E-Z-GO 2005 Annual Report Download - page 51

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ment’s best estimates based on current and forecasted market conditions, and the profit margin assumptions are projected by each reporting unit
based on the current cost structure and anticipated net cost reductions. If different assumptions were used in these plans, the related undis-
counted cash flows used in measuring impairment could be different, potentially resulting in an impairment charge.
Within our Industrial segment, the Fluid Handling Products component has assumed an annual operating profit growth rate of approximately 9%
over the five-year planning period driven by anticipated revenue growth of approximately 4% annually along with increased profit margins from
improvements resulting from ongoing transformation efforts. A 100-basis-point reduction in the estimated operating profit growth rate from those
used in our discounted cash flow model to approximately 8% would reduce the estimated fair value by up to approximately $20 million, and may
result in the carrying value of the business exceeding its estimated fair value, potentially resulting in an impairment charge. At December 31,
2005, the goodwill allocated to this business totaled approximately $200 million.
Securitized Transactions
Securitized transactions involve the sale of finance receivables to qualified special purpose trusts. While the assets sold are no longer on our bal-
ance sheet, our retained interests are included in Other Assets. We may retain an interest in the transferred assets in the form of interest-only
securities, seller certificates, cash reserve accounts, and servicing rights and obligations. Our retained interests are subordinate to other
investors’ interests in the securitizations. Generally, we do not provide legal recourse to third-party investors that purchase interests in our securi-
tizations beyond the credit enhancement inherent in the retained interest only securities, seller certificates and cash reserve accounts.
We estimate the fair value of the retained interests based on the present value of future cash flows expected using our best estimates of prepay-
ment speeds, credit losses and discount rates commensurate with the risks involved. These assumptions are reviewed each quarter, and the
retained interests are written down when the carrying value exceeds the fair value based on revised estimates and the decline is estimated to be
other than temporary. Based on our sensitivity analysis, as discussed in Note 5 to the Consolidated Financial Statements, a 20% adverse change
in either the prepayment speed, expected credit losses or the residual cash flows discount rate would not result in a material charge to income.
Pension and Other Postretirement Benefits
We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement
benefit obligations which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related
expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections. These assumptions are evalu-
ated and updated annually by management in consultation with outside actuaries and investment advisors. Other assumptions used include
employee demographic factors such as retirement patterns, mortality, turnover and the rate of compensation increases.
To determine the expected long-term rate of return on plan assets, we consider the current and expected asset allocation, as well as historical and
expected returns on each plan asset class. A lower expected rate of return on plan assets will increase pension expense. For 2005, we have
reduced the assumed expected long-term rate of return on plan assets used in calculating pension expense to 8.57% from 8.72% in 2004. While
over the past ten years, returns for the largest pool of managed retirement assets have exceeded 9.97%, the weighted-average expected long-term
rate of return assumption was lowered to reflect the generally expected moderation of long-term rates of return in the financial markets, as well as
the change in our investment portfolio mix. Our qualified domestic plans compose over 83% of our total pension obligations. In 2005, the
assumed rate of return for our qualified domestic plans was 8.75%. A 50-basis-point decrease in this long-term rate of return would result in a
$21 million annual increase in pension expense for our qualified domestic plans.
The discount rate enables us to state expected future benefit payments as a present value on the measurement date, reflecting the current rate at
which the pension liabilities could be effectively settled. This rate should be in line with rates for high-quality fixed income investments available
for the period to maturity of the pension benefits, which fluctuate as long-term interest rates change. A lower discount rate increases the present
value of the benefit obligations and increases pension expense. In 2005, we decreased our weighted-average discount rate used in calculating
pension expense to 5.69% from 6.17% in 2004. For our qualified domestic plans, the assumed discount rate was 5.75% for 2005. A 50-basis-
point decrease in this discount rate would result in a $32 million annual increase in pension expense for our qualified domestic plans.
The estimated accumulated benefit obligations for certain pension plans exceeded the fair value of the plan assets at December 31, 2005. How-
ever, strong asset returns and contributions to the plans reduced the shortfall during 2005. Accordingly, we recorded a non-cash adjustment to
shareholders’ equity for the minimum pension liability of $34 million, net of income taxes, in the fourth quarter of 2005.
The trend in healthcare costs is difficult to estimate, and it has an important effect on postretirement liabilities. The 2005 medical and prescription
drug healthcare cost trend rate, which is the weighted-average annual projected rate of increase in the per capita cost of covered benefits, was
11%. The medical rate is assumed to decrease to 5% by 2009 and then remain at that level. The prescription drug rate is expected to rise to 12%
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations