Sara Lee 2010 Annual Report Download - page 50

Stock Compensation The corporation issues restricted stock units
(RSUs) and stock options to employees in exchange for employee
services. See Note 9 to the Consolidated Financial Statements
regarding stock-based compensation for further information on
these awards. The cost of RSUs and stock option awards is equal
to the fair value of the award at the date of grant, and compensation
expense is recognized for those awards earned over the service
period. Certain of the RSUs vest based upon the employee achieving
certain defined performance measures. During the service period,
management estimates the number of awards that will meet the
defined performance measures. With regard to stock options, at
the date of grant, the corporation determines the fair value of the
award using the Black-Scholes option pricing formula. Management
estimates the period of time the employee will hold the option prior
to exercise and the expected volatility of the corporation’s stock,
each of which impacts the fair value of the stock options. The cor-
poration believes that changes in the estimates and assumptions
associated with prior non-performance based grants and stock
option grants are not reasonably likely to have a material impact
on future operating results. However, changes in estimates and
assumptions related to previously issued performance based RSUs
may have a material impact on future operating results.
Defined Benefit Pension Plans See Note 16 to the Consolidated
Financial Statements, titled “Defined Benefit Pension Plans,” for
information regarding plan obligations, plan assets and the meas-
urements of these amounts, as well as the net periodic benefit
cost and the reasons for changes in this cost.
Pension costs and obligations are dependent on assumptions
used in calculating such amounts. These assumptions include esti-
mates of the present value of projected future pension payments
to all plan participants, taking into consideration the likelihood of
potential future events such as salary increases and demographic
experience. The assumptions used in developing the required esti-
mates include the following key factors: discount rates, salary growth,
expected return on plan assets, retirement rates and mortality.
In determining the discount rate, the corporation utilizes a yield
curve based on high-quality fixed-income investments that have a
AA bond rating to discount the expected future benefit payments to
plan participants. Salary increase assumptions are based on historical
experience and anticipated future management actions. In deter-
mining the long-term rate of return on plan assets, the corporation
assumes that the historical long-term compound growth rate of
equity and fixed-income securities will predict the future returns of
similar investments in the plan portfolio. Investment management
and other fees paid out of plan assets are factored into the deter-
mination of asset return assumptions. Retirement rates are based
primarily on actual plan experience, while standard actuarial tables
are used to estimate mortality. Results that differ from these
assumptions are accumulated and amortized over future periods
and, therefore, generally affect the net periodic benefit cost in
future periods.
Net periodic benefit costs for the corporation’s defined benefit
pension plans were $115 million in 2010, $67 million in 2009
and $97 million in 2008, and the projected benefit obligation was
$4,727 million at the end of 2010 and $4,218 million at the end
of 2009. The corporation currently expects its net periodic benefit
cost for 2011 to be approximately $50 million, a $65 million decrease
over 2010 due primarily to a reduction in service cost due to plan
freezes in the U.S., a reduction in interest rates, and an increase in
expected return on assets due to higher plan assets at the end of
2010 as compared to the prior year.
The following information illustrates the sensitivity of the net
periodic benefit cost and projected benefit obligation to a change
in the discount rate and return on plan assets. Amounts relating to
foreign plans are translated at the spot rate at the close of 2010.
The sensitivities reflect the impact of changing one assumption at
a time and are specific to base conditions at the end of 2010 and
treat the household and body care businesses as discontinued
operations. It should be noted that economic factors and conditions
often affect multiple assumptions simultaneously and that the
effects of changes in assumptions are not necessarily linear.
Increase/(Decrease) in
2010
2011 Projected
Net Periodic Benefit
Assumption Change Benefit Cost Obligation
Discount rate 1% increase $(36) $(590)
1% decrease 32 674
Asset return 1% increase (41) –
1% decrease 41 –
The corporation’s defined benefit pension plans had a net
unamortized actuarial loss of $1,143 million in 2010 and $883 mil-
lion in 2009. The unamortized actuarial loss is reported in the
“Accumulated other comprehensive loss” line of the Consolidated
Balance Sheet. The increase in the net actuarial loss in 2010 was
primarily due to a 120 basis point reduction in the weighted average
discount rate partially offset by actual asset performance in excess
of the asset return assumption.
48 Sara Lee Corporation and Subsidiaries
Financial review