E-Z-GO 2006 Annual Report Download - page 73

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Note 6. Inventories
Inventories are composed of the following:
December 30, December 31,
(In millions) 2006 2005
Finished goods $ 665 $ 527
Work in process 1,562 1,410
Raw materials 435 267
2,662 2,204
Less progress/milestone payments 593 492
$ 2,069 $ 1,712
Inventories valued by the LIFO method totaled $1.5 billion and $1.3 billion at the end of 2006 and 2005, respectively. Had our LIFO inventories
been valued at current costs, their carrying values would have been approximately $276 million and $251 million higher at those respective dates.
Inventories related to long-term contracts, net of progress/milestone payments were $380 million at the end of 2006 and $350 million at the end
of 2005.
Bell Helicopter’s H-1 program with the U.S. Government is currently transitioning to the production phase of the program with manufacturing of
the first three production lots for Low Rate Initial Production (“LRIP”) aircraft. Inventories related to the H-1 LRIP Lot 1 and Lot 2 contracts have
been written down to net realizable value to reflect charges related to these contracts as discussed below.
During 2006, we estimated that the costs to complete H-1 LRIP Lot 1 would exceed contractual reimbursement. Through the third quarter of 2006,
we recorded $29 million in charges related to the H-1 LRIP Lot 1 contract. These charges primarily reflected the impact of higher estimated incre-
mental costs for resources added to meet the contractual schedule requirements and higher anticipated efforts in final assembly. At the end of the
third quarter, we had anticipated that acceptance of the initial H-1 LRIP Lot 1 aircraft by the U.S. Government would occur in the fourth quarter of
2006. However, acceptance was delayed and no aircraft were delivered. This delay was due to changes in the development and engineering
requirements that were identified in the final stages of assembly and acceptance testing. Due to this delay and the costs associated with the addi-
tional development efforts, rework of in-process units and resulting inefficiencies, we increased our estimate of the completion costs in the fourth
quarter. Accordingly, we recorded an additional $20 million charge related to the H-1 LRIP Lot 1 contract in the fourth quarter of 2006. In January
2007, the U.S. Government accepted two aircraft, and we expect the remaining seven H-1 LRIP Lot 1 units to be accepted later in 2007.
The H-1 LRIP Lot 2 contract is in the early stages of production, with first aircraft delivery anticipated in the second half of 2007. We now antici-
pate that the disruption and delays experienced with the H-1 LRIP Lot 1 contract in the fourth quarter will result in increased costs for the H-1 LRIP
Lot 2 contract due to delays in its completion, as well as a reduction in previously anticipated learning curve improvements. Due to these higher
cost estimates, the H-1 LRIP Lot 2 contract now is in a loss position resulting in a fourth quarter charge of $33 million.
The net H-1 program charge, including favorable performance on the Engineering and Manufacturing Development contract of $3 million, was
$50 million in the fourth quarter of 2006.
Note 7. Property, Plant and Equipment, net
Our Manufacturing group’s property, plant and equipment, net are composed of the following:
December 30, December 31,
(In millions) 2006 2005
Land and buildings $ 1,093 $ 1,008
Machinery and equipment 2,827 2,565
3,920 3,573
Less accumulated depreciation and amortization 2,147 1,999
$ 1,773 $ 1,574
Depreciation expense for the Manufacturing group totaled $243 million in 2006, $250 million in 2005 and $229 million in 2004.
Notes to the Consolidated Financial Statements