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.
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|
Defined Benefit |
Retiree Health |
||
|
|
Pension Plans |
Benefits |
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|
2004 |
2003 |
2004 |
2003 |
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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 |
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|
|
|
|
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 |
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|
|
Pension Plans |
Benefits |
||
|
(Percents) |
2004 |
2003 |
2004 |
2003 |
|
Weighted-average assumptions as |
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|
|
|
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of December 31 |
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|
|
|
|
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%.)