UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 20212022
OR
☐ Transition Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER 001-38661
Elanco Animal Health Incorporated
(Exact name of Registrant as specified in its charter) | | | | | | | | |
| INDIANA | | 82-5497352 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
2500 INNOVATION WAY, GREENFIELD, INDIANA 46140
(Address of principal executive offices)
Registrant’s telephone number, including area code (877) 352-6261
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock, no par value | ELAN | New York Stock Exchange |
| 5.00% Tangible Equity Units | ELAT | New York Stock Exchange |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | | | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | | Smaller reporting company | ☐ |
| | | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of common stock outstanding as of August 5, 2021 were 473,019,1173, 2022 was 474,113,647.
ELANCO ANIMAL HEALTH INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 20212022
TABLE OF CONTENTS | | | | | | | | | | | | | | |
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| Item 2. | | | | |
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| Item 3. | | | | |
| Item 4. | | | | |
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| Item 1. | | | | |
| Item 1A. | | | | |
| Item 2. | | | | |
| Item 3. | | | | |
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| Item 6. | | | | |
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| 20212022 Q2 Form 10-Q | 2
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FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY
This Quarterly Report on Form 10-Q (Form 10-Q) includes forward-looking statements within the meaning of the federal securities laws. This quarterly report containsThese forward-looking statements, including,include, without limitation, statements concerning the impact on Elanco Animal Health Incorporated and its subsidiaries (collectively, Elanco, the Company, we, us or our) caused by the pending acquisitionintegration of Kindred Biosciences, Inc. (KindredBio), the integration of and the animal health business of Bayer Aktiengesellschaft (Bayer), expected synergies and cost savings, expectations relating to the sales of manufacturing facilities, product launches, independent company stand-up costs and timing, the coronavirus (COVID-19) global pandemic, conflict involving Russia and Ukraine and the potential impact on our business and global economic conditions, reduction of debt, expectations relating to liquidity and sources of capital, our expected compliance with debt covenants, cost savings, expenses, and expensesreserves relating to restructuring actions, our industry and our operations, performance and financial condition, and including, in particular, statements relating to our business, growth strategies, distribution strategies, product development efforts and future expenses.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important risk factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national, or global political, economic, business, competitive, market, and regulatory conditions, including but not limited to the following:
•heightened competition, including from generics;
•the impact of disruptive innovations and advances in veterinary medical practices, animal health technologies and alternatives to animal-derived protein;
•changes in regulatory restrictions on the use of antibiotics in farm animals;
•our ability to implement our business strategies or achieve targeted cost efficiencies and gross margin improvements;
•consolidation of our customers and distributors;
•an outbreak of infectious disease carried by farm animals;
•the impact on our operations, the supply chain, customer demand, and our liquidity as a result of the COVID-19 global health pandemic;
•the potential impact on our business and global economic conditions resulting from the conflict involving Russia and Ukraine;
•the success of our research and development (R&D)R&D and licensing efforts;
•misuse, off-label or counterfeiting use of our products;
•unanticipated safety, quality or efficacy concerns and the impact of identified concerns associated with our products;
•fluctuations in our business results due to seasonality and other factors;
•the impact of weather conditions and the availability of natural resources;
•risks related to the modification of foreign trade policy;
•risks related to currency rate fluctuations;
•our dependence on the success of our top products;
•the impact of customer exposure to rising costs and reduced customer income;
•the lack of availability or significant increases in the cost of raw materials;
•use of alternative distribution channels and the impact of increased or decreased sales to our channel distributors resulting in fluctuation in our revenues;
•manufacturing problems and capacity imbalances;
•challengesrisks related to our intellectual property rightsthe write-down of goodwill or our alleged violation of rights of others;identifiable intangible assets;
•risks related to our presence in foreign markets;the evaluation of animals;
•breachesmanufacturing problems and capacity imbalances;
•our ability to complete acquisitions and successfully integrate the businesses we acquire, including Kindred Biosciences, Inc. and the animal health business of Bayer (Bayer Animal Health);
•effect of our substantial indebtedness on our business;
•the uncertainties inherent in research relatingimpact of litigation, regulatory investigations, and other legal matters and the risk that our insurance policies may be insufficient to product safety and additional analysesprotect us from the impact of existing safety data;such matters;
•actions by regulatory bodies, including as a result of their interpretation of studies on product safety;
•unfavorable publicity resulting from media reports on our products;risks related to tax expense or exposure;
•public acceptancerisks related to environmental, health and safety laws and regulations;
•risks related to our presence in foreign markets;
•challenges to our intellectual property rights or our alleged violation of rights of others;
•our dependence on sophisticated information technology and infrastructure and the impact of breaches of our products; andinformation technology systems;
•the impact of litigation, regulatory investigations,increased regulation or decreased financial support related to farm animals;
•adverse effects of labor disputes, strikes, work stoppages, and other legal matters.the loss of key personnel or highly skilled employees;
•risks related to underfunded pension plan liabilities;
•our ability to complete acquisitions and successfully integrate the businesses we acquire, including KindredBio and the animal health business of Bayer (Bayer Animal Health);
•the effect of our substantial indebtedness on our business, including restrictions in our debt agreements that will limit our operating flexibility; and
•risks related to certain governance provisions in our constituent documents.
See Item 1A, “Risk Factors,” of Part I of our Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 20202021 filed with the United States (U.S.) Securities and Exchange Commission (SEC), and Item 1A, "Risk Factors," of Part II of our Quarterly Report on Form 10-Q for the period ended March 31, 2021 and Part II of this Quarterly Report on Form 10-Q, for a further description of these and other factors. Although we have attempted to identify important risk factors, there may be other risk factors not presently known to us or that we presently believe are not material that could cause actual results and developments to differ materially from those made in or suggested by the forward-looking statements contained in this quarterly report. If any of these risks materialize, or if any of the above assumptions underlying forward-looking statements prove incorrect, actual results and developments may differ materially from those made in or suggested by the forward-looking statements contained in this quarterly report. We caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this quarterly report. Any forward-looking statement made by us in this quarterly report speaks only as of the date hereof. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or to revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should be viewed as historical data.
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| 20212022 Q2 Form 10-Q | 4
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PART I
ITEM 1. FINANCIAL STATEMENTS
Elanco Animal Health Incorporated
Condensed Consolidated Statements of Operations (Unaudited)
(in millions, except per-share data) | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | Revenue | $ | 1,279 | | | $ | 586 | | | $ | 2,521 | | | $ | 1,244 | | Revenue | $ | 1,177 | | | $ | 1,279 | | | $ | 2,402 | | | $ | 2,521 | |
| Costs, expenses and other: | Costs, expenses and other: | | Costs, expenses and other: | |
| Cost of sales | Cost of sales | 551 | | | 296 | | | 1,120 | | | 629 | | Cost of sales | 484 | | | 551 | | | 993 | | | 1,120 | |
| Research and development | Research and development | 94 | | | 59 | | | 183 | | | 126 | | Research and development | 82 | | | 94 | | | 163 | | | 183 | |
| Marketing, selling and administrative | Marketing, selling and administrative | 385 | | | 163 | | | 733 | | | 345 | | Marketing, selling and administrative | 343 | | | 385 | | | 663 | | | 733 | |
| Amortization of intangible assets | Amortization of intangible assets | 129 | | | 49 | | | 276 | | | 101 | | Amortization of intangible assets | 133 | | | 129 | | | 270 | | | 276 | |
| Asset impairment, restructuring and other special charges | Asset impairment, restructuring and other special charges | 299 | | | 119 | | | 407 | | | 194 | | Asset impairment, restructuring and other special charges | 86 | | | 299 | | | 132 | | | 407 | |
| Interest expense, net of capitalized interest | Interest expense, net of capitalized interest | 60 | | | 25 | | | 121 | | | 41 | | Interest expense, net of capitalized interest | 67 | | | 60 | | | 119 | | | 121 | |
| Other income, net | (3) | | | (48) | | | (3) | | | (47) | | |
| Other (income) expense, net | | Other (income) expense, net | — | | | (3) | | | 9 | | | (3) | |
| | 1,515 | | | 663 | | | 2,837 | | | 1,389 | | | 1,195 | | | 1,515 | | | 2,349 | | | 2,837 | |
| Loss before income taxes | (236) | | | (77) | | | (316) | | | (145) | | |
| Income tax benefit | (26) | | | (24) | | | (45) | | | (43) | | |
| Net loss | $ | (210) | | | $ | (53) | | | $ | (271) | | | $ | (102) | | |
| Income (loss) before income taxes | | Income (loss) before income taxes | (18) | | | (236) | | | 53 | | | (316) | |
| Income tax expense (benefit) | | Income tax expense (benefit) | 4 | | | (26) | | | 27 | | | (45) | |
| Net income (loss) | | Net income (loss) | $ | (22) | | | $ | (210) | | | $ | 26 | | | $ | (271) | |
| | Loss per share: | | |
| Earnings (loss) per share: | | Earnings (loss) per share: | |
| Basic | Basic | $ | (0.43) | | | $ | (0.13) | | | $ | (0.56) | | | $ | (0.25) | | Basic | $ | (0.04) | | | $ | (0.43) | | | $ | 0.05 | | | $ | (0.56) | |
| Diluted | Diluted | $ | (0.43) | | | $ | (0.13) | | | $ | (0.56) | | | $ | (0.25) | | Diluted | $ | (0.04) | | | $ | (0.43) | | | $ | 0.05 | | | $ | (0.56) | |
| Weighted average shares outstanding: | Weighted average shares outstanding: | | Weighted average shares outstanding: | |
| Basic | Basic | 487.3 | | | 413.2 | | | 487.0 | | | 408.5 | | Basic | 488.4 | | | 487.3 | | | 488.2 | | | 487.0 | |
| Diluted | Diluted | 487.3 | | | 413.2 | | | 487.0 | | | 408.5 | | Diluted | 488.4 | | | 487.3 | | | 492.1 | | | 487.0 | |
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See notes to condensed consolidated financial statements.
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| 20212022 Q2 Form 10-Q | 5
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Elanco Animal Health Incorporated
Condensed Consolidated Statements of Comprehensive LossIncome (Loss) (Unaudited)
(in millions) | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Net loss | $ | (210) | | | $ | (53) | | | $ | (271) | | | $ | (102) | | |
| Net income (loss) | | Net income (loss) | $ | (22) | | | $ | (210) | | | $ | 26 | | | $ | (271) | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | |
| Unrealized gain (loss) on derivatives for cash flow hedges, net of taxes | (5) | | | (21) | | | 48 | | | (60) | | |
| Cash flow hedges, net of taxes | | Cash flow hedges, net of taxes | 8 | | | (5) | | | 117 | | | 48 | |
| Foreign currency translation | Foreign currency translation | 169 | | | 50 | | | (297) | | | 21 | | Foreign currency translation | (470) | | | 169 | | | (555) | | | (297) | |
| Defined benefit pension and retiree health benefit plans, net of taxes | Defined benefit pension and retiree health benefit plans, net of taxes | 3 | | | (1) | | | 11 | | | (2) | | Defined benefit pension and retiree health benefit plans, net of taxes | (1) | | | 3 | | | (2) | | | 11 | |
| Other comprehensive income (loss), net of taxes | Other comprehensive income (loss), net of taxes | 167 | | | 28 | | | (238) | | | (41) | | Other comprehensive income (loss), net of taxes | (463) | | | 167 | | | (440) | | | (238) | |
| Comprehensive loss | Comprehensive loss | $ | (43) | | | $ | (25) | | | $ | (509) | | | $ | (143) | | Comprehensive loss | $ | (485) | | | $ | (43) | | | $ | (414) | | | $ | (509) | |
See notes to condensed consolidated financial statements.
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| 20212022 Q2 Form 10-Q | 6
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Elanco Animal Health Incorporated
Condensed Consolidated Balance Sheets
(in millions)millions, except share data) | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (Unaudited) | | | | (Unaudited) | | |
| Assets | Assets | | | Assets | | |
| Current Assets | Current Assets | | Current Assets | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 580 | | | $ | 495 | | Cash and cash equivalents | $ | 507 | | | $ | 638 | |
| Accounts receivable, net of allowances of $10 (2021) and $9 (2020) | 1,067 | | | 872 | | |
| Accounts receivable, net of allowances of $10 (2022) and $12 (2021) | | Accounts receivable, net of allowances of $10 (2022) and $12 (2021) | 916 | | | 833 | |
| Other receivables | Other receivables | 107 | | | 205 | | Other receivables | 212 | | | 195 | |
| Inventories | Inventories | 1,450 | | | 1,578 | | Inventories | 1,334 | | | 1,373 | |
| Prepaid expenses and other | Prepaid expenses and other | 227 | | | 256 | | Prepaid expenses and other | 338 | | | 237 | |
| | Restricted cash | 0 | | | 11 | | |
| | Total current assets | Total current assets | 3,431 | | | 3,417 | | Total current assets | 3,307 | | | 3,276 | |
| Noncurrent Assets | Noncurrent Assets | | | | Noncurrent Assets | | | |
| | Goodwill | Goodwill | 6,239 | | | 6,225 | | Goodwill | 5,898 | | | 6,172 | |
| Other intangibles, net | Other intangibles, net | 5,755 | | | 6,387 | | Other intangibles, net | 5,059 | | | 5,587 | |
| Other noncurrent assets | Other noncurrent assets | 375 | | | 348 | | Other noncurrent assets | 376 | | | 387 | |
| Property and equipment, net of accumulated depreciation of $1,054 (2021) and $1,038 (2020) | 1,033 | | | 1,316 | | |
| Property and equipment, net of accumulated depreciation of $688 (2022) and $1,041 (2021) | | Property and equipment, net of accumulated depreciation of $688 (2022) and $1,041 (2021) | 961 | | | 1,061 | |
| | Total assets | Total assets | $ | 16,833 | | | $ | 17,693 | | Total assets | $ | 15,601 | | | $ | 16,483 | |
| Liabilities and Equity | Liabilities and Equity | | | | Liabilities and Equity | | | |
| Current Liabilities | Current Liabilities | | Current Liabilities | |
| Accounts payable | Accounts payable | $ | 506 | | | $ | 501 | | Accounts payable | $ | 386 | | | $ | 418 | |
| Employee compensation | Employee compensation | 124 | | | 144 | | Employee compensation | 113 | | | 185 | |
| Sales rebates and discounts | Sales rebates and discounts | 303 | | | 295 | | Sales rebates and discounts | 284 | | | 316 | |
| Current portion of long-term debt | Current portion of long-term debt | 555 | | | 555 | | Current portion of long-term debt | 56 | | | 294 | |
| | Other current liabilities | Other current liabilities | 502 | | | 582 | | Other current liabilities | 499 | | | 430 | |
| | Total current liabilities | Total current liabilities | 1,990 | | | 2,077 | | Total current liabilities | 1,338 | | | 1,643 | |
| Noncurrent Liabilities | Noncurrent Liabilities | | | | Noncurrent Liabilities | | | |
| Long-term debt | Long-term debt | 5,542 | | | 5,572 | | Long-term debt | 6,007 | | | 6,025 | |
| Accrued retirement benefits | Accrued retirement benefits | 317 | | | 346 | | Accrued retirement benefits | 254 | | | 271 | |
| Deferred taxes | Deferred taxes | 767 | | | 900 | | Deferred taxes | 620 | | | 745 | |
| Other noncurrent liabilities | Other noncurrent liabilities | 237 | | | 322 | | Other noncurrent liabilities | 242 | | | 261 | |
| Total liabilities | Total liabilities | 8,853 | | | 9,217 | | Total liabilities | 8,461 | | | 8,945 | |
| Commitments and Contingencies | Commitments and Contingencies | 0 | | | 0 | | Commitments and Contingencies | 0 | | 0 |
| Equity | Equity | | Equity | |
| | Preferred stock, no par value, 1,000,000,000 shares authorized; 0ne issued | 0 | | | 0 | | |
| Common stock, no par value, 5,000,000,000 shares authorized, 473,003,487 and 471,921,116 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 0 | | | 0 | | |
| Preferred stock, no par value, 1,000,000,000 shares authorized; none issued | | Preferred stock, no par value, 1,000,000,000 shares authorized; none issued | — | | | — | |
| Common stock, no par value, 5,000,000,000 shares authorized, 474,097,334 and 473,119,786 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | | Common stock, no par value, 5,000,000,000 shares authorized, 474,097,334 and 473,119,786 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | — | | | — | |
| Additional paid-in capital | Additional paid-in capital | 8,663 | | | 8,650 | | Additional paid-in capital | 8,712 | | | 8,696 | |
| Accumulated deficit | Accumulated deficit | (748) | | | (477) | | Accumulated deficit | (923) | | | (949) | |
| Accumulated other comprehensive income | 65 | | | 303 | | |
| Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (649) | | | (209) | |
| Total equity | Total equity | 7,980 | | | 8,476 | | Total equity | 7,140 | | | 7,538 | |
| Total liabilities and equity | Total liabilities and equity | $ | 16,833 | | | $ | 17,693 | | Total liabilities and equity | $ | 15,601 | | | $ | 16,483 | |
See notes to condensed consolidated financial statements.
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| 20212022 Q2 Form 10-Q | 7
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Elanco Animal Health Incorporated
Condensed Consolidated Statements of Equity (Unaudited)
(Dollars and shares in millions)
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| Common Stock | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | |
| Shares | | Amount | | Additional Paid-in Capital | | | | Retained Earnings (Accumulated Deficit) | | Cash Flow Hedge Gain (Loss) | | Foreign Currency Translation | | Defined Benefit Pension and Retiree Health Benefit Plans | | Total | | Total Equity |
| December 31, 2019 | 373.0 | | | $ | 0 | | | $ | 5,636 | | | | | $ | 84 | | | $ | — | | | $ | (199) | | | $ | 25 | | | $ | (174) | | | $ | 5,546 | |
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| Net loss | — | | | — | | | — | | | | | (49) | | | — | | | — | | | — | | | — | | | (49) | |
Adoption of Accounting Standards Update 2016-13 | — | | | — | | | — | | | | | (1) | | | — | | | — | | | — | | | — | | | (1) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | | | — | | | (39) | | | (29) | | | (1) | | | (69) | | | (69) | |
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Separation activities (1) | — | | | — | | | 16 | | | | | — | | | — | | | — | | | — | | | — | | | 16 | |
| Stock compensation | — | | | — | | | 11 | | | | | — | | | — | | | — | | | — | | | — | | | 11 | |
| Issuance of stock under employee stock plans, net | 0.8 | | | — | | | (13) | | | | | — | | | — | | | — | | | — | | | — | | | (13) | |
| Issuance of common stock, net of issuance costs | 25.0 | | | — | | | 768 | | | | | — | | | — | | | — | | | — | | | — | | | 768 | |
| Issuance of tangible equity units, net of issuance costs | — | | | — | | | 452 | | | | | — | | | — | | | — | | | — | | | — | | | 452 | |
| March 31, 2020 | 398.8 | | | 0 | | | 6,870 | | | | | 34 | | | (39) | | | (228) | | | 24 | | | (243) | | | 6,661 | |
| Net loss | — | | | — | | | — | | | | | (53) | | | — | | | — | | | — | | | — | | | (53) | |
| Other comprehensive income (loss), net of tax | — | | | — | | | — | | | | | — | | | (21) | | | 50 | | | (1) | | | 28 | | | 28 | |
Separation activities (1) | — | | | — | | | 9 | | | | | — | | | — | | | — | | | — | | | — | | | 9 | |
| Stock compensation | — | | | — | | | 8 | | | | | — | | | — | | | — | | | — | | | — | | | 8 | |
| Issuance of stock under employee stock plans, net | 0.1 | | | — | | | (1) | | | | | — | | | — | | | — | | | — | | | — | | | (1) | |
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| June 30, 2020 | 398.9 | | | $ | 0 | | | $ | 6,886 | | | | | $ | (19) | | | $ | (60) | | | $ | (178) | | | $ | 23 | | | $ | (215) | | | $ | 6,652 | |
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| Common Stock | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | |
| Shares | | Amount | | Additional Paid-in Capital | | | | Accumulated Deficit | | Cash Flow Hedge Gain (Loss) | | Foreign Currency Translation | | Defined Benefit Pension and Retiree Health Benefit Plans | | Total | | Total Equity |
| December 31, 2020 | 471.9 | | | $ | — | | | $ | 8,650 | | | | | $ | (477) | | | $ | (61) | | | $ | 360 | | | $ | 4 | | | $ | 303 | | | $ | 8,476 | |
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| Net loss | — | | | — | | | — | | | | | (61) | | | — | | | — | | | — | | | — | | | (61) | |
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| Other comprehensive income (loss), net of tax | — | | | — | | | — | | | | | — | | | 53 | | | (466) | | | 8 | | | (405) | | | (405) | |
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| Stock compensation | — | | | — | | | 15 | | | | | — | | | — | | | — | | | — | | | — | | | 15 | |
| Issuance of stock under employee stock plans, net | 1.1 | | | — | | | (18) | | | | | — | | | — | | | — | | | — | | | — | | | (18) | |
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| March 31, 2021 | 473.0 | | | — | | | 8,647 | | | | | (538) | | | (8) | | | (106) | | | 12 | | | (102) | | | 8,007 | |
| Net loss | — | | | — | | | — | | | | | (210) | | | — | | | — | | | — | | | — | | | (210) | |
| Other comprehensive income (loss), net of tax | — | | | — | | | — | | | | | — | | | (5) | | | 169 | | | 3 | | | 167 | | | 167 | |
| Stock compensation | — | | | — | | | 16 | | | | | — | | | — | | | — | | | — | | | — | | | 16 | |
| | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | 473.0 | | | $ | — | | | $ | 8,663 | | | | | $ | (748) | | | $ | (13) | | | $ | 63 | | | $ | 15 | | | $ | 65 | | | $ | 7,980 | |
| | | | | | | | | | | | | | | | | | | |
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| | | | December 31, 2020 | 471.9 | | | $ | 0 | | | $ | 8,650 | | | | $ | (477) | | | $ | (61) | | | $ | 360 | | | $ | 4 | | | $ | 303 | | | $ | 8,476 | | |
| December 31, 2021 | | December 31, 2021 | 473.1 | | | $ | — | | | $ | 8,696 | | | | $ | (949) | | | $ | 25 | | | $ | (253) | | | $ | 19 | | | $ | (209) | | | $ | 7,538 | |
| | Net loss | — | | | — | | | — | | | | (61) | | | — | | | — | | | — | | | — | | | (61) | | |
| Net income | | Net income | — | | | — | | | — | | | | 48 | | | — | | | — | | | — | | | — | | | 48 | |
| Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | — | | | — | | | — | | | | — | | | 53 | | | (466) | | | 8 | | | (405) | | | (405) | | Other comprehensive income (loss), net of tax | — | | | — | | | — | | | | — | | | 109 | | | (85) | | | (1) | | | 23 | | | 23 | |
| | Stock compensation | Stock compensation | — | | | — | | | 15 | | | | — | | | — | | | — | | | — | | | — | | | 15 | | Stock compensation | — | | | — | | | 14 | | | | — | | | — | | | — | | | — | | | — | | | 14 | |
| Issuance of stock under employee stock plans, net | Issuance of stock under employee stock plans, net | 1.1 | | | — | | | (18) | | | | — | | | — | | | — | | | — | | | — | | | (18) | | Issuance of stock under employee stock plans, net | 1.0 | | | — | | | (11) | | | | — | | | — | | | — | | | — | | | — | | | (11) | |
| | March 31, 2021 | 473.0 | | | 0 | | | 8,647 | | | | (538) | | | (8) | | | (106) | | | 12 | | | (102) | | | 8,007 | | |
| March 31, 2022 | | March 31, 2022 | 474.1 | | | — | | | 8,699 | | | | (901) | | | 134 | | | (338) | | | 18 | | | (186) | | | 7,612 | |
| Net loss | Net loss | — | | | — | | | — | | | | (210) | | | — | | | — | | | — | | | — | | | (210) | | Net loss | — | | | — | | | — | | | | (22) | | | — | | | — | | | — | | | — | | | (22) | |
| Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | — | | | — | | | — | | | | — | | | (5) | | | 169 | | | 3 | | | 167 | | | 167 | | Other comprehensive income (loss), net of tax | — | | | — | | | — | | | | — | | | 8 | | | (470) | | | (1) | | | (463) | | | (463) | |
| Stock compensation | Stock compensation | — | | | — | | | 16 | | | | — | | | — | | | — | | | — | | | — | | | 16 | | Stock compensation | — | | | — | | | 17 | | | | — | | | — | | | — | | | — | | | — | | | 17 | |
| | June 30, 2021 | 473.0 | | | $ | 0 | | | $ | 8,663 | | | | $ | (748) | | | $ | (13) | | | $ | 63 | | | $ | 15 | | | $ | 65 | | | $ | 7,980 | | |
| Issuance of stock under employee stock plans, net | | Issuance of stock under employee stock plans, net | — | | | — | | | (4) | | | | — | | | — | | | — | | | — | | | — | | | (4) | |
| June 30, 2022 | | June 30, 2022 | 474.1 | | | $ | — | | | $ | 8,712 | | | | $ | (923) | | | $ | 142 | | | $ | (808) | | | $ | 17 | | | $ | (649) | | | $ | 7,140 | |
|
(1)Represent amounts associated with transactions between us and Lilly, related primarily to the completion of the local country asset purchases, the finalization of assets and liabilities associated with the legal separation from Lilly, centralized cash management, and resulting impacts on deferred tax assets, that occurred subsequent to our initial public offering.
