UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Report Under SectionPeriod Ended March 31, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the
COMMISSION FILE NUMBER 001-38661
Elanco Animal Health Incorporated
(Exact name of Registrant as specified in its charter)
| INDIANA | 82-5497352 | |||||||
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
2500 INNOVATION WAY, GREENFIELD, INDIANA 46140
(Address and zip code of principal executive offices)
Registrant’s telephone number, including area code (877) 352-6261
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common stock, no par value | ELAN | New York Stock Exchange | ||||||
Indicate by check mark whether the Registrantregistrant (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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ý☒ No o☐
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||||||
Emerging growth company | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o☐ No ý☒
The number of shares of common stock outstanding as of November 6, 2018 were 365,625,000
May 3, 2024 was 494,181,620.
ELANCO ANIMAL HEALTH INCORPORATED
TABLE OF CONTENTS
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PART II. Other Information | ||||||||||||||||
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2024 Q1 Form 10-Q | 1 | ||||||||
FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY
This Quarterly Report on Form 10-Q (Form 10-Q) includes forward-looking statements within the meaning of the federal securities laws. This quarterly report containsThese forward-looking statements including,include, without limitation, statements concerning the impact on Elanco Animal Health Incorporated and its subsidiaries (collectively, Elanco, the Company, we, us or our) caused by the integration of business acquisitions, expected synergies and cost savings, product launches, global macroeconomic conditions, expectations relating to liquidity and sources of capital, our expected compliance with debt covenants, cost savings, expenses and reserves relating to restructuring actions, our industry and our operations, performance and financial condition, and including, in particular, statements relating to our business, growth strategies, distribution strategies, product development efforts and future expenses.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important risk factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions, including but not limited to the following:
•the success of our research and development (R&D) and licensing efforts;
•the impact of disruptive innovations and advances in veterinary medical practices, animal health technologies and alternatives to animal-derived protein;
•competition from generic products that may be viewed as more cost-effective;
•changes in regulatory restrictions on the use of antibiotics in food animals, as well as changing market demand regardingfarm animals;
•an outbreak of infectious disease carried by farm animals;
•risks related to the useevaluation of antibioticsanimals;
•consolidation of our customers and productivitydistributors;
•the impact of increased or decreased sales into our distribution channels resulting in fluctuations in our revenues;
•our dependence on the success of our top products;
•our ability to complete acquisitions and divestitures (including the proposed divestiture of our aqua business) and to successfully integrate the businesses we acquire;
•our ability to implement our business strategies or achieve targeted cost efficiencies and gross margin improvements;
•fluctuations in inventory levels in our distribution channels;
•risks related to the use of artificial intelligence (AI) in our business;
•our dependence on sophisticated information technology and infrastructure and the impact of breaches of our customersinformation technology systems;
•the impact of weather conditions, including those related to climate change, and distributors;the availability of natural resources;
•demand, supply and operational challenges associated with the successeffects of a human disease outbreak, epidemic, pandemic or other widespread public health concern;
•the loss of key personnel or highly skilled employees;
•adverse effects of labor disputes, strikes and/or work stoppages;
•the effect of our R&D, acquisitionsubstantial indebtedness on our business, including restrictions in our debt agreements that limit our operating flexibility, changes in our credit ratings that lead to higher borrowing expenses and licensing efforts;may restrict access to credit and changes in interest rates that may adversely affect our earnings and cash flows;
•changes in interest rates;
•risks related to the write-down of goodwill or identifiable intangible assets;
•the lack of availability or significant increases in the cost of raw materials;
•risks related to our presence in foreign markets;
•risks related to foreign currency exchange rate fluctuations;
•risks related to underfunded pension plan liabilities;
•our current plans not to pay dividends and restrictions on our ability to pay dividends;
2024 Q1 Form 10-Q | 2 | ||||||||
•the potential impact that actions by activist shareholders could have on the pursuit of our business strategies;
•risks related to certain governance provisions in our constituent documents;
•risks related to tax expense or exposure;
•actions by regulatory bodies, including as a result of their interpretation of studies on product safety;
•the possible slowing or cessation of acceptance and/or adoption of our farm animal sustainability initiatives;
•the impact of increased regulation or decreased governmental financial support related to the raising, processing or consumption of farm animals;
•risks related to the modification of foreign trade policy;
•the impact of litigation, regulatory investigations and other legal matters, including the risk to our reputation and the risk that our insurance policies may be insufficient to protect us from the impact of such matters;
•challenges to our intellectual property rights or our alleged violation of rights of others;
•misuse, off-label or counterfeiting use of our products;
•unanticipated safety, quality or efficacy concerns and the impact of identified concerns associated with our products;
•compliance with privacy laws and security of weather conditionsinformation; and the availability
•risks related to environmental, health and safety laws and regulations.
See Item 1A, “Risk Factors,” of natural resources;
2024 Q1 Form 10-Q | 3 | ||||||||
PART I. Financial InformationI
ITEM 1. Financial StatementsFINANCIAL STATEMENTS
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Revenue | $ | 761.1 | $ | 697.1 | $ | 2,267.5 | $ | 2,134.7 | |||||||
| Costs, expenses and other: | |||||||||||||||
| Cost of sales | 369.8 | 376.2 | 1,161.3 | 1,088.9 | |||||||||||
| Research and development | 58.9 | 61.9 | 185.5 | 189.7 | |||||||||||
| Marketing, selling and administrative | 179.0 | 194.7 | 550.1 | 583.0 | |||||||||||
| Amortization of intangible assets | 48.7 | 51.6 | 147.3 | 161.0 | |||||||||||
| Asset impairments, restructuring and other special charges (Note 6) | 12.4 | 23.7 | 82.8 | 189.3 | |||||||||||
| Other–net, (income) expense | 13.5 | (1.9 | ) | 24.2 | — | ||||||||||
| 682.3 | 706.2 | 2,151.2 | 2,211.9 | ||||||||||||
| Income (loss) before income taxes | 78.8 | (9.1 | ) | 116.3 | (77.2 | ) | |||||||||
| Income tax expense | 18.6 | 11.6 | 46.2 | 72.0 | |||||||||||
| Net income (loss) | $ | 60.2 | $ | (20.7 | ) | $ | 70.1 | $ | (149.2 | ) | |||||
| Earnings (loss) per share: | |||||||||||||||
| Basic and diluted | $ | 0.16 | $ | (0.06 | ) | $ | 0.19 | $ | (0.41 | ) | |||||
| Weighted average shares outstanding: | |||||||||||||||
| Basic and diluted | 365.6 | 365.6 | 365.6 | 365.6 | |||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Net income (loss) | $ | 60.2 | $ | (20.7 | ) | $ | 70.1 | $ | (149.2 | ) | |||||
| Other comprehensive income (loss), net of tax | 94.5 | (4.0 | ) | (9.8 | ) | 231.8 | |||||||||
| Comprehensive income (loss) | $ | 154.7 | $ | (24.7 | ) | $ | 60.3 | $ | 82.6 | ||||||
Elanco Animal Health Incorporated
Condensed Consolidated and Combined Balance SheetsStatements of Operations (Unaudited)
(Dollars in millions)millions, except per-share data)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Revenue | $ | 1,205 | $ | 1,257 | |||||||||||||||||||
| Costs, expenses and other: | |||||||||||||||||||||||
| Cost of sales | 515 | 494 | |||||||||||||||||||||
| Research and development | 87 | 81 | |||||||||||||||||||||
| Marketing, selling and administrative | 337 | 327 | |||||||||||||||||||||
| Amortization of intangible assets | 133 | 134 | |||||||||||||||||||||
| Asset impairment, restructuring and other special charges | 46 | 40 | |||||||||||||||||||||
| Interest expense, net of capitalized interest | 66 | 64 | |||||||||||||||||||||
| Other expense, net | 9 | 9 | |||||||||||||||||||||
| 1,193 | 1,149 | ||||||||||||||||||||||
| Income before income taxes | 12 | 108 | |||||||||||||||||||||
| Income tax (benefit) expense | (20) | 5 | |||||||||||||||||||||
| Net income | $ | 32 | $ | 103 | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.06 | $ | 0.21 | |||||||||||||||||||
| Diluted | $ | 0.06 | $ | 0.21 | |||||||||||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||||||||
| Basic | 493.2 | 491.1 | |||||||||||||||||||||
| Diluted | 496.0 | 492.8 | |||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| September 30, 2018 | December 31, 2017 | ||||||
| Assets | (Unaudited) | ||||||
| Current Assets | |||||||
| Cash and cash equivalents | $ | 300.0 | $ | 323.4 | |||
| Accounts receivable, net of allowances of $8.8 (2018) and $9.8 (2017) | 606.1 | 567.4 | |||||
| Other receivables | 30.8 | 34.5 | |||||
| Inventories (Note 7) | 1,008.7 | 1,062.3 | |||||
| Prepaid expenses and other | 123.2 | 136.1 | |||||
| Restricted cash (Note 14) | 634.9 | — | |||||
| Total current assets | 2,703.7 | 2,123.7 | |||||
| Noncurrent Assets | |||||||
| Investments (Note 9) | 14.9 | 12.3 | |||||
| Goodwill | 2,968.8 | 2,969.2 | |||||
| Other intangibles, net | 2,514.8 | 2,672.8 | |||||
| Other noncurrent assets | 100.0 | 242.0 | |||||
| Property and equipment, net of accumulated depreciation $894.5 (2018) and $834.1 (2017) | 909.3 | 920.3 | |||||
| Total assets | $ | 9,211.5 | $ | 8,940.3 | |||
| Liabilities and Equity | |||||||
| Current Liabilities | |||||||
| Accounts payable | $ | 202.7 | $ | 203.8 | |||
| Employee compensation | 81.3 | 89.3 | |||||
| Sales rebates and discounts | 147.9 | 165.5 | |||||
| Other current liabilities | 178.6 | 184.5 | |||||
| Payable to Lilly (Note 14) | 634.9 | — | |||||
| Total current liabilities | 1,245.4 | 643.1 | |||||
| Noncurrent Liabilities | |||||||
| Long-term debt (Note 8) | 2,478.5 | — | |||||
| Accrued retirement benefits | 136.0 | 139.0 | |||||
| Deferred taxes | 125.0 | 251.9 | |||||
| Other noncurrent liabilities | 89.5 | 126.0 | |||||
| Total liabilities | 4,074.4 | 1,160.0 | |||||
| Commitments and Contingencies (Note 11) | |||||||
| Equity | |||||||
| Net parent company investment | — | 8,036.9 | |||||
| Common stock, no par value, 5,000,000,000 shares authorized 365,625,000 shares issued and outstanding as of September 30, 2018 | — | — | |||||
| Additional paid-in capital | 5,347.4 | — | |||||
| Accumulated other comprehensive loss | (210.3 | ) | (256.6 | ) | |||
| Total equity | 5,137.1 | 7,780.3 | |||||
| Total liabilities and equity | $ | 9,211.5 | $ | 8,940.3 | |||
2024 Q1 Form 10-Q | 4 | ||||||||
Elanco Animal Health Incorporated
(Dollars and shares in millions)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Net income | $ | 32 | $ | 103 | |||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Cash flow hedges, net of taxes | 32 | (48) | |||||||||||||||||||||
| Foreign currency translation, net of taxes | (227) | 130 | |||||||||||||||||||||
| Defined benefit plans, net of taxes | (4) | — | |||||||||||||||||||||
| Other comprehensive (loss) income, net of taxes | (199) | 82 | |||||||||||||||||||||
| Comprehensive (loss) income | $ | (167) | $ | 185 | |||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-in Capital | Net Parent Company Investment | Foreign Currency Translation | Defined Benefit Pension and Retiree Health Benefit Plans | Total | Total Equity | |||||||||||||||||||||||
| December 31, 2016 | — | $ | — | $ | — | $ | 7,474.3 | $ | (437.3 | ) | $ | (19.6 | ) | $ | (456.9 | ) | $ | 7,017.4 | ||||||||||||
| Net loss | — | — | — | (149.2 | ) | — | — | — | (149.2 | ) | ||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 228.1 | 3.7 | 231.8 | 231.8 | ||||||||||||||||||||||
| Transfers (to)/from Lilly, net | — | — | — | 862.7 | — | — | — | 862.7 | ||||||||||||||||||||||
| September 30, 2017 | — | $ | — | $ | — | $ | 8,187.8 | $ | (209.2 | ) | $ | (15.9 | ) | $ | (225.1 | ) | $ | 7,962.7 | ||||||||||||
| December 31, 2017 | — | $ | — | $ | — | $ | 8,036.9 | $ | (227.2 | ) | $ | (29.4 | ) | $ | (256.6 | ) | $ | 7,780.3 | ||||||||||||
| Adoption of Accounting Standards Update 2016-16 | — | — | — | (0.3 | ) | — | — | — | (0.3 | ) | ||||||||||||||||||||
| Net income | — | — | — | 70.1 | — | — | — | 70.1 | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (20.6 | ) | 10.8 | (9.8 | ) | (9.8 | ) | |||||||||||||||||||
| Transfers (to)/from Lilly, net | — | — | — | (226.3 | ) | — | — | — | (226.3 | ) | ||||||||||||||||||||
| Separation adjustments | — | — | — | 2.2 | 56.1 | — | 56.1 | 58.3 | ||||||||||||||||||||||
| Issuance of common stock | 365.6 | — | 1,659.7 | — | — | — | — | 1,659.7 | ||||||||||||||||||||||
| Consideration to Lilly in connection with the Separation | — | — | (4,194.9 | ) | — | — | — | — | (4,194.9 | ) | ||||||||||||||||||||
| Reclassification of net parent company investment | — | — | 7,882.6 | (7,882.6 | ) | — | — | — | — | |||||||||||||||||||||
| September 30, 2018 | 365.6 | $ | — | $ | 5,347.4 | $ | — | $ | (191.7 | ) | $ | (18.6 | ) | $ | (210.3 | ) | $ | 5,137.1 | ||||||||||||
See accompanying notes to unaudited condensed consolidated and combined financial statements.
