SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR QUARTER ENDED MARCH 31, 1995
COMMISSION FILE NUMBER 1-6351
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ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA 35-0470950
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrant's telephone number, including area code (317) 276-2000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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The number of shares of common stock outstanding as of April 30, 1995:
Class Number of Shares Outstanding
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Common 292,461,934
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months
Ended March 31,
-------------------
1995 1994
-----------------
(Dollars in millions except
per-share data)
Net sales $1,717.3 $1,309.1
Cost of sales 512.5 382.1
Research and development 236.7 177.3
Marketing and administrative 407.2 280.0
Special charges - 56.0
Interest expense 66.2 16.7
Other income - net (33.2) (35.8)
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1,189.4 876.3
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Income from continuing operations before
income taxes 527.9 432.8
Income taxes 153.1 132.1
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Income from continuing operations 374.8 300.7
Income from discontinued operations, net of tax 18.4 30.0
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Net income $ 393.2 $ 330.7
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Earnings per share:
Income from continuing operations $1.30 $1.04
Income from discontinued operations .06 .10
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Net income $1.36 $1.14
==== ====
Dividends paid per share $ .645 $ .625
See Notes to Consolidated Financial Statements.
2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
March 31, December 31,
1995 1994
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(Millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 978.8 $ 536.9
Short-term investments 151.3 209.8
Accounts receivable, net of
allowances of $54.7 (1995)
and $46.6 (1994) 1,638.0 1,550.2
Other receivables 286.8 284.4
Inventories 901.1 968.9
Deferred income taxes 199.6 245.0
Prepaid expenses 278.0 167.1
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TOTAL CURRENT ASSETS 4,433.6 3,962.3
OTHER ASSETS
Prepaid retirement 413.6 411.9
Investments 465.0 464.1
Goodwill and other intangibles, net of
allowances for amortization of
$359.0 (1995) and $326.2 (1994) 4,379.1 4,411.5
Sundry 852.3 846.1
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6,110.0 6,133.6
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress 7,101.9 7,026.4
Less allowances for depreciation 2,684.8 2,614.9
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4,417.1 4,411.5
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$14,960.7 $14,507.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $3,620.0 $2,724.4
Accounts payable 783.7 878.2
Employee compensation 220.9 304.6
Dividends payable - 188.8
Other liabilities 960.8 1,065.1
Income taxes payable 543.6 508.4
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TOTAL CURRENT LIABILITIES 6,129.0 5,669.5
LONG-TERM DEBT 1,638.7 2,125.8
DEFERRED INCOME TAXES 218.7 188.9
RETIREE MEDICAL BENEFIT OBLIGATION 173.7 170.5
OTHER NONCURRENT LIABILITIES 965.4 997.1
SHAREHOLDERS' EQUITY
Common stock 183.0 183.0
Additional paid-in capital 417.6 421.7
Retained earnings 5,467.0 5,062.1
Deferred costs-ESOP (214.4) (218.2)
Currency translation adjustments 10.1 (38.0)
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5,863.3 5,410.6
Less cost of common stock in treasury 28.1 55.0
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5,835.2 5,355.6
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$14,960.7 $14,507.4
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See Notes to Consolidated Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Ended
March 31,
--------------------
1995 1994
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(Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $393.2 $330.7
Adjustments to Reconcile Net Income to
Cash Flows from Operating Activities:
Changes in operating assets and liabilities (288.5) (356.8)
Change in deferred taxes 60.9 60.4
Special charges - 56.0
Depreciation and amortization 140.1 103.6
Other items, net (21.9) (25.8)
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NET CASH FLOWS FROM OPERATING ACTIVITIES 283.8 168.1
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment (96.9) (111.9)
Additions to sundry assets and intangibles (3.4) (34.0)
Reduction of investments 129.9 388.9
Additions to investments (57.0) (439.5)
Acquisitions (28.4) -
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NET CASH USED FOR INVESTING ACTIVITIES (55.8) (196.5)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (186.6) (181.0)
Purchase of common stock and other capital
transactions (22.4) (13.9)
Net additions to short-term borrowings 412.2 254.5
Net (reductions) additions to long-term debt (15.2) 21.6
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NET CASH PROVIDED BY FINANCING ACTIVITIES 188.0 81.2
Effect of Exchange Rate Changes on Cash 25.9 12.5
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NET INCREASE IN CASH AND CASH EQUIVALENTS 441.9 65.3
Cash and cash equivalents at January 1 536.9 539.6
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CASH AND CASH EQUIVALENTS AT MARCH 31 $978.8 $604.9
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See Notes to Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the requirements of Form 10-Q and therefore
do not include all information and footnotes necessary for a fair presentation
of financial position, results of operations, and cash flow in conformity with
generally accepted accounting principles. In the opinion of management, the
financial statements reflect all adjustments (consisting only of normal
recurring accruals) that are necessary to a fair statement of the results for
the periods shown. Certain 1994 amounts have been reclassified to conform to
the 1995 presentation of discontinued operations.
