- Third Quarter 2023 Financial Results
- Revenue of $1,068 million, representing 4% reported growth
or 5% excluding the impact of foreign exchange rates
- Reported Net Loss of $1,096 million, inclusive of a non-cash
goodwill impairment charge of $1,042 million primarily related to
increased long-term treasury rates
- Adjusted EBITDA of $214 million, or 20.0% of
Revenue
- Reported EPS of $(2.22) inclusive of a $(2.10) per share
impact of goodwill impairment charge, Adjusted EPS of
$0.18
- Net leverage ratio of 5.7x Adjusted EBITDA
- Updating full year 2023 guidance to reflect third quarter
outperformance offset by expected unfavorable impact of foreign
exchange rates:
- Revenue of $4,360 to $4,400 million, constant currency
growth improves to flat to 1%
- Reported Net Loss of $1,174 to $1,204 million, Reported
diluted EPS of $(2.43) to $(2.37)
- Adjusted EPS of $0.88 to $0.94, Adjusted EBITDA of $965 to
$1,000 million
- Net leverage ratio expected at 5.5x to 5.8x Adjusted EBITDA
at year-end 2023
Elanco Animal Health Incorporated (NYSE: ELAN) today reported
financial results for the third quarter of 2023, provided guidance
for the fourth quarter of 2023, and updated guidance for the full
year 2023.
“Elanco delivered a strong third quarter across both pet health
and farm animal, with revenue, adjusted EBITDA, and adjusted EPS
growth. Constant currency revenue growth of 5 percent was driven by
accelerating contribution from innovation, stabilizing core
volumes, price growth and improved market conditions in Europe. In
constant currency, Pet Health grew 6% and Farm Animal grew 4%,
enabled by our differentiated global omnichannel execution,
strategic leverage of our diverse portfolio, and our enhanced
capabilities and leadership,” said Jeff Simmons, Elanco President
and CEO. “Our innovation pipeline remains on track, with potential
blockbuster products Credelio Quattro, Bovaer and our
differentiated JAK inhibitor for canine dermatology, which upon
approval will be known as Zenrelia, all on a path toward U.S.
approval in the first half of 2024. We are also investing in
important commercial capabilities and expanded share of voice to
drive our current portfolio and expected launches in 2024.”
“For the full year, we are tightening our guidance ranges to
reflect third quarter outperformance and the continued
strengthening of the U.S. dollar. We are increasing the midpoint of
our guidance range for constant currency revenue growth, and for
adjusted EBITDA and adjusted EPS despite increased headwinds from
foreign exchange rates. We expect constant currency revenue growth
to continue in the fourth quarter and in 2024.”
Financial Highlights
Third Quarter Results
(dollars in millions, except per share
amounts)
2023
2022
Change (%)
CC Change(1) (%)
Pet Health
$
495
$
469
6
%
6
%
Farm Animal
$
561
$
545
3
%
4
%
Cattle
$
242
$
227
7
%
7
%
Poultry
$
184
$
176
5
%
7
%
Swine
$
93
$
95
(2
)%
(2
)%
Aqua
$
42
$
47
(11
)%
(13
)%
Contract Manufacturing
$
12
$
12
0
%
(2
)%
Total Revenue
$
1,068
$
1,026
4
%
5
%
Reported Net Loss
$
(1,096
)
$
(65
)
NM
Adjusted EBITDA
$
214
$
203
5
%
Reported EPS
$
(2.22
)
$
(0.13
)
NM
Adjusted EPS
$
0.18
$
0.17
6
%
(1) CC = Constant Currency, representing
the growth rate excluding the impact of foreign exchange rates.
Numbers may not add due to rounding.
In the third quarter of 2023, revenue was $1,068 million, an
increase of 4% on a reported basis, or an increase of 5% excluding
the unfavorable impact from foreign exchange rates, compared to the
third quarter of 2022.
Pet Health revenue was $495 million, a 6% increase on
both a reported and constant currency basis, with a 4% increase
from price, compared to the third quarter of 2022. The year over
year constant currency growth in the third quarter was primarily
driven by price, improved market conditions in Europe impacting
parasiticides, and improved supply for vaccines in the U.S.,
partially offset by continued competitive pressure on certain
products in the U.S. veterinary channel. In the third quarter of
2023, the Advantage® Family of products and Seresto® contributed
$103 million and $41 million, respectively.
Farm Animal revenue was $561 million, a 3% increase on a
reported basis or an increase of 4% excluding the unfavorable
impact from foreign exchange rates, with a 3% increase from price
compared to the third quarter of 2022. The year over year constant
currency growth in the third quarter was primarily driven by
revenue from new products, led by Experior, price, and strength in
European poultry, partially offset by regulatory changes impacting
cattle implant products and timing of poultry rotations in the
U.S.
Gross profit was $581 million, or 54.4% of revenue on a reported
basis, and $582 million, or 54.5% of revenue on an adjusted basis,
in the third quarter of 2023. Gross profit as a percent of revenue
increased 40 and 50 basis points on a reported and adjusted basis,
respectively, primarily driven by improved price and productivity,
partially offset by inflation, inventory losses, and planned
reduced throughput at certain manufacturing sites in support of
efforts to reduce balance sheet inventory and improve cash
conversion.
