- Second Quarter 2023 Financial Results
- Revenue of $1,057 million, impacted by an estimated $90-$110
million of revenue related to customer purchasing shifted from the
second quarter into the first as a result of ERP system commercial
ordering blackout period for legacy Bayer Animal Health products in
April
- Reported Net Loss of $(97) million, Adjusted Net Income of
$90 million
- Adjusted EBITDA of $222 million or 21.0% of Revenue
- Reported EPS of $(0.20), Adjusted EPS of $0.18
- Net leverage ratio of 5.9x Adjusted EBITDA
- Raising full year 2023 guidance ranges to reflect current
assumptions:
- Revenue of $4,350 to $4,410 million
- Reported Net Loss of $127 to $170 million, Reported diluted
EPS of $(0.34) to $(0.26)
- Adjusted EPS of $0.80 to $0.89, Adjusted EBITDA of $950 to
$1,010 million
- Net leverage ratio expected at 5.5x to 5.8x Adjusted EBITDA
at year-end 2023
- Announced the Environmental Protection Agency (EPA)
completed its review of Seresto®, confirming continued
registration
Elanco Animal Health Incorporated (NYSE: ELAN) today reported
financial results for the second quarter of 2023, provided guidance
for the third quarter of 2023, and raised guidance for the full
year 2023.
“Elanco exceeded expectations for the second quarter and first
half of 2023, putting us on track to return to revenue growth in
the second half and raise full year guidance for revenue, adjusted
EBITDA and adjusted EPS. Excluding the estimated impact of the
successful ERP integration in the second quarter, we delivered
sequential improvement in topline performance driven by strong
performance in our U.S. Pet Health and International Farm Animal
businesses, and contributions from new products and price,” said
Jeff Simmons, Elanco president and CEO. “In addition to our
improving business performance, Elanco advanced key drivers of our
strategic Innovation, Pipeline, and Portfolio framework. I am very
pleased with the positive EPA resolution on Seresto and proud that
we have launched our Canine Parvovirus Monoclonal Antibody
treatment, providing veterinarians with a breakthrough lifesaving
product for infected dogs."
“We also made significant progress on our late-stage pipeline –
advancing strategic programs and enhancing our confidence in our
differentiation and launch revenue plans. By the end of August, we
expect the FDA will have all data necessary to approve our
differentiated JAK inhibitor for canine dermatology, our
differentiated broad spectrum parasiticide for dogs, and Bovaer, a
novel product for methane reduction in cattle, supporting our
timeline for a path to approval in the first half of 2024 for these
potential blockbusters. We are very encouraged by this progress and
are intently focused on our launch preparation strategies.”
Financial Highlights
Second Quarter Results
(dollars in millions, except per share
amounts)
2023
2022
Change (%)
CC Change(1) (%)
Pet Health
$518
$610
(15
)%
(14
)%
Farm Animal
$527
$553
(5
)%
(3
)%
Cattle
$210
$248
(15
)%
(13
)%
Poultry
$178
$174
2
%
5
%
Swine
$89
$89
0
%
1
%
Aqua
$50
$42
19
%
17
%
Contract Manufacturing
$12
$12
0
%
1
%
Total Revenue
$1,057
$1,175
(10
)%
(9
)%
Reported Net Loss
$(97
)
$(10
)
870
%
Adjusted EBITDA
$222
$304
(27
)%
Reported EPS
$(0.20
)
$(0.02
)
(900
)%
Adjusted EPS
$0.18
$0.39
(54
)%
(1) CC = Constant Currency, representing
the growth rate excluding the impact of foreign exchange rates.
Numbers may not add due to rounding.
In the second quarter of 2023, revenue was $1,057 million, a
decrease of 10% on a reported basis, or a decrease of 9% excluding
the unfavorable impact from foreign exchange rates, compared to the
second quarter of 2022. Revenue in the period was unfavorably
impacted by customer purchases of legacy Bayer Animal Health
products that the company believes were shifted from the second
quarter of 2023 into the first quarter as a result of the
communicated commercial shipping blackout period in April resulting
from the company’s ERP system integration (the “ERP Blackout”).
