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Goodrich Corporation. (NYSE:GR)

Q1 2009 Earnings Call

April 23, 2009 10:00 am ET

Executives

Paul Gifford - VP, Investor Relations

Marshall Larsen - Chairman, President and CEO

Scott Kuechle - CFO

Analysts

Samuel Pearlstein - Wachovia

Itay Michaeli - Citi

Robert Spingarn - Credit Suisse

Troy Lahr - Stifel Nicolaus

Ron Epstein - Merrill Lynch

Joe Nadol - JPMorgan

Carter Copeland - Barclays Capital

David Strauss - UBS

Peter Arment - Broadpoint AmTech

Noah Poponak - Goldman Sachs

Cai von Rumohr - Cowen & Company

Howard Rubel - Jefferies & Company

J.B. Groh - D. A. Davidson

Ted Wheeler - Buckingham Research

Operator

Good day, everyone and welcome to the Goodrich First Quarter 2009 Earnings Results Conference Call. Today's call is being recorded. The press has been invited to participate in today's conference in a listen-only mode.

At this time for opening remarks and introductions, I’d like to turn the call over to the Vice President of Investor Relations, Mr. Paul Gifford. Mr. Gifford, please go ahead, sir.

Paul Gifford

Thank you, Robert and thank you for joining us today as we discuss our first quarter 2009 result. With us today are Marshall Larsen, our Chairman, President and CEO and Scott Kuechle, our CFO.

We will start with some brief prepared remarks followed by Q&A. The presentation is available at 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 today's remarks include forward-looking statements that involve risks and uncertainties and the 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 reports filed with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

They are also detailed in today's earnings press release. I urge you to read them carefully. This conference call is being webcast and replays will be available at our internet site beginning this afternoon.

Now, I'll turn the call over to Marshall who will provide you with an overview of the first quarter 2009 results and our updated full year outlook for 2009.

Marshall Larsen

Thanks, Paul. I assume you've all had the opportunity to review today's earnings release and the related presentation. Today, I'll describe the key factors that led to our strong performance during the first quarter 2009 and our updated outlook for full year 2009.

Our first quarter sales compared to the first quarter of 2008 decreased slightly by about 3%, primarily due to the residual impact of the 2008 Boeing machinists strike and unfavorable foreign currency exchange rate impact on sales and lower engine control sales resulted from the formation of the Engine Control joint venture with Rolls-Royce.

Our large commercial airplane original equipment market channel experienced a sales decrease of 7%. Sales to Airbus grew by 2%, but sales to Boeing dropped by about 20% largely due to their 2008 machinists strike.

Additionally, our regional business in general aviation original equipment sales decreased by about 2% during the quarter.

The results also include an 8% decrease in sales in our commercial after market channel even though sales of spare parts as MRO services for the A320 aircraft grew significantly during the first quarter of 2009 compared to the first quarter of 2008.

Sequentially, aftermarket sales declined 2% from the fourth quarter 2008. Our defense and space market channel continues to show a strong growth with an increase in first quarter 2009 sales of 11% compared to the first quarter 2008.

We were able to overcome much of the income impact from lower commercial OE in aftermarket sales through increased productivity and successful cost containment initiatives.

In the first quarter 2009, we achieved segment operating income margins of 17.2% compared to 17.3% in the first quarter of 2008. These margins were achieved despite increased pension expense of about 1.7% of sales during the quarter and significantly lower, but still favorable revisions of estimates for long-term contracts.

Long-term contract revisions were $5 million in the first quarter of 2009 compared to $40 million in the first quarter of 2008.

Our first quarter 2009 net income was $170 million or $1.35 per diluted share compared to net income of $158 million or $1.23 per diluted share during the first quarter of 2008. These results for the first quarter of 2009 included a lower effective tax rate of 26% that contributed about $0.10 per share compared to our prior 2009 full year tax rate outlook of 31% to 32%.

For the first quarter of 2009, we generated net cash provided by operating activities, minus capital expenditures of $33 million compared to $97 million during the first quarter of 2008. The decrease was primarily related to lower increases in accounts payable and a first quarter 2008 cash tax refund that was not repeated in the first quarter of 2009 partially offset by lower capital expenditures

During the first quarter, we had several significant accomplishments in February, we successfully sold $300 million in a 10-year senior unsecured notes at a coupon of 6.125%.

The new debt is the lowest coupon debt in Goodrich's long-term debt portfolio. A portion of the proceeds will be used to repay the $120 million of debt that matures in May of 2009. And the remainder adds to the company's already excellent liquidity position that provides additional financial flexibility.

Last month, we announced that we had been selected by Bombardier to design and produce the high lift actuation system for the new Bombardier CSeries family of commercial aircraft. The selection is expected to generate more than $750 million in original equipment in aftermarket revenue over the next 20 years.

As I'm sure you're aware, market conditions for 2009 have clearly deteriorated since we provided you with our last outlook in early February. The outlook for global GDP has softened. The IMF forecast for 2009 worldwide GDP is now at minus 1% to minus 0.5%. There are other organizations with even lower forecasts.

Our expectations for large commercial production rates have not changed significantly since our prior outlook. We continue to expect Boeing and Airbus to deliver a total of 960 to 970 airplanes this year. The recent announcement of a rate reduction on the 777 aircraft beginning in mid-2010 should have little, if any impact on Goodrich in 2009.

