MYL10Q_2014.09.30_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, 2014
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.)
1000 Mylan Boulevard, 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 29, 2014
 
 
$0.50 par value
  
374,273,573
 
 


Table of Contents

MYLAN INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the Quarterly Period Ended
September 30, 2014
 
Insert Title Here
  
 
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 millions, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Net sales
$
2,069.4

 
$
1,756.1

 
$
5,588.8

 
$
5,062.8

Other revenues
14.6

 
11.3

 
48.1

 
37.8

Total revenues
2,084.0

 
1,767.4

 
5,636.9

 
5,100.6

Cost of sales
1,071.6

 
958.9

 
3,077.9

 
2,856.2

Gross profit
1,012.4

 
808.5

 
2,559.0

 
2,244.4

Operating expenses:
 
 
 
 
 
 
 
Research and development
158.2

 
114.0

 
431.6

 
351.9

Selling, general and administrative
418.3

 
349.8

 
1,200.1

 
1,028.5

Litigation settlements, net
20.9

 
(10.1
)
 
47.2

 
(1.4
)
Other operating (income) expense, net
(80.0
)
 
15.0

 
(80.0
)
 
3.1

Total operating expenses
517.4

 
468.7

 
1,598.9

 
1,382.1

Earnings from operations
495.0

 
339.8

 
960.1

 
862.3

Interest expense
83.9

 
73.9

 
251.2

 
233.7

Other (income) expense, net
(1.5
)
 
70.6

 
6.8

 
74.4

Earnings before income taxes and noncontrolling interest
412.6

 
195.3

 
702.1

 
554.2

Income tax (benefit) provision
(86.8
)
 
35.9

 
(40.5
)
 
108.6

Net earnings
499.4

 
159.4

 
742.6

 
445.6

Net earnings attributable to the noncontrolling interest
(0.3
)
 
(0.5
)
 
(2.4
)
 
(2.1
)
Net earnings attributable to Mylan Inc. common shareholders
$
499.1

 
$
158.9

 
$
740.2

 
$
443.5

Earnings per common share attributable to Mylan Inc. common shareholders:
 
 
 
 
 
 
 
Basic
$
1.33

 
$
0.42

 
$
1.98

 
$
1.15

Diluted
$
1.26

 
$
0.40

 
$
1.86

 
$
1.13

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
374.1

 
382.1

 
373.4

 
385.5

Diluted
397.3

 
395.5

 
397.1

 
393.9

 
 
 
 
 
 
 
 











See Notes to Condensed Consolidated Financial Statements
3


Table of Contents

MYLAN INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings
(Unaudited; in millions)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net earnings
$
499.4

 
$
159.4

 
$
742.6

 
$
445.6

Other comprehensive (loss) earnings, before tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(453.8
)
 
113.6

 
(317.2
)
 
(248.4
)
Change in unrecognized gain (loss) and prior service cost related to defined benefit plans
1.4

 
0.2

 
(3.7
)
 
4.7

Net unrecognized (loss) gain on derivatives
(23.1
)
 
(20.2
)
 
(98.3
)
 
128.3

Net unrealized (loss) gain on marketable securities
(0.1
)
 
0.1

 

 
(0.9
)
Other comprehensive (loss) earnings, before tax
(475.6
)
 
93.7

 
(419.2
)
 
(116.3
)
Income tax (benefit) provision
(8.0
)
 
(10.1
)
 
(39.0
)
 
48.1

Other comprehensive (loss) earnings, net of tax
(467.6
)
 
103.8

 
(380.2
)
 
(164.4
)
Comprehensive earnings
31.8

 
263.2

 
362.4

 
281.2

Comprehensive earnings attributable to the noncontrolling interest
(0.3
)
 
(0.5
)
 
(2.4
)
 
(2.1
)
Comprehensive earnings attributable to Mylan Inc. common shareholders
$
31.5

 
$
262.7

 
$
360.0

 
$
279.1

 
 
 
 
 
 
 
 




See Notes to Condensed Consolidated Financial Statements
4


Table of Contents

MYLAN INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited; in millions, except share and per share amounts)
 
September 30,
2014
 
December 31,
2013
ASSETS
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
199.6

 
$
291.3

Accounts receivable, net
1,733.3

 
1,820.0

Inventories
1,707.5

 
1,656.9

Deferred income tax benefit
283.1

 
250.1

Prepaid expenses and other current assets
1,894.3

 
452.9

Total current assets
5,817.8

 
4,471.2

Property, plant and equipment, net
1,738.3

 
1,665.5

Intangible assets, net
2,541.1

 
2,517.9

Goodwill
4,188.5

 
4,340.5

Deferred income tax benefit
110.3

 
77.8

Other assets
778.1

 
2,221.9

Total assets
$
15,174.1

 
$
15,294.8

 
 
 
 
LIABILITIES AND EQUITY
Liabilities
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
857.9

 
$
1,072.8

Short-term borrowings
364.7

 
439.8

Income taxes payable
84.1

 
49.7

Current portion of long-term debt and other long-term obligations
1,992.6

 
3.6

Deferred income tax liability
0.3

 
1.5

Other current liabilities
1,174.3

 
1,396.6

Total current liabilities
4,473.9

 
2,964.0

Long-term debt
5,723.5

 
7,586.5

Other long-term obligations
1,274.3

 
1,269.1

Deferred income tax liability
296.1

 
515.3

Total liabilities
11,767.8

 
12,334.9

Equity
 
 
 
Mylan Inc. shareholders’ equity
 
 
 
Common stock — par value $0.50 per share
 
 
 
Shares authorized: 1,500,000,000
 
 
 
Shares issued: 545,732,255 and 543,978,030 as of September 30, 2014 and December 31, 2013
272.9

 
272.0

Additional paid-in capital
4,170.3

 
4,103.6

Retained earnings
3,425.3

 
2,685.1

Accumulated other comprehensive loss
(620.3
)
 
(240.1
)
 
7,248.2

 
6,820.6

Noncontrolling interest
18.8

 
18.1

Less: Treasury stock — at cost

 
 
Shares: 171,571,414 and 172,373,900 as of September 30, 2014 and December 31, 2013
3,860.7

 
3,878.8

Total equity
3,406.3

 
2,959.9

Total liabilities and equity
$
15,174.1

 
$
15,294.8

 
 
 
 


See Notes to Condensed Consolidated Financial Statements
5


Table of Contents

MYLAN INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited; in millions)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net earnings
$
742.6

