Results
Elanco Animal Health Inc.
02/24/2026 | Press release | Distributed by Public on 02/24/2026 08:20
Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis of financial condition and results of operations (MD&A) is intended to assist the reader in understanding and assessing significant changes and trends related to our results of operations and financial position. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Item 8 of Part II of this Form 10-K. Certain statements in this Item 7 of Part II of this Form 10-K constitute forward-looking statements. Various risks and uncertainties, including, but not limited to those discussed in "Forward-Looking Statements and Risk Factor Summary" and Item 1A. Risk Factors, may cause our actual results, financial position and cash flows to differ materially from these forward-looking statements.
Business Overview
Elanco is a global leader in animal health, dedicated to innovating and delivering products and services to prevent and treat disease in farm animals and pets. We partner with farmers, pet owners, veterinarians and society to create value and help our customers improve the health of animals in their care, while also making a meaningful impact on the communities we serve. Our diverse, durable product portfolio is sold in more than 90countries and serves animals across many species, primarily: dogs and cats (collectively, pet health) and cattle, poultry, swine and sheep (collectively, farm animal). Our purpose - making life better for animals makes life better- inspires us to Go Beyond for animals, our customers, our people and society.
With a heritage dating back to 1954, we operate our business in a single segment within the animal health industry, offering a diverse product portfolio of approximately 200 brands, which helps make us a trusted partner to pet owners, veterinarians and farm animal producers. Our products are generally sold worldwide to third-party distributors and independent retailers and directly to farm animal producers and veterinarians. Our omnichannel presence extends to both the veterinary clinic and retail markets, including e-commerce.
Product Development and Regulatory Update
A key element of our targeted value creation strategy is to drive revenue growth through portfolio development and product innovation. We continue to pursue the development of new chemical and biological molecules, as well as additional registrations and indications for current products. Our future growth and success depend on both our pipeline of new products, including new products we develop internally, with partners or obtain through licenses or acquisitions, and the life cycle management of our existing products. We believe we are an industry leader in animal health R&D, with a track record of successful product innovation, business development and commercialization. New product development, regulatory and product launch highlights throughout 2024 and 2025 include the following:
Bovaer: In May 2024, the FDA completed its comprehensive, multi-year review of Bovaer(3-NOP), a first-in-class methane-reducing feed ingredient for use in lactating dairy cattle. Producers began feeding the product to cattle in the U.S. during the third quarter of 2024.
Zenrelia: We received final FDA approval for Zenrelia, a JAK inhibitor targeting control of pruritus and atopic dermatitis in dogs, in September 2024. We launched Zenreliain the U.S. shortly after final approval and have also received approval for Zenreliain Australia, Brazil, Canada, the EU, Japan and the U.K. Additional reviews are ongoing in other markets.
Credelio Quattro: In October 2024, we received final FDA approval for Credelio Quattro, a monthly chewable tablet for dogs that protects against fleas, ticks, heartworms, roundworms, hookworms and three different species of tapeworms. Credelio Quattrowas launched in January 2025, and in December 2025 we also received conditional approval for treatment of the New World screwworm. Regulatory approval was received in February 2026 in Australia and additional submissions have now been made in other key markets, including Canada, the EU, Japan and the U.K.
Experior: In October 2024, we received multiple combination clearance approvals from the FDA for Experiorto be used in combination with other farm animal products, allowing for broader use in heifers, which represent nearly 40% of the fed cattle population in the U.S.
AdTab: In April 2025, AdTab, a chewable flea and tick treatment for dogs and cats, was approved and launched in the U.K.
Befrena: In December 2025, we received final approval from the USDA for Befrena, a new anti-IL31 monoclonal antibody injection targeting canine allergic and atopic dermatitis. We anticipate launching Befrena in the second quarter of 2026.
