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 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, including both principal and interest payments, as well as interest rate swaps, lease payments, purchase obligations and costs associated with mergers, acquisitions, divestitures, business integrations and/or restructuring activities. As of March 31, 2025, we had cash and cash equivalents of$487 million and unused borrowing capacity on our Revolving Credit Facility of approximately $750 million. In addition, our Securitization Facility provides for additional borrowing capacity based on our U.S. Net Eligible Receivable Balances. As of March 31, 2025, we had approximately $75 million in undrawn borrowing capacity on this 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.

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 2024 Form 10-K.

Cash Flows

The following table provides a summary of cash flows from operating, investing and financing activities for the three months ended March 31, 2025 and 2024:

Operating activities

Cash used for operating activities was $4 million for the three months ended March 31, 2025, compared to cash provided by operating activities of $2 million for the three months ended March 31, 2024. Changes in working capital were largely offset by increased net income year-over-year.

Investing activities

Cash used for investing activities was $58 million for the three months ended March 31, 2025, compared to cash provided by investing activities of $37 million for the three months ended March 31, 2024. Cash used for investing activities during the three months ended March 31, 2025, included $65 million of net purchases of property and equipment and software, which is $41 million higher than the three months ended March 31, 2024, principally due to the ongoing expansion of our monoclonal antibody manufacturing facility in Elwood, Kansas. Cash provided by investing activities during the three months ended March 31, 2024, also included the collectionof a $66 million receivable related to our prior divestitures of manufacturing facilities in Shawnee, Kansas, and Speke, U.K. (see Note 4. Acquisitions, Divestitures and Other Arrangements to the condensed consolidated financial statements for further information).

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Financing activities

Cash provided by financing activities was $52 million for the three months ended March 31, 2025, compared to cash used for financing activities of $27 million for the three months ended March 31, 2024. Cash provided by financing activities during the three months ended March 31, 2025, included $85 million in net borrowings on our Securitization Facility, primarily for working capital purposes, partially offset by scheduled repayments of long-term borrowings. Cash used for financing activities of $27 million during the three months ended March 31, 2024, included $13 million in scheduled repayments of long-term borrowings.

Description of Indebtedness

For a complete description of our existing debt and available credit facilities as of March 31, 2025 and December 31, 2024, see Note 8. Debt within Item 8, “Financial Statements and Supplementary Data,” of Part II of our 2024 Form 10-K. New developments are discussed in Note 7. Debt of this Form 10-Q.

Critical Accounting Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments 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. Certain of our accounting estimates are considered critical because they are the most important to the fair presentation of our financial statements, including the disclosures thereto, and often require significant, difficult or complex judgments, probabilities and assumptions. We believe the ongoing assessment for goodwill impairment to be one of our critical accounting estimates. This includes assessing at each reporting date if there has been a significant change in events or circumstances that indicates the fair value of our single reporting unit is more likely than not less than its carrying amount (a "triggering event"). When required, a comparison of fair value to the carrying amount of our reporting unit is performed to determine the amount of impairment, if any. We begin by assessing qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value. Based on that qualitative assessment, if we conclude it is more likely than not that the fair value is less than its carrying value, we conduct a quantitative impairment test, which involves comparing the estimated fair value of our single reporting unit to its carrying value. For quantitative goodwill impairment tests, when required, we estimate the fair value of our single reporting unit using an income approach. If the carrying value of the reporting unit exceeds its estimated fair value, we recognize an impairment loss for the difference. Significant management judgment is required in estimating our reporting unit’s fair value and in the creation of forecasts of future operating results to be used in the discounted cash flow method of the income approach valuation. These include, but are not limited to, estimates and assumptions regarding our future cash flows, revenue growth rates and other profitability measures such as gross margin and EBITDA margin; and the determination of an appropriate discount rate.

We will continue to monitor the evolving international trade environment and any related economic or market volatility and/or disruption, among other factors, to determine if a triggering event occurs. To the extent these or other factors lead to decreased assumptions regarding our future cash flows, revenue growth rates and/or other profitability measures such as gross margin and EBITDA margin, we potentially may need to record a future goodwill impairment charge. Further, our discount rate assumption is highly correlated with long-term treasury rates. To the extent of a material increase in long-term interest rates, we may need to correspondingly increase our discount rate assumption, potentially leading to a future goodwill impairment charge.

While we believe our critical accounting estimates to be reasonable based on all relevant information available, given their inherent uncertainty, if our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted. We regularly evaluate our estimates and assumptions and adjust them when facts and circumstances indicate the need for change, and such changes generally would be reflected in our condensed consolidated financial statements in the period they are determined. We apply estimation methodologies consistently from year to year. Our critical accounting estimates are summarized in Item 7, "Management's Discussion & Analysis of Results of Financial Condition and Results of Operations," of our 2024 Form 10-K. There were no significant changes or developments in the application of our critical accounting estimates during the three months ended March 31, 2025.

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