Eli Lilly 2010 Annual Report Download - page 39

FORM 10-K
and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success
of the asset in development. Milestone payments may be required contingent upon the successful 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 regulatory 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 material to the results of operations in any one period. 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 milestone 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 flows from sales of products.
Our current noncancelable contractual obligations that will require future cash payments are as follows (in millions):
Payments Due by Period
Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years
Long-term debt, including interest payments1............. $ 9,965.2 $ 205.8 $1,936.7 $1,429.1 $6,393.6
Capital lease obligations ................................ 38.9 13.9 13.1 8.5 3.4
Operating leases ...................................... 572.3 108.7 162.6 103.2 197.8
Purchase obligations2.................................. 11,806.2 9,206.6 1,105.7 740.5 753.4
Other long-term liabilities reflected on our balance sheet3. . . 1,252.9 0.0 309.2 238.8 704.9
Other4............................................... 298.3 298.3 0.0 0.0 0.0
Total ................................................ $23,933.8 $9,833.3 $3,527.3 $2,520.1 $8,053.1
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, 2010, 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 significant operating locations as of
December 31, 2010. 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 significant vendors, which are noncancelable and are not contingent.
3We have included long-term liabilities consisting primarily of our nonqualified supplemental pension funding requirements and
deferred compensation liabilities. We excluded long-term liabilities for unrecognized tax benefits of $1.23 billion, as we cannot
reasonably estimate the timing of future cash outflows associated with those liabilities.
4This category consists of various miscellaneous items expected to be paid in the next year, none of which are individually
material.
The contractual obligations table is current as of December 31, 2010. We expect the amount of these obligations to
change materially over time as new contracts are initiated and existing contracts are completed, terminated, or
modified.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
In preparing our financial 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 assumption 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, financial 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 Return, 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 approximately 85 percent of our sales, this is at the time products are
shipped to the customer, typically a wholesale distributor or a major retail chain. The remaining sales, which are
outside the U.S., are recorded at the point of delivery. Provisions for returns, rebates, and discounts are established
in the same period the related sales are recorded.
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