Management's discussion and analysis of financial condition and results of operations, 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 consolidated and combined financial statements and accompanying footnotes in Item 8 of Part II of this Annual Report on Form 10-K. Certain statements in this Item 7 of Part II of this Annual Report on Form 10-K constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, "Risk Factors," may cause our actual results, financial position, and cash generated from operations to differ materially from these forward-looking statements. Overview Founded in 1954 as part of Eli Lilly & Co. (Lilly),Elanco is a premier animal health company that innovates, develops, manufactures and markets products for companion and food animals. Headquartered inGreenfield, Indiana , we are the fourth largest animal health company in the world, with revenue of$3,071.0 million for the year endedDecember 31, 2019 . Globally, we are #1 in medicinal feed additives, #2 in poultry, and #3 in other pharmaceuticals, which are mainly companion animal therapeutics, measured by 2018 revenue, according to Vetnosis. We have one of the broadest portfolios of pet parasiticides in the companion animal sector. We offer a diverse portfolio of more than 125 brands that make us a trusted partner to veterinarians and food animal producers in more than 90 countries. OnSeptember 24, 2018 , we completed our initial public offering (IPO), pursuant to which we issued and sold 19.8% of our total outstanding shares. OnSeptember 20, 2018 , our common stock began trading on theNew York Stock Exchange (NYSE) under the symbol "ELAN." OnSeptember 24, 2018 , immediately preceding the completion of the IPO, Lilly transferred to us substantially all of its animal health businesses in exchange for (i) all of the net proceeds (approximately$1,659.7 million ) we received from the sale of our common stock in the IPO, including the net proceeds we received as a result of the exercise in full of the underwriters' option to purchase additional shares, (ii) all of the net proceeds (approximately$2,000 million ) we received from the issuance of our senior notes; and (iii) all of the net proceeds ($498.6 million ) we received from the entry into our term loan facility. In addition, immediately prior to the completion of the IPO, we entered into certain agreements with Lilly that provide a framework for our ongoing relationship with them. OnFebruary 8, 2019 , Lilly announced an exchange offer whereby Lilly shareholders could exchange all or a portion of Lilly common stock for shares ofElanco common stock owned by Lilly. On that date, we filed a Registration Statement on Form S-4 with theSEC in connection with that exchange offer. The disposition ofElanco shares was completed onMarch 11, 2019 , and resulted in the full separation ofElanco along with the disposal of Lilly's entire ownership and voting interest inElanco . We operate our business in a single segment directed at fulfilling our vision of enriching 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 theU.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 theU.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
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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. For the years endedDecember 31, 2019 , 2018 and 2017, our revenue was$3,071.0 million ,$3,066.8 million and$2,889.0 million , respectively. For the years endedDecember 31, 2019 , 2018 and 2017, our net income (loss) was$67.9 million ,$86.5 million and$(310.7) million , respectively. Increases or decreases in inventory levels at our channel distributors can positively or negatively impact our quarterly and annual revenue results, leading to variations in quarterly revenues. 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, payment terms we extend, which are subject to internal policies, and procedures and environmental factors beyond our control, including weather conditions. Key Trends and Conditions Affecting Our Results of Operations Industry Trends The animal health industry, which focuses on both food animals and companion animals, is a growing industry that benefits billions of people worldwide. As demand for animal protein grows, food animal health is becoming increasingly important. Factors influencing growth in demand for food animal medicines and vaccines include: •one in three people need improved nutrition; •increased global demand for protein, particularly poultry and aquaculture; •natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, driving the need for more efficient food production; •loss of productivity due to food animal disease and death; •increased focus on food safety and food security; and •human population growth, increased standards of living, particularly in many emerging markets, and increased urbanization. Growth in food animal nutritional health products (enzymes, probiotics and prebiotics) is influenced, among other factors, by demand for antibiotic alternatives that can promote animal health and increase productivity. Factors influencing growth in demand for companion animal medicines and vaccines include: •increased pet ownership globally; •pets living longer; and •increased pet spending as pets are viewed as members of the family by owners. Factors Affecting Our Results of Operations Product Development and New Product Launches A key element of our targeted value creation strategy is to drive 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 have launched or acquired 14 new products, including the additions of Entyce, Nocita and Tanovea in 2019. Revenue from these products contributed$439.2 million to revenue for the
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year endedDecember 31, 2019 . We continue to pursue the development of new chemical and biological molecules through our approach to innovation. Our future growth and success depends on both our pipeline of new products, including new products that we may develop through joint ventures and products that we are able to obtain through license or acquisition, and the expansion of the use of our existing products. We believe we are an industry leader in animal health R&D, with a track record of product innovation, business development and commercialization. Impact of Changing Market Demand for Antibiotics In recent years, our operational results have been, and will continue to be, affected by regulations and changing market demand relating to the use of antibiotics and other products intended to increase food animal production. There are two classes of antibiotics used in animal health: (i) shared-class, or medically important, antibiotics; and (ii) animal-only antibiotics. Shared-class antibiotics are used to treat infectious disease caused by pathogens that occur in both humans and animals. As part of our antibiotic stewardship plan and in compliance with FDA guidance, shared-class antibiotics are labeled only for the treatment of an established need in animals and only with veterinarian oversight. However, not all pathogens that cause disease in animals are infectious in humans, and accordingly animal-only antibiotics are not used in human medicine (i.e., not medically important). From 2015 to 2019, our revenue from shared-class antibiotics declined at a CAGR of 10%, excluding the impact of foreign exchange. This was driven primarily by changing regulations in many markets, including the Veterinary Feed Directive, as well as changing market demand andElanco's tiered-approach to antibiotic stewardship, which included removing growth promotion from labels and requiring veterinary oversight in theU.S. and other markets. Globally, during 