Aligned with estimates communicated with first quarter financial
results, the company estimates $90 million to $110 million of
revenue detriment to the second quarter, or an estimated 8 to 9
percentage point reduction in growth, as a result of the ERP
Blackout. The system integration was executed in line with the
company’s expectations. Beyond the negative impact of the ERP
Blackout in the second quarter, estimated year over year revenue
performance improved sequentially for the second straight
quarter.
The following table summarizes the estimated impact from the ERP
Blackout on Pet Health and Farm Animal revenue:
Second Quarter Results
(dollars in millions)
2023
CC Change(1) (%)
Estimated ERP Blackout Impact
(%)
Estimated ERP Blackout Impact
($)
Pet Health
$518
(14
)%
(11)% to (13)%
$(65) to $(80)
Farm Animal
$527
(3
)%
(5)%
$(25) to $(30)
Contract Manufacturing
$12
1
%
0%
0%
Total Revenue
$1,057
(9
)%
(8)% to (9)%
$(90) to $(110)
(1) CC = Constant Currency, representing
the growth rate excluding the impact of foreign exchange rates.
Numbers may not add due to rounding.
Pet Health revenue was $518 million, a 15% decrease on a
reported basis or a decrease of 14% excluding the unfavorable
impact from foreign exchange rates, with a 4% increase from price,
compared to the second quarter of 2022. Excluding the estimated ERP
Blackout impact, the year over year constant currency decline in
the second quarter was primarily driven by declines in demand for
retail parasiticide products in Spain and continued competitive
pressure on certain parasiticide products in the U.S., partially
offset by improved price, higher demand for pain products in the
U.S., revenue from new products and increased demand for U.S. OTC
products, including a shift of approximately $10 million related to
retailer promotion events that the company expected to occur in the
third quarter of 2023.
Farm Animal revenue was $527 million, a 5% decrease on a
reported basis or a decrease of 3% excluding the unfavorable impact
from foreign exchange rates, with a 3% increase from price compared
to the second quarter of 2022. Excluding the estimated ERP Blackout
impact, the year over year constant currency growth in the second
quarter was primarily driven by revenue from new products, led by
Experior, strength in European poultry, and aqua demand, partially
offset by supply constraints for cattle vaccines in the U.S. and a
weaker sheep season.
Contract Manufacturing revenue was $12 million, flat on a
reported basis or an increase of 1% excluding the unfavorable
impact from foreign exchange rates, driven primarily by disruptions
in supply from the company’s vaccine manufacturing facility.
Reported and adjusted gross profit was $623 million, or 58.9% of
revenue, in the second quarter of 2023. Reported and adjusted gross
profit as a percent of revenue increased 10 basis points, primarily
driven by improved price, the impact of favorable foreign exchange
rates across our European manufacturing footprint, partially offset
by the ERP Blackout and inflation. The company believes gross
profit as a percent of revenue was negatively impacted by an
estimated 150 to 180 basis points from the ERP Blackout, as the
average gross margin of those products is greater than Elanco's
overall average gross margin.
Total operating expense was $434 million for the second quarter
of 2023. Marketing, selling and administrative expenses increased
3% to $353 million, and research and development expenses decreased
1% to $81 million. The increase in total operating expenses was
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.
Asset impairment, restructuring and other special charges were
$35 million in the second quarter of 2023 compared to $86 million
in the second quarter of 2022. Charges recorded in the second
quarter of 2023 primarily related to costs associated with the
implementation of new systems, programs and processes due to the
integration of Bayer Animal Health. The ERP system go-live was
completed in April 2023, with continued performance optimization
expected over the next several quarters.
Reported and adjusted net interest expense was $74 million in
the second quarter of 2023, an increase of $7 million on a reported
basis and $24 million on an adjusted basis, compared to the second
quarter of 2022. The increase was driven by the impact of rate
increases on variable rate debt and rate increases on our Senior
Notes driven by credit downgrades. On a reported basis, the
increase was partially offset by a $17 million debt extinguishment
charge in the second quarter of 2022.
