Notes to Condensed Consolidated Financial Statements (Unaudited)
(Tables present dollars in millions, except per-share data)
Note 1. Nature of Business and Organization
Nature of Business
Elanco Animal Health Incorporated (Elanco Parent) and its subsidiaries (collectively, Elanco, the Company, we, us or our) was formed as a wholly-owned subsidiary of Eli Lilly and Company (Lilly). Elanco is a global animal health company that innovates, develops, manufactures and markets products for companion and food animals. We offer a diverse portfolio of more than 125 brands to veterinarians and food animal producers in more than 90 countries.
Organization
Elanco Parent was formed in May 2018, as a wholly-owned subsidiary of Lilly, to serve as the ultimate parent company of substantially all of the animal health businesses of Lilly.
On September 24, 2018, Elanco Parent completed an initial public offering (IPO) resulting in the issuance of 72.3 million shares of its common stock (including shares issued pursuant to the underwriters’ option to purchase additional shares), which represented 19.8% of the outstanding shares, at $24 per share resulting in total net proceeds, after underwriting discounts and commissions, of $1.7 billion. In connection with the completion of the IPO, through a series of equity and other transactions, Lilly transferred to Elanco Parent the animal health businesses that form its business. In exchange, Elanco Parent has paid to Lilly approximately $4.2 billion, which included the net proceeds from the IPO, the net proceeds from the debt offering completed by Elanco Parent in August 2018 and the term loan facility entered into by Elanco Parent in September 2018 (see Note 10: Debt). These transactions are collectively referred to herein as the Separation.
On February 8, 2019, Lilly announced an exchange offer whereby Lilly shareholders could exchange all or a portion of Lilly common stock for shares of Elanco common stock owned by Lilly. The disposition of Elanco shares was completed on March 11, 2019, and resulted in the full separation of Elanco along with the disposal of Lilly's entire ownership and voting interest in Elanco.
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 requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a 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. The accounts of all wholly owned and controlled subsidiaries are included in the condensed consolidated financial statements and all intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to prior periods in the condensed consolidated financial statements and accompanying notes to conform with current presentation.
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, 2019 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 28, 2020.
Our income taxes in 2019 and thereafter reflect the results on a stand-alone basis independent of Lilly, except for the period during which we were included in a combined tax return with Lilly until full separation. The income tax amounts in the financial statements have been calculated based on a separate return methodology and presented as if our operations were separate taxpayers in the respective jurisdictions. We file income tax returns in the U.S. federal jurisdiction and various state, local and non-U.S. jurisdictions.
The significant accounting policies set forth in Note 4 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 appropriately represent, in all material respects, the current status of our accounting policies, except as it relates to the adoption of the standards that were effective January 1, 2020 as described in Note 4: Implementation of New Financial Accounting Pronouncements, and are incorporated herein by reference.
Note 3. Impact of Separation
In connection with the Separation, we issued $2.0 billion aggregate principal amount of senior notes in a private placement, and we also entered into a $750.0 million senior unsecured revolving credit facility and $500.0 million senior unsecured term credit facility. In connection with the Separation, we entered into various agreements with Lilly, including a master separation agreement, a tax matters agreement and the transitional services agreement (TSA).
In addition to the agreements referenced above, we entered into several other related party transactions with Lilly before and at the time of the Separation. For additional information regarding our ongoing agreements, as well as certain activities while Lilly was a related party, see Note 17: Related Party Agreements and Transactions.
Note 4. Implementation of New Financial Accounting Pronouncements
The following table provides a brief description of accounting standards that were effective January 1, 2020 and were adopted on that date:
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Standard
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Description
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Effect on the financial statements or other significant matters
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Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
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This standard modifies the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables.
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We adopted the standard using the modified retrospective approach. The impact of adoption included the first-time recognition of expected credit losses (i.e., bad debt expense) on current receivables that are not past due, which resulted in a decrease in retained earnings of $1.4 million. Recognition of this allowance and other impacts of adoption were not material to the consolidated financial statements.
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Accounting Standards Update 2018-15, Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
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This guidance aligns the requirements for capitalizing implementation costs incurred in a cloud-based hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
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We implemented the guidance on a prospective basis. The adoption did not have a significant impact on the consolidated financial statements.
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The following table provides a brief description of accounting standards applicable to us that have not yet been adopted:
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Standard
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Description
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Effective Date
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Effect on the financial statements or other significant matters
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Accounting Standards Update 2019-12, Simplifying the Accounting for Income Taxes
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The amendments in this update simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses, and annual effective tax rate calculations.
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This standard is effective January 1, 2021, with early adoption permitted. We intend to adopt this standard on that date.
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We are currently evaluating the effect of this standard on our consolidated financial statements.
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Accounting Standards Update 2020-04, Reference rate reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
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This update provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.
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This standard can be applied immediately, but early adoption is only available through December 31, 2022.
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We are currently in the process of evaluating the impact of the London Interbank Offered Rate (LIBOR) on our existing contracts, but do not expect that this update will have a material impact on our consolidated financial statements.
