E-Z-GO 2007 Annual Report Download - page 41

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20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
of this exposure and the ultimate outcome of our discussions with the U.S. Government, we did not believe that a loss was probable under the
guidelines established by Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies.”
In March 2007, we received correspondence from the U.S. Government that created uncertainty about whether it would proceed into the
production phase of the ARH program. Accordingly, we provided for losses of $18 million in supplier obligations for long-lead component
production incurred at our own risk to support anticipated ARH LRIP contract awards.
In the second quarter of 2007, the U.S. Army agreed to re-plan the ARH program, and we reached a non-binding memorandum of understanding
(“MOU”) related to aircraft specifi cations, pricing methodology and delivery schedules for initial LRIP aircraft. We also agreed to conduct
additional SDD activities on a funded basis. Based on the plan at that time and our related estimates of aircraft production costs, including costs
related to risks associated with achieving learning curve and schedule assumptions, we expected to lose approximately $73 million on the
production of the proposed initial LRIP aircraft. Accordingly, an additional charge of $55 million was taken in the second quarter of 2007 for
estimated LRIP contract losses.
In December 2007, the U.S. Government’s remaining option related to production of aircraft under the original ARH program expired unexercised.
We are continuing to restructure the program through negotiations with the U.S. Government, including reducing the number of units and
modifying the pricing and delivery schedules previously reached under the MOU. Based on the current status of these negotiations and our
contractual commitments with our vendors related to materials for the anticipated production units we have procured at our risk, we have revised
our best estimate of the expected loss to $50 million, resulting in a $23 million reduction of previously established reserves. We expect that the
initial LRIP contract awards will be fi nalized in mid-2008. Until the contract negotiations are fi nalized, including pricing, aircraft specifi cations
and delivery schedules, losses related to future contract awards or additional recovery of our vendor obligations are uncertain.
Commercial Business
In 2007, profi t increased $47 million, compared with 2006, primarily due to higher pricing of $94 million and lower engineering, research and
development expense of $18 million, partially offset by infl ation of $44 million and the net impact of an unfavorable product mix of $23 million.
Lower overhead expense of $36 million, which included a $7 million recovery discussed above related to the ARH program, was offset by higher
costs of $37 million as we streamlined our legacy commercial product line, resulting in certain vendor termination costs.
In 2006, profi t decreased $94 million, compared with 2005, primarily due to unfavorable cost performance of $140 million and infl ation of
$28 million, partially offset by higher pricing of $46 million and the impact of increased volume and mix of $42 million.
The unfavorable cost performance refl ected increased overhead costs of $55 million, the impact of the $30 million gain on the sale of our interest
in the Model AB139 program in 2005, higher net research and development expense of $29 million, and the $13 million prior year impact of the
resolution of uncertainties and receipt of cash related to a collaborative research and development agreement, partially offset by $18 million in
additional reserves recorded by Lycoming in 2005 for a crankshaft retirement program and related service bulletins.
Cessna
(Dollars in millions) 2007 2006 2005
Revenues $ 5,000 $ 4,156 $ 3,480
Segment profi t $ 865 $ 645 $ 457
Profi t margin 17% 16% 13%
Backlog $ 12,583 $ 8,467 $ 6,342
Demand in the business jet market continued to strengthen in 2007, which was refl ected in a 49% increase in our backlog, in addition to a
26% increase in business jet deliveries. Over the past three years, Cessna has increased its annual production rate and has continued to focus
on improving margins while investing in engineering, research and development in Cessna’s continual effort to bring new technology and
products to market. Citation business jets are the largest component of Cessna’s revenues. We delivered 387, 307 and 252 Citation business
jets in 2007, 2006 and 2005, respectively.
Cessna Revenues
In 2007, Cessna’s revenues increased $844 million, compared with 2006, due to higher volume of $631 million, primarily due to higher Citation
business jet deliveries, and improved pricing of $212 million. In 2006, revenues increased $676 million, compared with 2005, due to higher
volume of $493 million, primarily related to Citation business jets, and improved pricing of $183 million.