Myl 10Q_Sep 30 2012 Doc

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________to___________                 

Commission File Number 1-9114
MYLAN INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
 
25-1211621
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1500 Corporate Drive, Canonsburg, Pennsylvania 15317
(Address of principal executive offices)
(724) 514-1800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
þ
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class of
  
Outstanding at
 
 
Common Stock
 
October 19, 2012
 
 
$0.50 par value
  
407,527,845
 

 


Table of Contents

MYLAN INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the Quarterly Period Ended
September 30, 2012
 
  
 
Page
 
PART I — FINANCIAL INFORMATION
 
ITEM 1.
Condensed Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
PART II — OTHER INFORMATION
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 6.
 
 
 
 

2

Table of Contents

PART I — FINANCIAL INFORMATION


MYLAN INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited; in thousands, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Net revenues
$
1,789,836

 
$
1,572,341

 
$
5,040,896

 
$
4,579,215

Other revenues
19,936

 
3,415

 
52,821

 
19,375

Total revenues
1,809,772

 
1,575,756

 
5,093,717

 
4,598,590

Cost of sales
1,021,247

 
917,365

 
2,939,740

 
2,679,825

Gross profit
788,525

 
658,391

 
2,153,977

 
1,918,765

Operating expenses:
 
 
 
 
 
 
 
Research and development
108,250

 
70,847

 
283,570

 
218,651

Selling, general and administrative
342,412

 
319,389

 
1,038,397

 
913,604

Litigation settlements, net
7,950

 
2,247

 
(2,083
)
 
28,457

Total operating expenses
458,612

 
392,483

 
1,319,884

 
1,160,712

Earnings from operations
329,913

 
265,908

 
834,093

 
758,053

Interest expense
76,051

 
85,772

 
234,126

 
254,836

Other income, net
10,939

 
12,073

 
13,084

 
22,543

Earnings before income taxes and noncontrolling interest
264,801

 
192,209

 
613,051

 
525,760

Income tax provision
52,762

 
34,831

 
132,449

 
116,851

Net earnings
212,039

 
157,378

 
480,602

 
408,909

Net earnings attributable to the noncontrolling interest
(782
)
 
(680
)
 
(1,716
)
 
(1,590
)
Net earnings attributable to Mylan Inc. common shareholders
$
211,257

 
$
156,698

 
$
478,886

 
$
407,319

Earnings per common share attributable to Mylan Inc. common shareholders:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.37

 
$
1.15

 
$
0.94

Diluted
$
0.51

 
$
0.36

 
$
1.13

 
$
0.92

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
406,469

 
426,412

 
418,000

 
432,265

Diluted
411,562

 
431,587

 
422,775

 
441,817













See Notes to Condensed Consolidated Financial Statements



3

Table of Contents

MYLAN INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings (Loss)
(Unaudited; in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net earnings
$
212,039

 
$
157,378

 
$
480,602

 
$
408,909

Other comprehensive earnings (loss), before tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
141,742

 
(383,108
)
 
24,958

 
(103,178
)
Change in unrecognized (loss) gain and prior service
cost related to post-retirement plans
(10
)
 
246

 
(29
)
 
768

Net unrecognized gain (loss) on derivatives
51,749

 
(40,430
)
 
39,589

 
(36,961
)
Net unrealized gain (loss) on marketable securities
147

 
88

 
67

 
(44
)
Other comprehensive earnings (loss), before tax
193,628

 
(423,204
)
 
64,585

 
(139,415
)
Income tax related to items of other comprehensive earnings (loss)
16,567

 
(12,824
)
 
12,559

 
(11,418
)
Other comprehensive earnings (loss), net of tax
177,061

 
(410,380
)
 
52,026

 
(127,997
)
Comprehensive earnings (loss)
389,100

 
(253,002
)
 
532,628

 
280,912

Comprehensive earnings attributable to the
noncontrolling interest
(782
)
 
(680
)
 
(1,716
)
 
(1,590
)
Comprehensive earnings (loss) attributable to Mylan Inc. common shareholders
$
388,318

 
$
(253,682
)
 
$
530,912

 
$
279,322






























See Notes to Condensed Consolidated Financial Statements



4

Table of Contents

 MYLAN INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited; in thousands, except share and per share amounts)
 
September 30, 2012
 
December 31, 2011
ASSETS
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
332,316

 
$
375,056

Restricted cash
1,442

 
9,274

Marketable securities
33,680

 
30,686

Accounts receivable, net
1,499,633

 
1,426,438

Inventories
1,495,924

 
1,396,742

Deferred income tax benefit
210,186

 
202,899

Prepaid expenses and other current assets
177,553

 
127,749

Total current assets
3,750,734

 
3,568,844

Property, plant and equipment, net
1,335,837

 
1,298,034

Intangible assets, net
2,392,092

 
2,630,747

Goodwill
3,531,134

 
3,517,935

Deferred income tax benefit
91,647

 
39,376

Other assets
604,974

 
543,207

Total assets
$
11,706,418

 
$
11,598,143

LIABILITIES AND EQUITY
Liabilities
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
677,364

 
$
703,235

Short-term borrowings
416,671

 
128,054

Income taxes payable
64,760

 
42,880

Current portion of long-term debt and other long-term obligations
98,457

 
691,614

Deferred income tax liability
1,274

 
1,215

Other current liabilities
911,047

 
996,158

Total current liabilities
2,169,573

 
2,563,156

Long-term debt
4,846,595

 
4,479,080

Contingent consideration
401,363

 
376,110

Other long-term obligations
362,882

 
366,100

Deferred income tax liability
301,769

 
308,915

Total liabilities
8,082,182

 
8,093,361

Equity
 
 
 
Mylan Inc. shareholders’ equity
 
 
 
Common stock — par value $0.50 per share
 
 
 
Shares authorized: 1,500,000,000
 
 
 
Shares issued: 533,797,490 and 530,315,453 as of September 30, 2012 and December 31, 2011
266,899

 
265,158

Additional paid-in capital
3,869,793

 
3,795,373

Retained earnings
1,899,405

 
1,420,520

Accumulated other comprehensive loss
(35,813
)
 
(87,839
)
 
6,000,284

 
5,393,212

Noncontrolling interest
14,745

 
13,007

Less: treasury stock — at cost

 
 
Shares: 126,451,604 and 103,637,016 as of September 30, 2012 and
December 31, 2011
2,390,793

