Eli Lilly 2003 Annual Report Download - page 21

FINANCIALS
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and the contracts with our various customer groups.
The largest of our sales rebate/discount amounts
are rebates associated with sales covered by Medicaid.
Although we generally accrue a liability for Medicaid re-
bates at the time we record the sale (when the product
is shipped), the Medicaid rebate related to that sale is
typically paid up to six months later. In determining the
appropriate accrual amount, we consider our historical
Medicaid rebate payments by product as a percent of
our historical sales as well as any signifi cant changes
in sales trends, an evaluation of the current Medicaid
rebate laws and interpretations, the percent of our
products that are sold to Medicaid recipients, and our
product pricing and current rebate/discount contracts.
We believe that the accruals we have established for
sales rebates and discounts are reasonable and appropri-
ate based on current facts and circumstances. However, it
is possible that other people applying reasonable judg-
ment to the same facts and circumstances could develop a
different accrual amount for sales rebates and discounts.
A 5 percent change in the Medicaid rebate expense we
recognized in 2003 would lead to an approximate $28 mil-
lion effect on our income before income taxes.
Product Litigation Liabilities and Other Contingencies
Product litigation liabilities and other contingencies are,
by their nature, uncertain and are based upon complex
judgments and probabilities. The factors we consider in
developing our product litigation liability reserves and
other contingent liability amounts include the merits and
jurisdiction of the litigation, the nature and the number
of other similar current and past litigation cases, the
nature of the product and the current assessment of
the science subject to the litigation, and the likelihood of
settlement and current state of settlement discussions
if any. In addition, we have accrued for certain product
liability claims incurred, but not fi led, to the extent we
can formulate a reasonable estimate of their costs. We
estimate these expenses based primarily on historical
claims experience and data regarding product usage.
We also consider the insurance coverage we have to
diminish the exposure. In assessing our insurance cov-
erage, we consider the policy coverage limits and exclu-
sions, the potential for denial of coverage by the insur-
ance company, the fi nancial position of the insurers, and
the possibility of and the length of time for collection.
We believe that the accruals and related insurance
recoveries we have established for product litigation li-
abilities and other contingencies are appropriate based on
current facts and circumstances. However, it is possible
that other people applying reasonable judgment to the
same facts and circumstances could develop a different
liability amount for product litigation liabilities and other
contingencies or a different recovery amount from the
insurance companies. A 5 percent change in the product
litigation liabilities and other contingencies accrual would
lead to an approximate $13 million effect on our income
before income taxes; however, much of this effect would
be expected to be offset by recoveries from our insurance
coverages. A 5 percent change in the insurance recoveries
estimate would lead to an approximate $4 million effect
on our income before income taxes.
Pension and Retiree Medical Plan Assumptions
Pension benefi t costs include assumptions for the
discount rate, retirement age, and the expected return
on plan assets. Retiree medical plan costs include
assumptions for the discount rate, retirement age, the
expected return on plan assets, and the health-care-
cost trend rates. These assumptions have a signifi -
cant effect on the amounts reported. In addition to the
analysis below, see Note 12 to the consolidated fi nancial
statements for additional information regarding our
retirement benefi ts.
Periodically, we evaluate the discount rate and the
expected return on plan assets in our defi ned benefi t
pension and retiree health benefi t plans. In evaluating
these assumptions, we consider many factors, includ-
ing an evaluation of the discount rates, expected return
on plan assets and the health-care-cost trend rates
of other companies; our historical assumptions com-
pared with actual results; an analysis of current market
conditions and asset allocations (approximately 85 to
95 percent of which are growth investments); and the
views of leading fi nancial advisers and economists. In
evaluating our expected retirement age assumption,
we consider the retirement ages of our past employees
eligible for pension and medical benefi ts together with
our expectations of future retirement ages.
We believe our pension and retiree medical plan
assumptions are appropriate based upon the above
factors. However, other people applying reasonable
judgment to the same facts and circumstances could
develop a different estimate of these factors. If the
health-care-cost trend rates were to be increased by
one percentage point each future year, the aggregate
of the service cost and interest cost components of the
2003 annual expense would increase by approximately
$15 million. A one-percentage-point decrease would
decrease the aggregate of the 2003 service cost and in-
terest cost by approximately $13 million. If the discount
rate for 2003 were to be changed by a quarter percent-
age point, income before income taxes would change
by approximately $17 million. If the expected return on
plan assets for 2003 were to be changed by a quarter
percentage point, income before income taxes would
change by approximately $10 million. If our assumption
regarding the expected age of future retirees for 2003
were adjusted by one year, that would affect our income
before income taxes by approximately $24 million.