##### 



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 1934
 For The Quarterly Period Ended September 30, 2004OR
 [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For 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 [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [x]  No [   ] As of September 30, 2004, there were 118,931,857 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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##### 



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements Report of Independent Registered Public Accounting Firm 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 September 30, 2004, and the related
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 2004 and 2003, and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 2004
and 2003. These financial statements are the responsibility of the Companys
management. We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated interim financial
statements for them to be in conformity with U.S. generally accepted accounting
principles. We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (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
November 2, 2004 2




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##### 



GOODRICH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Sales
    
    $
    1,166.5
    
    
    $
    1,063.9
    
    
    $
    3,462.6
    
    
    $
    3,252.6Operating costs and expenses:Cost of sales
    
    
    853.5
    
    
    
    785.2
    
    
    
    2,548.8
    
    
    
    2,504.7Selling and administrative costs
    
    
    201.2
    
    
    
    170.8
    
    
    
    595.1
    
    
    
    533.3Restructuring and consolidation costs
    
    
    3.8
    
    
    
    6.1
    
    
    
    8.7
    
    
    
    43.81,058.5
    
    
    
    962.1
    
    
    
    3,152.6
    
    
    
    3,081.8Operating Income
    
    
    108.0
    
    
    
    101.8
    
    
    
    310.0
    
    
    
    170.8Interest expense
    
    
    (35.7
    )
    
    
    (38.9
    )
    
    
    (108.8
    )
    
    
    (117.1
    )Interest income
    
    
    1.0
    
    
    
    0.3
    
    
    
    2.3
    
    
    
    5.4Other income (expense)  net
    
    
    (10.9
    )
    
    
    (9.8
    )
    
    
    (40.6
    )
    
    
    (24.9
    )Income from continuing operations before
income taxes and trust distributions
    
    
    62.4
    
    
    
    53.4
    
    
    
    162.9
    
    
    
    34.2Income tax expense
    
    
    (12.5
    )
    
    
    (16.7
    )
    
    
    (43.6
    )
    
    
    (10.4
    )Distributions on trust preferred securities
    
    
    
    
    
    
    (2.7
    )
    
    
    
    
    
    
    (7.9
    )Income From Continuing Operations
    
    
    49.9
    
    
    
    34.0
    
    
    
    119.3
    
    
    
    15.9Income from discontinued operations 
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62.4Cumulative effect of change in accounting
    
    
    
    
    
    
    
    
    
    
    16.2
    
    
    
    (0.5
    )Net Income
    
    $
    49.9
    
    
    $
    34.0
    
    
    $
    135.5
    
    
    $
    77.8Basic Earnings Per Share:Continuing operations
    
    $
    0.42
    
    
    $
    0.29
    
    
    $
    1.01
    
    
    $
    0.14Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.52Cumulative effect of change in accounting
    
    
    
    
    
    
    
    
    
    
    0.13
    
    
    
    Net Income
    
    $
    0.42
    
    
    $
    0.29
    
    
    $
    1.14
    
    
    $
    0.66Diluted Earnings Per Share:Continuing operations
    
    $
    0.41
    
    
    $
    0.29
    
    
    $
    1.00
    
    
    $
    0.13Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.53Cumulative effect of change in accounting
    
    
    
    
    
    
    
    
    
    
    0.13
    
    
    
    Net Income
    
    $
    0.41
    
    
    $
    0.29
    
    
    $
    1.13
    
    
    $
    0.66Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.60
    
    
    $
    0.60
 See notes to unaudited condensed consolidated financial statements. 3




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##### 



GOODRICH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN MILLIONS) September 30,
    
    December 31,2004
    
    2003Current AssetsCash and cash equivalents
    
    $
    345.5
    
    
    $
    378.4Accounts and notes receivable, less allowances
for doubtful receivables ($24.9 at September 30,
2004; $28.2 at December 31, 2003)
    
    
    683.5
    
    
    
    608.5Inventories
    
    
    1,084.1
    
    
    
    964.2Deferred income taxes
    
    
    83.2
    
    
    
    53.3Prepaid expenses and other assets
    
    
    88.8
    
    
    
    82.7Total Current Assets
    
    
    2,285.1
    
    
    
    2,087.1Property, plant and equipment  net
    
    
    1,124.4
    
    
    
    1,175.9Prepaid pension
    
    
    214.3
    
    
    
    219.5Goodwill
    
    
    1,258.6
    
    
    
    1,259.5Identifiable intangible assets  net
    
    
    489.0
    
    
    
    484.7Deferred income taxes
    
    
    26.6
    
    
    
    22.9Other assets
    
    
    597.0
    
    
    
    640.3Total Assets
    
    $
    5,995.0
    
    
    $
    5,889.9Current LiabilitiesShort-term bank debt
    
    $
    1.0
    
    
    $
    2.7Accounts payable
    
    
    428.4
    
    
    
    414.5Accrued expenses
    
    
    746.8
    
    
    
    648.2Income taxes payable
    
    
    309.2
    
    
    
    259.9Current maturities of long-term debt and capital
lease obligations
    
    
    2.3
    
    
    
    75.6Total Current Liabilities
    
    
    1,487.7
    
    
    
    1,400.9Long-term debt and capital lease obligations
    
    
    2,030.6
    
    
    
    2,136.6Pension obligations
    
    
    652.0
    
    
    
    642.0Postretirement benefits other than pensions
    
    
    312.6
    
    
    
    319.2Other non-current liabilities
    
    
    215.4
    
    
    
    197.7Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders EquityCommon stock  $5 par valueAuthorized 200,000,000 shares; issued
132,491,022 shares at September 30, 2004, and
131,265,173 shares at December 31, 2003
(excluding 14,000,000 shares held by a
wholly-owned subsidiary at each date)
    
    
    662.5
    
    
    
    656.3Additional paid-in capital
    
    
    1,069.5
    
    
    
    1,035.8Income retained in the business
    
    
    107.4
    
    
    
    42.4Accumulated other comprehensive income (loss)
    
    
    (128.6
    )
    
    
    (126.1
    )Unearned compensation
    
    
    
    
    
    
    (1.4
    )Common stock held in treasury, at cost
(13,559,165 shares at September 30, 2004, and
13,539,820 shares at December 31, 2003)
    
    
    (414.1
    )
    
    
    (413.5
    )Total Shareholders Equity
    
    
    1,296.7
    
    
    
    1,193.5Total Liabilities And Shareholders Equity
    
    $
    5,995.0
    
    
    $
    5,889.9
 See notes to unaudited condensed consolidated financial statements. 4




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##### 



GOODRICH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS) Nine MonthsEndedSeptember 30,2004
    
    2003Operating ActivitiesIncome from continuing operations
    
    $
    119.3
    
    
    $
    15.9Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
operating activities:Restructuring and consolidation:Expenses
    
    
    8.5
    
    
    
    43.8Payments
    
    
    (22.6
    )
    
    
    (37.8
    )Asset impairments
    
    
    0.2
    
    
    
    86.1Depreciation and amortization
    
    
    165.3
    
    
    
    163.6Stock-based compensation expense (income)
    
    
    13.8
    
    
    
    (0.1
    )Loss on extinguishment of debt
    
    
    3.1
    
    
    
    Deferred income taxes
    
    
    (31.0
    )
    
    
    8.4Payment-in-kind interest income
    
    
    
    
    
    
    (4.3
    )Change in assets and liabilities, net of effects of
acquisitions and dispositions of businesses:Receivables
    
    
    (72.8
    )
    
    
    59.8Change in receivables sold, net
    
    
    
    
    
    
    (6.6
    )Inventories
    
    
    (106.3
    )
    
    
    (15.5
    )Other current assets
    
    
    (2.1
    )
    
    
    10.9Accounts payable
    
    
    13.0
    
    
    
    (75.6
    )Accrued expenses
    
    
    110.1
    
    
    
    41.4Income taxes payable
    
    
    41.0
    
    
    
    59.7Tax benefit on non-qualified options
    
    
    2.9
    
    
    
    Other non-current assets and liabilities
    
    
    (2.5
    )
    
    
    (10.9
    )Net Cash Provided By Operating Activities
    
    
    239.9
    
    
    
    338.8Investing ActivitiesPurchases of property, plant and equipment
    
    
    (82.4
    )
    
    
    (75.0
    )Proceeds from sale of property, plant and equipment
    
    
    9.7
    
    
    
    5.4Proceeds from payment-in-kind notes
    
    
    
    
    
    
    151.9Payments received (made) in connection with acquisitions,
net of cash acquired
    
    
    (0.5
    )
    
    
    26.6Net Cash Provided (Used) By Investing Activities
    
    
    (73.2
    )
    
    
    108.9Financing ActivitiesDecrease in short-term debt
    
    
    (2.8
    )
    
    
    (379.9
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    18.1Repayment of long-term debt and capital lease obligations
    
    
    (149.2
    )
    
    
    (2.0
    )Proceeds from issuance of capital stock
    
    
    23.0
    
    
    
    6.8Purchases of treasury stock
    
    
    (0.2
    )
    
    
    (0.4
    )Dividends
    
    
    (70.9
    )
    
    
    (70.4
    )Distributions on trust preferred securities
    
    
    
    
    
    
    (7.9
    )Net Cash Used By Financing Activities
    
    
    (200.1
    )
    
    
    (435.7
    )Discontinued OperationsNet cash provided by discontinued operations
    
    
    
    
    
    
    161.5Effect of exchange rate changes on cash and cash equivalents
    
    
    0.5
    
    
    
    2.5Net increase (decrease) in cash and cash equivalents
    
    
    (32.9
    )
    
    
    176.0Cash and cash equivalents at beginning of period
    
    
    378.4
    
    
    
    149.9Cash and cash equivalents at end of period
    
    $
    345.5
    
    
    $
    325.9
 See notes to unaudited condensed consolidated financial statements. 5




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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 and nine months ended September 30, 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. 6




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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 the stock options and shares are earned and vest. Prior periods have not
been restated. The adoption reduced before tax income by $2.8 million and $9.4
million for the three and nine months ended September 30, 2004, respectively,
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.
Prior to that date, the stock-based employee compensation was accounted for in
accordance with APB No. 25 and no compensation expense was included in net
income for stock options or employee stock purchase plan shares. 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 and nine months ended September 30,
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 period 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 Months
    
    Nine MonthsEnded
    
    Ended(In millions, except per share amounts)
    
    September 30, 2003
    
    September 30, 2003Net income, as reported
    
    $
    34.0
    
    
    $
    77.8Reverse: Stock-based employee
compensation expense (income) included
in net income, as reported above (net
of related tax effects)
    
    
    1.5
    
    
    
    (0.1
    )Deduct: Stock-based employee
compensation (expense) income
determined under fair value method for
all awards (net of related tax effects)
    
    
    (3.9
    )
    