2019, our revenue from shared-class antibiotics declined 13%, excluding the impact of foreign exchange, and represented 11% (4% from sales in theU.S. and 7% from sales outside of theU.S. ) of our total revenue, down from 16% in 2015. From 2015 to 2019, our revenue from animal-only antibiotics grew at a CAGR of 4%, excluding the impact of foreign exchange, driven by sales outside theU.S. , which offset a slight decline in theU.S. Globally, during 2019, our revenue from animal-only antibiotics declined 1%, excluding the impact of foreign exchange, and represented 24% of our total revenue, up from 23% in 2015. During 2019, 87% of our revenue from animal-only antibiotics resulted from the sale of ionophores. Ionophores are a special class of animal-only antimicrobials, and because of their animal-only designation, mode of action and spectrum of activity, their use, to date have not been impacted by regulations or changing market demand in many markets outside theU.S. We have intentionally shifted away from shared-class antibiotics, and are focusing on animal-only antibiotics, as well as antibiotic-free solutions. When an animal-only antibiotic exists, we believe it should be the first, preferred antibiotic treatment. Antibiotic resistance concerns, or other health concerns regarding food animal products, may result in additional restrictions, expanded regulations or changes in market demand to further reduce the use of antibiotics in food animals. We believe it is important to protect the benefits of antibiotics in human medicine, while responsibly protecting the health of food animals and the safety of our food supply. Impact of Competition The animal health industry is competitive. Established animal health companies who consistently deliver high quality products enjoy brand loyalty from their customers, which often continues after the loss of patent-based or regulatory exclusivity. In 2019, approximately 67% of our revenue was from products that did not have patent protection. In animal health, while potentially significant, erosion from generic competition is often not as steep as in human health, with the originator often retaining a significant market share. However, generic competition can nevertheless significantly affect our results. While our largest product, Rumensin (monensin), has been subject to generic competition from monensin outside theU.S. for more than 10 years, our revenue from Rumensin sales outside theU.S. grew at a CAGR of 5% from 2015 to 2019. In the third quarter of 2019, an established animal health company receivedU.S. approval for generic monensin in cattle and goats for certain indications.U.S. revenue from Rumensin may decline as a result of the generic competition. We have experienced significant competitive headwinds from generic ractopamine in theU.S. In the third quarter of 2013, a large, established animal health company receivedU.S. approval for ractopamine (the generic to our drugs Paylean and Optaflexx).U.S. revenue for Paylean and Optaflexx, our ractopamine beef and swine products, has declined at a CAGR of 44% and 21%, respectively, from 2015 to 2019 as a result of generic competition and the impact of international regulatory restrictions. In 2019, we had an estimated 70% market share of allU.S. ractopamine-treated beef cattle based on management estimates.
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Although we believe brand loyalty is an important contributor to a product's ongoing success, the animal health industry is also impacted by innovation. We experienced an innovation lag in the companion animal parasiticide space from 2015 to 2017. In the absence of a competitive combined oral flea and tick product, ourU.S. companion animal parasiticide portfolio revenue declined 15% in 2017, excluding the impact on revenue resulting from a reduction in inventory levels within our distribution channel. InFebruary 2018 , we launched Credelio in theU.S. for the treatment of fleas and ticks. Since the launch of Credelio, our sales of parasiticides in theU.S. have begun to grow again. Productivity Our results during the periods presented have benefited from operational and productivity initiatives implemented following recent acquisitions and in response to changing market demand for antibiotics and other headwinds. Our acquisitions within the last six years added in the aggregate$1.4 billion in revenue, 4,600 full-time employees, 12 manufacturing and eight R&D sites. In addition, from 2015 to 2019, changing market demand for antibiotics and other headwinds, such as competition with generics and innovation, affected some of our highest gross margin products, resulting in a change to our product mix and driving operating margin lower. In response, we implemented a number of initiatives across the manufacturing, R&D and selling, general and administrative (SG&A) functions. Our manufacturing cost savings strategies included improving manufacturing processes and headcount through lean manufacturing (minimizing waste while maintaining productivity), closing of three manufacturing sites, consolidating our CMO network, strategically insourcing certain projects, and pursuing cost savings opportunities with respect to raw materials via a new procurement process. Additional cost savings resulted from reducing the number of R&D sites from 16 to nine, SG&A savings from sales force consolidation, and reducing discretionary and other general and administrative (G&A) operating expense. 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. For the years endedDecember 31, 2019 and 2018, approximately 44% and 52%, respectively, of our revenue was denominated in foreign currencies. As we operate in multiple foreign currencies, including the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar, Chinese yuan, and other currencies, changes in those currencies relative to theU.S. dollar will impact our revenue, cost of sales 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. Currency movements decreased revenue by 2% during the year endedDecember 31, 2019 . Currency movements had limited impact on revenue during the years endedDecember 31, 2018 and 2017. General Economic Conditions In addition to industry-specific factors, we, like other businesses, face challenges related to global economic conditions. Growth in both the food animal and companion animal sectors is driven in part by overall economic development and related growth, particularly in many emerging markets. In recent years, certain of our customers and suppliers have been affected directly by economic downturns, which decreased the demand for our products. The cost of our products to food animal producers is small relative to their other production costs, including feed, and the use of our products is intended to improve economic outcomes for food animal producers. Similarly, industry sources have reported that pet owners indicated a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on pet care. While these factors have mitigated the impact of recent downturns in the global economy, further economic challenges could increase cost sensitivity among our customers, which may result in reduced demand for our products and could have a material adverse effect on our financial condition and results of operations. Weather Conditions and the Availability of Natural Resources The animal health industry and demand for many of our animal health products in a particular region are affected by weather conditions, varying weather patterns and weather-related pressures from pests, such as fleas and ticks. As a result, we may experience regional and seasonal fluctuations in our results of operations.
