ELANCO ANIMAL HEALTH INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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Management's discussion and analysis of financial condition and results of
operations (MD&A) is intended to assist the reader in understanding and
assessing significant changes and trends related to our results of operations
and financial position. This discussion and analysis should be read in
conjunction with the condensed consolidated financial statements and
accompanying footnotes in Item 1 of Part I of this Form 10-Q. Certain statements
in this Item 2 of Part I of this Form 10-Q constitute forward-looking
statements. Various risks and uncertainties, including those discussed in
"Forward-Looking Statements" of this Form 10-Q, in Item 1A, "Risk Factors" of
Part II of this Form 10-Q, and in Item 1A, "Risk Factors" of Part I of our

Form 10-K for the year ended December 31, 2021, may cause our actual results, financial condition and cash generated from our operations to differ materially from these forward-looking statements. In addition, due to the seasonal nature of our pet health product sales, interim results are not necessarily an appropriate basis from which to project annual results.

Insight

Elanco is a global animal health company that develops products for pets and
farm animals in more than 90 countries. With a heritage dating back to 1954, we
rigorously innovate to improve the health of animals and to benefit our
customers while fostering an inclusive, cause-driven culture for our employees.
We operate our business in a single segment directed at fulfilling our vision of
enriching the lives of people through food, making protein more accessible and
affordable, and through pet companionship, helping pets live longer, healthier
lives.

On August 27, 2021, we acquired KindredBio, a biopharmaceutical company that
develops innovative biologics focused on saving and improving the lives of pets.
We had previously signed an agreement with KindredBio in the second quarter of
2021 to acquire exclusive global rights to KIND-030, a monoclonal antibody in
development for the treatment and prevention of canine parvovirus. The
acquisition of KindredBio further accelerates our opportunity for expansion in
pet health, notably by expanding our research efforts in dermatology. See Note
5: Acquisitions and Divestitures to the condensed consolidated financial
statements for additional information on the acquisition. Subsequent to the
acquisition date, our consolidated financial statements include the assets,
liabilities, operating results and cash flows of KindredBio.

On August 1, 2020, we completed the acquisition of Bayer Animal Health. The
acquisition expanded our pet health product category, advancing our planned
portfolio mix transformation and creating a better balance between our farm
animal and pet health product categories. Our product portfolio and pipeline
have been enhanced by the addition of Bayer Animal Health, which complements our
commercial operations and international infrastructure. See Note 5: Acquisitions
and Divestitures to the condensed consolidated financial statements for
additional information on the acquisition. Subsequent to the acquisition date,
our consolidated financial statements include the assets, liabilities, operating
results and cash flows of Bayer Animal Health.

We offer a diverse portfolio of approximately 200 brands that make us a trusted
partner to pet owners, veterinarians and farm animal producers. Our products are
generally sold worldwide to third-party distributors and independent retailers,
and directly to farm animal producers and veterinarians. With the acquisition of
Bayer Animal Health, we have expanded our presence in retail and e-commerce
channels in order to meet pet owners where they want to purchase.

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We operate our business in a single segment directed at fulfilling our vision of
food and companionship enriching life - all to advance the health of animals,
people and the planet. We advance our vision by offering products in these two
primary categories:

Pet Health: Our pet health portfolio is focused on parasiticides, vaccines and
therapeutics. We have one of the broadest parasiticide portfolios in the pet
health sector based on indications, species and formulations, with products that
protect pets from worms, fleas and ticks. Our Seresto and Advantage Family
products are over-the-counter treatments for the elimination and prevention,
respectively, of fleas and ticks, and complement our prescription parasiticide
products, Credelio, Interceptor Plus, and Trifexis. Our vaccines portfolio
provides differentiated prevention coverage for a number of important pet health
risks and is available in the U.S. only. In therapeutics, we have a broad pain
and osteoarthritis portfolio across species, modes of action, indications and
disease stages. Pet owners are increasingly treating osteoarthritis in their
pets, and our Galliprant product is one of the fastest growing osteoarthritis
treatments in the U.S. Additionally, we have products that offer treatment for
otitis (ear infections) with Claro, as well as treatments for certain
cardiovascular and dermatology indications.

