E-Z-GO 2009 Annual Report Download - page 46

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37
Fair values are established primarily using discounted cash flows that incorporate assumptions for the unit’s short and long-term revenue growth
rates, operating margins and discount rates, which represent our best estimates of current and forecasted market conditions, current cost
structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a
company having similar risks and business characteristics to the reporting unit being assessed. The revenue growth rates and operating margins
used in our discounted cash flow analysis are based on our businesses’ strategic plans and long-range planning forecasts. The long-term growth
rate we use to determine the terminal value of the business is based on our assessment of its minimum expected terminal growth rate, as well as
its past historical growth and broader economic considerations such as gross domestic product, inflation and the maturity of the markets we
serve. We utilize a weighted-average cost of capital in our impairment analysis that makes assumptions about the capital structure that we believe
a market participant would make and include a risk premium based on an assessment of risks related to the projected cash flows of each reporting
unit. We believe this approach yields a discount rate that is consistent with an implied rate of return that an independent investor or market
participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed.
As further discussed in Note 10 to the Consolidated Financial Statements, our annual test in the fourth quarter of 2009 resulted in an impairment
charge of $80 million in the Golf & Turf reporting unit. The fair value of all the other reporting units exceeded their carrying values, and we do not
believe that there is a reasonable possibility that any of these units might fail the Step 1 impairment test in the foreseeable future.
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 2009, the
assumed expected long-term rate of return on plan assets used in calculating pension expense was 8.58%, compared with 8.66% in 2008. In
2009 and 2008, the assumed rate of return for our domestic plans, which represent approximately 88% of our total pension assets, was 8.75%.
A 50-basis-point decrease in this long-term rate of return in 2009 would have resulted in a $22 million increase in pension expense for our
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 2009, the weighted-average discount rate used in calculating pension
expense was 6.61%, compared with 5.99% in 2008. For our domestic plans, the assumed discount rate was 6.57% in 2009, compared with 6.0%
for 2008. A 50-basis-point decrease in this discount rate in 2009 would have resulted in a $32 million increase in pension expense for our
domestic plans.
The trend in healthcare costs is difficult to estimate, and it has an important effect on postretirement liabilities. The 2009 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
2009 medical rate of 7% is assumed to decrease to 5% by 2019 and then remain at that level. The 2009 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.
Textron Inc.