Pension and Postretirement Benefits

Pension Benefits — The company sponsors a number of noncontributory defined benefit pension plans to provide retirement benefits to all eligible U.S. and non-U.S. employees. The benefits provided under these plans are based primarily on years of service and compensation levels. In 1999, the company implemented significant amendments to certain U.S. pension plans. Under a new formula, retirement benefits are determined based on percentages of annual pay and age. To minimize the impact of converting to the new formula, service and earnings credit continues to accrue for active employees participating in the plans under the old formula prior to the amendments through the year 2014. Employees will receive the benefit from either the new or old formula, whichever is higher. Benefits become vested upon the completion of three years of service. Benefits are paid from funds previously provided to trustees and insurance companies or are paid directly by the company from general funds. Effective as of January 1, 2011, the company’s U.S. pension plans were amended so that employees hired or rehired on or after that date and who are not covered by collective bargaining agreements will not be eligible to participate in the plans.

Postretirement Benefits — The company provides postretirement benefits including health care and life insurance to substantially all retired U.S. employees and their dependents. The company established retiree medical account benefits for eligible U.S. retirees. The accounts were intended to provide reimbursement for eligible health care expenses on a tax-favored basis. Effective as of January 1, 2011, the retirement medical program was amended to eliminate the retiree medical account benefit for employees not covered by collective bargaining agreements. To preserve the benefit for employees close to retirement age, the retiree medical account will be available to employees who were at least age 50 with at least 10 years of service as of December 31, 2010, and who satisfy the other eligibility requirements for the retiree medical program.

The company uses the fiscal year end as the measurement date for the benefit plans.

Components of net periodic benefit cost:



	Pension
	2012			2011			2010
Service cost	$	55		$	58		$	55
Interest cost	122			121			121
Expected return on plan assets	(178		)	(178		)	(170		)
Amortization of prior service cost	—			1			1
Recognized net actuarial loss	74			70			49
Settlement (gains)/costs	—			(1		)	12
Net periodic benefit expense	$	73		$	71		$	68

The settlement costs in 2010 are related to the closure of a plant in Canada. The settlement costs are included in Restructuring charges in the Consolidated Statements of Earnings. See Note 6 for additional information.

The estimated prior service credit and net actuarial loss that will be amortized from Accumulated other comprehensive loss into net periodic pension cost during 2013 are $1 and $108, respectively.



	Postretirement
	2012			2011			2010
Service cost	$	3		$	3		$	3
Interest cost	18			18			19
Amortization of prior service cost/(credit)	(1		)	(1		)	1
Recognized net actuarial loss	9			7			1
Net periodic benefit expense	$	29		$	27		$	24

The estimated prior service credit and net actuarial loss that will be amortized from Accumulated other comprehensive loss into net periodic postretirement expense during 2013 are $1 and $15, respectively.

Change in benefit obligation:



	Pension						Postretirement
	2012			2011			2012			2011
Obligation at beginning of year	$	2,388		$	2,275		$	374		$	362
Service cost	55			58			3			3
Interest cost	122			121			18			18
Actuarial loss	361			61			47			15
Participant contributions	—			—			6			5
Benefits paid	(157		)	(146		)	(38		)	(34		)
Medicare subsidies	—			—			3			5
Other	(5		)	(4		)	—			—
Plan amendments	—			(1		)	—			—
Settlement	—			(8		)	—			—
Foreign currency adjustment	(16		)	32			—			—
Benefit obligation at end of year	$	2,748		$	2,388		$	413		$	374

Change in the fair value of pension plan assets:



	2012			2011
Fair value at beginning of year	$	2,059		$	1,767
Actual return on plan assets	149			266
Employer contributions	71			144
Benefits paid	(149		)	(139		)
Settlement	—			(6		)
Foreign currency adjustment	(12		)	27
Fair value at end of year	$	2,118		$	2,059

Amounts recognized in the Consolidated Balance Sheets:



