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Goodrich (NYSE:GR)

Q4 2010 Earnings Call

February 03, 2011 10:00 am ET

Executives

Marshall Larsen - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Paul Gifford - Vice President of Investor Relations

Scott Kuechle - Chief Financial Officer and Executive Vice President

Analysts

Kenneth Herbert - Wedbush Securities Inc.

Cai Von Rumohr - Cowen and Company, LLC

Robert Stallard - RBC Capital Markets, LLC

Edward Wheeler - Buckingham Research Group, Inc.

Douglas Harned - Bernstein Research

Jason Gursky - Citigroup

Howard Rubel - Jefferies & Company, Inc.

Eric Hugel - Stephens Inc.

George Shapiro - Citi

Ronald Epstein - BofA Merrill Lynch

Joseph Nadol - JP Morgan Chase & Co

Heidi Wood - Morgan Stanley

Robert Spingarn - Crédit Suisse AG

Samuel Pearlstein - Wells Fargo Securities, LLC

Noah Poponak - Goldman Sachs Group Inc.

Myles Walton - Deutsche Bank AG

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Peter Arment - Gleacher & Company, Inc.

David Strauss - UBS Investment Bank

Operator

Good day, everyone, and welcome to the Goodrich Fourth Quarter and Full Year 2010 Earnings Results Conference Call. [Operator Instructions] 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, Karen, and thank you for joining us today as we discuss our fourth quarter 2010 results.

In the room with me today are Marshall Larsen, our Chairman, President and CEO; and Scott Kuechle, our CFO. We will start with brief prepared remarks followed by Q&A. A 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 actual results could differ materially from those projected in the forward-looking statements. The risks and uncertainties are detailed from time to time in 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 call is being webcast. Replays will be available at our Internet site beginning this afternoon.

Once again, we ask that callers limit themselves to one question so that we can have time to allow all of you to ask your questions. If you have further unanswered questions, please get back into the queue and you can ask another one, time permitting.

Now I'll turn the call over to Marshall, who will provide you with an overview of our fourth quarter results and our outlook for 2011.

Marshall Larsen

Thanks, Paul. You've all had the opportunity to review today's earnings release and the related presentation. Today, I'll begin with our fourth quarter results and then turn to our improved earnings outlook for 2011 and discuss its drivers.

We closed out a solid 2010 with a very strong fourth quarter results. Our net income per diluted share grew 41% on sales growth of 10%. All of our major market channels, including the commercial aftermarket, reported year-over-year sales growth. Our large commercial airplane original equipment market channel grew by 2%. Our regional, business and general aviation original equipment market, sales increased by about 52%, which included organic growth of about 20%. Commercial aftermarket sales were 12% higher than the fourth quarter last year. Our defense and space sales continued their positive growth trend in the fourth quarter of 2010, increasing by 9% compared to the fourth quarter of 2009. Our acquisition of Atlantic Inertial Systems contributed 7% of this growth, while organic sales growth was about 2%.

In the fourth quarter 2010, we achieved segment operating income margins of 15.8% compared to 14.2% in the fourth quarter of 2009, which helped us increase our net income per diluted share from $0.82 in the fourth quarter 2009 to $1.16 in the fourth quarter 2010. The overall improvement was due to strong sales growth, excellent operational performance, relentless pursuit of continuous improvement, a lower tax rate and increased favorable changes and estimates for certain long-term contracts, partially offset by costs associated with the early retirement of debt.

Specifically, as we discussed with you last October, the fourth quarter 2010 results included debt redemption costs of approximately $0.17 per diluted share. We reported an effective tax rate of 8.5% for the fourth quarter 2010 compared to an effective tax rate of 29.5% during the fourth quarter 2009.

Fourth quarter 2010 tax rate included previously announced tax benefit of approximately $0.18 per diluted share related to a settlement with the California Franchise Tax Board concerning issues related to Goodrich and Rohr for all tax years through 2001 and approximately $0.11 per diluted share for the full year 2010 benefit of the R&D tax credit, which was renewed by the U.S. Congress in late 2010.

Our fourth quarter 2010 results included higher pretax income of $8 million, $5 million after tax or $0.04 per diluted share related to changes in estimates for certain long-term contracts, primarily in our Aerostructures and Aircraft Wheels and Brakes businesses compared to the fourth quarter of 2009.

Total changes in estimates for the fourth quarter 2010 were $27 million pretax. The fourth quarter 2010 included total pretax restructuring charges of $7 million, $4 million after tax or $0.03 per diluted share. These actions were not included in our prior outlook for the 2010 earnings.

Net cash provided by operating activities minus capital expenditures, or free cash flow for the fourth quarter 2010, was a use of cash of $114 million. As we discussed during our last conference call, we made $300 million of incremental contribution to our pension plans in October. Excluding this incremental contribution, our free cash flow conversion of net income would have easily exceeded 100%.

Since last October, we have announced significant progress on existing programs and several new business wins. We have begun environmental testing of the first operationally responsive satellite. We signed a 10-year in a sales service agreement with Air Arabia for the support of missiles and thrust reversers in the airlines' fleet of more than 50 A320 aircraft.

We were selected by Airbus to provide the main landing gear for the -1000 variant of the A350 XWB aircraft. This contract is expected to generate more than $2 billion in original equipment and aftermarket revenue for us over the life of the program. And we received a production contract from Lockheed Martin to supply 160 pylons to the U.S. Air Force C-5 Galaxy strategic airlifter, reliability enhancement and re-engining program.

For our full year 2010, we reported a 4% increase in sales to $7 billion, and our income from continuing operations increased from $560 million in 2009 to $577 million in 2010. On a per share basis, we reported income from continuing operations per diluted share of $4.50 in 2010.

For the full year 2010, our large commercial airplane original equipment sales increased by 4%. Regional, business and general aviation airplane original equipment sales grew by 2%, including sales associated with DeCrane acquisition. Organically, sales in this market channel decreased by about 5%.

