Filed with the SEC from July 10 to July 16:
Atlantic Investment Management will continue its "active discussions" with Goodrich's management, aimed at maximizing shareholder value. It also may hold discussions with other parties about value-enhancing activities. Atlantic Investment boosted its holdings to 6,500,000 shares (5.2%) by buying 2,630,000 from May 29 to July 11 at prices ranging from $43.41 to $64.69.
We are one of the largest worldwide suppliers of components, systems and services to the commercial and general aviation airplane markets. We are also a leading supplier of systems and products to the global defense and space markets. Our business is conducted on a global basis with manufacturing, service and sales undertaken in various locations throughout the world. Our products and services are principally sold to customers in North America, Europe and Asia.
We were incorporated under the laws of the State of New York on May 2, 1912 as the successor to a business founded in 1870.
Our principal executive offices are located at Four Coliseum Centre, 2730 West Tyvola Road, Charlotte, North Carolina 28217 (telephone 704-423-7000).
We maintain an Internet site at http://www.goodrich.com. The information contained at our Internet site is not incorporated by reference in this report, and you should not consider it a part of this report. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, are available free of charge on our Internet site as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission. In addition, we maintain a corporate governance page on our Internet site that includes key information about our corporate governance initiatives, including our Guidelines on Governance, the charters for our standing board committees and our Business Code of Conduct. These materials are available upon request.
Unless otherwise noted herein, disclosures in this Annual Report on Form 10-K relate only to our continuing operations. Our discontinued operations include the Avionics business, which was sold in March 2003, the Passenger Restraints Systems (PRS) business, which ceased operating during the first quarter of 2003, the JCAir Inc. (Test Systems) business, which was sold in April 2005 and the Goodrich Aviation Technical Services, Inc. (ATS) business, which was sold in November 2007.
Unless the context otherwise requires, the terms â€śweâ€ť, â€śourâ€ť, â€śusâ€ť, â€śCompanyâ€ť and â€śGoodrichâ€ť as used herein refer to Goodrich Corporation and its subsidiaries.
As used in this Form 10-K, the following terms have the following meanings:
â€˘ â€śaftermarketâ€ť means products and services provided to our customers to replace, repair or overhaul OE;
â€˘ â€ścommercialâ€ť means large commercial and regional airplanes;
â€˘ â€ślarge commercialâ€ť means commercial airplanes with a capacity of more than 110 seats, including those manufactured by Airbus S.A.S (Airbus) and The Boeing Company (Boeing);
â€˘ â€śregionalâ€ť means commercial airplanes with a capacity of 110 seats or less; and
â€˘ â€śgeneral aviationâ€ť means business jets and all other non-commercial, non-military airplanes.
Business Segment Information
Our three business segments are as follows.
â€˘ The Actuation and Landing Systems segment provides systems, components and related services pertaining to aircraft taxi, take-off, flight control, landing and stopping, as well as engine components, including fuel delivery systems and rotating assemblies.
â€˘ The Nacelles and Interior Systems segment produces products and provides maintenance, repair and overhaul services associated with aircraft engines, including thrust reversers, cowlings, nozzles and their components, and aircraft interior products, including slides, seats, cargo and lighting systems.
â€˘ The Electronic Systems segment produces a wide array of systems and components that provide flight performance measurements, flight management, fuel controls, electrical systems, and control and safety data, as well as reconnaissance and surveillance systems.
For financial information about our segments, see Note 3, â€śBusiness Segment Informationâ€ť to our Consolidated Financial Statements included in Part II, Item 8 of this report, which is incorporated herein by reference.
Key Products and Services
We provide products and services for the entire life cycle of airplane and defense programs, including a significant amount of aftermarket support for our key products. Our key products include:
â€˘ Nacelles â€” the structure surrounding an aircraft engine. Components that make up a nacelle include thrust reversers, inlet and fan cowls, nozzle assemblies, exhaust systems and other structural components. Our aerostructures business is one of a few businesses that is a nacelle integrator, which means that we have the capabilities to design and manufacture all components of a nacelle, dress the engine systems and coordinate the installation of the engine and nacelle to the aircraft.
â€˘ Actuation systems â€” equipment that utilizes linear, rotary or fly-by-wire actuation to control movement. We manufacture a wide-range of actuators including primary and secondary flight controls, helicopter main and tail rotor actuation, engine and nacelle actuation, utility actuation, precision weapon actuation and land vehicle actuation.
â€˘ Landing gear â€” complete landing gear systems for commercial, general aviation and defense aircraft.
â€˘ Aircraft wheels and brakes â€” aircraft wheels and brakes for a variety of commercial, general aviation and defense applications.
