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Analysis of Income Taxes

Difficulty: Advanced


Income Tax Expense (Benefit)

Eli Lilly & Co., income tax expense (benefit), continuing operations

USD $ in thousands

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12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Federal (100,600) (57,000) 660,500  168,900  259,100 
Foreign 38,500  378,900  422,000  406,200  553,200 
State 4,000  (125,000) 47,500  (2,100) 126,300 
2017 Tax Act, provisional 3,247,500  –  –  –  – 
Current tax expense 3,189,400  196,900  1,130,000  573,000  938,600 
Federal 801,500  517,000  (689,600) (83,300) 297,000 
Foreign (256,300) (83,300) (66,000) 120,200  (28,200)
State 400  5,800  7,200  (100) (2,900)
2017 Tax Act, provisional (1,333,500) –  –  –  – 
Deferred tax expense (benefit) (787,900) 439,500  (748,400) 36,800  265,900 
Income taxes 2,401,500  636,400  381,600  609,800  1,204,500 

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

Item Description The company
Current tax expense Amount of current income tax expense (benefit) pertaining to taxable income (loss) from continuing operations. Eli Lilly & Co.’s current tax expense declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.
Deferred tax expense (benefit) Amount of deferred income tax expense (benefit) pertaining to income (loss) from continuing operations. Eli Lilly & Co.’s deferred tax expense (benefit) increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
Income taxes Amount of current income tax expense (benefit) and deferred income tax expense (benefit) pertaining to continuing operations. Eli Lilly & Co.’s income taxes increased from 2015 to 2016 and from 2016 to 2017.

Effective Income Tax Rate (EITR)

Eli Lilly & Co., effective income tax rate (EITR) reconciliation

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
U.S. federal statutory tax rate 35.00% 35.00% 35.00% 35.00% 35.00%
Effective income tax rate 109.29% 18.86% 13.68% 20.32% 20.45%

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

Item Description The company
Effective income tax rate Percentage of current income tax expense (benefit) and deferred income tax expense (benefit) pertaining to continuing operations. Eli Lilly & Co.’s effective income tax rate increased from 2015 to 2016 and from 2016 to 2017.

Components of Deferred Tax Assets and Liabilities

Eli Lilly & Co., components of deferred tax assets and liabilities

USD $ in thousands

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Compensation and benefits 1,021,700  1,126,000  1,034,600  897,300  639,800 
Tax loss carryforwards and carrybacks 501,400  327,300  247,800  265,500  311,700 
Tax credit carryforwards and carrybacks 473,000  458,900  294,200  279,400  494,600 
Purchases of intangible assets 443,100  620,300  637,200  473,300  418,800 
Product return reserves 88,400  128,100  212,100  241,800  313,700 
Other comprehensive loss on hedging transactions 68,900  123,300  129,700  –  – 
Debt 53,500  95,300  111,300  176,000  110,000 
Contingent consideration 41,800  142,700  214,600  –  – 
Contingencies –  –  –  68,900  106,000 
Intercompany profit in inventories –  –  –  –  104,500 
Other 555,800  587,300  628,600  633,300  595,000 
Gross deferred tax assets 3,247,600  3,609,200  3,510,100  3,035,500  3,094,100 
Valuation allowances (709,100) (648,300) (590,300) (601,100) (647,100)
Deferred tax assets 2,538,500  2,960,900  2,919,800  2,434,400  2,447,000 
Inventories (654,800) (955,500) (771,300) (684,600) (685,600)
Intangibles (314,600) (604,200) (756,300) (582,600) (598,900)
Property and equipment (282,100) (398,600) (411,600) (424,700) (379,100)
Prepaid employee benefits (231,500) (265,300) (317,800) (275,800) (446,200)
Financial instruments (41,500) (279,300) (152,600) (161,500) (109,600)
Unremitted earnings (16,600) (673,600) (218,800) (737,100) (898,300)
Deferred tax liabilities (1,541,100) (3,176,500) (2,628,400) (2,866,300) (3,117,700)
Deferred tax assets (liabilities), net 997,400  (215,600) 291,400  (431,900) (670,700)

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

Item Description The company
Gross deferred tax assets Amount before allocation of valuation allowances of deferred tax asset attributable to deductible temporary differences and carryforwards. Eli Lilly & Co.’s gross deferred tax assets increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
Deferred tax assets Amount after allocation of valuation allowances of deferred tax asset attributable to deductible temporary differences and carryforwards. Eli Lilly & Co.’s deferred tax assets increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
Deferred tax assets (liabilities), net Amount, after allocation of valuation allowances and deferred tax liability, of deferred tax asset attributable to deductible differences and carryforwards, without jurisdictional netting. Eli Lilly & Co.’s deferred tax assets (liabilities), net declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

