Estee Lauder 2010 Annual Report Download - page 84

THE EST{E LAUDER COMPANIES INC. 83
to the inventory based on age, historical trends and
requirements to support forecasted sales. In addition, and
as necessary, we may establish specific reserves for future
known or anticipated events.
PENSION AND OTHER POST-RETIREMENT
BENEFIT COSTS
We offer the following benefits to some or all of our
employees: a domestic trust-based noncontributory qual-
ified defined benefit pension plan (“U.S. Qualified Plan”)
and an unfunded, non-qualified domestic noncon-
tributory pension plan to provide benefits in excess of
statutory limitations (collectively with the U.S. Qualified
Plan, the “Domestic Plans”); a domestic contributory
defined contribution plan; international pension plans,
which vary by country, consisting of both defined benefit
and defined contribution pension plans; deferred
compensation arrangements; and certain other post-
retirement benefit plans.
The amounts needed to fund future payouts under
these plans are subject to numerous assumptions and
variables. Certain significant 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 select
assumptions that we believe reflect the economics under-
lying our pension and post-retirement obligations. While
we believe these assumptions are within accepted indus-
try ranges, an increase or decrease in the assumptions or
economic events outside our control could have a direct
impact on reported net earnings.
The discount rate for each plan used for determining
future net periodic benefit cost is based on a review of
highly rated long-term bonds. For fiscal 2010, we used a
discount rate for our Domestic Plans of 6.50% and vary-
ing rates on our international plans of between 1.75% and
8.75%. The discount 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 flows
related to the bonds included in this portfolio is expected
to match the estimated defined benefit payment streams
of our Domestic Plans. For fiscal 2010, we used an
expected return on plan assets of 7.75% for our U.S. Qual-
ified Plan and varying rates of between 2.75% and 8.75%
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,
see “Note 13 — Pension, Deferred Compensation and
Post- retirement Benefit Plans” of Notes to Consolidated
Financial Statements for details regarding the nature of
our pension and post-retirement plan investments. The
difference between actual and expected return on plan
assets is reported as a component of accumulated other
comprehensive income. Those gains/losses that are sub-
ject to amortization over future periods will be recognized
as a component of the net periodic benefit cost in such
future periods. For fiscal 2010, our pension plans had
actual return on assets of approximately $101 million as
compared with expected return on assets of approxi-
mately $52 million, which resulted in a net deferred gain
of approximately $49 million, substantially all of which is
currently subject to be amortized over periods ranging
from approximately 4 to 26 years. The actual return on
assets was primarily related to the performance of equity
markets during the past fiscal year.
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 fiscal 2010 pension expense:
25 Basis-Point 25 Basis-Point
Increase Decrease
(In millions)
Discount rate $(1.5) $3.3
Expected return on assets $(1.9) $1.9
Our post-retirement plans are comprised of health care
plans that could be impacted by health care cost trend
rates, which may have a significant effect on the amounts
reported. A one-percentage-point change in assumed
health care cost trend rates for fiscal 2010 would have had
the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
(In millions)
Effect on total service
and interest costs $1.1 $(1.0)
Effect on post-retirement
benefit obligations $9.4 $(9.0)
For fiscal 2011, we are using a discount rate for the
Domestic Plans of 5.30% and varying rates for our inter-
national plans of between 1.25% and 8.00%. We are using
an expected return on plan assets of 7.75% for the U.S.
Qualified Plan and varying rates for our international pen-
sion plans of between 2.50% and 8.00%. The net change
in these assumptions from those used in fiscal 2010 will
result in an increase in pension expense of approximately
$11.4 million in fiscal 2011. We will continue to monitor
the market conditions relative to these assumptions and
adjust them accordingly.