|
| | | | | | | |
| 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 |
|
During the nine months ended September 30, 2018, we recognized $38.6 million
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 |
|
(1)Our Revolving Credit Facility provides up to $750 million in borrowing capacity (with incremental capacity if certain conditions are met), bears interest at Term SOFR plus 2.10% and matures in August 2025.Long-term debt as(2)Our Securitization Facility is secured and collateralized by our U.S. Net Eligible Receivables Balance, has a maximum borrowing capacity of December$300 million, bears interest at Term SOFR plus 1.25% and matures in July 2026.
(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%.
Revolving and Term Credit Facilities
On September 5, 2018, we entered into a revolving credit agreement with a syndicateAs of banks providing for a five-year $750.0 million senior unsecured revolving credit facility (Revolving Facility). The Revolving FacilityMarch 31, 2024, approximately 78% of our long-term indebtedness bears interest at a variablefixed rate, plus specified margin as defined inincluding variable-rate debt converted to fixed-rate through the agreement and is payable quarterly. There were no borrowings outstanding under the Revolving Facility at September 30, 2018. The Revolving Facility is payable in full at the enduse of the term.
On September 5, 2018 we also entered into a $500.0 million three-year term loan under a term credit facility with a syndicate of banks (the Term Facility and collectively with the Revolving Facility, the Credit Facilities.) The Term Facility bears interest at a variable rate plus margin as defined in Term Facility (3.50% at September 30, 2018) and is payable quarterly. The Term Facility is payable in full at the end of the term.
The Credit Facilities are subject to various financial and other covenants including restrictions on the level of borrowings based on a consolidated leverage ratio and a consolidated interest coverage ratio.swaps (see Note 9. Financial Instruments for further information). We were in compliance with all suchof our debt covenants as of September 30, 2018.March 31, 2024.
Senior NotesNote 9. Financial Instruments
On August 28, 2018,To manage our exposure to market risks, such as changes in foreign currency exchange rates and interest rates, we issued $2.0 billion of senior notes (Senior Notes) in a private placement. The Senior Notes comprised of $500.0 million of 3.912% Senior Notes due August 27, 2021, $750.0 million of 4.272% Senior Notes due August 28, 2023, and $750.0 million of 4.900% Senior Notes due August 28, 2028. The interest rate payable on each series of Senior Notes is subject to adjustment if Moody's Investor Services, Inc. or Standard & Poor's Financial Services LLC downgrades, or subsequently upgrades, its ratings on the respective series of Senior Notes.
The indenture that governs the Senior Notes contains covenants, including limitations on our ability, and certain of our subsidiaries, to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets, in addition, to other customary terms. We were in compliance with all such covenants under the indenture governing the Senior Notes as of September 30, 2018.
We have entered into various derivative transactions. We formally assess, designate and document, as a hedge of an agreementunderlying exposure, each qualifying derivative instrument that requires us to use commercially reasonable efforts to cause a registration statement to becomewill be accounted for as an accounting hedge at inception. We also assess at least quarterly thereafter whether the financial instruments used in the hedging transaction are effective at offsetting changes in either the fair values or cash flows of the underlying exposures. Derivative cash flows are principally classified in the operating activities section of the condensed consolidated statements of cash flows, consistent with the SEC by August 28, 2019, relating to an offer to exchange the Senior Notes for registered Senior Notes having substantially identical terms, or, in certain cases, to register the Senior Notes for resale. Ifunderlying hedged item. Further, we do not registeroffset derivative assets and liabilities on the condensed consolidated balance sheets.
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.
Note 9. Financial Instruments and Fair Value
Financial instruments that are potentially subject to credit risk consist principally of trade receivables. Collateral isoperations. Forward contracts generally have maturities not required. The risk associated with this concentration is mitigated by our ongoing credit-review procedures and insurance.
A large portion of our cash is held by a few major financial institutions. We monitor the exposure with these institutions and do not expect any of these institutions to fail to meet their obligations. All highly liquid investments with a maturity of three months or less from the date of purchase are considered to be cash equivalents. The cost of these investments approximates fair value. We also consider the carrying value of restricted cash balances to be representative of its fair value.
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
(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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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) | |
| | | | | | | | | | |
| | | | | | | | | | |
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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
projected cash flows related to Galliprant, we increased the fair value of the contingent consideration liabilities by $8.5 million. The additional expense was recognized in other-net (income) expense.
We have long term debt of $2.5 billion that is recorded at amortized cost in our condensed consolidated balance sheetsheets totaling $25 million and $26 million as of September 30, 2018. We consider the carrying value of the long term debt to be representative of itsMarch 31, 2024 and December 31, 2023, respectively. These investments are not recorded at fair value on a recurring basis, and as of September 30, 2018. The fair value of this long term debt is estimated based on quoted market prices of similar liabilities and is classified as Level 2. As of December 31, 2017, long term debt wassuch, are not material.
Note 10. Income Taxes
Prior to Separation
During the periods presented in the unaudited condensed consolidated and combined financial statements, our operations were generally included in the tax groupingfair value table above.
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.
Note 12. Income Taxes
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2024 | | 2023 |
Income tax (benefit) expense | | | | | | $ | (20) | | | $ | 5 | |
Effective tax rate | | | | | | (182.2) | % | | 4.4 | % |
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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.
For the three and nine months ended September 30, 2017, despite reporting a loss before taxes of $9.1 million and $77.2 million, respectively, we incurred $11.6 million and $72.0 million of income tax expense. The tax expense recorded related primarily to income generated in certain foreign jurisdictions as no tax benefit was recorded for U.S. net operating losses.