Farm Animal: Our farm animal portfolio consists of products designed to prevent,
control and treat health challenges primarily focused on cattle (beef and
dairy), swine, poultry, and aquaculture (cold and warm water) production. Our
products include medicated feed additives, injectable antibiotics, vaccines,
insecticides, and enzymes, among others. We have a wide range of farm animal
products, including Rumensin and Baytril, both of which are used extensively in
ruminants (e.g., cattle, sheep and goats). In poultry, our Maxiban product, is a
valuable offering for the control and prevention of intestinal disease.

Here is a summary of our revenue and net income (loss) in 2022 compared to the same period in 2021:

                                  Three Months Ended March 31,
(Dollars in millions)                   2022                   2021
Revenue                    $        1,225                    $ 1,242
Net income (loss)                      48                        (61)


Increases or decreases in inventory levels at our channel distributors can
positively or negatively impact our quarterly and annual revenue results,
leading to variations in revenues. This can be a result of various factors, such
as end customer demand, new customer contracts, heightened and generic
competition, the need for certain inventory levels, our ability to renew
distribution contracts with expected terms, our ability to implement commercial
strategies, regulatory restrictions, unexpected customer behavior, proactive
measures taken by us in response to shifting market dynamics, payment terms we
extend, which are subject to internal policies, and procedures and environmental
factors beyond our control, including weather conditions and the COVID-19 global
pandemic.

Key Trends and Conditions Affecting Our Results of Operations

Industry trends

The animal health industry, which includes both companion animals and farm animals, is a growing industry that benefits billions of people around the world.

We believe factors influencing the growth in demand for pet medicines and vaccines include:

•increased number of pet owners worldwide;

•animals live longer; and

•an increase in expenses for pets because pets are considered as members of the family by the owners.

As demand for animal protein grows, farm animal health is becoming increasingly
important. We believe that factors influencing growth in demand for farm animal
medicines and vaccines include:

•two out of three people in need of better nutrition;

•increased global demand for protein, particularly for poultry and aquaculture;

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•natural resource constraints, such as scarcity of arable land, fresh water and
increased competition for cultivated land, driving the need for more efficient
food production;

•loss of productivity due to disease and death of livestock;

•increased focus on food safety and food security; and

•growth in human population, rising standard of living, particularly in many emerging markets, and increased urbanization.

The growth of farm animal nutritional health products (enzymes, probiotics and prebiotics) is influenced, among other factors, by the demand for alternatives to antibiotics that can promote animal health and increase productivity.

Factors Affecting Our Results of Operations

Russia-Ukraine conflict

In February 2022, Russia commenced military action against Ukraine. In response,
the U.S. and certain other countries imposed significant sanctions and export
controls against Russia, Belarus and certain individuals and entities connected
to Russian or Belarusian political, business, and financial organizations. The
U.S. and certain other countries could impose further sanctions, trade
restrictions, and other retaliatory actions if the conflict continues or
worsens. The broader consequences of the conflict, including related
inflationary pressures, geopolitical tensions, additional retaliatory actions
taken by the U.S. and other countries, and any counter retaliatory actions by
Russia or Belarus in response, including, for example, potential cyberattacks or
the disruption of energy exports, are likely to cause regional instability and
could materially adversely affect global trade, currency exchange rates,
regional economies and the global economy. The situation remains uncertain and
it is difficult to predict the impact that the conflict and actions taken in
response to the conflict will have on our business; however, they could increase
our costs, disrupt our supply chain, reduce our sales and earnings, or otherwise
adversely affect our business and results of operations.

As a global animal health leader, we have an obligation to support the health of
animals and people. At the center of that work is ensuring access and
availability of food. At this time, we are limiting our business in Russia to
only the essential products that support these needs, while complying with all
imposed sanctions. We do not manufacture products or source any materials from
companies in Russia for use in our products, nor do we conduct business with the
Russian government. During the three months ended March 31, 2022, revenue to
Russian and Ukrainian customers represented approximately 1% of our consolidated
revenue. Assets held in Russia as of March 31, 2022 represented less than 1% of
our consolidated assets.