 
1,901,437

Total equity
3,624,236

 
3,504,782

Total liabilities and equity
$
11,706,418

 
$
11,598,143

See Notes to Condensed Consolidated Financial Statements



5

Table of Contents

MYLAN INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited; in thousands)
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
480,602

 
$
408,909

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
424,118

 
386,451

Stock-based compensation expense
 
32,099

 
32,803

Change in estimated sales allowances
 
204,700

 
(43,176
)
Deferred income tax (benefit) expense
 
(73,949
)
 
1,443

Other non-cash items
 
143,938

 
73,642

Litigation settlements, net
 
(2,083
)
 
28,457

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(243,082
)
 
(82,286
)
Inventories
 
(121,450
)
 
(181,548
)
Trade accounts payable
 
(24,634
)
 
(51,902
)
Income taxes
 
5,376

 
45,823

Deferred revenue
 
(18,890
)
 
(999
)
Other operating assets and liabilities, net
 
(154,408
)
 
(191,279
)
Net cash provided by operating activities
 
652,337

 
426,338

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(159,917
)
 
(168,474
)
Change in restricted cash
 
7,748

 
15,007

Proceeds from sale of property, plant and equipment
 
16,338

 
2,400

Purchase of marketable securities
 
(10,019
)
 
(3,363
)
Proceeds from sale of marketable securities
 
5,954

 
1,855

Other items, net
 
(72,308
)
 
(477
)
Net cash used in investing activities
 
(212,204
)
 
(153,052
)
Cash flows from financing activities:
 
 
 
 
Cash paid for warrant amendment and exchange
 

 
(149,947
)
Purchase of common stock
 
(499,953
)
 
(349,998
)
Change in short-term borrowings, net
 
288,175

 
22,722

Proceeds from issuance of long-term debt
 
860,000

 

Payment of long-term debt
 
(1,191,377
)
 
(6,152
)
Proceeds from exercise of stock options
 
52,482

 
65,035

Other items, net
 
5,415

 
6,047

Net cash used in financing activities
 
(485,258
)
 
(412,293
)
Effect on cash of changes in exchange rates
 
2,385

 
(10,208
)
Net decrease in cash and cash equivalents
 
(42,740
)
 
(149,215
)
Cash and cash equivalents — beginning of period
 
375,056

 
662,052

Cash and cash equivalents — end of period
 
$
332,316

 
$
512,837




See Notes to Condensed Consolidated Financial Statements



6

Table of Contents



MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 



1.
General
The accompanying unaudited Condensed Consolidated Financial Statements (“interim financial statements”) of Mylan Inc. and subsidiaries (“Mylan” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q; therefore, as permitted under these rules, certain footnotes and other financial information included in audited financial statements were condensed or omitted. The interim financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the interim results of operations, comprehensive earnings, financial position and cash flows for the periods presented.
These interim financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The December 31, 2011 Condensed Consolidated Balance Sheet was derived from audited financial statements.
The interim results of operations and comprehensive earnings for the three and nine months ended and the interim cash flows for the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full fiscal year or any other future period. The Company computed its provision for income taxes using an estimated effective tax rate for the full year with consideration of certain discrete tax items which occurred within the interim period. The estimated annual effective tax rate for 2012 includes an estimate of the full-year effect of foreign tax credits that the Company anticipates it will claim against its 2012 U.S. tax liabilities.
2.
Revenue Recognition and Accounts Receivable
Mylan recognizes net revenue for product sales when title and risk of loss pass to its customers and when provisions for estimates, including discounts, sales allowances, price adjustments, returns, chargebacks and other promotional programs are reasonably determinable. Accounts receivable are presented net of allowances relating to these provisions. No revisions were made to the methodology used in determining these provisions during the nine months ended September 30, 2012. Such allowances were $934.9 million and $763.0 million at September 30, 2012 and December 31, 2011. Other current liabilities include $182.9 million and $147.9 million at September 30, 2012 and December 31, 2011, for certain sales allowances and other adjustments that are paid to indirect customers.
In February 2012, Mylan Pharmaceuticals Inc. (“MPI”), a wholly-owned subsidiary of the Company, entered into a receivable securitization facility (the “Receivables Facility”) of up to $300 million, which was expanded to $400 million in July 2012. Pursuant to the terms of the Receivables Facility, MPI transfers certain of its domestic receivables, on an ongoing basis, to Mylan Securitization LLC (“Mylan Securitization”), a wholly-owned bankruptcy remote subsidiary. In turn, from time to time, Mylan Securitization sells its interests in such receivables, related assets and collections to certain conduit purchasers, committed purchasers and letter of credit issuers in exchange for cash or letters of credit. Mylan Securitization maintains a subordinated interest, in the form of over collateralization, in a portion of the receivables sold. At September 30, 2012, there were $300 million of short-term borrowings outstanding under the Receivables Facility, which are recorded as a secured loan and included in short-term borrowings in the Condensed Consolidated Balance Sheets. The receivables underlying any borrowings are included in accounts receivable, net, in the Condensed Consolidated Balance Sheets. There were $562.9 million of securitized accounts receivable at September 30, 2012.
The Company utilizes proceeds from the sale of its accounts receivable as an alternative to other forms of debt, effectively reducing its overall borrowing costs. MPI has agreed to continue servicing the sold receivables for the financial institution at market rates.
3.
Acquisitions and Collaborative Agreements
The Respiratory Delivery Platform
On December 23, 2011, Mylan completed its acquisition of the exclusive worldwide rights to develop, manufacture and commercialize a generic equivalent to GlaxoSmithKline’s Advair® Diskus and Seretide® Diskus incorporating Pfizer Inc.’s (“Pfizer”) proprietary dry powder inhaler delivery platform (the “Respiratory Delivery Platform”). As part of the agreement, Mylan will fund the remaining development and capital requirements to bring the products to market. In accordance with GAAP guidance regarding business combinations, the Company accounted for this transaction as a purchase of a business and

