Elanco Animal Health Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Elanco develops, manufactures and sells animal-health products for pets and farm animals worldwide. The Bayer Animal Health acquisition closed August 1, 2020, so Q1 2021 includes Bayer while Q1 2020 does not; reported year-over-year growth is therefore not directly comparable.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $1.242 billion | $658 million; up 89% reported and 88% at constant exchange rates |
| Net loss | $61 million | $49 million |
| Loss per share | $0.12 | $0.12 |
| Cost of sales | $569 million; 46% of revenue | $333 million; 51% of revenue |
| Operating cash flow | $22 million | $4 million |
| Cash and cash equivalents | $515 million at March 31 | $495 million at December 31, 2020 |
| Total debt carrying amount | $6.161 billion, including $605 million current | $6.127 billion at December 31, 2020 |
Pet Health revenue was $645 million, up 213%, including $369 million of Bayer portfolio revenue. Farm Animal revenue was $578 million, up 33%, including $174 million from Bayer. Contract manufacturing contributed $19 million. Bayer accounted for $559 million of total revenue; management says it cannot accurately determine Bayer’s post-acquisition earnings separately.
Reported cost of sales included $62 million of Bayer inventory fair-value step-up amortization. Excluding it, cost of sales would have been about 41% of revenue, compared with 51% in Q1 2020. Intangible amortization rose to $147 million from $52 million. Interest expense increased to $61 million from $16 million, primarily due to acquisition financing. Asset impairment, restructuring and other special charges were $108 million versus $75 million.
At March 31, current assets were $3.344 billion and current liabilities $2.034 billion. Cash flow from investing activities was positive $10 million; financing activities provided $2 million. Cash, cash equivalents and restricted cash increased by $9 million during the quarter. Comprehensive loss was $466 million, including a $466 million foreign-currency translation loss in other comprehensive income.
Material changes and drivers
- Revenue rose mainly because Bayer was included for the full quarter, alongside 86% volume growth, 2% price growth and limited favorable foreign exchange. Management also cited a favorable comparison with Q1 2020, when distributor inventory reductions lowered legacy Elanco revenue by about $160 million overall, including about $60 million in Pet Health.
- Legacy Farm Animal revenue faced weaker demand in some markets, particularly international poultry and aquaculture, COVID-related pressure on consumption and producer profitability, and generic competition. China demand and pricing partly offset these effects.
- R&D expense increased to $89 million from $67 million, but declined to 7% of revenue from 10%; some planned project spending shifted from Q1 to Q2. Marketing, selling and administrative expense increased to $348 million from $182 million, while remaining 28% of revenue.
- Q1 operating cash flow improved by $18 million year over year, but changes in operating assets and liabilities were a significant use of cash. Acquisition-related financing and the 2020 equity and tangible equity unit offerings make financing cash flow comparisons especially uneven.
Outlook, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the supplied filing text. Management expected recovery in end-consumer demand, particularly food service, to continue during 2021, while noting ongoing pressure in certain farm-animal markets.
- Management said available cash, operating cash flow and credit facilities should be sufficient for planned needs, and expected to remain in compliance with debt covenants. The company was in compliance at March 31, 2021. It had drawn $150 million on its revolving facility in February, repaid $100 million in March and repaid the remaining $50 million in April.
- The revolving facility has a $750 million commitment. The $4.151 billion term loan B carries a floating LIBOR-based rate; approximately $4.1 billion of interest-rate swaps partially convert variable-rate exposure to fixed. Senior notes include $500 million due in August 2021, $750 million due in 2023 and $750 million due in 2028.
- A January 2021 restructuring is expected to eliminate approximately 330 positions and be substantially complete by year-end; Q1 charges related to it were about $41 million. The post-acquisition September 2020 restructuring eliminated approximately 900 positions. The company had $118 million in restructuring reserves at quarter-end, substantially expected to be paid within 18 months.
- COVID-19 had not caused significant supply-chain interruptions in Q1, but could affect suppliers, freight costs, demand and distributor liquidity. Management cited continued pressure in some markets and tighter distributor inventory management.
- Seresto flea-and-tick collar litigation and a congressional subcommittee information request were ongoing. Elanco said it stood behind the product’s safety and efficacy, was cooperating with the subcommittee and EPA, and believed no removal or recall was warranted. The company reported no material litigation liabilities because no significant claims were considered both probable and estimable.
- Other risks include substantial indebtedness, acquisition integration and synergy execution, competition and generics, product safety or regulatory actions, foreign-exchange exposure, and the uncertain effects of the pandemic. A hypothetical 10% adverse foreign-exchange move was estimated to reduce quarterly net income by approximately $6 million.
- Standalone-company investments and transition costs were estimated at $315 million to $335 million, net of completed and planned real-estate dispositions and employee-benefit changes; part would be capitalized and the remainder expensed. Operations-focused transition service agreements with Lilly ended as planned on March 31, 2021.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying legacy-business performance; confirm the Bayer contribution and the effects of prior-year channel destocking.
- Track integration costs, restructuring execution, expected synergies, and the remaining standalone-company costs.
- Monitor debt maturities, floating-rate exposure, refinancing plans, covenant headroom and cash generation relative to debt service.
- Follow Seresto litigation and regulatory developments, as well as any resulting product, sales or financial effects.
- Assess recovery in farm-animal demand, distributor inventory levels, COVID-19 effects and product safety or competitive developments.