    
    (8.1
    )Pro forma net income
    
    $
    31.6
    
    
    $
    69.6Earnings per share:Basic, as reported
    
    $
    0.29
    
    
    $
    0.66Basic, pro forma
    
    $
    0.27
    
    
    $
    0.59Diluted, as reported
    
    $
    0.29
    
    
    $
    0.66Diluted, pro forma
    
    $
    0.27
    
    
    $
    0.59
 The Company recorded income related to stock-based compensation in the nine
months ended September 30, 2003 as a result of revisions to the estimated
payout on performance share plans. 7




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Note C: Inventories Inventories consist of: September 30,
    
    December 31,2004
    
    2003(Dollars in millions)FIFO or average cost (which approximates
current costs):Finished products
    
    $
    176.2
    
    
    $
    185.2In-process
    
    
    747.4
    
    
    
    644.6Raw materials and supplies
    
    
    257.6
    
    
    
    241.6Total
    
    
    1,181.2
    
    
    
    1,071.4Less:Reserve to reduce certain inventories to
LIFO
    
    
    (41.0
    )
    
    
    (40.6
    )Progress payments and advances
    
    
    (56.1
    )
    
    
    (66.6
    )Total
    
    $
    1,084.1
    
    
    $
    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 $253.1 million
and $214.7 million as of September 30, 2004 and December 31, 2003,
respectively. At September 30, 2004, the
 Company revised the accounting treatment of a
technology development grant from a non-U.S. government entity. See Note L. As
a result, approximately $16.0 million of funds received under
the grant was reclassified from long-term debt and applied against the value of inventory on
the Companys unaudited condensed consolidated balance sheet at September 30,
2004. The impact of the cumulative effect of change in contract accounting resulted
in an increase to the inventory balance of $23.3 million as of January 1, 2004.
See Note K. 8




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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. The engineered
polymer products business unit provides large-scale marine composite structures,
marine acoustic materials, acoustic/vibration damping structures, fireproof
composites and high performance elastomer formulations to government and
commercial customers. 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. 9




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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 Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in millions)Net customer salesAirframe Systems
    
    $
    399.5
    
    
    $
    373.6
    
    
    $
    1,205.9
    
    
    $
    1,171.1Engine Systems
    
    
    474.5
    
    
    
    420.1
    
    
    
    1,422.2
    
    
    
    1,267.5Electronic Systems
    
    
    292.5
    
    
    
    270.2
    
    
    
    834.5
    
    
    
    814.0Total sales
    
    $
    1,166.5
    
    
    $
    1,063.9
    
    
    $
    3,462.6
    
    
    $
    3,252.6Intersegment salesAirframe Systems
    
    $
    11.4
    
    
    $
    13.3
    
    
    $
    39.3
    
    
    $
    44.0Engine Systems
    
    
    5.3
    
    
    
    7.6
    
    
    
    15.1
    
    
    
    24.2Electronic Systems
    
    
    8.7
    
    
    
    7.0
    
    
    
    24.6
    
    
    
    32.8Total intersegment sales
    
    $
    25.4
    
    
    $
    27.9
    
    
    $
    79.0
    
    
    $
    101.0Segment operating incomeAirframe Systems
    
    $
    27.6
    
    
    $
    17.8
    
    
    $
    74.0
    
    
    $
    62.5Engine Systems
    
    
    65.2
    
    
    
    63.0
    
    
    
    209.0
    
    
    
    53.6Electronic Systems
    
    
    38.8
    
    
    
    37.0
    
    
    
    93.5
    
    
    
    101.2131.6
    
    
    
    117.8
    
    
    
    376.5
    
    
    
    217.3Corporate general and
administrative expenses
    
    
    (23.6
    )
    
    
    (16.0
    )
    
    
    (66.5
    )
    
    
    (46.5
    )Total operating income
    
    $
    108.0
    
    
    $
    101.8
    
    
    $
    310.0
    
    
    $
    170.8
 The Company has five categories of substantially similar products that share
common customers, similar technologies and similar end-use applications and
share similar risks and growth opportunities. Product categories cross the
Companys Business Segments and do not reflect the management structure of the
Company. The Companys sales by these product categories for the
full year
2003, 2002 and 2001 are as follows: Year Ended December 31,2003
    
    2002
    
    2001(Dollars in millions)Engine Products & Services
    
    $
    1,557.5
    
    
    $
    1,402.6
    
    
    $
    1,705.6Landing System Products & Services
    
    
    871.4
    
    
    
    962.2
    
    
    
    1,075.7Electrical and Optical Products & Services
    
    
    707.5
    
    
    
    617.2
    
    
    
    578.2Safety Products & Services
    
    
    339.1
    
    
    
    320.8
    
    
    
    346.3Airframe Products & Services
    
    
    841.6
    
    
    
    470.7
    
    
    
    333.6Other Products & Services
    
    
    65.8
    
    
    
    35.0
    
    
    
    22.8Total Sales
    
    $
    4,382.9
    
    
    $
    3,808.5
    
    
    $
    4,062.2
 Segment assets include assets directly identifiable with each segment.
Corporate assets include assets not specifically identified with a business
segment, including cash. September 30,
    
    December 31,2004
    
    2003(Dollars in millions)AssetsAirframe Systems
    
    $
    1,699.5
    
    
    $
    1,665.8Engine Systems
    
    
    2,175.0
    
    
    
    2,078.9Electronic Systems
    
    
    1,423.5
    
    
    
    1,410.9Corporate
    
    
    697.0
    
    
    
    734.3Total Assets
    
    $
    5,995.0
    
    
    $
    5,889.9
 10




---



##### 



Note E: Earnings Per Share The computation of basic and diluted earnings per share from continuing
operations is as follows: Three Months Ended
    
    Nine Months Ended(In millions, except
    
    September 30,
    
    September 30,per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Numerator:Numerator for basic earnings per share 
income from continuing operations
available to common shareholders
    
    $
    49.9
    
    
    $
    34.0
    
    
    $
    119.3
    
    
    $
    15.9Denominator:Denominator for basic earnings per share -
weighted-average shares
    
    
    118.8
    
    
    
    117.5
    
    
    
    118.5
    
    
    
    117.4Effect of dilutive securities:Stock options, performance
shares, restricted shares and
employee stock purchase plan shares
    
    
    1.8
    
    
    
    1.1
    
    
    
    1.7
    
    
    
    0.6Denominator for
diluted earnings per share -
adjusted weighted-average
shares and assumed conversions
    
    
    120.6
    
    
    
    118.6
    
    
    
    120.2
    
    
    
    118.0Earnings per share from continuing
operations:Basic
    
    $
    0.42
    
    
    $
    0.29
    
    
    $
    1.01
    
    
    $
    0.14Diluted
    
    $
    0.41
    
    
    $
    0.29
    
    
    $
    1.00
    
    
    $
    0.13
 At September 30, 2004 and 2003, the Company had outstanding stock options for
participants to acquire 10.3 million and 11.3 million shares, 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 stock options outstanding, options to acquire
4.5 million and 8.4 million shares were anti-dilutive at September 30, 2004 and
2003, respectively. 11




---



##### 



Note F: Comprehensive Income Total comprehensive income consists of the following: Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in millions)Net income
    
    $
    49.9
    
    
    $
    34.0
    
    
    $
    135.5
    
    
    $
    77.8Other comprehensive income:Unrealized foreign currency
translation
adjustments during period
    
    
    7.9
    
    
    
    27.1
    
    
    
    11.5
    
    
    
    71.9Gain (loss) on cash flow hedges
    
    
    (2.8
    )
    
    
    2.9
    
    
    
    (13.9
    )
    
    
    22.7Gain (loss) on certain investments
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    0.3Total Comprehensive Income
    
    $
    55.0
    
    
    $
    64.0
    
    
    $
    133.0
    
    
    $
    172.7
 Accumulated other comprehensive income consists of the following September 30,
    
    December 31,2004
    
    2003(Dollars in millions)Cumulative unrealized foreign currency
translation adjustments
    
    $
    134.8
    
    
    $
    123.3Minimum pension liability adjustment
    
    
    (318.3
    )
    
    
    (318.3
    )Accumulated gain on cash flow hedges
    
    
    54.9
    
    
    
    68.8Unrealized gain on certain investments
    
    
    
    
    
    
    0.1$
    (128.6
    )
    
    $
    (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 $29.4 million and $31.9 million at September 30, 2004 and December 31,
2003, respectively. 12




---



##### 



Note G: Restructuring and Consolidation Costs For the three and nine months ended September 30, 2004, the Company recorded
restructuring and consolidation charges totaling $3.8 million and $8.7 million,
respectively. The charges were recorded across the Companys segments as
follows: Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30, 2004
    
    September 30, 2004(Dollars in millions)Airframe Systems
    
    $
    
    
    
    $
    0.1Engine Systems
    
    
    2.1
    
    
    
    3.2Electronic Systems
    
    
    1.7
    
    
    
    5.4$
    3.8
    
    
    $
    8.7
 Restructuring and consolidation reserves, at December 31, 2003 and September
30, 2004, as well as activity during the nine months ended September 30, 2004,
consisted of: AssetBalance
    
    
    
    
    
    
    
    
    
    Impairments
    
    BalanceDecember 31,
    
    
    
    
    
    Cash
    
    and Other
    
    September 30,2003
    
    Provision
    
    Payments
    
    Changes
    
    2004(Dollars in millions)Personnel-related
costs
    
    $
    5.3
    
    
    $
    6.2
    
    
    $
    (8.1
    )
    
    $
    1.8
    
    
    $
    5.2Facility closure
and other costs
    
    
    6.0
    
    
    
    2.5
    
    
    
    (3.8
    )
    
    
    (0.6
    )
    
    
    4.1$
    11.3
    
    
    $
    8.7
    
    
    $
    (11.9
    )
    
    $
    1.2
    
    
    $
    9.3
 During the nine months ended September 30, 2004, approximately 160 employees
were terminated as part of the personnel-related restructuring activities
described below. As of September 30, 2004, the Company expects to spend
approximately $2.0 million of the reserve balance, mostly during the fourth
quarter of 2004, in connection with the termination of an additional 20
employees. Approximately $1.6 million of the remaining reserve balance relates
to expected payments to previously terminated employees for short-term medical
and dental coverage, outplacement services and workers compensation through
the first half of 2005. The reserve balance also includes a $1.6 million
provision for certain medical benefit payments for terminated employees at a
closed facility. The $4.1 million balance at September 30, 2004
 for facility closure and
other costs related primarily to environmental expenses for the closure of
several facilities. Approximately $1.0 million of the reserve balance is
expected to be spent in the next 12 months. The remaining balance is expected
to be spent by the end of December 31, 2009. The balance, by segment, of the restructuring reserves at December 31, 2003 and
September 30, 2004 as well as the activity during the nine months ended
September 30, 2004 consisted of: AssetBalance
    
    
    
    
    
    Employee
    
    Facility
    
    Impairment
    
    BalanceDecember 31,
    
    
    
    
    
    Termination
    
    Closure
    
    and Other
    
    September 30,2003
    
    Provision
    
    Benefits
    
    Costs
    
    Costs
    
    2004(Dollars in millions)Airframe Systems
    
    $
    5.7
    
    
    $
    0.1
    
    
    $
    (1.3
    )
    
    $
    
    
    
    $
    0.4
    
    
    $
    4.9Engine Systems
    
    
    1.9
    
    
    
    3.2
    
    
    
    (1.7
    )
    
    
    (1.2
    )
    
    
    (0.2
    )
    
    
    2.0Electronic Systems
    
    
    2.1
    
    
    
    5.4
    
    
    
    (5.1
    )
    
    
    (1.3
    )
    
    
    1.3
    
    
    
    2.4Corporate
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (0.3
    )
    
    
    $
    11.3
    
    
    $
    8.7
    
    
    $
    (8.1
    )
    
    $
    (3.8
    )
    
    $
    1.2
    
    
    $
    9.3
 13




---



##### 



Restructuring and Consolidation Costs  Provision The following is a description of key components of the $8.7 million provision
for restructuring and consolidation costs incurred during the nine months ended
September 30, 2004: Airframe Systems: The segment recorded $0.1 million in restructuring and
consolidation costs, all of which related to personnel costs for employee
severance and benefits. Engine Systems: The segment recorded $3.2 million in restructuring and
consolidation costs, consisting of $1.8 million in personnel-related costs,
which include severance and benefits, $1.2 million in facility closure costs,
and $0.2 million in asset impairments. The $1.2 million in facility closure
costs include $0.5 million for machinery and equipment relocation, $0.4 million
for employee relocation costs and $0.3 million for plant shutdown costs. Electronic Systems: The segment recorded $5.4 million in restructuring and
consolidation costs, consisting of $3.9 million in personnel-related costs and
$1.5 million in facility closure and other costs. The $3.9 million in
personnel-related charges are for employee severance, benefits and outplacement
services. The $1.5 million in facility closure costs were primarily for
relocation of production equipment and data conversion. Restructuring and Consolidation Costs  Cash Payments During the nine months ended September 30, 2004, the $11.9 million in cash
payments related to employee termination benefits of $8.1 million and facility
closure and other costs of $3.8 million. Restructuring and Consolidation Costs  Asset Impairments and Other Changes During the nine months ended September 30, 2004, the $1.2 million  net in
non-cash asset impairments and other changes included a $1.3 million increase
in restructuring reserves related to a business that utilizes contract
accounting. The restructuring provision has not yet been reflected in earnings
as the amount is currently capitalized into contract costs. An offsetting $0.2
million impairment charge is related to the impairment of production assets at
a foreign facility reduced the reserve. The remaining $0.1 million  net is
related to foreign currency translation adjustments. Opening Balance Sheet  Aeronautical Systems Acquisition During the nine months ended September 30, 2004, no additional provisions were
recorded in the opening balance sheet related to the Aeronautical Systems
acquisition. Restructuring and consolidation reserves, at December 31, 2003 and
September 30, 2004, as well as cash activity during the nine months ended
September 30, 2004, consisted of: AssetBalance
    
    
    
    
    
    
    
    
    
    Impairments
    
    BalanceDecember 31,
    
    
    
    
    
    Cash
    
    and Other
    
    September 30,2003
    
    Provision
    
    Payments
    
    Changes
    
    2004(Dollars in millions)Personnel-related
costs
    
    $
    11.1
    
    
    $
    
    
    
    $
    (8.5
    )
    
    $
    1.9
    
    
    $
    4.5Facility closure
and other costs
    
    
    5.2
    
    
    
    
    
    
    
    (2.2
    )
    
    
    (1.9
    )
    
    
    1.1$
    16.3
    
    
    $
    
    
    
    $
    (10.7
    )
    
    $
    
    
    
    $
    5.6
 14




---



##### 



The balance, by segment, of the opening balance sheet restructuring reserves at
December 31, 2003 and September 30, 2004 as well as the activity during the
nine months ended September 30, 2004 consisted of: Balance
    
    Employee
    
    Employee
    
    
    
    
    
    BalanceDecember 31,
    
    Termination
    
    Relocation
    
    Facility
    
    September 30,2003
    
    Benefits
    
    Costs
    
    Closure
    
    2004(Dollars in millions)Engine Systems
    
    $
    8.9
    
    
    $
    (3.6
    )
    
    $
    (1.3
    )
    
    $
    
    
    
    $
    4.0Electronic Systems
    
    
    6.4
    
    
    
    (2.6
    )
    
    
    (0.5
    )
    
    
    (1.8
    )
    
    
    1.5Corporate
    
    
    1.0
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.4
    )
    
    
    0.1$
    16.3
    
    
    $
    (6.7
    )
    
    $
    (1.8
    )
    
    $
    (2.2
    )
    
    $
    5.6
 During the nine months ended September 30, 2004, approximately 200 employees
were terminated as part of the restructuring activities detailed in the above
table. As of September 30, 2004, the Company expects to further reduce
employment levels by approximately 65 employees as part of those restructuring
activities. The remaining reserves will be used for future lease payments
related to a redundant facility, costs to return a redundant facility to its
original condition and a special early retirement program at an overseas
operation. Note H: Asset Impairments During the first quarter 2004, the Company recorded a non-cash $7.0 million
before tax asset impairment charge to Other Income (Expense)  net 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
before tax asset impairment charge, which was reported in Cost of Sales, 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 September 30, 2004, the Companys remaining notes receivable balance was
$6.6 million. The total carrying value of inventory related to the Super 27
business was $4.6 million at September 30, 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 before tax asset impairment charge which was reported in Other Income
(Expense)  Net related to its equity investment in Cordiem LLC and a non-cash
$6.2 million before tax impairment charge related to rotable landing gear
assets which was reported in Cost of Sales. 15




---



##### 



Note I: Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill for the nine months ended
September 30, 2004, by segment, are as follows: Balance
    
    Foreign
    
    BalanceDecember 31,
    
    Currency
    
    September 30,2003
    
    Translation
    
    2004(Dollars in millions)Airframe Systems
    
    $
    244.8
    
    
    $
    2.5
    
    
    $
    247.3Engine Systems
    
    
    488.1
    
    
    
    3.3
    
    
    
    491.4Electronic Systems
    
    
    526.6
    
    
    
    (6.7
    )
    
    
    519.9$
    1,259.5
    
    
    $
    (0.9
    )
    
    $
    1,258.6
 Identifiable intangible assets as of September 30, 2004 are comprised of: Gross
    
    AccumulatedAmount
    
    Amortization
    
    Net(Dollars in millions)Amortizable intangible assets:Patents, trademarks and licenses
    
    $
    180.8
    
    
    $
    56.8
    
    
    $
    124.0Customer relationships
    
    
    291.0
    
    
    
    19.3
    
    
    
    271.7Technology
    
    
    91.7
    
    
    
    2.0
    
    
    
    89.7Non-compete agreements
    
    
    6.3
    
    
    
    4.8
    
    
    
    1.5Sourcing contracts
    
    
    6.3
    
    
    
    4.2
    
    
    
    2.1$
    576.1
    
    
    $
    87.1
    
    
    $
    489.0
 Identifiable intangible assets as of December 31, 2003 are comprised of: Gross
    
    AccumulatedAmount
    
    Amortization
    
    Net(Dollars in millions)Amortizable intangible assets:Patents, trademarks and licenses
    
    $
    162.1
    
    
    $
    48.6
    
    
    $
    113.5Customer relationships
    
    
    288.1
    
    
    
    13.5
    
    
    
    274.6Technology
    
    
    92.2
    
    
    
    1.1
    
    
    
    91.1Non-compete agreements
    
    
    6.6
    
    
    
    4.8
    
    
    
    1.8Sourcing contracts
    
    
    6.2
    
    
    
    2.5
    
    
    
    3.7$
    555.2
    
    
    $
    70.5
    
    
    $
    484.7
 Amortization of intangible assets for the nine months ended September 30, 2004
was $16.6 million. Amortization expense of these intangible assets for 2005 to
2009 is estimated to be approximately $24 million per year. There were no
indefinite lived identifiable intangible assets as of September 30, 2004. During the nine months ended September 30, 2004, the Company acquired certain
aftermarket rights classified as patents, trademarks and licenses for
approximately $15 million. 16




---



##### 



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 $63.0 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 business ceased operations in the first quarter of 2003.
Prior periods have been restated to reflect the Avionics and Passenger
Restraint Systems 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 Financial Accounting Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Accordingly, the revenues, costs
and expenses, 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: Nine MonthsEnded(Dollars in millions)
    
    September 30, 2003Net customer sales
    
    $
    24.3Before tax loss from operations
    
    $
    (0.9
    )Income tax benefit
    
    
    0.3Gain on sale of Avionics (net of income
tax expense of $39.1 million)
    
    
    63.0Income from discontinued operations
    
    $
    62.4
 17




---



##### 



Note K: Cumulative Effect of Change in Accounting In conjunction with the Audit Review Committee of the Companys Board of
Directors, management reassessed the application of contract accounting at its
aerostructures business. Specifically, consideration was given to whether or
not the accounting methods used by the Company were appropriate given the predominance of an
alternative method used by peer companies and changes in the nature of
contractual relationships with the Companys customers. Effective January 1,
2004, the Company changed two aspects of the application of contract accounting
to preferable methods at its aerostructures business which is included in the
Engines Systems segment. The Company changed its method of accounting for revisions in estimates of
total revenue, total costs or extent of progress of a contract from the
reallocation method to the cumulative catch-up method. Although both methods
are used in practice to account for changes in estimates, American
Institute of Certified Public Accounting Statement of Position 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts (SOP
81-1), indicates that the cumulative catch-up method is preferable. A
contemporaneous review of accounting policy disclosures of peer companies in the
same or similar industry indicated that the cumulative catch-up method was the
predominant method of accounting for changes in estimates. The Company believes
that consistency in financial reporting with peer companies, as well as with
less significant business units within the consolidated group which already use
the cumulative catch-up method, will enhance the comparability of financial
data. 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 Company also changed its accounting for 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. This
policy was appropriate in the past because aircraft and engine manufacturers
typically reimbursed component suppliers directly for pre-certification costs
up to an agreed-upon level. Recently, however, aircraft and engine
manufacturers have begun to require component suppliers to participate more in
the initial design and certification costs for products and are no longer
specifically reimbursing non-recurring costs. Instead, the component supplier
now typically absorbs these non-recurring costs and recovers those costs over
the contract term through the price and margin of its product sales. Under the new
policy, which was adopted January 1, 2004, pre-certification costs, including
those in excess of original estimated levels, are included in total
contract costs used to evaluate overall contract profitability. The Company
believes the new method better reflects the substance of its current
contractual arrangements and is more consistent with SOP 81-1, which indicates
that all direct costs and indirect costs allocable to contracts should be
included in the total contract cost. The impact of the changes in accounting methods was to record a before tax gain
of $23.3 million ($16.2 million after tax) as a cumulative effect of a change
in accounting 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 and
nine months ended September 30, 2003, as if these methods of accounting had
been in effect. Three Months Ended
    