As presented herein, sales include sales of the Company's life-sciences
products and service revenue from PCS Health Systems, Inc. (PCS).
CONTINGENCIES
The Company has been named as a defendant in numerous product liability
lawsuits involving primarily two products, diethylstilbestrol and Prozac(R).
The Company has accrued for its estimated exposure, including costs of
litigation, with respect to all current product liability claims. In
addition, the Company has accrued for certain future anticipated product
liability claims to the extent the Company can formulate a reasonable estimate
of their costs. The Company's estimates of these expenses are based primarily
on historical claims experience and data regarding product usage. The Company
expects the cash amounts related to the accruals to be paid out over the next
several years. The majority of costs associated with defending and disposing
of these suits are covered by insurance. The Company's estimate of insurance
recoveries is based on existing deductibles, coverage limits, and the existing
and projected future level of insolvencies among its insurance carriers.
The Company is a party to various patent litigation matters involving
Humatrope(R), Humulin(R), bovine somatotropin, and various products within the
former Medical Devices and Diagnostics Division. Based upon historical and
industry data, the Company has accrued for the anticipated cost of resolution
of the claims.
Under the Comprehensive Environmental Response, Compensation, and Liability
Act, commonly known as Superfund, the Company has been designated as one of
several potentially responsible parties with respect to certain sites. Under
Superfund, each responsible party may be jointly and severally liable for the
entire amount of the cleanup. The Company also continues remediation of
certain of its own sites. The Company has accrued for estimated Superfund
cleanup costs, remediation, and certain other environmental matters, taking
into account, as applicable, available information regarding site conditions,
potential cleanup methods, estimated costs, and the extent to which other
parties can be expected to contribute to those costs. The Company has
asserted its right to coverage for defense costs in certain environmental
proceedings and has reserved its right to pursue claims for insurance with
respect to certain environmental liabilities. However, because of
uncertainties with respect to the timing and ultimate realization of those
claims, the Company has not recorded any environmental insurance recoverables.
5
The product, patent, and environmental liabilities have been reflected in the
Company's consolidated balance sheets at their gross amounts (approximately
$415 million at March 31, 1995). Estimated insurance recoverables appear as
assets in the consolidated balance sheets (approximately $150 million at March
31, 1995).
The Company has been named, along with numerous other U.S. prescription drug
manufacturers, as a defendant in a large number of related actions brought by
retail pharmacies alleging violations of federal and state antitrust and
pricing laws. The federal suits include a class action on behalf of nearly
all U.S. retail pharmacies alleging an industrywide agreement to deny
favorable prices to retail pharmacies. Other related suits, brought by
several thousand pharmacies, involve claims of price discrimination or claims
under other pricing laws. These suits are presently in discovery.
While it is not possible to predict or determine the outcome of the patent,
product liability, antitrust or other legal actions brought against the
Company, or the ultimate cost of environmental matters, the Company continues
to believe the costs associated with all such matters will not have a material
adverse effect on its consolidated financial position.
SPECIAL CHARGES
In the first quarter of 1994, the Company incurred $56 million of pretax
charges associated with the March 31 voluntary recall of three of its liquid
oral antibiotics. The recall, which was initiated by the Company after
consultation with the FDA, was made after four instances were reported of
small plastic caps being found in the antibiotics. Shipments of all three
products were resumed during the second and third quarters of 1994.