Total operating expense was $399 million for the third quarter
of 2023. Marketing, selling and administrative expenses increased
5% to $313 million, primarily driven by higher employee related
expenses and increased promotional spend, primarily supporting the
U.S. Pet Health business, partially offset by the favorable impact
from foreign exchange rates. Research and development expenses
increased 10% to $86 million, primarily driven by higher
employee-related expenses, project costs and the unfavorable impact
of Euro strength.
Asset impairment, restructuring and other special charges were
$16 million in the third quarter of 2023 compared to $26 million in
the third quarter of 2022. Charges recorded in both the third
quarter of 2022 and the third quarter of 2023 are primarily related
to costs associated with the implementation of new systems,
programs and processes due to the integration of Bayer Animal
Health, with charges decreasing year over year as the system
implementation winds down after go-live in April of 2023.
Since the significant change in our market value relative to our
book value during the third quarter of 2022, we have closely
monitored our goodwill for indicators of impairment. During the
third quarter of 2023, we determined that the sharp rise in
long-term treasury rates in the U.S. was such an indicator, and as
a result, we performed a goodwill impairment test. Given an
increased discount rate, which was primarily driven by the increase
in long-term treasury rates, we determined our goodwill was
impaired, recording a non-cash goodwill impairment charge of $1,042
million as of September 30, 2023.
Reported and adjusted net interest expense was $72 million in
the third quarter of 2023, an increase of $12 million on a reported
basis and $14 million on an adjusted basis, compared to the third
quarter of 2022. The increase was driven by the impact of rate
increases.
Other expense was $9 million in the third quarter of 2023 on a
reported basis, compared to $8 million in the third quarter of
2022. Other expense recorded in the third quarter of 2023 primarily
consisted of the impact of hyperinflationary accounting in Turkey
and Argentina, partially offset by milestone income related to a
license agreement.
The reported effective tax rate was 0.2% in the third quarter of
2023, compared to (47.7)% in the third quarter of 2022. The
reported effective tax rate in the third quarter of 2023 was
primarily driven by the recognition of a non-cash goodwill
impairment charge which was nondeductible in most of the impacted
jurisdictions. The adjusted effective tax rate decreased to 16.0%
in the third quarter of 2023 compared to 27.7% in the third quarter
of 2022, primarily driven by the U.S. taxation of foreign
operations and the jurisdictional location of Elanco profits.
Net loss for the third quarter of 2023 was $1,096 million and
$2.22 per diluted share on a reported basis, compared with net loss
of $65 million and $0.13 per diluted share for the same period in
2022. On an adjusted basis, net income for the third quarter of
2023 was $90 million, or $0.18 per diluted share, a 6% increase
compared with the same period in 2022. Adjusted EBITDA was $214
million in the third quarter of 2023, a 5% increase compared to the
third quarter of 2022. Adjusted EBITDA as a percent of revenue was
20.0% compared with 19.8% for the third quarter of 2022, an
increase of 20 basis points.
Working Capital and Balance
Sheet
Cash provided by operations was $198 million in the third
quarter of 2023 compared to cash provided by operations of $189
million in the third quarter of 2022. The increase in cash from
operations in the third quarter of 2023 reflects improved working
capital, primarily related to inventory performance within the
quarter, partially offset by decreased cash from interest rate swap
settlements compared to the third quarter of 2022.
As of September 30, 2023, Elanco’s net leverage ratio was 5.7x
adjusted EBITDA, compared to 5.9x as of June 30, 2023.
Select Business Highlights Since the
Last Earnings Call
- Completed U.S Food and Drug Administration (FDA) submissions
for Credelio Quattro™, a broad spectrum parasiticide product for
dogs, and Bovaer®, a feed additive to reduce methane emissions for
Dairy cows.
- Completed submissions in Canada and Japan for Zenrelia™, a JAK
inhibitor for canine dermatology.
- Received approval for Elura™ for stimulation of appetite and
weight gain in cats in the EU and Credelio™ Cat for treatment and
prevention of fleas and ticks in China, as well as claim expansions
to include demodex for Credelio and Credelio Plus™, in Australia
and Japan.
- Launched Varenzin™-CA1, the first-of-its-kind oral treatment
for anemia in cats with chronic kidney disease after receiving FDA
conditional approval.
- Rumensin™ received first accepted protocol aimed at reducing
greenhouse gas emissions with verified carbon credits available for
sale on the Athian marketplace.
- Announced the Board of Directors has commenced a process to
amend Elanco’s corporate governing documents, expecting to seek
shareholder approval for amendments to the Articles of
Incorporation that will commence a process to declassify the Board,
allow shareholders to amend the Company’s bylaws, and allow
shareholders to call special meetings.
Financial Guidance
Elanco is updating financial guidance for the full year 2023,
summarized in the following table:
2023 Full Year
(dollars in millions, except per share
amounts)
August
Guidance
November
Guidance
Revenue
$4,350
to
$4,410
$4,360
to
$4,400
Reported Net Loss
$(170)
to
$(127)
$(1,204)
to
$(1,174)
Adjusted EBITDA
$950
to
$1,010
$965
to
$1,000
Reported EPS
$(0.34)
to
$(0.26)
$(2.43)
to
$(2.37)
Adjusted EPS
$0.80
to
$0.89
$0.88
to
$0.94
Elanco is adjusting its full year 2023 guidance for revenue,
adjusted EBITDA and adjusted earnings per share to reflect the
outperformance in the third quarter partially offset by the
expected negative impact of changes in foreign exchange rates. The
impact of foreign exchange on revenue is now expected to be a
headwind of approximately $70 million, a $40 million increase from
the August guidance. On a constant currency basis, the company
expects the year-over-year change in revenue to be flat to a 1%
increase.
Full year reported net loss guidance does not include any
further goodwill impairment beyond the third quarter charge. Future
changes in our discount rate, whether driven by increases in
long-term treasury rates or other factors, or future changes in
other significant assumptions or the use of alternative estimates
and assumptions, could have a significant impact on the estimated
fair value of our reporting unit, exposing us to further non-cash
goodwill impairment losses.
“Our return to revenue growth in the third quarter and related
growth in adjusted EBITDA and adjusted EPS was driven by
improvement across both pet heath and farm animal. The
outperformance in the third quarter allowed us to increase the
midpoint of our expectations for constant currency revenue growth,
adjusted EBITDA and adjusted EPS, while covering the expected
negative impact of the foreign exchange rates. Business execution
paired with company-wide efforts to manage balance sheet inventory
and improve working capital are leading to increased cash flow
generation,” said Todd Young, Elanco Executive vice president and
CFO.
Additionally, the company is providing guidance for the fourth
quarter of 2023, as summarized in the following table:
2023 Fourth Quarter
(dollars in millions, except per share
amounts)
Guidance
Revenue
$978
to
$1,018
Reported Net Loss
$(113)
to
$(83)
Adjusted EBITDA
$151
to
$186
Reported EPS
$(0.23)
to
$(0.17)
Adjusted EPS
$0.07
to
$0.13
Revenue guidance for the fourth quarter includes an estimated
headwind of approximately $10 million from the unfavorable impact
of foreign exchange rates compared to the prior year. On a constant
currency basis, the company expects revenue growth of 1% to 4%.
The financial guidance reflects interest rates and foreign
exchange rates consistent with those as of the beginning of
November.
Further details on guidance, including GAAP reported to non-GAAP
adjusted reconciliations, are included in the financial tables of
this press release and will be discussed on the company's
conference call this morning.
WEBCAST & CONFERENCE CALL
DETAILS
Elanco will host a webcast and conference call at 8:00 a.m.
Eastern time today, during which company executives will review
third quarter financial and operational results, discuss fourth
quarter and full year 2023 financial guidance, and respond to
questions from analysts. Investors, analysts, members of the media
and the public may access the live webcast and accompanying slides
by visiting the Elanco website at https://investor.elanco.com and
selecting Events and Presentations. A replay of the webcast will be
archived and made available a few hours after the event on the
company's website, at
https://investor.elanco.com/investor/events-and-presentations.
ABOUT ELANCO
Elanco Animal Health Incorporated (NYSE: ELAN) is a global
leader in animal health dedicated to innovating and delivering
products and services to prevent and treat disease in farm animals
and pets, creating value for farmers, pet owners, veterinarians,
stakeholders and society as a whole. With nearly 70 years of animal
health heritage, we are committed to helping our customers improve
the health of animals in their care, while also making a meaningful
impact on our local and global communities. At Elanco, we are
driven by our vision of Food and Companionship Enriching Life and
our Elanco Healthy Purpose™ – all to advance the health of animals,
people, the planet and our enterprise. Learn more at
www.elanco.com.
Cautionary Statement Regarding
Forward-Looking Statements
This press release contains forward-looking statements within
the meaning of the federal securities laws, including, without
limitation, statements concerning product launches and revenue from
such products, our 2023 full year and fourth quarter guidance and
long-term expectations, our expectations regarding debt levels, and
expectations regarding our industry and our operations, performance
and financial condition, and including, in particular, statements
relating to our business, growth strategies, distribution
strategies, product development efforts and future expenses.
