured Notes due August 2018 (the “August 2018 Senior Unsecured Notes”), (iii) repay $350 million of amounts outstanding under the Company's Revolving Credit Facility and (iv) pay related fees and expenses (collectively, the “March 2017 Refinancing Transactions”).
Amendments to the covenants made as part of Amendment No. 14 include: (i) removed the financial maintenance covenants with respect to the Series F Tranche B Term Loan Facility, (ii) reduced the interest coverage ratio maintenance covenant to 1.50:1.00 with respect to the Revolving Credit Facility beginning in the quarter ending March 31, 2017 through the quarter ending March 31, 2019 (stepping up to 1.75:1.00 thereafter) and (iii) increased the secured leverage ratio maintenance covenant to 3.00:1.00 with respect to the Revolving Credit Facility beginning in the quarter ending March 31, 2017 through the quarter ending March 31, 2019 (stepping down to 2.75:1.00 thereafter). These financial maintenance covenants apply only with respect to the Revolving Credit Facility and can be waived or amended without the consent of the term loan lenders under the Credit Agreement.
Modifications to Consolidated Adjusted EBITDA from Amendment No. 14 included, among other things: (i) modifications to permit the Company to add back extraordinary, unusual or non-recurring expenses or charges (including certain costs of, and payments of, litigation expenses, actual or prospective legal settlements, fines, judgments or orders, subject to a cap of $500 million in any twelve month period, of which no more than $250 million may pertain to any costs, payments, expenses, settlements, fines, judgments or orders, in each case, arising out of any actual or potential claim, investigation, litigation or other proceeding that the Company did not publicly disclose on or prior to the effectiveness of Amendment No. 14, and subject to other customary limitations), and (ii) modifications to allow the Company to add back expenses, charges or losses actually reimbursed or for which the Company reasonably expects to be reimbursed by third parties within 365 days, subject to customary limitations.
Amendment No. 14 was accounted for as a modification of debt to the extent the Refinanced Debt was replaced with the incremental Series F-3 Tranche B Term Loan issued to the same creditor and an extinguishment of debt to the extent the Refinanced Debt was replaced with Series F-3 Tranche B Term Loan issued to a different creditor. The Refinanced Debt replaced with the proceeds of the newly issued senior secured notes was accounted for as an extinguishment of debt. For amounts accounted for as an extinguishment of debt, the Company incurred a Loss on extinguishment of debt of $27 million representing the difference between the amount paid to settle the extinguished debt and the extinguished debt’s carrying value (the stated principal amount net of unamortized discount and debt issuance costs). Payments made to the lenders of $38 million associated with the issuance of the new Series F-3 Tranche B Term Loan were capitalized and are being amortized as interest expense over the remaining term of the Series F Tranche B Term Loan Facility. Third party expenses of $3 million associated with the modification of debt were expensed as incurred and included in Interest expense.
On March 28, 2017, the Company entered into Amendment No. 15 to the Credit Agreement (“Amendment No. 15”) which provided for the extension of the maturity date of $1,190 million of revolving credit commitments under the Revolving Credit Facility from April 20, 2018 to the earlier of (i) April 20, 2020 and (ii) the date that is 91 calendar days prior to the scheduled maturity of any series or tranche of term loans under the Credit Agreement, certain Senior Secured Notes or Senior Unsecured Notes and any other indebtedness for borrowed money in excess of $750 million. Unless otherwise terminated prior thereto, the remaining $310 million of revolving credit commitments under the Revolving Credit Facility will continue to mature on April 20, 2018. Amendment No. 15 was accounted for in part as a debt modification, whereby the fees paid to lenders agreeing to extend their commitment through April 20, 2020 and the fees paid to lenders providing additional commitments were recognized as additional debt issuance costs and are being amortized over the remaining term of the Revolving Credit Facility. Amendment No. 15 was accounted for in part as an extinguishment of debt and the Company incurred a Loss on extinguishment of debt of $1 million representing the unamortized debt issuance costs associated with the commitments canceled by lenders in the amendment.
In April 2017, using the remaining proceeds from the Skincare Sale and the proceeds from the divestiture of a manufacturing facility in Brazil, the Company repaid $220 million of its Series F Tranche B Term Loan Facility. On July 3, 2017, using the net proceeds from the Dendreon Sale, the Company repaid $811 million of its Series F Tranche B Term Loan Facility.  On September 29, 2017, using cash on hand, the Company repaid $100 million of amounts outstanding under its Revolving Credit Facility. 