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Note 5. Revenue
Our sales rebates and discounts are based on specific agreements and the majority relate to sales in the U.S. As of June 30, 2020 and 2019, the liability for sales rebates and discounts in the U.S. represents approximately 74% and 75%, respectively, of our total liability with the next largest country representing approximately 7% and 5%, respectively, of our total liability.
The following table summarizes the activity in the sales rebates and discounts liability in the U.S.:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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Beginning balance
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$
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137.6
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$
|
120.0
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|
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$
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150.4
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$
|
118.5
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Reduction of revenue
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65.1
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|
80.6
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|
125.6
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146.3
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Payments
|
(80.7)
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(68.5)
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(154.0)
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(132.7)
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Ending balance
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$
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122.0
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$
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132.1
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$
|
122.0
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$
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132.1
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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, 2020 and 2019 for product shipped in previous periods were not material.
Actual product returns were approximately 1.5% and less than 0.1% of net revenue for the three months ended June 30, 2020 and 2019, respectively. Actual product returns were approximately 1.6% and 0.2% of net revenue for the six months ended June 30, 2020 and 2019, respectively.
Disaggregation of Revenue
The following table summarizes our revenue disaggregated by product category:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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Companion Animal Disease Prevention
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$
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176.3
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|
$
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223.4
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|
|
$
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316.6
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$
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409.3
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Companion Animal Therapeutics
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78.0
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83.4
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143.8
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164.8
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Food Animal Future Protein & Health
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157.9
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175.8
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337.9
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343.0
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Food Animal Ruminants & Swine
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158.2
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271.5
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410.8
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545.6
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Strategic Exits(1)
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15.9
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27.5
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34.9
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50.0
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Revenue
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$
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586.3
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$
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781.6
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$
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1,244.0
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$
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1,512.7
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(1)Represents revenue from business activities we have either exited or made a strategic decision to exit.
Note 6. Acquisitions and Divestitures
2019 Acquisitions
During 2019, we completed the acquisitions of all outstanding shares of Aratana Therapeutics, Inc. (Aratana) and Prevtec Microbia Inc. (Prevtec). These transactions were accounted for as business combinations under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our condensed consolidated financial statements. The determination of estimated fair value required 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 these acquisitions are included in our condensed consolidated financial statements from the dates of acquisition.
Aratana Therapeutics, Inc.
On July 18, 2019, we acquired Aratana, a pet therapeutics company focused on innovative therapies for dogs and cats, for stock and cash-based contingent value rights. Aratana is the creator of the canine osteoarthritis medicine, Galliprant™, the rights to which we acquired in 2016. The acquisition enhances our presence in the areas of appetite stimulants in dogs, pain relief in dogs and cats, and treatments of other conditions in the U.S. and internationally. In connection with the acquisition, we issued approximately 7.2 million shares with a value of $238.0 million to Aratana shareholders, based on our stock price on the last trading day immediately prior to the closing date. The purchase consideration also included up to $12 million in contingent value rights, which represent the rights of Aratana shareholders to receive a contingent payment of $0.25 per share in cash upon the achievement of a specified milestone as outlined in the merger agreement. We calculated an immaterial fair value for the contingent value rights using the Monte Carlo simulation model.
Contingent consideration liabilities that we previously recorded for future royalty and milestone payments in relation to the 2016 acquisition of rights to Galliprant were settled upon the closing of our acquisition of Aratana. The liabilities were valued at $84.7 million as of the acquisition date using the Monte Carlo simulation model. The resulting $7.5 million loss upon settlement was recorded in other - net, (income) expense in the consolidated and combined statement of operations for the year ended December 31, 2019.
The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
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Estimated Fair Value at July 18, 2019
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Cash and cash equivalents
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$
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26.4
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Inventories
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10.3
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Acquired in-process research and development
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31.9
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Marketed products (1)
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36.7
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Other intangible assets (1)
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13.2
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Other assets and liabilities - net
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4.1
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Total identifiable net assets
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122.6
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Goodwill (2)
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30.7
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Settlement of existing contingent consideration liabilities
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84.7
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Total consideration transferred
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$
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238.0
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(1)These intangible assets, which are being amortized on a straight-line basis over their estimated useful lives, are expected to have a weighted average useful life of approximately 12.5 years.
(2)The goodwill recognized from this acquisition is attributable primarily to expected synergies from combining the operations of Aratana with our legacy business. The majority of goodwill associated with this acquisition is not deductible for tax purposes.
The accounting for this acquisition is complete. A $19.1 million measurement period adjustment was recorded to establish a deferred tax liability for the preexisting Galliprant contingent consideration liability during the three and six months ended June 30, 2020.
We issued 0.1 million shares and recorded $3.6 million of stock-based compensation expense for the vesting of Aratana equity awards that was accelerated upon the closing of the acquisition during 2019.
Had Aratana been acquired on January 1, 2018, the unaudited pro forma combined revenues and income before income taxes of Elanco and Aratana would have been $1,520.6 million and $82.3 million, respectively, for the six months ended June 30, 2019.
Prevtec Microbia Inc.
On July 31, 2019, we acquired Prevtec in a cash transaction for approximately $60.3 million, inclusive of certain post-closing adjustments. Prevtec is a Canadian biotechnology company specializing in the development of vaccines intended to help prevent bacterial diseases in food animals. The acquisition allows us to expand on our previous distribution arrangement for Coliprotec™ and is consistent with our efforts to explore innovative antibiotic alternatives.
