Elanco(ELAN) - 2025 Q2 - Quarterly Report

Forward-Looking Statements and Risk Factor Summary This section outlines inherent uncertainties in forward-looking statements and summarizes key risk factors - Forward-looking statements are based on current expectations and assumptions, inherently subject to uncertainties, risks, and changes in circumstances that may cause actual results to differ materially[9][10] - Key risk factors include operating in a highly competitive industry, success of R&D and regulatory efforts, impact of disruptive innovations, competition from generic products, changes in regulatory restrictions, disease outbreaks, customer consolidation, dependence on top products, ability to complete acquisitions/divestitures, manufacturing problems, inventory fluctuations, risks related to AI, IT systems, weather conditions, loss of key personnel, labor disputes, substantial indebtedness, interest rate changes, goodwill write-downs, raw material costs, foreign/domestic economic/political/legal/business environments, foreign currency exchange rate fluctuations, underfunded pension plan liabilities, no dividend payment plan, activist shareholders, tax expense/exposures, regulatory actions, farm animal sustainability initiatives, tariffs, litigation, intellectual property rights, product misuse/counterfeiting, safety/quality/efficacy concerns, insufficient insurance, privacy laws, environmental/health/safety regulations, and inability to achieve ESG goals[11][13] PART I. Financial Information This part presents Elanco's unaudited consolidated financial statements and management's discussion and analysis Item 1. Financial Statements Elanco's unaudited consolidated financial statements for Q2 and H1 2025, including operations, balance sheets, and key notes Condensed Consolidated Statements of Operations (Unaudited) This statement provides a summary of the company's revenues, gross profit, net income (loss), and earnings per share for the periods presented Table: Condensed Consolidated Statements of Operations | Metric | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Revenue | $1,241 million | $1,184 million | $2,434 million | $2,389 million | | Gross profit | $713 million | $689 million | $1,397 million | $1,379 million | | Net income (loss) | $11 million | $(50) million | $78 million | $(18) million | | Basic EPS | $0.02 | $(0.10) | $0.16 | $(0.04) | | Diluted EPS | $0.02 | $(0.10) | $0.16 | $(0.04) | Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) This statement details the company's net income (loss) and other comprehensive income (loss), including foreign currency translation adjustments Table: Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) | $11 million | $(50) million | $78 million | $(18) million | | Other comprehensive income (loss), net of taxes | $391 million | $(77) million | $579 million | $(276) million | | Comprehensive income (loss) | $402 million | $(127) million | $657 million | $(294) million | - Foreign currency translation, net of taxes, significantly contributed to other comprehensive income, with $403 million for Q2 2025 and $621 million for H1 2025, compared to losses in the prior year periods[18] Condensed Consolidated Balance Sheets This statement presents the company's financial position, including assets, liabilities, and equity, as of the reporting dates Table: Condensed Consolidated Balance Sheets | Asset/Liability | June 30, 2025 (Millions USD) | December 31, 2024 (Millions USD) | Change (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | :-------------------- | | Cash and cash equivalents | $539 | $468 | +$71 | | Accounts receivable, net | $989 | $805 | +$184 | | Inventories | $1,670 | $1,574 | +$96 | | Property and equipment, net | $1,357 | $993 | +$364 | | Goodwill | $4,758 | $4,414 | +$344 | | Total assets | $13,742 | $12,614 | +$1,128 | | Total current liabilities | $1,392 | $1,315 | +$77 | | Long-term debt and finance lease liability | $4,148 | $4,277 | -$129 | | Liability for sale of future revenue | $293 | — | +$293 | | Total liabilities | $6,967 | $6,518 | +$449 | | Total equity | $6,775 | $6,096 | +$679 | Condensed Consolidated Statements of Equity (Unaudited) This statement outlines changes in the company's total equity, accumulated deficit, and accumulated other comprehensive loss Table: Condensed Consolidated Statements of Equity | Metric | December 31, 2024 (Millions USD) | June 30, 2025 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | | Total equity | $6,096 | $6,775 | | Accumulated deficit | $(1,950) | $(1,872) | | Accumulated other comprehensive loss | $(771) | $(192) | - Net income contributed $67 million (Q1 2025) and $11 million (Q2 2025) to equity, while other comprehensive income (loss), net of tax, contributed $188 million (Q1 2025) and $391 million (Q2 2025), largely due to foreign currency translation[24] Condensed Consolidated Statements of Cash Flows (Unaudited) This