7

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


utilized the purchase method of accounting. Under the purchase method of accounting, the assets acquired and liabilities assumed in the transaction were recorded at the date of acquisition at the estimate of their respective fair values.
The total purchase consideration was $348 million. This amount consisted of an initial cash payment of $22 million, approximately $4 million in assumed liabilities, and $322 million of contingent consideration. Pfizer is eligible to receive milestone payments, which are contingent upon future product development achievements including regulatory approvals, market launches, sales targets and profitability. The $322 million of contingent consideration at the acquisition date represents the net present value of expected milestone and profit sharing payments. The purchase price allocation, including the valuation of the contingent payment elements of the purchase price, resulted in in-process research and development (“IPR&D”) of $338 million, fixed assets of $8 million and goodwill of $2 million. The impact on our results of operations since the acquisition date was not material.
The amount allocated to acquired IPR&D represents an estimate of the fair value of purchased in-process technology that, as of the closing date of the acquisition, had not reached technological feasibility and had no alternative future use. The fair value of IPR&D was based on the excess earnings method, which utilizes forecasts of expected net cash inflows (including estimates for ongoing costs) and other contributory charges. A discount rate of 12.5% was utilized to discount net cash inflows to present values.
The project is in the early stages of development, and the expected costs to complete are estimated to be significant. The project is not expected to begin generating a material benefit to the Company until after 2016. There can be no certainty that these assets ultimately will yield a successful product. Failure to successfully complete this project would have a material impact on the IPR&D assets related to it. Additionally, no assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change in future periods.

Pfizer Japan
On August 22, 2012, the Company and Pfizer Japan Inc. (“Pfizer Japan”) announced a definitive agreement to establish an exclusive long-term strategic collaboration to develop, manufacture, distribute and market generic drugs in Japan. Under the agreement, the Company and Pfizer Japan will continue to operate separate legal entities in Japan, but will collaborate on current and future generic products, sharing the costs and profits resulting from the collaboration. The Company’s responsibilities primarily consist of managing operations, including research and development and manufacturing. Pfizer Japan’s responsibilities under the agreement primarily consist of the commercialization of the combined generics portfolio and managing a combined marketing and sales effort. The transaction remains subject to the satisfaction of certain closing conditions.
4.
Stock-Based Incentive Plan
Mylan’s shareholders have approved the 2003 Long-Term Incentive Plan (as amended, the “2003 Plan”). Under the 2003 Plan, 55,300,000 shares of common stock are reserved for issuance to key employees, consultants, independent contractors and non-employee directors of Mylan through a variety of incentive awards, including: stock options, stock appreciation rights, restricted shares and units, performance awards, other stock-based awards and short-term cash awards. Stock option awards are granted at the fair value of the shares underlying the options at the date of the grant, generally become exercisable over periods ranging from three years to four years, and generally expire in ten years. In the 2003 Plan, no more than 8,000,000 shares may be issued as restricted shares, restricted units, performance shares and other stock-based awards.
Upon approval of the 2003 Plan, no further grants of stock options have been made under any other plan. However, there are stock options outstanding from frozen or expired plans and other plans assumed through acquisitions.

8

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


The following table summarizes stock option activity:
 
Number of Shares
Under Option
 
Weighted
Average
Exercise Price
per Share
Outstanding at December 31, 2011
23,599,256

 
$
17.42

Options granted
2,749,843

 
22.97

Options exercised
(3,482,848
)
 
15.07

Options forfeited
(635,313
)
 
20.24

Outstanding at September 30, 2012
22,230,938

 
$
18.39

Vested and expected to vest at September 30, 2012
21,237,047

 
$
18.25

Options exercisable at September 30, 2012
15,107,043

 
$
16.80

As of September 30, 2012, options outstanding, options vested and expected to vest, and options exercisable had average remaining contractual terms of 5.97 years, 5.85 years and 4.71 years, respectively. Also at September 30, 2012, options outstanding, options vested and expected to vest and options exercisable had aggregate intrinsic values of $133.1 million, $130.1 million and $114.4 million, respectively.
A summary of the status of the Company’s nonvested restricted stock and restricted stock unit awards, including performance based restricted stock, as of September 30, 2012 and the changes during the nine months ended September 30, 2012 is presented below:
 
Number of
Restricted
Stock Awards
 
Weighted  Average
Grant-Date
Fair Value per  Share
Nonvested at December 31, 2011
2,520,487

 
$
20.16

Granted
926,512

 
23.28

Released
(794,248
)
 
16.15

Forfeited
(141,159
)
 
22.29

Nonvested at September 30, 2012
2,511,592

 
$
22.47

As of September 30, 2012, the Company had $53.0 million of total unrecognized compensation expense, net of estimated forfeitures, related to all of its stock-based awards, which will be recognized over the remaining weighted average period of 1.65 years. The total intrinsic value of stock-based awards exercised and restricted stock units converted during the nine months ended September 30, 2012 and September 30, 2011 was $45.8 million and $61.2 million.
5.
Balance Sheet Components
Selected balance sheet components consist of the following:
(In thousands)
September 30,
2012
 
December 31,
2011
Inventories:
 
 
 
Raw materials
$
462,171

 
$
370,423

Work in process
272,667

 
253,492

Finished goods
761,086

 
772,827

 
$
1,495,924

 
$
1,396,742


9

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


(In thousands)
September 30, 2012
 
December 31, 2011
Property, plant and equipment:
 
 
 
Land and improvements
$
72,462

 
$
72,945

Buildings and improvements
678,361

 
676,028

Machinery and equipment
1,376,552

 
1,358,163

Construction in progress
274,371

 
263,948

 
2,401,746

 
2,371,084

Less accumulated depreciation
1,065,909

 
1,073,050

 
$
1,335,837

 
$
1,298,034

Other current liabilities:
 
 
 