    Nine Months EndedSeptember 30, 2003
    
    September 30, 2003As Reported
    
    Pro forma
    
    As Reported
    
    Pro forma(in millions)
    
    (in millions)Income from continuing operations
    
    $
    34.0
    
    
    $
    30.4
    
    
    $
    15.9
    
    
    $
    8.5Net income
    
    $
    34.0
    
    
    $
    30.4
    
    
    $
    77.8
    
    
    $
    70.4Earnings per share  net incomeBasic
    
    $
    0.29
    
    
    $
    0.26
    
    
    $
    0.66
    
    
    $
    0.60Fully-diluted
    
    $
    0.29
    
    
    $
    0.26
    
    
    $
    0.66
    
    
    $
    0.60
 The cumulative effect of a change in accounting, as presented after taxes, in
the nine months ended September 30, 2003 of a loss of $0.5 million represents
the adoption of Financial Accounting Standard No. 143, Accounting for Asset
Retirement Obligations. The Company established a liability for contractual
obligations for the retirement of long-lived assets. 18




---



##### 



Note L: Financing Arrangements Credit Facilities The Company has 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 September 30, 2004, there were no borrowings and
$26.1 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 this 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 September 30, 2004, the
Company had borrowing capacity under this facility of $473.9 million, after
reductions for letters of credit outstanding. At September 30, 2004, the Company maintained $25 million of uncommitted
domestic money market facilities and $22.2 million of uncommitted and committed
foreign working capital facilities with various banks to meet short-term
borrowing requirements. As of September 30, 2004 and December 31, 2003, there
were no borrowings under these facilities. However, as of September 30, 2004,
there were $3.1 million of bank guarantees outstanding under the foreign
working capital facilities, thus reducing availability by that amount. These
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, 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 September 30, 2004, the Company had long-term debt and capital lease
obligations of $2,030.6 million with maturities ranging from 2005 to 2046.
Current maturities of long-term debt and capital lease obligations at September
30, 2004 were $2.3 million. On August 1, 2004, the Company redeemed $60.0
million principal amount of Special Facilities Airport Revenue Bonds and in May
2004 redeemed $5.9 million principal amount of industrial revenue bonds. During
the third quarter 2004, the Company repurchased $15.2 million principal amount
of long-term debt securities with stated interest of 6.45% on the open market.
Approximately $7.4 million of the long-term debt securities were due in 2007
and approximately $7.8 million were due in 2008. The Company recorded $3.2
million of expenses in other income (expense)  net related to the redemption
of the Special Facilities Airport Revenue Bonds and industrial revenue bonds
and the open market purchases of long-term debt securities. The earliest
maturity of a material long-term debt obligation is December 2007. The Company
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. 19




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##### 



At September 30, 2004, the Company revised the accounting treatment of a
technology development grant from a non-U.S. government entity. Prior to the
revision, the Company reported the grant as long-term debt. After an analysis
of the matter during the third quarter 2004, the Company concluded that the
grant provides assistance intended to enhance the profitability of the
Companys operations in order to provide an incentive to conduct operations in
such a way as to achieve social or economic objectives. Consequently, the
assistance is an element in determining the profit from operations in the
period to which the benefit relates. Therefore, the Company revised the
accounting for the government grant to reflect the funds received as a
reduction of qualifying expenses or reduction of the cost of a qualifying
asset. As a result of the Companys revision of the accounting treatment,
long-term debt was reduced by $24.5 million at September 30, 2004. Inventory
was reduced by $16.0 million, property, plant and equipment was reduced by $2.1
million and foreign exchange was impacted by $0.2 million. The Company realized
a before tax gain of $5.8 million related to qualifying costs which had been
expensed in periods prior to the nine months ended September 30, 2004 and a
before tax gain of $0.4 related to the nine months ended September 30, 2004. 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 allow the Company to claim a
deduction for the tax depreciation on the assets, rather than the lessor, and
allow the Company to lease equipment having a maximum unamortized value of $90
million at September 30, 2004. At September 30, 2004, $50.8 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 $142.5 million at September 30,
2004. Sale of Receivables At September 30, 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 $97.3 million at September 30, 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, Canadian Dollars and Polish
Zlotys 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 and
Polish Zlotys. 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 September 30, 2004 was $600.9 million. The fair value of the
forward contracts at September 30, 2004 was an asset of $84.2 million, of which
$56.1 million is recorded in Prepaid Expenses and Other Assets and $28.1
million is recorded in Other Assets. The total fair value of the forward contracts of $84.3 million (before deferred
taxes of $29.4 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 September 30, 2004, the portion of
the $84.3 million fair value that would be reclassified into earnings as an
increase in sales to offset the effect of the hedged item in the next 12 months
is a gain of $56.2 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 September
30, 2004, Accumulated Other Comprehensive Income included a gain of $0.1
million related to these terminated contracts that will be reflected in income
and sales when the original contracts would have matured. 20




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##### 



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 Financial Accounting Standards Board Statement 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 $2.5 million at
September 30, 2004. 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 September 30, 2004, the Company had forward contracts
with a notional value of $57.4 million to buy Great Britain Pounds Sterling,
contracts with a net notional value of $10.4 million to buy Euros and contracts
with a notional value of $1.5 million to buy Canadian Dollars. Note O: Guarantees The Company extends financial and product performance guarantees to third
parties. As of September 30, 2004, the following
environmental remediation and indemnification and financial guarantees were
outstanding: CARRYINGMAXIMUM
    
    AMOUNTPOTENTIAL
    
    OF(Dollars in millions)
    
    PAYMENT
    
    LIABILITYEnvironmental remediation indemnification (Note P)
    
    
    No limit
    
    
    $
    20.2Financial Guarantees:TIDES (Note P)
    
    $
    145.0
    
    
    $
    Debt and lease payments (Note P)
    
    $
    2.9
    
    
    $
    Residual values on leases
    
    $
    54.6
    
    
    $
    Executive loans to purchase company stock
    
    $
    4.5
    
    
    $
    
 Prior to the adoption of Financial Accounting Standards Board 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. 21




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TIDES In connection with the Companys acquisition of Coltec Industries Inc. on July
12, 1999, the Company 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 have guaranteed Coltecs
performance of its obligations with respect to Coltecs guarantee of the TIDES
and the underlying Coltec convertible junior subordinated debentures. Following
the spin-off of the Companys engineered industrial products
(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 Industries, Inc.,
Coltec and Coltec Capital Trust have agreed to indemnify the Company
for any costs and liabilities arising under or relating to the TIDES
after the spin-off. The Companys guarantee requires that the Company pay, to the extent not paid
by Coltec Capital Trust, distributions or other payments on the TIDES to the
extent that Coltec Capital Trust has funds available therefore at such time,
and that it pay or perform, to the extent not paid or performed by Coltec,
Coltecs obligations under its guarantee of the TIDES and under the underlying
Coltec convertible junior subordinated debentures. The Companys guarantee is
unsecured and is subordinated in right of payment to all of the Companys
senior debt that is currently outstanding or that may be incurred in the
future. The Companys guarantee will terminate upon full payment of the redemption
price for the TIDES, the distribution of the Coltec convertible junior
subordinated debentures or full payment of the amounts payable upon liquidation
of Coltec Capital Trust. Debt and Lease Payments The debt and lease payments primarily represent obligations of the Company
under industrial development revenue bonds to finance additions to facilities
that have since been divested. Each of these obligations was assumed by a third
party in connection with the Companys divestiture of the related facilities.
If the assuming parties default, the Company will be liable for payment of the
obligations. The industrial development revenue bonds mature in February 2008. Residual Value on Leases Residual value on leases
relate to corporate aircraft and production equipment leases pursuant
to which the Company is obligated to either purchase the leased equipment at the end of
the lease term or remarket the leased equipment. The residual values were
established at lease inception. The lease terms for the corporate aircraft
mature in 2011 and 2012. The lease term for the production equipment matures in
2005 but may be extended. Executive Loans to Purchase Company Stock The executive loans to
purchase Company stock are full-recourse bank loans made pursuant to the Companys
Executive Stock Purchase Program (the Program). The
Company has guaranteed the loans in the event of default, but has
recourse to the executives if the Company incurs a loss under the
guarantee. Participants in the Program are fully liable for any
losses, as well as for the repayment of the loans when they come due.
Each of the loans has a maturity date of September 30, 2006, with the
exception of one loan to a former officer that matures on March 31,
2005. The Program was suspended effective August 16, 2002, and no
further loans may be made under the Program.  None of the loans has been modified since the Company suspended the Program. Service and Product Warranties 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
nine months ended September 30, 2004, are as follows: (Dollars in millions)Balance at December 31, 2003
    
    $
    78.6Service and product warranty provision
    
    
    22.6Payments
    
    
    (15.1
    )Balance at September 30, 2004
    
    $
    86.1
 22




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##### 



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 tax, contract, patent protection, environmental and other matters.
Gain contingencies, if any, are recognized when they are realized. 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 for 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. The Companys unaudited condensed consolidated balance sheet included an
accrued liability for environmental remediation obligations of $89.1 million
and $87.8 million at September 30, 2004 and December 31, 2003, respectively. At
September 30, 2004, $17.8 million of the $89.1 million accrual was included in
current liabilities as Accrued Expenses. Of the $89.1 million, $24.8 million
was associated with ongoing operations and $64.3 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 in up to 30 years of all sites for which it has been identified as
a potentially responsible party. This period includes operation and monitoring
costs that are generally incurred over 15 to 25 years. 23




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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. The Company believes that it has substantial insurance coverage available to it
related to any remaining claims. However, the primary layer of insurance
coverage for some of 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. Kemper has also
indicated that it is currently operating under a run-off plan approved by the
Illinois Department of Insurance. The Company cannot predict the impact of
Kempers financial position on the availability of the Kemper insurance. Liabilities of Divested Businesses Asbestos At the time of the Engineered Industrial Products segment (EIP) spin-off in
2002, 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 financial
condition, results of operations and cash flows. 24




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Guarantees At September 30, 2004, the
Company has an outstanding contingent liability for a guarantee of
the TIDES of $145 million, guarantees of debt and
lease payments of $2.9 million, letters of credit and bank guarantees of $61.3
million, residual value of leases of $54.6 million and executive loans to
purchase the Companys stock of $4.5 million. See Note O. 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 September 30, 2004, the Company had
recorded a receivable from Northrop Grumman for approximately $45 million for
such claims. During the quarter ended June 30, 2004, Northrop Grumman made a
payment of $10 million. Since the payment is subject to an audit of the
Companys claims that amount was recorded as a deposit reflected in Accrued
Expenses. Commercial Airline Customers Several of the Companys commercial airline customers are experiencing
financial difficulties. 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, included 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 September 30, 2004, the Companys remaining notes receivable of $6.6
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 September 30, 2004 and represents the Companys
assessment of the current market value of the remaining inventory. Collection of the notes may be negatively affected by adverse developments in
the commercial aerospace market. The Company will continue to assess the value
of these assets and their ultimate recovery. 25




