Goodrich's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Jul.21.11 | About: Goodrich Corporation (GR)

Goodrich (NYSE:GR)

Q2 2011 Earnings Call

July 21, 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

Cai Von Rumohr - Cowen and Company, LLC

Kenneth Herbert - Wedbush Securities Inc.

Robert Stallard - RBC Capital Markets, LLC

Jason Gursky - Citigroup

J. B. Groh - D.A. Davidson & Co.

Eric Hugel - Stephens Inc.

Howard Rubel - Jefferies & Company, Inc.

George Shapiro - Citi

Ronald Epstein - BofA Merrill Lynch

Joseph Nadol - JP Morgan Chase & Co

Heidi Wood - Morgan Stanley

Douglas Harned - Sanford C. Bernstein & Co., Inc.

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 Second Quarter 2011 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, and thank you for joining us today as we discuss our second quarter 2011 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 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 report on Form 10-Q. There are also details 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. Once again, we ask callers to 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, you can get back into the queue and ask another question, time permitting.

Now, I'll turn the call over to Marshall, who will provide you with an overview of our second quarter 2011 results and our updated 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 second quarter results and then turn to our updated outlook for 2011 and discuss its drivers.

Today, we reported excellent second quarter 2011 results for sales and earnings and announced a very significant increase to our sales and earnings expectations for 2011.

During the second quarter, our sales grew 17%, including organic growth of 12%. All of our major market channels, including the commercial aftermarket, reported strong year-over-year and sequential sales growth. On a year-over-year basis, sales in our large commercial airplane original equipment market channel grew by 17%. Our regional business and general aviation original equipment sales increased by about 58%, with organic growth of 23%.

Our commercial aftermarket sales growth of 16% was significantly greater than the growth in airline capacity. This growth rate, which showed significant acceleration from our first quarter growth, was one of the primary reasons we raised our full year's expectations for this market channel to growth of about 13%. The second quarter 2011 sales were 6% higher than first quarter 2011.

Our defense and space sales grew at a rate of 10%, with 6% organic growth. We continue to believe that our presence in attractive high-growth markets, such as ISR, helicopters and precision munitions will enable us to grow our defense and space sales at a mid-single-digit growth rate for the next several years despite the difficult global defense budget environment.

In the second quarter 2011, we achieved segment operating income margins of 17.2% compared to 17.9% in the second quarter 2010. Our second quarter results included $23 million of cost related to a plant closure decision and the acquisition of Microtecnica. Excluding these costs, segment operating income margins would have been 18.4%.

Our net income per diluted share increased to $1.38 in the second quarter 2011 and included cost of $0.14 per diluted share for plant closure and Microtecnica acquisition-related costs. Excluding these costs, EPS was up 23% from the second quarter 2010.

Our strong earnings growth was primarily due to excellent growth in all of our market channels, particularly the commercial aftermarket, our relentless pursuit of Continuous Improvement and lower pension expense.

Some of the specific items that affected earnings during the second quarter 2011 were as follows. We announced in June -- as we announced in June, we recorded pre-tax costs related to a plant closure of $16 million or $0.08 per diluted share during the second quarter 2011. Our second quarter 2011 results also included pre-tax and after-tax costs of $7 million or $0.06 per diluted share associated with the Microtecnica acquisition. The plant closure and acquisition-related costs are reflected in the segment operating income for Actuation and Landing Systems.

Total changes in estimates for the second quarter of 2011 were a favorable $21 million pre-tax, somewhat lower than the favorable $33 million we reported in the second quarter 2010. Compared to last year, we had lower pre-tax pension expense of about $19 million or $0.09 per diluted share in the second quarter 2011.

The effective tax rate in the second quarter 2011 was 32.6%, in line with our expectations as compared to 32.1% in the second quarter 2010. Our second quarter 2011 results included higher pre-tax expenses of $14 million or $0.07 per diluted share related to share-based compensation compared to the second quarter of 2010. Net cash provided by operating activities minus capital expenditures or free cash flow for the second quarter 2011 was $179 million, a little over 100% of reported net income.

Since April, we have announced several significant events. Our ORS-1 satellite was successfully launched. ORS-1 is the first satellite in the Operational Responsive Space program designed to support combatant command operations and will provide a battle space awareness capability supporting the U.S. Central Command's mission needs. Goodrich is the prime contractor on this program.

We completed the acquisition of Microtecnica, a leading provider of flight control actuation systems for helicopter, regional and business aircraft, missile actuation and aircraft thermal and environmental control systems. The integration is going very well and results are in line with our expectations.

We announced the closure of the Marble Avenue landing gear facility in Cleveland, Ohio by the end of 2012. We expect to record pre-tax charges totaling $37 million of which 40% are non-cash. Approximately $20 million, $0.10 per diluted share, is expected to be recorded in 2011. And approximately $15 million, $0.07 per diluted share, is expected to be recorded in 2012. We expect cost benefits of about $0.13 to $0.15 per share beginning in 2013.

I'll now turn to our expectations for the full year 2011. We believe the strong growth trends we experienced in the second quarter 2011 will continue throughout the year, and we expect significant sales growth in each of our market channels. Overall, we expect sales to grow about 16% in 2011 with about 13% organic growth, which would provide us with sales of approximately $8.1 billion in 2011.

Due to our first half growth rate of 14% for commercial aftermarket sales and our expectation that worldwide airline capacity will continue to show good growth, we have increased our full year outlook for growth in this market channel to approximately 13% compared to our prior outlook of 7% to 9%. We expect growth of about 16% organically in our regional business and general aviation OE channel. Including sales from acquisitions made in 2010 and 2011, reported sales growth is expected to be about 40% in this channel.