Other Key Trends and Factors Affecting Our Results of Operations
Restructuring Activities: In December 2025, our Board of Directors authorized a restructuring plan (the 2025 Restructuring Plan) to support margin expansion, optimize our global footprint and further invest in innovation. Specifically, the 2025 Restructuring Plan targeted an expected 2026 closure of the animal studies portion of our R&D facilities in Monheim, Germany, while also expanding our R&D organization in Indianapolis, Indiana, among other changes to our R&D organization. The 2025 Restructuring Plan is also expected to result in our exit from certain farm animal implant products and the related closure of our manufacturing facility in Kansas City, Kansas, in 2026. In total, the 2025 Restructuring Plan is expected to result in a global headcount reduction of approximately 300 employees, with an additional approximately 300 employees whose positions will be replaced with positions in growth areas or in lower-cost geographies. In 2025, we incurred $155 million of charges associated with the 2025 Restructuring Plan, of which $116 million related to expected cash-based severance costs and $39 million related primarily to non-cash impairment charges associated with our animal studies R&D facilities in Monheim, Germany, and our manufacturing facility in Kansas City, Kansas. We expect a further $25 million to $30 million of restructuring charges in 2026, primarily related to the remaining shut-down costs for our Monheim, Germany, and Kansas City, Kansas, facilities. The 2025 Restructuring Plan is expected to result in savings of approximately $25 million in 2026 and approximately $60 million in 2027.
Additionally, in February 2024 our Board of Directors authorized a separate restructuring plan (the 2024 Restructuring Plan) to improve operational efficiencies and better align our organizational structure with business needs, top strategic priorities and key growth opportunities. Specifically, the 2024 Restructuring Plan reallocated resources by shifting international resources from farm animal to pet health in anticipation of the global launches of several potential blockbuster products. The 2024 Restructuring Plan also impacted how we operate in and sell into the Argentina market, among others.
See Note 5. Asset Impairment, Restructuring and Other Special Chargesto the consolidated financial statements for further information on the 2025 and 2024 Restructuring Plans.
Trade Environment and Other U.S. Government Initiatives: Changes to U.S. trade policy throughout 2025 and into 2026 have resulted in new or higher tariffs on goods imported from numerous countries, and some countries have imposed retaliatory tariffs on imports from the U.S. While pharmaceutical products are largely exempt from the U.S. tariffs imposed, it remains uncertain if this will continue to be the case, and pharmaceutical products are not exempt from all tariffs imposed outside of the U.S. Aside from quarterly fluctuations in revenue due to some customers' accelerated purchases of certain farm animal products internationally in anticipation of future tariff increases, these new and increased tariffs did not have a material impact on our results of operations during the year ended December 31, 2025. On February 20, 2026, the U.S. Supreme Court issued a decision concluding that the International Emergency Economic Powers Act does not provide authority for the U.S. President to impose tariffs. Subsequently, new tariffs were imposed pursuant to Section 122 of the Trade Act of 1974. While the ultimate financial impact of these and other decisions cannot be reasonably estimated at this time, we will continue to closely monitor the trade policies in the countries in which we operate and/or from where we import products and continue to take actions, where possible, to mitigate the impacts on our business.
Further, throughout 2025, the U.S. presidential administration has implemented significant changes to the size and scope of the federal government. Among these changes, certain previously authorized government incentives focused on the adoption of new products for the sole purpose of sustainability have been frozen or rescinded. While we have made significant progress in recent years in gaining acceptance of farm animal sustainability products, we believe the adoption rate of Bovaer, one of our farm animal sustainability products, has been tempered given the absence of government incentives focused on such adoption. As a result, we are continuing to make investments to support Bovaer'sadoption beyond its initial launch, and we expect that additional studies, which are underway, and a potential expansion of claims may be required for Bovaer to achieve its expected potential. We continue to monitor the impact these changes are having on our current business and on the adoption ramp of Bovaer, although the potential longer-term impact to us remains uncertain.
Debt Refinancing: In October 2025, we refinanced our previously outstanding Term Loan B due 2027, paying off the $2,102 million balance in full with the proceeds from three new debt facilities - a €400 million Euro Term Loan due 2029, $1,100 million Term Loan B due 2032 and $540 million Incremental Term Facility due 2032 - and cash on hand. These refinancing activities extend our debt maturity profile and are expected to lower future cash paid for interest. See Liquidity and Capital Resources discussion below, as well as Note 7. Debt and Finance Lease Liabilityto the consolidated financial statements, for further information.
