Goodrich Corporation (GR)
Q3 2009 Earnings Call
October 22, 2009 10:00 a.m. ET
Executives
Paul Gifford - VP IR
Marshall Larsen - Chairman, President and CEO
Scott Kuechle - CFO
Analysts
Ronald Epstein - Merrill Lynch
David Strauss - UBS
Sam Pearlstein - Wells Fargo
Howard Rubel - Jefferies
Peter Arment -Broadpoint
Joe Nadol - J.P. Morgan
Myles Walton - Oppenheimer
Robert Spingam - Credit Suisse
George Shapiro - Access 342
Noah Poponak - Goldman Sachs
Cai von Rumohr - Cowen And Company
J.B. Groh - D.A. Davidson
Itay Michaeli - Citi
Colin Campbell - Societe Generale
Joe Campbell - Barclays Capital
Operator
Good day, ladies and gentlemen and welcome to the Goodrich Third 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 would like to turn the call over to Vice President of Investor Relations, Mr. Paul Gifford. Please go ahead, sir.
Paul Gifford
Thank you, Debbie. Thank you today for joining us as we discuss our Third Quarter 2009 results. 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. 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 today'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 reports filed with the Securities and Exchange Commission, including our annual report on form 10-K and quarterly reports on 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. Because of the number of people who want to ask questions on the call, please limit yourself to one question. If you have more than that, you can get them unanswered after the call or after the initial questions; you can reenter the queue to ask an additional question.
Now I'll turn the call over to Marshall, who will provide with you an overview of the third quarter 2009 results, our updated full year outlook for 2009 and our outlook for 2010.
Marshall Larsen
Thanks, Paul. I'm sure you have all had the opportunity to review today's earnings release and the related presentation. So today I'll describe the key factors that led to our performance during the third quarter of this year, our updated outlook for the full year of 2009, and our outlook for 2010.
Our third quarter earnings resulted with solid performance in our Military businesses and continued success on our cost containment efforts. The environment for commercial aerospace however remains challenging. Advance bookings for after market products and services remain weak; there are some hopeful signs of recovery in the airline system.
Freight traffic continues to improve from levels seen earlier this year and airline ridership and load factors are improving. Although airline capacity has yet to turn the corner, we believe that 2010 will be a year of modest recovery, which should allow us to grow our commercial aftermarket sales.
In our original equipment market channel, Boeing and Airbus appear to be on track to deliver a total of about 960 aircraft in 2009, and both manufacturers are striving to maintain stable production for their narrow body airplanes.
Our defense and space sales growth has been robust with 2009 growth between 11% and 12% and 2010 growth expected to be in the mid single digits. Our third quarter 2009 sales compared to third quarter 2008 decreased by about 7% or $124 million.
About half of that decrease was due to unfavorable foreign currency exchange rate impacts on sales and lower reported sales resulting from the formation of the engine controls joint venture with Rolls Royce. Our large commercial airplane original equipment market channel experienced a sales increase of 9%, and our regional business and general aviation original equipment sales decreased about 45% during the quarter.
Sales in our commercial after market channels decreased 19% in the third quarter 2009, compared to the third quarter 2008. Sequentially, after market sales declined 3% from the second quarter of 2009. Our defense and space market channel continues to show strong growth with an increase in third quarter 2009 sales of 9% compared to third quarter 2008. Growth was driven by sales of products to the Military helicopter market and from sales growth in ISR products.
In the third quarter 2009, we achieved segment operating income margins of 15.8%, compared to 18.2% in the third quarter 2008. These margins were achieved despite increased pension expense of about 1.6% of sales during the quarter. Our third quarter 2009 net income was $145 million or $1.14 per diluted share, compared to net income of $168 million or $1.32 per diluted share during the third quarter 2008.
Third quarter 2009 results included higher pre-tax pension expense of $26 million or $0.13 a share. Long-term contract revisions for the third quarter 2009 were less favorable by $26 million pre-tax or about $0.13 a share, partially offsetting these negative items was a lower effective tax rate, which benefited third quarter 2009 by about $0.17, a share compared to third quarter 2008.
For the third quarter 2009 net cash, provided by operating activities, minus capital expenditures was $211 million or about 150% of income from continuing operations. During the third quarter, we had several significant accomplishments.
Our Board of Directors increased our quarterly dividend to $0.27 per share payable January 4, 2010 to shareholders of record on December 1. This represents an 8% increase over the previous quarterly dividend of $0.25 cents a share and is our third consecutive annual increase of the dividend.
We were awarded a contract by the defense logistics agency Ogden, to provide new carbon brakes and boltless wheels for the U.S. Air Force fleet of C-130 transport aircraft. The selection is expected to generate up to $400 million in revenue over the life of the program.
Goodrich signed agreements with Xi'an Aircraft International Corporation, XAIC to form two joint venture companies to support landing gear and engine nacelle component manufacturing focused on the fast growing Chinese aerospace market.
New companies are expected to compete for market positions on the COMAC-919 single aisle Chinese commercial aircraft currently under development and also manufacture various landing gear and cell components and sub assemblies for other care craft.
The U.S. Air Force authorized continued development of the operation responsive space or S program that features Goodrich's satellite. This build authorization follows a successful critical design review that Goodrich completed only eight months after the beginning of the contract.
Satellite delivery and launch are on schedule to occur in late 2010. As I'm sure you are aware market conditions for 2009 continue to be very challenging. But there are some indicators that we have seen the most significant impacts on our company in our industry.
The IMF outlook for global GDP has improved somewhat for 2009 and 2010. They now estimate worldwide contraction of 1.1% in '09 and growth of 3.1% in 2010. Our expectations for large commercial production rates for 2009 have not changed since our prior outlook. We continue to expect Boeing and Airbus to deliver a total of 960 to 970 airplanes this year.
The contingency weakness in sales and advanced orders for aftermarket components especially major components in our aero structures business. We believe that part of the reason for this is lower utilization of in service aircraft and airline repairs being limited to only must have repairs as they strive to conserve cash.
