Baker Hughes 2004 Annual Report Download - page 110

We฀have฀an฀investment฀committee฀that฀meets฀quarterly฀
to฀review฀the฀portfolio฀returns฀and฀to฀determine฀asset-mix฀฀
targets฀based฀on฀asset/liability฀studies.฀A฀nationally฀recognized฀
third-party฀investment฀consultant฀assisted฀us฀in฀developing฀an฀
asset฀allocation฀strategy฀to฀determine฀our฀expected฀rate฀of฀
return฀and฀expected฀risk฀for฀various฀investment฀portfolios.฀The฀
investment฀committee฀considered฀these฀studies฀in฀the฀formal฀
establishment฀of฀the฀current฀asset-mix฀targets฀based฀on฀the฀
projected฀risk฀and฀return฀levels฀for฀each฀asset฀class.
In฀2005,฀we฀expect฀to฀contribute฀between฀$2.0฀million฀
and฀$5.0฀million฀to฀the฀U.S.฀pension฀plans฀and฀between฀
$10.0฀million฀to฀$14.0฀million฀to฀the฀non-U.S.฀pension฀plans.฀
The฀expected฀benefit฀payments฀related฀to฀our฀U.S.฀pension฀
plans฀for฀each฀of฀the฀five฀years฀in฀the฀period฀ending฀December฀
31,฀2009฀are฀$11.4฀million,฀$12.3฀million,฀$13.3฀million,฀
$14.7฀million฀and฀$17.2฀million,฀respectively,฀and฀$126.4฀mil-
lion฀in฀the฀aggregate฀for฀the฀five฀years฀thereafter.฀The฀
expected฀benefit฀payments฀related฀to฀our฀non-U.S.฀pension฀
plans฀for฀each฀of฀the฀five฀years฀in฀the฀period฀ending฀Decem-
ber฀31,฀2009฀are฀$7.9฀million,฀$7.9฀million,฀$12.0฀million,฀฀
$6.2฀million฀and฀$4.2฀million,฀respectively,฀and฀$26.0฀million฀
in฀the฀aggregate฀for฀the฀five฀years฀thereafter.฀These฀payments฀
reflect฀benefits฀attributable฀to฀estimated฀future฀employee฀service฀
and฀are฀primarily฀funded฀from฀plan฀assets.
Postretirement฀Welfare฀Benefits
We฀provide฀certain฀postretirement฀health฀care฀and฀life฀
insurance฀benefits฀(“postretirement฀welfare฀benefits”)฀to฀sub-
stantially฀all฀U.S.฀employees฀who฀retire฀and฀have฀met฀certain฀
age฀and฀service฀requirements.฀The฀plan฀is฀unfunded.฀The฀mea-
surement฀of฀plan฀obligations฀is฀as฀of฀October฀1฀of฀each฀year฀
presented.฀The฀reconciliation฀of฀the฀beginning฀and฀ending฀bal-
ances฀of฀benefit฀obligations฀and฀the฀funded฀status฀of฀the฀plan฀
is฀as฀follows฀for฀the฀years฀ended฀December฀31:
฀ 2004฀ 2003
Change฀in฀benefit฀obligation:฀
฀ Accumulated฀benefit฀obligation฀฀฀
฀ ฀ at฀beginning฀of฀year฀ $฀ 174.8฀ $฀ 158.7฀
฀ Service฀cost฀ ฀ 5.5฀ ฀ 4.8฀
฀ Interest฀cost฀ ฀ 9.6฀ ฀ 10.3฀
฀ Actuarial฀(gain)฀loss฀ ฀ (7.1)฀ ฀ 12.3฀
฀ Benefits฀paid฀ ฀ (13.3)฀ ฀ (11.3)
Accumulated฀benefit฀obligation฀฀
฀ at฀end฀of฀year฀ ฀ 169.5฀ ฀ 174.8
฀
Funded฀status฀–฀over฀(under)฀ ฀ (169.5)฀ ฀ (174.8)฀
Unrecognized฀actuarial฀loss฀ ฀ 34.9฀ ฀ 42.9฀
Unrecognized฀prior฀service฀cost฀ ฀ 7.8฀ ฀ 8.5
Net฀amount฀recognized฀ ฀ (126.8)฀ ฀ (123.4)฀
Benefits฀paid฀–฀October฀to฀December฀ 3.6฀ ฀ 4.2
Net฀amount฀recognized฀ ฀ (123.2)฀ ฀ (119.2)฀
Less฀current฀portion฀reported฀in฀฀
฀ accrued฀employee฀compensation฀฀ (16.3)฀ ฀ (18.6)
Long-term฀portion฀reported฀in฀฀
฀ pensions฀and฀postretirement฀฀
฀ benefit฀obligations฀ $฀ (106.9)฀ $฀ (100.6)
Weighted฀average฀discount฀rates฀of฀6.00%฀and฀6.25%฀
were฀used฀to฀determine฀postretirement฀welfare฀benefit฀obliga-
tions฀for฀the฀plan฀for฀the฀years฀ended฀December฀31,฀2004฀and฀
2003,฀respectively.
