E-Z-GO 2008 Annual Report Download - page 52

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Retirement Benefits
We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement
benefit 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 2008, the assumed
expected long-term rate of return on plan assets used in calculating pension expense was 8.66%, compared with 8.63% in 2007. In 2008 and
2007, the assumed rate of return for our qualified domestic plans, which represent approximately 95% of our total pension assets, was 8.75%
and 8.74%, 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 qualified domestic plans.
The discount rate enables us to state expected future benefit payments as a present value on the measurement date, reflecting the current rate at
which the pension liabilities could be effectively settled. This rate should be in line with rates for high-quality fixed income investments available
for the period to maturity of the pension benefits, which fluctuate as long-term interest rates change. A lower discount rate increases the present
value of the benefit obligations and increases pension expense. In 2008, the weighted-average discount rate used in calculating pension expense
was 5.99%, compared with 5.63% in 2007. For our qualified domestic plans, the assumed discount rate was 6.0% in 2008, compared with
5.66% for 2007. A 50-basis-point decrease in this discount rate would result in a $28 million annual increase in pension expense for our
qualified domestic plans.
The trend in healthcare costs is difficult to estimate, and it has an important effect on postretirement liabilities. The 2008 medical and prescription
drug healthcare cost trend rates represent the weighted-average annual projected rate of increase in the per capita cost of covered benefits. The
2008 medical rate of 7% is assumed to decrease to 5% by 2019 and then remain at that level. The 2008 prescription drug rate of 10% is assumed
to decrease to 5% by 2019 and then remain at that level. See Note 14 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 five years. A significant 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.
We assess the adequacy of our recorded warranty and product maintenance liabilities periodically and adjust the amounts as necessary.
Adjustments are made to accruals as claim data and actual experience warrant. Should future warranty experience differ materially from our
historical experience, we may be required to record additional warranty liabilities, which could have a material adverse effect on our results of
operations and cash flows in the period in which these additional liabilities are required.
Securitized Transactions
Securitized transactions involve the sale of finance receivables to qualified special purpose trusts. We may retain an interest in the assets sold in
the form of interest-only securities, seller certificates, cash reserve accounts, and servicing rights and obligations. At the time of sale, a gain or
loss is recorded based on the difference between the proceeds received and the allocated carrying value of the finance receivables sold. The
allocated carrying value is determined based on the relative fair values of the finance receivables sold and the interests retained. As such, the fair
value estimate of the retained interests has a direct impact on the gain or loss recorded. We estimate fair value based on the present value of future
cash flows using management’s best estimates of key assumptions – credit losses, prepayment speeds, discount rates and forward interest rate
yield curves commensurate with the risks involved.
Textron Inc.