The number of newer generation parked aircraft has remained about the same as it was at the end of the second quarter. While timing is uncertain, these will be the first aircraft returned to service when airline markets start recovering.
Freight traffic continues to be weak but the recent IATA results for international freight showed marked improvement over the traffic results for earlier months of 2009. The market for our defense and space products remains strong. Our third quarter defense and space sales continue to show above trend growth and we expect 2009 sales to grow at a rate between 11% and 12%.
Today's release also contains an update to our outlook for 2009, we now expect full year sales in 2009 to be about $6.7 billion, 5% or $360 million sales decline from 2008. The 2009 sales expectations compared to 2008 include unfavorable sales impacts of approximately $154 million or 2% of sales related to stronger U.S. dollar and lower sales of approximately $125 million or another 2% of sales related to the formation of the Rolls Royce engine controls joint venture.
Excluding the impact of these two nonoperational sales adjustments, our expected sales would be down about 1% in '09 over '08. Our 2009 sales growth expectations for each of our market channels, compared to 2008 are as follows, large commercial airplane original equipment sales are expected to increase slightly in 2009, and assumes Boeing and Airbus each deliver about 480 aircraft this year.
Regional business and general aviation airplane original equipment sales are expected to decrease by almost 30% with regional airplane sales down about 20% and business and general aviation original equipment sales down about 40%. Large commercial regional business and general aviation airplane after market sales are expected to decrease by 13% to 15%, and defense and space sales are expected to increase between 11% and 12%, driven by growth and intelligence surveillance and reconnaissance systems, Military helicopter systems and landing gear products.
All three of our segments expect significant growth in their defense and space sales in 2009. Our outlook for net income per diluted share in 2009 remains unchanged from our prior outlook of 460 to 475. This outlook includes about $0.27 per diluted share, associated with discontinued operations. Therefore we expect income from continuing operations to be in the range of 433 to 448.
Our '09 outlook range includes, among other factors, higher pre-tax pension expense of $102 million or $0.51 a share, compared to '08. Restructuring charges totaled about $0.10 to $0.15 a share, about $0.08 per share of the expected charges were incurred in the first nine months of '09, and a full year 2009 effective tax rate of 26% to 27%.
For 2009, we 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 the range of $190 to $200 million, compared to our prior outlook of $200 to $220.
In today's press release, we introduced our outlook for 2010. We believe the economic recovery will continue into 2010, and therefore expect sales growth in most of our major market channels in 2010. Overall, we expect 2010 sales of approximately $7 billion, up about 5% from our current 2009 outlook of $6.7 billion.
We expect large commercial airplane original equipment sales to increase by about 8% to 10%, assuming the current narrow body production rates are maintained through at least early 2011, and 787 deliveries begin in late 2010. We expect regional business and general aviation airplane original equipment sales to decrease by approximately 8% to 10%.
Large commercial regional business and general aviation airplane after market sales are expected to increase by about 4% to 7%, assuming that worldwide Available-Seat-Miles, ASM increased in the range of 1% to 3% in 2010. We expect after market sales to continue to be weak for the first few months of 2010, with the recovery beginning toward the middle of the year.
Finally, defense and space sales of both the original equipment and after market products and services are expected to increase by about 5%. Our outlook for 2010 net income per diluted share is for a range of $4.15 to $4.40, about flat compared to the company's current outlook for income from continuing operations for 2009.
Our 2010 outlook includes higher pre-tax pension expense of $28 million or $0.14 per diluted share. This pension expense assumes a 2009 return on U.S. plan assets consistent with our 2009 assumption of 8.75% and a 2010 U.S. discount rate of approximately 5.6%. Both of which reflect experience through September 30, 2009.
Pension expense for 2010 will be finalized based on an actual asset values and discount rates on December 31. A full year effective tax rate of 29% to 30% for 2010 reducing income per diluted share by about $0.19 compared to expectations for 2009.
For 2010, we expect net cash provided by operating activities minus capital expenditures to be approximately 85% of net income. We expect CapEx for 2010 to be in the range of $250 to $275 million. Overall, our performance during the current recession has been very good as we have been able to maintain strong margins despite significantly higher pension expense and reduced sales in our most profitable market channel.
I attribute our strong results to a continued focus on cost control and operational excellence. Our focus on flight critical systems with a nondiscretionary after market, our strong positions on new large commercial aircraft, and our significant and growing defense in space business has positioned us very well to grow sales and earnings as the economy emerges from this recession.
Our longer term prospects for sustainable growth are also excellent, fueled by our significant market share gains on new commercial and military aircraft currently in development. We look forward to meeting with you are investors and analysts at our investor meeting on November 6, in New York City.
At the meeting we will share a more detailed view of our market and financial expectations and our segment presidents will provide you with a more detailed overview of their segments. I look forward to your questions. Operator, please open the lines for questions.
Question-And-Answer Session
Operator
Thank you Mr. Larsen. Ladies and gentlemen today's question and answer session will be conducted electronically (Operator instructions)I would like to remind you again to please limit yourself to one question and you may reenter the queue (Operator instructions)we will take your questions at this time we will pause a moment to assemble the roster. We will go first today to Ronald Epstein with Merrill Lynch.
Ronald Epstein - Merrill Lynch
Good morning, Marshall.
Marshall Larsen
Good morning.
Ronald Epstein - Merrill Lynch
Were you surprised at how soft the after market ended up being this year, for you guys and if so, why? What happened to make it softer than maybe you were originally anticipating?
Marshall Larsen
Well, when we put our outlook for '09, Ron, there was one thing we didn't expect to have quite as much impact. And that is the utilization rate of the newer generation aircraft like A320s and 737 NGs. As you know, those are the last aircraft that you know any fleet is going to park, because they are the most fuel efficient. But the extent of the recessionary down turn in '09 in the U.S. in particular caused some of the carriers that fly exclusively A320s or 737 NGs to have a reduced utilization rate.