â€˘ Engine control systems â€” applications for commercial engines, large and small, helicopters and all forms of military aircraft. Our products include fuel metering controls, fuel pumping systems, electronic controls (software and hardware), variable geometry actuation controls and engine health monitoring systems.
â€˘ Intelligence surveillance and reconnaissance systems â€” high performance custom engineered electronics, optics, shortwave infrared cameras and arrays, and electro-optical products and services for sophisticated defense, scientific and commercial applications.
â€˘ Sensor systems â€” aircraft and engine sensors that provide critical measurements for flight control, cockpit information and engine control systems.
â€˘ Power systems â€” aircraft electrical power systems for large commercial airplanes, business jets and helicopters. We supply these systems to defense and civil customers around the globe.
We serve a diverse group of customers worldwide in the commercial and general aviation airplane markets and in the global defense and space markets. We market our products, systems and services directly to our customers through an internal marketing and sales force.
In 2007, 2006 and 2005, direct and indirect sales to the United States (U.S.) government totaled approximately 13%, 16% and 18%, respectively, of consolidated sales. Indirect sales to the U.S. government include a portion of the direct and indirect sales to Boeing referred to in the following paragraph.
In 2007, 2006 and 2005, direct and indirect sales to Airbus totaled approximately 15%, 18% and 17%, respectively, of consolidated sales. In 2007, 2006 and 2005, direct and indirect sales to Boeing totaled approximately 15%, 14% and 12%, respectively, of consolidated sales.
The aerospace industry in which we operate is highly competitive. Principal competitive factors include price, product and system performance, quality, service, design and engineering capabilities, new product innovation and timely delivery. We compete worldwide with a number of U.S. and foreign companies that are both larger and smaller than us in terms of resources and market share, and some of which are our customers.
The following table lists the companies that we consider to be our major competitors for each major aerospace product or system platform for which we believe we are one of the leading suppliers.
Firm commercial backlog includes orders for which we have definitive purchase contracts and the estimated sales value to be realized under firm agreements to purchase future aircraft maintenance and overhaul services. Firm backlog includes fixed, firm contracts that have not been shipped and for which cancellation is not anticipated.
Aircraft manufacturers, such as Airbus and Boeing, may have firm orders for commercial aircraft that are in excess of the number of units covered under their firm contracts with us. We believe it is reasonable to expect that we will continue to provide products and services to these aircraft in the same manner as those under firm contract. Our unobligated commercial backlog includes the expected sales value for our product on the aircraft manufacturersâ€™ firm orders for commercial aircraft in excess of the amount included in our firm commercial backlog.
Firm defense and space backlog represents the estimated remaining sales value of work to be performed under firm contracts the funding for which has been approved by the U.S. Congress, as well as commitments by international customers that are similarly funded and approved by their governments. Unobligated defense and space backlog represents the estimated remaining sales value of work to be performed under firm contracts for which funding has not been appropriated. Indefinite delivery, indefinite quantity contracts are not reported in backlog.
Backlog is subject to delivery delays or program cancellations which are beyond our control. Firm backlog approximated $4.8 billion at December 31, 2006.
Raw Materials and Components
We purchase a variety of raw materials and components for use in the manufacture of our products, including aluminum, titanium, steel, various specialty metals and carbon fiber. In some cases we rely on sole-source suppliers for certain of these raw materials and components, and a delay in delivery of these materials and components could create difficulties in meeting our production and delivery obligations. We continue to experience margin and cost pressures in some of our businesses due to increased market prices and limited availability of some raw materials, such as titanium, steel and various specialty metals. We have taken actions to address these market dynamics, including securing long-term supply contracts for titanium, and with these actions, we believe that we currently have adequate sources of supply for raw materials and components.
We are subject to various domestic and international environmental laws and regulations which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which we have been identified as a potentially responsible party under the federal Superfund laws and comparable state laws. We are currently involved in the investigation and remediation of a number of sites under these laws. For additional information concerning environmental matters, see â€śItem 3. Legal Proceedings â€” Environmental.â€ť
Research and Development
We perform research and development under company-funded programs for commercial products and under contracts with customers. Research and development under contracts with others is performed on both defense and commercial products. Total research and development expenses from continuing operations in 2007, 2006 and 2005 were approximately $280 million, $247 million and $267 million, respectively. These amounts are net of approximately $124 million, $113 million and $112 million, respectively, which were funded by customers.
We own or are licensed to use various intellectual property rights, including patents, trademarks, copyrights and trade secrets. While such intellectual property rights are important to us, we do not believe that the loss of any individual property right or group of related rights would have a material adverse effect on our overall business or on any of our business segments.