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Boeing 717 The Company has a long-term contract with Boeing for nacelle systems used on
the Boeing 717 aircraft that 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 it disclosed in its 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 the Company could recognize a before tax loss on the
contract of up to approximately $17 million. The loss, if any,
is dependent upon a number of factors, including additional orders received or
exercise of existing options from Boeing, timing of deliveries, 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, a former subsidiary of the Company,
 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 U.S. Government in the U.S. Court of Federal Claims seeking a
 refund of this payment. The trial portion of the case was completed in May 2004.
 On November 2, 2004, the Company was notified that the trial court
ruled in favor of Coltec and ordered the Government to refund federal
tax payments of $82.8 million to Coltec. This tax refund will also
bear interest to the date of payment. As of November 3, 2004, the
interest amount was approximately $46.2 million before tax, or $30.0
million after tax. The Government has 90 days following the entry of
a final judgment to appeal the decision. If the Government does not
appeal the decision or Judge Bardens decision is ultimately
upheld, the Company will be entitled to this tax refund and related
interest pursuant  to an agreement with Coltec. Upon receipt of these
amounts, the Company expects to record net income of approximately
$145 million, based on interest through November 3, 2004, and
including the release of previously established reserves described
below. If the IRS
were to appeal the judgment and ultimately prevail in this case,
Coltec will not owe any additional interest or taxes with respect to
1996. The Company may, however, 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 amount
of the previously estimated liability if the IRS were to prevail for the 1997
through 2000 period remains fully reserved. 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 may be scheduled for trial in 2005 and that it will
ultimately be successful in these cases. At the time of settlement or final
determination by the court, there will be a net cash cost to the Company due at
least in part to the reversal of a timing item. The Company believes that its
total net cash cost is unlikely to exceed $100 million. The Company is reserved
for the estimated liability associated with these cases and as a result, it
does not expect a charge to earnings to result from the resolution of these
matters. Note Q: New Accounting Standards Except as reflected elsewhere, there are no new
 accounting standards that have
been adopted by the Company during the nine months ended September 30,
2004. 26




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Note R: Pensions and Postretirement Benefits Pensions The following tables set forth the components of net periodic benefit costs
(income) for the three and nine months ended September 30, 2004 and 2003,
respectively. Other Non-U.S.U.S. Plans
    
    U.K. Plans
    
    PlansThree Months Ended
    
    Three Months Ended
    
    Three Months EndedSeptember 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003(Dollars in millions)Service cost
    
    $
    9.6
    
    
    $
    9.1
    
    
    $
    4.9
    
    
    $
    1.2
    
    
    $
    0.6
    
    
    $
    0.6Interest cost
    
    
    37.1
    
    
    
    36.4
    
    
    
    6.3
    
    
    
    1.4
    
    
    
    1.0
    
    
    
    0.8Expected rate of
return on plan
assets
    
    
    (40.6
    )
    
    
    (37.3
    )
    
    
    (9.5
    )
    
    
    (2.2
    )
    
    
    (1.0
    )
    
    
    (0.8
    )Amortization of
transition
obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
prior service cost
    
    
    2.5
    
    
    
    2.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
actuarial (gain) loss
    
    
    11.7
    
    
    
    8.8
    
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Periodic benefit
cost (income)
    
    
    20.3
    
    
    
    19.5
    
    
    
    1.7
    
    
    
    0.5
    
    
    
    0.8
    
    
    
    0.8Settlements and
curtailments (gain)
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Special termination
benefit charge
(credit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net benefit cost
(income)
    
    $
    20.3
    
    
    $
    19.5
    
    
    $
    1.7
    
    
    $
    0.5
    
    
    $
    0.9
    
    
    $
    0.8
 27




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##### 



Other Non-U.S.U.S. Plans
    
    U.K. Plans
    
    PlansNine Months Ended
    
    Nine Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003(Dollars in millions)Service cost
    
    $
    28.9
    
    
    $
    27.5
    
    
    $
    14.9
    
    
    $
    12.2
    
    
    $
    1.8
    
    
    $
    1.4Interest cost
    
    
    111.1
    
    
    
    109.8
    
    
    
    18.9
    
    
    
    14.5
    
    
    
    2.9
    
    
    
    2.2Expected rate of
return on plan
assets
    
    
    (121.9
    )
    
    
    (112.7
    )
    
    
    (28.6
    )
    
    
    (21.8
    )
    
    
    (2.7
    )
    
    
    (1.8
    )Amortization of
transition
obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
prior service cost
    
    
    7.3
    
    
    
    7.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
actuarial (gain)
loss
    
    
    33.4
    
    
    
    26.8
    
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.3Periodic benefit
cost (income)
    
    
    58.8
    
    
    
    59.0
    
    
    
    5.2
    
    
    
    5.0
    
    
    
    2.2
    
    
    
    2.1Settlements and
curtailments (gain)
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Special termination
benefit charge
(credit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net benefit cost
(income)
    
    $
    58.8
    
    
    $
    59.0
    
    
    $
    5.2
    
    
    $
    5.0
    
    
    $
    2.3
    
    
    $
    2.1
 The following table provides the weighted average assumptions used to determine
the net periodic benefit costs. Other Non-U.S. Plans
    
    U.K. Plans
    
    U.S. PlansThree and Nine
    
    Three and Nine
    
    Three and NineMonths Ended
    
    Months Ended
    
    Months EndedSeptember 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Discount 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
    %
 During the nine months ended September 30, 2004, the Company contributed a
total of $50 million to its worldwide qualified and nonqualified pension plans.
Of that amount, $40.6 million was contributed to the qualified U.S. trust fund.
Total contributions in the third quarter 2004 were $8.7 million, of which $5.6
million was contributed to the U.S. trust fund. Total worldwide qualified and
nonqualified pension contributions in 2004 are expected to be approximately $55
million. U.S. Non-Qualified Pension Plan Funding The Company maintains non-qualified pension plans in the U.S. to accrue
retirement benefits in excess of Internal Revenue Code limitations and other
contractual obligations. As of September 30, 2004, approximately $73 million
fair market value of assets were held in a rabbi trust for payment of future
non-qualified pension benefits for certain retired, terminated and active
employees. The assets consist of the cash surrender value of split dollar life
insurance policies, equities, fixed income securities and cash. The assets of
the rabbi trust, not otherwise included in the tables in this section, are
available to pay pension benefits to these individuals but are otherwise
unavailable to the Company. The assets, other than approximately $30 million
which is assigned to certain individuals in the event benefit payments to these
individuals are not made when due, are available to the Companys general
creditors in the event of insolvency. 28




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##### 



Postretirement Benefits Other Than Pensions The following table sets forth the components of net periodic benefit costs
(income): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in millions)Service cost
    
    $
    0.3
    
    
    $
    0.4
    
    
    $
    1.0
    
    
    $
    1.0Interest cost
    
    
    6.3
    
    
    
    7.0
    
    
    
    18.8
    
    
    
    21.1Expected return on
plan assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
transition obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior
service cost
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )Amortization of
actuarial (gain) loss
    
    
    0.5
    
    
    
    0.6
    
    
    
    1.4
    
    
    
    1.8Periodic benefit cost
(income)
    
    
    7.0
    
    
    
    8.0
    
    
    
    21.1
    
    
    
    23.8Settlements and
curtailments (gain)
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special termination
benefit charge
(credit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net benefit cost
(income)
    
    $
    7.0
    
    
    $
    8.0
    
    
    $
    21.1
    
    
    $
    23.8
 The following table provides the weighted average assumptions used to determine
the net periodic benefit costs. Three and Nine MonthsEnded September 30,2004
    
    2003Discount rate
    
    
    6.25
    %
    
    
    6.875
    %Healthcare trend rate
    
    10% in 2004 to 5% in 2008
    
    10% in 2003 to 5% in 2007
 The payment for retiree health care and life insurance benefits are classified
as contributions for reporting purposes and are estimated to be approximately
$40 million in 2004. Medicare Prescription Drug, Improvement and Modernization Act of 2003 The U.S. Medicare Prescription Drug Improvement and Modernization Act of 2003
(the Medicare Act) was signed into law on December 8, 2003. The Company anticipates
receipt of federal subsidy payments beginning in 2006 for continuing retiree
prescription drug benefits in plans without fixed dollar company contribution
limits. Subsidy amounts are assumed to be shared with participants in
proportion to applicable premium sharing percentage for each retiree group in
each future year. No other assumptions have been changed for this measurement.
Effective with the second quarter 2004, the Company has adopted retroactively
the Financial Accounting Standards Board Staff Position No. FAS 106-2
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. The effect of
the Medicare Act was
measured as of January 1, 2004 and is now reflected in the Companys unaudited
condensed consolidated financial statements and accompanying notes. The effect
of the Medicare Act is a $34 million reduction on the accumulated postretirement benefit
obligation for the Companys retiree benefit plans as well as a reduction in
the net periodic postretirement benefit cost. The effect of the reduction in
net periodic postretirement benefit cost is an increase to income from
continuing operations of $1.2 million ($0.9 million after tax) and $3.7 million
($2.6 million after tax) for the three and nine months ended September 30,
2004, respectively. 29




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##### 



The following table provides
the effect of the Medicare Act on the net periodic benefit
costs. Three Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2004(Dollars in millions)Service cost
    
    $
    
    
    
    $
    (0.1
    )Interest cost
    
    
    (0.6
    )
    
    
    (1.6
    )Amortization of actuarial (gain) loss
    
    
    (0.6
    )
    
    
    (2.0
    )Net benefit cost (income)
    
    $
    (1.2
    )
    
    $
    (3.7
    )
 Note S: Income Tax Rate The effective income tax rate from continuing operations was 20.0 percent and
31.3 percent during the three months ended September 30, 2004 and 2003,
respectively. The effective tax rate from continuing operations was 26.8
percent and 30.4 percent during the nine months ended September 30, 2004 and
2003, respectively. The Companys effective tax rate is less than the domestic
federal income tax rate primarily due to the effect of lower tax rates in
certain foreign jurisdictions, the domestic tax benefit derived through U.S.
export activity, and higher research tax credits, offset by changes in the
amount of contingent tax liabilities, including interest on such contingent
liabilities and a valuation allowance against deferred tax assets
relating to certain foreign jurisdiction net
operating losses. Additionally, the lower rates during the three
and nine months ended September 30, 2004 compared to the three and nine months
ended September 30, 2003 were due to a favorable state tax settlement that
generated approximately $6.8 million of income. On October 22, 2004, the President signed H.R. 4520, the American Jobs Creation
Act of 2004 (the Act). The Act contains numerous provisions related to
corporate and international taxation including repeal of the Extraterritorial
Income (ETI) regime, creation of a new Domestic Production Activities
deduction and a temporary dividends received deduction related to repatriation
of foreign earnings. The Act contains various effective dates and transition
periods related to its provisions. The Company does not expect the Act, and in particular, the repeal of ETI and
its replacement with a Domestic Production Activities deduction to have a
material impact on the Companys income tax provision for the twelve months
ended December 31, 2004. The Company is currently analyzing the Act and
awaiting FASB guidance to determine whether it will require a revaluation
of the Companys deferred taxes. The Company does not expect that any
revaluation, if required, would have a material effect on the Companys balance
sheet. While the Company is currently studying the impact of the temporary dividends
received deduction provisions contained in the Act, as of September 30, 2004
and based on the tax laws in effect at that time, it was the Companys
intention to continue to indefinitely reinvest its undistributed foreign
earnings and, accordingly, no deferred tax liability has been recorded in
connection therewith. 30




