E-Z-GO 2006 Annual Report Download - page 50

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Textron Inc.
historical levels, the estimated fair value would be reduced by up to approximately $50 million and may result in the carrying value of the report-
ing unit exceeding its estimated fair value, potentially resulting in an impairment charge. At December 30, 2006, the goodwill allocated to this
reporting unit totaled approximately $206 million.
Our operating plans and projections for the Golf and Turf care reporting unit anticipate operating margin improvements over the five-year planning
period resulting in high single-digit margins, with anticipated annual revenue growth of approximately 4%. A 100-basis-point decline in our
operating margin assumptions would reduce the estimated fair value by up to approximately $60 million and may result in the carrying value of
the reporting unit exceeding its estimated fair value, potentially resulting in an impairment charge. At December 30, 2006, the goodwill allocated
to this reporting unit totaled approximately $141 million.
Retirement 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. We evaluate and update these
assumptions annually in consultation with third-party actuaries and investment advisors. We also make assumptions regarding employee demo-
graphic 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 2006, the assumed
expected long-term rate of return on plan assets used in calculating pension expense was 8.54%, compared with 8.57% in 2005. In 2006 and
2005, the assumed rate of return for our qualified domestic plans, which represent approximately 82% of our total pension obligations, was
8.75%. A 50-basis-point decrease in this long-term rate of return would result in a $20 million annual increase in pension expense for our quali-
fied 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 2006, we lowered the weighted-average discount rate used in calculating pen-
sion expense to 5.55% from 5.69% in 2005. For our qualified domestic plans, the assumed discount rate was 5.65% for 2006. A 50-basis-point
decrease in this discount rate would result in a $29 million annual increase in pension expense for our qualified domestic plans.
The trend in healthcare costs is difficult to estimate, and it has an important effect on postretirement liabilities. The 2006 medical and prescription
drug healthcare cost trend rates represent the weighted-average annual projected rate of increase in the per capita cost of covered benefits. The
2006 medical rate of 8% is assumed to decrease to 5% by 2009 and then remain at that level. The 2006 prescription drug rate of 12% is assumed
to decrease to 5% by 2013 and then remain at that level. See Note 12 to the consolidated financial statements for the impact of a one-percentage-
point change in the cost trend rate.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates that we expect to be in effect for the year in which we expect the differences will reverse. Based on the evalua-
tion of available evidence, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely
than not that we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect
any changes in our estimates in the valuation allowance, with a corresponding adjustment to earnings or other comprehensive income (loss),
as appropriate.
In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carry-
back years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to
tax laws, changes to statutory tax rates and changes to future taxable income estimates.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed
assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for
any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our
estimated tax liabilities due to closure of income tax examinations, new regulatory or judicial pronouncements, or other relevant events. As a
result, our effective tax rate may fluctuate significantly on a quarterly basis.