6. Financial Instruments and Risk Management

Financial Risks

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, interest rate risk and equity risk.

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 Consolidated Balance Sheets. Any gains or losses on the foreign exchange forward contracts are recognized in earnings in the period incurred in the 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 Consolidated Balance Sheets. Any changes in fair value are included in earnings or deferred through AOCE, depending on the nature and effectiveness of the offset.

As of December 31, 2010, the Company had €679.2 million of borrowings under its Amended and Restated Credit Agreement dated December 20, 2007 (the "Prior Credit Agreement") that were designated as a hedge of its net investment in certain Euro-functional currency subsidiaries to manage foreign currency translation risk. The U.S. Dollar equivalent of such amounts was $909.3 million at December 31, 2010. Borrowings designated as hedges of net investments are marked to market using the current spot exchange rate as of the end of the period, with gains and losses included in the foreign currency translation adjustment component of AOCE on the Consolidated Balance Sheets until the sale or substantial liquidation of the underlying net investments. During 2011, the borrowings that were designated as a net investment hedge were repaid in conjunction with the refinancing of the Prior Credit Agreement (see Note 7).

The Company enters into interest rate swaps in order to manage interest rate risk associated with the Company's fixed and floating-rate debt. These derivative instruments are measured at fair value and reported as current assets or current liabilities on the 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. Any changes in fair value are included in earnings or deferred through AOCE, depending on the nature and effectiveness of the offset.

As discussed further in Note 7, in November 2011, the Company entered into a credit agreement (the "Senior Credit Agreement") and refinanced the Prior Credit Agreement. In conjunction with the refinancing of the Prior Credit Agreement, the Company terminated certain interest rate swaps that had previously fixed the interest rate on a portion of the Company's variable-rate U.S. Tranche B Term Loans. As a result, during the year ended December 31, 2011, charges of approximately $13.9 million that had previously been classified in AOCE were recognized into other (expense) income, net. In December 2011, the Company executed $500.0 million of notional interest rate swaps in order to fix the interest rate on a portion of its variable rate U.S. Term Loans under the Senior Credit Agreement at a rate of 0.604% plus the specified spread under the Credit Agreement (currently 200 basis points), from January 2012 until January 2014. These interest rate swaps are designated as cash flow hedges of the variability of interest expense related to our variable rate debt. The total notional amount of the Company's interest rate swaps on floating-rate debt was $500.0 million and $767.7 million as of December 31, 2011 and 2010, respectively.

In January 2012, the Company executed a further $350.0 million of notional interest rate swaps in order to fix the interest rate on an additional portion of its variable rate U.S. Term Loans under the Senior Credit Agreement at a rate of 0.4504% plus the specified spread under the Senior Credit Agreement (currently 200 basis points), from March 2012 until March 2014. These interest rate swaps are designated as cash flow hedges of the variability of interest expense related to our variable rate debt.

In January 2011, the Company entered into interest rate swaps which convert $500.0 million of the Company's fixed-rate 6.0% Senior Notes due 2018 (the "2018 Senior Notes") to a variable rate. These interest rate swaps are designated as fair value hedges, are measured at fair value and reported as current assets or current liabilities on the Consolidated Balance Sheets. The change 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. As of December 31, 2011, the total notional amount of the Company's interest rate swaps on fixed-rate debt was $500 million.

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 aggregate fair value of all such contracts that are in an asset position at December 31, 2011 is $29.1 million. The Company is not subject to any obligations to post collateral under derivative instrument contracts.

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 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 stock, and have been recorded in shareholders' equity in the Company's 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 December 31, 2011, the convertible note hedge had a total fair value of $460.0 million, 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.