Legal and professional accruals, including litigation reserves
$
135,700

 
$
232,670

Payroll and employee benefit plan accruals
233,158

 
221,458

Accrued sales allowances
182,923

 
147,938

Accrued interest
49,838

 
74,754

Fair value of financial instruments
12,527

 
69,493

Other
296,901

 
249,845

 
$
911,047

 
$
996,158


6.
Earnings per Common Share Attributable to Mylan Inc.
Basic earnings per common share is computed by dividing net earnings attributable to Mylan Inc. common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per common share is computed by dividing net earnings attributable to Mylan Inc. common shareholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding related to potentially dilutive securities or instruments, if the impact is dilutive.
On September 15, 2008, concurrent with the sale of $575 million aggregate principal amount of Cash Convertible Notes due 2015 (the “Cash Convertible Notes”), Mylan entered into a convertible note hedge and warrant transaction with certain counterparties. Pursuant to the warrant transactions, the Company sold to the counterparties warrants to purchase in the aggregate up to approximately 43.2 million shares of Mylan common stock, subject to anti-dilution adjustments substantially similar to the anti-dilution adjustments for the Cash Convertible Notes, which under most circumstances represents the maximum number of shares that underlie the conversion reference rate for the Cash Convertible Notes. The sold warrants had an exercise price of $20.00 and will be net share settled, meaning that Mylan will issue a number of shares per warrant corresponding to the difference between its share price at each warrant expiration date and the exercise price. The warrants meet the definition of derivatives under the guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 815 Derivatives and Hedging (“ASC 815”); however, because these instruments have been determined to be indexed to the Company’s own stock and meet the criteria for equity classification under ASC 815-40 Contracts in Entity’s Own Equity, the warrants have been recorded in shareholders’ equity in the Condensed Consolidated Balance Sheets.
In September 2011, the Company entered into amendments with the counterparties to exchange the original warrants with an exercise price of $20.00 (the “Old Warrants”) with new warrants with an exercise price of $30.00 (the “New Warrants”). Approximately 41.0 million of the Old Warrants were exchanged in the transaction. All other terms and settlement provisions of the Old Warrants remain unchanged in the New Warrants. The New Warrants meet the definition of derivatives under the guidance in ASC 815; however, because these instruments have been determined to be indexed to the Company’s own stock and meet the criteria for equity classification under ASC 815-40, the New Warrants have also been recorded in shareholders’ equity in the Condensed Consolidated Balance Sheets.
The average market value of the Company’s shares did not exceed the exercise price of the New Warrants during the three and nine months ended September 30, 2012. For the three and nine months ended September 30, 2012, the average market value of the Company’s shares exceeded the exercise price of the Old Warrants, and as a result, the Company has included 0.3 million and 0.2 million shares, respectively, in the calculation of diluted earnings per share. For the three and nine months ended September 30, 2011, the average market value of the Company’s shares exceeded the exercise price of the Old

10

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


Warrants, and as a result, the Company has included 1.2 million and 4.3 million shares, respectively, in the calculation of diluted earnings per share.
On May 10, 2012, the Company announced that its Board of Directors had approved the repurchase of up to $500 million of the Company’s common stock in the open market. During the second quarter of 2012, the repurchase program was completed with approximately 23.4 million shares of common stock being repurchased for approximately $500 million.
Basic and diluted earnings per common share attributable to Mylan Inc. are calculated as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In thousands, except per share amounts)
2012
 
2011
 
2012
 
2011
Basic earnings attributable to Mylan Inc. common shareholders (numerator):
 
 
 
 
 
 
 
Net earnings attributable to Mylan Inc. common shareholders
$
211,257

 
$
156,698

 
$
478,886

 
$
407,319

Shares (denominator):
 
 
 
 
 
 
 
Weighted average common shares outstanding
406,469

 
426,412

 
418,000

 
432,265

Basic earnings per common share attributable to Mylan Inc. common shareholders
$
0.52

 
$
0.37

 
$
1.15

 
$
0.94

Diluted earnings attributable to Mylan Inc. common shareholders (numerator):
 
 
 
 
 
 
 
Net earnings attributable to Mylan Inc. common shareholders
$
211,257

 
$
156,698

 
$
478,886

 
$
407,319

Shares (denominator):
 
 
 
 
 
 
 
Weighted average common shares outstanding
406,469

 
426,412

 
418,000

 
432,265

Stock-based awards and warrants
5,093

 
5,175

 
4,775

 
9,552

Total dilutive shares outstanding
411,562

 
431,587

 
422,775

 
441,817

Diluted earnings per common share attributable to Mylan Inc. common shareholders
$
0.51

 
$
0.36

 
$
1.13

 
$
0.92

Additional stock options and restricted stock awards were outstanding during the periods ended September 30, 2012 and September 30, 2011 but were not included in the computation of diluted earnings per share for each respective period, because the effect would be anti-dilutive. Such anti-dilutive stock options or restricted stock awards represented 5.7 million and 7.1 million shares for the three and nine months ended September 30, 2012, respectively, and 7.5 million and 4.9 million shares for the three and nine months ended September 30, 2011, respectively.
7.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2012 are as follows:
(In thousands)
Generics
Segment
 
Specialty
Segment
 
Total
Balance at December 31, 2011:
 
 
 
 
 
Goodwill
$
3,196,428

 
$
706,507

 
$
3,902,935

Accumulated impairment losses

 
(385,000
)
 
(385,000
)
 
3,196,428

 
321,507

 
3,517,935

Foreign currency translation
13,199

 

 
13,199

 
$
3,209,627

 
$
321,507

 
$
3,531,134

Balance at September 30, 2012:
 
 
 
 
 
Goodwill
$
3,209,627

 
$
706,507

 
$
3,916,134

Accumulated impairment losses

 
(385,000
)
 
(385,000
)
 
$
3,209,627

 
$
321,507

 
$
3,531,134



11

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


Intangible assets consist of the following components:
(In thousands)
Weighted
Average Life
(Years)
 
Original
Cost
 
Accumulated
Amortization
 
Net Book
Value
September 30, 2012
 
 
 
 
 
 
 
Amortized intangible assets:
 
 
 
 
 
 
 
Patents and technologies
20
 
$
116,631

 
$
85,551

 
$
31,080

Product rights and licenses
10
 
3,464,311

 
1,656,438

 
1,807,873

Other (1)
8
 
182,221

 
54,361

 
127,860

 
 
 
3,763,163

 
1,796,350

 
1,966,813

IPR&D
 
 
425,279

 

 
425,279

 
 
 
$
4,188,442

 
$
1,796,350

 
$
2,392,092

December 31, 2011
 
 
 
 
 
 
 
Amortized intangible assets:
 
 
 
 
 
 
 
Patents and technologies
20
 
$
116,631

 
$
82,815

 
$
33,816

Product rights and licenses
10
 
3,364,263

 
1,418,492

 
1,945,771

Other (1)
8
 
200,663

 
45,604

 
155,059

 
 
 
3,681,557

 
1,546,911

 
2,134,646

IPR&D
 
 
496,101

 

 
496,101

 
 