See notes to condensed consolidated financial statements.
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| 20212022 Q2 Form 10-Q | 8
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Elanco Animal Health Incorporated
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions) | | | | | | | | | | | |
| Six Months Ended June 30, |
| | 2021 | | 2020 |
| Cash Flows from Operating Activities | |
| Net loss | $ | (271) | | | $ | (102) | |
| Adjustments to reconcile net loss to cash flows from operating activities: | | | |
| Depreciation and amortization | 372 | | | 162 | |
| Change in deferred income taxes | (114) | | | (78) | |
| Stock-based compensation expense | 31 | | | 19 | |
| Asset impairment and write-down charges | 278 | | | 3 | |
| Loss (gain) on sale of assets | 2 | | | (51) | |
| | | |
| Inventory fair value step-up amortization | 63 | | | 0 | |
| Changes in operating assets and liabilities, net of acquisitions | (190) | | | 206 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other non-cash operating activities, net | 0 | | | 5 | |
| Net Cash Provided by Operating Activities | 171 | | | 164 | |
| Cash Flows from Investing Activities | | | |
| | | |
| Net proceeds from sale (purchases) of property and equipment | (35) | | | 19 | |
| Cash paid for acquisitions, net of cash acquired | 73 | | | 0 | |
| Proceeds from settlement of net investment hedges | 0 | | | 33 | |
| Purchases of intangible assets | (34) | | | 0 | |
| Purchases of software | (12) | | | (60) | |
| Other investing activities, net | (7) | | | (1) | |
| Net Cash Used for Investing Activities | (15) | | | (9) | |
| Cash Flows from Financing Activities | | | |
| Repayments of borrowings | (37) | | | (378) | |
| | | |
| Proceeds from issuance of long-term debt | 0 | | | 79 | |
| | | |
| Proceeds from issuance of common stock and tangible equity units | 0 | | | 1,220 | |
| Debt issuance costs | 0 | | | (3) | |
| | | |
| | | |
| | | |
| | | |
| Other net financing transactions with Lilly | (11) | | | 0 | |
| Other financing activities, net | (17) | | | (14) | |
| Net Cash Provided by (Used for) Financing Activities | (65) | | | 904 | |
| Effect of exchange rate changes on cash and cash equivalents | (17) | | | (2) | |
| Net increase in cash, cash equivalents and restricted cash | 74 | | | 1,057 | |
| Cash, cash equivalents and restricted cash at January 1 | 506 | | | 345 | |
| Cash, cash equivalents and restricted cash at June 30 | $ | 580 | | | $ | 1,402 | |
| | | | | | | | | | | |
| June 30, |
| 2021 | | 2020 |
| Cash and cash equivalents | $ | 580 | | | $ | 1,391 | |
| Restricted cash | 0 | | | 11 | |
| Cash, cash equivalents and restricted cash at June 30 | $ | 580 | | | $ | 1,402 | |
| | | | | | | | | | | |
| Six Months Ended June 30, |
| | 2022 | | 2021 |
| Cash Flows from Operating Activities | |
| Net income (loss) | $ | 26 | | | $ | (271) | |
| Adjustments to reconcile net income (loss) to cash flows from operating activities: | | | |
| Depreciation and amortization | 347 | | | 372 | |
| Deferred income taxes | (40) | | | (114) | |
| Stock-based compensation expense | 31 | | | 31 | |
| Asset impairment and write-down charges | 87 | | | 278 | |
| Loss on sale of assets | 1 | | | 2 | |
| Gain on divestiture | (3) | | | — | |
| Inventory fair value step-up amortization | — | | | 63 | |
| Loss on extinguishment of debt | 17 | | | — | |
| Proceeds from interest rate swap settlements | 132 | | | — | |
| Changes in operating assets and liabilities | (369) | | | (190) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other non-cash operating activities, net | 21 | | | — | |
| Net Cash Provided by Operating Activities | 250 | | | 171 | |
| Cash Flows from Investing Activities | | | |
| | | |
| Net purchases of property and equipment | (45) | | | (35) | |
| Cash paid for acquisitions, net of cash acquired | — | | | 73 | |
| | | |
| | | |
| Purchases of intangible assets | (1) | | | (34) | |
| Purchases of software | (13) | | | (12) | |
| Other investing activities, net | (7) | | | (7) | |
| Net Cash Used for Investing Activities | (66) | | | (15) | |
| Cash Flows from Financing Activities | | | |
| Proceeds from issuance of long-term debt | 425 | | | — | |
| Proceeds from revolving credit facility | 563 | | | 150 | |
| | | |
| Repayments of long-term borrowings | (528) | | | (37) | |
| Repayments of revolving credit facility | (738) | | | (150) | |
| | | |
| Debt issuance costs | (1) | | | — | |
| | | |
| | | |
| | | |
| | | |
| Other net financing transactions with Lilly | — | | | (11) | |
| Other financing activities, net | (17) | | | (17) | |
| Net Cash Used for Financing Activities | (296) | | | (65) | |
| Effect of exchange rate changes on cash and cash equivalents | (19) | | | (17) | |
| Net increase (decrease) in cash and cash equivalents | (131) | | | 74 | |
| Cash and cash equivalents at January 1 | 638 | | | 506 | |
| Cash and cash equivalents at June 30 | $ | 507 | | | $ | 580 | |
See notes to condensed consolidated financial statements.
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| 20212022 Q2 Form 10-Q | 9
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Elanco Animal Health Incorporated
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Tables present dollars and shares in millions, except per-share and per-unit data)
Note 1. Background
Elanco is a global animal health company that innovates, develops, manufactures and markets products for pets and farm animals. We offer a portfolio of approximately 200 brands to pet owners, veterinarians and farm animal producers in more than 90 countries. Our products are generally sold worldwide directly to wholesalers, distributors, and independent retailers. Certain products are also sold directly to farm animal producers and veterinarians. We have a diversified business of products across species consisting of: dogs and cats (collectively, pet health) and cattle, poultry, swine and aqua (collectively, farm animal).
Elanco was incorporated in Indiana on September 18, 2018, and prior to that was a business unit of Eli Lilly and Company (Lilly).
Note 1.2. Basis of Presentation and Summary of Significant Accounting Policies
Elanco Animal Health Incorporated (Elanco Parent) and its subsidiaries (collectively, Elanco, the Company, we, us, or our) is a premier animal health company that innovates, develops, manufactures and markets products for pets and farm animals.
Elanco was originally a wholly owned subsidiary of Eli Lilly and Company (Lilly). Elanco Parent, formed as the ultimate parent company of substantially all of the animal health businesses of Lilly, completed an initial public offering (IPO) in September 2018 and Lilly completed the disposition of all of its ownership interest in Elanco in March 2019.
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the
United States (U.S.)U.S. Securities and Exchange Commission (SEC) requirements for interim reporting. As permitted under those rules, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (GAAP) have been condensed or omitted. The information included in this
Quarterly Report on Form 10-Q should be read in conjunction with our consolidated
and combined financial statements and accompanying notes for the year ended December 31,
20202021 included in our
Annual Report on Form 10-K filed with the SEC on March 1, 2021.February 28, 2022. In addition, results for interim periods should not be considered indicative of results for any other interim period or for the full year ending December 31, 2022 or any other future period.
In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for fair presentation of the results of operations for the periods shown. In preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior year information have been made to conform to the current year's presentation.
The significant accounting policies set forth in Note 43 to the consolidated and combined financial statements in our Annual Report on Form 10-K for the year ended December 31, 20202021 appropriately represent, in all material respects, the current status of our accounting policies, except as it relates to the adoption of the standard that was effective January 1, 20212022 as described in Note 2:3: Implementation of New Financial Accounting Pronouncements.
On August 1, 2020, we completed the previously announced acquisition of Bayer Animal Health. See Note 4: Acquisitions and Divestitures for additional information.
Note 2.3. Implementation of New Financial Accounting Pronouncements
The following table provides a brief description of an accounting standard that was effective January 1, 20212022 and was adopted on that date:
| | | | | | | | | | | | | | |
| Standard | | Description | | Effect on the financial statements or other significant matters |
Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes
ASU 2021-10, Government Assistance (Topic 832) | | The amendments in this update include simplifications relatedrequire annual disclosure of transactions with governments that are accounted for by applying a grant or contribution model. The new pronouncement requires entities to accounting for income taxes including removing certain exceptions related toprovide information about the approach for intraperiod tax allocationnature, terms and conditions associated with the transactions and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.financial statement line items affected. | | The adoption of this guidance did not have a material impact on our consolidated financial statements. |
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| 20212022 Q2 Form 10-Q | 10
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The following table provides a brief description of an accounting standard that is applicable to us but has not yet been adopted:
| | | | | | | | | | | | | | | | | | | | |
| Standard | | Description | | Effective Date | | Effect on the financial statements or other significant matters |
ASU 2020-04, Reference rate reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting; ASU 2021-01, Reference Rate Reform (Topic 848): Scope | | ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2021-01 clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions. | | These standards wereAdoption of the guidance is optional and effective as of March 12, 2020 through December 31, 2022 and adoption2022. Adoption is permitted at any time during the period on a prospective basis. | | We are currently in the process of evaluating the impact of theOur current credit facilities reference London InterbankInter-Bank Offered Rate (LIBOR) on our existing contracts and may electas a benchmark rate. The underlying credit agreements include provisions which outline criteria for establishing a consistent replacement benchmark rate in the event that LIBOR is discontinued. Therefore, it is unlikely that we will need to adopt this optional expedients in future periodsguidance. However, we will continue to evaluate the impact as reference rate reform activities occur. We do not expect that these updates will have a material impact on our consolidated financial statements. |
Note 3.4. Revenue
Our sales rebates and discounts are based on specific agreements. The most significant of our sales rebate and discount programs in terms of accrual and payment amounts, percentage of our products that are sold via these programs, and level of judgment required in estimating the appropriate transaction price, relate to our programs in the U.S., France and the United Kingdom (U.K.). As of June 30, 20212022 and 2020,2021, the aggregate liability for sales rebates and discounts for these countries represented approximately 73%77% and 84%, respectively, of our total liability with the next largest country representing approximately 5% and 4%73%, respectively, of our total liability.
The following table summarizes the activity in our global sales rebates and discounts liability: | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Beginning balance | Beginning balance | $ | 331 | | | $ | 193 | | | $ | 295 | | | $ | 211 | | Beginning balance | $ | 295 | | | $ | 331 | | | $ | 316 | | | $ | 295 | |
| | Reduction of revenue | Reduction of revenue | 178 | | | 91 | | | 367 | | | 177 | | Reduction of revenue | 176 | | | 178 | | | 355 | | | 367 | |
| Payments | Payments | (209) | | | (121) | | | (357) | | | (223) | | Payments | (187) | | | (206) | | | (387) | | | (359) | |
| Foreign currency translation adjustments | 3 | | | 1 | | | (2) | | | (1) | | |
| | Ending balance | Ending balance | $ | 303 | | | $ | 164 | | | $ | 303 | | | $ | 164 | | Ending balance | $ | 284 | | | $ | 303 | | | $ | 284 | | | $ | 303 | |
Adjustments to revenue recognized as a result of changes in estimates for the judgments described above during the three and six months ended June 30, 20212022 and 20202021 for product shipped in previous periods were not material.
Actual global product returns were approximately 1% and 2% of net revenue for the three months ended June 30, 2021 and 2020, respectively. Actual global product returns were approximately 1% and 2% of net revenue for the six months ended June 30, 20212022 and 2020, respectively.
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| 20212022 Q2 Form 10-Q | 11
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Disaggregation of Revenue
In the first quarter of 2021, management revisited how it analyzesThe following table summarizes our revenue both internally and externally, and determined that disaggregationdisaggregated by major product line provides a more meaningful view of our results. Accordingly, we updated our disaggregated revenue presentation from the previous five categories (i.e., pet health disease prevention, pet health therapeutics, farm animal future protein & health, farm animal ruminants & swine, and contract manufacturing) to the following:category:
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Pet Health | Pet Health | $ | 685 | | | $ | 254 | | | $ | 1,330 | | | $ | 460 | | Pet Health | $ | 612 | | | $ | 685 | | | $ | 1,251 | | | $ | 1,330 | |
| | Farm Animal | 567 | | | 316 | | | 1,145 | | | 749 | | |
| Farm Animal: | | Farm Animal: | |
| Cattle | | Cattle | 248 | | | 224 | | | 495 | | | 485 | |
| Poultry | | Poultry | 174 | | | 186 | | | 353 | | | 357 | |
| Swine | | Swine | 89 | | | 113 | | | 189 | | | 236 | |
| Aqua | | Aqua | 42 | | | 44 | | | 85 | | | 67 | |
| Total Farm Animal | | Total Farm Animal | 553 | | | 567 | | | 1,122 | | | 1,145 | |
Contract Manufacturing (1) | Contract Manufacturing (1) | 27 | | | 16 | | | 46 | | | 35 | | Contract Manufacturing (1) | 12 | | | 27 | | | 29 | | | 46 | |
| Revenue | Revenue | $ | 1,279 | | | $ | 586 | | | $ | 2,521 | | | $ | 1,244 | | Revenue | $ | 1,177 | | | $ | 1,279 | | | $ | 2,402 | | | $ | 2,521 | |
(1)Represents revenue from arrangements in which we act asmanufacture products on behalf of a contract manufacturer,third party, including supply agreements associated with divestitures of products related to the acquisition of Bayer Animal Health.
Note 4.5. Acquisitions, Divestitures and DivestituresOther Arrangements
KindredBio Acquisition
On June 15,August 27, 2021, we entered into an agreement (the Merger Agreement) to acquire Kindred Biosciences, Inc. (KindredBio).acquired KindredBio, is a publicly traded (ticker symbol: KIN) biopharmaceutical company that develops innovative biologics focused on saving and improving the lives of pets. Under the terms and conditions set forthThe acquisition further accelerates our pet health expansion, particularly by expanding our presence in the Merger Agreement, upon the consummation of the merger, we will acquire all outstanding common stock of KindredBio at a price of $9.25 per share, or approximately $440 million (subject to any KindredBio shareholders' proper exercise of appraisal rights). We intend to fund the acquisition with our revolving credit facility and available cash as necessary, and expect to close the transaction in the third quarter of 2021, subject to customary closing conditions, including approval by the stockholders of KindredBio.dermatology.
Bayer Animal Health Acquisition
On August 1, 2020, we completed the acquisition of Bayer Animal Health, a provider of products intended to improve the health and well-being of pets and farm animals, in a cash and stock transaction. The transaction was accounted for as a business combination under the acquisition method of accounting. The acquisition method requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. The determination of estimated fair value requires management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of Bayer Animal Health arethe acquisition is included in our condensed consolidated financial statements from the date of acquisition.
The acquisition has expandedIn connection with the merger agreement, we acquired all outstanding stock of KindredBio for $9.25 per share, or an aggregate cash purchase consideration of $444 million. We utilized our pet health product category, advancing our planned portfolio mix transformationrevolving credit facility and creatingcash on hand to finance the acquisition.
On May 5, 2021, we signed an agreement with KindredBio to acquire exclusive global rights to KIND-030, a better balance between our farm animal and pet health product categories. Our existing product portfolio and pipeline have been enhanced by the addition of Bayer Animal Health, which complements our commercial operations and international infrastructure while expanding our direct to retailer/e-commerce presence.
Total consideration transferred to Bayer and its subsidiariesmonoclonal antibody that is being developed for the acquisition is summarized as follows:
| | | | | |
Cash consideration (1)
| $ | 5,054 | |
Fair value of Elanco common stock (2)
| 1,724 | |
Fair value of total consideration transferred | $ | 6,778 | |
(1)Includes initial cash considerationtreatment and prevention of $5,170 million less working capital and tax adjustments of $116 million.
(2)Representscanine parvovirus. We calculated the acquisition date fair value of 73the liability associated with that agreement using an income approach leveraging the estimated sales royalty, sales milestone and technical milestone payments avoided, and settled the $29 million sharesliability upon the closing of Elanco common stock at $23.64 per share. Perour acquisition of KindredBio.
Revenue and loss from KindredBio included in our condensed consolidated statements of operations for the terms of the stockthree and asset purchase agreement, the number of shares was based on approximately $2.3 billion divided by the 20-day volume-weighted averagesix months ended June 30, 2022 were immaterial.
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| 20212022 Q2 Form 10-Q | 12
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stock price as of the last day of trading before the closing of the acquisition (but subject to a 7.5% symmetrical collar centered on the baseline share number of approximately $2.3 billion divided by an initial share price of $33.60).
We recognized transaction costs related to the acquisition of Bayer Animal Health of $3 million and $58 million during the six months ended June 30, 2021 and 2020, respectively. Transaction costs for the three months ended June 30, 2020 were $38 million. There were 0 transaction costs recognized during the three months ended June 30, 2021. Transaction costs were primarily associated with financial advisory, legal and other professional services related to the acquisition and are reflected within asset impairment, restructuring and other special charges in our condensed consolidated statements of operations.
The amount of revenue attributable to Bayer Animal Health included in our condensed consolidated statements of operations for the three and six months ended June 30, 2021 is $529 million and $1,088 million, respectively. Based on our current operational structure, we have not recorded standalone costs for Bayer Animal Health after the date of the acquisition. As a result, we are unable to accurately determine earnings or loss attributable to Bayer Animal Health since the date of acquisition.
The following table summarizes the fair value ofpreliminary amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
Estimated Fair Value at August 1, 202027, 2021 | |
| Cash and cash equivalents | $ | 16931 | |
Accounts receivableOther net working capital | 10 | |
Inventories | 487 | |
Prepaid expenses and other current assets | 6012 | |
| Property and equipment | 31533 | |
| |
| |
| |
| |
Intangible assets:assets, primarily acquired in-process research and development (IPR&D) | 333 | |
Acquired in-process research and development | 65 | |
Marketed products | 3,740 | |
Assets held for sale | 138 | |
Accounts payable and accrued liabilities | (237) | |
Accrued retirement benefits | (220) | |
Other noncurrent assets and liabilities,Deferred income taxes, net | (878)(26) | |
| Total identifiable net assets | 3,649383 | |
| Goodwill | 3,12932 | |
| Settlement of liability related to previous license agreement | 29 | |
| Total consideration transferred | $ | 6,778444 | |
The purchase price allocationaccounting for the Bayer Animal Healththis acquisition is complete.substantially complete, with the exception of the finalization of tax-related amounts and minor working capital adjustments. The measurement period adjustments recorded in 2021,during 2022, which were made to reflect the facts and circumstances in existence as of the acquisition date, primarily related to changes in the finalization of ourestimated fair value assessment of property and equipment located at the Shawnee, Kansas site, revised cash flow assumptions for marketed products, adjustments related to changes in inventory balances and gross margin assumptions, tax adjustments,acquired IPR&D and minor tax and working capital adjustments. TheseThe net impact of these adjustments resultedwas not material. Finalization of the valuation during the measurement period could result in a decrease to marketed products intangible assets of $210 million, a decrease to property and equipment of $32 million, a net decrease to working capital accounts and other non-current assets and liabilities of $14 million, and an increase to goodwill of $207 million. The fair valueschange in the table above have been updated to reflect these measurement period adjustments. Amountsamounts recorded in the condensed consolidated statement of operations for the six months ended June 30, 2021 that would have been recorded in a prior period if the adjustments had been recorded on the acquisition date were not material.
Inventories comprisedfair value. The completion of $311 million, $81 million, $95 million in finished products, work in process, and raw materials, respectively. The estimate of fair value of finished products was determined based on net realizable value adjusted for the costs to complete the sales process, a reasonable profit allowancevaluation will occur no later than one year from the sales process, and estimated holding costs. The estimate of fair value of work in process was determined based on net realizable value adjusted for costs to complete the manufacturing process, costs of the sales process, a reasonable profit allowance for the remaining manufacturing and sales process effort, and an estimate of holding costs. The fair value of raw
materials was determined to approximate book value. The net fair value step-up adjustment to inventories of $152 million has been amortized to cost of sales as the inventory is sold to customers. As of June 30, 2021, the fair value step-up adjustment has been fully amortized.acquisition date.
