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| GR > SEC Filings for GR > Form 10-K on 17-Feb-2009 | All Recent SEC Filings |
17-Feb-2009
Annual Report
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS DOCUMENT.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS. SEE "FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY" FOR A DISCUSSION OF CERTAIN OF THE UNCERTAINTIES, RISKS AND ASSUMPTIONS ASSOCIATED WITH THESE STATEMENTS.
OUR FORMER GOODRICH AVIATION TECHNICAL SERVICES, INC. (ATS) BUSINESS HAS BEEN ACCOUNTED FOR AS A DISCONTINUED OPERATION. UNLESS OTHERWISE NOTED HEREIN, DISCLOSURES PERTAIN ONLY TO OUR CONTINUING OPERATIONS.
OVERVIEW
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 manufacturers' 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, the Embraer 190, and engine types such as the Pratt and Whitney Geared Turbofan engine.
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. Delivery of new commercial, regional, business, and general aviation aircraft in 2009 and beyond may be negatively impacted by the current economic conditions which may influence customers' willingness and/or ability to purchase new aircraft.
While the commercial airline industry was negatively impacted during 2008 by the increase in fuel prices and economic conditions worldwide, the commercial airplane manufacturers still have a significant backlog of orders. Airlines worldwide are expected to continue to take delivery of a significant number of new airplanes in 2009 and beyond to replace older aircraft and for additional capacity.
In December 2008, we completed the formation of a joint venture with Rolls-Royce Group plc (R-R), which will develop and supply engine controls for R-R aero engines. The joint venture combined our existing U.K.-based engine controls OE design and manufacturing business with
R-R's expertise in the integration of controls into the engine. We will retain the aftermarket products and services business associated with the joint venture's products. See Note 9, "Investment in Joint Venture" to our Consolidated Financial Statements.
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, type and activity levels of the worldwide airplane fleet. Other important factors affecting growth in this market channel are the age and types of the airplanes in the fleet, fuel prices 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 decrease by about 4% annually in 2009. However, ASM growth could deteriorate further if airlines choose to fly their in-service airplanes less frequently due to high fuel prices, decreased demand and other factors.
While we have significant product content on most of the airplane models that are currently in service, we enjoy the benefit of having excellent positions on the newer, more fuel-efficient airplanes currently in service. Even though many airlines have announced that they will remove some of their older airplanes from their fleets, we do not expect these removals to have a significant impact on our results in 2009. These older airplanes, primarily MD-80s and 737 Classics, represent approximately 31% of the world's fleet of large commercial aircraft, but only 8% of our large commercial aftermarket sales, or about 2% of our total sales.
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. We anticipate fewer new fighter and transport aircraft platform starts over the next several years. We also anticipate that the introduction of the F-35 Lightning II and new helicopter platforms, along with upgrades on existing defense and space platforms, will provide long-term growth opportunities 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 overall sales over the long-term due to:
• 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 Pratt & Whitney Geared Turbofan engine, the Dassault Falcon 7X and the Lockheed Martin F-35 Lightning II and F-22 Raptor;
• Growing commercial airplane fleet and strong positions on newer, more fuel-efficient airplanes, which should fuel sustained aftermarket strength;
• Balance in the large commercial airplane market, with strong sales to both Airbus and Boeing;
• Aging of the existing large commercial and regional airplane fleets, which should result in increased aftermarket support;
• Increased number of long-term agreements for product sales on new and existing commercial airplanes;
• Increased opportunities for aftermarket growth due to airline outsourcing;
• Growth in global maintenance, repair and overhaul (MRO) opportunities for our systems and components, particularly in Europe, Asia and the Middle East, where we have expanded our capacity; and
