Elanco Animal Health Inc

Consolidated Statements of Operations

(in millions, except per-share data)

Consolidated Statements of Comprehensive Loss

Consolidated Balance Sheets

(in millions, except share data)

Consolidated Statements of Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

(Tables present dollars and shares in millions, except per-share and per-unit data)

Note 1. Background and Basis of Presentation

Elanco Animal Health Incorporated (collectively, Elanco, the Company, we, us, or our) is a global animal health company that innovates, develops, manufactures and markets products for pets and farm animals. Elanco was incorporated in Indiana on September 18, 2018, and prior to that was a business unit of Eli Lilly and Company (Lilly). Our diverse, durable product portfolio of approximately 200 brands is sold in more than 90 countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine, sheep and prior to the divestiture of our aqua business in July 2024 (see Note 4. Acquisitions, Divestitures and Other Arrangements), aqua (collectively, farm animal). Our products are generally sold worldwide to third-party distributors and independent retailers and directly to farm animal producers and veterinarians. In recent years, we have expanded our omnichannel presence in both the veterinary clinic and in retail markets, including e-commerce.

We have prepared the accompanying consolidated financial statements in accordance 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 fair presentation of the results of operations for the periods shown. All intercompany balances and transactions have been eliminated. We issued our financial statements by filing with the Securities and Exchange Commission (SEC) and have evaluated subsequent events up to the time of filing.

Note 2. Summary of Significant Accounting Policies

The following is a summary of significant accounting policies used in the preparation of the accompanying consolidated financial statements.

Estimates and Assumptions

The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. These estimates and underlying assumptions can impact all elements of our consolidated financial statements. Our estimates are often based on several factors, including the facts and circumstances available at the time the estimates are made, historical experience, risk of loss, general economic conditions and trends and the assessment of the probable future outcome. Some of our estimates require significant, difficult or complex judgments, probabilities and assumptions that we believe to be reasonable but that can be inherently uncertain and unpredictable. 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. Such changes generally would be reflected in our consolidated financial statements in the period they are determined. We apply estimation methodologies consistently from year to year.

Revenue

We recognize revenue primarily from product sales to customers. Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation, which is generally once the goods have shipped and the customer has assumed title. For contract manufacturing organization (CMO) arrangements, we recognize revenue over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or service.

Revenue reflects the total consideration to which we expect to be entitled (i.e., the transaction price), in exchange for products sold, after considering various types of variable consideration, such as rebates, sales allowances, product returns and discounts. Provisions for rebates and discounts, as well as returns, are established in the same period the related sales are recognized. Significant judgments must be made in determining the transaction price for sales of products related to anticipated rebates, discounts and returns. The following describe the most significant of these judgments:

Sales Rebates and Discounts

•Many of our products are sold and initially invoiced at contractual list prices. Contracts with customers often provide for various rebates and discounts that may differ in each contract. As a consequence, to determine the appropriate transaction price for our product sales, we must estimate any rebates or discounts that will ultimately be due to the customer under the terms of our contracts. The rebate and discount amounts are recorded as a reduction to revenue in the period in which the related revenue is recognized to arrive at net product sales. Significant judgment is involved in determining the rebate and discount amounts expected to be payable to a customer. In determining the appropriate accrual amount, we consider our historical experience with similar incentives programs and current sales data and estimates of inventory levels at our channel distributors to evaluate the impact of such programs on revenue. We continually monitor the impact of this experience and adjust our accrual amounts as necessary.

Sales Returns

•We estimate a reserve for future product returns based on several factors, including local returns policies and practices, historical returns as a percentage of revenue, an understanding of the reasons for past returns, estimated shelf life by product and estimates of the amount of time between shipment and return. Reserves for sales returns are estimated and recorded as a reduction to revenue and as a liability in the same period as the underlying revenue is recognized to arrive at net product sales.

Payment terms differ by jurisdiction and customer, but typically range from 30 to 120 days from date of shipment in most of our major jurisdictions. Revenue for our product sales has not been adjusted for the effects of a financing component, as we expect the period between when we transfer control of the product and when we receive payment will be one year or less. Any exceptions are either not material or we collect interest for payments made after the due date. Shipping and handling activities are considered fulfillment activities and are not considered to be a separate performance obligation. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are imposed on our sales of product and collected from a customer.

Allowance for Doubtful Accounts

We provide for an allowance for doubtful accounts, which represents our best estimate of expected lifetime credit losses inherent in our accounts and other receivables portfolios. Our estimates include a continuing credit evaluation of customers' financial condition, trade accounts and other receivables aging and historical loss experience, as well as reasonable and supportable forecasts of future economic conditions. As of December 31, 2024 and 2023, we had an allowance for doubtful accounts of $13 million and $18 million, respectively.

Inventories

We state all inventories at the lower of cost and net realizable value. We value a majority of our inventories using the first-in-first-out (FIFO) method, although at December 31, 2024 and 2023,$301 million and $295 million, respectively, of our total inventories were valued using the last-in, first-out (LIFO) method.

Research and Development Expenses

Research and development (R&D) costs are expensed as incurred and relate to the effort associated with the discovery of new knowledge that will be useful in developing a new product or in significantly improving an existing product and the implementation of research findings. R&D costs include, but are not limited to, compensation and benefits, facilities and overhead expenses, clinical trial expenses and fees paid to contract research organizations.

We may also enter into licensing arrangements with third parties to acquire the rights to in-process R&D (IPR&D). These arrangements typically do not meet the definition of a business combination. In such arrangements, prior to regulatory approval of a product, we record upfront and milestone payments to third parties as expense when the event requiring the upfront or milestone payment occurs.

Goodwill and Indefinite-lived Intangible Assets

Goodwill represents the excess of the consideration transferred in a business combination over the assigned fair value of the net assets of the acquired business. Goodwill is not amortized, but is reviewed at least annually for impairment during the fourth quarter, or more frequently if there is a significant change in events or circumstances that indicate 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 single 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 of our single reporting unit is less than its carrying value, we conduct a quantitative goodwill impairment test, which involves comparing the estimated fair value of our single reporting unit to its carrying value, including goodwill. We estimate the fair value of our single reporting unit using an income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. If the carrying value of the reporting unit exceeds its estimated fair value, we recognize an impairment loss for the difference.

The income approach represents a Level 3 fair value measurement in the fair value hierarchy (see Note 10. Fair Value for further information). When a quantitative goodwill impairment test is required, significant management judgment is involved in estimating our single reporting unit’s fair value, including in the creation of forecasts of future operating results to be used in the income approach valuation. These significant judgments include, but are not limited to, estimates and assumptions regarding our future cash flows, revenue growth rates, profitability measures such as gross margin and earnings before interest, taxes, depreciation and amortization (EBITDA) margin and the determination of an appropriate discount rate.

Similar to goodwill, indefinite-lived intangible assets, which primarily represent IPR&D acquired from prior business combinations, are not amortized, but rather are reviewed annually for impairment during the fourth quarter, or more frequently in the event of a triggering event. We utilize an income approach for determining the estimated fair value of indefinite-lived intangible assets upon acquisition and as needed for our evaluations of potential impairment. For valuation of IPR&D assets, we apply a probability weighting that considers the risk of development and commercialization to the estimated future net cash flows from the asset. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products and expected industry trends. The estimated future net cash flows are then discounted to present value using an appropriate discount rate. Acquired IPR&D assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are tested for impairment and, if not impaired, are transferred to marketed products (see Other Long-Lived Assets discussion below) and amortized over their estimated economic life.

Other Long-lived Assets

We have a substantial amount of long-lived assets on our consolidated balance sheets related to both property and equipment and finite-lived intangible assets.

Property and equipment:

•Property and equipment assets are stated at cost less accumulated depreciation. Assets placed in service are recorded at cost and depreciated using the straight-line method over the estimated useful life of the asset (12 to 50 years for buildings and 3 to 25 years for equipment), except for leasehold improvements, which are depreciated over the shorter of their economic useful life or their remaining lease term. Repair and maintenance costs that do not extend the useful life of the asset are expensed as incurred. Major replacements and significant improvements that either increase asset values or extend useful lives are capitalized. We assess the recoverability of the carrying value of the property and equipment asset or asset group whenever events or changes in circumstances indicate the carrying amount may not be fully recoverable. When such indications of a potential impairment exist, we compare the projected undiscounted cash flows to be generated by the asset (or asset group) to its carrying value. If the carrying amount is found to be greater, an impairment charge is recorded equal to the excess of the asset's carrying value over its fair value. In such an event, we also re-evaluate the remaining useful lives of the assets (or asset groups) and modify them, as appropriate.

