Goodrich Corporation (GR)

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This article discusses the airplane part maker. For the Oil and Gas company that owns oil fields in Texas and Louisiana, see Goodrich Petroleum (GDP).

Goodrich Corporation (NYSE:GR) manufactures and sells components and systems for commercial and military aircraft. With jet fuel prices increasing, commercial airlines are demanding more fuel efficient aircraft like Boeing’s 787. Furthermore, developing countries are demanding more planes. The order backlogs for Airbus and Boeing, who together composed 30 percent of GR’s 2007 sales revenue, have grown to over 8,800 and 3,400 aircraft.^[1] Aftermarket sales for commercial and business airplanes also increased about 16 percent, and since aircraft numbers are rising and planes are always aging, this is a market that keeps on growing.^[2]

The War on Terror and the War in Iraq, along with a republican president who supports military spending, has made the U.S. government one of GR's most prominent customers. Defense sales account for about 25 percent of revenues, and the U.S. Government composes more than half that, making what Congress sets in the Federal Budget as military spending critical to determining Goodrich's revenues. The two candidates in the 2008 election have stated vastly different plans for U.S. defense spending; Democratic Presidential Candidate Barack Obama has promised to end the Iraq War, which is likely to reduce defense spending, while Republican Candidate John McCain has vowed to push to victory, a stance which is likely to pump military spending up.

[edit] Business Financials

Goodrich Corporation is broken down into three business segments: Actuation and Landing Systems , Nacelles and Interior Systems, and Electronic Systems.^[3] They manufacture and produce: flight controls, helicopter's main and tail rotors, complete landing gear systems (including wheels and brakes), fuel controls, electrical systems, surveillance systems, and provide maintenance and repair services associated with aircraft engines and aircraft interior products. They also provide a significant amount of aftermarket support for the entire life cycle of airplanes and defense programs by providing products and services to their customers to replace, repair, or overhaul their products. Revenue in fiscal 2007 increased almost 9 percent, from $5.87B in 2006 to $6.39B in 2007, which is attributed to increasing sales in all three business segments.^[4] Total assets for fiscal 2007 was $7.5B and total liabilities were $4.95B with a current ratio of 2.03, a 60 percent debt-to-equity ratio, and a 7.5 percent net profit margin.^[5]

^{[6] [7]}

Although commercial backlog decreased 4.3% in 2007, from $2.69B in 2006 to $2.57B in 2007, the defense and space backlog saw a 32.5% increase, reaching $1.13B in 2007 from $857M during the previous fiscal year.^[9] Even though their commercial orders have been decreasing, their defense and space market has seen substantial increasing demand. Total backlog increased to $3.7B in 2007, a 4.5% increase from $3.5B in 2006.^[10]

[edit] Actuation and Landing Systems

The Actuation and Landing Systems (38% of Sales in fiscal 2007) business unit manufactures, among other products, flight controls, helicopter's main and tail rotors, and complete landing gear systems (including wheels and brakes). This business unit saw a 20 percent increase during 1Q 2008, up from $567M in 1Q 2007 to $682.1M 1Q 2008.^[12] Sales increased in 2007 by 15 percent due to: higher commercial airplane overhaul (OE) sales (approximately $130M), larger commercial, regional, business and general aviation aftermarket sales (about $99M), higher defense and space OE and aftermarket sales (approximately $30M), and higher regional, business and general aviation airplane OE sales (about $29M).^[13]

[edit] Nacelles and Interior Systems

The Nacelles and Interior Systems (34% of Sales in fiscal 2007) business provides maintenance, repair and overhaul services associated with aircraft engines, including thrust reversers, cowlings, nozzles and their components, and aircraft interior products, which include slides, seats, cargo and lighting systems. It increased about 13.5 percent during the 1Q 2008, from $546.9M in 1Q 2007 to $620.5M in 1Q 2008. ^[14] Sales increased more than 9 percent in 2007 due to: higher commercial airplane aftermarket sales (about $165M), larger commercial airplane overhaul (OE) sales (about $33M), higher regional, business, and general aviation airplane OE sales (about $25M), larger defense and space OE and aftermarket sales (about $17M), and lower larger commercial airplane OE sales (about $50M).^[15]

[edit] Electronic Systems

The Electronic Systems (28% of Sales in fiscal 2007) segment produces a variety of systems that provide flight performance measurements, flight management, fuel controls, electrical systems, and control and safety data, as well as reconnaissance and surveillance systems. During 1Q 2008, this business unit saw a 2 percent increase, from $432.4M in 1Q 2007 to $442.4M in 1Q 2008.^[16] Sales in 2007 increased by more than 10 percent due to: higher defense and space overhaul (OE) and aftermarket sales (about $63M), higher commercial, regional, business and general aviation airplane aftermarket sales (about $42M), larger regional, business and general aviation airplane OE sales (about $31M), higher sales of products to the commercial helicopter market (about $28M), and larger commercial airplane OE sales (about $11M). ^[17]

[edit] Acquisitions

In January 2008, GR confirmed the acquisition of Skyline Industries, Inc., a manufacturer of lightweight crashworthy military helicopter seats and helicopter floor armor.^[18] Additionally, during late 2007 GR completed the sale of its airframe heavy maintenance business, Goodrich Aviation Technical Services, Inc. (ATS), to a subsidiary of Macquarie Group Limited.^[19]

[edit] Key Trends and Forces

[edit] Increasing Demand for Commercial Aircraft Increases GR’s sales.