Our large commercial, regional, business and general aviation airplane aftermarket market channel is moderately seasonal because certain of our customers maintain busy flight schedules from late November through December. This has historically resulted in some sales in this market channel being postponed from the fourth quarter into the first quarter of the following year.
Our working capital is influenced by the following factors:
â€˘ New commercial aircraft development;
â€˘ Aircraft production rate changes by original equipment (OE) manufacturers;
â€˘ Levels of aircraft utilization, age of aircraft in the fleets and types of aircraft utilized by airlines; and
â€˘ Levels of defense spending by governments worldwide.
Our working capital is currently at a high level primarily due to several new commercial airplane development programs, early production of the Airbus A380 and the Boeing 787 and production rate increases by Airbus and Boeing.
As of December 31, 2007, we employed approximately 23,400 people, of which approximately 14,800 people were employed in the U.S. and approximately 8,600 people were employed in other countries. We believe that we have satisfactory relationships with our employees. Those hourly employees who are unionized are covered by collective bargaining agreements with a number of labor unions and with varying contract termination dates through May 2012. Approximately 20% of our global labor force is covered by collective bargaining arrangements and approximately 10% of our global labor force is covered by collective bargaining arrangements that will expire within one year. There were no material work stoppages during 2007.
We are engaged in business worldwide. We market our products and services through sales subsidiaries and distributors in various countries. We also have international joint venture agreements.
Currency fluctuations, tariffs and similar import limitations, price controls and labor regulations can affect our foreign operations, including foreign affiliates. Other potential limitations on our foreign operations include expropriation, nationalization, restrictions on foreign investments or their transfers and additional political and economic risks. In addition, the transfer of funds from foreign operations could be impaired by the unavailability of dollar exchange or other restrictive regulations that foreign governments could enact.
For financial information about our U.S. and foreign sales and assets, see Note 3, â€śBusiness Segment Informationâ€ť to our Consolidated Financial Statements included in Part II, Item 8 of this report, which is incorporated herein by reference.
DIANE C. CREEL, age 59 â€” Director since December 22, 1997.
Chairman, Chief Executive Officer and President, Ecovation, Inc., a wastewater management systems company. Ms. Creel has a B.A. and M.A. from the University of South Carolina. Ms. Creel joined Ecovation, Inc. as Chairman, Chief Executive Officer and President in May 2003. Prior to joining Ecovation, Ms. Creel served as Chief Executive Officer and President of Earth Tech from January 1993 to May 2003, Chief Operating Officer from 1987 to 1993 and Vice President from 1984 to 1987. Ms. Creel was director of business development and communications for CH2M Hill from 1978 to 1984, manager of communications for Caudill Rowlett Scot, Houston, Texas from 1976 to 1978, and director of public relations for LBC&W, Architects-Engineers-Plan ners, Columbia, South Carolina from 1971 to 1976. Ms. Creel currently serves on the boards of directors of Foster Wheeler, Inc. and Allegheny Technologies.
GEORGE A. DAVIDSON, JR., age 69 â€” Director since April 15, 1991.
Retired Chairman, Dominion Resources, Inc., a natural gas and electric power holding company. Mr. Davidson is a graduate of the University of Pittsburgh with a degree in petroleum engineering. Effective January 2000, Dominion Resources and Consolidated Natural Gas Company merged. He has been associated with Consolidated Natural Gas since 1966. He became Vice Chairman of Consolidated Natural Gas in October 1985 and served in that position until January 1987, when he assumed the additional responsibility of Chief Operating Officer. In May 1987 Mr. Davidson became Chairman and Chief Executive Officer and served in that capacity until becoming Chairman of Dominion Resources, Inc. in January 2000. He retired from that position in August 2000. Mr. Davidson is a director of Dominion Resources, Inc. and PNC Financial Services Group, Inc. Mr. Davidson is a director and Chairman of the Pittsburgh Foundation, Past Chairman of the Board of The Pittsburgh Cultural Trust, Chairman Emeritus of the Pittsburgh Civic Light Opera Board and Past Chairman of the American Gas Association. Mr. Davidson is a trustee of the University of Pittsburgh, chairs the Board of Visitors of the Katz Graduate School of Business and is Vice Chair of the Board of Visitors of the School of Engineering, and serves on the board of the Sewickley Valley Hospital Foundation and the Carnegie Museum of Natural History.
HARRIS E. DELOACH, JR., age 63 â€” Director since April 17, 2001.
