E-Z-GO 2008 Annual Report Download - page 51

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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 efficiencies 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 finance
professionals. We update our projections of costs at least semiannually or when circumstances significantly 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 significance 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 significantly higher than
expected due to changes in customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than
previously estimated due to cost overruns or inflation, (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 flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be
impaired. See the “Special Charges” section on page 19 for a discussion of the impairment of goodwill at the Finance segment. Subsequent to
this impairment, we completed our annual impairment test in the fourth quarter of 2008 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.
Our market capitalization at January 3, 2009 was approximately $3.7 billion, compared with approximately $17.9 billion at December 29, 2007.
This market capitalization is less than the sum of the fair values of our manufacturing reporting units calculated in connection with our annual
impairment test. We believe that the differences between the fair value estimates of our manufacturing reporting units and our market capitalization
are primarily due to the market’s view of risk in the Finance segment. As noted above, we have fully impaired goodwill at the Finance segment and
concerns over our liquidity. We believe that our fair value estimates for our manufacturing reporting units are consistent with market participant
assumptions.
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 flow methodology using assumptions consistent with market participants. The determination of discounted
cash flows 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 profit 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 flows used in measuring impairment could be different, potentially resulting in an impairment charge.
During the second half of 2008, Kautex was negatively impacted by the significant downturn in the automotive industry, which caused
deterioration in its revenues and segment profit. Our annual evaluation of goodwill recoverability for Kautex was extended to include our
projections and outlook for the automotive industry as of the end of the fourth quarter, and we believe the carrying value of the reporting unit is
recoverable at January 3, 2009. We anticipate volumes to continue to be lower through 2010. From 2009 through 2013, for purposes of our
goodwill analysis, we have assumed an average annual sales growth rate of 6% with operating profit margins returning to recent historical levels
by 2013. Operating profit margin improvements are expected to result from significant restructuring activities, including realignment of excess
capacity through personnel reductions, as well as from higher volumes. A 50-basis-point reduction in the estimated operating profit margins
during the 2009 to 2013 period, used in our discounted cash flow model, would reduce the estimated fair value of Kautex by up to $60 million and
may result in the carrying value of the business exceeding its estimated fair value, potentially resulting an impairment charge. At January 3, 2009,
the goodwill allocated to Kautex totaled $130 million.
Our operating plans and projections for our Golf & Turfcare component anticipate operating margin improvements over the five-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 $50 million and may result in the carrying value of
the component exceeding its estimated fair value, potentially resulting in an impairment charge. At January 3, 2009, the goodwill allocated to this
component totaled approximately $141 million.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations