Elanco Animal Health Inc
For the period ended Dec 31, 2024. Filed Feb 25, 2025.
View on SEC.govAbout this filing
A company's yearly report to the SEC, with audited financial statements. It is the fullest account a company gives of its business, its finances and the risks it sees.
FY2024 · Filed Feb 25, 2025
ELAN$25.74+8.7%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-K
Period ended 2023-12-31; filed 2024-02-26.
0001739104-24-000009
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCurrent report: 10-K
Period ended 2024-12-31; filed 2025-02-25.
0001739104-25-000014
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 91 previous paragraphs and 97 current paragraphs.
36 unchanged; 35 reworded; 26 added; 17 removed; 3 previous and 0 current paragraphs rearranged.
Tables are not compared: 13 previous and 14 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (26)
Current report
Bovaer: In May 2024, the FDA completed its comprehensive, multi-year review of Bovaer (3-NOP), a first-in-class methane-reducing feed ingredient for use in lactating dairy cattle. Producers began feeding the product to cattle in the U.S. during the third quarter of 2024.
Current report
Zenrelia: We received final FDA approval for Zenrelia, a JAK inhibitor targeting control of pruritus and atopic dermatitis in dogs, in September 2024. We launched Zenrelia shortly after final approval, with the first sales occurring in late September. We have also received approval for Zenrelia in Brazil, Canada and Japan. Additional reviews are ongoing in other key markets, including Europe, U.K. and Australia.
Current report
Credelio Quattro: In October 2024, we received final approval from the FDA for Credelio Quattro, a monthly chewable tablet for dogs that protects against fleas, ticks, heartworms, roundworms, hookworms and three different species of tapeworms. Credelio Quattro was launched, with the first commercial sale occurring in January 2025.
Current report
Experior: In October 2024, we received multiple combination clearance approvals from the FDA for Experior to be used in combination with other farm animal products, allowing for broader use in heifers, which represent nearly 40% of the fed cattle population in the U.S.
Current report
Aqua Business Divestiture: On July 9, 2024, we closed the sale of our aqua business to a subsidiary of Merck Animal Health, for $1,294 million in cash. We utilized a vast majority of these proceeds to repay previously outstanding term loan debt, thereby reducing our leverage and expected future interest expense. Our aqua business included products across both warm-water and cold-water species and generated revenue of $81 million in 2024, through the divestiture date, and $175 million in 2023. Strategically, this divestiture has allowed us to prioritize our investments in larger markets with greater long-term earnings potential.
Current report
Assets sold included inventories, real property and equipment, including our manufacturing sites in Canada and Vietnam, and certain intellectual property, technology and other intangible assets, including marketed products.
Current report
Along with these assets, approximately 280 commercial and manufacturing employees were transferred to Merck Animal Health as part of this divestiture. We recorded a pre-tax gain on divestiture of $640 million, while income tax expense associated with this gain was approximately $170 million, a majority of which is payable in 2025. See Note 4. Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements for further information.
Current report
Acquisition and Integration Activity: In November 2024, we acquired a manufacturing facility in Speke, U.K., including its workforce and related assets such as inventory and property and equipment, from a former contract manufacturing supply partner, TriRx Speke Ltd (TriRx Speke), for $36 million.
Current report
Farm animal revenue decreased $21 million, or 1%, driven by the divestiture of our aqua business in July 2024, which we estimate resulted in a decrease of $84 million in revenues year-over-year, and to a lesser degree the impact of foreign currency exchange rates. Partially offsetting these decreases were a 2% increase in pricing and higher volumes for our non-aqua products. Volume increases of non-aqua products were driven by strength in U.S. cattle, led by Experiorand Rumensin, and strength in poultry sales globally, partially offset by weakness in global swine markets, volume declines associated with our previous strategic decisions to change how we operate in and sell into certain international markets, including Argentina, and the impact from the European recall of Kexxtone, which occurred during the second quarter of 2024.
Current report
Marketing, selling and administrative expenses increased $29 million, or 2%, in 2024 compared to 2023, primarily driven by higher advertising and employee-related expenses and investments supporting our global pet health business, partially offset by cost savings associated with the completion of our ERP system integration in the second quarter of 2023 and the restructuring plan that was authorized and initiated in the first quarter of 2024.
Current report
Amortization of intangible assets decreased $21 million in 2024 compared to 2023. This decrease was primarily driven by changes in foreign currency exchange rates and the elimination of amortization related to our aqua business intangible assets, which met the criteria to be classified as held for sale on February 1, 2024, at which date amortization of these intangible assets ceased. See Note 4. Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements for further information.
Current report
Amounts recorded to asset impairment, restructuring and other special charges during the year ended December 31, 2024, included a $53 million impairment charge related to the write-off of a pet health IPR&D asset, $44 million of costs associated with the restructuring plan discussed above, $18 million of acquisition and divestiture-related charges, primarily associated with our aqua business divestiture, and $15 million of asset impairments tied to the financial difficulties of our former contract manufacturing supply partner, TriRx, the largest of which was a $12 million impairment of a contract asset related to a favorable supply agreement.
Current report
Gain on divestiture
Current report
As discussed above, we recorded a pre-tax gain of $640 million on the divestiture of our aqua business during the third quarter of 2024. For additional information, see Note 4. Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements.
Current report
Interest expense, net of capitalized interest decreased $42 million in 2024 compared to 2023, primarily due to lower average outstanding debt balances given our debt repayment activity in the current year (see Note 8. Debt to the consolidated financial statements for further information), as well as increased interest income from our net investment hedges, which we record as contra-interest expense, net of capitalized interest (see Note 9. Financial Instruments to the consolidated financial statements for further information). These decreases were partially offset by a $12 million non-cash charge in 2024 related to the write-off of previously deferred financing costs, given our early debt repayments.
Current report
Foreign currency exchange losses were lower in 2024 in large part due to the restructuring plan actions in the current year, which impacted how we operate in and sell into the Argentina market, among others, reducing our foreign currency exposure in these markets.