In December 2017, the President of the U.S. signed into law the Tax Cuts and Jobs Act (2017 Tax Act), which includes significant changes to the U.S. corporate income tax system, including a reduction in the corporate income tax rate, transition to a territorial tax system, and modifications to the international tax provisions. At September 30, 2018, our accounting for the 2017 Tax Act is incomplete; however, we expect to complete our accounting by December 2018. As discussed in our combined financial statements and accompanying notes as of and for the year ended December 31, 2017We were included in our IPO Prospectus, we recorded provisional adjustments for effects that we were able to reasonably estimate. Those effects included the one-time repatriation transition tax (also known as the Toll Tax), re-measurement of deferred tax assetsEli Lilly and liabilities, unremitted earnings, executive compensation, and uncertain tax positions. At December 31, 2017, we were not able to make reasonable estimates for Global Intangible Low-Taxed Income (GILTI) deferred taxes or changes to the valuation allowances; therefore, we did not record provisional amounts. We are still evaluating the effects of the GILTI provisions and assessing our valuation allowances, and we have not yet concluded upon our accounting policy election with respect to GILTI deferred taxes or the application of intra entity transfers of inventory; therefore, the estimated annual effective tax rate reflects GILTI as a period expense. For the three and nine months ended September 30, 2018, we have not made any additional measurement-period adjustments related to provisional amounts as we are continuing to collect and analyze additional information as well as evaluate the interpretations and assumptions made. Updates to the calculations may result in material changes to the provisional adjustments recorded at December 31, 2017 and the estimated annual effective tax rate.
As part of Lilly, we are included in Lilly'sCompany's (Lilly's) U.S. tax examinations by the Internal Revenue Service (IRS).through the full separation date of March 11, 2019. Pursuant to the tax matters agreement we executed with Lilly in connection with our initial public offering (IPO), the potential liabilities or potential refunds attributable to pre-IPO periods in which Elanco was included in a Lilly consolidated or combined tax return remain with Lilly. The IRSU.S. examination of tax years 2013-20152016 to 2018 began in 2016. While we believe it is reasonably possible that this audit could reach a resolution within the next twelve months, the IRS examination of tax years 2013-20152019 and remains ongoing. For periods prior toFinal resolution of certain matters is dependent upon several factors, including the Separation, Lilly will retain the liabilities related to such IRS audit resolutions.potential for formal administrative proceedings.
Impact of Separation
In connection with the Separation, we entered into a tax matters agreement (TMA) with Lilly that, among other things, formalized our agreement related to the responsibility for historical tax positions for the periods prior to the Separation for jurisdictions where our business was included in the consolidated or combined tax returns of Lilly. The TMA also established a tax sharing agreement for jurisdictions where our business will continue to be included in Lilly's consolidated or combined tax returns for a period of time.
Note 13. Commitments and Contingencies
Based on the TMA, Lilly retained the tax benefits and liabilities associated with all periods prior to the Separation date for any jurisdiction where we were included in a consolidated or combined tax return. The financial statements for periods prior to Separation included certain deferred tax assets related to tax credit and net operating loss carryovers that resulted from our tax expense being calculated on a separate return basis that will not transfer to us either because they were used by Lilly or are retained by Lilly and reflected certain tax liabilities that will be retained by Lilly. We recorded an adjustment to our consolidated balance sheet at the date of Separation to reflect our tax positions based on the TMA. This resulted in a decrease in tax liabilities by $31.2 million as these tax liabilities will be retained by Lilly.
At September 30, 2018, we have net operating losses for international tax purposes of approximately $190 million which will expire between 2022 and 2028. These net operating losses are partially reserved. Deferred tax assets related to state net operating losses are $6.2 million. The state net operating losses will generally expire between 2035 and 2037.
Note 11. ContingenciesLegal Matters
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
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.
Note 12. Geographic Information
We operate asaccrued a single operating segment engaged in the development, manufacturing, marketing and salesliability of animal health products worldwide for both food animals and companion animals. Consistent with our operational structure, our President and Chief Executive Officer (CEO), as the chief operating decision maker, makes resource allocation and business process decisions globally across our consolidated business. Strategic decisions are managed globally with global functional leaders responsible for determining significant cost/investments and with regional leaders responsible for overseeing the execution of the global strategy. Our global research and development organization is responsible for development of new products. Our manufacturing organization is responsible for the manufacturing and supply of products and for the optimization of our supply chain. Regional leaders are responsible for the distribution and sale of our products and for local direct costs. The business is also supported by global corporate staff functions. Managing and allocating resources at the global corporate level enables our CEO to assess the overall level of resources available and how to best deploy these resources across functions, product types, regional commercial organizations and research and development projects in line with our overarching long-term corporate-wide strategic goals, rather than on a product or geographic basis. Consistent with this decision-making process, our CEO uses consolidated, single-segment financial information for purposes of evaluating performance, allocating resources, setting incentive compensation targets, as well as forecasting future period financial results.
Our products include Rumensin®, Optaflexx®, Denagard®, Tylan®, Maxiban® and other products for livestock and poultry, as well as Trifexis®, Interceptor®, Comfortis® and other products for companion animals.
We have a single customer who accounted for 11.1% and 9.4% of revenue for the three months ended September 30, 2018 and 2017, respectively, and for 11.5% and 11.9% of revenue for the nine months ended September 30, 2018 and 2017, respectively. The product sales resulted in accounts receivable with this customer of $79.5 million and $88.0$15 million as of September 30, 2018 andMarch 31, 2024, which was an increase of $2.5 million from the liability we had recorded for this matter as of December 31, 2017, respectively.2023. This liability was included within other current liabilities on our condensed consolidated balance sheets. It remains uncertain whether an agreement will be reached and the terms of any such agreement. Management continues to believe its actions were appropriate.
WeOther Commitments
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.
Selected geographic area information was as follows:
|
| | | | | | | | | | | | | | | |
| 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 |
|
(1) Revenue is attributed to the countries based on the location(2) Long-lived assets consist of property and equipment, net, and certain noncurrent assets.
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.
Note 14. Related Party Agreements and Transactions
Separation-Related Agreements with Lilly
As described in Note 1, in connection with the Separation Lilly transferred to us substantially all of its animal health businesses in exchange for approximately $4.2 billion. This is reflected as consideration to Lilly in our statement of equity. In addition, we entered into a master separation agreement and a transitional services agreement with Lilly.