Other expense was $23 million in the second quarter of 2023,
compared with income of $6 million in the second quarter of 2022.
Other expense recorded in the second quarter of 2023 primarily
consisted of an accrual for a potential settlement related to the
Seresto class action lawsuits and to a lesser extent the impact of
hyperinflationary accounting in Turkey and Argentina. Other income
recorded in the second quarter of 2022 primarily related to a gain
on the disposal of the microbiome R&D platform.
The reported effective tax rate decreased to (23.0)% in the
second quarter of 2023 compared to 28.6% in the second quarter of
2022, primarily driven by the jurisdictional mix of Elanco earnings
and a benefit from a cash interest rate swap settlement in the
second quarter of 2022. The adjusted effective tax rate increased
to 19.9% in the second quarter of 2023 compared to 13.2% in the
second quarter of 2022, primarily driven by the jurisdictional mix
of Elanco earnings and certain favorable return to provision
adjustments that impacted the second quarter of 2022.
Net loss for the second quarter of 2023 was $97 million and
$0.20 per diluted share on a reported basis, compared with net loss
of $10 million and $0.02 per diluted share for the same period in
2022. On an adjusted basis, net income for the second quarter of
2023 was $90 million, or $0.18 per diluted share, a 54% decrease
compared with the same period in 2022. The company estimates
adjusted EPS in the second quarter includes a $0.11 to $0.14
detriment from the ERP Blackout, assuming a corporate consolidated
tax rate of 21.9%, aligned with the first quarter of 2023.
Adjusted EBITDA was $222 million in the second quarter of 2023,
a 27% decrease compared to the second quarter of 2022. Adjusted
EBITDA as a percent of revenue was 21.0% compared with 25.9% for
the second quarter of 2022, a decrease of 490 basis points. The
company estimates adjusted EBITDA in the second quarter includes a
$70 million to $90 million detriment from the ERP Blackout, or a
450 to 540 basis point detriment in adjusted EBITDA as a percent of
revenue.
The following table summarizes the estimated impact from the ERP
Blackout on adjusted EBITDA and adjusted EPS:
Second Quarter Results
(dollars in millions, except per share
amounts)
2023
Change (%)
Estimated ERP Blackout
Impact
Adjusted EBITDA
$222
(27
)%
$(70) to $(90)
Adjusted EPS
$0.18
(54
)%
$(0.11) to $(0.14)
Working Capital and Balance
Sheet
Cash provided by operations was $61 million in the second
quarter of 2023 compared to cash provided by operations of $312
million in the second quarter of 2022. The decrease in cash from
operations in the second quarter of 2023 reflects the impact of
interest rate swap settlements from the second quarter of 2022,
higher net loss, and increased net working capital, driven by
higher inventory.
As of June 30, 2023, Elanco’s net leverage ratio was 5.9x
adjusted EBITDA, compared to 5.4x as of March 31, 2023.
First Half Results
(dollars in millions, except per share
amounts)
2023
2022
Change (%)
CC Change(1) (%)
Pet Health
$1,193
$1,250
(5
)%
(3
)%
Farm Animal
$1,100
$1,122
(2
)%
1
%
Cattle
$458
$495
(7
)%
(5
)%
Poultry
$361
$353
2
%
6
%
Swine
$191
$189
1
%
5
%
Aqua
$90
$85
6
%
6
%
Contract Manufacturing
$21
$29
(28
)%
(23
)%
Total Revenue
$2,314
$2,401
(4
)%
(1
)%
Reported Net Income
$6
$41
(85
)%
Adjusted EBITDA
$601
$642
(6
)%
Reported EPS
$0.01
$0.08
(88
)%
Adjusted EPS
$0.63
$0.75
(16
)%
(1) CC = Constant Currency, representing
the growth rate excluding the impact of foreign exchange rates.
Numbers may not add due to rounding.