EARNINGS PER SHARE
Earnings per share are calculated based on the average number of outstanding
common shares.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
DISCONTINUED OPERATIONS:
The Company is proceeding with its plan to complete the divestiture of the
Medical Devices and Diagnostics (MDD) Division businesses in 1995, including
the split-off (an exchange offer pursuant to which Lilly shareholders will be
given the opportunity to exchange some or all their Lilly shares for Guidant
shares) of its remaining 80 percent interest in Guidant Corporation (Guidant)
and the sale of Hybritech Incorporated. Currently, the Company intends to
complete the split-off of Guidant in the latter half of 1995.
As a consequence of the divestiture plan, the operating results of the MDD
companies have been reflected as "discontinued operations" in the Company's
financial statements and have been excluded from consolidated sales and
expenses reflected therein. The Company expects to recognize a net gain on
the completion of the divestiture.
OPERATING RESULTS OF CONTINUING OPERATIONS:
The Company's sales for the first quarter increased 31 percent as compared
with the first quarter of 1994. Sales inside the United States increased 34
percent while sales outside the United States increased 28 percent. Compared
with the first quarter of 1994, volume increased 29 percent (24 percent
excluding PCS Health Systems, Inc. (PCS)), prices declined 1 percent, and
foreign exchange rates had a favorable effect of 3 percent.
Worldwide sales of pharmaceutical products increased 33 percent in the first
quarter compared with the same period last year. Contributing significantly
to the growth of worldwide pharmaceutical product sales were Axid(R),
cefaclor, Humulin, LorabidTM, and Prozac. Worldwide sales of Prozac in the
first quarter of 1995 were $456.7 million, an increase of 36 percent as
compared to the first quarter of 1994. The Company expects continued growth
of Prozac sales for the remainder of the year, but at a lower rate. U.S.
sales growth of 36 percent was achieved despite the growth in product
discounts and rebates associated with the Company's increased participation in
managed-care programs. U.S. sales of anti-infectives reflected an increase
over the first quarter of 1994 largely as a result of increased cefaclor
sales, including a generic form of the product marketed and distributed by the
Company's subsidiary STC Pharmaceuticals, Inc. (STC) under the previously
announced agreement between STC and Mylan Pharmaceuticals, Inc. A heavier
flu season in certain markets, as compared to the previous year, drove the
cefaclor sales increase. Service revenue from PCS, which was acquired in
November, 1994 contributed $63 million to the quarter's sales growth. U.S.
sales of Dobutrex(R) declined approximately 87 percent during the quarter as a
result of generic competition. International pharmaceutical sales growth of
28 percent was achieved primarily as a result of the Company's continuing
expansion in global markets.
In May 1995, two companies began marketing generic forms of cefaclor capsules
in the U.S. The Company has filed suit against those companies in Federal
court in Indianapolis asserting infringement of certain U.S. process patents
in the manufacture of cefaclor. The suit seeks, among other things, an
injunction against the sale of the product made by the infringed process. The
patents at issue expire in July 1996. There can be no assurance that the
Company will be successful in this litigation.
7
Worldwide sales of animal health products increased 15 percent over the first
quarter of 1994. The increase resulted from strong performance of the entire
product line both in the U.S. and international markets.
Cost of sales increased in the first quarter to 29.8 percent of sales from
29.2 percent of sales in the same quarter of 1994. This increase is primarily
the result of the inclusion of PCS and the impact of foreign exchange rates
offset, in part, by a favorable product mix.
Operating expenses increased 25 percent in the first quarter compared with the
same period in 1994. The increase reflects a 34 percent growth in research
and development due to the large number of compounds that have entered the
later and most expensive phases of clinical research. Also, marketing and
administrative expenses increased 45 percent from the first quarter of 1994
partially due to continued globalization of the Company's products,
particularly in emerging markets, the addition of PCS, and increased accruals
for performance-based compensation. In March 1994, the Company voluntarily
recalled three of its liquid oral antibiotics resulting in a special pre-tax
charge of $56 million. The rate of growth of 1995 operating expenses over
1994 would have been greater if this special charge was not included in the
comparison.