They didn't park the aircraft. Instead of running them for 12.8 hours a day they are running them for 12.3 for example. That had more of an effect on our after market and we weren't expecting that much of a utilization decrease. We also expect to see just the opposite going forward. Those aircraft were the first ones to be used fully as we start seeing demand solidify going into next year. So I think well, it causes a little bit more down turn this year than we were expecting. I think it will also add to the up turn going forward.
Ronald Epstein - Merrill Lynch
Okay great. Thank you.
Operator
Our next question will go to David Strauss with UBS.
David Strauss - UBS
Good morning.
Marshall Larsen
Good morning, David.
David Strauss - UBS
Just wanted to look at margins, it looks like in the fourth quarter on the segment basis you are applying about 14% margins and then more importantly looking to 2010 it looks like 14.5 to 15 or so, let me know if those are off. But you know, with the improvement in the after market that you are predicting, I think a bit of a tail wind on FX. I know you got a bit pension wind, but I would think margins would hang in there rather than go move lower in 2010?
Scott Kuechle
Yeah, David, the 2010 margins, you know, we think will be in the 15% to 16% range, based on our outlook for next year. So we see that very much consistent with what we are seeing for 2009, particularly in the second half of the year.
We do expect margins to decline some in the fourth quarter of this year, and that is partly related, give you two primary factors. One is we are expecting to take higher restructuring charges in the fourth quarter than we've seen earlier in the year and then secondly, we do see some after market softness, particularly in the majors area, within our cells and interior business.
And we also did have some additional sales in the third quarter, versus the fourth quarter, because we turned SAP on October 1, in a couple of fairly heavy focused after market businesses. So that is why we see a little bit of a decline in margins in the fourth quarter. But 2010 we would expect to be in the same kind of range, 15% to 16%.
That includes you know some pension head wind, as you had already mentioned that we are going to see for next year and it also includes a little bit of margin drag from some sales of 787 toward the end of next year, which as you know come at little to no margin.
David Strauss - UBS
Okay. Thanks Scott.
Operator
We'll go next to Sam Pearlstein with Wells Fargo.
Sam Pearlstein - Wells Fargo
Good morning. I guess just to follow-up on that the sales and landing. How is it you got the margins to improve since the second quarter, despite the lower sales and I would have expected to see a worse mix with the after market declines.
Marshall Larsen
Speaking just within the sales.
Sam Pearlstein - Wells Fargo
Just within the sales. Because in the other segments you saw some sequential pressure which you would expect the aftermarket being weaker I guess I was surprised to see the sales in interior go up.
Scott Kuechle
We had a little bit of benefit from contracts that came correct in the quarter which were about $12 to $13 million in the third quarter. They were about 4.5 or so in the second quarter so we got a little bit of benefit there.
Sam Pearlstein - Wells Fargo
Okay. And if you don't mind me following up, just how do you get the fourth quarter then down to $0.72 to $0. 87 cents? Which is what you presumed for your continuing operations. It sounds like it's got to be a pretty sizable amount of restructuring.
Scott Kuechle
Well it's fairly significant in terms of both restructuring costs and some higher reserves that we expect to take on some environmental areas and then we won't have the (inaudible) corrects in the fourth quarter that we had in the third quarter. So those two things are kind of unusual drivers of the fourth quarter that depressed that but obviously when you look into the first quarter of the following year you don't have a drag going forward on those.
Sam Pearlstein - Wells Fargo
Great. Thank you.
Operator
We will go next to Howard Rubel with Jefferies.
Howard Rubel - Jefferies
Thank you very much. Marshall you have done a great job of generating cash when we look at all the difficulties in the environment and you are sitting on almost like you have today almost $800 million. Could you sort of I mean the dividend is a very pleasant use for some of it. But could you sort of address what you are thinking about going forward with that?
Marshall Larsen
Sure, Howard. Well first of all you saw the dividend increase?
Howard Rubel - Jefferies
Yes.
Marshall Larsen
We prefer that to, wholesale buy back of shares, although you know we haven't been buying back shares recently. We have had in place a program to at least trim the delusion from any compensation, stock compensation factors. But the more likely use of that is going to be continued, bolt-on acquisitions.
We have done four of those in the last 18 months or so. And we see more of those on the Horizon. You know, we could do a fair sized acquisition in the $1 billion plus and maintain our liquidity and our balance sheet and our ratings. But that is not likely unless we find really the right property. We want to make sure whatever we do is creating value. And we have been able to do that with some of the smaller bolt-ons. But I would expect some of those to get larger in the few hundred million in revenue size as we go forward.
Howard Rubel - Jefferies
And then the pension plan, I mean there are sort of two things. You are using a fairly conservative discount rate, I think, Scott. You know wouldn't some of the cash be appropriately used there to mitigate the year on year decline or the increase in expense?
Scott Kuechle
We are assuming that we'll put contributions into the worldwide plans in 2010 in the $150 to $200 million range pre-tax, which is consistent with what we were putting in, in 2009. So our view has not been to load up the pension plan with the excess cash near term, but to maintain kind of a steady flow into that plan over several years and hopefully with some tail wind from the markets we'll get back to a fully funded position over several years.
And again, we, like Marshall said, we think there is opportunities to get some top line growth by using our balance sheet to look at good strategic acquisitions that you know can grow fast on their own and supplement the technology and business positions we already have.
Marshall Larsen
By the way the 2010 outlook top line does not include acquisitions.
Howard Rubel - Jefferies
Thank you both I mean, so you would probably a bit want them to be accretive then Marshall, as you look at them though?
Marshall Larsen
Absolutely. We want to make sure we bring value to the shareholder.
Howard Rubel - Jefferies
Thank you very much.
Operator
We will go next to Peter Arment with Broadpoint.
Peter Arment -Broadpoint
Good morning Marshall, Scott, Paul. Marshall, could you just walk us through maybe on the military and space outlook, you have had about 12% growth this year and I think that was up from high single digits, maybe 8% in your prior guidance and from the beginning of the year and you are projecting 5% in 2010.
It seems like you are really well positioned you know going forward. What we are seeing in terms of the slowdown in operational tempo seems to be pretty high. Could you help us walk through that a little bit?