Chairman, President and Chief Executive Officer, Sonoco Products Company, a worldwide, vertically integrated packaging company. Mr. DeLoach holds a bachelor of arts degree in business administration and a juris doctor degree from the University of South Carolina. Mr. DeLoach was named President and Chief Executive Officer of Sonoco Products Company in July 2000 and Chairman in April 2005. Previously, he was Senior Executive Vice President and Chief Operating Officer from 1999 to 2000, Executive Vice President from 1996 to 1999 and Group Vice President from 1993 to 1996. He joined Sonoco in 1985. Mr. DeLoach is a director of Sonoco Products Company and Progress Energy Corporation. He also serves on the Board of Directors of the Palmetto Institute, member of the University of South Carolina Business Partnership Foundation, member of the Board of Directors of the South Carolina Governorâ€™s School for Science and Mathematics Foundation, and Past Chairman of the South Carolina Chamber of Commerce.
JAMES W. GRIFFITH, age 54 â€” Director since July 15, 2002.
President and Chief Executive Officer, The Timken Company, an international manufacturer of highly engineered bearings, alloy and specialty steel and components. Mr. Griffith earned his B.S. in industrial engineering and his M.B.A. from Stanford University. He joined The Timken Company in 1984. From 1984 to 1999 he held a wide range of positions in several areas of the company, including international operations and strategic management. He was elected President and Chief Operating Officer in 1999 and President and Chief Executive Officer in July 2002. Mr. Griffith is a director of The Timken Company, is on the Executive Committee and Board of Directors of the National Association of Manufacturers, is on the Board of Directors of MAGNet, serves as the President for the World Bearing Association, and is a member of the Board of Trustees of Mount Union College.
WILLIAM R. HOLLAND, age 69 â€” Director since July 12, 1999.
Retired Chairman, United Dominion Industries Limited, a diversified manufacturing company that was acquired by SPX Corporation in May 2001. Mr. Holland has bachelor of arts and juris doctor degrees from the University of Denver. He joined United Dominion in 1973 as Vice President and General Counsel. He held various executive positions with United Dominion, including Chief Executive Officer from 1986 to 2000 and Chairman from 1987 to 2001. Mr. Holland is Chairman and a director of EnPro Industries, Inc. and a director of Lance Inc. He is a director of Cook & Boardman, Inc. and Crowder Construction Company, a director of the Carolinas Healthcare System Foundation, Charlotte, North Carolina, a corporate member of the Jupiter, Florida Medical Center and a member of the Advisory Board of the Walker School of Business, Appalachian State University, Boone, North Carolina. He was named as an Outstanding Director in 2008 by the Outstanding Directors Institute.
JOHN P. JUMPER, age 62 â€” Director since December 5, 2005.
Retired Chief of Staff, United States Air Force. General Jumper retired from the United States Air Force in 2005 after a distinguished 39-year military career. In his last position as Chief of Staff he served as the senior military officer in the Air Force leading more than 700,000 military, civilian, Air National Guard and Air Force Reserve men and women. In that position he administered annual budgets in excess of $100 billion. As Chief of Staff, he was a member of the Joint Chiefs of Staff providing military advice to the Secretary of Defense, the National Security Council and the President. From 2000 â€” 2001 General Jumper served as Commander, Air Combat Command. During the 1999 war in Kosovo and Serbia he commanded U.S. Air Forces in Europe and Allied Air Forces Central Europe. In earlier assignments he served on the Joint Staff and as Senior Military Assistant to Secretary of Defense Dick Cheney and Secretary Les Aspin. He also commanded an F-16 fighter squadron and two fighter wings, accumulating more than 5,000 flying hours, including more than 1,400 combat hours in Vietnam and Iraq. General Jumper holds a degree in electrical engineering from the Virginia Military Institute and an M.B.A from Golden Gate University in San Francisco. He currently serves on the boards of SAIC, Inc., Jacobs Engineering Group Inc., TechTeam Global Inc. and Somanetics Corporation, as well as on the non-profit boards of the Air Force Association, The Marshall Foundation and the Air Force Village Charitable Foundation.
MARSHALL O. LARSEN, age 59 â€” Director since April 16, 2002.
Chairman, President and Chief Executive Officer, Goodrich Corporation. Mr. Larsen received a B.S. in Engineering from the U.S. Military Academy and an M.S. in industrial administration from the Krannert Graduate School of Management at Purdue University. He joined Goodrich in 1977 as an Operations Analyst. In 1981, he became Director of Planning and Analysis and subsequently Director of Product Marketing. In 1986, he became Assistant to the President and later served as General Manager of several divisions of Goodrichâ€™s aerospace business. He was elected a Vice President of Goodrich and named a Group Vice President of Goodrich Aerospace in 1994 and was elected an Executive Vice President of Goodrich and President and Chief Operating Officer of Goodrich Aerospace in 1995. He was elected President and Chief Operating Officer of Goodrich in February 2002, Chief Executive Officer in April 2003 and Chairman in October 2003. Mr. Larsen is a member of the Board of Governors of the Aerospace Industries Association and the Business Roundtable and is a director of Becton, Dickinson & Co. and Loweâ€™s Companies, Inc. He is active in numerous community activities.