20

   

Borrowings under the Senior Secured Credit Facilities bear interest at a rate per annum equal to, at the Company's option from time to time, either (i) a base rate determined by reference to the higher of (a) the prime rate (as defined in the Credit Agreement) and (b) the federal funds effective rate plus 1/2 of 1% or (ii) a LIBO rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. These applicable margins are subject to increase or decrease quarterly based on the secured leverage ratio beginning with the quarter ended June 30, 2017. Based on its calculation of the Company’s secured leverage ratio, management does not anticipate any such increase or decrease to the current applicable margins for the next applicable period.
The applicable interest rate margins for borrowings under the Revolving Credit Facility are 2.75% with respect to base rate borrowings and 3.75% with respect to LIBO rate borrowings.  As of September 30, 2017, the stated rate of interest on the Revolving Credit Facility was 4.99% per annum. In addition, the Company is required to pay commitment fees of 0.50% per annum in respect to the commitments not utilized, letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on LIBO rate borrowings, customary fronting fees for the issuance of letters of credit and agency fees.
The applicable interest rate margins for the Series F Tranche B Term Loan Facility are 3.75% with respect to base rate borrowings and 4.75% with respect to LIBO rate borrowings, subject to a 0.75% LIBO rate floor.  As of September 30, 2017, the stated rate of interest on the Company’s borrowings under the Series F Tranche B Term Loan Facility was 5.99% per annum.
Senior Secured Notes
March 2017 Refinancing Transactions
As part of the March 2017 Refinancing Transactions, the Company issued $1,250 million aggregate principal amount of 6.50% senior secured notes due March 15, 2022 (the “March 2022 Senior Secured Notes”) and $2,000 million aggregate principal amount of 7.00% senior secured notes due March 15, 2024 (the “March 2024 Senior Secured Notes”), in a private placement, the proceeds of which, when combined with the proceeds from the Series F-3 Tranche B Term Loan and cash on hand, were used to (i) repay the Refinanced Debt, (ii) repurchase $1,100 million in principal amount of August 2018 Senior Unsecured Notes, (iii) repay $350 million of amounts outstanding under the Company's Revolving Credit Facility and (iv) pay related fees and expenses. Interest on these notes is payable semi-annually in arrears on each March 15 and September 15.
The Senior Secured Notes are guaranteed by each of the Company’s subsidiaries that is a guarantor under the Credit Agreement and existing Senior Unsecured Notes (together, the “Note Guarantors”). The Senior Secured Notes and the guarantees related thereto are senior obligations and are secured, subject to permitted liens and certain other exceptions, by the same first priority liens that secure the Company’s obligations under the Credit Agreement under the terms of the indenture governing the Senior Secured Notes.
The Senior Secured Notes and the guarantees rank equally in right of payment with all of the Company’s and Note Guarantors’ respective existing and future unsubordinated indebtedness and senior to the Company’s and Note Guarantors’ respective future subordinated indebtedness. The Senior Secured Notes and the guarantees related thereto are effectively pari passu with the Company’s and the Note Guarantors’ respective existing and future indebtedness secured by a first priority lien on the collateral securing the Senior Secured Notes and effectively senior to the Company’s and the Note Guarantors’ respective existing and future indebtedness that is unsecured, including the existing Senior Unsecured Notes, or that is secured by junior liens, in each case to the extent of the value of the collateral. In addition, the Senior Secured Notes are structurally subordinated to (i) all liabilities of any of the Company’s subsidiaries that do not guarantee the Senior Secured Notes and (ii) any of the Company’s debt that is secured by assets that are not collateral.
The March 2022 Senior Secured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 15, 2019, at the redemption prices set forth in the indenture. The Company may redeem some or all of the March 2022 Senior Secured Notes prior to March 15, 2019 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to March 15, 2019, the Company may redeem up to 40% of the aggregate principal amount of the March 2022 Senior Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture.
The March 2024 Senior Secured Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 15, 2020, at the redemption prices set forth in the indenture. The Company may redeem some or all of the March

21

   

2024 Senior Secured Notes prior to March 15, 2020 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to March 15, 2020, the Company may redeem up to 40% of the aggregate principal amount of the March 2024 Senior Secured Notes using the proceeds of certain equity offerings at the redemption price set forth in the indenture.
Upon the occurrence of a change in control (as defined in the indentures governing the Senior Secured Notes), unless the Company has exercised its right to redeem all of the notes of a series as described above, holders of the Senior Secured Notes may require the Company to repurchase such holder’s notes, in whole or in part, at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest.
Senior Unsecured Notes
The Senior Unsecured Notes issued by the Company are the Company’s senior unsecured obligations and are jointly and severally guaranteed on a senior unsecured basis by each of its subsidiaries that is a guarantor under the Senior Secured Credit Facilities. The Senior Unsecured Notes issued by the Company’s subsidiary Valeant are senior unsecured obligations of Valeant and are jointly and severally guaranteed on a senior unsecured basis by the Company and each of its subsidiaries (other than Valeant) that is a guarantor under the Senior Secured Credit Facilities. Future subsidiaries of the Company and Valeant, if any, may be required to guarantee the Senior Unsecured Notes.
If the Company experiences a change in control, the Company may be required to make an offer to repurchase each series of Senior Unsecured Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount of the Senior Unsecured Notes repurchased, plus accrued and unpaid interest.
As part of the March 2017 Refinancing Transactions, the Company completed a tender offer to repurchase $1,100 million in aggregate principal amount of the August 2018 Senior Unsecured Notes for total consideration of approximately $1,132 million plus accrued and unpaid interest through March 20, 2017. Loss on extinguishment of debt during the three months ended March 31, 2017 associated with the repurchase of the August 2018 Senior Unsecured Notes was $36 million representing the difference between the amount paid to settle the debt and the debt’s carrying value.
On August 15, 2017, the Company repurchased the remaining $500 million of outstanding August 2018 Senior Unsecured Notes using cash on hand, plus accrued and unpaid interest. Loss on extinguishment of debt during the three months ended September 30, 2017 associated with the repurchase of the August 2018 Senior Unsecured Notes was $1 million representing the difference between the amount paid to settle the debt and the debt’s carrying value.
Weighted Average Stated Rate of Interest
The weighted average stated rate of interest as of September 30, 2017 and December 31, 2016 was 6.09% and 5.75%, respectively.

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Maturities
Maturities and mandatory amortization payments of debt obligations for the period October through December 2017, the five succeeding years ending December 31 and thereafter are as follows:
(in millions)
 
October through December 2017
$
923

2018
2

2019

2020
5,365

2021
3,175

2022
6,677

Thereafter
11,284

Total gross maturities
27,426

Unamortized discounts
(285
)
Total long-term debt
$
27,141

During the nine months ended September 30, 2017, the Company made aggregate repayments of long-term debt of $9,249 million, which consisted of (i) $7,199 million of repayments of term loans under its Senior Secured Credit Facilities, (ii) $1,600 million of repurchased August 2018 Senior Unsecured Notes, and (iii) $450 million of Revolving Credit Facility amounts outstanding. During the nine months ended September 30, 2017, the Company incurred $6,310 million of long-term debt, consisting of $3,060 million of Series F-3 Tranche B Term Loan and $3,250 million of Senior Secured Notes.
On October 5, 2017, using the net proceeds from the iNova Sale, the Company repaid $923 million of its Series F Tranche B Term Loan Facility. This repayment satisfied the $923 million due during the period October through December 2017 in the table above. On October 17, 2017, the Company issued $1,000 million aggregate principal amount of 5.50% senior secured notes due November 1, 2025 (the “5.50% 2025 Notes”), in a private placement, the proceeds of which were used to (i) repurchase $569 million in principal amount of 6.375% senior notes due 2020 (the “6.375% 2020 Notes”) and (ii) repurchase $431 million in principal amount of 7.00% senior notes due 2020 (the “7.00% 2020 Notes”) (collectively the “2020 Notes”). The related fees and expenses were paid using cash on hand. The repayments of the 2020 Notes and issuance of the 5.50% 2025 Notes are not reflected in the table above. On November 2, 2017, using cash on hand, the Company repaid $125 million of its Series F Tranche B Term Loan Facility, satisfying an equivalent amount due in the year 2022 reflected in the table above. See Note 20, "SUBSEQUENT EVENTS" for additional details regarding the private placement of the 5.50% 2025 Notes and repurchase of the 2020 Notes.