Finite-lived intangible assets:

•Finite-lived intangible assets primarily relate to marketed products acquired or licensed from third parties and software. Marketed products consist of the amortized cost of the rights to assets acquired in business combinations and approved for marketing in a significant global jurisdiction. The cost basis of marketed products includes both the initial assigned IPR&D value, as well as any associated milestone payments subsequent to the marketed products receiving regulatory approval in a significant global jurisdiction. Software consists of certain costs incurred in connection with obtaining or developing internal-use software, including payroll and payroll-related costs for employees directly associated with the internal-use software projects and direct costs of external resources. Other finite-lived intangible assets consist primarily of the amortized cost of licensed platform technologies, manufacturing technologies and customer relationships. Intangible assets with finite lives are capitalized and amortized over their estimated economic lives, typically ranging from 3 to 20 years. We assess the recoverability of the carrying value of finite-lived intangible assets in the same manner as property and equipment, as described above.

Financial Instruments

We have various financial instruments to help manage our exposures to market risks, such as changes in foreign currency exchange rates and variable interest rates. 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. We also assess 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. Derivative cash flows are principally classified in the operating activities section of the consolidated statements of cash flows, consistent with the underlying hedged item. Our financial instruments are recorded at their fair values on our consolidated balance sheets, and we do not offset derivative assets and liabilities. Fair values are estimated based on quoted market values for similar instruments and are classified as Level 2 in the fair value hierarchy. As of December 31, 2024 and 2023, we held the following types of financial instruments:

Derivatives Not Designated as Hedges

•Foreign currency derivatives used for hedging our exposure to fluctuating currency exchange rates 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 expense, net in the consolidated statements of operations. These instruments generally have maturities not exceeding 12 months.

Derivatives Designated as Hedges – Net investment hedges

•Cross-currency fixed interest rates swaps determined to be effective economic hedges of net investments in foreign denominated net assets are designated as net investment hedges. Gains or losses on our net investment hedges due to spot rate fluctuations are recorded as cumulative translation adjustments as a component of other comprehensive income (loss). Gains and losses will remain in accumulated other comprehensive income (loss) until either the sale or substantial liquidation of the hedged subsidiary.

Derivatives Designated as Hedges – Interest rate swaps

•Interest rate swap contracts are used to effectively convert a portion of our variable-rate debt into fixed-rate debt. Differences between the variable interest rate payments and the fixed interest rate settlements with the swap counterparties are recorded as an adjustment to interest expense, net of capitalized interest over the life of the swaps. Changes in the fair value of interest rate swaps are recognized in other comprehensive income (loss) and reclassified into earnings through interest expense, net of capitalized interest at the time earnings are affected by the hedged transaction.

Advertising Expenses

Costs associated with advertising, including costs for TV, radio and other electronic media and publications, are generally expensed when the related advertising occurs, and are included in marketing, selling and administrative expenses in the consolidated statements of operations. Advertising expenses for the years ended December 31, 2024, 2023 and 2022, approximated $236 million, $207 million and $201 million, respectively.

Foreign Currency Translation

Operations in our subsidiaries outside the U.S. are recorded in the functional currency of each subsidiary, which is determined by a review of the environment where each subsidiary primarily generates and expends cash. The results of operations for our subsidiaries outside the U.S., where the U.S. dollar is not the functional currency, are translated from functional currencies into U.S. dollars using the exchange rates in effect as of the date of the transactions, or a reasonable approximation thereof, such as the weighted-average currency rate for the period. Assets and liabilities are translated using the period-end exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries are recorded in other comprehensive income (loss).

Foreign currency transaction gains and losses are due to the effect of exchange rate changes on transactions denominated in currencies other than a subsidiary's functional currency and are recognized in other expense, net, in the consolidated statements of operations in the period incurred. Transaction losses of $12 million, $40 million and $28 million were recorded during the years ended December 31, 2024, 2023 and 2022, respectively.

We generally identify hyperinflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Translation adjustments resulting from the application of hyperinflationary accounting are also recognized in other expense, net, in the consolidated statements of operations in the period incurred.

Recently Adopted Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to improve disclosures related to reportable segments, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker for purposes of assessing a segment's profit or loss and deciding how to allocate resources. This new standard applies to all public entities, including entities like us with a single reportable segment. We adopted this standard for the year ended December 31, 2024, on a retrospective basis. See Note 19. Business Segment Information for further details.

Recently Issued Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to enhance the transparency and usefulness of income tax disclosures by providing incremental and disaggregated income tax disclosures pertaining to the effective tax rate reconciliation and income taxes paid by jurisdiction. This standard is effective for fiscal years beginning after December 31, 2024, with early adoption permitted. The standard allows for prospective or retrospective application upon adoption. We are currently assessing the impact ASU 2023-09 will have on our consolidated financial statements, including our Income Taxes footnote disclosure.

In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which is intended to provide more detailed and disaggregated information about significant expense categories, such as purchases of inventory, employee compensation, depreciation and amortization and selling expenses. This new standard, including related updates, is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted, and the amendments may be applied either prospectively or retrospectively. We are currently assessing the impact ASU 2024-03 will have on our consolidated financial statements, including our footnote disclosures.

Other Significant Accounting Policies

Our other significant accounting policies are described in the remaining appropriate notes to the consolidated financial statements.

Note 3. Revenue

The following table summarizes the activity in our global sales rebates and discounts liability for the years ended December 31:

Adjustments to revenue recognized as a result of changes in estimates during the years ended December 31, 2024, 2023 and 2022, for product shipped in previous periods were not material. Actual global product returns approximated 1% of net revenue in each of the years ended December 31, 2024, 2023 and 2022.

Disaggregation of Revenue

The following table summarizes our revenue disaggregated by product category for the years ended December 31:

(1)Represents revenue from arrangements in which we manufacture products on behalf of a third party and royalty revenue.

The following table summarizes our revenue disaggregated by geographic area for the years ended December 31:

We have a single customer that accounted for approximately 11%,10% and 11% of revenue for the years ended December 31, 2024, 2023 and 2022, respectively. Product sales with this customer resulted in accounts receivable of $90 million and $78 million as of December 31, 2024 and 2023, respectively.

Note 4. Acquisitions, Divestitures and Other Arrangements

Acquisitions

In November 2024, we acquired a manufacturing facility in Speke, United Kingdom (U.K.), including its workforce and related assets such as inventory and property and equipment (Speke), from a former contract manufacturing supply partner, TriRx Speke Ltd (TriRx Speke). During 2023, we completed the acquisitions of certain U.S. marketed products, pipeline products, inventory and an assembled workforce from NutriQuest, LLC (NutriQuest) and certain assets including inventory and distribution rights for certain marketed products from NutriQuest Nutricao Animal Ltda (NutriQuest Brazil). These transactions were all accounted for as business combinations under the acquisition method of accounting. The acquisition method requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The determination of estimated fair value requires 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.

Speke

Speke was previously owned by Elanco, prior to our sale of it to TriRx Speke in February 2022 (see below discussion within the Divestitures section of this footnote). Concurrent with this initial sale of the facility to TriRx Speke, we entered into a long-term supply agreement with them for a number of farm animal product lines. In September 2024, TriRx Speke entered into trading administration, a formal insolvency process in the U.K., and on November 15, 2024, we acquired Speke for $36 million in order to minimize supply disruption for our impacted product lines. The purchase price included $25 million in cash paid at closing and our forgiveness of $11 million related to a loan made to support the interim funding of the site during the trading administration period.

The following table summarizes the fair values of assets acquired as of the acquisition date:

NutriQuest

On January 3, 2023, we acquired NutriQuest for total purchase consideration of $59 million. NutriQuest is a provider of swine, poultry and cattle nutritional health products to animal producers. This acquisition helped us expand our existing nutritional health offerings and further our efforts to explore innovative antibiotic alternatives. The composition of the purchase price was as follows:

Contingent consideration for this acquisition included up to $85 million of cash consideration payable if specific development, sales and geographic expansion milestones are achieved, as outlined in the asset purchase agreement. The initial fair value of this contingent consideration liability of $38 million was estimated at the acquisition date using a Monte Carlo simulation model, which represented a Level 3 measurement under the fair value measurement hierarchy.

The following table summarizes the fair value of assets acquired as of the acquisition date:

Other intangible assets consisted of customer relationships and trade names. The acquired finite-lived intangible assets are being amortized over a weighted-average useful life of approximately 12 years on a straight-line basis.