 
$
445.6

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
398.1

 
373.9

Stock-based compensation expense
48.0

 
36.0

Change in estimated sales allowances
462.0

 
164.8

Deferred income tax benefit
(250.5
)
 
(31.9
)
Loss from equity method investments
65.5

 
13.1

Other non-cash items
120.3

 
90.8

Litigation settlements, net
47.2

 
(1.4
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(339.2
)
 
(302.7
)
Inventories
(163.4
)
 
(177.3
)
Trade accounts payable
(126.8
)
 
129.3

Income taxes
30.4

 
(8.4
)
Other operating assets and liabilities, net
(146.0
)
 
(43.1
)
Net cash provided by operating activities
888.2

 
688.7

Cash flows from investing activities:
 
 
 
Capital expenditures
(220.3
)
 
(238.5
)
Change in restricted cash
(76.4
)
 
(49.0
)
Cash paid for acquisitions, net
(50.0
)
 
(50.9
)
Proceeds from sale of property, plant and equipment
8.8

 

Purchase of marketable securities
(17.6
)
 
(13.8
)
Proceeds from sale of marketable securities
16.4

 
8.1

Payments for product rights and other, net
(377.8
)
 
(19.1
)
Net cash used in investing activities
(716.9
)
 
(363.2
)
Cash flows from financing activities:
 
 
 
Payment of financing fees
(2.4
)
 
(20.3
)
Purchase of common stock

 
(500.0
)
Change in short-term borrowings, net
(75.1
)
 
236.1

Proceeds from issuance of long-term debt
635.0

 
2,358.3

Payment of long-term debt
(695.0
)
 
(2,457.3
)
Proceeds from exercise of stock options
34.2

 
56.7

Taxes paid related to net share settlement of equity awards
(22.8
)
 

Payments for contingent consideration
(150.0
)
 

Other items, net
22.4

 
10.5

Net cash used in financing activities
(253.7
)
 
(316.0
)
Effect on cash of changes in exchange rates
(9.3
)
 
5.4

Net (decrease) increase in cash and cash equivalents
(91.7
)
 
14.9

Cash and cash equivalents — beginning of period
291.3

 
350.0

Cash and cash equivalents — end of period
$
199.6

 
$
364.9

 
 
 
 

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 (“U.S. 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, 2013, as updated by the Company’s Current Report on Form 8-K filed on August 6, 2014. The December 31, 2013 Condensed Consolidated Balance Sheet, as updated, was derived from audited financial statements.
The interim results of operations, comprehensive earnings and cash flows for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full fiscal year or any other future period. Certain prior period amounts have been reclassified from selling, general and administrative (“SG&A”) expense to other operating (income) expense, net to conform to the presentation for the current period. The reclassifications had no impact on the previously reported net earnings attributable to Mylan Inc. common shareholders. 
2.
Revenue Recognition and Accounts Receivable
Mylan recognizes net 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, 2014. Such allowances were $1.62 billion and $1.24 billion at September 30, 2014 and December 31, 2013, respectively. Other current liabilities include $349.3 million and $281.1 million at September 30, 2014 and December 31, 2013, respectively, for certain sales allowances and other adjustments that are paid to indirect customers.
Through its wholly owned subsidiary Mylan Pharmaceuticals Inc. (“MPI”), the Company has access to a $400 million accounts receivable securitization facility (the “Receivables Facility”). The receivables underlying any borrowings are included in accounts receivable, net, in the Condensed Consolidated Balance Sheets. As of September 30, 2014 and December 31, 2013, there were $544.5 million and $723.1 million of securitized accounts receivable.
3.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised accounting guidance on revenue recognition that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of this guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years and can be applied using a full retrospective or modified retrospective approach. The Company is currently assessing the impact of the adoption of this guidance on its financial position, results of operations and cash flows.
4.
Acquisitions and Other Transactions
Abbott Branded Generics Business
On July 13, 2014, the Company entered into a definitive agreement with Abbott Laboratories (“Abbott”) to acquire Abbott’s non-U.S. developed markets specialty and branded generics business (the “Business”) in an all-stock transaction, in which Abbott will carve out the Business and transfer it to a new public company (“New Mylan”) organized in the

7

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


Netherlands. Immediately following the transfer of the Business, the Company will merge with a wholly owned subsidiary of New Mylan (the “Merger” and, together with the transfer of the Business, the “Transaction”), and New Mylan will become the parent company of Mylan. The new public company will be called Mylan N.V. and will be led by the current Mylan leadership team and headquartered in Pittsburgh, Pennsylvania.

On October 21, 2014, the Company and Abbott entered into an amendment in connection with pre-closing actions required to be taken pursuant to the definitive agreement implementing the Transaction, and on November 4, 2014, the Company and Abbott entered into an amended and restated definitive agreement implementing the Transaction (the “Transaction Agreement”). On November 5, 2014, New Mylan filed a Registration Statement on Form S-4 (the “Registration Statement”), which includes a proxy statement of Mylan as a prospectus.

Pursuant to the Transaction Agreement, Abbott will receive 110 million shares of New Mylan in exchange for the transfer of the Business, and in the Merger, each issued and outstanding share of Mylan common stock will be converted into the right to receive one New Mylan ordinary share. As a result of the Transaction, Mylan shareholders will own approximately 78% of New Mylan and Abbott’s affiliates will own approximately 22% of New Mylan. New Mylan and Abbott will enter into a shareholder agreement in connection with the Transaction.

The consummation of the Transaction is subject to the satisfaction of certain customary closing conditions, including regulatory approvals and the approval of the Transaction Agreement by Mylan’s shareholders. Abbott will not require shareholder approval in connection with the Transaction. The Transaction Agreement contains certain customary termination rights, including the right of either party to terminate the agreement if the Transaction is not completed by October 13, 2015, subject to extension for a period of 90 days in the event conditions relating to regulatory approvals have not been satisfied as of that date. If the Transaction Agreement is terminated in certain circumstances, including in the event that certain regulatory approvals are not obtained, approval of Mylan’s shareholders is not obtained or Mylan’s Board of Directors withdraws its recommendation of the Transaction or approves or recommends an alternative acquisition proposal for Mylan, Mylan will be required, at Abbott’s option, to reimburse Abbott’s costs and expenses incurred in connection with the Transaction (including certain restructuring related taxes), provided that Mylan will not be required to reimburse Abbott for an amount in excess of $100 million.
The Business, which is being acquired on a debt-free basis, includes more than 100 specialty and branded generic pharmaceutical products in five major therapeutic areas and includes several patent protected, novel and/or hard-to-manufacture products. As a result of the acquisition, the Company will significantly expand and strengthen its product portfolio in Europe, Japan, Canada, Australia and New Zealand. The transaction is expected to close in the first quarter of 2015.

