Elanco Animal Health Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Elanco develops, manufactures and markets animal-health products for pets and farm animals; it reports as one operating segment. The 2021 results include Bayer Animal Health, acquired August 1, 2020, and KindredBio from August 27, 2021, so year-over-year comparisons are materially affected by acquisitions.
Financial performance and position
- Revenue: Q3 revenue was $1.131 billion, up 27% from $890 million; nine-month revenue was $3.652 billion, up 71% from $2.134 billion. Q3 growth reflected 24% volume, 2% price and 1% favorable foreign exchange. For nine months, growth reflected 67% volume, 2% price and 2% favorable foreign exchange.
- Product categories: Q3 Pet Health revenue was $527 million (+31%) and Farm Animal revenue was $583 million (+23%). Nine-month revenue was $1.857 billion for Pet Health (+116%) and $1.728 billion for Farm Animal (+41%). Much of the increase reflected Bayer revenue and the comparison with partial-year inclusion in 2020.
- Profitability: Net loss was $104 million in Q3 versus $135 million a year earlier; loss per share was $0.21 versus $0.29. Nine-month net loss was $375 million versus $237 million; loss per share was $0.77 versus $0.56. Cost of sales was 44% of revenue in both 2021 periods, compared with 50% in 2020. The filing does not provide a clear operating-margin figure.
- Expenses and unusual items: Asset impairment, restructuring and other special charges were $111 million for Q3 and $518 million for nine months. Nine-month charges included a $271 million write-down related to the planned Shawnee and Speke manufacturing-site sales. Q3 also included a $50 million impairment of an R&D asset after unfavorable efficacy results prompted termination of a farm-animal parasiticide project.
- Cash flow: Nine-month operating cash flow was $260 million, up from $52 million. Investing cash outflow was $456 million, including the KindredBio acquisition; financing cash inflow was $166 million. Cash and cash equivalents were $453 million at September 30, 2021, down from $495 million at December 31, 2020.
- Debt and liquidity: Debt carrying value was $6.334 billion, including $61 million current and $6.273 billion long-term, versus $6.127 billion at year-end 2020. The company had drawn $250 million on its $750 million revolving facility. It reported compliance with debt covenants and said liquidity sources were sufficient for planned and existing requirements. It refinanced $500 million of notes due in 2021 with a Farm Credit term facility.
- Balance sheet: Total current assets were $3.160 billion and current liabilities $1.362 billion. Goodwill was $6.191 billion and other intangible assets, net, were $5.816 billion. Nine-month comprehensive loss was $824 million, including substantial foreign-currency translation losses.
Changes, outlook and risks
- KindredBio was acquired for $444 million in cash, financed with cash and revolving-credit borrowings. Its preliminary purchase allocation included $352 million of intangible assets, primarily in-process R&D; the allocation remained subject to finalization.
- Management attributed improved gross margin to the acquired Bayer portfolio, manufacturing productivity and pricing, partly offset by product mix. Integration and standalone-company costs, amortization and interest expense remained significant.
- Management gave no specific financial guidance in the supplied filing text. It expected the January 2021 restructuring initiatives to be substantially complete by year-end 2021 and the Speke sale to close in Q1 2022. On October 5, 2021, after quarter-end, Elanco announced plans to pursue a microbiome R&D platform carve-out, targeted by the end of Q1 2022; completion and structure were uncertain.
- Management cited COVID-19-related supply-chain disruption, raw-material shortages, freight-cost increases, labor constraints and uncertain farm-animal demand. Results are also exposed to distributor inventory swings, seasonality in pet parasiticides, generic competition and foreign exchange.
- Material legal and regulatory matters include Seresto product-related class actions and an EPA petition concerning its registration, a congressional information request, shareholder litigation, and an SEC subpoena concerning channel inventory and sales practices before mid-2020. Management said it intended to defend the lawsuits and cooperate with the SEC; outcomes were uncertain. No material litigation liabilities had been recorded because no significant claims were considered both probable and estimable.
Important facts for investors to verify
- How much of reported revenue growth reflects acquired Bayer sales versus organic volume, price and currency effects.
- Whether gross-margin gains persist as product mix, input costs and inventory effects change.
- Progress on KindredBio integration, pipeline development and realization of expected benefits.
- Cash generation, debt reduction, floating-rate exposure and continued compliance with revolving-credit covenants.
- Final costs and proceeds from the Shawnee and Speke transactions, and the terms and feasibility of the proposed microbiome carve-out.
- Developments in Seresto litigation and regulatory review, shareholder lawsuits, and the SEC investigation.