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 THE QUARTER ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-6351
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
---- ----
The number of shares of common stock outstanding as of April 30, 1998:
Class Number of Shares Outstanding
----- ----------------------------
Common 1,107,425,186
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months
Ended March 31,
1998 1997
-------------------------------------------
(Dollars in millions
except per-share data)
Net sales ........................... $2,269.1 $1,953.0
Cost of sales ....................... 602.1 541.3
Research and development ............ 364.7 301.2
Marketing and administrative ........ 566.0 471.7
Interest expense .................... 48.6 60.6
Other (income) expense - net ........ (16.7) 1.4
--------- --------
1,564.7 1,376.2
--------- --------
Income before income taxes and
extraordinary item ............... 704.4 576.8
Income taxes ........................ 176.1 144.2
--------- --------
Income before extraordinary item .... 528.3 432.6
--------- --------
Extraordinary item -
Loss on early redemption of debt,
net of tax ..................... (7.2) --
--------- --------
Net income .......................... $ 521.1 $ 432.6
========= ========
Earnings per share
Income before extraordinary item . $ .48 $ .39
Extraordinary item ............... (.01) --
--------- --------
Net income ....................... $ .47 $ .39
========= ========
Earnings per share - diluted
Income before extraordinary item . $ .47 $ .38
Extraordinary item ............... (.01) --
--------- --------
Net income ....................... $ .46 $ .38
========= ========
Dividends paid per share ............ $ .20 $ .18
========= ========
See Notes to Consolidated Condensed Financial Statements.
2
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months
Ended March 31,
1998 1997
-------------------------------------------
(Dollars in millions
except per-share data)
Net income ......................... $ 521.1 $ 432.6
Other comprehensive income ......... (4.8) (82.2)
-------- --------
Comprehensive income ............... $ 516.3 $ 350.4
======== ========
See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
March 31, December 31,
1998 1997
-------------------------------------------------
(Millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................. $ 1,264.7 $ 1,947.5
Short-term investments ..................................... 63.1 77.1
Accounts receivable, net of allowances
for doubtful amounts of $59.3 (1998)
and $53.3 (1997) ......................................... 1,670.4 1,544.3
Other receivables .......................................... 163.3 338.9
Inventories ................................................ 977.8 900.7
Deferred income taxes ...................................... 342.1 325.7
Prepaid expenses ........................................... 297.6 186.5
--------- ---------
TOTAL CURRENT ASSETS ....................................... 4,779.0 5,320.7
OTHER ASSETS
Prepaid retirement ......................................... 585.2 579.1
Investments ................................................ 429.9 465.6
Goodwill and other intangibles, net of
allowances for amortization of
$131.1 (1998) and $119.3 (1997) .......................... 1,520.9 1,550.5
Sundry ..................................................... 690.0 559.8
--------- ---------
3,226.0 3,155.0
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress ................................. 7,014.9 7,034.9
Less allowances for depreciation ........................... 2,973.1 2,933.2
--------- ---------
4,041.8 4,101.7
--------- ---------
$12,046.8 $12,577.4
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings ...................................... $ 220.0 $ 227.6
Accounts payable ........................................... 841.4 985.5
Employee compensation ...................................... 339.4 456.6
Dividends payable .......................................... -- 221.7
Income taxes payable ....................................... 1,229.0 1,188.0
Other liabilities .......................................... 900.7 1,112.2
--------- ---------
TOTAL CURRENT LIABILITIES .................................. 3,530.5 4,191.6
LONG-TERM DEBT ................................................ 2,337.2 2,326.1
DEFERRED INCOME TAXES ......................................... 333.6 215.5
RETIREE MEDICAL BENEFIT OBLIGATION ............................ 112.1 118.3
OTHER NONCURRENT LIABILITIES .................................. 780.0 920.3
--------- ---------
3,562.9 3,580.2
COMMITMENTS AND CONTINGENCIES ................................. -- --
MINORITY INTEREST IN SUBSIDIARY ............................... 160.0 160.0
SHAREHOLDERS' EQUITY
Common stock ............................................... 692.0 694.7
Retained earnings .......................................... 4,551.8 4,398.7
Deferred costs-ESOP ........................................ (154.0) (155.7)