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Food animal producers depend on the availability of natural resources, including large supplies of fresh water. Their animals' health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. Drought conditions could negatively impact, among other things, the supply of corn and the availability of grazing pastures. A decrease in harvested corn results in higher corn prices, which could negatively impact the profitability of food animal producers of ruminants, pork and poultry. Higher corn prices and reduced availability of grazing pastures contribute to reductions in herd or flock sizes that in turn result in less spending on animal health products. As such, a prolonged drought could have a material adverse effect on our financial condition and results of operations. Factors influencing the magnitude and timing of effects of a drought on our performance include, but may not be limited to, weather patterns and herd management decisions. In addition, veterinary hospitals and practitioners depend on visits from and access to the animals under their care. Veterinarians' patient volume and ability to operate could be adversely affected if they experience prolonged snow, ice or other severe weather conditions, particularly in regions not accustomed to sustained inclement weather. Adverse weather conditions or a shortage of fresh water may cause veterinarians and food animal producers to purchase less of our products. Disease Outbreaks Sales of our food animal products could be adversely affected by the outbreak of disease carried by animals, such as African Swine Fever. Outbreaks of disease may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce demand for our products. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere. Alternatively, sales of products that treat specific disease outbreaks may increase. Manufacturing and Supply In order to sell our products, we must be able to reliably produce and ship our products in sufficient quantities. Many of our products involve complex manufacturing processes and are sole-sourced from certain manufacturing sites. Minor deviations in our manufacturing or logistical processes, unpredictability of a product's regulatory or commercial success or failure, the lead time necessary to construct highly technical and complex manufacturing sites, and shifting customer demand increase the potential for capacity imbalances. Components of Revenue and Costs and Expenses Revenue Our revenue is primarily derived from sales of our products to third-party distributors, and directly to food producers and veterinarians. For additional information regarding our products, including descriptions of our products, see "Item 1. Business - Products." We aggregate our products into five categories to understand revenue growth: •CA Disease Prevention includes parasiticides and vaccine products for dogs and cats; •CA Therapeutics includes products for the treatment of pain, osteoarthritis, otitis, cardiovascular and dermatology indications in dogs and cats; •FA Future Protein & Health includes vaccines, antibiotics, parasiticides and other products used in poultry and aquaculture production, as well as functional nutritional health products, including enzymes, probiotics and prebiotics; •FA Ruminants & Swine includes vaccines, antibiotics, implants, parasiticides, and other products used in ruminants and swine production, as well as certain other food animal products; and
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•Strategic Exits includes business activities that we have either exited or made the strategic decision to exit, including the transitional contract manufacturing activity that we acquired in connection with our acquisition of the BI VetmedicaU.S. vaccines portfolio, two terminated legacyU.S. distribution agreements, a terminated distribution agreement outside theU.S. , an equine product not core to our business and a transitional contract manufacturing activity associated with the supply to Lilly of human growth hormone. Costs, Expenses and Other Cost of sales consists primarily of cost of materials, facilities and other infrastructure used to manufacture our products, shipping and handling, inventory losses and expired products. Marketing, selling and administrative expenses consist of, among other things, the costs of marketing, promotion and advertising and the costs of administration (business technology, facilities, legal, finance, human resources, business development, external affairs and procurement). Amortization of intangible assets consists of the amortization expense for intangible assets that have been acquired through business combinations. R&D expenses consist of project costs specific to new product R&D and product lifecycle management, overhead costs associated with R&D operations, regulatory, product registrations and investments that support local market clinical trials for approved indications. We manage overall R&D based on our strategic opportunities and do not disaggregate our R&D expenses incurred by nature or by product as we do not use or maintain such information in managing our business. Asset impairment, restructuring and other special charges consist primarily of impairment of long-term assets, restructuring charges, costs associated with acquiring and integrating businesses, and certain non-recurring expenses, including costs related to the build out of processes and systems to support finance and global supply and logistics, among others, to stand our organization up as an independent company. Interest expense, net of capitalized interest consists of interest incurred on our long-term debt. Other-net, expense (income) consists primarily of realized or unrealized foreign exchange losses and loss or impairment on other investments. Comparability of Historical Results Our historical results of operations for the periods presented may not be comparable with prior periods or with our results of operations in the future, due to many factors, included but not limited to the factors identified in "Key Trends and Conditions Affecting Our Results of Operations." Our Relationship with Lilly and Additional Standalone Costs During the period prior to the IPO, our business operated solely as part of a division of Lilly. Our combined financial statements have been derived from Lilly's consolidated financial statements and accounting records. Our consolidated and combined financial statements reflect our financial position, results of operations and cash flows of the 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 prior to the IPO. Our historical results reflect an allocation of costs for certain Lilly corporate costs for periods prior to the IPO, 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 Lilly 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. The total allocations included in our results for the years endedDecember 31, 2019 , 2018 and 2017 were$0.0 million ,$105.2 million , and$151.7 million , respectively. See Note 20: Related Party Agreements and Transactions to our consolidated and combined financial statements.