COVID-19 pandemic and resulting operating environment

We continue to closely monitor the impact of the COVID-19 pandemic, including
its variants, and the related economic effects on all aspects of our business,
including impacts on our operations, supply chain, and customer demand. The
extent to which the COVID-19 pandemic may impact our financial condition and
results of operations remains uncertain and is dependent on developments that
are out of our control, including measures being taken by authorities to
mitigate against the spread of COVID-19, such as the recent lockdowns in China,
the emergence of new variants and the availability and successful administration
of effective vaccines. We cannot predict the impact that the ongoing COVID-19
pandemic will have on our customers, vendors and suppliers; however, the
COVID-19 pandemic has had and may continue to have an adverse impact on our
business if these parties continue to experience negative effects.

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While the situation surrounding the COVID-19 pandemic remains fluid, the effects
have disrupted the global supply chain across all modes of transportation, which
in turn has resulted in less reliable transportation schedules and increased
freight costs. This disruption, combined with increased demand for key raw
materials, including those used in COVID-19 vaccine manufacturing, has also
impacted our suppliers, resulting in shortages of raw materials or components
required to manufacture our products. We continue to work closely with suppliers
and freight partners to mitigate impacts to our operations and customers,
including the addition of new transportation routes and targeted increases of
certain safety stocks. Although we regularly monitor the financial health of
companies in our supply chain, prolonged financial hardship on our suppliers and
labor shortages could continue to disrupt our ability to obtain key raw
materials, adversely affecting our operations. The global industry freight
environment has experienced, and could continue to experience, lead time
disruptions and increases in shipping costs, negatively impacting our
profitability.

Our acquisition of Bayer Animal Health and KindredBio

We have incurred and expect to continue to incur expenses in connection with our
acquisitions of Bayer Animal Health and KindredBio, including fees for
professional services such as legal, accounting, consulting, and other advisory
fees and expenses. Expenses incurred in 2021 and thus far in 2022 are primarily
related to integration activities. In addition, we have incurred and expect to
continue to incur costs related to the build out of processes and systems to
support finance and global supply and logistics and to expand administrative
functions, including, but not limited to, information technology, facilities
management, distribution, human resources, and manufacturing, to replace
services previously provided by the former parent company of Bayer Animal
Health. We anticipate that these additional costs will be partially offset by
expected synergies.

Product development and new product launches

A key element of our targeted value creation strategy is to drive growth through
portfolio development and product innovation. We continue to pursue the
development of new chemical and biological molecules through our approach to
innovation. Our future growth and success depend on both our pipeline of new
products, including new products that we may develop through joint ventures and
products that we are able to obtain through license or acquisition, and the
expansion of the use of our existing products. We believe we are an industry
leader in animal health R&D, with a track record of product innovation, business
development and commercialization.

Competition

We face intense competition. Principal methods of competition vary depending on
the particular region, species, product category, or individual product. Some of
these methods include new product development, including generic alternatives to
our products, quality, price, service and promotion.

Our primary competitors include animal health medicines and vaccines companies
such as Zoetis Inc.; Boehringer Ingelheim Vetmedica, Inc., the animal health
division of Boehringer Ingelheim GmbH; and Merck Animal Health, the animal
health division of Merck & Co., Inc. We also face competition globally from
manufacturers of generic drugs, as well as from producers of nutritional health
products, such as DSM Nutritional Products AG and Danisco Animal Nutrition, the
animal health division of E.I. du Pont de Nemours and Company, a subsidiary of
DowDuPont, Inc. There are also several new start-up companies working in the
animal health area. In addition, we compete with numerous other producers of
animal health products throughout the world.

Productivity

Our results in the periods presented benefited from operational and productivity initiatives implemented following recent acquisitions and in response to changing market demand for antibiotics and other headwinds.