Large commercial, regional, business and general aviation airplane aftermarket sales were flat compared to 2009. Defense and space sales grew by about 11%, including sales generated by the AIS acquisition. Organic growth in this market channel was 3%.

For 2010, our free cash flow was approximately 50% of income from continuing operations, including the incremental $300 million pension contribution made in the fourth quarter. Excluding this incremental contribution, free cash flow is approximately 102% of income from continuing operations.

Now I'll turn to 2011. We believe the strong growth trends we experienced in late 2010 will continue in 2011, and we expect significant sales growth in each of our market channels. Overall, we expect sales to grow about 11%, which would provide us with record sales of $7.7 billion to $7.8 billion in 2011.

Based on the recent improvements in airline capacity trends, improving airline profitability and increasing demand trends for our commercial aftermarket products, we are raising our sales growth expectations for commercial aftermarket sales to a range of 7% to 9%. This strong sales growth should result in an even better growth than net income per diluted share. Largely driven by increased expectations for commercial aftermarket sales and lower pension expense, we now expect 2011 net income per diluted share to be in the range of $5.30 to $5.45, an increase of 18% to 21% compared to 2010.

As I noted, we expect sales growth in 2011 in every market channel, including large commercial airplane original equipment sales growth of about 15%. We are assuming that all announced production rate increases are implemented. And Boeing 787 and 747-8 deliveries are consistent with the latest schedule announced by Boeing. Regional, business and general aviation airplane original equipment sales are expected to grow by about 30%, including incremental sales associated with the DeCrane acquisition. Organically, we expect sales to increase by about 6%.

Large commercial, regional, business and general aviation airplane aftermarket sales are expected to increase by about 7% to 9%. And defense and space sales of both original equipment and aftermarket products and services are expected to increase by about 7% to 9%.

Our 2011 outlook includes operating margins of about 16.5%. This reflects growth in aftermarket and the benefit of continuous improvement and lean initiatives on costs, offset by very rapid growth in lower-margin commercial original equipment and cost-plus military contracts.

Lower worldwide pretax pension expense of approximately $74 million or $0.37 per diluted share. The estimate for 2011 pension expense is based on the 2010 actual return on U.S. plan assets of 14% and a 2011 U.S. discount rate of 5.67%. In addition, we have reduced our long-term rate of return assumption on U.S. plan assets to 8.25% as of January 1, 2011 compared to our prior assumption of 8.75%.

For 2011, we expect total worldwide pretax pension expense of approximately $88 million compared to $162 million in 2010. We are expecting a 2011 full year effective tax rate of approximately 30%, somewhat higher than the rate we experienced in 2010.

We continue to expect net cash provided by operating activities minus capital expenditures to exceed 85% of net income for 2011. Our outlook includes expected capital expenditures of $300 million to $350 million and pretax worldwide pension plan contributions of about $100 million.

We get a lot of questions about our defense programs and our ability to continue to show significant growth in this market channel. Our defense programs are characterized by diversity and criticality. We are in almost every platform in the defense industry today, both OE and aftermarket. A significant portion of our sales are to international customers, either directly or through foreign military sales contracts. We expect that trend to continue.

In many cases, we have content on multiple platforms competing for an award, such as the Air Force U.S. tanker competition where we are well positioned on both the Boeing 767 and the Airbus A330. We have strong positions in a number of large defense programs, which will grow over the next several years like the C-5 re-engining, the F-35 and the C-130.

As we have previously discussed in our presentations, we are well positioned in growth markets like helicopters and ISR. We have substantial shipset content on helicopters like the Black Hawk, the Apache and the CH-47. Another area of strength for Goodrich is our ISR sensors. The U2 with our SYERS multi-spectral imaging sensor is being tasked more than ever, and the Goodrich DB-110 sensor is having great success with numerous international customers and has received new international contract awards.

Finally, we also play a big part in the precision weapons programs of the U.S. and foreign militaries with our actuation and inertial guidance systems. So overall, we feel we are well positioned to help the U.S. and allied troops with vital and cost-effective equipment that will result in continued good growth in our defense and space sales.

Overall, our performance during the fourth quarter was excellent from an operational standpoint, and we are looking forward to a strong 2011. We continue to expect long-term sustainable growth in sales and earnings fueled by our significant market share gains on new commercial and military aircraft currently in development and steadily increasing commercial aftermarket sales.

Our financial position remains excellent, with about $800 million of cash on our balance sheet, significant cash flow expectations for 2011 and no significant debt maturities until 2016. This will allow us the flexibility to continue to seek acquisition opportunities that further enhance our sales and earnings growth, contribute to cash generation and drive shareholder value.

I'm looking forward to talking to all of you during 2011. We have a great team, and we're all very excited about continuing to grow the company and our profits as we enter a period of strong commercial aerospace growth.

With that, let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] For our first question, we'll go to Heidi Wood with Morgan Stanley.

Heidi Wood - Morgan Stanley

Marshall, you talked about the demand trend in 2011. Can you give us a little bit more details on that? What are you seeing specifically that's adding to your confidence? And what are some of the watch items that you're also watching that might impact the new guidance that you've just given us?

Marshall Larsen

Well, obviously, we've raised of our aftermarket forecast to the 7% to 9%, Heidi. And as I mentioned in the fourth quarter, we continue to see what we think is a harbinger of better things to come in our Wheel and Brake business where our landings have been steadily increasing. And we’re starting off January in many of our businesses with a much larger backlog than we had in January of last year. So orders are coming in. And particularly in our Aerostructures business, the orders from majors have turned up in the fourth quarter. That's a very good sign that airlines are having to do some restocking on parts that they have avoided buying in the past because they've had a lot of spare engines out there. So it's not any one thing, we're just kind of seeing a lot of our aftermarket businesses see a much better level of activity, which gave us the confidence to raise that forecast.