We now expect available seat miles to contract by about 5% to 8% in 2009 compared to our prior expectations of minus 4%. Remember, these ASMs do not include traffic and cycles related to the freight market or the business jets.

The number of parked aircraft continue to grow, and now includes roughly 200 A320s and 737MGs or about 3% of the entire fleet of these airplanes, while timing is uncertain, these will be the first aircraft to return to service.

Freight traffic was down significantly in the quarter. Freighters represent about 10% of the world's airplanes and 5% to 10% of our aftermarket sales. Although well there are some indications that the decline in freight traffic has bottomed, this lower traffic and expected declines in capacity had an impact on our first quarter aftermarket sales and this impact is expected to carry through to our full year results.

The business jet market continues to be weaker than expected. Well not a large part of our sales with business jet original equipment and aftermarket sales totaling at about 4% to 5% of total sales, the environment is significantly worse than we had previously expected.

The market for our defense and space products remained strong. Our first quarter defense and space sales grew faster than previously expected, leading us to increase our expectations for 2009 sales in this market channel to a growth rate of about 8%.

We believe that the President's defense budget will continue to emphasize investment in areas which benefit Goodrich, such as helicopters and ISR capabilities. Further, we expect the upside from accelerated deliveries of the F-35 JSF aircraft to offset potential downside from termination of F-22 and C-17 sales to the US military.

Today's release also contains an update to our outlook for 2009. We believe that this outlook realistically portrays our expectations for performance in the current environment. We now expect a small sales decline in 2009 of about 2% to 3%, $6.9 billion.

2009 sales expectations compared to 2008 included unfavorable sales impacts of approximately $219 million or 3% of sales related to the stronger US dollar and lower sales of approximately $150 million or another 2% of sales related to the formation of the Rolls-Royce engine controls joint venture.

Our sales growth expectations for each of the major market channels are as follows; large commercial airplane original equipment sales are expected to be approximately flat. Our expectation is based on the latest 2009 delivery estimates by Boeing and Airbus of about 480 deliveries each and incorporates the impact of the 2010 production rate adjustments that Boeing announced on April 9th.

Regional business and general aviation airplane original equipment sales are expected to decrease by slightly more than 20%. Regional airplane original equipment sales are expected to decrease by 15% to 20% and business and general aviation original equipment sales are expected to decrease by significantly more than 20%. Large commercial, regional, business and general aviation airplane aftermarket sales are expected to decrease by 5% to 8%.

These expectations include double-digit decreases in sales support of freighters and regional business and general aviation airplane. This outlook assumes that a worldwide available seat mile decrease by approximately 5% to 8% in 2009 compared to 2008. Defense and space sales of both original equipment and aftermarket products and services are expected to increase by about 8% in 2009 compared to 2008.

Our outlook for net income per diluted share in 2009 has been revised to $4.50 to $4.75 from our previous outlook of $4.50 to $4.90. We expect that the income decrease related to lower to commercial aftermarket and commercial original equipment sales expectations will largely be offset by income from higher defense and space sales, continued success of our cost containment initiatives and the combined benefit of a slightly lower tax rate compared to the previous estimate and expected resolution of certain non-operating items in 2009.

Our 2009 outlook range includes among other factors, benefit of $0.15 to $0.20 per diluted share, related to lower full year 2009 effective tax rate of 30% to 31%, compared to the previous estimate of 31 to 32, and an expected benefit related to resolution of issues relating to certain non-operating items, and higher pre-tax pension expense of $103 million or $0.52 per diluted share.

For 2009, we continue to expect net cash provided by operating activities, minus capital expenditures, to exceed 75% of net income. We now expect capital expenditures for 2009 to be in a range of $220 to $240 million, compared to our prior outlook of $230 to $270 million. During 2009, we still expect to contribute between $150 and $200 million to our worldwide pension plans, including an April contribution of $137 million to our US plans.

Clearly, we are operating in extremely uncertain global economic environment. We have performed very well so far this year. Our focus on flight critical systems with nondiscretionary aftermarket, our concentration of sales, our newer large commercial aircraft and our defense and space business positions as very well weathered a difficult market environment.

We expect that the second quarter 2009 will be more difficult than the first from an operating perspective and then we will start to see a slight recovery in aftermarket sales during the third and fourth quarters of 2009. We continue to pursue our cost containment initiatives and we are prepared to act swiftly should economic conditions worsened further.

We will maintain our sharp focus on continuous improvement which has allowed us to reduce waste increased productivity and protect our monitors. With our strong balance sheet, excellent cash flow and motivated workforce we believe, we can continue our track record of strong financial performance during 2009 and beyond.

Now we'll open up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). For our first question we go to Sam Pearlstein with Wachovia.

Samuel Pearlstein - Wachovia

Marshall, you mentioned your assumption that ASMs are down 5% to 8% and it looks like now your aftermarket sales are also assumed to be down at same 5% to 8%, can you just talk about that just because my impression was, you talked about outperforming the capacity reductions and it seems like now you're more in line with those reductions?

Marshall Larsen

Well, we actually did outperform. If you look at the large commercial aftermarket, we were only down 5% first quarter. The difference is the freighters and the regional jets, but I think we will continue.