Current report
Income tax expense was $150 million in 2024 compared to $36 million in 2023. Income tax expense in 2024 included approximately $170 million related to income tax associated with the taxable gain on the divestiture of our aqua business. Our effective tax rate of 31% in 2024 differed from the statutory income tax rate primarily due to the income tax associated with the gain on the divestiture of our aqua business, jurisdictional earnings mix of income in higher tax jurisdictions and losses for which no tax benefit was recognized. These factors were partially offset by our ability to realize certain net operating loss carryforwards and other tax attributes, which had historically been offset by a valuation allowance, due to the gain on the sale of our aqua business, and the recognition of certain state tax credits.
Current report
We made $1,600 million of term loan debt repayments during the year ended December 31, 2024, utilizing the vast majority of the proceeds from the sale of our aqua business, a portion of the proceeds from our new $350 million Incremental Term Facility due 2031 and available cash on hand. We also repaid $200 million, net on our Revolving Credit Facility and $25 million, net on our Securitization Facility. Combined, these net repayments of $1,475 million during 2024 have significantly reduced our leverage and anticipated future interest expense.
Current report
Cash provided by investing activities was $1,158 million for the year ended December 31, 2024, and was driven by cash proceeds of $1,294 million from the sale of our aqua business in July 2024, and to a lesser extent, the collection of a $66 million receivable related to the previous divestiture of our Shawnee and Speke facilities. These proceeds from investing activities were partially offset by $147 million of net purchases of property and equipment and software and $36 million of cash paid for the acquisition of the Speke facility (see Note 4. Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements for additional information on current and prior year acquisition and divestiture activities). Cash used for investing activities of $169 million during the year ended December 31, 2023, primarily related to $140 million of cash paid for property and equipment and software and $19 million paid for our acquisitions of NutriQuest and NutriQuest Brazil.
Current report
Critical Accounting Estimates
Current report
Acquisitions and Divestitures
Current report
Acquisitions
Current report
Divestitures
Current report
Determining the gain or loss on the divestiture of a business under GAAP requires us to allocate a portion of our single reporting unit's goodwill to the divested business' carrying value (the disposal group). The determination of how much goodwill to allocate to a disposal group is based on the relative fair value of the business being sold and the fair value of the remaining reporting unit being retained, which in the case of Elanco, is our remaining consolidated business.
Current report
In determining the amount of goodwill to be included in our aqua business disposal group, we compared the fair value of the disposal group, which we determined corresponded with the agreed upon sales price, to the estimated fair value of our single reporting unit as a whole. We estimated the fair value of our single reporting unit using the income approach. Significant management judgment was required in estimating the fair value of our single reporting unit, including, but not limited to, estimates and assumptions regarding future cash flows of our single reporting unit, revenue growth and other profitability measures, such as gross margin and earnings before interest, taxes, depreciation and amortization (EBITDA) margin and the determination of an appropriate discount rate. While we believe the estimates and assumptions underlying our fair value estimates were reasonable in view of all available information, significant changes to any of these significant judgments could have resulted in a different amount of goodwill allocated to our aqua business disposal group, and if so, would have impacted the amount of the pre-tax gain recognized.
Current report
While we believe the estimates and assumptions underlying our annual goodwill impairment review in the fourth quarter of 2024 were reasonable in view of all available information, these assumptions are subject to change in future periods because of, among other things, reductions in our estimates of future cash flows, revenue growth or other profitability measures, and/or an increase in the discount rate, which is highly correlated with long-term treasury rates. We have observed long-term treasury rates increase since our annual goodwill impairment review. While we believe, as of December 31, 2024, the current rate environment does not represent a triggering event, based on our best estimates we believe a further 50 basis-point increase in long-term treasury rates could result in a triggering event, and therefore, a quantitative goodwill impairment test. While we cannot say with certainty whether or not such a quantitative test would result in a goodwill impairment, we do believe a 100 basis-point increase, absent any other changes, would likely result in a goodwill impairment charge.
Removed paragraphs (17)
Previous report
Seresto: On July 13, 2023, the EPA announced its completion of a comprehensive, multi-year review, with support from the FDA, of the Seresto flea and tick collar and confirmed the continued registration of the collar. As part of the EPA’s scientific review process, the agency analyzed incident data including third-party assessments and compared data to other EPA-registered pet products. Based on comprehensive data from the study, the EPA concluded that Seresto continues to meet all the EPA’s standards for registration under FIFRA, which ensures that products do not pose an unreasonable risk of harm. We believe the EPA's conclusions align with those of authorities worldwide, with Seresto being approved for use in more than 80 countries and supported by veterinary professionals around the globe. The robust scientific evidence continues to support Seresto's safe use.
Previous report
Macroeconomic Factors: Our operations are exposed to and are impacted by various global macroeconomic factors. We face continuing market and operating challenges across the globe due to, among other factors, the Russia-Ukraine conflict, conditions related to the COVID-19 pandemic, supply chain disruption, higher interest rates, foreign currency exchange rate volatility and inflationary pressures. Continued evolution of these conditions has led to economic slowdowns in certain countries and/or regions and volatility in consumer behavior. We anticipate global macroeconomic pressures to continue in 2024.
Previous report
Russia-Ukraine Conflict: As a global animal health leader, we have an obligation to support the health of animals and people. At the center of that work is ensuring access and availability of food and avoiding the spread of disease. At this time, we are limiting our business in Russia to only the essential products that support these needs, while complying with all imposed sanctions. We do not currently manufacture products in Russia, but we continue to support the health of animals and people in the country. We have entered into an agreement pursuant to which we will supply raw material inventories to an entity in Russia that will manufacture its own products, which we will then distribute, because of new laws requiring products sold in Russia to be produced there as well. We do not conduct business with the Russian government. During 2023, revenue from Russian and Ukrainian customers represented approximately 1% of our consolidated revenue. Assets held in Russia as of December 31, 2023, represented less than 1% of our consolidated assets.