Heidi Wood - Morgan Stanley

Marshall, you assume that the announced rate increases are implemented, and today, A330 rates just got increased. Should we expect a positive cumulative catch-up next quarter?

Marshall Larsen

Too early for me to say that at this point in time, but certainly a good sign.

Operator

Next, we'll go to Rob Spingarn with Credit Suisse.

Robert Spingarn - Crédit Suisse AG

Marshall, I'm jumping between various calls this morning so you may have addressed this a little bit. But could you talk about the moving pieces of the revenue guidance? You just mentioned you took aftermarket up, but a couple of other things went down.

Scott Kuechle

We thought you'd ask that question. So my colleague is here and always prepared. Yes, and in terms of the military side, we changed the guidance in terms of growth rates, but the absolute dollars for 2011 are pretty similar to what we would have expected back in October. So we had a little bit softer sales level in the fourth quarter of 2010. But if you look at the dollar sales value in 2011, that's fairly unchanged. So the only other market segment that we changed a bit was regional business, general aviation, where we took those sales down by around $50 million from our prior guidance. That's mostly in the business jet market. And just to give you a little bit of color there, first of all, it's a relatively small part of our total sales, 4%, 5% when you look at OE and aftermarket. So it's not a huge part of our business. But we're seeing good underlying trends that would suggest momentum in that marketplace is starting to develop. So the things that we look for are the used aircraft prices beginning to stabilize. We're seeing better activity levels across the current business jet fleet, and we're seeing good growth in Goodrich's aftermarket related to the business jets. And what we're seeing on the OE side there is decent expectations for growth in OE sales rates, production rates on the larger aircraft. But the smaller, small and midsized aircraft have not yet seen those kinds of increases. So our general view is the small and medium growth rates are pushed out to 2012 from where we were thinking they could occur in the second half of '11, previously. So that's the major change in our sales guidance there. And on commercial OE, we took those down from a range of 15% to 20% growth in October down to 15%, and that's all related to changed expectations on 787.

Robert Spingarn - Crédit Suisse AG

And just one last question on airline maintenance, have you noticed any behavior change back toward normal from the airlines. Through the recession, they were very tight on how they did maintenance. Everything was done at the last minute. Anything that could be put off was put off, cannibalizing parts, all that sort of thing. Have you seen any loosening?

Marshall Larsen

Well, I think the biggest indicator is the majors on Aerostructures, the [indiscernible], the thrust reversers and things like that. They are high-dollar items that they -- and they really were avoiding doing because they had aircraft that weren't being utilized as heavily. And I think that's an indicator to us between that. And the backlog on our Wheel and Brake business and the increased landings indicate to me that they’re getting towards the end of the rope in terms of having to restock.

Robert Spingarn - Crédit Suisse AG

So that being the case, your 12% in the quarter, you're guiding lower than that for the year, so just the higher -- the more difficult comps going forward?

Marshall Larsen

Yes, that's right.

Operator

Noah Poponak with Goldman Sachs has our next question.

Noah Poponak - Goldman Sachs Group Inc.

Just following up on some of your answers to Heidi's questions. I think last quarter, you specifically said you were looking for the majors to be flat in '11 and also we're not looking for much price. Can you just quantify how much different those are in the new outlook? And I think you just also stated, just for clarification, that order activity in January was accelerated versus the fourth quarter. Is that correct?

Marshall Larsen

I said the backlog is higher in January going into January than it was going into January of 2009. So I mean, that's a good sign. And on the majors, a few months is hard to make a trend out of it, but it's a very good sign that we're moving back towards normal levels on major orders. So we're in a lot better shape in January of this year on major orders that we were last year.

Noah Poponak - Goldman Sachs Group Inc.

And any new thoughts on price for the year?

Marshall Larsen

We'll get price increases in selected areas, but we're also taking advantage of trying to grab market share, too.

Noah Poponak - Goldman Sachs Group Inc.

And Scott, would you be willing to share with us what you're looking for the operating margins in the three different segments in '11?

Scott Kuechle

We can give you some rough ranges. I mean, we've talked about overall margins across the enterprise at about 16.5%, give or take, in 2011. So our expectations generally by segment would be in the 11% to 12% range in actuation and landing systems; 21% to 22% in nacelle; and 16 to 17% in electronics. And that would get you to about 16.5%. And again, every one of those can move by 0.5 pretty easily during the year.

Operator

Next, we'll go to Robert Stallard with Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC

I just want to follow up on those operating margins, Scott, if I could. I was wondering if you could give us some of the puts and takes for why specifically you think that sales have been coming down year-on-year, especially given these positive aftermarket trends?

Scott Kuechle

Well, you get positive aftermarket, but we're getting a lot of OE growth in that particular business. So 787 sales will be much higher in 2011 than they are in '10. And those are low margin to no margin for new programs coming out of the block. So for them, it's in part a mix issue. And then secondly, we do expect lower levels of contract adjustments in 2011 than we did in 2010. And the offset then obviously is a much better aftermarket environment, which is good margin, so it offsets a lot of that change.

Robert Stallard - RBC Capital Markets, LLC

I assume this is the case of the first two aerospace-driven divisions. But you probably have this dilutive issue of 787 being more back-end loaded than first-half loaded?

Scott Kuechle

No, I wouldn't say that. I think that's relatively steady throughout the year.

Marshall Larsen

Yes, it depends on the business because -- we're still delivering on a lot of things here in the first half of the year that they haven't showed us down on.

Robert Stallard - RBC Capital Markets, LLC

And just to clarify, your aftermarket, sequentially, commercial aftermarket was down 2%, sequentially. Is there anything to read into that?

Marshall Larsen

No, nothing there. I mean, fourth quarter is generally a weaker quarter because of the utilization of the passenger airline or package airlines trying to run everything all out. So that we don't read anything into it. What we took heart in is that the order intake during that time period was better than we've had in the past.

Operator

Next, we'll hear from George Shapiro with Access 342.

