E-Z-GO 2011 Annual Report Download - page 79

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There are no active, quoted market prices for our finance receivables. The estimate of fair value was determined based on the use
of discounted cash flow models to estimate the exit price we expect to receive in the principal market for each type of loan in an
orderly transaction, which includes both the sale of pools of similar assets and the sale of individual loans. The models we used
incorporate estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market
participants combined with estimated loan cash flows based on credit losses, payment rates and credit line utilization rates. Where
available, assumptions related to the expectations of current market participants are compared with observable market inputs,
including bids from prospective purchasers of similar loans and certain bond market indices for loans perceived to be of similar
credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these inputs
are not typically derived from markets with directly comparable loan structures, industries and collateral types. Therefore, all
valuations of finance receivables held for sale involve significant management judgment, which can result in differences between
our fair value estimates and those of other market participants.
Other assets — Other assets include repossessed assets and properties, operating assets received in satisfaction of troubled finance
receivables and other investments, which are accounted for under the equity method of accounting and have no active, quoted
market prices. The fair value of these assets is determined based on the use of appraisals, industry pricing guides, input from
market participants, our recent experience selling similar assets or internally developed discounted cash flow models. For our
other investments, the discounted cash flow models incorporate assumptions specific to the nature of the investments’ business and
underlying assets and include industry valuation benchmarks such as discount rates, capitalization rates and cash flow multiples.
Intangible assets — In the fourth quarter of 2011, we determined that we had an indicator of potential asset impairment in our Textron
Systems segment. As Textron Systems sells many of its products to the U.S. Government, its business environment continues to be shaped
by policy and budget decisions determined by the U.S. Government. Recent actions of the President and Congress indicate an ongoing
emphasis on federal budget deficit reduction, and budget decisions by the President and Congress may considerably reduce discretionary
spending, of which defense constitutes a significant share. Based on the continued deterioration of this environment, the results of our
annual operating plan review, which included updated long-range forecast estimates, and the loss of certain contracts, we determined that an
indicator of potential asset impairment existed in the fourth quarter, requiring us to perform impairment tests. Based on our analysis, we
determined that certain intangible assets were impaired and recorded a $41 million pre-tax impairment charge to write down intangible
assets primarily related to customer agreements and contractual relationships associated with AAI-Logistics & Technical Services and
AAI-Test & Training businesses. We determined the fair value of these assets using discounted cash flows related to each asset group and
a weighted-average cost of capital of approximately 10%. The impairment charge is recorded in cost of sales within segment profit.
Assets and Liabilities Not Recorded at Fair Value
The carrying value and estimated fair values of our financial instruments that are not reflected in the financial statements at fair
value are as follows:
December 31, 2011
January 1, 2011
(In millions)
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
Manufacturing group
Long-term debt, excluding leases
$ (2,328)
$ (2,561)
$ (2,172)
$ (2,698)
Finance group
Finance receivables held for investment, excluding leases
1,997
1,848
3,345
3,131
Debt
(1,974)
(1,854)
(3,660)
(3,528)
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions. At December 31,
2011 and January 1, 2011, approximately 53% and 33%, respectively, of the fair value of term debt for the Finance group was
determined based on observable market transactions. The remaining Finance group debt was determined based on discounted cash
flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations. We
utilize the same valuation methodologies to determine the fair value estimates for finance receivables held for investment as used
for finance receivables held for sale.
68
68 Textron Inc. Annual Report • 2011