NutriQuest Brazil

On August 1, 2023, we acquired NutriQuest Brazil for total purchase consideration of $19 million. The composition of the purchase price included cash paid on the closing date of approximately $3 million, with additional consideration payable through 2026 valued at approximately $16 million, a portion of which is contingent upon the continuation of certain terms and conditions set forth in the asset purchase agreement. The following table summarizes the fair values of assets acquired as of the acquisition date:

The acquired finite-lived intangible assets are being amortized over a weighted-average useful life of approximately nine years on a straight-line basis.

Divestitures

Aqua business

On July 9, 2024, we closed the sale of our aqua business to Intervet International B.V., a Dutch subsidiary of Merck Animal Health, for $1,294 million in cash, the vast majority of which was utilized to repay outstanding term loan debt following the close of the transaction (see Note 8. Debt for further information). Our aqua business included products across both warm-water and cold-water species and generated revenues of $81 million in 2024, through the divestiture date, and $175 million in both 2023 and 2022. Given that we operate our business as a single reporting unit, we are unable to reasonably determine stand-alone costs and related earnings or loss before income taxes attributable to our aqua business. We also determined that the sale did not qualify for reporting as a discontinued operation, as it did not represent a strategic shift that will have a major effect on our operations and/or financial results. Assets sold included inventories, real property and equipment, including our manufacturing sites in Canada and Vietnam, and certain intellectual property, technology and other intangible assets, including marketed products. Additionally, approximately 280 commercial and manufacturing employees were transferred to Merck Animal Health as part of this divestiture.

As of the disposal date, the carrying amounts of the following major assets were derecognized from our consolidated balance sheet:

Based on the aggregate carrying value of our aqua business and $20 million of costs to sell, we recorded a pre-tax gain on divestiture of $640 million. We also recognized income tax expense of approximately $170 million related to the taxable gain. In determining the amount of goodwill to include in our aqua business disposal group, a portion of our single reporting unit’s goodwill was allocated to it on a relative fair value basis by comparing the fair value of the disposal group to the estimated fair value of our single reporting unit as a whole. We estimated the fair value of our single reporting unit using the income approach, which is a valuation technique that provides an estimate of fair value based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Significant management judgment was required in estimating the fair value of our single reporting unit, including, but not limited to, estimates and assumptions regarding future cash flows of our single reporting unit, revenue growth and other profitability measures, such as gross margin and EBITDA margin, and the determination of an appropriate discount rate. We consider this valuation approach to be a Level 3 measurement under the fair value hierarchy.

Microbiome R&D platform carve-out

In April 2022, we signed an agreement to transfer assets associated with our microbiome R&D platform to a newly created, independent biopharmaceutical company, BiomEdit, focused on developing solutions for animal and human health. As part of the agreement, we retained a non-voting, minority stake in the company. Assets transferred included intellectual property and laboratory equipment. During the year ended December 31, 2022, we recorded a gain on disposal of $3 million. In the fourth quarter of 2024, while performing our qualitative assessment for impairment for our equity investments without readily determinable fair value, we determined our retained investment in BiomEdit was impaired and recorded an $8 million charge. Both the 2024 charge and the initial gain on disposal in 2022 were recorded within other expense, net in the consolidated statements of operations.

Shawnee and Speke

In August 2021 and February 2022, we completed the sales of our Shawnee, Kansas and Speke, U.K. sites, respectively, to TriRx Pharmaceuticals (TriRx). We received cash proceeds from the sale of these sites of $13 million from TriRx in 2022 and $66 million, in addition to accrued interest, in February 2024. As discussed above, upon our initial sale of the Speke site to TriRx, we concurrently entered into a long-term supply agreement with their subsidiary, TriRx Speke. Because we determined this supply agreement was on terms favorable to us, we recorded a contract asset associated with it. In 2023, due to a forecasted decline in cash flows associated with this contract asset, we determined the asset was partially impaired, and we recorded a $26 million impairment charge. We impaired the remaining $12 million value of this contract asset when TriRx Speke entered into trading administration in September 2024. These impairment charges were included within asset impairment, restructuring and other special charges within our consolidated statements of operations for the years ended December 31, 2024 and 2023.

BexCaFe Arrangement

In June 2022, we signed a license agreement with BexCaFe, LLC (BexCaFe) for the development and commercialization of products related to Bexacat, an oral treatment intended to reduce glucose levels in diabetic cats. We determined that BexCaFe represented a variable interest entity and that we are the primary beneficiary because the terms of the license give us the power to direct the activities that most significantly impact BexCaFe's economic performance. As a result, we consolidated BexCaFe, a development-stage company with no employees that did not meet the definition of a business, as of the date we signed the license agreement. Upon initial consolidation of BexCaFe, we measured an IPR&D asset at its fair value of $59 million and recorded liabilities totaling $59 million, which included contingent consideration of $49 million based on the fair value of estimated future milestone payments and sales royalties owed under the license agreement. There is no minimum payout due on the contingent consideration and the maximum payout related to sales royalties is unlimited. Remaining contingent consideration liabilities of $32 million were included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet as of December 31, 2024. Since BexCaFe did not meet the definition of a business, no goodwill was recorded, and immediately after initial consolidation, we expensed the IPR&D asset because we concluded it did not have an alternative future use.

Note 5. 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 have primarily included charges associated with business and facility rationalizations and workforce reductions. We have also incurred costs associated with executing acquisition, divestiture and other significant transactions and related integration and/or separation activities. Components of asset impairment, restructuring and other special charges for the years ended December 31 were as follows:

(1)Restructuring charges in 2024 primarily related to cash-based severance costs associated with a restructuring program approved and announced in February 2024 intended to reallocate resources by shifting international resources from farm animal to pet health. This restructuring program also resulted in changes in how we operate in and sell into the Argentina market, among others.

(2)Acquisition and divestiture-related charges in 2024 consisted of transaction costs directly related to the divestiture of our aqua business (see Note 4. Acquisitions, Divestitures and Other Arrangements for further information). Acquisition and divestiture-related charges in 2023 and 2022 primarily represented costs associated with the implementation of new systems, programs and processes due to the integration of Bayer Animal Health.

(3)Asset impairments in 2024 principally included the write-off of our IL-4R IPR&D asset ($53 million) and $15 million of asset impairments tied to the financial difficulties of TriRx Speke, the largest of which was a $12 million impairment of a contract asset related to a favorable supply agreement (see Note 4. Acquisitions, Divestitures and Other Arrangements for further information). Asset impairments in 2023 principally included a $26 million partial write-down of the contract asset with TriRx Speke. Asset impairments during 2022 included a charge of $59 million related to the write-off of an IPR&D asset with no alternative future use licensed from BexCaFe and a $22 million charge related to the finalization of the write-down upon the sale of our Speke, U.K. site to TriRx.

The following table summarizes the activity in our reserves established in connection with restructuring activities:

Timing of when the restructuring reserve obligations are expected to be paid can vary due to certain country-specific negotiations and regulations. Of the total reserve, $9 million was included within other current liabilities on our consolidated balance sheet at December 31, 2024, with the remainder included within other noncurrent liabilities.

Note 6. Inventories

Inventories at December 31 consisted of the following:

Note 7. Equity

Elanco had 5.0 billion ordinary shares authorized, with approximately 494.4 million issued and outstanding as of December 31, 2024. Elanco also had 1.0 billion preferred shares, no par value, authorized (with none issued or outstanding) as of December 31, 2024.

Tangible Equity Unit (TEU) Offering

In January 2020 we issued 11 million in TEUs at the stated amount of $50 per unit. The TEU prepaid stock purchase contracts were converted into shares of our common stock on February 1, 2023. Holders of our TEUs received 1.5625 shares of our common stock based on the maximum settlement rate for the applicable market value being below $32.00. In total, we issued approximately 17 million shares to holders in connection with the settlement.

Note 8. Debt

Long-term debt as of December 31 consisted of the following:

(1)Subsequent to issuance in August 2018, our 4.900% Senior Notes due 2028 have been subject to interest rate increases related to credit rating agency downgrades. As of December 31, 2024, these notes bear interest at a rate of 6.650%.