Marshall Larsen
Yeah it really has less to do with the slowdown in operational tempo and it does some few major programs finishing up on the military side we get tremendous growth in the arms program and health utilization line of existence army helicopters and we are just bringing you know the level back down more from finishing up one time programs than anything else. I still think we'll see pretty good growth going forward.
Peter Arment -Broadpoint
Okay. Thank you.
Operator
We will go next to Joe Nadol with J.P. Morgan.
Joe Nadol - J.P. Morgan
Thanks, good morning. Marshall or Scott, on the outlook for next year, the OE growth rate of 8% to 10%, just wondering if you could help us with how you built that?
I know you have a little bit of a tail wind from the impact with the Boeing strike very early this year. And but how are you thinking about potential cuts, when they are announced, lead times, destocking, that could result, etcetera?
Paul Gifford
Yeah, Joe, relative to the first part in terms of how we built the outlook, you are right, the impact of the Boeing strike had somewhere in the $40 to $50 million impact when you compare '09 to 2010, because of the impact that it had on us in the first quarter of 2009.
Then we are assuming roughly $100 million of sales growth coming from 787 and A380. So those are the two biggest programs. The rest is you know just kind of timing mix. Marshall can probably comment on our expectations for productions.
Marshall Larsen
Well, as I said earlier, we are assuming in our outlook that it's not until early 2011 should there be a production cut that could be announced you know say going into the third quarter of 2010 if there was such a thing. So we are saying level production on the narrow bodies and particularly through 2010.
But you know to give you an example, you know, if we did have an OE production cut at some future point in time, whether it's 2011 or whatever, if the production cut was let's say announced in the third quarter, and it was down 20%, let's say in rates, in 2010, that could have a $0.15 to $0.20 per share effect on us if it was started early enough in the year, it could be 25% in 2011. I mean $0.25 cents in 2011. That's if they announced a 20% and neither OE is saying that at this point in time and I think that they would have to announce something by mid-year to affect it if they did. All indications that we have are that 2010 is reasonably safe in terms of the levels.
Joe Nadol - J.P. Morgan
But given your lead times, Marshall, let's say there is announcement in the first quarter of next year that there is going to be a narrow body cut early in 2011, you wouldn't anticipate any impact to your second half of the year numbers next year?
Marshall Larsen
Well, they would be a lot less than that $0.15 to $0.20 I just gave you if they went down 20% you know, earlier. But if it didn't happen until 2011 we'll get a little bit of an impact toward the last three, four months of the year.
Paul Gifford
And Joe, you do get a little bit of impact, you know the first year, right during the announcement because you do take a little bit of incremental restructuring charges at that point. So we think the full year impact is something like that as Marshall said is around $0.25 a share you know, and depending on the timing, you know, it would be something less than that in the first year of announcement.
Joe Nadol - J.P. Morgan
Right and on a quarterly basis sequentially here, have you seen, I know it varies for your different businesses but for the 777 rate have you been impacted by that fully already or is it in some of your businesses in like landing gear and not in others yet? How is that kind of folding through?
Paul Gifford
Yeah there is less activity in the shop. You know, obviously so that does have some effect on overhead rates, etcetera and you certainly change your intake of forgings and equipment that goes, that's associated with that aircraft.
Marshall Larsen
It is more the landing gear has seen the most effect of that because they do the gear for the 777.
Joe Nadol - J.P. Morgan
Right anticipate you are seeing you know the impact in your other businesses maybe early next year?
Marshall Larsen
That's the primary impact is in landing gear.
Paul Gifford
Yeah the primary impact is in landing gear on that 777.
Joe Nadol - J.P. Morgan
Okay.
Paul Gifford
We have already built their already announced reduction rates into our plan.
Joe Nadol - J.P. Morgan
Right of course. Okay, Thank you, guys.
Operator
We'll go next to Myles Walton with Oppenheimer.
Myles Walton - Oppenheimer
Thanks, good morning. I was wondering if I could follow-up on the outlook for 2010. If you talk about your after market outlook for 4% to 7% growth in underlying ASM growth of 1% to 3%. Can you talk about the assumptions on pricing and whether or not destocking continues or if there is a pickup in restocking I guess from deferred maintenance?
Marshall Larsen
Well, as far as destocking, I think you know, we've got to see some ASM capacity increase in 2010. We said we needed about 1% to 3% to get our 4% to 7% after market growth. I think you'll see as we start getting a capacity increase in ASM that is about the time you'll start seeing destocking you know, decline.
A lot of airlines are running this on condition. In other words they are flying the airplane until the part is no longer serviceable and then they are taking it off to have it repaired or they are cannibalizing from a fleet. A lot of that is happening on the older fleets.
What we are looking at for 2010 is with an ASM pickup of 1% to 3% that our positions on the newest generation aircraft the A320s, 737 NGs, the A330s, and the 777s will allow us to get an after market growth of about 4% going into next year, just because of the aging of the fleet. And assumes normal retirement will take place, and there is a stable utilization of the aircraft in 2010 over 2009.
And you know the utilization in 2009 is less than it was in 2008. So just if that remains stable, and we have you know stable maintenance practices, we think we'll get 4% just from that alone. And I think as we look at it, it just depends on the growth rates out there. We think 4% to 7% is doable.
Myles Walton - Oppenheimer
Okay. I mean I guess to follow-up in a different way, so you're underlying installed base despite a 1% to 3% ASM growth outlook for next year I guess, what you are saying is your install base ASM alone would be closer to what your after market outlook is?
Marshall Larsen
Right.
Myles Walton - Oppenheimer
And then just one follow-up, in the last quarter you said 4 out of the 9 aftermarket related businesses saw sequential upward revision in sales kind of initial signals. Were those false positives? Did they continue in the other five or more negative? Or you can just characterize those. Thanks.