statement summarizes the company's cash flows from operating, investing, and financing activities for the periods presented Table: Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | Change (YoY, Millions USD) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------- | | Net Cash Provided by Operating Activities | $233 | $202 | +$31 | | Net Cash (Used for) Provided by Investing Activities | $(114) | $4 | -$118 | | Net Cash Used for Financing Activities | $(104) | $(120) | +$16 | | Net increase in cash and cash equivalents | $71 | $64 | +$7 | - Investing activities included $122 million in net purchases of property and equipment and software in H1 2025, up from $58 million in H1 2024, primarily due to manufacturing facility expansions[27][135] - Financing activities in H1 2025 included $290 million proceeds from the sale of future revenue, used to repay $374 million in long-term borrowings[27][136] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures regarding the company's significant accounting policies, financial instruments, debt, revenue, and other key financial information Note 1. Basis of Presentation and Summary of Significant Accounting Policies This note describes the basis of preparation for the unaudited condensed consolidated financial statements, adhering to SEC interim reporting requirements and GAAP - The unaudited condensed consolidated financial statements are prepared in accordance with SEC interim reporting requirements and GAAP, with certain disclosures condensed or omitted[30] - Interim results should not be considered indicative of results for any other interim period or for the full year ending December 31, 2025, or any other future period[31] Note 2. New Financial Accounting Pronouncements This note details new accounting standards and their expected impact on future financial reporting - ASU 2023-09 (Income Taxes) is effective for fiscal years beginning after December 15, 2024, and is expected to result in additional income tax disclosures[32] - ASU 2024-03 (Expense Disaggregation Disclosures) is effective for fiscal years beginning after December 15, 2026, and will provide more detailed information about significant expense categories[33] Note 3. Revenue This note disaggregates revenue by product category for the three and six months ended June 30, 2025 and 2024 Table: Revenue by Product Category (Three Months) | Product Category | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | % Change | | :--------------- | :--------------------------------------------- | :--------------------------------------------- | :------- | | Pet Health | $643 | $579 | 11% | | Farm Animal | $583 | $594 | (2)% | | Contract Mfg & Other | $15 | $11 | 36% | | Total Revenue | $1,241 | $1,184 | 5% | Table: Revenue by Product Category (Six Months) | Product Category | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | % Change | | :--------------- | :--------------------------------------------- | :--------------------------------------------- | :------- | | Pet Health | $1,278 | $1,218 | 5% | | Farm Animal | $1,129 | $1,150 | (2)% | | Contract Mfg & Other | $27 | $21 | 29% | | Total Revenue | $2,434 | $2,389 | 2% | - A single customer accounted for approximately 12% and 10% of revenue for the six months ended June 30, 2025 and 2024, respectively[38] Note 4. Acquisitions, Divestitures and Other Arrangements This note details significant transactions including facility acquisitions, sales, and the divestiture of the Aqua business - Acquired the Speke, U.K. manufacturing facility in November 2024 for $36 million to minimize supply disruption for farm animal product lines[40] - Sold the New Zealand manufacturing facility in February 2025 for $9 million cash[41] - Closed the sale of the Aqua business on July 9, 2024, for $1,294 million cash, primarily used to repay term loan debt, resulting in a pre-tax gain of $640 million[42] Note 5. Asset Impairment, Restructuring and Other Special Charges This note outlines various special charges, including restructuring, acquisition/divestiture costs, and asset impairments Table: Asset Impairment, Restructuring and Other Special Charges | Charge Type | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Restructuring charges | $0 | $4 | $1 | $43 | | Acquisition & divestiture-related charges | $1 | $10 | $1 | $17 | | Asset impairments | $0 | $61 | $0 | $61 | | Other | $0 | $5 | $8 | $5 | | Total expense | $1 | $80 | $10 | $126 | - Asset impairments in 2024 principally reflected the write-off of the IL-4R IPR&D asset ($53 million)[44] - Restructuring charges in 2024 primarily related to cash-based severance costs from a program shifting international resources from farm animal to pet health[43] Note 6. Inventories This note provides a breakdown of inventory categories, including finished products, work in process, and raw materials Table: Inventories by Category | Inventory Category | June 30, 2025 (Millions USD) | December 31, 2024 (Millions USD) | | :----------------- | :------------------------------- | :------------------------------- | | Finished products | $819 | $754 | | Work in process | $826 | $783 | | Raw materials and supplies | $98 | $98 | | Total Inventories | $1,670 | $1,574 | Note 7. Debt This note details the company's debt structure, including term loans, senior notes, and finance lease liabilities Table: Debt Structure | Debt Type | June 30, 2025 (Millions USD) | December 31, 2024 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | | Term Loan B due 2027 | $2,288 | $2,593 | | Securitization Facility | $100 | $100 | | 4.900% Senior Notes due 2028 | $750 | $750 | | Total debt | $3,954 | $4,321 | | Finance lease liability | $255 | — | | Total long-term debt and finance lease liability | $4,148 | $4,277 | - The Revolving Credit Facility provides up to $750 million in borrowing capacity, bearing interest at Term SOFR plus 1.60% at June 30, 2025[48] - Entered into a five-year finance lease for the new corporate headquarters in June 2025, resulting in a $255 million finance lease liability and a $234 million right-of-use asset[52] Note 8. Financial Instruments This note describes the company's use of derivative financial instruments to manage market risks - Outstanding foreign currency exchange contracts had aggregate notional amounts of $1,011 million at June 30, 2025[56] - Restructured net investment hedges in January 2025, settling previous instruments and entering new cross-currency fixed interest rate swaps with 1,000 million CHF notional amounts[57] - Outstanding interest rate swaps totaled $2,800 million as of June 30, 2025, with scheduled maturities in 2026, and forward-starting interest rate swap agreements of $850 million will become effective in 2026[59] Note 9. Fair Value This note provides fair value measurements for derivative instruments, contingent consideration liabilities, and long-term debt - Fair value measurements for derivative instruments are primarily Level 2, while contingent consideration liabilities are Level 3, estimated using a Monte Carlo simulation model[64][66] - Long-term debt (excluding finance lease liability) had a carrying amount of $(3,975) million and a fair value of $(4,007) million at June 30, 2025[64] Note 10. Liability for Sale of Future Revenue This note details the liability recognized from the sale of future royalties and sales milestone payments from XDEMVY - Received $295 million cash from Blackstone in May 2025 for rights to future royalties and sales milestone payments from XDEMVY in the U.S. until August 2033[67] - The proceeds, net of $5 million transaction costs, were recorded as a $293 million liability for sale of future revenue as of June 30, 2025[67][71] - Imputed interest expense of $7 million was recognized for the three months ended June 30, 2025, with an effective interest rate of 16.1%[71] Note 11. Income Taxes This note presents income tax expense (benefit) and effective tax rates, discussing factors influencing the rates Table: Income Tax Expense (Benefit) and Effective Tax Rate | Metric | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Income tax expense (benefit) | $14 million | $18 million | $7 million | $(2) million | | Effective tax rate | 55.4% | (61.3)% | 7.6% | 7.4% | - The effective tax rate for Q2 2025 (55.4%) was primarily due to the jurisdictional mix of projected income/losses and discrete tax expenses from a foreign tax rate change[72] - The 'One Big Beautiful Bill Act,' enacted July 4, 2025, is being evaluated for its expected impact on consolidated results and U.S. valuation allowance position[74] Note 12. Commitments and Contingencies This note outlines significant legal proceedings, including securities class actions, derivative lawsuits, and an antitrust lawsuit - A putative securities class action (Barpar) and related derivative lawsuits allege materially false/misleading statements regarding Zenrelia product safety and labeling; motions to dismiss are pending or cases are stayed[78] - Ongoing shareholder class actions (Hunter, Safron Capital) relate to alleged false/misleading statements about supply chain, inventory, revenue, and distributor relationships; appeals are ongoing for both[79][80][81] - An antitrust lawsuit (Tevra Brands, LLC) against Bayer Animal Health (acquired by Elanco) regarding alleged unlawful exclusive dealing resulted in a jury verdict for Bayer Animal Health, now under appeal, with additional related matters filed[82] Note 13. Earnings Per Share This note provides basic and diluted weighted-average common shares outstanding for the periods presented Table: Earnings Per Share Data | Metric | Three Months Ended June 30, 2025 (Millions) | Three Months Ended June 30, 2024 (Millions) | Six Months Ended June 30, 2025 (Millions) | Six Months Ended June 30, 2024 (Millions) | | :---------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Basic