The purchase consideration included up to $16.3 million in additional cash consideration, contingent upon the achievement of specific sales milestones by December 31, 2021. We recorded a $4.7 million liability on the condensed consolidated balance sheet as of the acquisition date based on the fair value of the contingent consideration as calculated using the Monte Carlo simulation model.
A previously existing $0.7 million receivable owed from Prevtec to Elanco Animal Health UK Limited was settled upon the closing of our acquisition of Prevtec. The resulting immaterial gain upon settlement was recorded in other - net, (income) expense in the consolidated and combined statement of operations for the year ended December 31, 2019.
The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
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Estimated Fair Value at July 31, 2019
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Cash and cash equivalents
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$
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0.9
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Property and equipment
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0.5
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Acquired in-process research and development
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2.8
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Marketed products (1)
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58.9
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Other intangible assets
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1.1
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Other assets and liabilities - net
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(9.3)
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Total identifiable net assets
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54.9
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|
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Goodwill (2)
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10.1
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Total consideration transferred
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$
|
65.0
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(1)These intangible assets, which are being amortized on a straight-line basis over their estimated useful lives, are expected to have a weighted average useful life of 10 years.
(2)The goodwill recognized from this acquisition is attributable primarily to expected synergies from combining the operations of Prevtec with our legacy business and future unidentified projects and products. The goodwill associated with this acquisition is not deductible for tax purposes.
The accounting for this acquisition is complete. An immaterial measurement period adjustment to deferred taxes was recorded during the three and six months ended June 30, 2020.
Pending Acquisition
Bayer Animal Health Business
On August 19, 2019, we entered into a Share and Asset Purchase Agreement (Purchase Agreement) with Bayer, a German corporation, to acquire Bayer's animal health business. Bayer's animal health business is a provider of products intended to improve the health and well-being of pets and farm animals. This acquisition is expected to expand our Companion Animal product category, advancing our planned intentional portfolio mix transformation and creating a better balance between our Food Animal and Companion Animal product categories. Pursuant to the Purchase Agreement and subject to the satisfaction of certain customary closing conditions, including the absence of any law or order enjoining or otherwise prohibiting the transaction in specified jurisdictions, we will purchase Bayer’s animal health business for $5.3 billion in cash and shares of our common stock equal to approximately $2.3 billion divided by the 20-day volume-weighted average 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 volume-weighted average price for the 30 trading days ended August 6, 2019 of $33.60). The transaction is expected to close in August 2020. See Note 14: Commitments and Contingencies for discussion regarding certain commitments related to this transaction.
Divestitures
In January 2020, we signed agreements to divest the worldwide rights to Osurnia™ and the U.S. rights to Capstar™, and in February 2020, we signed an agreement to divest the worldwide rights to Vecoxan™, for an aggregate of $285 million in all cash transactions. The agreements were signed with the intent to advance our efforts to secure the necessary regulatory clearances for the pending acquisition of the Bayer animal health business. The closing of these transactions is contingent on us entering into consent decrees with certain agencies in connection with the pending acquisition as well as customary closing conditions. On July 27, 2020, we completed the sale of our remaining interest in Osurnia. Cash proceeds from the sale were approximately $141.6 million. The divestitures of Capstar and Vecoxan, along with certain other immaterial divestitures, are expected to close contemporaneously with our acquisition of Bayer's animal health business.
The related assets for all three divestitures met the assets held for sale criteria as of June 30, 2020 and the assets for the Osurnia and Capstar divestitures met the assets held for sale criteria as of December 31, 2019. No adjustments were required to record the assets at the lower of their carrying amounts or fair values less costs to sell on the condensed consolidated balance sheet. Assets and liabilities considered held for sale in connection with the divestitures were included in the respective line items on the consolidated balance sheet as follows:
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June 30, 2020
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December 31, 2019
|
Inventories
|
$
|
7.0
|
|
|
$
|
10.6
|
|
Other intangibles, net
|
100.0
|
|
|
61.2
|
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Property and equipment, net
|
0.2
|
|
|
0.2
|
|
Total assets held for sale
|
$
|
107.2
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|
|
$
|
72.0
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|
|
|
|
|
Deferred taxes
|
$
|
(3.4)
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|
|
$
|
(1.4)
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|
Total liabilities held for sale
|
$
|
(3.4)
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|
|
$
|
(1.4)
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|
Other intangibles, net classified as held for sale primarily consist of marketed products. We determined that the disposal of these 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.
Note 7. 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. Restructuring activities primarily include charges associated with facility rationalization and workforce reductions. In connection with our recent acquisitions and the pending acquisition of Bayer's animal health business, 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 asset 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.