 
$
4,177,658

 
$
1,546,911

 
$
2,630,747

____________
(1) 
Other intangible assets consist principally of customer lists and contracts.
Amortization expense, which is classified primarily within cost of sales on Mylan’s Condensed Consolidated Statements of Operations, for the nine months ended September 30, 2012 and September 30, 2011, was $304.7 million and $273.0 million, respectively. Amortization expense is expected to be approximately $86 million for the remainder of 2012 and $342 million, $335 million, $312 million and $245 million for the years ended December 31, 2013 through 2016, respectively.
Indefinite-lived intangibles, such as the Company’s IPR&D assets, are tested at least annually for impairment, but may be tested whenever certain impairment indicators are present. Impairment is determined to exist when the fair value is less than the carrying value of the assets being tested.
The Company performs its annual impairment review of certain IPR&D assets at September 30th. This review of IPR&D assets principally relates to assets acquired as part of the Bioniche Pharma (“Bioniche”) acquisition in September 2010. For the three and nine months ended September 30, 2012 and 2011, the Company recorded impairment charges related to the Bioniche IPR&D assets in the amounts of $41.6 million and $16.2 million, respectively, which were recorded as a component of amortization expense. These impairment charges resulted from the Company’s estimate of the fair value of these assets, which was based upon updated forecasts, compared with the assigned fair values at the acquisition date. The fair value was determined based upon detailed valuations employing the income approach which utilized Level 3 inputs, as defined in Note 8. The fair value of IPR&D was calculated as the present value of the estimated future net cash flows using a market rate of return. The assumptions inherent in the estimated future cash flows include, among other things, the impact of changes to the development programs, the projected development and regulatory time frames and the current competitive environment. A discount rate of approximately 10% was utilized in the valuation at September 30, 2012 and 2011. Changes to any of the Company’s assumptions may result in a further reduction to the estimated fair value of the IPR&D asset.
During the nine months ended September 30, 2012, approximately $33.0 million was reclassified from acquired IPR&D to product rights and licenses. Also during the nine months ended September 30, 2012, the Company paid approximately $70.0 million to acquire products rights and licenses, the majority of which relates to two dermatological products acquired from Valeant Pharmaceuticals.

12

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


8.
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 Condensed Consolidated Balance Sheets. Any gains or losses on the foreign exchange forward contracts are recognized in earnings in the period incurred in the Condensed 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 Condensed Consolidated Balance Sheets. Any changes in fair value are included in earnings or deferred through accumulated other comprehensive earnings (“AOCE”), depending on the nature and effectiveness of the offset.
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 Condensed Consolidated Balance Sheets.
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 its senior credit agreement (the “Senior Credit Agreement”). 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. In June 2012, the Company executed an additional $750.0 million of forward starting swaps to extend the existing swaps to maturities ranging from March 2016 to November 2016. All of these interest rate swaps are designated as cash flow hedges of the variability of interest expense related to 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. The total notional amount of the Company’s effective interest rate swaps on floating-rate debt was $850.0 million and $500.0 million as of September 30, 2012 and December 31, 2011, respectively.
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 Condensed 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 September 30, 2012, the total notional amount of the Company’s interest rate swaps on fixed-rate debt was $500.0 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, which are in a net asset position at September 30, 2012, is $36.2 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 Condensed 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 Condensed 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.

13

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


At September 30, 2012, the convertible note hedge had a total fair value of $524.8 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. 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
 
September 30, 2012
 
December 31, 2011
(In thousands)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate swaps
Prepaid expenses and other current assets
 
$
46,671

 
Prepaid expenses and other current assets
 
$
29,773

Foreign currency forward contracts
Prepaid expenses and other current assets
 
2,241

 
Prepaid expenses and other current assets
 

Total
 
 
$
48,912

 
 
 
$
29,773

 
 
Liability Derivatives
 
September 30, 2012
 
December 31, 2011
(In thousands)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate swaps
Other current liabilities
 
$
10,435

 
Other current liabilities
 
$
658

Foreign currency forward contracts
Other current liabilities
 

 
Other current liabilities
 
57,075

Total
 
 
$
10,435

 
 
 
$
57,733


Fair Values of Derivative Instruments
Derivatives Not Designated as Hedging Instruments
 
Asset Derivatives
 
September 30, 2012
 
December 31, 2011
(In thousands)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign currency forward contracts
Prepaid expenses and other current assets
 
$
3,020

 
Prepaid expenses and other current assets
 
$
3,802

Purchased cash convertible note hedge
Other assets
 
524,800

 
Other assets
 
460,000

Total
 
 
$
527,820

 
 
 
$
463,802

 
 
Liability Derivatives
 
September 30, 2012
 
December 31, 2011
(In thousands)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign currency forward contracts
Other current liabilities
 
$
2,092

 
Other current liabilities
 
$
11,760

Cash conversion feature of Cash Convertible Notes
Long-term debt
 
524,800

 
Long-term debt
 
460,000

Total
 
 
$
526,892

 
 
 
$
471,760

 

14

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued



The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations
Derivatives in Fair Value Hedging Relationships
 
Location of Gain
Recognized
in Earnings
on Derivatives
 
Amount of Gain
Recognized in Earnings on
Derivatives
(In thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Interest rate swaps
Interest expense
 
$
13,050

 
$
34,985

 
$
26,509

 
$
39,780

Total
 
 
$
13,050

 
$
34,985

 
$
26,509

 
$
39,780

 
 
Location of
Loss Recognized
in Earnings
on Hedged Items
 
Amount of Loss
Recognized in Earnings on
Hedging Items
(In thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
2018 Senior Notes
Interest expense
 
$
(9,823
)
 
$
(34,985
)
 
$
(16,897
)
 
$
(39,780
)
Total
 
 
$
(9,823
)
 
$
(34,985
)
 
$
(16,897
)
 
$
(39,780
)

The Effect of Derivative Instruments on the Condensed 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)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In thousands)
2012
 
2011
 
2012
 
2011
Foreign currency forward contracts
$
23,981

 
$
(30,105
)
 
$
(11
)
 
$
(28,417
)
Interest rate swaps
(5,485
)
 
2,354

 
(7,836
)
 
5,243

  Total
$
18,496

 
$
(27,751
)
 
$
(7,847
)
 
$
(23,174
)
 
 
Location of Gain or
(Loss) Reclassified
from AOCE
into Earnings
(Effective Portion)
 
Amount of Gain or (Loss)
Reclassified from AOCE
into Earnings (Effective Portion)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In thousands)
 
2012
 
2011
 
2012
 
2011
Foreign currency forward contracts
Net revenues
 
$
(15,062
)
 
$
(267
)
 
$
(33,357
)
 
$
2,099

Interest rate swaps
Interest expense
 
(651
)
 
(466
)
 
(1,670
)
 
(2,655
)
  Total
 
 
$
(15,713
)
 
$
(733
)
 
$
(35,027
)
 
$
(556
)
 
 
Location of Gain
Excluded
from the
Assessment of
Hedge Effectiveness
 
Amount of Gain Excluded from the
Assessment of Hedge Effectiveness
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In thousands)
 
2012
 
2011
 
2012
 
2011
Foreign currency forward contracts
Other income, net
 
$
22,210

 
$
12,158

 
$
43,281

 
$
17,246

  Total
 
 
$
22,210

 
$
12,158

 
$
43,281

 
$
17,246

 
At September 30, 2012, the Company expects that approximately $27.1 million of pre-tax net losses on cash flow hedges will be reclassified from AOCE into earnings during the next 12 months.