---



##### 



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 CONDENSED 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 CERTAIN 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
globally 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 third quarter 2004, we reported net income of $50 million, or $0.41 per
diluted share. Sales for the third quarter 2004 were $1,167 million. For the
third quarter 2003, we reported net income of $34 million, or $0.29 per diluted
share. Sales for the third quarter 2003 were $1,064 million. Foreign currency
translation was responsible for approximately $21 million of the $103 million
increase in sales. The remaining increase resulted primarily from increased
original equipment and aftermarket sales for large commercial aircraft,
aftermarket sales to the regional and business aircraft markets, and sales of
military and space products. 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 for the third quarter 2004 included several
non-recurring items described below that had an aggregate after tax benefit
during the quarter of $7.6 million, or $0.06 per fully diluted share. The items
included a favorable state tax settlement that generated approximately $6.8
million of income during the third quarter. This item, along with an expected
increase in export activity and higher research tax credits reduced our tax
rate from 31.3 percent in the third quarter 2003 to 20.0 percent in the third
quarter 2004. Also included in these items were after tax expenses of $3.5
million for debt retirement costs and a reserve for an adverse preliminary
administrative ruling in a labor dispute. These items were offset by a $4.3
million after tax benefit from revising the accounting treatment of a
technology development grant from a non-US government entity. Foreign currency
translation of non-U.S. dollar net expenses had a negligible impact on net
income for the third quarter 2004. The third quarter 2004 results include after
tax charges for asset impairments and facility closure and headcount reduction
actions totaling $2.6 million, or $0.02 per fully diluted share, compared to
similar charges of $4.1 million, or $0.03 per fully diluted share, for the
third quarter 2003. For the nine months ended September 30, 2004, we reported net income of $136
million, or $1.13 per diluted share. Sales for the nine months ended September
30, 2004 were $3,463 million. For the nine months ended September 30, 2003, we
reported net income of $78 million, or $0.66 per diluted share. Sales for the
nine months ended September 30, 2003 were $3,253 million. Foreign currency
translation was responsible for approximately $62 million of the $210 million
increase in sales. The remaining increase resulted primarily from increased
sales of military and space, large commercial aircraft aftermarket and
regional, business and general aviation original equipment and aftermarket
parts and services. Net income for both periods included certain charges as
described in the Results of Operations and Business Segment Performance
sections. In addition, on January 1, 2004, we changed certain aspects of our
contract accounting policy and adopted expensing of stock-based compensation. 31




---



##### 



Income from continuing operations for the nine months ended September 30, 2004,
increased $103 million over the nine months ended September 30, 2003. The
increase was primarily due to reduced charges for facility closure and
headcount reduction actions and reduced asset impairment expenses.
Additionally, the 2003 results included a 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. These items,
which totaled $92 million after tax during the nine months ended September 30,
2003, were reduced to $11 million after tax during the nine months ended
September 30, 2004. In the nine months ended September 30, 2004, we experienced
reduced earnings relating to foreign currency translation of non-U.S. dollar
net expenses of approximately $10 million after tax, or $0.09 per diluted
share, compared to the nine months ended September 30, 2003. Also in the nine
months ended September 30, 2004, we experienced reduced earnings totaling
approximately $11 million after tax, or $0.09 per diluted share, compared to
the nine months ended September 30, 2003, relating to certain medical expenses,
liability insurance premiums, litigation costs and performance-based management
incentive compensation expenses. During the nine months ended September 30,
2004, we began expensing stock-based compensation, which reduced our diluted
earnings per share by $0.08, and we adjusted our effective tax rate to 26.8
percent, from the 30.4 percent rate in the same period last year. Our tax rate
was reduced due to a favorable state income tax settlement of $6.8 million, an
expected increase in export activity and higher research tax credits. We recorded income from discontinued operations of $62 million during the nine
months ended September 30, 2003, associated with the gain on the sale of our
Avionics business. No income from discontinued operations was recorded during
the nine months ended September 30, 2004. Net cash from operating activities was $240 million in the nine months ended
September 30, 2004 and $339 million in the nine months ended September 30,
2003. Net cash from operating activities included tax refunds of $55 million in
the nine months ended September 30, 2003. There were net income tax payments
during the nine months ended September 30, 2004 of approximately $38 million.
Worldwide pension contributions increased from $42 million in the nine months
ended September 30, 2003 to $50 million in the nine months ended September 30,
2004. Net cash from operating activities in the nine months ended September 30,
2004 included cash received from the termination of certain life insurance
policies of $23 million and a $10 million prepayment from Northrop Grumman for
the reimbursement of certain costs incurred by us on behalf of TRW, offset in
part by the acquisition of certain aftermarket rights of $15 million. Net cash
used by financing activities was $200 million in the nine months ended
September 30, 2004 primarily due to the redemption of the $63.5 million of
8.30% Cumulative Quarterly Income Preferred Securities, Series A (QUIPS
Debentures), the redemption of $60 million of Special Facilities Airport
Revenue Bonds, redemption of $5.9 million of industrial revenue bonds and
repurchase of $15 million principal value of long-term debt on the open market
and common stock dividend payments of $70.9 million. Net cash used by financing
activities was $436 million in the nine months ended September 30, 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 September 30, 2004 was $2,033
million compared to $2,212 million at December 31, 2003. At September 30, 2004,
we had cash and marketable securities of $346 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, the redemption of Special Facilities Airport
Revenue Bonds and industrial revenue bonds, the repurchase of long-term debt on
the open market and the revision of the accounting treatment of a technology
development grant from a non-U.S. government entity. Our current outlook
anticipates the retirement of approximately $100 million of debt during the
fourth quarter 2004, subject to market conditions. 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 September 30, 2004, there were no borrowings and $26.1 million
in letters of credit outstanding under this facility. At September 30, 2004, we
had borrowing capacity under this facility of $473.9 million, after reductions
for letters of credit outstanding. At September 30, 2004, we maintained $25
million of uncommitted domestic money market facilities and $22.2 million of
uncommitted and committed foreign working capital facilities with various banks
to meet short-term borrowing requirements. At September 30, 2004, there were
$3.1 million of bank guarantees outstanding under the foreign working capital
facilities, thus reducing the availability by that amount. 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. 32




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##### 



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 now
expect our 2004 sales to be in the high end of our previously announced range
of $4.70 billion to $4.75 billion. Our outlook for fully diluted EPS has now
been revised upward to $1.45 to $1.50 per share, including the cost of the
early retirement of debt, the favorable impact of the third quarter 2004 state
tax settlement and market conditions as noted in Outlook. We expect cash flow
from operations, minus capital expenditures to exceed net income in 2004. We
expect capital expenditures in 2004 to be $140 to $150 million. Refer to
Outlook for specific assumptions relating to our outlook for 2004. 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 September 30, 2004 year-to-date 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 36 percent of our sales and
total commercial aircraft aftermarket sales for these same aircraft and for
aircraft heavy maintenance represented 29 percent of sales. Other areas,
including industrial gas turbine components, made up the remaining 6 percent.
Overall, our aftermarket sales both for commercial aircraft and in the military
and space markets represented approximately 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 2004 We now expect 2004 sales to be at the high end of our previously announced
range of $4.70 to $4.75 billion. The 2004 outlook for fully diluted EPS has
been revised upward, to $1.45 to $1.50 per share, including actual and expected
premiums for the early retirement of debt, the favorable impact of the third
quarter 2004 state tax settlement and market conditions as noted below:  
    
    While 2004 deliveries of Boeing and Airbus large commercial aircraft
are expected to be approximately flat when compared to 2003, large
commercial aircraft original equipment production rates are expected to
increase in 2005. We have begun deliveries to support these higher
production rates, which will positively impact our sales during the
fourth quarter of 2004. Total sales to the large commercial aircraft
manufacturers are now expected to be approximately 5 percent higher in
2004 than they were in 2003.
    
    We expect continued capacity growth in the global airline system, as
measured by available seat miles (ASMs). Our sales to airlines for large
commercial and regional aircraft aftermarket parts and service are
expected to grow approximately 6 percent in 2004, compared to 2003.
Aftermarket sales in support of regional and business aircraft are
expected to grow by 8 to 10 percent in 2004, compared to 2003.
    
    Our sales for regional and business new aircraft production are
expected to increase by more than 10 percent when compared to 2003.
    
    Our military sales (OE and aftermarket) should increase slightly
greater than global military budgets, in the 10 percent range, when
compared to 2003. 33




---



##### 



The 2004 outlook for operating income and earnings per share (EPS) is based on
many external and internal factors that may have a material impact on projected
results, some of which were discussed in detail as part of the 2003 Annual
Report on Form 10-K and updated in subsequent Quarterly Reports on Form 10-Q.
To the extent that any of the factors highlighted in those filings have changed
significantly, they are discussed below:  
    
    Foreign exchange  We are currently fully hedged for our estimated
foreign exchange net expense exposure for the balance of 2004. We
continue to expect the unfavorable impact on earnings as a result of
foreign currency translation of non-U.S. dollar net expenses for 2004 to
be approximately $15 million before tax. This impact occurred during the
first half of 2004.
    
    Pension expense  Expectations for pension expense have not changed
significantly since the outlook provided during the second quarter 2004.
We continue to expect 2004 pension costs to decline by approximately $1
to $2 million, when compared to 2003.
    
    Certain expenses included in Corporate General & Administrative,
Other Income (Expense) and segment operating results  In our 2003
Annual Report on Form 10-K, we indicated that these costs were expected
to increase, on a before tax basis, in 2004 by approximately $30
million. As noted in the second quarter 2004 Form 10-Q, this increase is
now expected to be approximately $20 to $25 million, including the
impact of FASB Staff Position 106-2 Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, which was implemented in the second quarter
2004.
    
    7E7 and A380 research and development expense  Combined research and
development expense on these two programs is expected to be higher in
2004 compared to 2003 in support of new awards on the 7E7 and continued
development on the A380 program.
    