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Prior to the acquisition of Bayer Animal Health, our acquisitions within the
last six years added in the aggregate $1.4 billion in revenue, 4,600 full-time
employees, and 12 manufacturing and eight R&D sites. The acquisitions of Bayer
Animal Health on August 1, 2020 and KindredBio on August 27, 2021 added 3,950
full-time employees, 10 manufacturing sites, and five R&D sites (before
company-wide restructuring activities initiated in 2020 and 2021). In addition,
from 2015 to 2021, changing market demand for antibiotics and other headwinds,
such as competition with generics and innovation, affected some of our highest
gross margin products, resulting in a change to our product mix and driving
operating margin lower. In response, we implemented a number of initiatives
across the manufacturing, R&D and marketing, selling and administrative
functions. Our manufacturing cost savings strategies included improving
manufacturing processes and headcount through lean manufacturing (minimizing
waste while maintaining productivity), closing and selling manufacturing sites,
consolidating our CMO network, strategically insourcing certain projects, and
pursuing cost savings opportunities through alternate sources of supply.
Additional cost savings have resulted from reducing the number of R&D sites,
sales force consolidation and reducing discretionary and other general and
administrative operating expenses.

Seasonality

The results of our pet health business may fluctuate due to seasonality. For
example, based upon historical results, approximately 70% and 60% of total
annual revenue contributed by our higher-margin parasiticide products Seresto
and Advantage Family, respectively, has occurred during the first half of the
year, which is reflective of the flea and tick season in the Northern
Hemisphere. Therefore, a period-to-period comparison of our historical results
may not be meaningful and fluctuations in total revenue for our pet health
products are not necessarily an indication of future performance.

Foreign exchange rates

Significant portions of our revenue and costs are exposed to changes in foreign
exchange rates. Our products are sold in more than 90 countries and, as a
result, our revenue is influenced by changes in foreign exchange rates. During
the three months ended March 31, 2022 and 2021, approximately 54% of our revenue
was denominated in foreign currencies. As we operate in multiple foreign
currencies, including the Euro, British pound, Swiss franc, Brazilian real,
Australian dollar, Japanese yen, Canadian dollar, Chinese yuan, and other
currencies, changes in those currencies relative to the U.S. dollar impact our
revenue, cost of sales and expenses, and consequently, net income. These
fluctuations may also affect the ability to buy and sell our products between
markets impacted by significant exchange rate variances. Currency movements
decreased revenue by 3% during the three months ended March 31, 2022. Currency
movements had a limited impact on revenue during the three months ended March
31, 2021.

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Results of Operations


The following discussion and analysis of our results of operations should be
read along with our condensed consolidated financial statements and the notes
thereto.

                                                                          Three Months Ended March 31,
(Dollars in millions)                                             2022                2021              % Change
Revenue                                                     $      1,225           $ 1,242                     (1) %
Costs, expenses and other:
Cost of sales                                                        509               569                    (11) %
% of revenue                                                          42   %            46  %                  (4) %
Research and development                                              81                89                     (9) %
% of revenue                                                           7   %             7  %                   -  %
Marketing, selling and administrative                                320               348                     (8) %
% of revenue                                                          26   %            28  %                  (2) %
Amortization of intangible assets                                    137               147                     (7) %
% of revenue                                                          11   %            12  %                  (1) %
Asset impairment, restructuring and other special charges             46               108                    (57) %
Interest expense, net of capitalized interest                         52                61                    (15) %
Other expense, net                                                     9                 -                        NM
Income (loss) before income taxes                                     71               (80)                   189  %
% of revenue                                                           6   %            (6) %                  12  %

Income tax expense (benefit)                                          23               (19)                   221  %
Net income (loss)                                           $         48           $   (61)                   179  %

Certain amounts and percentages may reflect rounding.

