E-Z-GO 2007 Annual Report Download - page 51

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For homogeneous loan pools, we examine current delinquencies, characteristics of the existing accounts, historical loss experience, underlying
collateral value, and general economic conditions and trends. We estimate losses will range from 0.3% to 6.0% of fi nance receivables depending
on the specifi c homogeneous loan pool. For larger balance commercial loans, we also consider borrower specifi c information, industry trends
and estimated discounted cash fl ows. Our process involves the use of estimates and a high degree of management judgment. While we believe
that our consideration of the factors and assumptions referred to above results in an accurate evaluation of existing losses in the portfolio based
on prior trends and experience, changes in the assumptions or trends within reasonable historical volatility may have a material impact on our
allowance for losses. The allowance for losses on fi nance receivables currently represents 1.03% of total fi nance receivables. During the last fi ve
years, net charge-offs as a percentage of average fi nance receivables have ranged from 0.38% to 2.08%.
Long-Term Contracts
We make a substantial portion of our sales to government customers pursuant to long-term contracts. These contracts require development and
delivery of products over multiple years and may contain fi xed-price purchase options for additional products. We account for these long-term
contracts under the percentage-of-completion method of accounting.
Under the percentage-of-completion method, we estimate profi t as the difference between total estimated revenue and cost of a contract. We then
recognize that estimated profi t over the contract term based on either the costs incurred (under the cost-to-cost method, which typically is used
for development effort) or the units delivered (under the units-of-delivery method, which is used for production effort), as appropriate under the
circumstances. The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at
completion and, in some cases, includes estimates of recoveries asserted against the customer for changes in specifi cations. Due to the size,
length of time and nature of many of our contracts, the estimation of total contract costs and revenue through completion is complicated and
subject to many variables relative to the outcome of future events over a period of several years. We are required to make numerous assumptions
and estimates relating to items such as expected engineering requirements, complexity of design and related development costs, performance of
subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs, manufacturing effi ciencies and the
achievement of contract milestones, including product deliveries.
Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with fi nance
professionals. We update our projections of costs at least semiannually or when circumstances signifi cantly change. Adjustments to projected
costs are recognized in earnings when determinable. Anticipated losses on contracts are recognized in full in the period in which the losses
become probable and estimable. Due to the signifi cance of judgment in the estimation process described above, it is likely that materially different
revenues and/or cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Our
earnings could be reduced by a material amount resulting in a charge to earnings if (a) total estimated contract costs are signifi cantly higher than
expected due to changes in customer specifi cations prior to contract amendment, (b) total estimated contract costs are signifi cantly higher than
previously estimated due to cost overruns or infl ation, (c) there is a change in engineering efforts required during the development stage of the
contract or (d) we are unable to meet contract milestones.
Goodwill
We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances, such as
declines in sales, earnings or cash fl ows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be
impaired. We completed our annual impairment test in the fourth quarter of 2007 using the estimates from our long-term strategic plans. No
adjustment was required to the carrying value of our goodwill based on the analysis performed.
Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair values are primarily
established using a discounted cash fl ow methodology using assumptions consistent with market participants. The determination of discounted
cash fl ows is based on the businesses’ strategic plans and long-range planning forecasts. The revenue growth rates included in the forecasts
represent our best estimates based on current and forecasted market conditions, and the profi t margin assumptions are projected by each
reporting unit based on the current cost structure and anticipated net cost reductions. If different assumptions were used in these forecasts, the
related undiscounted cash fl ows used in measuring impairment could be different, potentially resulting in an impairment charge. The impact of
reducing our fair value estimates by 10% would have no impact on our goodwill assessment, with the exception of our Fluid Handling Products
(“FHP”) and Golf & Turfcare (“G&T”) components. Assuming a 10% reduction in our fair value estimates, the carrying value of these components
may approximate or exceed fair value.