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Derivative instruments and hedging activities | 12 Months Ended
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Dec. 31, 2021
Derivative Instruments and Hedging Activities | NOTE 10—Derivative instruments and hedging activities:
a. | Foreign exchange risk management:
In 2021, approximately 48% 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, revenues and expenses. 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 subsidiaries within Teva. The currency hedged items are usually denominated in the following main currencies: the euro, the Swiss franc, the Japanese yen, the British pound, the Russian ruble, the Canadian dollar, the Polish zloty, the Indian rupee 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 may choose to hedge against possible fluctuations in foreign subsidiaries net assets (“net investment hedge”) and entered into cross currency swaps and forward contracts in the past 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 senior notes, sustainability-linked senior notes, bank loans, convertible debentures and syndicated revolving credit facility that bear a fixed or variable interest rate. In some cases, the Company has swapped from a fixed to a variable 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. | Bifurcated embedded derivatives:
Upon issuance of sustainability-linked senior notes, Teva recognized embedded derivatives related to interest rate adjustments and a potential one-time premium payment upon failure to achieve certain sustainability performance targets, such as access to medicines in low-to-middle-income countries and absolute greenhouse gas emissions reduction, which were bifurcated and are accounted for separately as derivative financial instruments. As of December 31, 2021 the fair value of these derivative instruments is negligible.
d. | Derivative instrument outstanding:
The following table summarizes the classification and fair values of derivative instruments:
|  | Fair value |
|  | Not designated as hedging instruments |
|  | December 31, 2021 |  |  | December 31, 2020 |
Reported under |  | (U.S. $ in millions) |
Asset derivatives: |  |  |  |  |  |  |  |
Other current assets: |  |  |  |  |  |  |  |
Option and forward contracts |  | $ | 30 |  |  | $ | 24 |
Liability derivatives: |  |  |  |  |  |  |  |
Other current liabilities: |  |  |  |  |  |  |  |
Option and forward contracts |  |  | (23 | ) |  |  | (79 | )
The table below provides information regarding the location and amount of pre-tax (gains) losses from derivatives designated in fair value or cash flow hedging relationships:
|  | Financial expenses, net |  |  | Other comprehensive income (loss) |
|  | Year ended December 31, |  |  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |  |  | 2021 |  |  | 2020 |  |  | 2019 |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  | $ | 1,058 |  |  | $ | 834 |  |  | $ | 822 |  |  | $ | (391 | ) |  | $ | (30 | ) |  | $ | 160 |
Cross-currency swaps—cash flow hedge (1) |  |  | — |  |  |  | — |  |  |  | (2 | ) |  |  | — |  |  |  | — |  |  |  | (33 | )
Cross-currency swaps—net investment hedge (2) |  |  | — |  |  |  | (2 | ) |  |  | (29 | ) |  |  | — |  |  |  | (21 | ) |  |  | (22 | )
Interest rate swaps—fair value hedge (3) . |  |  | — |  |  |  | — |  |  |  | 2 |  |  |  | — |  |  |  | — |  |  |  | — |
The table below provides information regarding the location and amount of pre-tax (gains) losses from derivatives not designated as hedging instruments:
|  | Financial expenses, net |  |  | Net revenues |
|  | Year ended December 31, |  |  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |  |  | 2021 |  |  | 2020 |  |  | 2019 |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  | $ | 1,058 |  |  | $ | 834 |  |  | $ | 822 |  |  | $ | 15,878 |  |  | $ | 16,659 |  |  | $ | 16,887 |
Option and forward contracts (4) |  |  | (45 | ) |  |  | 130 |  |  |  | (51 | ) |  |  | — |  |  |  | — |  |  |  | — |
Option and forward contracts (5) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 31 |  |  |  | * |  |  |  | 14 |
* | Represents an amount less than $0.5 million.
(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. In the fourth quarter of 2019, Teva terminated $588 million in cross-currency swap agreements against its outstanding 3.65% senior notes maturing in November 2021. The settlement of these transactions resulted in cash proceeds of $95 million. The cash flow 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.
(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. In the first quarter of 2020, these cross-currency swap agreements expired. The settlement of these transactions resulted in cash proceeds of $3 million.
(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. In the third quarter of 2019, Teva terminated this interest rate swap agreement. The settlement of these transactions resulted in a gain position of $10 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.
(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.
