Eli Lilly and Company (LLY)

Dividends of $1.96 per share were paid in 2009, an increase of 4 percent from 2008. In the fourth quarter of 2009, effective for the first-quarter dividend in 2010, the quarterly dividend was maintained at $.49 per share, resulting in an indicated annual rate for 2010 of $1.96 per share. The year 2009 was the 125th consecutive year in which we made dividend payments.

 

Despite increasing unemployment and declines in real consumer spending, consumer confidence has grown and job losses have slowed during the second half of 2009. Many financial institutions continue to have tightened lines of credit, thus reducing funding available to stimulate near-term economic growth. While there are some positive signs, the prospects for recovery are uncertain. Pharmaceutical consumption has traditionally been relatively unaffected by economic downturns; however, an extended downturn could lead to a decline in overall prescriptions corresponding to the growth of the uninsured and underinsured population in the U.S. In addition, both private and public health care payers are facing heightened fiscal challenges due to the economic slowdown and are taking aggressive steps to reduce the costs of care, including pressures for increased pharmaceutical discounts and rebates and efforts to drive greater use of generic drugs. We continue to monitor the potential near-term impact of prescription trends, the creditworthiness of our wholesalers and other customers and suppliers, the evolving health care debate, the federal government’s involvement in the economic crisis, and various international government funding levels.

 

We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including debt service, capital expenditures, costs associated with litigation and government investigations, and dividends in 2010. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowings. Our access to credit markets has not been adversely affected by the illiquidity in the markets because of the high credit quality of our short- and long-term debt. We currently have $1.24 billion of unused committed bank credit facilities, $1.20 billion of which backs our commercial paper program and matures in May 2011. Various risks and uncertainties, including those discussed in Item 1A, “Risk Factors,” may affect our operating results and cash generated from operations.

 

We depend on patents or other forms of intellectual property protection for most of our revenues, cash flows, and earnings. In the next three years we will lose effective exclusivity for Zyprexa in major European countries (September 2011) and the U.S. (October 2011); and for Humalog in major European countries (November 2010). Gemzar has already lost effective exclusivity in major European countries. In addition, we face U.S. patent litigation over several key patent-protected products whose exclusivity extends beyond 2012, including Alimta, Cymbalta, Evista, Gemzar, and Strattera and it is possible we could face an unexpected loss of our effective exclusivity for one or more of these products prior to the end of 2012. Revenue from each of these products contributes materially to our results of operations, liquidity, and financial position, and the loss of exclusivity could result in a rapid and severe decline in revenue from the affected product. However, we plan to mitigate the effect on our operations, liquidity and financial position through growth in our remaining business and the previously announced plan to reduce our expected cost structure by $1 billion by the end of 2011.

 

In the normal course of business, our operations are exposed to fluctuations in interest rates and currency values. These fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.

 

Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at December 31, 2009 and 2008, including derivatives and other interest rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of December 31, 2009 and 2008, respectively, would have no material impact on earnings, cash flows, or fair values of interest rate risk-sensitive instruments over a one-year period.

 

Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro and the Japanese yen, and the British pound against the euro. We face transactional currency exposures that arise when we enter into transactions, generally on an intercompany basis, denominated in currencies other than the local currency. We also face currency exposure that arises from 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 use forward contracts and purchased options to manage our foreign currency exposures. 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, 2009 and 2008, a hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) as of December 31, 2009 and 2008,

 

 

26

respectively, would have no 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.

 

124th consecutive year in which we made dividend payments and the 41st consecutive year in which dividends have been increased.

 

 

In recent months, global economic conditions have deteriorated. Triggered by the liquidity crisis in the capital markets, the implications have become more widespread, resulting in higher unemployment and declines in real consumer spending. In addition, many financial institutions have tightened lines of credit, reducing funding available for near-term economic growth. Pharmaceutical consumption has traditionally been relatively unaffected by economic downturns; however, an extended downturn could lead to a decline in overall prescriptions corresponding with the growth of the uninsured and underinsured population in the U.S. In addition, both private and public health care payers are facing heightened fiscal challenges due to the economic slowdown and are taking aggressive steps to reduce the costs of care, including pressures for increased pharmaceutical discounts and rebates and efforts to drive greater use of generic drugs. We continue to monitor the potential near-term impact of prescription trends, the credit worthiness of our wholesalers and other customers and suppliers, the decline of health insurance coverage in the overall population, and the federal government’s involvement in the economic crisis.