	Pension						Postretirement
	2012			2011			2012			2011
Accrued liabilities	$	(12	)	$	(10	)	$	(27	)	$	(30	)
Other liabilities	(618		)	(319		)	(386		)	(344		)
Net amount recognized	$	(630	)	$	(329	)	$	(413	)	$	(374	)



	Pension						Postretirement
Amounts recognized in accumulated other comprehensive loss consist of:	2012			2011			2012			2011
Net actuarial loss	$	1,486		$	1,179		$	133		$	95
Prior service credit	(3		)	(3		)	(8		)	(9		)
Total	$	1,483		$	1,176		$	125		$	86

The changes in other comprehensive loss associated with pension benefits included the reclassification of actuarial losses into earnings of $74 and $70 in 2012 and 2011, respectively. The remaining changes in other comprehensive loss associated with pension benefits were primarily due to net actuarial losses arising during the period and the impact of foreign currency.

The change in other comprehensive loss associated with postretirement benefits was due to the reclassification of actuarial losses into earnings of $9 and $7 in 2012 and 2011. The remaining changes in other comprehensive loss associated with postretirement benefits were primarily due to net actuarial losses arising during the period.

The following table provides information for pension plans with accumulated benefit obligations in excess of plan assets:



	2012		2011
Projected benefit obligation	$	2,739	$	2,194
Accumulated benefit obligation	$	2,653	$	2,131
Fair value of plan assets	$	2,114	$	1,891

The accumulated benefit obligation for all pension plans was $2,657 at July 29, 2012 and $2,299 at July 31, 2011.

Weighted-average assumptions used to determine benefit obligations at the end of the year:



	Pension				Postretirement
	2012		2011		2012		2011
Discount rate	4.05	%	5.41	%	3.75	%	5.00	%
Rate of compensation increase	3.31	%	3.31	%	3.25	%	3.25	%

Weighted-average assumptions used to determine net periodic benefit cost for the years ended:



	Pension
	2012		2011		2010
Discount rate	5.41	%	5.46	%	6.00	%
Expected return on plan assets	7.90	%	8.15	%	8.13	%
Rate of compensation increase	3.31	%	3.29	%	3.29	%

The discount rate is established as of the company’s fiscal year-end measurement date. In establishing the discount rate, the company reviews published market indices of high-quality debt securities, adjusted as appropriate for duration. In addition, independent actuaries apply high-quality bond yield curves to the expected benefit payments of the plans. The expected return on plan assets is a long-term assumption based upon historical experience and expected future performance, considering the company’s current and projected investment mix. This estimate is based on an estimate of future inflation, long-term projected real returns for each asset class, and a premium for active management.

The discount rate used to determine net periodic postretirement expense was 5.00% in 2012, 5.25% in 2011, and 6.00% in 2010.

Assumed health care cost trend rates at the end of the year:



	2012	2011
Health care cost trend rate assumed for next year	8.25%	8.25%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)	4.50%	4.50%
Year that the rate reaches the ultimate trend rate	2020	2019

A one-percentage-point change in assumed health care costs would have the following effects on 2012 reported amounts:



	Increase		Decrease
Effect on service and interest cost	$	1	$	—
Effect on the 2012 accumulated benefit obligation	$	35	$	(10	)

Pension Plan Assets

The fundamental goal underlying the investment policy is to ensure that the assets of the plans are invested in a prudent manner to meet the obligations of the plans as these obligations come due. The primary investment objectives include providing a total return which will promote the goal of benefit security by attaining an appropriate ratio of plan assets to plan obligations, to provide for real asset growth while also tracking plan obligations, to diversify investments across and within asset classes, to reduce the impact of losses in single investments, and to follow investment practices that comply with applicable laws and regulations.

The primary policy objectives will be met by investing assets to achieve a reasonable tradeoff between return and risk relative to plan obligations. This includes investing a portion of the assets in funds selected in part to hedge the interest rate sensitivity to plan obligations.