2024 Q1 Form 10-Q | 5 | ||||||||
Elanco Animal Health Incorporated
(in millions, except share data)
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 345 | $ | 352 | |||||||
| Accounts receivable, net | 988 | 842 | |||||||||
| Other receivables | 90 | 168 | |||||||||
| Inventories | 1,638 | 1,735 | |||||||||
| Prepaid expenses and other | 338 | 310 | |||||||||
| Assets held for sale | 651 | — | |||||||||
| Total current assets | 4,050 | 3,407 | |||||||||
| Noncurrent Assets | |||||||||||
| Goodwill | 4,478 | 5,094 | |||||||||
| Other intangibles, net | 4,196 | 4,494 | |||||||||
| Other noncurrent assets | 346 | 341 | |||||||||
| Property and equipment, net | 949 | 1,026 | |||||||||
| Total assets | $ | 14,019 | $ | 14,362 | |||||||
| Liabilities and Equity | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 302 | $ | 270 | |||||||
| Sales rebates and discounts | 318 | 367 | |||||||||
| Current portion of long-term debt | 38 | 38 | |||||||||
| Other current liabilities | 574 | 566 | |||||||||
| Total current liabilities | 1,232 | 1,241 | |||||||||
| Noncurrent Liabilities | |||||||||||
| Long-term debt | 5,727 | 5,736 | |||||||||
| Deferred taxes | 530 | 567 | |||||||||
| Other noncurrent liabilities | 474 | 595 | |||||||||
| Total liabilities | 7,963 | 8,139 | |||||||||
| Commitments and Contingencies | |||||||||||
| Equity | |||||||||||
| Common stock, no par value, 5,000,000,000 shares authorized, 494,049,915 and 492,845,216 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | — | — | |||||||||
| Additional paid-in capital | 8,777 | 8,777 | |||||||||
| Accumulated deficit | (2,256) | (2,288) | |||||||||
| Accumulated other comprehensive loss | (465) | (266) | |||||||||
| Total equity | 6,056 | 6,223 | |||||||||
| Total liabilities and equity | $ | 14,019 | $ | 14,362 | |||||||
See accompanying notes to condensed consolidated financial statements.
2024 Q1 Form 10-Q | 6 | ||||||||
Elanco Animal Health Incorporated
Condensed Consolidated Statements of Equity (Unaudited)
(in millions)
| Common Stock | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Cash Flow Hedges | Foreign Currency Translation | Defined Benefit Plans | Total | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | 474.2 | $ | — | $ | 8,738 | $ | (1,057) | $ | 182 | $ | (672) | $ | 98 | $ | (392) | $ | 7,289 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 103 | — | — | — | — | 103 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (48) | 130 | — | 82 | 82 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity, net | 1.0 | — | 6 | — | — | — | — | — | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of tangible equity units (TEUs) into common stock | 17.2 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | 492.4 | $ | — | $ | 8,744 | $ | (954) | $ | 134 | $ | (542) | $ | 98 | $ | (310) | $ | 7,480 | ||||||||||||||||||||||||||||||||||||||||||
| December 31, 2023 | 492.8 | $ | — | $ | 8,777 | $ | (2,288) | $ | 57 | $ | (379) | $ | 56 | $ | (266) | $ | 6,223 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 32 | — | — | — | — | 32 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax | — | — | — | — | 32 | (227) | (4) | (199) | (199) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity, net | 1.2 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2024 | 494.0 | $ | — | $ | 8,777 | $ | (2,256) | $ | 89 | $ | (606) | $ | 52 | $ | (465) | $ | 6,056 | ||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
2024 Q1 Form 10-Q | 7 | ||||||||
Elanco Animal Health Incorporated
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net income | $ | 32 | $ | 103 | |||||||
| Adjustments to reconcile net income to cash flows from operating activities: | |||||||||||
| Depreciation and amortization | 166 | 173 | |||||||||
| Stock-based compensation expense | 11 | 12 | |||||||||
| Changes in operating assets and liabilities, net of acquisitions and divestitures | (177) | (439) | |||||||||
| Other non-cash operating activities, net | (30) | 6 | |||||||||
| Net Cash Provided by (Used for) Operating Activities | 2 | (145) | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Net purchases of property and equipment and software | (24) | (24) | |||||||||
| Cash paid for acquisitions | (5) | (16) | |||||||||
| Proceeds from sale of Shawnee and Speke facilities (see Note 4) | 66 | — | |||||||||
| Purchases of intangible assets | — | (14) | |||||||||
| Other investing activities, net | — | (1) | |||||||||
| Net Cash Provided by (Used for) Investing Activities | 37 | (55) | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Proceeds from Revolving Credit Facility | 50 | 200 | |||||||||
| Repayments of Revolving Credit Facility | (50) | — | |||||||||
| Proceeds from Securitization Facility | 50 | — | |||||||||
| Repayments of Securitization Facility | (50) | — | |||||||||
| Repayments of long-term borrowings | (13) | (19) | |||||||||
| Other financing activities, net | (14) | (7) | |||||||||
| Net Cash (Used for) Provided by Financing Activities | (27) | 174 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (19) | (1) | |||||||||
| Net decrease in cash and cash equivalents | (7) | (27) | |||||||||
| Cash and cash equivalents – beginning of period | 352 | 345 | |||||||||
| Cash and cash equivalents – end of period | $ | 345 | $ | 318 | |||||||
| Nine Months Ended September 30, | |||||||
| 2018 | 2017 | ||||||
| Cash Flows from Operating Activities | |||||||
| Net income (loss) | $ | 70.1 | $ | (149.2 | ) | ||
| Adjustments to Reconcile Net Income (Loss) to Cash Flows from Operating Activities: | |||||||
| Depreciation and amortization | 222.3 | 231.3 | |||||
| Change in deferred income taxes | 12.6 | (7.0 | ) | ||||
| Stock-based compensation expense | 20.2 | 18.7 | |||||
| Asset impairment charges | 102.5 | 43.8 | |||||
| Gain on sale of assets | — | (16.0 | ) | ||||
| Other changes in operating assets and liabilities, net of acquisitions and divestitures | (83.4 | ) | 42.7 | ||||
| Other non-cash operating activities, net | 3.5 | 2.8 | |||||
| Net Cash Provided by Operating Activities | 347.8 | 167.1 | |||||
| Cash Flows from Investing Activities | |||||||
| Net purchases of property and equipment | (74.3 | ) | (31.7 | ) | |||
| Cash paid for acquisitions, net of cash acquired | — | (882.1 | ) | ||||
| Other investing activities, net | (4.6 | ) | (15.3 | ) | |||
| Net Cash Used for Investing Activities | (78.9 | ) | (929.1 | ) | |||
| Cash Flows from Financing Activities | |||||||
| Proceeds from issuance of long-term debt (Note 8) | 2,477.7 | — | |||||
| Proceeds from issuance of common stock (Note 1) | 1,659.7 | — | |||||
| Consideration paid to Lilly in connection with the Separation (Note 1) | (3,559.1 | ) | — | ||||
| Other financing activities, net | (3.7 | ) | (0.5 | ) | |||
| Other net transactions with Lilly | (247.4 | ) | 844.0 | ||||
| Net Cash Provided by Financing Activities | 327.2 | 843.5 | |||||
| Effect of exchange rate changes on cash and cash equivalents | 15.4 | 3.3 | |||||
| Net increase in cash, cash equivalents and restricted cash | 611.5 | 84.8 | |||||
| Cash, cash equivalents and restricted cash at January 1 | 323.4 | 258.8 | |||||
| Cash, cash equivalents and restricted cash at September 30 | $ | 934.9 | $ | 343.6 | |||
| September 30, | |||||||
| 2018 | 2017 | ||||||
| Cash and cash equivalents | $ | 300.0 | $ | 343.6 | |||
| Restricted cash (Note 14) | 634.9 | — | |||||
| Cash, cash equivalents and restricted cash at September 30 | $ | 934.9 | $ | 343.6 | |||
See accompanying notes to unaudited condensed consolidated and combined financial statements.
2024 Q1 Form 10-Q | 8 | ||||||||
Elanco Animal Health Incorporated
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
(Tables present dollars and shares in millions, except per-share and per-unit data)
Note 1. Nature of Business and Organization
We have prepared the accompanying unaudited condensed consolidated and combined financial statements in accordance with the SEC requirements offor interim reporting. As permitted under those rules, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (GAAP) have been condensed or omitted. The information included in this Form 10-Q should be read in conjunction with our consolidated financial statements and therefore, they doaccompanying notes for the year ended December 31, 2023, included in our 2023 Form 10-K. In addition, results for interim periods should not include all information and footnotes necessarybe considered indicative of results for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted inany other interim period or for the United States (GAAP). full year ending December 31, 2024, or any other future period.
In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operations for the periods shown. In preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
Certain reclassifications of prior year information have been made to prior periods in the unaudited condensed consolidated and combined financial statements and accompanying notes to conform with current presentation. In addition, during the period ended September 30, 2018, certain combined balance sheet amounts related to the prior year have been revisedcurrent year's presentation.
The significant accounting policies set forth in Note 2 to correct the sales rebates and discounts liability, which did not correctly reflect an accrual for rebates related to product held in the wholesalers' pipeline. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, and Accounting Standards Codification (ASC) 250, Presentation of Financial Statements, we assessed the materiality of this correction and concluded that the accrual for the rebate related to product held in the wholesalers' pipeline was not material to prior periods, and therefore, amendments of previously filed reports are not required.
Note 14.
The following table provides a brief description of accounting standards applicable to us that were effective January 1, 2018 and were adopted on that date:
we have not yet adopted:
| Standard | Description | Effective Date | ||||||||||||||||||
| Effect on the | ||||||||||||||||||||
| ASU 2023-07 is intended to improve disclosure requirements related to reportable segments, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker (CODM) for purposes of assessing a segment's profit or loss and | This new | |||||||||||||||||||
| We are | ||||||||||||||||||||
ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures | ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures by enhancing information about how an entity's operations and related tax risks and its tax planning and operational opportunities affect its tax rate and prospects for future cash flows. | The guidance is effective for fiscal years beginning after December 31, 2024, with early adoption permitted. Adoption allows for prospective application, with retrospective application permitted. | We are currently assessing the impact ASU 2023-09 will have | |||||||||||||||||
Note 5.3. Revenue
We recognize revenue primarily from product sales to customers. Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation,obligations, which is generally isonce the goods have been shipped and the customer has assumed title. For contract manufacturing organization (CMO) arrangements, we recognize revenue over time or at a point in time depending on our evaluation of when the time we ship the product to the customer. Payment terms differ by jurisdiction and customer but payment terms in most of our major jurisdictions typically range from 30 to 100 days from date of shipment. Revenue for our product sales has not been adjusted for the effects of a financing component as we expect, at contract inception, that the period between when we transferobtains control of the product and when we receive payment will be one yearpromised goods or less. Any exceptions are either not material or we collect interestservices.
2024 Q1 Form 10-Q | 9 | ||||||||
Provisions for payments made after the due date. Provisions forsales rebates and discounts and returns are establishedrecorded as a reduction to revenue in the same period the related sales are recognized. We generally, ship product shortly after orders are received; therefore, we generally only have a few days of orders received but not yet shipped at the end of any reporting period. Shipping and handling activities are considered to be fulfillment activitiesrecognized and are not considered to be a separate performance obligation. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are imposedbased on our sales of product and collected from a customer.
specific agreements. In determining the appropriate accrual amount, we consider our historical experience with similar incentivesincentive programs, and current sales data to estimate the impactand estimates of such programs on revenue and continually monitor the impact of this experience and adjust as necessary. Although we accrue a liability for rebates related to these
channel distributors. The following table summarizes the activity in theour global sales rebates and discounts liability in the U.S.:liability:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Beginning balance | $ | 367 | $ | 324 | |||||||||||||||||||
| Reduction of revenue | 221 | 209 | |||||||||||||||||||||
| Payments | (266) | (204) | |||||||||||||||||||||
| Foreign currency translation adjustments | (4) | — | |||||||||||||||||||||
| Ending balance | $ | 318 | $ | 329 | |||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Beginning balance | $ | 99.1 | $ | 118.7 | $ | 114.8 | $ | 116.1 | |||||||
| Reduction of revenue | 53.5 | 48.6 | 154.2 | 184.9 | |||||||||||
| Payments | (49.1 | ) | (49.6 | ) | (165.5 | ) | (183.3 | ) | |||||||
| Ending balance | $ | 103.5 | $ | 117.7 | $ | 103.5 | $ | 117.7 | |||||||
Adjustments to revenue recognized as a result of changes in estimates for the judgments described above during the three and nine months ended September 30, 2018March 31, 2024 and 2023, for product shipped in previous periods were not material.
Disaggregation of Revenue
The following table summarizes our revenue disaggregated by product category:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Pet Health | $ | 639 | $ | 675 | |||||||||||||||||||
| Farm Animal: | |||||||||||||||||||||||
| Cattle | 244 | 248 | |||||||||||||||||||||
| Poultry | 197 | 183 | |||||||||||||||||||||
| Swine | 84 | 102 | |||||||||||||||||||||
| Aqua | 31 | 40 | |||||||||||||||||||||
| Total Farm Animal | 556 | 573 | |||||||||||||||||||||
Contract Manufacturing (1) | 10 | 9 | |||||||||||||||||||||
| Revenue | $ | 1,205 | $ | 1,257 | |||||||||||||||||||
(1)Represents revenue from arrangements in which we manufacture products on behalf of a third party.
The following table summarizes our revenue disaggregated by geographic area:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| United States | $ | 531 | $ | 543 | |||||||||||||||||||
| International | 674 | 714 | |||||||||||||||||||||
| Revenue | $ | 1,205 | $ | 1,257 | |||||||||||||||||||
We have a single customer that accounted for approximately 9% of revenue for each of the three months ended March 31, 2024 and 2023. Product sales with this customer resulted in accounts receivable of $93 million and $78 million at March 31, 2024 and December 31, 2023, respectively.
Note 4. Acquisitions, Divestitures and Other Arrangements
Acquisitions
During 2023, we completed the acquisitions of certain U.S. marketed products, pipeline products, inventory and an assembled workforce from NutriQuest, LLC (NutriQuest) and certain assets including inventory and distribution rights for certain marketed products from NutriQuest Nutricao Animal Ltda (NutriQuest Brazil). Each of these transactions was accounted for as a business combination under the acquisition method of accounting. The acquisition method requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The determination of estimated fair value requires management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Companion Animal Disease Prevention | $ | 188.6 | $ | 140.4 | $ | 603.9 | $ | 519.7 | |||||||
| Companion Animal Therapeutics | 80.5 | 63.5 | 211.1 | 181.8 | |||||||||||
| Companion Animal Other | 27.7 | 48.3 | 69.3 | 119.9 | |||||||||||
| Food Animal Future Protein & Health | 162.8 | 164.5 | 502.1 | 456.0 | |||||||||||
| Food Animal Ruminants & Swine | 301.5 | 280.4 | 881.1 | 857.3 | |||||||||||
| Revenue | $ | 761.1 | $ | 697.1 | $ | 2,267.5 | $ | 2,134.7 | |||||||
2024 Q1 Form 10-Q | 10 | ||||||||
NutriQuest
On January 3, 2023, we acquired NutriQuest for total purchase consideration of $59 million. NutriQuest is a provider of swine, poultry and cattle nutritional health products to animal producers. The acquisition helped us expand our existing nutritional health offerings and further our efforts to explore innovative antibiotic alternatives. The composition of the purchase price was as follows:
| Up-front cash consideration | $ | 16 | ||||||
| Deferred cash consideration paid January 4, 2024 | 5 | |||||||
| Fair value of contingent consideration | 38 | |||||||
| Total purchase consideration | $ | 59 | ||||||
Contingent consideration for this acquisition includes up to $85 million of cash consideration payable if specific development, sales and geographic expansion milestones are achieved, as outlined in the asset purchase agreement. The initial fair value of this contingent consideration liability of $38 million was estimated at the acquisition date using a Monte Carlo simulation model, which represented a Level 3 measurement under the fair value hierarchy (see Note 10. Fair Value for further information).
The following table summarizes the fair values of assets acquired as of the acquisition date:
| Inventories | $ | 3 | |||
| Intangible assets: | |||||
| Marketed products | 29 | ||||
| Acquired in-process research and development (IPR&D) | 9 | ||||
| Other intangible assets | 15 | ||||
| Total identifiable assets | 56 | ||||
| Goodwill | 3 | ||||
| Total consideration transferred | $ | 59 | |||
Other intangible assets consist of customer relationships and trade names. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 12 years on a straight-line basis.
NutriQuest Brazil
On August 1, 2023, we acquired NutriQuest Brazil for total purchase consideration of $19 million. The composition of the purchase price included cash paid on the closing date of $3 million, with additional consideration payable through 2026 valued at approximately $16 million, a portion of which is contingent upon the continuation of certain terms and conditions set forth in the asset purchase agreement.
The following table summarizes the preliminary amounts recognized for assets acquired as of the acquisition date:
| Inventories | $ | 3 | |||
| Definite-lived intangible assets | 15 | ||||
| Total identifiable assets | 18 | ||||
| Goodwill | 1 | ||||
| Total consideration transferred | $ | 19 | |||
The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately nine years on a straight-line basis. The purchase price allocation for this acquisition is preliminary as of March 31, 2024, and subject to change, including the valuation of the intangible assets. The final determination of these amounts will be completed as soon as possible but no later than one year from the acquisition date.
Divestitures
Shawnee and Speke
During 2021, we announced an agreement with TriRx Pharmaceuticals (TriRx) to sell our manufacturing sites in Shawnee, Kansas (Shawnee) and Speke, U.K. (Speke). In August 2021 and February 2022, we completed the sales of our Shawnee and Speke sites, respectively. Based on the original terms of the sales agreements, we anticipated receiving cash consideration from TriRx over a three-year period, and we received cash proceeds of $13 million from TriRx in 2022. In May 2023, we entered into amendments to the agreements (the amended agreement), which effectively restructured the payment schedule related to the remaining amount owed. At December 31, 2023, our remaining net receivable balance from TriRx under the amended agreement was $69 million. In February 2024, we received $66 million from TriRx, in addition to accrued interest, with the remaining $3 million due in August 2024.
2024 Q1 Form 10-Q | 11 | ||||||||
Aqua Business
In February 2024, we entered into an asset purchase agreement (APA) to sell our aqua business to Intervet International B.V., a Dutch subsidiary of Merck Animal Health, for approximately $1.3 billion in cash, payable at closing. Our aqua business includes products across both warm-water and cold-water species. This divestiture is expected to include inventories, real property and equipment, including our manufacturing sites in Canada and Vietnam, and certain intellectual property, technology and other intangible assets, including marketed brands, as well as approximately 280 commercial and manufacturing employees. The APA contains certain representations, warranties and covenants that are customary for transactions of this nature, including covenants by us relating to the operation of the aqua business prior to the closing of the transaction, as well as certain non-compete restrictions. The future closing of the divestiture is subject to customary conditions, including the receipt of applicable regulatory and antitrust approvals, and is currently anticipated to occur around mid-year 2024. If the APA is terminated due to failure to obtain the applicable required approvals, subject to certain conditions, Merck Animal Health will be required to pay us a termination fee of $55 million in cash. Our aqua business generated revenues of $31 million and $40 million during the three months ended March 31, 2024 and 2023, respectively. Given that we operate our business as a single reporting unit, we are unable to reasonably determine stand-alone costs and related earnings or loss before income taxes attributable to our aqua business.