 

We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including debt service, capital expenditures, costs associated with litigation and government investigations, and dividends in 2009. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowings. Our access to credit markets has not been adversely affected by the recent illiquidity in the market because of the high credit quality of our short- and long-term debt. In 2009, we intend to fund payments required in connection with the EDPA settlements, and to further reduce outstanding commercial paper with cash and cash equivalents on hand, cash generated from operations, and the issuance of longterm debt. We currently have $1.24 billion of unused committed bank credit facilities, $1.20 billion of which backs our commercial paper program. Additionally, in November 2008, we obtained a one-year short-term revolving credit facility in the amount of $4.00 billion as back-up, alternative financing. Various risks and uncertainties, including those discussed in the Financial Expectations for 2009 section, may affect our operating results and cash generated from operations.

 

In the normal course of business, our operations are exposed to fluctuations in interest rates and currency values. These fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.

 

Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at December 31, 2008 and 2007, including derivatives and other interest rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of December 31, 2008 and 2007, respectively, would have no material impact on earnings, cash flows, or fair values of interest rate risksensitive instruments over a one-year period.

 

Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro and the Japanese yen, and the British pound against the euro. We face transactional currency exposures that arise when we enter into transactions, generally on an intercompany basis, denominated in currencies other than the local currency. We also face currency exposure that arises from 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 use forward contracts and purchased options to manage our foreign currency exposures. 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, 2008 and 2007, a hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) as of December 31, 2008 and 2007, respectively, would have no 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.

 

 

As of December 31, 2008, cash, cash equivalents, and
short-term investments totaled $5.93 billion compared with
$4.83 billion at December 31, 2007. Cash flow from
operations in 2008 of $7.30 billion and net proceeds from
the issuance of debt of $4.41 billion exceeded the total of
the net cash paid for corporate acquisitions of
$6.08 billion, dividends paid of $2.06 billion,
purchases of property and equipment of $947.2 million, and
net purchases of noncurrent investments of $815.1 million.

 

Capital expenditures of $947.2 million during 2008 were
$135.2 million less than in 2007. We expect 2009 capital
expenditures to be approximately $1.1 billion as we invest
in our biotechnology capabilities, continue to upgrade our
manufacturing and research facilities to enhance productivity
and quality systems, and invest in the long-term growth of our
diabetes care products.

 

 

Total debt as of December 31, 2008 increased
$5.45 billion, to $10.46 billion, reflecting the
commercial paper we issued in November 2008 primarily to finance
our acquisition of ImClone, offset by long-term debt repayments
and paydown of commercial paper with cash and cash equivalents
on hand. Our current debt ratings from Standard &
Poor’s and Moody’s are at AA and A1, respectively.

 

Dividends of $1.88 per share were paid in 2008, an increase of
11 percent from 2007. In the fourth quarter of 2008,
effective for the first-quarter dividend in 2009, the quarterly
dividend was increased to $.49 per share (a 4.3 percent
increase), resulting in an indicated annual rate for 2009 of
$1.96 per share. The year 2008 was the

124th consecutive year in which we made dividend payments
and the 41st consecutive year in which dividends have been
increased.

 

 

In recent months, global economic conditions have deteriorated.
Triggered by the liquidity crisis in the capital markets, the
implications have become more widespread, resulting in higher
unemployment and declines in real consumer spending. In
addition, many financial institutions have tightened lines of
credit, reducing funding available for near-term economic
growth. Pharmaceutical consumption has traditionally been
relatively unaffected by economic downturns; however, an
extended downturn could lead to a decline in overall
prescriptions corresponding with the growth of the uninsured and
underinsured population in the U.S. In addition, both
private and public health care payers are facing heightened
fiscal challenges due to the economic slowdown and are taking
aggressive steps to reduce the costs of care, including
pressures for increased pharmaceutical discounts and rebates and
efforts to drive greater use of generic drugs. We continue to
monitor the potential near-term impact of prescription trends,
the credit worthiness of our wholesalers and other customers and
suppliers, the decline of health insurance coverage in the
overall population, and the federal government’s
involvement in the economic crisis.

 

We believe that cash generated from operations, along with
available cash and cash equivalents, will be sufficient to fund
our normal operating needs, including debt service, capital
expenditures, costs associated with litigation and government
investigations, and dividends in 2009. We believe that amounts
accessible through existing commercial paper markets should be
adequate to fund short-term borrowings. Our access to credit
markets has not been adversely affected by the recent
illiquidity in the market because of the high credit quality of
our short- and long-term debt. In 2009, we intend to fund
payments required in connection with the EDPA settlements, and
to further reduce outstanding commercial paper with cash and
cash equivalents on hand, cash generated from operations, and
the issuance of longterm debt. We currently have
$1.24 billion of unused committed bank credit facilities,
$1.20 billion of which backs our commercial paper program.
Additionally, in November 2008, we obtained a one-year
short-term revolving credit facility in the amount of
$4.00 billion as
back-up,
alternative financing. Various risks and uncertainties,
including those discussed in the Financial Expectations for 2009
section, may affect our operating results and cash generated
from operations.

 

In the normal course of business, our operations are exposed to
fluctuations in interest rates and currency values. These
fluctuations can vary the costs of financing, investing, and
operating. We address a portion of these risks through a
controlled program of risk management that includes the use of
derivative financial instruments. The objective of controlling
these risks is to limit the impact on earnings of fluctuations
in interest and currency exchange rates. All derivative
activities are for purposes other than trading.

 

Our primary interest rate risk exposure results from changes in
short-term U.S. dollar interest rates. In an effort to
manage interest rate exposures, we strive to achieve an
acceptable balance between fixed and floating rate debt
positions and may enter into interest rate derivatives to help
maintain that balance. Based on our overall interest rate
exposure at December 31, 2008 and 2007, including
derivatives and other interest rate risk-sensitive instruments,
a hypothetical 10 percent change in interest rates applied
to the fair value of the instruments as of December 31,
2008 and 2007, respectively, would have no material impact on
earnings, cash flows, or fair values of interest rate
risksensitive instruments over a one-year period.

 

Our foreign currency risk exposure results from fluctuating
currency exchange rates, primarily the U.S. dollar against
the euro and the Japanese yen, and the British pound against the
euro. We face transactional currency exposures that arise when
we enter into transactions, generally on an intercompany basis,
denominated in currencies other than the local currency. We also
face currency exposure that arises from 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 use forward contracts and purchased options to manage our
foreign currency exposures. 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, 2008 and 2007, a hypothetical 10 percent
change in exchange rates (primarily against the
U.S. dollar) as of December 31, 2008 and 2007,
respectively, would have no 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.

 

manufacturing facilities to enhance productivity and quality systems, and invest in the long-term growth of our diabetes care products.

 

 

Total debt as of December 31, 2007 increased $1.29 billion, to $5.01 billion, reflecting the $2.50 billion of debt we issued in 2007 to finance our acquisition of ICOS, offset by long-term debt repayment of $1.06 billion. Our current debt ratings from Standard & Poor’s and Moody’s remain at AA and Aa3, respectively.

 

Dividends of $1.70 per share were paid in 2007, an increase of 6 percent from 2006. In the fourth quarter of 2007, effective for the first-quarter dividend in 2008, the quarterly dividend was increased to $.47 per share (a 10.6 percent increase), resulting in an indicated annual rate for 2008 of $1.88 per share. The year 2007 was the 123rd consecutive year in which we made dividend payments and the 40th consecutive year in which dividends have been increased.