Term Loan B due 2027 and Revolving Credit Facility

In 2020, we entered into our Term Loan B due 2027 facility, which bears interest at a floating rate of Term SOFR plus 175 basis points and is payable in quarterly installments through its maturity on August 1, 2027. We simultaneously entered into our Revolving Credit Facility, which provides us with a source of liquidity for certain operating activities and for additional flexibility to finance capital investments, business development activities, repayments of debt and other cash requirements. On July 3, 2024, we amended our Revolving Credit Facility, which extended its maturity through July 2029. Our Revolving Credit Facility provides up to $750 million in borrowing capacity and bears interest at Term SOFR plus a spread, dependent on our Net Total Leverage Ratio, as defined within the amended agreement, which was 1.60% at December 31, 2024. Our Term Loan B due 2027 and Revolving Credit Facility are secured by a significant portion of our assets.

There aretwo financial maintenance covenants which are solely for the benefit of the lenders under our Revolving Credit Facility. There areno financial maintenance covenants for the benefit of our Term Loan B due 2027, and the lenders under our Term Loan B due 2027 have no enforcement rights with respect to the financial maintenance covenants for our Revolving Credit Facility. The first financial maintenance covenant for our Revolving Credit Facility requires us to maintain a net total leverage ratio level (which is not subject to step-downs) as of the end of each quarter. The required level of this covenant is based on closing date pro forma net leverage and pro forma adjusted EBITDA not to exceed 7.71 to 1.00 of our pro forma adjusted EBITDA for the preceding four fiscal quarters. The second financial maintenance covenant for the Revolving Credit Facility requires us 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. We were in compliance with all of our debt covenants as of December 31, 2024.

During the year ended December 31, 2024, we repaid $1,245 million on our Term Loan B due 2027 and $200 million on our Revolving Credit Facility, primarily utilizing the proceeds from the divestiture of our aqua business in July 2024 (see Note 4. Acquisitions, Divestitures and Other Arrangements for further information), as well as cash generated by operations. In conjunction with these principal repayments, as well as principal payments made on our Incremental Term Facilities (see below for further details), we recognized charges of $12 million for the write-off of previously deferred financing costs, which were included in interest expense, net of capitalized interest in the consolidated statement of operations for the year ended December 31, 2024.

Incremental Term Facilities

Incremental Term Facility due 2028: Our Incremental Term Facility due 2028 bears interest at Term SOFR plus 175 basis points and is payable in quarterly installments of principal and interest with a final balloon payment due at scheduled maturity on August 12, 2028. During the year ended December 31, 2024, we repaid $119 million on our Incremental Term Facility due 2028, primarily utilizing the proceeds from the divestiture of our aqua business in July 2024. The terms of the Incremental Term Facility due 2028 are generally consistent with the terms of our Term Loan B due 2027 and Revolving Credit Facility.

Incremental Term Facility due 2029: Our Incremental Term Facility due 2029 bears interest at Term SOFR, including a credit spread adjustment, plus 175 basis points and is payable in quarterly installments of principal and interest with a final balloon payment due at scheduled maturity on April 19, 2029. During the year ended December 31, 2024, we repaid $60 million on our Incremental Term Facility due 2029, primarily utilizing the proceeds from the divestiture of our aqua business in July 2024. The terms of the Incremental Term Facility due 2029 are generally consistent with the terms of our Term Loan B due 2027 and Revolving Credit Facility.

Incremental Term Facility due 2031: On August 13, 2024, we entered into an incremental assumption agreement, supplementing and amending our existing credit agreement dated August 1, 2020, related to our senior secured credit facility. The incremental assumption agreement provides for an incremental term facility (the Incremental Term Facility due 2031) with an aggregate principal amount of $350 million and is scheduled to mature on August 13, 2031. The Incremental Term Facility due 2031 bears interest at Term SOFR, including a spread adjustment, plus 175 basis points and will be payable in quarterly installments of principal and interest with a final balloon payment due on August 13, 2031. The proceeds were used to repay the remaining outstanding balance on our Incremental Term Facility due 2025 and for general corporate purposes. Accordingly, upon repayment all obligations and commitments related to the Incremental Term Facility due 2025 were satisfied in full. The terms of the Incremental Term Facility due 2031, including pledged collateral and financing maintenance covenants, are generally consistent with the terms of our Term Loan B due 2027 and Revolving Credit Facility.

Securitization Facility

In August 2023, we entered into a secured term facility (the Securitization Facility), which is secured and collateralized by our U.S. accounts receivable, subject to certain adjustments (defined as the Net Eligible Receivables Balance within the applicable agreement). The terms of the agreement result in an amount of our U.S. accounts receivable, equivalent to the outstanding balance of the Securitization Facility at any point in time, being pledged to the lender as collateral for the borrowings. Our borrowing capacity under our Securitization Facility is subject to monthly fluctuation, based on the level of our borrowing base as reported to the lender, which is correlated to our U.S. Net Eligible Receivables Balances, with a maximum borrowing capacity not to exceed $300 million. The Securitization Facility requires monthly interest payments over its term at a variable rate based on Term SOFR plus 125 basis points. The full, outstanding balance of the Securitization Facility is due on July 31, 2026. The Securitization Facility includes various covenants specific to the underlying composition of our U.S. accounts receivables portfolio, all of which we were in compliance with as of December 31, 2024. During the year ended December 31, 2024, we repaid $25 million on our Securitization Facility.

Senior Notes

In August 2018, we issued $750 million of 4.272% Senior Notes due August 28, 2023 and $750 million of 4.900% Senior Notes due August 28, 2028. In April 2022, we completed a tender offer and retired $406 million in aggregate principal amount of our 4.272% Senior Notes due 2023, resulting in a debt extinguishment loss of approximately $17 million, which was recognized in interest expense, net of capitalized interest in the consolidated statements of operations. On August 7, 2023, we redeemed in full the remaining outstanding 4.272% Senior Notes due 2023.

The interest rate payable on the 4.900% Senior Notes due 2028 is subject to adjustment in the event of credit rating agency downgrades, which last occurred in April 2023. The indenture that governs these senior notes contains covenants that limit our ability to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets, in addition to other customary terms. We were in compliance with all such covenants under the indenture governing the 4.900% Senior Notes due 2028 as of December 31, 2024.

Scheduled Repayments

Future required principal payments on our outstanding indebtedness for each of the next five years and thereafter, as of December 31, 2024, were as follows:

As of December 31, 2024, approximately 82% of our long-term indebtedness bore interest at a fixed rate, including variable-rate debt converted to fixed-rate through the use of interest rate swaps (see Note 9. Financial Instruments for further information).

Cash payments for interest during the years ended December 31 were as follows:

(1)Reflected within the above totals are $31 million and $4 million of cash interest received from our net investment hedges during the years ended December 31, 2024 and 2023, respectively. See Note 9. Financial Instruments for further information on our net investment hedges.

Note 9. Financial Instruments

To manage our exposure to market risks, such as changes in foreign currency exchange rates and variable interest rates, we have entered into various derivative transactions. Our outstanding positions are discussed below.

Derivatives Not Designated as Hedges

We may enter into foreign currency exchange forward or option contracts to reduce the effects of fluctuating currency exchange rates. As of December 31, 2024 and 2023, we had outstanding foreign currency exchange contracts with aggregate notional amounts of $1,016 million and $891 million, respectively. The amounts of net gains (losses) on our derivative instruments not designated as hedging instruments, recorded in other expense, net for the years ended December 31, were as follows:

(1)These amounts were substantially offset in other expense, net by the effect of changing exchange rates on the underlying foreign currency exposures.

Derivatives Designated as Hedges – Net investment hedges

As of December 31, 2024 and 2023, we had a series of cross-currency fixed interest rate swaps to help mitigate the impact of currency fluctuations on our operations in Switzerland with a combined 1,000 million CHF notional amount with tenors in 2026 and 2027. These instruments were determined to be, and were designated as, effective economic hedges of net investments in our CHF denominated net assets. The amount of gains (losses) on net investment hedges, net of tax, recorded in accumulated other comprehensive loss for the years ended December 31, were as follows:

For the years ended December 31, 2024 and 2023, these instruments also generated $31 million and $9 million of interest income, respectively, which was included as a contra interest expense, net of capitalized interest in our consolidated statements of operations. In January 2025, we took advantage of market opportunities to restructure our net investment hedges, paying $10 million to early settle these instruments while also collecting $5 million of accrued interest. We simultaneously entered into new cross-currency fixed interest rate swaps with the same

1,000 million CHF notional amounts and covering the same tenors. The new instruments were determined to be, and have been designated as, effective economic hedges of net investments in our CHF denominated net assets.

