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Goodrich Retread

It makes aircraft landing systems, not tires anymore, but can CEO David Burner remake the stodgy manufacturer’s image on Wall Street?

An official-looking letter arrived at the Charlotte, NC, headquarters of BF Goodrich last January, adorned with the gold and blue embossed seal of the House of Representatives. The correspondence was addressed to Goodrich’s CEO, David L. Burner, from the chairman of the House Committee on Energy and Commerce. As part of an investigation into tire safety and a review of Ford Motor Co.’s recall of Firestone tires, the committee was gathering information from “other tire and vehicle manufacturers.”

If Burner didn’t respond to this request, it wasn’t an attempt to stonewall. It’s just that Goodrich Corp., as BF Goodrich is now called, hasn’t been in the tire business since 1986. The confusion is understandable; tires and rubber products once were the heart and soul of Goodrich, which Benjamin Franklin Goodrich started 130 years ago in Akron, OH. But the BF Goodrich brand today is owned and marketed by the French tire giant Groupe Michelin.

Goodrich, meanwhile, has retread itself over the past decade, morphing from a stodgy maker of tires and specialty chemicals into a leading manufacturer and supplier of aerospace and engineered industrial products. And Burner’s performance is evidence of how one executive and his team is turning around a once top-flight company that had fallen into a rut.

The only tires at Goodrich now are in the employee parking lot. Aerospace, which involves big-ticket aircraft landing systems, structures, and aviation services, accounted for $3.7 billion, or about 85 percent, of Goodrich’s $4.4 billion in sales in 2000. Sealing products, compressor systems, and other engineered industrial products made up the rest. That’s a far cry from 1985, when aerospace was a nascent $250 million business for Goodrich, representing just 7 percent of sales.

Yet despite this corporate makeover, and strong ties to big jet aircraft manufacturers including Boeing and Airbus Industrie, Goodrich still seems overshadowed by its former self. Burner has referred to his company as the “Rodney Dangerfield of the aerospace industry” because he says it doesn’t get the respect from Wall Street that he feels it deserves. “We created this new business out of the foundation of a few product lines, and then added strategic acquisitions,” Burner says. “We’re a transformed company today, completely.”

Under Burner, Goodrich’s annual revenues have increased nearly 40 percent from $3.2 billion in 1996, and operating income is up sharply as well, to $591.8 million in 2000 from $383 million five years earlier. Operating margin in 2000 topped 13 percent and net margin was 7 percent, comfortably above the aerospace industry average. Return on equity in 2000 was 26.6 percent, more than double the results of 1999. Burner has “taken a lot of bold steps” since becoming CEO in December 1996, observes Sam Pearlstein, a First Union Securities aerospace analyst who follows Goodrich. “He’s certainly been more aggressive than [prior CEOs of] Goodrich have been.”

But storm clouds are gathering around the U.S. aerospace industry as the economy has slowed, and Goodrich, like its rivals, is searching for smoother altitude. Burner says he’s “cautiously optimistic” about the business environment, and that Goodrich is in “pretty good shape” for what lies ahead. For 2001, the company expects earnings of $3.30 to $3.35 a share, an 11 to 12 percent increase over 2000, but below analysts’ consensus estimate of $3.43. Goodrich expects revenues of $4.9 billion for the year.

Still, conditions now are far less expansive than the relatively open sky of the past few years, when a series of acquisitions and calculated sales helped turn Goodrich into the company it is today. Jettisoning its tire and polyvinyl chloride operations gave Goodrich a fat checkbook to buy some well-known names in the $290 billion aerospace industry. Aerospace revenues soared tenfold in the 1990s, capped by Goodrich’s 1999 merger with Coltec Industries, a maker of aircraft wheels and brakes and other industrial products. That $2.2 billion pooling of interests enhanced Goodrich’s landing gear business, launched its engineered industrial products segment and bolstered its stance against aerospace rivals like Lockheed Martin and United Technologies.

Among the boldest leaps was Goodrich’s decision in 1999 to leave its Akron headquarters after 125 years and move into Coltec’s Charlotte offices. Akron was once the “rubber capital of the world,” and BF Goodrich was an integral part of that community. Looking back, Burner, a 62-year-old Ohio native, calls the relocation the “biggest emotional challenge” in a long career at Goodrich, which he joined in 1983 as vice president of finance of the Engineered Products Group. But as someone who evidently craves new opportunities-witness Goodrich’s voracious appetite for acquisitions-Burner also sees the move as shaking up some but galvanizing many.