We determined the aqua business assets being sold (the disposal group) met all the required criteria to be classified as held for sale in February 2024. Accordingly, at that time we ceased depreciation and amortization of the long-lived assets included within the disposal group. We have also determined that the sale of our aqua business does not qualify for reporting as a discontinued operation, as it does not represent a strategic shift that has or will have a major effect on our operations and/or financial results.
We also determined that the disposal group's fair value, based upon the expected $1.3 billion sales price, less anticipated costs to sell, exceeded its carrying value. As such, no write-down of the carrying value was required. In establishing the carrying value of our disposal group, a portion of our single reporting unit’s goodwill was allocated to it on a relative fair value basis. In determining the relative fair value of the disposal group to our single reporting unit as a whole, we compared the fair value of the disposal group to an estimated fair value of our single reporting unit, which was based on a fair value assessment using the income approach. The income approach is a valuation technique that provides an estimate of fair value based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Significant management judgment was required in estimating the fair value of our single reporting unit, including, but not limited to, estimates and assumptions regarding future cash flows of our single reporting unit, revenue growth and other profitability measures, such as gross margin and earnings before interest, taxes, depreciation and amortization (EBITDA) margin, and the determination of an appropriate discount rate. We consider this valuation approach to be a Level 3 measurement under the fair value hierarchy.
As of March 31, 2024, the carrying amounts of the following major assets were classified as held for sale on our condensed consolidated balance sheet:
| Inventories | $ | 45 | |||
| Goodwill | 482 | ||||
| Other intangibles, net | 50 | ||||
| Property and equipment, net | 66 | ||||
| Other assets | 8 | ||||
| Total assets held for sale | $ | 651 | |||
Based on our current estimates, we expect to recognize a pre-tax gain on sale in the range of $600 million to $650 million.
Note 6.5. Asset Impairment, Restructuring and Other Special Charges
In recent years, we have incurred substantial costs associated with restructuring programs and cost-reduction initiatives designed to achieve a flexible and competitive cost structure. Restructuring activities primarily include charges associated with product, facility and business rationalizations and workforce reductions. We have historically participated in Lilly's cost-reduction initiatives. Our total chargesalso incurred costs associated with executing acquisition, divestiture and other significant transactions and related tointegration and/or separation activities. Components of asset impairment, restructuring and other special charges including integration of acquired businesses, in the unaudited condensed consolidated and combined statements of operations consisted of the following:were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Cash expense: | |||||||||||||||
| Severance | $ | (0.2 | ) | $ | 5.8 | $ | (2.8 | ) | $ | 62.1 | |||||
| Integration and other | 4.9 | 6.4 | 10.5 | 75.1 | |||||||||||
| Exit costs | 1.5 | 11.5 | 11.2 | 24.3 | |||||||||||
| Total cash expense | 6.2 | 23.7 | 18.9 | 161.5 | |||||||||||
| Non-cash expense | |||||||||||||||
| Asset impairment | 6.2 | — | 63.9 | 43.8 | |||||||||||
| Total non-cash expense | 6.2 | — | 63.9 | 43.8 | |||||||||||
| Gain on sale of fixed assets | — | — | — | (16.0 | ) | ||||||||||
| Total | $ | 12.4 | $ | 23.7 | $ | 82.8 | $ | 189.3 | |||||||
2024 Q1 Form 10-Q | 12 | ||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
Restructuring charges(1) | $ | 39 | $ | — | |||||||||||||||||||
Acquisition and divestiture-related charges(2) | 7 | 40 | |||||||||||||||||||||
| Total expense | $ | 46 | $ | 40 | |||||||||||||||||||
(1)Restructuring charges in 2024 primarily related to expected cash-based severance costs representassociated with a restructuring program approved and announced in February 2024 intended to reallocate resources by shifting international resources from farm animal to pet health. This restructuring program has also resulted in changes in how we operate in and sell into the Argentina market, among others.
(2)Acquisition and divestiture-related charges included transaction costs incurreddirectly related to acquiring or divesting businesses, such as a result of actions taken to reduce our cost structure.
The following table summarizes the activity in our reserves established in connection with these restructuring activities:
| Balance at December 31, 2023 | $ | 7 | |||||||||||||||
| Charges | 39 | ||||||||||||||||
| Cash paid | (6) | ||||||||||||||||
| Balance at March 31, 2024 | $ | 40 | |||||||||||||||
| Exit costs | Severance | Total | |||||||||
| Balance at December 31, 2016 | $ | 11.5 | $ | 26.6 | $ | 38.1 | |||||
| Charges | 24.3 | 62.1 | 86.4 | ||||||||
| Cash paid | (7.6 | ) | (61.8 | ) | (69.4 | ) | |||||
| Balance at September 30, 2017 | $ | 28.2 | $ | 26.9 | $ | 55.1 | |||||
| Balance at December 31, 2017 | $ | 34.9 | $ | 43.1 | $ | 78.0 | |||||
| Charges | 11.2 | (2.8 | ) | 8.4 | |||||||
| Separation adjustment | (5.9 | ) | — | (5.9 | ) | ||||||
| Cash paid | (10.9 | ) | (22.6 | ) | (33.5 | ) | |||||
| Balance at September 30, 2018 | $ | 29.3 | $ | 17.7 | $ | 47.0 | |||||
Note 6. Inventories
Inventories are adequate.
Inventories consisted of the following:
| March 31, 2024 | December 31, 2023 | ||||||||||
| Finished products | $ | 797 | $ | 857 | |||||||
| Work in process | 796 | 814 | |||||||||
| Raw materials and supplies | 109 | 128 | |||||||||
| Total | 1,702 | 1,799 | |||||||||
| Decrease to LIFO cost | (64) | (64) | |||||||||
| Inventories | $ | 1,638 | $ | 1,735 | |||||||
Note 7. Equity
Tangible Equity Unit (TEU) Offering
In January 2020 we issued 11 million in TEUs at the stated amount of $50 per unit. The TEU prepaid stock purchase contracts were converted into shares of our common stock on February 1, 2023. Holders of our TEUs received 1.5625 shares of our common stock based on the maximum settlement rate for the applicable market value being below $32.00. In total, we issued approximately 17 million shares to holders in connection with the settlement.
| September 30, 2018 | December 31, 2017 | ||||||
| Finished products | $ | 408.1 | $ | 452.0 | |||
| Work in process | 572.3 | 580.0 | |||||
| Raw materials and supplies | 71.4 | 70.4 | |||||
| Total (approximates replacement cost) | 1,051.8 | 1,102.4 | |||||
| Decrease to LIFO cost | (43.1 | ) | (40.1 | ) | |||
| Inventories | $ | 1,008.7 | $ | 1,062.3 | |||
2024 Q1 Form 10-Q | 13 | ||||||||
Note 8. Debt
Long-term debt as of September 30, 2018 consisted of the following:
| March 31, 2024 | December 31, 2023 | ||||||||||
| Incremental Term Facility due 2025 | $ | 175 | $ | 175 | |||||||
| Incremental Term Facility due 2028 | 488 | 489 | |||||||||
| Incremental Term Facility due 2029 | 246 | 247 | |||||||||
| Term Loan B due 2027 | 3,827 | 3,838 | |||||||||
Revolving Credit Facility (1) | 200 | 200 | |||||||||
Securitization Facility (2) | 125 | 125 | |||||||||
4.900% Senior Notes due 2028 (3) | 750 | 750 | |||||||||
| Unamortized debt issuance costs | (46) | (50) | |||||||||
| 5,765 | 5,774 | ||||||||||
| Less current portion of long-term debt | 38 | 38 | |||||||||
| Total long-term debt | $ | 5,727 | $ | 5,736 | |||||||
| September 30, 2018 | |||
| Term credit facility | $ | 500.0 | |
| 3.912% Senior Notes due 2021 | 500.0 | ||
| 4.272% Senior Notes due 2023 | 750.0 | ||
| 4.900% Senior Notes due 2028 | 750.0 | ||
| Other obligations | 0.2 | ||
| Unamortized debt issuance costs | (21.7 | ) | |
| Total long-term debt | 2,478.5 | ||
| Less current portion of long-term debt | — | ||
| $ | 2,478.5 | ||
(3)Subsequent to issuance in August 2018, our 4.900% Senior Notes due 2028 have been subject to interest rate increases related to credit rating agency downgrades. As of March 31, 2017 was not material.2024, these notes bear interest at a rate of 6.650%.
Derivatives not designated as hedges
We may enter into foreign exchange forward or option contracts to reduce the effect of fluctuating foreign currency exchange rates. Foreign currency derivatives used for hedging are put in place using the Senior Notes pursuant tosame or like currencies and duration as the termsunderlying exposures and are recorded at fair value with the gain or loss recognized in other expense, net in the condensed consolidated statements of the registration rights agreement, we will be required to pay additional interest to the holders of the Senior Notes under certain circumstances.
exceeding 12 months. As of September 30, 2018March 31, 2024 and December 31, 2017,2023, we had $14.9outstanding foreign exchange contracts with aggregate notional amounts of $812 million and$12.3 $891 million, respectively,respectively.
The amounts of costnet (losses) gains on derivative instruments not designated as hedging instruments, recorded in other expense, net were as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
Foreign exchange forward contracts (1) | $ | (9) | $ | 2 | |||||||||||||||||||
(1)These amounts were substantially offset in other expense, net by the effect of changing exchange rates on the underlying foreign currency exposures.
Derivatives designated as hedges - Net investment hedges
In September 2023 we entered into a series of cross-currency fixed interest rate swaps to help mitigate the impact of foreign currency fluctuations on our operations in Switzerland with a combined 1,000 million CHF notional amount with tenors in 2026 and equity method investments.2027. These instruments were determined to be, and were designated as, effective economic hedges of net investments in our CHF denominated net assets. The fair values of these instruments were estimated based on quoted market values of similar hedges and are classified as Level 2 in the fair value hierarchy (see Note 10. Fair Value for further information). Gains or losses related to these instruments due to spot rate fluctuations are recorded as cumulative translation adjustments as a component of other comprehensive income
2024 Q1 Form 10-Q | 14 | ||||||||
(loss). Gains and losses will remain in accumulated other comprehensive income (loss) until either the sale or substantial liquidation of the hedged subsidiary. Gains on net investment hedges, net of tax, recorded in other comprehensive (loss) income, were as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Cross-currency fixed interest rate swaps | $ | 62 | $ | — | |||||||||||||||||||
During the three months ended March 31, 2024, these instruments also generated $8 million of interest income, which was included as a contra interest expense, net of capitalized interest in our condensed consolidated statement of operations.
Derivatives designated as hedges - Interest rate swaps
To manage our exposure to variable interest rate risk, we utilize interest rate swap contracts to effectively convert our variable-rate debt into fixed-rate debt. We recognize any differences between the variable interest rate payments and the fixed interest rate settlements with the swap counterparties as an adjustment to interest expense, net of capitalized interest over the life of the swaps. We have designated our interest rate swaps as cash flow hedges and record them at fair value on the condensed consolidated balance sheets. Changes in the fair value of the hedges are recognized in other comprehensive income (loss) and reclassified into earnings through interest expense, net of capitalized interest at the time earnings are affected by the hedged transaction. Fair value is estimated based on quoted market values of similar hedges and is classified as Level 2 in the fair value hierarchy.