Paul Gifford
Yeah, that is what we saw at the end of the second quarter. What we saw in the third quarter is almost all of our businesses trended down. But most of them trended down sequentially very slightly. Like sales declines of $1, $2 or $3 million. Not significant. Where we did see a more dramatic fall off was in the sales and interior businesses more focused on the order rate and the sales rate more on the larger major repairs in overhaul activity.
Myles Walton - Oppenheimer
Got it thanks.
Operator
We will go next to Robert Spingam with Credit Suisse.
Robert Spingam - Credit Suisse
Hey good morning guys hopefully Marshall I can avoid incurring Paul’s wrath, I want to ask a single question with two unrelated parts and the first part is to go back to the last question just to clarify.
I think what you are saying is, the ASM growth on the newer fleet is going to exceed the overall ASM growth for the industry. And that's the 4% to 7% in the A330s, A320s, 777s if I understood that correctly?
Marshall Larsen
That's right. In fact, well let me give you one data point from Goodrich in the third quarter that will give you an idea about that. You know, we said our overall after market was down 19% quarter-over-quarter from last year. It was down 15% on the large commercial aircraft. And most of our businesses, you know, trended down, because the third quarter last year was our highest after market in large commercial aircraft we'd ever had.
But one business, actuation, which has a significant amount of their aftermarket on A320s had a positive growth year-over-year. That gives you an indication what the newer generation aircraft are like. Now that's varied in the cells, because they have a fair amount on the A320s too, and they are still seeing positive piece parts in there. But the overall market is down.
The utilizations are down. That's one of the reasons we believe, as we go into next year, that we're going to have a fleet next year that's going to have 7% or so new airplanes and its being delivered. And then when you take out the 4% or so that's going out in terms of retirements that leaves a net three increase in the fleet.
Now those don't in of themselves give you more aftermarket because they're new aircraft. But those that are 5 to 7 years old, especially on the A320s that move into that maintenance spot increase the amount of available maintenance repair and overhaul revenue that are out there.
Robert Spingam - Credit Suisse
Okay so taking that, that is linear and the new aircraft push other aircraft into the sweet spot on maintenance isn't there another source of aftermarket growth that we on top of the 4 to 7? And that is restocking because that is separate from the higher ASM activity?
Marshall Larsen
That's right and what we are assuming is kind of maintenance stabilization for net year. We are assuming that airlines are actually going to continue some of those practices that they are doing this year. Now, at some point in time you reach a stage where you are running those aircraft more and you are going to have to have more line maintenance parts available than just calling up for an AOG. Or taking it off the airplane and putting it on from another airplane, because more of those older generation aircraft are going to be out of the fleet. So that could be an upside, but we are not counting on it.
Robert Spingam - Credit Suisse
All right. But it should be at some point because we all know there is a multiplier effect here and we've seen it on the downside. ASM is down 5% to 10% and some businesses seems parts down 15% to 30%. So there should be upside somewhere whether it is back into 10 or 11 its coming.
Paul Gifford
It is difficult to predict when.
Robert Spingam - Credit Suisse
Okay the other thing I wanted to ask you is on the OE side in the engine business and what I am trying to reconcile is some other suppliers. For example, precision have seen massive OED stocking in the engine business which suggests that maybe the engine customers were preparing for the narrow body down take. Yet in your quarter you saw stronger $40 million in higher airplane OE commercial airplane OE sales in your new cell business. So how do we reconcile that?
Marshall Larsen
I'm not quite sure if I know that answer. The only thing I could think of, off the top of my head is that there are months that we have, in sometimes a quarter where we deliver a lot more engines between CFM 56s and V2500s than they are actually producing on the line.
You know because for whatever reason one of the engine makers gets behind, and the only other thing I can think about is AOGs
Robert Spingam - Credit Suisse
In August there is a shut down at Airbus, relative to deliveries and productions. So that does cause some kind of unusual things to occur in the third quarter.
Marshall Larsen
It could be just a seasonal drop in production at Airbus because of vacations.
Robert Spingam - Credit Suisse
But one would think you as suppliers to the engine companies, you would see and I guess some of your parts are going straight to the air framer. We'd see destocking hit all of you somewhat together and certainly not higher sales when people are seeing huge decreases.
Scott Kuechle
Yeah, Rob, I don't think that's coming on the OE side. The OEs are still taking from us in all of our businesses at a rate that is consistent with the way that they are producing and what they have signaled going into 2010. So, we are not seeing an OE change and we are not seeing significant changes in inventory as it relates to that.
Robert Spingam - Credit Suisse
Okay so you are not oversupplying? That's the key point here.
Paul Gifford
No I don't think per oversupplying. The other thing I could think about TCP, they could be delivering, over time, spares also to the engine manufacturer and those are probably down.
Robert Spingam - Credit Suisse
What's interesting is they are seeing it in their forging business to some extent, castings as well. But I wanted to try to put the two together and see if you can figure it out.
Paul Gifford
I haven't seen that.
Robert Spingam - Credit Suisse
Thanks for your color, though.
Paul Gifford
That was all one question?
Operator
We'll go next to George Shapiro with Access 342.
George Shapiro - Access 342
Good morning.
Paul Gifford
Good morning, George.
George Shapiro - Access 342
Hey Marshall I want to push this after market a little bit more. Because historically, there has really been a much bigger lag when you see the after market recover than what you are suggesting. If you looked at '02 traffic was up 0.5%, year after market was down 7, '03 traffic was up 2 you were down 3, even in '04, traffic was up 14 and you lagged it you were up only 8.
It wasn't until '05 that you really substantially started on out grow the traffic where your after market was up 15 and the traffic was up 8. And I know there is more A320s but they were still you know over 200 A320s being delivered in the '02, '03 time frame so I want to know what do you think I am missing here in terms of expecting you know this recovery to be further out there with what you are suggesting?
Marshall Larsen
Well, if you go back to that last cycle you are correct in what you are saying in terms of the growth that we had. But you have got to remember that those years depended on those aircraft coming from about 5 to 7 years earlier from OE deliveries, not from those current years, which now you are looking at, at least 2000 more A320s, going in that sweet spot for maintenance than we had back then. And that's a lot of the difference.