Sale of Future Revenue: In May 2025, we executed a Purchase and Sale Agreement (PSA) with affiliates of Blackstone, pursuant to which we received proceeds of $295 million in exchange for the rights to the proceeds from qualifying future royalties and sales milestone payments owed to us by Tarsus Pharmaceuticals, Inc. (Tarsus) based on their net sales of XDEMVY®(lotilaner ophthalmic solution) 0.25%, a medical treatment for Demodex blepharitis in humans. Rights to qualifying royalties sold to Blackstone apply to net sales of XDEMVY in the U.S. from April 1,
2025 through August 24, 2033. We retain the rights to all royalty payments on net sales outside the U.S. and any royalties due on U.S. net sales after August 24, 2033. These net proceeds were utilized to repay previously outstanding debt. See Note 10. Liability for Sale of Future Revenueto the consolidated financial statements for further information.
Corporate Headquarters Lease: In June 2025, we commenced a five-year finance lease for our new corporate headquarters in Indianapolis, Indiana. This lease contains both an option for Elanco to purchase the headquarters facility and a put right for the landlord to put the facility to us, both of which, if exercised, would occur at the end of the five-year lease term for $250 million. It is our current expectation that we will exercise our purchase option at the end of the lease term. As of December 31, 2025, the total finance lease liability was $255 million, with a corresponding right-of-use (ROU) asset of $223 million, net of accumulated amortization. See Note 7. Debt and Finance Lease Liabilityand Note 13. Leasesto the consolidated financial statements for further information.
Aqua Business Divestiture: On July 9, 2024, we closed the sale of our aqua business to a subsidiary of Merck Animal Health, for $1,294 million in cash proceeds, which was paid at closing. 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. Along with these assets, approximately 280 commercial and manufacturing employees were transferred to Merck Animal Health as part of this divestiture. We recorded a pre-tax gain on divestiture of $640 million in 2024. Income tax expense associated with this gain on divestiture was $170 million. See Note 4. Acquisitions and Divestituresto the consolidated financial statements for further information.
Results of Operations
The following discussion and analysis of our results of operations should be read along with the consolidated financial statements and the notes thereto included in Item 8. Financial Statements and Supplementary Data. For results of operations discussions related to the years ended December 31, 2024 and 2023, refer to Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on February 25, 2025. Our results of operations for the periods presented below may not be comparable with prior periods or with our results of operations in the future due to many factors, including but not limited to the factors identified in the "Product Development and Regulatory Update" and "Other Key Trends and Factors Affecting Our Results of Operations" discussions above.
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Revenue | $ | 4,715 | $ | 4,439 | 6% | |||||||||||||||
| Cost of sales | 2,122 | 2,003 | 6% | |||||||||||||||||
| Gross profit | 2,593 | 2,436 | 6% | |||||||||||||||||
| Research and development | 368 | 344 | 7% | |||||||||||||||||
| Marketing, selling and administrative | 1,430 | 1,314 | 9% | |||||||||||||||||
| Amortization of intangible assets | 543 | 527 | 3% | |||||||||||||||||
| Asset impairment, restructuring and other special charges | 237 | 150 | 58% | |||||||||||||||||
| Gain on divestiture | - | (640) | NM | |||||||||||||||||
| Interest expense, net of capitalized interest | 220 | 235 | (6)% | |||||||||||||||||
| Other expense, net | 19 | 18 | 6% | |||||||||||||||||
| (Loss) income before income taxes | (224) | 488 | NM | |||||||||||||||||
| Income tax expense | 8 | 150 | (95)% | |||||||||||||||||
| Net (loss) income | $ | (232) | $ | 338 | NM | |||||||||||||||
NM - Not meaningful
Revenue
Our products are sold in more than 90 countries, and as a result, a significant portion of our revenue is recorded in currencies other than the U.S. dollar. Because of this, our revenue is influenced by changes in foreign currency exchange rates. For the years ended December 31, 2025 and 2024, approximately 51%and 53%, respectively, of our revenue was denominated in foreign currencies.
Further, increases or decreases in inventory levels in our distribution channels can positively or negatively impact our periodic revenue, leading to variations. This can be a result of various factors, such as end customer demand, new customer contracts, initial stocking of new products, heightened and generic competition, the need for certain inventory levels, our ability to renew distribution contracts with expected terms, our ability to implement commercial strategies, regulatory restrictions, unexpected customer behavior, proactive measures taken by us in response to
shifting market dynamics, payment terms we extend, which are subject to internal policies, blackout shipping periods due to system downtime, implementations and integrations and procedures and environmental factors beyond our control.
