Estee Lauder 2009 Annual Report Download - page 94

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 qual-
ifi ed defi ned benefi t pension plan (“U.S. Qualifi ed Plan”)
and an unfunded, non-qualifi ed domestic noncon tributory
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 defined
contribution plan; international pension plans, which
vary by country, consisting of both defi ned benefi t and
defi ned contribution pension plans; deferred compen-
sation 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 select
assumptions that we believe refl ect 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 benefi t cost is based on a review of
highly rated long-term bonds. For fi scal 2009, we used a
discount rate for our Domestic Plans of 6.75% and vary-
ing rates on our international plans of between 2.00% and
9.00%. 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. We believe the timing and amount of cash fl ows
related to the bonds included in this portfolio is expected
to match the estimated defi ned benefi t payment streams
of our Domestic Plans. For fiscal 2009, we used an
expected return on plan assets of 7.75% for our U.S. Qual-
ifi ed Plan and varying rates of between 3.25% and 9.00%
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 expec-
tation for the plan’s investment strategies. The U.S. Quali-
fied Plan asset allocation as of June 30, 2009 was
approximately 32% equity investments, 51% debt securi-
ties and 17% other investments. The asset allocation of
our combined international plans as of June 30, 2009 was
approximately 19% equity investments, 59% debt securi-
ties and 22% other 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 subject to amortization over
future periods will be recognized as a component of the
net periodic benefi t cost in such future periods. For fi scal
2009, our pension plans had actual negative return on
assets of $60.5 million as compared with expected return
on assets of $52.2 million, which resulted in a net deferred
loss of $112.7 million, of which approximately $48 million
is currently subject to be amortized over periods ranging
from approximately 4 to 22 years. The actual negative
return on assets was primarily related to the performance
of equity markets during the past fi scal 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 fi scal 2009 pension expense:
25 Basis-Point 25 Basis-Point
Increase Decrease
(In millions)
Discount rate $(1.5) $2.4
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 signifi cant effect on the amounts
reported. A one-percentage-point change in assumed
health care cost trend rates for fi scal 2009 would have
had the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
(In millions)
Effect on total service
and interest costs $1.2 $(1.1)
Effect on post-retirement
benefi t obligations $8.8 $(8.4)
For fi scal 2010, we are using a discount rate for the
Domestic Plans of 6.50% and varying rates for our inter-
national plans of between 1.75% and 8.75%. We are using
an expected return on plan assets of 7.75% for the U.S.
Qualifi ed Plan and varying rates for our international pen-
sion plans of between 2.75% and 8.75%. The net change
THE EST{E LAUDER COMPANIES INC. 93