Elanco Animal Health Inc.: Quarterly Report

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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, 2019

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

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 ý No o

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 ý No o

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 o

Accelerated filer o

Non-accelerated filer ý

Smaller reporting company o

Emerging growth company o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

The number of shares of common stock outstanding as of August 9, 2019 were 372,996,341

Elanco Animal Health Incorporated

Form 10-Q

For the Quarter Ended June 30, 2019

Table of Contents

Page

PART I. Financial Information

Item 1.

Financial Statements

Unaudited Condensed Consolidated and Combined Statements of Operations

4

Unaudited Condensed Consolidated and Combined Statements of Comprehensive Income (Loss)

5

Unaudited Condensed Consolidated Balance Sheets

6

Unaudited Condensed Consolidated and Combined Statements of Equity

7

Unaudited Condensed Consolidated and Combined Statements of Cash Flows

8

Notes to Unaudited Condensed Consolidated and Combined Financial Statements

9

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

24

Results of Operations

27

Summary of Changes

28

Liquidity and Capital Resources

31

Contractual Obligations

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

PART II. Other Information

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

Signatures

38

2

Forward-Looking Statements

T his Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the federal securities laws. This quarterly report contains forward-looking statements, including, without limitation, statements concerning our estimated "stand up" costs, our estimated interest expense, our industry and our operations, performance and financial condition, including in particular, statements relating to our business, growth 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 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 innovation or 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 food 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 food animals;
  • the success of our R&D and licensing efforts;
  • our ability to complete acquisitions and successfully integrate the businesses we acquire;
  • misuse, off-label or counterfeiting use of our products;
  • unanticipated safety, quality or efficacy concerns associated with our products;
  • the impact of weather conditions and the availability of natural resources;
  • risks related to our presence in emerging markets;
  • changes in U.S. foreign trade policy, imposition of tariffs or trade disputes;
  • the impact of global macroeconomic conditions; and
  • the effect on our business resulting from our separation from Eli Lilly & Co. (Lilly), including the various costs associated with transition to a stand alone entity.
See "Risk Factors," of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (SEC) and Item 1A, "Risk Factors," of Part II of this Quarterly Report on Form 10-Q and of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019, 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. For the reasons described above, 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.

3

PART I. Financial Information

Item 1. Financial Statements

Elanco Animal Health Incorporated

Unaudited Condensed Consolidated and Combined Statements of Operations

(Dollars and shares in millions, except per-share data)

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Revenue

$

781.6

$

770.2

$

1,512.7

$

1,506.4

Costs, expenses and other:

Cost of sales

356.0

431.5

699.8

791.5

Research and development

68.8

61.4

132.9

126.6

Marketing, selling and administrative

200.9

191.1

382.0

371.1

Amortization of intangible assets

49.3

49.4

98.3

98.6

Asset impairment, restructuring and other special charges (Note

6)

31.8

68.0

56.7

70.4

Interest expense, net of capitalized interest

20.7

-

41.5

-

Other-net, expense

3.9

8.8

6.5

10.7

731.4

810.2

1,417.7

1,468.9

Income (loss) before income taxes

50.2

(40.0)

95.0

37.5

Income tax expense

14.3

22.8

27.6

27.6

Net income (loss)

$

35.9

$

(62.8)

$

67.4

$

9.9

Earnings (loss) per share:

Basic

$

0.10

$

(0.21)

$

0.18

$

0.03

Diluted

$

0.10

$

(0.21)

$

0.18

$

0.03

Weighted average shares outstanding:

Basic

365.7

293.3

365.7

293.3

Diluted

367.0

293.3

366.5

293.3

See notes to unaudited condensed consolidated and combined financial statements.

4

Elanco Animal Health Incorporated

Unaudited Condensed Consolidated and Combined Statements of Comprehensive Income (Loss)

(Dollars in millions)

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Net income (loss)

$

35.9

$

(62.8)

$

67.4

$

9.9

Other comprehensive income (loss):

Foreign currency translation

35.4

(224.9)

5.2

(105.7)

Defined benefit pension and retiree health benefit plans, net of

taxes

0.2

2.0

2.2

1.4

Other comprehensive income (loss), net of tax

35.6

(222.9)

7.4

(104.3)

Comprehensive income (loss)

$

71.5

$

(285.7)

$

74.8

$

(94.4)

See notes to unaudited condensed consolidated and combined financial statements.

5

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Elanco Animal Health Inc. published this content on 13 August 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 13 August 2019 20:30:10 UTC