Elanco Animal Health Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Financial statements are consolidated after Elanco’s separation from Lilly; Bayer Animal Health results are included only from its August 1, 2020 acquisition date, limiting direct comparability with 2019.
Business context
Elanco develops, manufactures and sells animal health products for pets and farm animals in more than 90 countries. It operates as one reporting segment. On August 1, 2020, Elanco acquired Bayer Animal Health for preliminary total consideration of $6.787 billion, including cash and Elanco shares. The acquired business contributed $591.9 million of revenue after closing; the company said it could not reliably determine its post-acquisition earnings contribution.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $3.273 billion | $3.071 billion |
| Net income (loss) | $(560.1) million | $67.9 million |
| Operating cash flow | $(41.0) million | $224.1 million |
| Cash and cash equivalents at year-end | $494.7 million | $334.0 million |
| Long-term debt, including current portion | $6.127 billion | $2.355 billion |
- Revenue rose 7% year over year, reflecting the Bayer acquisition. At constant exchange rates, total revenue increased 8%; legacy Elanco volume declined 15%, partly offset by 20% volume growth from Bayer Animal Health.
- Fourth-quarter revenue was $1.140 billion versus $787.0 million in fourth-quarter 2019. Net loss was $322.8 million versus $9.5 million; diluted loss per share was $0.66 versus $0.03.
- Cost of sales was 50.9% of revenue, compared with 47.9% in 2019. Excluding the $90.1 million amortization of acquired inventory fair-value step-up, cost of sales would have been approximately 48.2% of revenue.
- Operating expenses included $327.0 million of R&D, $996.6 million of marketing, selling and administrative expense, $359.9 million of intangible amortization, and $623.7 million of impairment, restructuring and other special charges.
- The 2020 net loss included significant acquisition, integration and restructuring costs. Other income of $178.3 million included $156.7 million of divestiture gains and a $45.6 million gain on an Australian property sale. Income tax benefit was $111.9 million, including a $74.9 million non-cash valuation-allowance charge against U.S. deferred tax assets.
- Cash used in investing activities was $4.779 billion, primarily reflecting the Bayer acquisition. Financing activities provided $4.954 billion, mainly from acquisition-related debt and equity issuance. Capital expenditures were $134.6 million and software purchases were $176.3 million.
- Current assets were $3.417 billion and current liabilities were $2.076 billion at year-end. The company reported $4.164 billion outstanding under its term loan B and $2.0 billion of senior notes. The $750 million revolving facility had no year-end balance; Elanco drew $150 million in February 2021 for working capital.
Material changes and management commentary
- The Bayer acquisition materially expanded Elanco’s pet-health portfolio and international and retail/e-commerce presence. Acquisition-related intangibles, goodwill, inventory step-up amortization, added debt and share issuance substantially changed the company’s scale and cost structure.
- Pet Health Disease Prevention revenue increased 26%, primarily from acquired products. Farm Animal Future Protein & Health and Farm Animal Ruminants & Swine each declined 1%; the company cited weaker legacy volumes, channel inventory reductions, COVID-19-related market pressure and, in some products, generic competition.
- Management estimated that first-half 2020 channel inventory reductions reduced revenue by approximately $160 million. Currency movements reduced full-year revenue by 1%.
- In September 2020, Elanco initiated a restructuring that eliminated approximately 900 positions across 40 countries. It expected about $11 million of additional non-severance restructuring charges in 2021. In January 2021, it announced a further plan to eliminate about 350 positions, with expected charges of $58 million to $77 million, mostly in the first quarter of 2021.
- Management expected lower end-consumer demand than the prior year to continue into 2021, particularly in farm animals, citing COVID-19 effects on food service, processing, producer economics and poultry and aquaculture markets. The filing does not provide quantified revenue or earnings guidance. Expected 2021 capital expenditures and software purchases were $170 million to $200 million.
- The company stated it expected liquidity to cover planned requirements and expected covenant compliance. It reported compliance with credit-facility covenants at December 31, 2020. It does not anticipate common-stock dividends in the foreseeable future.
Risks, contingencies and unusual items
- Key risks include successfully integrating Bayer Animal Health and realizing synergies; substantial debt, variable interest rates and restrictive covenants; COVID-19-related demand and supply disruption; competition and generics; regulation and changing demand for farm-animal antibiotics; product safety, quality and efficacy; and foreign-exchange exposure.
- Two shareholder class actions allege, among other matters, misleading statements concerning supply chain, inventory, revenue, projections and distributor relationships. Elanco said it considers the claims meritless and intends to defend them. The ultimate outcomes are uncertain; no material litigation liability was recorded because no significant claim was both probable and estimable.
- Goodwill was $6.225 billion and other intangible assets were $6.387 billion at year-end. The acquisition purchase-price allocation remained preliminary, making valuation assumptions and potential future impairment important to monitor.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. However, the internal-control assessment excluded Bayer Animal Health, representing approximately 10% of consolidated assets and 18% of 2020 revenue.
Investor verification priorities
- Separate acquisition-driven growth from legacy-business performance, and track channel inventory, end-market demand and constant-currency trends.
- Verify progress on Bayer integration, expected synergies, restructuring costs and whether operational improvements offset added amortization and other costs.
- Monitor operating cash flow, working capital, debt reduction, interest expense, covenant headroom and the February 2021 revolving-credit draw.
- Review the final Bayer purchase-price allocation, acquired intangible valuations, goodwill and impairment assumptions.
- Track the 2021 demand outlook, announced restructuring charges, class-action litigation and any developments affecting product regulation or generic competition.