Agila Specialties
On February 27, 2013, the Company announced that it had signed definitive agreements to acquire the Agila Specialties businesses (“Agila”), a developer, manufacturer and marketer of high-quality generic injectable products, from Strides Arcolab Limited (“Strides Arcolab”). The transaction closed on December 4, 2013, and the total purchase price was approximately $1.43 billion (net of cash acquired of $3.4 million), which included estimated contingent consideration of $250 million. During the three months ended September 30, 2014, the Company entered into an agreement with Strides Arcolab to settle a portion of the contingent consideration for $150 million, for which the Company accrued $230 million at the acquisition date. As a result of this agreement, the Company recognized a gain of $80 million during the three months ended September 30, 2014, which is included in other operating (income) expense, net in the Condensed Consolidated Statements of Operations. The remaining contingent consideration, which could total a maximum of $211 million, is primarily related to the satisfaction of certain regulatory conditions, including potential regulatory remediation costs and the resolution of certain pre-acquisition contingencies. The acquisition of Agila significantly expanded and strengthened Mylan's injectables platform and portfolio, and also provided Mylan entry into certain new geographic markets.

In accordance with U.S. GAAP, the Company used the purchase method of accounting to account for this transaction. Under the purchase method of accounting, the assets acquired and liabilities assumed in the transaction were recorded at their respective estimated fair values at the acquisition date. During the six months ended June 30, 2014, adjustments were made to the preliminary amounts recorded at December 31, 2013 primarily related to working capital and deferred taxes. These adjustments are reflected in the values presented below and in the updated December 31, 2013 consolidated balance sheet. The allocation of the $1.43 billion purchase price to the assets acquired and liabilities assumed for Agila is as follows:


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


(In millions)
 
 
Current assets (excluding inventories)
 
$
45.5

Inventories
 
37.3

Property, plant and equipment
 
146.2

Identified intangible assets
 
280.0

In-process research and development
 
436.0

Goodwill
 
936.6

Other assets (including equity method investment)
 
152.8

Total assets acquired
 
2,034.4

Current liabilities
 
(242.0
)
Deferred tax liabilities
 
(235.1
)
Other non-current liabilities
 
(123.6
)
Net assets acquired
 
$
1,433.7


The amount allocated to in-process research and development (“IPR&D”) represents an estimate of the fair value of purchased in-process technology for research projects that, as of the closing date of the acquisition, had not reached technological feasibility and had no alternative future use. The fair value of the IPR&D was based on the excess earnings method, which utilizes forecasts of expected cash inflows (including estimates for ongoing costs) and other contributory charges. A discount rate of 13.0% was utilized to discount net cash inflows to present values. IPR&D is accounted for as an indefinite-lived intangible asset and will be subject to impairment testing until completion or abandonment of the projects. Upon successful completion and launch of each product, the Company will make a determination of the estimated useful life of the individual IPR&D asset. The acquired IPR&D projects are in various stages of completion and the estimated costs to complete these projects total approximately $50 million which is expected to be incurred from 2014 through 2016. There are risks and uncertainties associated with the timely and successful completion of the projects included in IPR&D, and no assurances can be given that the underlying assumptions used to estimate the fair value of IPR&D will not change or the timely completion of each project to commercial success will occur.

The identified intangible assets of $280 million are comprised of $221 million of product rights and licenses that have a weighted average useful life of eight years and $59 million of customer relationships that have a weighted average useful life of five years. The equity method investment of $125 million represents the fair value of Agila’s 50% interest in Sagent Agila LLC (“Sagent Agila”). Payments for product rights and other, net on the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014, includes payments totaling $120 million to acquire certain commercialization rights in the U.S. and other countries. The goodwill of $937 million arising from the acquisition consisted largely of the value of the employee workforce and the value of products to be developed in the future. All of the goodwill was assigned to Mylan’s Generics segment. At the date of the acquisition, the Company estimated that none of the goodwill recognized would be deductible for income tax purposes. As a result of a legal merger of the Indian subsidiaries of Agila with Mylan Laboratories Limited, which was approved by the relevant Indian regulatory authorities during the three months ended September 30, 2014, approximately $739 million of goodwill related to the acquisition of Agila will be deductible for tax purposes, refer to Note 14 Income Taxes for additional information.

Significant assumptions utilized in the valuation of identified intangible assets, the equity method investment and IPR&D were based on company specific information and projections which are not observable in the market and are thus considered Level 3 measurements as defined by U.S. GAAP.

Pro Forma Financial Results
The following table presents supplemental unaudited pro forma information as if the acquisition of Agila had occurred on January 1, 2012. The unaudited pro forma results reflect certain adjustments related to past operating performance and acquisition accounting adjustments, such as increased amortization expense based on the fair valuation of assets acquired, the impact of acquisition financing, and the related income tax effects. The unaudited pro forma results do not include any anticipated synergies which may be achievable subsequent to the acquisition date. Accordingly, the unaudited pro forma results are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on January 1, 2012, nor are they indicative of the future operating results of the combined company.


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


 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
September 30,
2013
 
September 30,
2013
Total revenues
$
1,797.7

 
$
5,243.5

Net earnings attributable to Mylan Inc. common shareholders
$
120.7

 
$
350.4

Earnings per common share attributable to Mylan Inc. common shareholders:
 
 
 
Basic
$
0.32

 
$
0.91

Diluted
$
0.31

 
$
0.89

Weighted average common shares outstanding:
 
 
 