Accumulated comprehensive income ........................... (187.4) (182.6)
--------- ---------
4,902.4 4,755.1
Less cost of common stock in treasury ...................... 109.0 109.5
--------- ---------
4,793.4 4,645.6
--------- ---------
$12,046.8 $12,577.4
--------- ---------
--------- ---------
See Notes to Consolidated Condensed Financial Statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Ended
March 31,
1998 1997
--------------------------------
(Millions)
OPERATING ACTIVITIES
Net income ................................................... $ 521.1 $ 432.6
Adjustments to Reconcile Net Income to Cash
Flows from Operating Activities:
Changes in operating assets and liabilities .................. (677.9) (121.8)
Change in deferred taxes ..................................... 108.4 (153.4)
Depreciation and amortization ................................ 119.2 139.0
Other items, net ............................................. (13.5) 7.3
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES ..................... 57.3 303.7
INVESTING ACTIVITIES
Net additions to property and equipment ...................... (77.7) (58.7)
Additions to sundry assets and intangibles ................... (7.4) (16.1)
Reduction of investments ..................................... 19.9 137.4
Additions to investments ..................................... (7.9) (60.2)
Divestitures/(Acquisitions) .................................. 24.6 (0.2)
-------- --------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES ................ (48.5) 2.2
FINANCING ACTIVITIES
Dividends paid ............................................... (220.7) (197.9)
Purchase of common stock and other capital
transactions .............................................. (461.9) 53.0
Net additions to short-term borrowings ....................... 5.5 114.9
Net additions (reductions) to long-term debt ................. (2.4) 7.6
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES ....................... (679.5) (22.4)
Effect of exchange rate changes on cash ...................... (12.1) (55.1)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................... (682.8) 228.4
Cash and cash equivalents at January 1 ....................... 1,947.5 813.7
-------- --------
CASH AND CASH EQUIVALENTS AT MARCH 31 ........................ $1,264.7 $1,042.1
-------- --------
-------- --------
See Notes to Consolidated Condensed Financial Statements.
5
NOTES TO CONSOLIDATED CONDENSED 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 flows 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 for a fair statement of the results of
operations for the periods shown. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures at the date of the
financial statements and during the reporting period. Actual results could
differ from those estimates.
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.
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 the payment of those costs. The Company has reached a
settlement with its primary liability insurance carrier providing for coverage
for certain environmental liabilities and has instituted litigation seeking
coverage from certain excess carriers.
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 the majority of U.S.
retail pharmacies. The Company and several other manufacturers have settled the
federal class action case. The Company has also settled with a large number of
the remaining retail pharmacies. Still pending are related suits brought in
federal and some state courts by a large number of retail pharmacies involving
claims of price discrimination or claims under other pricing laws. Additional
cases have been brought on behalf of consumers in several states.
The environmental liabilities and litigation accruals have been reflected in the
Company's consolidated balance sheet at the gross amount of approximately
6
$342 million at March 31, 1998. Estimated insurance recoverables of
approximately $235 million have been reflected as assets in the consolidated
balance sheet at March 31, 1998.
Barr Laboratories, Inc. (Barr) and Geneva Pharmaceuticals, Inc. (Geneva) have
each submitted an Abbreviated New Drug Application (ANDA) seeking FDA approval
to market a generic form of Prozac several years before expiration of the
Company's patents. The ANDAs assert that Lilly's U.S. patents covering Prozac
are invalid and unenforceable. In April 1996, the Company filed suit against
Barr in federal court in Indianapolis seeking a ruling that Barr's challenge to
Lilly's patents is without merit. In June 1997, the Company filed a similar suit
against Geneva in the same court. While the Company believes that the claims of
Barr and Geneva are without merit, there can be no assurance that the Company
will prevail. An unfavorable outcome of this litigation could have a material
adverse effect on the Company's consolidated financial position, liquidity, or
results of operations.