In the first half of 2023, revenue was $2,314 million, a
decrease of 4% on a reported basis, or a decrease of 1% excluding
the unfavorable impact from foreign exchange rates, compared to the
first half of 2022.
Pet Health revenue was $1,193 million, a 5% decrease on a
reported basis or a decrease of 3% excluding the unfavorable impact
from foreign exchange rates, with a 5% increase from price,
compared to the first half of 2022.
The Advantage® Family of products contributed $252 million, a
decrease of 4% excluding the unfavorable impact from foreign
exchange rates compared to the first half of 2022. Seresto revenue
was $247 million, a decrease of 7% excluding the unfavorable impact
from foreign exchange rates, compared to the first half of 2022.
Both products grew in the U.S., but declined outside the U.S.
compared to the first half of 2022.
Farm Animal revenue was $1,100 million, a 2% decrease on a
reported basis or a 1% increase excluding the unfavorable impact
from foreign exchange rates, with a 4% increase from price compared
to the first half of 2022.
Select Business Highlights Since the
Last Earnings Call
- Environmental Protection Agency (EPA) completed its review of
Seresto® and confirmed the continued registration of the
product.
- Launched Canine Parvovirus Monoclonal Antibody treatment in
U.S. after receiving all U.S. Department of Agriculture state
approvals.
- Entered into $300 million accounts receivable asset
securitization facility, with the intent to retire the company’s
August 2023 bonds on August 7, 2023.
- Released 2022 Environmental, Social and Governance Report,
demonstrating sustainability progress in internal operations and
customer collaborations.
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)
May Guidance
August Guidance
Revenue
$4,310
to
$4,400
$4,350
to
$4,410
Reported Net Income (Loss)
$(134)
to
$(98)
$(170)
to
$(127)
Adjusted EBITDA
$940
to
$1,000
$950
to
$1,010
Reported EPS
$(0.27)
to
$(0.20)
$(0.34)
to
$(0.26)
Adjusted EPS
$0.76
to
$0.83
$0.80
to
$0.89
Elanco is raising its full year 2023 guidance for revenue,
adjusted EBITDA and adjusted earnings per share. The raised revenue
guidance is driven by increased expectations for U.S. Pet Health,
poultry and aqua, partially offset by lowered expectations for U.S.
Farm Animal and contract manufacturing revenue. The impact of
foreign exchange on revenue is now expected to be a headwind of
approximately $25 million to $30 million, a $5 million increase
from May, from the unfavorable impact of foreign exchange rates
compared to the prior year. On a constant currency basis, the
company expects the year-over-year change in revenue to be between
a 1% decline and 1% growth. For adjusted EBITDA, overperformance in
the second quarter is expected to be offset in the second half of
the year by gross margin pressure from expected sales mix and
reduced plant utilization to decrease balance sheet inventory as
well as increased investment in Pet Health to drive portfolio
momentum and support launch preparations. In addition to the items
impacting adjusted EBITDA, improved expectations on interest
expense and tax are reflected in the raised adjusted EPS
guidance.
Additionally, the company is providing guidance for the third
quarter of 2023, as summarized in the following table:
2023 Third Quarter
(dollars in millions, except per share
amounts)
Guidance
Revenue
$1,025
to
$1,060
Reported Net Income (Loss)
$(92)
to
$(69)
Adjusted EBITDA
$170
to
$200
Reported EPS
$(0.18)
to
$(0.14)
Adjusted EPS
$0.08
to
$0.13
Revenue guidance for the third quarter represents an estimated
1% decline to 2% growth excluding the estimated benefit of
approximately $10 million from the favorable impact of foreign
exchange rates compared to the prior year.
The financial guidance reflects interest rates and foreign
exchange rates consistent with those as of the beginning of
August.
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
second quarter financial and operational results, discuss third
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 third 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 the conflict involving Russia and
Ukraine;
- 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;
- 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, and changes in our credit ratings that lead
to higher borrowing expenses;
- 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 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
U.S. 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 U.S. GAAP
reported measures. We encourage investors to review our unaudited
condensed consolidated and combined financial statements in their
entirety and caution investors to use U.S. 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 June
30,
Six Months Ended June
30,
2023
2022
2023
2022
Revenue
$
1,057
$
1,175
$
2,314
$
2,401
Costs, expenses, and other:
Cost of sales
434
484
928
993
Research and development
81
82
162
163
Marketing, selling, and administrative
353
343
680
666
Amortization of intangible assets
136
133
270
270
Asset impairment, restructuring, and other
special charges
35
86
75
126
Interest expense, net of capitalized
interest
74
67
138
119
Other expense (income), net
23
(6
)
32
3
(Loss) income before income taxes
$
(79
)
$
(14
)
$
29
$
61
Income tax expense (benefit)
18
(4
)
23
20
Net (loss) income
$
(97
)
$
(10
)
$
6
$
41
(Loss) earnings per share:
Basic
$
(0.20
)
$
(0.02
)
$
0.01
$
0.08
Diluted
$
(0.20
)
$
(0.02
)
$
0.01
$
0.08
Weighted average shares outstanding:
Basic
492.6
488.4
491.8
488.2
Diluted
492.6
488.4
492.7
492.1
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, asset
impairment, 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, asset impairment, 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
June 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 June 30, 2023 and 2022 to Selected Non-GAAP Adjusted
information:
Three Months Ended June 30,
2023
Three Months Ended June 30,
2022
GAAP Reported
Adjusted Items (b)
Non- GAAP (a)
GAAP Reported
Adjusted Items (b)
Non- GAAP (a)
Amortization of intangible assets
$
136
$
136
$
—
$
133
$
133
$
—
Asset impairment, restructuring and other
special charges (1)
35
35
—
86
86
—
Interest expense, net of capitalized
interest (2)
74
—
74
67
17
50
Other expense (income), net (3)
23
21
2
(6
)
(2
)
(4
)
(Loss) income before taxes
(79
)
192
113
(14
)
234
220
Income tax expense (benefit) (4)
18
(5
)
23
(4
)
(33
)
29
Net (loss) income
$
(97
)
$
187
$
90
$
(10
)
$
201
$
191
(Loss) earnings per share:
basic
$
(0.20
)
$
0.38
$
0.18
$
(0.02
)
$
0.41
$
0.39
diluted
$
(0.20
)
$
0.38
$
0.18
$
(0.02
)
$
0.41
$
0.39
Adjusted weighted average shares
outstanding:
basic
492.6
492.6
492.6
488.4
488.4
488.4
diluted (5)
492.6
492.6
492.6
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 U.S. generally
accepted accounting principles (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 June 30, 2023 and 2022 include the following:
(1)
Adjustments of $35 million for the three
months ended June 30, 2023 related to charges associated with
integration efforts and external costs related to the acquisition
of Bayer Animal Health. Adjustments of $86 million for the three
months ended June 30, 2022, primarily related to charges associated
with integration efforts and external costs related to the
acquisitions of Bayer Animal Health and KindredBio ($26 million)
and 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).
(2)
Adjustments of $17 million for the three
months ended June 30, 2022, primarily related to a loss recorded in
connection with the partial early extinguishment of our 4.272%
Senior Notes due 2023.
(3)
Adjustments of $21 million for the three
months ended June 30, 2023 primarily related to an accrual of $15
million during the quarter for a potential settlement related to
the Seresto class action lawsuits, as well as the impact of
hyperinflationary accounting in Turkey (approximately $5 million).
Adjustments of $2 million for the three months ended June 30, 2022,
primarily related to a gain on the disposal of the microbiome
R&D platform.
(4)
Adjustments of $5 million for the three
months ended June 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 ($8 million). Adjustments
of $33 million for the three months ended June 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 ($24 million).
(5)
During the three months ended June 30,
2022, we reported a GAAP net loss and thus potential dilutive
common shares were not assumed to have been issued since their
effect is anti-dilutive. During the same period, we reported
non-GAAP net income. As a result, potential dilutive common shares
would not have an anti-dilutive effect, and diluted weighted
average shares outstanding for purposes of calculating adjusted EPS
include 3.6 million of common stock equivalents.