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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 costs related to the build out of processes and systems to support finance and global supply and logistics, among others. We currently estimate these costs taken together to be in a range from$240 million to$290 million , net of potential real estate dispositions and employee benefit changes, of which a portion will be capitalized and the remainder will be expensed. Lilly utilizes a centralized treasury management system, of which we were a part until our IPO. For periods prior to the IPO, our consolidated and combined financial statements reflect cash held only in bank accounts in our legal name and no allocation of combined cash positions. Our consolidated and combined financial statements do not reflect an allocation of Lilly's debt or any associated interest expense. In connection with the IPO, we incurred$2.5 billion of long-term borrowings. Our historical results reflect$29.6 million of interest expense during the year endedDecember 31, 2018 due to the timing of the borrowings, in comparison to our interest expense of$78.9 million during the year endedDecember 31, 2019 . For the periods prior to the IPO, our consolidated and combined financial statements reflect income tax expense (benefit) computed on a separate company basis, as if operating as a standalone entity or a separate consolidated group in each material jurisdiction in which we operate. Our consolidated and combined financial statements for the periods prior to the IPO also reflect certain deferred tax assets and liabilities and income taxes payable based on this approach that did not transfer to us upon the Separation, as the underlying tax attributes were used by Lilly or retained by Lilly. As a result of potential changes to our business model and the fact that certain deferred tax assets and liabilities and income taxes payable did not transfer to us, income tax expense (benefit) included in the consolidated and combined financial statements may not be indicative of our future expected tax rate. Our historical results prior to IPO also 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. Subsequent to the IPO, we have implemented competitive compensation policies and programs as a standalone public company. Our historical results prior to the IPO reflect compensation costs that were allocated by Lilly. As a result of the IPO, we became subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act. We are continuing to establish or expand additional procedures and practices as a standalone public company. As a result, we will continue to incur additional costs as a standalone public company, including internal audit, external audit, investor relations, stock administration, stock exchange fees and regulatory compliance costs. Recent Significant Acquisitions Our financial results have been impacted by acquisitions and integrations. For the periods presented, these include primarily the acquisitions and integrations ofNovartis Animal Health , which closed onJanuary 1, 2015 ,Boehringer Ingelheim Vetmedica, Inc.'s U.S. feline, canine and rabies vaccine portfolio and other related assets (BIVIVP), which closed onJanuary 3, 2017 ,Aratana Therapeutics, Inc. , which closed onJuly 18, 2019 , andPrevtec Microbia Inc. , which closed onJuly 31, 2019 . For more information, see Note 6: Acquisitions to our consolidated and combined financial statements. Asset Impairment, Restructuring and Other Special Charges During the years endedDecember 31, 2019 , 2018 and 2017 including in connection with the productivity initiatives described above under "Key Trends and Conditions Affecting Our Results of Operations - Productivity," we incurred charges related to asset impairment, restructuring and other special charges, including integration of acquired businesses. These charges include severance costs resulting from actions taken to reduce our costs, asset impairment charges primarily related to competitive pressures for certain companion animal products, product rationalizations, site closures and integration costs related to acquired businesses, primarilyNovartis Animal Health , and costs related to the build out of processes and systems to support finance and global supply and logistics, among others, as we stand our organization up as an independent company.
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For more information on these charges, see Note 7: Asset Impairment, Restructuring and Other Special Charges to our consolidated and combined financial statements. Results of Operations The following discussion and analysis of our consolidated and combined statements of operations should be read along with our consolidated and combined financial statements and the notes thereto included elsewhere in this report. For more information, see Note 2: Basis of Presentation to our consolidated and combined financial statements. (Dollars in millions) Year Ended December 31, % Change 2019 2018 2017 19/18 18/17 Revenue$ 3,071.0 $ 3,066.8 $ 2,889.0 -% 6% Costs, expenses and other: Cost of sales 1,470.3 1,573.8 1,493.9 (7)% 5% % of revenue 48 % 51 % 52 % Research and development 270.1 246.6 251.7 10% (2)% % of revenue 9 % 8 % 9 % Marketing, selling and administrative 760.2 735.2 779.8 3% (6)% % of revenue 25 % 24 % 27 % Amortization of intangible assets 200.4 197.4 221.2 2% (11)% % of revenue 7 % 6 % 8 % Asset impairment, restructuring and other special charges 185.5 128.8 375.1 44% (66)% Interest expense, net of capitalized interest 78.9 29.6 - 167% NM Other-net, expense (income) 27.4 41.3 (0.1) NM NM Income (loss) before taxes 78.2 114.1 (232.6) NM NM % of revenue 3 % 4 % (8) % NM NM Income tax expense 10.3 27.6 78.1 (63)% (65)% Net income (loss)$ 67.9 $ 86.5 $ (310.7) NM NM Certain amounts and percentages may reflect rounding adjustments. NM - Not meaningful Revenue On a global basis, our revenue within our product categories was as follows: (Dollars in millions) Year Ended December 31, % Change 2019 2018 2017 19/18 18/17 CA Disease Prevention$ 787.9 $ 804.6 $ 660.2 (2)% 22% CA Therapeutics (1) 348.0 283.1 260.8 23% 9% FA Future Protein & Health 745.1 711.2 649.2 5% 10% FA Ruminants & Swine 1,110.3 1,174.0 1,175.0 (5)% -% Subtotal 2,991.3 2,972.9 2,745.2 1% 8% Strategic Exits (1) 79.7 93.9 143.8 (15)% (35)% Total$ 3,071.0 $ 3,066.8 $ 2,889.0 -% 6% (1) Represents revenue from business activities we have either exited or made a strategic decision to exit. OnJune 30, 2018 ,Elanco made the decision to exit an equine product not core to its business. Revenue from this product is reflected in Strategic Exits for the years endedDecember 31, 2019 and 2018 and in CA Therapeutics for the year endedDecember 31, 2017 . Revenue from this product was$0.4 million ,$1.6 million and$3.4 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively.
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On a global basis, the effect of price, foreign exchange rates and volumes on changes in revenue as compared to the prior year was as follows: (Dollars in millions) Full year 2019 Revenue Price FX Rate Volume Total CER* CA Disease Prevention$ 787.9 1% (1)% (2)% (2)% (1)% CA Therapeutics 348.0 5% (2)% 20% 23% 25% FA Future Protein & Health 745.1 4% (3)% 4% 5% 8% FA Ruminants & Swine 1,110.3 1% (2)% (5)% (5)% (4)% Core Revenue$ 2,991.3 2% (2)% 1% 1% 3% Strategic Exits 79.7 -% -% (15)% (15)% (15)% Total Elanco$ 3,071.0 2% (2)% -% -% 2% (Dollars in millions) Full year 2018 Revenue Price FX Rate Volume Total CER* CA Disease Prevention$ 804.6 8% -% 14% 22% 22% CA Therapeutics 283.1 7% 1% -% 9% 7% FA Future Protein & Health 711.2 4% -% 6% 10% 10% FA Ruminants & Swine 1,174.0 (1)% -% 1% -% -% Core Revenue$ 2,972.9 3% -% 5% 8% 8% Strategic Exits 93.9 -% -% (34)% (35)% (35)% Total Elanco$ 3,066.8 3% -% 3% 6% 6% Note: Numbers may not add due to rounding *CER = Constant exchange rate
Revenue
Total revenue 2019 vs. 2018 Total revenue increased$4.2 million or 0.1% in 2019 as compared to 2018, reflecting a 2% increase in price, offset by a 2% unfavorable impact from foreign exchange rates. Volume was flat as compared to prior year. In summary, the total revenue increase was due primarily to: •an increase in revenue of$72.0 million or 25% from CA Therapeutics products, excluding the impact of foreign exchange rates; and •an increase in revenue of$59.5 million or 8% from FA Future Protein & Health products, excluding the impact of foreign exchange rates; partially offset by: •a decrease in revenue of$46.1 million or 4% from FA Ruminants & Swine products, excluding the impact of foreign exchange rates; •a decrease in revenue of$7.3 million or 1% from CA Disease Prevention products, excluding the impact of foreign exchange rates; •a decrease in revenue of$14.2 million or 15% from Strategic Exits, excluding the impact of foreign exchange rates; and •a decrease in revenue of$59.7 million due to the negative impact of foreign exchange rates.