Master Separation Agreement (MSA)
As stated in Note 1, Lilly transferred to us at the time of Separation, through a series of transactions, the businesses that will continue as part of Elanco. For a certain portion of our operations, the legal transfer of our net assets did not occur prior to the Separation dueFebruary 1, 2023 settlement date. The weighted-average number of potentially dilutive shares outstanding was calculated using the treasury stock method. Potential common shares that would have had the effect of increasing diluted earnings per share were considered to certain regulatory requirementsbe anti-dilutive and as such, these shares were not included in eachthe calculation of these countries. Underdiluted earnings per share.
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.
In addition, based on the MSA, we are required to distribute to Lilly any amount of cash in excess of $300.0 million held at September 30, 2018. As a result, we have reflected an additional $359.9 million of restricted cash on our balance sheet with an offsetting payable to Lilly at September 30, 2018.
Transitional Services Agreement (TSA)
Historically, Lilly has provided us significant shared services and resources related to corporate functions such as executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations, which we refer to collectively as the "Lilly Services." Under the terms of the TSA, we will be able to use Lilly Services for a fixed term established on a service-by-service basis. We will pay Lilly mutually agreed-upon fees for the Lilly Services provided under the TSA, which will be based on Lilly's cost (including third-party costs) of providing the Lilly Services through March 31, 2021, and subject to a mark-up of 7% thereafter, with additional inflation-based escalation beginning January 1, 2020. The fees under the TSA become payable for all periods beginning after October 1, 2018.
We also entered into a TMA, an employee matters agreement, a toll manufacturing and supply agreement and a registration rights agreement with Lilly in connection with the Separation.
Transactions with Lilly Prior to Separation
We did not historically operate as a standalone business and had various relationships with Lilly whereby Lilly provided services to us.
Transfers to/from Lilly, net
As discussed in the basis of presentation, net parent company investment is primarily impacted by contributions from Lilly which are the result of treasury activity and net funding provided by or distributed to Lilly. (2)For the three months ended September 30, 2018March 31, 2024 and 2017, respectively, the net transfers (to)/from Lilly were $(116.8)2023, approximately 0.8 million and $38.1 million. For1.4 million, respectively, of potential common shares were excluded from the nine months ended September 30, 2018 and 2017, respectively, the net transfers (to)/from Lilly were $(226.3) million and $862.7 million, respectively. The most significant activity impacting the 2017 transfercalculation of diluted weighted-average shares outstanding because their effect was the financing by Lilly of our acquisition in the amount of $882.1 million for Boehringer Ingelheim Vetmedica, Inc.'s United States feline, canine, and rabies vaccine portfolio and other related assets in 2017. Other activities that impacted the net transfers (to)/from Lilly include corporate overhead and other allocations, income taxes, retirement benefits, and centralized cash management.anti-dilutive.
Corporate Overhead and Other Allocations
Lilly provides us certain services, including executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations. We provide Lilly certain services related to manufacturing support. Our financial statements reflect an allocation of these costs. When specific identification is not practicable, the remainder have been allocated primarily on a proportional cost method on a basis of revenue or headcount.
The allocations of services from Lilly to us were reflected as follows in the unaudited condensed consolidated and combined statements of operations:
|
| | | | | | | | | | | | | | | |
| 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 |
|
We provide Lilly certain services related to manufacturing support. Allocations
The financial information herein may not necessarily reflect our consolidated financial position, results of operations and cash flows in the future or what they would have been if we had been a separate, standalone entity during the periods presented. Management believes that the methods used to allocate expenses are reasonable.ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSStock-based Compensation
Our employees participate in Lilly stock-based compensation plans, the costs of which have been allocated to us and recorded in cost of sales, research and development, and marketing, selling and administrative expenses in the unaudited condensed consolidated and combined statements of operations. The costs of such plans related to our employees were $6.9 million and $6.2 million for the three months ended September 30, 2018 and 2017, respectively, as well as $20.2 million and $18.7 million for the nine months ended September 30, 2018 and 2017, respectively.
Retirement BenefitsIntroduction
Our employees participate in defined benefit pension and other post retirement plans sponsored by Lilly, the costs and benefits of which have been recorded in the unaudited condensed consolidated and combined statement of operations in cost of sales, research and development, and marketing, selling and administrative expenses. For the three and nine months ended September 30, 2018, the benefit of such plans related to our employees was $1.6 million and $0.3 million, respectively, and for the three and nine months ended September 30, 2017 the costs of such plans related to our employees were $1.7 million and $5.1 million, respectively.
Centralized Cash Management
Lilly uses a centralized approach to cash management and financing of operations. Until Separation, the majority of our business was party to Lilly’s cash pooling arrangements to maximize Lilly's availability of cash for general operating and investing purposes. Under these cash pooling arrangements, cash balances were swept regularly from our accounts. Cash transfers to and from Lilly’s cash concentration accounts and the resulting balances at the end of each reporting period were reflected in net parent company investment in the condensed consolidated and combined balance sheets.
Debt
Lilly’s third-party debt and the related interest expense have not been allocated to us for any of the periods presented as we were not the legal obligor of the debt and Lilly borrowings were not directly attributable to our business.