Basic
382.1

 
385.5

Diluted
395.5

 
393.9


Other Transactions
On September 10, 2014, the Company entered into an agreement with Aspen Global Incorporated to acquire the U.S. commercialization, marketing and intellectual property rights related to Arixtra® Injection (“Arixtra”) and the authorized generic rights of Arixtra. The purchase price for this intangible asset was $300 million, of which $225 million was paid at the closing of the transaction on September 25, 2014, and is included in payments for product rights and other, net on the Condensed Consolidated Statements of Cash Flows with an additional $75 million held in escrow that will be released upon satisfaction of certain conditions. The asset will be amortized over an estimated useful life of 10 years.
On June 30, 2014, the Company acquired certain product rights and other intangible assets in, or for, Australia, New Zealand and Brazil. In accordance with U.S. GAAP, the Company used the purchase method of accounting to account for this transaction. The purchase price for these assets was $50.0 million. The preliminary purchase price allocation resulted in $36.7 million of intangible assets which was included in product rights and licenses, and goodwill of approximately $13.3 million which was assigned to Mylan’s Generics segment. Significant assumptions utilized in the valuation of identified intangible assets were based on company specific information and projections which are not observable in the market and are thus considered Level 3 measurements as defined by U.S. GAAP. The acquisition did not have a material impact on the Company’s results of operations since the acquisition date.
5.
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 (“SAR”), restricted shares and units, performance awards (“PSU”), 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 to four years, and generally expire in ten years. Upon approval of the 2003 Plan, no further grants of stock options have been made under any other previous plans.
In February 2014, Mylan’s Compensation Committee and the independent members of the Board of Directors adopted the One-Time Special Performance-Based Five-Year Realizable Value Incentive Program (the “2014 Program”) under the 2003 Plan. Under the 2014 Program, certain key employees received a one-time, performance-based incentive award (the “Awards”) either in the form of a grant of SAR or PSU. The Awards were granted in February 2014 and contain a five-year cliff-vesting feature based on the achievement of various performance targets, external market conditions and the employee’s continued services.

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


The following table summarizes stock option and SAR (“stock awards”) activity:
 
Number of Shares
Under Stock Awards
 
Weighted
Average
Exercise Price
per Share
Outstanding at December 31, 2013
13,563,881

 
$
22.05

Granted
5,995,732

 
52.37

Exercised
(1,780,406
)
 
19.67

Forfeited
(778,004
)
 
38.14

Outstanding at September 30, 2014
17,001,203

 
$
32.31

Vested and expected to vest at September 30, 2014
16,279,361

 
$
32.17

Exercisable at September 30, 2014
8,417,594

 
$
20.32

As of September 30, 2014, stock awards outstanding, stock awards vested and expected to vest and stock awards exercisable had average remaining contractual terms of 7.1 years, 7.0 years and 5.2 years, respectively. Also, at September 30, 2014, stock awards outstanding, stock awards vested and expected to vest and stock awards exercisable had aggregate intrinsic values of $263.7 million, $255.1 million and $212.0 million respectively.
A summary of the status of the Company’s nonvested restricted stock and restricted stock unit awards, including PSUs, (“restricted stock awards”) as of September 30, 2014 and the changes during the nine months ended September 30, 2014 are presented below:
 
Number of
Restricted
Stock Awards
 
Weighted  Average
Grant-Date
Fair Value per  Share
Nonvested at December 31, 2013
3,321,836

 
$
27.13

Granted
2,091,396

 
40.32

Released
(1,160,689
)
 
25.58

Forfeited
(385,327
)
 
31.75

Nonvested at September 30, 2014
3,867,216

 
$
34.32

As of September 30, 2014, the Company had $146.0 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 vesting period of 3.0 years. The total intrinsic value of stock-based awards exercised and restricted stock units converted during the nine months ended September 30, 2014 and 2013 was $118.1 million and $70.4 million, respectively.
Under the 2014 Program, approximately 4.4 million SARs and 1.5 million PSUs were granted. The fair value of the Awards was determined using a Monte Carlo simulation as both the SARs and PSUs contain the same performance and market conditions. The Monte Carlo simulation involves a series of random trials that result in different future stock price paths over the contractual life of the SAR or PSU based on appropriate probability distributions. Conditions are imposed on each Monte Carlo simulation to determine the extent to which the performance conditions would have been met, and therefore the extent to which the Awards would have vested, for the particular stock price path. Once the Company determines that it is probable that the performance targets will be met, compensation expense is recorded for these Awards. Each SAR or PSU is equal to one common share with the maximum value of each Award upon vesting subject to varying limitations.

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


The key assumptions used in the valuation of the Awards are as follows:
 
2014
Volatility
29.4
%
Risk-free interest rate
1.6
%
Expected term (years)
5.0

Forfeiture rate
5.5
%
Weighted average grant date fair value per stock appreciation right
$
9.43

Weighted average grant date fair value per performance award
$
34.58


6.
Balance Sheet Components
Selected balance sheet components consist of the following:
(In millions)
September 30,
2014
 
December 31,
2013
Inventories:
 
 
 
Raw materials
$
562.4

 
$
482.8

Work in process
301.9

 
310.0

Finished goods
843.2

 
864.1

 
$
1,707.5

 
$
1,656.9

Property, plant and equipment:
 
 
 
Land and improvements
$
79.9

 
$
75.1

Buildings and improvements
805.6

 
747.0

Machinery and equipment
1,710.0

 
1,698.4

Construction in progress
295.3

 
207.7

 
2,890.8

 
2,728.2

Less accumulated depreciation
1,152.5

 
1,062.7

 
$
1,738.3

 
$
1,665.5

Other current liabilities:
 
 
 
Legal and professional accruals, including litigation accruals
$
139.0

 
$
145.8

Payroll and employee benefit plan accruals
244.2

 
288.8

Accrued sales allowances
349.3

 
281.1

Accrued interest
69.2

 
68.5

Fair value of financial instruments
10.0

 
74.3

Other
362.6

 
538.1

 
$
1,174.3

 
$
1,396.6


Contingent consideration included in other current liabilities totaled $20 million and $250 million at September 30, 2014 and December 31, 2013, respectively. Contingent consideration included in other long-term obligations is $440.8 million and $414.6 million at September 30, 2014 and December 31, 2013, respectively. Included in prepaid expenses and other current assets is $205.6 million and $129.5 million of restricted cash at September 30, 2014 and December 31, 2013, respectively. An additional $100 million of restricted cash is classified in other long-term assets at September 30, 2014 and December 31, 2013, principally related to amounts deposited in escrow, or restricted amounts, for potential contingent consideration payments related to the Agila acquisition.

