E-Z-GO 2007 Annual Report Download - page 90

Textron Inc.
The Internal Revenue Service (“IRS”) has challenged both the ability to accelerate the timing of tax deductions and the amounts of those
deductions related to certain leveraged lease transactions within the Finance segment. These transactions, along with other transactions with
similar characteristics, have an initial investment of approximately $209 million. Resolution of these issues may result in an adjustment to the
timing of taxable income and deductions that reduce the effective yield of the leveraged lease transactions. In addition, resolution of these issues
could result in the acceleration of cash payments to the IRS. At December 29, 2007, $180 million of deferred tax liabilities are recorded on our
Consolidated Balance Sheets related to these leases. We believe that the proposed IRS adjustments are inconsistent with the tax law in existence
at the time the leases were originated and intend to vigorously defend our position.
ARH Program – The Armed Reconnaissance Helicopter (“ARH”) System Development and Demonstration (“SDD”) contract is a cost plus
incentive fee contract under which our eligibility for fees is reduced as total contract costs increase. 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 Low Rate Initial Production (“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
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 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.
Environmental Remediation
As with other industrial enterprises engaged in similar businesses, we are involved in a number of remedial actions under various federal and
state laws and regulations relating to the environment that impose liability on companies to clean up, or contribute to the cost of cleaning up,
sites on which hazardous wastes or materials were disposed or released. Our accrued environmental liabilities relate to disposal costs, U.S.
Environmental Protection Agency oversight costs, legal fees, and operating and maintenance costs for both currently and formerly owned or
operated facilities. Circumstances that can affect the reliability and precision of the accruals include the identifi cation of additional sites,
environmental regulations, level of cleanup required, technologies available, number and fi nancial condition of other contributors to remediation,
and the time period over which remediation may occur. We believe that any changes to the accruals that may result from these factors and
uncertainties will not have a material effect on our fi nancial position or results of operations.
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