We had outstanding interest rate swaps, with aggregate notional amounts of $3,800 million as of both March 31, 2024 and December 31, 2023. As of March 31, 2024, our interest rate swap instruments had maturities ranging between 2026 and 2028. The amounts of gains (losses) on our interest rate swap contracts, net of tax, recorded in other comprehensive (loss) income were as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Interest rate swaps | $ | 63 | $ | (25) | |||||||||||||||||||
The amounts of gains reclassified from accumulated other comprehensive loss and recognized into earnings through interest expense, net of capitalized interest were as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Interest rate swaps | $ | 31 | $ | 23 | |||||||||||||||||||
Over the next 12 months, we expect to reclassify a gain of $92 million from accumulated other comprehensive loss into interest expense, net of capitalized interest related to our current and previously settled interest rate swaps. As of March 31, 2024, when factoring in the $3,800 million of variable rate debt converted to fixed-rate through the use of interest rate swaps (excluding the expected future reclassifications to interest expense, net of capitalized interest related to past interest rate swap settlements), the weighted-average effective interest rate on our outstanding indebtedness was 6.40%.
Note 10. Fair Value
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a framework that utilizes the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. Level 1 fair value measurements are based on quoted prices in active markets for identical assets or liabilities. We determine our Level 2 fair value measurements based on a market approach using quoted market values or significant other observable inputs for identical or comparable assets or liabilities. Our Level 3 fair value measurements are based on unobservable inputs based on little or no market activity.
The following table summarizes the fair value information at September 30, 2018March 31, 2024 and December 31, 20172023, for contingent considerationassets and liabilities measured at fair value on a recurring basis in the respective balance sheet line items:items, as well as long-term debt, for which fair value is disclosed on a recurring basis:
| Fair Value Measurements Using | |||||||||||||||||||
| Financial statement line item | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value | ||||||||||||||
| September 30, 2018 | |||||||||||||||||||
| Other current liabilities- contingent consideration | $ | 17.4 | $ | — | $ | — | $ | 17.4 | $ | 17.4 | |||||||||
| Other noncurrent liabilities- contingent consideration | 41.4 | — | — | 41.4 | 41.4 | ||||||||||||||
| December 31, 2017 | |||||||||||||||||||
| Other current liabilities- contingent consideration | 1.3 | — | — | 1.3 | 1.3 | ||||||||||||||
| Other noncurrent liabilities- contingent consideration | 45.2 | — | — | 45.2 | 45.2 | ||||||||||||||
2024 Q1 Form 10-Q | 15 | ||||||||
| Fair Value Measurements Using | ||||||||||||||||||||||||||||||||
| Financial statement line item | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value | |||||||||||||||||||||||||||
| March 31, 2024 | ||||||||||||||||||||||||||||||||
| Recurring fair value measurements | ||||||||||||||||||||||||||||||||
| Prepaid expenses and other - derivative instruments | $ | 66 | $ | — | $ | 66 | $ | — | $ | 66 | ||||||||||||||||||||||
| Other current liabilities - derivative instruments | (74) | — | (74) | — | (74) | |||||||||||||||||||||||||||
| Other current liabilities - contingent consideration | (7) | — | — | (7) | (7) | |||||||||||||||||||||||||||
| Other noncurrent liabilities - derivative instruments | (17) | — | (17) | — | (17) | |||||||||||||||||||||||||||
| Other noncurrent liabilities - contingent consideration | (31) | — | — | (31) | (31) | |||||||||||||||||||||||||||
| Financial instruments not carried at fair value | ||||||||||||||||||||||||||||||||
| Long-term debt, including current portion | (5,811) | — | (5,815) | — | (5,815) | |||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| Recurring fair value measurements | ||||||||||||||||||||||||||||||||
| Prepaid expenses and other - derivative instruments | $ | 65 | $ | — | $ | 65 | $ | — | $ | 65 | ||||||||||||||||||||||
| Other current liabilities - derivative instruments | (63) | — | (63) | — | (63) | |||||||||||||||||||||||||||
| Other current liabilities - contingent consideration | (9) | — | — | (9) | (9) | |||||||||||||||||||||||||||
| Other noncurrent liabilities - derivative instruments | (132) | — | (132) | — | (132) | |||||||||||||||||||||||||||
| Other noncurrent liabilities - contingent consideration | (31) | — | — | (31) | (31) | |||||||||||||||||||||||||||
| Financial instruments not carried at fair value | ||||||||||||||||||||||||||||||||
| Long-term debt, including current portion | (5,824) | — | (5,825) | — | (5,825) | |||||||||||||||||||||||||||
Cash and cash equivalents include cash on hand and all highly liquid investments with original maturities at the time of purchase of three months or less. The carrying values of cash and cash equivalents, accounts and other receivables, accounts payable and other current liabilities relateare a reasonable estimate of their fair values due to Galliprant forthe short-term nature of these assets and liabilities. We also had investments without readily determinable fair values and equity method investments, which the fair value was estimated using a discounted cash flow analysis and Level 3 inputs, including projections representative of a market participant view for the probability of achieving potential future payments to Aratana Therapeutics, Inc. and an estimated discount rate. The amount to be paid is dependent upon certain development, success-based regulatory, and sales-based milestones. In addition, the amount of royalties to be paid is calculatedwere classified as a percentage of net sales dependent upon the timing and geography and will, therefore, vary directly with increases and decreases in net sales of Galliprant. There is no capother noncurrent assets on the amount that may be paid pursuant to this arrangement. During the second quarter of 2018, as a result of an increase in the
The fair values of other Lilly entities within the respective entity's tax jurisdiction; however, in certain jurisdictions, we filed separate tax returns. Priorcontingent consideration liabilities related to the Separation, the income tax expense included in these financial statements has been calculatedour acquisition of NutriQuest were estimated using the separate return basis as if Elanco filed separate tax returns.Monte Carlo simulation model, consisting of Level 3 inputs not observable in the market, including estimates relating to revenue forecasts, discount rates and volatility.
Note 11. Goodwill
The following table summarizes the changes in the carrying amount of goodwill:
| December 31, 2023 (gross) | $ | 6,136 | ||||||
| Accumulated impairment | (1,042) | |||||||
| December 31, 2023 (net) | 5,094 | |||||||
Reclassification to assets held for sale(1) | (482) | |||||||
| Foreign currency translation adjustments | (134) | |||||||
| March 31, 2024 (net) | $ | 4,478 | ||||||
(1)We reclassified $482 millionof goodwill to assets held for sale during the three months ended March 31, 2024, in connection with the expected divestiture of our aqua business. See Note 4. Acquisitions, Divestitures and Other Arrangements for further information.
2024 Q1 Form 10-Q | 16 | ||||||||
Note 12. Income Taxes
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Income tax (benefit) expense | $ | (20) | $ | 5 | ||||||||||||||||||||||
| Effective tax rate | (182.2) | % | 4.4 | % | ||||||||||||||||||||||
For the three and nine months ended September 30, 2018,March 31, 2024, we incurred $18.6 million and $46.2 million, respectively, ofrecognized an income tax expense. For the three and nine months ended September 30, 2018, thebenefit of $20 million. Our effective tax rate of 23.6% and 39.7%, respectively, was(182.2)% differed from the statutory income tax rate primarily due to the partial release of a valuation allowance attributable to the anticipated sale of our aqua business and a net operating lossbenefit related to the recognition of certain state tax credits. For the three months ended March 31, 2023, we recognized income tax expense of $5 million. Our effective tax rate of 4.4% differed from the statutory income tax rate due to jurisdictional earnings mix of projected income in lower tax jurisdictions, partially offset by losses in the U.S. and a Southeast Asia affiliate for which there was no tax benefit, was recognized and aas valuation allowance was recorded.allowances had been established in those countries.
Note 13. Commitments and Contingencies
We are party to various legal actions that arise in the normal course of business. We recordThe most significant matters are described below. Under GAAP, loss contingency provisions are recorded when we deem it probable that we will incur a liability if thereloss and we are able to formulate a reasonable estimate of that loss.
Seresto Class Action Lawsuits
Claims seeking actual damages, injunctive relief and/or restitution for allegedly deceptive marketing have been made against Elanco Animal Health Inc. and Bayer HealthCare LLC, along with other Elanco and Bayer entities, arising out of the use of Seresto™, a non-prescription flea and tick collar for cats and dogs. During 2021, putative class action lawsuits were filed in federal courts in the U.S. alleging that the Seresto collars contain pesticides that can cause serious injury and death to cats and/or dogs wearing the product. In August 2021, the lawsuits were consolidated by the Judicial Panel on Multidistrict Litigation, and the cases were transferred to the Northern District of Illinois. In June 2023, the parties agreed on the monetary terms of a potential settlement of the consolidated class action lawsuits, and as a result, a charge of $15 million was recorded. As of December 31, 2023, the parties had agreed on the non-monetary terms of a potential settlement, in addition to the monetary terms agreed to in June 2023. In January 2024, the court preliminarily approved the settlement. The court set a hearing to consider final approval of the settlement in December 2024. If at that time all conditions of the settlement are met, and the settlement is a claim for which it is probable a paymentapproved, we anticipate the settlement amount will be payable in the first quarter of 2025. As such, the $15 million provision was included within other current liabilities on our condensed consolidated balance sheet as of March 31, 2024.
Additional Legal Matters
For the legal matters discussed below, we either believe loss is not probable or are unable to estimate the possible loss or range of loss, if any. The process of resolving these matters is inherently uncertain and may develop over an extended period of time; therefore, at this time, the ultimate resolutions cannot be predicted. As of March 31, 2024 and December 31, 2023, we had no material liabilities established related to the matters discussed below.
On May 20, 2020, a shareholder class action lawsuit captioned Hunter v. Elanco Animal Health Inc., et al. (Hunter) was filed in the United States District Court for the Southern District of Indiana against Elanco and certain executives. On September 3, 2020, the court appointed a lead plaintiff, and on November 9, 2020, the lead plaintiff filed an amended complaint adding additional claims against Elanco, certain executives and other individuals. The lawsuit alleged, in part, that Elanco and certain of its executives made materially false and/or misleading statements and/or failed to disclose certain facts about Elanco’s supply chain, inventory, revenue and the amount is estimable. Atprojections. The lawsuit sought unspecified monetary damages and purports to represent purchasers of Elanco securities between September 30, 2018 and May 6, 2020, and purchasers of Elanco common stock issued in connection with Elanco's acquisition of Aratana Therapeutics, Inc. On January 13, 2021, we filed a motion to dismiss, and on August 17, 2022, the court issued an order granting our motion to dismiss the case without prejudice. On October 14, 2022, the plaintiffs filed a motion for leave to amend the complaint. On December 31, 2017,7, 2022, we filed an opposition to the plaintiffs' motion, and on September 27, 2023, the court denied the plaintiffs' motion for leave, issuing final judgment
2024 Q1 Form 10-Q | 17 | ||||||||
in favor of Elanco. On October 25, 2023, the plaintiffs filed a notice of appeal to the United Stated Court of Appeals for the Seventh Circuit. We continue to believe the claims made in the case are meritless, and we intend to continue to vigorously defend our position.