While it is not possible to predict or determine the outcome of the product
liability, antitrust, patent, or other legal actions brought against the Company
or the ultimate cost of environmental matters, the Company believes that, except
as noted above, the costs associated with all such matters will not have a
material adverse effect on its consolidated financial position or liquidity but
could possibly be material to the consolidated results of operations in any one
accounting period.
EARNINGS PER SHARE
To reflect the impact of the Company's September 1997 stock split, previously
reported outstanding and weighted-average number of shares of common stock and
per share data have been adjusted.
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share,"
which requires presentation of both basic earnings per share and diluted
earnings per share in the income statement. Accordingly, earnings per share data
for previous periods has been restated. All per share amounts, unless otherwise
noted in the footnotes, are presented on a diluted basis, that is, based on the
weighted-average number of outstanding common shares and the effect of all
potentially dilutive common shares (primarily unexercised stock options).
ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." Under provisions of
this statement, the Company has included a financial statement presentation of
comprehensive income to conform to these new requirements. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities,
minimum pension liability adjustments and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity to be included in other comprehensive income. As a consequence of this
change, certain balance sheet reclassifications will be necessary for previously
reported amounts to achieve the required presentation of comprehensive income.
Implementation of this disclosure standard will not affect the Company's
financial position or results of operations.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. The statement must be adopted by the Company
on December 31, 1998. Under provisions of this statement, the Company will be
required to modify or expand the financial statement disclosures for operating
segments, products and services, and geographic areas. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
7
In December 1997, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued and is effective for the Company's 1998
fiscal year. The statement revises current disclosure requirements for
employers' pensions and other retiree benefits. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OPERATING RESULTS OF CONTINUING OPERATIONS:
The Company's sales for the first quarter of 1998 increased 16 percent from the
first quarter of 1997. Sales inside the United States increased 20 percent,
while sales outside the United States increased 9 percent. Compared with the
first quarter of 1997, worldwide sales reflected volume growth of 17 percent and
a 2 percent increase in global selling prices which were offset, in part, by the
unfavorable effect of exchange rates of 3 percent.
Worldwide pharmaceutical sales for the quarter were $2,123 million, an increase
of 17 percent compared with the same period of 1997. Sales growth was led by
three of the Company's newer products, Gemzar'r', ReoPro'tm', and Zyprexa'r',
and by Prozac. In addition, the quarter benefited from additional
health-care-management revenues and the launch of Evista'r' in the United States
in January for the prevention of osteoporosis in postmenopausal women. Evista
sales totaled $33 million, driven largely by initial stocking by wholesalers.
Revenue growth for the period was partially offset by lower sales of
anti-infective products, Axid'r' and Humulin'r'. Total U.S. pharmaceutical sales
and services increased 20 percent to $1,393 million primarily as a result of
increased volume. International pharmaceutical sales increased 11 percent
compared with the first quarter of 1997, as sales volume growth of 18 percent
was mitigated by the effect of unfavorable exchange rates (7 percent), while
selling prices remained level.
Worldwide sales of Prozac in the first quarter were $618 million, an increase of
10 percent from the first quarter of 1997. Prozac sales in the U.S. increased 11
percent to $485 million in the first quarter. Sales of Prozac outside the U.S.
experienced an increase of 4 percent to $133 million despite the effects of
unfavorable exchange rates.
Zyprexa posted worldwide sales in the first quarter of $287 million, an
increase of $182 million over the first quarter 1997. U.S. Zyprexa sales
increased $139 million, while sales outside of the U.S. increased $43
million.
