Financial Instruments and Risk Management

Mylan is exposed to certain financial risks relating to its ongoing business operations. The primary financial risks that are managed by using derivative instruments are foreign currency risk and interest rate risk.

Foreign Currency Risk Management

In order to manage foreign currency risk, Mylan enters into foreign exchange forward contracts to mitigate risk associated with changes in spot exchange rates of mainly non-functional currency denominated assets or liabilities. The foreign exchange forward contracts are measured at fair value and reported as current assets or current liabilities on the Condensed Consolidated Balance Sheets. Any gains or losses on the foreign exchange forward contracts are recognized in earnings in the period incurred in the Condensed Consolidated Statements of Operations.

The Company has also entered into forward contracts to hedge forecasted foreign currency denominated sales from certain international subsidiaries. These contracts are designated as cash flow hedges to manage foreign currency transaction risk and are measured at fair value and reported as current assets or current liabilities on the Condensed Consolidated Balance Sheets. Any changes in fair value are included in earnings or deferred through accumulated other comprehensive earnings (“AOCE”), depending on the nature and effectiveness of the offset. Any ineffectiveness in a cash flow hedging relationship is recognized immediately in earnings in the Condensed Consolidated Statements of Operations.

Interest Rate Risk Management

The Company enters into interest rate swaps in order to manage interest rate risk associated with the Company’s fixed-rate and floating-rate debt. These derivative instruments are measured at fair value and reported as current assets or current liabilities in the Condensed Consolidated Balance Sheets.

The Company’s interest rate swaps designated as cash flow hedges fix the interest rate on a portion of the Company’s variable-rate debt or hedge part of the Company’s interest rate exposure associated with variability in future cash flows attributable to changes in interest rates. Any changes in fair value are included in earnings or deferred through AOCE, depending on the nature and effectiveness of the offset. Any ineffectiveness in a cash flow hedging relationship is recognized immediately in earnings in the Condensed Consolidated Statements of Operations.

In August 2014, the Company entered into a series of forward starting swaps to hedge against changes in interest rates that could impact future debt issuances. These swaps are designed as cash flow hedges of expected future issuances of long-term bonds. The Company executed $575 million of notional value swaps with an effective date of September 2015. These swaps have a maturity of 10 years.

The Company’s interest rate swaps designated as fair value hedges convert the fixed rate on a portion of the Company’s fixed-rate senior notes to a variable rate. These interest rate swaps designated as fair value hedges are measured at fair value and reported as current assets or current liabilities in the Condensed Consolidated Balance Sheets. Any changes in the fair value of these derivative instruments, as well as the offsetting change in fair value of the portion of the fixed-rate debt being hedged, is included in interest expense.

Certain derivative instrument contracts entered into by the Company are governed by Master Agreements, which contain credit-risk-related contingent features that would allow the counterparties to terminate the contracts early and request immediate payment should the Company trigger an event of default on other specified borrowings.

The Company maintains significant credit exposure arising from the convertible note hedge on its Cash Convertible Notes. Holders may convert their Cash Convertible Notes subject to certain conversion provisions determined by a) the market price of the Company’s common stock, b) specified distributions to common shareholders, c) a fundamental change, as defined in the purchase agreement, or d) certain time periods specified in the purchase agreement. The conversion feature can only be settled in cash and, therefore, it is bifurcated from the Cash Convertible Notes and treated as a separate derivative instrument. In order to offset the cash flow risk associated with the cash conversion feature, the Company entered into a convertible note hedge with certain counterparties. Both the cash conversion feature and the purchased convertible note hedge are measured at fair value with gains and losses recorded in the Company’s Condensed Consolidated Statements of Operations. Also, in conjunction with the issuance of the Cash Convertible Notes, the Company entered into several warrant transactions with certain counterparties. The warrants meet the definition of derivatives; however, because these instruments have been determined to be indexed to the Company’s own common stock, and have been recorded in shareholders’ equity in the Company’s Condensed Consolidated Balance Sheets, the instruments are exempt from the scope of the FASB’s guidance regarding accounting for derivative instruments and hedging activities and are not subject to the fair value provisions set forth therein.