    The current outlook anticipates the retirement of approximately $100
million of debt during the fourth quarter 2004, subject to market
conditions. Our current outlook for fully diluted EPS includes the
impact of approximately $10 million before tax of premiums related to
the early retirement of debt during the fourth quarter 2004. We expect cash flow from operations, minus capital expenditures, to exceed net
income in 2004. We now expect capital expenditures in 2004 to be $140 to $150
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 or
resolution of the previously disclosed Rohr and Coltec tax litigation, or of
potential contractual disputes with Northrop Grumman related to the purchase of
Aeronautical Systems from TRW. 2005 From an overall market standpoint, we expect continued growth in each of our
market channels during 2005, with the strongest growth expected in the large
commercial aircraft original equipment markets as Boeing and Airbus are
expected to ramp up their production rates. The aftermarket is expected to grow
by approximately 5 percent, based on expectations for global ASM growth, and we
expect to experience some moderation in the growth rate of our global military
and space markets, compared to 2004. 34




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##### 



RESULTS OF OPERATIONS Changes in Accounting Methods Effective January 1, 2004, we changed two aspects of the application of
contract accounting to preferable methods 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 before tax gain of $23.3 million ($16.2 million after tax) as a
cumulative effect of change in accounting. Had these methods of accounting been
in effect during 2003, the segment operating income as previously reported for
the Engine Systems segment for the third quarter 2003 would have been $5.4
million lower, the total operating income for the third quarter 2003 would have
been $5.4 million lower, segment operating income for the nine months ended
September 30, 2003 would have been $11.1 million lower and the total operating
income for the nine months ended September 30, 2003 would have been $11.1
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 (FASB 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, we now expense stock options and the shares issued under our employee
stock purchase plan. The expense is recognized over the period the stock
options and shares are earned and vest. The adoption of FASB No. 123 reduced
before tax income by $2.8 million for the third quarter 2004 and $9.4 million
for the nine months ended September 30, 2004. The U.S. Medicare Prescription Drug Improvement and Modernization Act of 2003
(the Medicare Act) was signed into law on December 8, 2003. Effective with the second
quarter 2004, we adopted retroactively the Financial Accounting Standards Board
Staff Position No. FAS 106-2 Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The
effect of the Medicare Act has been measured as of January 1, 2004 and is now reflected
in our unaudited condensed consolidated financial statements and accompanying
notes. The effect of the Medicare Act is a $34 million reduction of the accumulated
postretirement benefit obligation for the Companys retiree benefit plans as
well as a reduction in the net periodic postretirement benefit cost. The effect
of the reduction in net periodic postretirement benefit cost is an increase to
income from continuing operations of $1.2 million ($0.9 million after tax) and
$3.7 million ($2.6 million after tax) for the third quarter 2004 and the nine
months ended September 30, 2004, respectively. Quarter Ended September 30, 2004 Compared with the Quarter Ended September 30,
2003 Quarter EndedSeptember 30,2004
    
    2003(Dollars in millions)Sales
    
    $
    1,166.5
    
    
    $
    1,063.9Segment Operating Income
    
    $
    131.6
    
    
    $
    117.8Corporate General and Administrative Costs
    
    
    (23.6
    )
    
    
    (16.0
    )Total Operating Income
    
    
    108.0
    
    
    
    101.8Net Interest Expense
    
    
    (34.7
    )
    
    
    (38.6
    )Other Income (Expense)  net
    
    
    (10.9
    )
    
    
    (9.8
    )Income Tax Expense
    
    
    (12.5
    )
    
    
    (16.7
    )Distribution on Trust Preferred Securities
    
    
    
    
    
    
    (2.7
    )Income from Continuing Operations
    
    
    49.9
    
    
    
    34.0Income (Loss) from Discontinued Operations
    
    
    
    
    
    
    Cumulative Effect of an Accounting Change
    
    
    
    
    
    
    Net Income
    
    $
    49.9
    
    
    $
    34.0
 35




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##### 



Changes in sales and segment operating income are discussed within the
Business Segment Performance section below. Corporate general and administrative costs of $23.6 million for the third
quarter 2004 increased $7.6 million, or 47.5 percent, from $16.0 million for
the third quarter 2003 primarily due to higher incentive compensation costs
including expensing of stock-based compensation, higher tax litigation expenses
and higher audit fees. Corporate general and administrative costs as a
percentage of sales were 2.0 percent in the third quarter 2004 and 1.5 percent
in the third quarter 2003. Net interest expense decreased $3.9 million, or 10.1 percent, primarily due to
a lower debt level in 2004, the favorable effect of interest rate swaps entered
into in 2003 and lower bank fees. Other income (expense)  net increased by $1.1 million, or 11.2 percent, to
expense of $10.9 million in the third quarter 2004 from expense of $9.8 million
in the third quarter 2003. The increase in expense resulted primarily from $3.1
million of debt premium and unamortized issuance costs expensed in connection
with the early retirement of debt offset in part by a $1.6 million gain on the
sale of a product line. Our effective tax rate from continuing operations was 20.0 percent during the
third quarter 2004 and 31.3 percent during the third quarter 2003. The lower
rate in the third quarter 2004 as compared to the third quarter 2003 was due to
a favorable state tax settlement that generated approximately $6.8 million of
income in the third quarter 2004, an expected increase in export activity and
higher research tax credits. Nine Months Ended September 30, 2004 Compared with Nine Months Ended September
30, 2003 Nine Months EndedSeptember 30,2004
    
    2003(Dollars in millions)Sales
    
    $
    3,462.6
    
    
    $
    3,252.6Segment Operating Income
    
    $
    376.5
    
    
    $
    217.3Corporate General and Administrative Costs
    
    
    (66.5
    )
    
    
    (46.5
    )Total Operating Income
    
    
    310.0
    
    
    
    170.8Net Interest Expense
    
    
    (106.5
    )
    
    
    (111.7
    )Other Income (Expense)  net
    
    
    (40.6
    )
    
    
    (24.9
    )Income Tax (Expense)
    
    
    (43.6
    )
    
    
    (10.4
    )Distribution on Trust Preferred Securities
    
    
    
    
    
    
    (7.9
    )Income from Continuing Operations
    
    
    119.3
    
    
    
    15.9Income from Discontinued Operations
    
    
    
    
    
    
    62.4Cumulative Effect of an Accounting Change
    
    
    16.2
    
    
    
    (0.5
    )Net Income
    
    $
    135.5
    
    
    $
    77.8
 Changes in sales and segment operating income are discussed within the
Business Segment Performance section below. Corporate general and administrative costs of $66.5 million for the nine months
ended September 30, 2004 increased $20.0 million, or 43.0 percent, from $46.5
million for the nine months ended September 30, 2003 primarily due to higher
incentive compensation costs including expensing of stock-based compensation,
higher tax litigation expenses and higher audit fees. Corporate general and
administrative costs as a percentage of sales were 1.9 percent in the nine
months ended September 30, 2004 and 1.4 percent in the nine months ended
September 30, 2003. Net interest expense decreased $5.2 million, or 4.7 percent, primarily due to a
lower debt level in 2004, lower interest expense on short-term borrowings and
the favorable effect of interest rate swaps entered into in 2003. This was
offset in part by lower interest income due to the sale of the Noveon PIK Notes
in the first quarter of 2003. 36




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##### 



Other income (expense)  net increased by $15.7 million, or 63.1 percent, to
expense of $40.6 million in the nine months ended September 30, 2004 from
expense of $24.9 million in the nine months ended September 30, 2003. The
increase in expense resulted from a $7 million impairment of a note receivable
in connection with the sale of a business, the absence in the nine months ended
September 30, 2004 of the $6.9 million gain on the sale of the Noveon PIK
Notes, which was recognized in the first quarter 2003, $4.6 million in costs
associated with businesses previously sold, including settlement of a lawsuit
and higher life insurance expense, $3.1 million of debt premium and expensing
the unamortized issuance costs incurred in connection with the early retirement
of debt, $2.1 million of lower income from affiliated companies and $2.5
million of higher minority interest expense offset in part by a $1.6 million
gain on the sale of a product line. 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 26.8 percent during the
nine months ended September 30, 2004 and 30.4 percent during the nine months
ended September 30, 2003. The lower rate in the nine months ended September 30,
2004 as compared to the nine months ended September 30, 2003 was due to a
favorable state tax settlement in the third quarter 2004, an expected increase
in export activity and higher research tax credits. Income from discontinued operations, after tax, was $62.4 million during the
nine months ended September 30, 2003 primarily representing the $63.0 million
gain on the sale of the Avionics business. Income from discontinued operations
for the Avionics and PRS operating results was a loss of $0.6 million in the
nine months ended September 30, 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 the accounting method was
to record a before tax gain of $23.3 million ($16.2 million after tax) as a
cumulative effect of change in accounting in the first quarter 2004. The cumulative effect of a change in accounting for the nine months ended
September 30, 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. 37




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##### 



In the following tables, segment operating income is total segment revenue
reduced by operating expenses directly identifiable with that business segment. Quarter Ended September 30, 2004 Compared with the Quarter Ended September 30,
2003 Quarter Ended September 30,%
    
    % of Sales2004
    
    2003
    
    Change
    
    2004
    
    2003(Dollars in millions)NET CUSTOMER SALESAirframe Systems
    
    $
    399.5
    
    
    $
    373.6
    
    
    
    6.9Engine Systems
    
    
    474.5
    
    
    
    420.1
    
    
    
    12.9Electronic Systems
    
    
    292.5
    
    
    
    270.2
    
    
    
    8.3Total Sales
    
    $
    1,166.5
    
    
    $
    1,063.9
    
    
    
    9.6SEGMENT OPERATING INCOMEAirframe Systems
    
    $
    27.6
    
    
    $
    17.8
    
    
    
    55.1
    
    
    
    6.9
    
    
    
    4.8Engine Systems
    
    
    65.2
    
    
    
    63.0
    
    
    
    3.5
    
    
    
    13.7
    
    
    
    15.0Electronic Systems
    
    
    38.8
    
    
    
    37.0
    
    
    
    4.9
    
    
    
    13.3
    
    
    
    13.7Segment Operating Income
    
    $
    131.6
    
    
    $
    117.8
    
    
    
    11.7
    
    
    
    11.3
    
    
    
    11.1
 Airframe Systems:Airframe Systems segment sales of $399.5 million in the third
quarter 2004 increased $25.9 million, or 6.9 percent, from $373.6 million in
the third quarter 2003. The increase was due to the following:  
    
    Favorable currency translation on non-U.S. dollar sales, primarily in the actuation systems business;
    
    Higher sales volume of aircraft wheels and brakes, actuation systems and engineered polymer products; and
    
    Increased volume of airframe heavy maintenance services. Airframe Systems segment operating income increased $9.8 million, or 55.1
percent, from $17.8 million in the third quarter 2003 to $27.6 million in the
third quarter 2004. The increase in operating income for the third quarter 2004
as compared to the third quarter 2003 was primarily due to the following:  
    
    Increased sales volume as noted above for aircraft wheels and brakes,
actuation systems, engineered polymer products and airframe heavy
maintenance;
    
    Favorable income effect of $6 million before tax from the revision of
the accounting treatment of a technology development grant from a
non-U.S. government entity; and
    