The portfolio includes investments in the following asset classes: fixed income, equity, real estate and alternatives. Fixed income will provide a moderate expected return and partially hedge the exposure to interest rate risk of the plans’ obligations. Equities are used for their high expected return. Additional asset classes are used to provide diversification.

Asset allocation is monitored on an ongoing basis relative to the established asset class targets. The interaction between plan assets and benefit obligations is periodically studied to assist in the establishment of strategic asset allocation targets. The investment policy permits variances from the targets within certain parameters. Asset rebalancing occurs when the underlying asset class allocations move outside these parameters, at which time the asset allocation is rebalanced back to the policy target weight.

The company’s year-end pension plan weighted-average asset allocations by category were:



	Strategic Target	2012	2011
Equity securities	51%	48%	50%
Debt securities	35%	36%	35%
Real estate and other	14%	16%	15%
Net periodic benefit expense	100%	100%	100%

The company is required to categorize pension plan assets based on the following fair value hierarchy:


•	Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.


•	Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data.


•	Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The following table presents the company’s pension plan assets by asset category at July 29, 2012 and July 31, 2011:



	Fair Value as of July 29, 2012		Fair Value Measurements at July 29, 2012 Using Fair Value Hierarchy						Fair Value as of July 31, 2011			Fair Value Measurements at July 31, 2011 Using Fair Value Hierarchy
	Fair Value as of July 29, 2012		Level 1		Level 2		Level 3		Fair Value as of July 31, 2011			Level 1		Level 2		Level 3
Short-term investments	$	70	$	44	$	26	$	—	$	51		$	5	$	46	$	—
Equities:
U.S.	357		357		—		—		396			396		—		—
Non-U.S.	289		289		—		—		267			267		—		—
Corporate bonds:
U.S.	444		—		444		—		414			—		414		—
Non-U.S.	91		—		91		—		88			—		88		—
Government and agency bonds:
U.S.	33		—		33		—		9			—		9		—
Non-U.S.	30		—		30		—		31			—		31		—
Municipal bonds	75		—		75		—		42			—		42		—
Commingled funds:
Equities	301		—		301		—		318			—		318		—
Fixed income	37		—		37		—		62			—		62		—
Blended	81		—		81		—		86			—		86		—
Mortgage and asset backed securities	14		—		14		—		27			—		27		—
Real estate	85		8		61		16		59			7		33		19
Limited partnerships	19		—		—		19		20			—		—		20
Hedge funds	192		—		192		—		194			—		194		—
Total assets at fair value	$	2,118	$	698	$	1,385	$	35	$	2,064		$	675	$	1,350	$	39
Other items to reconcile to fair value of plan assets	$	—							$	(5	)
Total pension assets at fair value	$	2,118							$	2,059

Short-term investments — Investments include cash and cash equivalents, and various short-term debt instruments and short-term investment funds. Institutional short-term investment vehicles valued daily are classified as Level 1 at cost which approximates market value. Other investment vehicles are valued based upon a net asset value and are classified as Level 2.

Equities — Common stocks and preferred stocks are classified as Level 1 and are valued using quoted market prices in active markets.

Corporate bonds — These investments are valued based on quoted market prices, yield curves and pricing models using current market rates.

Government and agency bonds — These investments are generally valued based on bid quotations and recent trade data for identical or similar obligations.

Municipal bonds — These investments are valued based on quoted market prices, yield curves and pricing models using current market rates.

Commingled funds — Investments in commingled funds are classified as Level 2 assets as the funds are not traded in active markets. Commingled funds are valued based on the unit values of such funds. Unit values are based on the fair value of the underlying assets of the funds derived from inputs principally based on quoted market prices in an active market or corroborated by observable market data by correlation or other means. Blended commingled funds are invested in both equities and fixed income securities.