Commercial Operations
We sell certain products to and receives certain goods and services from a customer/vendor, whose chairman and Chief Executive Officer is a member of Lilly's Board of Directors. These product sales resulted in revenue of $4.2 million and $6.6 million for the three months ended September 30, 2018 and 2017, respectively, and of $16.4 million and $17.8 million for the nine months ended September 30, 2018 and 2017, respectively. The product sales resulted in accounts receivable of $1.9 million and $2.0 million at September 30, 2018 and December 31, 2017, respectively. The purchase of goods and services resulted in cost of sales and operating expenses of $1.4 million and $1.1 million for the three months ended September 30, 2018 and 2017, respectively, as well as $3.3 million and $5.3 million September 30, 2018 and 2017, respectively. The purchase of goods and services resulted in accounts payable of $0.4 million and $0.3 million at September 30, 2018 and December 31, 2017, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tables present dollars in millions, except per-share data)
The management’s discussion and analysis of financial condition and results of operations
(MD&A) is intended to assist the reader in understanding and assessing significant changes and trends related to our results of operations and financial position. This discussion and analysis should be read in conjunction with the
unaudited condensed consolidated
and combined financial statements and accompanying footnotes in Item 1 of Part I of this
Quarterly Report on Form 10-Q. Certain statements in this Item 2 of Part I of this
Quarterly Report on Form 10-Q constitute forward-looking statements. Various risks and uncertainties, including those discussed in
"Forward-Looking Statements"“Forward-Looking Statements” of this Form 10-Q, in Item 1A, “Risk Factors” of Part II of this Form 10-Q and in
Item 1A, “Risk Factors”
included inof Part I of our
final prospectus relating to our initial public offering filed on September 21, 2018 (IPO Prospectus)2023 Form 10-K, may cause our actual results, financial position and cash generated from operations to differ materially from these forward-looking statements. Further, due to the seasonality of our pet health sales, interim results are not necessarily an appropriate base from which to project annual results.Business Overview
Founded in 1954 as part of Eli Lilly and Company, Elanco is a premierglobal leader in animal health, company that innovates, develops, manufacturesdedicated to innovating and marketsdelivering products for companion and food animals. Headquarteredservices to prevent and treat disease in Greenfield, Indiana, we are the fourth largest animal health company in the world. We have one of the broadest portfolios of pet parasiticides in the companion animal sector. We offer afarm animals and pets. Our diverse, durable product portfolio of more than 125 brands that make us a trusted partner to veterinarians and food animal producersis sold in more than 90 countries.
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:
Companion Animal Disease Prevention (CA Disease Prevention): We have one of the broadest parasiticide portfolios in the companion animal sector based on indications, species and formulations, with products that protect pets from worms, fleas and ticks. Combining our parasiticide portfolio with our vaccines presence, we are a leader in the United States (U.S.) in the disease prevention category based on share of revenue.
Companion Animal Therapeutics (CA Therapeutics): We have a broad pain and osteoarthritis portfolio across species, modes of action, indications and disease stages. Pet owners are increasingly treating osteoarthritis in their pets, and our Galliprant product is one of the fastest growing osteoarthritis treatments in the U.S. We also have treatments for otitis (ear infections), as well as cardiovascular and dermatology indications.
Food Animal Future Protein & Health (FA Future Protein & Health): Our portfolio in this category, which includes vaccines, nutritional enzymes and animal only antibiotics, serves the growing demand for protein and includes innovative products in poultry and aquaculture production, where demand for animal health products is outpacing overall industry growth. We are focused on developing functional nutritional health products that promote food animal health, including enzymes, probiotics and prebiotics. We are a leader in providing vaccines as alternatives to antibiotics to promote animal health based on share of revenue.
Food Animal Ruminants & Swine (FA Ruminants & Swine): We have developed a range of food animal products used extensively in ruminant (e.g., cattle, sheep and goats) and swine production.
On September 24, 2018, we completed an initial public offering resulting in the issuance of 72.3 million shares our common stock (IPO), which represented approximately 19.8% of our total outstanding shares. Our common stock began trading on the New York Stock Exchange under the symbol "ELAN" on September 20, 2018. Prior toveterinary clinic and in connection with the IPO, we completed a $2.0 billion senior notes offering and entered into a $500.0 million term loan, and Lilly transferred to us substantially all of the assets and liabilities of their animal health business. Lilly continues to own the remaining 80.2% of our outstanding shares. Lilly has informed us that it may make a tax-free distribution to its shareholders of all or a portion of its remaining equity interest in us, which may include one or more distributions effected as a dividend to all Lilly shareholders, one or more distributions in exchange for Lilly shares or other securities, or any combination thereof. We refer to any such potential distribution as the Distribution. Lilly has no obligation to pursue or consummate any further dispositions of its ownership interest in us,retail markets, including through the Distribution, by any specified date or at all.
For the three months ended September 30, 2018 and 2017, our revenue was $761.1 million and $697.1 million,
respectively. For the three months ended September 30, 2018 and 2017, our net income (loss) was $60.2 million and $(20.7) million, respectively.
For the nine months ended September 30, 2018 and 2017, our revenue was $2,267.5 million and $2,134.7 million, respectively, For the nine months ended September 30, 2018 and 2017 our net income (loss) was $70.1 million and $(149.2) million, respectively.
Factors Affecting Our Results of Operationse-commerce.
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.
ProductivityOther Key Trends and Factors Affecting Our Results of Operations
Our results have benefitedAcquisition and Integration Activity: In 2023 we acquired certain U.S. marketed products, pipeline products, inventory and an assembled workforce from our continued operationalNutriQuest, LLC (NutriQuest) and productivity initiatives implemented following recent acquisitionscertain assets including inventory and distribution rights for certain marketed products from NutriQuest Nutricao Animal Ltda (NutriQuest Brazil). Additionally, in response to changing market demand for antibiotics and other headwinds, such as competition with generics and innovation. We implemented a number of initiatives across manufacturing, R&D and marketing, selling and administrative, such as rationalization of stock keeping units, reduction of contract manufacturing organizations, implementation of lean manufacturing principles and procurement initiatives.
Foreign Exchange Rates
Significant portions of our revenue and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 90 countries and, as a result, our revenue is influenced by changes in foreign exchange rates. DuringApril 2023 we successfully completed the nine months ended September 30, 2018 and 2017, approximately 51.1% and 50.6%, respectively, of our revenue was denominated in foreign currencies. As we operate in multiple foreign currencies, including the Euro, British pound, Brazilian real, Australian dollar, Japanese yen, Canadian dollar, Chinese yuan, and other currencies, changes in those currencies relative to the U.S. dollar impact our revenue, cost of goods and expenses, and consequently, net income. These fluctuations may also affect the ability to buy and sell our products between markets impacted by significant exchange rate variances. There has been limited impact on our results due to currency movements during the nine months ended September 30, 2018 and 2017.
