Eli Lilly 2007 Annual Report Download - page 24

FINANCIALS
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levels). 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 annual reporting period. However, if mile-
stones for multiple products covered by these arrange-
ments would happen to be reached in the same report-
ing 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 uni-
laterally terminate development of the product, which
would allow us to avoid making the contingent pay-
ments; however, we are unlikely to cease development
if the compound successfully achieves clinical testing
objectives. We also note that, from a business perspec-
tive, 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.
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
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 . . . . . . . . . . . . . . . . . . . . $ 9,582.3 $ 645.6 $ 522.4 $1,000.7 $7,413.6
Capital lease obligations. . . . . . . . . . . 72.5 15.5 20.3 5.8 30.9
Operating leases . . . . . . . . . . . . . . . . . 305.4 93.7 129.5 76.2 6.0
Purchase obligations2 . . . . . . . . . . . . . 5,101.7 4,575.5 330.3 149.7 46.2
Other long-term liabilities
refl ected on our balance sheet3 . . 829.3 — 154.3 159.7 515.3
Other4 . . . . . . . . . . . . . . . . . . . . . . . . . . 146.3 146.3 — — —
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,037.5 $5,476.6 $1,156.8 $1,392.1 $8,012.0
1Our 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, 2007 to compute the amount of the contractual obligation for interest on the variable rate
debt instruments and swaps.
2We have included the following:
• Purchase obligations, consisting primarily of all open purchase orders at our signifi cant operating locations as of December 31,
2007. 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.
3We have included our long-term liabilities consisting primarily of our nonqualifi ed supplemental pension funding requirements and
deferred compensation liabilities. Liabilities for unrecognized tax benefi ts of $1.57 billion are excluded as reasonable estimates could
not be made regarding the timing of future cash outfl ows associated with those liabilities.
4This category comprises primarily minimum pension funding requirements.
The contractual obligations table is current as of December 31, 2007. The amount of these obligations can be
expected to change materially over time as new contracts are initiated and existing contracts are completed, ter-
minated, or modifi ed.