Components of asset impairment, restructuring and other special charges are as follows:
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Three Months Ended June 30,
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Six Months Ended June 30,
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|
2020
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2019
|
|
2020
|
|
2019
|
Restructuring charges:
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|
|
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|
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Severance and other costs (1)
|
$
|
0.6
|
|
|
$
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(1.3)
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|
|
$
|
1.0
|
|
|
$
|
(0.8)
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|
Facility exit costs
|
0.1
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Acquisition related charges:
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|
|
|
|
|
|
|
Transaction and integration costs (2)
|
111.1
|
|
|
33.1
|
|
|
187.4
|
|
|
53.5
|
|
|
|
|
|
|
|
|
|
Non-cash and other items:
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|
|
|
|
|
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Asset impairment (3) (4)
|
3.5
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|
|
—
|
|
|
3.5
|
|
|
4.0
|
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Asset write-down (5)
|
1.0
|
|
|
—
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|
|
2.3
|
|
|
—
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|
Gain on sale of fixed assets (6)
|
—
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|
|
—
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|
(3.8)
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|
|
—
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Settlements and other (7)
|
3.1
|
|
|
—
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|
3.1
|
|
|
—
|
|
|
|
|
|
|
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Total expense
|
$
|
119.4
|
|
|
$
|
31.8
|
|
|
$
|
194.2
|
|
|
$
|
56.7
|
|
(1)For the three and six months ended June 30, 2020, these charges primarily related to the announced 2019 program to streamline operations in Speke, England 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 acquisition of Bayer's animal health business (e.g., expenditures for consulting, system and process integration, and product transfers), as well as stand-up costs related to the implementation of new systems, programs, and processes due to the Separation from Lilly.
(3)Asset impairment charges for the three and six months ended June 30, 2020 related to the impairment of an in-process research and development asset resulting from a reassessment of geographic viability.
(4)Asset impairment charges for the six months ended June 30, 2019 related to an adjustment to fair value of intangible assets that were subject to product rationalization.
(5)Asset write-down expenses for the three and six months ended June 30, 2020 resulted from adjustments recorded to write assets classified as held and used down to their current fair value. These charges primarily related to fixed assets in Wusi, China in connection with the announced 2019 program to streamline operations.
(6)Represents a gain on the disposal from the sale of an R&D facility in Prince Edward Island, Canada, which was written down during the three months ended September 30, 2019 as part of the announced 2019 program to streamline operations.
(7)Charge primarily relates to a non-recurring litigation settlement for a matter that originated prior to the Separation.
The following table summarizes the activity in our reserves established in connection with restructuring activities:
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Facility exit costs
|
|
Severance
|
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Total
|
Balance at December 31, 2018
|
$
|
9.3
|
|
|
$
|
35.1
|
|
|
$
|
44.4
|
|
Charges
|
—
|
|
|
2.5
|
|
|
2.5
|
|
Reserve adjustments
|
—
|
|
|
(3.3)
|
|
|
(3.3)
|
|
Cash paid
|
(1.7)
|
|
|
(13.8)
|
|
|
(15.5)
|
|
Balance at June 30, 2019
|
$
|
7.6
|
|
|
$
|
20.5
|
|
|
$
|
28.1
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
5.4
|
|
|
$
|
15.5
|
|
|
$
|
20.9
|
|
Charges
|
0.7
|
|
|
1.7
|
|
|
2.4
|
|
Reserve adjustments
|
—
|
|
|
(0.7)
|
|
|
(0.7)
|
|
Cash paid
|
(1.2)
|
|
|
(12.6)
|
|
|
(13.8)
|
|
Balance at June 30, 2020
|
$
|
4.9
|
|
|
$
|
3.9
|
|
|
$
|
8.8
|
|
These reserves are included in other current liabilities on the consolidated balance sheets. Substantially all of the reserves are expected to be paid in the next twelve months. We believe that the reserves are adequate.
Note 8. 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. FIFO cost approximates current replacement cost.
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Finished products
|
$
|
439.5
|
|
|
$
|
402.9
|
|
Work in process
|
575.4
|
|
|
603.2
|
|
Raw materials and supplies
|
84.1
|
|
|
83.9
|
|
Total (approximates replacement cost)
|
1,099.0
|
|
|
1,090.0
|
|
Decrease to LIFO cost
|
(33.7)
|
|
|
(39.3)
|
|
Inventories
|
$
|
1,065.3
|
|
|
$
|
1,050.7
|
|
Note 9. Equity
Common Stock Offering
On January 22, 2020, we entered into an underwriting agreement in which we agreed to sell approximately 22.7 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 2.3 million shares, which was exercised in full on January 23, 2020. As a result, we issued and sold a total of approximately 25.0 million shares of our common stock for $767.5 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 $528.5 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 long-term debt on the consolidated balance sheet, with payments expected in the next twelve months reflected in current portion of long-term debt. 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
|
|
$
|
470.8
|
|
|
$
|
79.2
|
|
|
$
|
550.0
|
|
Less: Issuance costs
|
|
18.4
|
|
|
3.1
|
|
|
21.5
|
|
Net proceeds
|
|
$
|
452.4
|
|
|
$
|
76.1
|
|
|
$
|
528.5
|
|
The senior amortizing notes have an aggregate principal amount of $79.2 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 due 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 14.3 million shares or a maximum of 17.2 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 14.3 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.
