E-Z-GO 2010 Annual Report Download - page 47

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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 2010, the weighted-
average discount rate used in calculating pension expense was 6.20%, compared with 6.61% in 2009. For our domestic plans, the
assumed discount rate was 6.25% in 2010, compared with 6.57% for 2009. A 50-basis-point decrease in this discount rate in 2010
would have resulted in approximate a $25 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 2010 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 2010 medical rate of 8% is assumed to decrease to 5% by 2020 and then remain at that level. The 2010
prescription drug rate of 9% is assumed to decrease to 5% by 2020 and then remain at that level. See Note 13 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.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets
and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates
expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce
income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by
assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary
differences, taxable income in carryback years, available tax planning strategies and estimated future taxable income. We recognize
net tax-related interest and penalties for continuing operations in income tax expense.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in
proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We assess our income
tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and
information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be
sustained, we record the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a
taxing authority that has full knowledge of all relevant information. Interest and penalties are accrued, where applicable. We
recognize net tax-related interest and penalties for continuing operations in income tax expense. If we do not believe that it is more
likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations, new regulatory or judicial
pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual
basis.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risks
Our financial results are affected by changes in the U.S. and foreign interest rates. As part of managing this risk, we seek to achieve a
prudent balance between floating- and fixed-rate exposures. We continually monitor our mix of these exposures and adjust the mix, as
necessary.
Our Finance group limits its risk to changes in interest rates with its strategy of matching floating-rate assets with floating-rate
liabilities. This strategy includes the use of interest rate exchange agreements. At January 1, 2011, floating-rate liabilities in excess of
floating-rate assets were $591 million, after considering interest rate exchange agreements and the treatment of $640 million of
floating-rate loans with index-rate floors as fixed-rate loans. These loans have index rates that are, on average, 198 basis points above
the applicable index rate (predominately the Prime rate). The Finance group has benefited from interest rate floor agreements in the
recent low-rate environment; however, in a rising rate environment, this benefit will dissipate until the Prime rate exceeds the floor
rates embedded in these agreements. The net effect of interest rate exchange agreements designated as hedges of debt decreased
interest expense for our Finance group by $28 million, $56 million and $25 million in 2010, 2009 and 2008, respectively.