George Shapiro - Citi

In actuation, even if you make the adjustment for like the $4 million less pickup this year, the margin would have been about flat. And yet you had lower defense and higher aftermarket, which I think -- actually think would have been a favorable mix so I would have expected the margin to be a little bit higher then. So maybe, Scott, if you can just go through what's wrong with that thinking?

Scott Kuechle

George, just referring to fourth quarter margins or...

George Shapiro - Citi

Yes. I'm just looking at the fourth quarter.

Scott Kuechle

Okay. Yes, there are a few higher cost items in the fourth quarter. We booked about $3 million or so of restructuring costs in the quarter in compensation cost. Generally, we're higher at the corp G&A than our normal levels, and that was probably $6 million, $7 million. And each segment had higher comp cost as well in the $2 million, $3 million range per segment. So between those two, there's $5 million to $6 million of cost in the fourth quarter that aren't there on a normal basis, so that's almost the point of margin right there. And then as Marshall said, we ended the quarter with a decent backlog in the Wheel and Brake business. So there was timing of shipments that moved from fourth quarter to first quarter of 2011 that changed that margin picture in the fourth quarter just a little bit. So those three factors are mostly the gap between our normal margin levels of a little over 11% to where they were in the fourth quarter of about 10%.

George Shapiro - Citi

Okay. And then also if you just comment, you mentioned this higher operating costs with landing gear, wheels and brakes, and just what that -- a little more color on what that meant?

Scott Kuechle

It was really what I was referring to earlier, those items.

Operator

And now we'll go to Jason Gursky with Citi.

Jason Gursky - Citigroup

A couple of bookkeeping questions. Can you just talk a little bit about what the restructuring was all about? And then in one of the slides, you've got some benefit that you expect in 2011 related to foreign exchange. Can you talk a little bit about what that's coming from and what the volatility might be there?

Scott Kuechle

Sure. I mean, restructuring, those are just relatively small facility consolidation restructuring that we had expected to do sometime in 2011 or even 2012. And frankly, with the benefit of the R&D tax credit and some of the other upsides we saw, we decided to pull those in a little bit faster, start those activities sooner and get the benefits sooner as well. So there were just two different facilities that we looked at there. On the foreign exchange side, what we're looking at there in 2011 is about $20 million benefit versus 2010 in terms of foreign exchange exposure and hedge cost in 2011 versus '10. And we're about 93% hedged going into 2011, so there shouldn't be a lot of volatility around that number. And then when we look forward into 2012, we could see an additional $25 million benefit on top of the benefit we have in 201, if exchange rates stay about where they are today. And we're about 73% hedged in 2012. And then we're about 60% hedged in 2013. And there'll be a modest benefit in addition in 2013 over 2012, but it's in the $2 million to $5 million range.

Jason Gursky - Citigroup

And then CapEx expectations going out beyond '11, did they going to go much above that $300 million to $350 million?

Scott Kuechle

I wouldn't expect them to go above the $300 million to $350 million, but they might stay at an elevated level for the next couple of years because we are continuing to invest in some of our low-cost country to drive margins in the future. And we also have some raised [ph] capital that we'll be spending to keep up with the production rate increases that the OEs have announced. Get ready for A350s, 787 ramp up, et cetera.

Jason Gursky - Citigroup

And that includes something related to A320.

Scott Kuechle

Well, just the A320 ramp-up, there's a modest amount of capital there. But the A320 NEO, no.

Operator

Next we have Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co

I want to start out on DeCrane, it looks like you took down your sales expectations there from the high 100s to the low 100s? And I know you mentioned some of the business jet outlook has or some of the small and midsized have been pushed out. But is there anything else going on there? Because it looks like the sales expectations came down by close to a third.

Scott Kuechle

No, that's anywhere near that kind of a magnitude. We had expected sales growth in that business, and we're expecting that to be more stable in 2011 versus their run rate in 2010. It's driven by the changed expectation on when we'll start to see OE growth occur in the OE production rate increases in the small and medium-sized end of that market.

Jason Gursky - Citigroup

I guess, I'd have to go back and check my numbers. But since you raised the organic growth outlook and lowered the overall sales outlook for the business, and maybe depends on the 2009 comp, that could throw me off. Okay. Can you comment on AIS? And you mentioned some higher operating costs there. Is that just expected restructuring? Or is there something else going on there as well?

Scott Kuechle

That's just the way we do the GAAP when we report the MD&A. The additional SG&A and nonrecurring engineering costs just show up as additional costs because the volume and mix on that has picked up in the other lines. So it's not higher costs than what the business was incurring, it's just that we didn't have those costs a year ago.

Joseph Nadol - JP Morgan Chase & Co

Well, how is the acquisition going?

Scott Kuechle

AIS is going very well. We've been very pleased with the people, the technology, the ability to access markets, both in the U.S. and outside the U.S. because that is a U.K. business. So they've got some very exciting opportunities. They continue to win business at the rate that we expected relative to the competition. So we're very pleased with that business.

Operator

Next, we'll go to David Strauss with UBS.

David Strauss - UBS Investment Bank

Scott, can you walk us through 2010, the 2011 in terms of the increase in the guidance? I've looked at the earnings bridge today versus last time and there are some things that are not included this time that were included last time. But just thinking about it, you got $0.22 from pension. Another $0.15 to $0.20 from the higher aftermarket. I know your contract adjustments are now off of a bigger number from 2010, but it looks like that actually, got bumped up on an absolute basis. So I'm just trying to reconcile all that with the guidance only moving up $0.20 to $0.30.

Scott Kuechle

So you're not talking about '10 to '11, you're talking about prior guidance to current guidance?

David Strauss - UBS Investment Bank

Yes. Yes, I guess. I mean, I guess my starting point is just you got $0.22 from pension and upside versus what you were thinking before and you got another, based on your numbers, it looks like $0.19 on the aftermarket. So I'm trying to figure out the offsets to reconcile to the only $0.25 to $0.30 increase in guidance.

