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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For The Quarterly Period Ended March 31, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from           to          .
 Commission file number 1-892   GOODRICH CORPORATION (Exact Name of Registrant as Specified in its Charter) New York(State or Other Jurisdiction of
Incorporation or Organization)
    
    34-0252680(I.R.S. Employer
Identification No.)Four Coliseum Centre, 2730 West Tyvola Road,
Charlotte, North Carolina(Address of Principal Executive Offices)
    
    28217(Zip Code)
 704-423-7000Registrants Telephone Number, Including Area Code Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o As of March 31, 2004, there were 117,605,382 shares of common stock
outstanding (excluding 14,000,000 shares held by a wholly owned subsidiary).
There is only one class of common stock.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes In Securities, Use Of Proceeds and Issuer Purchases of Equity SecuritiesItem 6. Exhibits and Reports on Form 8-KSIGNATUREEXHIBIT INDEXEX-15EX-18EX-31EX-32    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements Independent Accountants Review Report To the Shareholders and Board of Directors of Goodrich Corporation We have reviewed the accompanying condensed consolidated balance sheet of
Goodrich Corporation and subsidiaries as of March 31, 2004, and the related
condensed consolidated statements of income and cash flows for the three-month
periods ended March 31, 2004 and 2003. These financial statements are the
responsibility of the companys management. We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion. Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with accounting principles
generally accepted in the United States. We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Goodrich
Corporation and subsidiaries as of December 31, 2003, and the related
consolidated statements of income, shareholders equity, and cash flows for the
year then ended, not presented herein; and in our report dated February 9,
2004, except for Note W as to which the date is February 23, 2004, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2003, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived. /s/ Ernst & Young LLP Charlotte, North Carolina
May 3, 2004 1




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GOODRICH CORPORATION 
 CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 Three Months EndedMarch 31,2004
    
    2003Sales
    
    $
    1,162.1
    
    
    $
    1,094.2Operating Costs and Expenses:Cost of sales
    
    
    868.8
    
    
    
    899.8Selling and administrative costs
    
    
    193.0
    
    
    
    182.4Restructuring and consolidation costs
    
    
    1.8
    
    
    
    9.11,063.6
    
    
    
    1,091.3Operating Income
    
    
    98.5
    
    
    
    2.9Interest expense
    
    
    (37.4
    )
    
    
    (39.9
    )Interest income
    
    
    0.8
    
    
    
    4.5Other income (expense)  net
    
    
    (18.9
    )
    
    
    (12.6
    )Income (loss) from continuing operations before income taxes and trust
distributions
    
    
    43.0
    
    
    
    (45.1
    )Income tax benefit (expense)
    
    
    (13.3
    )
    
    
    14.9Distributions on trust preferred securities
    
    
    
    
    
    
    (2.6
    )Income (Loss) From Continuing Operations
    
    
    29.7
    
    
    
    (32.8
    )Income from discontinued operations  net of taxes
    
    
    
    
    
    
    62.7Cumulative effect of change in accounting
    
    
    16.2
    
    
    
    (0.5
    )Net Income
    
    $
    45.9
    
    
    $
    29.4Basic Earnings (Loss) per Share:Continuing operations
    
    $
    0.25
    
    
    $
    (0.28
    )Discontinued operations
    
    
    
    
    
    
    0.53Cumulative effect of change in accounting
    
    
    0.14
    
    
    
    Net Income
    
    $
    0.39
    
    
    $
    0.25Diluted Earnings (Loss) per Share:Continuing operations
    
    $
    0.25
    
    
    $
    (0.28
    )Discontinued operations
    
    
    
    
    
    
    0.53Cumulative effect of change in accounting
    
    
    0.13
    
    
    
    Net Income
    
    $
    0.38
    
    
    $
    0.25Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
 See notes to unaudited condensed consolidated financial statements. 2




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GOODRICH CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN MILLIONS)
 March 31,
    
    December 31,2004
    
    2003Current AssetsCash and cash equivalents
    
    $
    329.5
    
    
    $
    378.4Accounts and notes receivable, less allowances for doubtful receivables ($26.8 at March 31,
2004; $28.0 at December 31, 2003)
    
    
    702.2
    
    
    
    608.5Inventories
    
    
    993.9
    
    
    
    964.2Deferred income taxes
    
    
    50.3
    
    
    
    53.3Prepaid expenses and other assets
    
    
    94.4
    
    
    
    82.7Total Current Assets
    
    
    2,170.3
    
    
    
    2,087.1Property
    
    
    1,155.9
    
    
    
    1,175.9Prepaid pension
    
    
    215.8
    
    
    
    219.5Goodwill
    
    
    1,267.6
    
    
    
    1,259.5Identifiable intangible assets
    
    
    499.7
    
    
    
    484.7Deferred income taxes
    
    
    20.5
    
    
    
    22.9Other assets
    
    
    609.1
    
    
    
    640.3Total Assets
    
    $
    5,938.9
    
    
    $
    5,889.9Current LiabilitiesShort-term bank debt
    
    $
    2.7
    
    
    $
    2.7Accounts payable
    
    
    425.9
    
    
    
    414.5Accrued expenses
    
    
    694.0
    
    
    
    648.2Income taxes payable
    
    
    253.0
    
    
    
    259.9Current maturities of long-term debt and capital lease obligations
    
    
    9.6
    
    
    
    75.6Total Current Liabilities
    
    
    1,385.2
    
    
    
    1,400.9Long-term debt and capital lease obligations
    
    
    2,140.7
    
    
    
    2,136.6Pension obligations
    
    
    645.4
    
    
    
    642.0Postretirement benefits other than pensions
    
    
    316.5
    
    
    
    319.2Other non-current liabilities
    
    
    201.0
    
    
    
    197.7Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders EquityCommon stock  $5 par valueAuthorized 200,000,000 shares; issued 132,080,334 shares at March 31, 2004, and
131,265,173 shares at December 31, 2003 (excluding 14,000,000 shares held by a wholly-owned subsidiary at each date)
    
    
    660.4
    
    
    
    656.3Additional paid-in capital
    
    
    1,052.2
    
    
    
    1,035.8Income retained in the business
    
    
    64.6
    
    
    
    42.4Accumulated other comprehensive income (loss)
    
    
    (113.4
    )
    
    
    (126.1
    )Unearned compensation
    
    
    
    
    
    
    (1.4
    )Common stock held in treasury, at cost (13,546,755 shares at March 31, 2004, and
13,539,820 shares at December 31, 2003)
    
    
    (413.7
    )
    
    
    (413.5
    )Total Shareholders Equity
    
    
    1,250.1
    
    
    
    1,193.5Total Liabilities And Shareholders Equity
    
    $
    5,938.9
    
    
    $
    5,889.9
 See notes to unaudited condensed consolidated financial statements. 3




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GOODRICH CORPORATION 
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
 Three MonthsEndedMarch 31,2004
    
    2003Operating ActivitiesIncome (loss) from continuing operations
    
    $
    29.7
    
    
    $
    (32.8
    )Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Restructuring and consolidation:Expenses
    
    
    1.8
    
    
    
    15.3Payments
    
    
    (6.7
    )
    
    
    (10.3
    )Asset impairments
    
    
    
    
    
    
    79.9Depreciation and amortization
    
    
    54.5
    
    
    
    56.3Stock-based compensation expense
    
    
    5.1
    
    
    
    (4.5
    )Deferred income taxes
    
    
    3.0
    
    
    
    4.5Payment-in-kind interest income
    
    
    
    
    
    
    (4.3
    )Change in assets and liabilities, net of effects of acquisitions and dispositions of businesses:Receivables
    
    
    (78.5
    )
    
    
    12.0Change in receivables sold, net
    
    
    (14.5
    )
    
    
    (2.1
    )Inventories
    
    
    (5.9
    )
    
    
    (11.0
    )Other current assets
    
    
    (9.8
    )
    
    
    (10.4
    )Accounts payable
    
    
    12.3
    
    
    
    (38.3
    )Accrued expenses
    
    
    45.8
    
    
    
    37.5Income taxes payable
    
    
    (12.7
    )
    
    
    36.5Tax benefit on non-qualified options
    
    
    1.6
    
    
    
    Other non-current assets and liabilities
    
    
    22.8
    
    
    
    (13.2
    )Net Cash Provided By Operating Activities
    
    
    48.5
    
    
    
    115.1Investing ActivitiesPurchases of property
    
    
    (22.9
    )
    
    
    (19.9
    )Proceeds from sale of property
    
    
    
    
    
    
    2.4Proceeds from payment-in-kind notes
    
    
    
    
    
    
    151.9Payments received (made) in connection with acquisitions, net of cash acquired
    
    
    (0.5
    )
    
    
    (2.4
    )Net Cash Provided (Used) By Investing Activities
    
    
    (23.4
    )
    
    
    132.0Financing ActivitiesIncrease (decrease) in short-term debt
    
    
    0.5
    
    
    
    (379.7
    )Proceeds from long-term debt and capital lease obligations
    
    
    
    
    
    
    5.5Repayment of long-term debt and capital lease obligations
    
    
    (65.7
    )
    
    
    (1.9
    )Proceeds from issuance of capital stock
    
    
    13.9
    
    
    
    6.5Dividends
    
    
    (23.5
    )
    
    
    (23.4
    )Distributions on Trust preferred securities
    
    
    
    
    
    
    (2.6
    )Net Cash Used By Financing Activities
    
    
    (74.8
    )
    
    
    (395.6
    )Discontinued OperationsNet cash provided (used) by discontinued operations
    
    
    
    
    
    
    185.0Effect of exchange rate changes on cash and cash equivalents
    
    
    0.8
    
    
    
    (0.6
    )Net increase (decrease) in cash and cash equivalents
    
    
    (48.9
    )
    
    
    35.9Cash and cash equivalents at beginning of period
    
    
    378.4
    
    
    
    149.9Cash and cash equivalents at end of period
    
    $
    329.5
    
    
    $
    185.8
 See notes to unaudited condensed consolidated financial statements. 4




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GOODRICH CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Note A: Basis of Interim Financial Statement Preparation The accompanying unaudited condensed consolidated financial statements of
Goodrich Corporation and its subsidiaries have been prepared in accordance with
the instructions to Form 10-Q and do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. Unless indicated otherwise or the
context requires, the terms we, our, us, Goodrich or Company refer to
Goodrich Corporation and its subsidiaries. In our opinion, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain amounts in prior year financial
statements have been reclassified to conform to the current year presentation.
Operating results for the three months ended March 31, 2004 are not necessarily
indicative of the results that may be achieved for the year ending December 31,
2004. For further information, refer to the consolidated financial statements
and footnotes included in our Annual Report on Form 10-K for the year ended
December 31, 2003. As discussed in Note J, our former Avionics business and our former
Passenger Restraints Systems business have been accounted for as discontinued
operations. Unless otherwise noted, disclosures herein pertain to our
continuing operations. Note B: Stock-Based Employee Compensation During 2004, the Company granted stock options to certain employees and
administered an employee stock purchase plan. Effective January 1, 2004, the
Company changed its method of accounting for stock-based compensation. The
Company adopted the provisions of Financial Accounting Standard No. 123
Accounting for Stock-Based Compensation (SFAS No. 123) and Financial
Accounting Standard No. 148 Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of FASB Statement No. 123. As such, the Company
expensed stock options and the shares issued under its employee stock purchase
plan on a modified prospective basis. The expense will be recognized over the
period earned and vested. Prior periods have not been restated. The adoption
reduced pretax income by $4.3 million for the quarter ended March 31, 2004 as
compared to accounting for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25.) Prior to January 1, 2004, the Company granted stock options and
performance shares to certain employees, and administered an employee stock
purchase plan. The stock-based employee compensation was accounted for in
accordance with APB No. 25. No compensation expense was included in net income
for stock options or employee stock purchase plan shares. 5




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The following table represents the effect on net income and earnings per
share if the Company had applied the fair value based method and recognition
provisions of SFAS No. 123 for the three months ended March 31, 2003. For
purposes of the pro forma disclosures, the estimated fair value of stock
options at the date of grant is amortized to expense over the stock option
vesting period. Pro forma compensation expense for the employee stock purchase
plan awards in a given year includes both the fair value of the option to
purchase shares at the date of grant and additional compensation to reflect the
discounted purchase price. The grant date fair value of performance shares is
amortized to expense over the three-year plan cycle without adjustments for
subsequent changes in the market price of the Companys common stock. Three MonthsEnded(In millions, except per share amounts)
    
    March 31, 2003Net income, as reported
    
    $
    29.4Reverse: Stock-based employee compensation expense (income)
included in net income, as reported above (net of related tax effects)
    
    
    (3.0
    )Deduct: Stock-based employee compensation (expense) income determined
Under fair value method for all awards, net of related tax effects
    
    
    (0.2
    )Pro forma net income
    
    $
    26.2Earnings per share:Basic, as reported
    
    $
    0.25Basic, pro forma
    
    $
    0.22Diluted, as reported
    
    $
    0.25Diluted, pro forma
    
    $
    0.22
 The Company recorded income related to stock-based compensation in the
first quarter 2003 as a result of revisions to the estimated payout on
performance share plans. Note C: Inventories Inventories consist of: March 31,
    
    December 31,2004
    
    2003(Dollars in millions)FIFO or average cost (which approximates current costs):Finished products
    
    $
    178.2
    
    
    $
    185.2In-process
    
    
    670.7
    
    
    
    644.6Raw materials and supplies
    
    
    250.6
    
    
    
    241.61,099.5
    
    
    
    1,071.4Less:Reserve to reduce certain inventories to LIFO
    
    
    (40.8
    )
    
    
    (40.6
    )Progress payments and advances
    
    
    (64.8
    )
    
    
    (66.6
    )Total
    
    $
    993.9
    
    
    $
    964.2
 The preproduction and excess over average in-process inventory balance and
deferred engineering costs recoverable under long-term contractual
arrangements, which are included in in-process inventory, were $216.1 million
and $192.2 million as of March 31, 2004 and December 31, 2003, respectively. The impact of the Cumulative Effect of Accounting Changes resulted in an
increase to the inventory balance of $23.3 million as of January 1, 2004. See
Note K. 6