Property and equipment is mostly composedcomprised of land, buildings, equipment (including machinery,laboratory equipment, furniture and fixtures, and computer equipment), and construction in progress. The estimated fair value of real and personal property was determined using the sales comparison data valuation technique, and personal propertyto the extent that market data for similar assets was determined usingavailable. When market pricing data was not available for a given asset or asset class, the direct replacement cost method. method was used.
The estimated fair valuevalues of property and equipment located at the Shawnee, Kansas site wasacquired IPR&D were determined using the "incomeincome approach," which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life.
Intangible assets relate to $65 million of in-process research and development (IPR&D) and $3,740 million of marketed products. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of approximately 10 years on a straight-line basis. The estimated fair values of identifiable intangible assets were determined using the income approach. Some of the significant assumptions inherent in the development of these asset valuations include the estimated net cash flows for each year for each asset or product (including revenues, cost of sales, R&D expenses, marketing, selling and administrative expenses, and contributory asset charges), the appropriate discount rate necessary to measure the risk inherent in each future cash flow stream, the life cycle of each asset, the potential regulatory and commercial success risk, and competitive trends impacting the asset and each cash flow stream, as well as other factors.
Assets held for sale include $133 million of intangible assets, consisting of marketed products and IPR&D, and $5 million of inventory related to the divestitures of Drontal™, Profender™ and other products. In order to secure the necessary regulatory clearances for the acquisition of Bayer Animal Health, we signed agreements to divest the rights to the Drontal and Profender product families within the United Kingdom and European Economic Area as well as other IPR&D. We completed the transactions, which were accounted for as asset divestitures, in the third quarter of 2020.
Accrued retirement benefits primarily relate to certain Bayer Animal Health international subsidiaries that have underfunded defined benefit pension plans. We have recorded the fair value of these plans using assumptions and accounting policies similar to those disclosed in Note 19: Retirement Benefits to the consolidated and combined financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020. Upon acquisition, the excess of projected benefit obligation over the fair value of plan assets was recognized as a liability and previously existing deferred actuarial gains and losses and unrecognized service costs or benefits were eliminated.
The goodwill recognized from this acquisition represents the value of additional growth platformsis primarily attributable to KindredBio's assembled workforce and an expanded revenue base as well as anticipated operational synergies and cost savings from the creation of a single combined global organization.expected synergies. The majority of goodwill associated with this acquisition is not deductible for tax purposes.
Pro forma financial information (unaudited)
The following table presents the estimated unaudited pro forma combined results of Elanco and Bayer Animal Health as if the acquisition of Bayer Animal Health had occurred on January 1, 2020:
| | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, 2020 | | | | Six Months Ended June 30, 2020 |
| Revenue | | | $ | 1,067 | | | | | $ | 2,237 | |
| Loss before income taxes | | | (100) | | | | | (168) | |
The supplemental pro forma financial information has been prepared using the acquisition method of accounting and is based on the historical financial information of Elanco and Bayer Animal Health. The supplemental pro forma financial information does not necessarily represent what the combined companies' revenue or results of operations would have been had the acquisition been completed on January 1, 2020, nor is it intended to be a projection of future operating results of the combined company. It also does not reflect any operating efficiencies or potential cost savings that might be achieved from synergies of combining Elanco and Bayer Animal Health.
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| 20212022 Q2 Form 10-Q | 1413
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The unaudited supplemental pro forma financial information reflects primarily pro forma adjustments related to divestitures, fair value estimates for property and equipment, intangibles and inventory, and interest expense and amortization of debt issuance costs for the debt issuance to finance the acquisition of Bayer Animal Health. The unaudited supplemental pro forma financial information includes transaction charges associated with the acquisition. There are no material, nonrecurring pro forma adjustments directly attributable to the acquisition included in the reported pro forma revenue and loss before income taxes.Divestitures
Divestitures and Assets Held For SaleMicrobiome R&D platform carve-out
OnIn April 2022, we signed an agreement to transfer assets associated with our microbiome R&D platform to a newly created, independent biopharmaceutical company, BiomEdit, focused on developing solutions for animal and human health. As part of the agreement, we retain a non-voting, minority stake in the company. Assets transferred include intellectual property and laboratory equipment. The book values of those assets were not material. In addition, we have entered into transitional services agreements with the company for certain services. We have determined that the disposal of the related net assets does not qualify for reporting as a discontinued operation because it does not represent a strategic shift that has or will have a major effect on our operations and financial results. During the three and six months ended June 9,30, 2022, we recorded a gain on the disposal of approximately $3 million. While there is no certainty that additional equity in BiomEdit will be sold, the sale of additional Series A equity by the company during 2022 could result in additional gains.
Shawnee and Speke
During 2021, as part of our strategy to optimize our manufacturing footprint, we announced an agreement with TriRx Pharmaceuticals (TriRx) to sell our manufacturing sites in Shawnee, Kansas (Shawnee) and Speke, U.K. (Speke), including the planned transfer of approximately 600 employees. In connection with these arrangements, we also entered into long-term manufacturing and supply agreements, under which TriRx will manufacture existing Elanco products at both sites upon the closing of the transactions. The related assets met the assets held for sale criteria as of June 30, 2021. During the second quarter of 2021, we recorded a $265 million pre-tax charge to reduce the carrying value of the disposal groups to an amount equal to fair value less costs to sell in asset impairment, restructuring, and other special charges in our condensed consolidated statement of operations. Our fair value less cost to sell assessment includes the fair value of the favorable manufacturing and supply agreements, estimated using a combined income and market approach which incorporated Level 3 inputs. On August 1, 2021, we completed the sale of our Shawnee Kansas site. Wesite and expect to closereceive gross cash proceeds of $51 million over a period of three years based on the Speke, U.K. transactionterms of the agreement, beginning in the first quartersecond half of 2022. On February 1, 2022, we completed the sale of our Speke site and expect to receive gross cash proceeds of $29 million over a period of one year commencing 12 months from the closing date. Receivables for the expected cash proceeds are included in other receivables and other noncurrent assets on our condensed consolidated balance sheets. Upon closing, we recorded a contract asset of $55 million for the favorable supply agreement, which is included in prepaid expenses and other and other noncurrent assets on our condensed consolidated balance sheets. The related assets for Speke were classified as held for sale as of December 31, 2021. The divestitures did not represent a strategic shift that has or will have a major effect on our operations and financial results, and therefore do not qualify for reporting as a discontinued operation. See Note 5:6: Asset Impairment, Restructuring and Other Special Charges for further information.
In connection with advancing our efforts to secure the necessary regulatory clearances for our acquisition of Bayer Animal Health, we signed agreements in 2020 to divest the rights to manufacture and commercialize certain products, including currently marketed products and certain IPR&D assets. As part of those transactions, we signed an agreement to divest the worldwide rights to the legacy Elanco products Itrafungol™ and Clomicalm™ in connection with the required disposal of an early-stage IPR&D asset. We also made a payment during the six months ended June 30, 2021 and accrued for future amounts we are required to pay to the buyer of the IPR&D asset to help fund their development costs for a set period of time. The related assets met the assets held for sale criteria as of December 31, 2020. The divestiture closed during the six months ended June 30, 2021. There were no proceeds received from the disposition of these assets and the resulting immaterial impact was recorded in other income, net in our condensed consolidated statement of operations.Assets Held For Sale
Assets and liabilities considered held for sale in connection with the above divestitures were included in the respective line items on theour condensed consolidated balance sheetsheets as follows:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Inventories | $ | 79 | | | $ | 2 | |
| Other intangibles, net | 0 | | | 4 | |
| Property and equipment, net | 64 | | | 0 | |
| Deferred tax asset | 1 | | | 1 | |
| | | |
| Total assets held for sale | $ | 144 | | | $ | 7 | |
| | | |
| Employee compensation | 1 | | | 0 | |
| Total liabilities held for sale | $ | 1 | | | $ | 0 | |
| | | |
| | | |
| | | |
Other intangibles, net classified as held for sale primarily consisted of marketed products.
| | | | | | | |
| | | December 31, 2021 |
| Inventories | | | $ | 31 | |
| | | |
| Property and equipment, net | | | 50 | |
| | | |
| | | |
| Total assets held for sale | | | $ | 81 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
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| 20212022 Q2 Form 10-Q | 1514
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BexCaFe Arrangement
On June 9, 2022, we signed a license agreement with BexCaFe, LLC (BexCaFe) for the development and commercialization of products related to an oral treatment intended to reduce glucose levels in diabetic cats. BexCaFe held the rights to the compound through a license agreement with similar terms and conditions. We will incur all development and regulatory costs associated with the products. Based on the guidance in Accounting Standards Codification (ASC) 810, Consolidation, we determined that BexCaFe represents a variable interest entity and that we are the primary beneficiary of BexCaFe because the terms of the license give us the power to direct the activities that most significantly impact the entity’s economic performance. As a result, we consolidated BexCaFe, a development-stage company with no employees that did not meet the definition of a business, as of the date we signed the license agreement. Upon initial consolidation of BexCaFe, we measured an IPR&D asset at its fair value of $59 million and recorded liabilities totaling $59 million, which include contingent consideration of $49 million based on the fair value of estimated future milestone payments and sales royalties owed under the license agreement. These liabilities are included in other current liabilities and other noncurrent liabilities on our condensed consolidated balance sheet as of June 30, 2022. The fair value of the contingent payments was calculated based on an income approach, with payments adjusted for probability of success and then discounted to a present value. There is no minimum payout due on the contingent consideration and the maximum payout is unlimited. Since BexCaFe did not meet the definition of a business, no goodwill was recorded and immediately after initial consolidation, we expensed the IPR&D asset because we concluded that it did not have an alternative future use. This amount is included in asset impairment, restructuring, and other special charges in our condensed consolidated statements of operations for the three and six months ended June 30, 2022.
Subsequent to the effective date of the license agreement, our condensed consolidated financial statements include the assets, liabilities, operating results and cash flows of BexCaFe. Based on the guidance in ASC 810, income and expense between us and BexCaFe have been eliminated against the income or expense included in the financial statements of BexCaFe. The resulting amounts after the effect of these eliminations were included in our condensed consolidated financial statements for the three and six months ended June 30, 2022 and were not material.
Note 5.6. Asset Impairment, Restructuring and Other Special Charges
In recent years, we have incurred substantial costs associated with restructuring programs and cost-reduction initiatives designed to achieve a flexible and competitive cost structure. RestructuringAs discussed further below, restructuring activities primarily include charges associated with facility rationalization and workforce reductions. In connection with our recent acquisitions, including the acquisition of Bayer Animal Health, we have also incurred costs associated with executing transactions and integrating acquired operations, which may include expenditures for banking, legal, accounting, and other similar services. In addition, we have incurred costs to stand up our organization as an independent company. All operating functions can be impacted by these actions; therefore, non-cash expenses associated with our tangible and intangible assets can be incurred as a result of revised fair value projections and/or determinations to no longer utilize certain assets in the business on an ongoing basis.
For finite-lived intangible assetassets and other long-lived assets, whenever impairment indicators are present, we calculate the undiscounted value of projected cash flows associated with the asset, or group of assets, and compare it to the carrying amount. If the carrying amount is greater, we record an impairment loss for the excess of book value over fair value. Determinations of fair value can result from a complex series of judgments and rely on estimates and assumptions. See Note 1:2: Basis of Presentation and Summary of Significant Accounting Policies for discussion regarding estimates and assumptions.
2021 Restructuring Programs
In 2021, we announced 2 separate restructuring programs to improve operating efficiencies.
The actions proposed in January 2021 focused on streamlining processes and delivering increased efficiency in functional areas, while improving the productivity of our investments in innovation. As part of the restructuring plan, we closed our R&D sites in Manukau, New Zealand and Cuxhaven, Germany. We have also reduced duplication and optimized structures in U.S. operations, marketing, manufacturing and quality central functions, and administrative areas. The restructuring resulted in the elimination of approximately 315 positions around the world. Activities related to this initiative resulted in net charges of $3 million and $44 million for the three and six months ended June 30, 2021, respectively, primarily consisting of severance costs and other non-cash charges. Restructuring charges under this program were substantially complete at the end of 2021.
The program announced in November 2021 included initiatives to consolidate certain international commercial operations into one organization, integrate our centralized global marketing organization into country level commercial organizations, transform and simplify our R&D organizational structure, and other organizational adjustments. In connection with the proposed restructuring, we eliminated 380 positions. During the three and six months ended June 30, 2022, we recorded adjustments of $2 million and $9 million, respectively, to reduce severance accruals resulting from final negotiations and certain restructured employees filling open positions. Restructuring charges under this program were substantially complete as of June 30, 2022; however, we may continue to make adjustments to our severance accruals to reflect changes in estimates resulting from ongoing negotiations.
Components of asset impairment, restructuring and other special charges are as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Restructuring charges: | | | | | | | | |
| Restructuring charges (credits): | | Restructuring charges (credits): | | | | | | | |
Severance and other costs (1) | Severance and other costs (1) | $ | 1 | | | $ | 1 | | | $ | 28 | | | $ | 1 | | Severance and other costs (1) | $ | (2) | | | $ | 1 | | | $ | (9) | | | $ | 28 | |
Facility exit costs (1) | Facility exit costs (1) | 0 | | | 0 | | | 0 | | | 1 | | Facility exit costs (1) | 1 | | | — | | | 2 | | | — | |
| | Acquisition related charges: | Acquisition related charges: | | Acquisition related charges: | |
Transaction and integration costs (2) | Transaction and integration costs (2) | 30 | | | 111 | | | 111 | | | 188 | | Transaction and integration costs (2) | 26 | | | 30 | | | 50 | | | 111 | |
| | Non-cash and other items: | Non-cash and other items: | | Non-cash and other items: | |
Asset impairment (3) | Asset impairment (3) | 4 | | | 3 | | | 13 | | | 3 | | Asset impairment (3) | 59 | | | 4 | | | 59 | | | 13 | |
Asset write-down (4) | Asset write-down (4) | 267 | | | 1 | | | 269 | | | 2 | | Asset write-down (4) | — | | | 267 | | | 28 | | | 269 | |
Gain on sale of fixed assets (5) | 0 | | | 0 | | | 0 | | | (4) | | |
Settlements and other (6) | (3) | | | 3 | | | (14) | | | 3 | | |
| | Net periodic benefit cost (credits) (Note 14) | | Net periodic benefit cost (credits) (Note 14) | — | | | (8) | | | — | | | (17) | |
Settlements and other (5) | | Settlements and other (5) | 2 | | | 5 | | | 2 | | | 3 | |
| | Total expense | Total expense | $ | 299 | | | $ | 119 | | | $ | 407 | | | $ | 194 | | Total expense | $ | 86 | | | $ | 299 | | | $ | 132 | | | $ | 407 | |
(1)2022 credits primarily related to adjustments resulting from the reversal of severance accruals associated with the November 2021 program. For the three and six months ended June 30, 2021, these charges primarily related tomainly represent employee termination costs for the restructuring program announced and initiated in January 2021, partially offset by $1 million and $14 million, respectively, for the reversal of severance accruals associated with a restructuring program announced and initiated in January 2021. These costs were partially offset by the reversal of severance accruals under the September 2020 program that are no longer needed. See below for further details.2020.
For the six months ended June 30, 2020, these charges primarily related to the announced 2019 program to streamline operations in Speke, U.K. as well as the remaining costs to close the Larchwood, Iowa facility.
(2)Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services. Integration costs represent internal and external incremental costs directly related to integrating acquired businesses, including the pending acquisitionacquisitions of KindredBio and the acquisition of Bayer Animal Health (e.g., expenditures for consulting, system and process integration, and product transfers), as well as independent company stand-up costs related to the implementation of new systems, programs, and processes.
(3)Asset impairment charges for the three and six months ended June 30, 20212022 includes a charge of $59 million related to the expensing of an adjustmentIPR&D asset with no alternative future use licensed from BexCaFe during the second quarter. See Note 5: Acquisitions, Divestitures and Other Arrangements for further discussion. 2021 represents the impact of adjustments to fair value of property and equipment, IPR&D assets, and marketed products that were subject to product rationalization.
Asset impairment charges for the three and six months ended June 30, 2020 related to the impairment of an IPR&D asset resulting from a reassessment of geographic viability.
(4)Asset2022 includes the finalization of the write-down expenses forcharge upon the three and six months ended June 30,final sale of the Speke manufacturing site. 2021 resulted primarily fromrepresents adjustments recorded to write down assets classified as held for sale to an amount equal to fair value less costs to sell. These charges related to our Shawnee and Speke manufacturing sites in Speke, U.K. and Shawnee, Kansas.sites. See Note 4:5: Acquisitions, Divestitures and DivestituresOther Arrangements for further discussion. Also included are charges recorded to write down assets in Belford Roxo, Brazil; Basel, Switzerland; Cuxhaven, Germany; and Manukau, New Zealand that were classified as held and used to their current fair value. These charges were recorded in connection with announced restructuring programs.
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| 20212022 Q2 Form 10-Q | 16
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Asset write-down expenses(5)2022 includes a $2 million measurement period adjustment to the charge associated with the settlement of a liability for the threefuture royalty and six months ended June 30, 2020 resulted from adjustments recorded to write down assets classified as held and used to their current fair value. These charges primarily related to fixed assets in Wusi, Chinamilestone payments triggered in connection with the announced 2019 program to streamline operations.
(5)Represents a gain on the disposal from the saleour acquisition of an R&D facility in Prince Edward Island, Canada.
(6)SettlementsKindredBio. See Note 5: Acquisitions, Divestitures and other expensesOther Arrangements for further discussion. For the three and six months ended June 30, 2021, include net curtailmentcharges mainly represent accounting and settlement gains fromadvisory fees related to the remeasurementplanned sale of our pension benefit obligation asShawnee and Speke manufacturing sites, partially offset by a result of workforce reductions in connection with our September 2020 and January 2021 restructuring programs. See Note 13: Retirement Benefits for further information. The amount for the six months ended June 30, 2021 also includes the gain recorded on the divestiture of an early-stage IPR&D asset acquired as part of the Bayer Animal Health acquisition. Amounts for both periods were partially offset by accounting and advisory fees related to the planned sale of our manufacturing sites in Shawnee, Kansas and Speke, U.K.
Settlements and other expenses for the three and six months ended June 30, 2020 relate to a non-recurring litigation settlement for a matter that originated prior to our separation from Lilly.
In January 2021, we announced a restructuring aligned with our ongoing efforts to improve operating efficiencies. The proposed actions are focused on streamlining processes and delivering increased efficiency in functional areas, while improving the productivity of our investments in innovation. As part of the restructuring plan, we intend to close R&D sites in Manukau, New Zealand and Cuxhaven, Germany. We will also reduce duplication and optimize structures in U.S. operations, marketing, manufacturing and quality central functions, and administrative areas. The restructuring will result in the elimination of approximately 330 positions around the world. Charges related to this initiative were approximately $3 million and $44 million for the three and six months ended June 30, 2021, respectively. Initiatives under this program are expected to be substantially completed by the end of 2021.
In September 2020, following the closing of the Bayer Animal Health acquisition, we implemented a restructuring program designed to reduce duplication, drive efficiency and optimize our footprint in key geographies. As part of the restructuring plan, we have eliminated approximately 900 positions across 40 countries, primarily in the commercial and marketing functions, but also in R&D, manufacturing and quality, and back office support functions. During the three and six months ended June 30, 2021 we recorded favorable adjustments of $1 million and $14 million, respectively, as a change in estimate related to this initiative, which reflects adjustments to severance accruals resulting from favorable negotiations and certain restructured employees filling open positions. Initiatives under this program are expected to be substantially completed by the end of 2021.
The following table summarizes the activity in our reserves established in connection with restructuring activities:
| | | | | | | | | | | | | | | | | |
| Facility exit costs | | Severance | | Total |
| Balance at December 31, 2019 | $ | 5 | | | $ | 16 | | | $ | 21 | |
| Charges | 1 | | | 2 | | | 3 | |
| Reserve adjustments | 0 | | | (1) | | | (1) | |
| Cash paid | (1) | | | (13) | | | (14) | |
| Balance at June 30, 2020 | $ | 5 | | | $ | 4 | | | $ | 9 | |
| | | | | |
| Balance at December 31, 2020 | $ | 0 | | | $ | 130 | | | $ | 130 | |
| | | | | |
| Charges | 0 | | | 42 | | | 42 | |
| Reserve adjustments | 0 | | | (14) | | | (14) | |
| Cash paid | 0 | | | (70) | | | (70) | |
| Balance at June 30, 2021 | $ | 0 | | | $ | 88 | | | $ | 88 | |
| | | | | | | | | |
| | | Severance | | |
| Balance at December 31, 2020 | | | $ | 130 | | | |
| Charges | | | 42 | | | |
| Reserve adjustments | | | (14) | | | |
| Cash paid | | | (70) | | | |
| Balance at June 30, 2021 | | | $ | 88 | | | |
| | | | | |
| Balance at December 31, 2021 | | | $ | 126 | | | |
| | | | | |
| | | | | |
| Reserve adjustments | | | (9) | | | |
| Cash paid | | | (63) | | | |
| Balance at June 30, 2022 | | | $ | 54 | | | |
These reserves are included in other current and noncurrent liabilities on theour condensed consolidated balance sheets. Substantially all of the reserves are expected to be paid in the next 1512 months primarily due to certain country negotiations and regulations. We believe that the reserves are adequate.
Note 6.7. Inventories
We state all inventories at the lower of cost or net realizable value. We use the last-in, first-out (LIFO) method for a portion of our inventories located in the continental U.S. Other inventories are valued by the first-in, first-out (FIFO) method or the weighted average cost method.
Inventories consisted of the following: | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Finished products | Finished products | $ | 599 | | | $ | 772 | | Finished products | $ | 618 | | | $ | 598 | |
| Work in process | Work in process | 662 | | | 625 | | Work in process | 545 | | | 565 | |
| Raw materials and supplies | Raw materials and supplies | 227 | | | 210 | | Raw materials and supplies | 222 | | | 256 | |
| Total | Total | 1,488 | | | 1,607 | | Total | 1,385 | | | 1,419 | |
| Decrease to LIFO cost | Decrease to LIFO cost | (38) | | | (29) | | Decrease to LIFO cost | (51) | | | (46) | |
| Inventories | Inventories | $ | 1,450 | | | $ | 1,578 | | Inventories | $ | 1,334 | | | $ | 1,373 | |
Note 7.8. Equity
Common Stock Offering
On January 22, 2020, we entered into an underwriting agreement in which we agreed to sell approximately 23 million shares of our common stock at a public offering price of $32.00 per share. In connection with the offering, we granted the underwriters an option to purchase up to an additional 2 million shares, which was exercised in full on January 23, 2020. As a result, we issued and sold a total of approximately 25 million shares of our common stock for $768 million, after issuance costs.