On October 16, 2020, a shareholder class action lawsuit captioned Saffron Capital Corporation v. Elanco Animal Health Inc., et al. was filed in the Marion Superior Court of Indiana against Elanco, certain executives and other individuals and entities. On December 23, 2020, the plaintiffs filed an amended complaint adding an additional plaintiff. The lawsuit alleges, in part, that Elanco and certain of its executives made materially false and/or misleading statements and/or failed to disclose certain facts about Elanco’s relationships with third party distributors and revenue attributable to those distributors within the registration statement on Form S-3 dated January 21, 2020, and accompanying prospectus filed in connection with Elanco’s public offering which closed on or about January 27, 2020. The lawsuit seeks unspecified monetary damages and purports to represent purchasers of Elanco common stock or TEUs issued in connection with the public offering. From February 2021 to August 2022, this case was stayed in deference to Hunter. On October 24, 2022, we filed a motion to dismiss. On December 23, 2022, the plaintiffs filed their opposition to the motion to dismiss. Prior to the ruling on the motion to dismiss, on June 8, 2023, the plaintiffs filed a motion for leave to file a second amended complaint, which is now the operative complaint. We filed a motion to dismiss the second amended complaint on August 7, 2023, to which the plaintiffs filed their opposition on October 13, 2023. On April 17, 2024, our motion to dismiss was granted. The dismissal is without prejudice to plaintiffs' right to re-file a claim, and it is possible the plaintiffs will attempt to file a third amended complaint. We continue to believe the claims made in the case are meritless, and we intend to vigorously defend our position.
In the third quarter of 2019, Tevra Brands, LLC (Tevra) filed a complaint in the U.S. District Court of the Northern District of California, alleging that Bayer Animal Health (acquired by us in August 2020) had no liabilities establishedbeen involved in unlawful, exclusive dealing and tying of its flea and tick products Advantage, Advantix and Seresto and maintained a monopoly in the market. The complaint was amended in March 2020 and then dismissed in September 2020 with leave to amend. A second amended complaint was filed in March 2021 and realleges claims of unlawful exclusive dealing related to litigation as there are noAdvantage and Advantix and monopoly maintenance. A motion to dismiss the second amended complaint was denied in January 2022. Tevra’s demands include both actual and treble damages. On April 16, 2024, the court granted our motion for summary judgment to exclude all damages subsequent to our acquisition of Bayer Animal Health in August 2020. The trial is scheduled for July 2024. We intend to vigorously defend our position.
Regulatory Matters
On July 1, 2021, we received a subpoena from the SEC relating to our channel inventory and sales practices prior to mid-2020. We have cooperated in providing documents and information to the SEC and will continue to do so. We have engaged in discussions with the SEC about a possible resolution or settlement of potential disclosure claims. While we have not reached an agreement on a resolution or settlement of the potential disclosure claims, which werebased on the ongoing discussions with the SEC, we believe a loss contingency is both probable and estimable. WeAccordingly, we have not historically had any significant litigation expense and are not currently subject to any claim.
As of March 31, 2024, we had a lease commitment that has not yet commenced for our new corporate headquarters in Indianapolis, Indiana. Total minimum lease payments are exposedestimated to be approximately $378 million over a term of 25 years, excluding extensions. Final lease payments may vary depending on the actual cost of certain construction activities. Lease commencement is expected in 2025.
The land for our new corporate headquarters is located in a Tax Increment Finance District, and the project is, in part, funded through Tax Incremental Financing (TIF) through an incentive agreement between us and the City of Indianapolis. The agreement provides for an estimated total incentive of $64 million to be funded by the City of Indianapolis in connection with the future tax increment revenue generated from the developed property. In December 2021, as part of a funding and development agreement entered into between us and the developer, we made a commitment to use the expected TIF proceeds towards the cost of developing and constructing the headquarters. In exchange, the developer reimbursed us up to the risk$64 million commitment in 2021. During 2022, we refunded approximately $15 million of changesthe TIF proceeds to the developer. As a result, it is our expectation that our future lease payments will be reduced. The remaining accrued incentive was included in social, politicalother noncurrent liabilities on our condensed consolidated balance sheets and economic conditions inherent in foreign operationswill be amortized over the lease term beginning on the commencement date and our results of operations and the value of its foreign assets are affected by fluctuations in foreign currency exchange rates.offset future rent expense.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue—to unaffiliated customers (1) | |||||||||||||||
| United States | $ | 382.2 | $ | 321.4 | $ | 1,108.6 | $ | 1,054.6 | |||||||
| International | 378.9 | 375.7 | 1,158.9 | 1,080.1 | |||||||||||
| Revenue | $ | 761.1 | $ | 697.1 | $ | 2,267.5 | $ | 2,134.7 | |||||||
| September 30, 2018 | December 31, 2017 | ||||||
Long-lived assets (2) | |||||||
| United States | $ | 589.5 | $ | 604.7 | |||
| United Kingdom | 195.9 | 204.4 | |||||
| Other foreign countries | 190.5 | 190.2 | |||||
| Long-lived assets | $ | 975.9 | $ | 999.3 | |||
2024 Q1 Form 10-Q | 18 | ||||||||
Note 13.14. Earnings Per Share
We have calculatedcompute basic earnings per share assuming 365,625,000by dividing net income available to common shareholders by the actual weighted-average number of common shares were outstanding for all periods presented. This represents an aggregate of 293,290,000 shares of ourthe reporting period. Elanco has variable common stock held by Lilly (which represents the 100 shares held by Lilly priorequivalents relating to giving effectcertain equity awards in stock-based compensation arrangements. We also had variable common stock equivalents related to the 2,932,900-for-1TEU prepaid stock splitpurchase contracts in the first quarter of 2023 through the settlement date of February 1, 2023 (see Note 7. Equity for further discussion). Diluted earnings per share reflects the potential dilution that could have occurred on September 19, 2018),if holders of the issuance of 62,900,000 shares of ourunvested equity awards converted their holdings into common stock in the IPO, and the issuancethat could have occurred if holders of 9,435,000 shares of ourunsettled TEUs had converted their holdings into common stock sold pursuant to the underwriters’ option to purchase additional shares.
Basic and diluted weighted-average shares outstanding were as follows:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
Basic weighted-average common shares outstanding (1) | 493.2 | 491.1 | ||||||||||||||||||||||||
Assumed conversion of dilutive common stock equivalents (2) | 2.8 | 1.7 | ||||||||||||||||||||||||
| Diluted weighted-average shares outstanding | 496.0 | 492.8 | ||||||||||||||||||||||||
(1)The TEU prepaid stock purchase contracts were convertible into a minimum of 14.3 million shares or a maximum of 17.2 million shares. The minimum 14.3 million shares were included in the MSA entered into with Lilly, we are responsible forcalculation of basic weighted-average shares from January 22, 2020 to February 1, 2023. The 17.2 million shares that were ultimately issued have been included in the business activities conducted by Lilly on our behalf and are subjectcalculation of basic weighted-average shares outstanding subsequent to the risks and entitled to the benefits generated by these operations and assets. As a result, the related assets and liabilities and resultssettlement date of operations have been reported in our unaudited condensed consolidated and combined financial statements. The total net assets associated with these jurisdictions are $84.5 million and the annual profits are insignificant. Upon Separation, we retained $275.0 million, which is reflected as restricted cash, that will be used to fund the purchase of these operations from Lilly at the time of the local country closing and have an offsetting payable to Lilly. If the amount of local purchases is less than $275.0 million, we are required to repay the remaining amount to Lilly.February 1, 2023.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Cost of sales | $ | 7.0 | $ | 7.7 | $ | 21.8 | $ | 23.0 | |||||||
| Research and development | 0.7 | 0.7 | 2.2 | 2.1 | |||||||||||
| Marketing, selling and administrative | 26.4 | 27.7 | 81.2 | 82.7 | |||||||||||
| Total | $ | 34.1 | $ | 36.1 | $ | 105.2 | $ | 107.8 | |||||||
2024 Q1 Form 10-Q | 19 | ||||||||
Business Overview
countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine, sheep and aqua (collectively, farm animal). With a heritage dating back to 1954, we consistently innovate to improve the health of animals and to benefit our customers while fostering an inclusive, cause-driven culture for our employees. We operate our business in a single segment, directed at fulfillingadvancing the well-being of animals, people and the planet, enabling us to realize our vision of enrichingFood and Companionship Enriching Life.
Our diverse product portfolio of approximately 200 brands helps make us a trusted partner to pet owners, veterinarians and farm animal producers. Our products are generally sold worldwide to third-party distributors and independent retailers, and directly to farm animal producers and veterinarians. In recent years, we have expanded our omnichannel presence in both the lives of people through food - making protein more accessible and affordable - and through pet companionship - helping pets live longer, healthier lives. We advance our vision by offering products in four primary categories:
Product Development and New Product LaunchesRegulatory Update
A key element of our targeted value creation strategy is to drive revenue growth through portfolio development and product innovation, primarily in our three targeted growth categories of CA Disease Prevention, CA Therapeutics and FA Future Protein & Health. Since 2015, we've launched 11 new products, five of which were launched in 2017 and 2018.innovation. We continue to pursue the development of new chemical and biological molecules, through our approach to innovation.as well as additional registrations and indications for current products. Our future growth and success dependsdepend on both our pipeline of new products, including new products we develop internally, develop with partners or that we may develop through joint ventures and products that we are able to obtain through licenselicenses or acquisition,acquisitions, and the expansion of the uselife cycle management of our existing products. We believe we are an industry leader in animal health research and development (R&D),R&D, with a track record of successful product innovation, business development and commercialization.
Aqua Business Divestiture: On February 5, 2024, we entered into an agreement to sell our aqua business to a subsidiary of Merck Animal Health for approximately $1.3 billion in cash, payable at closing, which we currently anticipate to occur around mid-year 2024. Our aqua business includes products across both warm-water and global supplycold-water species and logistics, among others. We currently estimate these costs taken togethergenerated $31 million and $40 million in revenue during the three months ended March 31, 2024 and 2023, respectively. Upon closing of this sale, we intend to use the after-tax cash proceeds to accelerate debt repayment and reduce our leverage and future interest expense. Strategically, this divestiture allows us to prioritize our investments in larger markets with greater long-term earnings potential. The closing of the transaction is subject to customary conditions, including the receipt of applicable antitrust approvals. If the agreement is terminated due to failure to obtain required antitrust approvals, subject to certain conditions, Merck Animal Health will be required to
2024 Q1 Form 10-Q | 20 | ||||||||
pay us a termination fee of $55 million in cash. Based on our current estimates, we expect to recognize a pre-tax gain on sale in the range of $600 million to $650 million. Income tax expense associated with this sale is expected to be in athe range from $240of $170 million to $290 million, of which a portion will be capitalized$190 million. See Note 4. Acquisitions, Divestitures and Other Arrangements to the remainder will be expensed.