15

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued



The Effect of Derivative Instruments on the Condensed 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)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In thousands)
2012
 
2011
 
2012
 
2011
Foreign currency borrowings
$

 
$
7,428

 
$

 
$
(39,868
)
  Total
$

 
$
7,428

 
$

 
$
(39,868
)
There was no gain or loss recognized into earnings on derivatives with net investment hedging relationships during the nine months ended September 30, 2012 or 2011. The Euro-denominated borrowings that had been designated as a hedge of the net investments in certain Euro functional currency subsidiaries were repaid in November 2011.

The Effect of Derivative Instruments on the Condensed 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
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In thousands)
 
2012
 
2011
 
2012
 
2011
Foreign currency forward contracts
Other income, net
 
$
(7,860
)
 
$
(19,368
)
 
$
(16,517
)
 
$
(5,244
)
Cash conversion feature of Cash Convertible Notes
Other income, net
 
(98,700
)
 
286,500

 
(64,800
)
 
177,500

Purchased cash convertible note hedge
Other income, net
 
98,700

 
(286,500
)
 
64,800

 
(177,500
)
  Total
 
 
$
(7,860
)
 
$
(19,368
)
 
$
(16,517
)
 
$
(5,244
)
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.

16

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


Financial assets and liabilities carried at fair value are classified in the tables below in one of the three categories described above:
 
 
September 30, 2012
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
44,152

 
$

 
$

 
$
44,152

Total cash equivalents
44,152

 

 

 
44,152

Trading securities:
 
 
 
 
 
 
 
Equity securities — exchange traded funds
10,284

 

 

 
10,284

Total trading securities
10,284

 

 

 
10,284

Available-for-sale fixed income investments:
 
 
 
 
 
 
 
U.S. Treasuries

 
11,495

 

 
11,495

Corporate bonds

 
8,030

 

 
8,030

Agency mortgage-backed securities

 
1,184

 

 
1,184

Other

 
2,617

 

 
2,617

Total available-for-sale fixed income investments

 
23,326

 

 
23,326

Available-for-sale equity securities:
 
 
 
 
 
 
 
Biosciences industry
70

 

 

 
70

Total available-for-sale equity securities
70

 

 

 
70

Foreign exchange derivative assets

 
5,261




5,261

Interest rate swap derivative assets

 
46,671

 

 
46,671

Purchased cash convertible note hedge

 
524,800

 

 
524,800

Total assets at fair value (1)
$
54,506


$
600,058


$


$
654,564

Financial Liabilities:
 
 
 
 
 
 
 
Foreign exchange derivative liabilities
$

 
$
2,092

 
$

 
$
2,092

Interest rate swap derivative liabilities

 
10,435




10,435

Cash conversion feature of Cash Convertible Notes

 
524,800




524,800

Contingent consideration

 

 
401,363

 
401,363

Total liabilities at fair value (1)
$

 
$
537,327

 
$
401,363

 
$
938,690



17

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


 
December 31, 2011
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
152,331

 
$

 
$

 
$
152,331

Total cash equivalents
152,331

 

 

 
152,331

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)
$
159,263

 
$
517,329

 
$

 
$
676,592

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

Contingent consideration

 

 
376,110

 
376,110

Total liabilities at fair value (1)
$

 
$
529,493

 
$
376,110

 
$
905,603

____________
(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:
Cash equivalents — valued at observable net asset value prices.
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 nine months ended September 30, 2012 that would reduce the receivable amount owed, if any, to the Company.

18

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


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 nine months ended September 30, 2012 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 nine months ended September 30, 2012 that would reduce the receivable amount owed, if any, to the Company.
The fair value measurement of contingent consideration is determined using Level 3 inputs. The Company’s contingent consideration represents a component of the total purchase consideration for the Respiratory Delivery Platform and other acquisitions made during 2011. The measurement is calculated using unobservable inputs based on the Company’s own assumptions. Significant unobservable inputs in the valuation include the probability and timing of future development and commercial milestones and future profit sharing payments. A discounted cash flow method was used to value contingent consideration at September 30, 2012 and December 31, 2011, which was calculated as the present value of the estimated future net cash flows using a market rate of return at September 30, 2012. Discount rates ranging from 3.3% to 10.4% were utilized in the valuation. Significant changes in unobservable inputs could result in material changes to the contingent consideration liability. To reflect a change in fair value measurement of contingent consideration during the nine months ended September 30, 2012, a net adjustment of approximately $1.2 million was recorded, to increase the liability. For the three and nine months ended September 30, 2012, accretion of $8.3 million and $24.0 million, respectively, was recorded in interest expense in the Condensed Consolidated Statements of Operations.
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.
9.
Debt
The Receivables Facility
In February 2012, MPI entered into a $300 million accounts receivable securitization facility, which was expanded to $400 million in July 2012, pursuant to (i) a Purchase and Contribution Agreement, between MPI and Mylan Securitization, and (ii) a Receivables Purchase Agreement, among Mylan Securitization, as seller, MPI, as originator and servicer, certain conduit purchasers, committed purchasers and letter of credit issuers from time to time party thereto (collectively, the “Purchasers”), certain purchaser agents from time to time party thereto and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as agent (the “Agent”). The Company agreed to enter into a performance guarantee with respect to the obligations of MPI under these agreements.
Under the Purchase and Contribution Agreement, MPI will sell, on an ongoing basis, certain accounts receivable and the right to the collections on those accounts receivable to Mylan Securitization. Once sold to Mylan Securitization, the accounts receivable and rights to collection described above will be separate and distinct from MPI’s own assets and will not be available to MPI’s creditors should MPI become insolvent. The servicing, administration and collection of the accounts receivable will be conducted by MPI, as servicer. Under the terms of the Receivables Purchase Agreement, Mylan Securitization may, from time to time, obtain up to $400 million (in the form of cash or letters of credit for the benefit of MPI) from the Purchasers through the sale of its interest in such receivables and collections. The size of the accounts receivable securitization facility may be increased from time to time, upon request by Mylan Securitization and with the consent of the purchaser agents and the Agent, up to a maximum of $500 million. Purchases under the Receivables Purchase Agreement will be repaid as accounts receivable are collected, with new purchases being advanced as new accounts receivable are originated by MPI and sold to Mylan Securitization, with settlement occurring monthly. Mylan Securitization has the option to reduce the commitments under the Receivables Purchase Agreement. Mylan Securitization’s assets have been pledged to the Agent in support of its obligations under the Receivables Purchase Agreement. Any amounts outstanding under the facility will be recorded as a secured loan and the receivables underlying any borrowings will continue to be included in accounts receivable, net, in the Condensed Consolidated Balance Sheets of the Company. The accounts receivable securitization facility has a term of three years.
The Receivables Purchase Agreement contains various customary affirmative and negative covenants and also contains customary default and termination provisions, which provide for acceleration of amounts owed under the Receivables Purchase Agreement upon the occurrence of certain specified events, including, but not limited to, failure by Mylan Securitization to pay