Our expectations for growth in the defense and space market channel increased to 15%, including about 10% organic growth at the top end of our prior outlook. This includes organic growth greater than 15% for our Intelligence Surveillance and Reconnaissance business. This strong sales growth should result in an even better growth in our net income per diluted share.

We now expect 2011 net income per diluted share to be in the range of $5.85 to $6, including costs of $0.16 per diluted share associated with the plant closure and the Microtecnica acquisition. The prior outlook was for net income per diluted share of $5.40 to $5.55, which did not include the costs noted above. Excluding these costs, earnings guidance for 2011 has increased by more than 10%. Compared to the full year 2010, we are expecting earnings per share to grow by more than 30%.

Our 2011 outlook includes operating margins of over 17%, including the plant closure and Microtecnica acquisition-related cost of $23 million pre-tax. This reflects growth in the aftermarket, the benefit of continuous improvement and lean initiatives on costs and lower pension expense than 2010. Lower worldwide pre-tax pension expense is expected to provide a benefit of approximately $78 million or $0.39 per diluted share, which is slightly better than our prior outlook.

Excluding the plant closure and acquisition-related costs, 2011 segment margins are expected to be about 17.5%, and EBITDA margins are expected to be about 19.5%. We are expecting a 2011 full year effective tax rate for approximately 30%, somewhat higher than the rate we experienced in 2010. This is unchanged from our prior outlook.

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 pre-tax worldwide pension plan contributions of about $100 million.

Overall, our excellent performance during the second quarter further strengthened our view that 2011 will be a very good year for Goodrich. We continue to expect excellent growth in sales and earnings over the next 5 years, fueled by strong market conditions in commercial, original equipment and aftermarket. Our significant market share gains on new commercial and military aircraft currently in development and our position in the growth areas of the military budgets, helicopters, precision-guided munitions, intelligence, surveillance and reconnaissance and fixed-wing aircraft retrofit programs.

Our financial position remains excellent with more than $500 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 additional 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 each of you during the second half of 2011. We've got a great team, and we're all very excited about continuing to grow our company and our profits as we enter a period of strong commercial aerospace growth.

Now let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Robert Spingarn with Crédit Suisse.

Robert Spingarn - Crédit Suisse AG

On the aftermarket, it seems to be a little bit more level than some may have expected. We thought there could be a bit of a fade in the back end of the year on tougher comps. But based on your guidance, you seem to be looking at fairly level growth around the 12% organic number throughout the year. So can you talk a little bit about what holds that up as we go into H2 and how, Marshall, you think aftermarket growth trends into next year?

Marshall Larsen

Well, as we looked at what took place in our second quarter, with very strong growth from similar quarter last year and from the first quarter, 6 out of 8 of our commercial aftermarket businesses had double-digit growth in the second quarter. And as we looked at businesses like wheels and brakes, they have done extremely well, with much improved sales in the second quarter over the last year, and they've seen a continuing trend about the last 6 months of increases in that business. Landings are up about 10% in June -- over June last year, which is a very good indicator. But if you look at our interiors business, which had well over a 20% increase in aftermarket, that reflected A380 initial provisioning but also a fairly widespread number of discretionary products that airlines are buying. And that is a bullish sign, because they don't have to refurbish some of the flight attendant seats or evacuation slides, but that is happening. And so that is a very good sign. All in all, as we look at ASM capacity, it looks like it's going to be up in the 6% to 8% range for the full year, which is good. We generally grow faster than that ASM capacity increase. So all of those indicators have caused us to reassess our aftermarket growth rate up to 13% for 2011.

Robert Spingarn - Crédit Suisse AG

Do you see the discretionary holding up as well as the nondiscretionary going forward?

Marshall Larsen

Well, our book-to-bill on that discretionary is over one. And so that's another good sign that it will hold up for the rest of the year.

Robert Spingarn - Crédit Suisse AG

And just lastly, on aftermarket, with the strong summer flying season, do you think some people may defer some of their -- whether it's discretionary or not, into Q4? I mean, how do you see Q3 and Q4, specifically?

Marshall Larsen

Well, I think it will be relatively flat in terms of the growth. I think we'll -- just what you said before, we'll maintain a double-digit growth during that rest of the year. If there's one area that hasn't jumped up as much as our piece parts or majors or wheel and brake aftermarket, it's the extent of the repair and overhaul in the MRO shops. That has maintained fairly steady from last year, but that's going to happen at some point here down the road.

Robert Spingarn - Crédit Suisse AG

Okay. So just to sum up, it sounds like you expect this kind of pace to continue into '12.

Marshall Larsen

There's no reason why we shouldn't expect a double-digit pace to increase in '12.

Operator

We'll go next to David Strauss with UBS.

David Strauss - UBS Investment Bank

I'll stick with one question, asking the aftermarket question a different way. It looks like you're still -- your aftermarket forecast is now at 13% for the full year, still assumes relatively flat with the dollar run rate of the second quarter in Q3 and Q4, which would only put you back, I think, to the kind of run rate you were at at the prior peak. Meanwhile, flight hours and cycles and ASMs are well above. So why wouldn't we see sequential growth in the aftermarket from here in the back half of the year?

