Eli Lilly 2013 Annual Report Download - page 44

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translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from
the beginning of the period. We may enter into foreign currency forward contracts to reduce the effect of
fluctuating currency exchange rates (principally the euro, the British pound, and the Japanese yen). 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 fluctuations on the existing assets, liabilities,
commitments, and anticipated revenues. Considering our derivative financial instruments outstanding at
December 31, 2013 and 2012, a hypothetical 10 percent change in exchange rates (primarily against the U.S.
dollar) as of December 31, 2013 and 2012, respectively, would not have a material impact on earnings, cash
flows, or fair values of foreign currency rate risk-sensitive instruments over a one-year period. These
calculations do not reflect 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 financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on
potential products still in development and enter into research and development arrangements with third
parties that often require milestone 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 for marketing by the appropriate regulatory agency or upon the
achievement of certain sales levels). If required by the arrangement, we may 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 below.
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 that period. See
"Financial Statements and Supplementary Data—Note 4, Collaborations," for additional details. 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.