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


The Company’s equity method investments in clean energy investments, whose activities qualify for income tax credits under section 45 of the U.S. Internal Revenue Code, totaled $378.2 million and $401.7 million at September 30, 2014 and December 31, 2013, respectively, and are included in other assets in the Condensed Consolidated Balance Sheets. Liabilities related to these investments totaled $408.0 million and $415.4 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014, $360.1 million of these liabilities are included in other long-term obligations and $47.9 million are included in other current liabilities in the Condensed Consolidated Balance Sheets.
As part of the Agila acquisition, the Company acquired a 50% interest in Sagent Agila, which was established in 2007 between Agila and Sagent Pharmaceuticals, Inc. and is accounted for using the equity method of accounting. Sagent Agila was established to allow for the development, manufacturing and distribution of certain generic injectable products in the U.S. market. The initial term of the venture expires upon the tenth anniversary of the formation. The equity method investment included in other assets totaled $113.6 million and $123.2 million at September 30, 2014 and December 31, 2013, respectively, in the Condensed Consolidated Balance Sheets. The results of Sagent Agila were not material to Mylan’s interim financial statements.
7.
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 certain anti-dilution provisions. In 2011, the Company entered into amendments with the counterparties to exchange the original warrants with an exercise price of $20.00 (the “Old Warrants”) for 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. Both the Old and New Warrants meet the definition of derivatives under the FASB’s guidance regarding accounting for derivative instruments and hedging activities; however, because these instruments have been determined to be indexed to the Company’s own common stock and meet the criteria for equity classification under the FASB’s guidance regarding contracts in an entity’s own equity, the warrants have been recorded in shareholders’ equity in the Condensed Consolidated Balance Sheets. The dilutive impact of the Old and New Warrants are included in the calculation of diluted earnings per share based upon the average market value of the Company’s common stock during the period as compared to the exercise price. For the three and nine months ended September 30, 2014, 17.0 million warrants and 17.1 million warrants, respectively, were included in the calculation of diluted earnings per share. For the three and nine months ended September 30, 2013, 7.0 million warrants and 2.8 million warrants were included in the calculation of diluted earnings per share.
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 millions, except per share amounts)
2014
 
2013
 
2014
 
2013
Basic earnings attributable to Mylan Inc. common shareholders (numerator):
 
 
 
 
 
 
 
Net earnings attributable to Mylan Inc. common shareholders
$
499.1

 
$
158.9

 
$
740.2

 
$
443.5

Shares (denominator):
 
 
 
 
 
 
 
Weighted average common shares outstanding
374.1

 
382.1

 
373.4

 
385.5

Basic earnings per common share attributable to Mylan Inc. common shareholders
$
1.33

 
$
0.42

 
$
1.98

 
$
1.15


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


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In millions, except per share amounts)
2014
 
2013
 
2014
 
2013
Diluted earnings attributable to Mylan Inc. common shareholders (numerator):
 
 
 
 
 
 
 
Net earnings attributable to Mylan Inc. common shareholders
$
499.1

 
$
158.9

 
$
740.2

 
$
443.5

Shares (denominator):
 
 
 
 
 
 
 
Weighted average common shares outstanding
374.1

 
382.1

 
373.4

 
385.5

Stock-based awards and warrants
23.2

 
13.4

 
23.7

 
8.4

Total dilutive shares outstanding
397.3

 
395.5

 
397.1

 
393.9

Diluted earnings per common share attributable to Mylan Inc. common shareholders
$
1.26

 
$
0.40

 
$
1.86

 
$
1.13

Additional stock awards and restricted stock awards were outstanding during the periods ended September 30, 2014 and 2013, 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 awards represented 7.1 million shares and 5.8 million shares for the three and nine months ended September 30, 2014, respectively, and 1.1 million shares and 1.2 million shares for the three and nine months ended September 30, 2013, respectively.
8.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 are as follows:
(In millions)
Generics
Segment
 
Specialty
Segment
 
Total
Balance at December 31, 2013:
 
 
 
 
 
Goodwill
$
3,991.4

 
$
734.1

 
$
4,725.5

Accumulated impairment losses

 
(385.0
)
 
(385.0
)
 
3,991.4

 
349.1

 
4,340.5

Acquisitions
13.3

 

 
13.3

Divestment
(10.5
)
 

 
(10.5
)
Foreign currency translation
(154.8
)
 

 
(154.8
)
 
$
3,839.4

 
$
349.1

 
$
4,188.5

Balance at September 30, 2014:
 
 
 
 
 
Goodwill
$
3,839.4

 
$
734.1

 
$
4,573.5

Accumulated impairment losses

 
(385.0
)
 
(385.0
)
 
$
3,839.4

 
$
349.1

 
$
4,188.5


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



Intangible assets consist of the following components at September 30, 2014 and December 31, 2013:
(In millions)
Weighted
Average Life
(Years)
 
Original
Cost
 
Accumulated
Amortization
 
Net Book
Value
September 30, 2014
 
 
 
 
 
 
 
Amortized intangible assets:
 
 
 
 
 
 
 
Patents and technologies
20
 
$
116.6

 
$
97.8

 
$
18.8

Product rights and licenses
10
 
3,770.1

 
2,178.0

 
1,592.1

Other (1)
8
 
166.6

 
68.6

 
98.0

 
 
 
4,053.3

 
2,344.4

 
1,708.9

In-process research and development
 
 
832.2

 

 
832.2

 
 
 
$
4,885.5

 
$
2,344.4

 
$
2,541.1

December 31, 2013
 
 
 
 
 
 
 
Amortized intangible assets:
 
 
 
 
 
 
 
Patents and technologies
20
 
$
116.6

 
$
93.8

 
$
22.8

Product rights and licenses
10
 
3,559.5

 
2,018.1

 
1,541.4

Other (1)
8
 
174.0

 
59.4

 
114.6

 
 
 
3,850.1

 
2,171.3

 
1,678.8

In-process research and development
 
 
839.1

 

 
839.1

 
 
 
$
4,689.2

 
$
2,171.3

 
$
2,517.9

____________
(1) 
Other intangible assets consist principally of customer lists and contracts.
Amortization expense, which is classified primarily within cost of sales in the Condensed Consolidated Statements of Operations, for the nine months ended September 30, 2014 and 2013, was $269.3 million and $260.6 million, respectively. Amortization expense is expected to be approximately $95 million for the remainder of 2014 and $374 million, $292 million, $248 million and $203 million for the years ended December 31, 2015 through 2018, respectively.
Indefinite-lived intangible assets, such as the Company’s IPR&D assets, are tested at least annually for impairment, but they may also 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. During the nine months ended September 30, 2013, the Company recorded impairment charges related to IPR&D assets of $5.1 million.
During the nine months ended September 30, 2014 and 2013, approximately $6.3 million and $6.5 million, respectively, were reclassified from acquired IPR&D to product rights and licenses.
9.
Financial Instruments and Risk Management
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 and interest rate risk.
Foreign Currency Risk Management
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.