Scott Kuechle

David, we still think we're going to see good sustained growth going forward into 2012 and beyond. And we think this is a multiyear catch-up from the dip that we saw in '09 and '10. So it's unwinding the way we would have expected given that the activity-based businesses, particularly wheel and brake, have come on very strong this year. And that's a reflection of the overall size of the fleet, the positions that we have in the earlier turn-on of aftermarket there for newer aircraft -- the newer in-production aircraft. That will roll out to the other aircraft in the other businesses beyond 2011. So our view is we kind of stay at these levels as the growth in aftermarket shifts from wheel and brake on an activity basis into the rest of our businesses. So we think we sustain at a very high level for several years. Maybe not at 13%, 14% going into next year, but it's the start of a very good upmarket.

David Strauss - UBS Investment Bank

Okay. But your 13% forecast is, if I'm doing the math right, implies flat in the back of the year relative to what you just did in Q2 in terms of a dollar number. Is that correct?

Scott Kuechle

Yes, that's right. And that would put us still $100 million plus below the 2008 levels that we were able to achieve in the aftermarket despite the fact, as you said, that the fleet is at least 10% bigger now than what it was in '08. So that's why we see a good long-term trend here.

Operator

We'll go next to Peter Arment with Gleacher & Company.

Peter Arment - Gleacher & Company, Inc.

Marshall, on Defense, I guess I want to ask a question about -- given what we know about the budgets and the expected trend, I think, over the long term, plus I think there's most likely a CR coming here for fiscal '12, I mean, how does your mid-single-digit or roll-up over the next couple of years, when you think about the different categories that you're in, whether it's fixed wing or ISR, precision-guided munitions or helicopters -- I know ISR, you said 15% plus this year. And clearly, I think you guys are a standout in terms of your defense growth against your peers. But how should we think about that with just that as the backdrop? How does it roll up?

Marshall Larsen

Well, if you look over the next couple of years, if you just look at military helicopter production rates, they're hanging in there and in fact, increasing a little bit. You also have, I think, as you've indicated, very good growth on the ISR side. The need for intelligence is not lessening. In fact, if anything, it's increasing. So the outlook for the next decade on UAVs is pretty positive in terms of spend worldwide. And when we look at our mix going into the defense side, we're pretty happy with being able to maintain, over the next several years, about a mid-single-digit growth rate. Now some programs, like the C17, that certainly has been curtailed, as F-22, but the F-35 is growing. And the other thing that people don't think about in relation to our military side is we got a fair amount of international sales. So we're selling nonclassified ISR programs to other allied countries, and our European-based businesses still do a fair amount of business with European governments, particularly on the helicopter side.

Peter Arment - Gleacher & Company, Inc.

And just related to all this, I just -- trying to keep it in the one question here but just want to make sure I understand. Have you seen any congestion on the bookings environment domestically? It doesn't -- I mean, it doesn't seem like you're running into much trouble compared to your peers, and we're certainly hearing about that.

Marshall Larsen

We haven't at this point in time. No.

Operator

We'll go next to Jason Gursky with Citi.

Jason Gursky - Citigroup

In the past couple of months, you've talked a little bit about the potential for the aftermarket growth to accelerate going into 2012. I'm just wondering if that's still a potential given the comments that you've made today. And then just is there a general rule of thumb that can -- people can use looking at ASM capacity growth as it relates to your potential growth? Is it some sort of multiple that we can all kind of use as a general rule of thumb?

Scott Kuechle

Yes. Jason, on the first part of that question, the expectations that we had earlier in the year when we talked about accelerating growth into 2012, that's what we're seeing right now. So it was hard for us to call exactly when we would see that acceleration. But based on a strong Q1 and an even stronger Q2, that expectation is being realized in 2011. So I think we'll sustain very good growth rates going into 2012, but the acceleration that we had talked to earlier was from our earlier -- against our earlier expectation of 7% to 9% for '11. We're now at 13% area for this year. That's the acceleration that we were expecting.

Jason Gursky - Citigroup

Okay. Perfect. And then on the rule of thumb, is there a way to look at ASM capacity growth? And then...

Marshall Larsen

There really isn't a hard and fast rule of thumb that we're going to grow x percent greater than ASMs. But I think one way you can get an indicator is if you look at what we said, a 6% to 8% ASM growth for -- projected for this year, if you look at the A320 family, it's going to be close to 10%. And the 737 is going to be mid-teens in terms of growth. So we have most of our content on narrowbodies on those 2 platforms. The other one that's doing very well is the EMBRAER 190, where we have very good content on, and that's growing very nicely.

Operator

We'll go next to Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc.

I just wanted to try to dig into the operating margin performance a little bit, another good quarter when we make the adjustments. In the slides where you give us the walk from the prior outlook to the new outlook, you're giving us a pretty large increase from better margins, but there's also an implied better margin in the aftermarket increase and in the estimates on long-term contract increase. So really kind of a lot going on with the margins, and it seems like you're still doing very well on your cost and efficiency initiatives. So can you talk about what you're still doing there and what's still ahead of us? And then maybe talk about where segment margins should land in the back half of the year.

Scott Kuechle

Yes. I can kind of give you the numbers and if Marshall wants to comment on how we're driving those and how we'll do that further. In terms of margins, you're right. The reported year-to-date margins are about 17.4%, almost 18% if you exclude those charges related to landing gear and our acquisition that we called out in the press release. So back half of the year, we would expect to be over 17% with a slight decline coming on an adjusted basis, just because we're going to see more OE growth in the second half of the year than what we saw in the first half. With that comes higher load charge, hardware shipments coming in our wheel and brake business as an example. Our Microtecnica acquisition -- in the first couple of quarters after you complete an acquisition, those sales come at basically no or very low margins. So we don't get the accretion from that acquisition until 2012. So that's the reason we'll see a little bit lower margin in the second half of the year than what we ran on an adjusted basis in Q2. But I think overall for the full year, we're going to be north of 17%, which is a good increase from where we expected to be.