Previous report
Seasonality: While many of our products are sold consistently throughout the year, we do experience seasonality in our pet health business due to increased demand for certain parasiticide product offerings in the first half of the year. For example, based upon historical results, approximately 75% and 60% of total annual revenue contributed by our higher-margin parasiticide products Seresto and Advantage Family, respectively, typically occurs during the first half of the year, which is reflective of the flea and tick season in the Northern Hemisphere.
Previous report
Due principally to the sharp increase in long-term treasury rates, which led to an increased discount rate assumption relative to prior assessments, our quantitative test resulted in a $1,042 million pre-tax impairment charge. While we believe the estimates and assumptions underlying our goodwill impairment test were reasonable in view of all available information, and while no further impairment charges were recorded during the fourth quarter of 2023, future changes in our discount rate assumption, whether driven by increases in long-term treasury rates or other factors, or future changes in other significant assumptions or the use of alternative estimates and assumptions, could have a significant impact on our reporting unit's estimated fair value, exposing us to further goodwill impairment losses. For additional information regarding this goodwill impairment, see Note 11. Goodwill and Intangibles to the consolidated financial statements.
Previous report
Subsequent Events
Previous report
Announced sale of aqua business: On February 5, 2024, we entered into an agreement to sell our aqua business to a subsidiary of Merck Animal Health for approximately $1.3 billion in cash, payable at closing, which we currently anticipate to occur around mid-year 2024. Our aqua business includes products across both warm-water and cold-water species and generated $175 million in revenue during each of the years ended December 31, 2023 and 2022. Upon closing of this sale, we intend to use the after-tax cash proceeds to accelerate our debt paydown efforts, creating balance sheet flexibility and lower future interest expense, which will allow us to prioritize our investments in larger markets with greater long-term earnings potential. The closing of the agreement is subject to customary closing conditions, including the receipt of applicable antitrust approvals. If the agreement is terminated due to failure to obtain required antitrust approvals, subject to certain conditions, Merck Animal Health will be required to pay us a termination fee of $55 million in cash. See Note 19. Subsequent Events to the consolidated financial statements for further information.
Previous report
(1)Constant Currency (CC), a non-GAAP measure, is defined as revenue growth excluding the impact of foreign exchange rates. The calculation assumes the same foreign currency exchange rates that were in effect for the comparable prior year were used in translation of the current period results. We believe this metric provides a useful comparison to previous periods.
Previous report
Farm animal revenue increased $52 million, or 2%, driven by an increase in price, which was partially offset by an unfavorable impact from foreign exchange rates. On a constant currency basis, the increase of 4% was primarily attributable to pricing increases, as volumes were flat year over year. Revenue from new products, led by Experior, revenue from our acquisitions of NutriQuest and NutriQuest Brazil and strength in poultry globally were offset by reduced sales of cattle implants due to U.S. regulatory changes, a less favorable environment for sheep due to weather conditions and generic competition.
Previous report
Marketing, selling and administrative expenses increased $20 million, or 2%, in 2023 compared to 2022, primarily driven by increases in marketing and promotional spend relating to our U.S. Pet Health business and employee-related expenses.
Previous report
Amortization of intangible assets increased $20 million in 2023 compared to 2022, due to the addition of amortization of intangible assets recorded from our acquisitions of certain assets of NutriQuest and NutriQuest Brazil in 2023, as well as the impact of foreign currency exchange rates.
Previous report
Interest expense, net of capitalized interest increased $36 million in 2023 compared to 2022, primarily due to higher interest rates on our outstanding variable-rate debt and rate increases on our Senior Notes driven by credit downgrades. Interest expense, net of capitalized interest in 2022 included $20 million of debt extinguishment charges, which did not recur in 2023.
Previous report
$38 million in 2022. Foreign currency losses in 2023 included $40 million of transaction losses, of which $25 million related to our affiliate in Argentina, and devaluation losses of $10 million related to the hyperinflationary environments in Turkey and Argentina.
Previous report
Income tax expense for the year ended December 31, 2022, included a $17 million income tax benefit reclassified from accumulated other comprehensive loss due to the termination of interest rate swaps and a $16 million Brazil income tax refund claim resulting from a Brazil Supreme Court decision rendered in 2022 that determined certain Brazil state value-added tax (VAT) incentives were not subject to federal tax. For additional information, see Note 15. Income Taxes to the consolidated financial statements.
Previous report
Cash used for investing activities decreased $10 million to $169 million for the year ended December 31, 2023, compared to $179 million for the year ended December 31, 2022. The decrease in cash used for investing activities was primarily driven by a decrease of $31 million in cash paid for property and equipment and software, which was partially offset by cash paid for the acquisitions of certain assets of NutriQuest and NutriQuest Brazil, totaling $19 million, during the year ended December 31, 2023.
Previous report
Critical Accounting Policies and Estimates
Previous report
Acquisitions and Fair Value
Reworded paragraphs (35)
Previous wording
Management’s discussion and analysis of financial condition and results of operations (MD&A) is intended to assist the reader in understanding and assessing significant changes and trends related to our financial position and results of operations. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Item 8 of Part II of this Form 10-K. Certain statements in this Item 7 of Part II of this 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.
Current wording
Management’s discussion and analysis of financial condition and results of operations (MD&A) is intended to assist the reader in understanding and assessing significant changes and trends related to our results of operation and financial position. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Item 8 of Part II of this Form 10-K. Certain statements in this Item 7 of Part II of this Form 10-K constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements and Risk Factor Summary" and Item 1A. “Risk Factors,” may cause our actual results, financial position and cash flows to differ materially from these forward-looking statements.
Previous wording
Elanco 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. Our diverse, durable product portfolio is sold in more than 90 countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine, sheep and aqua (collectively, farm animal). With a heritage dating back to 1954, we consistently innovate to improve the health of animals and to benefit our customers while fostering an inclusive, cause-driven culture for our employees. We operate our business in a single segment, directed at advancing the well-being of animals, people and the planet, enabling us to realize our vision of Food and Companionship Enriching Life.