Three Months Ended June
30,
2023
2022
As reported diluted EPS
$
(0.20
)
$
(0.02
)
Amortization of intangible assets
0.28
0.27
Asset impairment, restructuring and other
special charges
0.07
0.17
Interest expense, net of capitalized
interest
—
0.03
Other (income) expense, net
0.04
—
Subtotal
0.39
0.47
Tax impact of adjustments (1)
(0.01
)
(0.06
)
Total adjustments to diluted EPS
$
0.38
$
0.41
Adjusted diluted EPS (2)
$
0.18
$
0.39
Numbers may not add due to rounding.
(1)
2023 includes the 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 June 30, 2023. 2022 includes the unfavorable
adjustment 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
the favorable adjustment relating to the increase in the valuation
allowance recorded against our deferred tax assets (impact of $0.04
per share) during the three months ended June 30, 2022.
(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 six
months ended June 30, 2023 and 2022 to Selected Non-GAAP Adjusted
information:
Six Months Ended June 30,
2023
Six Months Ended June 30,
2022
GAAP Reported
Adjusted Items (b)
Non- GAAP (a)
GAAP Reported
Adjusted Items (b)
Non- GAAP (a)
Cost of sales (1)
$
928
$
1
$
927
$
993
$
—
$
993
Amortization of intangible assets
270
270
—
270
270
—
Asset impairment, restructuring and other
special charges (2)
75
75
—
126
126
—
Interest expense, net of capitalized
interest (3)
138
—
138
119
17
102
Other expense, net (4)
32
19
13
3
(1
)
4
Income before taxes
29
365
394
61
412
473
Income tax expense (5)
23
(61
)
84
20
(84
)
104
Net income
$
6
$
304
$
310
$
41
$
328
$
369
Earnings per share:
basic
$
0.01
$
0.62
$
0.63
$
0.08
$
0.67
$
0.75
diluted
$
0.01
$
0.62
$
0.63
$
0.08
$
0.67
$
0.75
Adjusted weighted average shares
outstanding:
basic
491.8
491.8
491.8
488.2
488.2
488.2
diluted
492.7
492.7
492.7
492.1
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 U.S. generally
accepted accounting principles (GAAP). The company believes that
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 six months
ended June 30, 2023 and 2022 include the following:
(1)
Adjustments of $1 million for the six
months ended June 30, 2023 primarily related to amortization of
inventory fair value adjustments recorded from the acquisition of
certain assets of NutriQuest, LLC.
(2)
Adjustments of $75 million for the six
months ended June 30, 2023 related to charges associated with
integration efforts and external costs related to the acquisition
of Bayer Animal Health. Adjustments of $126 million for the six
months ended June 30, 2022, primarily related to charges associated
with integration efforts and external costs related to the
acquisitions of Bayer Animal Health and KindredBio ($50 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 $17 million for the six
months ended June 30, 2022, primarily related to a loss recorded in
connection with the partial early extinguishment of our 4.272%
Senior Notes due 2023.
(4)
Adjustments of $19 million for the six
months ended June 30, 2023 primarily related to an accrual of $15
million during the second quarter for a potential settlement
related to the Seresto class action lawsuits, as well as the impact
of hyperinflationary accounting in Turkey (approximately $4
million). Adjustments of $1 million for the six months ended June
30, 2022, primarily related to a gain on the disposal of the
microbiome R&D platform.
(5)
Adjustments of $61 million for the six
months ended June 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 ($12 million).
Adjustments of $84 million for the six months ended June 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).
Six Months Ended June
30,
2023
2022
As reported diluted EPS
$
0.01
$
0.08
Amortization of intangible assets
0.55
0.55
Asset impairment, restructuring and other
special charges
0.15
0.26
Interest expense, net of capitalized
interest
—
0.03
Other (income) expense, net
0.04
0.00
Subtotal
0.74
0.84
Tax impact of adjustments (1)
(0.12
)
(0.17
)
Total Adjustments to EPS
$
0.62
$
0.67
Adjusted diluted EPS (2)
$
0.63
$
0.75
Numbers may not add due to rounding.