Tangible Equity Unit (TEU) Offering
On January 22, 2020, we also completed our offering of 11 million, 5.00% TEUs. Total proceeds, net of issuance costs, were $528 million. Each TEU, which has a stated amount of $50, is comprised of a prepaid stock purchase contract (prepaid stock) and a senior amortizing note due February 1, 2023. Subsequent to issuance, each TEU may be legally separated into the two components. The prepaid stock is considered a freestanding financial instrument, indexed to Elanco common stock, and meets the conditions for equity classification.
The value allocated to the prepaid stock is reflected net of issuance costs in additional paid-in capital. The value allocated to the senior amortizing notes is reflected in current portion of long-term debt on the condensed consolidated balance sheet, with payments expected in the next twelve months reflected in current portion of long-term debt.sheets. Issuance costs related to the amortizing notes are reflected as a reduction of the carrying amount and will be amortized through the maturity date using the effective interest rate method.
The proceeds from the issuance were allocated to equity and debt based on the relative fair value of the respective components of each TEU as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Equity Component | | Debt Component | | Total |
| Fair value per unit | | $ | 42.80 | | | $ | 7.20 | | | $ | 50.00 | |
| | | | | | |
| Gross proceeds | | $ | 471 | | | $ | 79 | | | $ | 550 | |
| Less: Issuance costs | | 19 | | | 3 | | | 22 | |
| Net proceeds | | $ | 452 | | | $ | 76 | | | $ | 528 | |
The senior amortizing notes have an aggregate principal amount of $79 million and bear interest at 2.75% per year. On each February 1, May 1, August 1, and November 1 until the maturity date, we will pay equal quarterly cash installments of $0.6250 per each amortizing note with an initial principal amount of $7.2007 (except for the first installment payment of $0.6528 per amortizing note paid on May 1, 2020). Each installment constitutes a payment of interest and partial payment of principal, and in the aggregate will be equivalent to 5.00% per year with respect to the $50 stated amount per TEU.
Unless settled early at the holder’s or our election, each prepaid stock purchase contract will automatically settle on February 1, 2023 (the mandatory settlement date) for a number of shares of common stock per contract based on the average of the volume-weighted average trading prices during the 20 consecutive trading day period beginning on, and including the 21st scheduled trading day immediately preceding February 1, 2023 (applicable market value) with reference to the following settlement rates:
| | | | | | | | |
| Applicable Market Value | | Common Stock Issued |
| Equal to or greater than $38.40 | | 1.3021 shares (minimum settlement rate) |
| Less than $38.40, but greater than $32.00 | | $50 divided by applicable market value |
| Less than or equal to $32.00 | | 1.5625 (maximum settlement rate) |
The prepaid stock purchase contracts are mandatorily convertible into a minimum of 14 million shares or a maximum of 17 million shares of our common stock on the mandatory settlement date (unless redeemed by us or settled earlier at the unit holder's option). The 14 million minimum shares are included in the calculation of basic weighted average shares outstanding. The difference between the minimum and maximum shares represents potentially dilutive securities, which are included in the calculation of diluted weighted average shares outstanding on a pro rata basis to the extent that the average applicable market value is higher than $32.00 but is less than $38.40 during the period. The entire additional 3 million shares are included in diluted weighted average shares outstanding if the applicable market value is at or below $32.00 and the impact is not anti-dilutive.
Note 8. Debt
Long-term debt consisted of the following:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| | | |
| Term loan B credit facility | $ | 4,140 | | | $ | 4,164 | |
| | | |
| 3.912% Senior Notes due 2021 | 500 | | | 500 | |
| 4.272% Senior Notes due 2023 | 750 | | | 750 | |
| 4.900% Senior Notes due 2028 | 750 | | | 750 | |
| TEU amortizing notes | 47 | | | 60 | |
| Other obligations | 0 | | | 1 | |
| Unamortized debt issuance costs | (90) | | | (98) | |
| | | |
| 6,097 | | | 6,127 | |
| Less current portion of long-term debt | 555 | | | 555 | |
| Total long-term debt | $ | 5,542 | | | $ | 5,572 | |
Bayer Animal Health Related Financing
In connection with the acquisition of Bayer Animal Health, on August 1, 2020, we borrowed $4,275 million under a term loan B credit facility. The term loan B facility bears interest at a floating rate of LIBOR plus 175 basis points over a seven-year term.
Simultaneously, we entered into a revolving credit facility providing up to $750 million (with incremental capacity available if certain conditions are met) and maturing over a five-year term. The revolving credit facility bears interest at LIBOR plus an applicable margin ranging between 1.50% and 2.25% per annum based on our corporate family rating or corporate credit rating. In February 2021, we drew down $150 million on the revolving credit facility for working capital needs. We subsequently repaid $100 million in March 2021 and the remaining $50 million in April 2021.
These senior secured first lien credit facilities are secured by a significant portion of our assets. They include 2 financial maintenance covenants which are solely for the benefit of lenders under the revolving credit facility. There are 0 financial maintenance covenants for the benefit of the term loan B facility. The lenders under the term loan B facility have no enforcement rights with respect to the financial maintenance covenants for the revolving credit facility.
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| 20212022 Q2 Form 10-Q | 1918
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Note 9. Debt
Long-term debt consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Incremental Term Facility due 2025 (1) | $ | 175 | | | $ | — | |
| Incremental Term Facility due 2028 | 496 | | | 499 | |
Incremental Term Facility due 2029 (2) | 250 | | | — | |
| Term Loan B | 4,027 | | | 4,118 | |
| Revolving Credit Facility | 75 | | | 250 | |
4.272% Senior Notes due 2023 (3) | 344 | | | 750 | |
| 4.900% Senior Notes due 2028 | 750 | | | 750 | |
| TEU Amortizing Notes | 20 | | | 34 | |
| | | |
| Unamortized debt issuance costs | (74) | | | (82) | |
| 6,063 | | | 6,319 | |
| Less current portion of long-term debt | 56 | | | 294 | |
| Total long-term debt | $ | 6,007 | | | $ | 6,025 | |
(1)In June 2022, we entered into an incremental assumption agreement with Bank of America, N.A. supplementing and amending our existing credit agreement dated August 1, 2020 relating to our senior secured credit facility. The first financial maintenance covenantincremental assumption agreement provides for a new incremental term facility with an aggregate principal amount of $175 million. The new incremental term facility bears interest at the Secured Overnight Financing Rate (Term SOFR), including a credit spread adjustment, plus 175 basis points and is payable in full on June 30, 2025. The proceeds were used to repay a portion of our outstanding obligations under our revolving credit facility requires us to maintain a net total leverage ratio level (which is not subject to step-downs) as of the end of each quarter. The required level of this covenant is based on closing date pro forma net leverage and pro forma adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) not exceeding 7.71 to 1.00 of our pro forma adjusted EBITDA for the four fiscal quarters ended June 30, 2021.facility.
(2)In April 2022, we entered into an incremental assumption agreement with Farm Credit Mid-America, PCA supplementing and amending our existing credit agreement dated August 1, 2020 relating to our senior secured credit facility. The second financial maintenance covenantincremental assumption agreement provides for thea new incremental term facility with an aggregate principal amount of $250 million maturing on April 19, 2029. The new incremental term facility bears interest at Term SOFR, including a credit spread adjustment, plus 175 basis points and is payable in quarterly installments of principal and interest with a final balloon payment due on April 19, 2029. The proceeds were used to repay a portion of our outstanding obligations under our revolving credit facility requires us to maintain a ratio of pro forma adjusted EBITDA to cash interest expense of no less than 2.00 to 1.00, tested as of the end of each fiscal quarter. We were in compliance with all covenants under the credit facility as of June 30, 2021.facility.
Senior Notes
In August 2018,April 2022, we issued $2 billioncompleted a tender offer and retired $406 million in aggregate principal amount of senior notes (Senior Notes). The Senior Notes comprised of $500 million of 3.912% Senior Notes due August 27, 2021, $750 million ofour 4.272% Senior Notes due August 28, 2023, and $750 million of 4.900% Senior Notes due August 28, 2028. The interest rate payable on each series of Senior Notes is subject to adjustment if Moody's Investor Services, Inc. or Standard & Poor's Financial Services LLC downgrades, or subsequently upgrades, its ratings on the respective series of Senior Notes.
The indenture that governs the Senior Notes contains covenants, including limitations on our ability, and certain of our subsidiaries, to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets, in addition, to other customary terms. We were in compliance with all such covenants under the indenture governing the Senior Notes as of June 30, 2021.
TEU Amortizing Notes
On January 22, 2020, we issued $550 million in TEUs. We offered 11 million, 5.00% TEUs at the stated amount of $50 per unit, comprised of prepaid stock purchase contracts and a senior amortizing note due February 1, 2023 (the mandatory settlement date). Total cash of $528 million was received, comprised of $452 million of prepaid stock purchase contracts and $76 million of senior amortizing notes, net of issuance costs. During the three and six months ended June 30, 2021, we paid $7 million and $14 million, respectively, representing partial payment of principal and interest on the TEU amortizing notes. See Note 7: Equity for further information.
Debt Extinguishment
On January 31, 2020, we repaid indebtedness outstanding under our previous term loan facility. We paid $372 million in cash, composed of $371 million of principal and $1 million of accrued interest, resulting in a debt extinguishment loss of $1approximately $17 million (recognizedrecognized in interest expense, net of capitalized interest in the condensed consolidated statementstatements of operations for the six months endedoperations. The repayment was funded with proceeds received from a draw under our revolving credit facility.
We were in compliance with all of our debt covenants as of June 30, 2020), primarily related to the write-off of deferred debt issuance costs.2022.
Note 9.10. Financial Instruments and Fair Value
Financial instruments that are potentially subject to credit risk consist principally of trade receivables. We evaluate the creditworthiness of our customers on a regular basis, monitor economic conditions, and calculate allowances for estimated credit losses on our trade receivables on a quarterly basis using an expected credit loss model. We assess whether collectability is probable at the time of sale and on an ongoing basis. Collateral is generally not required. The risk associated with this concentration is mitigated by our ongoing credit-review procedures.
A large portion of our cash is held by a few major financial institutions. We monitor the exposure with these institutions and do not expect any of these institutions to fail to meet their obligations. All highly liquid investments with a maturity of three months or less from the date of purchase are considered to be cash equivalents. The cost of these investments approximates fair value. We also consider the carrying value of restricted cash balances to be representative of its fair value.
We had investments without readily determinable fair values and equity method investments included in other noncurrent assets on our condensed consolidated balance sheetsheets totaling $18$31 million and $24$22 million as of June 30, 20212022 and December 31, 20202021, respectively. Unrealized net gains and losses on our investments for the three and six months ended June 30, 20212022 and 20202021 were immaterial.
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| 20212022 Q2 Form 10-Q | 2019
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The following table summarizes the fair value information at June 30, 20212022 and December 31, 20202021 for foreign exchange contract assets (liabilities), investments, contingent consideration liabilities, and cash flow hedge assets (liabilities) measured at fair value on a recurring basis in the respective balance sheet line items, as well as long-term debt (including TEU amortizing notes) for which fair value is disclosed on a recurring basis:
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| | | | | Fair Value Measurements Using | | |
| Financial statement line item | | Carrying
Amount | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant
Other Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair
Value |
| June 30, 2021 | | | | | | | | | | |
| | | | | | | | | | |
| Prepaid expenses and other - foreign exchange contracts not designated as hedging instruments | | $ | 34 | | | $ | 0 | | | $ | 34 | | | $ | 0 | | | $ | 34 | |
| Other noncurrent assets -investments | | 21 | | | 21 | | | 0 | | | 0 | | | 21 | |
| Other current liabilities - foreign exchange contracts not designated as hedging instruments | | (43) | | | 0 | | | (43) | | | 0 | | | (43) | |
| Other noncurrent liabilities - contingent consideration | | (1) | | | 0 | | | 0 | | | (1) | | | (1) | |
| | | | | | | | | | |
| Other noncurrent liabilities - forward-starting interest rate contracts designated as cash flow hedges | | (29) | | | 0 | | | (29) | | | 0 | | | (29) | |
| Long-term debt - senior notes | | (2,000) | | | 0 | | | (2,191) | | | 0 | | | (2,191) | |
| | | | | | | | | | |
| TEU amortizing note | | (47) | | | 0 | | | (50) | | | 0 | | | (50) | |
| Term loan B | | (4,140) | | | 0 | | | (4,078) | | | 0 | | | (4,078) | |
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| December 31, 2020 | | | | | | | | | | |
| | | | | | | | | | |
| Prepaid expenses and other - foreign exchange contracts not designated as hedging instruments | | $ | 36 | | | $ | 0 | | | $ | 36 | | | $ | 0 | | | $ | 36 | |
| Other noncurrent assets -investments | | 9 | | | 9 | | | 0 | | | 0 | | | 9 | |
| Other current liabilities - foreign exchange contracts not designated as hedging instruments | | (36) | | | 0 | | | (36) | | | 0 | | | (36) | |
| Other noncurrent liabilities - contingent consideration | | (1) | | | 0 | | | 0 | | | (1) | | | (1) | |
| Other noncurrent liabilities - forward-starting interest rate contracts designated as cash flow hedges | | (76) | | | 0 | | | (76) | | | 0 | | | (76) | |
| | | | | | | | | | |
| Long-term debt - senior notes | | (2,000) | | | 0 | | | (2,218) | | | 0 | | | (2,218) | |
| TEU amortizing notes | | (60) | | | 0 | | | (58) | | | 0 | | | (58) | |
| Term loan B | | (4,164) | | | 0 | | | (4,144) | | | 0 | | | (4,144) | |
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| | | | | Fair Value Measurements Using | | |
| Financial statement line item | | Carrying
Amount | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant
Other Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair
Value |
| June 30, 2022 | | | | | | | | | | |
| | | | | | | | | | |
| Prepaid expenses and other - foreign exchange contracts not designated as hedging instruments | | $ | 48 | | | $ | — | | | $ | 48 | | | $ | — | | | $ | 48 | |
| Prepaid expense and other - forward-starting interest rate contracts designated as cash flow hedges | | 18 | | | — | | | 18 | | | — | | | 18 | |
| Other noncurrent assets - forward-starting interest rate contracts designated as cash flow hedges | | 4 | | | — | | | 4 | | | 0 | | 4 | |
| Other noncurrent assets - investments | | 9 | | | 9 | | | — | | | — | | | 9 | |
| Other current liabilities - foreign exchange contracts not designated as hedging instruments | | (48) | | | — | | | (48) | | | — | | | (48) | |
| Other noncurrent liabilities - forward-starting interest rate contracts designated as cash flow hedges | | (3) | | | — | | | (3) | | | — | | | (3) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Long-term debt, including current portion | | (6,137) | | | — | | | (5,892) | | | — | | | (5,892) | |
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| | | | | | | | | | |
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| December 31, 2021 | | | | | | | | | | |
| | | | | | | | | | |
| Prepaid expenses and other - foreign exchange contracts not designated as hedging instruments | | $ | 19 | | | $ | — | | | $ | 19 | | | $ | — | | | $ | 19 | |
| Other noncurrent assets - investments | | 13 | | | 13 | | | — | | | — | | | 13 | |
| Other noncurrent assets - forward-starting interest rate contracts designated as cash flow hedges | | 8 | | | — | | | 8 | | | — | | | 8 | |
| | | | | | | | | | |
| Other current liabilities - foreign exchange contracts not designated as hedging instruments | | (20) | | | — | | | (20) | | | — | | | (20) | |
| | | | | | | | | | |
| Long-term debt, including current portion | | (6,401) | | | — | | | (6,518) | | | — | | | (6,518) | |
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We determine our Level 2 fair value measurements based on a market approach using quoted market values or significant other observable inputs for identical or comparable assets or liabilities.
Contingent consideration liabilities as of June 30, 2021 and December 31, 2020 related to contingent consideration associated with the acquisitions of Aratana Therapeutics, Inc. (Aratana) and Prevtec Microbia Inc.
(Prevtec) during 2019. For Aratana, we will pay up to $12 million in contingent value rights that are dependent on the achievement of a specified milestone as outlined in the merger agreement. For Prevtec, based on the terms of the purchase agreement, we will pay up to $16 million contingent upon the achievement of specific Coliprotec sales milestones by December 31, 2021. The fair value of both contingent consideration liabilities was estimated using the Monte Carlo simulation model and Level 3 inputs including historical revenue, discount rate, asset volatility, and revenue volatility.
Derivative Instruments and Hedging Activities
We are exposed to market risks, such as changes in foreign currency exchange rates and interest rates. To manage the volatility related to these exposures, we have entered into various derivative transactions. We formally assess, designate and document, as a hedge of an underlying exposure, each qualifying derivative instrument that will be accounted for as an accounting hedge at inception. Additionally, we assess, both at inception and at least quarterly thereafter, whether the financial instruments used in the hedging transaction are effective at offsetting changes in either the fair values or cash flows of the underlying exposures. Derivative cash flows, with the exception of net investment hedges, are principally classified in the operating activities section of the condensed consolidated statements of cash flows, consistent with the underlying hedged item. Cash flows related to net investment hedges are classified in the investing activities section of the consolidated statements of cash flows. Our outstanding positions are discussed below.
Derivatives Not Designatednot designated as Hedgeshedges
We may enter into foreign exchange forward or option contracts to reduce the effect of fluctuating currency exchange rates. These derivative financial instruments primarily offset exposures in the Euro, British pound, CanadianSwiss franc, Brazilian real, Australian dollar, Euro, Japanese yen, Swiss franc (CHF),Canadian dollar, and Chinese yuan. Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures and are recorded at fair value with the gain or loss recognized in other income,expense, net in the condensed consolidated statementstatements of operations. Forward contracts generally have maturities not exceeding 12 months. At June 30, 20212022 and December 31, 2020,2021, we had outstanding foreign exchange contracts with aggregate notional amounts of $1,405$1,085 million and $1,391$1,212 million, respectively.
The amount of net gain (loss)gains (losses) on derivative instruments not designated as hedging instruments, recorded in other income,(income) expense, net arewere as follows:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Foreign exchange forward contracts (1) | $ | 7 | | | $ | (6) | | | $ | (27) | | | $ | 22 | |
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Foreign exchange forward contracts (1) | $ | (7) | | | $ | 7 | | | $ | (15) | | | $ | (27) | |
(1)These amounts were substantially offset in other income,(income) expense, net by the effect of changing exchange rates on the underlying foreign currency exposures.
Derivatives Designateddesignated as Hedgeshedges
In October 2018, as a means of mitigatingWe are subject to interest rate risk with regard to our existing floating-rate debt, and we utilize interest rate swap contracts to mitigate the impact of currency fluctuations on our operationsvariability in Switzerland, we enteredcash flows by effectively converting the floating-rate debt into a five-year cross-currencyfixed-rate debt. We recognize any differences between the variable interest rate payments and the fixed interest rate settlements with the swap with a 750 million CHF notional amount, which was designatedcounterparties as a net investment hedge (NIH) against CHF denominated assets (the fair value of which was estimated based on quoted market values of similar hedges and was classified as Level 2). During the six months ended June 30, 2020 we fully liquidated our cross currency interest rate swaps for a cash benefit of $35 million (including $2 million in interest). Notwithstanding settlement, gains and losses within accumulated other comprehensive income will remain in accumulated other comprehensive income until either the sale or substantial liquidation of the hedged subsidiary.
Gains on the NIH, recognized withinan adjustment to interest expense, net of capitalized interest are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Cross-currency interest rate swap contracts | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 6 | |
Overover the life of the derivative, gains or losses due to spot rate fluctuations were recorded in cumulative translation adjustment in other comprehensive income (loss). The amounts of net gains on interest rate swap contracts, recorded, net of tax, in accumulated other comprehensive income, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Cross-currency interest rate swap contracts | $ | 0 | | | $ | 1 | | | $ | 0 | | | $ | 24 | |
Separately, in March 2020, as a means of mitigating variability in cash flows associated with the anticipated term loan B issuance, we executed forward-starting interest rateswaps. We have designated these swaps with a $4.1 billion notional amount, which are designated as cash flow hedges and have maturity dates ranging between 2022 and 2025. These instruments effectively convert floating-rate debt to fixed-rate debt. The cash flow hedges are recordedrecord them at fair value on ourthe condensed consolidated balance sheet, while changessheets. Changes in the fair value of the hedgehedges are recognized in other comprehensive income (loss). Fair value is estimated based on quoted market values of similar hedges and is classified as Level 2. Amounts recorded in accumulated other comprehensive income will be recognized in earnings inOur outstanding forward-starting interest expense, netrate swaps have maturities ranging between 2022 and 2025 with aggregate notional amounts of capitalized interest when the hedged transaction affects earnings (i.e., when interest payments are accrued on the term loan B).$3,050 million and $3,800 million as of June 30, 2022 and December 31, 2021, respectively.
The amounts of net gains (losses) on cash flow hedges recorded, net of tax, in accumulated other comprehensive income (loss), are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Forward-starting interest rate swaps, net of tax benefit of $0, $6, $0 and $17, respectively | $ | (5) | | | $ | (21) | | | $ | 48 | | | $ | (60) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Forward-starting interest rate swaps | $ | 8 | | | $ | (5) | | | $ | 117 | | | $ | 48 | |
ThereDuring the three months ended June 30, 2022 and 2021, net gains (losses) on cash flow hedges recorded in other comprehensive income (loss) included an unrealized gain of $33 million and an unrealized loss of $5 million, respectively, related to mark-to-market adjustments. During the six months ended June 30, 2022 and 2021, net gains (losses) on cash flow hedges recorded in other comprehensive income (loss) included unrealized gains of $143 million and $48 million, respectively, related to mark-to-market adjustments.
In April 2022, we took advantage of market opportunities to restructure our interest rate swap portfolio. We unwound the existing swaps and simultaneously entered into new agreements with the same notional amounts and covering the same tenors. As a result, we received a cash settlement of $132 million. This gain was 0 tax benefitinitially recognized in accumulated other comprehensive loss and will be reclassified to interest expense, net of capitalized interest over the period during which the related interest payments will be made.