(5) | Teva entered into option and forward contracts designed to limit the exposure of foreign exchange fluctuations on projected revenues and expenses recorded in euro, the Swiss franc, the Japanese yen, the British pound, the Russian ruble, the Canadian dollar and some other currencies to protect its projected operating results for 2021 and 2022. These derivative instruments do not meet the criteria for hedge accounting, however, they are accounted for as an economic hedge. These derivative instruments, which may include hedging transactions against future projected revenues and expenses, are recognized on the balance sheet at their fair value on a quarterly basis, while the foreign exchange impact on the underlying revenues and expenses may occur in subsequent quarters. In 2021, the positive impact from these derivatives recognized under revenues was $31 million. Changes in the fair value of the derivative instruments are recognized in the same line item in the statements of income as the underlying exposure being hedged. The cash flows associated with these derivatives are reflected as cash flows from operating activities in the consolidated statements of cash flows.
e. | Amortizations due to terminated derivative instruments:
Forward starting interest rate swaps and treasury lock agreements In 2015, Teva entered into forward starting interest rate swaps and treasury lock agreements to protect the Company from interest rate fluctuations in connection with a future debt issuance the Company was planning. These forward starting interest rate swaps and treasury lock agreements were terminated in July 2016 upon the debt issuance. The termination of these transactions resulted in a loss position of $493 million, which was recorded in other comprehensive income (loss) and is amortized under financial expenses, net over the life of the debt. With respect to these forward starting interest rate swaps and treasury lock agreements, losses of $37 million, $31 million and $29 million were recognized under financial expenses, net for the years ended December 31, 2021, 2020 and 2019, respectively. Fair value hedge In the third quarter of 2016, Teva terminated interest rate swap agreements designated as a 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. In the third quarter of 2019, Teva terminated $500 million interest rate swap agreements designated as a fair value hedge relating to its 2.8% senior notes due 2023 with respect to $3,000 million notional amount. Settlement of these transactions resulted in cash proceeds of $10 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. Cash flow hedge In the fourth quarter of 2019, Teva terminated $588 million cross-currency swap agreements against its outstanding 3.65% senior notes which were repaid in November 2021. Settlement of these transactions resulted in cash proceeds of $95 million. The cash flow hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, were amortized under financial expenses, net over the life of the debt. With respect to the interest rate swap and cross-currency swap agreements, gains of $5 million, $3 million and $6 million were recognized under financial expenses, net for the years ended December 31, 2021, 2020 and 2019, respectively.
f. | Securitization:
In April 2011, Teva established a trade receivables securitization program to sell trade receivables to BNP Paribas Bank (“BNP”). Under the program Teva (on a consolidated basis) receives an initial cash purchase price and the right to receive a deferred purchase price (“DPP”), according to the purchase price for the receivables sold by it. On an individual seller basis, each Teva subsidiary sells receivables to BNP for an amount equal to their nominal amount. BNP then immediately on-sells such receivables to a bankruptcy-remote special-purpose entity (“SPE”), for an amount equal to the nominal amount of such trade receivables. The SPE then on-sells such receivables to a conduit sponsored by BNP (“the conduit”) for an initial cash purchase price (equal to the nominal amount of such receivables less a discount) and the right to receive a DPP. The SPE is a VIE for which Teva is considered to be the primary beneficiary. The SPE’s sole business consists of the purchase of receivables from Teva subsidiaries and the subsequent transfer of such receivables to the conduit. Although the SPE is included in Teva’s consolidated financial statements, it is a separate legal entity with separate creditors. The conduit and other designated creditors of the SPE are entitled, both before and upon the SPE’s liquidation, to be paid out of the SPE’s assets prior to the DPP payable to Teva. The assets of the SPE are not available to pay creditors of Teva or its subsidiaries. In August 2021, Teva has reached an agreement with BNP Paribas to extend the asset backed securitization agreement by additional five years, to August 2026. The amended agreement includes several improvements related to the commercial terms. No changes were applied with the program volume, scope or associated processes. Once sold to BNP, the relevant Teva subsidiary as seller has no retained interests in the receivables sold and they are unavailable to the relevant seller should the relevant seller become insolvent. The conduit has all the rights in the securitized trade receivables, including the right to pledge or dispose of such receivables. Consequently, receivables sold under this agreement are de-recognized from Teva’s consolidated balance sheet. The portion of the purchase price for the receivables which is not paid in cash by the conduit is a DPP asset. The conduit pays the SPE the DPP from collections received by the conduit from the securitized trade receivables (after paying senior costs and expenses, including the conduit’s debt service obligations), which the SPE then pays to Teva. The DPP asset represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The DPP asset is included in other current assets on Teva’s consolidated balance sheet. Teva has collection and administrative responsibilities for the sold receivables. The fair value of these servicing arrangements as well as the fees earned was immaterial. The DPP asset as of December 31, 2021 and 2020 was $235 million and $266 million, respectively. As of December 31, 2021 and 2020, the balance of Teva’s securitized assets sold were $685 million and $734 million, respectively. The following table summarizes the sold receivables outstanding balance net of the DPP asset under the outstanding securitization program:
|  | As of and for the year ended December 31, |
|  | 2021 |  |  | 2020 |
|  | (U.S. $ in millions) |
Sold receivables at the beginning of the year |  | $ | 734 |  |  | $ | 690 |
Proceeds from sale of receivables |  |  | 5,139 |  |  |  | 4,606 |
Cash collections (remitted to the owner of the receivables) |  |  | (5,152 | ) |  |  | (4,607 | )
Effect of currency exchange rate changes |  |  | (36 | ) |  |  | 45 |
Sold receivables at the end of the year |  | $ | 685 |  |  | $ | 734 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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