NM – Not significant

Disaggregated income

On a worldwide basis, our revenue by product category for the three months ended
March, 31st can be summed up as follows:

                                                                Revenue                        % of Total Revenue                                  Increase (Decrease)
(Dollars in millions)                                    2022             2021              2022                2021               $ Change               % Change              CER (1)
Pet Health                                            $   639          $   645                  52  %              52  %       $             (6)                 (1) %                 2  %
Farm Animal                                               569              578                  46  %              47  %                     (9)                 (2) %                 1  %
Subtotal                                                1,208            1,223                  99  %              98  %                    (15)                 (1) %                 2  %
Contract Manufacturing(2)                                  17               19                   1  %               2  %                     (2)                (11) %                (8) %
Total                                                 $ 1,225          $ 1,242                 100  %             100  %                    (17)                 (1) %                 2  %

Note: numbers may not add up due to rounding

(1)Constant exchange rate (CER), a non-GAAP measure, is defined as revenue
growth excluding the impact of foreign exchange. The calculation assumes the
same foreign currency exchange rates that were in effect for the comparable
prior-year period were used in translation of the current period results. We
believe this metric provides a useful comparison to previous periods.

(2) Represents revenue from arrangements in which we act as a contract manufacturer, including supply agreements associated with product divestments related to the acquisition of Bayer Animal Health.

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On a global basis, the effect of price, foreign exchange rates and volumes on
changes in revenue for the three months ended March 31, 2022 and 2021 was as
follows:

First quarter of 2022
(Dollars in millions)                    Revenue      Price        FX Rate       Volume      Total       CER
Pet Health                              $   639         2%          (3)%           -%         (1)%        2%
Farm Animal                                 569         1%          (3)%           -%         (2)%        1%
Subtotal                                  1,208         2%          (3)%           -%         (1)%        2%
Contract Manufacturing                       17         -%          (3)%          (8)%       (11)%       (8)%
Total                                   $ 1,225         2%          (3)%           -%         (1)%        2%



First quarter of 2021
(Dollars in millions)                    Revenue      Price        FX Rate 
      Volume (1)       Total       CER
Pet Health                              $   645         2%           2%              210%           213%       211%
Farm Animal                                 578         2%           -%              31%            33%        34%
Subtotal                                  1,223         2%           -%              89%            91%        91%
Contract Manufacturing                       19         -%           -%               -%             -%         -%
Total                                   $ 1,242         2%           -%              86%            89%        88%

Note: numbers may not add up due to rounding

(1) Impact of 2021 revenue Bayer Animal Health is reflected in volume.

Revenue

Pet Health revenue decreased by $6 million, or less than 1%, for the quarter,
driven by an unfavorable impact from foreign exchange rates, partially offset by
an increase in price. On a constant currency basis, an increase in international
pet health revenue was partially offset by a decline in U.S. pet health revenue.
In addition, growth in newer generation parasiticides and pain products was
partially offset by declines in older generation parasiticides.

Farm Animal revenue decreased by $9 million, or 2%, for the quarter, driven by
an unfavorable impact from foreign exchange rates, partially offset by an
increase in price. Improved producer demand and innovation in poultry as well as
strong aqua demand was partially offset by a decline in demand in the swine
market, particularly in China, as compared to the first quarter of 2021.
Additionally, cattle declined in the quarter primarily driven by generic
competition impacting price on several key brands.

Cost of Sales

                                          Three Months Ended March 31,
(Dollars in millions)            2022                            2021       % Change
Cost of sales              $        509                        $ 569           (11) %
% of revenue                         42    %                      46  %



Costs of sales as a percentage of revenue decreased for three months ended March
31, 2022, primarily due to amortization of the fair value adjustment of $62
million recorded from the acquisition of Bayer Animal Health in the first
quarter of 2021 and improvements in manufacturing productivity, partially offset
by unfavorable inflationary impacts on input costs, freight and conversion
costs. Excluding the $62 million fair value adjustment for the three months
ended March 31, 2021, cost of sales as a percentage of revenue would have been
approximately 41%.

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Research and Development

                                             Three Months Ended March 31,
(Dollars in millions)               2022                            2021       % Change
Research and development      $        81                          $ 89            (9) %
% of revenue                            7    %                        7  %



R&D expenses decreased $8 million for the three months ended March 31, 2022. R&D
expenses were favorably impacted by cost savings realized as a result of 2021
restructuring activities.