Derivatives Designated as Hedges – Interest rate swaps

We had outstanding interest rate swaps with aggregate notional amounts of $2,800 million and $3,800 million as of December 31, 2024 and 2023, respectively. Following the sale of our aqua business and the associated debt pay down (see Note 4. Acquisitions, Divestitures and Other Arrangements and Note 8. Debt for further information), in July 2024 we settled $1,000 million of existing interest rate swaps. We received cash proceeds of approximately $5 million upon these settlements, which was recorded in accumulated other comprehensive loss and will be amortized to interest expense, net of capitalized interest in future periods. As of December 31, 2024, all of our outstanding interest rate swap instruments had scheduled maturities in 2026.

Additionally, in August 2024 we entered into new forward-starting interest rate swap agreements with a combined notional amount of $850 million, which will become effective on August 1, 2026, and mature in line with the applicable Incremental Term Facility maturities, which range between 2028 and 2031.

The amounts of gains on interest rate swap contracts, net of tax, recorded in accumulated other comprehensive loss for the years ended December 31, were as follows:

The amounts of gains reclassified out of accumulated other comprehensive loss and recognized into earnings through interest expense, net of capitalized interest for the years ended December 31, were as follows:

Over the next 12 months, we expect to reclassify a gain of $29 million out of accumulated other comprehensive loss and into interest expense, net of capitalized interest related to our interest rate swaps.

At various points throughout 2023 and 2022, we restructured our interest rate swap portfolio by unwinding certain existing swaps and simultaneously entering into new agreements with the same notional amounts and tenors. As a result, we received aggregate cash settlement proceeds of $57 million and $207 million in 2023 and 2022, respectively, which were included in net cash provided by operating activities in the consolidated statements of cash flows. Additionally, as a result of one of the 2022 interest rate swap settlements, we reclassified $17 million of a stranded tax benefit from accumulated other comprehensive loss to income tax expense, based on our policy to reclassify income tax effects from accumulated other comprehensive loss using the portfolio approach.

As of December 31, 2024, when factoring in the impact from our interest rate swaps, the weighted-average effective interest rate on our outstanding indebtedness was 6.27% (excluding the expected future reclassifications to interest expense, net of capitalized interest related to past interest rate swap settlements).

Note 10. Fair Value

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a framework that utilizes the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. Level 1 fair value measurements are based on quoted prices in active markets for identical assets or liabilities. 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. Our Level 3 fair value measurements are based on unobservable inputs based on little or no market activity. As of December 31,2024 and 2023, liabilities measured using Level 3 inputs consisted of contingent consideration liabilities stemming from our acquisitions of NutriQuest and NutriQuest Brazil in 2023 (see Note 4. Acquisitions, Divestitures and Other Arrangements for further information). The fair values of these liabilities were estimated using a Monte Carlo simulation model, consisting of inputs not observable in the market, including estimates relating to revenue forecasts, discount rates and volatility.

The following table summarizes the fair value information at December 31,2024 and 2023, for assets and liabilities measured at fair value on a recurring basis in the respective balance sheet line items, as well as long-term debt, for which fair value is disclosed on a recurring basis:

Cash and cash equivalents include cash on hand and all highly liquid investments with original maturities at the time of purchase of three months or less. The carrying values of cash and cash equivalents, accounts and other receivables, accounts payable, employee compensation and other current liabilities are a reasonable estimate of their fair values due to the short-term nature of these assets and liabilities. We also had investments without readily determinable fair values and equity method investments, which were classified as other noncurrent assets on the consolidated balance sheets totaling $17 million and $26 million as of December 31, 2024 and 2023, respectively. These investments are not recorded at fair value on a recurring basis, and as such, are not included in the fair value table above.

Note 11. Goodwill and Intangibles

Goodwill

The following table summarizes the changes in the carrying amount of goodwill:

(1)We derecognized $458 million of goodwill in connection with the divestiture of our aqua business in July 2024. See Note 4. Acquisitions, Divestitures and Other Arrangements for further information.

As previously disclosed, due to the sharp increase in long-term treasury rates during the third quarter of 2023, we assessed our long-lived assets, including goodwill, for impairment, concluding that a triggering event existed. Due principally to an increased discount rate assumption, which was driven by the increase in long-term treasury rates, our quantitative goodwill impairment test resulted in a $1,042 million pre-tax impairment charge. No impairments to the carrying value of goodwill were recorded during either of the years ended December 31, 2024 or 2022.

Whileno goodwill impairment charges were recorded during 2024, future changes in our discount rate, whether driven by increases in long-term treasury rates or other factors, or future changes in other significant assumptions or the use of alternative estimates and assumptions, could have a significant impact on the estimated fair value of our reporting unit, exposing us to future goodwill impairment losses.

Other Intangible Assets

The gross amount of intangible assets and related accumulated amortization, as of December 31, were as follows:

Intangible assets with finite lives are capitalized and amortized over their estimated economic lives. As of December 31, 2024, the remaining weighted-average amortization periods for finite-lived intangible assets were as follows:

The estimated amortization expense for each of the next five years associated with our finite-lived intangible assets, as of December 31, 2024, is as follows:

For the years ended December 31, 2024, 2023 and 2022, amortization expense related to software was $40 million, $54 million and $65 million, respectively.

As discussed in Note 2. Summary of Significant Accounting Policies, acquired IPR&D is not amortized, but rather is reviewed for impairment at least annually, or more frequently in the event of a triggering event. Acquired IPR&D assets are treated as indefinite-lived assets until completion or abandonment of the projects, at which time they are tested for impairment and, if not impaired, are transferred to marketed products and amortized over their estimated economic life. Amortization expense that will be incurred related to assets currently classified as acquired IPR&D upon their future transfer to marketed products, is not included in the future amortization expense table presented above, as we are not able to predict with certainty the period in which such related amortization will begin.

Impairment charges related to acquired IPR&D assets for the years ended December 31, were as follows:

These charges were included within asset impairment, restructuring and other special charges within our consolidated statements of operations (see Note 5. Asset Impairment, Restructuring and Other Special Charges, for further discussion).

Note 12. Property and Equipment

At December 31, property and equipment consisted of the following:

Property and equipment, net by geographic area as of December 31, was as follows:

The reduction in property and equipment, net in other foreign countries during 2024 was primarily due to the divestiture of our manufacturing facilities in Vietnam and Canada as part of our aqua business divestiture in July 2024 (see Note 4. Acquisitions, Divestitures and Other Arrangements). Additionally, the increase in property and equipment, net in 2024 in the U.S. primarily related to $42 million recorded within construction in progress related to the expansion of our monoclonal antibody manufacturing facility in Elwood, Kansas.

Depreciation expense related to property and equipment for the years ended December 31, was as follows:

Note 13. Leases

We have operating leases for corporate offices, research and development facilities, vehicles and equipment with lease terms generally ranging fromone to 15 years, some of which have options to extend or terminate the leases. We determine if an arrangement is a lease at inception, and if so, whether it represents an operating or finance lease. Right-of-use (ROU) assets relating to our operating leases are included in noncurrent assets, while lease liabilities relating to operating leases are included in other current liabilities and other noncurrent liabilities within the consolidated balance sheets. As of December 31, 2024 and 2023, finance leases were not material.

ROU assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. We use the implicit rate if it is readily determinable. Our lease terms may include options to extend or terminate the lease, and when it is reasonably certain we will exercise that option, these extensions are included in the lease term used to calculate the ROU assets and operating lease liabilities. We do not include leases with a lease term of 12 months or less within the determination of our ROU assets or lease liabilities.

Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments, which represent lease payments that vary due to changes in facts or circumstances occurring after the commencement date, are expensed in the period in which the obligation for these payments is incurred.

The impact of operating leases on the consolidated financial statements for the years ended December 31, was as follows:

Supplemental balance sheet information related to our operating leases is as follows:

As of December 31, 2024, the minimum lease payments for our operating lease liabilities for each of the next five years and thereafter were as follows:

Lease contracts that have been executed but have not yet commenced are excluded from the tables above. As of December 31, 2024, we have a lease commitment that has not yet commenced for our new corporate headquarters in Indianapolis, Indiana. Total minimum lease payments are estimated to be approximately $378 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 2025.

Note 14. Stock-Based Compensation

The Amended and Restated 2018 Elanco Stock Plan (Plan) provides long-term incentives to attract, motivate and retain employees and non-employee directors. The types of stock-based awards available include, but are not limited to, restricted stock units (RSUs), performance-based awards (PAs) and stock options. Our practices and policies specify that stock-based compensation awards are approved by the Compensation and Human Capital Committee of the Board of Directors. As of December 31, 2024, the total number of shares authorized for stock-based compensation awards under the plan was 40 million, out of which the aggregate number of remaining shares available for future grant was 22.4 million.