Restructuring Activities: In February 2024, our IPO,Board of Directors authorized a restructuring plan (the restructuring plan) to improve operational efficiencies and better align our effective tax rateorganizational structure with current business needs, top strategic priorities and key growth opportunities. Specifically, the restructuring plan was computed on a separate company basis,intended to reallocate resources by shifting international resources from farm animal to pet health as if we had operated as a standalone entity or a separate consolidated groupplan for the global launches of certain blockbuster potential products currently under regulatory review. Further, the restructuring plan has impacted how we operate in each material jurisdictionand sell into the Argentina market, among others, reducing our foreign currency exposure in those markets.
Total expected pre-tax charges associated with the restructuring plan total $50 to $55 million in 2024, of which we operate. As a$39 million was incurred during the first quarter of 2024, the majority relating to cash-based severance costs. The restructuring plan is expected to result of potential changes to our business model and due the fact that we are a standalone entity, income tax expense (benefit) included in the consolidatedelimination of approximately 420 personnel across our global organization and combined financial statements may not be indicativeannualized net savings of our future expected tax rate.
Macroeconomic Factors: As a global company with products sold in more than 90 countries, our operations are exposed to and are impacted by various global macroeconomic factors. We face continuing market and operating challenges across the globe due to, among other factors, the Russia-Ukraine conflict, conditions related to supply chain disruption, higher interest rates, foreign currency exchange rate volatility and inflationary pressures. Continued evolution of these conditions has led to economic slowdowns in certain countries and/or regions and volatility in consumer behavior. We anticipate global macroeconomic pressures to continue throughout 2024.
Seasonality: While many of our products are sold consistently throughout the year, we do experience seasonality in our unaudited condensed consolidatedpet health business due to increased demand for certain parasiticide product offerings in the first half of the year. For example, based upon historical results, approximately 75% and combined financial statements.60% of total annual revenue contributed by our higher-margin parasiticide products Seresto and Advantage Family, respectively, typically occurs during the first half of the year, which is reflective of the flea and tick season in the Northern Hemisphere.
Results of Operations
The following discussion and analysis of our results of operations should be read along with our unaudited condensed consolidated and combined financial statements and the notes thereto, which reflect thethereto. Our results of operations for the periods presented below may not be comparable with prior periods or with our results of operations in the business transferredfuture due to us from Lilly.many factors, including but not limited to the factors identified above.
| Three Months Ended September 30, | % | Nine Months Ended September 30, | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| (Dollars in millions) | (Dollars in millions) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 761.1 | $ | 697.1 | 9 | % | $ | 2,267.5 | $ | 2,134.7 | 6 | % | Revenue | $ | 1,205 | $ | $ | 1,257 | (4) | (4) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Costs, expenses and other: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 369.8 | 376.2 | (2 | )% | 1,161.3 | 1,088.9 | 7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 515 | 494 | 4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of revenue | 49 | % | 54 | % | (5 | )% | 51 | % | 51 | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | 58.9 | 61.9 | (5 | )% | 185.5 | 189.7 | (2 | )% | 87 | 81 | 81 | 7 | 7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of revenue | 8 | % | 9 | % | (1 | )% | 8 | % | 9 | % | (1 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketing, selling and administrative | 179.0 | 194.7 | (8 | )% | 550.1 | 583.0 | (6 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketing, selling and administrative | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketing, selling and administrative | 337 | 327 | 3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of revenue | 24 | % | 28 | % | (4 | )% | 24 | % | 27 | % | (3 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 48.7 | 51.6 | (6 | )% | 147.3 | 161.0 | (9 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of revenue | 6 | % | 7 | % | (1 | )% | 6 | % | 8 | % | (1 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 133 | 134 | (1) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset impairment, restructuring and other special charges | 12.4 | 23.7 | (48 | )% | 82.8 | 189.3 | (56 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other - (income) expense | 13.5 | (1.9 | ) | NM | 24.2 | — | NM | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) before taxes | 78.8 | (9.1 | ) | NM | 116.3 | (77.2 | ) | NM | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of revenue | 10 | % | (1 | )% | 11 | % | 5 | % | (4 | )% | NM | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax expense | 18.6 | 11.6 | 60 | % | 46.2 | 72.0 | (36 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 60.2 | $ | (20.7 | ) | NM | $ | 70.1 | $ | (149.2 | ) | NM | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset impairment, restructuring and other special charges | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset impairment, restructuring and other special charges | 46 | 40 | 15 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net of capitalized interest | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net of capitalized interest | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net of capitalized interest | 66 | 64 | 3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expense, net | Other expense, net | 9 | 9 | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | Income before income taxes | 12 | 108 | (89) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | (20) | 5 | NM | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | Net income | $ | 32 | $ | 103 | (69) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Certain amounts and percentages may reflect rounding adjustments.
NM – Not meaningful
2024 Q1 Form 10-Q | 21 | ||||||||
Revenue
As a global company, our products are sold in more than 90 countries, and as a result, a significant portion of our revenue is recorded in currencies other than the U.S. Dollar. Because of this, our revenue is influenced by changes in foreign currency exchange rates. During the three months ended March 31, 2024 and 2023, approximately 52% and 53% of our revenue was denominated in foreign currencies, respectively.
Further, increases or decreases in inventory levels in our distribution channels can positively or negatively impact our quarterly revenue results, leading to variations in revenue. This can be a result of various factors, such as end customer demand, new customer contracts, heightened and generic competition, the need for certain inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to shifting market dynamics, payment terms we extend, which are subject to internal policies, blackout shipping periods due to system downtime, implementations and integrations and procedures and environmental factors beyond our control. For example, in connection with the integration of the Bayer Animal Health business into our ERP system, we communicated commercial shipping blackout periods that occurred in April 2023. Given this timing, we believe certain customers modified purchasing habits, which we estimate caused a shift of revenue from the second quarter of 2023 to the first quarter of 2023 of approximately $90 million to $110 million. While first quarter 2023 revenue benefited from this shift in purchases, this resulted in a corresponding decrease in revenue during the second quarter of 2023. This estimated shift of quarterly revenue in the prior year is a principal contributor to the year-over-year volume declines experienced during the three months ended March 31, 2024.
On a global basis, our revenue within ourby product categories was as follows:
| Three Months Ended September 30, | % | Nine Months Ended September 30, | % | ||||||||||||||||||
| 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||
| CA Disease Prevention | $ | 188.6 | $ | 140.4 | 34 | % | $ | 603.9 | $ | 519.7 | 16 | % | |||||||||
| CA Therapeutics | 80.5 | 63.5 | 27 | % | 211.1 | 181.8 | 16 | % | |||||||||||||
| FA Future Protein & Health | 162.8 | 164.5 | (1 | )% | 502.1 | 456.0 | 10 | % | |||||||||||||
| FA Ruminants & Swine | 301.5 | 280.4 | 8 | % | 881.1 | 857.3 | 3 | % | |||||||||||||
| Subtotal | 733.4 | 648.8 | 13 | % | 2,198.2 | 2,014.8 | 9 | % | |||||||||||||
Strategic Exits (1) | 27.7 | 48.3 | (42 | )% | 69.3 | 119.9 | (42 | )% | |||||||||||||
| Total | $ | 761.1 | $ | 697.1 | 9 | % | $ | 2,267.5 | $ | 2,134.7 | 6 | % | |||||||||
| Revenue | % of Total Revenue | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | 2024 | 2023 | $ Change | % Change | CC (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pet Health | $ | 639 | $ | 675 | 53 | % | 54 | % | $ | (36) | (5) | % | (5) | % | |||||||||||||||||||||||||||||||||||||||||||||
| Farm Animal | 556 | 573 | 46 | % | 46 | % | (17) | (3) | % | (3) | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Contract Manufacturing (2) | 10 | 9 | 1 | % | 1 | % | 1 | 11 | % | 12 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,205 | $ | 1,257 | 100 | % | 100 | % | $ | (52) | (4) | % | (4) | % | |||||||||||||||||||||||||||||||||||||||||||||
Note: Numbers may not add due to rounding
(1)Constant Currency (CC), a non-GAAP measure, is defined as revenue growth excluding the impact of foreign exchange rates. The calculation assumes the same foreign currency exchange rates that were in effect for the comparable prior-year period were used in translation of the current period results. We believe this metric provides a useful comparison to previous periods.
(2)Represents revenue from arrangements in which we manufacture products on behalf of a third-party.
On a global basis, the effects of price, foreign currency exchange rates and volume on changes in revenue for the three months ended March 31, 2024, compared to the three months ended September 30, 2017, reflecting a 4% increaseMarch 31, 2023, were as follows:
| (Dollars in millions) | Revenue | Price | FX Rate | Volume | Total | CC | ||||||||||||||||||||||||||||||||||||||||||||
| Pet Health | $ | 639 | 3% | —% | (8)% | (5)% | (5)% | |||||||||||||||||||||||||||||||||||||||||||
| Farm Animal | 556 | —% | —% | (3)% | (3)% | (3)% | ||||||||||||||||||||||||||||||||||||||||||||
| Contract Manufacturing | 10 | (2)% | (1)% | 14% | 11% | 12% | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,205 | 2% | —% | (6)% | (4)% | (4)% | |||||||||||||||||||||||||||||||||||||||||||
Note: Numbers may not add due to higher realized pricesrounding
Pet health revenue decreased $36 million, or 5%, for the three months ended March 31, 2024, compared to the same period in 2023, driven by lower volumes and a 7% increase due to higher volumes partially offset by a 2% unfavorable foreign exchange rate impact.
2024 Q1 Form 10-Q | 22 | ||||||||
Cost of Sales
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 515 | $ | 494 | 4 | % | ||||||||||||||||||||||||||||||||
| % of revenue | 43 | % | 39 | % | ||||||||||||||||||||||||||||||||||
Cost of sales increased $72.4 million in the nine months ended September 30, 2018 as compared to nine months ended September 30, 2017 primarily due to costs related to increased volume of products sold, the write-off of inventory primarily related to the suspension of activities for Imrestor and various cost increases, partially offset by non-recurring costs in 2017 associated with purchase accounting charges from the acquisition of BIVIVP related to the fair value adjustments of inventory acquired that was subsequently sold.
Research and Development
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Research and development | $ | 87 | $ | 81 | 7 | % | ||||||||||||||||||||||||||||||||
| % of revenue | 7 | % | 6 | % | ||||||||||||||||||||||||||||||||||
Research and development expenses increased $6 million for the three months ended March 31, 2024, as compared to the three months ended September 30, 2017 duesame period in the prior year, primarily to normaldriven by higher employee-related expenses and timing of project spend fluctuationscosts.
Marketing, Selling and restructuring savings.Administrative
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Marketing, selling and administrative | $ | 337 | $ | 327 | 3 | % | ||||||||||||||||||||||||||||||||
| % of revenue | 28 | % | 26 | % | ||||||||||||||||||||||||||||||||||
Marketing, selling and administrative expenses decreased $15.7increased $10 million for the three months ended September 30, 2018March 31, 2024, as compared to the three months ended September 30, 2017 duesame period in the prior year, primarily to productivity initiativesdriven by increases in marketing and promotional spend supporting our global pet health business and higher employee-related expenses. These increases were partially offset by cost control measures across these functions.