 

We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including debt service, capital expenditures, costs associated with product liability litigation, dividends, and taxes in 2008. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowings, if necessary. We currently have $1.24 billion of unused committed bank credit facilities, $1.20 billion of which backs our commercial paper program. Our access to credit markets has not been adversely affected by the recent illiquidity in the market. Various risks and uncertainties, including those discussed in the Financial Expectations for 2008 section, may affect our operating results and cash generated from operations.

 

 

In the normal course of business, our operations are exposed to fluctuations in interest rates and currency values. These fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.

 

Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at December 31, 2007 and 2006, including derivatives and other interest rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of December 31, 2007 and 2006, respectively, would have no material impact on earnings, cash flows, or fair values of interest rate risk-sensitive instruments over a one-year period.

 

Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro and the Japanese yen, and the British pound against the euro. We face transactional currency exposures that arise when we enter into transactions, generally on an intercompany basis, denominated in currencies other than the local currency. We also face currency exposure that arises from 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 use forward contracts and purchased options to manage our foreign currency exposures. 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, 2007 and 2006, a hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) as of December 31, 2007 and 2006, respectively, would have no 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.

 

As of December 31, 2007, cash, cash equivalents, and
short-term investments totaled $4.83 billion compared with
$3.89 billion at December 31, 2006. Cash flow from
operations in 2007 of $5.15 billion and net proceeds from
the issuance of long-term debt of $1.45 billion exceeded
the total of the net cash paid for corporate acquisitions of
$2.67 billion, dividends paid of $1.85 billion, and
purchases of property and equipment of $1.08 billion.

 

Capital expenditures of $1.08 billion during 2007 were
consistent with 2006, due primarily to the management of capital
spending. We expect near-term capital expenditures to remain
approximately the same as 2007 levels while we invest in our
biotech and research and development initiatives, continue to
upgrade our

manufacturing facilities to enhance productivity and quality
systems, and invest in the long-term growth of our diabetes care
products.

 

 

Total debt as of December 31, 2007 increased
$1.29 billion, to $5.01 billion, reflecting the
$2.50 billion of debt we issued in 2007 to finance our
acquisition of ICOS, offset by long-term debt repayment of
$1.06 billion. Our current debt ratings from
Standard & Poor’s and Moody’s remain at AA
and Aa3, respectively.

 

Dividends of $1.70 per share were paid in 2007, an increase of
6 percent from 2006. In the fourth quarter of 2007,
effective for the first-quarter dividend in 2008, the quarterly
dividend was increased to $.47 per share (a 10.6 percent
increase), resulting in an indicated annual rate for 2008 of
$1.88 per share. The year 2007 was the 123rd consecutive
year in which we made dividend payments and the
40th consecutive year in which dividends have been
increased.

 

We believe that cash generated from operations, along with
available cash and cash equivalents, will be sufficient to fund
our normal operating needs, including debt service, capital
expenditures, costs associated with product liability
litigation, dividends, and taxes in 2008. We believe that
amounts accessible through existing commercial paper markets
should be adequate to fund short-term borrowings, if necessary.
We currently have $1.24 billion of unused committed bank
credit facilities, $1.20 billion of which backs our
commercial paper program. Our access to credit markets has not
been adversely affected by the recent illiquidity in the market.
Various risks and uncertainties, including those discussed in
the Financial Expectations for 2008 section, may affect our
operating results and cash generated from operations.

 

 

In the normal course of business, our operations are exposed to
fluctuations in interest rates and currency values. These
fluctuations can vary the costs of financing, investing, and
operating. We address a portion of these risks through a
controlled program of risk management that includes the use of
derivative financial instruments. The objective of controlling
these risks is to limit the impact on earnings of fluctuations
in interest and currency exchange rates. All derivative
activities are for purposes other than trading.