Marketing, Sales and Administration

                                                                              Three Months Ended March 31,
(Dollars in millions)                                                 2022                 2021              % Change
Marketing, selling and administrative                           $        320            $   348                     (8) %
% of revenue                                                              26    %            28  %



Marketing, selling and administrative expenses decreased $28 million for the
three months ended March 31, 2022, primarily driven by disciplined cost
management across the business and cost savings realized as a result of 2021
restructuring activities.

Amortization of intangible assets

                                                      Three Months Ended March 31,
(Dollars in millions)                                2022                    2021       % Change
Amortization of intangible assets      $          137                       $ 147           (7) %



Amortization of intangible assets decreased $10 million for the three months
ended March 31, 2022, primarily due to the timing of finalizing the valuation of
intangible assets acquired from the Bayer Animal Health acquisition and the
impact of foreign exchange rates.

Asset impairment, restructuring and other special charges

                                                                             Three Months Ended March 31,
(Dollars in millions)                                                2022                2021              % Change

Asset impairment, restructuring and other special charges $46 $108

                    (57) %



For additional information regarding our asset impairment, restructuring and
other special charges, see Note 6: Asset Impairment, Restructuring and Other
Special Charges to the condensed consolidated financial statements.

Asset impairment, restructuring and other special charges decreased $62 million
for the three months ended March 31, 2022, primarily due to a period over period
decrease in overall acquisition-related charges, which include transaction costs
related to acquisitions and costs associated with the implementation of new
systems, programs, and processes due to both our separation from Lilly and the
integration of Bayer Animal Health. The decrease was also driven by lower
severance charges as compared to 2021. These decreases were partially offset by
a $28 million asset write-down charge recorded upon the final sale of our Speke
site during the first quarter of 2022.

Interest expense, net of capitalized interest

                                                                             Three Months Ended March 31,
(Dollars in millions)                                                2022                 2021              % Change
Interest expense, net of capitalized interest                  $           52          $    61                    (15) %



Interest expense, net of capitalized interest decreased for the three months
ended March 31, 2022, primarily due to the favorable impact of refinancing at
lower interest rates.
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Other Expense, Net

                                             Three Months Ended March 31,
(Dollars in millions)                       2022                       2021      % Change
Other expense, net         $             9                            $  -               NM



Other expense recorded during the three months ended March 31, 2022 primarily
consisted of mark-to-market adjustments on equity investments and foreign
exchange losses, partially offset by certain components of net periodic benefit
cost. See Note 14: Retirement Benefits to the condensed consolidated financial
statements for further discussion related to net periodic benefit cost (income)
recorded during the period. Other expense recorded during the three months ended
March 31, 2021 consisted of losses recorded in relation to divestitures. This
was fully offset by up-front payments received, milestones earned, and equity
issued to us in relation to a license agreement.

Income tax expense (benefit)

                                                  Three Months Ended March 

31,

(Dollars in millions)                    2022                            2021       % Change
Income tax expense (benefit)        $       23                         $ (19)         (221) %
Effective tax rate                        32.1    %                     23.5  %



Income tax expense increased for the three months ended March 31, 2022,
primarily due to positive pre-tax earnings. The effective tax rate increased for
the three months ended March 31, 2022 and differs from the statutory income tax
rate largely due to certain research and experimentation costs being capitalized
beginning January 1st, 2022, as provided under the Tax Cuts and Jobs Act. This
has increased the expected profits in jurisdictions with higher statutory tax
rates as well as expected U.S. international tax inclusions, which are partially
offset by utilization of net operating losses and valuation allowance release in
the U.S. See Note 11: Income Taxes to the condensed consolidated financial
statements.