Scott Kuechle

Okay. Yes, like you said, we upped our guidance by $0.25 to $0.30. So the big factors are pension, and as you mentioned, which is about a $0.21, $0.22 benefit. I mean, I would point out that not all of that pension expense reduction actually flows through earnings in 2011 because some of it gets caught up in inventory and some it is already reflected in our contracts, but just assuming that, that's about $0.20. Aftermarket sales, we took our guidance up by two percentage points, and we've said about $0.06 per share per percentage point and growth. So that's about $0.12 of increase there. And then the offset would be the slight reduction in sales in RBG&A OE, so the business jet OE market that we spoke of a moment ago. And then we do have expectation for a little bit higher corp cost in 2011 than we did earlier, and that's frankly all due to the higher stock price that we're enjoying. So then whatever else the gap is, a couple of cents is operational performance on the margin line.

David Strauss - UBS Investment Bank

And if I'm reading the contract adjustments right, it looks like just on an absolute basis, you're now expecting like $35 million to $40 million in positive contract adjustments in 2011?

Scott Kuechle

Our expectation is kind of $25 million, $35 million, in that range, contract adjustment next year. And that's really not a change from where we were earlier.

David Strauss - UBS Investment Bank

And last one for me, timing on a decision on A320 NEO nacelle?

Marshall Larsen

I would expect any time in the next two to four weeks. And we've outlined the potential outcomes. We could win both of them. We could win one. We could win zero. But my expectation is we will -- I think, we will do well enough to win at least one of them.

Operator

Sam Pearlstein with Wells Fargo has our next question.

Samuel Pearlstein - Wells Fargo Securities, LLC

I just wanted to follow up a little bit more on some of the things you mentioned. You talked about the higher operating costs in actuation and landing, within various pieces of ES. And just looking at your SG&A as a percentage of sales in this quarter jumped up, and just -- can you talk about -- I know you were successful in taking out a lot of costs during the downturn, can you talk about what kind of costs are coming back and what that might mean in terms of your ability to drive longer-term margin gains?

Scott Kuechle

I don't think we're seeing a ramp-up of costs that we took out over the last couple of years. I mean, that's really been a disciplined approach that were centered around Lean and CI. And as that culture spreads around the company, the cost that leave because of productivity focus, those are not coming back. I mean we didn't take the easy things like easy actions, like salary reductions and the 401(k) freezes and things like that across the enterprise. So we don't have a headwind of cost that have to come back into the system. So we're really not seeing those kinds of pressures. So we'll continue to drive margin enhancement as long as the mix of sales growth between OE and aftermarket stays reasonably aligned. That tends to be the biggest difficulty that we have. And obviously, with the pension cost reduction, that's going to be helpful in terms of margins going forward as well. So that's kind of how we see the margin story. Again, to focus on the ALS, ES' margin story in the fourth quarter, a lot of that was unusual costs. And in terms of restructuring, higher compensation cost that we incurred during the quarter and just timing of some of the higher margin military and aftermarket sales. So you bridge those couple of three things, the margin performance in the quarter was in line with what we're thinking going into 2011 and with prior quarters.

Samuel Pearlstein - Wells Fargo Securities, LLC

The continuing resolution with regards to defense, did that change how you think of the growth rate throughout the year in 2011 and in the individual quarters? Does that push some defense later in the year?

Marshall Larsen

Well, I mean it certainly could have some of that effect. But I think that where items are of national security where we play a lot, I think we will still prevail.

Operator

Next, we'll go to Troy Lahr with Stifel, Nicolaus.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

I'm just looking at the aftermarket guidance and wondering if you can talk a little bit about maybe how sensitive that is to higher fuel prices. I'm not sure if you saw that even Delta said that they were cutting their full year capacity guidance on higher fuel costs. I mean, is that kind of reflected in, in your range there? Or could there be some downside if the airlines start cutting because of higher fuel prices?

Marshall Larsen

Well, I don't know exactly what they meant by that cutting, if it's just not adding more capacity as fast. But I don't think that's going to affect that outlook that much that we've given, the 7% to 9% because we were certainly conscious of oil prices as we were making it.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Okay. So I mean, could you say that if oil prices continue to go up, you might just be at the low end of the range but at $90, $100 oil, you're pretty comfortable with that?

Marshall Larsen

You know, if you go back to '08, I think that's when prices got up to $140 or so, we had a tendency to lag that increase, in other words, the effect. I mean, it’d have to get up there pretty high for quite a while for it to have that much of an effect.

Operator

Next, we'll go to Doug Harned with Sanford Bernstein.

Douglas Harned - Bernstein Research

Could you talk about progress on operational improvements? I know this is an important part of your outlook. And particularly, what metrics you're following and how you expect them to develop over the next few years?

Marshall Larsen

Well, we actually have a matrix that we -- of metrics that we show the Board of Directors every quarter that lists every SBU and also categories of cost reduction that we achieved through Lean/CI and restructuring and low-cost country sourcing. And so we'll go completely through indirect/direct expenses. We have a fairly large bogey for the year that we've achieved or exceeded each of the last number of years. And it really is, back to what Scott was saying, doing this in a very methodical manner in terms of continuous improvement that drives the cost out of the system. An example would be what we did in our seeding business. I'm not sure. Did I talk about this in the fourth quarter?

Scott Kuechle

Not in the call. We've talked about it in a couple of one-and-ones.

Marshall Larsen

In the fourth quarter, we took our Colorado Springs aircraft seeding business, and over the course of one week, completely relaid out the whole plant based on one-piece flow, continuous improvement, where we think will provide us double-digit gains in throughput and productivity and cost decrease. And nothing was sacred. I mean, we moved monuments. We did everything. We moved all the electrical connections, all the air connections, everything. And as Scott said earlier, this is really becoming a culture across this company. We improved our linearity of cash flow this last year instead of everything towards the end of reporting periods based on continuous improvement events that our segment president started at the early part of the year. And we have about close to 10% of our employee equivalents in low-cost country now. We measure that. We measure the throughput and improved quality and improved on-time delivery that comes through this in terms of operational then a lot of cost metrics also. And that's what allowed us to keep the margins reasonably high even in the financial downturn and why we think we can continue to move margins positively.

