E-Z-GO 2007 Annual Report Download - page 52

Our operating plans and projections anticipate continued investments in capital expenditures at our FHP component to capture additional
business in the oil and gas markets. During 2007, FHP achieved revenue growth of 20% and operating profi t growth of approximately 25%. We
anticipate continued sales growth over the fi ve-year planning period as well as operating margin improvements. Should the revenue growth rates
and operating margins over the planning period approximate historical levels, the estimated fair value would be reduced by up to approximately
$50 million and may result in the carrying value of the component exceeding its estimated fair value, potentially resulting in an impairment
charge. At December 29, 2007, the goodwill allocated to this component totaled approximately $216 million.
Our operating plans and projections for our G&T component anticipate operating margin improvements over the fi ve-year planning period
resulting in high single-digit margins and assume 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 $35 million and may result in the carrying value of the
component exceeding its estimated fair value, potentially resulting in an impairment charge. At December 29, 2007, the goodwill allocated to this
component totaled approximately $141 million.
Retirement Benefi ts
We maintain various pension and postretirement plans for our employees globally. These plans include signifi cant pension and postretirement
benefi t 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 also make assumptions
regarding employee demographic factors such as retirement patterns, mortality, turnover and the rate of compensation increases. We evaluate and
update these assumptions annually.
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 2007, the assumed
expected long-term rate of return on plan assets used in calculating pension expense was 8.53%, compared with 8.54% in 2006. In 2007 and
2006, the assumed rate of return for our qualifi ed domestic plans, which represent approximately 88% of our total pension assets, was 8.74%
and 8.75%, respectively. A 50-basis-point decrease in this long-term rate of return would result in a $22 million annual increase in pension
expense for our qualifi ed domestic plans.
The discount rate enables us to state expected future benefi t payments as a present value on the measurement date, refl ecting the current rate at
which the pension liabilities could be effectively settled. This rate should be in line with rates for high-quality fi xed income investments available
for the period to maturity of the pension benefi ts, which fl uctuate as long-term interest rates change. A lower discount rate increases the present
value of the benefi t obligations and increases pension expense. In 2007, the weighted-average discount rate used in calculating pension expense
was 5.59%, compared with 5.55% in 2006. For our qualifi ed domestic plans, the assumed discount rate was 5.66% in 2007, compared with
5.65% for 2006. A 50-basis-point decrease in this discount rate would result in a $34 million annual increase in pension expense for our
qualifi ed domestic plans.
The trend in healthcare costs is diffi cult to estimate, and it has an important effect on postretirement liabilities. The 2007 medical and prescription
drug healthcare cost trend rates represent the weighted-average annual projected rate of increase in the per capita cost of covered benefi ts. The
2007 medical rate of 8% is assumed to decrease to 5% by 2015 and then remain at that level. The 2007 prescription drug rate of 12% is assumed
to decrease to 5% by 2015 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.
Warranty Liabilities
We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to fi ve
years. A signifi cant portion of these liabilities arises from our commercial aircraft businesses. We also may incur costs related to product recalls.
We estimate the costs that may be incurred under warranty programs and record a liability in the amount of such costs at the time product revenue
is recognized. Factors that affect this liability include the number of products sold, historical costs per claim, contractual recoveries from vendors,
and historical and anticipated rates of warranty claims, including production and warranty patterns for new models. During our initial aircraft
model launches, we typically incur higher warranty-related costs until the production process matures, at which point warranty costs moderate.
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Textron Inc.