Stock-Based Compensation Expense

We measure compensation expense for stock-based awards based on grant date fair value and the estimated number of awards that are expected to vest. For purposes of measuring stock-based compensation expense, we consider whether an adjustment to the observable market price is necessary to reflect material nonpublic information that is known to us at the time the award is granted. Adjustments during the years ended December 31, 2024, 2023 and 2022, were not material. Forfeitures are estimated based on historical experience at the time of grant and are revised in subsequent periods if actual forfeitures differ from those estimates.

A majority of our stock-based compensation expense relates to RSUs and PAs. The associated tax benefit from stock-based compensation expense was offset by a valuation allowance. Stock-based compensation expense for the years ended December 31, 2024, 2023 and 2022, was$55 million, $46 million and $59 million, respectively.

Restricted Stock Units

RSUs are granted to certain employees and are settled in shares of our common stock. RSUs are accounted for at fair value based upon the closing stock price on the date of grant. The corresponding expense is amortized over the vesting period, which is typically three years. RSUs granted to employees for the years ended December 31 were as follows:

Changes in the nonvested portion of RSUs for 2024 are summarized below:

The fair market value of RSUs vesting in 2024, 2023 and 2022 was$29 million, $12 million and $29 million, respectively. As of December 31, 2024, the total remaining unrecognized stock-based compensation expense related to nonvested RSUs was$20 million, which is expected to be amortized over a weighted-average remaining requisite service period of 16 months.

Performance-Based Awards

PAs, which are granted to eligible officers and management, represent the right to receive a share of our common stock and are subject to forfeiture until restrictions lapse, including continued employment through the end of the vesting period and achievement of certain pre-established metrics. Payouts can vary depending on achievement. PAs are accounted for at fair value based upon the closing stock price on the date of grant and fully vest at the end of the measurement period. Stock-based compensation expense for PAs is recognized only if it is deemed probable that the performance condition will be achieved.

PA activity during the year ended December 31, 2024, is summarized below:

The fair market value of PAs vesting in 2024, 2023 and 2022 was$10 million, $8 million and $23 million, respectively. As of December 31, 2024, the total remaining unrecognized stock-based compensation expense related to nonvested PAs was$9 million, which is expected to be amortized over a weighted-average remaining requisite service period of 12 months.

Stock Options

Stock options represent the right to purchase shares of our common stock within a specified period of time at a specified price. Stock options are granted to our officers and management at exercise prices equal to the fair market value of our stock at the date of the grant. Options fully vest three years from the grant date and have a term of 10 years. We value stock options at grant date using a Black-Scholes-Merton valuation model, and the corresponding expense is generally amortized on a straight-line basis over the vesting period. The weighted-average fair value of stock options granted during the years ended December 31, 2024, 2023 and 2022 was estimated to be$7.35,$4.93, and $10.89 respectively. The Black-Scholes-Merton model incorporates a number of valuation assumptions, which are noted in the following table, shown at their weighted-average values for the years ended December 31:

(1)We have never declared nor paid any dividends on our common stock, nor do we anticipate paying dividends on our common stock for the foreseeable future.

(2)Determined using the term-matched, zero-coupon risk-free rate from the Treasury Constant Maturity yield curve, continuously compounded.

(3)Determined using a leverage-adjusted historical volatility of peer companies.

(4)Determined using SEC safe harbor approach, based on a 3-year cliff vesting schedule and 10-year contractual term.

Stock option activity during the year ended December 31, 2024, is summarized below:

As of December 31, 2024, there was approximately$4 million of unrecognized stock-based compensation expense related to nonvested stock options, which is expected to amortize over an expected remaining weighted-average period of 17 months.

Note 15. Income Taxes

Our income tax provision for the years ended December 31, 2024, 2023 and 2022, included income tax costs and benefits such as valuation allowances, uncertain tax positions, audit settlements and other items. We were included in Lilly's U.S. tax examinations by the Internal Revenue Service (IRS) 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. The U.S. examination by the IRS of tax years 2016 to 2018 began in 2019 and is ongoing. Final resolution of certain matters is dependent upon several factors, including the potential for formal administrative proceedings.

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Deferred taxes are not provided on substantially all of the unremitted earnings of subsidiaries outside of the U.S., except where required, because it is expected that these earnings will be reinvested indefinitely. Deferred taxes, including U.S. or foreign withholding taxes, would be provided when we no longer consider our subsidiary earnings to be permanently reinvested.

We treat taxes due on future Global Intangible Low-Taxed Income (GILTI) inclusions in U.S. taxable income as a current period expense when incurred. Certain countries in which we have operations have adopted legislation influenced by the Organization for Economic Co-operation and Development (OECD) Pillar Two rules, including a minimum tax rate of 15%. As of December 31, 2024, the U.S. has not yet enacted legislation to adopt the Pillar Two framework. We are continuing to evaluate additional guidance released by the OECD and the pending legislative adoption by additional individual countries. The adoption of Pillar Two was not material to income tax expense for the year ended December 31, 2024.

The composition of income (loss) before income tax expense for the years ended December 31, was as follows:

The composition of income tax expense for the years ended December 31, was as follows:

Significant components of our deferred tax assets and liabilities as of December 31 were as follows:

The deferred tax assets and related valuation allowance amounts for net operating losses and tax credits shown above have been adjusted for differences between prior provisional estimates and tax return filings.

At December 31, 2024, we had tax credit carryovers of $43 million available to reduce future income taxes. This amount was comprised of foreign, U.S. federal and state credits. The foreign credits totaled $2 million and if unused, will begin to expire in 2034. The U.S. federal credits totaled $28 million and if unused, will begin to expire in 2029. The state credits totaled $13 million and if unused, will begin to expire in 2027. The U.S. federal credits were subject to a partial valuation allowance and the state credits were subject to a full valuation allowance.

At December 31, 2024, we had net operating loss carryovers for foreign, U.S. federal and state income tax purposes of $180 million. Of this total, $79 million will expire between 2025 and 2036, and $101 million of the carryovers had an indefinite carryforward period. Net operating losses and other carryovers for foreign, U.S. federal and state income tax purposes were subject to full and partial valuation allowances.

Movements in the valuation allowance for the years ended December 31, are summarized as follows:

The decrease in the valuation allowance during 2024 was primarily attributable to the sale of our aqua business, which generated U.S. federal taxable income, allowing us to realize certain net operating loss carryforwards and other tax attributes which were historically offset by a valuation allowance. The total net decrease in the valuation allowance recorded in income tax expense in the consolidated statements of operations was $77 million in 2024, with the remaining change in the balance primarily recorded through accumulated other comprehensive loss. The total net increase in the valuation allowance recorded in income tax expense in 2023 and 2022 was $93 million and $80 million, respectively, with the remaining change in balance primarily recorded through accumulated other comprehensive loss.

Cash payments of income taxes during the years ended December 31, were as follows:

Income taxes receivable of $121 million and $149 million, respectively, were included in prepaid expenses and other on our consolidated balance sheets as of December 31 2024 and 2023. Income taxes payable of $127 million and $26 million, respectively, were included within other current liabilities on our consolidated balance sheets as of December 31 2024 and 2023.

The following is a reconciliation of the income tax expense applying the U.S. federal statutory rate to income (loss) before income taxes to reported income tax expense:

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for the years ended December 31, was as follows:

The total amount of unrecognized tax benefits that, if recognized, would affect tax expense was $40 million and $31 million at December 31, 2024 and 2023, respectively. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties related to income tax matters were not material for the years ended December 31, 2024, 2023 and 2022.

Note 16. Commitments and Contingencies

Legal Matters

We are party to various legal actions that arise in the normal course of business. The most significant matters are described below. Under GAAP, loss contingency provisions are recorded when we deem it probable that we will incur a loss and we are able to formulate a reasonable estimate of that loss.

Seresto Class Action Lawsuits

Claims seeking actual damages, injunctive relief and/or restitution for allegedly deceptive marketing were made against Elanco Animal Health Inc. and Bayer HealthCare LLC, along with other Elanco and Bayer entities, arising out of the use of Seresto™, a non-prescription flea and tick collar for cats and dogs. During 2021, putative class action lawsuits were filed in federal courts in the U.S. alleging that the Seresto collars contain pesticides that can cause serious injury and death to cats and/or dogs wearing the product. In August 2021, the lawsuits were consolidated by the Judicial Panel on Multidistrict Litigation, and the cases were transferred to the Northern District of Illinois. In June 2023, the parties agreed on the monetary terms of a potential settlement of the consolidated class action lawsuits, and at that time, we recorded a charge of $15 million, which was included within other expense, net in our consolidated statements of operations. During the fourth quarter of 2023, the parties agreed on the non-monetary terms which, in addition to the monetary terms, were approved by the court in January 2025. The previously accrued $15 million was paid in February 2025.