Forward-looking statements are based on our current expectations
and assumptions regarding our business, the economy and other
future conditions. Because forward-looking statements relate to the
future, by their nature, they are subject to inherent
uncertainties, risks and changes in circumstances that are
difficult to predict. As a result, our actual results may differ
materially from those contemplated by the forward-looking
statements. Important risk factors that could cause actual results
to differ materially from those in the forward-looking statements
include regional, national or global political, economic, business,
competitive, market and regulatory conditions, including but not
limited to the following:
- heightened competition, including from generics;
- the impact of disruptive innovations and advances in veterinary
medical practices, animal health technologies and alternatives to
animal-derived protein;
- changes in regulatory restrictions on the use of antibiotics in
farm animals;
- our ability to implement our business strategies or achieve
targeted cost efficiencies and gross margin improvements;
- consolidation of our customers and distributors;
- an outbreak of infectious disease carried by farm animals;
- demand, supply and operational challenges associated with the
effects of a human disease outbreak, epidemic, pandemic or other
widespread public health concern;
- the potential impact on our business and global economic
conditions resulting from regional conflicts;
- the success of our research and development (R&D) and
licensing efforts;
- misuse, off-label or counterfeiting use of our products;
- unanticipated safety, quality or efficacy concerns and the
impact of identified concerns associated with our products;
- fluctuations in our business results due to seasonality and
other factors;
- the impact of weather conditions, including those related to
climate change, and the availability of natural resources;
- risks related to the modification of foreign trade policy;
- risks related to currency exchange rate fluctuations;
- our dependence on the success of our top products;
- the impact of customer exposure to rising costs and reduced
customer income;
- the lack of availability or significant increases in the cost
of raw materials;
- the impact of increased or decreased sales into our
distribution channels resulting in fluctuations in our
revenues;
- risks related to the write-down of goodwill or identifiable
intangible assets;
- risks related to the evaluation of animals;
- manufacturing problems and capacity imbalances;
- the impact of litigation, regulatory investigations and other
legal matters, including the risk to our reputation and the risk
that our insurance policies may be insufficient to protect us from
the impact of such matters;
- actions by regulatory bodies, including as a result of their
interpretation of studies on product safety;
- risks related to tax expense or exposure;
- risks related to environmental, health and safety laws and
regulations;
- risks related to our presence in foreign markets;
- challenges to our intellectual property rights or our alleged
violation of rights of others;
- our dependence on sophisticated information technology and
infrastructure and the impact of breaches of our information
technology systems;
- risks related to the use of machine learning and artificial
intelligence by us and our competitors;
- the impact of increased regulation or decreased financial
support related to farm animals;
- adverse effects of labor disputes, strikes, work stoppages and
the loss of key personnel or highly skilled employees;
- risks related to underfunded pension plan liabilities;
- our ability to complete acquisitions and successfully integrate
the businesses we acquire, including Kindred Biosciences, Inc.
(KindredBio) and the animal health business of Bayer
Aktiengesellschaft (Bayer Animal Health);
- the effect of our substantial indebtedness on our business,
including restrictions in our debt agreements that limit our
operating flexibility, changes in our credit ratings that lead to
higher borrowing expenses and may restrict access to credit and
changes in interest rates that may adversely affect earnings and
cash flows;
- risks related to certain governance provisions in our
constituent documents; and
- any failure to maintain an effective system of disclosure
controls and internal control over financial reporting, including
arising from an identified material weakness.
For additional information about the factors that could cause
actual results to differ materially from forward-looking
statements, please see the company’s latest Form 10-K and Form
10-Qs filed with the Securities and Exchange Commission. Although
we have attempted to identify important risk factors, there may be
other risk factors not presently known to us or that we presently
believe are not material that could cause actual results and
developments to differ materially from those made in or suggested
by the forward-looking statements contained in this press release.
If any of these risks materialize, or if any of the above
assumptions underlying forward-looking statements prove incorrect,
actual results and developments may differ materially from those
made in or suggested by the forward-looking statements contained in
this press release. We caution you against relying on any
forward-looking statements, which should also be read in
conjunction with the other cautionary statements that are included
elsewhere in this press release. Any forward-looking statement made
by us in this press release speaks only as of the date thereof.
Factors or events that could cause our actual results to differ may
emerge from time to time, and it is not possible for us to predict
all of them. We undertake no obligation to publicly update or to
revise any forward-looking statement, whether as a result of new
information, future developments or otherwise, except as may be
required by law. Comparisons of results for current and any prior
periods are not intended to express any future trends or
indications of future performance, unless specifically expressed as
such, and should be viewed as historical data.
Use of Non-GAAP Financial
Measures:
We use non-GAAP financial measures, such as revenue excluding
the impact of foreign exchange rate effects, EBITDA, EBITDA margin,
adjusted EBITDA, adjusted EBITDA margin, adjusted net income
(loss), adjusted EPS, adjusted gross profit, adjusted gross margin
and net debt leverage to assess and analyze our operational results
and trends as explained in more detail in the reconciliation tables
later in this release.
We believe these non-GAAP financial measures are useful to
investors because they provide greater transparency regarding our
operating performance. Reconciliation of non-GAAP financial
measures and reported U.S. generally accepted accounting principles
(GAAP) financial measures are included in the tables accompanying
this press release and are posted on our website at www.elanco.com.
The primary material limitations associated with the use of such
non-GAAP measures as compared to GAAP results include the
following: (i) they may not be comparable to similarly titled
measures used by other companies, including those in our industry,
(ii) they exclude financial information and events, such as the
effects of an acquisition or amortization of intangible assets,
that some may consider important in evaluating our performance,
value or prospects for the future, (iii) they exclude items or
types of items that may continue to occur from period to period in
the future and (iv) they may not exclude all unusual or
non-recurring items, which could increase or decrease these
measures, which investors may consider to be unrelated to our
long-term operations. These non-GAAP measures are not, and should
not be viewed as, substitutes for GAAP reported measures. We
encourage investors to review our unaudited condensed consolidated
financial statements in their entirety and caution investors to use
GAAP measures as the primary means of evaluating our performance,
value and prospects for the future, and non-GAAP measures as
supplemental measures.
Availability of Certain Information
We use our website to disclose important company information to
investors, customers, employees and others interested in Elanco. We
encourage investors to consult our website regularly for important
information about Elanco, including an Investor Overview
presentation containing a general overview of the business, which
can be found in the Events and Presentations page of the
website.
