Elanco Animal Health Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Elanco is a global animal-health company with food-animal and companion-animal products. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $657.7 million | $731.1 million |
| Gross profit | $325.0 million | $387.3 million |
| Cost of sales as % of revenue | 50.6% | 47.0% |
| Asset impairment, restructuring and other special charges | $74.8 million | $24.9 million |
| Interest expense, net | $16.5 million | $20.8 million |
| Net income (loss) | $(49.1) million | $31.5 million |
| Diluted EPS | $(0.12) | $0.09 |
| Operating cash flow | $4.3 million | $8.1 million |
| Cash and cash equivalents at period-end | $1,206.4 million | Not provided for this comparison |
| Total debt at period-end | $2,061.6 million | Not provided for this comparison |
Revenue declined 10%, reflecting a 10% volume decrease and a 1% unfavorable foreign-exchange impact, partly offset by 1% higher pricing. Gross profit and gross margin also fell; management attributed the margin pressure primarily to product and geographic mix and foreign exchange effects on international inventories sold. The pretax loss was $67.8 million, compared with pretax income of $44.8 million; the tax benefit was $18.7 million. Comprehensive loss was $118.0 million, including $39.2 million of after-tax cash-flow-hedge losses and $29.3 million of foreign-currency translation losses.
Liquidity, debt and financing
Cash, cash equivalents and restricted cash totaled $1,217.1 million at March 31, 2020. Current assets were $3,120.6 million and current liabilities were $707.5 million. Operating cash flow was positive but modest; investing activities used $19.6 million, while financing activities provided $896.6 million. Financing cash inflows principally reflected the January common-stock and tangible-equity-unit offerings, partly offset by repayment of the term loan.
Elanco repaid $371.4 million of term-loan principal in January. It ended the quarter with $2,061.6 million of debt, including $2.0 billion of senior notes and $79.2 million of TEU amortizing notes. The company raised approximately $767.5 million net from a 25-million-share stock offering and $528.5 million net from TEUs. It priced a proposed $4.275 billion seven-year term loan B and a $750 million five-year revolving facility to help finance the Bayer acquisition; the filing says the debt agreements were expected to be executed upon acquisition closing. Management said available cash, operating cash flows and financing arrangements were expected to meet needs for at least the next 12 months.
Material changes versus the prior year
- Revenue fell across companion-animal categories: Disease Prevention declined 25% to $140.3 million and Therapeutics declined 19% to $65.8 million. Food Animal Future Protein & Health grew 8% to $180.0 million; Ruminants & Swine declined 8% to $252.6 million.
- Management cited reduced distributor channel inventory, partly in response to COVID-19, as a significant volume headwind. Disease Prevention revenue fell $45.6 million and Therapeutics fell $15.6 million.
- Special charges rose to $74.8 million, primarily from acquisition transaction and integration costs, including Bayer-related work and standalone systems and process implementation.
- Weighted-average basic shares increased to 403.9 million from 365.7 million, reflecting the stock offering and TEU-related shares.
- Cash increased substantially from $334.0 million at year-end 2019, largely due to equity and TEU proceeds. Long-term debt fell from $2,330.5 million to $2,035.6 million, after repayment of the term facility.
Outlook, commentary and risks
The filing does not provide a specific numerical full-year earnings or revenue forecast. Management estimated that distributor inventory reductions reduced Q1 revenue by approximately $60 million and could have a further $80 million to $100 million revenue impact, primarily in Q2, as the approach expanded across businesses and geographies. Elanco anticipated further COVID-19-related demand pressure, including fewer veterinary visits and clinic constraints, food-processing plant closures, strained producer economics and lower dairy production. It also reported higher freight costs and warned of potential supply-chain, customer-collection and liquidity effects, while noting that it had not yet experienced significant supply-chain interruptions.
The pending Bayer animal-health acquisition was expected to close no earlier than July 1, 2020, subject to customary conditions and antitrust approvals. Consideration was approximately $5.3 billion cash plus Elanco shares valued at approximately $2.3 billion, subject to agreement terms. Elanco agreed to sell the worldwide rights to Osurnia and Vecoxan and U.S. rights to Capstar for an aggregate $285 million, with closing subject to conditions, including regulatory consent decrees. Acquisition completion, financing, integration, synergies and COVID-19 effects remain uncertain. Financing commitment fees of $40.4 million would become payable upon acquisition closing or termination of the purchase agreement and were not recorded at quarter-end.
Elanco estimated standalone transition and systems costs at $240 million to $290 million, net of potential real-estate dispositions and employee-benefit changes; some costs would be capitalized. Other notable exposures include competition and generics, foreign-exchange movements, distributor and customer credit risk, animal disease outbreaks, product safety and regulatory matters, and cybersecurity. No significant probable and estimable litigation liabilities were recorded, and the filing reported no significant current litigation claim. Management stated disclosure controls were effective and reported no material first-quarter change in internal controls over financial reporting.
Key facts for investors to verify
- Whether subsequent-quarter revenue reflects end-customer demand or distributor destocking, and whether the estimated additional $80 million to $100 million channel-reduction impact occurred.
- How COVID-19 affected veterinary visits, food-animal demand, freight expense, supply continuity, receivable collections and cash flow.
- Whether the Bayer acquisition closed on schedule, what antitrust remedies or divestitures were required, and the final financing and share issuance.
- Progress toward the $240 million to $290 million standalone-cost estimate and the level of recurring versus one-time acquisition and integration charges.
- Debt and liquidity after the acquisition, including execution and terms of the proposed term loan and revolving facility, interest-rate exposure and covenant headroom.
- Revenue trends by product category, foreign exchange, gross margin and the continuing impact of channel inventory adjustments.