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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, 2022
OR
Transition Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER 001-38661
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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 (877352-6261
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, no par valueELANNew York Stock Exchange
5.00% Tangible Equity UnitsELATNew 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 3, 2022 was 474,113,647.



ELANCO ANIMAL HEALTH INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2022
TABLE OF CONTENTS
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2022 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. These forward-looking statements, 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 integration of Kindred Biosciences, Inc. (KindredBio) and the animal health business of Bayer Aktiengesellschaft (Bayer), expected synergies and cost savings, product launches, 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 reserves 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 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;
risks related to the write-down of goodwill or identifiable intangible assets;
risks related to the evaluation of animals;
manufacturing problems and capacity imbalances;
2022 Q2 Form 10-Q | 3
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the impact of litigation, regulatory investigations, and other legal matters and the risk that our insurance policies may be insufficient to protect us from the impact of such matters;
actions by regulatory bodies, including as a result of their interpretation of studies on product safety;
risks related to tax expense or exposure;
risks 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 information technology systems;
the impact of increased regulation or decreased financial support related to farm animals;
adverse effects of labor disputes, strikes, work stoppages, and 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, 2021 filed with the United States (U.S.) Securities and Exchange Commission (SEC), and Part II of this 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 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.


2022 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,
 2022202120222021
Revenue$1,177 $1,279 $2,402 $2,521 
Costs, expenses and other:
Cost of sales484 551 993 1,120 
Research and development82 94 163 183 
Marketing, selling and administrative343 385 663 733 
Amortization of intangible assets
133 129 270 276 
Asset impairment, restructuring and other special charges
86 299 132 407 
Interest expense, net of capitalized interest67 60 119 121 
Other (income) expense, net (3)9 (3)
1,195 1,515 2,349 2,837 
Income (loss) before income taxes(18)(236)53 (316)
Income tax expense (benefit)4 (26)27 (45)
Net income (loss)$(22)$(210)$26 $(271)
Earnings (loss) per share:
Basic $(0.04)$(0.43)$0.05 $(0.56)
Diluted$(0.04)$(0.43)$0.05 $(0.56)
Weighted average shares outstanding:
Basic488.4 487.3 488.2 487.0 
Diluted488.4 487.3 492.1 487.0 
See notes to condensed consolidated financial statements.
2022 Q2 Form 10-Q | 5
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Elanco Animal Health Incorporated
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in millions)
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Net income (loss)$(22)$(210)$26 $(271)
Other comprehensive income (loss):
Cash flow hedges, net of taxes8 (5)117 48 
Foreign currency translation(470)169 (555)(297)
Defined benefit pension and retiree health benefit plans, net of taxes(1)3 (2)11 
Other comprehensive income (loss), net of taxes(463)167 (440)(238)
Comprehensive loss$(485)$(43)$(414)$(509)
See notes to condensed consolidated financial statements.

2022 Q2 Form 10-Q | 6
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Elanco Animal Health Incorporated
Condensed Consolidated Balance Sheets
(in millions, except share data)
June 30, 2022December 31, 2021
(Unaudited)
Assets 
Current Assets
Cash and cash equivalents$507 $638 
Accounts receivable, net of allowances of $10 (2022) and $12 (2021)
916 833 
Other receivables212 195 
Inventories1,334 1,373 
Prepaid expenses and other338 237 
Total current assets3,307 3,276 
Noncurrent Assets
Goodwill5,898 6,172 
Other intangibles, net5,059 5,587 
Other noncurrent assets376 387 
Property and equipment, net of accumulated depreciation of $688 (2022) and $1,041 (2021)
961 1,061 
Total assets$15,601 $16,483 
Liabilities and Equity
Current Liabilities
Accounts payable$386 $418 
Employee compensation113 185 
Sales rebates and discounts284 316 
Current portion of long-term debt56 294 
Other current liabilities499 430 
Total current liabilities1,338 1,643 
Noncurrent Liabilities
Long-term debt6,007 6,025 
Accrued retirement benefits 254 271 
Deferred taxes620 745 
Other noncurrent liabilities242 261 
Total liabilities8,461 8,945 
Commitments and Contingencies
Equity
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
  
Additional paid-in capital8,712 8,696 
Accumulated deficit(923)(949)
Accumulated other comprehensive loss(649)(209)
Total equity7,140 7,538 
Total liabilities and equity$15,601 $16,483 
See notes to condensed consolidated financial statements.
2022 Q2 Form 10-Q | 7
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Elanco Animal Health Incorporated
Condensed Consolidated Statements of Equity (Unaudited)
(Dollars and shares in millions)
Common StockAccumulated Other Comprehensive Income (Loss)
SharesAmountAdditional Paid-in CapitalAccumulated DeficitCash Flow Hedge Gain (Loss)Foreign Currency TranslationDefined Benefit Pension and Retiree Health Benefit PlansTotalTotal Equity
December 31, 2020
471.9 $ $8,650 $(477)$(61)$360 $4 $303 $8,476 
Net loss— — — (61)— — — — (61)
Other comprehensive income (loss), net of tax— — — — 53 (466)8 (405)(405)
Stock compensation — — 15 — — — — — 15 
Issuance of stock under employee stock plans, net1.1 — (18)— — — — — (18)
March 31, 2021473.0  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, 2021473.0 $ $8,663 $(748)$(13)$63 $15 $65 $7,980 
December 31, 2021
473.1 $ $8,696 $(949)$25 $(253)$19 $(209)$7,538 
Net income— — — 48 — — — — 48 
Other comprehensive income (loss), net of tax— — — — 109 (85)(1)23 23 
Stock compensation— — 14 — — — — — 14 
Issuance of stock under employee stock plans, net1.0 — (11)— — — — — (11)
March 31, 2022474.1  8,699 (901)134 (338)18 (186)7,612 
Net loss— — — (22)— — — — (22)
Other comprehensive income (loss), net of tax— — — — 8 (470)(1)(463)(463)
Stock compensation— — 17 — — — — — 17 
Issuance of stock under employee stock plans, net— — (4)— — — — — (4)
June 30, 2022474.1 $ $8,712 $(923)$142 $(808)$17 $(649)$7,140 

See notes to condensed consolidated financial statements.
2022 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,
 20222021
Cash Flows from Operating Activities
Net income (loss)$26 $(271)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Depreciation and amortization347 372 
Deferred income taxes(40)(114)
Stock-based compensation expense31 31 
Asset impairment and write-down charges87 278 
Loss on sale of assets1 2 
Gain on divestiture(3) 
Inventory fair value step-up amortization 63 
Loss on extinguishment of debt17  
Proceeds from interest rate swap settlements132  
Changes in operating assets and liabilities
(369)(190)
Other non-cash operating activities, net21  
Net Cash Provided by Operating Activities250 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 debt425  
Proceeds from revolving credit facility563 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 1638 506 
Cash and cash equivalents at June 30$507 $580 
See notes to condensed consolidated financial statements.
2022 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 2. Basis of Presentation and Summary of Significant Accounting Policies

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the 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 Form 10-Q should be read in conjunction with our consolidated financial statements and accompanying notes for the year ended December 31, 2021 included in our Form 10-K filed with the SEC on 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 3 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 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, 2022 as described in Note 3: Implementation of New Financial Accounting Pronouncements.

Note 3. Implementation of New Financial Accounting Pronouncements

The following table provides a brief description of an accounting standard that was effective January 1, 2022 and was adopted on that date:
StandardDescriptionEffect on the financial statements or other significant matters
ASU 2021-10, Government Assistance (Topic 832)
The amendments in this update require annual disclosure of transactions with governments that are accounted for by applying a grant or contribution model. The new pronouncement requires entities to provide information about the nature, terms and conditions associated with the transactions and the financial statement line items affected.The adoption of this guidance did not have a material impact on our consolidated financial statements.