At September 30, 2014, the convertible note hedge had a total fair value of $1.39 billion, which reflects the maximum loss that would be incurred should the parties fail to perform according to the terms of the contract. The counterparties are highly rated diversified financial institutions with both commercial and investment banking operations. The counterparties are required to post collateral against this obligation should they be downgraded below thresholds specified in the contract. Eligible collateral is comprised of a wide range of financial securities with a valuation discount percentage reflecting the associated risk.

The Company regularly reviews the creditworthiness of its financial counterparties and does not expect to incur a significant loss from failure of any counterparties to perform under any agreements.

The Company records all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. Accordingly, there are no offsetting amounts that net assets against liabilities. The asset and liability balances presented in the tables below reflect the gross amounts of derivatives recorded in the Company’s interim financial statements.

Fair Values of Derivative Instruments

Derivatives Designated as Hedging Instruments



	Asset Derivatives
	September 30, 2014			December 31, 2013
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps	Prepaid expenses and other current assets	$	59.0	Prepaid expenses and other current assets	$	90.3
Foreign currency forward contracts	Prepaid expenses and other current assets	7.2		Prepaid expenses and other current assets	—
Interest rate swaps	Other assets	—		Other assets	93.1
Total		$	66.2		$	183.4



	Liability Derivatives
	September 30, 2014			December 31, 2013
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps	Other current liabilities	$	0.5	Other current liabilities	$	15.8
Foreign currency forward contracts	Other current liabilities	—		Other current liabilities	53.1
Total		$	0.5		$	68.9

Fair Values of Derivative Instruments

Derivatives Not Designated as Hedging Instruments



	Asset Derivatives
	September 30, 2014			December 31, 2013
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign currency forward contracts	Prepaid expenses and other current assets	$	5.2	Prepaid expenses and other current assets	$	6.4
Purchased cash convertible note hedge	Prepaid expenses and other current assets	1,387.9		Other assets	1,303.0
Total		$	1,393.1		$	1,309.4



	Liability Derivatives
	September 30, 2014			December 31, 2013
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign currency forward contracts	Other current liabilities	$	9.3	Other current liabilities	$	5.4
Cash conversion feature of Cash Convertible Notes	Current portion of long-term debt and other long-term obligations	1,387.9		Long-term debt	1,303.0
Total		$	1,397.2		$	1,308.4

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations

Derivatives in Fair Value Hedging Relationships



	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
(In millions)		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2014		2013		2014		2013
Interest rate swaps	Interest expense	$	2.4	$	5.3	$	50.2	$	(4.5	)
Total		$	2.4	$	5.3	$	50.2	$	(4.5	)



	Location of (Loss) or Gain Recognized in Earnings on Hedged Items	Amount of (Loss) or Gain Recognized in Earnings on Hedged Items
(In millions)		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2014		2013			2014			2013
2016 Senior Notes (1.800% coupon)	Interest expense	$	1.0	$	(1.8	)	$	0.1		$	0.8
2018 Senior Notes (6.000% coupon)	Interest expense	2.8		0.2			3.9			14.3
2023 Senior Notes (3.125% coupon)	Interest expense	2.3		—			(28.6		)	—
Total		$	6.1	$	(1.6	)	$	(24.6	)	$	15.1

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations

Derivatives in Cash Flow Hedging Relationships



	Amount of (Loss) or Gain Recognized in AOCE (Net of Tax) on Derivative (Effective Portion)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2014			2013			2014			2013
Foreign currency forward contracts	$	(17.7	)	$	(37.3	)	$	(11.8	)	$	(84.8	)
Interest rate swaps	(7.7		)	4.8			(84.6		)	119.8
Total	$	(25.4	)	$	(32.5	)	$	(96.4	)	$	35.0