Our A320 sales were actually up mid-single digits for the quarter and 737 were nearly up that high, also 737MG. I think the difference has been the tremendous downturn in the freighter market, business jet aftermarket, down 20 plus percent and also the regionals were hit even harder than we expected.

So a combination of those three put another three points on that. We would expect as we said in February that the first quarter would be the worst and we'd climb out of it during the course of the year.

Back then we said we'd be down like 3% to 5%. What we're seeing now still indicates we think the first quarter is the worst even though, I think the second quarter will be operationally difficult, I think our aftermarket will be down a little or flat, I think we've just about seen the bottom of it.

Samuel Pearlstein - Wachovia

But if you look at just parsing the large commercial aftermarket, what's your assumption for this year in terms of how that should perform?

Marshall Larsen

Parking? Parsing. The large commercial aftermarket, I think will continue to get better as the year goes by. Right now, we're seeing its about 180 A320s and 737MGs that are temporarily parked.

Those fleets, that's all they have in them. The only way they can reduce capacity is to either take segments out of their schedule, which means parking some of those aircraft temporarily, plus a lot of them are leased.

They're owned by leased companies. They will end up getting placed here eventually before anything else. So, I think what we'll see is on our large commercial aircraft, the Boeing and Airbus aircraft have continued upswing during the course of the year.

Samuel Pearlstein - Wachovia

Okay. Thanks.

Operator

And for our next question we go to Itay Michaeli with Citi.

Itay Michaeli - Citi

Great, thanks. Good morning.

Marshall Larsen

Good morning.

Itay Michaeli - Citi

I wonder if you can quantify some of the cost containment. It seems like you guys are able to offset some of the top line pressure there.

How you should be thinking about that for this year and possibly next year as well, how much more opportunity do you see through there?

Marshall Larsen

Sure, I'm not sure we'll quantify specific actions, because they've been pretty broadly taken on, not only in our SBUs or business units, but also on the corporate side.

The broad themes though are in headcount containments, some selective headcount reductions around the company, particularly in those businesses that have more exposure to either business aircraft, regional aircraft or some of the older large commercial aircraft that are being retired at an accelerated pace.

So some headcount reductions, but again focused in those areas, a lot of focus generally on discretionary expenditures from travel to the way that we do our business on a day-to-day basis.

So anything that, would fall into the discretionary category unrelated to long-term growth plans and projections. That's where we're focused and we got really good traction, really good leverage in the first quarter of the year.

R&D expenses are down a little bit from last year as well. That's consistent with our plan and largely reflects the formation of the Rolls-Royce joint venture. So that's another area where year-over-year we've got some improvement.

But it's largely been in the area of just clamping down hard on discretionary expenditures.

Marshall Larsen

We started that really in the fourth quarter. We knew this was coming.

Itay Michaeli - Citi

Great and then just a quick follow-up on the pension. You raised some very attractive money in the first quarter and your balance sheet ended the quarter in stronger shape. Any thought to maybe increase the pension funding on a voluntary basis this year or into next year?

Marshall Larsen

Well, we've kind of taken the approach that, we have an under-funded position. We'll require some level of ongoing cash contribution to get back to a fully funded situation and we assume that at some point the markets do recover.

So, we chose to put our entire US pension contribution already in the early part of 2009, in April. So we accelerated within the year, but we don't currently have any plans to accelerate 2010 or 2011 contributions into the plan.

Itay Michaeli - Citi

Okay. Great. Thanks.

Operator

And we go next to Robert Spingarn with Credit Suisse.

Robert Spingarn - Credit Suisse

Good morning, guys.

Marshall Larsen

Morning, Rob.

Robert Spingarn - Credit Suisse

Mark, going back to the aftermarket for a minute and you talked about the bottom in March, but it sounds like June's kind of flat with the March in your view and then September, December quarters improve.

But just a couple of the US airlines in any event have talked about bookings being a little bit stronger. Do you see some of these aircraft, particularly the newer ones you mentioned, the A320s, the next-gen 737s, if they come back in, is that seasonal or do you think we actually are starting to see a real improvement?

Marshall Larsen

Well, I wish I could answer that very accurately. But if I look at the US airlines as opposed to the airlines around the world, they took so much cost out, capacity as a result of getting hit hard in the oil prices early last year; they were positioned well for this last fall when the economy just took a real tank. What I'm seeing now is the load factors are hanging in there. They've taken out a lot of capacity. But I don't think they are going to take too much more capacity out at this point in time.

And I think the A320s and the 737MGs I mean you know what leasing companies are like. They're going to fight like hell to place those aircraft. And there's still older aircraft that can be parked that don't affect us as much. So I'm fairly optimistic that, we're kind of bouncing along the bottom here right now and we're going to start seeing some changes. You've already seen the fares come down significantly and if you've flown lately, I've flown four commercial segments in the last month and they were asking people to take free tickets not to get on the airplanes.

So that's not much of a survey, but I'm hearing that a lot from our travels. So I think, we're going to see a seasonal uptick because of summer and if we get any bounce kind of in the economy, if we stop losing jobs, we've been down in the 600,000 job loss level where at that starts to turnaround at all I think we're going to see an upturn.