2022 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:
StandardDescriptionEffective DateEffect 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.Adoption of the guidance is optional and effective as of March 12, 2020 through December 31, 2022. Adoption is permitted at any time during the period on a prospective basis.
Our current credit facilities reference London Inter-Bank Offered Rate (LIBOR) as 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 guidance. However, we will continue to evaluate the impact as reference rate reform activities occur.

Note 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, 2022 and 2021, the aggregate liability for sales rebates and discounts for these countries represented approximately 77% and 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,
2022202120222021
Beginning balance$295 $331 $316 $295 
Reduction of revenue176 178 355 367 
Payments(187)(206)(387)(359)
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, 2022 and 2021 for product shipped in previous periods were not material.

Actual global product returns were approximately 1% of net revenue for the three and six months ended June 30, 2022 and 2021.
2022 Q2 Form 10-Q | 11
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Disaggregation of Revenue

The following table summarizes our revenue disaggregated by product category:
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Pet Health$612 $685 $1,251 $1,330 
Farm Animal:
Cattle248 224 495 485 
Poultry174 186 353 357 
Swine89 113 189 236 
Aqua42 44 85 67 
Total Farm Animal553 567 1,122 1,145 
Contract Manufacturing (1)
12 27 29 46 
Revenue$1,177 $1,279 $2,402 $2,521 
(1)Represents revenue from arrangements in which we manufacture products on behalf of a third party, including supply agreements associated with divestitures of products related to the acquisition of Bayer Animal Health.

Note 5. Acquisitions, Divestitures and Other Arrangements

KindredBio Acquisition

On August 27, 2021, we acquired KindredBio, a publicly traded biopharmaceutical company that develops innovative biologics focused on saving and improving the lives of pets. The acquisition further accelerates our pet health expansion, particularly by expanding our presence in dermatology.

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 the acquisition is included in our condensed consolidated financial statements from the date of acquisition.

In 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 revolving credit facility and cash 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 monoclonal antibody that is being developed for the treatment and prevention of canine parvovirus. We calculated the fair value of the 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 liability upon the closing of our acquisition of KindredBio.

Revenue and loss from KindredBio included in our condensed consolidated statements of operations for the three and six months ended June 30, 2022 were immaterial.

2022 Q2 Form 10-Q | 12
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The following table summarizes the preliminary amounts recognized for assets acquired and liabilities assumed as of the acquisition date:

Estimated Fair Value at August 27, 2021
Cash and cash equivalents$31 
Other net working capital12 
Property and equipment33 
Intangible assets, primarily acquired in-process research and development (IPR&D)333 
Deferred income taxes, net(26)
Total identifiable net assets383 
Goodwill32 
Settlement of liability related to previous license agreement29 
Total consideration transferred$444 

The accounting for this acquisition is substantially complete, with the exception of the finalization of tax-related amounts and minor working capital adjustments. The measurement period adjustments recorded during 2022, which were made to reflect the facts and circumstances in existence as of the acquisition date, primarily related to changes in the estimated fair value of acquired IPR&D and minor tax and working capital adjustments. The net impact of these adjustments was not material. Finalization of the valuation during the measurement period could result in a change in the amounts recorded for the acquisition date fair value. The completion of the valuation will occur no later than one year from the acquisition date.

Property and equipment is mostly comprised of land, buildings, equipment (including 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, to the extent that market data for similar assets was available. When market pricing data was not available for a given asset or asset class, the direct replacement cost method was used.

The estimated fair values of acquired IPR&D were determined using the income 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. 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 (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.

The goodwill recognized from this acquisition is primarily attributable to KindredBio's assembled workforce and expected synergies. The majority of goodwill associated with this acquisition is not deductible for tax purposes.




2022 Q2 Form 10-Q | 13
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Divestitures

Microbiome R&D platform carve-out

In 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 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. On August 1, 2021, we completed the sale of our Shawnee site and expect to receive gross cash proceeds of $51 million over a period of three years based on the terms of the agreement, beginning in the second 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 6: Asset Impairment, Restructuring and Other Special Charges for further information.