• 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, 2008 Sales Content by Market Channel During 2008, approximately 95% of our sales were from our three key market channels described above. Following is a summary of the percentage of sales by market channel: Airbus Commercial OE 16 % Boeing Commercial OE 9 % Regional, Business and General Aviation Airplane OE 9 % Total Commercial Regional, Business and General Aviation Airplane OE 34 % Large Commercial Airplane Aftermarket 29 % Regional, Business and General Aviation Airplane Aftermarket 7 % Total Large Commercial Regional, Business and General Aviation Airplane Aftermarket 36 % Total Defense and Space 25 % Other 5 % Total 100 % |
Results of Operations - Year Ended December 31, 2008 as Compared to the Year
Ended December 31, 2007
$ %
2008 2007 Change Change
(Dollars in millions, except diluted EPS)
Sales $ 7,061.7 $ 6,392.2 $ 669.5 10.5
Segment operating income(1) $ 1,216.3 $ 1,026.6 $ 189.7 18.5
Corporate general and administrative costs (115.4 ) (145.3 ) 29.9 20.6
Total operating income 1,100.9 881.3 219.6 24.9
Net interest expense (106.7 ) (115.7 ) 9.0 7.8
Other income (expense) - net (27.6 ) (48.7 ) 21.1 43.3
Income tax expense (293.0 ) (220.9 ) (72.1 ) 32.6
Income from continuing operations 673.6 496.0 177.6 35.8
Income (loss) from discontinued operations 7.6 (13.4 ) 21.0 156.7
Net income $ 681.2 $ 482.6 $ 198.6 41.2
Effective tax rate 30.3 % 30.8 %
Diluted EPS:
Continuing operations $ 5.33 $ 3.88 $ 1.45 37.4
Net income $ 5.39 $ 3.78 $ 1.61 42.6
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(1) We measure each reporting segment's profit based upon operating income. Accordingly, we do not allocate net interest expense, other income (expense) - net and income taxes to our reporting segments. The company-wide Enterprise Resource Planning (ERP) implementation costs that were not directly associated with a specific business were not allocated to the segments. For a reconciliation of total segment operating income to total operating income, see Note 3, "Business Segment Information" to our Consolidated Financial Statements.
Sales
Our 2008 sales and income performance was driven primarily by growth in each of our major market channels as follows:
• Large commercial airplane original equipment sales increased by approximately 7%;
• Regional, business and general aviation airplane original equipment sales increased by approximately 23%;
• Large commercial, regional, business and general aviation airplane aftermarket sales increased by approximately 9%; and
• Defense and space sales of both original equipment and aftermarket products and services increased by approximately 11%.
Segment operating income and corporate general and administrative costs
The segment operating income growth was generated by increased sales and improved operational performance in most business units as discussed in the "Business Segment Performance" section.
Corporate general and administrative costs decreased for 2008 as compared to 2007 primarily due to lower share-based compensation expense as discussed below and lower non-qualified pension expense due to a favorable discount rate in 2008 compared to 2007.
The change in segment operating income and corporate general and administrative costs during 2008 as compared to 2007 was also impacted by the following items:
Increase (Decrease)
Before After Diluted
Tax Tax EPS
(Dollars in millions, except diluted EPS)
Changes in estimates on long-term contracts $ 35.8 $ 22.1 $ 0.18
Lower share-based compensation $ 33.6 $ 20.4 $ 0.15
Foreign exchange rate impact, including net monetary asset
remeasurement $ (21.1 ) $ (12.9 ) $ (0.10 )
Settlement of claims $ (40.1 ) $ (24.5 ) $ (0.19 )
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Changes in estimates on long-term contracts
During 2008 and 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 $36 million compared to 2007. These changes were primarily due to favorable cost and operational performance.
Share-based compensation
The decrease in share-based compensation expense was primarily due to the following:
• The impact of the unfavorable change in our share price, which declined by 48%, resulting in lower expense of approximately $43 million; and
• Approximately $8 million of costs in 2007 related to the 2007 special stock options (see Note 6, "Share-Based Compensation", to our Consolidated Financial Statements); partially offset by
• Approximately $17 million of additional costs for retirement eligible individuals in 2008 resulting from a change in vesting requirements.