Paul Gifford
And in some cases, you are even seeing those come back a second time because they are now in that 10 to 15 year old range. So they are coming through the shops for a second round.
George Shapiro - Access 342
But you are also seeing, you know at this point, Boeing continue and Airbus continuing overproduce, so that the parked A320s like even in the summer flying season didn't really come down and without them shoving out in my view too many new airplanes out there, which you say you don't get the trap the aftermarket from. It's not clear to me that you know, even utilizations hold up unless we get a bigger increase than everybody's looking for in traffic next year. Sorry.
Marshall Larsen
Well I think, we tried to take into account for that when we know that there's you know, effectively 7% of the fleet being replaced by deliveries in the year. But 4% of the fleet being retired, so a net 3 up, that right in '09 doesn't work and '10 it will work better because of you know the economies, but there has to be some amount of traffic increase coming forward. And you know we are starting to see some signs of that with United and others. So it's more I think for Goodrich it’s having a lot more of those aircraft in the maintenance sweet spot.
George Shapiro - Access 342
Okay. I just figured I wanted to pursue it a little bit more and we'll obviously see what happens. Thanks.
Marshall Larsen
You are welcome.
Operator
We'll go next to Noah Poponak with Goldman Sachs.
Noah Poponak - Goldman Sachs
Hi good morning.
Scott Kuechle
Hi Noah.
Noah Poponak - Goldman Sachs
I wanted to pursue further the first question of where you have been surprised in the after market. Because the answer to the question was being surprised on the younger aircraft. But you were talking about being surprised on the younger aircraft when you were at minus 5 to minus 8 and revising that and we are now at minus 13 to minus 15, which is a massive variance and we are talking about a bottom nine months later and we have printed a couple quarters now with rates of decline very similar to other suppliers with less favorable positioning. So I'm still very confused on how you were so surprised to such a large extent in the back half of the year.
Paul Gifford
Yeah. Let me give you a few different items there. You know, you can think about the regional business generally aviation and freighter markets, those four areas account for roughly a quarter of our after market sales. Those are down about 30% year-over-year in terms of our sales and you all know how heavily impacted those have been and how abrupt that change was.
So that drives a lot of reduction we didn't anticipate when we entered into our initial guidance for 2009. So those markets fell off very quickly, rapidly and haven't recovered yet.
Noah Poponak - Goldman Sachs
Have those been much worse than you expected since the last time you provided after market guidance?
Scott Kuechle
Since the last time we provided after market guidance was only three months ago.
Noah Poponak - Goldman Sachs
Right.
Scott Kuechle
So the biggest change that we have seen there has been actually order patterns relative to our major spare parts that has been the most significant change and if you look a little bit longer it has been the utilization of the aircraft and the continued pressure on maintenance practices by the airlines that have driven us to lower than expected results on the aftermarket. And as we have talked about in the last couple of questions, those trends do reverse. But the first thing that has to happen is, supply and demand has to get back in balance and that happens as growth occurs on the demand side you know to sop up the new aircraft that are coming in then utilization will start to turn and as utilization turns you are going to see changes in maintenance practices, destocking starts to reverse the amount of deferrals etcetera that the airlines have taken advantage of near term debt also reverses. So I think what I was talking about is timing.
Noah Poponak - Goldman Sachs
So it's really been the abnormal behavior of airlines that you described or destocking just being substantially worse and longer than you expected?
Marshall Larsen
Yes. And I think that their priorities, they go right down the high cost items. And so it's engines and it’s the cells and things like that they are parked in aircraft and there are about 100 A320s parked you can take an engine off one of those or in the cell and move it to one that's operating.
Noah Poponak - Goldman Sachs
Yes. Could you guys very quickly comment on your latest thinking of the shape of the business jet cycle? I think you are showing down 8 to 10 for regional Bizjet next year. What is the business jet element of that? And just anecdotally what have you seen differently in the past couple of months.
Marshall Larsen
We saw that come down dramatically in the first half of the year. So you know, we were running somewhere around $160 million a quarter in regional business general aviation OE sales. It's down to just a little bit above half of that right now.
Our guidance for next year is that it doesn't get worse, in fact it gets a little bit better from where we are trading in the second half of 2009. But we've got to lap the first half of the year where rates were continuing come dawn. So we are not looking at further deterioration from where we are now on business and regional OE deliveries but we are not looking at improvement from 2010 where we are at right now. Just a very modest improvement particularly on the business side.
Noah Poponak - Goldman Sachs
Okay thanks a lot.
Operator
Going next to Cai von Rumohr with Cowen And Company.
Cai von Rumohr - Cowen And Company
Yes thank you very much question on the aftermarket Marshall could you give us some color on the destocking trends you are seeing in the after market, air transport after market by various geographies, and tell us are you seeing any kind of initial signs of potential lift. Like you know, many times, people tend to buy in the fourth quarter, because to beat price hikes we are seeing you know better utilization of the Bizjet, we are seeing better traffic, trader traffic trends. Are you seeing any kind of initial signs at any of these markets are actually starting to turn in terms of orders?
Marshall Larsen
We haven't seen any substantial turn. We've seen sort of a flattening. You know, like in our wheel and brake business, for instance. We are seeing a lot more RFQs coming out from airlines that want multiple year buys, or are putting their whole fleet up, in terms of certain component maintenance. So there are also opportunities out there to lock in some market share. But we've not seen anything on the business side. That utilization hasn't substantially changed. And on the regionals, certainly the small regional jets are down pretty significantly. I think you have got to get up into the 90 passengers before you see any kind of reasonable utilization on those. So I think that the airlines are still working very hard to take cost out.
I do think they are going to reach a point here, if there's any up turn in traffic, which we think there will be, and we have seen signs of it, that they are going to have to increase their utilization, which means they can't go too hand to mouth on spares, otherwise you are going to have broken schedules. So I think that could break here in the next 3 to 6 months. But I haven't seen it break yet.
