Estee Lauder 2013 Annual Report Download - page 117

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 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 our
defined benefit pension and post-retirement benefit plans
are subject to numerous assumptions and variables. Cer-
tain significant variables require us to make assumptions
that are within our control such as an anticipated 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 underlying our pension and
post-retirement obligations. While we believe these
assumptions are within accepted industry 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 2013, we used a
discount rate for our Domestic Plans of 3.90% and vary-
ing rates on our international plans of between 1.00% and
7.00%. 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. As of June 30, 2013, we used an above-mean
yield curve, rather than the broad-based yield curve we
used before, because we believe it represents a better
estimate of an effective settlement rate of the obligation,
and the timing and amount of cash flows related to the
bonds included in this portfolio are expected to match
the estimated defined benefit payment streams of our
Domestic Plans. The benefit obligation of our Domestic
Plans would have been higher by approximately $34 mil-
lion at June 30, 2013 had we not used the above-mean
yield curve. For our international plans, the discount rate
in a particular country was principally determined based
on a yield curve constructed from high quality corporate
bonds in each country, with the resulting portfolio
having a duration matching that particular plan.
For fiscal 2013, we used an expected return on plan
assets of 7.50% for our U.S. Qualified Plan and varying
rates of between 2.25% and 7.00% 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 12 „ Pension, Deferred
Compensation and Post-retirement Bene“ t PlansŽ of Notes
to Consolidated Financial Statements for details regarding
the nature of our pension and post-retirement plan invest-
ments. The difference between actual and expected
return on plan assets is reported as a component of accu-
mulated other comprehensive income. Those gains/losses
that are subject to amortization over future periods will be
recognized as a component of the net periodic benefit
cost in such future periods. For fiscal 2013, our pension
plans had actual return on assets of approximately $74
million as compared with expected return on assets of
approximately $64 million. The resulting net deferred gain
of approximately $10 million, when combined with gains
and losses from previous years, will be amortized over
periods ranging from approximately 7 to 22 years. The
actual return on plan assets from our international pen-
sion plans exceeded expectations, primarily reflecting a
strong performance from fixed income and equity invest-
ments. The lower than expected return on assets from our
U.S. Qualified Plan was primarily due to weakness in our
fixed income investments, partially offset by our strong
equity returns.
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 2013 pension expense:
25 Basis-Point 25 Basis-Point
Increase Decrease
(In millions)
Discount rate $(3.5) $3.9
Expected return on assets $(2.5) $2.7
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
THE EST{E LAUDER COMPANIES INC. 115