19

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


interest and other amounts due, defaults on certain indebtedness, certain judgments, change in control, certain events negatively affecting the overall credit quality of transferred accounts receivable, bankruptcy and insolvency events.
As of September 30, 2012, the Condensed Consolidated Balance Sheets include $562.9 million of accounts receivable balances legally sold to Mylan Securitization, as well as $300 million of short-term borrowings. The interest rate on borrowings under this facility was approximately 1.01% at September 30, 2012.
Mylan Securitization holds trade accounts receivable whose cash flows are the primary source of repayment for its liabilities. Investors only have recourse to the assets held by Mylan Securitization. The Company is involved in these arrangements to the extent that it originates the accounts receivable and provides servicing activities.
Long-Term Debt
A summary of long-term debt is as follows:
(In thousands)
September 30,
2012
 
December 31,
2011
U.S. Term Loans
$
1,179,688

 
$
1,250,000

Revolving Facility
340,000

 

Cash Convertible Notes
1,019,108

 
937,160

Senior Convertible Notes

 
593,983

2017 Senior Notes
550,000

 
550,000

2018 Senior Notes
836,657

 
818,774

2020 Senior Notes
1,013,697

 
1,014,643

Other
2,614

 
3,666

 
4,941,764

 
5,168,226

Less: Current portion
95,169

 
689,146

Total long-term debt
$
4,846,595

 
$
4,479,080

Senior Credit Facilities
In November 2011, the Company entered into a Senior Credit Agreement with a syndication of banks, which provided $1.25 billion in U.S. Term Loans (the “U.S. Term Loans”) and contains a $1.25 billion revolving facility (the “Revolving Facility,” and together with the U.S. Term Loans, the “Senior Credit Facilities”). Amortization payments due in the first, second and third quarters of 2012 under the Senior Credit Agreement on the U.S. Term Loans were paid in March 2012, June 2012 and September 2012, in the amount of $23.4 million for each quarter. At September 30, 2012, the Company had $340 million outstanding under the Revolving Facility. The interest rate on the Revolving Facility at September 30, 2012 was 1.82%.
Cash Convertible Notes
At September 30, 2012, the $1.02 billion outstanding consists of $494.3 million of Cash Convertible Notes debt ($575 million face amount, net of $80.7 million discount) and the bifurcated conversion feature with a fair value of $524.8 million recorded as a liability within long-term debt in the Condensed Consolidated Balance Sheets at September 30, 2012. The Cash Convertible Notes will mature on September 15, 2015, subject to earlier repurchase or conversion. Holders may convert their notes subject to certain conversion provisions determined by the market price of the Company’s common stock, specified distributions to common shareholders, a fundamental change, and certain time periods specified in the purchase agreement. Additionally, the Company has purchased call options, which are recorded as assets at their fair value of $524.8 million within other assets in the Condensed Consolidated Balance Sheets at September 30, 2012. At December 31, 2011, the $937.2 million outstanding consists of $477.2 million of debt ($575 million face amount, net of $97.8 million discount) and the bifurcated conversion feature with a fair value of $460 million recorded as a liability within other long-term obligations in the Condensed Consolidated Balance Sheets. The purchased call options are assets recorded at their fair value of $460 million within other assets in the Condensed Consolidated Balance Sheets at December 31, 2011.
As of September 30, 2012, because the closing price of Mylan’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day in the September 30, 2012 period, was more than 130% of the applicable conversion reference price of $13.32 at September 30, 2012, the $575 million of Cash Convertible Notes are currently convertible. Although the Company’s experience is that convertible debentures are not normally converted by investors until close to their maturity date, it is possible that debentures could be converted prior to their maturity date if, for

20

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


example, a holder perceives the market for the debentures to be weaker than the market for the common stock. Upon an investor’s election to convert, the Company is required to pay the full conversion value in cash. Should holders elect to convert, the Company intends to draw on its revolving credit facility to fund any principal payments. The amount payable per $1,000 notional bond would be calculated as the product of (1) the conversion reference rate (currently 75.0751) and (2) the average Daily Volume Weighted Average Price per share of common stock for a specified period following the conversion date. Any payment above the principal amount is matched by a convertible note hedge.
Senior Convertible Notes
In March 2012, $600 million of Senior Convertible Notes was repaid at maturity. At December 31, 2011, the $594 million of debt is net of a $6.0 million discount.
Senior Notes
The Company has entered into interest rate swaps that convert $500 million of 2018 Senior Notes principal debt to a variable rate. The variable rate was 3.39% at September 30, 2012. At September 30, 2012, the $836.7 million of 2018 Senior Notes debt is net of a $10.0 million discount and includes a fair value adjustment of $46.7 million associated with the interest rate swaps. At December 31, 2011, the $818.8 million of debt is net of an $11.0 million discount and includes a fair value adjustment of $29.8 million.
At September 30, 2012, the $1.01 billion of 2020 Senior Notes debt includes a $13.7 million premium. At December 31, 2011, the $1.01 billion of debt includes a $14.6 million premium.
Details of the interest rates in effect at September 30, 2012 and December 31, 2011 on the outstanding borrowings under the U.S. Term Loans are in the table below:
 