LLOYD W. NEWTON, age 65 â€” Director since December 11, 2006.
General, United States Air Force (Ret.) and Retired Executive Vice President, Pratt & Whitney Military Engines, a leading manufacturer of engines for military aircraft. General Newton retired from the United States Air Force in August 2000 after a distinguished 34 year career. He culminated his Air Force career as a four-star General and was Commander, Air Education and Training Command. His command consisted of 13 bases, 43,000 active duty personnel and 14,000 civilians. In April 2005 he was appointed by the President to serve as a commissioner on the Defense 2005 Base Realignment and Closure Commission. General Newton joined Pratt & Whitney Military Engines in September 2000 as Vice President where he was responsible for all aspects of business development, customer requirements, support and services. He retired from Pratt & Whitney in March 2006 as Executive Vice President. General Newton received a Bachelor of Science degree in Aviation Education from Tennessee State University in 1966. In 1985, he received a Master of Arts degree in Public Administration from George Washington University. He currently serves on the Board of Directors of Sonoco Products Company and Torchmark Corporation, as well as on the non-profit Boards of the National Air and Space Museum, the National Museum of the U.S. Air Force and the Air Force Association.
DOUGLAS E. OLESEN, age 69 â€” Director since October 1, 1996.
Retired President and Chief Executive Officer, Battelle Memorial Institute, a worldwide technology organization, working for government and industry. Dr. Olesen earned his B.S., M.S. and Ph.D. degrees in civil engineering at the University of Washington. In 1963 Dr. Olesen joined Boeing Aircraft Company as a Research Engineer and assisted in developing and testing closed life-support systems for long-term space missions. He joined Battelle Memorial Institute, Northwest Labs, in Richland, Washington in 1967 and served in a series of management positions. Dr. Olesen was named Vice President and Director of the Northwest Division in 1979. In 1984 he became Executive Vice President and Chief Operating Officer of the Battelle Memorial Institute in Columbus, Ohio. In 1987 he was elected President and Chief Executive Officer and in October 2001 he retired.
ALFRED M. RANKIN, JR., age 66 â€” Director since April 18, 1988.
Chairman, President and Chief Executive Officer, NACCO Industries, Inc., an operating holding company with interests in the mining and marketing of lignite, manufacturing and marketing of forklift trucks, and the manufacturing and marketing of small household electric appliances. Mr. Rankin holds a bachelor of arts degree in economics from Yale University, and a juris doctor degree from the Yale Law School. He joined NACCO Industries in April 1989 as President and Chief Operating Officer and became President and Chief Executive Officer in May 1991. He assumed the additional title of Chairman in May 1994. Previously, Mr. Rankin served in a number of management positions with Eaton Corporation, with the most recent being Vice Chairman and Chief Operating Officer from April 1986 to April 1989. He is a director of NACCO Industries, Inc., NMHG Holding Co. and The Vanguard Group. He is a director and deputy Chairman of the Federal Reserve Bank of Cleveland and a trustee and president of the Cleveland Museum of Art. He is a trustee of The Greater Cleveland Partnership, the Musical Arts Association and University Hospitals of Cleveland.
A. THOMAS YOUNG, age 69 â€” Director since April 17, 1995.
Retired Executive Vice President, Lockheed Martin Corporation, an aerospace and defense company. Mr. Young is a graduate of the University of Virginia with bachelor degrees in aeronautical engineering and mechanical engineering, and of the Massachusetts Institute of Technology with a masterâ€™s degree in management. Mr. Young was with the National Aeronautics and Space Administration from 1961 to 1982, serving in a number of management positions including Mission Director of the Project Viking Mars landing program and Director of the Goddard Space Flight Center. In 1982 he joined Martin Marietta as Vice President of Aerospace Research and Engineering, and later became Senior Vice President and President of Martin Marietta Electronics & Missiles Group and Executive Vice President. He became President and Chief Operating Officer in January 1990, Executive Vice President of Lockheed Martin Corporation in March 1995 and retired in July of that year. Mr. Young is a director of SAIC, Inc. Mr. Young is also a Fellow of the American Astronautical Society, the American Institute of Aeronautics and Astronautics and the Royal Aeronautical Society and a member of the National Academy of Engineering. He was named as an Outstanding Director in 2005 by the Outstanding Directors Institute.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are one of the largest worldwide suppliers of aerospace components, systems and services to the commercial and general aviation airplane markets. We are also a leading supplier of systems and products to the global defense and space markets. Our business is conducted globally with manufacturing, service and sales undertaken in various locations throughout the world. Our products and services are principally sold to customers in North America, Europe and Asia.