Robert Spingarn - Credit Suisse

And just as an extension of this, reading through your material and listening to what you said earlier, it looks like you have made an adjustment to some extent based on the new IATA forecast which came out since your last guidance update.

Marshall Larsen

That's right.

Robert Spingarn - Credit Suisse

And is it possible that IATA is a lagging indicator? In other words, we saw freight start to collapse in the back end of last year to these minus 20% plus levels. And is that perhaps the issue that we already saw a lot of the bad airline data and the capacity cuts, before IATA got to it and that's why we might have an upside kind of back end of the year?

Marshall Larsen

Well as I look at it, I think the freight market is going to lead this thing out. FedEx already said that they think they've hit bottom. IATA is international traffic, primarily. I already talked about the US, but China stimulus is hitting, we're starting to see more consumer spending in China, they are still mid-single digit growth in there. It's been the international traffic that's been hit the hardest outside of the domestic market here in the US. I think that the US airline market and the freighters in particular will lead this thing out.

Robert Spingarn - Credit Suisse

Okay. And then finally for Scott, you guys just seem to you have a track record of outperforming your own margin guidance and the strong margin quarter here in Q1. When I look at your EPS guidance and the down tick from aftermarket, the uptick from the tax rate and a couple of the other items that you mentioned, how are you thinking about margins? I think your previous guidance was in the low sixteen's for the year.

Scott Kuechle

Yeah, that's right. And we did have outstanding margin performance in the first quarter, especially again when you compare it to prior years the pension delta alone is about 1.7%, which is to overcome that despite pretty soft aftermarket conditions with good cost control etcetera it was great margin performance in the quarter.

We think we give a little bit of that back in the back part of the year, primarily because we've got, OE sales growth coming in the latter part. Our Q1 was a little bit understated because our landing gear was still catching up deliveries or growing ramp to get back into alignment with Boeing's production. So you have that.

We also tend to get more price in the first part of the year and then costs tend to increase throughout the year, so that will provide a little bit of pressure. There could be some upside on the margin side, but the flip to that is, revenue is not yet settled. So to the extent we've got upside on costs, there could be downside on revenue. So we're trying to stay fairly balanced in those two areas.

And the short-term issue is that, with the Boeing machinist strike, we'd shipped a lot of free of charge wheel and brake hardware to Boeing in the fourth quarter that didn't repeat in the first quarter, we expense that every month. So, we'll get more free of charge shipments here starting in the second quarter, but there will be a little pressure on margins that way.

Nonetheless, we're going full steam ahead on cost cutting. We've pretty much eliminated all nonessential conferences, things like that.

As Scott said, the hiring freeze has been on since the end of last year, actually before the end of last year and the co-operation we're getting out of our business units and people at [corporate] is just fantastic on that front.

Robert Spingarn - Credit Suisse

Excellent. Thank you for the color.

Operator

We go next to Troy Lahr with Stifel Nicolaus.

Troy Lahr - Stifel Nicolaus

Thanks. I know you guys are tracking traffic pretty closely, but can you talk about the inventory at airlines? Has the excess been burned off or do you think that that's going to continue?

Marshall Larsen

Well, it really depends on the airline, but what we're seeing in some instances is that airlines are asking for a faster turnaround time and when that happens, the inventory is getting short.

And they're trying to do that rather than call in an AOG because that's more expensive. Well, we have Flight Hour agreements, it doesn't make any difference because we have to supply the overhaul or the parts when they're needed.

But I would say that for the kinds of flight critical items, we're not seeing our piece parts in our Nacelle business have hung in there, but the majors, things like old nozzles, old thrust reversers, fan cowls, those kinds of things, they're more expensive.

The airlines are being much more cautious about keeping more of those on inventory, getting some out of the smaller stuff, but, when it comes to the A320s, that's been an increase.

But any place in airline can do something to have to buy right now, they're doing it. The great examples are anything in the interior, the lights, anything that they don't have to have a significant inventory on and they're really watching that.

Troy Lahr - Stifel Nicolaus

Okay. And then on the F-35, you talked about how that would offset kind of a wind down on F-22, C-17?

Does that fully offset the revenue or do you still see some revenue pickup on F-35 with the others coming down and then what could the margin impact be?

Marshall Larsen

Over the next several years, we see the F-35 certainly offsetting any downside on F-22. And on C-17, while the US has stopped orders there, we would expect to see some foreign military orders and we've actually had some already on that aircraft.

So, at least for the next couple of years, we don't really see a downside in that airplane platform, and the F-35, we've got content of $3 million to $3.5 million per ship set, that is kind of standard military margin.

So we see that as directionally upside for us and the hope is that they can get to the production levels that they've anticipated, in 2010, 2011 so we get some near-term benefits.

Troy Lahr - Stifel Nicolaus

Great. Okay. Thanks, guys.

Operator

For our next question, we go to Ron Epstein with Merrill Lynch.

Ron Epstein - Merrill Lynch

Good morning, guys. Scott, when we think about going into the commercial downturn, typically in the past, you guys have had better free cash flow conversion rates.

So, when we think about that or I guess you are working out some of the working capital. How should we think about that? When will we expect the free cash conversion to improve due to the downturn?

Scott Kuechle

We still got two things going on right now. One is the ongoing efforts to complete some big new airplane platforms with the 787, the A350 is kind of in the primary area of non-recurring engineering development work.