Note 10. Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
|
Term credit facility
|
$
|
—
|
|
|
$
|
371.4
|
|
3.912% Senior Notes due 2021
|
500.0
|
|
|
500.0
|
|
4.272% Senior Notes due 2023
|
750.0
|
|
|
750.0
|
|
4.900% Senior Notes due 2028
|
750.0
|
|
|
750.0
|
|
TEU amortizing notes
|
72.6
|
|
|
—
|
|
Other obligations
|
0.3
|
|
|
0.4
|
|
Unamortized debt issuance costs
|
(16.6)
|
|
|
(16.8)
|
|
|
|
|
|
Total debt
|
2,056.3
|
|
|
2,355.0
|
|
Less current portion of long-term debt
|
25.9
|
|
|
24.5
|
|
Total long-term debt
|
$
|
2,030.4
|
|
|
$
|
2,330.5
|
|
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 $528.5 million was received, comprised of $452.4 million of prepaid stock purchase contracts and $76.1 million of senior amortizing notes, net of issuance costs. We paid $7.2 million representing partial payment of principal and interest on the TEU amortizing notes during the six months ended June 30, 2020. See Note 9: Equity for further information.
Term Loan Extinguishment
On January 31, 2020, we repaid indebtedness outstanding under our existing term loan facility. We paid $372.4 million in cash, composed of $371.4 million of principal and $1.0 million of accrued interest, resulting in a debt extinguishment loss of $0.8 million (recognized in interest expense, net of capitalized interest in the condensed consolidated statement of operations for the six months ended June 30, 2020) primarily related to the write-off of deferred debt issuance costs.
New Credit Facility
On February 4, 2020, we successfully priced our senior secured credit facilities, consisting of the following:
•Term loan B facility with an aggregate principal amount of $4,275.0 million and a maturity of seven years.
•Revolving credit facility providing up to $750.0 million and a maturity of five years.
The term loan B facility was priced at par at LIBOR plus 175 basis points, and the revolving loan facility is expected to bear 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.
We intend to use the proceeds from the equity and debt activities to finance the cash portion of the pending acquisition of Bayer's animal health business and to pay related fees and expenses. As a result, we have obtained substantially all of the financing necessary to consummate the acquisition and do not currently intend to pursue any additional financing previously provided under the commitment letter obtained in August 2019 (see Note 14: Commitments and Contingencies). We expect to execute the debt agreements upon closing the acquisition of Bayer's animal health business.
The senior secured credit facilities are expected to include two financial maintenance covenants which are solely for the benefit of lenders under the revolving credit facility and no financial maintenance covenant for the benefit of the term loan B facility. The lenders under the term loan B facility will have no enforcement rights with respect to the financial maintenance covenants for the revolving credit facility.
We expect the first financial maintenance covenant for the revolving credit facility to be a requirement to maintain a certain pro forma net total leverage ratio level (which will not be subject to step-downs) as of the end of each quarter, beginning with the fiscal quarter ending September 30, 2020 (assuming the closing of the acquisition of Bayer's animal health business occurs in early August 2020). The required level of this covenant will be based on closing date pro forma net leverage and pro forma adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) equal to 65% of our pro forma adjusted EBITDA for the four fiscal quarters ending June 30, 2020 (assuming the closing of the acquisition of Bayer's animal health business occurs in early August 2020).
The second financial maintenance covenant for the revolving credit facility is expected to be a requirement 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, beginning with the fiscal quarter ending September 30, 2020 (assuming the closing of the acquisition of Bayer's animal health business occurs in early August 2020).
Deferred financing costs of approximately $27.3 million, consisting of legal, accounting and other fees relating to our new credit facility, are capitalized within other noncurrent assets on the condensed consolidated balance sheet as of June 30, 2020. We expect to defer an additional $35.8 million in arrangement fees upon executing the debt agreements, which will be offset against the debt proceeds. Deferred financing costs will be recorded as a contra-liability and presented net against long-term debt on the condensed consolidated balance sheet at the time of issuance.
Note 11. Financial Instruments and Fair Value
Financial instruments that are potentially subject to credit risk consist principally of trade receivables. 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 in 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.
As of June 30, 2020 and December 31, 2019, we had $19.6 million and $18.8 million, respectively, primarily related to equity method investments included in other noncurrent assets on our condensed consolidated balance sheet.