Our revenue by product category for the years ended December 31, 2025 and 2024, was as follows:
| Revenue | % of Total Revenue | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | 2025 | 2024 | $ Change | % Change | ||||||||||||||||||||||||||||||||
| Pet Health | $ | 2,300 | $ | 2,143 | 49 | % | 48 | % | $ | 157 | 7 | % | ||||||||||||||||||||||||||
| Farm Animal | 2,362 | 2,250 | 50 | % | 51 | % | 112 | 5 | % | |||||||||||||||||||||||||||||
|
Contract Manufacturing and Other (1)
|
53 | 46 | 1 | % | 1 | % | 7 | 15 | % | |||||||||||||||||||||||||||||
| Total | $ | 4,715 | $ | 4,439 | 100 | % | 100 | % | $ | 276 | 6 | % | ||||||||||||||||||||||||||
Note: Numbers may not add due to rounding
(1)Represents revenue from arrangements in which we manufacture products on behalf of a third party and royalty revenue. In May 2025, we entered into an agreement to sell certain qualifying royalties, among other potential future cash flows for proceeds of $295 million in cash. While we are no longer entitled to these qualifying royalties, we are required under GAAP to continue recognizing them as revenue. For the year ended December 31, 2025, royalty revenue associated with this arrangement, which is reflected within Contract Manufacturing and Other in the table above, totaled $19 million. See Note 10. Liability for Sale of Future Revenueto the consolidated financial statements for additional information.
The effects of price, foreign currency exchange rates, volume and the impact of the prior year divestiture of our aqua business on changes in revenue for the year ended December 31, 2025, as compared to the prior year, were as follows:
|
(Dollars in millions)
|
Revenue | Price | FX Rate | Volume | Divestiture | Total | ||||||||||||||||||||||||||||||||
| Pet Health | $ | 2,300 | 2% | -% | 5% | -% | 7% | |||||||||||||||||||||||||||||||
| Farm Animal | 2,362 | 2% | 1% | 6% | (4)% | 5% | ||||||||||||||||||||||||||||||||
| Contract Manufacturing and Other | 53 | 15% | ||||||||||||||||||||||||||||||||||||
| Total | $ | 4,715 | 2% | 1% | 5% | (2)% | 6% | |||||||||||||||||||||||||||||||
Pet health revenue increased $157 million, or 7%, compared to 2024, driven by higher volumes and a 2% increase in pricing. Higher volumes were primarily driven by new products, led by Credelio Quattro,Zenrelia andAdTab, including the impacts of initial stocking.
Farm animal revenue increased $112 million, or 5%, compared to 2024, driven by higher volumes, a 2% increase in pricing and the impacts from foreign currency exchange rates. These increases were partially offset by the impact of the divestiture of our aqua business in July 2024, which generated revenue of $81 million during 2024. Higher volumes of our non-aqua products were led by Experior in U.S. cattle, and to a lesser degree, strength in poultry sales globally.
Gross Profit
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Gross profit | $ | 2,593 | $ | 2,436 | 6 | % | ||||||||||||||
| Gross margin % | 55.0 | % | 54.9 | % | ||||||||||||||||
Gross profit increased $157 million, or 6%, compared to 2024, driven by increased revenue, while gross margin percentage was relatively flat at 55.0%, compared to 54.9% in 2024. The favorable impacts from improved pricing and the productivity benefits from increased sales volumes were offset by the impacts of inflation and higher manufacturing costs.
Research and Development
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Research and development | $ | 368 | $ | 344 | 7 | % | ||||||||||||||
| % of revenue | 8 | % | 8 | % | ||||||||||||||||
R&D expenses increased $24 million, or 7%, compared to 2024, primarily driven by higher employee-related expenses and project costs and the impact from foreign currency exchange rate movements.
Marketing, Selling and Administrative
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Marketing, selling and administrative | $ | 1,430 | $ | 1,314 | 9 | % | ||||||||||||||
| % of revenue | 30 | % | 30 | % | ||||||||||||||||
Marketing, selling and administrative expenses increased $116 million, or 9%, compared to 2024, primarily driven by strategic investments in the global launches of new products and increased selling costs, corresponding to increased revenue.