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


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. Any ineffectiveness in a cash flow hedging relationship is recognized immediately in earnings in the Condensed Consolidated Statements of Operations.
Interest Rate Risk Management
The Company enters into interest rate swaps in order to manage interest rate risk associated with the Company’s fixed-rate and floating-rate debt. These derivative instruments are measured at fair value and reported as current assets or current liabilities in the Condensed Consolidated Balance Sheets.
The Company’s interest rate swaps designated as cash flow hedges fix the interest rate on a portion of the Company’s variable-rate debt or hedge part of the Company’s interest rate exposure associated with variability in future cash flows attributable to changes in interest rates. Any changes in fair value are included in earnings or deferred through AOCE, depending on the nature and effectiveness of the offset. Any ineffectiveness in a cash flow hedging relationship is recognized immediately in earnings in the Condensed Consolidated Statements of Operations.
In August 2014, the Company entered into a series of forward starting swaps to hedge against changes in interest rates that could impact future debt issuances. These swaps are designed as cash flow hedges of expected future issuances of long-term bonds. The Company executed $575 million of notional value swaps with an effective date of September 2015. These swaps have a maturity of 10 years.
The Company’s interest rate swaps designated as fair value hedges convert the fixed rate on a portion of the Company’s fixed-rate senior notes to a variable rate. These interest rate swaps designated as fair value hedges are measured at fair value and reported as current assets or current liabilities in the Condensed Consolidated Balance Sheets. Any changes 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.
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 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 common 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.
At September 30, 2014, the convertible note hedge had a total fair value of $1.39 billion, 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 with both commercial and investment banking operations. 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.

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


The Company records all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. Accordingly, there are no offsetting amounts that net assets against liabilities. The asset and liability balances presented in the tables below reflect the gross amounts of derivatives recorded in the Company’s interim financial statements.
Fair Values of Derivative Instruments
Derivatives Designated as Hedging Instruments
 
Asset Derivatives
 
September 30, 2014
 
December 31, 2013
(In millions)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate swaps
Prepaid expenses and other current assets
 
$
59.0

 
Prepaid expenses and other current assets
 
$
90.3

Foreign currency forward contracts
Prepaid expenses and other current assets
 
7.2

 
Prepaid expenses and other current assets
 

Interest rate swaps
Other assets
 

 
Other assets
 
93.1

Total
 
 
$
66.2

 
 
 
$
183.4

 
 
Liability Derivatives
 
September 30, 2014
 
December 31, 2013
(In millions)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate swaps
Other current liabilities
 
$
0.5

 
Other current liabilities
 
$
15.8

Foreign currency forward contracts
Other current liabilities
 

 
Other current liabilities
 
53.1

Total
 
 
$
0.5

 
 
 
$
68.9


Fair Values of Derivative Instruments
Derivatives Not Designated as Hedging Instruments
 
Asset Derivatives
 
September 30, 2014
 
December 31, 2013
(In millions)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign currency forward contracts
Prepaid expenses and other current assets
 
$
5.2

 
Prepaid expenses and other current assets
 
$
6.4

Purchased cash convertible note hedge
Prepaid expenses and other current assets
 
1,387.9

 
Other assets
 
1,303.0

Total
 
 
$
1,393.1

 
 
 
$
1,309.4

 
 
Liability Derivatives
 
September 30, 2014
 
December 31, 2013
(In millions)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign currency forward contracts
Other current liabilities
 
$
9.3

 
Other current liabilities
 
$
5.4

Cash conversion feature of Cash Convertible Notes
Current portion of long-term debt and other long-term obligations
 
1,387.9

 
Long-term debt
 
1,303.0

Total
 
 
$
1,397.2

 
 
 
$
1,308.4

 

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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 or (Loss)
Recognized in Earnings
on Derivatives
 
Amount of Gain or (Loss)
Recognized in Earnings on
Derivatives
(In millions)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Interest rate swaps
Interest expense
 
$
2.4

 
$
5.3

 
$
50.2

 
$
(4.5
)
Total
 
 
$
2.4

 
$
5.3

 
$
50.2

 
$
(4.5
)
 
 
Location of (Loss) or Gain
Recognized in Earnings
on Hedged Items
 
Amount of (Loss) or Gain
Recognized in Earnings on
Hedged Items
(In millions)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
2016 Senior Notes (1.800% coupon)
Interest expense
 
$
1.0

 
$
(1.8
)
 
$
0.1

 
$
0.8

2018 Senior Notes (6.000% coupon)
Interest expense
 
2.8

 
0.2

 
3.9

 
14.3

2023 Senior Notes (3.125% coupon)
Interest expense
 
2.3

 

 
(28.6
)
 

Total
 
 
$
6.1

 
$
(1.6
)
 
$
(24.6
)
 
$
15.1


The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations
Derivatives in Cash Flow Hedging Relationships
 
 
Amount of (Loss) or Gain
Recognized in AOCE
(Net of Tax) on Derivative
(Effective Portion)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In millions)
 
2014
 
2013
 
2014
 
2013
Foreign currency forward contracts
 
$
(17.7
)
 
$
(37.3
)
 
$
(11.8
)
 
$
(84.8
)
Interest rate swaps
 
(7.7
)
 
4.8

 
(84.6
)
 
119.8

  Total
 
$
(25.4
)
 
$
(32.5
)
 
$
(96.4
)
 
$
35.0

 
 
Location of Loss Reclassified
from AOCE into Earnings
(Effective Portion)
 
Amount of Loss
Reclassified from AOCE
into Earnings (Effective Portion)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In millions)
 
2014
 
2013
 
2014
 
2013
Foreign currency forward contracts
Net sales
 
$
(10.1
)
 
$
(22.5
)
 
$
(35.4
)
 
$
(44.4
)
Interest rate swaps
Interest expense
 
(0.2
)
 

 
(0.5
)
 
(1.4
)
Interest rate swaps
Other (income) expense, net
 

 

 

 
(0.8
)
  Total
 
 
$
(10.3
)
 
$
(22.5
)
 
$
(35.9
)
 
$
(46.6
)
 

18

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


 
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 millions)
 
2014
 
2013
 
2014
 
2013
Foreign currency forward contracts
Other (income) expense, net
 
$
17.8

 
$
16.3

 
$
59.9

 
$
43.5

  Total
 
 
$
17.8

 
$
16.3

 
$
59.9

 
$
43.5

 
At September 30, 2014, the Company expects that approximately $32 million of pre-tax net losses on cash flow hedges will be reclassified from AOCE into earnings during the next 12 months.
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 millions)
 
2014
 
2013
 
2014
 
2013
Foreign currency forward contracts
Other (income) expense, net
 
$
(60.3
)
 
$
13.4

 
$
(52.7
)
 
$
9.6

Cash conversion feature of Cash Convertible Notes
Other (income) expense, net
 
262.4

 
(299.2
)
 
(84.6
)
 
(442.6
)
Purchased cash convertible note hedge
Other (income) expense, net
 
(262.4
)
 
299.2

 
84.6

 
442.6

  Total
 
 
$
(60.3
)
 
$
13.4

 
$
(52.7
)
 
$
9.6

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.