Cai von Rumohr - Cowen And Company
And to the first part of my question, are you seeing any differences, you know, by the various geographies for air transport after market destocking? U.S. versus Europe versus Asia?
Marshall Larsen
Well we have certainly seen a lot more in the U.S. But Asia, some of the airlines, even Singapore airlines, has parked 777s, and they, you know, they just don't need the same amount of parts that they needed before when they were utilizing their fleets fully. We are going to probably see resurgence in China, they are back up to between 8% and 9% GDP this quarter. So I think it will start to happen in China, and spread there the freight markets, I think, are starting to change. And you know, freight is a pretty good indicator, to us once that starts going, we'll start seeing a lot more airline traffic, too.
Cai von Rumohr - Cowen And Company
Thank you very much.
Operator
We'll go next to J.B. Groh with D.A. Davidson.
J.B. Groh - D.A. Davidson
Good morning, guys. I had a question on your 2010 comment on the OEM production rates. Sounds like you are viewing it with a tad bit of skepticism. I know your statement here that you are ready to take quick action. My question is, are you more prepared than in past periods of time where you thought there was a potential production cut coming and two, is there any sort of ongoing costs associated with being say more prepared than less prepared and having your hand over the big red button on Marshall's desk?
Marshall Larsen
Well, let me put it this way, first of all, we are moving forward and making sure we can meet the production of Boeing and Airbus in particular, if they maintain their rates. On the other hand, would I say we are more prepared than the previous cycles? I would say yes.
The biggest reason there is the continuous improvement that's taken place in our businesses, in being able to produce at a faster rate with less resources, which allows you to stand down faster than you could in previous times. That's why we think you know even with a 20% production rate a full year effect on this is about $0.25. Which I think most people would have thought would be a lot more. But we're not predicting it. We are just prepared. Because you know if market conditions change next year, and you know, the OEs decide hey, they have changed enough that we have to make a change, we want to be prepared. But we're not predicting it.
J.B. Groh - D.A. Davidson
But any costs associated with that level of preparedness differing from just a steady state where you know the structure is going to be the same for a couple of years?
Marshall Larsen
No the only thing that wouldn’t change the EPS certainly we could probably do a little better on cash if we knew exactly when that was going to take place because we probably wouldn’t have ordered as much inventory.
J.B. Groh - D.A. Davidson
Great okay alright thank you for your time.
Marshall Larsen
You are welcome.
We will go next to (Inaudible) with Davenport and Company.
Unidentified Analyst
Good morning I want to return to the utilization issue so I have hear beating a dead horse here but if I am trying to get sensitivity if we take Continentals latest year-to-date numbers on aircraft utilization it shows them sort of flying around 30 minutes less year-to-date is that can you give me some sensitivity that we don’t see flat utilization on your 2010 guidance and maybe we go down another 15 or 30 minutes on utilization can you give me an indication of what impact that might have on your estimates.
Marshall Larsen
Well I think that what you are talking about is if worldwide that happens then it's certainly going to have an impact but that is going to depend on the economy I mean if there is no right now if you are predicting a 3% global GDP up swing for next year the IMF I mean if it went the opposite way if there was no growth then I wouldn’t expect that utilizations would get better. Because I think you all know that air travel is driven by GDP. So I think that is the key I mean if we have a recession worldwide you know I don’t think anyone's forecast is going to hold up.
Unidentified Analyst
I am going to clarify that the guidance you have has utilization remaining flat on the surprise utilization number that you gave to this quarter. Is that right?
Marshall Larsen
Yeah remaining out about 09 levels but if they ever went down next year that would imply that you were actually going to have an ASM decrease again year-over-year worldwide which we are not predicting and I don’t think most people are not predicting that
Unidentified Analyst
Just on the surprise and this is just a point that I've been looking at recently. That it's very clear that ASMs may become somewhat of a outdated use on after market demand just because it appears that we are grounding smaller shorter range aircraft and shifting to longer range international which has a tendency, we are having Lufthansa announced a 7% cut in departures but an actual 1.2% increase in ASMs. Is that mature that’s factored in when you are giving your guidance, is that correct?
Marshall Larsen
Well we do a much finer outlook than just basing it on ASMs I mean it has a lot to do with lot of factors that are specific to our businesses and the aircraft fleet this is going to be out there. But ASMs have always been a kind of a sanity check too in total particularly on large commercial aircraft. So, you get the 100 passenger and above, it’s little easier to look at it from that standpoint.
Unidentified Analyst
And just one last issue on after market demand. Do you differentiate between a larger wide body after market demand versus say narrow body? In other words, would you rather have narrow bodies flying more or why bodies flying more?
Marshall Larsen
We'd rather have narrow bodies flying a lot more because that means more landings for wheels and brakes. It means more actuators being used and all of the components on these aircraft will wear out and be replaced that much faster. You have to put another narrow body and it only lands twice a day and you don’t get the same kind of utilization on a wide body.
Unidentified Analyst
Great, thank you.
Marshall Larsen
You're welcome.
Operator
We'll go next to Itay Michaeli with Citi.
Itay Michaeli - Citi
Great, thanks.
Good morning. Just wanted to go back to the 2010 operating margin that I think you mentioned 15% to 16% range I believe the segment margin, can you just talk about the outlook for G&A as a percentage of sales in 2010 where you see that going?
Scott Kuechle
Yeah, we would estimate that the corp. G&A would be somewhere around $32 million per quarter and then the other income and expense would be around $8 million a quarter. So you add the two together and about $40 million per quarter.
Itay Michaeli - Citi
Okay, that's helpful and then quickly just a follow up on CapEx if conditions actually worsen versus your expectations how quickly can you flex that down and then is this the right level of CapEx you think about you know in 2011 assuming a continued gradual recovery.
Scott Kuechle
Well the answer reflects down the question if you look at 2009 we are below $200 million of CapEx and if you go back a year you know we were in the upper 200s and then we are looking to go back to that level in 2010.