Additionally, as a result of the April 2022 interest rate swap settlement, other comprehensive income (loss) for the three and six months ended June 30, 2022 included a $17 million reclassification of stranded tax benefit from accumulated other comprehensive loss, based on our policy to reclassify income tax effects from accumulated other comprehensive loss using the portfolio approach, as well as $8 million of reclassification of unrealized gains. Other than the reclassification of the stranded tax benefit, there was no tax effect recorded in relation to our cash flow hedges for the three and six months ended June 30, 2022 and 2021 after the application of the U.S. valuation allowance. See Note 10:11: Income Taxes for further discussion. Over
During the next 12three months ended June 30, 2022 and 2021, we expect to reclassify $27reclassified $7 million from accumulated other comprehensive income toof net losses into interest expense, net of capitalized interest due to the amortizationin our condensed consolidated statements of net losses on the interest rate swaps.operations. During the three and six months ended June 30, 2022 and 2021, we reclassified $7$10 million and $14 million, respectively, of net losses into interest expense. Over the next 12 months, we expect to reclassify a gain of $72 million, which includes $53 million relating to the interest rate swap settlement, to interest expense, net of capitalized interest.
Note 10.11. Income Taxes
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| Income Tax Benefit | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Income tax benefit | | $ | (26) | | | $ | (24) | | | $ | (45) | | | $ | (43) | |
| Effective tax rate | | 11.1 | % | | 30.9 | % | | 14.2 | % | | 29.4 | % |
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Income tax expense (benefit) | | $ | 4 | | | $ | (26) | | | $ | 27 | | | $ | (45) | |
| Effective tax rate | | (22.5) | % | | 11.1 | % | | 50.7 | % | | 14.2 | % |
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We were included in Lilly's U.S. tax examinations by the Internal Revenue Service through the full separation date of March 11, 2019. Pursuant to the tax matters agreement we executed with Lilly in connection with the IPO,our initial public offering (IPO), the potential liabilities or potential refunds attributable to pre-IPO periods in which Elanco was included in a Lilly consolidated or combined tax return remain with Lilly. The U.S. examination of tax years 2016 -to 2018 began in the fourth quarter of 2019 and remains ongoing; therefore, theongoing. The resolution of this audit period will likely extend beyond the next 12 months.
For the three and six months ended June 30, 2022, we recognized income tax expense of $4 million and $27 million, respectively. Our effective tax rate of (22.5)% and 50.7%, respectively, differs from the statutory income tax rate largely due to changes in the earnings mix between periods resulting in projected losses in the U.S. The U.S. federal and state losses are subject to valuation allowances. The income tax expense was partially offset by the $17 million income tax benefit reclassified from accumulated other comprehensive loss due to the termination of interest rate swaps during the period.
For the three and six months ended June 30, 2021, we recognized an income tax benefit of $26 million and $45 million, respectively. For the three and six months ended June 30, 2021, ourOur effective tax rate of 11.1% and 14.2%, respectively, differs from the statutory income tax rate primarily because the U.S. federal and state jurisdictions arewere currently generating losses that arewere subject to valuation allowances.
For the three and six months ended June 30, 2020, we recognized an income tax benefit of $24 million and $43 million, respectively. For the three and six months ended June 30, 2020, our effective tax rate of 30.9% and 29.4%, respectively, differs from the statutory income tax rate primarily due to changes in the expected geographical mix of profits and the impact of U.S. tax on non-U.S. earnings as a result of U.S. tax reform.
Note 11.12. Commitments and Contingencies
Legal Matters
On May 20, 2020, a shareholder class action lawsuit captioned Hunter v. Elanco Animal Health Inc., et al. was filed in the United States District Court for the Southern District of Indiana (the Court) against Elanco Jeffrey Simmons and Todd Young.certain executives. On September 3, 2020, the Court appointed a lead plaintiff, and on November 9, 2020, the lead plaintiff filed an amended complaint.complaint adding additional claims against Elanco, certain executives, and other individuals. The lawsuit alleges, in part, that Elanco and certain of its executives made materially false and/or misleading statements and/or failed to disclose certain facts about Elanco’s supply chain, inventory, revenue and projections. The lawsuit seeks unspecified monetary damages and purports to represent purchasers of Elanco securities between September 30, 2018 and May 6, 2020, and purchasers of Elanco common stock issued in connection with Elanco's acquisition of Aratana. We filed a motion to dismiss on January 13, 2021. The timing of the Court's decision is uncertain. We believe the claims made in the case are meritless, and we intend to vigorously defend our position. The process of resolving these matters is inherently uncertain and may develop over an extended period of time; therefore, at this time, the ultimate resolution cannot be predicted.
On October 16, 2020, a shareholder class action lawsuit captioned SafronSaffron Capital Corporation v. Elanco Animal Health Inc., et al. was filed in the Marion Superior Court of Indiana against Elanco, certain executives, and other individuals. On December 23, 2020, the plaintiffs filed an amended complaint adding an additional plaintiff. The lawsuit alleges, in part, that Elanco and certain of its executives made materially false and/or misleading statements and/or failed to disclose certain facts about Elanco’s relationships with third party distributors and revenue attributable to those distributors within the registration statement on Form S-3 dated January 21, 2020 and accompanying prospectus filed in connection with Elanco’s public offering which closed on or about January 27, 2020. The lawsuit seeks unspecified monetary damages and purports to represent purchasers of Elanco common stock or 5.00% TEUs issued in connection with the public offering. This case is currently stayed in deference to Hunter v. Elanco Animal Health Inc. We believe the claims made in the case are meritless, and we intend to vigorously defend our position. The process of resolving these matters is inherently uncertain and may develop over an extended period of time; therefore, at this time, the ultimate resolution cannot be predicted.Inc
Claims seeking actual damages, injunctive relief, and/or restitution for allegedly deceptive marketing have been made against Elanco Animal Health Inc. and Bayer HealthCare LLC, along with other Elanco and Bayer entities, arising out of the use of Seresto™, a non-prescription flea and tick collar for cats and dogs. During the six months ended June 30, 2021, putative class action lawsuits were filed in state and federal courts in the U.S. alleging that the Seresto collars contain pesticides and other ingredients that can cause serious injury and death to cats and/or dogs wearing the product. The cases which are now pending in federal court, mention the existence of incident reports involving humans, but no plaintiff has claimed personal harm from the product. One plaintiff filed a petition beforeIn August 2021, the lawsuits were consolidated by the Judicial Panel on Multidistrict Litigation, (JPML), which may result in all pending lawsuits beingand the cases were transferred to a single federal judge for coordinated pretrial proceedings. The hearing on the JPML petition took place on July 29,Northern District of Illinois. We are vigorously defending these lawsuits.
Further, in March 2021, and a decision is pending. Further, a U.S. House of RepresentativeRepresentatives subcommittee chair requested that Elanco to produce certain documents and information related to the Serestocollar and further made a request to temporarily recall Seresto collars from the market. We are continuing to cooperate withOn June 15, 2022, the subcommittee held a hearing at which our President and have produced information pursuantChief Executive Officer (CEO) testified. During and after the hearing, the subcommittee chair repeated his request that Elanco voluntarily recall the collars and also requested that the Environmental Protection Agency (EPA) commence administrative proceedings that would allow the EPA to the request.remove Seresto from the market.
Serestois a pesticide registered with the Environmental Protection Agency (EPA).EPA. A non-profit organization submitted a petition to the EPA requesting that the agency take action to cancel Seresto’s pesticide registration and suspend the registration pending cancellation. The EPA is considering this petition and has asked for public comment. We are providing informationsubmitted a comment to the EPA regardingsupporting the safety profile of Seresto. All dataData and scientific evaluation used during the product registration process and through pharmacovigilance review supports the product’s positive safety profile and efficacy. Therefore, we believe no removal, recall, or cancellation of the pesticide registration is warranted, nor has it been suggested by any regulatory agency. We continue to stand behind the safety profile for Seresto, and it remains available to consumers globally. We continue to receive information with respect to potential litigation costs and the anticipated number of cases, and we will be taking appropriate steps to defend these putative class action lawsuits.
We are party to various other legal actions in the normal course of business. In determining whether a pending matter is significant for financial reporting and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality. We accrue for certain liability claims to the extent that it is probable we will incur a loss and we can formulate a reasonable estimate of the costs. As of June 30, 20212022 and December 31, 2020,2021, we had 0no material liabilities established related to litigation as there were no significant claims which were probable and estimable. We are not currently subject to a significant claim other than the lawsuits noted above.
Regulatory Matters
On July 1, 2021, we received a subpoena from the SEC relating to our channel inventory and sales practices prior to mid-2020. We have cooperated in providing documents and information to the SEC and will continue to do so. Management believes that its actions were appropriate.
Other Commitments
As of June 30, 2022, we have a lease commitment that has not yet commenced for our new corporate headquarters in Indianapolis, Indiana. Total minimum lease payments are estimated to be approximately $310 million over a term of 25 years, excluding extensions. Final lease payments may vary depending on the actual cost of certain construction activities. Lease commencement is expected in 2024.
The land for our new corporate headquarters is located in a Tax Increment Finance District, and the project is, in part, funded through Tax Incremental Financing (TIF) through an incentive agreement between us and the City of Indianapolis. The agreement provides for an estimated total incentive of $64 million to be funded by the City of Indianapolis in connection with the future tax increment revenue generated from the developed property. In December 2021, as part of a funding and development agreement entered into between us and the developer, we made a commitment to use the expected TIF proceeds towards the cost of developing and constructing the headquarters. In exchange, the developer reimbursed us up to the $64 million commitment in 2021. We expect to refund approximately $15 million to the developer within the next 12 months, and this amount is included in other current liabilities on our condensed consolidated balance sheet as of June 30, 2022. As a result, it is our expectation that our future lease payments will be reduced. The remaining accrued incentive is included in other noncurrent liabilities on our condensed consolidated balance sheets and will be amortized over the lease term beginning at the commencement date and offset future rent expense.
Note 12.13. Geographic Information
We operate as a single operating segment engaged in the development, manufacturing, marketing and sales of animal health products worldwide for both pets and farm animals and pets.animals. Consistent with our operational structure, our President and Chief Executive Officer (CEO),CEO, as the chief operating decision maker, makes resource allocation and business process decisions globally across our consolidated business. Strategic decisions are managed globally with global functional leaders responsible for determining significant costs/investments and with regional leaders responsible for overseeing the execution of the global strategy. Our global research and development organization is responsible for development of new products. Our manufacturing organization is responsible for the manufacturing and supply of products and for the optimization of our supply chain. Regional leaders are responsible for the distribution and sale of our products and for local direct costs. The business is also supported by global corporate staff functions. Managing and allocating resources at the global corporate level enables our CEO to assess the overall level of resources available and how to best deploy these resources across functions, product types, regional commercial organizations and research and development projects in line with our overarching long-term corporate-wide strategic goals, rather than on a product or geographic basis. Consistent with this decision-making process, our CEO uses consolidated, single-segment financial information for purposes of evaluating performance, allocating resources, setting incentive compensation targets, as well as forecasting future period financial results.
Our products include Baycox™AviPro™, Cydectin™Baytril™, Denagard™Cydectin™, Maxiban™Catosal™, Optaflexx™Denagard™, Maxiban™, Rumensin™, Tylan™Pulmotil™, and other products for livestock and poultry, as well as Advantage™, Advantix™, Advocate™ (collectivelyAdvocate™ (collectively referred to as the Advantage Family)Family), Credelio™, Duramune™, Duramune™,Galliprant™, Interceptor™ Plus, Seresto, Trifexis™, and other products for pets.
We have a single customer that accounted for 10% of revenue for the three months ended June 30, 2022 and 2021, and 202010% and 8% and 12% of revenue for the six months ended June 30, 20212022 and 2020,2021, respectively. Product sales with this customer resulted in accounts receivable of $100$78 million and $87$74 million as of June 30, 20212022 and December 31, 2020,2021, respectively.
We are exposed to the risk of changes in social, political and economic conditions inherent in foreign operations and our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates.
Selected geographic area information was as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | Revenue | | | | | | | | Revenue | | | | | | | |
| United States | United States | $ | 581 | | | $ | 248 | | | $ | 1,114 | | | $ | 548 | | United States | $ | 539 | | | $ | 581 | | | $ | 1,061 | | | $ | 1,114 | |
| International | International | 698 | | | 338 | | | 1,407 | | | 696 | | International | 638 | | | 698 | | | 1,341 | | | 1,407 | |
| | Revenue | Revenue | $ | 1,279 | | | $ | 586 | | | $ | 2,521 | | | $ | 1,244 | | Revenue | $ | 1,177 | | | $ | 1,279 | | | $ | 2,402 | | | $ | 2,521 | |
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Note 13.14. Retirement Benefits
The following table summarizes net periodic benefit cost (recovery)(income) relating to our defined benefit pension plans:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | Service cost | $ | 5 | | | $ | 2 | | | $ | 10 | | | $ | 5 | | Service cost | $ | 3 | | | $ | 5 | | | $ | 7 | | | $ | 10 | |
| Interest cost | Interest cost | 0 | | | 1 | | | 1 | | | 1 | | Interest cost | 1 | | | — | | | 2 | | | 1 | |
| Expected return on plan assets | Expected return on plan assets | (1) | | | (1) | | | (3) | | | (2) | | Expected return on plan assets | (1) | | | (1) | | | (3) | | | (3) | |
| Amortization of prior service cost | Amortization of prior service cost | (2) | | | (2) | | | (4) | | | (4) | | Amortization of prior service cost | (1) | | | (2) | | | (2) | | | (4) | |
| Amortization of net actuarial loss | Amortization of net actuarial loss | 0 | | | 0 | | | 1 | | | 1 | | Amortization of net actuarial loss | — | | | — | | | — | | | 1 | |
| Net curtailments and settlements (Note 5) | (8) | | | 0 | | | (17) | | | 0 | | |
| Net curtailments and settlements (Note 6) | | Net curtailments and settlements (Note 6) | — | | | (8) | | | — | | | (17) | |
| Net periodic benefit cost (income) | Net periodic benefit cost (income) | $ | (6) | | | $ | 0 | | | $ | (12) | | | $ | 1 | | Net periodic benefit cost (income) | $ | 2 | | | $ | (6) | | | $ | 4 | | | $ | (12) | |
The components of net periodic benefit cost (income) other than service cost and net curtailments and settlements are included in other income,(income) expense, net in theour condensed consolidated statements of operations. Net curtailments and settlements are included in asset impairment, restructuring and other special charges in theour condensed consolidated statements of operations.
Note 14. Loss15. Earnings (Loss) Per Share
We compute basic lossearnings (loss) per share by dividing net lossincome (loss) available to common shareholders by the actual weighted average number of common shares outstanding for the reporting period. Elanco has variable common stock equivalents relating to certain equity awards in stock-based compensation arrangements and the TEU prepaid stock purchase contracts (see Note 7:8: Equity for further discussion). Diluted earnings per share reflects the potential dilution that could occur if holders of the unvested equity awards and unsettled TEUs converted their holdings into common stock. The weighted average number of potentially dilutive shares outstanding is calculated using the treasury stock method. Potential common shares that would have the effect of increasing diluted earnings per share (or reducing loss per share) are considered to be anti-dilutive and as such, these shares are not included in the calculation of diluted lossearnings (loss) per share.
Basic and diluted lossearnings (loss) per share are calculated as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Net loss available to common shareholders | | $ | (210) | | | $ | (53) | | | $ | (271) | | | $ | (102) | | |
| Net income (loss) available to common shareholders | | Net income (loss) available to common shareholders | | $ | (22) | | | $ | (210) | | | $ | 26 | | | $ | (271) | |
| Determination of shares: | Determination of shares: | | Determination of shares: | |
| Weighted average common shares outstanding | Weighted average common shares outstanding | | 487.3 | | | 413.2 | | 487.0 | | | 408.5 | Weighted average common shares outstanding | | 488.4 | | | 487.3 | | 488.2 | | | 487.0 |
Assumed conversion of dilutive common stock equivalents (1) | Assumed conversion of dilutive common stock equivalents (1) | | 0 | | | 0 | | | 0 | | | 0 | | Assumed conversion of dilutive common stock equivalents (1) | | — | | | — | | | 3.9 | | | — | |
| Diluted weighted average shares outstanding | Diluted weighted average shares outstanding | | 487.3 | | | 413.2 | | 487.0 | | | 408.5 | Diluted weighted average shares outstanding | | 488.4 | | | 487.3 | | 492.1 | | | 487.0 |
Loss per share (2) | | | | | | | | | |
Earnings (loss) per share (2) | | Earnings (loss) per share (2) | | | | | | | | |
| Basic | Basic | | $ | (0.43) | | | $ | (0.13) | | | $ | (0.56) | | | $ | (0.25) | | Basic | | $ | (0.04) | | | $ | (0.43) | | | $ | 0.05 | | | $ | (0.56) | |
| Diluted | Diluted | | $ | (0.43) | | | $ | (0.13) | | | $ | (0.56) | | | $ | (0.25) | | Diluted | | $ | (0.04) | | | $ | (0.43) | | | $ | 0.05 | | | $ | (0.56) | |
(1)During the three and six months ended June 30, 2021 and 2020, weFor periods with a reported a net loss. Therefore,loss, dilutive common stock equivalents are not assumed to have been issued since their effect is anti-dilutive. As a result, basic and diluted weighted average shares are the same, causing diluted net loss per share to be equivalent to basic net loss per share. For the three months ended June 30, 2022 and 2021, and 2020, approximately 1.43.2 million and 2.34.2 million, respectively, of potential common shares were excluded from the calculation of diluted earnings (loss) per share because their effect was anti-dilutive. For the six months ended June 30, 2022 and 2021, and 2020, approximately 1.51.6 million and 2.14.3 million, respectively, of potential common shares were excluded from the calculation of diluted earnings (loss) per share because their effect was anti-dilutive.
(2)Due to rounding conventions, lossearnings (loss) per share may not recalculate precisely based on the amounts presented within this table.
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Note 15. Transactions and Agreements with Bayer
For regulatory purposes in certain jurisdictions, consideration was required to be paid locally at closing in addition to amounts paid globally for the acquisition. Pursuant to the stock and asset purchase agreement, Bayer has provided a refund for payment amounts duplicated in these regions. The total amount paid to and received from Bayer during the six months ended June 30, 2021 for these local country asset purchases was approximately $16 million. All local country asset purchases have been completed as of June 30, 2021.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations (MD&A) is intended to assist the reader in understanding and assessing significant changes and trends related to our results of operations and financial position. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying footnotes in Item 1 of Part I of this Quarterly Report on Form 10-Q. Certain statements in this Item 2 of Part I of this Quarterly Report on Form 10-Q constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements,"Statements" of this Form 10-Q, in Item 1A, "Risk Factors,"Factors" of Part II of this Quarterly Report on Form 10-Q, and in Item 1A, “Risk Factors,”Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020,2021, may cause our actual results, financial position, and cash generated from operations to differ materially from these forward-looking statements. Further, due to the seasonality of our pet health sales, interim results are not necessarily an appropriate base from which to project annual results.
Overview
Founded in 1954, Elanco is a premierglobal animal health company that innovates, develops manufactures and markets products for pets and farm animals. Headquarteredanimals in Greenfield, Indiana,more than 90 countries. With a heritage dating back to 1954, we are onerigorously innovate to improve the health of animals and to benefit our customers while fostering an inclusive, cause-driven culture for our employees. We operate our business in a single segment directed at fulfilling our vision of enriching the largest animal health companieslives of people through food, making protein more accessible and affordable, and through pet companionship, helping pets live longer, healthier lives.
On August 27, 2021, we acquired KindredBio, a biopharmaceutical company that develops innovative biologics focused on saving and improving the lives of pets. We had previously signed an agreement with KindredBio in the world, with pro forma combined revenuesecond quarter of Elanco and Bayer Animal Health of approximately $4.4 billion2021 to acquire exclusive global rights to KIND-030, a monoclonal antibody in development for the year ended December 31, 2020.treatment and prevention of canine parvovirus. The acquisition of KindredBio further accelerates our opportunity for expansion in pet health, notably by expanding our research efforts in dermatology. See Note 5: Acquisitions, Divestitures and Other Arrangements to the condensed consolidated financial statements for additional information on the acquisition. Subsequent to the acquisition date, our consolidated financial statements include the assets, liabilities, operating results and cash flows of KindredBio.
On August 1, 2020, we completed the acquisition of Bayer Animal Health. The acquisition expanded our pet health product category, advancing our planned portfolio mix transformation and creating a better balance between our farm animal and pet health product categories. Our existing product portfolio and pipeline have been enhanced by the addition of Bayer Animal Health, which complements our commercial operations and international infrastructure. See Note 4: Acquisitions and Divestitures to the condensed consolidated financial statements for additional information on the acquisition. Subsequent to the acquisition date, our consolidated financial statements include the assets, liabilities, operating results and cash flows of Bayer Animal Health.
We offer a diverse portfolio of approximately 190200 brands that make us a trusted partner to pet owners, veterinarians and farm animal producers in more than 90 countries.producers. Our products are generally sold worldwide to third-party distributors and independent retailers, and directly to farm animal producers and veterinarians. With the acquisition of Bayer Animal Health, we have expanded our presence in retail and e-commerce channels in order to meet pet owners where they want to purchase.
We operate our business in a single segment directed at fulfilling our vision of food and companionship enriching life – all to advance the liveshealth of animals, people through food, making protein more accessible and affordable, and through pet companionship, helping pets live longer, healthier lives. In 2020, we renamed our four primary product categories by replacing "food animal" and "companion animal" with "farm animal" and "pet health," respectively, to better reflect the terminology used by our customers.planet. We advance our vision with the followingby offering of portfolio solutions:products in these two primary categories:
Pet HealthHealth: : Our pet health portfolio is focused on parasiticides, vaccines and therapeutics. We have one of the broadest parasiticide portfolios in the pet health sector based on indications, species and formulations, with products that protect pets from worms, fleas and ticks. Our Seresto and Advantage Family , Advantix, Advocate (collectively referred to as the Advantage Family) products are over-the-counter treatments for the elimination and prevention, respectively, of fleas and ticks, and complement our prescription parasiticide products, Credelio, Interceptor Plus, and Trifexis. Our vaccines portfolio provides differentiated prevention coverage for a number of important pet health risks and is available in the U.S. only. In therapeutics, we have a broad pain and osteoarthritis portfolio across species, modes of action, indications and disease stages. Pet owners are increasingly treating osteoarthritis in their pets, and our Galliprant™ product is one of the fastest growing osteoarthritis treatments in the U.S. Additionally, we have products that offer treatment for otitis (ear infections) with Claro™, as well as treatments for certain cardiovascular and dermatology indications.