Key Market Channels for Products and Services, Growth Drivers and Industry and our Highlights
We participate in three key market channels: commercial, regional, business and general aviation airplane original equipment (OE); commercial, regional, business and general aviation airplane aftermarket; and defense and space.
Commercial, Regional, Business and General Aviation Airplane OE
Commercial, regional, business and general aviation airplane OE includes sales of products and services for new airplanes produced by Airbus and Boeing, and regional, business and small airplane manufacturers.
The key growth drivers in this market channel include the number of orders for new airplanes, which will be delivered to the manufacturersâ€™ customers over a period of several years, OE manufacturer production and delivery rates and introductions of new airplane models such as the Boeing 787 and 747-8, the Airbus A380 and A350 XWB and the Embraer 190 airplanes.
We have significant sales content on most of the airplanes manufactured in this market channel. We have benefited from increased production rates and deliveries of Airbus and Boeing airplanes and from our substantial content on many of the regional and general aviation airplanes. We were also awarded several new contracts for our products on airplanes currently in a pre-production or early development stage, including the Boeing 787 and 747-8 and the Airbus A350 XWB, which should provide substantial future sales growth for us.
The commercial airplane manufacturers have a significant backlog of orders and continue to experience strong new order flow. Airlines worldwide are expected to continue to increase capacity in 2008 and beyond. These trends bode very well for large commercial aircraft production over the next several years.
Commercial, Regional, Business and General Aviation Airplane Aftermarket
The commercial, regional, business and general aviation airplane aftermarket channel includes sales of products and services for existing commercial and general aviation airplanes, primarily to airlines and package carriers around the world.
The key growth drivers in this channel include worldwide passenger capacity growth measured by Available Seat Miles (ASM) and the size and activity level of the worldwide airplane fleet. Other important factors affecting growth in this market channel are the age of the airplanes in the fleet and Gross Domestic Product (GDP) trends in countries and regions around the world.
Capacity in the global airline system, as measured by ASMs, is expected to grow at about 4% to 5% annually in 2008 through 2012. We expect that the global airplane fleet will continue to grow in 2008 and beyond, as the OE manufacturers are expected to deliver more airplanes than are retired.
We have significant product content on most of the airplane models that are currently in service. We have benefited from good growth in ASMs, especially in Asia, and from the aging of the worldwide fleet of airplanes.
Defense and Space
Worldwide defense and space sales include sales to prime contractors such as Boeing, Northrop Grumman, Lockheed Martin, the U.S. Government and foreign companies and governments.
The key growth drivers in this channel include the level of defense spending by the U.S. and foreign governments, the number of new platform starts, the level of military flight operations and the level of upgrade, overhaul and maintenance activities associated with existing platforms.
The market for our defense and space products is global, and is not dependent on any single program, platform or customer. While we anticipate fewer new platform starts over the next several years, which are expected to negatively affect OE sales, we anticipate that upgrades on existing defense and space platforms will be necessary and will provide long-term growth in this market channel. Additionally, we are participating in, and developing new products for, the rapidly expanding homeland security and intelligence, surveillance and reconnaissance sectors, which should further strengthen our position in this market channel.
Long-term Sustainable Growth
We believe that we are well positioned to continue to grow our commercial airplane OE and aftermarket and defense and space sales due to:
â€˘ Awards for key products on important new and expected programs, including the Airbus A380 and A350 XWB, the Boeing 787 and 747-8, the Embraer 190, the Dassault Falcon 7X and the Lockheed Martin F-35 Lightning II and F-22 Raptor;
â€˘ Growing commercial airplane fleet, which should fuel sustained aftermarket strength;
â€˘ Balance in the large commercial airplane market, with strong sales to both Airbus and Boeing;
â€˘ Aging of the existing large commercial and regional airplane fleets, which should result in increased aftermarket support;
â€˘ Increased number of long-term agreements for product sales on new and existing commercial airplanes;
â€˘ Increased opportunities for aftermarket growth due to airline outsourcing;
â€˘ Growth in global maintenance, repair and overhaul opportunities for our systems and components, particularly in Europe, Asia and the Middle East, where we have expanded our capacity; and
â€˘ Expansion of our product offerings in support of high growth areas in the defense and space market channel, such as helicopter products and systems and intelligence, surveillance and reconnaissance products.
Year Ended December 31, 2007 Sales Content by Market Channel
Our 2007 sales and income performance was driven primarily by growth in each of our major market channels as follows:
â€˘ Large commercial airplane OE sales increased by approximately 8%;
â€˘ Regional, business and general aviation airplane OE sales increased by approximately 20%;
â€˘ Large commercial, regional, business and general aviation airplane aftermarket sales increased by approximately 16%; and
â€˘ Defense and space sales of both OE and aftermarket products and services increased by approximately 7%.
Changes in estimates on long-term contracts
During 2007, we revised our estimates on certain of our long-term contracts, primarily in our aerostructures and aircraft wheels and brakes business units, resulting in higher income of approximately $61 million compared to 2006. These changes were primarily due to favorable cost and operational performance and to some extent, sales pricing improvements on follow-on contracts.
Settlement of claims
During 2007, we settled certain claims with a customer and a claim with Northrop Grumman resulting in an increase in operating income of approximately $40 million.
Foreign exchange rate impact
The net unfavorable foreign exchange rate impact was primarily due to approximately $64 million of unfavorable foreign currency translation of net costs in currencies other than the U.S. Dollar, partially offset by approximately $35 million of higher net gains on cash flow hedges settled during 2007.
The increase in share-based compensation was primarily due to the following:
â€˘ Approximately $25 million of increased costs primarily resulting from an increase in our share price and favorable financial performance against plan targets; and
â€˘ Approximately $8 million of costs related to a 2007 special stock option award that did not occur in 2006; offset by
â€˘ Approximately $22 million of costs recognized in 2006 that resulted from accelerated expense on awards granted to employees who were retirement eligible.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
First Quarter 2008 Sales Content by Market Channel
The sales increase in the first quarter 2008 as compared to the first quarter 2007 was driven by changes in each of our major market channels as follows:
â€˘ Large commercial airplane original equipment sales increased by approximately 13%;
â€˘ Regional, business and general aviation airplane original equipment sales increased by approximately 23%;
â€˘ Large commercial, regional and general aviation airplane aftermarket sales increased by approximately 10%; and
â€˘ Defense and space sales of both original equipment and aftermarket products and services increased by approximately 13%.
The segment operating income growth was generated by increased sales and improved operational performance in most business units as discussed in the â€śBusiness Segment Performanceâ€ť section.
Changes in estimates on long-term contracts
During the first quarter 2008, we revised our estimates on certain of our long-term contracts, primarily in our aerostructures and aircraft wheels and brakes business units, resulting in higher income of approximately $24 million compared to the first quarter 2007. These revised estimates were primarily due to changes in volume, price, cost and operational performance.
The decrease in share-based compensation was primarily due to changes in our share price.
Foreign exchange rate impact
The net unfavorable foreign exchange rate impact was primarily due to approximately $18 million of unfavorable foreign currency translation of net costs in currencies other than the U.S. Dollar, partially offset by approximately $5 million of higher net gains on cash flow hedges settled during the first quarter of 2008.
Thank you for joining us today as we discuss our first quarter 2008 results. In the room with us today are Marshall Larsen, our Chairman, President and CEO and Scott Kuechle our CFO. We will start with brief prepared remarks followed by Q&A. Our presentation is available on our website www.Goodrich.com which together with our press release provides the basis for most of our remarks.
Before we start let me remind you that todayâ€™s remarks include forward-looking statements that involve risks and uncertainties and actual results could differ materially from those projected in the forward-looking statements. The risks and uncertainties are detailed from time-to-time in our report filed with the Securities & Exchange Commission including our annual report on Form 10K and quarterly reports on Form 10Q. They are also detailed in todayâ€™s earnings press release. I urge you to read them carefully. This conference call is being webcast and replays will be available on our Internet site beginning this afternoon.
Now, Iâ€™ll turn the call over to Marshall who will provide you with an overview of our first quarter 2008 results and our increased full year outlook for 2008.
Marshall O. Larsen
I know youâ€™ve all had the opportunity to review our earnings release and the related presentation. Today Iâ€™ll briefly talk about our quarter. Iâ€™ll describe the key factors that led to our strong performance during the first quarter and increased sales and EPS outlook for Goodrich for the full year. Our first quarter was another excellent quarter with strong organic sales growth of 13% including double digit sales growth in each of the major market channels. Our first quarter net income per diluted share was $1.24 compared to first quarter 2007 of $0.78 per diluted share, an increase of 59%.