Cash and capital resources

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, following U.S. tax reforms, the income taxes associated with
transferring cash to the U.S. We intend to indefinitely reinvest foreign
earnings for continued use in our foreign operations. As our structure evolves
as a standalone company, 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 which include principal and interest
payments as well as interest rate swaps, operating lease payments, purchase
obligations, and costs associated with the integrations of Bayer Animal Health
and KindredBio. In addition, we have the ability to access capital markets to
obtain debt refinancing for longer-term funding, if required, to service our
long-term debt obligations. 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 markets 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 may not be able to
generate sufficient cash to service all of our indebtedness and may be forced to
take other actions to satisfy our obligations under our indebtedness, which may
not be successful" in Part I of our   Form 10-K   for the year ended
December 31, 2021.

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Cash Flows

The following table presents a summary of cash flows from operating, investing and financing activities for the periods presented:

(Dollars in millions)                                                      Three Months Ended March 31,
Net cash provided by (used for):                                     2022               2021            $ Change
Operating activities                                            $       (62)         $    22          $     (84)
Investing activities                                                    (29)              10                (39)
Financing activities                                                   (200)               2               (202)
Effect of exchange-rate changes on cash and cash
equivalents                                                              (5)             (25)                20
Net increase (decrease) in cash and cash equivalents            $      (296)         $     9          $    (305)



Operating activities

Operating cash flows decreased $84 million, to a use of $62 million for the
three months ended March 31, 2022 as compared to cash provided by operating
activities of $22 million for the three months ended March 31, 2021. Cash used
in operating activities during the period was negatively impacted by changes in
operating assets and liabilities, particularly changes in accounts receivable,
accounts payable and other liabilities as compared to the three months ended
March 31, 2021, partially offset by an increase in net income after excluding
non-cash operating activities. In the past, we have extended our payment terms
for distributors on occasion. Although we presently have no plans to do so in
the future, it is possible that we will need to extend payment terms in certain
situations as a result of the COVID-19 global health pandemic, competitive
pressures and the need for certain inventory levels at our channel distributors
to avoid supply disruptions. If so, such extensions of customer payment terms
could result in additional uses of our cash flow.

Investing activities

Our cash used for investing activities was $29 million for three months ended
March 31, 2022 as compared to cash provided by investing activities of $10
million for the three months ended March 31, 2021. The change was primarily
driven by cash received for the three months ended March 31, 2021 due to the
finalization of the working capital adjustment for the acquisition of Bayer
Animal Health, partially offset by the purchase of intangible assets during that
same period.

Financing activities

Our cash used for financing activities was $200 million for three months ended
March 31, 2022 as compared to cash provided by financing activities of $2
million for the three months ended March 31, 2021. Cash used in financing
activities during the three months ended March 31, 2022 reflected the repayment
of indebtedness outstanding under our Term Loan B credit facility and net
repayments on our revolving credit facility. Cash provided by financing
activities during the three months ended March 31, 2021 reflected net proceeds
from our revolving credit facility, partially offset by the repayment of
indebtedness outstanding under our Term Loan B credit facility.

Description of the debt

For a full description of our debt and available credit facilities at
March 31, 2022 and December 31, 2021see Note 9: Debt to the condensed consolidated financial statements.

Contractual obligations

Our contractual obligations and commitments as of March 31, 2022 are primarily
comprised of long-term debt obligations, operating leases, and purchase
obligations. Our long-term debt obligations are comprised of our expected
principal and interest obligations and our interest rate swaps. Purchase
obligations consist of open purchase orders as of March 31, 2022 and contractual
payment obligations with significant vendors which are noncancelable and are not
contingent. These obligations are primarily short-term in nature.

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  Table of Contents
As of March 31, 2022, we also have an additional lease commitment that has not
yet commenced for our new corporate headquarters in Indianapolis, Indiana. Total
minimum lease payments are estimated to be approximately $310 million over a
term of 25 years, excluding extensions. Final lease payments may vary depending
on the actual cost of certain construction activities. Lease commencement is
expected in 2024.

Significant 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 by us, 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   Form 10-K
for the year ended December 31, 2021. There have been no significant changes in
the application of our critical accounting policies during the three months
ended March 31, 2022.

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