Analyst Adjustments: Removal of Deferred Taxes

Eli Lilly & Co., adjustments to financial data

USD $ in thousands

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Current Liabilities
Current liabilities (as reported) 14,535,900  10,986,600  8,229,600  11,207,500  8,916,600 
Less: Current deferred tax liabilities, net –  –  –  1,466,500  792,800 
Current liabilities (adjusted) 14,535,900  10,986,600  8,229,600  9,741,000  8,123,800 
Adjustment to Total Liabilities
Total liabilities (as reported) 33,313,100  24,725,400  20,978,600  21,790,100  17,608,000 
Less: Current deferred tax liabilities, net –  –  –  1,466,500  792,800 
Total liabilities (adjusted) 33,313,100  24,725,400  20,978,600  20,323,600  16,815,200 
Adjustment to Total Eli Lilly And Company Shareholders’ Equity
Total Eli Lilly and Company shareholders’ equity (as reported) 11,592,200  14,007,700  14,571,300  15,373,200  17,631,400 
Less: Net deferred tax assets (liabilities) 997,400  (215,600) 291,400  (431,900) (670,700)
Total Eli Lilly and Company shareholders’ equity (adjusted) 10,594,800  14,223,300  14,279,900  15,805,100  18,302,100 
Adjustment to Net Income (loss)
Net income (loss) (as reported) (204,100) 2,737,600  2,408,400  2,390,500  4,684,800 
Add: Deferred income tax expense (benefit) (787,900) 439,500  (748,400) 36,800  265,900 
Net income (loss) (adjusted) (992,000) 3,177,100  1,660,000  2,427,300  4,950,700 

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).


Eli Lilly & Co., Financial Data: Reported vs. Adjusted


Adjusted Ratios: Removal of Deferred Taxes (Summary)

Eli Lilly & Co., adjusted ratios

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Current Ratio
Reported current ratio 1.32 1.37 1.53 1.09 1.47
Adjusted current ratio 1.32 1.37 1.53 1.25 1.61
Net Profit Margin
Reported net profit margin -0.89% 12.90% 12.07% 12.19% 20.27%
Adjusted net profit margin -4.34% 14.97% 8.32% 12.37% 21.42%
Financial Leverage
Reported financial leverage 3.88 2.77 2.44 2.42 2.00
Adjusted financial leverage 4.25 2.73 2.49 2.35 1.93
Return on Equity (ROE)
Reported ROE -1.76% 19.54% 16.53% 15.55% 26.57%
Adjusted ROE -9.36% 22.34% 11.62% 15.36% 27.05%
Return on Assets (ROA)
Reported ROA -0.45% 7.05% 6.77% 6.43% 13.29%
Adjusted ROA -2.21% 8.19% 4.67% 6.53% 14.05%

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. Eli Lilly & Co.’s adjusted current ratio deteriorated from 2015 to 2016 and from 2016 to 2017.
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Eli Lilly & Co.’s adjusted net profit margin improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Eli Lilly & Co.’s adjusted financial leverage increased from 2015 to 2016 and from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Eli Lilly & Co.’s adjusted ROE improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Eli Lilly & Co.’s adjusted ROA improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Eli Lilly & Co., Ratios: Reported vs. Adjusted


Adjusted Current Ratio

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Current assets 19,202,100  15,101,400  12,573,600  12,179,800  13,104,700 
Current liabilities 14,535,900  10,986,600  8,229,600  11,207,500  8,916,600 
Ratio
Current ratio1 1.32 1.37 1.53 1.09 1.47
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in thousands)
Current assets 19,202,100  15,101,400  12,573,600  12,179,800  13,104,700 
Adjusted current liabilities 14,535,900  10,986,600  8,229,600  9,741,000  8,123,800 
Ratio
Adjusted current ratio2 1.32 1.37 1.53 1.25 1.61

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

2017 Calculations

1 Current ratio = Current assets ÷ Current liabilities
= 19,202,100 ÷ 14,535,900 = 1.32

2 Adjusted current ratio = Current assets ÷ Adjusted current liabilities
= 19,202,100 ÷ 14,535,900 = 1.32

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. Eli Lilly & Co.’s adjusted current ratio deteriorated from 2015 to 2016 and from 2016 to 2017.