We've still got CSeries and Mitsubishi Regional Jet activity going on. So the overall activity on new airplane platforms is still high relative to average cycles or average periods of time.

The other thing that we'll see is as aftermarket and OE starts to come down, we do chase the supply side. So, it's tough to pull that inventory down until you get some stabilization or some better visibility in terms of where the aftermarket and OE are going.

So, that's a challenge for us and I think we've been able to work it well so far. I mean certainly our first quarter cash flow is typically light. It was actually a little better than our internal forecast. So, we're tracking along pretty well with what we anticipated so far.

Ron Epstein - Merrill Lynch

Okay. And then how should we think about the investment in the Mitsubishi Regional Jet and the CSeries. How substantial are they as programs for Goodrich?

Scott Kuechle

You'll end up seeing them eventually in our queues, but they're not going to be anywhere close to what A350 and 787 are.

Ron Epstein - Merrill Lynch

Okay and then Marshall, you mentioned that regional was down more than maybe what you guys had expected. Is that largely due to the decline of the production rates for the 190 EMBRAER?

Marshall Larsen

Well, the fact that our wheel and brakes are so doggone good, they're lasting longer.

So, we've got lot more time between overhauls too.

Ron Epstein - Merrill Lynch

Okay and that's on the 50 seaters as well?

Marshall Larsen

Mostly on the 190.

Scott Kuechle

The 50 seat aftermarket.

Marshall Larsen

The 30 to 50 seat aftermarket is just decimated, I mean across the board.

Ron Epstein - Merrill Lynch

Okay. Okay. Great. Thank you.

Operator

We go next to Joe Nadol with JPMorgan.

Joe Nadol - JPMorgan

Thanks, good morning. Just to start off to Scott, could you quantify what the non-operating items are in guidance for 2009? And then maybe help out with a bridge from your prior guidance to the current, because the number we've had has been sort of $0.06 per aftermarket percentage point and you didn't lower the bottom end of your range. So maybe help out with some of the items that help sustain guidance?

Scott Kuechle

Just to start with the non-operating items, we've said $0.15 to $0.20 total that includes both tax and what I would characterize as some partial resolution of some litigation and the litigation by the way, is unrelated to customers or trade suppliers. And that benefit will get reported in probably some combination of other income and discontinued operations.

Joe Nadol - JPMorgan

Okay.

Scott Kuechle

So that's an upside to our prior guidance. If you GAAP to kind of a mid-point of where we were before which would be about 470, you've got the benefit of the tax and non-operating items, which again is $0.15 to $0.20 positive, you've got lower aftermarket, which we've guided to $150 to $175 million of sales lower than our prior estimate.

That would suggest somewhere around $0.50 a share downside based on the kind of margin indications we've given you previously. But we're making up the rest of that with cost containment and that was demonstrated, I think, well in the first quarter. So the deltas in the first quarter between aftermarket and cost containment, kind of sustained through the rest of the year. So that gets you back to the middle of the 450 to 475 range.

Joe Nadol - JPMorgan

That's very impressive. Just back to the aftermarket a little bit and just returning to a question that was asked earlier, even the negative 5% on the large commercial in the quarter, it was sort of in line with ASMs and you have been, ahead of ASMs by several percentage points, throughout the last couple of years.

It sounded like now a body did well, so really by process of elimination, it sounds like the wide-body was poor. To what degree are you seeing I guess, in wide-body? Which platforms are doing poorly? And how much of this was that do you think was inventory destocking?

Marshall Larsen

I don't know, how much was inventory destocking, but I think the international traffic has been down fairly significantly. So you're seeing 777s being utilized less, even our major utilities which are very good platforms for us. I don't see many of them are getting parked, but they're just being utilized less. I think the international traffic more than anything the domestic traffic has held us pretty well for us in the countries.

Joe Nadol - JPMorgan

So this thing is like 777 and 47 that were down well into the double-digits, is that fair?

Marshall Larsen

[47400], what's happening with that, where they don't have to use the four engines, they want to reduce their capacity. So those are being used less than 777s and A330s, obviously.

Joe Nadol - JPMorgan

Okay.

Marshall Larsen

Joe, you're also seeing, the impact of the freighter weakness coming through those large commercial numbers. The large commercial passenger portion of that performed relatively well as compared to general ASM trends. So it's the freighter market that has been a big delta there and then on the regional business side, what's happened in business jet market.

Joe Nadol - JPMorgan

It's pretty small for you, is that right?

Scott Kuechle

Well, it's probably 5% of our aftermarket, our total aftermarket. But, you're talking about 20%, 30% decreases is what the press has been talking about there. And we're seeing, impacts that are strongly into the double-digit range. And then, we do have preferred revenue adjustments, long-term contract adjustments within the regional wheel and brake business and those were fairly significant, about $14 million in the first quarter versus the period a year ago.

So that's kind of an artificial impact when you're looking at underlying demand. So again, the core of our business, the large passenger airplane business has done relatively well and the volume side of regionals has actually been okay, especially the larger regionals.

Marshall Larsen

But as we look at the first quarter, even though the aftermarket was worse than we originally expected, we were very pleased with the balance of rest of our sales and particularly on the military side and also the ability to keep our costs down and pretty well maintain our margins.

