Notes to Consolidated Financial Statements
9. PENSION AND 401(K) RETIREMENT PLANS
We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor 401(k) retirement plans in the U.S. and contribute to government-sponsored retirement plans in locations outside the U.S.
Defined Benefit Pension Plans
A September 30 measurement date is used to value plan assets and obligations for all of our defined benefit pension plans.
The significant assumptions used to determine benefit obligations are as follows:
| United States | International | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2006 | 2005 | |||||||||
| Discount rate – funded plan | 6.1% | 5.9% | 4.5 - 5.3% | 4.1 - 5.0% | ||||||||
| Discount rate – unfunded plan | 5.9% | 5.9% | ||||||||||
| Salary scale | 4.0% | 4.0% | 3.0 - 4.3% | 2.0 - 4.2% | ||||||||
| Expected return on plan assets | 8.5% | 8.5% | 4.0 - 7.0% | 4.5 - 7.5% | ||||||||
The expected long-term rate of return on assets assumption is based on weighted-average expected returns for each asset class. Expected returns reflect a combination of historical performance analysis and forward-looking views of the financial markets, and include input from actuaries, investment service firms and investment managers.
Our pension expense is as follows:
| United States | International | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (millions) | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||||
| Service cost | $ | 13.2 | $ | 11.9 | $ | 11.6 | $ | 6.3 | $ | 6.2 | $ | 5.4 | ||||||
| Interest costs | 22.1 | 20.7 | 19.8 | 9.1 | 8.0 | 6.7 | ||||||||||||
| Expected return on plan assets |
(22.5 | ) | (20.3 | ) | (18.6 | ) | (7.8 | ) | (7.4 | ) | (7.0 | ) | ||||||
| Amortization of prior service costs and transition assets |
.1 | – | – | .1 | – | – | ||||||||||||
| Curtailment loss | .1 | – | – | .1 | – | – | ||||||||||||
| Recognized net actuarial loss |
10.5 | 11.4 | 11.5 | 3.0 | 1.2 | .6 | ||||||||||||
| Special termination benefits |
6.8 | – | – | .1 | – | – | ||||||||||||
| $ | 30.3 | $ | 23.7 | $ | 24.3 | $ | 10.9 | $ | 8.0 | $ | 5.7 | |||||||
The $6.8 million expense for special termination benefits in 2006 related to closing of our manufacturing facility in Salinas, California and our voluntary separation program (see note 4 of the financial statements).
Rollforwards of the benefit obligation, fair value of plan assets and a reconciliation of the pension plans’ funded status at the measurement date, September 30, follow:
| United States | International | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (millions) | 2006 | 2005 | 2006 | 2005 | ||||||||
| Change in benefit obligation Benefit obligation at beginning of year |
$ | 378.1 | $ | 349.6 | $ | 174.0 | $ | 141.8 | ||||
| Service cost | 13.2 | 11.9 | 6.3 | 6.2 | ||||||||
| Interest costs | 22.1 | 20.7 | 9.1 | 8.0 | ||||||||
| Employee contributions | – | – | 1.7 | 1.7 | ||||||||
| Net transfers in | – | – | – | 11.5 | ||||||||
| Plan changes and other | – | – | – | .4 | ||||||||
| Curtailment gain | (6.2 | ) | – | (.7 | ) | – | ||||||
| Plan settlement | – | – | – | (2.8 | ) | |||||||
| Special termination benefits | 6.8 | – | .1 | .5 | ||||||||
| Actuarial loss | 16.7 | 9.4 | 4.6 | 24.7 | ||||||||
| Benefits paid | (18.7 | ) | (13.5 | ) | (5.5 | ) | (8.0 | ) | ||||
| Foreign currency impact | – | – | 16.6 | (10.0 | ) | |||||||
| Benefit obligation at end of year |
$ | 412.0 | $ | 378.1 | $ | 206.2 | $ | 174.0 | ||||
| Change in fair value of plan assets Fair value of plan assets at beginning of year |
$ | 273.4 | $ | 237.7 | $ | 113.3 | $ | 90.9 | ||||
| Actual return on plan assets | 31.0 | 25.2 | 11.6 | 16.4 | ||||||||
| Employer contributions | 22.0 | 22.0 | 17.2 | 9.7 | ||||||||
| Employee contributions | – | – | 1.7 | 1.7 | ||||||||
| Plan settlement | – | – | – | (2.8 | ) | |||||||
| Benefits paid | (16.7 | ) | (11.5 | ) | (5.5 | ) | (8.0 | ) | ||||
| Net transfers in | – | – | – | 11.0 | ||||||||
| Foreign currency impact | – | – | 10.4 | (5.6 | ) | |||||||
| Fair value of plan assets at end of year |
$ | 309.7 | $ | 273.4 | $ | 148.7 | $ | 113.3 | ||||
| Funded status | $ | (102.3 | ) | $ | (104.7 | ) | $ | (57.5 | ) | $ | (60.7 | ) |
| Unrecognized net actuarial loss | 124.1 | 132.6 | 64.2 | 60.7 | ||||||||
| Unrecognized prior service cost | .3 | .4 | .6 | .7 | ||||||||
| Employer contributions | – | – | 1.4 | .9 | ||||||||
| Net amount recognized | $ | 22.1 | $ | 28.3 | $ | 8.7 | $ | 1.6 | ||||
Included in the United States in the preceding table is a benefit obligation of $42.9 million and $39.1 million for 2006 and 2005, respectively, related to an unfunded pension plan. The accrued liability related to this plan was $40.4 million and $35.2 million as of November 30, 2006 and 2005, respectively. The assets related to this plan are held in a Rabbi Trust and accordingly have not been included in the preceding table. These assets were $31.6 million and $24.6 million as of November 30, 2006 and 2005, respectively.
Amounts recorded in the balance sheet consist of the following:
| United States | International | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (millions) | 2006 | 2005 | 2006 | 2005 | ||||||||
| Prepaid pension cost | – | – | $ | .2 | $ | 1.8 | ||||||
| Accrued pension liability | $ | (52.0 | ) | $ | (50.5 | ) | (39.4 | ) | (44.6 | ) | ||
| Intangible assets | .3 | .4 | .6 | .6 | ||||||||
| Deferred income taxes | 27.2 | 29.0 | 14.3 | 13.3 | ||||||||
| Accumulated other comprehensive income |
46.6 | 49.4 | 33.0 | 30.5 | ||||||||
| Net amount recognized | $ | 22.1 | $ | 28.3 | $ | 8.7 | $ | 1.6 | ||||
The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The accumulated benefit obligation for the U.S. pension plans was $361.8 million and $323.9 million as of September 30, 2006 and 2005, respectively. The accumulated benefit obligation for the international pension plans was $188.1 million and $157.8 million as of November 30, 2006 and 2005, respectively.
Our actual and target weighted-average asset allocations of U.S. pension plan assets as of September 30, 2006 and 2005, by asset category, were as follows:
| September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Asset Category | 2006 | 2005 | Target | ||||||
| Equity securities | 70.3% | 69.0% | 70% | ||||||
| Debt securities | 18.8% | 29.1% | 20% | ||||||
| Other | 10.9% | 1.9% | 10% | ||||||
| Total | 100.0% | 100.0% | 100% | ||||||
The average actual and target asset allocations of the international pension plans’ assets as of November 30, 2006 and 2005, by asset category, were as follows:
| November 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Asset Category | 2006 | 2005 | Target | ||||||
| Equity securities | 56.7% | 58.8% | 56% | ||||||
| Debt securities | 43.1% | 39.7% | 44% | ||||||
| Other | .2% | 1.5% | – | ||||||
| Total | 100.0% | 100.0% | 100% | ||||||