Worldwide ReoPro sales of $70 million in the first quarter reflected an increase
of $18 million (35 percent) as compared with the first quarter of 1997.
Worldwide Gemzar sales grew to $57 million in the first quarter of 1998. Sales
both inside and outside the U.S. increased by $12 million, representing growth
of 72 percent and 87 percent, respectively.
Insulin sales, composed of Humulin, Humalog'r', and Iletin'r', decreased 1
percent compared with the first quarter of 1997. Insulin sales decreased 9
percent in the U.S., to $130 million, but increased 11 percent outside the U.S.
to $107 million. Worldwide Humulin sales decreased 7 percent, to $195 million,
compared with the first quarter of 1997. Growth comparisons for Humulin in the
quarter were negatively affected in the U.S. by wholesaler stocking which
occurred at the end of the fourth quarter 1997. In addition, Humulin faced
increased competitive pressures, including oral anti-diabetic products. As a
result, U.S. Humulin sales declined 16 percent to $106 million. International
Humulin sales increased 6 percent despite unfavorable exchange rates. Worldwide
Humalog sales for the first quarter were $25 million, an increase of $13
million.
Worldwide anti-infective sales decreased $48 million (14 percent) in the first
quarter. U.S. anti-infective sales declined 34 percent in the first quarter.
International anti-infective sales decreased 5 percent. These declines were due
in part to continued generic competition in certain markets and the impact of
unfavorable exchange rates. Cefaclor accounted for the majority of the decline
in anti-infective sales. Sales of cefaclor declined 17 percent in the first
quarter.
9
Worldwide sales of animal health products increased 7 percent over the first
quarter of 1998. This sales growth was led by Micotil'r'.
Health-care-management revenues increased 59 percent for the first quarter,
largely due to increased mail order pharmacy sales.
Gross margin improved to 73.5 percent of sales for the first quarter, compared
with 72.3 percent for the first quarter of 1997. The increase was primarily the
result of favorable changes in product mix, continued productivity improvements
and enhanced plant utilization. These improvements were offset, in part, by
increased health-care-management service revenues, which have lower margins than
pharmaceutical products.
Operating expenses for 1998 increased 20 percent for the first quarter. Research
and development increased 21 percent in the first quarter, as the result of
greater investments in both internal research efforts and external research
collaborations. Marketing and administrative expenses increased 20 percent from
the first quarter of 1997. This increase was driven by increased expenditures to
support continued new product launches around the world, including the U.S.
launch of Evista, enhancements of the Company's global information technology
capabilities, including expenditures relating to the Company's development and
implementation of the year 2000 computer initiatives, and direct-to-consumer
advertising campaigns in the U.S.
Compared with the first quarter of 1997, interest expense decreased $12 million
(20 percent). The decrease was primarily due to a decline in the Company's short
term borrowings.
Net other income of $17 million for the first quarter was $18 million higher
than the first quarter of 1997. The quarter benefited from a decrease in
goodwill amortization expense, gains on the sale of certain investments and
increased interest income. Also, the quarterly comparison benefited from
inclusion in the 1997 amount of the charges associated with the discontinuance
of a collaboration with Somatogen, Inc. These increases were partially offset by
the absence of DowElanco joint venture income in the first quarter of 1998 due
to the June 1997 divestiture.
The Company's effective tax rate for the quarter was 25 percent, which was
consistent with the first quarter of 1997.
The Company refinanced a portion of its long term debt, which resulted in a
one-time extraordinary charge of $7 million ($.01 per share), net of a $5
million tax benefit.
First quarter net income was $521 million and $ .46 per share (after
extraordinary item), representing increases of 20 percent and 21 percent,
respectively, as compared with the same periods of 1997. For the first quarter,
net income was favorably impacted by increased sales, improved gross margin, and
increased other income, offset somewhat by higher operating expenses as a
percent of sales.