	Location of Loss Reclassified from AOCE into Earnings (Effective Portion)	Amount of Loss Reclassified from AOCE into Earnings (Effective Portion)
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(In millions)		2014			2013			2014			2013
Foreign currency forward contracts	Net sales	$	(10.1	)	$	(22.5	)	$	(35.4	)	$	(44.4	)
Interest rate swaps	Interest expense	(0.2		)	—			(0.5		)	(1.4		)
Interest rate swaps	Other (income) expense, net	—			—			—			(0.8		)
Total		$	(10.3	)	$	(22.5	)	$	(35.9	)	$	(46.6	)



	Location of Gain Excluded from the Assessment of Hedge Effectiveness	Amount of Gain Excluded from the Assessment of Hedge Effectiveness
		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(In millions)		2014		2013		2014		2013
Foreign currency forward contracts	Other (income) expense, net	$	17.8	$	16.3	$	59.9	$	43.5
Total		$	17.8	$	16.3	$	59.9	$	43.5

At September 30, 2014, the Company expects that approximately $32 million of pre-tax net losses on cash flow hedges will be reclassified from AOCE into earnings during the next 12 months.

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations

Derivatives Not Designated as Hedging Instruments



	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(In millions)		2014			2013			2014			2013
Foreign currency forward contracts	Other (income) expense, net	$	(60.3	)	$	13.4		$	(52.7	)	$	9.6
Cash conversion feature of Cash Convertible Notes	Other (income) expense, net	262.4			(299.2		)	(84.6		)	(442.6		)
Purchased cash convertible note hedge	Other (income) expense, net	(262.4		)	299.2			84.6			442.6
Total		$	(60.3	)	$	13.4		$	(52.7	)	$	9.6

Fair Value Measurement

Fair value is based on the price that would be received from the sale of an identical asset or paid to transfer an identical liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a fair value hierarchy has been established that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:


•	Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.


•	Level 2: Observable market-based inputs other than quoted prices in active markets for identical assets or liabilities.


•	Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considers counterparty credit risk in its assessment of fair value.

Financial assets and liabilities carried at fair value are classified in the tables below in one of the three categories described above:



	September 30, 2014
(In millions)	Level 1		Level 2		Level 3		Total
Recurring fair value measurements
Financial Assets
Cash equivalents:
Money market funds	$	111.3	$	—	$	—	$	111.3
Total cash equivalents	111.3		—		—		111.3
Trading securities:
Equity securities — exchange traded funds	19.6		—		—		19.6
Total trading securities	19.6		—		—		19.6
Available-for-sale fixed income investments:
U.S. Treasuries	—		13.3		—		13.3
Corporate bonds	—		11.9		—		11.9
Agency mortgage-backed securities	—		0.6		—		0.6
Other	—		2.1		—		2.1
Total available-for-sale fixed income investments	—		27.9		—		27.9
Available-for-sale equity securities:
Biosciences industry	0.1		—		—		0.1
Total available-for-sale equity securities	0.1		—		—		0.1
Foreign exchange derivative assets	—		12.4		—		12.4
Interest rate swap derivative assets	—		59.0		—		59.0
Purchased cash convertible note hedge	—		1,387.9		—		1,387.9
Total assets at recurring fair value measurement	$	131.0	$	1,487.2	$	—	$	1,618.2
Financial Liabilities
Foreign exchange derivative liabilities	$	—	$	9.3	$	—	$	9.3
Interest rate swap derivative liabilities	—		0.5		—		0.5
Cash conversion feature of Cash Convertible Notes	—		1,387.9		—		1,387.9
Contingent consideration	—		—		460.8		460.8
Total liabilities at recurring fair value measurement	$	—	$	1,397.7	$	460.8	$	1,858.5