During the first quarter we had an effective tax rate of 34% which was consistent with our expectation and slightly lower than last yearâ€™s 35%. The 2008 tax rate does not include any benefit from the R&D tax credit which has yet to be renewed. The main drivers of this improvement were double digit sales growth in all of our three major market channels. Large commercial airplane original equipment sales grew by about 13%, large commercial and regional business in general aviation aftermarket sales increased by about 10% and the defense and space sales increased by 13%. We believe that the global nature of our sales will provide us with continued strong growth prospects even in the face of current economic conditions in the US. Our sales to Boeing and Airbus comprise 26% of our total and these manufacturers will deliver most of their airplanes this year to non-US customers. Within 50% of our aftermarket sales go to non-US customers and many of these sales are through our extensive worldwide network of MRO service centers. Finally, a significant portion of our defense and space sales are for non-US customers such as the sales associated with our DB-110 surveillance systems to the UK, Poland and Greece. Given our strong international presence, we are definitely a well balanced global company.
Also included in our earnings for the first quarter 2008 compared to the first quarter 2007 was a benefit of about $20 million or $0.10 per diluted share for contract account cumulative catch up adjustments. We had anticipated that many of these adjustments would occur during 2008 but we had thought some would occur later in the year. Remember, and I want to emphasize this that these adjustments are a result of many operational factors including improved operating efficiencies, higher unit volume, better overhead absorption and negotiated price changes with our customers. These same operational factors will generally provide us with improved performance in successive quarters and years through higher margins on the contracts that were affected.
During the first quarter in early April we had several significant accomplishments. We completed the acquisition of TEAC Aerospace Holdings. Their proprietary airborne mission data products will provide us with an additional presence in the defense and space market. We were selected by Gulfstream to supply a wide array of products for their new Gulfstream G650 business jet including the main and nose landing gear. We increased our share repurchase plan to $600 million with the expectation that this plan will be used primarily to offset dilution from our company share-based compensation plan.
As we look at the full year of 2008 weâ€™ve increased our outlook for sales and net income per diluted share. We increased our expected sales growth for our commercial aftermarket and defense market channels which resulted in an increased sales expectation of between $7.2 and $7.3 billion compared to our prior outlook of between $7.1 and $7.2. Our strong EPS growth in the first quarter coupled with our expectations for higher sales and continuing operational improvements have resulted in a revised outlook for net income per diluted share of $4.30 to $4.45, a significant increase over our prior outlook of $4.15 to $4.30. For our major market channels we now expect the following growth rates in 2008: large commercial airplane original equipment sales are expected to grow about 20% and regional business and general aviation airplane original equipment sales are expected to grow about 15%; commercial aftermarket sales are expected to increase by about 8 to 11% compared to our prior outlook of 8 to 10%; defense and space sales are expected to increase by about 9 to 11% compared to our prior outlook of 5 to 8%. Regarding the 787 program our current outlook incorporates the production and delivery information received from Boeing regarding the latest delays in this program.
Airline load factors remain very high at about 75% and capacity in the worldwide airline system will continue to grow for the foreseeable future. Goodrich remains very well positioned to take advantage of these trends because of our strong balanced portfolio of products and our key positions on the most popular aircraft. As we noted last quarter if you look at an expected aircraft retirements over the next several years, we have far less content on the airplanes that are most likely to be retired especially the older McDonald Douglas airplanes than we do on airplanes that are likely to remain in service. We believe that the active fleet of commercial airplanes should grow at about 4% this year net of retirements but the portion of the fleet with a high Goodrich content such as the A320, the 737NG, the 787, the A380, etcetera will grow at about double that rate.
The recent bankruptcy filings by several smaller US carriers have done nothing to change our position regarding future growth of the airline industry. Our 2008 outlook continues to assume among other factors a full year effective tax rate of 33 to 35% which includes the benefit of the extension of the US research tax credit. The effective tax rate is higher than the 31% we experienced in 2007. For 2008 we continue to expect net cash provided by operating activities minus capital expenditures to exceed 75% of net income. This quarter we increased our expectations for capital expenditures for 2008 to a range of $275 to $325 million. The increase in cap ex is primarily due to a decision to purchase rather than lease certain equipment, increased spending on low cost country manufacturing and MRO facilities and acceleration of US capital spending to take advantage of bonus depreciation on 2008 capital spending as part of the US government stimulus plan. Even with these higher expenditures we are still comfortable with our prior outlook for cash flow conversion.
Our first quarter results and our increased outlook for 2008 demonstrate our confidence in our ability to grow the top line at rates faster than the overall market and drive significant increases in income per diluted share. Over the last several years we have grown our market shares in key businesses and product areas as we continue to invest in our businesses. We expect these actions to drive above market growth rates and sales for the foreseeable future. Our strong aftermarket presence should drive margins and earnings growth after the OE cycle peaks and our cash flow improvement trends should continue over the balance of the cycle.