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11.
PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS
The Company sponsors defined benefit plans and a participatory defined benefit postretirement medical and life insurance plan, which covers certain U.S. employees and employees in certain other countries. The following table provides the components of net periodic (benefit) cost for the Company’s defined benefit pension plans and postretirement benefit plan for the three and nine months ended September 30, 2017 and 2016:
 
 
Pension Benefit Plans
 
Postretirement
Benefit
Plan
 
U.S. Plan
 
Non-U.S. Plans
 
 
 
Three Months Ended September 30,
(in millions)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
1

 
$
1

 
$
1

 
$
1

 
$

 
$
1

Interest cost
 
2

 
2

 
1

 
1

 
1

 

Expected return on plan assets
 
(4
)
 
(3
)
 
(2
)
 
(2
)
 

 

Amortization of prior service credit
 

 

 

 

 

 
(1
)
Amortization of net loss
 

 

 

 

 

 

Net periodic (benefit) cost
 
$
(1
)
 
$

 
$

 
$

 
$
1

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefit Plans
 
Postretirement
Benefit
Plan
 
U.S. Plan
 
Non-U.S. Plans
 
 
 
Nine Months Ended September 30,
(in millions)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
2

 
$
2

 
$
2

 
$
2

 
$

 
$
1

Interest cost
 
6

 
6

 
3

 
4

 
2

 
1

Expected return on plan assets
 
(10
)
 
(10
)
 
(4
)
 
(5
)
 

 

Amortization of prior service credit
 

 

 
(1
)
 

 
(2
)
 
(2
)
Amortization of net loss
 

 

 
1

 

 

 

Net periodic (benefit) cost
 
$
(2
)
 
$
(2
)
 
$
1

 
$
1

 
$

 
$

During the nine months ended September 30, 2017, the Company contributed $5 million, $5 million, and $2 million to the U.S. pension benefit plans, the non-U.S. pension benefit plans, and the postretirement benefit plan, respectively. The Company expects to contribute $5 million, $6 million, and $6 million in 2017 to the U.S. pension benefit plans, the non-U.S. pension benefit plans, and the postretirement benefit plan, respectively, inclusive of amounts contributed during the nine months ended September 30, 2017.
12.
SHARE-BASED COMPENSATION
In May 2014, the shareholders approved the Company’s 2014 Omnibus Incentive Plan (the “2014 Plan”) which replaced the Company’s 2011 Omnibus Incentive Plan (the “2011 Plan”) for future equity awards granted by the Company. The Company transferred the common shares available under the 2011 Plan to the 2014 Plan. The maximum number of common shares that may be issued to participants under the 2014 Plan is equal to 18,000,000 common shares, plus the number of common shares under the 2011 Plan reserved but unissued and not underlying outstanding awards and the number of common shares becoming available for reuse after awards are terminated, forfeited, cancelled, exchanged or surrendered under the 2011 Plan and the Company’s 2007 Equity Compensation Plan. The Company registered, in the aggregate, 20,000,000 common shares of common stock for issuance under the 2014 Plan. Approximately 7,205,000 shares were available for future grants as of September 30, 2017. The Company uses reserved and unissued common shares to satisfy its obligations under its share-based compensation plans.

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During the three months ended March 31, 2017, the Company introduced a new long-term incentive program with the objective to re-align the share-based awards granted to senior management with the Company’s focus on improving its tangible capital usage and allocation while maintaining focus on improving total shareholder return over the long-term. The share-based awards granted under this long-term incentive program consist of time-based stock options, time-based restricted share units (“RSUs”) and performance-based RSUs. Performance-based RSUs are comprised of awards that vest upon achievement of certain share price appreciation conditions that are based on total shareholder return (“TSR”) and awards that vest upon attainment of certain performance targets that are based on the Company’s return on tangible capital (“ROTC”).
The fair value of the ROTC performance-based RSUs is estimated based on the trading price of the Company’s common shares on the date of grant. Expense recognized for the ROTC performance-based RSUs in each reporting period reflects the Company’s latest estimate of the number of ROTC performance-based RSUs that are expected to vest. If the ROTC performance-based RSUs do not ultimately vest due to the ROTC targets not being met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
The accounting policy with respect to time-based stock options, time-based RSUs and TSR performance-based RSUs is described in the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The following table summarizes the components and classification of share-based compensation expense related to stock options and RSUs for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended
September 30,

Nine Months Ended
September 30,
(in millions)
2017

2016

2017

2016
Stock options
$
4

 
$
4

 
$
14

 
$
11

RSUs
15

 
33

 
56

 
123

 
$
19

 
$
37

 
$
70

 
$
134

 
 
 
 
 
 
 
 
Research and development expenses
$
2

 
$
2

 
$
6

 
$
5

Selling, general and administrative expenses
17

 
35

 
64

 
129

 
$
19

 
$
37

 
$
70

 
$
134

During the nine months ended September 30, 2017 and 2016, the Company granted approximately 1,545,000 stock options with a weighted-average exercise price of $14.28 per option and approximately 2,414,000 stock options with a weighted-average exercise price of $26.04 per option, respectively. The weighted-average fair values of all stock options granted to employees during the nine months ended September 30, 2017 and 2016 were $5.97 and $14.76, respectively.
During the nine months ended September 30, 2017 and 2016, the Company granted approximately 3,557,000 time-based RSUs with a weighted-average grant date fair value of $11.78 per RSU and approximately 1,675,000 time-based RSUs with a weighted-average grant date fair value of $30.94 per RSU, respectively.
During the nine months ended September 30, 2017, the Company granted approximately 416,000 performance-based RSUs, consisting of approximately 208,000 units of TSR performance-based RSUs with an average grant date fair value of $16.34 per RSU and approximately 208,000 units of ROTC performance-based RSUs with a weighted-average grant date fair value of $15.76 per RSU. During the nine months ended September 30, 2016, the Company granted approximately 1,401,000 performance-based RSUs with a weighted-average grant date fair value of $37.33 per RSU.
In March 2016, the Company announced that its Board of Directors had initiated a search to identify a candidate for a new CEO to succeed the Company's then current CEO, who would continue to serve in that role until his replacement was appointed. On May 2, 2016, the Company's new CEO assumed the role, succeeding the Company's former CEO. Pursuant to the terms of his employment agreement dated January 2015, the former CEO was entitled to certain share-based awards and payments upon termination. Under his January 2015 employment agreement, the former CEO received performance-based RSUs that vest when certain market conditions (namely total shareholder return) are met at the defined dates, provided continuing employment through those dates. Under the termination provisions of his employment agreement, upon termination of the former CEO, the defined dates for meeting the market conditions of the performance-based RSUs were eliminated and, as a result, vesting was based solely on the attainment of the applicable level of total shareholder return through the date of

25

   

termination and the resulting number of common shares, if any, to be awarded to the former CEO was determined on a pro-rata basis for service provided under the original performance period, with credit given for an additional year of service. As the total shareholder return at the time of the former CEO’s termination did not meet the performance threshold, no common shares were issued and no value was ultimately received by the former CEO pursuant to this performance-based RSU award. However, an incremental share-based compensation expense of $28 million was recognized during the six months ended June 30, 2016, which represents the additional year of service credit consistent with the grant date fair value calculated using a Monte Carlo Simulation Model in the first quarter of 2015, notwithstanding the fact that no value was ultimately received by the former CEO. In addition to the acceleration of his performance-based RSUs, the former CEO was also entitled to a cash severance payment of $9 million and a pro-rata annual cash bonus of approximately $2 million pursuant to his employment agreement. The cash severance payments, the pro-rata cash bonus and the associated payroll taxes were also recognized as expense in the first quarter of 2016.
As of September 30, 2017, the remaining unrecognized compensation expense related to all outstanding non-vested stock options, time-based RSUs and performance-based RSUs amounted to $129 million, which will be amortized over a weighted-average period of 2.11 years.
13.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss were as follows:
(in millions)
 
September 30,
2017
 
December 31,
2016
Foreign currency translation adjustments
 
$
(1,850
)
 
$
(2,074
)
Pension and postretirement benefit plan adjustments, net of tax