E-Z-GO 2005 Annual Report Download - page 90

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In 2004, Textron sold its remaining investment in C&A common stock for cash proceeds of $34 million and recorded a pre-tax gain of $12 million
in Special Charges.
In 2003, Textron redeemed its 7.92% Junior Subordinated Deferrable Interest Debentures due 2045. The debentures were held by Textron’s wholly
owned trust, and the proceeds from their redemption were used to redeem all of the $500 million Textron Capital I trust preferred securities. Upon
the redemption, $15 million of unamortized issuance costs were written off and recorded in Special Charges.
Note 17. Commitments and Contingencies
Textron is subject to legal proceedings and other claims arising out of the conduct of Textron’s business, including proceedings and claims relat-
ing to private sector transactions; government contracts; production partners; product liability; employment; and environmental, safety, and health
matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental
contamination. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in Textron’s sus-
pension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, Textron believes that
these proceedings and claims will not have a material effect on Textron’s financial position or results of operations.
During 2002, the Lycoming aircraft engine business, in conjunction with the U.S. Federal Aviation Administration (“FAA”), recalled approximately
950 turbocharged airplane engines and mandated the inspection of another 736 engines to replace potentially faulty crankshafts manufactured by
a former third-party supplier. Lycoming initiated a comprehensive customer care program to replace the defective crankshafts, make any neces-
sary related repairs, and compensate its customers for the loss of use of their aircraft during the recall. This program has been completed. Textron
has continued to monitor the performance of the crankshafts previously supplied by the former supplier to ensure their continued suitability for
their intended use and to ensure that the existing reserves are adequate to cover the costs directly related to potential crankshaft issues that may
not specifically be a part of the prior recall program. On July 11, 2005, Lycoming issued a service bulletin covering certain non-turbocharged air-
craft engines to replace crankshafts manufactured by the former supplier with new FAA-certified crankshafts. The service bulletin covers approxi-
mately 1,100 crankshafts and requires the affected crankshafts to be replaced within the earlier of the next 50 hours of operation or six months. An
additional $5 million was accrued in the second quarter of 2005 to increase existing reserves for this matter. In November, this service bulletin
was amended to include an additional 325 engines and an additional $3 million was recorded.
During the fourth quarter of 2005, Lycoming developed a plan to institute a retirement program for approximately 5,100 crankshafts, representing
the remaining crankshafts manufactured by the former supplier using the same forging technique as the crankshafts covered by prior service bul-
letins. This program is being discussed with the FAA and is expected to be implemented in early 2006. There have been no accidents involving
these crankshafts, and they have not been the subject of a recall. An additional reserve of $10 million was recorded in the fourth quarter to cover
the expected cost of this planned retirement program. As of December 31, 2005, reserves to cover costs directly related to crankshafts provided by
the former supplier totaled $23 million.
In connection with the recall, the former supplier filed a lawsuit against Lycoming claiming that the former supplier had been wrongly blamed for
aircraft engine failures resulting from its crankshaft forging process and that Lycoming’s design was the cause of the engine failures. In February
2005, a jury returned a verdict against Lycoming for $86 million in punitive damages, $2.7 million in expert fees and $1.7 million in increased
insurance costs. The jury also found that the former supplier’s claim that it had incurred $5.3 million in attorneys’ fees was reasonable. Judgment
was entered on the verdict on March 29, 2005, awarding the former supplier $9.7 million in alleged compensatory damages and attorneys’ fees
and $86 million in alleged punitive damages. While the ultimate outcome of the litigation cannot be assured, management strongly disagrees with
the verdicts and believes that it is probable that they will be reversed through the appellate process.
Research and Development Arrangements
As part of the realignment of Bell/Agusta Aerospace Company LLC (“BAAC”) (see Note 19), Bell Helicopter, Agusta S.p.A. and two of its affiliated
companies (collectively, “Agusta”) have agreed to share certain Model BA609 development costs. On behalf of BAAC, Agusta will incur develop-
ment costs to enhance its investment in BAAC. These development costs will be recorded by Textron in consolidation as research and develop-
ment expense, with a credit to minority interest for Agusta’s share. Agusta may also make cash contributions to reimburse portions of Bell
Helicopter’s development costs incurred on behalf of BAAC. Based on development costs incurred, Bell received $43 million in cash contribu-
tions from Agusta, which were recorded in income in 2005.
70
Textron Inc.