Marshall Larsen

I think the efficiency programs that we do through our Lean and Continuous Improvement are continuing to pay dividends for us. We've -- if anything, we have accelerated those programs. And I think last call, I talked about a kaikaku event we did in our Colorado Springs seating business that increased the floor space by over 25% and dramatically increased throughput. We've done that same thing in 2 more plants since then. And those kinds of step changes really make a difference going forward, and I think we're far from -- I don't think we're any further than about the second inning in this baseball game on that, because we've really stepped it up to make it a much more uniform and enterprise-wide push on Lean across every business around the world, and it's making a difference.

Noah Poponak - Goldman Sachs Group Inc.

So as we look beyond '11, maybe Scott, if you're willing to put some numbers around how you think margins progressed, just because on the one hand, you've got the comment Marshall just made that we're only in the second inning, which is -- which would seem pretty positive. On the other hand, you potentially have OE growing faster than aftermarket again, which is pressuring you in the second half of '11. How do you think we'd progress into '12?

Scott Kuechle

Yes. If we're going into 2012 with operating margins in '11 north of 17%, we're -- I don't think we're going to go backwards in margins. And I think we have the ability to move them up very slightly in 2012, 2013 while we're still running very, very high sales growth rates during those years. Once the OE growth rate starts to moderate a little bit, then we've got the opportunity to grow margins further over a little later period. So I think we'd clearly hold those margins and build on them slightly over the next year or 2. But the real -- the driver on EPS is going to be the ability to drive very large growth rates across all 3 of our major market channels and hold or slightly increase those margins. That drives a lot of good EPS growth.

Operator

And we'll go next to Doug Harned with Sanford Bernstein.

Douglas Harned - Sanford C. Bernstein & Co., Inc.

We've been talking about the results here and clearly, very, very good. In looking at 2012, what do you worry about? Are there some programs or some areas that you're focused on, where you see some risk here going into the next year?

Marshall Larsen

Well, first of all, Doug, I've never had a year where there wasn't some risk. But that's our job, to manage that risk, and I think as far as executing on our programs that I have every confidence that we will do that. As far as worries, I worry more about whether or not there's some exogenous event out there that can affect the entire industry, not just Goodrich, and that's very difficult to plan for. So we tend to stick to our knitting and really concentrate on what we can control, and that's how well we execute.

Douglas Harned - Sanford C. Bernstein & Co., Inc.

Well, when you look forward, you've -- this year, you're raising your CapEx and very understandable, A350, 787, the neo. And when you look at the different development programs you're on, are there some of those that look more challenging that -- when you look at the long-term trajectory of CapEx, is that something that we should see staying at those levels or going up or that there's some risk around?

Scott Kuechle

I'm sure capital expenditures, we would expect -- as opposed to R&D investments for programs, CapEx, we would expect to be high this year and probably next year and then actually tail off. A lot of the CapEx that we're investing in 2011, 2012 is just to continue to reposition our manufacturing base into more lower-cost countries, to get some of that growth that we're seeing over the next few years positioned in a low-cost base. So that will drive margins as much as anything. There's some rate capital that are in those numbers, but the bigger drivers, the big chunky things are capacity growth and capacity growth in smart areas where we can drive margin.

Marshall Larsen

And as far as executing against the programs, I mean we're about ready to closeout on 787. But on A350, that's still progressing nicely, CSeries, progressing nicely. So those are things that we try to stay on top of on a daily basis. So that's our job.

Operator

We'll go next to Howard Rubel with Jefferies.

Howard Rubel - Jefferies & Company, Inc.

I noticed that you increased your outlook for DeCrane. And could you talk about how you've been able to integrate that into the business and how you look at Microtecnica doing the same thing, Marshall?

Scott Kuechle

Just to clarify Howard, we don't really disclose specific operations for DeCrane. What we did do is raise our regional business, general aviation OE and aftermarket projections going forward. DeCrane is part of that, so they're performing well. On an inorganic basis, we're also -- Microtecnica has some good strength in those markets as well, so we're benefiting from that in terms of year-over-year growth. So just to set the stage.

Marshall Larsen

Yes. In terms of integration, Howard, I mean, the DeCrane cabin systems businesses are -- the biggest thing we've been doing there is instilling our Goodrich operating philosophy in those businesses, where we can move them further up the efficiency curve on Lean. That's progressing nicely. We've put some people in place in those businesses. Microtecnica, obviously, is brand new. So we're not quite as far along on that one, but that will be between their locations in Italy and our locations in the rest of Europe. We'll be able to trade off capacity, and I think we'll be able to help them in certain areas on the Goodrich operating system and Lean. And I think they will open up doors for our other Goodrich businesses and some of their customers in Europe that we didn't have before on the helicopter side. So we look forward to that one adding to our growth, and I'll be able to tell you more about that in 6 months or so. But right now, it's pretty early.

Operator

We'll go next to Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co

Scott, I was wondering if you could walk us through some of the -- as we look into next year -- and of course, I'm aware you haven't given guidance yet, but I think you probably will next quarter. Just in advance to that, maybe some of the nonoperating or kind of non-core items, ForEx, what you think the tax -- do you see anything from here on the tax rate? Maybe some of the accretion from the Microtecnica, other items besides the fundamentals that might drive earnings next year one way or the other.