	December 31, 2013
(In millions)	Level 1		Level 2		Level 3		Total
Recurring fair value measurements
Financial Assets
Cash equivalents:
Money market funds	$	—	$	—	$	—	$	—
Total cash equivalents	—		—		—		—
Trading securities:
Equity securities — exchange traded funds	16.6		—		—		16.6
Total trading securities	16.6		—		—		16.6
Available-for-sale fixed income investments:
U.S. Treasuries	—		12.8		—		12.8
Corporate bonds	—		10.7		—		10.7
Agency mortgage-backed securities	—		0.7		—		0.7
Other	—		2.6		—		2.6
Total available-for-sale fixed income investments	—		26.8		—		26.8
Available-for-sale equity securities:
Biosciences industry	0.2		—		—		0.2
Total available-for-sale equity securities	0.2		—		—		0.2
Foreign exchange derivative assets	—		6.4		—		6.4
Interest rate swap derivative assets	—		183.4		—		183.4
Purchased cash convertible note hedge	—		1,303.0		—		1,303.0
Total assets at recurring fair value measurement	$	16.8	$	1,519.6	$	—	$	1,536.4
Financial Liabilities
Foreign exchange derivative liabilities	$	—	$	58.5	$	—	$	58.5
Interest rate swap derivative liabilities	—		15.8		—		15.8
Cash conversion feature of Cash Convertible Notes	—		1,303.0		—		1,303.0
Contingent consideration	—		—		664.6		664.6
Total liabilities at recurring fair value measurement	$	—	$	1,377.3	$	664.6	$	2,041.9

For financial assets and liabilities that utilize Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including the LIBOR yield curve, foreign exchange forward prices and bank price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities:


•	Cash equivalents — valued at observable net asset value prices.


•	Trading securities — valued at the active quoted market price from broker or dealer quotations or transparent pricing sources at the reporting date.


•	Available-for-sale fixed income investments — valued at the quoted market price from broker or dealer quotations or transparent pricing sources at the reporting date.


•	Available-for-sale equity securities — valued using quoted stock prices from the London Exchange at the reporting date and translated to U.S. Dollars at prevailing spot exchange rates.


•	Interest rate swap derivative assets and liabilities — valued using the LIBOR/EURIBOR yield curves at the reporting date. Counterparties to these contracts are highly rated financial institutions.


•	Foreign exchange derivative assets and liabilities — valued using quoted forward foreign exchange prices at the reporting date. Counterparties to these contracts are highly rated financial institutions.


•	Cash conversion feature of cash convertible notes and purchased convertible note hedge — valued using quoted prices for the Company’s cash convertible notes, its implied volatility and the quoted yield on the Company’s other long-term debt at the reporting date. Counterparties to the purchased convertible note hedge are highly rated financial institutions.

The fair value measurement of contingent consideration is determined using Level 3 inputs. The Company’s contingent consideration represents a component of the total purchase consideration for the respiratory delivery platform, the Agila acquisition and certain other acquisitions. The measurement is calculated using unobservable inputs based on the Company’s own assumptions. For the respiratory platform and certain other acquisitions, significant unobservable inputs in the valuation include the probability and timing of future development and commercial milestones and future profit sharing payments. A discounted cash flow method was used to value contingent consideration at September 30, 2014 and December 31, 2013, which was calculated as the present value of the estimated future net cash flows using a market rate of return. Discount rates ranging from 0.6% to 10.3% were utilized in the valuation. For the contingent consideration related to the Agila acquisition, significant unobservable inputs in the valuation include the probability of future payments to the seller of amounts withheld at the closing date. Significant changes in unobservable inputs could result in material changes to the contingent consideration liability. During the three months ended September 30, 2014, the Company entered into an agreement with Strides Arcolab to settle a portion of the contingent consideration for $150 million, for which the Company accrued $230 million at the acquisition date. As a result of this agreement, the Company recognized a gain of $80 million during the three months ended September 30, 2014, which is included in other operating (income) expense, net in the Condensed Consolidated Statements of Operations. The remaining contingent consideration, which could total a maximum of $211 million, is primarily related to the satisfaction of certain regulatory conditions, including potential regulatory remediation costs and the resolution of certain pre-acquisition contingencies. During the three and nine months ended September 30, 2014, accretion of $9.0 million and $26.1 million, respectively was recorded in interest expense. During the three and nine months ended September 30, 2013, $8.2 million and $23.9 million, respectively was recorded in interest expense, and a fair value adjustment to increase the liability by approximately $15.0 million and $3.1 million, respectively, was recorded as a component of other operating (income) expense, net.

Although the Company has not elected the fair value option for financial assets and liabilities, any future transacted financial asset or liability will be evaluated for the fair value election.