Our Relationship with Lilly and Additional Standalone Costs
During the period prior to the IPO, our business operated as part of a division of Lilly. Our combined financial statements have been derived from Lilly’s consolidated financial statements and accounting records. Our combined financial statements reflect the financial position, results of operations and cash flowsintegration of the Bayer Animal Health business that was transferred at the time of the Separation and do not purport to reflect what the results of operations, comprehensive income/(loss), financial position, equity or cash flows would have been had we operated as an independent, publicly traded company during the periods presented.
Our historical results reflect an allocation ofinto our enterprise resource planning (ERP) system. We incurred costs for certain Lilly corporate costs, including, among others, executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations. These allocations are not necessarily indicative of the expenses we may incur as a standalone public company. Although we entered into certain agreements with Lillytotaling $93 million in connection with the IPO and the Separation, the amount and composition of our expenses may vary from historical levels since the fees charged for the services under these agreements may be higher or lower than the costs reflected in the historical allocations. In addition, we intend to replace these services over time with ones supplied either internally by our employees or by third parties, the cost of which may be higher or lower than the historical allocations. During the three and nine months ended September 30, 2018 and 2017, corporate overhead and other allocations were $34.1 million, $105.2 million, $36.1 million and $107.8 million, respectively. See Note 14: Related Party Agreements and Transactions in our unaudited condensed consolidated and combined financial statements.
We are currently investing in expanding our own administrative functions, including, but not limited to, information technology, facilities management, distribution, human resources and manufacturing, to replace services previously provided by Lilly. Because of initial stand up costs and overlaps with services previously provided by Lilly, we have incurred and expect to continue to incur certain temporary, duplicative expenses in connection with the
Separation. We have also incurred and expect to continue to incur costs2023 related to integration activities, including the build out of processes and systems to support financeour global organization. In connection with this integration, we notified our customers of an expected commercial blackout period during specified periods of time in April 2023, during which certain products would not be able to be shipped. Due to this, we believe certain customers modified their purchasing habits, causing a shift of revenue from the second quarter of 2023 to the first quarter of 2023 of approximately $90 million to $110 million, based on our high-level estimates. 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.
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
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.
In addition, our historical results do not reflect the impact of costs we have incurred and expect to continue to incur as a consequence of becoming a standalone company, including incremental costs associated with being a publicly traded company. These costs include a change in compensation expense as we institute competitive compensation policies and programs as a standalone public company, the costs of internal and external audit (including those related to Sarbanes-Oxley Act of 2002), investor relations, stock administration, stock exchange fees and regulatory compliance costs.
For the purposes of ourcondensed consolidated financial statements for periods priorfurther information.
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.
In connection with the IPO, we entered into $2.5 billion of long-term borrowings. Our historical results for the period prior$30 to entering into such agreements do not reflect interest expense, which we estimate at approximately $110.0 million on an annual basis.
Asset Impairment, Restructuring and Other Special Charges
Our results have been impacted by asset impairment, restructuring and other special charges, including integration of acquired businesses, during the nine months ended September 30, 2018 and 2017. These charges primarily include severance costs resulting from actions taken to reduce our cost structure, asset impairment charges related to product rationalization, site closures, and integration costs related to acquired businesses. For more information on these charges, see$35 million. See Note 6:5. Asset Impairment, Restructuring and Other Special Charges to the condensed consolidated financial statements for further information.
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, | |
| | | Three Months Ended March 31, | |
(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
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 | % |
(1) Represents revenue from business activities we have either exited or made a strategic decision to exit.
Total revenue
Three months ended September 30, 2018 vs. three months ended September 30, 2017
Total revenue increased $64.0 million or 9%category for the three months ended September 30, 2018March 31, 2024 and 2023, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | 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.
In summary, the total revenue increase was due primarily to:
an3% increase in revenuepricing. The primary driver of $49.4 million or 35% from CA Disease Prevention products, excludingthe lower volumes was the impact of foreign exchange rates;
an increasethe ERP system integration commercial blackout periods in revenue of $17.5 million or 28% from CA Therapeutics products, excluding the impact of foreign exchange rates;
an increase in revenue of $2.8 million or 2% from FA Future Protein & Health products, excluding the impact foreign exchange rates; and
an increase in revenue of $26.3 million or 10% from FA Ruminants & Swine products, excluding the impact of foreign exchange rates;
partially offset by:
a decrease in revenue of $11.5 million due to the negative impact of foreign exchange rates; and
a decrease in revenue of $20.5 million from Strategic Exits, excluding the impact of foreign exchange rates.
The detailed change in revenue by product category was as follows:
CA Disease Prevention revenue increased by $48.2 million or 34% primarily driven by increases in volume and price, partially offset by an unfavorable impact from foreign exchange rates. Growth was primarily driven by higher realized price on Trifexis and a favorable comparison to prior year, relatedwhich we believe shifted an estimated $65 million to an anticipated stock out$80 million in third quarter of 2017 which shifted sales of Trifexis topet health revenue from the second quarter of 2017. Growth was also driven by the continued uptake of Interceptor Plus and Credelio, as well as increased sales of certain vaccines from new customer agreements.
CA Therapeutics revenue increased by $17.0 million or 27% due to volume and increased price, partially offset by the unfavorable impact of foreign exchange rates. Growth was primarily due2023 to the re-introductionfirst quarter of Galliprant 100mg for dogs,2023. This impact to volumes, in addition to the slow start to the U.S. parasiticide season and continued uptake ofcompetitive pressure on certain products in the product and realized price increases across the category.
FA Future Protein & Health revenue decreased by $1.7 million or 1% due to unfavorable impact from foreign exchange rates and a decline in volume,U.S. veterinary channel, were partially offset by increased price. Volume growth in aqua, vaccines and nutritional health products was offset by international purchasing patterns in the current year for poultry which shiftedvaccine sales from the third quarter of 2018 to the first half of 2018.
FA Ruminants & Swine revenue increased by $21.1 million or 8% due primarily to increases in volume partially offset by the unfavorable impact of foreign exchange rates. Growth was driven mainly by U.S. and international purchasing patterns in both the current and prior year which resulted in higher sales in third quarter of 2018.