Scott Kuechle

Okay. I'll take you through a few those, and you can see if there's anything that I missed, glad to try to comment on them. In terms of foreign exchange, in 2012, we would expect that to be about plus $25 million versus this year. So we're expecting about $14 million pre-tax year-over-year in '11 versus '10. That's actually down slightly from where we had guided last. And 2012 will be an additional $25 million favorable. Pension expense, I would expect to be fairly flat in 2012 versus 2011 and very much in line with our total level of contributions. Tax rate's probably similar in 2012 to what we're seeing in 2011, so I wouldn't expect any major changes there. Some of the nonoperating items that we're seeing in 2011, we've got the landing gear plant closure costs this year. Those are going to be about -- and with Microtecnica as well, it's about $0.16 negative in the quarter, $0.20 for the year. We'll see another $0.07 continue into 2012 as we complete that -- the closure activities there and then we'll get the benefit in 2013 after we complete that closure. And then Microtecnica probably generates maybe $0.10 of accretion in 2012, something around that range.

Joseph Nadol - JP Morgan Chase & Co

Okay. A couple of other ones. Marble Ave savings and anything you can see from here in terms of changes in cum adjustments.

Marshall Larsen

What was the...

Scott Kuechle

Oh, the savings from the plant closure? Is that what you asked?

Joseph Nadol - JP Morgan Chase & Co

Yes. And changes in long-term contract assumptions, its headwinds this year, is that going to be another headwind next year?

Scott Kuechle

Yes. In terms of savings in -- from the plant closures, we'd expect somewhere -- we said $0.13 to $0.15 a share beginning some time in 2013, that kind of a run rate. Those -- it's a 2-year plant closure movement of facilities. So when we get that done, there's not a specific timeframe on that, and it's -- there's some challenge to get it done well. So -- but that's the run rate of savings. It's hard to predict exactly what quarter we start to get that benefit, but it'll be around that rate. And what was the last one?

Joseph Nadol - JP Morgan Chase & Co

Cum adjustments. Do you anticipate any further headwind next year from lower positive cum adjustments?

Scott Kuechle

Yes. This year, we're thinking around $55 million now would be our newer guidance given the strength that we saw in Q2, and it'll be less than that as far as expectations in 2012. Normal -- we came into this year thinking $25 million, $30 million something like that, $20 million to $30 million. That's probably more of a reasonable expectation going into 2012.

Operator

We'll go next to Sam Pearlstein with Wells Fargo.

Samuel Pearlstein - Wells Fargo Securities, LLC

You were talking a lot about, I guess, the margin benefits we've seen in -- certainly in the nacelles and the actuation, but can you talk a little bit about the electronic segment and why those margins were down sequentially and year-over-year and what the rest of the year looks like there? Because you do a highlight in the release at least about higher operating costs. Can you just talk about that?

Scott Kuechle

Yes. We had a few kind of unusual small magnitude cost items in the current quarter that we don't think repeat going forward. Just to tick off a handful of them, we finished our SAP implementation in the largest business unit in that Electronic Systems segment. So they incurred some additional cost in the quarter related to that startup, some higher compensation-related costs there as well as in the other segments and in the corporate line as well. We did -- as Marshall said, we've got a significant focus on driving Lean/CI into our businesses. We did a major event with -- in one of the plants in that particular segment. We call it -- they're called kaikaku events, where essentially, you shut the plant down for a week, reorganize the flow and linkage in the plant, start back up. So there's some significant incremental cost associated with that as you do that, and we'll get the benefits of that in future quarters. So Q2 was around 15.6%. Year-to-date, we're at 16%. The second half is going to be north of the 16%, between 16% and 17%, and that's where we think we'll finish the year.

Samuel Pearlstein - Wells Fargo Securities, LLC

Okay. And so you mentioned some of that was G&A. Is that why SG&A picks up as well from Q1 to Q2? Was that...

Scott Kuechle

Yes. The SG&A line was higher in Q2 than previous quarter and higher than normal because of some higher compensation-related accruals. Stock price performed pretty well in the quarter. So that was the big driver.

Samuel Pearlstein - Wells Fargo Securities, LLC

Okay. And then just one last question, just as a yes-or-no question. Do you have the opportunity to bid on the nacelle work on the 737 with the leadbacks? Or is that something you don't have an opportunity to bid on?

Marshall Larsen

Well, we don't know the extent of that at this point in time. So until we hear from Boeing about what -- if any opportunities will be there on the current 737MG nacelle. That's primarily been done in Wichita, what we're a supplier to it. So I would think at a minimum, we'll maintain that kind of content.

Operator

We'll go next to George Shapiro with Access 342.

George Shapiro - Citi

Scott, just a question. You mentioned Microtecnica wouldn't provide much boost this year, and yet, I thought they had like 18% EBITDA margin. So can you just walk through why you came to the conclusions that you did?

Scott Kuechle

Yes. On -- if you're looking at EBITDA, it clearly provides some good benefit to us, but as you know, you do 2 things when you make an acquisition. You do some write-up of the intangible assets and then you amortize those over multiple years. So that's a -- that reduces some of that EBITDA in terms of how much carries through into booked earnings, and that's over a longer period of time. But then the other thing you have to do is write up the current level of inventory to full fair value. So you get 0 margin as you turn that inventory the first time, and that happens during the course of 2011. So essentially, the first couple of quarters after an acquisition, you don't make any book profit on those sales, and then of course, you absorb some of the transaction costs as well in the current year. So that's why there's really no accretion in the current year on a book basis. There clearly would be good accretion on an EBITDA basis this year and then also into next year. And just to touch on the closing costs that we highlighted there, $6 million of that just related to foreign exchange. So in other words, we bought this business. It's a European-based business. We bought it in Euros. So we bought the Euros a couple of days ahead of the closing of the acquisition. And during that time period, the dollar strengthened, and we got hit with a -- about a $6 million charge through the P&L purely related to FX prepositioning of cash. So it's not a classic transactional type cost in terms of fees and expenses. We can absorb those. We could have absorbed those and still maintained about breakeven for this year for Microtecnica and then get good contribution next year.