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Note D: Business Segment Information The Companys operations are reported as three business segments: Airframe
Systems, Engine Systems and Electronic Systems. Effective January 1, 2004, the
Company realigned the business units within its three reportable segments. The
customer services business was transferred from the Airframe Systems segment to
the Engine Systems segment. In addition, the costs and sales associated with
products or services provided to customers through the customer services
business are reflected in the business providing the product or service rather
than the customer services business. Prior period amounts have been
reclassified to conform to the current year presentation. Airframe Systems:Airframe Systems provides systems and components
pertaining to aircraft taxi, take-off, landing and stopping. Several business
units within the segment are linked by their ability to contribute to the
integration, design, manufacture and service of entire aircraft undercarriage
systems, including landing gear, wheels and brakes and certain brake controls.
Airframe Systems also includes the aviation technical services business unit
which performs comprehensive total aircraft maintenance, repair, overhaul and
modification services for many commercial airlines, independent operators,
aircraft leasing companies and airfreight carriers. The segment includes the
actuation systems and flight controls business units that were acquired as part
of Aeronautical Systems. The actuation systems business unit provides systems
that control the movement of steering systems for missiles and
electro-mechanical systems that are characterized by high power, low weight,
low maintenance, resistance to extreme temperatures and vibrations and high
reliability. The actuation systems business unit also provides actuators for
primary flight control systems that operate elevators, ailerons and rudders,
and secondary flight controls systems such as flaps and slats. Engine Systems:Engine Systems includes the aerostructures business unit,
a leading supplier of nacelles, pylons, thrust reversers and related aircraft
engine housing components. The segment also produces engine and fuel controls,
pumps, fuel delivery systems, and structural and rotating components such as
discs, blisks, shafts and airfoils for both aerospace and industrial gas
turbine applications. The segment includes the cargo systems, engine controls
and customer services business units, which were acquired as part of
Aeronautical Systems. The cargo systems business unit produces fully integrated
main deck and lower lobe cargo systems for wide body aircraft. The engine
controls business unit provides engine control systems and components for jet
engines used on commercial and military aircraft, including fuel metering
controls, fuel pumping systems, electronic control software and hardware,
variable geometry actuation controls, afterburner fuel pump and metering unit
nozzles, and engine health monitoring systems. The customer services business
unit supports aftermarket products for the businesses that were acquired as
part of Aeronautical Systems. Electronic Systems:Electronic Systems produces a wide array of products
that provide flight performance measurements, flight management, and control
and safety data. Included are a variety of sensors systems that measure and
manage aircraft fuel and monitor oil debris, engine and transmission, and
structural health. The segments products also include ice detection systems,
test equipment, aircraft lighting systems, landing gear cables and harnesses,
satellite control, data management and payload systems, launch and missile
telemetry systems, airborne surveillance and reconnaissance systems, laser
warning systems, aircraft evacuation systems, de-icing systems, ejection seats,
and crew and attendant seating. The power systems business unit, which was
acquired as part of Aeronautical Systems, provides systems that produce and
control electrical power for commercial and military aircraft, including
electric generators for both main and back-up electrical power, electric
starters and electric starter generating systems and power management and
distribution systems. Also acquired as part of Aeronautical Systems was the
hoists and winches business unit, which provides airborne hoists and winches
used on both helicopters and fixed wing aircraft, and a business that produces
engine shafts primarily for helicopters. 7




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Segment operating income is total segment revenue reduced by operating
expenses identifiable with that business segment. The accounting policies of
the reportable segments are the same as those for Goodrich consolidated. Three Months EndedMarch 31,2004
    
    2003(Dollars in millions)Net Customer SalesAirframe Systems
    
    $
    402.6
    
    
    $
    402.1Engine Systems
    
    
    498.5
    
    
    
    423.6Electronic Systems
    
    
    261.0
    
    
    
    268.5Total Sales
    
    $
    1,162.1
    
    
    $
    1,094.2Intersegment SalesAirframe Systems
    
    $
    15.6
    
    
    $
    17.0Engine Systems
    
    
    5.1
    
    
    
    8.6Electronic Systems
    
    
    8.1
    
    
    
    12.9Total Intersegment Sales
    
    $
    28.8
    
    
    $
    38.5Segment Operating Income (Loss)Airframe Systems
    
    $
    20.9
    
    
    $
    21.8Engine Systems
    
    
    74.4
    
    
    
    (35.2
    )Electronic Systems
    
    
    22.7
    
    
    
    32.2118.0
    
    
    
    18.8Corporate General and Administrative Expenses
    
    
    (19.5
    )
    
    
    (15.9
    )Total Operating Income
    
    $
    98.5
    
    
    $
    2.9
 Segment assets include assets directly identifiable with each segment.
Corporate assets include assets not specifically identified with a business
segment, including cash. March 31,
    
    December 31,2004
    
    2003(Dollars in millions)AssetsAirframe Systems
    
    $
    1,702.8
    
    
    $
    1,660.2Engine Systems
    
    
    2,117.2
    
    
    
    2,084.5Electronic Systems
    
    
    1,411.3
    
    
    
    1,410.9Corporate
    
    
    707.6
    
    
    
    734.3Total Assets
    
    $
    5,938.9
    
    
    $
    5,889.9
 8




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Note E: Earnings Per Share The computation of basic and diluted earnings per share from continuing
operations is as follows: Three Months EndedMarch 31,(In millions, except per share amounts)
    
    2004
    
    2003Numerator:Numerator for basic earnings per share  income (loss) from
continuing operations available to common shareholders
    
    $
    29.7
    
    
    $
    (32.8
    )Denominator:Denominator for basic earnings per share  weighted-average shares
    
    
    118.2
    
    
    
    117.2Effect of dilutive securities:Stock options, performance shares, restricted shares and
employee stock purchase plan shares
    
    
    1.7
    
    
    
    Denominator for diluted earnings per share  adjusted weighted-average shares and assumed conversions
    
    
    119.9
    
    
    
    117.2Earnings (loss) per share from continuing operations:Basic
    
    $
    0.25
    
    
    $
    (0.28
    )Diluted
    
    $
    0.25
    
    
    $
    (0.28
    )
 At March 31, 2004 and 2003, the Company had approximately 10.9 million and
11.3 million stock options outstanding, respectively. Stock options are
included in the diluted earnings per share calculation using the treasury stock
method, unless the effect of including the stock options would be
anti-dilutive. Of the 10.9 million and 11.3 million stock options outstanding,
5.4 million and 11.3 million options were anti-dilutive stock options at March
31, 2004 and 2003, respectively. Note F: Comprehensive Income Total comprehensive income consists of the following: Three MonthsEndedMarch 31,2004
    
    2003(Dollars in millions)Net Income
    
    $
    45.9
    
    
    $
    29.4Other Comprehensive Income:Unrealized translation adjustments during period
    
    
    15.3
    
    
    
    (2.2
    )Gain (loss) on cash flow hedges
    
    
    (2.6
    )
    
    
    (2.7
    )Total Comprehensive Income
    
    $
    58.6
    
    
    $
    24.5
 Accumulated other comprehensive income consists of the following (dollars
in millions): March 31,
    
    December 31,2004
    
    2003Cumulative unrealized translation adjustments
    
    $
    138.6
    
    
    $
    123.3Minimum pension liability adjustment
    
    
    (318.3
    )
    
    
    (318.3
    )Accumulated gain on cash flow hedges
    
    
    66.2
    
    
    
    68.8Unrealized gain on certain investments
    
    
    0.1
    
    
    
    0.1$
    (113.4
    )
    
    $
    (126.1
    )
 The minimum pension liability amounts above are net of deferred taxes of
$171.4 million. The accumulated gain on cash flow hedges above is net of
deferred taxes of $34.2 million and $31.9 million at March 31, 2004 and
December 31, 2003, respectively. 9




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Note G: Restructuring and Consolidation Costs For the three months ended March 31, 2004, the Company recorded
restructuring and consolidation charges totaling $1.8 million. The charges were
recorded across the Companys segments as follows: Three MonthsEndedMarch, 2004(Dollars in millions)Engine Systems
    
    $
    0.3Electronic Systems
    
    
    1.5$
    1.8
 Restructuring and consolidation reserves at December 31, 2003 and March
31, 2004, as well as activity during the three months ended March 31, 2004,
consisted of: Balance
    
    
    
    
    
    
    
    
    
    BalanceDecember 31,
    
    
    
    
    
    
    
    
    
    March 31,2003
    
    Provision
    
    Activity
    
    2004Personnel-related costs
    
    $
    16.4
    
    
    $
    1.4
    
    
    $
    (0.8
    )
    
    $
    17.0Facility closure and other costs
    
    
    11.2
    
    
    
    0.4
    
    
    
    (3.1
    )
    
    
    8.5$
    27.6
    
    
    $
    1.8
    
    
    $
    (3.9
    )
    
    $
    25.5
 During the three months ended March 31, 2004, approximately 50 employees
were terminated as part of the restructuring activities described below. As of
March 31, 2004, the Company expects to further reduce employment levels by
approximately 260 people as part of those restructuring activities. Restructuring and Consolidation Costs  Provision The following is a description of key components of the $1.8 million
provision for restructuring and consolidation costs in the first three months
of 2004: Engine Systems:The segment recorded $0.3 million in restructuring and
consolidation costs, consisting of $0.2 million in personnel-related costs and
$0.1 million in facility closure and other costs. The personnel-related charges are for employee severance and benefits.
Facility closure and other costs include $0.1 million for machinery and
equipment relocation and other facility closure costs. Electronic Systems:The segment recorded $1.5 million in restructuring and
consolidation costs, consisting of $1.2 million in personnel-related costs and
$0.3 million in facility closure and other costs. The $1.2 million personnel-related charges are for employee severance and
benefits. Facility closure and other costs included $0.3 million in equipment
relocation and other facility closure costs. Restructuring and Consolidation Costs  Activity During the first three months of 2004, there were $6.7 million in cash
payments for restructuring and consolidation activities. The cash payments were
offset by a $2.8 million increase in restructuring reserves resulting in a $3.9
million net decrease in reserves for the first three months of 2004. The $2.8
million increase in restructuring reserves related to businesses that utilize
contract accounting and has not yet been reflected in earnings as the amount is
currently capitalized into contract costs. 10




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Note H: Asset Impairments During the first quarter 2004, the Company recorded a non-cash $7.0
million pretax asset impairment charge resulting in part from insufficient
collateral value for a note receivable arising out of the divestiture of a
business. During the first quarter of 2003, the Company recorded a non-cash $79.9
million pretax asset impairment charge for the Companys Super 27 re-engining
program, reflecting a revaluation of the assets in light of market conditions.
In March 2003, the Company repossessed four 727 aircraft from a receivable
obligor who was in financial difficulty and also received a revised cash flow
forecast indicating a significant decline in the financial strength of another
receivable obligor. In addition, the deterioration in the commercial airline
market resulting from the conflict in Iraq and Severe Acute Respiratory
Syndrome (SARS) made available more aircraft that compete with or are newer
than the Super 27 aircraft. Because of these events, the Company concluded that
its ability to recover the recorded values of the Companys inventory and notes
receivable was significantly affected. In the first quarter 2003, based on an
independent appraisal and the Companys assessment of market conditions, the
Company wrote-down the carrying value of its inventory to equal the estimated
market value of $12.2 million. Also in the first quarter of 2003, the Company
wrote-off $0.4 million of related trade receivables and $46.1 million of notes
receivable from a receivable obligor. As of March 31, 2004, the Companys
remaining notes receivable of $7.2 million represents the present value of
expected future cash flows related to those receivables. The total carrying
value of inventory related to the Super 27 business was $4.6 million at March
31, 2004 and represents the Companys assessment of the current market value. During the first quarter 2003, the Company also recorded a non-cash $11.7
million pretax asset impairment charge related to its equity investment in
Cordiem LLC and a non-cash $6.2 million pretax impairment charge on rotable
landing gear assets. Note I: Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill for the three months ended
March 31, 2004, by segment are as follows: Balance
    
    Foreign
    
    BalanceDecember 31,
    
    Currency
    
    March 31,2003
    
    Translation
    
    2004(Dollars in millions)Airframe Systems
    
    $
    239.2
    
    
    $
    10.9
    
    
    $
    250.1Engine Systems
    
    
    493.7
    
    
    
    4.4
    
    
    
    498.1Electronic Systems
    
    
    526.6
    
    
    
    (7.2
    )
    
    
    519.4$
    1,259.5
    
    
    $
    8.1
    
    
    $
    1,267.6
 Identifiable intangible assets as of March 31, 2004 are comprised of: Gross
    
    AccumulatedAmount
    
    Amortization(Dollars in millions)Amortizable intangible assets:Patents, trademarks and licenses
    
    $
    180.8
    
    
    $
    51.4Customer relationships
    
    
    291.2
    
    
    
    15.4Technology
    
    
    90.8
    
    
    
    1.3Non-compete agreements
    
    
    6.6
    
    
    
    4.9Sourcing contracts
    
    
    6.4
    
    
    
    3.1$
    575.8
    
    
    $
    76.1
 Amortization of intangible assets for the three months ended March 31,
2004 was $5.9 million. Amortization expense of these intangible assets for 2005
to 2009 is estimated to be approximately $23 million per year. There were no
indefinite lived identifiable intangible assets as of March 31, 2004. During the first three months ended March 31, 2004, the Company acquired
certain aftermarket rights for approximately $15 million. 11




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Note J: Discontinued Operations On March 28, 2003, the Company completed the sale of its Avionics business
to L-3 Communications Corporation for $188 million, or $181 million net of fees
and expenses. The gain on the sale was $63.3 million after tax, which was
reported as Income from Discontinued Operations. The Avionics business marketed
a variety of state-of-the-art avionics instruments and systems primarily for
general aviation, business jet and military aircraft. The Companys Passenger
Restraints Systems (PRS) business ceased operations in the first quarter of
2003. Prior periods have been restated to reflect the Avionics and PRS
businesses as discontinued operations. The disposition of the former Avionics business and the former Passenger
Restraints Systems business each represented the disposal of a component of an
entity under FASB Statement No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. Accordingly, the revenues, costs and expenses, assets
and liabilities, and cash flows of Avionics and Passenger Restraints Systems
have been segregated in the accompanying unaudited condensed consolidated
statement of income and unaudited condensed consolidated statement of cash
flows. The following summarizes the results of discontinued operations for
Avionics and Passenger Restraints Systems during the three months ended March
31, 2003: (Dollars in millions)
    
    2003Net Customer Sales
    
    $
    24.3Pretax loss from operations
    
    
    (0.9
    )Income tax benefit
    
    
    0.3Gain on sale of Avionics (net of income tax expense of $38.8
million)
    
    
    63.3Income from discontinued operations
    
    $
    62.7
 Note K: Cumulative Effect of Change in Accounting Effective January 1, 2004, the Company changed two aspects of the
application of contract accounting for its aerostructures business which is
included in the Engines Systems segment. The first is a change to the
cumulative catch-up method from the reallocation method for accounting for
changes in contract estimates of revenue and costs. The change was effected by
adjusting contract profit rates from the balance to complete gross profit rate
to the estimated gross profit rate at completion of the contract. The second
change related to pre-certification costs. Under the old policy,
pre-certification costs exceeding the level anticipated in the Companys
original investment model used to negotiate contractual terms were expensed
when determined regardless of overall contract profitability. Under the new
policy, pre-certification costs, including those in excess of original
estimated levels, will be included in total contract costs used to evaluate
overall contract profitability. The impact of the changes in accounting methods
was to record a pretax gain of $23.3 million ($16.2 million after tax) as a
Cumulative Effect of Accounting Change representing profit that would have been
recognized prior to January 1, 2004 had these methods of accounting been in
effect in prior periods. The following table indicates pro forma financial results for the three
months ended March 31, 2003, as if these methods of accounting had been in
effect for the three months ended March 31, 2003. Three Months EndedMarch 31, 2003As Reported
    
    Pro forma(in millions)Income (loss) from continuing operations
    
    $
    (32.8
    )
    
    $
    (35.2
    )Net income
    
    $
    29.4
    
    
    $
    27.0Earnings per share  Net IncomeBasic
    
    $
    0.25
    
    
    $
    0.23Fully-diluted
    
    $
    0.25
    
    
    $
    0.23
 12




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The cumulative effect of an accounting change, as presented after taxes,
in 2003 of a loss of $0.5 million represents the adoption of Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations. The Company established a liability for contractual obligations
for the retirement of long-lived assets. Note L: Financing Arrangements Credit Facilities The Company has a committed syndicated revolving credit facility that
expires in August 2006 that permits borrowing, including letters of credit, up
to a maximum of $500 million. At March 31, 2004, there were no borrowings and
$25.8 million in letters of credit outstanding under this facility. At December
31, 2003, there were no borrowings and $17.1 million in letters of credit
outstanding under the facility. The level of unused borrowing capacity under the Companys committed
syndicated revolving credit facility varies from time to time depending in part
upon its consolidated net worth and leverage ratio levels. In addition, the
Companys ability to borrow under this facility is conditioned upon compliance
with financial and other covenants set forth in the related agreement,
including a consolidated net worth requirement and maximum leverage ratio. The
Company is currently in compliance with all such covenants. As of March 31,
2004, the Company had borrowing capacity under this facility of $322.2 million,
after reductions for letters of credit outstanding. At March 31, 2004, the Company also maintained $75 million of uncommitted
domestic money market facilities and $25.6 million of uncommitted foreign
working capital facilities with various banks to meet short-term borrowing
requirements. In April 2004, the domestic uncommitted facilities were reduced
to $50 million. As of March 31, 2004 and December 31, 2003, there were no
borrowings under these facilities. These uncommitted credit facilities are
provided by a small number of commercial banks that also provide the Company
with committed credit through the syndicated revolving credit facility and with
various cash management, trust and other services. The Companys credit facilities do not contain any credit rating downgrade
triggers that would accelerate the maturity of its indebtedness. However, a
ratings downgrade would result in an increase in the interest rate and fees
payable under its committed syndicated revolving credit facility. Such a
downgrade also could adversely affect the Companys ability to renew existing
or obtain access to new credit facilities in the future and could increase the
cost of such new facilities. QUIPS On March 2, 2004, the Company completed the redemption of the $63.5
million in outstanding 8.30% Cumulative Quarterly Income Preferred Securities,
Series A (QUIPS) issued by BFGoodrich Capital, a Delaware business trust
(Trust), all of the common equity of which is owned by the Company. The QUIPS
were supported by the Companys 8.30% Junior Subordinated Debentures, Series A
(QUIPS Debentures), which were also redeemed on March 2, 2004. Long-Term Financing At March 31, 2004, the Company had long-term debt and capital lease
obligations of $2,140.7 million with maturities ranging from 2005 to 2046.
Current maturities of long-term debt and capital lease obligations at March 31,
2004 were $9.6 million, including $5.9 million of industrial revenue bonds that
will be redeemed on May 11, 2004. The earliest maturity of a material long-term
debt obligation is December 2007. The Company also maintains a shelf
registration statement that allows the Company to issue up to $1.4 billion of
debt securities, series preferred stock, common stock, stock purchase contracts
and stock purchase units. 13




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##### Table of Contents



Note M: Off-Balance Sheet Arrangements Lease Agreements The Company finances its use of certain equipment, including corporate
aircraft, under committed lease arrangements provided by financial
institutions. Certain of these arrangements allowed us to claim a deduction for
the tax depreciation on the assets, rather than the lessor, and allowed us to
lease up to a maximum of $90 million at March 31, 2004. At March 31, 2004,
$50.5 million of future minimum lease payments were outstanding under these
arrangements. The other arrangements are standard operating leases. Future
minimum lease payments under the standard operating leases approximated $149.3
million at March 31, 2004. Sale of Receivables At March 31, 2004, the Company had in place a variable rate trade
receivables securitization program pursuant to which the Company could sell
receivables up to a maximum of $140 million. Accounts receivable sold under
this program were $82.8 million at March 31, 2004. Continued availability of
the securitization program is conditioned upon compliance with covenants,
related primarily to operation of the securitization, set forth in the related
agreements. The Company is currently in compliance with all such covenants. The
securitization does not contain any credit rating downgrade triggers. Note N: Derivatives and Hedging Activities Cash Flow Hedges The Company has subsidiaries that conduct a substantial portion of their
business in Euros, Great Britain Pounds Sterling and Canadian Dollars but have
significant sales contracts that are denominated in U.S. Dollars. Periodically,
the Company enters into forward contracts to exchange U.S. Dollars for Euros,
Great Britain Pounds Sterling and Canadian Dollars. The forward contracts described above are used to mitigate the potential
volatility to earnings and cash flow arising from changes in currency exchange
rates. The forward contracts are being accounted for as cash flow hedges. The
forward contracts are recorded in the Companys condensed consolidated balance
sheet at fair value with the offset reflected in Accumulated Other
Comprehensive Income, net of deferred taxes. The notional value of the forward
contracts at March 31, 2004 was $702.4 million. The fair value of the forward
contracts at March 31, 2004 was an asset of $97.8 million, of which $54.0
million is recorded in Prepaid Expenses and Other Assets and $43.8 million is
recorded in Other Assets. The total gross gain of $100.4 million (before deferred taxes of $34.2
million), including terminated forward contracts as discussed below, was
recorded in Accumulated Other Comprehensive Income and will be reflected in
income as the individual contracts mature which will offset the earnings effect
of the hedged item. As of March 31, 2004, the portion of the $100.4 million
gain that would be reclassified into earnings to offset the effect of the
hedged item as an increase in sales in the next 12 months is a gain of $56.6
million. In 2003, the Company terminated certain forward contracts prior to their
scheduled maturities in 2004 and received cash of $3.4 million. As of March 31,
2004, Accumulated Other Comprehensive Income included a gain of $2.6 million
related to these terminated contracts that will be reflected in income and
sales when the original contracts would have matured. Fair Value Hedges In July 2003, the Company entered into a $100 million fixed-to-floating
interest rate swap on the 6.45 percent senior notes due in 2007. In October
2003, the Company entered into two $50 million fixed-to-floating interest rate
swaps. One $50 million swap is on the Companys 7.50 percent senior notes due
in 2008 and the other $50 million swap is on the Companys 6.45 percent
medium-term notes due in 2008. In December 2003, the Company entered into a $50
million fixed-to-floating interest rate swap on its 7.50 percent senior notes
due in 2008. The purpose of entering into these swaps was to increase the
Companys exposure to variable interest rates. The settlement and maturity
dates on each swap are the same as those on the referenced notes. In accordance
with Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, the interest rate swaps are
being accounted for as fair value hedges and the carrying value of the notes
has been adjusted to reflect the fair values of the interest rate swaps. The
fair value of the interest rate swaps was an asset (gain) of $8.5 million at
March 31, 2004. 14




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##### Table of Contents



Other Forward Contracts In January 2004, the Company entered into forward contracts to manage its
foreign currency risk related to the translation of monetary assets and
liabilities denominated in currencies other than the relevant functional
currency. These forward contracts mature monthly and the notional amounts are
adjusted periodically to reflect changes in net monetary asset balances. The
gains or losses on these forward contracts are being recorded in earnings when
realized in order to mitigate the earnings impact of the translation of net
monetary assets. As of March 31, 2004, the Company had forward contracts with a
notional value of $67.5 million to buy Great Britain Pounds Sterling, contracts
with a notional value of $42.2 million to buy Euros and contracts with a
notional value of $11.5 million to buy Canadian Dollars. Note O: Guarantees The Company extends financial and product performance guarantees to third
parties. As of March 31, 2004, the following financial guarantees were
outstanding: CARRYINGMAXIMUM
    
    AMOUNTPOTENTIAL
    
    OF(Dollars in millions)
    
    PAYMENT
    
    LIABILITYEnvironmental remediation indemnification (Note P)
    
    No limit
    
    $
    23.1Financial Guarantees:TIDES (Note P)
    
    $
    145.0
    
    
    $
    Debt and lease payments (Note P)
    
    $
    3.3
    
    
    $
    Residual values on leases (Note M)
    
    $
    54.8
    
    
    $
    Executive loans to purchase company stock
    
    $
    4.8
    
    
    $
    
 Prior to the adoption of FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others (FIN 45), the Company accrued for costs
associated with guarantees when it was probable that a liability has been
incurred and the amount could be reasonably estimated. The most likely cost to
be incurred was accrued based on an evaluation of currently available facts,
and where no amount within a range of estimates was more likely, the minimum
was accrued. Guarantees extended subsequent to the adoption of FIN 45 will be
recorded at fair value. The Company provides service and warranty policies on its products.
Liability under service and warranty policies is based upon a review of
historical warranty and service claim experience. Adjustments are made to
accruals as claim data and historical experience warrant. In addition, the
Company incurs discretionary costs to service its products in connection with
product performance issues. The changes in the carrying amount of service and product warranties for
the three months ended March 31, 2004, are as follows: (Dollars in millions)Balance at December 31, 2003
    
    $
    78.6Service and product warranty provision
    
    
    11.0Payments
    
    
    (3.3
    )Balance at March 31, 2004
    
    $
    86.3
 Note P: Contingencies General There are pending or threatened against the Company or its subsidiaries
various claims, lawsuits and administrative proceedings, all arising from the
ordinary course of business with respect to commercial, product liability,
asbestos and environmental matters, which seek remedies or damages. The Company
believes that any liability that may finally be determined with respect to
commercial and non-asbestos product liability claims should not have a material
effect on its consolidated financial position, results of operations or cash
flow. From time to time, the Company is also involved in legal proceedings as a
plaintiff involving contract, patent protection, environmental and other
matters. Gain contingencies, if any, are recognized when they are realized. 15




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Environmental The Company is subject to various domestic and international environmental
laws and regulations which may require that it investigate and remediate the
effects of the release or disposal of materials at sites associated with past
and present operations, including sites at which the Company has been
identified as a potentially responsible party under the federal Superfund laws
and comparable state laws. The Company is currently involved in the
investigation and remediation of a number of sites under these laws. The measurement of environmental liabilities by the Company is based on
currently available facts, present laws and regulations and current technology.
Such estimates take into consideration the Companys prior experience in site
investigation and remediation, the data concerning cleanup costs available from
other companies and regulatory authorities and the professional judgment of the
Companys environmental specialists in consultation with outside environmental
specialists, when necessary. Estimates of the Companys environmental
liabilities are further subject to uncertainties regarding the nature and
extent of site contamination, the range of remediation alternatives available,
evolving remediation standards, imprecise engineering evaluations and estimates
of appropriate cleanup technology, methodology and cost, the extent of
corrective actions that may be required and the number and financial condition
of other potentially responsible parties, as well as the extent of their
responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceed, it
is likely that adjustments in the Companys accruals will be necessary to
reflect new information. The amounts of any such adjustments could have a
material adverse effect on the Companys results of operations in a given
period, but the amounts, and the possible range of loss in excess of the
amounts accrued, are not reasonably estimable. Based on currently available
information, however, the Company does not believe that future environmental
costs in excess of those accrued with respect to sites with which it has been
identified as a potentially responsible party are likely to have a material
adverse effect on the Companys financial condition. There can be no assurance,
however, that additional future developments, administrative actions or
liabilities relating to environmental matters will not have a material adverse
effect on the Companys results of operations or cash flows in a given period. Environmental liabilities are recorded when the Companys liability is
probable and the costs are reasonably estimable, which generally is not later
than at completion of a feasibility study or when the Company has recommended a
remedy or has committed to an appropriate plan of action. The liabilities are
reviewed periodically and, as investigation and remediation proceed,
adjustments are made as necessary. Liabilities for losses from environmental
remediation obligations do not consider the effects of inflation, and
anticipated expenditures are not discounted to their present value. The
liabilities are not reduced by possible recoveries from insurance carriers or
other third parties, but do reflect anticipated allocations among potentially
responsible parties at federal Superfund sites or similar state-managed sites
and an assessment of the likelihood that such parties will fulfill their
obligations at such sites. At March 31, 2004, the Companys unaudited condensed consolidated balance
sheet included an accrued liability for environmental remediation obligations
of $86.0 million, of which $15.9 million was included in current liabilities as
Accrued Liabilities. Of the $86.0 million, $24.9 million was associated with
ongoing operations and $61.1 million was associated with businesses previously
disposed of or discontinued. The timing of expenditures depends on a number of factors that vary by
site, including the nature and extent of contamination, the number of
potentially responsible parties, the timing of regulatory approvals, the
complexity of the investigation and remediation, and the standards for
remediation. The Company expects that it will expend present accruals over many
years, and will complete remediation of all sites with which it has been
identified in up to 30 years. This period includes operation and monitoring
costs that are generally incurred over 15 to 25 years. Asbestos The Company and a number of its subsidiaries have been named as defendants
in various actions by plaintiffs alleging injury or death as a result of
exposure to asbestos fibers in products, or which may have been present in the
Companys facilities. A number of these cases involve maritime claims, which
have been and are expected to continue to be administratively dismissed by the
court. These actions primarily relate to previously owned businesses. The
Company believes that pending and reasonably anticipated future actions, net of
anticipated insurance recoveries, are not likely to have a material adverse
effect on the Companys financial condition, results of operations or cash
flows. 16




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##### Table of Contents



The Company believes that it has substantial insurance coverage available
to it related to any remaining claims. However, a major portion of the primary
layer of insurance coverage for these claims is provided by the Kemper
Insurance Companies. Kemper has indicated that, due to capital constraints and
downgrades from various rating agencies, it has substantially ceased
underwriting new business and now focuses on administering policy commitments
from prior years. The Company cannot predict the long-term impact of these
actions on the availability of the Kemper insurance. Liabilities of Divested Businesses Asbestos At the time of the Engineered Industrial Products (EIP) spin-off, two
subsidiaries of Coltec Industries Inc. (Coltec) were defendants in a
significant number of personal injury claims relating to alleged
asbestos-containing products sold by those subsidiaries. It is possible that
asbestos-related claims might be asserted against the Company on the theory
that the Company has some responsibility for the asbestos-related liabilities
of EnPro Industries, Inc. (EnPro), Coltec or its subsidiaries, even though the
activities that led to those claims occurred prior to the Companys ownership
of any of those subsidiaries. Also, it is possible that a claim might be
asserted against the Company that Coltecs dividend of its aerospace business
to the Company prior to the spin-off was made at a time when Coltec was
insolvent or caused Coltec to become insolvent. Such a claim could seek
recovery from the Company on behalf of Coltec of the fair market value of the
dividend. A limited number of asbestos-related claims have been asserted against the
Company as successor to Coltec or one of its subsidiaries. The Company
believes that it has substantial legal defenses against these claims, as well
as against any other claims that may be asserted against the Company on the
theories described above. In addition, the agreement between EnPro and the
Company that was used to effectuate the spin-off provides the Company with an
indemnification from EnPro covering, among other things, these liabilities. The
success of any such asbestos-related claims would likely require, as a
practical matter, that Coltecs subsidiaries were unable to satisfy their
asbestos-related liabilities and that Coltec was found to be responsible for
these liabilities and was unable to meet its financial obligations. The Company
believes any such claims would be without merit and that Coltec was solvent
both before and after the dividend of its aerospace business to the Company. If
the Company is ultimately found to be responsible for the asbestos-related
liabilities of Coltecs subsidiaries, the Company believes it would not have a
material adverse effect on its financial condition, but could have a material
adverse effect on its results of operations and cash flows in a particular
period. However, because of the uncertainty as to the number, timing and
payments related to future asbestos-related claims, there can be no assurance
that any such claims will not have a material adverse effect on the Companys
financial condition, results of operations and cash flows. If a claim related
to the dividend of Coltecs aerospace business were successful, it could have a
material adverse impact on the Companys financial condition, results of
operations and cash flows. Other In connection with the divestiture of the Companys tire, vinyl and other
businesses, the Company has received contractual rights of indemnification from
third parties for environmental and other claims arising out of the divested
businesses. Failure of these third parties to honor their indemnification
obligations could have a material adverse effect on the Companys condensed
consolidated financial condition, results of operations and cash flows. Guarantees The Company has guaranteed amounts owed by Coltec Capital Trust with
respect to the $145 million of outstanding Coltec Capital Trust
51⁄4 convertible trust preferred securities (TIDES) and has guaranteed Coltecs
performance of its obligations with respect to the TIDES and the underlying
Coltec convertible subordinated debentures. Following the spin-off of the EIP
segment, the TIDES remained outstanding as an obligation of Coltec Capital
Trust and the Companys guarantee with respect to the TIDES remains an
obligation of the Company. EnPro, Coltec and Coltec Capital Trust have agreed
to indemnify the Company for any costs and liabilities arising under or related
to the TIDES after the spin-off. In addition to the Companys guarantee of the TIDES, at March 31, 2004,
the Company has an outstanding contingent liability for guarantees of debt and
lease payments of $3.3 million, letters of credit and bank guarantees of $56.0
million, residual value of leases of $54.8 million and executive loans to
purchase the Companys stock of $4.8 million. 17




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##### Table of Contents



Potential Contractual Dispute with Northrop Grumman In connection with the Companys acquisition of the Aeronautical Systems
businesses from TRW Inc. (TRW), certain liabilities and obligations of the
Aeronautical Systems businesses were retained by TRW but are being administered
by the Company. The Company has submitted claims to Northrop Grumman, which
acquired TRW, for reimbursement of several items related to the retained
liabilities and obligations. Northrop has questioned the documentary and
contractual support for the claims, and has withheld payment pending resolution
of these questions. The Company is providing additional information to Northrop
in order to answer these questions. As of March 31, 2004, the Company had
recorded a receivable from Northrop Grumman for approximately $33 million for
such claims. Commercial Airline Customers The downturn in the commercial air transport market, the terrorist attacks
on September 11, 2001, the military conflict in Iraq and the outbreak of Severe
Acute Respiratory Syndrome (SARS) have adversely affected the financial
condition of many of the Companys commercial airline customers. The Company
performs ongoing credit evaluations on the financial condition of its customers
and maintains reserves for uncollectible accounts receivable based upon
expected collectibility. Although the Company believes its reserves are
adequate, the Company is not able to predict the future financial stability of
these customers. Any material change in the financial status of any one or
group of customers could have a material adverse effect on the Companys
financial condition, results of operations or cash flows. The extent to which
extended payment terms are granted to customers may negatively affect future
cash flow. Super 27 Program The Companys Aerostructures business unit, included in the Engine Systems
segment, includes a business to re-engine 727 aircraft to meet sound
attenuation requirements and improve their fuel efficiency (Super 27 program).
At December 31, 2002, the Company had an investment in the Super 27 program of
$105.9 million consisting of $44.7 of inventory and $61.2 million of notes
receivable. The inventory included three Super 27 aircraft, seven nacelle kits
and other spare parts. In March 2003, the Company repossessed four 727 aircraft from a receivable
obligor who was in financial difficulty and also received a revised cash flow
forecast indicating a significant decline in the financial strength of another
receivable obligor. In addition, the deterioration in the commercial airline
market resulting from the military conflict in Iraq and SARS made available
more aircraft that compete with or are newer than these aircraft. Because of
these events, the Company concluded that its ability to recover the recorded
values of its inventory and notes receivable was significantly affected. In the
first quarter 2003, based on an independent appraisal and the Companys
assessment of market conditions, the Company wrote down the carrying value of
its inventory to equal the estimated market value of $12.2 million. Also in the
first quarter 2003, the Company reserved $0.4 million of related trade
receivables and $46.1 million of notes receivable from a receivable obligor. As of March 31, 2004, the Companys remaining notes receivable of $7.2
million represents the present value of expected future cash flows related to
those receivables. The total carrying value of inventory related to the Super
27 business was $4.6 million at March 31, 2004 and represents the Companys
assessment of the current market value of the remaining inventory. Collection of the notes may be negatively affected if the overall
deterioration in the commercial aerospace market continues. Because of these
conditions, the Company will continue to assess the value of these assets and
their ultimate recovery. Boeing 717 The Company
has a long term contract with Boeing for nacelle systems used
on the Boeing 717 aircraft which is accounted for using contract accounting. In
the Companys estimate of contract profitability, the Company has assumed
deliveries of aircraft in excess of those for which Boeing has firm orders.
Boeing continues to market the aircraft to specific potential customers. During
the fourth quarter of 2003, Boeing announced that it lost a major sales
campaign which they disclosed in their December 31, 2003 Annual Report on Form
10-K, increasing the possibility that the program could be terminated before
attaining the estimated number of deliveries included in our contract revenue
and cost estimates. If units delivered fall short of amounts assumed due to
program termination or for other reasons, estimates of total contract revenue
and cost would change and we could recognize a pretax loss on the contract of
approximately $15.0 million to $25.0 million. The range of loss, if any, is
dependent upon a number of factors, including additional orders received or
exercise of existing options from Boeing, realization of cost efficiencies
related to expected volume and collection of program termination costs should
the contract be terminated prematurely. 18




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##### Table of Contents



Tax Litigation In 2000, Coltec made a $113.7 million payment to the Internal Revenue
Service (IRS) for an income tax assessment and the related accrued interest
arising out of certain capital loss deductions and tax credits taken in 1996.
On February 13, 2001, Coltec filed suit against the IRS in the U.S. Court of
Claims seeking a refund of this payment. Trial began in May 2004.
Coltec has agreed to pay to the Company an amount equal to any refunds or
credits of taxes and interest received by it as a result of the litigation. If
the IRS prevails in this case, Coltec will not owe any additional interest or
taxes with respect to 1996. However, the Company may be required by the IRS to
pay up to $32.7 million plus accrued interest with respect to the same items
claimed by Coltec in its tax returns for 1997 through 2000. The potential tax
liability for 1997 through 2000 has been fully reserved. A reasonable
estimation of the potential refund for 1996, if any, cannot be made at this
time; accordingly, no receivable has been recorded. In 2000, the IRS issued a statutory notice of deficiency asserting that
Rohr, Inc. (Rohr), the Companys subsidiary, was liable for $85.3 million of
additional income taxes for the fiscal years ended July 31, 1986 through 1989.
In 2003, the IRS issued an additional statutory notice of deficiency asserting
that Rohr was liable for $23 million of additional income taxes for the fiscal
years ended July 31, 1990 through 1993. The proposed assessments relate
primarily to the timing of certain tax deductions and tax credits. Rohr has
filed petitions in the U.S. Tax Court opposing the proposed assessments. Rohr
expects that these cases will go to trial in late 2004 or in 2005 and that it
will ultimately be successful in these cases. However, if Rohr is not
successful in these cases, the Company believes that the net cost to Rohr at
the time of the final determination by the court would not exceed $100 million,
including interest, as the court will take into account the timing benefit of
the disallowed tax deductions at that time. The Company believes that its best
estimate of the liability resulting from these cases has been fully reserved. Note Q: New Accounting Standards The U.S. Medicare Prescription Drug Improvement and Modernization Act of
2003 (the Act) was signed into law on December 8, 2003. In accordance with
Financial Accounting Standards Board Staff Position 106-1 Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug Improvement
and Modernization Act of 2003, the effects of the Act on the Companys benefit
plans are not reflected in any measure of the accumulated postretirement
benefit obligation or net periodic postretirement benefit cost in the Companys
unaudited condensed consolidated financial statements or accompanying Notes.
Specific authoritative guidance on the accounting for the federal subsidy is
pending and that guidance, when issued, could require the Company to change
previously reported information. 19




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##### Table of Contents



Note R: Pensions and Postretirement Benefits Pensions The following table sets forth the components of net periodic benefit
costs (income) for the first quarter 2004 and 2003. Other Non-U.S.U.S. Plans
    
    U.K. Plans
    
    PlansMarch 31,
    
    March 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003(In millions)Service cost
    
    $
    10.4
    
    
    $
    8.3
    
    
    $
    5.0
    
    
    $
    5.6
    
    
    $
    0.6
    
    
    $
    0.4Interest cost
    
    
    35.9
    
    
    
    33.2
    
    
    
    6.1
    
    
    
    6.6
    
    
    
    0.9
    
    
    
    0.7Expected rate of return on plan assets
    
    
    (40.4
    )
    
    
    (33.4
    )
    
    
    (9.0
    )
    
    
    (9.9
    )
    
    
    (0.8
    )
    
    
    (0.5
    )Amortization of transition obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    2.4
    
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of actuarial (gain) loss
    
    
    9.0
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Periodic benefit cost (income)
    
    
    17.3
    
    
    
    18.5
    
    
    
    2.1
    
    
    
    2.3
    
    
    
    0.7
    
    
    
    0.6Settlements and curtailments (gain) loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special termination benefit charge
(credit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net benefit cost (income)
    
    $
    17.3
    
    
    $
    18.5
    
    
    $
    2.1
    
    
    $
    2.3
    
    
    $
    0.7
    
    
    $
    0.6
 WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COSTS FOR
THE QUARTERS ENDED MARCH 31 Discount rate
    
    
    6.25
    %
    
    
    6.875
    %
    
    
    5.75
    %
    
    
    6.00
    %
    
    
    6.25
    %
    
    
    6.35
    %Expected long-term return on assets
    
    
    9.00
    %
    
    
    9.00
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.43
    %Rate of compensation increase
    
    
    3.63
    %
    
    
    3.86
    %
    
    
    3.25
    %
    
    
    3.25
    %
    
    
    3.25
    %
    
    
    3.47
    %
 The Company has not changed its expectations for pension contributions to
its Trust funds since its 2003 financial statements were issued. The Company
continues to expect to make voluntary contributions totaling $35 to $50 million
to its U.S. qualified defined benefit pension plans in 2004. During the first
quarter of 2004, the Company contributed $10 million to the U.S. Trust fund and
on April 5 the Company made a $25 million contribution to the U.S. Trust fund.
The Company continues to expect that contributions to non-U.S. defined benefit
plans will total less than $5 million in 2004. In addition to contributions to Trust funds, the Company also makes lump
sum and annuity pension benefit payments directly to participants as part of
its U.S. non-qualified plans and certain foreign plans. These payments are
classified as contributions for reporting purposes and are estimated to be
approximately $10 million in 2004. 20




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##### Table of Contents



Postretirement Benefits Other Than Pensions The following table sets forth the components of net periodic benefit
costs (income) for the first quarter 2004 and 2003. March 31,2004
    
    2003Service cost
    
    $
    0.4
    
    
    $
    0.3Interest cost
    
    
    7.3
    
    
    
    6.6Expected return on plan assets
    
    
    
    
    
    
    Amortization of transition obligation
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    Amortization of actuarial (gain) loss
    
    
    1.5
    
    
    
    0.5Periodic benefit cost (income)
    
    
    9.2
    
    
    
    7.4Settlements and curtailments (gain) loss
    
    
    
    
    
    
    Special termination benefit charge (credit)
    
    
    
    
    
    
    Net benefit cost (income)
    
    $
    9.2
    
    
    $
    7.4
 WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COSTS FOR
THE QUARTERS ENDED MARCH 31 Discount rate
    
    
    6.25
    %
    
    
    6.875
    %Healthcare Trend Rate
    
    10% in 2004
    
    10% in 2003to 5% in 2008
    
    to 5% in 2007
 The Company pays retiree health care and life insurance benefits as they
are incurred. These payments are classified as contributions for reporting
purposes and are estimated to be approximately $40 million in 2004. Note S: Income Tax Rate The effective income tax rate from continuing operations was 31.0 percent
during the quarter ended March 31, 2004 and 33.0 percent during the quarter
ended March 31, 2003. The lower rate in the quarter ended March 31, 2004 as
compared to the quarter ended March 31, 2003 was due to an expected increase in
export activity and higher research tax credits. 21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
OUR UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
DOCUMENT. THIS MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS. SEE FORWARD-LOOKING
INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY FOR A DISCUSSION OF THE
UNCERTAINTIES, RISKS AND ASSUMPTIONS ASSOCIATED WITH THESE STATEMENTS. OUR FORMER AVIONICS BUSINESS AND PASSENGER RESTRAINT SYSTEMS BUSINESS
(PRS) HAVE BEEN ACCOUNTED FOR AS DISCONTINUED OPERATIONS. UNLESS OTHERWISE
NOTED HEREIN, DISCLOSURES PERTAIN ONLY TO OUR CONTINUING OPERATIONS. OVERVIEW We are one of the largest worldwide suppliers of aerospace components,
systems and services to the commercial, regional, business and general aviation
markets. We are also a leading supplier of aircraft and satellite systems
products to the global military and space markets. Our business is conducted on
a global basis with manufacturing, service and sales undertaken in various
locations throughout the world. Our products and services are principally sold
to customers in North America, Europe and Asia. For the first quarter 2004, we reported net income of $46 million, or
$0.38 per diluted share. Sales for the first quarter 2004 were $1,162 million.
For the first quarter 2003, we reported net income of $29 million, or $0.25 per
diluted share. Sales for the first quarter 2003 were $1,094 million. Foreign
currency translation was responsible for approximately 40 percent of the $68
million, or 6 percent, increase in sales. The remaining increase resulted
primarily from increased sales of military and space products, large commercial
aircraft original equipment products and large commercial aircraft aftermarket
products and services. Net income for both quarters included certain charges as
described in the Results of Operations and Business Segment Performance
sections. In addition, in the first quarter 2004, we changed certain aspects of
our contract accounting policy and adopted expensing of stock-based
compensation. Income from continuing operations increased $63 million over the first
quarter 2003. The increase was primarily due to reduced charges for facility
closure and headcount reduction actions and reduced asset impairment expenses.
Additionally, the $5 million gain on the sale of the Noveon International, Inc.
payment-in-kind notes (Noveon PIK Notes) issued to us in connection with the
sale of the Performance Materials segment was not repeated in the first quarter
of 2004. These items, which totaled $69 million, after tax, during the first
quarter 2003, were reduced to $6 million, after tax, during the first quarter
of 2004. Also in the first quarter 2004, we experienced reduced earnings
totaling approximately $12 million after tax, or $0.10 per diluted share,
compared to the first quarter 2003, relating to the impact of foreign currency
exchange rates and certain medical expenses, liability insurance premiums,
litigation costs and performance-based management incentive compensation
expenses. During the first quarter 2004, we began expensing stock-based
compensation, which reduced our diluted earnings per share by $0.02, and we
adjusted our effective tax rate to 31 percent, a decrease of 2 percent from the
33 percent rate in the same quarter last year. We recorded income from discontinued operations of $63 million during the
first quarter 2003, associated with the gain on the sale of our Avionics
business. No income from discontinued operations was recorded during the first
quarter 2004. Cash flow from operating activities was $49 million in the first quarter
2004 and $122 million in the first quarter 2003. Cash flow from operating
activities included tax refunds of $55 million in the first quarter 2003.
There were no significant tax refunds during the first quarter 2004. Worldwide
pension contributions decreased from $30 million in the first quarter 2003 to
$13 million in the first quarter 2004. Net cash flow used by financing
activities was $75 million in the first quarter 2004 primarily due to the
repayment of the 8.30% Cumulative Quarterly Preferred Securities, Series A
(QUIPS Debentures) and $402 million in the first quarter 2003 primarily due to
the repayment of debt with the proceeds from the sale of the Avionics business
and the sale of the Noveon PIK Notes. Long-term debt and capital lease obligations, including current maturities
of long-term debt and capital lease obligations, at March 31, 2004 was $2,150
million compared to $2,212 million at December 31, 2003. At March 31, 2004 we
had cash and marketable securities of $330 million as compared to $378 million
at December 31, 2003. The reduction in debt and cash and marketable securities
from the December 31, 2003 levels resulted primarily from the repayment of the
QUIPS Debentures. 22




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##### Table of Contents



We maintain a committed syndicated revolving credit facility expiring in
August 2006 that permits borrowing, including letters of credit, up to a
maximum of $500 million. At March 31, 2004 there were no borrowings and $25.8
million in letters of credit outstanding under this facility. At March 31,
2004, we had borrowing capacity under this facility of $322.2 million, after
reductions for letters of credit outstanding. At March 31, 2004, we also
maintained $75 million of uncommitted domestic money market facilities and $26
million of uncommitted foreign working capital facilities with various banks to
meet short-term borrowing requirements. In April 2004, the domestic uncommitted
facilities were reduced to $50 million. At March 31, 2004, there were no
borrowings under these uncommitted facilities. We maintain a shelf registration
that allows us to issue up to $1.4 billion of debt securities, series preferred
stock, common stock, stock purchase contracts and stock purchase units. We expect our 2004 sales to be in the $4.65 billion to $4.7 billion range.
Our outlook for operating income and earnings per share (EPS) is based upon
many external and internal factors that may have a material impact on operating
income and EPS. See Outlook for a list of certain of these factors. We expect
2004 fully diluted EPS to be at the upper end of our range of $1.20 to $1.35.
We expect cash flow from operations, minus capital expenditures, to approximate
net income in 2004. We expect capital expenditures in 2004 to be 20 to 30
percent higher than the 2003 capital expenditures of $125 million. Our business balance across the aerospace and defense markets continues to
be an important strategic aspect of our business. The three major market areas
for our products and services each represents around one-third of total sales,
and we believe that trends in these markets will have an important impact on
future sales. Looking at our first quarter 2004 sales by market channel,
military and space sales represented 29 percent of sales, total commercial
aircraft original equipment sales, including regional, business and general
aviation original equipment sales, represented 31 percent of our sales and
total commercial aircraft aftermarket sales for these same aircraft and for
heavy maintenance represented 35 percent of sales. Other areas, including
industrial gas turbine components, made up the remaining 5 percent. Overall,
our aftermarket sales both for commercial aircraft and in the military and
space markets represented between 45 to 50 percent of total sales. In 2004, we remain focused on improving our operational and financial
performance and on specific enterprise-wide goals, including margin improvement
and strong cash flow. We continue to invest in new products and systems that
are expected to fuel our future growth. OUTLOOK Our sales outlook for 2004 has been revised upward based on the following
market assumptions:  
    
    Deliveries of Boeing and Airbus large commercial aircraft are
expected to be approximately flat when compared to the 586 deliveries in
2003.
    
    We expect capacity growth in the global airline system, as measured
by available seat miles (ASMs), to be in the 3 to 5 percent range. Our
sales to airlines for large commercial and regional aircraft aftermarket
parts and service are expected to grow approximately in-line with
increases in capacity. Assuming the first quarter sales and order trends
continue, we now expect aftermarket sales to grow at the higher end of
the range.
    
    Regional and business new aircraft production is expected to increase
by about 8 to 10 percent when compared to 2003.
    
    Military sales (OE and aftermarket) should increase slightly greater
than global military budgets, in the 10 to 12 percent range, when
compared to 2003, an increase from the prior outlook. Based on current expectations for these key market trends, our 2004 sales
are now expected to be in the $4.65 to $4.70 billion range. The 2004 outlook for operating income and EPS is based on many external
and internal factors that may have a material impact on those measures. These
factors include, but are not limited to:  
    
    Stock-based compensation expensing  we began expensing stock-based
compensation during the first quarter 2004. For the full year 2004, it
is now expected that stock-based compensation expense will be
approximately $13 million pretax (about $0.07 per diluted share). Our
prior outlook estimated this expense to be approximately $16 million
pretax (about $0.09 per diluted share). 23




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##### Table of Contents




    
    Foreign exchange  we are currently hedged on about 90 percent of our
estimated foreign exchange exposure for the balance of 2004. We now
expect our unfavorable foreign exchange impact for 2004 to be
approximately $15 million pretax, compared to 2003, based on hedging
activity in the first quarter and current exchange rates. Our prior
outlook estimated the unfavorable foreign exchange impact for 2004 to be
approximately $15 to $20 million pretax, compared to 2003.
    
    Certain expenses included in Corporate General and Administrative
Costs, Other Income (Expense) and segment operating results are expected
to increase by approximately $30 million, in the aggregate, in 2004
compared to 2003. The increase, is primarily due to a change in our
incentive compensation plan, which replaced a portion of the annual
stock option grant with restricted stock.
    
    Pension expense  we expect pension costs to be approximately $7
million (pretax) lower than 2003, due to higher than previously
anticipated pension plan asset levels driven by strong equity markets in
the fourth quarter 2003.
    
    7E7 and A380 research and development expense  combined research and
development expense on these two programs is expected to be relatively
flat, depending upon the level and timing of 7E7 program awards, in 2004
compared to 2003 as the reductions in research and development expense
on the Airbus A380 program are expected to be largely offset by
increased research and development expense on the Boeing 7E7 program. Taking these factors into account, we expect 2004 diluted EPS to be at the
upper end of our range of $1.20 to $1.35. EPS from continuing operations, which
excludes the one-time gain from the cumulative effect of accounting change but
includes the ongoing negative impact of the contract accounting change for our
aerostructures business and stock-based compensation expensing, is expected to
be between $1.07 to $1.22. We expect cash flow from operations, minus capital expenditures, to
approximate net income in 2004. We expect capital expenditures in 2004 to be 20
to 30 percent higher than the 2003 capital expenditures of $125 million. The current earnings and cash flow from operations outlook does not
include any impact of potential curtailment of production for the Boeing 717
program, premiums associated with potential early retirement of debt,
resolution of the previously disclosed Rohr and Coltec tax litigation or
potential contractual disputes with Northrop Grumman related to the purchase of
Aeronautical Systems from TRW. RESULTS OF OPERATIONS Changes in Accounting Methods Effective January 1, 2004, we changed two aspects of the application of
contract accounting for our aerostructures business which is included in the
Engine Systems segment. The first is a change to the cumulative catch-up method
from the reallocation method for accounting for changes in contract estimates
of revenue and costs. The change was effected by adjusting contract profit
rates from the balance to complete gross profit rate to the estimated gross
profit rate at completion of the contract. The second change related to
pre-certification costs. Under the old policy, pre-certification costs
exceeding the level anticipated in our original investment model used to
negotiate contractual terms were expensed when determined regardless of overall
contract profitability. Under the new policy, pre-certification costs,
including those in excess of original estimated levels, will be included in
total contract costs used to evaluate overall contract profitability. The
impact of the changes in accounting method was to record a pretax gain of $23.3
million ($16.2 million after tax) as a Cumulative Effect of Accounting Change.
Had these methods of accounting been in effect during 2003, the segment
operating loss as previously reported for the Engine Systems segment for the
quarter ended March 31, 2003 would have been $3.6 million higher and the total
operating income would have been $3.6 million lower. Also effective January 1, 2004, we changed our method of accounting for
stock-based compensation. We previously accounted for stock-based compensation
under APB No. 25. We have adopted the provisions of Financial Accounting
Standard No. 123 Accounting for Stock-Based Compensation and Financial
Accounting Standard No. 148 Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of FASB Statement No. 123. As such, we now expense
stock options and the shares issued under our employee stock purchase plan. The
expense is be recognized over the period earned and vested. The adoption of
FASB No. 123 reduced pretax income by $4.3 million for the quarter ended March
31, 2004. 24




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##### Table of Contents



Quarter Ended March 31, 2004 Compared with Quarter Ended March 31, 2003 Three Months EndedMarch 31,2004
    
    2003(Dollars in millions)Sales
    
    $
    1,162.1
    
    
    $
    1,094.2Segment Operating Income
    
    $
    118.0
    
    
    $
    18.8Corporate General and Administrative Costs
    
    
    (19.5
    )
    
    
    (15.9
    )Total Operating Income
    
    
    98.5
    
    
    
    2.9Net Interest Expense
    
    
    (36.6
    )
    
    
    (35.4
    )Other Income (Expense)  net
    
    
    (18.9
    )
    
    
    (12.6
    )Income Tax Expense
    
    
    (13.3
    )
    
    
    (14.9
    )Distribution on Trust Preferred Securities
    
    
    
    
    
    
    (2.6
    )Income (Loss) from Continuing Operations
    
    
    29.7
    
    
    
    (32.8
    )Income (Loss) from Discontinued Operations
    
    
    
    
    
    
    62.7Cumulative Effect of an Accounting Change
    
    
    16.2
    
    
    
    (0.5
    )Net Income
    
    $
    45.9
    
    
    $
    29.4
 Changes in sales and segment operating income are discussed within the
Business Segment Performance section below. Corporate general and administrative costs of $19.5 million for the
quarter ended March 31, 2004 increased $3.6 million, or 22.6 percent, from
$15.9 million for the quarter ended March 31, 2003 primarily due to higher
incentive compensation costs including expensing of stock-based compensation.
Corporate general and administrative costs as a percentage of sales were 1.7
percent in the quarter ended March 31, 2004 and 1.5 percent in the quarter
ended March 31, 2003. Net interest expense increased $1.2 million, or 3.4 percent, primarily due
to lower interest income of $3.8 million, primarily due to the sale of the
Noveon PIK Notes in the first quarter of 2003 offset in part by lower interest
expense on short-term borrowings and the favorable effect of interest rate
swaps entered into in 2003. Other income (expense)  net increased by $6.3 million, or 50.0 percent,
to expense of $18.9 million in the quarter ended March 31, 2004 from expense of
$12.6 million in the quarter ended March 31, 2003. The increase in expense
resulted from a $7.0 million impairment of a note receivable we received in
connection with the sale of a business, the absence in the first quarter 2004
of the $6.9 million gain on the sale of the Noveon PIK Notes, which occurred in
the first quarter 2003, and $3.6 million in costs associated with businesses
previously sold, including settlement of a lawsuit. Included in the first
quarter 2003 was the write-off of our equity investment in Cordiem LLC of $11.7
million. Our effective tax rate from continuing operations was 31.0 percent during
the quarter ended March 31, 2004 and 33.0 percent during the quarter ended
March 31, 2003. The lower rate in the quarter ended March 31, 2004 as compared
to the quarter ended March 31, 2003 was due to an expected increase in export
activity and higher research tax credits. Income (loss) from discontinued operations, after tax, was $62.7 million
during the quarter ended March 31, 2003 primarily representing the $63.3
million gain on the sale of the Avionics business. Income (loss) from
discontinued operations for the Avionics and PRS operating results was a loss
of $0.6 million in the quarter ended March 31, 2003. Our PRS business ceased
operations in the first quarter of 2003. Effective January 1, 2004, we changed two aspects of the application of
contract accounting for our aerostructures business. The first is a change to
the cumulative catch-up method from the reallocation method for accounting for
changes in contract estimates of revenue and costs. The change was effected by
adjusting contract profit rates from the balance to complete gross profit rate
to the estimated gross profit rate at completion of the contract. The second
change related to pre-certification costs. Under the old policy,
pre-certification costs exceeding the level anticipated in our original
investment model used to negotiate contractual terms were expensed when
determined regardless of overall contract profitability. Under the new policy,
pre-certification costs, including those in excess of original estimated
levels, will be included in total contract costs used to evaluate overall
contract profitability. The impact of the changes in accounting method was to
record a pretax gain of $23.3 million ($16.2 million after tax) as a Cumulative
Effect of Accounting Change. 25




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The cumulative effect of an accounting change for the quarter ended March
31, 2003 of a loss of $0.5 million, after tax, represents the adoption of
Statement of Financial Accounting Standards No. 143 Accounting for Asset
Retirement Obligations. We established a liability for contractual obligations
for the retirement of long-lived assets. BUSINESS SEGMENT PERFORMANCE Our operations are reported as three business segments: Airframe Systems,
Engine Systems and Electronic Systems. Effective January 1, 2004, we realigned
the business units within our three reportable segments. These segments are
described in Note D to our unaudited condensed consolidated financial statements
effective January 1, 2004. The customer services business was transferred from
the Airframe Systems segment to the Engine Systems segment to better align our
enterprise resources with our global customer base and to streamline the
business to support future growth. In addition, the costs and sales associated
with products or services provided to customers through the customer services
business are allocated to the business providing the product or service rather
than allocated to the customer services business. Prior periods have been
reclassified to conform to the current year presentation. An expanded analysis of Net Customer Sales and Operating Income by
business segment follows. In the following tables, segment operating income is total segment revenue
reduced by operating expenses directly identifiable with that business segment. Quarter Ended March 31, 2004 Compared with the Quarter Ended March 31, 2003 Quarter Ended March 31,%
    
    % of Sales2004
    
    2003
    
    Change
    
    2004
    
    
    
    
    
    2003(Dollars in millions)NET CUSTOMER SALESAirframe Systems
    
    $
    402.6
    
    
    $
    402.1
    
    
    
    0.1Engine Systems
    
    
    498.5
    
    
    
    423.6
    
    
    
    17.7Electronic Systems
    
    
    261.0
    
    
    
    268.5
    
    
    
    (2.8
    )Total Sales
    
    $
    1,162.1
    
    
    $
    1,094.2
    
    
    
    6.2SEGMENT OPERATING INCOME (LOSS)Airframe Systems
    
    $
    20.9
    
    
    $
    21.8
    
    
    
    (4.1
    )
    
    
    
    
    
    
    5.2
    
    
    
    5.4Engine Systems
    
    
    74.4
    
    
    
    (35.2
    )
    
    
    311.4
    
    
    
    
    
    
    
    14.9
    
    
    
    (8.3
    )Electronic Systems
    
    
    22.7
    
    
    
    32.2
    
    
    
    (29.5
    )
    