Current wording
Elanco 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. Our diverse, durable product portfolio is sold in more than 90 countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine, sheep and, prior to the divestiture of our aqua business in July 2024 (see below), aqua (collectively, farm animal). With a heritage dating back to 1954, we consistently innovate to improve the health of animals and to benefit our customers while fostering an inclusive, cause-driven culture for our employees. We operate our business in a single segment, directed at advancing the well-being of animals, people and the planet, enabling us to realize our vision of Food and Companionship Enriching Life.
Previous wording
A key element of our targeted value creation strategy is to drive revenue growth through portfolio development and product innovation. We continue to pursue the development of new chemical and biological molecules, as well as additional registrations and indications for current products. Our future growth and success depend on both our pipeline of new products, including new products we develop internally, develop with partners or that we are able to obtain through licenses or acquisitions, and the life cycle management of our existing products. We believe we are an industry leader in animal health R&D, with a track record of successful product innovation, business development and commercialization. For example, in 2023 we received conditional approval from the USDA and launched our canine parvovirus monoclonal antibody treatment in the U.S. This product is the first and only approved therapeutic solution to treat canine parvovirus, one of the most contagious and deadly viruses to dogs, if not treated.
Current wording
A key element of our targeted value creation strategy is to drive revenue growth through portfolio development and product innovation. We continue to pursue the development of new chemical and biological molecules, as well as additional registrations and indications for current products. Our future growth and success depend on both our pipeline of new products, including new products we develop internally, develop with partners or that we obtain through licenses or acquisitions, and the life cycle management of our existing products. We believe we are an industry leader in animal health R&D, with a track record of successful product innovation, business development and commercialization. New product development and regulatory highlights during 2024 included the following:
Previous wording
Acquisition and Integration Activity: In 2023 we acquired certain U.S. marketed products, pipeline products, inventory and an assembled workforce from NutriQuest, LLC (NutriQuest) and certain assets including inventory and distribution rights for certain marketed products from NutriQuest Nutricao Animal Ltda (NutriQuest Brazil). Additionally, as previously disclosed, in April 2023 we successfully completed the integration of the Bayer Animal Health business into our ERP system. We incurred costs totaling $93 million in 2023 related to integration activities, including the build out of processes and systems to support our global organization. We anticipate some additional costs through early 2024 as we finalize these integration activities.
Current wording
In 2023, we acquired certain U.S. marketed products, pipeline products, inventory and an assembled workforce from NutriQuest, LLC (NutriQuest) and certain assets including inventory and distribution rights for certain marketed products from NutriQuest Nutricao Animal Ltda (NutriQuest Brazil). Additionally, we successfully completed the integration of the Bayer Animal Health business into our ERP system, including the build out of processes and systems to support our global organization. See Note 4. Acquisitions, Divestitures and Other Arrangements and Note 5. Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements for further information on these acquisition and integration activities.
Previous wording
Approved restructuring plan: In February 2024 our Board of Directors authorized a restructuring plan (the restructuring plan) to improve operational efficiencies and better align our organizational structure with current business needs, top strategic priorities and key growth opportunities. Specifically, the restructuring plan is intended to reallocate resources by shifting international resources from farm animal to pet health as we plan for the global launches of certain potential blockbuster products currently under regulatory review. Further, the restructuring plan is expected to result in changes in how we operate in and sell into the Argentina market, among others, which we anticipate will reduce our foreign currency exposure.
Current wording
Restructuring Activities: In February 2024, our Board of Directors authorized a restructuring plan (the restructuring plan) to improve operational efficiencies and better align our organizational structure with current business needs, top strategic priorities and key growth opportunities. Specifically, the restructuring plan was intended to reallocate resources by shifting international resources from farm animal to pet health as we plan for the global launches of certain potential blockbuster products. Further, the restructuring plan impacted how we operate in and sell into the Argentina market, among others, reducing our foreign currency exposure in those markets.
Previous wording
The restructuring plan will result in the elimination of approximately 420 personnel across our global organization. Expected pre-tax charges associated with the restructuring plan total $50 to $55 million in 2024, including $40 to $45 million of cash-based severance costs, the majority of which will be paid in 2024. The restructuring plan is expected to result in annualized net savings of $30 to $35 million. See Note 19. Subsequent Events to the consolidated financial statements for further information.
Current wording
We incurred $44 million of charges associated with the restructuring plan in 2024, the majority relating to cash-based severance costs. The restructuring plan is expected to result in annualized net savings of $30 to $35 million. See Note 5. Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements for further information.
Previous wording
The following discussion and analysis of the consolidated statements of operations should be read along with the consolidated financial statements and the notes thereto included in Item 8. Financial Statements and Supplementary Data. For results of operations discussions related to years ended December 31, 2022 and 2021, refer to Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023. Our results of operations for the periods presented below may not be comparable with prior periods or with our results of operations in the future due to many factors, including but not limited to the factors identified in "Key Trends and Factors Affecting Our Results of Operations" above.
Current wording
The following discussion and analysis of the consolidated statements of operations should be read along with the consolidated financial statements and the notes thereto included in Item 8. Financial Statements and Supplementary Data. For results of operations discussions related to the years ended December 31, 2023 and 2022, refer to Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 26, 2024. Our results of operations for the periods presented below may not be comparable with prior periods or with our results of operations in the future due to many factors, including but not limited to the factors identified in the "Product Development and Regulatory Update" and "Other Key Trends and Factors Affecting Our Results of Operations" discussions above.
Previous wording
As a global company, our products are sold in more than 90 countries, and as a result significant portions of our revenue and expenses are recorded in currencies other than the U.S. dollar. As a result, our revenue is influenced by changes in foreign currency exchange rates. For the years ended December 31, 2023 and 2022, approximately 51% of our revenue was denominated in foreign currencies. Foreign currency movements decreased revenue by 1% and 4% for the years ended December 31, 2023 and 2022, respectively, compared to the prior years.
