E-Z-GO 2008 Annual Report Download - page 37

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24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
on a funded basis. Based on the status of our negotiations with the U.S. Government and our contractual commitments with our vendors related
to materials for the anticipated production units at that time, we revised our best estimate of the expected loss to $50 million, resulting in a
$23 million reduction of previously established reserves.
In 2006, we expensed $14 million in unreimbursed costs we incurred in the development phase of the program as costs exceeded the original
contract amount for this program.
H-1 Program
Segment profit includes charges related to the H-1 program of $39 million in 2007 and $82 million in 2006. In 2006, this program was still in the
development phase while we were concurrently working on the initial production aircraft under firm fixed-price LRIP contracts with the U.S.
Government. In 2006, we recorded $82 million in charges based on our estimate that the costs to complete these LRIP contracts would exceed
contractual reimbursement due to higher estimated incremental costs for resources added to meet the contractual schedule requirements, higher
anticipated efforts in final assembly, delayed acceptance of the initial aircraft by the U.S. Government due to changes in the development and
engineering requirements identified in the final stages of assembly and acceptance testing, rework of in-process units and resulting inefficiencies,
and a reduction in previously anticipated learning curve improvements.
During 2007, we completed delivery of all the Lot 1 aircraft as well as the first Lot 2 aircraft. Our manufacturing performance during the year was
substantially consistent with our expectations; however, we anticipated a cost increase, primarily due to anticipated delays in receiving cabins
from a supplier. Additionally, during the fourth quarter, we committed to higher pricing levels on an anticipated Lot 5 contract that we estimated
would likely result in a loss once contract negotiations were finalized, primarily due to higher cabin supplier costs. Accordingly, in the fourth
quarter of 2007, we recorded a net charge of $30 million to reflect the higher cost estimates for existing contract completion resulting from
supplier delays, as well as the estimated loss resulting from our price commitment on the Lot 5 contract.
During 2008, our production efficiencies improved, resulting in $6 million of favorable cost performance. We delivered all remaining Lot 2 aircraft
during the year and expect to deliver the final Lot 3 aircraft in February 2009. We also completed contract negotiations with the U.S. Government
on Lot 5, consistent with our prior expectations.
Textron Systems
(Dollars in millions) 2008 2007 2006
Revenues $ 2,116 $ 1,334 $ 1,061
Segment profit $ 279 $ 191 $ 141
Profit margin 13% 14% 13%
Backlog $ 2,476 $ 2,379 $ 1,335
Textron Systems Revenues
Revenues at Textron Systems increased $782 million in 2008, compared with 2007, primarily due to the acquisition of AAI in 2007, which
contributed $701 million to revenues in 2008, and higher volume of $101 million, partially offset by the nonrecurrence of the $28 million cost
reimbursement in 2007 related to losses incurred during Hurricane Katrina. The volume increase is primarily due to $69 million in higher volume
in our ASV aftermarket products, $48 million in higher volume for IBS products and $22 million in higher volume at Lycoming, partially offset by
$32 million in lower Sensor Fused Weapons (SFW) volume.
Revenues at Textron Systems increased $273 million in 2007, compared with 2006, primarily due to newly acquired businesses, which
contributed $163 million, higher volume of $93 million and $21 million in higher reimbursement of costs related to Hurricane Katrina. The
volume increase is primarily due to $78 million in higher ASV revenues due to a 21% increase in deliveries to 576 units in 2007, $56 million in
higher revenues for IBS and a $16 million increase from SFW deliveries. These increases were partially offset by lower Joint Direct Attack
Munitions volume of $63 million.
Textron Systems Segment Profit
Segment profit at Textron Systems increased $88 million in 2008, compared with 2007, primarily due to the acquisition of AAI, which contributed
$62 million in 2008, and favorable cost performance of $23 million. The favorable cost performance includes $39 million related to the ASV
program, partially offset by the 2007 reimbursement of $28 million for the impact of losses incurred during Hurricane Katrina. The ASV cost
performance is primarily due to improved labor efficiencies and lower material costs.