    
    
    
    
    
    8.7
    
    
    
    12.0Segment Operating Income
    
    $
    118.0
    
    
    $
    18.8
    
    
    
    527.7
    
    
    
    
    
    
    
    10.2
    
    
    
    1.7
 Airframe Systems:Airframe Systems segment sales of $402.6 million in the
quarter ended March 31, 2004 increased $0.5 million, or 0.1 percent, from
$402.1 million in the quarter ended March 31, 2003. The increase was due to
favorable currency translation on non-U.S. dollar sales, primarily in the
actuation systems business, offset in part by lower sales for aircraft wheels
and brakes, landing gear services and original equipment and a decrease in
heavy airframe maintenance activity during the first quarter 2004. Airframe Systems segment operating income decreased $0.9 million, or 4.1
percent, from $21.8 million in the quarter ended March 31, 2003 to $20.9
million in the quarter ended March 31, 2004. The decrease in operating income
for the quarter ended March 31, 2004 as compared to the quarter ended March 31,
2003 was primarily due to the following:  
    
    Decreased sales as noted above for aircraft wheels and brakes,
landing gear services and original equipment and heavy airframe
maintenance;
    
    Unfavorable foreign exchange translation of non-U.S. dollar operating costs; and
    
    Higher new program research and development costs. There were asset impairment, facility closure and headcount reduction
charges of approximately $10 million recorded in the first quarter 2003. There
were no such charges in the first quarter 2004. 26




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##### Table of Contents



Engine Systems:Engine Systems segment sales in the quarter ended March
31, 2004 of $498.5 million increased $74.9 million, or 17.7 percent, from
$423.6 million in the quarter ended March 31, 2003. The increase was due to the
following:  
    
    Higher aerostructures original equipment and aftermarket sales;
    
    Increased sales of aftermarket and European military engine controls; and
    
    Higher sales of turbine fuel engine components to the U.S. military. This was partially offset by:  
    
    Lower turbomachinery sales in certain Canadian product lines; and
    
    Lower cargo systems sales due to the initial provisioning for B747 main deck sales made in the first quarter 2003. Engine Systems segment operating income increased $109.6 million, or 311.4
percent, from a loss of $35.2 million in the quarter ended March 31, 2003 to
$74.4 million in the quarter ended March 31, 2004. Segment operating income was
higher due to:  
    
    Non-cash write-downs of inventory and long-term receivables relating
to the Super 27 re-engining program of $79.9 million in the quarter
ended March 31, 2003, which did not recur in the first quarter 2004. The
write-down of the Super 27 re-engining program is described in detail at
Contingencies  Super 27 Program; and
    
    Higher volume as described above. The increase in Engine Systems segment operating income was partially
mitigated as a result of the change in contract accounting. Electronic Systems:Electronic Systems segment sales of $261.0 million in
the quarter ended March 31, 2004 decreased $7.5 million, or 2.8 percent, from
$268.5 million in the quarter ended March 31, 2003. The decrease was primarily
due to:  
    
    Lower volume for the space electronics programs in the optical and space business;
    
    Lower volume for classified programs in the optical and space business;
    
    Lower commercial aftermarket and military original equipment volume in the fuel and utility
systems business; and
    
    Lower aftermarket commercial and military sales for the sensors business. Partially offsetting the decrease in sales were increases in sales of
commercial and military aftermarket products for de-icing and specialty
systems, lighting systems and power systems. Electronic Systems segment operating income decreased $9.5 million, or
29.5 percent, from $32.2 million in the quarter ended March 31, 2003 to $22.7
million in the quarter ended March 31, 2004. Segment operating income was
unfavorably affected by:  
    
    The decline in sales as listed above; and
    
    Increased investments in research and development costs and bid and proposal costs in an effort to win new programs. 27




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LIQUIDITY AND CAPITAL RESOURCES We currently expect to fund expenditures for capital requirements as well
as liquidity needs from a combination of cash, internally generated funds and
financing arrangements. We believe that our internal liquidity, together with
access to external capital resources, will be sufficient to satisfy existing
commitments and plans and also provide adequate financial flexibility. Cash At March 31, 2004, we had cash and marketable securities of $329.5
million, as compared to $378.4 million at December 31, 2003. Credit Facilities We have a committed syndicated revolving credit facility that expires in
August 2006 that permits borrowing, including letters of credit, up to a
maximum of $500 million. At March 31, 2004, there were no borrowings and $25.8
million in letters of credit outstanding under this facility. At December 31,
2003, there were no borrowings and $17.1 million in letters of credit
outstanding under the facility. The level of unused borrowing capacity under our committed syndicated
revolving credit facility varies from time to time depending in part upon our
consolidated net worth and leverage ratio levels. In addition, our ability to
borrow under this facility is conditioned upon compliance with financial and
other covenants set forth in the related agreement, including a consolidated
net worth requirement and maximum leverage ratio. We are currently in
compliance with all such covenants. As of March 31, 2004, we had borrowing
capacity under this facility of $322.2 million, after reductions for letters of
credit outstanding. At March 31, 2004, we also maintained $75 million of uncommitted domestic
money market facilities and $25.6 million of uncommitted foreign working
capital facilities with various banks to meet short-term borrowing
requirements. In April 2004, the domestic uncommitted facilities were reduced
to $50 million. As of March 31, 2004 and December 31, 2003, there were no
borrowings under these facilities. These uncommitted credit facilities are
provided by a small number of commercial banks that also provide us with
committed credit through the syndicated revolving credit facility and with
various cash management, trust and other services. Our credit facilities do not contain any credit rating downgrade triggers
that would accelerate the maturity of our indebtedness. However, a ratings
downgrade would result in an increase in the interest rate and fees payable
under our committed syndicated revolving credit facility. Such a downgrade also
could adversely affect our ability to renew existing or obtain access to new
credit facilities in the future and could increase the cost of such new
facilities. QUIPS On March 2, 2004, we completed the redemption of all of the $63.5 million
in outstanding 8.30% Cumulative Quarterly Income Preferred Securities, Series A
(QUIPS) issued by BFGoodrich Capital, a Delaware business trust (Trust), all of
the common equity of which is owned by us. The QUIPS were supported by our
8.30% Junior Subordinated Debentures, Series A (QUIPS Debentures), which were
also redeemed on March 2, 2004. Long-Term Financing At March 31, 2004, we had long-term debt and capital lease obligations of
$2,140.7 million with maturities ranging from 2005 to 2046. Current maturities
of long-term debt and capital lease obligations at March 31, 2004 were $9.6
million. The earliest maturity of a material long-term debt obligation is
December 2007. We also maintain a shelf registration statement that allows us
to issue up to $1.4 billion of debt securities, series preferred stock, common
stock, stock purchase contracts and stock purchase units. Current maturities of long-term debt and capital lease obligations at
March 31, 2004 included $5.9 million of industrial revenue bonds that will be
redeemed on May 11, 2004. We expect to pursue additional opportunities in
future quarters to reduce our long-term indebtedness. 28




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Off-Balance Sheet Arrangements We utilize several forms of off-balance sheet financing arrangements. At
March 31, 2004, these arrangements included: UndiscountedMinimumFuture Lease
    
    ReceivablesPayments
    
    Sold(In millions)Tax Advantaged Operating Leases
    
    $
    50.5Standard Operating Leases
    
    
    155.0$
    205.5Short-term Receivables
    
    
    
    
    
    $
    82.8
 Lease Agreements We finance our use of certain equipment, including corporate aircraft,
under committed lease arrangements provided by financial institutions. Certain
of these arrangements allowed us to claim a deduction for the tax depreciation
on the assets, rather than the lessor, and allowed us to lease up to a maximum
of $90 million at March 31, 2004. At March 31, 2004, $50.5 million of future
minimum lease payments were outstanding under these arrangements. The other
arrangements are standard operating leases. Future minimum lease payments under
the standard operating leases approximated $155.0 million at March 31, 2004. Sale of Receivables At March 31, 2004, we had in place a variable rate trade receivables
securitization program pursuant to which we could sell receivables up to a
maximum of $140 million. Accounts receivable sold under this program were $82.8
million at March 31, 2004. Continued availability of the securitization program
is conditioned upon compliance with covenants, related primarily to operation
of the securitization, set forth in the related agreements. We are currently in
compliance with all such covenants. The securitization does not contain any
credit rating downgrade triggers pursuant to which the program could be
terminated. Cash Flow Hedges We have subsidiaries that conduct a substantial portion of their business
in Euros, Great Britain Pounds Sterling and Canadian Dollars, but have
significant sales contracts that are denominated in U.S. Dollars. Periodically,
we enter into forward contracts to exchange U.S. Dollars for Euros, Great
Britain Pounds Sterling and Canadian Dollars. The forward contracts described above are used to mitigate the potential
volatility to earnings and cash flow arising from changes in currency exchange
rates. The forward contracts are being accounted for as cash flow hedges. The
forward contracts are recorded in our Consolidated Balance Sheet at fair value
with the net change in fair value reflected in Accumulated Other Comprehensive
Income, net of deferred taxes. The notional value of the forward contracts at
March 31, 2004 was $702.4 million. The fair value of the forward contracts at
March 31, 2004 was an asset of $97.8 million, of which $54.0 million is
recorded in Prepaid Expenses and Other Assets and $43.8 million is recorded in
Other Assets. The total gross gain of $100.4 million (before deferred taxes of $34.2
million), including terminated forward contracts as discussed below, was
recorded in Accumulated Other Comprehensive Income and will be reflected in
income as the individual contracts mature which will offset the earnings effect
of the hedged item. As of March 31, 2004, the portion of the $100.4 million
gain that would be reclassified into earnings to offset the effect of the
hedged item as an increase in sales in the next 12 months is a gain of $56.6
million. In June 2003, we terminated certain forward contracts prior to their
scheduled maturities in 2004 and received cash of $3.4 million. As of March 31,
2004, Accumulated Other Comprehensive Income included a gain of $2.6 million
related to these terminated forward contracts that will be reflected in income
and sales when the original forward contracts would have matured. 29




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##### Table of Contents



Fair Value Hedges In July 2003, we entered into a $100 million fixed-to-floating interest
rate swap on our 6.45 percent senior notes due in 2007. In October 2003, we
entered into two $50 million fixed-to-floating interest rate swaps. One $50
million swap is on our 7.50 percent senior notes due in 2008 and the other $50
million swap is on our 6.45 percent medium-term notes due in 2008. In December
2003, we entered into a $50 million fixed-to-floating interest rate swap on our
7.50 percent senior notes due in 2008. The purpose of entering into these swaps
was to increase our exposure to variable interest rates. The settlement and
maturity dates on each swap are the same as those on the referenced notes. In
accordance with Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, the interest
rate swaps are being accounted for as fair value hedges and the carrying value
of the notes has been adjusted to reflect the fair values of the interest rate
swaps. The fair value of the interest rate swaps was an asset (gain) of $8.5
million at March 31, 2004. Other Forward Contracts In January 2004, we entered into forward contracts to manage our foreign
currency risk related to the translation of monetary assets and liabilities
denominated in currencies other than the relevant functional currency. These
forward contracts mature monthly and the notional amounts are adjusted
periodically to reflect changes in net monetary asset balances. The gains or
losses on these forward contracts are being recorded in earnings when realized
in order to mitigate the earnings impact of the translation of net monetary
assets. As of March 31, 2004, we had forward contracts with a notional value of
$67.5 million to buy Great Britain Pounds Sterling, contracts with a notional
value of $42.2 million to buy Euros and contracts with a notional value of
$11.5 million to buy Canadian Dollars. Contractual Obligations and Other Commercial Commitments The following charts reflect our contractual obligations and commercial
commitments as of March 31, 2004. Commercial commitments include lines of
credit, guarantees and other potential cash outflows resulting from a
contingent event that requires performance by us pursuant to a funding
commitment. Total
    
    2004
    
    2005-2006
    
    2007-2008
    
    ThereafterPayments Due by PeriodContractual ObligationsShort-Term and Long-Term Debt
    
    $
    2,150.5
    
    
    $
    71.1
    
    
    $
    3.8
    
    
    $
    709.7
    
    
    $
    1,365.9Capital Lease Obligations
    
    
    2.5
    
    
    
    1.5
    
    
    
    0.6
    
    
    
    0.2
    
    
    
    0.2Operating Leases
    
    
    199.8
    
    
    
    33.1
    
    
    
    60.2
    
    
    
    36.7
    
    
    
    69.8Unconditional Purchase Obligations(1)
    
    
    44.0
    
    
    
    12.3
    
    
    
    18.7
    
    
    
    13.0
    
    
    
    Other Long-Term Obligations
    
    
    7.3
    
    
    
    3.0
    
    
    
    2.3
    
    
    
    2.0
    
    
    
    Total
    
    $
    2,404.1
    
    
    $
    121.0
    
    
    $
    85.6
    
    
    $
    761.6
    
    
    $
    1,435.9Amount of Commitments that Expire per
PeriodOther Commercial CommitmentsLines of Credit(2)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby Letters of Credit & Bank
Guarantees
    
    
    62.7
    
    
    
    43.9
    
    
    
    18.8
    
    
    
    
    
    
    
    Guarantees
    
    
    208.1
    
    
    
    0.4
    
    
    
    0.8
    
    
    
    2.1
    
    
    
    204.8Standby Repurchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Commercial Commitments
    
    
    98.1
    
    
    
    35.3
    
    
    
    45.8
    
    
    
    14.7
    
    
    
    2.3Total
    
    $
    368.9
    
    
    $
    79.6
    
    
    $
    65.4
    
    
    $
    16.8
    
    
    $
    207.1
  (1)
    
    At December 31, 2003, we should have reported $78.7 million of
unconditional purchase obligations. We incorrectly reported $155.3 million
due to an overstatement of $77.6 million at December 31, 2003.(2)
    
    As of March 31, 2004, we had in place (a) a committed syndicated
revolving credit facility which expires in August 2006 and permits
borrowing up to a maximum of $500 million, (b) $75 million of uncommitted
domestic money market facilities and (c) $25.6 million of uncommitted
foreign working capital facilities. As of March 31, 2004, we had borrowing
capacity under our committed syndicated revolving credit facility of
$322.2 million, after reductions for outstanding letters of credit. 30




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##### Table of Contents



CASH FLOW The following table summarizes our cash flow activity for the quarter
ended March 31, 2004 and March 31, 2003. Quarter Ended March 31,Net Cash Provided by (Used by):
    
    2004
    
    2003Operating activities of continuing operations
    
    $
    48.5
    
    
    $
    115.1Investing activities of continuing operations
    
    $
    (23.4
    )
    
    $
    132.0Financing activities of continuing operations
    
    $
    (74.8
    )
    
    $
    (395.6
    )Discontinued operations
    
    $
    
    
    