Elanco Animal Health
Incorporated
Unaudited Condensed
Consolidated Statements of Operations
(Dollars and shares in
millions, except per share data)
Three Months Ended September
30,
Nine Months Ended September
30,
2023
2022
2023
2022
Revenue
$
1,068
$
1,026
$
3,382
$
3,426
Costs, expenses, and other:
Cost of sales
487
472
1,415
1,465
Research and development
86
78
248
241
Marketing, selling, and administrative
313
298
993
963
Amortization of intangible assets
140
128
410
398
Asset impairment, restructuring and other
special charges
16
26
91
152
Goodwill impairment
1,042
—
1,042
—
Interest expense, net of capitalized
interest
72
60
210
179
Other expense, net
9
8
41
11
(Loss) income before income taxes
$
(1,097
)
$
(44
)
$
(1,068
)
$
17
Income tax (benefit) expense
(1
)
21
22
41
Net loss
$
(1,096
)
$
(65
)
$
(1,090
)
$
(24
)
Loss per share:
Basic
$
(2.22
)
$
(0.13
)
$
(2.21
)
$
(0.05
)
Diluted
$
(2.22
)
$
(0.13
)
$
(2.21
)
$
(0.05
)
Weighted average shares outstanding:
Basic
492.7
488.4
492.1
488.3
Diluted
492.7
488.4
492.1
488.3
Elanco Animal Health Incorporated
Reconciliation of GAAP Reported to Selected Non-GAAP Adjusted
Information (Unaudited) (Dollars and shares in
millions, except per share data)
We define adjusted gross profit as total revenue less adjusted
cost of sales and adjusted gross margin as adjusted gross profit
divided by total revenue.
We define adjusted net income as net income (loss) excluding
amortization of intangible assets, purchase accounting adjustments
to inventory, integration costs of acquisitions, severance,
goodwill and other asset impairments, gain on sale of assets,
facility exit costs, tax valuation allowances and other specified
significant items, such as unusual or non-recurring items that are
unrelated to our long-term operations adjusted for income tax
expense associated with the excluded financial items.
We define adjusted EBITDA as net income (loss) adjusted for
interest expense (income), which includes debt extinguishment
losses, income tax expense (benefit), and depreciation and
amortization, further adjusted to exclude purchase accounting
adjustments to inventory, integration costs of acquisitions,
severance, goodwill and other asset impairments, gain on sale of
assets, facility exit costs and other specified significant items,
such as unusual or non-recurring items that are unrelated to our
long-term operations.
We define adjusted EPS as adjusted net income divided by the
number of weighted average shares outstanding for the periods ended
September 30, 2023 and 2022.
We define net debt as gross debt less cash and cash equivalents
on the balance sheet. We define gross debt as the sum of the
current portion of long-term debt and long-term debt excluding
unamortized debt issuance costs. We define the net leverage ratio
as gross debt less cash and cash equivalents divided by adjusted
EBITDA. This calculation does not include Term Loan B
covenant-related adjustments that reduce this leverage ratio.
The following is a reconciliation of GAAP Reported for the three
months ended September 30, 2023 and 2022 to Selected Non-GAAP
Adjusted information:
Three Months Ended September
30, 2023
Three Months Ended September
30, 2022
GAAP Reported
Adjusted Items (b)
Non- GAAP (a)
GAAP Reported
Adjusted Items (b)
Non- GAAP (a)
Cost of sales (1)
$
487
$
1
$
486
$
472
$
—
$
472
Amortization of intangible assets
140
140
—
128
128
—
Asset impairment, restructuring and other
special charges (2)
16
16
—
26
26
—
Goodwill impairment
1,042
1,042
—
—
—
—
Interest expense, net of capitalized
interest (3)
72
—
72
60
2
58
Other expense, net (4)
9
6
3
8
—
8
(Loss) income before taxes
(1,097
)
1,205
108
(44
)
156
112
Income tax (benefit) expense (5)
(1
)
(19
)
18
21
(10
)
31
Net (loss) income
$
(1,096
)
$
1,186
$
90
$
(65
)
$
146
$
81
(Loss) earnings per share:
basic
$
(2.22
)
$
2.40
$
0.18
$
(0.13
)
$
0.30
$
0.17
diluted
$
(2.22
)
$
2.40
$
0.18
$
(0.13
)
$
0.30
$
0.17
Adjusted weighted average shares
outstanding:
basic
492.7
492.7
492.7
488.4
488.4
488.4
diluted (6)
492.7
494.4
494.4
488.4
492.0
492.0
Numbers may not add due to rounding. The table above
reflects only line items with non-GAAP adjustments.
(a)
The company uses non-GAAP financial measures that differ from
financial statements reported in conformity with GAAP. The company
believes these non-GAAP measures provide useful information to
investors. Among other things, they may help investors evaluate the
company’s ongoing operations. They can also assist in making
meaningful period-over-period comparisons and in identifying
operating trends that would otherwise be masked or distorted by the
items subject to the adjustments. Management uses these non-GAAP
measures internally to evaluate the performance of the business,
including to allocate resources. Investors should consider these
non-GAAP measures in addition to, not as a substitute for or
superior to, measures of financial performance prepared in
accordance with GAAP.