Joe Nadol - JPMorgan

Okay. Well, thank you. Good quarter.

Marshall Larsen

Thank you.

Operator

Our next question we go to Carter Copeland with Barclays Capital.

Carter Copeland - Barclays Capital

Hey, good quarter, guys.

Marshall Larsen

Thanks, Carter.

Carter Copeland - Barclays Capital

Marshall, I wondered if you could chat a bit about the A380, Airbus has yet to ship any A380s this year. And I'm wondering if you're seeing any slowdown in shipments to them on that program?

Marshall Larsen

Well, so far we haven't seen any change in their outlook, but we'll have to see. One of the things that scares me about the A380 is what's going on with Emirates, they've given Airbus a long Squawk list. Their first airplanes have gone into service and you just wonder whether that's because of what's going on in the Middle East because they've been affected too by this when they haven't in the past.

I think that could be just a prelude to delaying some of those shipments. So, we don't have any more information on that right now, but let's put it this way, we're not counting on exactly hitting their forecast.

Carter Copeland - Barclays Capital

But you're not seeing any backing up of the supply chain as a result of no airplanes moving out of the factory?

Marshall Larsen

Well, our inventory has been high because of the continued delays they've had in that program. Now, we've not heard of another delay at this point in time, but we've got more inventory than we need right now.

Carter Copeland - Barclays Capital

Great. That's useful.

Marshall Larsen

They're also low margin sales. So, just like any brand new OE program, especially when it's a low production rate, so it won't make a big difference in our bottom-line in the near term.

Carter Copeland - Barclays Capital

But, it will be important for cash?

Marshall Larsen

Yes, but I think we spent that cash. We got it, setting an inventory.

Carter Copeland - Barclays Capital

That's already gone. I wondered if you could give some color on the impact of some of these newer parked airplanes as well. Are the A320s that are showing up in park, the sort of aircraft you would have expected to see in repairs and overhauls in the cells, is there any of that going on?

Marshall Larsen

Well, we don't see a lot of that, but I think what you're doing. We count about 107 A320s parked right now and usually you don't park one of those until they get up close to a heavy maintenance period.

The other thing is that, I'd say the majority of those are owned by leasing companies and they will usually try to cut a deal at some point in time to get those back in service.

They don't want them to just sit. I also believe because they're the most efficient airplanes out there along with the 737MG that they'll be the very first airplanes to go back in service. So, I just think it's a temporary thing.

Carter Copeland - Barclays Capital

But that sort of implies that there's some pent-up demand there, if leasing companies are parking aircraft that are closest to some sort of maintenance or overhaul cycle than to bring them back, presumably those overhauls will have to happen?

Marshall Larsen

I would expect that.

Carter Copeland - Barclays Capital

Great. Thanks a lot, guys.

Operator

And we go next to David Strauss with UBS.

David Strauss - UBS

Good morning, thanks.

Marshall Larsen

Good morning, David.

David Strauss - UBS

Morning. You obviously talked about what you're seeing as far as sales of the aftermarket. What have you seen over the last couple of months in terms of order rates for spares?

Marshall Larsen

Pretty flat.

David Strauss - UBS

Pretty flat year-over-year?

Marshall Larsen

Yes. Month-to-month. The March to April timeframe we've seen it stabilize.

David Strauss - UBS

Okay, but I guess on a year-over-year basis, what do you see in terms of decline in the order rates?

Marshall Larsen

It's consistent with what we've seen on the sales side. The time from order to sale is pretty short in the aftermarket. So they're not dramatically different.

David Strauss - UBS

Okay. And then back to the margin question again, so I guess, you take your guidance, you are back in the margins. It looks like you're implying now for segment margin stock,22159 like high 15% to low 16% range?

Scott Kuechle

Low 16 for the last three quarters of the year is consistent with what our guidance would suggest.

David Strauss - UBS

And really what we should see, I guess, based on what's going to happen is that you should see some pressure at actuation and landing systems more than anywhere?

Marshall Larsen

Well, they got out of the blocks very strong in the first quarter. What we expect to see there is higher OE sales, as we mentioned before, on the landing gear side.

And there will be more low charge wheel and brake shipments in the second half of 2009 as well. So those two will put some margin pressure on that segment, but if they're off to a very good start and the margins they reported in Q1 are similar to the high point that we saw during 2008.

David Strauss - UBS

Okay. And last one, cumul adjustments. I think last year in total you took like $110 million in cumul adjustments. I think you took $5 million in the quarter.

What's the outlook there? Can you actually even bake any of that into your outlook or what are you thinking about as the opportunity to take further cumul adjustments?

Scott Kuechle

We think they'll be obviously much lower than last year by a lot, as we saw in the first quarter.

So we have not baked much in the way of cumul correct or further deferred revenue adjustments into our forecast for the rest of the year. So, it's not a big number.

David Strauss - UBS

Okay. Thanks, guys.

Operator

We go next to Peter Arment with Broadpoint AmTech.

Peter Arment - Broadpoint AmTech

Hey good morning, Marshall, Scott, Paul and everyone.

Marshall Larsen

Hey Peter.

Peter Arment - Broadpoint AmTech

Hey, could you give us a little more color on what's going on in Asia? You've kind of indicated that Marshall, you think freight will kind of lead us out of there, but everything we're seeing out of Asia is pretty negative and you kind of indicated that some of the biggest impacts will be in Asia

Could you just provide us a little more color there on what you're seeing?