 

Our primary interest rate risk exposure results from changes in
short-term U.S. dollar interest rates. In an effort to
manage interest rate exposures, we strive to achieve an
acceptable balance between fixed and floating rate debt
positions and may enter into interest rate derivatives to help
maintain that balance. Based on our overall interest rate
exposure at December 31, 2007 and 2006, including derivatives
and other interest rate risk-sensitive instruments, a
hypothetical 10 percent change in interest rates applied to
the fair value of the instruments as of December 31, 2007
and 2006, respectively, would have no material impact on
earnings, cash flows, or fair values of interest rate
risk-sensitive instruments over a one-year period.

 

Our foreign currency risk exposure results from fluctuating
currency exchange rates, primarily the U.S. dollar against
the euro and the Japanese yen, and the British pound against the
euro. We face transactional currency exposures that arise when
we enter into transactions, generally on an intercompany basis,
denominated in currencies other than the local currency. We also
face currency exposure that arises from 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
use forward contracts and purchased options to manage our
foreign currency exposures. 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, 2007 and 2006, a hypothetical 10 percent
change in exchange rates (primarily against the
U.S. dollar) as of December 31, 2007 and 2006,
respectively, would have no 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.

manufacturing facilities to enhance productivity and quality systems, and invest in the long-term growth of our diabetes care products.

 

 

Total debt as of December 31, 2007 increased $1.29 billion, to $5.01 billion, reflecting the $2.50 billion of debt we issued in 2007 to finance our acquisition of ICOS, offset by long-term debt repayment of $1.06 billion. Our current debt ratings from Standard & Poor’s and Moody’s remain at AA and Aa3, respectively.

 

Dividends of $1.70 per share were paid in 2007, an increase of 6 percent from 2006. In the fourth quarter of 2007, effective for the first-quarter dividend in 2008, the quarterly dividend was increased to $.47 per share (a 10.6 percent increase), resulting in an indicated annual rate for 2008 of $1.88 per share. The year 2007 was the 123rd consecutive year in which we made dividend payments and the 40th consecutive year in which dividends have been increased.

 

We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including debt service, capital expenditures, costs associated with product liability litigation, dividends, and taxes in 2008. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowings, if necessary. We currently have $1.24 billion of unused committed bank credit facilities, $1.20 billion of which backs our commercial paper program. Our access to credit markets has not been adversely affected by the recent illiquidity in the market. Various risks and uncertainties, including those discussed in the Financial Expectations for 2008 section, may affect our operating results and cash generated from operations.

 

 

In the normal course of business, our operations are exposed to fluctuations in interest rates and currency values. These fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.

 

Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at December 31, 2007 and 2006, including derivatives and other interest rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of December 31, 2007 and 2006, respectively, would have no material impact on earnings, cash flows, or fair values of interest rate risk-sensitive instruments over a one-year period.

 

Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro and the Japanese yen, and the British pound against the euro. We face transactional currency exposures that arise when we enter into transactions, generally on an intercompany basis, denominated in currencies other than the local currency. We also face currency exposure that arises from 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 use forward contracts and purchased options to manage our foreign currency exposures. 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, 2007 and 2006, a hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) as of December 31, 2007 and 2006, respectively, would have no 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.

 

As of December 31, 2007, cash, cash equivalents, and
short-term investments totaled $4.83 billion compared with
$3.89 billion at December 31, 2006. Cash flow from
operations in 2007 of $5.15 billion and net proceeds from
the issuance of long-term debt of $1.45 billion exceeded
the total of the net cash paid for corporate acquisitions of
$2.67 billion, dividends paid of $1.85 billion, and
purchases of property and equipment of $1.08 billion.

 

Capital expenditures of $1.08 billion during 2007 were
consistent with 2006, due primarily to the management of capital
spending. We expect near-term capital expenditures to remain
approximately the same as 2007 levels while we invest in our
biotech and research and development initiatives, continue to
upgrade our

manufacturing facilities to enhance productivity and quality
systems, and invest in the long-term growth of our diabetes care
products.

 

 

Total debt as of December 31, 2007 increased
$1.29 billion, to $5.01 billion, reflecting the
$2.50 billion of debt we issued in 2007 to finance our
acquisition of ICOS, offset by long-term debt repayment of
$1.06 billion. Our current debt ratings from
Standard & Poor’s and Moody’s remain at AA
and Aa3, respectively.

