Retirement Benefits

12 Months Ended

Dec. 31, 2023

Retirement Benefits [Abstract]

Retirement Benefits

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:

Change in benefit obligation:	2023		2022
Benefit obligation at beginning of year	$	324	$	462
Service cost	9		14
Interest cost	11		4
Actuarial loss (gain)	17		(123)
Benefits paid	(14)		(12)
Foreign currency exchange rate changes and other adjustments	19		(21)
Benefit obligation at end of year	366		324

Change in plan assets:
Fair value of plan assets at beginning of year	175	207
Actual return on plan assets	8	(26)
Employer contribution	11	12
Benefits paid	(14)	(12)
Foreign currency exchange rate changes and other adjustments	12	(6)
Fair value of plan assets at end of year	192	175

Funded status	(174)		(148)
Unrecognized net actuarial gain	(63)		(82)
Unrecognized prior service cost	(28)		(30)
Net amount recognized	$	(265)	$	(260)

Amounts recognized in the consolidated balance sheet as of December 31, consisted of:
Other noncurrent assets	$	1	$	2
Other current liabilities	(1)		—
Accrued retirement benefits	(174)		(150)
Accumulated other comprehensive loss before income taxes	(91)		(112)
Net amount recognized	$	(265)	$	(260)

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, 2023. We do not expect any plan assets to be returned to us in 2024.

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

(Percentages)	2023		2022		2021
Discount rate for benefit obligation	2.8	%	3.4	%	1.1	%
Discount rate for net benefit costs	3.4		1.1		0.6
Rate of compensation increase for benefit obligation	2.9		3.0		2.7
Rate of compensation increase for net benefit costs	3.0		2.7		3.1
Expected return on plan assets for net benefit costs	4.4		3.1		2.9

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, 2023, which reflect expected future service, as appropriate, are expected to be as follows:

	2024		2025		2026		2027		2028		2029-2033
Benefit payments	$	14	$	15	$	15	$	16	$	16	$	93

We also expect to contribute $10 million to our pension plans in 2024.

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

	2023		2022
Projected benefit obligation	$	343	$	301
Fair value of plan assets	168		150

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

	2023		2022
Accumulated benefit obligation	$	332	$	289
Fair value of plan assets	168		146

The total accumulated benefit obligation for our defined benefit pension plans was $354 million and $314 million at December 31, 2023 and 2022, respectively.

Net pension expense (benefit) related to our defined benefit pension plans for the years ended December 31, included the following components:

	2023		2022		2021
Service cost	$	9	$	14	$	18
Interest cost	11		4		2
Expected return on plan assets	(8)		(6)		(6)
Amortization of prior service cost	(5)		(5)		(6)
Amortization of net actuarial (gain) loss	(3)		1		2
Net curtailments and settlements	—		—		(29)
Net pension expense (benefit)	$	4	$	8	$	(19)

The components of net periodic benefit expense, other than service cost and net curtailments and settlements, were included in other expense, net in the consolidated statements of operations. Net curtailments and settlements related to the remeasurement of our pension benefit obligation as a result of workforce reductions in connection with past restructuring programs. See Note 5. Asset Impairment, Restructuring and Other Special Charges for further information.

The following represents the pre-tax amounts recognized for defined benefit plans in other comprehensive income (loss) for the years ended December 31, 2023:

	2023		2022		2021
Actuarial (loss) gain arising during period	$	(17)	$	92	$	29
Amortization of prior service cost, including settlements, in net loss	(5)		(5)		(36)
Amortization of net actuarial (gain) loss, including curtailments, in net loss	(3)		1		22
Foreign currency exchange rate changes and other	5		2		—
Total other comprehensive (loss) income during period	$	(20)	$	90	$	15

We recognized $3 million and $11 million of income tax expense in other comprehensive income (loss), respectively, related to our defined benefit plans during the years ended December 31, 2023 and 2022. Amounts recognized in 2021 were not material.

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 87% 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. The investment strategy for the legacy Elanco plans is to diversify our plan assets with a designated percentage invested in fixed-income securities, equity securities, real estate and other alternative investments. The acquired Bayer Animal Health plans are managed separately, and underlying investments are classified in the same categories.

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 the investments based on a market approach using quoted market values, 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 on 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, 2023, by asset category were as follows:

			Fair Value Measurements Using
Asset Class	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Investments Valued at NAV(1)
Public equity securities	$	58	$	55	$	—	$	—	$	3
Fixed income:
Developed markets	72		71		—		—		1
Emerging markets	12		12		—		—		—
Real estate	18		11		7		—		—
Other	32		28		4		—		—
Total	$	192	$	177	$	11	$	—	$	4

(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.

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

The fair values of pension plan assets as of December 31, 2022, by asset category were as follows:

			Fair Value Measurements Using
Asset Class	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Investments Valued at NAV(1)
Public equity securities	$	49	$	47	$	—	$	—	$	2
Fixed income:
Developed markets	64		63		—		—		1
Emerging markets	9		9		—		—		—
Real estate	23		17		6		—		—
Other	30		25		5		—		—
Total	$	175	$	161	$	11	$	—	$	3

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

No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2022.

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 $40 million, $34 million and $39 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Multiemployer Plans

Through the acquisition of Bayer Animal Health, we acquired participation in certain multiemployer arrangements with Bayer-Pensionskasse VVaG, Leverkusen (Germany) (Bayer-Pensionskasse) and Rheinishche Pensionskasse VVaG, Leverkusen (Germany) (Rheinishche Pensionskasse). These plans 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 plan. The Company-specific plan information for Bayer-Pensionskasse and Rheinische-Pensionskasse 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 Bayer-Pensionskasse or Rheinische-Pensionskasse are underfunded, our future contributions to the plan(s) may increase and may be used to fund retirement benefits for employees related to other employers, although as of December 31, 2022 and 2021, both 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, 2023, 2022 and 2021, 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.