Amortization of Intangible Assets
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Amortization of intangible assets | $ | 543 | $ | 527 | 3 | % | ||||||||||||||
Amortization of intangible assets increased $16 million compared to 2024, primarily driven by the impact from foreign currency exchange rate movements.
Asset Impairment, Restructuring and Other Special Charges
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Asset impairment, restructuring and other special charges | $ | 237 | $ | 150 | 58 | % | ||||||||||||||
Amounts recorded to asset impairment, restructuring and other special charges during the year ended December 31, 2025, included $155 million associated with the 2025 Restructuring Plan, of which $116 million related to expected cash-based severance costs and $39 million related primarily to non-cash impairment charges associated with our animal studies R&D facilities in Monheim, Germany, and our manufacturing facility in Kansas City, Kansas. Additional amounts recorded to asset impairment, restructuring and other special charges in 2025 included a $47 million impairment of a marketed product intangible asset during the fourth quarter due to a decline in projected sales of a product group acquired in a past acquisition and $16 million in impairments recorded during the third quarter related to two early-stage capital projects that were indefinitely suspended.
Amounts recorded to asset impairment, restructuring and other special charges during the year ended December 31, 2024, included a $53 million impairment charge related to the write-off of a pet health IPR&D asset, $44 million of costs associated with the 2024 Restructuring Plan, $18 million of acquisition and divestiture-related charges, primarily associated with our aqua business divestiture, and $15 million of asset impairments tied to the financial difficulties of our former contract manufacturing supply partner, TriRx Speke.
Gain on Divestiture
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Gain on divestiture | $ | - | $ | (640) | NM | |||||||||||||||
As discussed above, we recorded a pre-tax gain of $640 million on the divestiture of our aqua business in 2024. For additional information, see Note 4. Acquisitions and Divestituresto the consolidated financial statements.
Interest Expense, Net of Capitalized Interest
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Interest expense, net of capitalized interest | $ | 220 | $ | 235 | (6) | % | ||||||||||||||
Interest expense, net of capitalized interest decreased $15 million compared to 2024. This decrease was driven by lower average outstanding debt balances during the current year. This decrease was partially offset by the combined impacts from the $33 millionof imputed interest on our liability for sale of future revenue (see Note 10. Liability for Sale of Future Revenueto the consolidated financial statements for further information), an $11 million increase in financing costs, including the non-cash write-offs of previously deferred debt issuance costs, as compared to 2024, as well as $8 million of interest expense related to our new corporate headquarters finance lease (see Note 13. Leasesto the consolidated financial statements for further information).
Other Expense, Net
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Other expense, net | $ | 19 | $ | 18 | 6 | % | ||||||||||||||
Other expense, net for the years ended December 31, 2025 and 2024, primarily consisted of foreign currency exchange losses. Other expense, net for the year ended December 31, 2024, also included an $8 million write-down of the retained equity interest in a previous divestiture.
Income Tax Expense
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | % Change | |||||||||||||||||
| Income tax expense | $ | 8 | $ | 150 | (95)% | |||||||||||||||
| Effective tax rate | (3.5) | % | 30.7 | % | ||||||||||||||||
Income tax expense was $8 million in 2025 compared to $150 million in 2024. Our effective tax rate of (3.5)% in 2025 differed from the statutory income tax rate primarily due to the jurisdictional earnings mix in non-U.S. jurisdictions and an increase in our reserve for uncertain tax positions, partially offset by the tax benefit from the remeasurement of certain deferred tax positions throughout the year due to foreign tax rate changes.
Income tax expense in 2024 included $170 million associated with the taxable gain on the divestiture of our aqua business. Our effective tax rate of 30.7% in 2024 differed from the statutory income tax rate primarily due to the income tax associated with the gain on the divestiture of our aqua business, jurisdictional earnings mix of income in higher tax jurisdictions and losses for which no tax benefit was recognized. These factors were partially offset by our ability to realize certain net operating loss carryforwards and other tax attributes, which had historically been offset by a valuation allowance, due to the gain on the sale of our aqua business, and the recognition of certain state tax credits.