Strategic Exits revenue decreased by $20.6 million or 42% due primarily to reduced revenue from a temporary contract manufacturing arrangement as part of the acquisition of the BI Vetmedica U.S. vaccines portfolio (BIVIVP), as well as the termination of two legacy U.S. distribution agreements acquired as part of our Novartis Animal Health acquisition.
Nine months ended September 30, 2018 vs. nine months ended September 30, 2017
Total revenue increased $132.8 million or 6% for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, reflecting a 1% favorable foreign exchange rate impact, a 3% increase due to higher realized priceseasing of supply constraints, improved demand for retail parasiticide products in certain European markets, including Spain, and a 2% increase due to higher volumes.
In summary, the total revenue increase was due primarily to:
an increase in revenue of $22.9 million due to the positive impact of foreign exchange rates;
an increase in revenue of $79.6 million or 15% from CA Disease Prevention products, excluding the impact foreign exchange rates;
an increase in revenue of $24.3 million or 13% from CA Therapeutics products, excluding the impact of foreign exchange rates;an initial stocking of certain legacy Bayer Animal Health products into the U.S. distribution channel.
an increase inFarm animal revenue of $39.4decreased $17 million, or 9% from FA Future Protein & Health products, excluding the impact of foreign exchange rates;
an increase in revenue of $17.7 million or 2% from FA Ruminants & Swine, excluding the
impact of foreign exchange rates; and
partially offset by:
a decrease in revenue of $51.1 million from Strategic Exits, excluding the impact of foreign exchange rates.
The detailed change in revenue by product category was as follows:
CA Disease Prevention revenue increased by $84.2 million or 16% due primarily to the continued uptake of Credelio and Interceptor Plus, as well as realized price increases primarily impacting Trifexis, Capstar and Comfortis, partially offset by competition in certain parasiticides, primarily impacting Trifexis and Comfortis.
CA Therapeutics revenue increased by $29.3 million or 16% due primarily to the continued uptake of Galliprant and Osurnia, as well as increased demand3%, for Atopica and Onsior, partially offset by a temporary supply shortage of Percorten V used for the treatment of canine Addison’s Disease.
FA Future Protein & Health revenue increased by $46.1 million or 10% due primarily to the launch of Imvixa and the growth in poultry animal-only antibiotics and AviPro.
FA Ruminants & Swine revenue increased by $23.8 million or 3% due primarily to growth in animal-only and shared-class antibiotics, offset by competition from generic ractopamine based products.
Strategic Exits revenue decreased by $50.6 million or 42% due to reduced revenue from a temporary contract manufacturing arrangement as part of the acquisition of BIVIVP, as well as the termination in the third quarter of 2017 of a legacy U.S. distribution agreement acquired as part of our Novartis Animal Health acquisition.
Costs and Expenses and Other
Cost of sales
Three months ended September 30, 2018 vs. three months ended September 30, 2017
Cost of sales decreased $6.4 million in the three months ended September 30, 2018 asMarch 31, 2024, compared to three months ended September 30, 2017 due primarilythe same period in 2023. The primary driver of the lower volumes was the impact of the ERP system integration commercial blackout periods in the prior year, which we believe shifted an estimated $25 million to $30 million of revenue from the second quarter of 2023 to the mixfirst quarter of products sold,2023. This impact to volumes, as well as market weakness impacting the results of the manufacturing productivity agenda and non-recurring costsswine business in 2017 associated with purchase accounting charges from the acquisition of BIVIVP related to the fair value adjustments of inventory acquired thatChina, was subsequently sold, partially offset by costs related to increased volumerevenue from new products, led by Experior, and strength in poultry sales globally.
Nine months ended September 30, 2018 vs. nine months ended September 30, 2017
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 September 30, 2018 vs. months ended September 30, 2017
R&D expenses decreased $3.0$21 million for the three months ended September 30, 2018March 31, 2024, and cost of sales as a percentage of revenue increased from 39% for the three months ended March 31, 2023, to 43% for the three months ended March 31, 2024. These increases were due to a combination of inflation, the impact of product mix, which was driven by the impact of the ERP system integration commercial blackout periods on higher margin products in the prior year, and planned reduced throughput at certain manufacturing sites in support of efforts to reduce inventory balances and improve cash conversion.
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
Nine months ended September 30, 2018 vs. nine months ended September 30, 2017
R&D expenses decreased $4.2 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due primarily to site closures and headcount reductions in early 2017.
Marketing, selling and administrative
Three months ended September 30, 2018 vs. three months ended September 30, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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.
Nine months ended September 30, 2018 vs. nine months ended September 30, 2017
Marketing, selling and administrative expenses decreased $32.9 million forsavings associated with the nine months ended September 30, 2018 as compared tocompletion of our ERP system integration in the nine months ended September 30, 2017 due primarily to productivity initiatives and reduced direct to consumer programs.second quarter of 2023.
Amortization of intangible assetsIntangible Assets
Three months ended September 30, 2018 vs. three months ended September 30, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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.
Nine months ended September 30, 2018 vs. nine months ended September 30, 2017Asset Impairment, Restructuring and Other Special Charges
Amortization of intangible assets decreased $13.7 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due primarily to the acceleration of amortization related to certain product exits in 2017. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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.
Three months ended September 30, 2018 vs. three months ended September 30, 2017Asset impairment, restructuring and other special charges decreased $11.3
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.
Nine months ended September 30, 2018 vs. nine months ended September 30, 2017Other Expense, Net
Asset impairment, restructuring and other special charges decreased $106.5 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 primarily due to a decrease in severance, integration and exit costs, partially offset by an increase in asset impairments and a gain on disposal of a site that was previously closed as part of the acquisition and integration of Novartis Animal Health in 2017. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(Dollars in millions) | | | | | | | | 2024 | | 2023 | | % Change |
Other expense, net | | | | | | | | $ | 9 | | | $ | 9 | | — | % |
Income taxOther expense,
Three months ended September 30, 2018 vs. three months ended September 30, 2017
Income tax expense increased $7.0 million net for the three months ended September 30, 2018 as compared toMarch 31, 2024 and 2023, primarily consisted of foreign exchange losses. During the three months ended September 30, 2017 primarily due toMarch 31, 2024, we also increased our accrual for the possible resolution or settlement with the SEC by $2.5 million, which was included within other expense, net.