George Shapiro - Citi

Okay. And then one -- just one follow. Marshall, anything different in terms of the distribution of aftermarket based on geography: Asia, Europe, the U.S.?

Marshall Larsen

No. It's pretty well followed the fleet. We'd have seen a little more pickup in Asia than we have seen in previous quarters, so that's a good sign. But generally, it's maintained -- it's pretty much our distribution of where our products are with the airlines.

Operator

And we'll go next to Heidi Wood with Morgan Stanley.

Heidi Wood - Morgan Stanley

Yes. I want to talk a little bit about the results that you saw on regional business and general aviation. That was pretty terrific organic growth. Can you give us a little more detail on what you -- the puts and takes that you saw there?

Scott Kuechle

Yes, just within the quarter. Yes, we're like 24% organic growth on a year-to-date basis versus year ago period. So the big drivers on the regional side are the EMBRAER 190, where we've got a lot of content on the nacelle thrust reverser on that airplane, and that's obviously seen some good growth. So significant there as well as the turboprops within the regional market. So the Dash 8, for example, is a good airplane for us as well. On the business jets side, good content on the large cabin aircraft, so coming out of Dassault, Gulfstream and Bombardier 8. So that part of the market has been good. The mid-cabin level has been -- it's not gotten worse. It hasn't gotten better, but it's not been, at least, a drag. And remember, the comps a year ago from about mid-2009 to mid-2010 were pretty weak, so we're still -- have some good comparables there as well. But the strength is coming in exactly the part of the market where you want to be right now.

Heidi Wood - Morgan Stanley

And can you give us some color on your discussions? The commercial OE cycle has been pretty well telegraphed, but can you give us some color on what your conversations are like with the regional and business jet and general aviation OEs are as we look ahead into 2012?

Marshall Larsen

Well, Heidi, on the business side, we don't think we're going to see much in the small cabin stuff before the end of next year in terms of growth. I think they will start getting more orders by year end this year, but I don't think we're going to see production rate increases to any great extent until the latter half or the end of '12. On the regional side, most of our bullishness comes from that large EMBRAER. That one continues to do very, very well. The small regionals -- jets are not doing well, but turboprops seem to be hanging in there. In fact, there's -- that's been a source of increased growth for us.

Heidi Wood - Morgan Stanley

Great. And Marshall, maybe can we get your industry view as we look at kind of the impact on Goodrich as this Boeing reengineering and the implications of the A320neo built in the United States? And remind us, any other competitions that are out there still with you in China or other opportunities?

Marshall Larsen

Well, obviously, the A320neo has done quite well in terms of orders, and we're on the gear turbo band engine for that. And so we would expect to get a fair share of that market going forward. On the re-engining of the Boeing, as I said earlier, we don't know enough. We haven't had that kind of conversation with Boeing yet to comment on this. But if you look at the current nacelle made in Wichita, we're a supplier to that. We would hope to at least be a supplier into the new one. I think as we just look around the world, all these airlines are pressing for increasingly efficient aircraft. And you just saw what went on with the American order, and so that bodes pretty well for the content of Goodrich going forward.

Operator

And we'll go next to Robert Stallard with Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC

I was going to ask you, Marshall -- clearly, you're seeing strong growth across the commercial aerospace sector, both in OEM and aftermarket. I was wondering how comfortable you are as to whether your supply chain can keep up with the levels of growth that you're seeing, particularly in some of these new development programs.

Marshall Larsen

Well, generally, the aftermarket part is not that -- as critical as the OE side in terms of with these ramp-up rates, and we're spending a lot of time with our suppliers, making sure that they can deliver quality and on time. And that isn't a recent thing. We've been doing that for a number of -- the last number of years now, where we'd actually go in the suppliers, help them become more efficient. In some instances, we do Lean events in their places of manufacture, especially if we got a supplier that's delivering about 50% on time. We've got to get them up above the 90% to make sure we don't slow down any production lines. So right now, we feel pretty good about being able to meet all these increased rates.

Robert Stallard - RBC Capital Markets, LLC

And that goes as well for someone like 787. That's a new aircraft too.

Marshall Larsen

Yes.

Operator

And we'll go next to Ronald Epstein with Bank of America Merrill Lynch.

Ronald Epstein - BofA Merrill Lynch

Can you speak a bit about what you're seeing in the M&A world now, Marshall? Because you've been pretty active as of recently. And what are you thinking going forward? And how does it look out there?

Marshall Larsen

Well, we continue to look at various properties, and as -- we have seen multiples increasing a fair amount, especially on the more commercial properties. So we're -- we'll be somewhat cautious. But I've used that term with you for the last several years, and we still have been able to find good properties. And I would suspect we'll find some more over the next year, but I think, particularly on the commercial side, the pricing is getting higher and higher out there. The good news is there is nothing out there that we are compelled to have. We've got critical mass in all of our businesses now. But there may be some opportunities, and we will certainly keep looking.

Operator

And we'll go next to Ken Herbert with Wedbush.

Kenneth Herbert - Wedbush Securities Inc.

Just wanted to ask one more follow-up question on the aftermarket. You've -- Marshall and Scott, you've spoken a lot in the past about how the continued strength in new OE deliveries had pushed out a lot of the demand for aftermarket services in 2010 and into the early part of this year. I guess by some of the numbers, you're seeing this -- the fundamental demand really start to overtake or continue to increase. Can you just talk about the dynamics and where you see that today in terms of ongoing impact of -- as we head into significant production increases here relative to obviously the deferred and other drivers in terms of aftermarket demand?