Amortization of intangible assetsIntangible Assets
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | $ | 133 | $ | 134 | (1) | % | ||||||||||||||||||||||||||||||||
Amortization of intangible assets decreased $2.9$1 million for the three months ended September 30 2018March 31, 2024, as compared to the three months ended September 30, 2017 due primarilysame period in the prior year. Partially contributing to this decrease, as of February 1, 2024, the date we concluded the assets to be sold as part of our aqua business divestiture qualified as held for sale, we ceased the amortization of the finite-lived intangible assets included within this disposal group. See Note 4. Acquisitions, Divestitures and Other Arrangements to the acceleration of amortization related to certain product exits in 2017.condensed consolidated financial statements for further information.
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Asset impairment, restructuring and other special charges | $ | 46 | $ | 40 | 15 | % | ||||||||||||||||||||||||||||||||
Asset impairment, restructuring and other special charges
increased $6 million for the three months ended March 31, 2024, as compared to the same period in the prior year. Amounts recorded during the three months ended March 31, 2024, consist of $39 million of costs associated with the restructuring plan announced in February 2024 and $7 million of acquisition integration and divestiture-related costs. Amounts recorded during the three months ended March 31, 2023, primarily represented costs associated with the implementation of new systems, programs, and processes due to the integration of Bayer Animal Health. For additional information regarding our asset impairment, restructuring and other special charges, see Note 6:5. Asset Impairment, Restructuring and Other Special Charges to our unauditedthe condensed consolidated and combined financial statements.
2024 Q1 Form 10-Q | 23 | ||||||||
Interest Expense, Net of Capitalized Interest
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Interest expense, net of capitalized interest | $ | 66 | $ | 64 | 3 | % | ||||||||||||||||||||||||||||||||
Interest expense, net of capitalized interest increased $2 million for the three months ended September 30, 2018March 31, 2024, as compared to the three months ended September 30, 2017same period in the prior year, primarily due to decreased severance, integration and exit costs, partially offset by higher asset impairments.weighted-average interest rates.
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Other expense, net | $ | 9 | $ | 9 | — | % | ||||||||||||||||||||||||||||||||
Income Tax (Benefit) Expense
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | $ | (20) | $ | 5 | NM | |||||||||||||||||||||||||||||||||
| Effective tax rate | (182.2) | % | 4.4 | % | ||||||||||||||||||||||||||||||||||
We recognized an increase in pretax earnings offset by a decrease inincome tax benefit of $20 millionfor the U.S. valuation allowance related to utilization of prior years' net operating losses.
Liquidity and Capital
Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under our Credit Facilities.credit facilities. As a significant portion of our business is conducted outside the U.S.,internationally, we hold a significant portion of cash outside of the U.S. We monitor and adjust the amount of foreign cash based on projected cash flow requirements. Our ability to use foreign cash to fund cash flow requirements in the U.S. may be impacted by local regulations and, to a lesser extent, following U.S. tax reforms, the income taxes associated with transferring cash to the U.S. We intend to indefinitely reinvest substantially all foreign earnings for continued use in our foreign operations. As our structurebusiness evolves, as a standalone company, we may change that strategy, particularly to the extent we identify tax efficient reinvestment alternatives for our foreign earnings or change our cash management strategy.
expenditures, business development in our targeted areas, short-term and long-term debt obligations, such as principal and interest expensepayments, as well as interest rate swaps, operating lease payments, purchase obligations and an anticipated dividend. We believe ourcosts associated with mergers, acquisitions, divestitures and business integrations and/or restructuring activities. As of March 31, 2024, we had cash and cash equivalents of $345 million and unused borrowing capacity on hand, our operatingRevolving Credit Facility of approximately $550 million. In addition, our Securitization Facility provides additional borrowing capacity in the event our borrowing capacity on this facility, which is correlated to our U.S. Net Eligible Receivables Balances, exceeds our outstanding borrowings on the facility. As of March 31, 2024, we had undrawn borrowing capacity of $114 million on our Securitization Facility. We also have the ability to access capital markets to obtain debt financing for longer-term funding, if required. Further, we believe we have sufficient cash flowsflow and liquidity to remain in compliance with our existing financing arrangements will be sufficient to support our cash needs for the foreseeable future, including for at least the next 12 months.debt covenants.
Our ability to meet future funding requirements may be impacted by macroeconomic, business and financial volatility. As marketsmarket conditions change, we will continue to monitor our liquidity position. However, a challenging economic environment or an economic downturn may impact our liquidity or ability to obtain future financing. See Forward-Looking Statements."Item 1A. Risk Factors - We have substantial indebtedness" in Part I of our 2023 Form 10-K.
2024 Q1 Form 10-Q | 24 | ||||||||
Cash Flows
The following table provides a summary of cash flows from operating, investing and financing activities for the periods presented:three months ended March 31, 2024 and 2023:
| Nine Months Ended September 30, | % | |||||||||||||||||||||||||||||||||||||
| Net cash provided by (used in): | 2018 | 2017 | Change | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||
| Net cash provided by (used for): | ||||||||||||||||||||||||||||||||||||||
| Net cash provided by (used for): | ||||||||||||||||||||||||||||||||||||||
| Net cash provided by (used for): | 2024 | 2023 | $ Change | |||||||||||||||||||||||||||||||||||
| Operating activities | $ | 347.8 | $ | 167.1 | 108 | % | ||||||||||||||||||||||||||||||||
| Investing activities | (78.9 | ) | (929.1 | ) | (92 | )% | ||||||||||||||||||||||||||||||||
| Financing activities | 327.2 | 843.5 | (61 | )% | ||||||||||||||||||||||||||||||||||
| Effect of exchange-rate changes on cash and cash equivalents | 15.4 | 3.3 | 367 | % | ||||||||||||||||||||||||||||||||||
| Net increase in cash, cash equivalents and restricted cash | $ | 611.5 | $ | 84.8 | 621 | % | ||||||||||||||||||||||||||||||||
| Net decrease in cash and cash equivalents | ||||||||||||||||||||||||||||||||||||||
Operating activities
Investing activities
Financing activities
Description of Indebtedness
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. GAAP requires managementus to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There are certainCertain of our
accounting policies that are considered critical asbecause these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments, often employingrequiring the use of estimates about the effects of matters that are inherently uncertain. Actual results that differ from our estimates could have an unfavorable effect on our financial position and results of operations. We apply estimation methodologies consistently from year to year. Such policies are summarized in the Management’sItem 7, "Management's Discussion and& Analysis of Results of Financial Condition and Results of Operations, section in" of our IPO Prospectus.2023 Form 10-K. There have beenwere no significant changes or developments in the application of our critical accounting policies during 2018.
2024 Q1 Form 10-Q | 25 | ||||||||
Foreign Exchange Risk
We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign currency exchange rates. We are exposed to foreign currency exchange risk as the functional currency financial statements of non-U.S. subsidiaries are translated to U.S. dollars. We are also subject to foreign currency transaction gains and losses to the extent revenue and expense transactions are not denominated in the functional currency of a subsidiary. We are primarily exposed to foreign currency exchange risk with respect to net assets denominated in the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar Australian dollar and Brazilian real. Lilly maintainsChinese yuan.
Additionally, we generally identify hyperinflationary markets as those markets whose cumulative inflation rate over a foreign currency risk management program through a central shared entity, which enters into derivative contracts to hedge foreign currency risk associated with forecasted transactions for the entire company, including historicallythree-year period exceeds 100%. We have applied hyperinflationary accounting for our operations. GainsArgentina and losses on derivative contracts entered into by LillyTurkey subsidiaries since 2018 and 2022, respectively, and as a result, have been allocated to our results to the extent they were to cover exposure related to our business and offset gains and losses on underlying foreign currency exposures. Following the Separation, we intend to implement our own foreign currency risk management program.
Interest Risk
ITEM 4. Controls and ProceduresCONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures. Under applicable SEC regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the company’s “disclosure controls and procedures,” which are defined generally as controls and other procedures of a reporting company designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the SEC (such as this Form 10-Q) is recorded, processed, summarized and reported on a timely basis.
Our management, with the participation of JeffJeffrey N. Simmons, president and chief executive officer, and Todd S. Young, executive vice president and chief financial officer, evaluated our disclosure controls and procedures as of September 30, 2018. Based on this evaluation, the chief executive officerMarch 31, 2024, and the chief financial officer concluded that the disclosure controls and procedures arethey were effective.
(b)Changes in Internal Controls. During the thirdfirst quarter of 2018,2024, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
2024 Q1 Form 10-Q | 26 | ||||||||
PART II. Other InformationII
ITEM 1. LEGAL PROCEEDINGS
See Note 13. Commitments and Contingencies to the condensed consolidated financial statements for a summary of our legal proceedings. This item should be read in conjunction with "Legal Proceedings" in Part I, Item 1. Legal Proceedings3 of our 2023 Form 10-K.
Our material risk factors are discloseddocumented in Item 1A of Part I of our IPO Prospectus.2023 Form 10-K. There have been no material changes from the risk factors previously disclosed in our IPO Prospectus.the 2023 Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(none)
ITEM 4. MINE SAFETY DISCLOSURES
(none)
ITEM 5. OTHER INFORMATION
During the issuance of 72.3 million shares of our common stock at a price to the public of $24.00 per share, which number of shares included the underwriters’ exercise in full of their option to purchase up to an additional 9.4 million shares of common stock at the IPO price, less underwriting discounts. The 72.3 million shares of our common stock sold in the IPO represent approximately 19.8% of our outstanding shares, while Lilly continues to own approximately 80.2% of our outstanding shares. The shares sold in the offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-226536), which was declared effective by the SEC as of September 19, 2018. The aggregate offering price of our common stock registered and sold under the registration statement was approximately $1,736.0 million (including the shares issued pursuant to the underwriters’ option to purchase additional shares). Our proceeds from the IPO were approximately $1,659.7 million, after deducting underwriting discounts and commissions of approximately $76.4 million. Goldman, Sachs & Co. LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC served as joint book-running managers and as representativesthree months ended March 31, 2024, no director or officer of the underwriters for the IPO. The offering commenced on September 19, 2018 and did not terminate before allCompany adopted, modified or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of the securities registered in the registration statement were sold.Regulation S-K.
2024 Q1 Form 10-Q | 27 | ||||||||
The following exhibits are either filed or furnished herewith (as applicable) or, if so indicated, incorporated by reference to the documents indicated in parentheses, which have previously been filed or furnished with the Securities and Exchange Commission.SEC.
| Exhibit Number | Description | |||||||
| Asset Purchase Agreement by and | ||||||||
| Cooperation Agreement, dated as of March 29, 2024, by and | ||||||||
| Section 302 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | ||||||||
| Section 302 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | ||||||||
| Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | ||||||||
| 101 | Interactive Data Files. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL document and included in Exhibit 101). | |||||||
**Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The company will furnish copies of any such schedules to the U.S. Securities and Exchange Commission upon request.
2024 Q1 Form 10-Q | 28 | ||||||||
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this Reportreport to be signed on its behalf by the undersigned thereunto duly authorized.
| ELANCO ANIMAL HEALTH INCORPORATED | ||||||||
| (Registrant) | ||||||||
| Date: | May 8, 2024 | /s/ Jeffrey N. Simmons | ||||||
| President and Chief Executive Officer | ||||||||
| Date: | May 8, 2024 | |||||||
| Todd S. Young | ||||||||
| Executive Vice President, Chief | ||||||||
| (Principal Financial Officer) | ||||||||
2024 Q1 Form 10-Q | 29 | ||||||||