E-Z-GO 2008 Annual Report Download - page 36

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Textron Inc.
Bell Segment Profit
Bell’s segment profit increased $134 million in 2008, compared with 2007, primarily due to favorable cost performance of $78 million, higher
pricing in excess of inflation of $32 million and $21 million in increased royalty revenues, primarily related to the Model A139. Cost performance
includes:
• Improved performance for the H-1 LRIP program of $46 million, primarily resulting from a $30 million net charge recorded in the fourth
quarter of 2007 and $6 million in favorability in 2008, as discussed in more detail below;
• $32 million in lower net charges for the ARH program, as discussed in more detail below;
• $26 million in costs incurred in 2007 related to our exit of certain commercial models;
• $14 million in commercial aircraft margins, primarily due to improved production efciencies for the 412 and 407 models; and
• $11 million for the V-22 program, primarily due to manufacturing efciencies.
Favorable cost performance in 2008 was partially offset by $20 million in increased selling and administrative expenses due to higher project-
related consulting expenses and $14 million in increased research and development expense.
Bell’s segment profit increased $36 million in 2007, compared with 2006, primarily due to higher pricing of $90 million and lower engineering,
research and development expense of $16 million, partially offset by inflation of $48 million and the net impact of an unfavorable product mix of
$17 million. Cost performance had only a moderate impact on profit but was impacted by the following significant items:
• An increase in ARH program charges from $14 million in 2006 to $32 million in 2007, which are discussed in more detail below;
• Lower H-1 LRIP program charges of $43 million, which are discussed in more detail below;
• $22 million in lower V-22 pro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; and
• Vendor termination costs of $37 million as a result of streamlining our legacy commercial product lines, which were partially offset by
$29 million in lower overhead expense in the commercial business.
ARH Program Termination
On October 16, 2008, we received notification from the U.S. Department of Defense that it would not certify the continuation of the ARH program
to Congress under the Nunn-McCurdy Act, resulting in the termination of the program for the convenience of the Government. The ARH program
included a development phase, covered by the SDD contract, and a production phase. We are in the process of establishing the termination costs
for the SDD contract, which we believe will be fully recoverable from the U.S. Government.
Prior to termination of the program, we obtained inventory and incurred vendor obligations for long-lead time materials related to the anticipated
LRIP contracts to maintain the program schedule based on our belief that the LRIP contracts would be awarded. We have since terminated
these vendor contracts and have initiated negotiations to settle our termination obligations, which we estimate may cost up to approximately
$80 million. We continue to evaluate the utility of the related inventory to other Bell programs, customers, or vendors. This review and the related
discussions with vendors are ongoing. We estimate that our potential loss resulting from our LRIP-related vendor obligations will be between
approximately $50 million and $80 million. At January 3, 2009, our reserves related to this program totaled $50 million. We intend to provide a
termination proposal to the U.S. Government to request reimbursement of costs expended in support of the LRIP program.
In 2007, we incurred net charges of $32 million related to this program. In the first quarter of 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 to maintain the program schedule. 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 related to aircraft specifications, 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 for
estimated LRIP contract losses. In the third quarter of 2007, we reached an agreement with our customer under which we recovered $18 million
of SDD launch-related costs previously written off, and, in December 2007, we agreed to expand the scope of the development contract efforts