FINANCIAL CONDITION:
As of March 31, 1998, cash, cash equivalents and short-term investments totaled
$1,328 million as compared with $2,025 million at December 31, 1997, a net
decrease of $697 million. The decrease in cash was due primarily to dividends
paid and stock repurchased for employee stock plans. Total debt at March 31,
1998, was $2,557 million, an increase of $3 million from December 31, 1997.
The Company believes that cash generated from operations in 1998, along with
available cash and cash equivalents, will be sufficient to fund essentially all
of the 1998 operating needs, including debt service, repayment of short term
borrowings, capital expenditures, and dividends.
Many of the Company's computer systems and laboratory and process automation
devices will require modification or replacement over the next two years in
order to render the systems ready for the year 2000. Modifications of some
10
systems have already occurred and others are in various stages of activity
ranging from evaluation to testing. The company is also assessing how it could
be affected by the failure of third parties (e.g., vendors and customers) to
mitigate their own Year 2000 issues. Management currently believes that the
incremental costs of addressing these issues will not materially affect the
Company's consolidated financial position, liquidity or results of operations
through December 31, 1999. The company believes it will be able to resolve all
major Year 2000 issues by the end of 1999. However, if the company is not able
to do so, the impact on business operations could be material to the company's
consolidated results of operations.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company are subject to risks and uncertainties which may
cause actual results to differ materially from those projected. Economic,
competitive, governmental, technological and other factors which may affect the
Company's operations are discussed in Exhibit 99 to this Form 10-Q filing.
RECENT DEVELOPMENT:
The Company announced on May 6, 1998, that Randall L. Tobias, chairman and chief
executive officer, plans to retire at the end of the year. The Board of
Directors has elected Sidney Taurel president and chief executive officer
effective July 1, 1998. Mr. Taurel is currently president and chief operating
officer. Mr. Tobias will remain chairman until his retirement from the Company
and Board on December 31, 1998. At that time, Mr. Taurel will become chairman,
president and chief executive officer.
11
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the discussion of In re Brand Name Prescription Drugs
Antitrust Litigation (MDL No. 997) and related cases contained in the Company's
1997 Form 10-K under Item 3, "Legal Proceedings -- Pricing Litigation." The
Company and several other manufacturers have now reached settlements, subject in
each case to court approval, in the state court cases brought on behalf of
consumers in Arizona, District of Columbia, Florida, Kansas, Maine, Michigan,
Minnesota, New York, North Carolina, Tennessee, and Wisconsin.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are filed as exhibits to this
Report:
3. Amended Articles of Incorporation (amended through April 20,
1998)
10. 1998 Lilly Stock Plan
11. Statement re: Computation of Basic Earnings Per Share and
Diluted Earnings Per Share
12. Statement re: Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges
27. Financial Data Schedule
99. Cautionary Statement Under Private Securities Litigation
Reform Act of 1995 - "Safe Harbor" for Forward-Looking
Disclosures
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the first quarter of
1998.
12
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
-----------------------------------------------
(Registrant)
Date May 12, 1998 S/Daniel P. Carmichael
----------------- -----------------------------------------------
Daniel P. Carmichael
Secretary and Deputy General Counsel
Date May 12, 1998 S/Arnold C. Hanish
----------------- -----------------------------------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer
13
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit
-------
3. Amended Articles of Incorporation (amended through
April 20, 1998)
10. 1998 Lilly Stock Plan*
11. Statement re: Computation of Basic Earnings Per
Share and Diluted Earnings Per Share
12. Statement re: Computation of Ratio of Earnings
from Continuing Operations to Fixed Charges
27. Financial Data Schedule
99. Cautionary Statement Under Private Securities Litigation
Reform Act of 1995 - "Safe Harbor" for Forward-Looking
Disclosures
*Incorporated by reference from Exhibit A to the Company's definitive Proxy
Statement filed with the Commission on March 4, 1998.
14
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................ 'tm'
The registered trademark symbol shall be expressed as................. 'r'