Douglas Harned - Bernstein Research

Well, when I think about this, I assume some of the work you're doing is to address potential increases in input costs. When you look forward, you're saying that you believe you can go well beyond that with the operational improvements you're making in terms of taking, getting, capturing more margin as well. Is that correct?

Marshall Larsen

I think we can in a lot of areas. I mean, sometimes, there will be an anomaly in a, like titanium cost that a few years back, there was a two-year backlog on forging. That's hard to contain that much. But we still hit our bogey in those years, overall. We just didn't hit it in the Landing Gear business because of the forgings, but we made up for it in other areas. So yes, I believe we can.

Douglas Harned - Bernstein Research

So the specific areas that you see more leverage than others today?

Marshall Larsen

It's all blocking and tackling in our functions and our facilities. So certainly, those areas that -- and some of our businesses haven't made as much progress, so it's lower hanging fruit that even the ones that have really been relentless on continuous improvement are able to glean more and more by revisiting even the same process that we've already leaned out a year or two back. So I don't see it ever changing. I think we're early in the game on this whole thing.

Operator

Next, we'll go to Peter Arment with Gleacher & Company.

Peter Arment - Gleacher & Company, Inc.

Just following up quickly on Doug's question on that. You said you're early in the game. So I mean, you said 10% of employees in the lower-cost countries, and I think you've mentioned in the past that your supply chain sourcing percentage I guess is lower that. Where can this go? I mean, do you have any longer-term targets? Or is it just, as you've said, more of it just a continuous improvement, there is no real...

Marshall Larsen

Well, a lot of it depends on where we need it because we don't just move manufacturing out of the U.S. or Europe because there are lower-cost areas in the world. A lot of it is where the demand is. We're able to reduce our whole supply chain by sourcing for customers closer to them. But it also has to do with freeing up other resources within the U.S. and Europe, whether it's engineering, and it's some of the things that ordinarily we would take outside the company into the supply chain. We found that in some of our low-cost facilities, we can actually produce it ourselves for a lower cost than we can buy it. And we can continue to lean the systems in those low-cost countries. So we don't get the big invoice markup after a three-year contract or whatever with a supplier in a low-cost country. So there's a lot of method to our madness here in driving overall margins across the company.

Peter Arment - Gleacher & Company, Inc.

And then just quickly on cash, you've got a lot -- this looks like in the last, I guess, four years, this will be the biggest year where you've got program investments. And I assume something is baked in there I think for A320 NEO. If you are successful in winning one of the sales, how do we think about that going forward just in terms of with 2012 be a bigger year on program investments? Or maybe just a little color on how that rolls out.

Marshall Larsen

Well, I mean it's probably going to be about flat from year-to-year. Because we will have to expend monies this year on NEO if we're awarded it and we have certainly put that into our guidance going forward because we have a high expectation to participate in that program.

Operator

Next, we'll go to Cai Von Rumohr with Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC

Scott, you mentioned the corporate expense would be higher in 2011. Could you tell us about where that will be and also included in that, the ERP? And then the second part of the question is the A330 rate is just gone up, does that give you any opportunity for positive cash [ph] adjustments?

Scott Kuechle

No. Relative to corp. G&A, it's actually going to come down in 2011 versus 2010. We...

Cai Von Rumohr - Cowen and Company, LLC

Right, but it's higher than your prior expectation. So about where should we model it?

Scott Kuechle

Yes, I would assume about $34 million a quarter for corp. costs and then another $6 million a quarter for other and another $1 million to $2 million for minority interest, which is further below the line. But those are the three elements of nonoperating costs that you probably want to pick up. And that's about $20 million less on the corp side then what we'd incurred in 2010. And most of that gap is adverse foreign exchange that we experienced in 2010 that we don't expect to recur in 2011 into onetime items in 2010 that again we don't expect to occur -- to recur in '11 and then slightly lower comp costs as we go into '11 versus '10. So that's the large part of the gap. The SAP cost will go up a little bit in '11 versus 2010 because we have some large businesses going live on that system in 2011, the early part, and we'll have some additional support costs as a result. But overall, about $20 million better in 2011 than 2010 on the corp line.

Cai Von Rumohr - Cowen and Company, LLC

And then the question on the A330, do you have opportunity there?

Marshall Larsen

I don't think that's a significant factor, but we'll have to evaluate that.

Operator

Ken Herbert with Wedbush has our next question.

Kenneth Herbert - Wedbush Securities Inc.

With the reduction in the commercial OE delivery outlook, from $15 million to $20 million to now just up $15 million, was that exclusively the 787?

Scott Kuechle

Yes, it was.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

And then can you talk about then conversely what the benefit was from that, obviously, push out knowing it's a lower-margin business, losing that headwind from an EPS standpoint into the now and the 2011 guidance?

Marshall Larsen

Well, there's no real headwind on EPS because it's a low to no margin business, so really it didn't affect EPS. It was marginally helpful on the margin line, so lower sales, higher margin, no effect on EPS is the way to think about it.

Kenneth Herbert - Wedbush Securities Inc.

Okay. Because when you look out then, do you -- when you look specifically with the changing guidance from October, the October numbers to now, the numbers for 2011, is there anything else in terms of the non-aftermarket volumes aside from what you've talked about already that drives some of that benefit you're putting in through there in terms of the...