    $
    185.0
 Operating Activities of Continuing Operations Net cash provided by operating activities of continuing operations
decreased $66.6 million from $115.1 million during the quarter ended March 31,
2003 to $48.5 million during the quarter ended March 31, 2004. Net cash
provided by operating activities in the quarter ended March 31, 2004 included
cash received from the termination of certain life insurance policies of $23
million offset in part by the acquisition of certain aftermarket rights of $15
million and the pre-funding of the redemption of certain industrial revenue
bonds of approximately $4 million. Net cash provided by operating activities in
the quarter ended March 31, 2003 included tax refunds of $55 million. There
were no significant tax refunds during the first quarter 2004. Net cash
provided by operating activities was reduced by worldwide pension contributions
of $13 million in the quarter ended March 31, 2004 and $30 million in the
quarter ended March 31, 2003. Higher working capital also contributed to lower
net cash provided by operating activities of continuing operations. Investing Activities of Continuing Operations Net cash provided by (used by) investing activities of continuing
operations was a use of cash of $23.4 million in the quarter ended March 31,
2004 and an inflow of cash of $132.0 million in the quarter ended March 31,
2003. Net cash used by investing activities for the quarter ended March 31,
2004 included capital expenditures of $22.9 million. Net cash provided by
investing activities in the quarter ended March 31, 2003 was due to proceeds
from the sale of the Noveon PIK Notes of $151.9 million offset in part by
capital expenditures of $19.9 million. Financing Activities of Continuing Operations Net cash used by financing activities of continuing operations was $74.8
million in the quarter ended March 31, 2004, compared to net cash used by
financing activities of continuing operations of $395.6 million for the quarter
ended March 31, 2003. The balance of the QUIPS of $63.5 million was repaid
during the quarter ended March 31, 2004. Short-term debt was repaid during the
quarter ended March 31, 2003 using the net after-tax cash proceeds from the
sale of our Avionics business and cash proceeds from the sale of the Noveon PIK
Notes. Discontinued Operations Net cash provided by discontinued operations of $185.0 million in the
quarter ended March 31, 2003 included $181.0 million of proceeds from the sale
of the Avionics business. 31




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CONTINGENCIES General There are pending or threatened against us or our subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to commercial, product liability, asbestos and
environmental matters, which seek remedies or damages. We believe that any
liability that may finally be determined with respect to commercial and
non-asbestos product liability claims should not have a material effect on our
consolidated financial position, results of operations or cash flows. From time
to time, we are also involved in legal proceedings as a plaintiff involving
contract, patent protection, environmental and other matters. Gain
contingencies, if any, are recognized when they are realized. Environmental We are subject to various domestic and international environmental laws
and regulations which may require that we investigate and remediate the effects
of the release or disposal of materials at sites associated with past and
present operations, including sites at which we have been identified as a
potentially responsible party under the federal Superfund laws and comparable
state laws. We are currently involved in the investigation and remediation of a
number of sites under these laws. The measurement of environmental liabilities by us is based on currently
available facts, present laws and regulations and current technology. Such
estimates take into consideration our prior experience in site investigation
and remediation, the data concerning cleanup costs available from other
companies and regulatory authorities and the professional judgment of our
environmental specialists in consultation with outside environmental
specialists, when necessary. Estimates of our environmental liabilities are
further subject to uncertainties regarding the nature and extent of site
contamination, the range of remediation alternatives available, evolving
remediation standards, imprecise engineering evaluations and estimates of
appropriate cleanup technology, methodology and cost, the extent of corrective
actions that may be required and the number and financial condition of other
potentially responsible parties, as well as the extent of their responsibility
for the remediation. Accordingly, as investigation and remediation of these sites proceed, it
is likely that adjustments in our accruals will be necessary to reflect new
information. The amounts of any such adjustments could have a material adverse
effect on our results of operations in a given period, but the amounts, and the
possible range of loss in excess of the amounts accrued, are not reasonably
estimable. Based on currently available information, however, we do not believe
that future environmental costs in excess of those accrued with respect to
sites with which we have been identified as a potentially responsible party are
likely to have a material adverse effect on our financial condition. There can
be no assurance, however, that additional future developments, administrative
actions or liabilities relating to environmental matters will not have a
material adverse effect on our results of operations or cash flows in a given
period. Environmental liabilities are recorded when our liability is probable and
the costs are reasonably estimable, which generally is not later than at
completion of a feasibility study or when we have recommended a remedy or have
committed to an appropriate plan of action. The liabilities are reviewed
periodically and, as investigation and remediation proceed, adjustments are
made as necessary. Liabilities for losses from environmental remediation
obligations do not consider the effects of inflation, and anticipated
expenditures are not discounted to their present value. The liabilities are not
reduced by possible recoveries from insurance carriers or other third parties,
but do reflect anticipated allocations among potentially responsible parties at
federal Superfund sites or similar state-managed sites and an assessment of the
likelihood that such parties will fulfill their obligations at such sites. At March 31, 2004, our unaudited consolidated balance sheet included an
accrued liability for environmental remediation obligations of $86.0 million,
of which $15.9 million was included in current liabilities as Accrued
Liabilities. Of the $86.0 million, $24.9 million was associated with ongoing
operations and $61.1 million was associated with businesses previously disposed
of or discontinued. The timing of expenditures depends on a number of factors that vary by
site, including the nature and extent of contamination, the number of
potentially responsible parties, the timing of regulatory approvals, the
complexity of the investigation and remediation, and the standards for
remediation. We expect that we will expend present accruals over many years,
and will complete remediation of all sites with which we have been identified
in up to 30 years. This period includes operation and monitoring costs that are
generally incurred over 15 to 25 years. 32




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##### Table of Contents



Asbestos We and a number of our subsidiaries have been named as defendants in
various actions by plaintiffs alleging injury or death as a result of exposure
to asbestos fibres in products, or which may have been present in our
facilities. A number of these cases involve maritime claims, which have been
and are expected to continue to be administratively dismissed by the court.
These actions primarily relate to previously owned businesses. We believe that
pending and reasonably anticipated future actions, net of anticipated insurance
recoveries, are not likely to have a material adverse effect on our financial
condition, results of operations or cash flows. We believe that we have substantial insurance coverage available to us
related to any remaining claims. However, a major portion of the primary layer
of insurance coverage for these claims is provided by the Kemper Insurance
Companies. Kemper has indicated that, due to capital constraints and downgrades
from various rating agencies, it has ceased underwriting new business and now
focuses on administering policy commitments from prior years. We cannot predict
the long-term impact of these actions on the availability of the Kemper
insurance. Liabilities of Divested Businesses Asbestos At the time of the EIP spin-off, two subsidiaries of Coltec were
defendants in a significant number of personal injury claims relating to
alleged asbestos-containing products sold by those subsidiaries. It is possible
that asbestos-related claims might be asserted against us on the theory that we
have some responsibility for the asbestos-related liabilities of EnPro, Coltec
or its subsidiaries, even though the activities that led to those claims
occurred prior to our ownership of any of those subsidiaries. Also, it is
possible that a claim might be asserted against us that Coltecs dividend of
its aerospace business to us prior to the spin-off was made at a time when
Coltec was insolvent or caused Coltec to become insolvent. Such a claim could
seek recovery from us on behalf of Coltec of the fair market value of the
dividend. A limited number of asbestos-related claims have been asserted against us
as successor to Coltec or one of its subsidiaries. We believe that we have
substantial legal defenses against these claims, as well as against any other
claims that may be asserted against us on the theories described above. In
addition, the agreement between EnPro and us that was used to effectuate the
spin-off provides us with an indemnification from EnPro covering, among other
things, these liabilities. The success of any such asbestos-related claims
would likely require, as a practical matter, that Coltecs subsidiaries were
unable to satisfy their asbestos-related liabilities and that Coltec was found
to be responsible for these liabilities and was unable to meet its financial
obligations. We believe any such claims would be without merit and that Coltec
was solvent both before and after the dividend of its aerospace business to us.
If we are ultimately found to be responsible for the asbestos-related
liabilities of Coltecs subsidiaries, we believe it would not have a material
adverse effect on our financial condition, but could have a material adverse
effect on our results of operations and cash flows in a particular period.
However, because of the uncertainty as to the number, timing and payments
related to future asbestos-related claims, there can be no assurance that any
such claims will not have a material adverse effect on our financial condition,
results of operations and cash flows. If a claim related to the dividend of
Coltecs aerospace business were successful, it could have a material adverse
impact on our financial condition, results of operations and cash flows. Other In connection with the divestiture of our tire, vinyl and other
businesses, we have received contractual rights of indemnification from third
parties for environmental and other claims arising out of the divested
businesses. Failure of these third parties to honor their indemnification
obligations could have a material adverse effect on our consolidated financial
condition, results of operations and cash flows. Guarantees We have guaranteed amounts owed by Coltec Capital Trust with respect to
the $145 million of outstanding TIDES and have guaranteed Coltecs performance
of its obligations with respect to the TIDES and the underlying Coltec
convertible subordinated debentures. Following the spin-off of the EIP segment,
the TIDES remained outstanding as an obligation of Coltec Capital Trust and our
guarantee with respect to the TIDES remains an obligation of ours. EnPro,
Coltec and Coltec Capital Trust have agreed to indemnify us for any costs and
liabilities arising under or related to the TIDES after the spin-off. 33




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In addition to our guarantee of the TIDES, at March 31, 2004, we have an
outstanding contingent liability for guarantees of debt and lease payments of
$3.3 million, letters of credit and bank guarantees of $56.0 million, residual
value of leases of $54.8 million and executive loans to purchase our stock of
$4.8 million. Potential Contractual Dispute with Northrop Grumman In connection with our acquisition of the Aeronautical Systems businesses
from TRW Inc. (TRW), certain liabilities and obligations of the Aeronautical
Systems businesses were retained by TRW, but are being administered by us. We
have submitted claims to Northrop Grumman, which acquired TRW, for
reimbursement of several items related to the retained liabilities and
obligations. Northrop has questioned the documentary and contractual support
for the claims, and has withheld payment pending resolution of these questions.
We are providing additional information to Northrop in order to answer these
questions. As of March 31, 2004, we had recorded a receivable from Northrop
Grumman for approximately $33 million for such claims. Commercial Airline Customers The downturn in the commercial air transport market, the terrorist attacks
on September 11, 2001, the military conflict in Iraq and the outbreak of Severe
Acute Respiratory Syndrome (SARS) have adversely affected the financial
condition of many of our commercial airline customers. We perform ongoing
credit evaluations on the financial condition of all of our customers and
maintain reserves for uncollectible accounts receivable based upon expected
collectibility. Although we believe our reserves are adequate, we are not able
to predict the future financial stability of these customers. Any material
change in the financial status of any one or group of customers could have a
material adverse effect on our financial condition, results of operations or
cash flows. The extent to which extended payment terms are granted to customers
may negatively affect future cash flow. Super 27 Program Our Aerostructures business unit, included in the Engine Systems segment,
includes a business to re-engine 727 aircraft to meet sound attenuation
requirements and improve their fuel efficiency (Super 27 program). At December
31, 2002, we had an investment in the Super 27 program of $105.9 million
consisting of $44.7 of inventory and $61.2 million of notes receivable. The
inventory included three Super 27 aircraft, seven nacelle kits and other spare
parts. In March 2003, we repossessed four 727 aircraft from a receivable obligor
who was in financial difficulty and also received a revised cash flow forecast
indicating a significant decline in the financial strength of another
receivable obligor. In addition, the deterioration in the commercial airline
market resulting from the military conflict in Iraq and SARS made available
more aircraft that compete with or are newer than these aircraft. Because of
these events, we concluded that our ability to recover the recorded values of
our inventory and notes receivable was significantly affected. In the first
quarter 2003, based on an independent appraisal and our assessment of market
conditions, we wrote-down the carrying value of our inventory to equal the
estimated market value of $12.2 million. Also in the first quarter 2003, we
reserved $0.4 million of related trade receivables and $46.1 million of notes
receivable from a receivable obligor. As of March 31, 2004, our remaining notes receivable of $7.2 million
represents the present value of expected future cash flows related to those
receivables. The total carrying value of inventory related to the Super 27
business was $4.6 million at March 31, 2004 and represents our assessment of
the current market value of the remaining inventory. Collection of the notes may be negatively affected if the overall
deterioration in the commercial aerospace market continues. Because of these
conditions, we will continue to assess the value of these assets and their
ultimate recovery. 34




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Boeing 717 We have a long term contract with Boeing for nacelle systems used on the
Boeing 717 aircraft which is accounted for using contract accounting. In our
estimate of contract profitability, we have assumed deliveries of aircraft in
excess of those for which Boeing has firm orders. Boeing continues to market
the aircraft to specific potential customers. During the fourth quarter of
2003, Boeing announced that it lost a major sales campaign which they disclosed
in their December 31, 2003 Annual Report on Form 10-K, increasing the
possibility that the program could be terminated before attaining the estimated
number of deliveries included in our contract revenue and cost estimates. If
units delivered fall short of amounts assumed due to program termination or for
other reasons, estimates of total contract revenue and cost would change and we
could recognize a pretax loss on the contract of approximately $15.0 million to
$25.0 million. The range of loss, if any, is dependent upon a number of
factors, including additional orders received or exercise of existing options
from Boeing, realization of cost efficiencies related to expected volume and
collection of program termination costs should the contract be terminated
prematurely. Tax Litigation In 2000, Coltec made a $113.7 million payment to the Internal Revenue
Service (IRS) for an income tax assessment and the related accrued interest
arising out of certain capital loss deductions and tax credits taken in 1996.
On February 13, 2001, Coltec filed suit against the IRS in the U.S. Court of
Claims seeking a refund of this payment. Trial began in May 2004.
Coltec has agreed to pay to us an amount equal to any refunds or credits of
taxes and interest received by it as a result of the litigation. If the IRS
prevails in this case, Coltec will not owe any additional interest or taxes
with respect to 1996. However, we may be required by the IRS to pay up to $32.7
million plus accrued interest with respect to the same items claimed by Coltec
in its tax returns for 1997 through 2000. The potential tax liability for 1997
through 2000 has been fully reserved. A reasonable estimation of the potential
refund for 1996, if any, cannot be made at this time; accordingly, no
receivable has been recorded. In 2000, the IRS issued a statutory notice of deficiency asserting that
Rohr, Inc. (Rohr), our subsidiary, was liable for $85.3 million of additional
income taxes for the fiscal years ended July 31, 1986 through 1989. In 2003,
the IRS issued an additional statutory notice of deficiency asserting that Rohr
was liable for $23 million of additional income taxes for the fiscal years
ended July 31, 1990 through 1993. The proposed assessments relate primarily to
the timing of certain tax deductions and tax credits. Rohr has filed petitions
in the U.S. Tax Court opposing the proposed assessments. Rohr expects that
these cases will go to trial in late 2004 or in 2005 and that it will
ultimately be successful in these cases. However, if Rohr is not successful in
these cases, we believe that the net cost to Rohr at the time of the final
determination by the court would not exceed $100 million, including interest,
as the court will take into account the timing benefit of the disallowed tax
deductions at that time. We believe that our best estimate of the liability
resulting from these cases has been fully reserved. NEW ACCOUNTING STANDARD The U.S. Medicare Prescription Drug Improvement and Modernization Act of
2003 (the Act) was signed into law on December 8, 2003. In accordance with
Financial Accounting Standards Board Staff Position 106-1 Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug Improvement
and Modernization Act of 2003, the effects of the Act on our benefit plans are
not reflected in any measure of the accumulated postretirement benefit
obligation or net periodic postretirement benefit cost in our unaudited
consolidated financial statements or accompanying notes. Specific authoritative
guidance on the accounting for the federal subsidy is pending and that
guidance, when issued, could require us to change previously reported
information. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of
operations is based upon our unaudited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including
those related to customer programs and incentives, product returns, bad debts,
inventories, investments, intangible assets, income taxes, financing
operations, warranty obligations, excess component order cancellation costs,
restructuring, long-term service contracts, pensions and other postretirement
benefits, and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. 35