For the first quarter of 1995, the Company had interest expense of $66.2
million as compared with $16.7 million for the same quarter of 1994,
reflecting the Company's increased debt levels associated with the PCS
acquisition. Net other income of $33.2 million for the quarter was $2.6
million less than 1994. This decrease relates largely to amortization of
goodwill associated with the PCS acquisition (an expense of approximately $25
million each quarter), offset, in part, by non-recurring income received under
a development contract and the sale of the U.S. marketing rights to methadone.
The Company's estimated tax rate was 29.0 percent in the first quarter of 1995
versus a tax rate of 30.5 percent in the first quarter of 1994. This decline
is primarily the result of increased earnings outside the United States where
tax rates are lower, particularly in Ireland, and the effectiveness of various
tax planning strategies.
As a consequence of the sales growth and the lower effective tax rate which
were partially offset by increased expenses, due largely to the acquisition of
PCS, both net income and earnings per share increased 19 percent for the first
quarter compared with the first quarter of 1994 to $383.2 million and $1.36,
respectively. First quarter 1994 earnings per share were reduced by $.13 as a
result of the product recall.
FINANCIAL CONDITION:
As of March 31, 1995, cash, cash equivalents and short-term investments
totaled $1,130.1 million as compared with $746.7 million at December 31, 1994.
Total debt at March 31, 1995, was $5,258.7 million, an increase of $408.5
million from December 31, 1994. The increase primarily reflects additional
borrowings necessary to fund normal seasonal operating needs. Changes in the
classification of borrowings between long and short-term primarily reflect the
reclassification from long-term the debt of Guidant which is due January 8,
1996.
The Company has recently filed with the Securities and Exchange Commission a
shelf registration statement to register $1 billion of debt securities. These
securities may have maturities exceeding nine months and, once the
registration statement is effective, may be offered by the Company from time
to time as
8
business and financing needs dictate. The Company currently plans to use any
net proceeds from sales of these securities for general corporate purposes,
which would include reducing short-term indebtedness in the form of commercial
paper incurred in the acquisition of PCS and other working capital needs.
PART II OTHER INFORMATION
Item 1.Legal Proceedings.
In February 1995, the Federal Trade Commission requested the Company to
produce documents and information in connection with a non-public
investigation concerning the pharmacy benefit management business. The
Company understands that similar requests were made to several other
pharmaceutical companies and other businesses involved in pharmaceutical
health care. The Company is cooperating fully with the Commission's
investigation.
Reference is made to the discussion of the antitrust litigation brought by
retail pharmacies against the Company and numerous other U.S. prescription
pharmaceutical manufacturers, contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1994, under Part I, Item 3, "Legal
Proceedings." A new trial date for the Federal class action cases, pending in
the Northern District of Illinois, has been set for April, 1996. In the
Federal Robinson-Patman Act cases, the Court in the Northern District of
Illinois has designated certain plaintiffs and defendants named in the
individual suits to participate in an initial trial or trials of the
plaintiffs' Robinson-Patman Act claims. Robinson-Patman claims asserted in
suits filed against non-designated defendants, including the Company, are
stayed.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits. The following documents are filed as exhibits to this
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Report:
10. Eli Lilly and Company Change in Control Severance
Pay Plan for Select Employees
11. Statement re: Computation of Earnings Per Share
on Primary and Fully Diluted Bases
12. Statement re: Computation of Ratio of Earnings
from Continuing Operations to Fixed Charges
27. Financial Data Schedule
99. Attachment to Form 10-Q: Contingent Payment
Obligation Units
(b)During the quarter for which this report is filed, the
Company filed no reports on Form 8-K.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELI LILLY AND COMPANY
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(Registrant)
Date May 11, 1995 s/Daniel P. Carmichael
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Daniel P. Carmichael
Secretary and Deputy
General Counsel
Date May 11, 1995 s/Arnold C. Hanish
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Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer
10
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit Page
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10.Eli Lilly and Company Change in Control
Severance Pay Plan for Select Employees 12
11.Statement re: 28
Computation of Earnings Per Share
on Primary and Fully Diluted Bases
12.Statement re: 29
Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges
27.Financial Data Schedule 30
99.Attachment to Form 10-Q:
Contingent Payment Obligation Units 32
11