Foreign exchange rate impact
The net unfavorable foreign exchange impact was due to the following:
• Approximately $37 million of lower net gains on cash flow hedges settled during 2008, partially offset by approximately $7 million of favorable foreign currency translation of net costs in currencies other than the U.S. Dollar; partially offset by
• Approximately $53 million of increased net transaction gains relating to re-measuring monetary assets/liabilities into the local functional currency, partially offset by approximately $43 million of higher net losses on forward contracts we entered into to offset the impact of net monetary asset gains/losses.
Settlement of claims
During 2007, we settled certain claims with a customer and a claim with Northrop Grumman Corporation (Northrop), that did not recur in 2008, which resulted in operating income of approximately $40 million.
Net interest expense
Net interest expense decreased for 2008 as compared to 2007 primarily due to lower debt levels in 2008 as a result of the repayment of $162 million of notes which matured in the second quarter of 2008.
Other income (expense) - net
Other income (expense) - net decreased for 2008 as compared to 2007, primarily as a result of:
• A net gain of approximately $13 million recognized in connection with the formation of a joint venture (see Note 9, "Investment in Joint Venture" of our Consolidated Financial Statements);
• Increased income of approximately $7 million from equity in affiliated companies; and
• Lower minority interest costs of approximately $3 million.
Income (loss) from discontinued operations
The income from discontinued operations for 2008 included a gain from the sale of a previously discontinued business of approximately $6 million. The loss from discontinued operations in 2007 included the loss on the sale of ATS of approximately $15 million.
Effective tax rate
For 2008, we reported an effective tax rate of 30.3%, compared to 30.8% for 2007. See Note 15, "Income Taxes" to our Consolidated Financial Statements.
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
$ %
2007 2006 Change Change
(Dollars in millions, except diluted EPS)
Sales $ 6,392.2 $ 5,719.1 $ 673.1 11.8
Segment operating income(1) $ 1,026.6 $ 772.2 $ 254.4 32.9
Pension curtailment - (10.9 ) 10.9 100.0
Corporate general and administrative costs (145.3 ) (121.5 ) (23.8 ) 19.6
Total operating income 881.3 639.8 241.5 37.7
Net interest expense (115.7 ) (121.0 ) 5.3 4.4
Other income (expense) - net (48.7 ) (62.0 ) 13.3 21.5
Income tax (expense) benefit (220.9 ) 21.2 (242.1 ) 1142.0
Income from continuing operations 496.0 478.0 18.0 3.8
Income (loss) from discontinued operations (13.4 ) 3.5 (16.9 ) 482.9
Cumulative Effect of Change in Accounting - 0.6 (0.6 ) 100.0
Net income $ 482.6 $ 482.1 $ 0.5 0.1
Effective tax rate 30.8 % (4.6 )%
Diluted EPS:
Continuing operations $ 3.88 $ 3.78 $ 0.10 2.6
Net income $ 3.78 $ 3.81 $ (0.03 ) 0.8
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(1) We measure each reporting segment's profit based upon operating income. Accordingly, we do not allocate net interest expense, other income (expense) - net and income taxes to our reporting segments. The company-wide Enterprise Resource Planning (ERP) implementation
costs that were not directly associated with a specific business were not allocated to the segments. For a reconciliation of total segment operating income to total operating income, see Note 3, "Business Segment Information" to our Consolidated Financial Statements.
Sales
Our 2007 sales and income performance was driven primarily by growth in each of our major market channels as follows:
• Large commercial airplane OE sales increased by approximately 8%;
• Regional, business and general aviation airplane OE sales increased by approximately 20%;
• Large commercial, regional, business and general aviation airplane aftermarket sales increased by approximately 16%; and
• Defense and space sales of both OE and aftermarket products and services increased by approximately 7%.
Pension curtailment
During 2006, we recorded a pension curtailment charge of $10.9 million related to the implementation of changes to our U.S. pension and retirement savings plans. See Note 14, "Pensions and Postretirement Benefits", to our Consolidated Financial Statements.
Segment operating income and corporate general and administrative costs
Changes in sales and segment operating income are discussed within the "Business Segment Performance" section below.