weighted-average common shares outstanding | 496.6 million | 494.2 million | 495.9 million | 493.7 million | | Diluted weighted-average shares outstanding | 500.1 million | 494.2 million | 499.6 million | 493.7 million | - Approximately 3.5 million to 3.7 million potential common shares were excluded from the calculation of diluted weighted-average shares outstanding because their effect was anti-dilutive[84] Note 14. Business Segment Information This note clarifies Elanco operates as a single business segment and provides a breakdown of significant segment expenses - Elanco operates as a single business segment focused on the development, manufacturing, marketing, and sales of animal health products for both pets and farm animals[85] - The CEO, as the chief operating decision maker, manages resource allocation and business process decisions globally, with consolidated net income (loss) as the principal measure of segment profit and loss[85] Table: Other Significant Segment Expenses | Expense Category | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | | :--------------- | :--------------------------------------------- | :--------------------------------------------- | | Research and development | $186 | $176 | | Marketing and selling | $497 | $442 | | General and administrative | $244 | $249 | | Interest expense, net | $88 | $131 | | Income tax expense (benefit) | $7 | $(2) | | Total other significant segment expenses | $1,045 | $1,007 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Elanco's financial condition and results of operations Business Overview and Key Trends This section provides an overview of Elanco's global leadership in animal health, its diverse portfolio, and key trends - Elanco is a global leader in animal health, offering a diverse portfolio of approximately 200 brands for pets and farm animals in over 90 countries[90][91] - Key trends impacting results include new/higher tariffs in 2025 (leading to accelerated customer purchases in Q2 2025), a freeze in U.S. government sustainability incentives, the sale of future XDEMVY royalties, the new corporate headquarters lease, and the divestiture of the Aqua business in July 2024[95][96][97][98][99] - The pet health business experiences seasonality, with increased demand for parasiticide products (Seresto, Advantage Family) in the first half of the year[102] Product Development and Regulatory Update This section highlights recent product approvals and launches, demonstrating the company's innovation in animal health - Bovaer (methane-reducing feed ingredient) received FDA approval in May 2024 and launched in Q3 2024[92] - Zenrelia (JAK inhibitor for canine atopic dermatitis) received final FDA approval in September 2024 and launched in the U.S., with subsequent approvals in Brazil, Canada, Japan, and the EU[92] - Credelio Quattro (monthly chewable for dogs protecting against multiple parasites) received final FDA approval in October 2024 and launched in January 2025[92] Results of Operations Analysis This section provides a detailed analysis of the company's revenue, gross profit, operating expenses, and net income (loss) Table: Key Results of Operations | Metric | Three Months Ended June 30, 2025 (Millions USD) | Three Months Ended June 30, 2024 (Millions USD) | % Change | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | % Change | | :---------------------------------- | :------------------------------- | :------------------------------- | :------- | :------------------------------ | :------------------------------ | :------- | | Revenue | $1,241 million | $1,184 million | 5% | $2,434 million | $2,389 million | 2% | | Gross profit | $713 million | $689 million | 3% | $1,397 million | $1,379 million | 1% | | Gross margin % | 57% | 58% | -1 ppt | 57% | 58% | -1 ppt | | R&D | $92 million | $89 million | 3% | $186 million | $176 million | 6% | | Marketing, selling & admin | $400 million | $354 million | 13% | $741 million | $691 million | 7% | | Asset impairment, restructuring & other special charges | $1 million | $80 million | (99)% | $10 million | $126 million | (92)% | | Interest expense, net | $48 million | $65 million | (26)% | $88 million | $131 million | (33)% | | Net income (loss) | $11 million | $(50) million | NM | $78 million | $(18) million | NM | - Pet Health revenue increased 11% for Q2 2025, driven by higher volumes (new products like Credelio Quattro, AdTab, Zenrelia), a 4% price increase, and foreign currency exchange rate movements[110][112] - Farm Animal revenue decreased 2% for Q2 2025, primarily due to the Aqua business divestiture (which generated $49 million in Q2 2024), largely offset by a 4% volume increase (led by Experior in U.S. cattle) and a 2% price increase[110][114] Liquidity and Capital Resources This section discusses the company's primary liquidity sources, operating cash flows, available credit facilities, and cash flow