About 70 percent of Goodrich Corporation’s sales come from commercial aircraft programs. GR sells products and service for Airbus' A380 and A350XWB, Boeing's 787, Embraer's 190, and Dassault's Falcon 7X. Commercial airlines are demanding more fuel efficient airplanes, such as Boeing’s 787, as jet fuel prices are rising; they have increased 90 percent from May 07 to May 08.^[20] In 2007, Boeing’s backlog increased 40 percent to over 3,400 aircraft. Airbus’ orders also increased, with orders at over 8,800 aircraft. As these orders are processed in future years, GR will see increasing sales for their products that go into commercial aircraft.

Thirty-six percent of GR’s sales came from sales to the aerospace aftermarket.^[21] GR’s profit margins in the aftermarket have increased; aftermarket sales for both commercial and business airplanes increased 16%. Its expansion in this market is partly due to an increasing demand for commercial aircraft, which raised Airbus’ average annual delivery to 1,215 aircraft from 1,130, increasing the number of aircraft needing aftermarket services since aircraft inevitably deteriorate.^[22][23]

Events that have a negative impact on the commercial aircraft market, such as the unexpected terrorist attack on 9/11 or a dramatic increase in fuel-prices that consumers cannot cope with, will also negatively affect GR by negatively affecting their customers.

[edit] U.S. Military Spending Drives GR’s Military Sales

In 2007, 25 percent of Goodrich Corporation’s sales came from defense and space aircraft, driven by a 7 percent increase of both overhaul and aftermarket sales.^[26] Demand for defense and space aircraft is directly tied to the U.S. Congress which sets the defense budget. GR provides its services and products to several of Lockheed Martin’s aircraft like the F-35 JSF and F-22 Raptor. The 2007 federal budget increased 7 percent in defense spending, from 410.8 B to 439.3B.^[27] Having a Republican president and both wars, the War on Terror and the War in Iraq, has brought up military spending for the U.S. government. The 2008 elections will also be instrumental in determining U.S. military spending for the next few years; Democratic Presidential Candidate Barack Obama has promised to end the Iraq War, which would greatly reduce defense spending, while Republican Candidate John McCain has vowed to push to victory, a stance which is certain to pump military spending up.

[edit] GR's Sales are Dependent on Boeing, Airbus, and the U.S. Government

Goodrich Corporation’s sales are dependent on Airbus and Boeing as primary customers. In 2007, 25 percent of its sales came directly from both: 15 percent from Airbus and 10 percent from Boeing. GR also depends on the U.S. Government; 13 percent of revenues were from direct or indirect sales to the U.S. Government.^[28] Almost half of GR's sales revenue derives from sales to Boeing, Airbus, and the U.S. Government. A decrease in defense spending by the U.S. Government or a declining commercial aircraft market which will decrease Boeing’s and Airbus’ backlog will have negative effects on GR. Any events that would make GR lose any of these key customers will have adverse affects on GR’s revenue.

[edit] Availability and Pricing of Raw Materials Affects GR's Profit Margin

Goodrich Corporation purchases aluminum, titanium, steel, carbon fiber, and other various specialty metals which are used to manufacture their products. The loss of a supplier or a delay from the supplier can have a negative impact on GR, since it would pressure their contractual obligations to deliver their products on time. Furthermore, supply fluctuations of these raw materials can lead to prices changes that affect GR's margins. Although titanium prices have decreased, both aluminum and steel prices have had an increasing trend. Steel Prices have been rising and continue to increase, from $.38/lb in April 2007 to $.55/lb in April 2008.^[29] Aluminum prices in April 2008 were $1.32/lb, increasing from $1.10/lb in October 2007.^[30] As the price of the materials GR uses increase, GR's costs increase, squeezing margins and slowing income growth.

^[31]

[edit] Competition

GR operates in a highly competitive aerospace industry. The following tables list GR’s major competitors in each business segment, which is further broken down into major aerospace products and systems platforms. GR competes with both domestic and foreign companies.

[edit] References

1. ↑ GR 2007 10-K, Pg 24
2. ↑ GR 2007 10-K, Pg 25
3. ↑ GR 2007 10-K, Pg 29
4. ↑ Income Statement by Yahoo Finance
5. ↑ Income Statement by Yahoo Finance
6. ↑ GR 2007 10-K, Pg 29
7. ↑ GR 2007 10-K, Pg 24
8. ↑ GR 2007 10-K, Pg 5
9. ↑ GR 2006 10-K, Pg 5
10. ↑ GR 2006 10-K, Pg 5
11. ↑ GR 2007 10-K, Pg 29
12. ↑ GR 4/2008 10-Q, Pg8
13. ↑ GR 2007 10-K, Pg 29
14. ↑ GR 4/2008 10-Q, Pg8
15. ↑ GR 2007 10-K, Pg 30
16. ↑ GR 4/2008 10-Q, Pg8
17. ↑ GR 2007 10-K, Pg 30-31
18. ↑ Key Developments For Goodrich Corp
19. ↑ Key Developments For Goodrich Corp
20. ↑ Jet Fuel Prices Soar...So Do Airline Tickets
21. ↑ GR 2007 10-K, Pg 24
22. ↑ GR 2007 10-K, Pg 25
23. ↑ Airbus, Boeing commercial aircraft demand predictions revised upward
24. ↑ Airbus Summary of Orders and Deliveries
25. ↑ Boeing, Orders and Deliveries
26. ↑ GR 2007 10-K, Pg 24, 25
27. ↑ FY 2007 Department of Defense Budget
28. ↑ GR 2007 10-K, Pg 24
29. ↑ Steel Prices
30. ↑ Aluminum Prices
31. ↑ Aluminum Prices
32. ↑ Goodrich Corporation Direct Competitor Comparison
33. ↑ GR 2007 10-K, Pg 3
34. ↑ GR 2007 10-K, Pg 3-4
35. ↑ GR 2007 10-K, Pg 3-4