Corporate general and administrative costs increased for 2007 as compared to 2006 primarily due to higher incentive and share-based compensation and non-qualified pension benefit expense.
The change in segment operating income and corporate general and administrative costs during 2007 as compared to 2006 was also impacted by the following items:
Increase (Decrease)
Before After Diluted
Tax Tax EPS
(Dollars in millions, except diluted EPS)
Changes in estimates on long-term contracts $ 67.6 $ 42.3 $ 0.33
Settlement of claims $ 40.1 $ 25.1 $ 0.20
Higher share-based compensation $ (13.8 ) $ (8.2 ) $ (0.06 )
Foreign exchange rate impact, including net monetary asset
remeasurement $ (24.2 ) $ (15.1 ) $ (0.12 )
2006 tax settlements $ - $ (147.0 ) $ (1.15 )
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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 $68 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 of approximately $40 million which did not occur in 2006.
Share-based compensation
The increase in share-based compensation was primarily due to the following:
• Approximately $25 million of increased costs primarily resulting from an increase in our share price and favorable financial performance against plan targets; and
• Approximately $8 million of costs related to a 2007 special stock option award that did not occur in 2006; offset by
• Approximately $22 million of costs recognized in 2006 that resulted from accelerated expense on awards granted to employees who were retirement eligible.
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.
2006 Tax Settlements
The net income results for 2006 included approximately $147 million primarily related to the Rohr and Coltec tax settlements that did not recur in 2007.
Net interest expense
Net interest expense for 2007 as compared to 2006 decreased primarily due to higher interest income as a result of higher cash balances in 2007.
Other income (expense) - net
Other income (expense) - net decreased in 2007 as compared to 2006, primarily as a result of:
• Lower expenses related to previously owned businesses of approximately $11 million, primarily for litigation costs, net of settlements, and remediation of environmental issues; and
• Expenses of approximately $5 million related to transaction costs for a long-term debt exchange program that occurred in 2006; partially offset by
• Higher minority interest costs and reduced income from equity in affiliated companies of approximately $9 million.
Effective tax rate
For 2007, we reported an effective tax rate of 30.8% compared to an effective tax rate benefit of 4.6% in 2006, which included a benefit of approximately 32 percentage points related to the Rohr and Coltec tax settlements and for several additional settlements and refunds. See "2006 Tax Settlements." The effective tax rate excluding the benefit related to these items would have been approximately 27%.
Income (loss) from discontinued operations
The loss from discontinued operations in 2007 was primarily a result of the loss on the sale of ATS. Income from discontinued operations during 2006 primarily represented income from ATS operations and net insurance settlements with several insurers relating to the recovery of environmental remediation costs at a former plant previously recorded as a discontinued operation.
2009 Outlook
We expect the following approximate results for the year ending December 31,
2009:
2009 Outlook 2008 Actual
Sales $7.1 to $7.2 billion $7.1 billion
Diluted EPS - Net
Income $4.50 to $4.90 per share $5.39 per share
Capital Expenditures $230 to $270 million $285 million
Operating Cash Flow net of
Capital Expenditures Exceed 75% of net income 74% of net income
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Our 2009 outlook assumes, among other factors:
• A full-year effective tax rate of 31% to 32%;
• Higher pre-tax pension expense of $110 million compared to 2008, or $0.55 per diluted share. The higher pension expense incorporates our return on U.S. plan assets of approximately negative 19% in 2008 and the lowering of the long-term U.S. rate of return on assets to 8.75% for 2009 partially offsetting a 2009 U.S. discount rate of approximately 6.5% compared to a rate of 6.3% for 2008; and
• Favorable foreign exchange translation costs of approximately $5 million.
Sales
Our current market assumptions, for each of our major market channels, for the full year 2009 outlook, compared with the full year 2008, include the following:
• Large commercial airplane OE sales are expected to increase by approximately 3% to 5%;
• Regional, business and general aviation airplane OE sales are expected to decrease by approximately 10%;
• Large commercial, regional, business and general aviation airplane . . .
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