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.
Ninethree months ended September 30, 2018 vs. nine months ended September 30, 2017
IncomeMarch 31, 2024, compared to income tax expense decreased $25.8of $5 million for the ninesame period in the prior year. The income tax benefit during the three months ended September 30, 2018 as comparedMarch 31, 2024, was primarily driven by the partial release of a valuation allowance attributable to the nine months ended September 30, 2017 primarily due toanticipated sale of our aqua business and a decrease in the U.S. valuation allowancebenefit related to the utilizationrecognition of prior years' net operating losses.certain state tax credits.
Liquidity and Capital
We historically participated in Lilly’s centralized treasury management system, including centralized cash pooling and overall financing arrangements. We have generated and expect to continue to generate positive cash flows from operations. In connection with the IPO, we entered into various long-term debt agreements as described below. Resources
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.
Our principalWe believe our primary sources of liquidity needs going forwardare sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, funding existing marketed and pipeline products, capital
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.
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
Our cash flow fromCash provided by operating activities increased by $180.7 million from $167.1was $2 million for the ninethree months ended September 30, 2017March 31, 2024, compared to $347.8cash used for operating activities of $145 million for the ninethree months ended September 30, 2018.March 31, 2023. The increase ischange in cash provided by (used for) operating activities was driven by a result of an increaseyear-over-year improvement in net income, which waschanges in operating assets and liabilities, partially offset by cash used to finance working capital. lower net income.
Investing activities
Our cash flow used inCash provided by investing activities decreased from $929.1was $37 million for the ninethree months ended September 30, 2017March 31, 2024, compared to $78.9cash used for investing activities of $55 million for the ninethree months ended September 30, 2018. Our cash used inMarch 31, 2023. Cash provided by investing activities forduring the ninethree months ended September 30, 2017 included $882.1March 31, 2024, was driven by the collection of a $66 million receivable related to our previous divestiture of our Shawnee and Speke locations (see Note 4. Acquisitions, Divestitures and Other Arrangements to the condensed consolidated financial statements for additional information). These proceeds were partially offset by net purchases of property and equipment and software and a deferred cash payment related to our prior year acquisition of NutriQuest. Cash used for investing activities during the three months ended March 31, 2023, primarily related to net purchases of property and equipment and software, $16 million paid for the acquisition of BIVIVP. This decrease was offset by a net increaseNutriQuest and $14 million for the purchase of $42.6 million in capital expenditures from 2017 to 2018.intangible assets.
Financing activities
OurCash used for financing activities was $27 million for the three months ended March 31, 2024, compared to cash provided by financing activities decreased from $843.5of $174 million for the ninethree months ended September 30, 2017 to $327.2 millionMarch 31, 2023. Cash used for financing activities during the ninethree months ended September 30, 2018. The cash flowsMarch 31, 2024, included $13 million in 2017 relate to net cashscheduled repayments of long-term borrowings. Cash provided by transactions with Lillyfinancing activities of $844.0$174 million compared to cash used in transactions with Lilly of $247.4 million in 2018, a reduction in financing of cash flows between periods of $1.1 billion. This was offset byduring the net cash provided from the financing transactions related to the Separation including thethree months ended March 31, 2023, primarily reflected proceeds from long-term debt and our IPO, which was onlyrevolving credit facility, partially offset by the consideration paid to Lilly in connection with the Separation. The remainderrepayment of the proceeds from the financing related to the Separation will be paid to Lilly in future periods and is reflected as restricted cash inindebtedness outstanding under our consolidated balance sheet.long-term borrowings.
Description of Indebtedness
During the three months ended September 30, 2018, we issued $2.0 billionFor a complete description of senior notes, entered into a $500.0 million three-year term loan,our existing debt and entered into five-year $750.0 million senior unsecured revolvingavailable credit facility. For more information,facilities as of March 31, 2024 and December 31, 2023, see Note 8:8. Debt within Item 8, “Financial Statements and Supplementary Data,” of Part II of our 2023 Form 10-K. New developments are discussed in our unaudited condensed consolidated and combined financial statements.Off Balance Sheet Arrangements
We have no off balance sheet arrangements that currently have a material effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenue or expenses, resultsNote 8. Debt of operations, liquidity, capital expenditures or capital resources.this Form 10-Q.
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.Contractual Obligations
See Contractual Obligations included in our IPO Prospectus. During the ninethree months ended September 30, 2018, we issued $2.0 billionMarch 31, 2024.
ItemITEM 3. Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKForeign 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.
We also face currency exposure that arises from translating the results of our global operationschanged their functional currencies to the U.S. dollar at exchange ratesdollar. During the three months ended March 31, 2024, revenue in Argentina and Turkey each represented less than 1% of our consolidated revenue, and assets held in Argentina and Turkey as of March 31, 2024, each represented less than 1% of our consolidated assets. Further, in February 2024 our Board of Directors authorized a restructuring plan that, have fluctuated fromamong other strategic decisions, has resulted in a change in how we operate in and sell into the beginning of the period. We may enter intoArgentina market, which has reduced our foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates in future periods, but our historical results do not reflect the impact of any such derivatives related to our exposure to foreign currency impacts on translation.
We estimate that a hypothetical 10% adverse movement in all foreign currency exchange rates relatedwith respect to the translationArgentine peso. In spite of this, and while the application of hyperinflationary accounting for our subsidiaries in Argentina and Turkey did not have a material impact on our business during the three months ended March 31, 2024, we may in the future incur further currency devaluations, which could have a material adverse impact on our results of our foreign operations would decrease our net income by approximately $12.0 million for the nine months ended September 30, 2018.operations.
Interest Risk
We are exposed toAt March 31, 2024, we held interest rate risk onswap agreements with a notional value of $3,800 million that had the long-termeconomic effect of modifying this amount of our variable-rate debt we entered into in connection with our IPO. Prior to our IPO, we did not have anyfixed-rate. When including variable-rate converted to fixed-rate through the use of interest rate exposure. We have cash flow risk associated with our $500.0 millionswaps, as of borrowings that pay interest based on variable rates. We actively monitor our exposure and will enter into financial instrument to fix the interest rate based on our assessment of the risk.
Recently Issued Accounting Pronouncements
For discussionMarch 31, 2024, approximately 78% of our new accounting standards, see Note 4: Implementation of New Financial Accounting Pronouncements to our unaudited condensed consolidated and combined financial statements.long-term indebtedness bore interest at a fixed rate.
Item
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.
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. (none)
ItemITEM 1A. Risk FactorsRISK FACTORSOur 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
ITEM 2. Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Use of Proceeds from Registered Securities(none)
On September 24, 2018, we completed our IPO resulting in
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.
As contemplated by the IPO Prospectus, we have paid, or will pay, to Lilly approximately $4.2 billion in connection with the Separation, which includes the net proceeds from the IPO. A portion
There has been no material change in the planned use of the IPO proceeds as described in the IPO Prospectus.
Item 3. Defaults Upon Senior Securities
(none)
Item 4. Mine Safety Disclosures
(none)
Item 5. Other Information
(none)
ItemITEM 6. ExhibitsEXHIBITSThe 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.
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Exhibit Number | | Description |
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| Exhibit Number | Description |
| 3.1 | |
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| | AmendedAsset Purchase Agreement by and Restated Articles of Incorporation ofbetween Elanco Animal Health Incorporated effective September 18, 2018as Seller and Intervet International B.V. as Buyer dated as of February 5, 2024 (incorporated by reference to Exhibit 3.12.1 of the Current Report on Form 8-K filed with the SEC on September 26, 2018)February 5, 2024)**. |
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| 3.2 | |
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| | AmendedCooperation Agreement, dated as of March 29, 2024, by and Restated Bylaws ofamong Elanco Animal Health Incorporated, effective September 19, 2018 (incorporated by reference to Exhibit 3.2 ofAncora Catalyst Institutional, LP and the Current Report on Form 8-K filed with the SEC on September 26, 2018). |
4.1 | Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.1 of Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on September 6, 2018). |
4.2 | Indenture, dated August 28, 2018, between Elanco Animal Health Incorporatedother person and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.2 of Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on September 6, 2018). |
4.3 | First Supplemental Indenture, dated August 28, 2018, between Elanco Animal Health Incorporated and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.3 of Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on September 6, 2018). |
10.1 | Registration Rights Agreement, dated August 28, 2018, between Elanco Animal Health Incorporated and Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, as representatives of the several initial purchasers (incorporated by reference to Exhibit 4.4 of Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on September 6, 2018). |
10.2 | Master Separation Agreement, dated September 24, 2018, between Eli Lilly and Company and Elanco Animal Health Incorporatedentities listed thereto (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on September 26, 2018)April 1, 2024). |
10.3 | Transitional Services Agreement, dated September 24, 2018, between Eli Lilly and Company and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on September 26, 2018). |
10.4 | Tax Matters Agreement, dated September 24, 2018, between Eli Lilly and Company and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the SEC on September 26, 2018). |
10.5 | Employee Matters Agreement, dated September 24, 2018, between Eli Lilly and Company and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed with the SEC on September 26, 2018). |
10.6 | Toll Manufacturing and Supply Agreement, dated September 24, 2018, between Eli Lilly Export S.A. and Elanco UK AH Limited (incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K filed with the SEC on September 26, 2018). |
10.7 | Registration Rights Agreement, dated September 24, 2018, between Eli Lilly and Company and Elanco Animal Health Incorporated (incorporated by reference to Exhibit 10.6 of the Current Report on Form 8-K filed with the SEC on September 26, 2018). |
10.8 | Transitional Trademark License Agreement, dated September 24, 2018, among Eli Lilly and Company, Elanco Animal Health Incorporated and Elanco US Inc. (incorporated by reference to Exhibit 10.7 of the Current Report on Form 8-K filed with the SEC on September 26, 2018). |
10.9 | Intellectual Property and Technology License Agreement, dated September 24, 2018, among Eli Lilly and Company, Elanco Animal Health Incorporated and Elanco US Inc. (incorporated by reference to Exhibit 10.8 of the Current Report on Form 8-K filed with the SEC on September 26, 2018). |
10.10 | Revolving Loan Credit Agreement, dated as of September 5, 2018, among Elanco Animal Health Incorporated, as borrower, JPMorgan Chase Bank, N.A., as administrative agent and the other Lenders party thereto (incorporated by reference to Exhibit 10.24 of Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on September 6, 2018). |
10.11 | Term Loan Credit Agreement, dated as of September 5, 2018, among Elanco Animal Health Incorporated, as borrower, JPMorgan Chase Bank, N.A., as administrative agent and the other Lenders party thereto (incorporated by reference to Exhibit 10.25 of Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-226536) filed with the SEC on September 6, 2018). |
10.12 | 2018 Elanco Stock Plan (incorporated by reference to Exhibit 4.3 of Registration Statement on Form S-8 (Registration No. 333-227447) filed with the SEC on September 20, 2018). |
10.13 | Elanco Animal Health Incorporated Directors’ Deferral Plan (incorporated by reference to Exhibit 4.4 of Registration Statement on Form S-8 (Registration No. 333-227447) filed with the SEC on September 20, 2018). |
| | 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). |
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| | 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). |
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| | 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). |
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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.
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. | | | | | | | | |
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| | ELANCO ANIMAL HEALTH INCORPORATED |
| | (Registrant) |
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Date: | May 8, 2024 | /s/ Jeffrey N. Simmons |
| Date: | November 8, 2018/s/ JeffJeffrey N. Simmons |
| | Jeff Simmons |
| | President and Chief Executive Officer |
| Date: | November 8, 2018/s/ James Meer(Principal Executive Officer) |
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Date: | May 8, 2024 | James Meer/s/ Todd S. Young |
| | Todd S. Young |
| | Executive Vice President, Chief AccountingFinancial Officer |
| | (Principal Financial Officer) |