Burner came to Goodrich with extensive finance experience at smaller Ohio-based industrial companies, including key roles in buying and selling businesses. But Goodrich had bigger plans for its new executive. Soon Burner was given a trial-by-fire in operations, assigned to restructure a troubled brake system business. “They threw me out there and I had a great time,” Burner recalls. “That was the beginning of my opportunity and transition into operations.” Other operations posts followed before Burner was appointed president of Goodrich’s promising aerospace division in 1987. At the time, that unit was generating about $270 million in annual sales, which grew to more than $1 billion under Burner by 1995.

Today, the shopping spree continues. Goodrich announced nine smaller aerospace-related deals between January 2000 and June 2001. “We’re skilled at the acquisition process,” Burner says. “We know how to find acquisitions and create a transaction that’s positive for seller and buyer.”

But all of this wheeling and dealing makes some Wall Street analysts and institutional investors anxious. They wonder if Goodrich is biting off more than it can chew. Without question, Burner and his team face formidable managerial and financial challenges in trying to integrate so many disparate operations and cultures. And even thorough due diligence can miss costly surprises, as Goodrich found with some Coltec units that needed restructuring.

Also, aerospace is highly cyclical. Goodrich is an original equipment manufacturer for Boeing, Airbus, the U.S. military, and short-haul regional jet manufacturers. About 18 percent of Goodrich’s revenues come from Boeing, with another 14 percent from Airbus, a concentration that worries some observers. “If Boeing sneezes, Goodrich catches cold,” says Robert Friedman, a defense and aerospace analyst with Standard & Poor’s. “It’s the same with Airbus. My feeling is that orders are going to start to decline materially. Does management really expect the services and repair parts business to mitigate the highly cyclical nature of original component sales to the likes of Boeing and Airbus?”

Burner, in fact, is confident that Goodrich’s aftermarket repair and replacement businesses, which together account for about 43 percent of sales, will help to insulate the company from the worst of any swings in aircraft manufacturing. The two areas run on different cycles, he explains. Manufacturing is capital intensive, while maintenance activity reflects passenger miles: Frequent flights put wear and tear on a plane’s brakes and landing gear. “Repair and replacement opportunities tend to be much more profitable,” Burner explains. “That has been essential to us in assuring we don’t suffer as much as [pure-play] original equipment manufacturers.”

Yet 2001 is not going to be a vintage year like 2000, Goodrich officials concede. While aerospace revenues could rise 14 percent over 2000, industrial equipment sales in 2001 will be flat at best and operating margins are expected to decline. “The orders aren’t as large this year as they were last year,” says Marshall Larsen, a 24-year Goodrich veteran who succeeded Burner in 1995 as president of the aerospace division. While regional jet and military markets remain strong, Larsen adds, “the warning sign is airline profitability.” Put simply, if people aren’t flying as much, then planes aren’t used as often, and a dip in repair and service would directly impact Goodrich.

That said, Goodrich seems reasonably well-provisioned for any economic storm. The sale of its specialty chemicals Performance Materials unit in February 2001 netted $1 billion, which Goodrich is using to pay down $2.1 billion of debt and to pursue new acquisitions. Says Burner, “We are now bringing the company back together as a unified company, but keeping a decentralized operating process.”

In addition, the company is tapping many new areas. Several recent purchases have been space-related ventures, for instance. Earlier this year Airbus chose Goodrich to supply the main and wing landing gear for its planned A380 superjumbo jet, a contract that could generate $2 billion to $3 billion in sales of original equipment and aftermarket service by about 2025. The A380 will be a big aircraft, accommodating more than 550 passengers. But it is becoming an even bigger deal for Goodrich. Besides landing gear, Goodrich is developing the A380′s evacuation slides, which could bring $300 million to $400 million in revenue over 20 years. Airbus expects the first A380 to fly early in 2006, and Goodrich’s revenue estimates assume that at least 300 of the giant planes will be built.

With all of Goodrich’s big changes, it seems puzzling that stock investors have not rewarded the company’s efforts. While the benchmark Standard & Poor’s 500-stock index about doubled over the five years through mid-July 2001, Goodrich shares have remained essentially flat. Some investors point to deteriorating cash flow and lackluster growth in key Goodrich operations. What many on Wall Street hope is that Goodrich will be taken over. Aerospace is consolidating, and Goodrich could be an attractive fit for a compatible rival.

Burner, not surprisingly, has a different opinion. “The company’s not for sale,” he retorts. “There’s no reason to say we can deliver greater value to shareholders if someone owns us.” But, he adds, somewhat unconvincingly, “If the time comes when the greater value for the business can be delivered in the longer term by being a part of somebody else, that’s probably going to happen.”

If Burner is able to stay the course, he predicts that Goodrich could reach $10 billion in sales in five years. This would be a triumphant legacy for Burner, who will step down as CEO when he turns 65.

About jonathan burton