Scott Kuechle

Yes, I mentioned earlier in response to another question that pension is a benefit of around $0.20. The aftermarket helps us by about 12%, with the two percentage point increase there. Military, while we took up the percentage growth, we really didn't change the actual dollar growth year-over-year, so no impact from military. And then a slight decrease in the regional business, general aviation OE focused on the business jet market. So that cost us about $0.05. So that gap from the prior outlook to the current one is $0.25 to $0.30 better, and those three things account for most of it, and then a little bit higher corp. cost offset by a little better margin performance in our businesses. And that's the gap.

Eric Hugel - Stephens Inc.

Okay. And then just finally on the military side, with keeping with what you just mentioned on the guidance, are you seeing potentially better outlook now relative to expectations on aftermarket or on OE sales into the military? Or is there any change in that mix?

Scott Kuechle

Not really much change in the mix from previously. We have the continuing resolution to contend with, but our expectation is that the important programs that we're involved in will get funded, if not through the historical process through new budget guidelines that they'll put out over the next couple of months because we believe those are very important programs. So we don't really think there's a lot of downside. And there's not much downside to us from a margin perspective because some of those are all cost-plus that would be accounted for there.

Operator

Next, we'll hear from Deutsche Bank's Myles Walton.

Myles Walton - Deutsche Bank AG

Just a quick question on the underlying industry ASM assumption for you, Marshall. I think the previous range had 4% to 6%, and I might have missed it, but is that still the underlying industry assumption?

Marshall Larsen

Yes, it is. That's we're basing it on.

Myles Walton - Deutsche Bank AG

So what you raised on is more of the multiplier effect in your own business. I'm just kind of curious what -- is it order rates that you're seeing? Is it assumption of deferred maintenance picking up just kind of -- if the underlying market assumption didn't change...

Marshall Larsen

No, I mean, we have obviously a better mix in the aftermarket on A320s and also 737 MGs. We've seen on our Wheel and Brake business the order rate move up, the number of Landings move up. We've seen majors in our Nacelle business start moving up in the fourth quarter. So it's more of the kind of our presence in the aftermarket that have changed in the industry outlook.

Myles Walton - Deutsche Bank AG

And then could you give us a picture inside of your aftermarket businesses kind of your aftermarket businesses? Is there a big variation where you're seeing something that's maybe going a little slower or quicker than you would have otherwise expected at this point?

Marshall Larsen

I don't think so, Scott?

Scott Kuechle

It's fairly broad-based. I mean, our bigger businesses, we're seeing good growth trends, good backlog at the end of the year. It is a little bit spotty in terms of some businesses that are picking up faster than others. But the larger businesses that we have seem to be the most solid coming into 2011. So we take a lot of comfort in that.

Operator

Ron Epstein with Bank of America Merrill Lynch is next.

Ronald Epstein - BofA Merrill Lynch

Just changing gears here a little bit, how is the integration of DeCrane going? And what are you guys seeing in the business jet market?

Marshall Larsen

Well, in terms of integration, organizationally, that's pretty much been done. And in terms of facilities, we've had no real need to do anything on that. But what we are doing is moving our learning on Lean manufacturing into those businesses. They're already very good-margin businesses, but we think they can even be better. Talk to Scott, he will tell you a little bit about what we saw in the business jet side. We've kind of lowered our forecast on that, particularly on the lower and the smaller aircraft. We don't see those coming out of the downturn as fast as the larger jets, the globals and the Gulf streams and so on. Their order books are better, and they're moving better. So it's really our outlook on the business side more than anything, not on the regionals that we've changed.

Operator

Next, we'll go to Eric Hugel with Stephens.

Eric Hugel - Stephens Inc.

You guys, in the fourth quarter, I guess, versus your prior expectations, were a little bit light in terms of the defense and space. And then your guidance for 2011 was a little bit stronger than you were previously expecting. Was there some kind of push out, out of fourth quarter into 2011 that we should be thinking about?

Marshall Larsen

It was modest at the margin. It was really just -- that's what caused the slightly lower level in fourth quarter than we had anticipated. But again, the total dollar level that we're expecting for 2011, we haven't changed that. It just changed the growth rates. And there's nothing that I would highlight that's significant across the enterprise in terms of things that moved in or out.

Eric Hugel - Stephens Inc.

You guys you talked about your efficiency and productivity improvements, all the stuff that you've been doing over the last year or so. And I remember last year, you threw out a metric, I think it was a 1% increase in aftermarket equals about $0.06 of EPS. Should we be thinking with all the efficiency improvements that you've sort of put in place that maybe that number maybe is a little bit higher now?

Scott Kuechle

It affects actually more on the OE side of our businesses as we drive costs down than it does in the aftermarket side because margins are already pretty good there. And there's a service component to the aftermarket side as well that just has a different dynamic than that. So I think it's more on the OE, which is where more of the volume is where you get more of that benefit from low-cost country sourcing from Lean/CI, et cetera. So we haven't put out a specific number that's reflected in our earnings, our margin guidance each year, and it reflects our expectation that over time we can continue to grow those margins.

Eric Hugel - Stephens Inc.

If you could just address what's going on in the M&A markets, sort of what you're seeing out there in terms of volume, of opportunities as well as pricing?

Marshall Larsen

I mean, we continue to have a list of companies that are either available or we would like to see available. And we've done I think three acquisitions since the end of '09. They all fit very nicely within our portfolio. We'll continue to look at those opportunities as we go forward and would not be surprised to do more of those bolt-on type acquisitions.

Operator

Now we'll hear from Howard Rubel with Jefferies.

Howard Rubel - Jefferies & Company, Inc.

Marshall, you have this unique position of being some cases a prime and some cases a sub, could you talk for a moment about what you're doing to kind of fend off the pressures that the Pentagon continues to push at both levels of the supply chain?

Marshall Larsen

Well, first of all, other than some cost-plus contracts that are more along the line of ISR, almost all of our contracts are either competitively bid or commercial, off-the-shelf pricing, so we don't get the same kind of pressure. Yes, we'll negotiate with a Lockheed or another prime that we're selling through to get the business, but we also have the benefit of driving our cost down through Lean and not have to pass it on because it's not a cost-plus contract. So we don't get the same kind of pressure that you would if you were building a total program, a total aircraft program, for instance.