Additional Legal Matters

For the legal matters discussed below, we either believe loss is not probable or are unable to estimate the possible loss or range of loss, if any. The process of resolving these matters is inherently uncertain and may develop over an extended period of time; therefore, at this time, the ultimate resolutions cannot be predicted. As of December 31, 2024 and 2023, we hadno material liabilities established related to the legal matters discussed below.

On October 7, 2024, a putative securities class action lawsuit captioned Joseph Barpar v. Elanco Animal Health Inc., et al. (Barpar) was filed in the United States District Court for the District of Maryland against Elanco andtwo of its executives. Barpar alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and specifically alleges that Elanco and thetwo executives made materially false and/or misleading statements and/or failed to disclose certain facts about the safety of and labeling for our Zenrelia® product, as well as the approval and launch timelines for Zenrelia and our Credelio Quattro™ product. The plaintiff purports to represent purchasers of Elanco securities between November 7, 2023 and June 26, 2024. On November 1, 2024, a shareholder derivative action captioned Lawrence Hollin v. Lawrence E. Kurzius, et al. was filed in the United States District Court for the District of Maryland against current members of Elanco's Board of Directors and senior management, alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and state law claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment and waste of corporate assets, based on allegations substantially similar to the allegations in the putative class action complaint in Barpar. We are vigorously defending our positions in connection with both actions. 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.

On May 20, 2020, a shareholder class action lawsuit captioned Hunter v. Elanco Animal Health Inc., et al.(Hunter) was filed in the United States District Court for the Southern District of Indiana against Elanco and certain executives. On September 3, 2020, the court appointed a lead plaintiff, and on November 9, 2020, the lead plaintiff filed an amended complaint adding additional claims against Elanco, certain executives and other individuals. The lawsuit alleged, 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 sought unspecified monetary damages and purports to represent purchasers of Elanco securities between September 30, 2018 and May 6, 2020, and purchasers of Elanco common stock issued in connection with Elanco's acquisition of Aratana Therapeutics, Inc. On January 13, 2021, we filed a motion to dismiss, and on August 17, 2022, the Court issued an order granting our motion to dismiss the case without prejudice. On October 14, 2022, the plaintiffs filed a motion for leave to amend the complaint. On December 7, 2022, we filed an opposition to the plaintiffs' motion, and on September 27, 2023, the court denied the plaintiffs' motion for leave, issuing final judgment in favor of Elanco. On October 25, 2023, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Seventh Circuit. We continue to believe the claims made in the case are meritless, and we intend to continue to vigorously defend our position.

On October 16, 2020, a shareholder class action lawsuit captioned Safron Capital Corporation v. Elanco Animal Health Inc., et al. was filed in the Marion Superior Court of Indiana against Elanco, certain executives and other individuals and entities. On December 23, 2020, the plaintiffs filed an amended complaint adding an additional plaintiff. 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 relationships with third-party distributors and revenue attributable to those distributors within the registration statement on Form S-3 dated January 21, 2020, and accompanying prospectus filed in connection with Elanco’s public offering which closed on or about January 27, 2020. The lawsuit seeks unspecified monetary damages and purports to represent purchasers of Elanco common stock or TEUs issued in connection with the public offering. From February 2021 to August 2022, this case was stayed in deference to Hunter. On October 24, 2022, we filed a motion to dismiss. On December 23, 2022, the plaintiffs filed their opposition to the motion to dismiss. Prior to the ruling on the motion to dismiss, on June 8, 2023, the plaintiffs filed a motion for leave to file a second amended complaint, which is now the operative complaint. We filed a motion to dismiss the second amended complaint on August 7, 2023, to which the plaintiffs filed their opposition on October 13, 2023. On April 17, 2024, our motion to dismiss was granted. The dismissal is without prejudice to plaintiffs' right to re-file a claim, and it is possible the plaintiffs will attempt to file a third amended complaint. We continue to believe the claims made in the case are meritless, and we intend to vigorously defend our position.

In the third quarter of 2019, Tevra Brands, LLC (Tevra) filed a complaint in the U.S. District Court of the Northern District of California, alleging that Bayer Animal Health (acquired by us in August 2020) had been involved in unlawful, exclusive dealing and tying of its flea and tick products Advantage, Advantix and Seresto and maintained a monopoly in the market. The complaint was amended in March 2020 and then dismissed in September 2020 with leave to amend. A second amended complaint was filed in March 2021 and realleged claims of unlawful exclusive dealing related to Advantage and Advantixand monopoly maintenance. A motion to dismiss the second amended complaint was denied in January 2022. Tevra’s demands included both actual and treble damages. On April 16, 2024, the court granted our motion for summary judgment to exclude all damages subsequent to our acquisition of Bayer Animal Health in August 2020. A jury trial was held in July 2024, and on August 1, 2024, the jury returned a verdict in favor of Bayer Animal Health. In January 2025, Tevra's motion for a new trial was denied, and in February 2025, Tevra filed their notice of appeal. Following the initial Tevra trial, three additional matters have been filed against us, both in the Northern District of California and in the Southern District of Indiana, most recently in January 2025: Tracy Spradlin v. Elanco Animal Health, Inc. (Spradlin), Tevra Brands, LLC v. Elanco Animal Health, Inc., and Susan Kraus-Silfen v. Elanco Animal Health, Inc. et. al. (Kraus-Silfen). While there are substantive and statutory differences, the allegations underpinning these matters are similar in some respects to the initial Tevra matter including, but not limited to, the family of pet health products and sales tactics and agreements alleged to drive a monopoly within the market. Two of the new matters, Spradlin and Kraus-Silfen, are putative class actions, and allthree matters seek injunctive relief and an unspecified amount of monetary relief. We are vigorously defending against the claims made in these matters. However, the process of resolving these matters is inherently uncertain and may develop over an extended period of time; therefore, at this time, the ultimate resolutions cannot be predicted.

Regulatory Matters

On July 1, 2021, we received a subpoena from the SEC relating to our channel inventory and sales practices prior to mid-2020. During the fourth quarter of 2023, we accrued a liability of $12.5 million for the possible settlement of this matter. In November 2024, we reached an agreement with the SEC and, without admitting to or denying the underlying allegations, settled the matter for $15 million. The initial charge in 2023 and the incremental amount in 2024 were recorded within other expense, net within the consolidated statements of operations. Payment of this amount was reflected within cash from operating activities in our consolidated statement of cash flows for the year ended December 31, 2024.

Other Commitments

As of December 31, 2024, we had a lease commitment that has not yet commenced for our new corporate headquarters in Indianapolis, Indiana. See Note 13. Leases for further information regarding this lease commitment.

The land for our new corporate headquarters is located in a Tax Increment Finance District, and the project is, in part, funded through Tax Incremental Financing (TIF) through an incentive agreement between the City of Indianapolis and us. The agreement provides for an estimated total incentive of $64 million to be funded by the City of Indianapolis in connection with the future tax increment revenue generated from the developed property. In December 2021, as part of a funding and development agreement entered into between the developer and us, we made a commitment to use the expected TIF proceeds towards the cost of developing and constructing the headquarters. In exchange, the developer reimbursed us up to the $64 million commitment in 2021. During 2022, we refunded approximately $15 million of the TIF proceeds to the developer. As a result, it is our expectation that our future lease payments will be reduced. The remaining accrued incentive was included in other noncurrent liabilities on our consolidated balance sheets and will be amortized over the lease term beginning on the commencement date and offset future rent expense.

Note 17. Retirement Benefits

Pension Plans

We sponsor various defined benefit pension plans, which cover certain employees worldwide. Our plans in Switzerland and Germany represent approximately 92% of our global benefit obligation. We use a measurement date of December 31 to develop the change in benefit obligation, change in plan assets, funded status and amounts recorded on the consolidated balance sheets at December 31 for our defined benefit pension plans, which were as follows:

The unrecognized net actuarial gain and unrecognized prior service cost for these pension plans have not yet been recognized in net periodic pension expense and were included in accumulated other comprehensive loss at December 31, 2024. We do not expect any plan assets to be returned to us in 2025.

