E-Z-GO 2012 Annual Report Download - page 48

36 Textron Inc. Annual Report ● 2012
At the outset of each contract, we estimate the initial profit booking rate. The initial profit booking rate of each contract considers
risks surrounding the ability to achieve the technical requirements (for example, a newly-developed product versus a mature
product), schedule (for example, the number and type of milestone events), and costs by contract requirements in the initial
estimated costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire
risks surrounding the technical, schedule, and costs aspects of the contract. Likewise, the profit booking rate may decrease if we
are not successful in retiring the risks; and, as a result, our estimated costs at completion increase. All of the estimates are subject
to change during the performance of the contract and, therefore, may affect the profit booking rate. When adjustments are required,
any changes from prior estimates are recognized using the cumulative catch-up method with the impact of the change from
inception-to-date recorded in the current period.
The following table sets forth the aggregate gross amount of all program profit adjustments that are included within segment profit
for the three years ended December 29, 2012:
(In millions) 2012 2011 2010
Gross favorable $ 88 $ 83 $ 98
Gross unfavorable (73) (29) (20)
N
et adjustments $ 15 $ 54 $ 78
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 a reporting unit might be impaired. The reporting unit represents the operating segment unless discrete financial
information is prepared and reviewed by segment management for businesses one level below that operating segment, in which
case such component is the reporting unit. In certain instances, we have aggregated components of an operating segment into a
single reporting unit based on similar economic characteristics.
For the Bell reporting unit, we performed a qualitative assessment based on economic, industry and company-specific factors as
the initial step in the annual goodwill impairment test. Based on the results of the qualitative assessment, we concluded that it is
more likely than not that the unit’s fair value is greater than its carrying amount and the next step of the impairment analysis was
not required. For our other reporting units, we performed the next step of the impairment analysis, which required us to calculate
fair value of each reporting unit.
Fair values were established primarily using discounted cash flows that incorporated assumptions for short- and long-term revenue
growth rates, operating margins and discount rates, which represent our best estimates of current and forecasted market conditions,
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 business having similar risks and 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 strategic plans and long-range planning
forecasts. These plans do not include any potential impact that sequestration budget cuts may have on our businesses that serve the
U.S. Government. 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.
If the reporting unit’s estimated fair value exceeds its carrying value, the reporting unit is not impaired, and no further analysis is
performed. Otherwise, the amount of the impairment must be determined by comparing the carrying amount of the reporting
unit’s goodwill to the implied fair value of that goodwill. The implied fair value of goodwill is determined by assigning a fair
value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had
been acquired in a business combination at fair value. If the carrying amount of the reporting unit goodwill exceeds the implied
fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.
Based on our annual impairment reviews, the fair value of all of our reporting units exceeded their carrying values, and we do not
believe that there is a reasonable possibility that any units might fail the initial step of the impairment test in the foreseeable future.