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Derivative instruments and hedging activities | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities | NOTE 8 – Derivative instruments and hedging activities:
a. | Foreign exchange risk management:
In the first nine months of 2023, approximately 47% 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 September 30, 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:
|  | September 30, |  |  | 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 of derivative instruments:
|  | Fair value |
|  | Designated as hedging instruments |  |  | Not designated as hedging instruments |
|  | September 30, 2023 |  |  | December 31, 2022 |  |  | September 30, 2023 |  |  | December 31, 2022 |
Reported under |  | (U.S. $ in millions) |  |  | (U.S. $ in millions) |
Asset derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Option and forward contracts |  | $ | — |  |  | $ | — |  |  | $ | 44 |  |  | $ | 29 |
Other non-current assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross-currency swap-cash flow hedge (1) |  |  | 14 |  |  |  | — |  |  |  | — |  |  |  | — |
Conversion option |  |  | — |  |  |  | — |  |  |  | 15 |  |  |  | — |
Liability derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other current liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Option and forward contracts |  |  | — |  |  |  | — |  |  |  | (40 | ) |  |  | (101 | )
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, |
|  | September 30, 2023 |  |  | September 30, 2022 |  |  | September 30, 2023 |  |  | September 30, 2022 |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  | $ | 280 |  |  | $ | 252 |  |  | $ | (249 | ) |  | $ | (395 | )
Cross-currency swaps—cash flow hedge (1) |  |  | (7 | ) |  |  | — |  |  |  | 1 |  |  |  | — |
|  | Financial expenses, net |  |  | Other comprehensive income (loss) |
|  | Nine months ended, |  |  | Nine months ended, |
|  | September 30, 2023 |  |  | September 30, 2022 |  |  | September 30, 2023 |  |  | September 30, 2022 |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  | $ | 808 |  |  | $ | 721 |  |  | $ | (156 | ) |  | $ | (663 | )
Cross-currency swaps - cash flow hedge (1) |  |  | (22 | ) |  |  | — |  |  |  | (4 | ) |  |  | — |
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, |
|  | September 30, 2023 |  |  | September 30, 2022 |  |  | September 30, 2023 |  |  | September 30, 2022 |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  | $ | 280 |  |  | $ | 252 |  |  | $ | (3,850 | ) |  | $ | (3,595 | )
Option and forward contracts (2) |  |  | 4 |  |  |  | (6 | ) |  |  | — |  |  |  | — |
Option and forward contracts economic hedge (3) |  |  | — |  |  |  | — |  |  |  | (22 | ) |  |  | (34 | )
|  | Financial expenses, net |  |  | Net revenues |
|  | Nine months ended, |  |  | Nine months ended, |
|  | September 30, 2023 |  |  | September 30, 2022 |  |  | September 30, 2023 |  |  | September 30, 2022 |
Reported under |  | (U.S. $ in millions) |
Line items in which effects of hedges are recorded |  | $ | 808 |  |  | $ | 721 |  |  | $ | (11,389 | ) |  | $ | (11,041 | )
Option and forward contracts (2) |  |  | (46 | ) |  |  | (48 | ) |  |  | — |  |  |  | — |
Option and forward contracts economic hedge (3) |  |  | — |  |  |  | — |  |  |  | (20 | ) |  |  | (69 | )
(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. For the three months ended September 30, 2023, the positive impact from these derivatives recognized under revenues was $22 million. For the three months ended September 30, 2022, the positive impact from these derivatives recognized under revenues was $34 million. In the first nine months of 2023, the positive impact from these derivatives recognized under revenues was $20 million. In the first nine months of 2022, the positive impact from these derivatives recognized under revenues was $69 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 I n 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 $7 million and $8 million were recognized under financial expenses, net, for each of the three months ended September 30, 2023 and 2022, and losses of $25 million and $22 million were recognized under financial expenses, net for each of the nine months ended September 30, 2023 and 2022, respectively.
f. | Securitization:
U.S. securitization program On November 7, 2022, Teva and a bankruptcy-remote special purpose vehicle (“SPV”) entered into an accounts receivable securitization facility (“AR Facility”) with PNC Bank, National Association (“PNC”) with a three-year term. The AR Facility provided for purchases of accounts receivable by PNC in an amount of up to $1 billion through November 2023, and up to $500 million from November 2023 through November 2025. On June 30, 2023, the AR Facility agreement was amended to include an additional receivables purchaser under the agreement, in an amount of up to $250 million through November 2025. As a result, the total commitment of PNC was reduced to an amount of up to $750 million, effective June 30, 2023. Under the terms of the AR facility agreement, in November 2023, the total commitment of PNC was further reduced to an amount of up to $500 million through November 2025 . On November 7, 2023, the SPV amended the agreement and increased the commitment amount up to $1 billion by including an additional receivables purchaser, in an amount of up to $250 million throug h March 2024, which will be reduced to an amount of up to $125 million through November 2025. The SPV may amend the agreement and increase the commitment amount up to $1 billion in March 2024 if additional purchasers participate in the AR facility .
g. | Supplier Finance Program Obligation
Teva maintains supply chain finance agreements with participating financial institutions. Under these agreements, participating suppliers may voluntarily elect to sell their accounts receivable with Teva to these financial institutions. Teva’s suppliers negotiate their financing agreements directly with the respective financial institutions and Teva is not a party to these agreements. Teva has no economic interest in its suppliers’ decisions to participate in the program and Teva pays the financial institutions the stated amount of confirmed invoices on the maturity dates, which is generally within 120 days from the date the invoice was received. The agreements with the financial institutions do not require Teva to provide assets pledged as security or other forms of guarantees for the supplier finance program. All outstanding amounts related to suppliers participating in the supplier finance program are recorded under accounts payables in Teva’s consolidated balance sheets. As of September 30, 2023 and December 31, 2022, respectively, $ 85 million and $ 34 million of accounts payables to suppliers participating in these supplier finance programs were outstanding.

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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://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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