So it can be flexed up, you know flexed down fairly rapidly. I would think that the $250 to $275 is kind of a longer term level that we should look for and that gives us some ability to continue to increase our manufacturing footprints in low cost countries expand the manufacturing you know not only in manufacturing but also the service network outside the U.S. as well which is where a lot of the growth is going to come in the service side and in the fleet.
Itay Michaeli - Citi
Great, that’s helpful. Thank you.
Operator
(Operation instructions) We will go to a follow up now from David Straus with UBS.
David Strauss - UBS
Good morning again. Scott can you give us some color on working capital what you are assuming there specifically on the inventory side and then also what you're guidance has baked in for R&D next year. Thanks.
Scott Kuechle
Yeah, on the R&D side you know we are tracking about $250 million per year of expense R&D right now which is lower than '08 but some of that is the fact that we formed joint venture with Rolls Royce I mean our engine controls business. So a good bit of R&D that we've had in prior years is now part of that venture so I would think $250 million roughly is a pretty decent number to assume in 2010 and may be even beyond that.
In terms of working capital you know we've had pretty good recent performance on working capital both product inventory and receivables have been fairly flat Q2, Q3 which is consistent with what we've seen from the marketplace in terms of sales.
Going into 2010 you know we think we will continue to get some leverage on the core working capital so it won't be nearly as big of a drag on cash flow as we've seen in the '07, '08 time period when we had rapidly growing sales. So and that’s all reflected in our outlook for cash flow of you know around 85% conversions on net income.
David Strauss - UBS
And Scott on your discount rate, that you are assuming I think 5 or 6, how are you coming up with that it looks pretty low.
Scott Kuechle
Again it's consistent with conditions as of September 30 and the way we do that discount rate is the high grade bonds matched to all of the individual cash flows that come out of that pension plan. So it's not a single metric like a Moody's AA that you can track it's actually a bond portfolio of high grade corporate that’s matched specifically to the payment stream on the pension plans. And when we get that you know on a monthly basis through our actuarial services and it was 5.58% at the end of September.
David Strauss - UBS
Okay. Thank you.
Operator
We will go next to a follow-up from Joe Nadol with J.P. Morgan.
Joe Nadol - J.P. Morgan
Scott is next year’s tax rate a normalized rate?
Scott Kuechle
29% to 30% rate, I would think that, that would drift up overtime from that level. Continue to benefit from not only credits but also from tax in favorable jurisdictions, so I think as we go forward its likely to increase a little bit from there.
Joe Nadol - J.P. Morgan
Okay. Because that’s been a source of upside for several quarters in a row it looks like next quarter is going to be low as well and then next year. So either variance by quarter or is that modest drift up in 2011 or anything more you can give us?
Scott Kuechle
Just to clarify Q4 we are going to see a much higher rate. What we try to do when we go in each year is look at audit cycles and things like that that are likely to mature in a year and take our best estimate of what those benefits or detriments will be for the year.
We can’t predict which quarter they are going to fall in, so you do get a lumpy tax rate through the year. But we try to give you a good estimate for the full year reflecting what we think will happen on those events. That’s why we think those drift, that rate drifts up over time because we are catching up on prior audit cycles and getting closure on some of those open items.
Joe Nadol - J.P. Morgan
Okay. And then on scheme adjustments do you have anything baked into your forecast for 2010?
Scott Kuechle
Our expectation is very modest positive for 2010 and that’s what our guidance would reflect.
Joe Nadol - J.P. Morgan
Okay.
Scott Kuechle
But less than what we are seeing this year and dramatically less than what we saw in '08.
Joe Nadol - J.P. Morgan
Right. Thanks.
Operator
We will go next to Colin Campbell with Societe Generale.
Colin Campbell - Societe Generale
Good morning gentlemen. Just was wondering on your defense growth for '010 of 5% and that seems very different from your growth rate you’re seeing in 2009. Is there any chance that is conservative because after all ISR will continue to grow (inaudible) and some other bigger wins.
Marshall Larsen
I think more than anything it's just because we have had a few large programs that have matured and finished out which added to our growth and double-digit growth in '09, but long reoccur in 2010 but we will still be benefiting from ISR growth and helicopter growth in particular for next year. So it’s more of a timing of programs than anything else.
Colin Campbell - Societe Generale
Thank you.
Operator
We will go next to Joe Campbell with Barclays Capital.
Joe Campbell - Barclays Capital
Good morning, it’s actually Carter Copeland. Marshall I had a question just on the OE outlook for 2010 and whether you can characterize if there is any risk based on what you can see given your position a sort of major sub system supplier and then a supplier to other sub system supplier. If you see anything in the data that suggest that people are sort of cheating to the downside to protect against the expectation that rates may have been lower especially on things that are bit longer lead. Is there anything you can see from your advantage point that suggests that there is any of that risk in 2010 or is that going away?
Marshall Larsen
I don’t know about other tier 1 suppliers what they are doing but we are making sure we can, we are prepared for the delivery rates that Boeing and Airbus had given us. We also go out to our supply base and make sure they are prepared.
We also try to keep constant communication with the OEs because in particular with landing gear, that’s our longest lead time item and sometimes even if we get a six month notice that it's not enough in terms of shutting of the forging pipeline. So, we try to stay right on those things we got a very good notice from Boeing when they decided to bring the 777 down mid-year 2010 they gave us a lot of notice on that to get ready for it.
I would expect the same kind of notice from them on others. But we've got no indication, we've been to supplier conferences and both OEs and they are pretty adamant, they are maintaining the rates. So, I just don’t want to speculate that they are going to do anything different than that. I just feel pretty good that we can react quickly if we have to.
Joe Campbell - Barclays Capital
Great, thanks a lot.
Operator
Mr. Gifford having no other questions in queue. I'll turn it back to you for closing remarks.
Paul Gifford
Thank you Debbie and thank you for joining us today. I know we are went a little bit longer than expected, trying to take all the questions from all the callers and we hope to see many of you at our conference in a couple of weeks. Thanks.
Operator
Ladies and gentlemen this concludes the Third Quarter 2009 Earnings Results Conference Call for Goodrich. We thank you for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!