activities - Primary liquidity sources are cash on hand ($539 million at June 30, 2025), cash flows from operations, and funds available under credit facilities (Revolving Credit Facility: ~$750 million unused; Securitization Facility: ~$165 million undrawn)[129][131] Table: Cash Flow Activities | Activity | Six Months Ended June 30, 2025 (Millions USD) | Six Months Ended June 30, 2024 (Millions USD) | Change (YoY, Millions USD) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------- | | Operating activities | $233 | $202 | +$31 | | Investing activities | $(114) | $4 | -$118 | | Financing activities | $(104) | $(120) | +$16 | | Net increase in cash | $71 | $64 | +$7 | - Cash used for investing activities increased significantly due to $122 million in capital expenditures for manufacturing facility expansions in H1 2025[135] Critical Accounting Estimates This section highlights critical accounting estimates, particularly the ongoing assessment for goodwill impairment - The ongoing assessment for goodwill impairment is a critical accounting estimate, requiring significant management judgment in estimating fair value using an income approach[139] - Estimates involve future cash flows, revenue growth rates, profitability measures (gross margin, EBITDA margin), and appropriate discount rates[139] - Future goodwill impairment charges could result from decreased assumptions on cash flows, revenue growth, or profitability, or material increases in long-term interest rates[140] Item 3. Quantitative and Qualitative Disclosures About Market Risk Elanco is exposed to market risks from foreign currency exchange rate fluctuations and variable interest rates, which it manages Foreign Exchange Risk This section describes Elanco's exposure to foreign currency exchange risk from non-U.S. subsidiaries' financial statements and transactions - Elanco is exposed to foreign currency exchange risk from the translation of non-U.S. subsidiaries' financial statements and transactions not denominated in the functional currency[142] - Primary exposures are to the Euro, British pound, Swiss franc, Brazilian real, Australian dollar, Japanese yen, Canadian dollar, and Chinese yuan[142] - Hyperinflationary accounting has been applied for the Turkey subsidiary since 2022, changing its functional currency to the U.S. dollar[143] Interest Rate Risk This section details how Elanco manages interest rate risk through interest rate swaps, converting variable-rate debt to fixed-rate - Outstanding interest rate swap agreements with a combined notional amount of $2,800 million effectively modified variable-rate debt to fixed-rate as of June 30, 2025[144] - Forward-starting interest rate swap agreements with a combined notional amount of $850 million will become effective in 2026[144] - Approximately 89% of long-term indebtedness (excluding finance lease liability) bore interest at a fixed rate as of June 30, 2025[144] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures as effective, with no material changes in internal control - Disclosure controls and procedures were evaluated by management, including the CEO and CFO, and concluded to be effective as of June 30, 2025[147] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the second quarter of 2025[148] PART II. Other Information This part provides additional information on legal proceedings, risk factors, equity sales, defaults, mine safety, other disclosures, and exhibits Item 1. Legal Proceedings This section refers to Note 12 for a summary of the company's legal proceedings, including various class action and derivative lawsuits - A summary of legal proceedings is provided in Note 12. Commitments and Contingencies to the condensed consolidated financial statements[151] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2024 Form 10-K - No material changes from the risk factors previously disclosed in the 2024 Form 10-K[152] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report Item 4. Mine Safety Disclosures No mine safety disclosures to report Item 5. Other Information No director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the three months ended June 30, 2025 - No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2025[153] Item 6. Exhibits This section lists the exhibits filed or furnished with the Form 10-Q, including employment agreements, credit facility amendments, and certifications - Exhibits include employment agreements, a transition agreement, an amendment to the receivables loan agreement, Section 302 and 906 certifications of the CEO and CFO, and Interactive Data Files (Inline XBRL)[156] Signatures This section confirms the official signing of the report by the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer - The report was signed on August 7, 2025, by Jeffrey N. Simmons, President and Chief Executive Officer, and Robert M. VanHimbergen, Executive Vice President and Chief Financial Officer[159]