Elanco Animal Health IncELAN
Elanco Animal Health Inc Stock Compensation Disclosure
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 our Board of Directors. As of December 31, 2025, 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 17.3 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. We include the impact of estimated forfeitures when measuring compensation expense, which are estimated based on historical experience at the time of grant and are revised in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense for the years ended December 31, 2025, 2024 and 2023, was $68 million, $55 million and $46 million, respectively, a majority of which related to RSUs and PAs in each year. The associated tax benefit from stock-based compensation expense was offset by a valuation allowance.
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 on a straight-line basis over the vesting period, which is typically three years. RSUs granted to employees for the years ended December 31, were as follows:
| (Units in millions) | 2025 | 2024 | 2023 | |||||||||||||||||
| Granted units | 3.4 | 2.4 | 3.2 | |||||||||||||||||
| Weighted-average grant date fair value | $ | 11.63 | $ | 15.89 | $ | 11.15 | ||||||||||||||
Changes in the nonvested portion of RSUs for 2025 are summarized below:
| (Shares in millions) | Shares | Weighted-Average Grant Date Fair Value | ||||||||||||
Nonvested units at January 1, 2025 | 4.4 | $ | 14.85 | |||||||||||
| Granted | 3.4 | 11.63 | ||||||||||||
| Vested | (2.0) | 15.56 | ||||||||||||
| Forfeited | (0.3) | 13.05 | ||||||||||||
Nonvested units at December 31, 2025 | 5.5 | 12.66 | ||||||||||||
The fair market value of RSUs vesting in 2025, 2024 and 2023 was $31 million, $29 million and $12 million, respectively. As of December 31, 2025, the total remaining unrecognized expense related to nonvested RSUs was $22 million, which is expected to amortize over a weighted-average remaining requisite service period of 17 months.
Performance-Based Awards
PAs, which are granted to eligible officers and management, represent the right to receive shares 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. 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, 2025, is summarized below:
| (Shares in millions) | Shares | Weighted-Average Grant Date Fair Value | ||||||||||||
Nonvested awards at January 1, 2025 | 2.5 | $ | 13.37 | |||||||||||
| Granted | 1.7 | 11.31 | ||||||||||||
| Vested | (1.3) | 11.26 | ||||||||||||
| Forfeited | (0.3) | 11.85 | ||||||||||||
Nonvested awards at December 31, 2025 | 2.6 | 13.25 | ||||||||||||
The fair market value of PAs vesting in 2025, 2024 and 2023 was $14 million, $10 million and $8 million, respectively. As of December 31, 2025, the total remaining unrecognized expense related to nonvested PAs was $10 million, which is expected to amortize 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, 2025, 2024 and 2023 was estimated to be $5.59, $7.35, and $4.93 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:
| 2025 | 2024 | 2023 | ||||||||||||||||||
| Expected dividend yield | — | % | — | % | — | % | ||||||||||||||
Risk-free interest rate (1) | 4.01 | % | 4.19 | % | 4.08 | % | ||||||||||||||
Expected stock price volatility (2) | 43.6 | % | 40.7 | % | 38.2 | % | ||||||||||||||
Expected term (3) (years) | 6 | 6 | 6 | |||||||||||||||||
(1)Determined based on the zero-coupon risk-free rate for a U.S. Treasury Constant Maturity yield curve, with a term equal to our expected term assumption.
(2)Determined based on our historical stock price volatility over the past six years (commensurate with our expected term assumption).
(3)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, 2025, is summarized below:
| (Shares in millions) | Shares of Common Stock Attributable to Options | Weighted-Average Exercise Price of Options | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (in millions) | ||||||||||||||||||||||
Outstanding at January 1, 2025 | 2.5 | $ | 17.27 | |||||||||||||||||||||||
| Granted | 1.3 | 11.71 | ||||||||||||||||||||||||
| Exercised | (0.1) | 11.26 | ||||||||||||||||||||||||
| Forfeited or expired | (0.2) | 13.39 | ||||||||||||||||||||||||
Outstanding at December 31, 2025 | 3.5 | $ | 15.51 | 7.4 | $ | 29.0 | ||||||||||||||||||||
Exercisable at December 31, 2025 | 1.5 | 18.97 | 5.8 | 9.7 | ||||||||||||||||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 24, 2026 | Showing above |
| 2024 | Feb 25, 2025 | |
| 2023 | Feb 26, 2024 | |
About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.