Estee Lauder 2007 Annual Report Download - page 36

2005, respectively. This reserve is based upon the evalua-
tion of accounts receivable aging, specifi c exposures and
historical trends.
INVENTORY
We state our inventory at the lower of cost or fair market
value, with cost being determined on the fi rst-in, fi rst-out
(FIFO) method. We believe FIFO most closely matches
the fl ow of our products from manufacture through sale.
The reported net value of our inventory includes saleable
products, promotional products, raw materials and com-
ponentry and work in process that will be sold or used in
future periods. Inventory cost includes raw materials,
direct labor and overhead.
We also record an inventory obsolescence reserve,
which represents the difference between the cost of the
inventory and its estimated realizable value, based on
various product sales projections. This reserve is calcu-
lated using an estimated obsolescence percentage applied
to the inventory based on age, historical trends and
requirements to support forecasted sales. In addition,
and as necessary, we may establish specifi c reserves for
future known or anticipated events.
PENSION AND OTHER POST-RETIREMENT
BENEFIT COSTS
We offer the following benefi ts to some or all of our
employees: a domestic trust-based noncontributory
qualifi ed defi ned benefi t pension plan (“U.S. Qualifi ed
Plan”) and an unfunded, non-qualifi ed domestic non-
contributory pension plan to provide benefi ts in excess of
statutory limitations (collectively with the U.S. Qualifi ed
Plan, the “Domestic Plans”); a domestic contributory
defi ned contribution plan; international pension plans,
which vary by country, consisting of both defi ned benefi t
and defined contribution pension plans; deferred
compensation arrangements; and certain other post-
retirement benefi t plans.
The amounts needed to fund future payouts under
these plans are subject to numerous assumptions and
variables. Certain signifi cant variables require us to make
assumptions that are within our control such as an antici-
pated discount rate, expected rate of return on plan assets
and future compensation levels. We evaluate these
assumptions with our actuarial advisors and we believe
they are within accepted industry ranges, although an
increase or decrease in the assumptions or economic
events outside our control could have a direct impact on
reported net earnings.
The pre-retirement discount rate for each plan used for
determining future net periodic benefi t cost is based on a
review of highly rated long-term bonds. For fi scal 2007,
we used a pre-retirement discount rate for our Domestic
Plans of 6.25% and varying rates on our international
plans of between 2.25% and 6.25%. The pre-retirement
rate for our Domestic Plans is based on a bond portfolio
that includes only long-term bonds with an Aa rating, or
equivalent, from a major rating agency. We believe the
timing and amount of cash fl ows related to the bonds
included in this portfolio is expected to match the esti-
mated defi ned benefi t payment streams of our Domestic
Plans. For fi scal 2007, we used an expected return on plan
assets of 7.75% for our U.S. Qualifi ed Plan and varying
rates of between 2.75% and 7.25% for our international
plans. In determining the long-term rate of return for a
plan, we consider the historical rates of return, the nature
of the plan’s investments and an expectation for the plan’s
investment strategies. The U.S. Qualifi ed Plan asset alloca-
tion as of June 30, 2007 was approximately 49% equity
investments, 31% fi xed income investments and 20%
other investments. The asset allocation of our combined
international plans as of June 30, 2007 was approximately
55% equity investments, 29% fi xed income investments
and 16% other investments. The difference between
actual and expected returns on plan assets is accumulated
and amortized over future periods and, therefore, affects
our recorded obligations and recognized expenses in
such future periods. For fi scal 2007, our pension plans had
actual returns on assets of $80.1 million as compared with
expected returns on assets of $42.5 million, which resulted
in a net deferred gain of $37.6 million.
A 25 basis-point change in the discount rate or the
expected rate of return on plan assets would have had the
following effect on fi scal 2007 pension expense:
25 Basis-Point 25 Basis-Point
Increase Decrease
(In millions)
Discount rate $(2.5) $2.7
Expected return on assets $(1.5) $1.5
Our post-retirement plans are comprised of health care
plans that could be impacted by health care cost trend
rates, which may have a signifi cant effect on the amounts
reported. A one-percentage-point change in assumed
health care cost trend rates for fi scal 2007 would have
had the following effects:
THE EST{E LAUDER COMPANIES INC. 35