Current wording
Our products are sold in more than 90 countries, and as a result, a significant portion of our revenue is recorded in currencies other than the U.S. dollar. Because of this, our revenue is influenced by changes in foreign currency exchange rates. For the years ended December 31, 2024 and 2023, approximately 53% and 51%, respectively, of our revenue was denominated in foreign currencies.
Previous wording
Further, increases or decreases in inventory levels in our distribution channels can positively or negatively impact our revenue results, leading to periodic variations in revenue. This can be a result of various factors, such as end customer demand, new customer contracts, heightened and generic competition, the need for certain inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to shifting market dynamics, payment terms we extend, which are subject to internal policies, blackout shipping periods due to system downtime, implementations and integrations and procedures and environmental factors beyond our control.
Current wording
Further, increases or decreases in inventory levels in our distribution channels can positively or negatively impact our periodic revenue results, leading to variations in revenue. This can be a result of various factors, such as end customer demand, new customer contracts, heightened and generic competition, the need for certain inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to shifting market dynamics, payment terms we extend, which are subject to internal policies, blackout shipping periods due to system downtime, implementations and integrations and procedures and environmental factors beyond our control.
Previous wording
On a global basis, our revenue by product category for the years ended December 31 is summarized as follows:
Current wording
Our revenue by product category for the years ended December 31, 2024 and 2023, was as follows:
Previous wording
(2)Represents revenue from arrangements in which we manufacture products on behalf of a third-party.
Current wording
(1)Represents revenue from arrangements in which we manufacture products on behalf of a third party and royalty revenue.
Previous wording
On a global basis, the effect of price, foreign currency exchange rates and volumes on changes in revenue for the year ended December 31, 2023, as compared to the prior year, was as follows:
Current wording
The effects of price, foreign currency exchange rates, volume changes and the impact of the divestiture of our aqua business on changes in revenue for the year ended December 31, 2024, as compared to the prior year, were as follows:
Previous wording
Pet health revenue decreased $34 million, or 2%, driven by a decrease in volume and an unfavorable impact from foreign exchange rates, partially offset by an increase in price. On a constant currency basis, the decrease of 1% was primarily attributable to declines in demand for retail parasiticide products in Spain and continued competitive pressure on certain products in the U.S. veterinary channel. These factors were partially offset by increased pricing, higher demand for over-the-counter products in the U.S. and increased revenue from new products.
Current wording
Pet health revenue increased $39 million, or 2%, driven by a 3% increase in pricing, partially offset by slightly lower volumes. Volume decreases were primarily due to competitive pressure on certain products in the U.S. veterinary channel and purchasing patterns of certain over-the-counter (OTC) products by U.S. retailers. These decreases were partially offset by revenue from new products and improved demand for retail parasiticide products in certain European markets, including Spain.
Previous wording
Cost of sales increased $18 million in 2023 as compared to 2022, and cost of sales as a percentage of revenue increased from 43% to 44% year-over-year, reflecting the impact of inflation and planned reduced throughput at certain manufacturing sites in support of efforts to reduce inventory balances on-hand and improve cash conversion.
Current wording
Cost of sales increased $72 million in 2024 as compared to 2023, and cost of sales as a percentage of revenue increased from 44% to 45% year-over-year. These increases were due to a combination of inflation, planned reduced throughput at certain manufacturing sites and product mix associated with the divestiture of our aqua business, partially offset by increased pricing.
Previous wording
R&D expenses increased $6 million, or 2%, in 2023 compared to 2022, primarily driven by higher employee-related expenses and project costs.
Current wording
R&D expenses increased $17 million, or 5%, in 2024 compared to 2023, primarily driven by higher employee-related expenses and timing of project costs.
Previous wording
Asset impairment, restructuring and other special charges decreased $56 million in 2023 compared to 2022, primarily due to lower impairment charges and costs associated with the implementation of new systems, programs and processes resulting from the integration of Bayer Animal Health. For additional information regarding our asset impairment, restructuring and other special charges, see Note 5. Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements.
Current wording
Amounts recorded to asset impairment, restructuring and other special charges during the year ended December 31, 2023, primarily represented $93 million of costs associated with the implementation of new systems, programs and processes due to the integration of Bayer Animal Health and $32 million of asset impairment charges. For additional information regarding our asset impairment, restructuring and other special charges, see Note 5. Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements.
Previous wording
As discussed above, due principally to the sharp increase in long-term treasury rates in the third quarter of 2023, which we considered a triggering event, we performed a quantitative goodwill impairment test, which resulted in a $1,042 million pre-tax impairment charge. For additional information, see Note 11. Goodwill and Intangibles to the consolidated financial statements.
Current wording
As previously disclosed, there was a sharp increase in long-term treasury rates during the third quarter of 2023, and as a result, we assessed our long-lived assets, including goodwill, for impairment. Due principally to an increased discount rate assumption, which was driven by the sharp increase in long-term treasury rates, our quantitative goodwill impairment test resulted in a $1,042 million pre-tax impairment charge. For additional information, see Note 11. Goodwill and Intangibles to the consolidated financial statements.
Previous wording
Other expense, net increased $43 million in 2023, as compared to 2022, due primarily to settlement provisions recorded in 2023 of $15 million related to the Seresto class action lawsuits and $12.5 million for a possible resolution or settlement with the SEC related to potential disclosure claims (see Note 16. Commitments and Contingencies to the consolidated financial statements for further information). Foreign currency exchange losses were also higher in 2023, as we incurred losses of $50 million, compared to foreign currency exchange losses of
Current wording
Other expense, net for the year ended December 31, 2024, primarily consisted of foreign currency exchange losses and an $8 million write-down of the retained equity interest in our previously divested BiomEdit R&D platform (see Note 4. Acquisitions, Divestitures and Other Arrangements to the consolidated financial statements for further information). Other expense, net for the year ended December 31, 2023, primarily consisted of foreign currency exchange losses of $50 million and settlement provisions of $15 million related to the Seresto class action lawsuit and $12.5 million for a possible resolution or settlement with the SEC related to potential disclosure claims, which was ultimately settled in 2024 for $15 million, with the increase in the provision recorded within other expense, net in 2024 (see Note 16. Commitments and Contingencies to the consolidated financial statements for further information).