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The detailed change in revenue by product category was as follows: •CA Disease Prevention revenue decreased by$16.7 million or 2%, driven by a decline in volume and to a lesser extent the unfavorable impact of foreign exchange rates, partially offset by an increase in price. The revenue decrease was a result of several unfavorable comparisons to 2018. In 2018, vaccines benefited from the initial stocking of a new customer agreement, customers purchased higher than normal levels of parasiticides and vaccines to achieve desired incentive levels across companion animal, and all remaining inventory for Parastar was sold prior to rationalizing the product, all contributing to the unfavorable comparison for the year. The decrease was also driven by declines in sales of older generation parasiticides, partially offset by the continued growth of Credelio and Interceptor Plus, including the initial stocking of a new customer agreement in the third quarter of 2019. •CA Therapeutics revenue increased by$64.9 million or 23%, driven by increased volume and to a lesser extent price, partially offset by the impact of foreign exchange rates. The revenue increase was driven by increased demand for products across the therapeutics portfolio, primarily Galliprant, initial stocking for a new customer agreement in the third quarter of 2019, and inclusion of sales of Entyce and Nocita, as a result of the acquisition of Aratana. •FA Future Protein & Health revenue increased by$33.9 million or 5%, driven by both increased volume and price, partially offset by an unfavorable impact from foreign exchange rates. Growth was driven by the aqua portfolio, poultry vaccines and nutritional products, partially offset by the loss of sales for certain products inChina as a result of changing antibiotic policies. •FA Ruminants & Swine revenue decreased by$63.7 million or 5%, driven by a decline in volume and to a lesser extent the unfavorable impact of foreign exchange rates, partially offset by an increase in price. The decline in revenue was driven by softness in swine products due to African Swine Fever acrossAsia , a disruption in global supply of certain third-party produced injectable cattle products, reducedU.S. producer use of Paylean, decreased Rumensin sales as a result of the generic entrant, and the impact from the Australian drought. These decreases were partially offset by revenue generated from Posilac™ sales as a result of the revised commercial agreement entered into in the third quarter of 2019. •Strategic Exits revenue decreased by$14.2 million to$79.7 million and represented 3% of total revenue. 2018 vs. 2017 Total revenue increased$177.8 million or 6% in 2018 as compared to 2017, reflecting a 3% increase due to higher realized prices and a 3% increase due to higher volumes. In summary, the total revenue increase was due primarily to: •an increase in revenue of$142.1 million or 22% from CA Disease Prevention products, excluding the impact of foreign exchange rates; •an increase in revenue of$18.4 million or 7% from CA Therapeutics products, excluding the impact of foreign exchange rates; •an increase in revenue of$63.8 million or 10% from FA Future Protein & Health products, excluding the impact of foreign exchange rates and partially offset by: •a decrease in revenue of$0.8 million or 0% from FA Ruminants & Swine, excluding the impact of foreign exchange rates and •a decrease in revenue of$49.9 million or 35% 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$144.4 million or 22% due primarily to a reduction in channel inventory in 2017 providing a favorable year-on-year comparison, continued uptake of Credelio and Interceptor Plus, as well as realized price increases primarily impacting Trifexis,Capstar (a flea treatment) and Comfortis, partially offset by volume declines in certain parasiticides, primarily Trifexis and Comfortis volumes.
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•CA Therapeutics revenue increased by$22.3 million or 9% due primarily to the continued uptake of Galliprant and Osurnia, as well as increased demand for 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$62.0 million or 10% due primarily to the launch of Imvixa and the growth in poultry animal-only antibiotics and poultry vaccines. •FA Ruminants & Swine revenue decreased by$1.0 million due primarily to competitive headwinds for ractopamine based products, offset by growth in animal-only antibiotics, primarily in cattle. •Strategic Exits revenue decreased by$49.9 million or 35% due primarily to the termination of a legacyU.S. distribution agreement in the third quarter of 2017, partially offset by revenue from the contract manufacturing agreement to supply human growth hormone to Lilly. Costs, Expenses and Other Cost of sales 2019 vs. 2018 Cost of sales decreased$103.5 million in 2019 as compared to 2018 due primarily to manufacturing productivity improvements and charges recorded during the year endedDecember 30, 2018 for inventory adjustments related to the suspension of commercial activities of Imrestor and the closure of theLarchwood, Iowa facility, partially offset by unfavorable product mix and logistics costs. 2018 vs. 2017 Cost of sales increased$79.9 million in 2018 as compared to 2017 primarily due to increased volume of products sold and the write-off of inventory related to the suspension of activities for Imrestor in 2018, partially offset by non-recurring costs incurred in 2017 associated with fair value adjustments to inventory acquired in the BIVIVP acquisition and subsequently sold. Research and development 2019 vs. 2018 R&D expenses increased$23.5 million for 2019 as compared to 2018 primarily due to additional costs from acquired businesses during the year, including Aratana and Prevtec, increased costs from R&D infrastructure investments, and project spend as a result of pipeline progression. 2018 vs. 2017 R&D expenses decreased$5.1 million in 2018 as compared to 2017 due primarily to cost control measures and timing of projects leading to lower spend in 2018. Marketing, selling and administrative 2019 vs. 2018 Marketing, selling and administrative expenses increased$25.0 million for 2019 as compared to 2018 due primarily to additional costs from acquired businesses during the year, primarily Aratana, and increased marketing efforts for our companion animal portfolio, and increased expenses as a result of operating as a standalone public company, partially offset by slightly lower selling costs and lower costs due to continued productivity initiatives and cost control measures across the business. 2018 vs. 2017 Marketing, selling and administrative expenses decreased$44.6 million in 2018 as compared to 2017 due primarily to productivity initiatives in sales and administrative functions and reduced direct to consumer programs combined with new product launches in 2017.
