Eli Lilly 2008 Annual Report Download - page 26

FINANCIALS
24
ity of our short- and long-term debt. In 2009, we intend
to fund payments required in connection with the EDPA
settlements, and to further reduce outstanding commer-
cial paper with cash and cash equivalents on hand, cash
generated from operations, and the issuance of long-
term debt. We currently have $1.24 billion of unused
committed bank credit facilities, $1.20 billion of which
backs our commercial paper program. Additionally, in
November 2008, we obtained a one-year
short-term
revolving credit facility in the amount of $4.00 billion
as back-up, alternative fi nancing. Various risks and
uncertainties, including those discussed in the Financial
Expectations for 2009 section, may affect our operating
results and cash generated from operations.
In the normal course of business, our operations
are exposed to fl uctuations in interest rates and cur-
rency values. These fl uctuations can vary the costs
of fi nancing, investing, and operating. We address a
portion of these risks through a controlled program of
risk management that includes the use of derivative
fi nancial instruments. The objective of controlling these
risks is to limit the impact on earnings of fl uctuations
in interest and currency exchange rates. All derivative
activities are for purposes other than trading.
Our primary interest rate risk exposure results
from changes in short-term U.S. dollar interest rates.
In an effort to manage interest rate exposures, we
strive to achieve an acceptable balance between fi xed
and fl oating rate debt positions and may enter into
interest rate derivatives to help maintain that balance.
Based on our overall interest rate exposure at Decem-
ber 31, 2008 and 2007, including derivatives and other
interest rate risk-sensitive instruments, a hypothetical
10 percent change in interest rates applied to the fair
value of the instruments as of December 31, 2008 and
2007, respectively, would have no material impact on
earnings, cash fl ows, or fair values of interest rate risk-
sensitive instruments over a one-year period.
Our foreign currency risk exposure results from
fl uctuating currency exchange rates, primarily the U.S.
dollar against the euro and the Japanese yen, and the
British pound against the euro. We face transactional
currency exposures that arise when we enter into trans-
actions, generally on an intercompany basis, denomi-
nated in currencies other than the local currency. We
also face currency exposure that arises from translating
the results of our global operations to the U.S. dollar at
exchange rates that have fl uctuated from the beginning
of the period. We may use forward contracts and pur-
chased options to manage our foreign currency expo-
sures. Our policy outlines the minimum and maximum
hedge coverage of such exposures. Gains and losses on
these derivative positions offset, in part, the impact of
currency fl uctuations on the existing assets, liabilities,
commitments, and anticipated revenues. Consider-
ing our derivative fi nancial instruments outstanding at
December 31, 2008 and 2007, a hypothetical 10 percent
change in exchange rates (primarily against the U.S.
dollar) as of December 31, 2008 and 2007, respectively,
would have no material impact on earnings, cash fl ows,
or fair values of foreign currency rate risk-sensitive
instruments over a one-year period. These calculations
do not refl ect the impact of the exchange gains or losses
on the underlying positions that would be offset, in part,
by the results of the derivative instruments.
Off-Balance Sheet Arrangements and Contractual
Obligations
We have no off-balance sheet arrangements that have
a material current effect or that are reasonably likely to
have a material future effect on our fi nancial condition,
changes in fi nancial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or
capital resources. We acquire and collaborate on assets
still in development and enter into research and develop-
ment arrangements with third parties that often require
milestone and royalty payments to the third party contin-
gent upon the occurrence of certain future events linked
to the success of the asset in development. Milestone
payments may be required contingent upon the success-
ful achievement of an important point in the development
life cycle of the pharmaceutical product (e.g., approval
of the product for marketing by the appropriate regula-
tory agency or upon the achievement of certain sales
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 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 mate-
rial to the results of operations in any one period. These
25 -
20 -
15 -
10 -
5 -
0 -
-5 -
-10 -
-15 -
-20 -
Return on Assets and Shareholders’ Equity
(ROA—based on net income divided by
quarterly average asset balance;
ROE—based on net income divided by
average shareholders’ equity)
Net income, ROA, and ROE were affected
by strategic decisions to acquire ImClone
($4.73 billion) and in-license molecules and
technologies, as described in Note 3, settlement
of federal and state investigations related to
Zyprexa ($1.48 billion), as well as asset
impairments, restructuring, and other related
items. These items resulted in negative ROA
and ROE for 2008.
04 05 06 07 08
7.8%
17.8%
8.2%
18.5%
11.1%
24.8%
12.1%
24.3%
-7.5%
-16.3%
Return on Assets (ROA)
Return on Shareholders’ Equity (ROE)