Marshall Larsen

Well as I said the international traffic between continents is down fairly significantly, I think everyone has seen that.

Inside of China, it's been 5% to 6% ASM and I think that will probably be the bottom given the Chinese stimulus spending going on. That's a lot of flights. So, it's really, I think a little too early to call on that. We're not counting on a big resurgence there during the year. I would expect more of resurgence here in the US.

Peter Arment - Broadpoint AmTech

Okay. That's helpful. And just one quick on the supplemental, anything there regarding for on ISR or anything that you factor into your guidance?

Marshall Larsen

Well, we don't normally factor much in the way of supplementals. So we don't know if you are going to get them. We work on them pretty hard, but we feel reasonably good about ISR and helicopters during the course of the year.

I mean in the first quarter, as we said, our military and defense sales were up 11% and our ISR was up double-digit in the first quarter and our HUM systems for Blackhawks were up fairly significantly, so now we feel reasonably good about that end of the budget because that's not being cut.

Peter Arment - Broadpoint AmTech

Right, great. Thanks very much. Nice quarter.

Operator

We go next to Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs

Hi, good morning.

Marshall Larsen

Good morning, Noah.

Noah Poponak - Goldman Sachs

Great quarter.

Marshall Larsen

Thank you.

Noah Poponak - Goldman Sachs

You've given us some nice color on how you see 2009 aftermarket. Can we maybe try to talk a little bit about 2010? I know it's a little uncertain, but how do you balance sort of the idea that there's going to be below trend economic growth even as we do recover economically with younger airlines.

Do they come back with their young fleets right away? You talked about the pent-up demand at leasing companies. You talked about freight leading the way.

Can some of this stuff really rip back and can you go back to outpacing the market in 2010?

Marshall Larsen

Well, once we're pretty sure we've hit a bottom, when we start up, the kind of platforms we're on, we’ll go up faster than most and that's why we feel like we can outpace the market increase.

The other thing is the aftermarket usually leads the aerospace cycle out while the OE production starts going down. That's always been the case. So we've got a good aftermarket orientation, obviously in this company with roughly a third of our business in the aftermarket.

So I can't tell you what the ASMs are going to be next year at this point in time, I need a few more quarters of data, to make a better estimate. But you've got to believe that 2010 ASMs are going to be better than 2009. I think we're going to be in the right direction.

Scott Kuechle

Noah, the other dynamic that goes on there is when our aftermarket on an individual airplane, except for wheels and brakes doesn't really start until it goes out of the warranty period or into the service period which is for most of our products is, three to five years after delivery of the airplane.

So when you look back at deliveries three, four, five years ago, you see an increasing trend of deliveries. Those are going to come through maintenance activity over the next several years.

So there's a natural trend up, in the kinds of airplanes that we have a lot of content on because of the deliveries that occurred several years ago and the increasing rate of those deliveries are going to start to cycle through the maintenance side of our business, 2010, 2011, 2012.

So there's a good underlying trend there that we can take advantage of.

Noah Poponak - Goldman Sachs

Great. So it sounds like you would be expect to be back to outpacing the market in 2010? I wanted to follow up on the cash flow question. If you could just be a little bit more specific, was the first quarter where you thought it would be or was it a little light?

What kind of upside is there in the rest of the year? And in 2010, do you start to get into the greater than 100% of net income as you got the late cycle benefit that was discussed? Thanks.

Marshall Larsen

Sure. In the first quarter the cash flow was actually, as I said, a little better than our internal forecast. It's normally a light quarter because we have compensation payments that are paid in the first quarter and at least over the last three or four years, we've typically had an accounts receivable rebuild in the first quarter because our customers have typically paid well in the fourth quarter of each year and then they rebuilt those balances in the first quarter.

So we saw that same trend occur in the first quarter of this year as we have in the last couple of years. So again, the first quarter numbers were not of surprise and were actually slightly better than what we had anticipated.

So that's why we kept our guidance for cash flow at still greater than 75% of our net income. So no real change there. And when you look out a little further, we do expect our cash flow to continue to improve and the pace at which it does is really dependent on what happens in the OE side of the business and how much visibility we have to any changes there and to make sure that we can keep our supply chain in line with what we're doing in the way of deliveries to our customers.

And as long as we can keep that well aligned, our cash flow should improve and continue to go toward that number.

Noah Poponak - Goldman Sachs

Great. Thanks a lot. Great quarter.

Operator

We go next to Cai von Rumohr with Cowen & Company.

Cai von Rumohr - Cowen & Company

Yes. One of the areas you did particularly well on in the first quarter was your kind control of indirect expenses I think you mentioned that, corporate G&A 20, ERP 4, Discontinued Retiree Health et cetera and the other. Could you give us some help in our modeling? Where would those four expense items likely to be for the entire year?

Marshall Larsen

I'm not sure I got all four of them. You cut out a little bit there. But on the corporate expense side, I think we would expect normal costs, given factoring in the effect of cost reductions that we've incurred being somewhere around $29 million a quarter roughly going forward through the balance of the year.

And on other income and expense, excluding whenever we get the benefit of the non-operating items that I alluded to earlier, probably settles in around $9 million per quarter going forward.