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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, 2014
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Recurring fair value measurements
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
111.3

 
$

 
$

 
$
111.3

Total cash equivalents
111.3

 

 

 
111.3

Trading securities:
 
 
 
 
 
 
 
Equity securities — exchange traded funds
19.6

 

 

 
19.6

Total trading securities
19.6

 

 

 
19.6

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

 
13.3

 

 
13.3

Corporate bonds

 
11.9

 

 
11.9

Agency mortgage-backed securities

 
0.6

 

 
0.6

Other

 
2.1

 

 
2.1

Total available-for-sale fixed income investments

 
27.9

 

 
27.9

Available-for-sale equity securities:
 
 
 
 
 
 
 
Biosciences industry
0.1

 

 

 
0.1

Total available-for-sale equity securities
0.1

 

 

 
0.1

Foreign exchange derivative assets

 
12.4




12.4

Interest rate swap derivative assets

 
59.0

 

 
59.0

Purchased cash convertible note hedge

 
1,387.9

 

 
1,387.9

Total assets at recurring fair value measurement
$
131.0


$
1,487.2


$


$
1,618.2

Financial Liabilities
 
 
 
 
 
 
 
Foreign exchange derivative liabilities
$

 
$
9.3

 
$

 
$
9.3

Interest rate swap derivative liabilities

 
0.5




0.5

Cash conversion feature of Cash Convertible Notes

 
1,387.9




1,387.9

Contingent consideration

 

 
460.8

 
460.8

Total liabilities at recurring fair value measurement
$

 
$
1,397.7

 
$
460.8

 
$
1,858.5



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


 
December 31, 2013
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Recurring fair value measurements
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$

 
$

 
$

 
$

Total cash equivalents

 

 

 

Trading securities:
 
 
 
 
 
 
 
Equity securities — exchange traded funds
16.6

 

 

 
16.6

Total trading securities
16.6

 

 

 
16.6

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

 
12.8

 

 
12.8

Corporate bonds

 
10.7

 

 
10.7

Agency mortgage-backed securities

 
0.7

 

 
0.7

Other

 
2.6

 

 
2.6

Total available-for-sale fixed income investments

 
26.8

 

 
26.8

Available-for-sale equity securities:
 
 
 
 
 
 
 
Biosciences industry
0.2

 

 

 
0.2

Total available-for-sale equity securities
0.2

 

 

 
0.2

Foreign exchange derivative assets

 
6.4

 

 
6.4

Interest rate swap derivative assets

 
183.4

 

 
183.4

Purchased cash convertible note hedge

 
1,303.0

 

 
1,303.0

Total assets at recurring fair value measurement
$
16.8

 
$
1,519.6

 
$

 
$
1,536.4

Financial Liabilities
 
 
 
 
 
 
 
Foreign exchange derivative liabilities
$

 
$
58.5

 
$

 
$
58.5

Interest rate swap derivative liabilities

 
15.8

 

 
15.8

Cash conversion feature of Cash Convertible Notes

 
1,303.0

 

 
1,303.0

Contingent consideration

 

 
664.6

 
664.6

Total liabilities at recurring fair value measurement
$

 
$
1,377.3

 
$
664.6

 
$
2,041.9


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.

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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.
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.
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, the Agila acquisition and certain other acquisitions. The measurement is calculated using unobservable inputs based on the Company’s own assumptions. For the respiratory platform and certain other acquisitions, 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, 2014 and December 31, 2013, which was calculated as the present value of the estimated future net cash flows using a market rate of return. Discount rates ranging from 0.6% to 10.3% were utilized in the valuation. For the contingent consideration related to the Agila acquisition, significant unobservable inputs in the valuation include the probability of future payments to the seller of amounts withheld at the closing date. Significant changes in unobservable inputs could result in material changes to the contingent consideration liability. During the three months ended September 30, 2014, the Company entered into an agreement with Strides Arcolab to settle a portion of the contingent consideration for $150 million, for which the Company accrued $230 million at the acquisition date. As a result of this agreement, the Company recognized a gain of $80 million during the three months ended September 30, 2014, which is included in other operating (income) expense, net in the Condensed Consolidated Statements of Operations. The remaining contingent consideration, which could total a maximum of $211 million, is primarily related to the satisfaction of certain regulatory conditions, including potential regulatory remediation costs and the resolution of certain pre-acquisition contingencies. During the three and nine months ended September 30, 2014, accretion of $9.0 million and $26.1 million, respectively was recorded in interest expense. During the three and nine months ended September 30, 2013, $8.2 million and $23.9 million, respectively was recorded in interest expense, and a fair value adjustment to increase the liability by approximately $15.0 million and $3.1 million, respectively, was recorded as a component of other operating (income) expense, net.
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.