Howard Rubel - Jefferies & Company, Inc.

And also some of these contracts have been in place for a while and still have some time to run, so there's some opportunity there that's not trivial.

Marshall Larsen

That's right.

Howard Rubel - Jefferies & Company, Inc.

But it's not free? You're not seeing any pressure for reopeners or anything like that?

Marshall Larsen

So far, we haven't seen much of that at all.

Howard Rubel - Jefferies & Company, Inc.

And then, Scott, the tax laws were fairly dramatic in terms of changes, in terms of depreciation and some other incentives. And while you provided us with a sense of what the cash flow could be for the upcoming year, how did you think about some of these benefits that would impact you? And does it cause you in any way to think about spending more in the United States than in a low-cost country?

Scott Kuechle

I think it's a couple of points there. One is that the changes going forward -- the R&D tax credit is obviously helpful, and that's more of a permanent benefit. Some of the accelerated depreciation, bonus depreciation, helps you on the cash flow side, not on the earnings side because it's a deferral mechanism. When we think about where to put our investment at the margin, that does make a difference, for us, it's more important to look at where long-term tax policy is and making those decisions rather than kind of short-term moves, how long are those things going to be in place. So if we had more confidence on what the outlook would be two, three, four, five years from now, it would be much more beneficial to our investment philosophy as it relates to U.S. versus elsewhere. And I think a lot of other companies around the industry would look at that as well. It's hard to base your long-term judgments on what happens one year when the political winds might blow someplace else the following year.

Marshall Larsen

And also if you look at our U.S. investments, I mean we're expanding our sensors facility in the Minneapolis area. We're not moving that to a low-cost country. We get very, very good productivity there. We get very good productivity down in our Alabama facilities. We've never even considered moving our Wheel and Brake production out of Ohio because we get a lot of cooperation from that workforce in terms of Lean, and we've been able to make that work very well. So it isn't one answer. But I agree with Scott on the tax policy. We need a longer-term tax policy. We can't -- look what's going on with this R&D tax credit. I mean, that's just crazy.

Howard Rubel - Jefferies & Company, Inc.

I agree, and I appreciate that. So there is some tax, some cash flow benefit you've gotten in '11, and some of it you may not have fully been able to calculate because it came fairly quickly after the -- towards the close of the year, Scott?

Scott Kuechle

Yes, our cash taxes relative to book taxes will be less than 50% in 2011. And we have reflected that in our guidance already.

Operator

We'll now take our last question from Ted Wheeler with Buckingham Research.

Edward Wheeler - Buckingham Research Group, Inc.

The commercial aftermarket uptick that you've outlined pretty detailed, just wondering if there's any change in your view of the mix of planes that are kind of consuming the improved parts. In other words, are some of the older planes being more actively used or is it as you expected prior to your revisions today?

Marshall Larsen

Well, we haven't seen that big a -- I mean, the more out-of-production airplanes, we haven't seen any large jump on that end of the market. I mean, what we're seeing out there with, particularly U.S. airlines, I mean they're running load factors at 80%. And I think they intend to try to stay there. And that means utilizing fuel-efficient aircraft first, like A320s and 737 MGs. And I think they will try not to bring as many of those old aircraft back. We start getting aftermarket on brand new narrow bodies after about one year, beginning with Wheels and Brakes. And then it varies how long thereafter. But there's a good bow wave of those aircraft because we've had very significant deliveries of those narrow bodies in the last five to seven years, which has built up the fleet. And that's why I answered earlier that in spite of sort of a stable 4% to 6% ASM outlook, we increased our aftermarket guidance based more on the mix of Goodrich content in the worldwide fleet.

Edward Wheeler - Buckingham Research Group, Inc.

Just another question on the OEM commercial, large commercial OEM market. If you took the current build plans of Boeing and Airbus and kind of move forward a year, would you think your OEM revenues would be in that same 15% increase for '12? Or would it be more or less? If you could just give a little color on that.

Marshall Larsen

They're, really, going to be double-digit for the next several years, as a result of not just production rate increases but the introduction of some of the new aircraft, beginning with 787 and A350 after that, et cetera. So I think we're looking at double-digit growth for the next several years.

Edward Wheeler - Buckingham Research Group, Inc.

Okay. But relative to the 15%, not sure yet?

Scott Kuechle

Just with the 87 delayed, I think we're going to see a full year production in 2012. And then we've already got announced production increases on narrow bodies, so I would say it's going to be at least that.

Edward Wheeler - Buckingham Research Group, Inc.

And just lastly on the earnings for the year, would you explain -- if you look at just the operating income change, would you expect kind of a linear performance in terms of year-on-year as you go through each quarter? Or is there any particular quarter where there might be some details we don't know about factored in?

Scott Kuechle

First quarter is historically the lower EPS quarter for the company and also lower cash flow, just because a number of things turn in the first quarter versus fourth quarter. So...

Edward Wheeler - Buckingham Research Group, Inc.

I was just thinking in terms of the operating income change year-to-year. I mean, it's always lower, but...

Scott Kuechle

Well, I mean, you've got a little bit different -- if you're talking about change year-to-year, it depends more on the comps from last -- the quarters of 2010. And of course, the quarters grew reasonably sequentially. I think the third quarter was higher than fourth, but second and third quarter are historically our best quarters.

Operator

Once again, that will conclude our question-and-answer session for today. I'd now like to turn the conference back over to Mr. Gifford for any additional remarks.

Paul Gifford

Thank you, Karen. And I'm sorry to keep you a little bit longer than scheduled. We want to make sure we got everybody who wanted ask a question the ability to ask one. I look forward to talking to you throughout the rest of today, tomorrow and as we go forward throughout 2011. Thanks a lot.

Operator

Once again, that does conclude our conference for today. Thank you again for your participation.

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