Estee Lauder 2014 Annual Report Download - page 49

THE EST{E LAUDER COMPANIES INC. 47
Manufacturing overhead is allocated to the cost of
inventory based on the normal production capacity.
Unallocated overhead during periods of abnormally low
production levels are recognized as cost of sales in the
period in which they are incurred.
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 2014, we used
discount rates for our Domestic Plans of between 4.30%
and 4.90% and varying rates on our international plans of
between 1.00% and 7.25%. 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 used an above-mean
yield curve which represents an estimate of the 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. For our
international plans, the discount rate in a particular coun-
try 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 2014, 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 7.25% 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. See “Note 12 — 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 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 2014, our pension
plans had actual return on assets of approximately
$129 million as compared with expected return on assets
of approximately $68 million. The resulting net deferred
gain of approximately $61 million, when combined with
gains and losses from previous years, will be amortized
over periods ranging from approximately 7 to 23 years.
The actual return on plan assets from our global pension
plans exceeded expectations, primarily reflecting
strong performance from global equity and U.S. fixed
income investments.
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 2014 pension expense:
25 Basis-Point 25 Basis-Point
Increase Decrease
(In millions)
Discount rate $(4.0) $4.2
Expected return on assets $(2.7) $2.7