Previous wording
Income tax expense was $36 million in 2023 compared to $6 million in 2022, and the effective tax rate was (3)% in 2023, compared to (8)% in 2022. The negative effective tax rate in 2023 differed from the statutory income tax rate primarily due to the recognition of the aforementioned goodwill impairment charge that was non-deductible for income tax purposes in most of the impacted jurisdictions and an increase in our valuation allowance during the year, primarily attributable to the likelihood of not realizing the benefit of U.S. federal and state deferred tax assets due to pre-tax losses.
Current wording
The negative effective tax rate in 2023 differed from the statutory income tax rate primarily due to the recognition of the goodwill impairment charge recognized in 2023 that was non-deductible for income tax purposes in most of the impacted jurisdictions, as well as an increase in our valuation allowance, primarily attributable to the likelihood of not realizing the benefit of U.S. federal and state deferred tax assets due to pre-tax losses.
Previous wording
We believe our primary sources of liquidity are sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, funding existing marketed and pipeline products, capital expenditures, business development in our targeted areas, short-term and long-term debt obligations, such as principal and interest payments, as well as interest rate swaps, operating lease payments, purchase obligations and costs associated with business integrations. As of December 31, 2023, we had cash and cash equivalents of $352 million and unused borrowing capacity on our Revolving Credit Facility of approximately $550 million, of which an incremental $50 million was drawn in February 2024. In addition, we have the ability to access capital markets to obtain debt financing for longer-term funding, if required. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants.
Current wording
We believe our primary sources of liquidity are sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, funding existing marketed and pipeline products, capital expenditures, business development in our targeted areas, short-term and long-term debt obligations, including both principal and interest payments, as well as interest rate swaps, operating lease payments, purchase obligations and costs associated with mergers, acquisitions, divestitures, business integrations and/or restructuring activities. As of December 31, 2024, we had cash and cash equivalents of $468 million and unused borrowing capacity on our Revolving Credit Facility of approximately $750 million. In addition, our Securitization Facility provides for additional borrowing capacity based on our U.S. Net Eligible Receivables Balances. As of December 31, 2024, we had $125 million in undrawn borrowing capacity on this facility. We also have the ability to access capital markets to obtain debt financing for longer-term funding, if required. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants.
Previous wording
The following table provides a summary of cash flows from operating, investing and financing activities for the periods presented:
Current wording
The following table provides a summary of cash flows from operating, investing and financing activities for the years ended December 31, 2024 and 2023:
Previous wording
Cash provided by operating activities decreased $181 million to $271 million for the year ended December 31, 2023, compared to $452 million for the year ended December 31, 2022. The decrease in cash from operating activities primarily related to a decrease of $150 million of proceeds from interest rate swap settlements year-over-year. Additionally, a larger net loss in 2023 (excluding non-cash goodwill and other impairment charges) was partially offset by year-over-year changes in working capital.
Current wording
Cash provided by operating activities increased $270 million to $541 million for the year ended December 31, 2024, compared to $271 million for the year ended December 31, 2023. The increase in cash provided by operating activities was driven by year-over-year improvements in changes in operating assets and liabilities, partially offset by a decrease of $52 million of cash proceeds from interest rate swap settlements year-over-year.
Previous wording
Cash used for financing activities was $83 million for the year ended December 31, 2023, compared to $549 million for the year ended December 31, 2022. In 2023, cash used to repay long-term borrowings totaled $402 million and included the repayment in full of our 4.272% Senior Notes due 2023. These long-term debt repayments were partially offset by $200 million of net borrowings on our Revolving Credit Facility ($350 million in borrowings, net of $150 million in repayments) and $125 million of net borrowings on our new Securitization Facility ($250 million in borrowings, net of $125 million in repayments). Cash used for financing activities during 2022 primarily reflected the tender offer to partially settle the 4.272% Senior Notes due 2023, as well as net repayments on our Revolving Credit Facility and repayment of indebtedness outstanding under our Term Loan B credit facility, partially offset by proceeds from our incremental term facilities issued in 2022. See Note 8. Debt to the consolidated financial statements for further information related to our debt related borrowing and repayment activity.
Current wording
Cash used for financing activities was $1,492 million for the year ended December 31, 2024, compared to $83 million for the year ended December 31, 2023. In 2024, we repaid $1,600 million of term loan debt, $200 million, net on our Revolving Credit Facility and $25 million, net on our Securitization Facility. These debt repayments were partially offset by proceeds of $350 million from the issuance of our Incremental Term Facility due 2031 in August 2024. Cash used for financing activities during 2023 primarily reflected the repayment of our previously outstanding 4.272% Senior Notes due 2023, partially offset by $200 million of net borrowings on our Revolving Credit Facility and $125 million of net borrowings on our Securitization Facility. See Note 8. Debt to the consolidated financial statements for further information related to our debt related borrowing and repayment activity.
Previous wording
Capital expenditures, which we define as cash paid for property and equipment and software, were $140 million during 2023, a decrease of $31 million compared to 2022. We anticipate capital expenditures in 2024 to be approximately $180 million to $200 million.
Current wording
Capital expenditures, which we define as cash paid for property and equipment and software, were $147 million during 2024, an increase of $7 million compared to 2023. We anticipate capital expenditures in 2025 to be approximately $225 million to $255 million. This anticipated increase in capital expenditures in 2025 compared to recent years is due, in part, to expected capital spend associated with the expansion of our monoclonal antibody manufacturing facility in Elwood, Kansas.