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Farm Animal: Our farm animal portfolio consists of products designed to prevent, control and treat health challenges primarily focused on cattle (beef and dairy), swine, poultry, and aquaculture (cold and warm water) production. Our products include medicated feed additives, injectable antibiotics, vaccines, insecticides, and enzymes, among others. We have a wide range of farm animal products, including Rumensin and Baytril™, both of which are used extensively in ruminants (e.g., cattle, sheep and goats) and swine production.. In poultry, our Maxiban product, is a valuable offering for the control and prevention of intestinal disease.
A summary of our 20212022 revenue and net lossincome (loss) compared with the same period in 20202021 is as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | (Dollars in millions) | | 2021 | | 2020 | | 2021 | | 2020 | (Dollars in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | Revenue | | $ | 1,279 | | | $ | 586 | | | $ | 2,521 | | | $ | 1,244 | | Revenue | | $ | 1,177 | | | $ | 1,279 | | | $ | 2,402 | | | $ | 2,521 | |
| Net loss | | (210) | | | (53) | | | (271) | | | (102) | | |
| Net income (loss) | | Net income (loss) | | (22) | | | (210) | | | 26 | | | (271) | |
Increases or decreases in inventory levels at our channel distributors can positively or negatively impact our quarterly and annual revenue results, leading to variations in quarterly revenues. This can be a result of various factors, such as end customer demand, new customer contracts, heightened and generic competition, the need for certain inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to shifting market dynamics, payment terms we extend, which are subject to internal policies, and procedures and environmental factors beyond our control, including weather conditions and the COVID-19 global pandemic.
Key Trends and Conditions Affecting Our Results of Operations
Industry Trends
The animal health industry, which includes both pets and farm animals, and pets, is a growing industry that benefits billions of people worldwide.
We believe that factors influencing growth in demand for pet medicines and vaccines include:
•increased pet ownership globally;
•pets living longer; and
•increased pet spending as pets are viewed as members of the family by owners.
As demand for animal protein grows, farm animal health is becoming increasingly important. We believe that factors influencing growth in demand for farm animal medicines and vaccines include:
•onetwo in three people needing improved nutrition;
•increased global demand for protein, particularly poultry and aquaculture;
•natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, driving the need for more efficient food production;
•loss of productivity due to farm animal disease and death;
•increased focus on food safety and food security; and
•human population growth, increased standards of living, particularly in many emerging markets, and increased urbanization.
Growth in farm animal nutritional health products (enzymes, probiotics and prebiotics) is influenced, among other factors, by demand for antibiotic alternatives that can promote animal health and increase productivity.
We believe that factors influencing growth in demand for pet medicines and vaccines include:
•increased pet ownership globally;
•pets living longer; and
•increased pet spending as pets are viewed as members of the family by owners.
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Factors Affecting Our Results of Operations
COVID-19 PandemicRussia-Ukraine Conflict
Our business has been impacted by the COVID-19 pandemic that originated in December 2019. We continue to monitor the global outbreak of COVID-19 and have worked with our customers, employees, suppliers and other stakeholders to mitigate the risks posed by its spread. The COVID-19 pandemic continues to impact the economy inIn February 2022, Russia commenced military action against Ukraine. In response, the U.S. and globally,certain other countries imposed and has had an effectcontinue to impose significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations. The U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions if the conflict continues or worsens. The broader consequences of the conflict, including related inflationary pressures, geopolitical tensions, additional retaliatory actions taken by the U.S. and other countries, and any counter retaliatory actions by Russia or Belarus in response, including, for example, potential cyberattacks or the disruption of energy and commodity exports, are likely to cause regional instability and could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. The situation remains uncertain and it is difficult to predict the impact that the conflict and actions taken in response to the conflict will have on the operationsour business; however, they could increase our costs, disrupt our supply chain, reduce our sales and earnings, or otherwise adversely affect our business and results of our company, vendors and suppliers, and supply of and demand for our products as follows:
Operationsoperations.
As a resultglobal animal health leader, we have an obligation to support the health of animals and people. At the center of that work is ensuring access and availability of food. At this time, we are limiting our business in Russia to only the essential products that support these needs, while complying with all imposed sanctions. We do not manufacture products or source any materials from companies in Russia for use in our products, nor do we conduct business with the Russian government. During the six months ended June 30, 2022, revenue to Russian and Ukrainian customers represented approximately 1% of our consolidated revenue. Assets held in Russia as of June 30, 2022 represented less than 1% of our consolidated assets.
COVID-19 Pandemic and Resulting Operating Environment
We continue to closely monitor the impact of the COVID-19 pandemic, governmentalincluding its variants, and the related economic effects on all aspects of our business, including impacts on our operations, supply chain, and customer demand. The extent to which the COVID-19 pandemic may impact our financial condition and results of operations remains uncertain and is dependent on developments that are out of our control, including measures being taken by authorities implemented measures to try to containmitigate against the virus,spread of COVID-19, such as travel bans and restrictions, limits on gatherings, quarantines, shelter-in-place orders, site closures and business shutdowns. These measures have affected the abilityrecent lockdowns in China, the emergence of our employees, vendors, and suppliers to perform their respective responsibilities and obligations relative to the conduct of our business. We have important manufacturing operations worldwide that have been impacted by the outbreak. Measures requiring business shutdowns generally exclude certain essential services, and those essential services commonly include critical infrastructurenew variants and the businessesavailability and successful administration of effective vaccines. We cannot predict the impact that support that critical infrastructure. Because the animal health industry has been designated an essential business, our manufacturing and research facilities remain operational, whileongoing COVID-19 pandemic will have on our employees, in other company functions continue to primarily work remotely. These measures have impacted and may further impact our workforce and operations, as well as those of our customers, vendors and suppliers.suppliers; however, the COVID-19 pandemic has had and may continue to have an adverse impact on our business if these parties continue to experience negative effects.
In late 2020 and early 2021, vaccines effective in combating COVID-19 were authorized for use by health agencies in certain countries and regions in which we operate (includingWhile the U.S., U.K., European Union, Canada and Mexico) and began to be administered. As a result, countries and regions in which we operate have begun to lift travel bans and ease restrictions put in place to contain the virus. However, the availability of COVID-19 vaccines and their take-up by individuals are difficult to predict, and vaccination levels are likely to vary across jurisdictions. The pace and shape of the COVID-19 recovery as well as the impact and extent of COVID-19 variants or potential resurgences is not presently known. As a result, it is possiblesituation surrounding the COVID-19 pandemic particularlyremains fluid, the effects have disrupted the global supply chain across all modes of transportation, which in lightturn has resulted in less reliable transportation schedules and increased freight costs. This disruption, combined with increased demand for key raw materials, including those used in COVID-19 vaccine manufacturing, and labor constraints has also impacted our suppliers, resulting in shortages of variant strains of the virus, could further impactraw materials or components required to manufacture our products. We continue to work closely with suppliers and freight partners to mitigate impacts to our operations and customers, including the operationsaddition of our customers, suppliersnew transportation routes and vendors as a resulttargeted increases of quarantines, facility closures, illnesses, and travel and logistics restrictions.
Supply
In the first half of 2021, we did not experience significant impacts or interruptions to our supply chain as a result of the COVID-19 pandemic. However, as the pandemic continues, we may face supply chain disruptions due to operational difficulties experienced by our suppliers.certain safety stocks. Although we regularly monitor the financial health of companies in our supply chain, theprolonged financial hardship on our suppliers caused by the COVID-19 pandemicand labor shortages could cause a disruption incontinue to disrupt our ability to obtain key raw materials, or components required to manufacture our products, adversely affecting our operations. The global industry freight environment has experienced, and could continue to experience, lead time disruptions and increases in shipping costs, negatively impacting our profitability.
Demand
The COVID-19 pandemic has adversely impacted global economic conditions. In particular, the COVID-19 pandemic created significant uncertainty for our channel distribution partners with respect to end customer demand and working capital. Our third party distributors may face difficulties maintaining operations and normal liquidity in light of government-mandated restrictions. Due to liquidity and working capital pressure caused by the COVID-19 pandemic, our distributors continue to manage inventory more tightly. In response to this along with a shift in tactics for demand generation with our distributors, we reduced channel inventory levels during the first half of 2020 as we tightened our approach across all facets of our distributor relationships. We estimate that this decreased our revenue by approximately $160 million. These actions have allowed us to improve working capital management, increase gross margin, implement new compensation structures with our distributors and enable greater control of overall stock levels. For our pet health business, demand in our direct to retailer and e-commerce channels could be negatively impacted by economic conditions as they fluctuate.
In our farm animal business, demand has been negatively impacted by processing plant closures, resulting in a backlog of animals ready for processing, and weakened food service demand, which collectively have put pressure on producer economics. Processing plants have adjusted operations and have cleared most of the backlog, and demand for certain protein categories continues to recover. While the impact has been most significant for the U.S. livestock industry, particularly in the second and third quarters of 2020, the pressure has occurred globally and across species. As the pandemic has continued through the first half of 2021, our business has been affected by lower levels of demand in certain markets due to unfavorable macroeconomic conditions and reduced food service consumption as well as an overall reduction in the bird and animal populations due to herd reduction and disease. As a result, the industry has seen lowered prices and producer profitability across species, most notably in international poultry and aqua. While we anticipate that recovery of end consumer demand will continue to occur, particularly in the food service business, this recovery may be negatively impacted by ongoing labor shortages in the swine, poultry, dairy and beef industries or the effect of inflation on customer profitability. We also expect this recovery to be volatile and uncertain. In addition, demand may be impacted by potential future mitigation measures such as shutdowns if prolonged resurgences in COVID-19 and its variants occur globally.
We continue to monitor the impacts on our customers' liquidity and therefore our ability to collect on our accounts receivable. While our allowance on these receivables factors in expected credit losses, disruption and declines in the global economy could result in difficulties in our ability to collect, which we have not experienced on a material basis at this time. If significant issues with collections occur, material increases in our allowance for doubtful accounts may be required.
Our Acquisition of Bayer Animal Health and KindredBio
We have incurred and expect to continue to incur expenses in connection with our acquisitionacquisitions of Bayer Animal Health and KindredBio, including fees for professional services such as legal, accounting, consulting, and other advisory fees and expenses. Expenses incurred in 2021 and thus far in 2022 are primarily relaterelated to integration activities. In addition, we have incurred and expect to continue to incur costs related to the build out of processes and systems to support finance and global supply and logistics and to expand administrative functions, including, but not limited to, information technology, facilities management, distribution, human resources, and manufacturing, to replace services previously provided by the former parent company of Bayer Animal Health. We anticipate that these additional costs will be partially offset by expected synergies.
Product Development and New Product Launches
A key element of our targeted value creation strategy is to drive growth through portfolio development and product innovation. We continue to pursue the development of new chemical and biological molecules through our approach to innovation. Our future growth and success depend on both our pipeline of new products, including new products that we may develop through joint ventures and products that we are able to obtain through license or acquisition, and the expansion of the use of our existing products. We believe we are an industry leader in animal health R&D, with a track record of product innovation, business development and commercialization.
Competition
We face intense competition. Principal methods of competition vary depending on the particular region, species, product category, or individual product. Some of these methods include new product development, including generic alternatives to our products, quality, price, service and promotion.
Our primary competitors include animal health medicines and vaccines companies such as Zoetis Inc.; Boehringer Ingelheim Vetmedica, Inc., the animal health division of Boehringer Ingelheim GmbH; and Merck Animal Health, the animal health division of Merck & Co., Inc. We also face competition globally from manufacturers of generic drugs, as well as from producers of nutritional health products, such as DSM Nutritional Products AG and Danisco Animal Nutrition, the animal health division of E.I. du Pont de Nemours and Company, a subsidiary of DowDuPont, Inc. There are also several new start-up companies working in the animal health area. In addition, we compete with numerous other producers of animal health products throughout the world.
Productivity
Our results during the periods presented have benefited from operational and productivity initiatives implemented following recent acquisitions and in response to changing market demand for antibiotics and other headwinds.
Prior to the acquisition of Bayer Animal Health, our acquisitions within the last six years added in the aggregate $1.4 billion in revenue, 4,600 full-time employees, and 12 manufacturing and eight R&D sites. The acquisitionacquisitions of Bayer Animal Health on August 1, 2020 and KindredBio on August 27, 2021 added 3,9003,950 full-time employees, eight10 manufacturing sites, and fourfive R&D sites.sites (before company-wide restructuring activities initiated in 2020 and 2021). In addition, from 2015 to 2020,2021, changing market demand for antibiotics and other headwinds, such as competition with generics and innovation, affected some of our highest gross margin products, resulting in a change to our product mix and driving operating margin lower. In response, we implemented a number of initiatives across the manufacturing, R&D and marketing, selling general and administrative (SG&A) functions. Our manufacturing cost savings strategies included improving manufacturing processes and headcount through lean manufacturing (minimizing waste while maintaining productivity), closing and selling manufacturing sites, consolidating our CMO network, strategically insourcing certain projects, and pursuing cost savings opportunities with respect to raw materials via a new procurement process.through alternate sources of supply. Additional cost savings have resulted from reducing the number of R&D sites, SG&A savings from sales force consolidation and reducing discretionary and other general and administrative (G&A) operating expense.expenses.
Seasonality
The results of our pet health business may fluctuate due to seasonality. For example, based upon historical results, approximately 70% and 60% of total annual revenue contributed by our higher-margin parasiticide products Seresto and Advantage Family, respectively, has occurred during the first half of the year, which is reflective of the flea and tick season in the Northern Hemisphere. Therefore, a period-to-period comparison of our historical results may not be meaningful and fluctuations in total revenue for our pet health products are not necessarily an indication of future performance.
Foreign Exchange Rates
Significant portions of our revenue and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 90 countries and, as a result, our revenue is influenced by changes in foreign exchange rates. During the six months ended June 30, 2022 and 2021, approximately 52% and 2020, approximately 51% and 49%, respectively, of our revenue was denominated in foreign currencies. As we operate in multiple foreign currencies, including the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar, Chinese yuan, and other currencies, changes in those currencies relative to the U.S. dollar impact our revenue, cost of sales and expenses, and consequently, net income. These fluctuations may also affect the ability to buy and sell our products between markets impacted by significant exchange rate variances. Currency movements increaseddecreased revenue by 3%4% during the six months ended June 30, 2021 and decreased2022. Currency movements had a limited impact on revenue by 2% during the six months ended June 30, 2020.2021.
Our Relationship with Lilly and Additional Standalone Costs
All operations-focused TSAs that went into effect after our 2018 separation from Lilly were exited as planned during the first half of 2021. We are nearly complete with investments in expanding our own administrative functions, including, but not limited to, information technology, facilities management, distribution, human resources, and manufacturing, to replace services previously provided by Lilly. Because of initial stand up costs and overlaps with services previously provided by Lilly, we have incurred and expect to continue to incur certain temporary, duplicative expenses in connection with the Separation. We have also incurred costs related to the build out of processes and systems to support finance and global supply and logistics, among others. At the present time, we expect minimal additional costs to be incurred and we anticipate that total costs incurred will be between $325 million and $335 million, net of completed and planned real estate dispositions and employee benefit changes, of which a portion will be capitalized and the remainder will be expensed.
Asset Impairment, Restructuring and Other Special Charges
During the six months ended June 30, 2021 and 2020 including in connection with the productivity initiatives described above under "Factors Affecting Our Results of Operations - Productivity," we incurred charges related to asset impairment, restructuring and other special charges, including integration of acquired businesses. These charges include severance costs resulting from actions taken to reduce our costs, asset impairment charges, and write-downs primarily related to competitive pressures for certain pet health products, product rationalizations, site closures, the sale of manufacturing sites and integration costs related to acquired businesses, primarily Bayer Animal Health, costs associated with the pending acquisition of KindredBio, and costs related to the build out of processes and systems to support finance and global supply and logistics, among others, as we stand our
organization up as an independent company.
For more information on these charges, see Note 5: Asset Impairment, Restructuring and Other Special Charges to the condensed consolidated financial statements.
Results of Operations
The following discussion and analysis of our results of operations should be read along with our condensed consolidated financial statements and the notes thereto.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | (Dollars in millions) | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change | (Dollars in millions) | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| Revenue | Revenue | $ | 1,279 | | | $ | 586 | | | 118 | % | | $ | 2,521 | | | $ | 1,244 | | | 103 | % | Revenue | $ | 1,177 | | | $ | 1,279 | | | (8) | % | | $ | 2,402 | | | $ | 2,521 | | | (5) | % |
| Costs, expenses and other: | Costs, expenses and other: | | Costs, expenses and other: | |
| Cost of sales | Cost of sales | 551 | | | 296 | | | 86 | % | | 1,120 | | | 629 | | | 78 | % | Cost of sales | 484 | | | 551 | | | (12) | % | | 993 | | | 1,120 | | | (11) | % |
| % of revenue | % of revenue | 43 | % | | 51 | % | | (8) | % | | 44 | % | | 51 | % | | (7) | % | % of revenue | 41 | % | | 43 | % | | (2) | % | | 41 | % | | 44 | % | | (3) | % |
| Research and development | Research and development | 94 | | | 59 | | | 59 | % | | 183 | | | 126 | | | 45 | % | Research and development | 82 | | | 94 | | | (13) | % | | 163 | | | 183 | | | (11) | % |
| % of revenue | % of revenue | 7 | % | | 10 | % | | (3) | % | | 7 | % | | 10 | % | | (3) | % | % of revenue | 7 | % | | 7 | % | | — | % | | 7 | % | | 7 | % | | — | % |
| Marketing, selling and administrative | Marketing, selling and administrative | 385 | | | 163 | | | 136 | % | | 733 | | | 345 | | | 112 | % | Marketing, selling and administrative | 343 | | | 385 | | | (11) | % | | 663 | | | 733 | | | (10) | % |
| % of revenue | % of revenue | 30 | % | | 28 | % | | 2 | % | | 29 | % | | 28 | % | | 1 | % | % of revenue | 29 | % | | 30 | % | | (1) | % | | 28 | % | | 29 | % | | (1) | % |
| Amortization of intangible assets | Amortization of intangible assets | 129 | | | 49 | | | 163 | % | | 276 | | | 101 | | | 173 | % | Amortization of intangible assets | 133 | | | 129 | | | 3 | % | | 270 | | | 276 | | | (2) | % |
| % of revenue | % of revenue | 10 | % | | 8 | % | | 2 | % | | 11 | % | | 8 | % | | 3 | % | % of revenue | 11 | % | | 10 | % | | 1 | % | | 11 | % | | 11 | % | | — | % |
| Asset impairment, restructuring and other special charges | Asset impairment, restructuring and other special charges | 299 | | | 119 | | | 151 | % | | 407 | | | 194 | | | 110 | % | Asset impairment, restructuring and other special charges | 86 | | | 299 | | | (71) | % | | 132 | | | 407 | | | (68) | % |
| Interest expense, net of capitalized interest | Interest expense, net of capitalized interest | 60 | | | 25 | | | 140 | % | | 121 | | | 41 | | | 195 | % | Interest expense, net of capitalized interest | 67 | | | 60 | | | 12 | % | | 119 | | | 121 | | | (2) | % |
| Other income, net | (3) | | | (48) | | | NM | | (3) | | | (47) | | | NM | |
| Loss before income taxes | (236) | | | (77) | | | 206 | % | | (316) | | | (145) | | | 118 | % | |
| Other (income) expense, net | | Other (income) expense, net | — | | | (3) | | | NM | | 9 | | | (3) | | | NM |
| Income (loss) before income taxes | | Income (loss) before income taxes | (18) | | | (236) | | | 92 | % | | 53 | | | (316) | | | 117 | % |
| % of revenue | % of revenue | (18) | % | | (13) | % | | (5) | % | | (13) | % | | (12) | % | | (1) | % | % of revenue | (2) | % | | (18) | % | | 16 | % | | 2 | % | | (13) | % | | 15 | % |
| | Income tax benefit | (26) | | | (24) | | | 8 | % | | (45) | | | (43) | | | 5 | % | |
| Net loss | $ | (210) | | | $ | (53) | | | 296 | % | | $ | (271) | | | $ | (102) | | | 166 | % | |
| Income tax expense (benefit) | | Income tax expense (benefit) | 4 | | | (26) | | | 115 | % | | 27 | | | (45) | | | 160 | % |
| Net income (loss) | | Net income (loss) | $ | (22) | | | $ | (210) | | | 90 | % | | $ | 26 | | | $ | (271) | | | 110 | % |
Certain amounts and percentages may reflect rounding adjustments.
NM - Not meaningful
Disaggregated Revenue
On a global basis, our revenue for the three months ended June 30 is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Revenue | | % of Total Revenue | | Increase (Decrease) |
| (Dollars in millions) | | | | | | | 2021 | | 2020 | | 2021 | | 2020 | | $ Change | | % Change | | CER (1) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Pet Health | | | | | | | $ | 685 | | | $ | 254 | | | 54 | % | | 43 | % | | $ | 431 | | 170 | % | | 167 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Farm Animal | | | | | | | 567 | | | 316 | | | 44 | % | | 54 | % | | 251 | | 79 | % | | 73 | % |
| Subtotal | | | | | | | 1,252 | | | 570 | | | 98 | % | | 97 | % | | 682 | | 120 | % | | 115 | % |
Contract Manufacturing(2) | | | | | | | 27 | | | 16 | | | 2 | % | | 3 | % | | 11 | | 69 | % | | 69 | % |
| Total | | | | | | | $ | 1,279 | | | $ | 586 | | | 100 | % | | 100 | % | | 693 | | 118 | % | | 114 | % |
(1)Constant exchange rate (CER) is defined as revenue growth excluding the impact of foreign exchange. The calculation assumes the same foreign currency exchange rates that were in effect for the comparable prior-year period were used in translation of the current period results. We believe this metric provides a useful comparison to previous periods.
(2)Represents revenue from arrangements in which we act as a contract manufacturer, including supply agreements associated with divestitures of products related to the acquisition of Bayer Animal Health.
Total revenue increased $693 million to $1,279 million, comprised of $750 million from the legacy Elanco portfolio
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and $529 million from the legacy Bayer Animal Health portfolio. This 118% increase reflects a 111% increase in volume, a 2% increase in price, and a 5% favorable impact from foreign exchange rates.Disaggregated Revenue
The detailed change in revenue by product category was as follows:
•Pet Health revenue increased by $431 million, or 170%, for the quarter, driven by an increase in revenue as a result of the addition of Bayer Animal Health product revenue of $348 million in the quarter. The increase in the legacy Elanco business was driven by a favorable comparison to the prior year, during which we reduced channel inventory levels with our distributors and experienced reduced demand for veterinary products, primarily in U.S. vaccines and international markets, due to the COVID-19 pandemic. Current period growth in the legacy Elanco business was attributable to higher volume in newer generation parasiticide and pain products, in addition to price growth led by U.S. vaccines.