 

Dividends of $1.70 per share were paid in 2007, an increase of
6 percent from 2006. In the fourth quarter of 2007,
effective for the first-quarter dividend in 2008, the quarterly
dividend was increased to $.47 per share (a 10.6 percent
increase), resulting in an indicated annual rate for 2008 of
$1.88 per share. The year 2007 was the 123rd consecutive
year in which we made dividend payments and the
40th consecutive year in which dividends have been
increased.

 

We believe that cash generated from operations, along with
available cash and cash equivalents, will be sufficient to fund
our normal operating needs, including debt service, capital
expenditures, costs associated with product liability
litigation, dividends, and taxes in 2008. We believe that
amounts accessible through existing commercial paper markets
should be adequate to fund short-term borrowings, if necessary.
We currently have $1.24 billion of unused committed bank
credit facilities, $1.20 billion of which backs our
commercial paper program. Our access to credit markets has not
been adversely affected by the recent illiquidity in the market.
Various risks and uncertainties, including those discussed in
the Financial Expectations for 2008 section, may affect our
operating results and cash generated from operations.

 

 

In the normal course of business, our operations are exposed to
fluctuations in interest rates and currency values. These
fluctuations can vary the costs of financing, investing, and
operating. We address a portion of these risks through a
controlled program of risk management that includes the use of
derivative financial instruments. The objective of controlling
these risks is to limit the impact on earnings of fluctuations
in interest and currency exchange rates. All derivative
activities are for purposes other than trading.

 

Our primary interest rate risk exposure results from changes in
short-term U.S. dollar interest rates. In an effort to
manage interest rate exposures, we strive to achieve an
acceptable balance between fixed and floating rate debt
positions and may enter into interest rate derivatives to help
maintain that balance. Based on our overall interest rate
exposure at December 31, 2007 and 2006, including derivatives
and other interest rate risk-sensitive instruments, a
hypothetical 10 percent change in interest rates applied to
the fair value of the instruments as of December 31, 2007
and 2006, respectively, would have no material impact on
earnings, cash flows, or fair values of interest rate
risk-sensitive instruments over a one-year period.

 

Our foreign currency risk exposure results from fluctuating
currency exchange rates, primarily the U.S. dollar against
the euro and the Japanese yen, and the British pound against the
euro. We face transactional currency exposures that arise when
we enter into transactions, generally on an intercompany basis,
denominated in currencies other than the local currency. We also
face currency exposure that arises from 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
use forward contracts and purchased options to manage our
foreign currency exposures. 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, 2007 and 2006, a hypothetical 10 percent
change in exchange rates (primarily against the
U.S. dollar) as of December 31, 2007 and 2006,
respectively, would have no 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.

 

We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including debt service, capital expenditures, costs associated with product liability litigation, dividends, and taxes in 2007. We believe that amounts available through our existing commercial paper program should be adequate to fund maturities of short-term borrowings, if necessary. We currently have $1.21 billion of unused committed bank credit facilities, $1.20 billion of which backs our commercial paper program. Excluding the longterm debt issued for the ICOS acquisition, we plan to use available cash to repay approximately $1 billion of debt outside the U.S. by the end of 2007. Various risks and uncertainties, including those discussed in the Financial Expectations for 2007 section, may affect our operating results and cash generated from operations.

 

 

In the normal course of business, our operations are exposed to fluctuations in interest rates and currency values. These fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.

 

Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at December 31, 2006 and 2005, including derivatives and other interest rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of December 31, 2006 and 2005, respectively, would have no material impact on earnings, cash flows, or fair values of interest rate risk-sensitive instruments over a one-year period.

 

Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro and the Japanese yen. We face transactional currency exposures that arise when we enter into transactions, generally on an intercompany basis, denominated in currencies other than the local currency. We also face currency exposure that arises from 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 use forward contracts and purchased options to manage our foreign currency exposures. 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, 2006 and 2005, a hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) as of December 31, 2006 and 2005, respectively, would have no 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.