Fair Values of Derivative Instruments

Derivatives Designated as Hedging Instruments


	Asset Derivatives
	December 31, 2011			December 31, 2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(In thousands)
Interest rate swaps	Prepaid expenses and other current assets	$	29,773	Prepaid expenses and other current assets	$	—
Foreign currency forward contracts	Prepaid expenses and other current assets		—	Prepaid expenses and other current assets		8,884

Total		$	29,773		$	8,884



	Liability Derivatives
	December 31, 2011			December 31, 2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(In thousands)
Interest rate swaps	Other current liabilities	$	658	Other current liabilities	$	25,666
Foreign currency forward contracts	Other current liabilities		57,075	Other current liabilities		—
Foreign currency borrowings	Long-term debt		—	Long-term debt		909,255

Total		$	57,733		$	934,921

Fair Values of Derivative Instruments

Derivatives Not Designated as Hedging Instruments


	Asset Derivatives
	December 31, 2011			December 31, 2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(In thousands)
Foreign currency forward contracts	Prepaid expenses and other current assets	$	3,802	Prepaid expenses and other current assets	$	2,668
Purchased cash convertible note hedge	Other assets		460,000	Other assets		472,400

Total		$	463,802		$	475,068



	Liability Derivatives
	December 31, 2011			December 31, 2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(In thousands)
Foreign currency forward contracts	Other current liabilities	$	11,760	Other current liabilities	$	7,375
Cash conversion feature of Cash Convertible Notes	Long-term debt		460,000	Long-term debt		472,400

Total		$	471,760		$	479,775

Fair Values of Derivative Instruments

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
		Year Ended December 31,
		2011		2010		2009
(In thousands)
Interest Rate Swaps	Interest Expense	$	42,648	$	—	$	—

Total		$	42,648	$	—	$	—


	Location of Gain or (Loss) Recognized in Earnings on Hedged Items	Amount of Gain or (Loss) Recognized in Earnings on Hedging Items
		Year Ended December 31,
		2011			2010		2009
(In thousands)
2018 Senior Notes	Interest Expense	$	(29,773	)	$	—	$	—

Total		$	(29,773	)	$	—	$	—

The Effect of Derivative Instruments on the Consolidated Statements of Operations

Derivatives in Cash Flow Hedging Relationships


	Amount of Gain or (Loss) Recognized in AOCE (Net of Tax) on Derivative (Effective Portion)
	Year Ended December 31,
	2011			2010		2009
(In thousands)
Foreign currency forward contracts	$	(55,453	)	$	6,657	$	—
Interest rate swaps		15,836			23,030		6,134

Total	$	(39,617	)	$	29,687	$	6,134


	Location of Gain or (Loss) Reclassified from AOCE into Earnings (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCE into Earnings (Effective Portion)
		Year Ended December 31,
		2011			2010			2009
(In thousands)
Foreign currency forward contracts	Net revenues	$	(5,492	)	$	2,301		$	—
Interest rate swaps	Interest expense		(15,719	)		(53,499	)		(51,746	)

Total		$	(21,211	)	$	(51,198	)	$	(51,746	)


	Location of Loss Excluded from the Assessment of Hedge Effectiveness	Amount of Loss Excluded from the Assessment of Hedge Effectiveness
		Year Ended December 31,
		2011		2010			2009
(In thousands)
Foreign currency forward contracts	Other (expense) income, net	$	13,432	$	(2,958	)	$	—

Total		$	13,432	$	(2,958	)	$	—

At December 31, 2011, the Company expects that approximately $40.8 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 Consolidated Statements of Operations

Derivatives in Net Investment Hedging Relationships


	Amount of Gain or (Loss) Recognized in AOCE (Net of Tax) on Derivative (Effective Portion)
	Year Ended December 31,
	2011			2010		2009
(In thousands)
Foreign currency borrowings	$	(11,596	)	$	42,236	$	(19,630	)

Total	$	(11,596	)	$	42,236	$	(19,630	)

During the years ended December 31, 2011, 2010 and 2009, there was no gain or loss recognized into earnings on derivatives with net investment hedging relationships.

