Elanco Animal Health Incorporated — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Elanco develops, manufactures and sells animal-health products for pets and farm animals. Results include Bayer Animal Health from its August 1, 2020 acquisition, limiting direct comparability with 2020.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,279 | $586 | $2,521 | $1,244 |
| Net loss | $(210) | $(53) | $(271) | $(102) |
| Basic and diluted loss per share | $(0.43) | $(0.13) | $(0.56) | $(0.25) |
| Operating cash flow | Not separately presented for the quarter | $171 | $164 |
- Q2 revenue rose 118% year over year; six-month revenue rose 103%. Management attributed Q2 growth to $750 million from the legacy Elanco portfolio and $529 million from Bayer Animal Health. For the six-month period, those contributions were $1,433 million and $1,088 million, respectively.
- Q2 product-line revenue: Pet Health $685 million, up 170%; Farm Animal $567 million, up 79%; Contract Manufacturing $27 million. Acquisition contribution, prior-year channel inventory reductions and COVID-19 comparisons materially affected growth.
- Cost of sales was 43% of revenue in Q2 versus 51% a year earlier; for the first half it was 44% versus 51%. Management cited acquired product mix, manufacturing productivity and pricing. First-half cost of sales included $63 million of acquired-inventory fair-value step-up amortization.
- Q2 R&D was $94 million (7% of revenue); marketing, selling and administrative expense was $385 million (30%); intangible amortization was $129 million. Asset impairment, restructuring and other special charges were $299 million.
- Six-month cash flow: operating activities provided $171 million, investing activities used $15 million and financing activities used $65 million. Cash and cash equivalents were $580 million at June 30, up from $495 million at December 31, 2020.
- At June 30, total debt carrying value was $6,097 million, including $555 million current and $5,542 million long-term. Long-term debt included a $4,140 million term loan B. Total liabilities were $8,853 million and equity was $7,980 million.
Material changes and unusual items
- The $265 million pre-tax write-down of the Shawnee, Kansas and Speke, U.K. manufacturing-site disposal groups was the principal unusual Q2 charge. Elanco completed the Shawnee sale on August 1, 2021; the Speke sale was expected in Q1 2022.
- Q2 net loss widened to $210 million from $53 million. Six-month interest expense increased to $121 million from $41 million, primarily reflecting debt used to finance Bayer Animal Health. Special charges also increased, while 2020 other income included a $46 million gain on sale of Australian land and buildings.
- On June 15, Elanco agreed to acquire Kindred Biosciences for approximately $440 million, or $9.25 per share, subject to customary conditions and shareholder approval. The company expected to close in Q3 2021 and intended to use cash and its revolving credit facility as needed.
- Elanco reported compliance with debt covenants at June 30. It expected to refinance $500 million of senior notes due August 27, 2021 in Q3 2021 and stated it believed available liquidity was sufficient for planned needs and covenant compliance.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management noted that pet-health sales are seasonal and interim results may not indicate full-year performance. It described farm-animal demand recovery as volatile and uncertain, with COVID-19 effects, labor shortages, inflation, disease and weaker poultry and aquaculture markets among the factors affecting demand.
- Management said first-half 2021 supply operations had not experienced significant COVID-19-related interruptions, but warned of possible supplier, freight-cost and logistics disruptions. Foreign-exchange movements increased first-half revenue by 3%; a hypothetical 10% adverse currency movement was estimated to reduce six-month net income by approximately $15 million.
- Seresto flea-and-tick collars are subject to putative class actions and regulatory and congressional scrutiny. The EPA was considering a petition seeking cancellation or suspension of the product’s registration. Elanco disputed the allegations and said it believed no recall or cancellation was warranted.
- On July 1, 2021, Elanco received an SEC subpoena concerning channel inventory and sales practices before mid-2020 and said it was cooperating. The filing states the outcome cannot be predicted.
- Shareholder class actions concerning alleged disclosures about supply chain, inventory, revenue, projections and distributor relationships remained unresolved. Elanco said no material litigation liabilities had been recorded because no significant claims were both probable and estimable.
- Restructuring plans included approximately 330 planned position eliminations under the January 2021 program and completion of initiatives by year-end 2021. The company also said operations-focused transition service agreements with Lilly were exited as planned in the first half and expected minimal additional standalone-company costs.
Important facts for investors to verify
- How much reported growth reflects Bayer Animal Health versus underlying legacy Elanco demand, and how channel inventory and distributor sales practices affect revenue.
- Execution and financial impact of the KindredBio acquisition, the manufacturing-site sales, and planned synergies and restructuring savings.
- Refinancing and repayment of the $500 million notes due in August 2021, debt reduction progress, and continued covenant compliance.
- Developments in the SEC inquiry, shareholder litigation and Seresto-related legal and regulatory matters, including any financial or commercial effects.
- Whether cost-of-sales improvements and cash generation persist after acquired-inventory amortization and unusual impairment charges.