Cai von Rumohr - Cowen & Company

Okay. And then why was the corporate expense so much lower in this quarter?

Marshall Larsen

Well, part of it was cost reductions, that's sustainable going forward which is why the number I gave you for future quarters is lower than the number we indicated previously.

We also got a little bit of a translation benefit from activity that we do outside the US because of foreign exchange and there were some just timing benefits in the first quarter where we clamped down on expenses. However, we'll get back a little bit of that in future periods.

Cai von Rumohr - Cowen & Company

And then the last one, help us a little bit on the quarterly pattern. You seem to suggest that the aftermarket is going to be very difficult in the second quarter and that presumably would hurt your margins, but then you mentioned the up tick in OE in the third and fourth which would hurt your margins.

What should we look for a quarterly pattern? Are they all flat at a little over a $1.10 or something like that, when you put all that in there or are there any kind of wrinkles we should be aware of?

Marshall Larsen

Let me speak to the aftermarket side. In the second quarter, it's almost too close to call. We think it's going to be relatively flat through the first quarter. We don't see us getting much improvement. We also don't see it going down much.

So we expect to see that aftermarket start to improve in the second half, sequentially quarter-by-quarter. The OE side will pick up only because the Boeing strike kept our OE shipments to Boeing down in the first quarter.

But I think we factored all of that in between those two plus an increased military and defense that gets us into that range that we talked about on EPS. Do you want to add anything, Scott?

Scott Kuechle

The timing of some of these non-operating items, benefits on the tax rate, those do create some volatility quarter-to-quarter. That's why we guide for a full year as opposed to get overly focused on any particular quarters.

Cai von Rumohr - Cowen & Company

Okay. Terrific. Thank you, and good job.

Marshall Larsen

Thank you.

Operator

Ladies and gentlemen, from this point, due to time constraints, we do ask that you limit yourself to one question. We go next to Howard Rubel with Jefferies & Company.

Howard Rubel - Jefferies & Company

Thank you very much. Scott, could you talk a little bit about how you're going to bridge some of this decline in OE volume with a little bit softer aftermarket? Some of the OE does absorb overhead, so how are you going to manage that as you see this transition and downturn in OE volumes?

Marshall Larsen

Well, we're actually seeing higher OE volumes for the rest of the year versus the first quarter. So, it's not going to be an absorption issue for us. It's just they're inherently lower margin products. And then as we start to get into some 787 shipments, we've already said that initial rate reduction programs tend to be very low to no margin programs. So, again you get some sales, but without a lot of margin help.

Howard Rubel - Jefferies & Company

I'm thinking about landing gear at 777, that's a long lead item and while you're playing a little catch up, I understand, the reality is that that's a big item for you.

Marshall Larsen

Yes and we had anticipated some decline in 777 production similar to the timeframe that Boeing suggested. So, we're not dramatically out of sink with them for that program. They've given us a year’s worth of lead time. It is a very long lead time item.

Scott Kuechle

We're also expecting, Howard, some offset with A380 shipments over that 777.

Howard Rubel - Jefferies & Company

You hope. Thank you.

Marshall Larsen

I am looking to you, Howard. You are [actual] one.

Howard Rubel - Jefferies & Company

I’m done.

Marshall Larsen

Thanks, Howard.

Operator

For our next question we go to J.B. Groh with D. A. Davidson.

J.B. Groh - D. A. Davidson

Thanks guys, most of my questions have been answered. But maybe you could give me on the refi interest costs embedded in your forecast?

Marshall Larsen

Well, with the refinancing that we did and the pre-financing, if you will, we still think interest expense is trending to around a $115 million for the full year.

J.B. Groh - D. A. Davidson

Okay. Okay. Thanks a lot. Congratulations.

Marshall Larsen

Thank you.

Operator

We go next to Ted Wheeler with Buckingham Research.

Ted Wheeler - Buckingham Research

Yeah, hi, you probably answered this, but I did want to circle back on the pattern of earnings just after the great first quarter and comments on the aftermarket that seem to be at least in the year here.

Maybe we're bottoming here. Well I know you've given full-year guidance for the percentage change, it just seems a little hard to stay within your range, really, in earnings after this first quarter.

I guess Cai asked the question, but are there some other issues there? The timing of pension or is there something else that you touched on a little higher corporate, but it just seems a little hard to stay in the range given your comments on aftermarket sequential performance and the first quarter execution.

Marshall Larsen

We've given you our best shot in terms of the baseline for revenue cost. We've highlighted some of the things that we think will be higher in terms of cost in the next few quarters versus what we saw in the first quarter and again there's still the revenue side of the equation is not entirely certain yet, so we're trying to protect that a little bit as well.

Ted Wheeler - Buckingham Research

Okay. Okay. Well, thanks for the call and wonderful execution.

Operator

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Gifford, I'll turn the conference over to you for any closing remarks.

Paul Gifford

Thank you very much, Rufus, and thank you once again for joining us today. I know it's a very busy earnings season for all of you. So we appreciate your time that you have provided us and feel free to give me a call if you have further questions. Thanks a lot.

Operator

And again, ladies and gentlemen, this does conclude the Goodrich first quarter 2009 earnings results conference call. We do appreciate your participation.

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