The following table summarizes the fair value information at June 30, 2020 and December 31, 2019 for foreign exchange contract assets (liabilities), contingent consideration liabilities, net investment hedge assets (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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other - foreign exchange contracts not designated as hedging instruments
|
$
|
14.6
|
|
|
$
|
—
|
|
|
$
|
14.6
|
|
|
$
|
—
|
|
|
$
|
14.6
|
|
Other current liabilities - foreign exchange contracts not designated as hedging instruments
|
(17.1)
|
|
|
—
|
|
|
(17.1)
|
|
|
—
|
|
|
(17.1)
|
|
Other noncurrent liabilities - contingent consideration
|
(2.6)
|
|
|
—
|
|
|
—
|
|
|
(2.6)
|
|
|
(2.6)
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities - forward-starting interest rate contracts designated as cash flow hedges
|
(77.3)
|
|
|
—
|
|
|
(77.3)
|
|
|
—
|
|
|
(77.3)
|
|
Long-term debt - senior notes
|
(2,000.0)
|
|
|
—
|
|
|
(2,137.0)
|
|
|
—
|
|
|
(2,137.0)
|
|
|
|
|
|
|
|
|
|
|
|
TEU amortizing note (1)
|
(72.6)
|
|
|
—
|
|
|
(72.6)
|
|
|
—
|
|
|
(72.6)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other - foreign exchange contracts not designated as hedging instruments
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
Other current liabilities - foreign exchange contracts not designated as hedging instruments
|
(1.1)
|
|
|
—
|
|
|
(1.1)
|
|
|
—
|
|
|
(1.1)
|
|
Other noncurrent liabilities - contingent consideration
|
(4.7)
|
|
|
—
|
|
|
—
|
|
|
(4.7)
|
|
|
(4.7)
|
|
Other noncurrent assets - cross currency interest rate contracts designated as net investment hedges
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt - senior notes
|
(2,000.0)
|
|
|
—
|
|
|
(2,120.6)
|
|
|
—
|
|
|
(2,120.6)
|
|
Long-term debt - term credit facility (1)
|
(371.4)
|
|
|
—
|
|
|
(371.4)
|
|
|
—
|
|
|
(371.4)
|
|
|
|
|
|
|
|
|
|
|
|
(1)We consider the carrying value to be representative of its fair value.
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, 2020 and December 31, 2019 related to contingent consideration associated with the acquisitions of Aratana and 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 $16.3 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. During the three months ended June 30, 2020, primarily as a result of a decrease in forecasted revenues related to Coliprotec, we decreased the fair value of the contingent consideration liability associated with the Prevtec acquisition by $2.1 million, and recognized the gain in other – net, (income) expense in the condensed consolidated statement of operations. See Note 6: Acquisitions and Divestitures for further discussion.
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.
Derivatives Not Designated as Hedges
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 British pound, Canadian dollar, Euro, Japanese yen and Swiss franc (CHF). 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 – net, (income) expense in the condensed consolidated income statement. Forward contracts generally have maturities not exceeding 12 months. At June 30, 2020 and December 31, 2019, we had outstanding foreign exchange contracts with aggregate notional amounts of $910.3 million and $861.2 million, respectively.
The amount of net gain/(loss) on derivative instruments not designated as hedging instruments, recorded in other - net, (income) expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Foreign exchange forward contracts (1)
|
$
|
(6.3)
|
|
|
$
|
6.7
|
|
|
$
|
21.7
|
|
|
$
|
(1.3)
|
|
(1)These amounts were substantially offset in other – net, (income) expense by the effect of changing exchange rates on the underlying foreign currency exposures.
Derivatives Designated as Hedges
In October 2018, as a means of mitigating the impact of currency fluctuations on our operations in Switzerland, we entered into a five-year cross-currency fixed interest rate swap with a 750 million CHF notional amount, which was designated 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 $35.1 million (including $2.4 million in interest). Notwithstanding settlement, gains and losses within accumulated other comprehensive loss will remain in accumulated other comprehensive loss until either the sale or substantial liquidation of the hedged subsidiary.
Gains on the NIH, recognized within interest expense, net of capitalized interest, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cross-currency interest rate swap contracts
|
$
|
0.1
|
|
|
$
|
6.1
|
|
|
$
|
6.2
|
|
|
$
|
12.2
|
|
Over the life of the derivative, gains or losses due to spot rate fluctuations were recorded in cumulative translation adjustment in other comprehensive income. The amounts of net gains on interest rate swap contracts, recorded, net of tax, in accumulated other comprehensive income/(loss), are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cross-currency interest rate swap contracts
|
$
|
0.7
|
|
|
$
|
6.8
|
|
|
$
|
24.0
|
|
|
$
|
5.4
|
|
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 rate swaps with a $4.05 billion notional amount, which are designated as cash flow hedges and have settlement dates ranging between 2022 and 2025. These instruments effectively convert floating-rate debt to fixed-rate debt. The cash flow hedges are recorded at fair value on our condensed consolidated balance sheet, while changes in the fair value of the hedge are recognized in other comprehensive income. Fair value is estimated based on quoted market values of similar hedges and is classified as Level 2. Amounts recorded in accumulated other comprehensive loss will be recognized in earnings in interest expense, net of capitalized interest when the hedged transaction affects earnings (i.e., when interest payments are accrued on the term loan B). During the three and six months ended June 30, 2020, we recorded a loss of $20.7 million (net of tax benefit of $6.0 million) and $59.9 million (net of tax benefit of $17.4 million), respectively, on the cash flow hedges in other comprehensive loss. Over the next 12 months we expect to reclassify $21.0 million from accumulated other comprehensive loss to interest expense, net of capitalized interest due to the amortization of net losses on the interest rate swaps.
Note 12. Leases
Australia Sale-Leaseback
On June 26, 2020, our wholly-owned subsidiary, Elanco Australasia PTY LTD, sold land and an R&D facility located in New South Wales, Australia, for aggregate proceeds of $55.1 million, and leased the property back for an initial term of 15 years through a sale-leaseback transaction. Under the terms of the purchase and sale agreement, we determined that control of the assets was relinquished to the buyer-lessor. Therefore, we recognized a pre-tax gain on the sale of $45.6 million in other - net, (income) expense in the condensed consolidated statement of operations during the three months ended June 30, 2020. Operating lease right-of-use assets and liabilities include the present value of $27.8 million for the associated lease payments, which are presented in other noncurrent assets and other noncurrent liabilities and other current liabilities on the condensed consolidated balance sheet as of June 30, 2020.
