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Derivative instruments and hedging activities

3 Months Ended

Mar. 31, 2019

Derivative Instruments and Hedging Activities

NOTE 13 – Derivative instruments and hedging activities:

a.	Foreign exchange risk management:

In the first quarter of 2019, approximately 49% of Teva’s revenues were denominated in currencies other than the U.S. dollar. As a result, Teva is subject to significant foreign currency risks.

The Company enters into forward exchange contracts, purchases and writes options in order to hedge the currency exposure on balance sheet items. In addition, the Company takes measures to reduce exposure by using natural hedging. The Company also acts to offset risks in opposite directions among the companies in the Group. The currency hedged items are usually denominated in the following main currencies: the new Israeli shekel (NIS), the euro (EUR), the Swiss franc (CHF), the Japanese yen (JPY), the British pound (GBP), the Canadian dollar (CAD), the Polish zloty (PLN), the Indian rupee (INR) and other European and Latin American currencies.

Depending on market conditions, foreign currency risk is also managed through the use of foreign currency debt.

The Company hedges against possible fluctuations in foreign subsidiaries net assets (“net investment hedge”) and entered into cross currency swaps and forward contracts in order to hedge such an exposure.

Most of the counterparties to the derivatives are major banks and the Company is monitoring the associated inherent credit risks. The Company does not enter into derivative transactions for trading purposes.

b.	Interest risk management:

The Company raises capital through various debt instruments, including straight notes that bear a fixed or variable interest rate, bank loans, securitizations and convertible debentures. In some cases, the Company has swapped from a fixed to a floating interest rate (“fair value hedge”) and from a fixed to a fixed interest rate with an exchange from a currency other than the functional currency (“cash flow hedge”), thereby reducing overall interest expenses or hedging risks associated with interest rate fluctuations.

c.	Derivative instruments notional amounts

The following table summarizes the notional amounts for hedged items, when transactions are designated as hedge accounting:

	March 31,		December 31,
	2019		2018
	(U.S. $ in millions)
Cross-currency swap—cash flow hedge	$	588	$	588
Cross-currency swap—net investment hedge		1,000		1,000
Interest rate swap—fair value hedge		500		500
		2,088		2,088

d.	Derivative instrument outstanding:

The following table summarizes the classification and fair values of derivative instruments:

	Fair value
	Designated as hedging instruments						Not designated as hedging instruments
	March 31, 2019			December 31, 2018			March 31, 2019			December 31, 2018
Reported under	(U.S. $ in millions)
Asset derivatives:
Other current assets:
Option and forward contracts	$	—		$	—		$	32		$	18
Other non-current assets:
Cross-currency swaps—cash flow hedge		76			58			—			—
Liability derivatives:
Other current liabilities:
Option and forward contracts		—			—			(11	)		(26	)
Cross-currency swaps—net investment hedge		(22	)		—			—			—
Other taxes and long-term liabilities:
Cross-currency swaps—net investment hedge		—			(41	)		—			—
Senior notes and loans:
Interest rate swaps—fair value hedge		(6	)		(9	)		—			—

The table below provides information regarding the location and amount of pretax (gains) losses from derivatives designated in fair value or cash flow hedging relationships:

	Reported under
	Financial expenses, net						Other Comprehensive income
	Period ended,
	March 31, 2019			March 31, 2018**			March 31, 2019			March 31, 2018**
	(U.S. $ in millions)
Line items in which effects of hedges are recorded	$	218		$	271		$	100		$	113
Cross-currency swaps — cash flow hedge (1)		(1	)		*			(20	)		17
Cross-currency swaps — net investment hedge (2)		(7	)		(7	)		(20	)	$	30
Interest rate swaps — fair value hedge (3)	$	1		$	*		$	—		$	—

*	Represents an amount less than $0.5 million.
**	Comparative figures are based on prior hedge accounting standard.

The table below provides information regarding the location and amount of pretax (gains) losses from derivatives not designated as hedging instruments:

	Reported under
	Financial expenses, net					Net Revenues
	Period ended,
	March 31, 2019			March 31, 2018		March 31, 2019		March 31, 2018
	(U.S. $ in millions)
Line items in which effects of hedges are recorded		218			271		4,295		5,065
Option and forward contracts (4)	$	(42	)	$	19	$	—	$	—

(1)	With respect to cross-currency swap agreements, Teva recognized gains which mainly reflect the differences between the fixed interest rate and the floating interest rate.
(2)	In each of the first and second quarters of 2017, Teva entered into a cross currency swap agreement with a notional amount of $500 million maturing in 2020. These cross currency swaps were designated as a net investment hedge of Teva’s foreign subsidiaries euro denominated net assets, in order to reduce the risk of adverse exchange rate fluctuations. With respect to these cross currency swap agreements, Teva recognized gains which mainly reflect the differences between the float-for-float interest rates paid and received. No amounts were reclassified from AOCI into income related to the sale of a subsidiary.
(3)	In the fourth quarter of 2016, Teva entered into an interest rate swap agreement designated as fair value hedge relating to its 2.8% senior notes due 2023 with respect to $500 million notional amount of outstanding debt. With respect to this interest rate swap agreement, Teva recognized a loss which mainly reflects the differences between the fixed interest rate and the floating interest rate.
(4)	Teva uses foreign exchange contracts (mainly option and forward contracts) to hedge balance sheet items from currency exposure. These foreign exchange contracts are not designated as hedging instruments for accounting purposes. In connection with these foreign exchange contracts, Teva recognizes gains or losses that offset the revaluation of the balance sheet items also recorded under financial expenses—net.

e.	Matured forward starting interest rate swaps and treasury lock agreements:

Commencing in the third quarter of

2015

, Teva entered into forward starting interest rate swap and treasury lock agreements designated as cash flow hedges of the U.S. dollar debt issuance in

July 2016

, with respect to $

3.75

billion and $

1.5

billion notional amounts, respectively. These agreements hedged the variability in anticipated future interest payments due to possible changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. dollar debt issuance in

July 2016

(in connection with the closing of the Actavis Generics acquisition). See note

Certain of the forward starting interest rate swaps and treasury lock agreements matured during the first half of 2016. In July 2016, in connection with the debt issuances, Teva terminated the remaining forward starting interest rate swaps and treasury lock agreements. The termination of these transactions resulted in a loss position of $493 million, of which $242 million were settled on October 7, 2016 and the remaining amount was settled in January 2017. The change in fair value of these instruments recorded in other comprehensive income (loss) will be amortized under financial expenses-net over the life of the debt. Such losses mainly reflect the changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. debt issuance in July 2016.

With respect to the forward starting interest rate swaps and treasury lock agreements, losses of $7 million were recognized under financial

expenses, net for the three months ended March 31, 2019 and 2018.

In the third quarter of 2016, Teva terminated interest rate swap agreements designated as fair value hedge relating to its 2.95% senior notes due 2022 with respect to $844 million notional amount and its 3.65% senior notes due 2021 with respect to $450 million notional amount. Settlement of these transactions resulted in a gain position of $41 million. The fair value hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, are amortized under financial expenses-net over the life of the debt as additional interest expense.

With respect to the interest rate swap agreements, gains of $2 million were recognized under financial expenses, net for the three months ended March 31, 2019 and 2018.