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 our condensed consolidated balance sheets as follows:
December 31, 2021
Inventories$31 
Property and equipment, net50 
Total assets held for sale$81 
2022 Q2 Form 10-Q | 14
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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 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. As 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 assets 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 2: Basis of Presentation and Summary of Significant Accounting Policies for discussion regarding estimates and assumptions.
2021 Restructuring Programs

In 2021, we announced two separate restructuring programs to improve operating efficiencies.

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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,
2022202120222021
Restructuring charges (credits):
Severance and other costs (1)
$(2)$1 $(9)$28 
Facility exit costs1  2  
Acquisition related charges:
Transaction and integration costs (2)
26 30 50 111 
Non-cash and other items:
Asset impairment (3)
59 4 59 13 
Asset write-down (4)
 267 28 269 
Net periodic benefit cost (credits) (Note 14) (8) (17)
Settlements and other (5)
2 5 2 3 
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, charges mainly 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 2020.
(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 acquisitions of KindredBio and 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)2022 includes a charge of $59 million related to the expensing of an IPR&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.
(4)2022 includes the finalization of the write-down charge upon the final sale of the Speke manufacturing site. 2021 represents 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. See Note 5: Acquisitions, Divestitures and Other 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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(5)2022 includes a $2 million measurement period adjustment to the charge associated with the settlement of a liability for future royalty and milestone payments triggered in connection with our acquisition of KindredBio. See Note 5: Acquisitions, Divestitures and Other Arrangements for further discussion. For the three and six months ended June 30, 2021, charges mainly represent accounting and advisory fees related to the planned sale of our Shawnee and Speke manufacturing sites, partially offset by a gain recorded on the divestiture of an early-stage IPR&D asset acquired as part of the Bayer Animal Health acquisition.

The following table summarizes the activity in our reserves established in connection with restructuring activities:
Severance
Balance at December 31, 2020$130 
Charges42 
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 our condensed consolidated balance sheets. Substantially all of the reserves are expected to be paid in the next 12 months primarily due to certain country negotiations and regulations. We believe that the reserves are adequate.

Note 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, 2022December 31, 2021
Finished products$618 $598 
Work in process545 565 
Raw materials and supplies222 256 
Total1,385 1,419 
Decrease to LIFO cost(51)(46)
Inventories$1,334 $1,373 

Note 8. Equity

Tangible Equity Unit (TEU) Offering

On January 22, 2020, we 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 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.

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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 ComponentDebt ComponentTotal
Fair value per unit$42.80 $7.20 $50.00 
Gross proceeds$471 $79 $550 
Less: Issuance costs19 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 ValueCommon 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.

2022 Q2 Form 10-Q | 18
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Note 9. Debt

Long-term debt consisted of the following:
June 30, 2022December 31, 2021
Incremental Term Facility due 2025 (1)
$175 $ 
Incremental Term Facility due 2028496 499 
Incremental Term Facility due 2029 (2)
250  
Term Loan B4,027 4,118 
Revolving Credit Facility75 250 
4.272% Senior Notes due 2023 (3)
344 750 
4.900% Senior Notes due 2028
750 750 
TEU Amortizing Notes20 34 
Unamortized debt issuance costs(74)(82)
6,063 6,319 
Less current portion of long-term debt56 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 incremental 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.

(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 incremental assumption agreement provides for a 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.

(3)In April 2022, we completed a tender offer and retired $406 million in aggregate principal amount of our 4.272% Senior Notes due August 28, 2023, resulting in a debt extinguishment loss of approximately $17 million recognized in interest expense, net of capitalized interest in the condensed consolidated statements of operations. 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, 2022.

Note 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 had investments without readily determinable fair values and equity method investments included in other noncurrent assets on our condensed consolidated balance sheets totaling $31 million and $22 million as of June 30, 2022 and December 31, 2021, respectively. Unrealized net gains and losses on our investments for the three and six months ended June 30, 2022 and 2021 were immaterial.

2022 Q2 Form 10-Q | 19
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The following table summarizes the fair value information at June 30, 2022 and December 31, 2021 for foreign exchange contract assets (liabilities), investments, 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:
  Fair Value Measurements Using 
Financial statement line itemCarrying
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 $ $