Deciphering Financial Statements (Eli Lilly and Company) Eli Lilly and Company is a pharmaceutical…

Deciphering Financial Statements (Eli Lilly and Company)

Eli Lilly and Company is a pharmaceutical company that is working to develop products to aid in the fight of cancer, diabetes, and other debilitating diseases. The company employs about 44,500 workers, many of whom are covered by the company’s defined benefit retirement plans.

 

 

Defined Benefit

Retiree Health

 

Pension Plans

Benefits

 

2004

2003

2004

2003

Change in benefit obligation

 

 

 

 

Benefit obligation at beginning of year                  

$4,7031

$3,9882

$1,0396

$ 9116

Service cost                                     

2388

1954

476

382

Interest cost                                     

2864

2672

625

604

Actuarial loss                                    

397

1058

1612

176

Benefits paid                                     

(2594)

(2505)

(715)

(755)

Reduction in discount rate, foreign currency exchange

 

 

 

 

rate changes, and other adjustments                    

1821 

3970 

1490 

873 

Benefit obligation at end of year                       

5,1907

4,7031

1,3884

1,0396

Change in plan assets

 

 

 

 

Fair value of plan assets at beginning of year              

3,7219

3,1774

5539

4150

Actual return on plan assets                         

4946

5802

587

753

Employer contribution                              

7840

1534

2043

1391

Benefits paid                                     

(2573)

(2476)

(715)

(755)

Foreign currency exchange rate changes

 

 

 

 

and other adjustments                            

546 

585 

— 

— 

Fair value of plan assets at end of year                  

4,7978

3,7219

7454

5539

Funded status                                    

(3929)

(9812)

(6430)

(4857)

Unrecognized net actuarial loss                       

2,3397

2,2965

9795

7282

Unrecognized prior service cost (benefit)                

660 

720 

(1169) 

(1326) 

Net amount recognized                             

$2,0128 

$1,3873 

$ 2196 

$ 1099 

Amounts recognized in the consolidated balance sheet consisted

 

 

 

 

of Prepaid pension                                

$2,2538

$1,6133

$ 3104

$ 1923

Accrued benefit liability                             

(4644)

(4450)

(908)

(824)

Accumulated other comprehensive income

 

 

 

 

before income taxes                               

2234

2190

 

 

 

 

 

Net amount recognized                              

$2,1028 

$1,3873 

$ 2196 

$ 1099 

 

 

Defined Benefit

Retiree Health

 

Pension Plans

Benefits

(Percents)

2004

2003

2004

2003

Weighted-average assumptions as

 

 

 

 

of December 31

 

 

 

 

Discount rate for benefit obligation                        

59

62

60

62

Discount rate for net benefit costs                         

62

68

62

69

Rate of compensation increase for benefit obligation            

56

53

Rate of compensation increase for net benefit costs            

53

53

Expected return on plan assets for net benefit costs            

920

927

925

925

In evaluating the expected return on plan assets, we have considered our historical assumptions compared with actual results, an analysis of current market conditions, asset allocations, and the views of leading financial advisers and economists. Our plan assets in our U.S. defined benefit pension and retiree health plans comprise approximately 85 percent of our worldwide benefit plan assets. Including the investment losses due to overall market condition in 2001 and 2002, our 10- and 20-year annualized rate of return on our U.S. defined benefit pension plans and retiree health benefit plan was approximately 10.3 percent and 11.9 percent, respectively, as of December 31, 2004. Health-care-cost trend rates were assumed to increase at an annual rate of 10 percent in 2005, decreasing 1 percent per year to 6 percent in 2009 and thereafter. If the health-care trend rates were to be increased by one percentage point each future year, the December 31, 2004, accumulated postretirement benefit obligation would increase by 13.9 percent and the aggregate of the service cost and interest cost components of 2004 annual expense would increase by 14.5 percent. A one-percentage-point decrease in these rates would decrease the December 31, 2004, accumulated postretirement benefit obligation by 12.2 percent and the aggregate of the 2004 service cost and interest cost by 12.6 percent.

Review Eli Lilly’s note disclosure on retirement benefits to answer the following questions.

1. Eli Lilly decreased its discount rate for its benefit obligation from 6.2% in 2003 to 5.9% in 2004. What effect would this have on net pension expense for 2004? What effect would it have on the prepaid/accrued pension cost reported in the balance sheet?

2. Overall, are Eli Lilly’s pension plans overfunded or underfunded? How do you know?

3. Review the components of Eli Lilly’s PBO to determine how accurate the actuaries were in estimating the PBO during 2003 and 2004.

4. Note that Eli Lilly’s expected long-term rate of return on plan assets is 9.2%. Can you think of where the company might be investing its plan assets in order to receive a return that high? (Note that typical bank certificates of deposit pay about 3%.)

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