The following represents our weighted-average assumptions related to these pension plans as of and for the years ended December 31:

The assumptions above were used both to estimate our pension benefit obligations at year-end, as well as in the determination of applicable pension benefit costs for the years presented. These assumptions are reviewed on at least an annual basis and are revised based on a yearly evaluation of long-term trends and market conditions that may impact the cost of providing retirement benefits. The weighted-average discount rates for our defined benefit plans are set by benchmarking against investment grade corporate bonds where available, including, when there is sufficient data, a yield curve approach. For countries that lack a sufficient corporate bond market, a government bond index is used to establish the discount rate. In evaluating the expected rate of return, we consider many factors, with a primary analysis of current and projected market conditions, asset returns and asset allocations and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the assumptions and trend rates utilized by similar plans, where applicable.

Future benefit payments as of December 31, 2024, which reflect expected future service, as appropriate, are expected to be as follows:

We also expect to contribute $11 million to our pension plans in 2025.

Amounts relating to pension plans with projected benefit obligations in excess of plan assets at December 31, were as follows:

Amounts relating to pension plans with accumulated benefit obligations in excess of plan assets at December 31, were as follows:

The total accumulated benefit obligation for our defined benefit pension plans was $340 million and $354 million at December 31, 2024 and 2023, respectively.

Net pension benefit expense for the years ended December 31, included the following components:

The above components, with the exception of service cost, were included within other expense, net in the consolidated statements of operations.

The following represents the pre-tax amounts recognized for defined benefit plans in other comprehensive (loss) income for the years ended December 31:

We recognized$4 million, $3 million, and $11 million of income tax expense in other comprehensive (loss) income, respectively, related to our defined benefit plans during the years ended December 31, 2024 and 2023, and 2022.

Benefit Plan Investments

Our benefit plan investment policies are set with specific consideration of return and risk requirements in relationship to the respective liabilities. Our plan assets related to our pension plans in Switzerland and Germany represent approximately 90% of our total plan assets for all pension plans. Given the long-term nature of our liabilities, our plans have the flexibility to manage an above-average degree of risk in the asset portfolios. At the investment-policy level, there are no specifically prohibited investments; however, individual investment manager mandates, restrictions and limitations are contractually set to align with our investment objectives, ensure risk control and limit concentrations.

We manage our portfolio to minimize concentration of risk by allocating funds within asset categories. In addition, within a category we use different managers with various management objectives to eliminate any significant concentration of risk. Our investment strategy is to diversify our plan assets with a designated percentage invested in fixed-income securities, equity securities, real estate and other alternative investments.

Each category is diversified and comprised of the following:

•Fixed-income securities – Swiss bonds, global aggregates, global aggregate corporates, global government bonds, emerging market local currencies and emerging markets hard currencies.

•Equity securities – Swiss equities, global equities, low volatility equities (to reduce risk) and emerging market equities.

•Real estate – Swiss real estate and global real estate funds.

•Other alternative investments – cash, cash equivalents and investments in senior secured loans.

We determine the fair value of our plan investments based on a market approach using quoted market values and/or significant other observable inputs for identical or comparable assets or liabilities.

Real estate is mostly comprised of public holdings. Real estate investments in registered investment companies that trade on an exchange are classified as Level 1 in the fair value hierarchy. Other real estate investments are marked to fair value using models that are supported by observable market-based data (Level 2).

The fair values of pension plan assets as of December 31, 2024, by asset category were as follows:

(1)Certain investments measured at fair value using the Net Asset Value (NAV) per share, or its equivalent, as a practical expedient have not been classified in the fair value hierarchy.

The fair values of pension plan assets as of December 31, 2023, by asset category were as follows:

No material transfers between Level 1, Level 2 or Level 3 occurred during the years ended December 31, 2024 or 2023.

Defined Contribution Plans

Elanco has defined contribution savings plans that include certain employees worldwide. Our contributions to these plans are based on our employee contributions and the level of our match. Expenses under the plans totaled$36 million, $40 million and $34 million for the years ended December 31, 2024, 2023 and 2022, respectively.

Multiemployer Plans

We also participate in certain multiemployer plan arrangements which provide basic pension benefits to the majority of our employees in Germany. Up to a certain salary level, the benefit obligations are covered by our contributions and the contributions from employees to the plans. The Company-specific plan information for these plans is not publicly available, and the plans are not subject to a collective-bargaining agreement. The plans provide fixed, monthly retirement payments on the basis of the credits earned by the participating employees. To the extent these plans become underfunded, our future required contributions may increase and may be used to fund retirement benefits for employees related to other employers, although as of December 31, 2023 and 2022, the plans' total assets exceeded the total actuarial present value of accumulated plan benefits. Our plan contributions to these plans are expensed as incurred and were not material in any of the years ended December 31, 2024, 2023 and 2022, nor did they exceed 5% of the total contributions to the plans.

Contributing to these types of plans creates risk that differs from providing benefits under our sponsored plans, in that if another participating employer ceases to contribute to a multiemployer plan, additional unfunded obligations may need to be funded over time by remaining participating employers.

Note 18. Earnings Per Share

We compute basic earnings (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding for the reporting period. Elanco has variable common stock equivalents relating to certain equity awards in stock-based compensation arrangements. We also had variable common stock equivalents related to the TEU prepaid stock purchase contracts through their settlement date of February 1, 2023 (see Note 7. Equity for further discussion). Diluted earnings per share reflects the potential dilution that could have occurred if holders of the unvested equity awards converted their holdings into common stock and that could have occurred if holders of unsettled TEUs had converted their holdings into common stock prior to the February 1, 2023, settlement date. The weighted-average number of potentially dilutive shares outstanding was calculated using the treasury stock method. Potential common shares that would have had the effect of increasing diluted earnings per share (or reducing loss per share) were considered to be anti-dilutive and as such, these shares were not included in the calculation of diluted earnings (loss) per share.

Basic and diluted weighted-average shares outstanding for the years ended December 31, were as follows:

(1)The TEU prepaid stock purchase contracts were convertible into a minimum of 14.3 million shares or a maximum of 17.2 million shares. The minimum 14.3 million shares were included in the calculation of basic weighted-average shares from January 22, 2020 to February 1, 2023. The 17.2 million shares that were ultimately issued have been included in the calculation of basic weighted-average shares subsequent to the settlement date of February 1, 2023.

(2)For the years ended December 31, 2024, 2023 and 2022, approximately 1.4 million,2.9 million, and 3.3 million, respectively, of potential common shares were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.

Note 19. Business Segment Information

We operate our business as a single segment engaged in the development, manufacturing, marketing and sales of animal health products for both pets and farm animals. Consistent with our operational structure, our Chief Executive Officer (CEO), as the chief operating decision maker, makes resource allocation and business process decisions globally across our consolidated business. Strategic and resource allocation decisions are managed globally, with global functional leaders responsible for determining significant costs and investments and with regional leaders responsible for overseeing the execution of our global strategy. 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 R&D 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 considers consolidated net income (loss), which is our single segment’s principal measure of segment profit and loss, when evaluating performance. Our CEO also considers these measures, as well as other factors, such as an assessment of a new product’s future market potential, when determining how to allocate company-wide resources.

Significant expenses are amounts that are regularly provided to our CEO and included in consolidated net income (loss), our primary measure of our single segment’s profit or loss. Our CEO regularly reviews reported consolidated revenues, significant expenses and consolidated net income (loss), in addition to forecasted revenues, significant expenses and net income (loss) amounts for future periods. A summary of our consolidated net income for the years ended December 31, 2024, 2023 and 2022 is as follows, including the significant expenses provided to and regularly reviewed by our CEO, as well as other expenses, which are included in consolidated net income (loss), but are not regularly provided to and/or reviewed by our CEO:

(1)Other expenses include amortization of intangible assets; asset impairment, restructuring and other special charges; goodwill impairment; and gain on divestiture.

Given our single reporting segment structure, we manage our assets on a total company basis. Cash paid for acquisitions, intangible assets and property and equipment and software, as well as cash proceeds from divestitures, are summarized in the Investing Activities section of our consolidated statements of cash flows.

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Elanco Animal Health Incorporated

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Elanco Animal Health Incorporated (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive loss, equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 25, 2025, expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

/s/Ernst & Young LLP

We have served as the Company’s auditor since 2017.

Indianapolis, Indiana

February 25, 2025

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Elanco Animal Health Incorporated

Opinion on Internal Control Over Financial Reporting

We have audited Elanco Animal Health Incorporated’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Elanco Animal Health Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive loss, equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes and our report dated February 25, 2025, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Indianapolis, Indiana

February 25, 2025