E-Z-GO 2013 Annual Report Download - page 48

35 Textron Inc. Annual Report • 2013
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 28, 2013:
(In millions) 2013 2012 2011
Gross favorable $ 51 $ 88 $ 83
Gross unfavorable (22) (73) (29)
N
et adjustments $ 29 $ 15 $ 54
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.
We calculate the fair value of each reporting unit, primarily using discounted cash flows. These cash flows incorporate
assumptions for short- and long-term revenue growth rates, operating margins and discount rates that 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 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 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.
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. If the carrying amount of the goodwill exceeds the implied fair value, an impairment
loss would be recognized in an amount equal to that excess.
Based on our annual impairment review, 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.
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 rate of compensation increases. We evaluate and update these assumptions annually.