Adjusted Net Profit Margin

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net income (loss) (204,100) 2,737,600  2,408,400  2,390,500  4,684,800 
Revenue 22,871,300  21,222,100  19,958,700  19,615,600  23,113,100 
Ratio
Net profit margin1 -0.89% 12.90% 12.07% 12.19% 20.27%
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in thousands)
Adjusted net income (loss) (992,000) 3,177,100  1,660,000  2,427,300  4,950,700 
Revenue 22,871,300  21,222,100  19,958,700  19,615,600  23,113,100 
Ratio
Adjusted net profit margin2 -4.34% 14.97% 8.32% 12.37% 21.42%

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

2017 Calculations

1 Net profit margin = 100 × Net income (loss) ÷ Revenue
= 100 × -204,100 ÷ 22,871,300 = -0.89%

2 Adjusted net profit margin = 100 × Adjusted net income (loss) ÷ Revenue
= 100 × -992,000 ÷ 22,871,300 = -4.34%

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Eli Lilly & Co.’s adjusted net profit margin improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Total assets 44,981,000  38,805,900  35,568,900  37,178,200  35,248,700 
Total Eli Lilly and Company shareholders’ equity 11,592,200  14,007,700  14,571,300  15,373,200  17,631,400 
Ratio
Financial leverage1 3.88 2.77 2.44 2.42 2.00
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in thousands)
Total assets 44,981,000  38,805,900  35,568,900  37,178,200  35,248,700 
Adjusted total Eli Lilly and Company shareholders’ equity 10,594,800  14,223,300  14,279,900  15,805,100  18,302,100 
Ratio
Adjusted financial leverage2 4.25 2.73 2.49 2.35 1.93

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

2017 Calculations

1 Financial leverage = Total assets ÷ Total Eli Lilly and Company shareholders’ equity
= 44,981,000 ÷ 11,592,200 = 3.88

2 Adjusted financial leverage = Total assets ÷ Adjusted total Eli Lilly and Company shareholders’ equity
= 44,981,000 ÷ 10,594,800 = 4.25

Ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Eli Lilly & Co.’s adjusted financial leverage increased from 2015 to 2016 and from 2016 to 2017.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net income (loss) (204,100) 2,737,600  2,408,400  2,390,500  4,684,800 
Total Eli Lilly and Company shareholders’ equity 11,592,200  14,007,700  14,571,300  15,373,200  17,631,400 
Ratio
ROE1 -1.76% 19.54% 16.53% 15.55% 26.57%
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in thousands)
Adjusted net income (loss) (992,000) 3,177,100  1,660,000  2,427,300  4,950,700 
Adjusted total Eli Lilly and Company shareholders’ equity 10,594,800  14,223,300  14,279,900  15,805,100  18,302,100 
Ratio
Adjusted ROE2 -9.36% 22.34% 11.62% 15.36% 27.05%

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

2017 Calculations

1 ROE = 100 × Net income (loss) ÷ Total Eli Lilly and Company shareholders’ equity
= 100 × -204,100 ÷ 11,592,200 = -1.76%

2 Adjusted ROE = 100 × Adjusted net income (loss) ÷ Adjusted total Eli Lilly and Company shareholders’ equity
= 100 × -992,000 ÷ 10,594,800 = -9.36%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Eli Lilly & Co.’s adjusted ROE improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net income (loss) (204,100) 2,737,600  2,408,400  2,390,500  4,684,800 
Total assets 44,981,000  38,805,900  35,568,900  37,178,200  35,248,700 
Ratio
ROA1 -0.45% 7.05% 6.77% 6.43% 13.29%
Adjusted for Deferred Taxes
Selected Financial Data (USD $ in thousands)
Adjusted net income (loss) (992,000) 3,177,100  1,660,000  2,427,300  4,950,700 
Total assets 44,981,000  38,805,900  35,568,900  37,178,200  35,248,700 
Ratio
Adjusted ROA2 -2.21% 8.19% 4.67% 6.53% 14.05%

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

2017 Calculations

1 ROA = 100 × Net income (loss) ÷ Total assets
= 100 × -204,100 ÷ 44,981,000 = -0.45%

2 Adjusted ROA = 100 × Adjusted net income (loss) ÷ Total assets
= 100 × -992,000 ÷ 44,981,000 = -2.21%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Eli Lilly & Co.’s adjusted ROA improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.