Marshall Larsen

Well, if you look at the A320 family and the 737 family MG, obviously, there's been a great demand evidenced by Airbus and Boeing orders for those aircraft, and I think that's driven primarily by fuel efficiency and a replacement of older aircraft. That's the whole premise on American. But what that says is if you have A320s and 737MGs in your fleet, you're going to be utilizing those to a greater extent because of that fuel efficiency. And that's why, as I've said earlier, we're seeing probably ASM growth on A320s almost 10% for 2011 and mid-teens change for 737MGs. So there's -- it's still -- the aftermarket is still growing nicely with those aircraft in particular but also A330s and 777s. And that -- those 4 aircraft are about 60% of the worldwide fleet, and we're positioned very well on them.

Kenneth Herbert - Wedbush Securities Inc.

Great. And just one quick follow-up. Are you seeing any initial -- or to what extent are you seeing 787 provisioning starting to flow through they year for the aftermarket?

Marshall Larsen

It's pretty early to have much of that. Most of our provisioning is just making sure we can support entry into service at this point in time. So we do stock in various locations where A&A and subsequent airlines are going to be taking new aircraft to make sure that we're -- we stand by at the ready to ensure the dispatch reliability.

Operator

And we'll go next to Eric Hugel with Stephens.

Eric Hugel - Stephens Inc.

Marshall, with regards to the -- to that A320 sort of fleet aging retrofit timing chart that you guys have in your presentation, when you think about for the aftermarket revenue growth that you're currently seeing from the fleet, conceptually, where are we in that growth acceleration curve? Is most of that still out ahead of us? Or is this really sort of what's driving sort of the very nice growth versus above sort of ASM levels that we're feeling today?

Marshall Larsen

Well, there's still a lot of growth ahead of us, because you got over 4,000 of those A320s in the global fleet. And all you have to do is look at the Airbus production to see how many more going in, and you can see what kind of percentage increase in that fleet is happening. You'll get to a point where maybe the actual percentage change in a year isn't as large, but because the percentage is on a much larger fleet, the dollars go up significantly.

Eric Hugel - Stephens Inc.

Okay. So -- but are we still sort of accelerating here? Or have we sort of climbed, and we hit sort of the peak, and we're starting to feel the sort of slower growth on bigger numbers?

Marshall Larsen

I think on those efficient narrowbodies, we're still accelerating.

Operator

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

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

Yes. I just wanted to drill down, I guess, on Ken's question a little bit. Can you actually just break down, I think you've done in the past, the revenues in aftermarket from in-production aircraft? You threw out some global fleet numbers, but I'm wondering just kind of your exposure to A320, 737 and then 777, some of the widebody stuff.

Marshall Larsen

Well, we've never given exactly that in Goodrich dollars. But we generally follow just the way the fleet is, because it's like 59% of the total global fleet when I last checked, where 4 aircraft: the A320, the 737MG, the A330 and the 777 -- and those are the 4 aircraft, 2 widebodies, 2 narrowbodies, we have the most content on. We have the least content on about the 20% of old out-of-production aircraft. Like American is going to get rid of MD-80s and MD-95s and DC-9s and 737 Classics, so on. There's the midrange, which is about another, I believe, 15%, 20%, where you got the 747-400s and others in there, A340s that are still hanging in there a little bit better than some of those very old aircraft. But really, the growth engines are those first 4 aircraft.

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

Okay. So if you look at maybe kind of 25% of the aftermarket -- but actually, maybe less than that is exposed to airlines cutting capacity and things like that. Is that fair?

Scott Kuechle

Yes. Well, let me -- well, less than that for us, because our exposure to those very old airplanes that are being retired is very low. We've got much more content per airplane on the in-production aircraft and a little bit less so on the kind of recently out-of-production aircraft. So that's why we get good sustainability of growth in our aftermarket. Because we -- as those airplanes age and the growth of that newer or in-production fleet, that drives the aftermarket up. And we don't lose much off the back end as those older aircraft are retired, because we just don't have much content there.

Marshall Larsen

And as we see, the 87 and the A350 eventually get into service, the content we have on those is much greater than those aircraft they're replacing.

Operator

And we'll go next to Myles Walton with Deutsche Bank.

Myles Walton - Deutsche Bank AG

Going back to the question on margins and the slide for the guidance walk from the last update of full year EPS versus the current, it seemed to me that favorable pricing expectations must be playing a role here in that increase. And so, I guess, number one, is that the case? Number two, how much of that change -- $0.09 to $0.24 change you're talking about from prior expectations is due to price?

Scott Kuechle

Actually, I don't think any of that change is due to price. When we -- we have a price expectation baked into our initial guidance, and I don't think that's changed at all as we've gone through the year for the current year of 2011. If so, it's pretty modest. So the margin improvement is really driven by good operating performance execution in our businesses and the work that they do daily on Lean productivity, CI, supply chain savings, et cetera. So that's really where we're getting the drive there.

Myles Walton - Deutsche Bank AG

So I guess to go back to that, it seemed though, from the release anyway, looking back historically, that pricing is starting to run a net positive versus costs, and that hasn't been the case in recent quarters. Is that expected to continue to be the case, that you run price ahead of costs?

Scott Kuechle

Remember, when we do our GAAP, we combine price and costs. So if you're taking costs out, that's as much of a positive as it is getting price up. So we don't break those out specifically within the segments when we do our disclosures. So it's the combined effect of both of those. So if we're successful getting dollars out of our supply chain, as we negotiate new contracts, that's a cost benefit us, and it shows up in the same line.