•Farm Animal revenue increased by $251 million, or 79%, for the quarter, driven by an increase in revenue as a result of the addition of Bayer Animal Health product revenue of $157 million in the quarter. Legacy Elanco revenue increased as a result of a favorable comparison to the prior year, which included lower levels of demand due to the impact of the COVID-19 pandemic on global protein markets, the unwind of anticipatory buying by direct customers in international export markets, and actions taken across brands to reduce channel inventory levels. In the current period, increased revenue due to price growth was more than offset by lower levels of demand in certain markets due to the negative impact of the COVID-19 pandemic on poultry and aqua consumption, production, and profitability.
•Contract Manufacturing revenue was $27 million, and represented 2% of total revenue. Contract manufacturing revenue for the period includes $24 million resulting from the acquisition of Bayer Animal Health.
On a global basis, our revenue by product category for the sixthree months ended June 30, 2022 and 2021 is summarized as follows:
| | | | | Revenue | | % of Total Revenue | | Increase (Decrease) | | | | Revenue | | % of Total Revenue | | Increase (Decrease) |
| (Dollars in millions) | (Dollars in millions) | | | 2021 | | 2020 | | 2021 | | 2020 | | $ Change | | % Change | | CER (1) | (Dollars in millions) | | | 2022 | | 2021 | | 2022 | | 2021 | | $ Change | | % Change | | CER (1) |
| | Pet Health | Pet Health | | | $ | 1,330 | | | $ | 460 | | | 53 | % | | 37 | % | | $ | 870 | | 189 | % | | 187 | % | Pet Health | | | $ | 612 | | | $ | 685 | | | 52 | % | | 54 | % | | $ | (73) | | (11) | % | | (7) | % |
| | Farm Animal | Farm Animal | | | 1,145 | | | 749 | | | 45 | % | | 60 | % | | 396 | | 53 | % | | 50 | % | Farm Animal | | | 553 | | | 567 | | | 47 | % | | 44 | % | | (14) | | (2) | % | | 3 | % |
| Subtotal | Subtotal | | | 2,475 | | | 1,209 | | | 98 | % | | 97 | % | | 1,266 | | 105 | % | | 102 | % | Subtotal | | | 1,165 | | | 1,252 | | | 99 | % | | 98 | % | | (87) | | (7) | % | | (3) | % |
Contract Manufacturing(2) | Contract Manufacturing(2) | | | 46 | | | 35 | | | 2 | % | | 3 | % | | 11 | | 31 | % | | 31 | % | Contract Manufacturing (2) | | | 12 | | | 27 | | | 1 | % | | 2 | % | | (15) | | (56) | % | | (53) | % |
| Total | Total | | | $ | 2,521 | | | $ | 1,244 | | | 100 | % | | 100 | % | | 1,277 | | 103 | % | | 100 | % | Total | | | $ | 1,177 | | | $ | 1,279 | | | 100 | % | | 100 | % | | (102) | | (8) | % | | (4) | % |
Note: Numbers may not add due to rounding
(1)Constant exchange rate (CER), a non-GAAP measure, is defined as revenue growth excluding the impact of foreign exchange. The calculation assumes the same foreign currency exchange rates that were in effect for the comparable prior-year period were used in translation of the current period results. We believe this metric provides a useful comparison to previous periods.
(2)Represents revenue from arrangements in which we act as a contract manufacturer, including supply agreements associated with divestitures of products related to the acquisition of Bayer Animal Health.
Total revenue increased $1,277 million to $2,521 million, comprisedOn a global basis, the effect of $1,433 million from the legacy Elanco portfolio and $1,088 million from the legacy Bayer Animal Health portfolio. This 103% increase reflects a 98% increase in volume, a 2% increase in price, and a 3% favorable impact from foreign exchange rates.
The detailed changerates and volumes on changes in revenue by product category was as follows:
•Pet Health revenue increased by $870 million, or 189%, for the period, driven by an increase in revenue as a result of the addition of Bayer Animal Health product revenue of $717 million in the period. The increase in the legacy Elanco business was driven by a favorable comparison to the prior year, during which we reduced channel inventory levels with our distributors and experienced reduced demand for veterinary products, primarily in U.S. vaccines and international markets, due to the COVID-19 pandemic. Current period growth in the legacy Elanco business was attributable to higher volume in newer generation parasiticide and pain products, in addition to price growth led by U.S. vaccines.
•Farm Animal revenue increased by $396 million, or 53%, for the period, driven by an increase in revenue as a result of the addition of Bayer Animal Health product revenue of $331 million in the period. Legacy Elanco revenue increased as a result of a favorable comparison to the prior year, which included lower levels of
demand due to the impact of the COVID-19 pandemic on global protein markets and actions taken across brands to reduce channel inventory levels due to the pandemic. In the current period, revenue increases due to price growth were partially offset by lower levels of demand in certain markets due to the negative impact of the COVID-19 pandemic on poultry and aqua consumption, production, and profitability as well as generic competition.
•Contract Manufacturing revenue was $46 million, and represented 2% of total revenue. Contract manufacturing revenue for the period includes $40 million resulting from the acquisition of Bayer Animal Health.
Cost of Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Cost of sales | | $ | 551 | | | $ | 296 | | | 86 | % | | $ | 1,120 | | | $ | 629 | | | 78 | % |
| % of revenue | | 43 | % | | 51 | % | | | | 44 | % | | 51 | % | | |
Cost of sales increased 86% for the three months ended June 30, 2022 and 2021 primarilywas as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended June 30, 2022 (Dollars in millions) | | | | | |
Revenue | | Price | | FX Rate | | Volume | | Total | | CER |
| Pet Health | | | | | | $ | 612 | | | 1% | | (4)% | | (8)% | | (11)% | | (7)% |
| Farm Animal | | | | | | 553 | | | 2% | | (5)% | | 1% | | (2)% | | 3% |
| Subtotal | | | | | | 1,165 | | | 1% | | (4)% | | (4)% | | (7)% | | (3)% |
| Contract Manufacturing | | | | | | 12 | | | —% | | (2)% | | (53)% | | (56)% | | (53)% |
| Total | | | | | | $ | 1,177 | | | 1% | | (4)% | | (5)% | | (8)% | | (4)% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended June 30, 2021 (Dollars in millions) | | | | | |
Revenue | | Price | | FX Rate | | Volume (1) | | Total | | CER |
| Pet Health | | | | | | $ | 685 | | | 6% | | 3% | | 161% | | 170% | | 167% |
| Farm Animal | | | | | | 567 | | | —% | | 6% | | 73% | | 79% | | 73% |
| Subtotal | | | | | | 1,252 | | | 2% | | 5% | | 112% | | 120% | | 115% |
| Contract Manufacturing | | | | | | 27 | | | —% | | —% | | 69% | | 69% | | 69% |
| Total | | | | | | $ | 1,279 | | | 2% | | 5% | | 111% | | 118% | | 114% |
Note: Numbers may not add due to an increase in sales. Costrounding
(1)Impact of sales during the three months ended June 30, 2021 was approximately 43% of revenue compared to 51% in the prior year. This decrease is due to the inclusion offrom Bayer Animal Health products, which have higher margins, as well as continued improvementsis reflected in manufacturing productivity and increases in price.
Cost of sales increased 78% for the six months ended June 30, 2021, partly due to the amortization of the fair value adjustment to inventory of $63 million due to the acquisition of Bayer Animal Health along with an increase in legacy Elanco sales. Excluding the amortization of the inventory fair value adjustment, cost of sales would have been approximately 42% of revenue, compared to 51% in the prior year. This decrease is due to the inclusion of Bayer Animal Health products, which have higher margins, as well as continued improvements in manufacturing productivity and increases in price.
Research and development
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Research and development | | $ | 94 | | | $ | 59 | | | 59 | % | | $ | 183 | | | $ | 126 | | | 45 | % |
| % of revenue | | 7 | % | | 10 | % | | | | 7 | % | | 10 | % | | |
R&D expenses increased 59% for the three months ended June 30, 2021 and 45% for the six months ended June 30, 2021, primarily due to the inclusion of the Bayer Animal Health business. As a percent of revenue, research and development was 7% compared to 10% in the prior year for both periods, primarily due to the rationalization of R&D projects, personnel and site operations in the current year following the acquisition of Bayer Animal Health.
Marketing, selling and administrative
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Marketing, selling and administrative | | $ | 385 | | | $ | 163 | | | 136 | % | | $ | 733 | | | $ | 345 | | | 112 | % |
| % of revenue | | 30 | % | | 28 | % | | | | 29 | % | | 28 | % | | |
Marketing, selling and administrative expenses for the three months ended June 30, 2021 were 30% of revenue, as compared to 28% in the prior year. Expenses increased 136% over prior year, primarily as a result of the acquisition of Bayer Animal Health, increased market research costs and promotional spend for direct-to-consumer and digital advertising, increased information technology spending, increases in legal costs, and increases in legacy Elanco compensation and benefits due to the addition of employees to perform activities that were previously covered by the TSAs with Lilly that were exited during the first half of 2021.
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| 20212022 Q2 Form 10-Q | 3531
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Marketing, sellingOn a global basis, our revenue by product category for the six months ended June 30, 2022 and administrative expenses2021 is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Revenue | | % of Total Revenue | | Increase (Decrease) |
| (Dollars in millions) | | | | | | | 2022 | | 2021 | | 2022 | | 2021 | | $ Change | | % Change | | CER |
| Pet Health | | | | | | | $ | 1,251 | | | $ | 1,330 | | | 52 | % | | 53 | % | | $ | (79) | | (6) | % | | (3) | % |
| Farm Animal | | | | | | | 1,122 | | | 1,145 | | | 47 | % | | 45 | % | | (23) | | (2) | % | | 2 | % |
| Subtotal | | | | | | | 2,373 | | | 2,475 | | | 99 | % | | 98 | % | | (102) | | (4) | % | | — | % |
| Contract Manufacturing | | | | | | | 29 | | | 46 | | | 1 | % | | 2 | % | | (17) | | (37) | % | | (34) | % |
| Total | | | | | | | $ | 2,402 | | | $ | 2,521 | | | 100 | % | | 100 | % | | (119) | | (5) | % | | (1) | % |
Note: Numbers may not add due to rounding
On a percentageglobal basis, the effect of revenue were 29% ofprice, foreign exchange rates and volumes on changes in revenue for the six months ended June 30, 2022 and 2021 was as follows:
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Six months ended June 30, 2022 (Dollars in millions) | | | | | |
Revenue | | Price | | FX Rate | | Volume | | Total | | CER |
| Pet Health | | | | | | $ | 1,251 | | | 1% | | (3)% | | (4)% | | (6)% | | (3)% |
| Farm Animal | | | | | | 1,122 | | | 1% | | (4)% | | —% | | (2)% | | 2% |
| Subtotal | | | | | | 2,373 | | | 1% | | (4)% | | (2)% | | (4)% | | —% |
| Contract Manufacturing | | | | | | 29 | | | —% | | (2)% | | (34)% | | (37)% | | (34)% |
| Total | | | | | | $ | 2,402 | | | 1% | | (4)% | | (2)% | | (5)% | | (1)% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, 2021 (Dollars in millions) | | | | | |
Revenue | | Price | | FX Rate | | Volume (1) | | Total | | CER |
| Pet Health | | | | | | $ | 1,330 | | | 4% | | 2% | | 183% | | 189% | | 187% |
| Farm Animal | | | | | | 1,145 | | | 1% | | 3% | | 49% | | 53% | | 50% |
| Subtotal | | | | | | 2,475 | | | 2% | | 2% | | 100% | | 105% | | 102% |
| Contract Manufacturing | | | | | | 46 | | | —% | | —% | | 31% | | 31% | | 31% |
| Total | | | | | | $ | 2,521 | | | 2% | | 2% | | 98% | | 103% | | 100% |
Note: Numbers may not add due to rounding
(1)Impact of 2021 revenue from Bayer Animal Health is reflected in volume.
Revenue
Pet Health revenue decreased by $73 million, or 11%, for the three months ended June 30, 2022, driven by a decrease in volume and an unfavorable impact from foreign exchange rates, partially offset by an increase in price. On a constant currency basis, the decrease of 7% was primarily attributable to lower volumes in U.S. parasiticides, driven by declines in older generation products, supply chain disruptions for certain products and increased competition.
Pet Health revenue decreased by $79 million, or 6%, for the six months ended June 30, 2022, driven by a decrease in volume and an unfavorable impact from foreign exchange rates, partially offset by an increase in price. On a constant currency basis, the decrease of 3% was primarily attributable to lower volumes in U.S. parasiticides, driven by declines in older generation products, supply chain disruptions for certain products and increased competition.
Farm Animal revenue decreased by $14 million, or 2%, for the three months ended June 30, 2022, driven by an unfavorable impact from foreign exchange rates, partially offset by increases in price and volume. On a constant currency basis, growth was driven by increased demand for ruminant products internationally, most notably sheep products, and certain customer programs that shifted sales expected in the third quarter of 2022 into the second quarter of 2022, partially offset by a continued decline in demand in the swine market, particularly in China, which began in the second half of 2021, as compared to 28%well as increased competition in the prior year. ExpensesEuropean swine market.
Farm Animal revenue decreased by $23 million, or 2%, for the six months ended June 30, 2022, driven by an unfavorable impact from foreign exchange rates, partially offset by an increase in price. On a constant currency basis, growth was driven by improved producer demand and innovation in poultry and strong aqua demand during the first quarter of 2022. Growth was also favorably impacted by increased 112% over prior year, primarilydemand for ruminant products internationally, most notably sheep products, and certain customer programs that shifted sales expected in the third quarter of 2022 into the second quarter of 2022. These increases were partially offset by a continued decline in demand in the swine market, particularly in China, which began in the second half of 2021, as well as the impact of generic competition on price for certain cattle brands and increased competition in the European swine market.
Cost of Sales
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| Cost of sales | | $ | 484 | | | $ | 551 | | | (12) | % | | $ | 993 | | | $ | 1,120 | | | (11) | % |
| % of revenue | | 41 | % | | 43 | % | | | | 41 | % | | 44 | % | | |
Cost of sales as a resultpercentage of revenue decreased for the three months ended June 30, 2022, primarily due to improvements in manufacturing productivity, price, and the effect of foreign exchange rates on international inventories sold, partially offset by unfavorable product mix and inflationary impacts on input costs, freight and conversion costs.
Cost of sales as a percentage of revenue decreased for the six months ended June 30, 2022, primarily due to amortization of the fair value adjustment of $63 million recorded from the acquisition of Bayer Animal Health increased promotional spend for direct-to-consumer and digital advertising, increased information technology spending, increases in legal and administrative costs, and increases in legacy Elanco compensation and benefits due to the addition of employees to perform activities that were previously covered by the TSAs with Lilly that were exited during the first half of 2021.2021, price, improvements in manufacturing productivity and the effect of foreign exchange rates on international inventories sold, partially offset by unfavorable product mix and inflationary impacts on input costs, freight and conversion costs. Excluding the $63 million fair value adjustment for the six months ended June 30, 2021, cost of sales as a percentage of revenue would have been approximately 42%.
Amortization of intangible assetsResearch and Development
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | (Dollars in millions) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change | (Dollars in millions) | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| Amortization of intangible assets | | $ | 129 | | | $ | 49 | | | 163 | % | | $ | 276 | | | $ | 101 | | 173 | % | |
| Research and development | | Research and development | | $ | 82 | | | $ | 94 | | | (13) | % | | $ | 163 | | | $ | 183 | | | (11) | % |
| % of revenue | | % of revenue | | 7 | % | | 7 | % | | 7 | % | | 7 | % | |
Amortization of intangible assets increasedR&D expenses decreased $12 million and $20 million for the three and six months ended June 30, 2022, respectively. R&D expenses were favorably impacted by cost savings realized as a result of 2021 primarilyrestructuring activities, lower professional service costs due to the additionrationalization of amortizationcertain R&D projects, and the impact of intangible assets recorded from the acquisition of Bayer Animal Health.
Asset impairment, restructuring and other special charges
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Asset impairment, restructuring and other special charges | | $ | 299 | | | $ | 119 | | | 151 | % | | $ | 407 | | | $ | 194 | | 110 | % |
Asset impairment, restructuringMarketing, Selling and other special charges increased $180 million for the three months ended June 30, 2021, primarily due to a $265 million charge recorded during the period to write down assets at our Shawnee, Kansas and Speke, U.K. sites that were classified as held for sale to an amount equal to fair value lessAdministrativecosts to sell, as well as costs incurred in relation to the pending acquisition of KindredBio. See Note 4: Acquisitions and Divestitures for further discussion. These increases were partially offset by decreases in integration costs of acquisitions and costs associated with the implementation of new systems, programs, and processes due to our separation from Lilly and in connection with the acquisition of Bayer Animal Health, as compared to the prior year.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| Marketing, selling and administrative | | $ | 343 | | | $ | 385 | | | (11) | % | | $ | 663 | | | $ | 733 | | | (10) | % |
| % of revenue | | 29 | % | | 30 | % | | | | 28 | % | | 29 | % | | |
Asset impairment, restructuringMarketing, selling and other special charges increased $213administrative expenses decreased $42 million for the six months ended June 30, 2021, primarily due to a $265and $70 million charge recorded during the period to write down assets at our Shawnee, Kansas and Speke, U.K. sites that were classified as held for sale to an amount equal to fair value lesscosts to sell, as well as costs incurred in relation to the pending acquisition of KindredBio. See Note 4: Acquisitions and Divestitures to the condensed consolidated financial statements for further discussion. These increases were partially offset by decreases in integration costs of acquisitions and costs associated with the implementation of new systems, programs, and processes due to our separation from Lilly and in connection with the acquisition of Bayer Animal Health, as compared to the prior year.
For additional information regarding our asset impairment, restructuring and other special charges, see Note 5: Asset Impairment, Restructuring and Other Special Charges to the condensed consolidated financial statements.
Interest expense, net of capitalized interest
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Interest expense, net of capitalized interest | | $ | 60 | | | $ | 25 | | | 140 | % | | $ | 121 | | | $ | 41 | | 195 | % |
Interest expense, net of capitalized interest, increased for the three and six months ended June 30, 2022, respectively, primarily driven by disciplined cost management across the business, cost savings realized as a result of 2021 primarily due to interest associated withrestructuring activities, changes in our promotional programs which resulted in a decrease in marketing expense, and the term loan B entered into August 1, 2020 and used to financeimpact of foreign exchange. These decreases more than offset the Bayer Animal Health acquisition.impact of inflation during the periods.
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| 20212022 Q2 Form 10-Q | 3633
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Other income, netAmortization of Intangible Assets
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | (Dollars in millions) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change | (Dollars in millions) | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| Other income, net | | $ | (3) | | | $ | (48) | | | NM | | $ | (3) | | | $ | (47) | | NM | |
| Amortization of intangible assets | | Amortization of intangible assets | | $ | 133 | | | $ | 129 | | | 3 | % | | $ | 270 | | | $ | 276 | | (2) | % |
Amortization of intangible assets increased $4 million for the three months ended June 30, 2022, primarily due to the timing of finalizing the valuation of intangible assets acquired from the Bayer Animal Health acquisition in the prior year, partially offset by the impact of foreign exchange rates.
Amortization of intangible assets decreased $6 million for the six months ended June 30, 2022, primarily due to the timing of finalizing the valuation of intangible assets acquired from the Bayer Animal Health acquisition in the prior year, as well as the impact of foreign exchange rates.
Asset Impairment, Restructuring and Other Special Charges
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| Asset impairment, restructuring and other special charges | | $ | 86 | | | $ | 299 | | | (71) | % | | $ | 132 | | | $ | 407 | | (68) | % |
For additional information regarding our asset impairment, restructuring and other special charges, see Note 6: Asset Impairment, Restructuring and Other Special Charges to the condensed consolidated financial statements.
Asset impairment, restructuring and other special charges decreased $213 million for the three months ended June 30, 2022, primarily due to a $265 million charge recorded during the three months ended June 30, 2021 to write down assets at our Shawnee and Speke manufacturing sites that were classified as held for sale to an amount equal to fair value less costs to sell, as well as a period over period decrease in overall acquisition-related charges, which include transaction costs related to acquisitions and costs associated with the implementation of new systems, programs, and processes due to both our separation from Lilly and the integration of Bayer Animal Health. These decreases were partially offset by a one-time charge of $59 million related to the expensing of an IPR&D asset licensed from BexCaFe during the three months ended June 30, 2022. See Note 5: Acquisitions, Divestitures and Other Arrangements for further discussion.
Asset impairment, restructuring and other special charges decreased $275 million for the six months ended June 30, 2022, primarily due to a $265 million charge recorded during the six months ended June 30, 2021 to write down assets at our Shawnee and Speke manufacturing sites that were classified as held for sale to an amount equal to fair value less costs to sell, as well as a period over period decrease in severance charges and overall acquisition-related charges, which include transaction costs related to acquisitions and costs associated with the implementation of new systems, programs, and processes due to both our separation from Lilly and the integration of Bayer Animal Health. See Note 6: Asset Impairment, Restructuring and Other Special Charges for further discussion. These decreases were partially offset by a $28 million asset write-down charge recorded upon the final sale of our Speke manufacturing site and a one-time charge of $59 million related to the expensing of an IPR&D asset licensed from BexCaFe during the six months ended June 30, 2022. See Note 5: Acquisitions, Divestitures and Other Arrangements for further discussion.
Interest Expense, Net of Capitalized Interest
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| Interest expense, net of capitalized interest | | $ | 67 | | | $ | 60 | | | 12 | % | | $ | 119 | | | $ | 121 | | (2) | % |
Interest expense, net of capitalized interest increased $7 million for the three months ended June 30, 2022, primarily due to a $17 million debt extinguishment loss recorded upon the retirement of a portion of the aggregate principal on our 4.272% Senior Notes due August 28, 2023 during the period and higher interest on variable-rate debt due to increases in rates, partially offset by the favorable impact of refinancing at lower interest rates and a lower average debt balance.
Interest expense, net of capitalized interest decreased $2 million for the six months ended June 30, 2022, primarily due to the favorable impact of refinancing at lower interest rates, partially offset by a $17 million debt extinguishment loss recorded upon the retirement of a portion of the aggregate principal on our 4.272% Senior Notes due August 28, 2023 during the three months ended June 30, 2022 and higher interest on variable-rate debt due to increases in rates.
