E-Z-GO 2007 Annual Report Download - page 40

19
Textron Inc.
Bell Segment Profi t
U.S. Government Business
Segment profi t in our U.S. Government business increased $39 million in 2007, compared with 2006, primarily due to improved cost
performance of $64 million, higher net volume and mix of $16 million, and the benefi t from acquisitions of $10 million, partially offset by the
impact from infl ation and pricing of $30 million. The improved cost performance is primarily due to:
• $43 million in lower charges for the H-1 LRIP program, which are discussed in more detail below;
• $25 million in lower costs related to the ARH SDD contract due to a $14 million 2006 write-off of launch-related costs and the $11 million
impact of the subsequent partial recovery of these costs; and
• $21 million in improvements with ASV due to improved productivity and lower indirect costs;
• Partially offset by $50 million in ARH LRIP 2007 charges as discussed below; and
• $22 million in lower V-22 profi tability largely due to a $15 million impact from lower margin units, which have been unfavorably impacted by
higher overhead costs associated with increasing production capacity, and a $6 million award fee recognized in 2006.
In 2006, profi t in our U.S. Government business decreased $25 million, compared with 2005. The decrease was primarily due to infl ation of
$33 million and unfavorable cost performance of $24 million, partially offset by the impact of higher net volume and mix of $35 million. The
unfavorable performance refl ected higher anticipated costs for the H-1 LRIP contracts of $68 million and charges of $14 million related to the
ARH SDD contract, partially offset by favorable program performance at Textron Systems of $34 million, primarily related to Hurricane Katrina.
H-1 Program – The H-1 program continues in development while we are concurrently working on the initial production aircraft under fi rm
fi xed-price LRIP contracts with the U.S. Government. In 2006, we recorded program charges of $82 million related to the LRIP contracts.
Through the third quarter of 2006, we recorded $29 million in charges based on our estimate that the costs to complete would exceed contractual
reimbursement during the transition to production phase. These charges primarily refl ected the impact of higher estimated incremental costs for
resources added to meet the contractual schedule requirements and higher anticipated efforts in fi nal assembly. In the fourth quarter of 2006,
acceptance of the initial aircraft by the U.S. Government was delayed, and no aircraft were delivered. This delay was a result of changes in the
development and engineering requirements that were identifi ed in the fi nal stages of assembly and acceptance testing. Due to this delay and the
costs associated with the additional development efforts, rework of in-process units and resulting ineffi ciencies, and a reduction in previously
anticipated learning curve improvements, we increased our estimate of the completion costs and recorded an additional $53 million charge in the
fourth quarter of 2006.
During 2007, the production process has continued to mature, and we have completed delivery of all the Lot 1 aircraft as well as the fi rst Lot 2
aircraft. Our manufacturing performance during the year has been substantially consistent with our expectations. Prospectively, our costs are
anticipated to increase primarily due to anticipated delays in receiving cabins from a supplier. Additionally, during the fourth quarter, we
committed to higher pricing levels on an anticipated Lot 5 contract that will likely result in a loss once contract negotiations are fi nalized, primarily
due to higher cabin supplier costs. Accordingly, in the fourth quarter of 2007, we recorded a net charge of $30 million to refl ect the higher cost
estimates for existing contract completion resulting from supplier delays, as well as the estimated loss resulting from our price commitment on
the Lot 5 contract.
ARH Program – The ARH SDD contract is a cost plus incentive fee contract under which our eligibility for fees is reduced as total contract
costs increase. In 2006, we continued our development activities as costs exceeded the original contract amount for this program and expensed
$14 million in unreimbursed costs related to this effort. In the third quarter of 2007, we reached an agreement with our customer under which we
recovered $18 million of launch-related costs previously written off. The amount included $11 million that had been charged to our U.S.
Government business and $7 million that had been charged to our Commercial business through overheads. In December 2007, we agreed to
expand the scope of the development contract efforts on a funded basis.
In the fourth quarter of 2006, we completed certain phases of the critical design review under the ARH SDD contract and determined the initial
production confi guration of the aircraft, including aircraft confi guration changes required by the U.S. Government. Our cost estimates based on
this confi guration, which included anticipated transition to production costs, exceeded the fi xed pricing contained in two options the U.S.
Government had under this program for the fi rst two LRIP lots. The option for the fi rst LRIP lot expired in 2006, while the option for the second lot
(for 18-36 aircraft) was set to expire in December 2007. At that time, we were in discussions with the U.S. Government related to the possible
reinstatement of the fi rst option, extension of the second option, delivery schedule, number of units to be exercised under the options and
possible additional aircraft to be contracted, in addition to those under the options, at revised pricing. At the end of 2006, due to the uncertainty