Mortgage and asset backed securities — Fair value is based on prices obtained from third party pricing sources. The prices from third party pricing sources may be based on bid quotes from dealers and recent trade data. Mortgage backed securities are traded in the over-the-counter market.

Real estate — Real estate investments consist of real estate investment trusts and property funds. Real estate investment trusts are classified as Level 1 and are valued based on quoted market prices. Property funds are classified as either Level 2 or Level 3 depending upon whether liquidity is limited or there are few observable market participant transactions. Fair value is based on third party appraisals.

Limited partnerships — Investments in limited partnerships are valued based upon valuations provided by the general partners of the funds. The values of limited partnerships are based upon an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sales transactions with third parties, expected cash flows, and market-based information, including comparable transactions and performance multiples among other factors. The investments are classified as Level 3 since the valuation is determined using unobservable inputs.

Hedge funds — Hedge fund investments include hedge funds valued based upon a net asset value derived from the fair value of underlying securities and are therefore classified as Level 2 assets. Hedge fund investments may include long and short positions in equity and fixed income securities, derivative instruments such as futures and options, commodities, and other types of securities.

Guaranteed insurance contracts — These assets are classified as Level 3 assets as they are valued using unobservable inputs. Guaranteed insurance contracts are valued based on the discounted stream of guaranteed benefit payments at a market rate increased for expected future profit sharing. The expected excess return is equal to expected indexation granted to participants. The discounted stream of guaranteed benefit payments is calculated based on the expected mortality rates of plan participants.

Other items to reconcile to fair value of plan assets included net accrued interest and dividends receivable, amounts due for securities sold, amounts payable for securities purchased, and other payables.

The following table summarizes the changes in fair value of Level 3 investments for the years ended July 29, 2012 and July 31, 2011:



	Real Estate			Limited Partnerships			Guaranteed Insurance Contracts		Total
Fair value at July 31, 2011	$	19		$	20		$	—	$	39
Actual return on plan assets	2			2			—		4
Purchases	—			—			—		—
Sales	(5		)	(3		)	—		(8		)
Settlements	—			—			—		—
Transfers out of Level 3	—			—			—		—
Fair value at July 29, 2012	$	16		$	19		$	—	$	35



	Real Estate			Limited Partnerships			Guaranteed Insurance Contracts			Total
Fair value at August 1, 2010	$	18		$	24		$	8		$	50
Actual return on plan assets	4			4			(2		)	6
Purchases	—			—			—			—
Sales	(3		)	(8		)	—			(11		)
Settlements	—			—			(6		)	(6		)
Transfers out of Level 3	—			—			—			—
Fair value at July 31, 2011	$	19		$	20		$	—		$	39

A contribution of $75 was made to U.S. pension plans in the first quarter of 2013. Additional contributions to U.S. plans are not expected in 2013. Contributions to non-U.S. pension plans are expected to be approximately $13 in 2013.

Estimated future benefit payments are as follows:



	Pension		Postretirement
2013	$	154	$	27
2014	$	153	$	27
2015	$	155	$	28
2016	$	160	$	28
2017	$	161	$	28
2018-2022	$	868	$	138

The benefit payments include payments from funded and unfunded plans.

The estimated Medicare subsidy receipt is approximately $1 in 2013.

Savings Plan — The company sponsors employee savings plans which cover substantially all U.S. employees. Effective January 1, 2011, the company provides a matching contribution of 100% of employee contributions up to 4% of compensation for employees who are not covered by collective bargaining agreements. Employees hired or rehired on or after January 1, 2011 who will not be eligible to participate in the defined benefit plans and who are not covered by collective bargaining agreements receive a contribution equal to 3% of compensation regardless of their participation in the Savings Plan. Prior to January 1, 2011, the company provided a matching contribution of 60% (50% at certain locations) of the employee contributions up to 5% of compensation after one year of continued service. Amounts charged to Costs and expenses were $24 in 2012, $20 in 2011, and $17 in 2010.