On July 4, 2025, the One Big Beautiful Bill Act (Act) was enacted into law in the U.S. The Act includes significant provisions, including tax cut extensions and modifications to the U.S. and international tax frameworks. Based on our current analysis of these provisions, we do not believe these provisions will have a material impact on our consolidated financial statements, including our analysis of our U.S. valuation allowance position. The Act did not have a material impact on our income tax expense for the year ended December 31, 2025.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under our credit facilities. As a significant portion of our business is conducted internationally, we hold a significant portion of cash outside the U.S. We monitor and adjust the amount of foreign cash based on projected cash flow requirements. Our ability to use foreign cash to fund cash flow requirements in the U.S. may be impacted by local regulations and, to a lesser extent, the income taxes associated with transferring cash to the U.S. We intend to indefinitely reinvest substantially all foreign earnings for continued use in our foreign operations. As our business evolves, we may change that strategy, particularly to the extent we identify tax-efficient reinvestment alternatives for our foreign earnings or change our cash management strategy.
We believe our primary sources of liquidity are sufficient to fund our short-term and long-term existing and planned capital requirements, which include working capital obligations, funding existing marketed and pipeline products, capital expenditures, business development in our targeted areas, short-term and long-term debt obligations, including both principal and interest payments, as well as interest rate swaps, lease payments, purchase obligations and costs associated with mergers, acquisitions, divestitures, business integrations and/or restructuring activities. As of December 31, 2025, we had cash and cash equivalents of $545 million and unused borrowing capacity on our Revolving Credit Facility of approximately $750 million. In addition, our Securitization Facility provides for additional borrowing capacity based on our U.S. Net Eligible Receivable Balances. As of December 31, 2025, we had approximately $120 million in undrawn borrowing capacity on this facility. We also have the ability to access capital markets to obtain debt financing for longer-term funding, if required. Further, we believe we have sufficient cash flow and liquidity to remain in compliance with our debt covenants.
In October 2025, we refinanced our previously outstanding Term Loan B due 2027 in full with the proceeds from three new debt facilities and cash on hand. Additionally, in June 2025 we amended our Securitization Facility, which extended its maturity through June 2028. In addition to these refinancings, we also repaid a net aggregate amount of $563 million of long-term indebtedness throughout 2025, partially enabled by the $290 million of net proceeds from our sale of future revenue. These activities have extended our debt maturity profile, decreased our net leverage position and are expected to result in lower future cash requirements for interest. See Note 7. Debt and
Finance Lease Liabilityto the consolidated financial statements for further information on current year debt financing and repayment activity.
Our ability to meet future funding requirements may be impacted by macroeconomic, business and financial volatility. As market conditions change, we will continue to monitor our liquidity position. However, a challenging economic environment or an economic downturn may impact our liquidity or ability to obtain future financing. See Item 1A. Risk Factors - We have substantial indebtedness.
Cash Flows
The following table provides a summary of cash flows from operating, investing and financing activities for the years ended December 31, 2025 and 2024:
| (in millions) | |||||||||||||||||
| Net cash provided by (used for): | 2025 | 2024 | $ Change | ||||||||||||||
| Operating activities | $ | 560 | $ | 541 | $ | 19 | |||||||||||
| Investing activities | (279) | 1,158 | (1,437) | ||||||||||||||
| Financing activities | (275) | (1,492) | 1,217 | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 71 | (91) | 162 | ||||||||||||||
| Net increase in cash and cash equivalents | $ | 77 | $ | 116 | $ | (39) | |||||||||||
Operating activities
Cash provided by operating activities increased $19 million compared to 2024. While net income was lower in 2025 than in 2024, the decrease was largely attributable to the prior year gain on our aqua business divestiture, for which the related cash proceeds were classified within investing activities, and increased restructuring charges due to our 2025 Restructuring Plan, the vast majority of which were either non-cash in nature or remain accrued as a liability as of December 31, 2025 (see Note 5. Asset Impairment, Restructuring and Other Special Chargesto the consolidated financial statements for further information). Cash paid for interest was $90 million lower in 2025 than in 2024, while cash paid for taxes, which included cash payments related to the taxable gain on our 2024 aqua business divestiture, was $85 million higher in 2025 than in 2024.
Investing activities
Cash used for investing activities was $279 million for the year ended December 31, 2025, compared to cash provided by investing activities of $1,158 million for the year ended December 31, 2024. Cash used for investing activities in 2025 largely consisted of $276 million of net purchases of property and equipment and software, which was $129 million higher than 2024. This increase in purchases of property and equipment and software primarily related to the expansion of our monoclonal antibody manufacturing facility in Elwood, Kansas, as well as multiple capital projects at other of our global manufacturing facilities. Additionally, in August 2025 we purchased approximately 56 acres of land to further our vision of creating the One Health Innovation District research hub centered around our new corporate headquarters in Indianapolis, Indiana.