Previous wording
Our contractual obligations and commitments as of December 31, 2023, are primarily comprised of long-term debt obligations, operating leases and purchase obligations. Our long-term debt obligations are comprised of our expected principal and interest obligations. Purchase obligations consist of open purchase orders as of December 31, 2023, and contractual payment obligations with significant vendors which are noncancelable and not contingent. These obligations are primarily short-term in nature. See Note 13. Leases to the consolidated financial statements for further discussion regarding the contractual obligations related to our new corporate headquarters in Indianapolis, Indiana.
Current wording
Our contractual obligations and commitments as of December 31, 2024, are primarily comprised of long-term debt obligations, operating leases, including a 25-year lease commitment that will commence in 2025 for our new corporate headquarters in Indianapolis, Indiana, and purchase obligations. Our long-term debt obligations are comprised of our expected principal and interest obligations. Purchase obligations consist of open purchase orders as of December 31, 2024, and contractual payment obligations with significant vendors which are noncancelable and not contingent. These obligations are primarily short-term in nature. See Note 13. Leases to the consolidated financial statements for further discussion regarding our contractual obligations related to leases, including for our new corporate headquarters in Indianapolis, Indiana.
Previous wording
The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and underlying assumptions can impact all elements of our consolidated financial statements. Certain of our accounting policies are considered critical because these policies are the most important to the fair presentation of our financial statements, including the disclosures thereto, and may require significant, difficult or complex judgments, probabilities and assumptions that we believe to be reasonable, but that can be inherently uncertain. If our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted. We regularly evaluate our estimates and assumptions and adjust them when facts and circumstances indicate the need for change. Such changes generally would be reflected in our consolidated financial statements in the period they are determined. We apply estimation methodologies consistently from year to year. The following is a summary of accounting policies that we consider critical to the consolidated financial statements.
Current wording
The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Certain of our accounting estimates are considered critical because they are the most important to the fair presentation of our financial statements, including the disclosures thereto, and often require significant, difficult or complex judgments, probabilities and assumptions. While we believe our critical accounting estimates to be reasonable based on all relevant information available, given their inherent uncertainty, if our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted. We regularly evaluate our estimates and assumptions and adjust them when facts and circumstances indicate the need for change, and such changes generally would be reflected in our consolidated financial statements in the period they are determined. We apply estimation methodologies consistently from year to year. The following is a summary of accounting estimates that we consider critical to our consolidated financial statements.
Previous wording
Our gross product revenue is subject to deductions that are generally estimated and recorded in the same period the revenue is recognized and primarily represent revenue incentives (rebates and discounts). For estimates related to our 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.
Current wording
Our gross product revenue is subject to reductions that are generally estimated and recorded in the same period the revenue is recognized and primarily represent revenue incentives (rebates and discounts). For estimates related to revenue incentives, we use our historical experience with similar incentives programs, current sales data and estimates of inventory levels at our channel distributors to estimate the impact of such programs on revenue and continually monitor the impact of this experience and adjust as necessary.
Previous wording
Although the amounts recorded for 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. 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.
Current wording
Although the amounts recorded for revenue reductions 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 reductions can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. 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.
Previous wording
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 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 revenues and EBIT margins, 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. For significant acquisitions, we normally engage an independent valuation specialist to assist in valuing significant assets and liabilities.
Current wording
We account for assets acquired and liabilities assumed in a business combination 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, as well as estimated asset lives, can materially affect our consolidated results of operations. The fair values of intangible assets are 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 revenues and earnings before interest and taxes (EBIT) margins, 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 similar companies. We often utilize an income approach, which is a valuation technique that provides an estimate of fair value based on market participant expectations of the cash flows an asset would generate over its remaining useful life. For significant acquisitions, we normally engage an independent valuation specialist to assist in valuing significant assets and liabilities.
Previous wording
Impairment of Goodwill and Other Indefinite-Lived Assets
Current wording
Impairment of Goodwill and Indefinite-Lived Assets
Previous wording
Goodwill and other indefinite-lived intangible assets are not amortized but are reviewed at least annually for impairment during the fourth quarter, or more frequently if there is a significant change in events or circumstances that indicate the fair value of our single reporting unit or other indefinite-lived asset(s) is more likely than not less than its carrying amount (i.e., a "triggering event"). When required, a comparison of fair value to the carrying amount of our asset(s) is performed to determine the amount of impairment, if any. We begin by assessing qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit or other indefinite-lived asset(s) is less than its carrying value. Based on that qualitative assessment, if we conclude it is more likely than not that the fair value is less than its carrying value, we conduct a quantitative impairment test, which involves comparing the estimated fair value of our single reporting unit or indefinite-lived asset(s) to its carrying value. For goodwill impairment tests, we estimate the fair value of our single reporting unit using an income approach. If the carrying value of the reporting unit exceeds its estimated fair value, we recognize an impairment loss for the difference. We also use an income approach when estimating the fair value of our other indefinite-lived intangible assets, which primarily represent IPR&D acquired from prior business combinations.
Current wording
Goodwill is not amortized but is reviewed at least annually for impairment during the fourth quarter, or more frequently if there is a significant change in events or circumstances that indicates the fair value of our single reporting unit is more likely than not less than its carrying amount (a "triggering event"). When required, a comparison of fair value to the carrying amount of our reporting unit is performed to determine the amount of impairment, if any. We begin by assessing qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value. Based on that qualitative assessment, if we conclude it is more likely than not that the fair value is less than its carrying value, we conduct a quantitative impairment test, which involves comparing the estimated fair value of our single reporting unit to its carrying value. For quantitative goodwill impairment tests, when required, we estimate the fair value of our single reporting unit using an income approach. If the carrying value of the reporting unit exceeds its estimated fair value, we recognize an impairment loss for the difference. Significant management judgment is required in estimating our reporting unit’s fair value and in the creation of forecasts of future operating results to be used in the discounted cash flow method of the income approach valuation. These include, but are not limited to, estimates and assumptions regarding our future cash flows, revenue growth rates and other profitability measures such as gross margin and EBITDA margin; and the determination of an appropriate discount rate.