Myles Walton - Deutsche Bank AG

Okay. Fair enough. And then just one clarification. Corporate expense, the run rate you expect, can you get that back to $32 million? Or is it -- was this one -- was this incentive comp here in the quarter, and you get back? Or is this the new run rate?

Scott Kuechle

Yes, we think the run rate -- we said in the past $34 million, $35 million for corp. costs and another $6 million for other, so $40 million, $41 million, $42 million, right in that range. That's normal run rate for us for those 2 things combined.

Operator

And we'll go next to J. B. Groh with D.A. Davidson.

J. B. Groh - D.A. Davidson & Co.

Scott, could you maybe talk about -- looking at the production rates of these narrowbodies in the backlog, I mean, I think we only have one way to go here, which is up. Can you talk about sort of breakpoints in major CapEx spending and where you are in terms of capacity utilization? Sort of what are the major spending points in terms of a monthly rate?

Scott Kuechle

I guess I don't know the specifics of that. I can tell you that for everything that's already been announced, we've got CapEx in the plans to make sure that we're facilitized accordingly. So there are some things that are longer lead item in our nacelle business or in our Landing Gear business. So we've been planning for those higher production rates for a while, and that CapEx is already being spent. So I don't know that there's any big breakpoints going forward where we have very large CapEx expenditures if rates continue to increase. I think it's more incremental. The facilities are in place to do that, so it's machines that we'll need to add above and beyond what we're already planning to do.

J. B. Groh - D.A. Davidson & Co.

So between small incremental CapEx and some Lean initiatives, you think you can meet everything that's been planned and maybe something beyond that. Is that a fair statement?

Scott Kuechle

Yes. The CapEx in our plants already reflect the announced production rate increases. And if they want to go up further than that, I think that's incremental machining, not new facilities or major points.

Operator

We'll go next to Cai Von Rumohr with Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC

Yes. A follow-up on the American order and 737 re-engining. What do you see in terms of implications for the landing gear? You're going to have to have a new landing gear. Do you think this means that production rates of the 37 and the A320 go up again? Because it's a lot of planes they're talking about. And are you concerned that it looks like an all GE Fleet, certainly for the 37 and probably the A320 and therefore, that it might make it difficult for Pratt to win any GTF business on the neos?

Marshall Larsen

Well, Pratt already has the GTF on the neo, on the A320neo.

Cai Von Rumohr - Cowen and Company, LLC

No, no. I mean in American, specifically at that...

Marshall Larsen

Oh, at American. Well, I don't know the specifics of that, but I'm sure that it'll be a well-fought battle in there. Pratt seems to be very aggressive when it comes to that. For Goodrich, obviously, if Pratt gets in there and wins the A320neo at American, we win in terms of nacelles. But we got a lot of other products on those A320s anyway, not just nacelles. And on the 737, if what I've read is correct and they've actually increased the efficiency but decreased the band diameter, it doesn't sound like there would be a landing gear replacement for that. But this is early days, and we haven't had enough technical exchange on this to give you an educated answer.

Cai Von Rumohr - Cowen and Company, LLC

Okay. Terrific. And a last one for Scott. I think you said you expected Microtecnica to be modestly accretive this year. Is that still the case with the FX charge you took in the second quarter?

Scott Kuechle

Yes. If you take the FX charge out, nothing's changed. But I think if you leave the FX charge in, it will probably would not be marginally accretive in 2011. But certainly, no changes as we look forward to 2012.

Operator

And we'll take our final question from David Strauss, UBS.

David Strauss - UBS Investment Bank

I want to go at this margin question, I think, a little bit differently. It looks like if you just adjust for cum catches and share-based comp in the quarter, it looks like your underlying incremental, Scott, were a little over 30%. How do you think about incrementals going forward given strong aftermarket growth but stronger lower margin OE growth? What is a decent range to think about for incremental margins if you -- if we x out cum adjustments and normalize for all the nonrecurring kind of stuff?

Scott Kuechle

I mean, it's -- you still go back to what we've said by market channels, so very strong 50 percentage kinds of margins incremental on aftermarket. Regional business, military are good margins, accretive margins for us as we get new business there. But the things that don't give us margin are brand new airplanes entering into service, so 787s, as we start to deliver more on that. That's coming with sales but not much margin. The acquisition sales that we get in the first 3 to 6 months don't come with margins. And then the cum corrects, we would expect those to be lower in the second half of the year than what we ran in the first quarter and in the second quarter. And then again, as you increase a lead production rate in the second half of the year, the wheel and brake business sources into that uptick with low-charge hardware. So it's hardware that goes in at a price that's lower than our cost so by a significant margin. So that's negative in terms of operating income as those rates go up within that particular business. So those are the 3 things that would push the margin, the incremental the other way. So you have to look at where those sales growth is coming from by market channel and then make those other adjustments to get to the incremental that's based on the actual sales mix that we'll have.

David Strauss - UBS Investment Bank

That's helpful. And last one for me. Share-based comp, I know it spiked up this quarter and the minimum stock price. What are you assuming for share-based comp for the rest of the year?

Scott Kuechle

Higher levels than what we had in the second quarter but not -- incrementally, it won't be as much of a drag as we saw in the second quarter.

Operator

I would now like to turn the conference back over to Paul Gifford for any additional or closing remarks.

Paul Gifford

I just want to thank everybody for listening to the call today, and I look forward to talking to you as we go forward through the balance of the third quarter. Thanks a lot.

Operator

And that concludes today's conference. We thank you for your participation.

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