September 30, 2012
 
Outstanding
 
Basis
 
Rate
 
(In thousands)
 
 
 
 
U.S. Term Loans:
 
 
 
 
 
Swapped to Fixed Rate — January 2014 (1)
$
500,000

 
Fixed
 
2.60
%
Swapped to Fixed Rate — March 2014 (1)
350,000

 
Fixed
 
2.45
%
Floating Rate
329,688

 
LIBOR + 2.00%
 
2.22
%
Total U.S. Term Loans
$
1,179,688

 
 
 
 

 
December 31, 2011
 
Outstanding
 
Basis
 
Rate
 
(In thousands)
 
 
 
 
U.S. Term Loans
$
1,250,000

 
LIBOR + 2.00%
 
2.34
%
____________
(1) 
Effective January 2012, $500 million of the U.S. Term Loans have been swapped to a fixed rate of 0.60% plus the specified spread under the Senior Credit Agreement, through January 2014. Effective March 2012, an additional $350 million of the U.S. Term Loans have been swapped to a fixed rate of 0.45% plus the specified spread under the Senior Credit Agreement, through March 2014. Effective June 2012, $750 million of the currently effective swaps have been extended to maturities ranging from March 2016 to November 2016, thereby fixing a rate of 0.91% plus the specified spread on the underlying U.S. Term Loans, for the extension period. As of September 30, 2012, the specified spread under the Senior Credit Agreement was 200 basis points. These swaps have been designated as cash flow hedges of the variability in interest expense related to our variable rate debt.
At September 30, 2012, the fair value of the Senior Notes was approximately $2.60 billion, and at December 31, 2011, the fair value of the Senior Notes and Senior Convertible Notes was approximately $3.15 billion. At September 30, 2012 and December 31, 2011, the fair value of the Cash Convertible Notes was approximately $1.10 billion and $1.00 billion, respectively. The fair values of the Senior Notes and Cash Convertible Notes were valued at quoted market prices from broker or dealer quotations and were classified as Level 2 in the fair value hierarchy.

21

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


Mandatory minimum repayments remaining on the outstanding borrowings under the term loans and notes at September 30, 2012, at notional amounts, are as follows for each of the periods ending December 31:
 
(In thousands)
U.S. Term Loans
 
Cash Convertible Notes
 
2017
Senior
Notes
 
2018
Senior
Notes
 
2020
Senior
Notes
 
Revolving Facility
 
Total
2012
$
23,438

 
$

 
$

 
$

 
$

 
$

 
$
23,438

2013
93,750

 

 

 

 

 

 
93,750

2014
125,000

 

 

 

 

 

 
125,000

2015
187,500

 
575,000

 

 

 

 

 
762,500

2016
750,000

 

 

 

 

 
340,000

 
1,090,000

Thereafter

 

 
550,000

 
800,000

 
1,000,000

 

 
2,350,000

Total
$
1,179,688

 
$
575,000

 
$
550,000

 
$
800,000

 
$
1,000,000

 
$
340,000

 
$
4,444,688


10.
Comprehensive Earnings
Components of other comprehensive earnings, before tax, consist of the following:
 
Three Months Ended
 
September 30,
(In thousands)
2012
 
2011
Defined benefit pension plans:
 
 
 
Unrecognized gain (loss) and prior service cost arising during the period
$

 
$

Less: Amortization of prior service cost (gain) included in net earnings
10

 
(246
)
Net change in unrecognized (loss) gain and prior service cost related to post-retirement plans
$
(10
)
 
$
246

 
 
 
 
Derivatives in cash flow hedging relationships:
 
 
 
Amount of gain (loss) recognized in AOCE on derivatives (effective portion)
$
36,036

 
$
(41,163
)
Less: Reclassification of loss from AOCE into earnings (effective portion)
(15,713
)
 
(733
)
Net unrecognized gain (loss) on derivatives
$
51,749

 
$
(40,430
)
 
 
 
 
Net unrealized gain on marketable securities:
 
 
 
Unrealized gain on marketable securities
$
170

 
$
223

Less: Reclassification for gain included in net earnings
23

 
135

 Net unrealized gain on marketable securities
$
147

 
$
88



22

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


 
Nine Months Ended
 
September 30,
(In thousands)
2012
 
2011
Defined benefit pension plans:
 
 
 
Unrecognized gain (loss) and prior service cost arising during the period
$

 
$

Less: Amortization of prior service cost (gain) included in net earnings
29

 
(768
)
Net change in unrecognized (loss) gain and prior service cost related to post-retirement plans
$
(29
)
 
$
768

 
 
 
 
Derivatives in cash flow hedging relationships:
 
 
 
Amount of gain (loss) recognized in AOCE on derivatives (effective portion)
$
4,562

 
$
(37,517
)
Less: Reclassification of loss from AOCE into earnings (effective portion)
(35,027
)
 
(556
)
Net unrecognized gain (loss) on derivatives
$
39,589

 
$
(36,961
)
 
 
 
 
Net unrealized loss on marketable securities:
 
 
 
Unrealized gain on marketable securities
$
119

 
$
152

Less: Reclassification for gain included in net earnings
52

 
196

Net unrealized gain (loss) on marketable securities
$
67

 
$
(44
)
 
Accumulated other comprehensive loss, as reflected on the Condensed Consolidated Balance Sheets, is comprised of the following:
(In thousands)
September 30,
2012
 
December 31,
2011
Accumulated other comprehensive loss:
 
 
 
Net unrealized gains on marketable securities, net of tax
$
1,123

 
$
1,080

Net unrecognized losses and prior service costs related to post-retirement plans, net of tax
(5,998
)
 
(5,840
)
Net unrecognized losses on derivatives, net of tax
(16,536
)
 
(43,719
)
Foreign currency translation adjustment
(14,402
)
 
(39,360
)
 
$
(35,813
)
 
$
(87,839
)

23

Table of Contents
MYLAN INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued


11.
Shareholder’s Equity
A summary of the change in shareholders’ equity for the nine months ended September 30, 2012 and 2011 is as follows:
(In thousands)
Total Mylan Inc. Shareholders' Equity
 
Noncontrolling Interest
 
 Total
December 31, 2011
$
3,491,775

 
$
13,007

 
$