E-Z-GO 2013 Annual Report Download - page 49

36Textron Inc. Annual Report • 2013
To determine the weighted-average 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 2013, the assumed expected long-term rate of return on plan assets used in calculating pension
expense was 7.56%, compared with 7.58% in 2012. In 2013 and 2012, the assumed rate of return for our domestic plans, which
represent approximately 90% of our total pension assets, was 7.75%. A 50-basis-point decrease in this long-term rate of return in
2013 would have increased pension expense for our domestic plans by approximately $25 million.
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 2013, the weighted-
average discount rate used in calculating pension expense was 4.23%, compared with 4.94% in 2012. For our domestic plans, the
assumed discount rate was 4.25% in 2013, compared with 5.00% for 2012. A 50-basis-point decrease in this discount rate in 2013
would have increased pension expense for our domestic plans by approximately $31 million.
The trend in healthcare costs is difficult to estimate, and it has an important effect on postretirement liabilities. The 2013 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 2013 medical rate of 7.20% is assumed to decrease to 5.00% by 2021 and then remain at that level.
The 2013 prescription drug rate of 7.20% is assumed to decrease to 5.00% by 2021 and then remain at that level. See Note 11 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.
Finance Receivables
Finance receivables are generally recorded at the amount of outstanding principal less allowance for losses. We maintain the
allowance for losses on finance receivables at a level considered adequate to cover inherent losses in the portfolio based on
management’s evaluation. For larger balance accounts specifically identified as impaired, including large accounts in
homogeneous portfolios, a reserve is established based on comparing the expected future cash flows, discounted at the finance
receivable’s effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to
its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our
borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated
with the repossession and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple
discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation
of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to
be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual
results. While our analysis is specific to each individual account, critical factors included in this analysis include industry
valuation guides, age and physical condition of the collateral, payment history and existence and financial strength of guarantors.
We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio. This
allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific
reserves. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default
trends, collateral values and both general economic and specific industry trends.