(1)
2023 includes the favorable adjustment
relating to the increase in the valuation allowance recorded
against our deferred tax assets (impact of $0.02 per share) during
the six months ended June 30, 2023. 2022 includes the 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
the decrease in the valuation allowance recorded against our
deferred tax assets (impact of $0.02 per share) during the six
months ended June 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, 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 three and six months ended June 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 June
30,
Six Months Ended June
30,
2023
2022
2023
2022
Reported net (loss) income
$
(97
)
$
(10
)
$
6
$
41
Net interest expense
74
67
138
119
Income tax (benefit) expense
18
(4
)
23
20
Depreciation and amortization
177
171
350
347
EBITDA
$
171
$
224
$
516
$
527
Non-GAAP adjustments:
Cost of sales
$
—
$
—
$
1
$
—
Asset impairment, restructuring and other
special charges
35
86
75
126
Other expense (income), net
21
(2
)
19
(1
)
Accelerated depreciation and amortization
(1)
(5
)
(5
)
(10
)
(10
)
Adjusted EBITDA
$
222
$
304
$
601
$
642
Adjusted EBITDA margin
21.0
%
25.9
%
26.0
%
26.7
%
Numbers may not add due to rounding.
(1)
Represents depreciation and amortization
of certain assets that was accelerated during the three and six
months ended June 30, 2023 and 2022. 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 June 30, 2023:
Long-term debt
6,023
Current portion of long-term debt
39
Less: Unamortized debt issuance costs
(56
)
Total gross debt
6,118
Less: Cash and cash equivalents
367
Net Debt
5,751
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
$(0.34)
to
$(0.26)
Amortization of intangible assets
Approx. $1.09
Asset impairment, restructuring, and other
special charges(1)
$0.18
to
$0.22
Other expense, net
Approx. $0.04
Subtotal
$1.32
to
$1.36
Tax impact of adjustments
$(0.21)
to
$(0.17)
Total adjustments to EPS
$1.14
to
$1.15
Adjusted earnings per share(2)
$0.80
to
$0.89
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)
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
$(170)
to
$(127)
Net interest expense
Approx. $305
Income tax benefit
$6
to
$44
Depreciation and amortization
Approx. $690
EBITDA
$830
to
$911
Non-GAAP adjustments
Cost of Sales
Approx. $1
Asset impairment, restructuring, and other
special charges
Approx. $100
Accelerated depreciation and
amortization
Approx. $(10)
Other income, net
Approx. $22
Adjusted EBITDA
$950
to
$1,010
Adjusted EBITDA margin
21.8%
to
22.9%
Reconciliation of 2023 third quarter reported EPS guidance to
2023 third quarter adjusted EPS guidance is as follows:
Third Quarter 2023
Guidance
Reported loss per share
$(0.18)
to
$(0.14)
Amortization of intangible assets
Approx. $0.27
Asset impairment, restructuring, and other
special charges (1)
$0.02
to
$0.04
Subtotal
$0.30
to
$0.32
Tax impact of adjustments
$(0.05)
to
$(0.03)
Total adjustments to EPS
Approx $0.27
Adjusted earnings per share (2)
$0.08
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)
Adjusted EPS is calculated as the sum of
reported EPS and total adjustments to EPS.
Reconciliation of 2023 third quarter reported net loss to 2023
third quarter adjusted EBITDA guidance is as follows:
$ millions
Third Quarter 2023
Guidance
Reported net loss
$(92)
to
$(69)
Net interest expense
Approx. $80
Income tax provision
$(12)
to
$6
Depreciation and amortization
Approx. $170
EBITDA
$148
to
$188
Non-GAAP adjustments
Asset impairment, restructuring, and other
special charges
Approx. $15
Other expense, net
Approx. $2
Adjusted EBITDA
$170
to
$200
Adjusted EBITDA margin
16.6%
to
18.9%
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230807477096/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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