Elanco Animal Health Inc

Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under our credit facilities. As a significant portion of our business is conducted internationally, we hold a significant portion of cash outside of the U.S. We monitor and adjust the amount of foreign cash based on projected cash flow requirements. Our ability to use foreign cash to fund cash flow requirements in the U.S. may be impacted by local regulations and, to a lesser extent, the income taxes associated with transferring cash to the U.S. We intend to indefinitely reinvest substantially all foreign earnings for continued use in our foreign operations. As our business evolves, we may change that strategy, particularly to the extent we identify tax-efficient reinvestment alternatives for our foreign earnings or change our cash management strategy.

We believe our primary sources of liquidity are sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, funding existing marketed and pipeline products, capital expenditures, business development in our targeted areas, short-term and long-term debt obligations, such as principal and interest payments, as well as interest rate swaps, operating lease payments, purchase obligations and costs associated with mergers, acquisitions, divestitures and business integrations and/or restructuring activities. As of September 30, 2024, we had cash and cash equivalents of $490 million and unused borrowing capacity on our Revolving Credit Facility of approximately $750 million. In addition, our Securitization Facility provides additional borrowing capacity in the event our borrowing capacity on this facility, which is correlated to our U.S. Net Eligible Receivables Balances, exceeds our outstanding borrowings on the facility. As of September 30, 2024, we had $93 million in undrawn borrowing capacity on our Securitization Facility. We also have the ability to access capital markets to obtain debt financing for longer-term funding, if required. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants.

We made $1,587 million of term loan debt repayments during the nine months ended September 30, 2024, utilizing a majority of the proceeds from the sale of our aqua business as well as a portion of the proceeds from our new $350 million Incremental Term Facility due 2031 and available cash on hand. We also repaid $200 million during the nine months ended September 30, 2024, on our Revolving Credit Facility. Combined, these net repayments of $1,437 million have significantly reduced our leverage and anticipated future interest expense.

Our ability to meet future funding requirements may be impacted by macroeconomic, business and financial volatility. As market conditions change, we will continue to monitor our liquidity position. However, a challenging economic environment or an economic downturn may impact our liquidity or ability to obtain future financing. See "Item 1A. Risk Factors - We have substantial indebtedness" in Part I of our 2023 Form 10-K.

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Cash Flows

The following table provides a summary of cash flows from operating, investing and financing activities for the nine months ended September 30, 2024 and 2023:

Operating activities

Cash provided by operating activities was $364 million for the nine months ended September 30, 2024, compared to cash provided by operating activities of $114 million for the nine months ended September 30, 2023. The increase in cash provided by operating activities was driven by year-over-year improvements in changes in operating assets and liabilities.

Investing activities

Cash provided by investing activities was $1,248 million for the nine months ended September 30, 2024, compared to cash used for investing activities of $134 million for the nine months ended September 30, 2023. Cash provided by investing activities during the nine months ended September 30, 2024, was driven by the cash proceeds of $1,294 million from the sale of our aqua business in July 2024, and to a lesser extent, the collection of a $66 million receivable related to the previous divestiture of our Shawnee and Speke locations (see Note 4. Acquisitions, Divestitures and Other Arrangements to the condensed consolidated financial statements for additional information). These proceeds were partially offset by net purchases of property and equipment and software. Cash used for investing activities during the nine months ended September 30, 2023, primarily related to net purchases of property and equipment and software, $19 million paid for our acquisition of NutriQuest and $14 million for the purchase of intangible assets.

Financing activities

Cash used for financing activities was $1,460 million for the nine months ended September 30, 2024, compared to cash provided by financing activities of $56 million for the nine months ended September 30, 2023. Cash used for financing activities during the nine months ended September 30, 2024, included $1,587 million in gross repayments of term loan debt and net repayments on our Revolving Credit Facility of $200 million. These repayments were partially offset by proceeds of $350 million from the issuance of our Incremental Term Facility due 2031 in August 2024. Cash provided by financing activities of $56 million during the nine months ended September 30, 2023, primarily reflected net proceeds from our Revolving Credit Facility and Securitization Facility, largely offset by the repayment of indebtedness outstanding under our previously outstanding 4.272% Senior Notes due 2023.

Description of Indebtedness

For a complete description of our existing debt and available credit facilities as of September 30, 2024 and December 31, 2023, see Note 8. Debt within Item 8, “Financial Statements and Supplementary Data,” of Part II of our 2023 Form 10-K. New developments are discussed in Note 8. Debt of this Form 10-Q.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Certain of our accounting policies are considered critical because these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments, often requiring the use of estimates about the effects of matters that are inherently uncertain. Actual results that differ from our estimates could have an unfavorable effect on our financial position and results of operations. We apply estimation methodologies consistently from year to year. Such policies are summarized in Item 7, "Management's Discussion & Analysis of Results of Financial Condition and Results of Operations," of our 2023 Form 10-K. There were no significant changes or developments in the application of our critical accounting policies during the nine months ended September 30, 2024.

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