Eli Lilly 2004 Annual Report Download - page 24

FINANCIALS
22
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
2004 annual expense would increase by approximately
$16 million. A one-percentage-point decrease would
decrease the aggregate of the 2004 service cost and in-
terest cost by approximately $14 million. If the discount
rate for 2004 were to be changed by a quarter percent-
age point, income before income taxes would change
by approximately $21 million. If the expected return on
plan assets for 2004 were to be changed by a quarter
percentage point, income before income taxes would
change by approximately $11 million. If our assumption
regarding the expected age of future retirees for 2004
were adjusted by one year, that would affect our income
before income taxes by approximately $26 million.
Income Taxes
We have recorded valuation allowances against certain
of our deferred tax assets, primarily those that have
been generated from net operating losses in certain
taxing jurisdictions. In evaluating whether we would
more likely than not recover these deferred tax assets,
we have not assumed any future taxable income or tax
planning strategies in the jurisdictions associated with
these carryforwards. Implementation of tax plan-
ning strategies to recover these deferred tax assets or
future income generation in these jurisdictions could
lead to the reversal of these valuation allowances and a
reduction of income tax expense.
We believe that our estimates for the valuation al-
lowances reserved against the deferred tax assets are
appropriate based on current facts and circumstances.
However, other people applying reasonable judgment to
the same facts and circumstances could develop a dif-
ferent estimate of these factors.
We prepare and fi le tax returns based on our
interpretation of tax laws and regulations and record
estimates based on these judgments and interpreta-
tions. In the normal course of business, our tax returns
are subject to examination by various taxing authorities.
Such examinations may result in future tax and inter-
est assessments by these taxing authorities. Inherent
uncertainties exist in estimates of tax contingencies
due to changes in tax law resulting from legislation,
regulation and/or as concluded through the various
jurisdictions’ tax court systems. We record a liability for
tax contingencies when we believe it is probable that we
will be assessed and the amount of the contingency can
be reasonably estimated. The tax contingency reserve
is adjusted for changes in facts and circumstances,
and additional uncertainties. For example, adjustments
could result from signifi cant amendments to existing
tax law and the issuance of regulations or interpreta-
tions by the taxing authorities, new information obtained
during a tax examination, or resolution of an examina-
tion. We believe that our estimates for tax contingency
reserves are appropriate and suffi cient to pay assess-
ments that may result from examinations of our tax
returns; however, other people applying reasonable
judgment to the same facts and circumstances could
develop a different estimate and the amount ultimately
paid upon resolution of issues raised may differ from
the amounts accrued.
FINANCIAL EXPECTATIONS FOR 2005
For the full year 2005, we currently expect earnings per
share to be in the range of $2.80 to $2.90, including the
incremental equity compensation expense estimated
at $.25 per share as a result of expensing stock options
(see Note 2 to the consolidated fi nancial statements for
additional information) and compensation structural
changes. For the full year 2005, we expect sales to grow
8 percent to 10 percent (with acceleration in the sec-
ond half of the year), gross margins as a percentage of
sales to decline by roughly 50 basis points to 75 basis
points, marketing and administrative expenses to grow
in the low single digits, and research and development
expenses to grow in the mid-single digits. Further, we
expect other income to contribute approximately $175
million to $225 million, and the effective tax rate to be
about 22 percent. As a result of recently restructur-
ing our arrangements with our U.S. wholesalers, we
anticipate reductions in wholesaler inventory levels for
certain products (primarily Strattera, Prozac, and Gem-
zar) in the fi rst part of 2005. While this could affect the
sales growth rates for certain individual products in the
near term, it is unlikely to have a material impact on our
consolidated sales or results of operations for 2005.
Actual results could differ materially and will
depend on, among other things, the continuing growth
of our currently marketed products; developments with
competitive products; the timing and scope of regula-
tory approvals and the success of our new product
launches; foreign exchange rates; wholesaler inventory
changes; other regulatory developments, litigation, and
government investigations; and the impact of govern-
mental actions regarding pricing, importation, and
reimbursement for pharmaceuticals. In particular, as
described later in Legal and Regulatory Matters, certain
generic pharmaceutical manufacturers have challenged
our U.S. compound patent for Zyprexa. We are awaiting
the trial court decision on the challenge. If the decision
is unfavorable and the generic companies launch gener-
ic olanzapine prior to resolution of appeals, our fi nancial
results would be very negatively affected. We undertake
no duty to update these forward-looking statements.