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We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Revenue Recognition For revenues not recognized under the contract method of accounting, we
recognize revenues from the sale of products at the point of passage of title,
which is at the time of shipment. Revenues earned from providing maintenance
service are recognized when the service is complete. Contract Accounting-Percentage of Completion Revenue Recognition Effective January 1, 2004, we changed two aspects of the application of
contract accounting for our aerostructures business unit, including a change to
the cumulative catch-up method from the reallocation method for accounting for
changes in contract estimates of revenue and costs, and a change to the
accounting for certain pre-certification costs. These contract accounting
methods are described below. The impact of these changes on our financial
statements is income of approximately $23 million, before tax, or $16 million
after tax which is reported as a Cumulative Effect of Change in Accounting in
the first quarter of 2004. We have sales under long-term, fixed-priced contracts, many of which
contain escalation clauses, requiring delivery of products over several years
and frequently providing the buyer with option pricing on follow-on orders.
Sales and profits on each contract are recognized in accordance with the
percentage-of-completion method of accounting, using the units-of-delivery
method. We follow the guidelines of Statement of Position 81-1 (SOP 81-1),
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts (the contract method of accounting) using the cumulative catch-up
method in accounting for revisions in estimates. Under the cumulative catch-up
method, the impact of revisions in estimates related to units shipped to date
is recognized immediately when changes in estimated contract profitability is
known. Profit is estimated based on the difference between total estimated
revenue and total estimated cost of a contract, excluding that reported in
prior periods, and is recognized immediately in the period when changes in
estimated contract profitability is known for shipments to date. Current
revenue does not anticipate higher or lower future prices, but includes units
delivered at actual sales prices. Cost includes the estimated cost of the
preproduction effort, primarily tooling and design, plus the estimated cost of
manufacturing a specified number of production units. The specified number of
production units used to establish the profit margin is predicated upon
contractual terms adjusted for market forecasts and does not exceed the lesser
of those quantities assumed in original contract pricing or those quantities
which we now expect to deliver in the timeframe/period assumed in the original
contract pricing. Our policies only allow the estimated number of production
units to be delivered to exceed the quantity assumed within the original
contract pricing when we receive firm orders for additional units. The
timeframe/period assumed in the original contract pricing is generally equal to
the period specified in the contract. If the contract is a life of program
contract, then such period is equal to the time period used in the original
pricing model which generally equals the time period required to recover our
preproduction costs. Option quantities are combined with prior orders when
follow-on orders are released. The contract method of accounting involves the use of various estimating
techniques to project costs at completion and includes estimates of recoveries
asserted against the customer for changes in specifications. These estimates
involve various assumptions and projections relative to the outcome of future
events, including the quantity and timing of product deliveries. Also included
are assumptions relative to future labor performance and rates, and projections
relative to material and overhead costs. These assumptions involve various
levels of expected performance improvements. We reevaluate our contract
estimates periodically and reflect changes in estimates immediately under the
cumulative catch-up method for the impact on shipments to date. 36




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Included in sales are amounts arising from contract terms that provide for
invoicing a portion of the contract price at a date after delivery. Also
included are negotiated values for units delivered and anticipated price
adjustments for contract changes, claims, escalation and estimated earnings in
excess of billing provisions, resulting from the percentage-of-completion
method of accounting. Certain contract costs are estimated based on the
learning curve concept discussed below. Inventory Inventoried costs on long-term contracts include certain preproduction
costs, consisting primarily of tooling and design costs and production costs,
including applicable overhead. The costs attributed to units delivered under
long-term commercial contracts are based on the estimated average cost of all
units expected to be produced and are determined under the learning curve
concept, which anticipates a predictable decrease in unit costs as tasks and
production techniques become more efficient through repetition. This usually
results in an increase in inventory (referred to as excess-over average)
during the early years of a contract. If in-process inventory plus estimated costs to complete a specific
contract exceeds the anticipated remaining sales value of such contract, such
excess is charged to current earnings, thus reducing inventory to estimated
realizable value. Identifiable Intangible Assets Identifiable intangible assets are recorded at cost, or when acquired as
part of a business combination, at estimated fair value. These assets include
patents and other technology agreements, sourcing contracts, trademarks,
licenses, customer relationships and non-compete agreements. Intangible assets
are generally amortized using the straight-line method over estimated useful
lives of 5 to 25 years for all acquisitions completed prior to June 30, 2001.
For acquisitions completed subsequent to June 30, 2001, identifiable intangible
assets are amortized over their useful life using undiscounted cash flows, a
method that reflects the pattern in which the economic benefits of the
intangible assets are consumed. Impairments of identifiable intangible assets are recognized when events
or changes in circumstances indicate that the carrying amount of the asset, or
related groups of assets, may not be recoverable and our estimate of
undiscounted cash flows over the assets remaining useful lives are less than
the carrying value of the assets. The determination of undiscounted cash flow
is based on our segments plans. The revenue growth is based upon aircraft
build projections from aircraft manufacturers and widely available external
publications. The profit margin assumption is based upon the current cost
structure and anticipated cost reductions. Measurement of the amount of
impairment may be based upon an appraisal, market values of similar assets or
estimated discounted future cash flows resulting from the use and ultimate
disposition of the asset. Sales Incentives We offer sales incentives to certain commercial customers in connection
with sales contracts. These incentives may consist of up-front cash payments,
merchandise credits and/or free products. The cost of these incentives is
recognized in the period incurred unless it is specifically guaranteed of
recovery within the contract by the customer. If the contract contains such a
guarantee, then the cost of the sales incentive is capitalized and amortized
over the contract period. Entry Fees-Investment in Risk and Revenue Sharing Programs Some aerospace customers may negotiate an entry fee, representing an
up-front cash investment in a new program. The payment effectively demonstrates
our commitment to participate in new product programs and is part of the
exclusive supply agreement. In return, we receive a percentage of the product
sales in the supply periods after flight certification. Entry fees differ from
sales incentives, as entry fees are an investment in a program that will
generate a benefit from the total sales of the program, not just sales from our
products, while sales incentives that are capitalized are recovered during the
contract period of our products pursuant to a specific guarantee of recovery by
the customer. The entry fees are recognized as Other Assets and amortized on a
straight-line basis over the programs useful life following certification,
which approximates 20 years. The value of the investment is evaluated for
impairment based on the criteria in Identifiable Intangible Assets above. The
estimated lives are reviewed periodically based upon the expected program lives
as communicated by the customer. 37




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Pension and Postretirement Benefits other than Pensions Assumptions used in determining the benefit obligations and the annual
expense for our pension and postretirement benefits other than pensions are
evaluated by us in consultation with an outside actuary. Changes in assumptions
are based upon our historical data, such as the rate of compensation increase
and the long-term rate of return on plan assets, and the health care cost
projections are evaluated at least annually and updated as necessary. FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY Certain statements made in this document are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
regarding our future plans, objectives and expected performance. Specifically,
statements that are not historical facts, including statements accompanied by
words such as believe, expect, anticipate, intend, estimate or
plan, are intended to identify forward-looking statements and convey the
uncertainty of future events or outcomes. We caution readers that any such
forward-looking statements are based on assumptions that we believe are
reasonable, but are subject to a wide range of risks, and actual results may
differ materially. Important factors that could cause actual results to differ include, but
are not limited to:  
    
    the extent to which we are successful in integrating Aeronautical
Systems in a manner and a timeframe that achieves expected cost savings
and operating synergies;
    
    potential contractual disputes with Northrop Grumman related to the
purchase of Aeronautical Systems;
    
    the nature, extent and timing of our proposed restructuring and
consolidation actions and the extent to which we are able to achieve
savings from these actions;
    
    the possibility of additional restructuring and consolidation actions
beyond those previously announced by us;
    
    demand for and market acceptance of new and existing products, such
as the Airbus A380, the Joint Strike Fighter, the Boeing 7E7, the
Embraer 190 and the Boeing 717;
    
    the health of the commercial aerospace industry, including the impact of bankruptcies in the airline industry;
    
    global demand for aircraft spare parts and aftermarket services;
    
    threats associated with and efforts to combat terrorism, including the current situation in Iraq;
    
    the impact of Severe Acute Respiratory Syndrome (SARS) or other airborne respiratory illnesses on global travel;
    
    potential cancellation of orders by customers;
    
    successful development of products and advanced technologies;
    
    the extent to which expenses relating to employee and retiree medical and pension benefits continue to rise;
    
    competitive product and pricing pressures;
    
    the payment of premiums by us in connection with the early retirement of debt;
    
    the resolution of tax litigation involving Coltec Industries Inc and Rohr, Inc.;
    
    our ability to recover from third parties under contractual rights of
indemnification for environmental and other claims arising out of the
divestiture of our tire, vinyl and other businesses; 38




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
    
    possible assertion of claims against us on the theory that it, as the
former corporate parent of Coltec Industries Inc, bears some
responsibility for the asbestos-related liabilities of Coltec and its
subsidiaries, or that Coltecs dividend of its aerospace business to us
prior to the EnPro spin-off was made at a time when Coltec was insolvent
or caused Coltec to become insolvent;
    
    the effect of changes in accounting policies;
    
    domestic and foreign government spending, budgetary and trade policies;
    
    economic and political changes in international markets where we
compete, such as changes in currency exchange rates, inflation,
deflation, recession and other external factors over which we have no
control; and
    
    the outcome of contingencies (including completion of acquisitions,
divestitures, litigation and environmental remediation efforts). We caution you not to place undue reliance on the forward-looking
statements contained in this document, which speak only as of the date on which
such statements were made. We undertake no obligation to release publicly any
revisions to these forward-looking statements to reflect events or
circumstances after the date on which such statements were made or to reflect
the occurrence of unanticipated events. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to certain market risks as part of our ongoing business
operations, including risks from changes in interest rates and foreign currency
exchange rates, which could impact our financial condition, results of
operations and cash flows. We manage our exposure to these and other market
risks through regular operating and financing activities, and on a limited
basis, through the use of derivative financial instruments. We intend to use
such derivative financial instruments as risk management tools and not for
speculative investment purposes. Our discussion of Market Risk in our 2003
Annual Report on Form 10-K provides more discussion as to the types of
instruments used to manage risk. Refer to Note N: Derivatives and Hedging in
Part 1  Item 1 of this Form 10-Q for a description of current developments
involving our hedging activities. 
 Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to
provide reasonable assurance that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our management, including our Chairman,
President and Chief Executive Officer and Executive Vice President and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding managements disclosure control
objectives. We have carried out an evaluation, under the supervision and with the
participation of our management, including our Chairman, President and Chief
Executive Officer and Executive Vice President and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report (the
Evaluation Date). Based upon that evaluation, our Chairman, President and
Chief Executive Officer and Executive Vice President and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of the Evaluation Date to provide reasonable assurance regarding managements
disclosure control objectives. (b) Changes in Internal Controls. There were no changes in our internal control over financial reporting
that occurred during our most recent fiscal quarter that materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting. 39




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings We and certain of our subsidiaries are defendants in various claims,
lawsuits and administrative proceedings. In addition, we have been notified
that we are among potentially responsible parties under federal environmental
laws, or similar state laws, relative to the cost of investigating and in some
cases remediating contamination by hazardous materials at several sites. See
the disclosure under the captions General, Environmental, Asbestos,
Liabilities of Divested Businesses-Asbestos and Tax Litigation in Note P to
the accompanying unaudited condensed consolidated financial statements, which disclosure
is incorporated herein by reference. 
 Item 2. Changes In Securities, Use Of Proceeds and Issuer Purchases of Equity
Securities The following table summarizes Goodrich Corporations purchases of its
common stock for the quarter ending March 31, 2004: ISSUER PURCHASES OF EQUITY SECURITIES(c) Total Number of
    
    (d) Maximum NumberShares Purchased as
    
    (or Approximate Dollar(a) Total Number
    
    
    
    
    
    Part of Publicly
    
    Value) of Shares that Mayof Shares
    
    (b) Average Price
    
    Announced Plans or
    
    Yet Be Purchased UnderPeriod
    
    Purchased (1)
    
    Paid Per Share
    
    Programs (2)
    
    the Plans or Programs (2)January 2004
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/AFebruary 2004
    
    
    325
    
    
    $
    30.56
    
    
    
    N/A
    
    
    
    N/AMarch 2004
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    325
    
    
    $
    30.56
    
    
    
    N/A
    
    
    
    N/A
  (1)
    
    The issuer purchase during the period covered by this report represents
shares delivered to Goodrich by an employee to pay
withholding taxes due upon vesting of a restricted stock award.  (2)
    
    In connection with the exercise and vesting of stock option and restricted
stock awards, Goodrich from time to time accepts
delivery of shares to pay the exercise price of employee stock options or to
pay withholding taxes due upon the exercise of employee stock options or the
vesting of restricted stock awards. Goodrich does not otherwise have any
plan or program to purchase its common stock. 40




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Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit 3.1
    
    Restated Certificate of Incorporation of Goodrich Corporation,
filed as Exhibit 3.1 to Goodrich Corporations Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003 (File No. 1-892),
is incorporated herein by reference.Exhibit 3.2
    
    By-Laws of Goodrich Corporation, as amended, filed as Exhibit
4(B) to Goodrich Corporations Registration Statement on Form S-3
(File No. 333-98165), is incorporated herein by reference.Exhibit 15
    
    Letter Re: Unaudited Interim Financial Information.Exhibit 18
    
    Letter Re: Change In Accounting Principles.Exhibit 31
    
    Rule 13a-14(a)/15d-14(a) Certifications.Exhibit 32
    
    Section 1350 Certifications.
 (b) Reports on Form 8-K. No Current Reports on Form 8-K were filed during the period covered by
this report. 41




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. May 6, 2004
    
    GOODRICH CORPORATION/s/ ULRICH SCHMIDTUlrich SchmidtExecutive Vice President andChief Financial Officer/s/ ROBERT D. KONEY, JRRobert D. Koney, Jr.Vice President & Controller(Chief Accounting Officer)
 42




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EXHIBIT INDEX Exhibit 3.1
    
    Restated Certificate of Incorporation of Goodrich Corporation,
filed as Exhibit 3.1 to Goodrich Corporations Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003 (File No. 1-892),
is incorporated herein by reference.Exhibit 3.2
    
    By-Laws of Goodrich Corporation, as amended, filed as Exhibit
4(B) to Goodrich Corporations Registration Statement on Form S-3
(File No. 333-98165), is incorporated herein by reference.Exhibit 15
    
    Letter Re: Unaudited Interim Financial Information.Exhibit 18
    
    Letter Re: Change In Accounting Principles.Exhibit 31
    
    Rule 13a-14(a)/15d-14(a) Certifications.Exhibit 32
    
    Section 1350 Certifications.
 43