(b)
Adjustments to certain GAAP reported measures for the three months
ended September 30, 2023 and 2022 include the following:
(1)
Adjustments of $1 million for the three
months ended September 30, 2023, related to amortization of an
inventory fair value adjustment recorded from the acquisition of
certain assets of NutriQuest Nutricao Animal Ltda (NutriQuest
Brazil).
(2)
Adjustments of $16 million for the three
months ended September 30, 2023 related to charges associated with
integration efforts and external costs related to the acquisition
of Bayer Animal Health ($11 million) and the write-down of certain
indefinite-lived intangible assets primarily due to increases in
discount rates ($5 million). Adjustments of $26 million for the
three months ended September 30, 2022, primarily related to charges
associated with integration efforts and external costs related to
the acquisitions of Bayer Animal Health and KindredBio.
(3)
Adjustments of $2 million for the three
months ended September 30, 2022, related to debt extinguishment
losses recorded in connection with the early repayment of our Term
Loan B.
(4)
Adjustments of $6 million for the three
months ended September 30, 2023 primarily related to the impact of
hyperinflationary accounting in Turkey ($1 million) and increases
in contingent consideration payable to NutriQuest, LLC (NutriQuest)
($4 million).
(5)
Adjustments of $19 million for the three
months ended September 30, 2023 represent the income tax expense
associated with the adjusted items discussed above, partially
offset by an increase in the valuation allowance recorded against
our deferred tax assets during the period ($2 million). Adjustments
of $10 million for the three months ended September 30, 2022,
represent the income tax expense associated with the adjusted items
discussed above.
(6)
During the three months ended September
30, 2023 and 2022, we reported a GAAP net loss and thus potential
dilutive common shares were not assumed to have been issued since
their effect was anti-dilutive. During the same periods, we
reported non-GAAP net income. As a result, potential dilutive
common shares would not have had an anti-dilutive effect, and
diluted weighted average shares outstanding for purposes of
calculating adjusted EPS include 1.7 million and 3.6 million,
respectively, of common stock equivalents.
Three Months Ended September
30,
2023
2022
As reported diluted EPS
$
(2.22
)
$
(0.13
)
Amortization of intangible assets
0.29
0.26
Asset impairment, restructuring and other
special charges
0.03
0.05
Goodwill impairment
2.11
—
Other (income) expense, net
0.01
—
Subtotal
2.44
0.31
Tax impact of adjustments (1)
(0.04
)
(0.01
)
Total adjustments to diluted EPS
$
2.40
$
0.30
Adjusted diluted EPS (2)
$
0.18
$
0.17
Numbers may not add due to rounding.
(1) 2023 includes a favorable adjustment
relating to the increase in the valuation allowance recorded
against our deferred tax assets (impact of $0.01 per share) during
the three months ended September 30, 2023.
(2) Adjusted diluted EPS is calculated as
the sum of as reported diluted EPS and total adjustments to diluted
EPS.
The following is a reconciliation of GAAP Reported for the nine
months ended September 30, 2023 and 2022 to Selected Non-GAAP
Adjusted information:
Nine Months Ended September
30, 2023
Nine Months Ended September
30, 2022
GAAP Reported
Adjusted Items (b)
Non- GAAP (a)
GAAP Reported
Adjusted Items (b)
Non- GAAP (a)
Cost of sales (1)
$
1,415
$
2
$
1,413
$
1,465
$
—
$
1,465
Amortization of intangible assets
410
410
—
398
398
—
Asset impairment, restructuring and other
special charges (2)
91
91
—
152
152
—
Goodwill impairment
1,042
1,042
—
—
—
—
Interest expense, net of capitalized
interest (3)
210
—
210
179
19
160
Other expense, net (4)
41
25
16
11
(1
)
12
Income before taxes
(1,068
)
1,570
502
17
568
585
Income tax (benefit) expense (5)
22
(80
)
102
41
(95
)
136
Net income
$
(1,090
)
$
1,490
$
400
$
(24
)
$
473
$
449
Earnings per share:
basic
$
(2.21
)
$
3.03
$
0.81
$
(0.05
)
$
0.97
$
0.92
diluted
$
(2.21
)
$
3.02
$
0.81
$
(0.05
)
$
0.96
$
0.91
Adjusted weighted average shares
outstanding:
basic
492.1
492.1
492.1
488.3
488.3
488.3
diluted (6)
492.1
493.4
493.4
488.3
492.1
492.1
Numbers may not add due to rounding.
The table above reflects only line items
with non-GAAP adjustments.
(a)
The company uses non-GAAP financial measures that differ from
financial statements reported in conformity with GAAP. The company
believes these non-GAAP measures provide useful information to
investors. Among other things, they may help investors evaluate the
company’s ongoing operations. They can also assist in making
meaningful period-over-period comparisons and in identifying
operating trends that would otherwise be masked or distorted by the
items subject to the adjustments. Management uses these non-GAAP
measures internally to evaluate the performance of the business,
including to allocate resources. Investors should consider these
non-GAAP measures in addition to, not as a substitute for or
superior to, measures of financial performance prepared in
accordance with GAAP.
(b)
Adjustments to certain GAAP reported measures for the nine months
ended September 30, 2023 and 2022, include the following:
(1)
Adjustments of $2 million for the nine
months ended September 30, 2023, primarily related to amortization
of inventory fair value adjustments recorded from the acquisition
of certain assets of NutriQuest and NutriQuest Brazil.
(2)
Adjustments of $91 million for the nine
months ended September 30, 2023, related to charges associated with
integration efforts and external costs related to the acquisition
of Bayer Animal Health ($86 million) and the write-down of certain
indefinite-lived intangible assets primarily due to increases in
discount rates ($5 million). Adjustments of $152 million for the
nine months ended September 30, 2022, primarily related to charges
associated with integration efforts and external costs related to
the acquisitions of Bayer Animal Health and KindredBio ($77
million), a nonrecurring charge for acquired IPR&D with no
alternative future use that was recorded upon the initial
consolidation of a variable interest entity that is not a business
($59 million) and the finalization of a write-down charge
associated with the sale of our manufacturing site in Speke, U.K.
($22 million), partially offset by adjustments from the reversal of
severance accruals ($7 million).
(3)
Adjustments of $19 million for the nine
months ended September 30, 2022, primarily related to debt
extinguishment losses recorded in connection with the early payment
of our Term Loan B ($2 million) and the partial early
extinguishment of our 4.272% Senior Notes due 2023 ($17
million).
(4)
Adjustments of $25 million for the nine
months ended September 30, 2023, primarily related to a settlement
charge of $15 million related to the Seresto class action lawsuits,
the impact of hyperinflationary accounting in Turkey ($6 million)
and increases in contingent consideration payable to NutriQuest ($4
million). Adjustments of $1 million for the nine months ended
September 30, 2022, primarily related to a gain on the disposal of
the microbiome R&D platform.
(5)
Adjustments of $80 million for the nine
months ended September 30, 2023, represent the income tax expense
associated with the adjusted items discussed above, partially
offset by an increase in the valuation allowance recorded against
our deferred tax assets during the period ($14 million).
Adjustments of $95 million for the nine months ended September 30,
2022, represent the income tax expense associated with the adjusted
items discussed above and the reversal of tax expense that was
previously stranded in accumulated other comprehensive income due
to an interest rate swap settlement ($17 million), partially offset
by an increase in the valuation allowance recorded against our
deferred tax assets during the period ($10 million).
(6)
During the nine months ended September 30,
2023 and 2022, we reported a GAAP net loss and thus potential
dilutive common shares were not assumed to have been issued since
their effect was anti-dilutive. During the same periods, we
reported non-GAAP net income. As a result, potential dilutive
common shares would not have had an anti-dilutive effect, and
diluted weighted average shares outstanding for purposes of
calculating adjusted EPS include 1.3 million and 3.8 million,
respectively, of common stock equivalents.
Nine Months Ended September
30,
2023
2022
As reported diluted EPS
$
(2.21
)
$
(0.05
)
Cost of sales
0.01
—
Amortization of intangible assets
0.83
0.81
Asset impairment, restructuring and other
special charges
0.18
0.31
Goodwill impairment
2.11
—
Interest expense, net of capitalized
interest
—
0.04
Other expense, net
0.05
(0.01
)
Subtotal
3.18
1.15
Tax impact of adjustments (1)
(0.16
)
(0.19
)
Total Adjustments to EPS
$
3.02
$
0.96
Adjusted diluted EPS (2)
$
0.81
$
0.91
Numbers may not add due to rounding.
(1)
2023 includes a favorable adjustment
relating to the increase in the valuation allowance recorded
against our deferred tax assets (impact of $0.03 per share) during
the nine months ended September 30, 2023. 2022 includes unfavorable
adjustments relating to the reversal of tax expense that was
previously stranded in accumulated other comprehensive loss due to
an interest rate swap settlement (impact of $0.03 per share) and a
decrease in the valuation allowance recorded against our deferred
tax assets (impact of $0.02 per share) during the nine months ended
September 30, 2022.
(2)
Adjusted diluted EPS is calculated as the
sum of as reported diluted EPS and total adjustments to diluted
EPS.
For the periods presented, we have not made adjustments for all
items that may be considered unrelated to our long-term operations.
We believe adjusted EBITDA, when used in conjunction with our
results presented in accordance with U.S. GAAP and its
reconciliation to net income (loss), enhances investors'
understanding of our performance, valuation and prospects for the
future. We also believe adjusted EBITDA is a measure used in the
animal health industry by analysts as a valuable performance metric
for investors. The following is a reconciliation of U.S. GAAP net
income (loss) for the three and nine months ended September 30,
2023 and 2022 to EBITDA, adjusted EBITDA and adjusted EBITDA
Margin, which is adjusted EBITDA divided by total revenue, for the
respective periods:
Three Months Ended September
30,
Nine Months Ended September
30,
2023
2022
2023
2022
Reported net loss
$
(1,096
)
$
(65
)
$
(1,090
)
$
(24
)
Net interest expense
72
60
210
179
Income tax expense
(1
)
21
22
41
Depreciation and amortization
173
166
523
513
EBITDA
$
(852
)
$
182
$
(335
)
$
709
Non-GAAP adjustments:
Cost of sales
$
1
$
—
$
2
$
—
Asset impairment, restructuring and other
special charges
16
26
91
152
Goodwill impairment
1,042
—
1,042
—
Other expense (income), net
6
—
25
(1
)
Accelerated depreciation and amortization
(1)
—
(5
)
(10
)
(15
)
Adjusted EBITDA
$
214
$
203
$
814
$
845
Adjusted EBITDA margin
20.0
%
19.8
%
24.1
%
24.7
%
Numbers may not add due to rounding.
