Goodrich Corporation (GR) reported second-quarter 2010 net income of $1.24 per share, surpassing the Zacks Consensus estimate of $1.07 by 17 cents. Results compare favorably with $1.15 per share reported in the year ago period. Net income was $158.9 million compared with $145.9 million in second-quarter 2009.

The improvement was driven by a combination of increase in sales and cost containment measures.

Total sales of Goodrich in the quarter were $1.72 billion, up 1% from $1.70 billion in the second-quarter 2009. Results were slightly lower than the Zacks Consensus Estimate of $1.75 billion. A double digit increase in sales in Electronic Systems segment drove the year-over-year increase.

Cost of sales declined 2.6% year over year to $1.17 million while selling and administrative costs increased 5.9% year over year to $269.3 million in the quarter.

Operating Income was $275.3 million, up 14% year over year from $241.4 million in the prior year quarter.

Interest expense increased by 9% year-over-year to $33.6 million in the quarter.

Segment Update

Actuation and Landing Systems: Sales declined 5% year over year to $608.1 million in the second quarter of 2010. Reduced large commercial airplane OE sales, lower regional, business and general aviation airplane OE sales and lower other aerospace and non-aerospace sales attributed to the decline.

Operating income was $60.5 million or 9.9% of sales, down from $62.8 million or 9.9% of sales in the prior year quarter. The decrease was primarily due to higher operating costs.

Nacelles and Interior Systems: Sales were $57.4 million, down 3% year over year. The decline was primary doe to lower large commercial, regional, business and general aviation airplane aftermarket sales and lower defense and space OE and aftermarket sales.

Operating income was $151.4 million or 26.2% of sales, comparing favorably with $135.2 million or 22.7% of sales in the prior year quarter. Estimate revisions of certain long-term contracts coupled with lower operating costs largely accounted for the increase.

Electronic Systems: Segment recorded a double digit year-over-year sales increase of 14%. Sales totaled $532.0 million in the quarter. The improvement was driven by increase in defense and space OE and aftermarket sales and other aerospace and non-aerospace sales.

Operating income was $95.1 million or 17.9% of sales, comparing favorably with $73.9 million or 15.8% of sales in the prior year quarter. The favorable results were largely driven by higher sales volume and favorable foreign exchange translation.

Financial Update

Cash and cash equivalent balance at the end of the second quarter of 2010 was $866.4 million, up from $811.0 million at the end of second-quarter 2009.

Long-term debt and capital lease obligations declined slightly to $2.0 billion at the quarter end.

Cash from operations more than doubled to $223.5 million in the reported quarter from $107.9 million in the year ago quarter.

Capital expenditure in the quarter totaled $30.7 million, down 21% from the prior year quarter.

Dividend Update

The board of directors of Goodrich declared a dividend of 27 cents per share, an increase of 8% from 25 cents per share declared in the second quarter of 2009.

Full-Year 2010 Guidance

Management reaffirms its sales expectation of $7.1 billion, an increase of 6% over 2009 sales.

Management expects net income to be $4.30 – $4.45 per share. The upward revision from the previously guided range of $4.15 – $4.40 per share is driven by better operating margin performance.

Management expects an effective tax rate of 31%. It includes a full-year benefit of approximately 1.5%, or $0.10 per share, related to an assumed extension of the U.S. R&D tax credit. 

Management expects capital expenditures to be $250 million and worldwide pension plan contributions to be $150 million.  It expects free cash flow to exceed 85% of net income.

Goodrich is positioned to post strong large commercial original equipment sales growth based on production rate increases of Boeing and Airbus for a variety of their programs and expects 787 deliveries. Other positives include continued contract wins and strong cash flow generating capability. Goodrich pays back a substantial portion through incremental dividend.

However, high research and development overheads and the defense department’s plans of cutting down on the defense budget by $100 billion over the next five years keeps us “Neutral” on Goodrich. 

The quantitative Zacks #4 Rank (Sell) for the company indicates downward directional pressure on the shares over the near term.

 
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