Other (Income) Expense, Net
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| Other (income) expense, net | | $ | — | | | $ | (3) | | | NM | | $ | 9 | | | $ | (3) | | NM |
Other expense recorded during the three months ended June 30, 2022 primarily consisted of mark-to-market adjustments on equity investments and foreign exchange losses. These amounts were fully offset by the gain recognized on the disposal of our microbiome R&D platform, as well as certain components of net periodic benefit cost. See Note 14: Retirement Benefits to the condensed consolidated financial statements for further discussion related to net periodic benefit cost (income) recorded during the period. Other income recorded during the three months ended June 30, 2021 consisted of certain components of net periodic benefit income and an up-front payment received in relation to an asset assignment agreement, partially offset by foreign exchange losses.
Other expense recorded during the six months ended June 30, 2022 primarily consisted of mark-to-market adjustments on equity investments and foreign exchange losses, partially offset by the gain recognized on the disposal of our microbiome R&D platform, as well as certain components of net periodic benefit cost. See Note 13:14: Retirement Benefits to the condensed consolidated financial statements for further discussion related to net periodic benefit incomecost (income) recorded during the period. Other income recorded during the three months ended June 30, 2020 was primarily composed of a $46 million gain on the sale of land and buildings in New South Wales, Australia.
Other income recorded during the six months ended June 30, 2021 consisted of consisted of certain components of net periodic benefit income, an up-front payment received in relation to an asset assignment agreement, and up-front payments received, milestones earned, and equity issued to us in relation to a license agreement. This income was partially offset by losses recorded in relation to divestitures and foreign exchange losses. Other income recorded during the six months ended June 30, 2020 was primarily composed of a $46 million gain on the sale of land and buildings in New South Wales, Australia.
Income Tax Expense (Benefit)
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| Income tax expense (benefit) | | $ | 4 | | | $ | (26) | | | (115) | % | | $ | 27 | | | $ | (45) | | (160) | % |
| Effective tax rate | | (22.5) | % | | 11.1 | % | | | | 50.7 | % | | 14.2 | % | | |
Income tax benefit
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Income tax benefit | | $ | (26) | | | $ | (24) | | | 8 | % | | $ | (45) | | | $ | (43) | | 5 | % |
| Effective tax rate | | 11.1 | % | | 30.9 | % | | | | 14.2 | % | | 29.4 | % | | |
Income tax benefitexpense increased for the three and six months ended June 30, 2021,2022, primarily due changes in earnings mix which caused the U.S. federal and state jurisdictions to an increase in pre-tax loss.generate losses which are subject to valuation allowances. The effective tax rate decreased fromfor the prior periodthree months ended June 30, 2022 driven by the change in U.S. valuation allowances and the income tax benefit due to the fact that U.S. federal and state jurisdictions are currently generating losses that are subjecttermination of interest rate swaps. The effective tax rate for the six months ended June 30, 2022 increased due to valuation allowances.adjustments in jurisdictional earnings mix, slightly offset by the income tax benefit due to the termination of interest rate swaps. See Note 10:11: Income Taxes to the condensed consolidated financial statements.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under our credit facilities. As a significant portion of our business is conducted internationally, we hold a significant portion of cash outside of the U.S. We monitor and adjust the amount of foreign cash based on projected cash flow requirements. Our ability to use foreign cash to fund cash flow requirements in the U.S. may be impacted by local regulations and, to a lesser extent, following U.S. tax reforms, the income taxes associated with transferring cash to the U.S. We currently intend to indefinitely reinvest foreign earnings for continued use in our foreign operations. As our structure evolves as a standalone company, we may change that strategy, particularly to the extent we identify tax efficient reinvestment alternatives for our foreign earnings or change our cash management strategy.
We believe our primary sources of liquidity are sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, funding existing marketed and pipeline products, capital expenditures, business development in our targeted areas, short-term and long-term debt obligations which include principal and interest payments as well as interest rate swaps, operating lease payments, purchase obligations, the pending acquisition of KindredBio, and costs associated with the integrationintegrations of Bayer Animal Health. We intend to use available cash on handHealth and liquidity from our revolving credit facility to fund the pending acquisition of KindredBio. In addition, we have the ability to access capital markets to obtain debt refinancing for longer-term funding, if required, to service our long-term debt obligations. We plan to refinance our existing Senior Notes due August 27, 2021 in the third quarter of 2021. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants.
Our ability to meet future funding requirements may be impacted by macroeconomic, business and financial volatility. As markets change, we will continue to monitor our liquidity position. However, a challenging economic environment or an economic downturn may impact our liquidity or ability to obtain future financing. See "Item 1A. Risk Factors - We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful" in Part I of our
Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Cash Flows
The following table provides a summary of cash flows from operating, investing and financing activities for the periods presented:
| | (Dollars in millions) | (Dollars in millions) | | Six Months Ended June 30, | (Dollars in millions) | | Six Months Ended June 30, |
| Net cash provided by (used for): | Net cash provided by (used for): | | 2021 | | 2020 | | $ Change | Net cash provided by (used for): | | 2022 | | 2021 | | $ Change |
| Operating activities | Operating activities | | $ | 171 | | | $ | 164 | | | $ | 7 | | Operating activities | | $ | 250 | | | $ | 171 | | | $ | 79 | |
| Investing activities | Investing activities | | (15) | | | (9) | | | (6) | | Investing activities | | (66) | | | (15) | | | (51) | |
| Financing activities | Financing activities | | (65) | | | 904 | | | (969) | | Financing activities | | (296) | | | (65) | | | (231) | |
| Effect of exchange-rate changes on cash and cash equivalents | Effect of exchange-rate changes on cash and cash equivalents | | (17) | | | (2) | | | (15) | | Effect of exchange-rate changes on cash and cash equivalents | | (19) | | | (17) | | | (2) | |
| Net increase in cash, cash equivalents and restricted cash | | $ | 74 | | | $ | 1,057 | | | $ | (983) | | |
| Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | $ | (131) | | | $ | 74 | | | $ | (205) | |
Operating activities
Our cashCash provided by operating activities increased by $7$79 million to $250 million for the six months ended June 30, 2022 from $171 million for the six months ended June 30, 2021, from $164 million for the six months ended June 30, 2020. The increase was primarily due to higheran increase in net income after the exclusionadjusting for non-cash items as well as proceeds of non-cash items. This increase was$132 million from interest rate swap settlements. These increases were partially offset by the impact of changes in operating assets and liabilities, particularly relatedchanges in inventories, other assets, and accounts payable and other liabilities as compared to accounts receivable.the prior year. In the past, we have extended our payment terms for distributors on occasion. Although we presently have no plans to do so in the future, it is possible that we will need to extend payment terms in certain situations as a result of the COVID-19 global health pandemic, competitive pressures and the need for certain inventory levels at our channel distributors to avoid supply disruptions. If so, such extensions of customer payment terms could result in additional uses of our cash flow.
Investing activities
Our cash used for investing activities increased $6was $66 million for the six months ended June 30, 2022 as compared to $15 million for the six months ended June 30, 2021 from $9 million for the six months ended June 30, 2020.2021. The change was primarily driven by cash used for purchases of property and equipment and intangible assets, partially offset byreceived during the impactsix months ended June 30, 2021 as a result of the finalization of the working capital adjustment related tofor the acquisition of Bayer Animal Health as well as an increase in cash used for net purchases of property and equipment in the current period, partially offset by a year over year decrease in cash used for purchases of software as compared to the prior year. Cash used for investing activities during the six months ended June 30, 2020 also reflected proceeds from the settlement of net investment hedges.intangible assets.
Financing activities
Our cash used for financing activities was $296 million for the six months ended June 30, 2022 as compared to cash used for financing activities of $65 million for the six months ended June 30, 2021 as compared to cash provided by2021. Cash used for financing activities of $904 million forduring the six months ended June 30, 2020.2022 primarily reflected the tender offer completed during the period as well as net repayments on our revolving credit facility and the repayment of indebtedness outstanding under our term loan B credit facility, partially offset by proceeds from our newly issued incremental term facilities. Cash used for financing activities during the six months ended June 30, 2021 primarily reflected the repayment of indebtedness outstanding under our term loan B credit facility and cash paid to Lilly in connection with local country asset purchases. Cash provided by financing activities during the six months ended June 30, 2020, reflected proceeds from issuances of common stock and TEUs during the period, partially offset by the repayment of indebtedness outstanding under our previous term loan facility.
Description of Indebtedness
For a complete description of our description of ourexisting debt and available credit facilities as of June 30, 20212022 and December 31, 2020,2021, see Note 8:9: Debt towithin Item 8, “Financial Statements and Supplementary Data,” of Part II of our Form 10-K for the condensed consolidated financial statements.
Off Balance-Sheet Arrangements
Other than the commitments and contingencies disclosedyear ended December 31, 2021. New developments are discussed in Note 11: Commitments and Contingencies, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results9: Debt of operations, or liquidity.this Form 10-Q.
Contractual Obligations
Our contractual obligations and commitments as of June 30, 20212022 are primarily comprised of long-term debt obligations, including interest payments, operating leases, and purchase obligations. Our long-term debt obligations are comprised of our expected principal and interest obligations and our interest rate swaps. Purchase obligations consist of open purchase orders as of June 30, 20212022 and contractual payment obligations with significant vendors which are noncancelable and are not contingent. These obligations are primarily short-term in nature.
Critical Accounting PoliciesAs of June 30, 2022, we also have an additional lease commitment that has not yet commenced for our new corporate headquarters in Indianapolis, Indiana. Total minimum lease payments are estimated to be approximately $310 million over a term of 25 years, excluding extensions. Final lease payments may vary depending on the actual cost of certain construction activities. Lease commencement is expected in 2024.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Certain of our accounting policies are considered critical because these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments by us, often requiring the use of estimates about the effects of matters that are inherently uncertain. Actual results that differ from our estimates could have an unfavorable effect on our financial position and results of operations. We apply estimation methodologies consistently from year to year. Such policies are summarized in Item 7, "Management's Discussion & Analysis of Results of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 31, 2020.2021. There have been no significant changes in the application of our critical accounting policies during the six months ended June 30, 2021.2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange rates. We are primarily exposed to foreign exchange risk with respect to net assets denominated in the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar, and Chinese yuan.
We face foreign currency exchange exposures when we enter into transactions arising from subsidiary trade and loan payables and receivables denominated in foreign currencies and purchases of local subsidiaries due to local regulations as a result of the acquisition of Bayer Animal Health.currencies. We also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates in future periods.
We estimate that a hypothetical 10% adverse movement in all foreign currency exchange rates related to the translation of the results of our foreign operations would decrease our net income by approximately $15$10 million for the six months ended June 30, 2021.2022.
We generally identify hyperinflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. We have concluded that our Argentina subsidiary is operating in a hyperinflationary market. As a result, beginning in the second quarter of 2018, the functional currency of our Argentina subsidiary changed from the local currency to the U.S. dollar. During the six months ended June 30, 2022, revenue in Argentina represented less than 1% of our consolidated revenue. Assets held in Argentina as of June 30, 2022 represented less than 1% of our consolidated assets.
During the first quarter of 2022, Turkey’s three-year cumulative inflation rate exceeded 100%, and we concluded that Turkey became a hyperinflationary economy for accounting purposes. As of April 1, 2022, we applied hyperinflationary accounting for our subsidiary in Turkey and changed its functional currency from the Turkish lira to the U.S. dollar. During the six months ended June 30, 2022, revenue in Turkey represented less than 1% of our consolidated revenue. Assets held in Turkey as of June 30, 2022 represented less than 1% of our consolidated assets.
While the hyperinflationary conditions did not have a material impact on our business during the six months ended June 30, 2022, in the future, we may incur larger currency devaluations, which could have a material adverse impact on our results of operations.
Interest Risk
Borrowings under our term loan B credit facility areOur variable-rate debt is exposed to interest rate fluctuations based on LIBOR.LIBOR and Term SOFR. As of June 30, 2021,2022, we held certain interest rate swap agreements with a notional value of approximately $4.1 billion$3,050 million that have the economic effect of modifying theour variable-interest obligations associated with the term loan B credit facility, so that a portion of the variable-rate interest payable becomes fixed. During the six months ended June 30, 2021,2022, we recorded a gain of $48$117 million, net of taxes on these interest rate swaps in other comprehensive loss. The gain is primarily attributable to an increase in the U.S. Treasury yield curve during the first half of 2021.income (loss). See Note 9:10: Financial Instruments and Fair Value to the condensed consolidated financial statements for further information.
Recently Issued Accounting Pronouncements
For discussion of our new accounting standards, see Note 2: Implementation of New Financial Accounting Pronouncements to the condensed consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures. Under applicable SEC regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the company’s “disclosure controls and procedures,” which are defined generally as controls and other procedures of a reporting company designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the SEC (such as this Form 10-Q) is recorded, processed, summarized, and reported on a timely basis.
Our management, with the participation of Jeffrey N. Simmons, president and chief executive officer, and Todd S. Young, executive vice president and chief financial officer, evaluated our disclosure controls and procedures as of June 30, 2021.2022. Based on this evaluation, the chief executive officer and the chief financial officer concluded that the disclosure controls and procedures are effective.
(b)Changes in Internal Controls. As of June 30, 2021, management is inDuring the process of integrating the internal controls of the acquired Bayer Animal Health business into our existing operations as part of planned integration activities. In addition, we have transitioned from a Lilly solutions center to a newly established Elanco solutions center and substantially completed the implementation of our new Enterprise Resource Planning (ERP) system during the firstsecond quarter of 2021. Other than the controls enhanced or implemented to integrate the Bayer Animal Health business and certain control processes that2022, there were updated to reflect our ERP implementation, there has been no changechanges in our internal control over financial reporting during the quarter ended June 30, 2021, that has materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. As additional transformation activities occur, we will continue to monitor and evaluate our internal control over financial reporting. Further, we have not experienced any material impact to our internal controls over financial reporting despite our accounting, finance, and legal employees working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 11: Commitments and Contingencies to the condensed consolidated financial statements for a summary of our legal proceedings.
Other than the revisions set forth below, there have been no material changes from the risk factors disclosed in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
The following risk factors have been changed from the risk factors that were previously disclosed:
Unanticipated safety, quality or efficacy concerns or identified concerns associated with our products may harm our reputation and have an adverse impact on our performance.
Unanticipated safety, quality or efficacy concerns arise from time to time with respect to animal health products, whether or not scientifically or clinically supported, potentially leading to product recalls, withdrawals or suspended
or declining sales, as well as product liability and other claims. Regulatory actions based on these types of safety, quality or efficacy concerns could impact all, or a significant portion, of a product’s sales.
For example, lawsuits seeking actual damages, injunctive relief, and/or restitution for allegedly deceptive marketing have been filed against us arising out of the use of Seresto, a non-prescription flea and tick collar for cats and dogs, based on reports alleging that the collar has caused injury and death to pets. Further, a U.S. House of Representatives' subcommittee chair requested that we produce certain documents and information related to the Seresto collar and further made a request to temporarily remove Seresto collars from the market. Similar actions relating to Seresto could be taken by regulatory agencies. If any such claims with respect to Seresto or our other products are resolved adversely to us, or if a regulatory agency determines that a recall of any of our products, including Seresto, is necessary, such action could cause harm to our reputation, reduce our product sales, result in monetary penalties and other costly remedies against us, and could therefore have a material adverse effect on our business, financial condition and results of operations.
In addition, we depend on positive perceptions of the safety, quality and efficacy of our products, and animal health products in general, by food producers, veterinarians and pet owners. Any concern as to the safety, quality or efficacy of our products, whether actual or perceived, may harm our reputation. These concerns, including those relating to Seresto, and the related harm to our reputation could materially adversely affect our business, financial condition and results of operations, regardless of whether such reports are accurate.
We may incur substantial costs and receive adverse outcomes in litigation, regulatory investigations, and other legal matters.
Our business, financial condition and results of operations could be materially adversely affected by unfavorable results in pending or future litigation, regulatory investigation, and other legal matters. These matters may include, among other things, allegations of violation of U.S. and foreign competition law, labor laws, securities laws and regulations, consumer protection laws and environmental laws and regulations, as well as claims or litigation relating to product liability, intellectual property, securities, breach of contract and tort. For example, shareholder class action lawsuits that were recently filed against us allege, in part, that we and certain of our executives made materially false and/or misleading statements and/or failed to disclose certain facts about our supply chain, inventory, revenue, projections and our relationships with third party distributors and revenue attributable to those distributors. We intend to vigorously defend the claims made in these lawsuits, however, the ultimate resolution cannot be predicted and the claims raised in these lawsuits may result in further legal matters or actions against us, including, but not limited to, government enforcement actions or additional private litigation. In addition, changes in the interpretations of laws and regulations to which we are subject, or in legal standards in one or more of the jurisdictions in which we operate, could increase our exposure to liability. For example, in the U.S., attempts have been made to allow damages for emotional distress and pain and suffering in connection with the loss of, or injury to, a pet. If such attempts were successful, our exposure with respect to product liability claims could increase materially.
Also, on July 1, 2021, we received a subpoena from the U.S. Securities and Exchange Commission (the SEC) relating to our channel inventory and sales practices prior to mid-2020. We have been responding to requests for documents and information from the SEC and will continue to do so. We believe that our actions were appropriate. However, we cannot predict the outcome of any particular proceeding, or whether the SEC investigation will be resolved favorably or ultimately result in charges or material damages, fines or other penalties, enforcement actions, or civil or criminal proceedings against us or members of our senior management.
Litigation matters and regulatory investigations, regardless of their merits or their ultimate outcomes, are costly, divert management’s attention and may materially adversely affect our reputation and demand for our products. We cannot predict with certainty the eventual outcome of pending or future legal matters. An adverse outcome of litigation or legal matters could result in us being responsible for significant damages. Any of these negative effects resulting from litigation, regulatory investigations and other legal matters could materially adversely affect our business, financial condition and results of operations.
We have identified the following additional risk factors:
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| 20212022 Q2 Form 10-Q | 4139
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We may not be able to successfully complete favorable transactions or successfully integrate acquired businesses when we pursue acquisitions, divestitures, joint ventures or other significant transactions, such as the acquisition of KindredBio.PART II
From time to time, we evaluate potential acquisitions, divestitures or joint ventures, such as the acquisition of KindredBio, that would further our strategic objectives. The completion of such transactions is often subject to conditions that may be outside our control, including obtaining the requisite approval of the stockholders of the target company and/or government approval pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Accordingly, we may not be able to complete announced and signed transactions and therefore not realize the anticipated benefits therefrom.
After the closing of an acquisition, including the transaction with KindredBio, we will be required to devote significant management attention and resources to integrating the portfolio and operations of the target company. Potential difficulties that we may encounter in the integration process, including as a result of distraction of our management, include the following:
•the inability to realize the anticipated value from various assets of the target company;
•the inability to combine the businesses of the acquired company with ours in a manner that permits us to achieve the cost savings or other synergies anticipated as a result of the transaction or to achieve such cost savings or other anticipated synergies in a timely manner, which could result in us not realizing some anticipated benefits of the transaction in the time frame anticipated, or at all;
•loss of key employees;
•potential unknown liabilities and unforeseen increased expenses, delays or unfavorable conditions in connection with the closing of the transaction and the subsequent integration; and
•performance shortfalls at our or the target company as a result of the diversion of management’s attention from ongoing business activities as a result of completing the transaction and integrating the companies’ operations.
Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to intangible assets, and increased operating expenses, which could adversely affect our results of operations and financial condition. Furthermore, if we issue equity or debt securities to raise additional funds, our existing shareholders may experience significant dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. Furthermore, if we sell a substantial number of shares of common stock in the public markets, the availability of those shares for sale could adversely affect the market price of our common stock. Such sales, or the perception in the market that holders of a large number of shares intend to sell shares, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.
Our business results fluctuate due to seasonality and other factors and the extent of such fluctuations may be unpredictable.
Historically, our operating results have fluctuated during the year, and we expect these fluctuations to continue. For example, on average, approximately 70% and 60% of total annual revenue contribution from our higher-margin parasiticide products Seresto and Advantage Family, respectively, occurs in the first half of the year. This dynamic is reflective of the flea and tick season in the Northern Hemisphere and our growing pet health portfolio.
Other factors that may cause our operating results to fluctuate are:
•weather conditions and the availability of natural resources;
•increased or decreased inventory levels at our channel distributors;
•timing of customer orders and deliveries;
•competitive changes, such as price changes or new product introductions that we or our competitors may make;
•timing of marketing programs and events; and
•availability of veterinarians to use our products, as there are seasonal impacts, due to veterinarian vacations or training events that limit their ability to serve their customers that result in the use of our products.
For more detailed information on someSee Note 12: Commitments and Contingencies to the condensed consolidated financial statements for a summary of the above-listedour legal proceedings, which is incorporated herein by reference.
Our risk factors that can cause fluctuationsare documented in our operating results, see "Our business may be negatively affected by weather conditions and the availabilityItem 1A of natural resources" and "Increased or decreased inventory levels at our channel distributors can lead to fluctuations in our revenues and variations in our payment terms extended to our distributors can impact our cash flows" in Part I - Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020.2021, which is incorporated herein by reference. There have been no material changes from the risk factors previously disclosed in the Form 10-K.
Accordingly, the fluctuations in our revenues due to seasonality and other factors, many of which are beyond our control, mean period-to-period comparisons of our historical results are not necessarily meaningful. Investors should not rely on such fluctuations as an indication of our future performance. To the extent that we experience the factors described above, our future operating results may not meet the expectations of securities analysts or investors, which may cause the market price of our common stock to decline.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(none)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(none)
ITEM 4. MINE SAFETY DISCLOSURES
(none)
ITEM 5. OTHER INFORMATION
(none)
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The following exhibits are either filed or furnished herewith (as applicable) or, if so indicated, incorporated by reference to the documents indicated in parentheses, which have previously been filed or furnished with the Securities and Exchange Commission.
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| 10.3 | | | Incremental Assumption Agreement dated June 28, 2022 by and among Elanco Animal Health Incorporated, Elanco US Inc., the subsidiary loan parties party thereto, Bank of America, N.A., as incremental term lender, each other person party thereto as incremental term lender, and Goldman Sachs Bank USA, as the term facility agent (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on June 29, 2022). |
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| 101 | | | Interactive Data FilesFiles. |
| 104 | | | Cover Page Interactive Data File (formatted as Inline XBRL document and included in Exhibit 101). |
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| 20212022 Q2 Form 10-Q | 4541
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | |
| | ELANCO ANIMAL HEALTH INCORPORATED |
| | (Registrant) |
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| Date: | August 9, 20218, 2022 | /s/ Jeffrey N. Simmons |
| | Jeffrey N. Simmons |
| | President and Chief Executive Officer |
| Date: | August 9, 20218, 2022 | /s/ Todd S. Young |
| | Todd S. Young |
| | Executive Vice President, Chief Financial Officer |
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| 20212022 Q2 Form 10-Q | 4642
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