The฀components฀of฀net฀periodic฀benefit฀cost฀are฀as฀follows฀
for฀the฀years฀ended฀December฀31:
฀ 2004฀ 2003฀ 2002
Service฀cost฀ $฀ 5.5฀ $฀ 4.8฀ $฀ 4.4฀
Interest฀cost฀ ฀ 9.6฀ ฀ 10.3฀ ฀ 9.5฀
Amortization฀of฀prior฀
฀ service฀cost฀ ฀ 0.6฀ ฀ 0.6฀ ฀ 0.6฀
Recognized฀actuarial฀loss฀ ฀ 1.0฀ ฀ 1.1฀ ฀ 0.2
Net฀periodic฀benefit฀cost฀ $฀ 16.7฀ $฀ 16.8฀ $฀ 14.7
Weighted฀average฀discount฀rates฀of฀6.25%,฀6.75%฀and฀
7.00%฀were฀used฀to฀determine฀net฀postretirement฀welfare฀ben-
efit฀costs฀for฀the฀plan฀for฀the฀years฀ended฀December฀31,฀2004,฀
2003฀and฀2002,฀respectively.
In฀December฀2003,฀the฀Medicare฀Prescription฀Drug,฀
Improvement฀and฀Modernization฀Act฀of฀2003฀(”the฀Medicare฀
Act”)฀was฀signed฀into฀law.฀The฀Medicare฀Act฀expanded฀Medi-
care฀to฀include,฀for฀the฀first฀time,฀coverage฀for฀prescription฀
drugs.฀In฀May฀2004,฀the฀FASB฀issued฀FSP฀106-2฀which฀฀
provided฀guidance฀on฀the฀accounting฀for฀the฀effects฀of฀the฀
Medicare฀Act฀for฀employers฀that฀sponsor฀postretirement฀health฀
care฀plans฀that฀provide฀prescription฀drug฀benefits.฀We฀adopted฀
the฀provisions฀of฀FSP฀106-2฀in฀the฀third฀quarter฀of฀2004,฀
resulting฀in฀a฀reduction฀in฀our฀accumulated฀postretirement฀
benefit฀obligation฀of฀$18.8฀million,฀which฀is฀reflected฀in฀the฀
actuarial฀(gain)฀loss฀caption฀of฀the฀funded฀status฀reconciliation.฀
We฀recognized฀a฀reduction฀in฀our฀net฀periodic฀postretirement฀
benefit฀costs฀of฀$2.0฀million฀as฀a฀result฀of฀the฀adoption฀of฀฀
FSP฀106-2.
Assumed฀health฀care฀cost฀trend฀rates฀have฀a฀significant฀
effect฀on฀the฀amounts฀reported฀for฀the฀postretirement฀welfare฀
benefits฀plan.฀The฀assumed฀health฀care฀cost฀trend฀rate฀used฀
in฀measuring฀the฀accumulated฀benefit฀obligation฀for฀postretire-
ment฀welfare฀benefits฀was฀increased฀in฀2003.฀As฀of฀Decem-
ber฀31,฀2004,฀the฀health฀care฀cost฀trend฀rate฀was฀9.0%฀for฀
employees฀under฀age฀65฀and฀7.0%฀for฀participants฀over฀age฀
65,฀with฀each฀declining฀gradually฀each฀successive฀year฀until฀
it฀reaches฀5.0%฀for฀both฀employees฀under฀age฀65฀and฀over฀
age฀65฀in฀2008.฀A฀one฀percentage฀point฀change฀in฀assumed฀
health฀care฀cost฀trend฀rates฀would฀have฀had฀the฀following฀
effects฀on฀2004:
฀ One฀Percentage฀ One฀Percentage฀
฀ Point฀Increase฀ Point฀Decrease
Effect฀on฀total฀of฀service฀
฀ and฀interest฀cost฀components฀ $฀ 0.6฀ $฀ (0.5)฀
Effect฀on฀postretirement฀welfare฀
฀ benefit฀obligation฀ ฀ 9.5฀ ฀ (8.5)
60฀฀฀฀฀Baker฀Hughes฀Incorporated