Cash provided by investing activities in 2024 was driven by the cash proceeds of $1,294 million from the sale of our aqua business and to a lesser extent, the collection of a $66 million receivable related to the previous divestiture of our Shawnee and Speke facilities. These proceeds from investing activities were partially offset by $147 million of net purchases of property and equipment and software and $36 million of cash paid for the acquisition of Speke.
Financing activities
Cash used for financing activities was $275 million for the year ended December 31, 2025, compared to $1,492 million for the year ended December 31, 2024. Cash used for financing activities in 2025, included $563 million in net repayments of long-term borrowings, partially enabled by the $290 million of net proceeds from our sale of future revenue (see Note 7. Debt and Finance Lease Liabilityto the consolidated financial statements for further information on current year debt financing and repayment activity and Note 10. Liability for Sale of Future Revenueto the consolidated financial statements for further information on our sale of future revenue).
Cash used for financing activities during 2024 included the repayment of $1,600 million of term loan debt, $200 million, net on our Revolving Credit Facility and $25 million, net on our Securitization Facility. These debt repayments were partially offset by proceeds of $350 million from the issuance of our Incremental Term Facility due 2031 in August 2024.
Capital Expenditures
Capital expenditures, which we define as cash paid for property and equipment and software, were $276 million during 2025, an increase of $129 million compared to 2024. As discussed above, this increase primarily related to the expansion of our monoclonal antibody manufacturing facility in Elwood, Kansas, as well as multiple capital projects at other of our global manufacturing facilities, in addition to the purchase of land around our new corporate
headquarters in Indianapolis, Indiana. We anticipate capital expenditures in 2026 to be approximately $175 million to $200 million.
Description of Indebtedness
For a complete description of our debt and available credit facilities as of December 31, 2025, see Note 7. Debt and Finance Lease Liabilityto the consolidated financial statements.
Contractual Obligations
Our contractual obligations and commitments as of December 31, 2025, are primarily comprised of long-term debt obligations, including both expected principal and interest obligations, leases and purchase obligations. Purchase obligations consist of open purchase orders as of December 31, 2025, and contractual payment obligations with significant vendors which are noncancelable and not contingent. These obligations are primarily short-term in nature. See Note 7. Debt and Finance Lease Liabilityand Note 13. Leasesto the consolidated financial statements for further discussion regarding our contractual obligations related to our long-term debt and leases.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period. Certain of our accounting estimates are considered critical because they are the most important to the fair presentation of our financial statements, including the disclosures thereto, and often require significant, difficult or complex judgments, probabilities and assumptions. While we believe our critical accounting estimates to be reasonable based on all relevant information available, given their inherent uncertainty, if our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted. We regularly evaluate our estimates and assumptions and adjust them when facts and circumstances indicate the need for change, and such changes generally would be reflected in our consolidated financial statements in the period they are determined. We apply estimation methodologies consistently from year to year. The following is a summary of accounting estimates that we consider critical to our consolidated financial statements.
Revenue Recognition
Our gross product revenue is subject to reductions, including revenue incentives (rebates and discounts), that are generally estimated and recorded in the same period the revenue is recognized. Amounts recorded for revenue incentives can result from a complex series of judgments about future events and uncertainties and can rely on management's estimates and assumptions. In making these estimates and assumptions, we use our historical experience with similar incentives programs, current sales data and contract information and estimates of inventory levels at our channel distributors, among other factors, to estimate the impact of such programs on revenue. The sensitivity of our estimates can vary by program, type of customer and geographic location, although historically our adjustments to actual results have not been material. Nonetheless, if any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected.
See Note 2. Summary of Significant Accounting Policiesand Note 3. Revenueto the consolidated financial statements for further discussion regarding our revenue recognition policy and quantitative information regarding our global sales rebate programs, respectively.
