Derivative instruments and hedging activities

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities

NOTE 8 – Derivative instruments and hedging activities:

a.	Foreign exchange risk management:

In the first

quarter

of 2023, approximately 50% 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 and 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 its 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: euro, Swiss franc, Japanese yen, British pound, Russian ruble, Canadian dollar, Polish zloty, new Israeli shekel, Indian rupee and other 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 has in the past 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 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 the issuance of its 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 reduction of absolute greenhouse gas emissions, which were bifurcated and are accounted for separately as derivative financial instruments. As of March 31, 2023, the fair value of these derivative instruments is negligible.

d.	Derivative instruments outstanding:

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


	March 31,		December 31,
	2023		2022

	(U.S. $ in millions)
Cross-currency swap - cash flow hedge (1)	$	169	$	—

The following table summarizes the classification and fair values

derivative instruments:


	Fair value
	Designated as hedging instruments				Not designated as hedging instruments
	March 31, 2023		December 31, 2022		March 31, 2023			December 31, 2022

Reported under	(U.S. $ in millions)				(U.S. $ in millions)
Asset derivatives:
Other current assets:
Option and forward contracts	$	—	$	—	$	45		$	29
Other non-current assets:
Cross-currency swap-cash flow hedge (1)		§		—		—			—
Liability derivatives:
Other current liabilities:
Option and forward contracts		—		—		(63	)		(101	)

§	Represents an amount less than $0.5 million.

The table below provides information regarding the location and amount of

pre-tax

(gains) losses from derivatives designated in cash flow hedging relationships:


	Financial expenses, net				Other comprehensive income (loss)
	Three months ended,				Three months ended,
	March 31, 2023		March 31, 2022		March 31, 2023			March 31, 2022

Reported under	(U.S. $ in millions)
Line items in which effects of hedges are recorded	$	260	$	258	$	127		$	(57	)
Cross-currency swaps - cash flow hedge (1)		1		—		(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
	Three months ended,						Three months ended,
	March 31, 2023			March 31, 2022			March 31, 2023			March 31, 2022

Reported under	(U.S. $ in millions)
Line items in which effects of hedges are recorded	$	260		$	258		$	(3,661	)	$	(3,661	)
Option and forward contracts (2)		(13	)		(5	)		—			—
Option and forward contracts economic hedge (3)		—			—			6			(19	)

(1)	On March 31, 2023, Teva entered into a cross currency interest rate swap agreement, designated as cash flow hedge for accounting purposes with respect to an intercompany loan due October 2026, denominated in Japanese yen.

(2)

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.

(3)

Teva entered into option and forward contracts designed to limit the exposure of foreign exchange fluctuations on projected revenues and expenses recorded in euro, Swiss franc, Japanese yen, British pound, Russian ruble, Canadian dollar, Polish zloty and several other currencies to protect its projected operating results for 2023. 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 the first quarter of 2023, the negative impact from these derivatives recognized under revenues was $6 million. In the first quarter of 2022, the positive impact from these derivatives recognized under revenues was $19 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. 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. Termination of these transactions resulted in a loss position of $493 million, which was recorded as 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 $11 million and $7 million were recognized under financial expenses, net, for each of the three months ended March 31, 2023 and 2022, respectively.