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Amortization of intangible assets 2019 vs. 2018 Amortization of intangible assets increased$3.0 million for 2019 as compared to 2018 primarily due to the addition of amortization of intangible assets recorded from the acquisitions of Aratana and Prevtec in 2019 and the acceleration of the amortization of certain software assets to be retired prior to the end of their previously estimated respective useful lives due to our separation from Lilly. 2018 vs. 2017 Amortization of intangible assets decreased$23.8 million in 2018 as compared to 2017 due primarily to the acceleration of amortization related to certain product exits in 2017. Asset impairment, restructuring and other special charges For additional information regarding our asset impairment, restructuring and other special charges, see Note 7: Asset Impairment, Restructuring and Other Special Charges to our consolidated and combined financial statements. 2019 vs. 2018 Asset impairment, restructuring and other special charges increased$56.7 million in 2019 as compared to 2018 primarily due to higher transaction costs directly related to business acquisitions, including the pending acquisition of the animal health business of Bayer, higher integration costs of acquisitions, and costs associated with the implementation of new systems, programs, and processes due to the Separation from Lilly as well as severance costs, exit costs, impairment charges, and write-down charges recorded in 2019, as more fully described in Note 7. 2018 vs. 2017 Asset impairment, restructuring and other special charges decreased$246.3 million in 2018 as compared to 2017 primarily due to a decrease in severance related to theU.S. voluntary early retirement program offered in 2017 as well as a decrease in integration costs related to the BIVIVP acquisition in 2017, partially offset by a gain on disposal of a site that was previously closed as part of the acquisition and integration ofNovartis Animal Health in 2017. Interest expense, net of capitalized interest 2019 vs. 2018 Interest expense increased$49.3 million for the year endedDecember 31, 2019 due to the timing of the issuance of debt in the third quarter of 2018. 2018 vs. 2017 Interest expense was$29.6 million for the year endedDecember 31, 2018 due to our issuance of debt in the third quarter of 2018. There was no interest expense in 2017 and prior years. Other-net, expense (income) 2019 vs. 2018 Other-net, expense decreased$13.9 million from$41.3 million in 2018 to$27.4 million in 2019. The decrease in expense is primarily due to the increase in the Aratana contingent consideration liability of$37.6 million associated with the Galliprant acquisition recorded in 2018, partially offset by the impact of$8.3 million of expense recorded in 2019 due to the release of a tax indemnity asset related to the 2015 acquisition of Novartis and$13.0 million of unfavorable adjustments to the contingent consideration liabilities recorded for Galliprant during 2019. 65
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2018 vs. 2017 Other-net, expense (income) was expense of$41.3 million in 2018 compared to income of$0.1 million in 2017. The increase in expense is primarily due to the increase in the Aratana contingent consideration liability of$37.6 million associated with the Galliprant acquisition. Income tax expenseElanco's historical income tax expense may not be indicative of its future expected tax rate. See "Comparability of Historical Results, Our Relationship with Lilly and Additional Standalone Costs." 2019 vs. 2018 Income tax expense decreased$17.3 million in 2019 as compared to 2018. The decrease is primarily attributable to lower pre-tax earnings primarily due to restructuring charges, in addition to the release of tax reserves related to final resolution of the Brazilian tax matter. See Note 15: Income Taxes to our consolidated and combined financial statements. 2018 vs. 2017 Income tax expense decreased$50.5 million in 2018 as compared to 2017. The decrease is primarily due to a decrease in theU.S. valuation allowance, which was recorded in 2017 based upon the pre-IPO separate return methodology. See Note 2: Basis of Presentation and Note 15: Income Taxes to our consolidated and combined financial statements. Liquidity and Capital Resources 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. Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under our Credit Facilities. As a significant portion of our business is conducted outside theU.S. , we hold a significant portion of cash outside of theU.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 theU.S. may be impacted by local regulations and, to a lesser extent, followingU.S. tax reforms, the income taxes associated with transferring cash to theU.S. See Note 15: Income Taxes to our consolidated and combined financial statements. We currently intend to indefinitely reinvest foreign earnings for continued use in our foreign operations. As our structure 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 principal liquidity needs going forward include funding existing marketed and pipeline products, capital expenditures, business development in our targeted areas, interest expense and funding the acquisition of the animal health business of Bayer. We believe our cash and cash equivalents on hand, our operating cash flows, our existing financing arrangements and financing arrangements entered into in 2020 will be sufficient to support our cash needs for the foreseeable future, including for at least the next 12 months. Our ability to meet future funding requirements may be impacted by macroeconomic, business and financial volatility. As markets 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 "Item 1A. Risk Factors - We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful." As ofDecember 31, 2019 , cash and cash equivalents was$334.0 million , a decrease of$140.8 million compared to$474.8 million atDecember 31, 2018 . We also held$11.1 million of restricted cash atDecember 31, 2019 , which is available solely to pay the remainder of the purchase for our businesses to Lilly. We have a corresponding liability recorded on our balance sheet and included in Payable to Lilly. Refer to the Consolidated and Combined
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Statements of Cash Flows for additional details on the significant sources and uses of cash for the years endedDecember 31, 2019 , 2018 and 2017. Cash Flows The following table provides a summary of cash flows from operating, investing and financing activities for the periods presented: (Dollars in millions) Year Ended December 31, % Change Net cash provided by (used for): 2019 2018 2017 19/18 18/17 Operating activities$ 224.1 $ 487.3 $ 173.8 (54) % 180 % Investing activities (234.8) (127.0) (964.6) 85 % (87) % Financing activities (304.8) (35.2) 847.5 766 % (104) % Effect of exchange-rate changes on cash and cash equivalents (16.9) 29.0 7.9 (158) % 267 %
Net (decrease) increase in cash, cash
equivalents and restricted cash