Note 13. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Taxes on Income
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Income tax (benefit) expense
|
|
$
|
(23.9)
|
|
|
$
|
14.3
|
|
|
$
|
(42.6)
|
|
|
$
|
27.6
|
|
Effective tax rate
|
|
30.9
|
%
|
|
28.5
|
%
|
|
29.4
|
%
|
|
29.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our income taxes for the three and six months ended June 30, 2020 and 2019, respectively, reflect the results on a stand-alone basis independent of Lilly, except for the period during which we were included in a combined tax return until full separation. In the jurisdictions in which we were included in a combined tax return, our income taxes were determined based on the tax matters agreement between us and Lilly. Prior to the Separation, the income tax
expense included in these financial statements has been calculated using the separate return basis as if Elanco filed separate tax returns.
In 2017, the U.S. enacted the Tax Cuts and Jobs Act (2017 Tax Act), which significantly revised U.S. tax law. Guidance related to the 2017 Tax Act, including Notices, Proposed Regulations, and Final Regulations, has been issued, and we expect additional guidance will be issued in 2020. This additional guidance could materially impact our assumptions and estimates used to record our U.S. federal and state income tax expense resulting from the 2017 Tax Act.
We are 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, 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. During the fourth quarter of 2019, the IRS began its examination of tax years 2016 - 2018. Because the examination is still in the early stages of information gathering, the resolution of the audit will likely extend beyond the next 12 months.
For the three and six months ended June 30, 2020, we recognized an income tax benefit of $23.9 million and $42.6 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.
For the three and six months ended June 30, 2019, we incurred $14.3 million and $27.6 million, respectively, of income tax expense. For the three and six months ended June 30, 2019, our effective tax rate of 28.5% and 29.0%, respectively, differs from the statutory income tax rate primarily due to a one-time foreign exchange gain on the transfer of assets upon separation in addition to the impact of state income taxes.
Note 14. 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. 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 January 10, 2020 and May 6, 2020. The Court is currently considering lead plaintiff motions. 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.
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 we can formulate a reasonable estimate of their costs and there is a reasonable probability of incurring significant costs or expenses. As of June 30, 2020 and December 31, 2019, we had no material liabilities established related to litigation as there were no significant claims which were probable and estimable. We have not historically had any significant litigation expense and are not currently subject to a significant claim other than the lawsuit noted above.
Bayer Animal Health acquisition fees
In connection with our pending acquisition of the animal health business of Bayer as discussed in Note 6: Acquisitions and Divestitures, in August 2019, we entered into a commitment letter that provides for financing consisting of up to $750 million in a revolving facility, $3.0 billion in a term facility and $2.75 billion in a senior secured bridge facility. In connection with the financing commitment letter, we will incur fixed commitment fees of $40.4 million that will become due and payable upon the closing of the pending acquisition or the termination of the Purchase Agreement with Bayer. In addition, we expect to incur approximately $22.5 million in advisory fees that are contingent upon closing the pending acquisition. These fees have not been recorded on the condensed consolidated balance sheet as of June 30, 2020. As a result of the financing secured for the acquisition through the equity and debt activity during the first quarter of 2020, we no longer intend to use the full financing pursuant to the commitment letter. See Note 9: Equity and Note 10: Debt for more information.
Note 15. Geographic Information
We operate as a single operating segment engaged in the development, manufacturing, marketing and sales of animal health products worldwide for both food animals and companion animals. Consistent with our operational structure, our President and Chief Executive Officer (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 cost/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 Rumensin™, Optaflexx™, Denagard™, Tylan™, Maxiban™ and other products for livestock and poultry, as well as Trifexis™, Interceptor™, Comfortis™, Galliprant and other products for companion animals.
We have a single customer that accounted for 10.4% and 12.5% of revenue for the three months ended June 30, 2020 and 2019, respectively, and for 12.1% and 12.2% of revenue for the six months ended June 30, 2020 and 2019, respectively. The product sales resulted in accounts receivable with this customer of $50.0 million and $90.5 million as of June 30, 2020 and December 31, 2019, respectively.
We are exposed to the risk of changes in social, political and economic conditions inherent in foreign operations and our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates.
Selected geographic area information was as follows:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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Revenue—to unaffiliated customers (1)
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United States
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$
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248.1
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$
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395.0
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$
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548.0
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$
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778.9
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International
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338.2
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386.6
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696.0
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733.8
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Revenue
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$
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586.3
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$
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781.6
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$
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1,244.0
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$
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1,512.7
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June 30, 2020
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December 31, 2019
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Long-lived assets (2)
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United States
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$
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737.5
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$
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709.8
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United Kingdom
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186.9
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192.6
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Other foreign countries
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262.4
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244.7
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Long-lived assets
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$
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1,186.8
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$
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1,147.1
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(1)Revenue is attributed to the countries based on the location of the customer.
(2)Long-lived assets consist of property and equipment, net, and certain noncurrent assets, including right-of-use assets.