Previous wording
Given the sharp increase in long-term treasury rates in the third quarter of 2023, we assessed our long-lived assets for impairment, concluding that a triggering event existed as of September 30, 2023, for certain indefinite-lived assets, including goodwill. Accordingly, we performed interim quantitative impairment tests of our goodwill and other indefinite-lived assets, which resulted in a $1,042 million pre-tax goodwill impairment charge. Significant management judgment was required in estimating our reporting unit’s fair value and in the creation of forecasts of future operating results that were used in the discounted cash flow method of the income approach valuation. These included, but were not limited to, estimates and assumptions regarding our future cash flows, revenue growth and other profitability measures such as gross margin and EBITDA margin; and the determination of an appropriate discount rate. We made these significant judgments based on our historical experience, relevant market size, historical pricing and expected industry trends. While we believe the estimates and assumptions underlying our goodwill impairment test were reasonable in view of all available information, 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, results of research and development and changes in macroeconomic conditions, including rising long-term treasury rates and inflation. Future changes in our discount rate assumption, whether driven by increases in long-term treasury rates or other factors, or future changes in any of these other significant assumptions or the use of alternative estimates and assumptions, could have a significant impact on our reporting unit's estimated fair value and may expose us to further goodwill impairment losses. For additional information regarding this goodwill impairment, see Note 11. Goodwill and Intangibles to the consolidated financial statements.
Current wording
Given the sharp increase in long-term treasury rates in the third quarter of 2023, we assessed our long-lived assets for impairment, concluding that a triggering event existed for certain indefinite-lived assets, including goodwill. Accordingly, we performed interim quantitative impairment tests of our goodwill and other indefinite-lived assets, which resulted in a $1,042 million pre-tax goodwill impairment charge. We have closely monitored for additional triggering events since this impairment charge, and the results of our most recent annual review indicated that the estimated fair value of our single reporting unit more likely than not exceeded its carrying amount.
Previous wording
Further, during the years ended December 31, 2023, 2022 and 2021, we recorded asset impairments related to our other indefinite-lived intangibles of $6 million, $59 million and $55 million, respectively. For more information related to our indefinite-lived asset impairment charges, see Note 5. Asset Impairment, Restructuring and Other Special Charges to the consolidated financial statements.
Current wording
Similar to goodwill, indefinite-lived intangible assets are also reviewed for impairment at least annually during the fourth quarter, or more frequently if there is a triggering event. We also typically use an income approach when estimating the fair value of our indefinite-lived intangible assets, which primarily represent IPR&D acquired from prior business combinations. During the years ended December 31, 2024, 2023 and 2022, we recorded asset impairments related to our indefinite-lived intangibles of $56 million, $6 million and $59 million, respectively. For more information related to our indefinite-lived asset impairment charges, see Note 5. Asset Impairment, Restructuring and Other Special Charges and Note 11. Goodwill and Intangibles to the consolidated financial statements.
Previous wording
We maintain valuation allowances unless it is more likely than not that all of the deferred tax asset will be realized. Changes in valuation allowances are typically 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 of tax attributes, amount and availability of taxable temporary differences 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. In making such judgments, significant weight is given to evidence that can be objectively verified.
Current wording
We maintain valuation allowances unless it is more likely than not that all of the deferred tax asset will be realized. Changes in valuation allowances are typically 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 of tax attributes, availability of taxable temporary differences 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. In making such judgments, significant weight is given to evidence that can be objectively verified.
Previous wording
As of December 31, 2023 and 2022, we had valuation allowances of $363 million and $228 million, respectively. In recent years we have incurred pre-tax losses in the U.S. primarily as a result of impairments and transaction, restructuring, integration and other costs. As a result, we have concluded that it is “more likely than not” that a portion of the U.S. deferred assets will not be utilized, and have recorded valuation allowances of $289 million and $181 million, respectively, against these deferred tax assets. Under current tax laws, the valuation allowance will not limit our ability to utilize U.S. deferred tax assets provided we can generate sufficient future taxable income in the U.S. We anticipate we will continue to record a valuation allowance against the losses until such time as we are able to determine it is “more likely than not” that the deferred tax asset will be realized.
Current wording
As of December 31, 2024 and 2023, we had valuation allowances of $269 million and $363 million, respectively. In recent years we have incurred pre-tax losses in the U.S. primarily as a result of impairments and transaction, restructuring, integration and other costs. As a result, we have concluded that it is “more likely than not” that a portion of the U.S. deferred assets will not be utilized, and have recorded valuation allowances of $218 million and $289 million, respectively, against these deferred tax assets. Under current tax laws, the valuation allowance will not limit our ability to utilize U.S. deferred tax assets provided we can generate sufficient future taxable income in the U.S. We anticipate we will continue to record a valuation allowance against the losses until such time as we are able to determine it is “more likely than not” that the deferred tax asset will be realized.
Rearranged previous paragraphs (3)
Previous report — wording carried elsewhere
Goodwill impairment: Given the sharp increase in long-term treasury rates in the third quarter of 2023, we assessed our long-lived assets for impairment, concluding that qualitative impairment indicators (i.e., a triggering event) existed as of September 30, 2023, for certain indefinite-lived assets, including goodwill. Accordingly, we performed an interim quantitative goodwill impairment test. Significant management judgment was required in estimating our reporting unit’s fair value and in the creation of forecasts of future operating results that were used in the discounted cash flow method of the income approach valuation. These included, but were not limited to, estimates and assumptions regarding our future cash flows, revenue growth and other profitability measures such as gross margin and EBITDA margin, and the determination of an appropriate discount rate. We made these significant judgments based on our historical experience, relevant market size, historical pricing and expected industry trends.
Previous report — wording carried elsewhere
Note: Numbers may not add due to rounding
Previous report — wording carried elsewhere
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.