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


10.
Debt
A summary of long-term debt, including the current portion, is as follows:
(In millions)
Coupon
 
September 30,
2014
 
December 31,
2013
Revolving Facility
 
 
$

 
$
60.0

Cash Convertible Notes
3.750
%
 
1,933.4

 
1,828.3

2016 Senior Notes (a)
1.800
%
 
499.2

 
499.2

2016 Senior Notes (b)
1.350
%
 
499.8

 
499.7

2018 Senior Notes (c)
2.600
%
 
649.0

 
648.8

2018 Senior Notes (d)
6.000
%
 
808.6

 
811.4

2019 Senior Notes (a)
2.550
%
 
499.0

 
498.8

2020 Senior Notes (e)
7.875
%
 
1,010.9

 
1,012.0

2023 Senior Notes (a)
3.125
%
 
761.9

 
733.2

2023 Senior Notes (f)
4.200
%
 
498.2

 
498.1

2043 Senior Notes (f)
5.400
%
 
496.9

 
496.9

Other
 
 
0.1

 
0.1

 
 
 
7,657.0

 
7,586.5

Less current portion
 
 
1,933.5

 

Total long-term debt
 
 
$
5,723.5

 
$
7,586.5

____________ 
(a)
Instrument is callable by the Company at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate plus 0.20% plus, in each case, accrued and unpaid interest.
(b)
Instrument is callable by the Company at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate plus 0.125% plus, in each case, accrued and unpaid interest.
(c) 
Instrument is callable by the Company at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate plus 0.30% plus, in each case, accrued and unpaid interest.
(d)
Instrument was called by the Company on October 16, 2014 at a redemption price of 103.000% of the principal amount.
(e) 
Instrument is callable by the Company at any time prior to July 15, 2015 at 100% of the principal amount plus the greater of 1% of the principal amount and the excess over the principal of the present value of 103.938% of the principal amount plus all scheduled interest payments from the call date through July 15, 2015 discounted at the U.S. Treasury Rate plus 0.50% plus accrued and unpaid interest. Instrument is callable by the Company at any time on or after July 15, 2015 at the redemption prices set forth in the Indenture dated May 19, 2010, plus accrued and unpaid interest.
(f) 
Instrument is callable by the Company at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate plus 0.25% plus, in each case, accrued and unpaid interest.
Exchange Offer
In June 2013, the Company issued $500 million aggregate principal amount of 1.800% Senior Notes due 2016 and $650 million aggregate principal amount of 2.600% Senior Notes due June 2018. These notes are the Company’s senior unsecured obligations and were issued to qualified institutional buyers in accordance with Rule 144A and to persons outside of the U.S. pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”) in a private offering exempt from the registration requirements of the Securities Act.

In connection with the senior notes offering, the Company entered into a registration rights agreement with the initial purchasers of the senior notes. Pursuant to the registration rights agreement, the Company was obligated to use commercially

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


reasonable efforts 1) to file a registration statement with respect to an offer to exchange senior notes (the “exchange offer”) for new notes with the same aggregate principal amount and terms substantially identical in all material respects and 2) to cause the exchange offer registration statement to be declared effective by the SEC under the Securities Act. The Company filed a registration statement with the SEC, which was declared effective on January 31, 2014 and the exchange offer was completed on March 4, 2014.
Cash Convertible Notes
Below is the summary of the components of the Cash Convertible Notes:

(In millions)
September 30,
2014
 
December 31,
2013
Outstanding principal
$
574.0

 
$
574.0

Equity component carrying amount
1,387.9

 
1,303.3

Unamortized discount
(28.5
)
 
(49.0
)
Net debt carrying amount (a)
$
1,933.4

 
$
1,828.3

Purchased call options (b)
$
1,387.9

 
$
1,303.3

___________ 
(a) 
As of September 30, 2014 and December 31, 2013, the cash convertible notes were classified as current portion of long-term debt and other long-term obligations and long-term debt, respectively, on the Consolidated Balance Sheets.
(b) 
As of September 30, 2014 and December 31, 2013, purchased call options were classified as prepaid expenses and other current assets and other assets, respectively, on the Consolidated Balance Sheets.

As of September 30, 2014, 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, 2014 period was more than 130% of the applicable conversion reference price of $13.32, the $574 million of Cash Convertible Notes were convertible. Although de minimis conversions have been requested, the Company’s experience is that convertible debentures are not normally converted by investors until close to their maturity date. 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 Notes
On October 16, 2014, the Company announced its intention to redeem all of its outstanding 6.000% 2018 Senior Notes on November 15, 2014 at a redemption price of 103% of the principal amount, together with accrued and unpaid interest at the redemption date. The redemption of the 2018 Senior Notes is expected to be funded through future debt offerings or borrowings under the Revolving Facility.
Receivables Facility
As of September 30, 2014 and December 31, 2013, the Company’s short-term borrowings under the Receivables Facility were $350 million and $374 million, respectively in the Condensed Consolidated Balance Sheets.
Fair Value
At September 30, 2014 and December 31, 2013, the fair value of the Senior Notes was approximately $5.84 billion and $5.85 billion, respectively. At September 30, 2014 and December 31, 2013, the fair value of the Cash Convertible Notes was approximately $1.96 billion and $1.88 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.

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


Mandatory minimum repayments remaining on the outstanding borrowings under the Revolving Facility and notes at notional amounts at September 30, 2014 are as follows for each of the periods ending December 31:
 
(In millions)
Total
2014
$

2015
574

2016
1,000

2017

2018
1,450

Thereafter
3,250

Total
$
6,274

11.
Comprehensive Earnings
Accumulated other comprehensive loss, as reflected on the Condensed Consolidated Balance Sheets, is comprised of the following:
(In millions)
September 30,
2014
 
December 31, 2013
Accumulated other comprehensive loss:
 
 
 
Net unrealized gains on marketable securities, net of tax
$
0.2

 
$
0.3

Net unrecognized losses and prior service cost related to defined benefit plans, net of tax
(11.2
)
 
(8.7
)
Net unrecognized gains on derivatives, net of tax
24.4

 
84.8

Foreign currency translation adjustment
(633.7
)
 
(316.5
)
 
$
(620.3
)
 
$
(240.1
)


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


Components of accumulated other comprehensive loss, before tax, consist of the following, for the three and nine months ended September 30, 2014 and 2013:

 
Three Months Ended September 30, 2014
Gains and Losses on Derivatives in Cash Flow Hedging Relationships
 
Gains and Losses on Marketable Securities
 
Defined Benefit Plan Items
 
Foreign Currency Translation Adjustment
 
Totals
(In millions)
Foreign currency forward contracts
 
Interest rate swaps
 
Total
 
 
 
 
 
 
 
 
Balance at June 30, 2014, net of tax
 
 
 
 
$
39.5

 
$
0.3

 
$
(12.6
)
 
$
(179.9
)
 
$
(152.7
)
Other comprehensive (loss) earnings before reclassifications, before tax
 
 
 
 
(33.4
)
 
(0.1
)
 
1.2

 
(453.8
)
 
(486.1
)
Amounts reclassified from accumulated other comprehensive loss, before tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss on foreign exchange forward contracts classified as cash flow hedges, included in net sales
(10.1
)
 
 
 
(10.1
)