Elanco Animal Health Inc

Cost of Sales

Cost of sales increased $21 million for the three months ended March 31, 2024, and cost of sales as a percentage of revenue increased from 39% for the three months ended March 31, 2023, to 43% for the three months ended March 31, 2024. These increases were due to a combination of inflation, the impact of product mix, which was driven by the impact of the ERP system integration commercial blackout periods on higher margin products in the prior year, and planned reduced throughput at certain manufacturing sites in support of efforts to reduce inventory balances and improve cash conversion.

Research and Development

Research and development expenses increased $6 million for the three months ended March 31, 2024, as compared to the same period in the prior year, primarily driven by higher employee-related expenses and timing of project costs.

Marketing, Selling and Administrative

Marketing, selling and administrative expenses increased $10 million for the three months ended March 31, 2024, as compared to the same period in the prior year, primarily driven by increases in marketing and promotional spend supporting our global pet health business and higher employee-related expenses. These increases were partially offset by cost savings associated with the completion of our ERP system integration in the second quarter of 2023.

Amortization of Intangible Assets

Amortization of intangible assets decreased $1 million for the three months ended March 31, 2024, as compared to the same period in the prior year. Partially contributing to this decrease, as of February 1, 2024, the date we concluded the assets to be sold as part of our aqua business divestiture qualified as held for sale, we ceased the amortization of the finite-lived intangible assets included within this disposal group. See Note 4. Acquisitions, Divestitures and Other Arrangements to the condensed consolidated financial statements for further information.

Asset Impairment, Restructuring and Other Special Charges

Asset impairment, restructuring and other special charges increased $6 million for the three months ended March 31, 2024, as compared to the same period in the prior year. Amounts recorded during the three months ended March 31, 2024, consist of $39 million of costs associated with the restructuring plan announced in February 2024 and $7 million of acquisition integration and divestiture-related costs. Amounts recorded during the three months ended March 31, 2023, primarily represented costs associated with the implementation of new systems, programs, and processes due to the integration of Bayer Animal Health. For additional information regarding our asset impairment, restructuring and other special charges, see Note 5. Asset Impairment, Restructuring and Other Special Charges to the condensed consolidated financial statements.

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Interest Expense, Net of Capitalized Interest

Interest expense, net of capitalized interest increased $2 million for the three months ended March 31, 2024, as compared to the same period in the prior year, primarily due to higher weighted-average interest rates.

Other Expense, Net

Other expense, net for the three months ended March 31, 2024 and 2023, primarily consisted of foreign exchange losses. During the three months ended March 31, 2024, we also increased our accrual for the possible resolution or settlement with the SEC by $2.5 million, which was included within other expense, net.

Income Tax (Benefit) Expense

We recognized an income tax benefit of $20 million for the three months ended March 31, 2024, compared to income tax expense of $5 million for the same period in the prior year. The income tax benefit during the three months ended March 31, 2024, was primarily driven by the partial release of a valuation allowance attributable to the anticipated sale of our aqua business and a benefit related to the recognition of certain state tax credits.