Eli Lilly 2006 Annual Report Download - page 24

FINANCIALS
22
life cycle of the pharmaceutical product (e.g., approval
of the product for marketing by the appropriate regula-
tory agency). If required by the arrangement, we may
have to make royalty payments based upon a percentage
of the sales of the pharmaceutical product in the event
that regulatory approval for marketing is obtained.
Because of the contingent nature of these payments,
they are not included in the table of contractual
obligations.
Individually, these arrangements are not material
in any one reporting period. However, if milestones for
multiple products covered by these arrangements would
happen to be reached in the same reporting period, the
aggregate charge to expense could be material to the
results of operations in any one period. The inherent risk
in pharmaceutical development makes it unlikely that this
will occur, as the failure rate for products in development
is very high. In addition, these arrangements often give
us the discretion to unilaterally terminate development
of the product, which would allow us to avoid making the
contingent payments; however, we are unlikely to cease
development if the compound successfully achieves clini-
cal testing objectives. We also note that, from a business
perspective, we view these payments as positive because
they signify that the product is successfully moving
through development and is now generating or is more
likely to generate cash fl ows from sales of products.
The contractual obligations table is current as of
December 31, 2006. The amount of these obligations
can be expected to change materially over time as new
contracts are initiated and existing contracts are com-
pleted, terminated, or modifi ed.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
In preparing our fi nancial statements in accordance
with generally accepted accounting principles (GAAP),
we must often make estimates and assumptions that
affect the reported amounts of assets, liabilities,
revenues, expenses, and related disclosures. Some of
those judgments can be subjective and complex, and
consequently actual results could differ from those
estimates. For any given individual estimate or as-
sumption we make, it is possible that other people
applying reasonable judgment to the same facts and
circumstances could develop different estimates. We
believe that, given current facts and circumstances,
it is unlikely that applying any such other reasonable
judgment would cause a material adverse effect on our
consolidated results of operations, fi nancial position,
or liquidity for the periods presented in this report. Our
most critical accounting policies have been discussed
with our audit committee and are described below.
Revenue Recognition and Sales Rebate and Discount
Accruals
We recognize revenue from sales of products at the
time title of goods passes to the buyer and the buyer
assumes the risks and rewards of ownership. For more
than 90 percent of our sales, this is at the time prod-
ucts are shipped to the customer, typically a wholesale
distributor or a major retail chain. The remaining sales
are recorded at the point of delivery. Provisions for dis-
We regularly review the supply levels of our sig-
Our current noncancelable contractual obligations that will require future cash payments are as follows (in millions):
Payments Due by Period
Less Than 1–3 3–5 More Than
Total 1 Year Years Years 5 Years
Long-term debt, including
interest payments1 . . . . . . . . . . . . . . $5,638.1 $ 374.0 $1,703.5 $ 265.4 $3,295.2
Capital lease obligations . . . . . . . . . . . 152.6 19.8 36.1 24.2 72.5
Operating leases. . . . . . . . . . . . . . . . . . 412.2 92.2 136.0 76.8 107.2
Purchase obligations2 . . . . . . . . . . . . . 2,105.0 1,879.4 140.9 68.3 16.4
Other long-term liabilities
refl ected on our balance sheet3 . . . 836.8 78.6 135.9 138.2 484.1
Other4 . . . . . . . . . . . . . . . . . . . . . . . . . . 67.1 67.1 — — —
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,211.8 $2,511.1 $2,152.4 $ 572.9 $3,975.4
1 Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We used the interest rate forward
curve at December 31, 2006 to compute the amount of the contractual obligation for interest on the variable rate debt instruments and swaps.
2 We have included the following:
• Purchase obligations, consisting primarily of all open purchase orders at our signifi cant operating locations as of December 31, 2006. Some of these
purchase orders may be cancelable; however, for purposes of this disclosure, we have not distinguished between cancelable and noncancelable purchase
obligations.
• Contractual payment obligations with each of our signifi cant vendors, which are noncancelable and are not contingent.
3 We have included our long-term liabilities consisting primarily of our nonqualifi ed supplemental pension funding requirements and deferred compensation
liabilities.
4 This category comprises primarily minimum pension funding requirements.
counts and rebates are established in the same period
the related sales are recorded.