(194) % 448 % Operating activities 2019 vs. 2018 Our cash flow from operating activities decreased by$263.2 million from$487.3 million for the year endedDecember 31, 2018 to$224.1 million for the year endedDecember 31, 2019 . The decrease in operating cash flows was primarily attributable to a decrease in net income, increases in accounts receivable and inventories, and changes in timing of payments in the ordinary course of business. We have extended our payment terms in the past in certain customer situations and may need to continue this practice going forward as a result of competitive pressures and the need for certain inventory levels at our channel distributors to avoid supply disruptions. Further extensions of customer payment terms could result in additional uses of our cash flow. 2018 vs. 2017 Our cash flow from operating activities increased by$313.5 million from$173.8 million for the year endedDecember 31, 2017 to$487.3 million for the year endedDecember 31, 2018 . The increase is a result of an increase in net income, which was partially offset by cash used to finance working capital, primarily focused on accounts receivable and inventory. Investing activities 2019 vs. 2018 Our cash flow used for investing activities increased by$107.8 million , to$234.8 million for the year endedDecember 31, 2019 compared to$127.0 million for the year endedDecember 31, 2018 . The change was primarily driven by cash paid for the acquisition of Prevtec during 2019 and increases in purchases of software from 2018 to 2019. 2018 vs. 2017 Our cash flow used for investing activities decreased from$964.6 million for the year endedDecember 31, 2017 to$127.0 million for the year endedDecember 31, 2018 . Our cash used in investing activities for the year endedDecember 31, 2017 included$882.1 million related to the acquisition of BIVIVP. This decrease was offset by a net increase of$35.9 million in capital expenditures from 2017 to 2018.
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Financing activities 2019 vs. 2018 Our cash used for financing activities increased by$269.6 million to$304.8 million in 2019 compared to$35.2 million in 2018. Cash used in financing activities during 2018 reflected the impact of our IPO and the issuance of long-term debt in connection with our Separation from Lilly during the period.$4.2 billion of cash was generated from those transactions, which was mostly offset by$4.1 billion of payments to Lilly in connection with local country asset purchases and other financing activities related to the Separation. During 2019, we made$121.1 million of payments on our term credit facility as well as$191.6 million of payments to Lilly in connection with local country asset purchases and other financing activities related to the Separation. 2018 vs. 2017 Our cash used for financing activities was a$35.2 million in 2018 compared to cash provided by financing activities of$847.5 million in 2017, a change of$882.7 million . The cash flows in 2017 relate to net cash provided by transactions with Lilly of$848.3 million compared to cash used in transactions with Lilly of$154.4 million in 2018, a reduction in financing of cash flows between periods of$1.0 billion . This, in addition to the consideration paid to Lilly in connection with the Separation, was partially offset by net cash provided from financing transactions related to the Separation including the proceeds from long-term debt and our IPO. The remainder of the proceeds from the financing related to the Separation will be paid to Lilly in future periods and is reflected as restricted cash in our consolidated balance sheet. Capital Expenditures Capital expenditures were$140.4 million during 2019, an increase of$5.9 million compared to 2018. We expect 2020 capital expenditures to be approximately$150 million . Description of Indebtedness For a complete description of our debt and available credit facilities as ofDecember 31, 2019 , see Note 9: Debt to our consolidated and combined financial statements. Contractual Obligations Payments due under contractual obligations as ofDecember 31, 2019 , are set forth below: Years More Than 5 (Dollars in millions) Total(1) Less Than 1 Year 1 - 3 Years 4 - 5 Years Years Long-term debt obligations, including interest payments(2)$ 2,771.5 $ 77.6$ 981.2 $ 1,578.2 $ 134.5 Operating leases 91.6 26.0 32.2 16.9 16.5 Purchase obligations(3) 1,127.4 1,079.8 29.9 7.7 10.0 Other long-term liabilities 18.4 5.7 8.5 0.8 3.4 Total$ 4,008.9 $ 1,189.1 $ 1,051.8 $ 1,603.6 $ 164.4 (1) We excluded deferred taxes because we cannot reasonably estimate the timing of future cash outflows associated with those liabilities. (2) Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We used current period assumptions for interest rates to compute expected interest payments on variable rate debt instruments and swaps. (3) Represents open purchase orders as ofDecember 31, 2019 and contractual payment obligations with each of our significant vendors which are noncancelable and are not contingent. In connection with our pending acquisition of the animal health business of Bayer as discussed in Note 6: Acquisitions, inAugust 2019 , we entered into a commitment letter that provides for financing consisting of up to$750 million in a revolving facility,$3.0 billion in a term facility, and$2.75 billion in a senior secured bridge facility. In connection with the financing commitment letter, we will incur fixed commitment fees of$40.4 million that will become due and payable upon the closing of the pending acquisition or the termination of the Purchase Agreement
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with Bayer. These fees have not been recorded on the consolidated balance sheet as ofDecember 31, 2019 . See Note 22: Subsequent Events to our consolidated and combined financial statements for updates regarding financing secured after the balance sheet date. Critical Accounting Policies The preparation of financial statements in accordance withU.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Certain of our accounting policies are considered critical because these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by us, often requiring 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. The following is a summary of accounting policies that we consider critical to the consolidated and combined financial statements. Revenue Recognition Our gross product revenue is subject to deductions that are generally estimated and recorded in the same period that the revenue is recognized and that primarily represent revenue incentives (rebates and discounts) and sales returns. For example: •for revenue incentives, we use our historical experience with similar incentives programs and current sales data and estimates of inventory levels at our channel distributors to evaluate the impact of such programs on revenue and continually monitor the impact of this experience and adjust as necessary; and •for sales returns, we consider items such as: local returns policies and practices; returns as a percentage of revenue; an understanding of the reasons for past returns; estimated shelf life by product; and estimate of the amount of time between shipment and return to estimate the impact of sales returns. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. Although the amounts recorded for these revenue deductions are dependent on estimates and assumptions, historically our adjustments to actual results have not been material. The sensitivity of our estimates can vary by program, type of customer and geographic location. Amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. See Note 4: Summary of Significant Accounting Policies to our consolidated and combined financial statements for further discussion regarding our revenue recognition policy. Acquisitions and Fair Value We account for the assets acquired and liabilities assumed in an acquisition based on their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as estimated asset lives, can materially affect our consolidated results of operations. The fair values of intangible assets are re-determined using information available at the acquisition date based on expectations and assumptions that are deemed reasonable by management. These fair value estimates require significant judgment with respect to future volume and prices, use of working capital, the selection of appropriate discount rates, product mix, income tax rates and other assumptions and estimates. Such estimates and assumptions are determined based upon our business plans and when applicable, market participants' views of us and other similar companies. Depending on the facts and circumstances, we may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities. We determine fair value of any contingent consideration liability that results from a business combination by utilizing a market approach (i.e., based on quoted market values, significant other observable inputs for identical or comparable assets or liabilities) a discounted cash flow analysis, or a Monte Carlo simulation (i.e., based on multiple potential financial outcomes using estimated variables such as expected revenues, growth rates, and a
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discount rate). Estimating the fair value of contingent consideration requires the use of significant estimates and judgments, including, but not limited to, revenue and the discount rate and will be remeasured every reporting period. Impairment of Indefinite-Lived and Long-Lived Assets We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset (or asset group) may not be recoverable. We identify impairment by comparing the projected undiscounted cash flows to be generated by the asset (or asset group) to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value utilizing a discounted cash flow analysis, and the cost basis is adjusted.Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and when certain impairment indicators are present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment. The estimated cash flows and fair values used in our impairment reviews require significant judgment with respect to future volume; use of working capital; foreign currency exchange rates; the selection of appropriate discount rates; product mix; income tax rates and other assumptions and estimates. Such estimates and assumptions are determined based upon our business plans and when applicable, market participants' views of us and other similar companies. We make these judgments based on our historical experience, relevant market size, historical pricing of similar products and expected industry trends. These assumptions are subject to change in future periods because of, among other things, additional information, financial information based on further historical experience, changes in competition, our investment decisions, volatility in foreign currency exchange rates, and results of research and development. A change in these assumptions or the use of alternative estimates and assumptions could have a significant impact on the estimated fair values of the assets, and may result in an impairment of the existing assets in a future period. During the years endedDecember 31, 2019 , 2018 and 2017, we recorded asset impairments of$15.4 million ,$81.9 million and$110.6 million , respectively, primarily due to product rationalization or changes in business strategy. For more information related to our impairment charges, see Note 7: Asset Impairment, Restructuring and Other Special Charges to our consolidated and combined financial statements. Deferred Tax Asset Valuation Allowances We maintain valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The realizability assessments made at a given balance sheet date are subject to change in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if we take operational or tax planning actions that could impact the future taxable earnings of a subsidiary. A change in these assumptions may result in an increase or decrease in the realizability of our existing deferred tax assets, and therefore a change in the valuation allowance, in future periods. As ofDecember 31, 2019 and 2018, we had valuation allowances of$32.7 million and$21.4 million , respectively. Quantitative and Qualitative Disclosures About Market Risk Foreign Exchange Risk We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange rates. We are primarily exposed to foreign exchange risk with respect to net assets denominated in the Euro, Swiss franc, British pound, Canadian dollar, Australian dollar and Brazilian real. As part of theTSA , Lilly maintained a foreign currency risk management program through a central shared entity, which entered into derivative contracts to hedge foreign currency risk associated with forecasted transactions for the entire company, including historically for our operations. Gains and losses on derivative contracts entered into by Lilly were previously 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. We implemented our own foreign currency risk management program and assumed all hedging activities in the second
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quarter of 2019. We face foreign currency exchange exposures when we enter into transactions arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. We also face currency exposure that arises from translating the results of our global operations to theU.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates in future periods, but our historical results prior to 2018 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 related to the translation of the results of our foreign operations would decrease our net income by approximately$7.4 million for the year endedDecember 31, 2019 . We also bear foreign exchange risk associated with the future cash settlement of an existingNIH . InOctober 2018 , we entered into a fixed interest rate, 5-year,750 million Swiss franc NIH against Swiss franc assets. TheNIH is expected to generate approximately$25 million in cash and contra interest expense per year; however, there is potential for significant 2023 settlement exposure on the750 million Swiss franc notional if theU.S. dollar devalues versus the Swiss franc. Interest Risk We are exposed to interest rate risk on the long-term debt we incurred in connection with our IPO. Prior to our IPO, we did not have any interest rate exposure. We have cash flow risk associated with our$371.4 million of borrowings under the Term Credit Facility that pay interest based on variable rates. We actively monitor our exposure and may enter into financial instruments to fix the interest rate based on our assessment of the risk. Recently Issued Accounting Pronouncements For discussion of our new accounting standards, see Note 4: Summary of Significant Accounting Policies - Implementation of New Financial Accounting Pronouncements to our consolidated and combined financial statements.
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