Acquisitions and Divestitures
Acquisitions
We account for assets acquired and liabilities assumed in a business combination based on their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed, as well as estimated asset lives, can materially affect our consolidated results of operations. The fair values of intangible assets are determined using information available at the acquisition date based on expectations and assumptions that are deemed reasonable by management. These fair value estimates require significant judgment with respect to future revenue and earnings before interest and taxes (EBIT) margins, use of working capital, the selection of appropriate discount rates, product mix, income tax rates and other assumptions and estimates. Such estimates and assumptions are determined based upon our business plans and, when applicable, the perspectives of market participants. We often utilize an 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. For significant acquisitions, we normally engage an independent valuation specialist to assist in valuing significant assets and liabilities.
Divestitures
Determining the gain or loss on the divestiture of a business under GAAP requires us to allocate a portion of our single reporting unit's goodwill to the divested business' carrying value (the disposal group). The determination of how much goodwill to allocate to a disposal group is based on the relative fair value of the business being sold and the fair value of the remaining reporting unit being retained, which in the case of Elanco, is our remaining consolidated business. In determining the relative fair value of our single reporting unit, we typically utilize an income approach. Significant management estimates required in such an analysis include, but are 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 earnings before interest, taxes, depreciation and amortization (EBITDA) margin and the determination of an appropriate discount rate. Significant changes to any of these estimates could result in a different amount of goodwill being allocated to a disposal group, and consequently, would impact the amount of any pre-tax gain or loss recognized.
Impairment of Goodwill and Indefinite-Lived Assets
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 indicates the fair value of our single reporting unit is more likely than not less than its carrying amount (a "triggering event"). 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 this qualitative assessment, if we conclude it is more likely than not that the fair value is less than its carrying value, we conduct a quantitative impairment test, which involves comparing the estimated fair value of our single reporting unit to its carrying value. For quantitative goodwill impairment tests, when required, we estimate the fair value of our single reporting unit using an income approach. If the carrying value of the reporting unit exceeds its estimated fair value, we recognize an impairment loss for the difference. Significant management judgment is required in estimating our reporting unit's fair value and in the creation of forecasts of future operating results to be used in the discounted cash flow method of the income approach valuation. These include, but are not limited to, estimates and assumptions regarding our future cash flows, revenue growth rates and other profitability measures such as gross margin and EBITDA margin; and the determination of an appropriate discount rate. These estimates and assumptions are subject to change due to, among other factors, changes in our estimates of future cash flows, revenue growth or other profitability measures and/or changes in the discount rate, which is highly correlated with long-term treasury rates.
Similar to goodwill, indefinite-lived intangible assets are also reviewed for impairment at least annually during the fourth quarter, or more frequently if there is a triggering event. We also typically use an income approach when estimating the fair value of our indefinite-lived intangible assets, which primarily represent IPR&D acquired from prior business combinations. For more information related to our goodwill and indefinite-lived asset accounting policies and recent activity, see Note 2. Summary of Significant Accounting Policiesand Note 11. Goodwill and Intangiblesto the consolidated financial statements.
Deferred Tax Asset Valuation Allowances
We maintain valuation allowances unless it is more likely than not that all of the deferred tax asset will be realized. Changes in valuation allowances are typically included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods of tax attributes, availability of taxable temporary differences and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The realizability assessments made at a given balance sheet date are subject to change in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if we take operational or tax planning actions that could impact the future taxable earnings of a subsidiary. A change in these assumptions may result in an increase or decrease in the realizability of our existing deferred tax assets, and therefore a change in the valuation allowance, in future periods. In making such judgments, significant weight is given to evidence that can be objectively verified.
As of December 31, 2025 and 2024, we had consolidated valuation allowances of $246 millionand $269 million, respectively. In recent years we have incurred pre-tax losses in the U.S., and as a result we have concluded that it is "more likely than not" that a portion of our U.S. deferred tax assets will not be utilized. Accordingly, we have recorded valuation allowances of $207 millionand $218 million as of December 31, 2025 and 2024, respectively, against these deferred tax assets. Under current tax laws, the valuation allowance will not limit our ability to utilize U.S. deferred tax assets provided we can generate sufficient future taxable income in the U.S. We anticipate we will continue to record a valuation allowance against the losses until such time as we are able to determine it is "more likely than not" that the deferred tax assets will be realized.
Recently Issued Accounting Pronouncements
For discussion of our new accounting standards, see Note 2. Summary of Significant Accounting Policies to the consolidated financial statements.
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