Note 16. Earnings Per Share
Basic Earnings Per Share
We compute basic earnings (loss) per share by dividing net earnings (loss) available to common shareholders by the actual weighted average number of common shares outstanding for the reporting period. For the three and six months ended June 30, 2020, weighted average number of common shares outstanding used to calculate basic earnings per share includes the impact of approximately 25.0 million shares and 14.3 million shares, respectively, relating to the common stock issued in connection with the January 2020 common stock offering and the shares of common stock issuable at the minimum settlement rate under the TEU prepaid stock purchase contracts. See Note 9: Equity for further discussion.
Diluted Earnings Per Share
Elanco has variable common stock equivalents relating to certain equity awards in stock-based compensation arrangements and the TEU prepaid stock purchase contracts. 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.
Weighted average diluted shares outstanding included common stock equivalents of 1.3 million and 0.8 million for the three and six months ended June 30, 2019, respectively.
Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and as such, these shares are not included in the calculation of diluted earnings per share. During the three and six months ended June 30, 2020, we reported a net loss. Therefore, dilutive common shares 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 and six months ended June 30, 2019, approximately 0.1 million shares of potential common shares were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.
Note 17. Related Party Agreements and Transactions
Transactions with Lilly Subsequent to Separation and Related to the Separation
Amounts due from/(due to) Lilly in connection with the Separation and agreed upon services were as follows:
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June 30, 2020
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December 31, 2019
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TSA
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$
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(10.9)
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$
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10.5
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Other activities
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(2.5)
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(15.8)
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Local country asset purchases
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(10.7)
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(11.1)
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Total payable to Lilly
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$
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(24.1)
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$
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(16.4)
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As described in Note 1, we completed an IPO in September 2018 and Lilly fully divested all ownership of Elanco in March 2019. In connection with the Separation, we entered into various agreements with Lilly related to the form of our separation and certain ongoing activities that will continue for a period of time. These included, among others, a master separation agreement (MSA), a TSA and a tax matters agreement. In addition, there was a portion of our operations for which the legal transfer of our net assets did not occur prior to the Separation due to certain regulatory requirements in each of these countries.
Transitional Services Agreement (TSA)
Historically, Lilly has provided us significant shared services and resources related to corporate functions such as executive oversight, treasury, legal, finance, human resources, tax, internal audit, financial reporting, information technology and investor relations, which we refer to collectively as the "Lilly Services." Under the terms of the TSA, we are able to use Lilly Services for a fixed term established on a service-by-service basis. We pay Lilly mutually agreed-upon fees for the Lilly Services provided under the TSA, which are based on Lilly's cost (including third-party costs) of providing the Lilly Services through March 31, 2021, and subject to a mark-up of 7% thereafter, with additional inflation-based escalation beginning January 1, 2022. The fees under the TSA became payable for all periods beginning after October 1, 2018.
Separation Activities
Subsequent to our IPO, there continue to be transactions between us and Lilly related primarily to the completion of the local country asset purchases and finalization of assets and liabilities associated with the legal separation from Lilly, combined income tax returns and the impact of the tax matters agreement, historical Lilly retirement benefits, and centralized cash management. The most significant of these activities includes the finalization of the local country valuation of business and the resulting impact on deferred tax assets and the impact of combined tax returns.
Other Activities
We continue to share certain services and back office functions with Lilly, which in certain instances result in Lilly paying costs for Elanco (e.g., utilities, local country operating costs, etc.) that are then passed through to Elanco for reimbursement. These amounts are included in cash flows from operating activities in our consolidated statements of cash flows. In addition, we operate through a single treasury settlement process and prior to the local country asset purchases (as described below) continued to transact through Lilly's processes in certain instances. As a result of these activities, there were certain amounts of financing that occurred between Lilly and Elanco during the six months ended June 30, 2019 and 2020. These amounts are included in cash flows from financing activities in our condensed consolidated statements of cash flows.
Local Country Asset Purchases
The legal transfer of certain of our net assets did not occur prior to the Separation due to certain regulatory requirements in each of these countries. The related assets, liabilities, and results of operations have been reported in our condensed consolidated financial statements, as we are responsible for the business activities conducted by Lilly on our behalf and are subject to the risks and entitled to the benefits generated by these operations and assets under the terms of the MSA. We held restricted cash, and the associated payable to Lilly, at the date of Separation to fund the acquisition of these assets. As of June 30, 2020, the majority of these assets have been legally acquired and the remainder are expected to be purchased during 2020. Restricted cash and Payable to Lilly of $10.7 million are recorded on the condensed consolidated balance sheet for the remainder of the assets expected to be purchased by the end of 2020.
Transactions with Lilly Prior to Full Separation
Prior to the IPO, we did not operate as a standalone business and had various relationships with Lilly whereby Lilly provided services to us. The impact on our historical combined financial statements includes the following:
Stock-based Compensation
Prior to full separation, our employees participated in Lilly stock-based compensation plans, the costs of which were allocated to us and recorded in cost of sales, research and development, and marketing, selling and administrative expenses in the condensed consolidated statements of operations. The costs of such plans related to our employees were $5.1 million for the six months ended June 30, 2019.