(1) Represents depreciation and
amortization of certain assets that was accelerated during the nine
months ended September 30, 2023 and the three and nine months ended
2022. These assets became fully depreciated and amortized during
the second quarter of 2023. This amount must be added back to
arrive at adjusted EBITDA because it is included in asset
impairment, restructuring and other special charges but it has
already been excluded from EBITDA in the "Depreciation and
amortization" row above.
The following is a reconciliation of gross debt to net debt as
of September 30, 2023:
Long-term debt
$
5,870
Current portion of long-term debt
39
Less: Unamortized debt issuance costs
(52
)
Total gross debt
5,961
Less: Cash and cash equivalents
369
Net Debt
$
5,592
The following is a reconciliation of the impact per share from
the goodwill impairment:
Goodwill impairment
$
1,042
Tax impact of goodwill impairment
(9
)
Impact of goodwill impairment, net of tax
impact
1,033
Per share impact of goodwill impairment,
net of tax impact (1)
$
(2.10
)
Numbers may not add due to rounding.
(1) Per share impact of goodwill
impairment, net of tax impact is calculated by goodwill impairment,
net of tax impact divided by diluted adjusted weighted average
shares outstanding for the three months ended September 30,
2023.
Elanco Animal Health
Incorporated
Guidance
Reconciliation of 2023 full year reported
EPS guidance to 2023 adjusted EPS guidance is as follows:
Full Year 2023
Guidance
Reported loss per share
$(2.43)
to
$(2.37)
Amortization of intangible assets
Approx. $1.11
Asset impairment, restructuring and other
special charges(1)
$0.19
to
$0.21
Goodwill impairment (2)
2.11
Other expense, net
Approx. $0.06
Subtotal
$3.47
to
$3.49
Tax impact of adjustments
$(0.18)
to
$(0.16)
Total adjustments to EPS
Approx. $3.31
Adjusted earnings per share(3)
$0.88
to
$0.94
Numbers may not add due to rounding.
(1) Asset impairment, restructuring and
other special charges adjustments primarily relate to integration
efforts of acquired businesses, including the animal health
business of Bayer.
(2) Current guidance does not assume any
further impairment beyond the third quarter charge.
(3) Adjusted EPS is calculated as the sum
of reported EPS and total adjustments to EPS.
Reconciliation of 2023 full year reported net loss to adjusted
EBITDA guidance is as follows:
$ millions
Full Year 2023
Guidance
Reported net loss
$(1,204)
to
$(1,174)
Net interest expense
Approx. $280
Income tax benefit
$27
to
$44
Depreciation and amortization
Approx. $695
EBITDA
$(199)
to
$(154)
Non-GAAP adjustments
Cost of sales
Approx. $2
Asset impairment, restructuring and other
special charges
Approx. $100
Goodwill impairment(1)
$1,042
Accelerated depreciation and
amortization
Approx. $(10)
Other income, net
Approx. $28
Adjusted EBITDA
$965
to
$1,000
Adjusted EBITDA margin
22.1%
to
22.7%
(1) Current guidance does not assume any
further impairment beyond the third quarter charge.
Reconciliation of 2023 fourth quarter reported EPS guidance to
2023 fourth quarter adjusted EPS guidance is as follows:
Fourth Quarter 2023
Guidance
Reported loss per share
$(0.23)
to
$(0.17)
Amortization of intangible assets
Approx. $0.28
Asset impairment, restructuring and other
special charges (1)
$0.01
to
$0.03
Goodwill impairment (2)
$0.00
Other expense, net
Approx. $0.01
Subtotal
$0.29
to
$0.32
Tax impact of adjustments
$(0.02)
to
$0.00
Total adjustments to EPS
$0.29
to
$0.30
Adjusted earnings per share (3)
$0.07
to
$0.13
Numbers may not add due to rounding.
(1) Asset impairment, restructuring and
other special charges adjustments are related to integration
efforts, including the acquisition of the animal health business of
Bayer.
(2) Current guidance does not assume any
further impairment beyond the third quarter charge.
(3) Adjusted EPS is calculated as the sum
of reported EPS and total adjustments to EPS.
Reconciliation of 2023 fourth quarter reported net loss to 2023
fourth quarter adjusted EBITDA guidance is as follows:
$ millions
Fourth Quarter 2023
Guidance
Reported net loss
$(113)
to
$(83)
Net interest expense
Approx. $70
Income tax provision
$5
to
$22
Depreciation and amortization
Approx. $170
EBITDA
$(134)
to
$(180)
Non-GAAP adjustments
Asset impairment, restructuring and other
special charges
Approx. $10
Goodwill impairment (1)
$0
Other expense, net
Approx. $3
Adjusted EBITDA
$151
to
$186
Adjusted EBITDA margin
15.4%
to
18.3%
(1) Current guidance does not assume any
further impairment beyond the third quarter charge.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231107863882/en/
Investor Contact: Kathryn Grissom (317) 273-9284 or
kathryn.grissom@elancoah.com Media Contact: Colleen Parr Dekker
(317) 989-7011 or colleen.dekker@elancoah.com
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