The Effect of Derivative Instruments on the 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
		Year Ended December 31,
		2011			2010			2009
(In thousands)
Foreign currency forward contracts	Other (expense) income, net	$	20,740		$	(29,215	)	$	(20,158	)
Cash Conversion feature of Cash Convertible Notes	Other (expense) income, net		12,400		$	(61,800	)	$	(174,850	)
Purchased cash convertible note hedge	Other (expense) income, net		(12,400	)	$	61,800		$	174,850

Total		$	20,740		$	(29,215	)	$	(20,158	)

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:


December 31, 2011	Level 1		Level 2		Total
(In thousands)
Financial Assets:
Trading securities:
Equity securities — exchange traded funds	$	6,760	$	—	$	6,760

Total trading securities	$	6,760	$	—	$	6,760

Available-for-sale fixed income investments:
U.S. Treasuries	$	—	$	1,519	$	1,519
Corporate bonds		—		7,192		7,192
Agency mortgage-backed securities		—		12,346		12,346
Other		—		2,697		2,697

Total available-for-sale fixed income investments	$	—	$	23,754	$	23,754

Available-for-sale equity securities:
Biosciences industry	$	172	$	—	$	172

Total available-for-sale equity securities	$	172	$	—	$	172

Foreign exchange derivative assets	$	—	$	3,802	$	3,802
Interest rate swap derivative assets		—		29,773		29,773
Purchased cash convertible note hedge		—		460,000		460,000

Total assets at fair value ⁽¹⁾	$	6,932	$	517,329	$	524,261

Financial Liabilities:
Foreign exchange derivative liabilities	$	—	$	68,835	$	68,835
Interest rate swap derivative liabilities		—		658		658
Cash conversion feature of cash convertible notes		—		460,000		460,000

Total liabilities at fair value ⁽¹⁾	$	—	$	529,493	$	529,493


December 31, 2010	Level 1		Level 2		Total
(In thousands)
Financial Assets:
Trading securities:
Equity securities — exchange traded funds	$	3,693	$	—	$	3,693

Total trading securities	$	3,693	$	—	$	3,693

Available-for-sale fixed income investments:
U.S. Treasuries	$	—	$	12,387	$	12,387
Corporate bonds		—		8,116		8,116
Agency mortgage-backed securities		—		1,934		1,934
Other		—		2,573		2,573

Total available-for-sale fixed income investments	$	—	$	25,010	$	25,010

Available-for-sale equity securities:
Biosciences industry	$	382	$	—	$	382

Total available-for-sale equity securities	$	382	$	—	$	382

Foreign exchange derivative assets	$	—	$	11,552	$	11,552
Purchased cash convertible note hedge		—		472,400		472,400

Total assets at fair value ⁽¹⁾	$	4,075	$	508,962	$	513,037

Financial Liabilities:
Foreign exchange derivative liabilities	$	—	$	7,375	$	7,375
Interest rate swap derivative liabilities		—		25,666		25,666
Cash conversion feature of cash convertible notes		—		472,400		472,400

Total liabilities at fair value ⁽¹⁾	$	—	$	505,441	$	505,441

⁽¹⁾

The Company chose not to elect the fair value option for its financial assets and liabilities that had not been previously carried at fair value. Therefore, material financial assets and liabilities not carried at fair value, such as short-term and long-term debt obligations and trade accounts receivable and payable, are still reported at their carrying values.

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:

•

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, none of which experienced any significant downgrades during the year ended December 31, 2011, that would reduce the receivable amount owed, if any, to the Company.

•

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, none of which experienced any significant downgrades during the year ended December 31, 2011 that would reduce the receivable amount owed, if any, to the Company.

•

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, none of which experienced any significant downgrades during the year ended December 31, 2011, that would reduce the receivable amount owed, if any, to the Company.

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.

Available-for-Sale Securities

The amortized cost and estimated fair value of available-for-sale securities were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(In thousands)
December 31, 2011
Debt securities	$	22,263	$	1,561	$	(70	)	$	23,754
Equity securities		—		172		—			172

	$	22,263	$	1,733	$	(70	)	$	23,926

December 31, 2010
Debt securities	$	23,797	$	1,259	$	(46	)	$	25,010
Equity securities		—		382		—			382

	$	23,797	$	1,641	$	(46	)	$	25,392

Maturities of available-for-sale debt securities at fair value as of December 31, 2011, were as follows:


(In thousands)
Mature within one year	$	32
Mature in one to five years		535
Mature in five years and later		23,187

	$	23,754