    Lower asset impairment, facility closure and headcount reduction
charges. There were asset impairment, facility closure and headcount
reduction charges of approximately $2.2 million recorded in the third
quarter 2003 and none in the third quarter 2004. These items were partially offset by:  
    
    Higher new program research and development expenditures, primarily
for actuation products; and
    
    An unfavorable impact of $2 million before tax for a reserve
established as a result of an adverse preliminary administrative ruling
in a labor dispute. 38




---



##### 



Engine Systems:Engine Systems segment sales in the third quarter 2004 of
$474.5 million increased $54.4 million, or 12.9 percent, from $420.1 million in
the third quarter 2003. The increase was due to the following:  
    
    Higher aerostructures and cargo systems aftermarket sales volume and
higher sales volume for commercial original equipment manufacturers;
    
    Favorable currency translation on non-U.S. dollar sales, primarily in
the engine controls business;
    
    Higher sales volume of turbine fuel engine components, aircraft
maintenance, repair and overhaul services (MRO) sales; and
    
    Higher sales volume of engine controls components to both the U.S.
and various European military customers. Engine Systems segment operating income increased $2.2 million, or 3.5 percent,
from $63.0 million in the third quarter 2003 to $65.2 million in the third
quarter 2004. Segment operating income was higher due to:  
    
    Higher sales volume as described above; and
    
    Favorable mix of sales, as spares and MRO sales increased more than the increase in original equipment sales. The increase in Engine Systems segment operating income was partially offset by:  
    
    Unfavorable foreign currency translation of the segments non-U.S. dollar net expenses; and
    
    Higher research and development expenditures. Electronic Systems:Electronic Systems segment sales of $292.5 million in the
third quarter 2004 increased $22.3 million, or 8.3 percent, from $270.2 million
in the third quarter 2003. The increase was primarily due to:  
    
    Higher sales volume of regional and business jet aircraft original
equipment and aftermarket products for the de-icing and specialty
systems, sensors and aircraft lighting businesses;
    
    Higher military and space sales volume for our optical space systems products; and
    
    Higher military spares sales volume in our propulsion products business. Partially offsetting the increase in sales were decreased sales volume in
commercial aftermarket products for Boeing and Airbus programs. Electronic Systems segment operating income increased $1.8 million, or 4.9
percent, from $37.0 million in the third quarter 2003 to $38.8 million in the
third quarter 2004. The increase in segment operating income was due to the
higher sales volume as described above which was offset partially by:  
    
    Unfavorable mix from regional and business original equipment and commercial aftermarket sales;
    
    Increased investments in research and development costs and bid and proposal costs on potential new programs;
    
    Operational inefficiencies in our propulsion products business; and
    
    Unfavorable foreign exchange in our lighting and power systems businesses. 39




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##### 



Nine Months Ended September 30, 2004 Compared with the Nine Months Ended
September 30, 2003 Nine Months Ended September 30,%
    
    % of Sales2004
    
    2003
    
    Change
    
    2004
    
    2003(Dollars in millions)NET CUSTOMER SALESAirframe Systems
    
    $
    1,205.9
    
    
    $
    1,171.1
    
    
    
    3.0Engine Systems
    
    
    1,422.2
    
    
    
    1,267.5
    
    
    
    12.2Electronic Systems
    
    
    834.5
    
    
    
    814.0
    
    
    
    2.5Total Sales
    
    $
    3,462.6
    
    
    $
    3,252.6
    
    
    
    6.5SEGMENT OPERATING
INCOMEAirframe Systems
    
    $
    74.0
    
    
    $
    62.5
    
    
    
    18.4
    
    
    
    6.1
    
    
    
    5.3Engine Systems
    
    
    209.0
    
    
    
    53.6
    
    
    
    289.9
    
    
    
    14.7
    
    
    
    4.2Electronic Systems
    
    
    93.5
    
    
    
    101.2
    
    
    
    (7.6
    )
    
    
    11.2
    
    
    
    12.4Segment Operating
Income
    
    $
    376.5
    
    
    $
    217.3
    
    
    
    73.3
    
    
    
    10.9
    
    
    
    6.7
 Airframe Systems:Airframe Systems segment sales of $1,205.9 million in the
nine months ended September 30, 2004 increased $34.8 million, or 3.0 percent,
from $1,171.1 million in the nine months ended September 30, 2003. The increase
was due to:  
    
    Favorable currency translation on non-U.S. dollar sales, primarily in the actuation systems business;
    
    Higher sales volume of large commercial aircraft wheels and brakes; and
    
    Higher sales volume of engineered polymer products. Partially offsetting the higher sales were decreased sales volumes in military
aircraft wheels and brakes, actuation systems and landing gears. Airframe Systems segment operating income increased $11.5 million, or 18.4
percent, from $62.5 million in the nine months ended September 30, 2003 to
$74.0 million in the nine months ended September 30, 2004. The increase in
operating income was primarily due to the following:  
    
    Lower asset impairment, facility closure and headcount reduction
charges. Asset impairment, facility closure and headcount reduction
charges were $14.9 million for the nine months ended September 30, 2003
and $0.1 million for the nine months ended September 30, 2004; and
    
    Favorable income effect of $6 million before tax from the revision of
the accounting treatment of a technology development grant from a
non-U.S. government entity. Partially offsetting the increase in segment operating income were the
following:  
    
    Unfavorable foreign exchange translation of non-U.S. dollar net expenses;
    
    Higher new program research and development expenditures;
    
    Unfavorable impact of $2 million before tax for a reserve established
as a result of an adverse preliminary administrative ruling in a labor
dispute;
    
    Decreased sales volume for military aircraft wheels and brakes; and
    
    Unfavorable effect of downward pressure on pricing from commercial customers. 40




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##### 



Engine Systems:Engine Systems segment sales in the nine months ended September
30, 2004 of $1,422.2 million increased $154.7 million, or 12.2 percent, from
$1,267.5 million in the nine months ended September 30, 2003. The increase was
due to the following:  
    
    Higher aerostructures MRO and aftermarket sales volume;
    
    Higher cargo systems engine OE and aftermarket sales volume;
    
    Favorable currency translation on non-U.S. dollar sales, primarily in the engine controls business;
    
    Increased sales volume of U.S. military original equipment and aftermarket engine controls; and
    
    Higher sales volume of turbine fuel engine components for U.S.
military and regional aircraft applications and to the power generation
market. The increase was partially offset by lower U.S. military turbomachinery repair
sales. Engine Systems segment operating income increased $155.4 million, or 289.9
percent, from $53.6 million in the nine months ended September 30, 2003 to
$209.0 million in the nine months ended September 30, 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 and the non-cash
asset impairment of a facility held for sale in the six months ended
June 30, 2003, which did not recur in the nine months ended September
30, 2004. The write-down of the Super 27 re-engining program is
described in detail in Contingencies  Super 27 Program;
    
    Higher sales volume as described above;
    
    Favorable mix of sales for aftermarket applications; and
    
    Favorable cumulative adjustments for certain aerostructures contracts
reflecting improved cost controls and lower contract costs of products
outsourced to suppliers. The increase in Engine Systems segment operating income was partially offset by
the following:  
    
    Increased aerostructures contract costs for certain U.S. military and regional jet applications; and
    
    Unfavorable currency translation on non-U.S. dollar costs, primarily in the aerostructures businesses. Electronic Systems:Electronic Systems segment sales of $834.5 million in the
nine months ended September 30, 2004 increased $20.5 million, or 2.5 percent,
from $814.0 million in the nine months ended September 30, 2003. The increase
was primarily due to higher volume for all of the businesses, except power
systems, in regional and business original equipment and aftermarket sales.
Partially offsetting the increase in sales were decreases in sales in all our
other commercial and military market channels in almost all of our businesses. Electronic Systems segment operating income decreased $7.7 million, or 7.6
percent, from $101.2 million in the nine months ended September 30, 2003 to
$93.5 million in the nine months ended September 30, 2004. Segment operating
income was unfavorably affected by:  
    
    The decline in sales volume of commercial original equipment and aftermarket and military original equipment;
    
    Weaker product mix in the commercial aftermarket;
    
    Unfavorable costs from operating inefficiencies in our propulsion products and optical and space businesses; and
    
    Increased investments in research and development costs and bid and proposal costs on potential new programs. 41




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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 September 30, 2004, we had cash and marketable securities of $345.5 million,
as compared to $378.4 million at December 31, 2003. Credit Facilities We have 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 September 30, 2004, there were no borrowings and $26.1 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 this 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 September 30, 2004, we had borrowing
capacity under this facility of $473.9 million, after reductions for letters of
credit outstanding. At September 30, 2004, we maintained $25 million of uncommitted domestic money
market facilities and $22.2 million of uncommitted and committed foreign
working capital facilities with various banks to meet short-term borrowing
requirements. As of September 30, 2004 and December 31, 2003, there were no
borrowings under these facilities. However, as of September 30, 2004 there were
$3.1 million of bank guarantees outstanding under the foreign working capital
facilities, thus reducing availability by that amount. These 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, 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 September 30, 2004, we had long-term debt and capital lease obligations of
$2,030.6 million with maturities ranging from 2005 to 2046. Current maturities
of long-term debt and capital lease obligations at September 30, 2004 were $2.3
million. On August 1, 2004, we redeemed $60.0 million principal amount of
Special Facilities Airport Revenue Bonds and in May 2004 redeemed $5.9 million
principal amount of industrial revenue bonds. During the third quarter of 2004,
we repurchased $15.2 million principal amount of long-term debt securities with stated
interest of 6.45% on the open market. Approximately $7.4 million of the
long-term debt securities were due in 2007 and approximately $7.8 million were
due in 2008. We recorded $3.2 million of expenses in other income (expense) 
net related to the redemption of the Special Facilities Airport Revenue Bonds
and industrial revenue bonds and the open market purchases of long-term debt
securities. We also revised the accounting for a technology development grant
from a non-U.S. government entity resulting in a reduction of long-term debt of
$25 million which had no cash impact. 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. 42




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##### 



Our current outlook anticipates the retirement of approximately $100 million of
debt during the fourth quarter 2004, subject to market conditions. Off-Balance Sheet Arrangements We utilize several forms of off-balance sheet financing arrangements. At
September 30, 2004, these arrangements included: UndiscountedMinimumFuture Lease
    
    ReceivablesPayments
    
    Sold(Dollars in millions)Tax Advantaged Operating Leases
    
    $
    50.8Standard Operating Leases
    
    
    142.5$
    193.3Short-term Receivables
    
    
    
    
    
    $
    97.3
 Lease Agreements We finance our use of certain equipment, including corporate aircraft, under
committed lease arrangements provided by financial institutions. Certain of
these arrangements allow us to claim a deduction for the tax depreciation on
the assets, rather than the lessor, and allow us to lease equipment having a
maximum unamortized value of $90 million at September 30, 2004. At September
30, 2004, $50.8 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
$142.5 million at September 30, 2004. Sale of Receivables At September 30, 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 $97.3
million at September 30, 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, Canadian Dollars and Polish Zlotys, 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, Canadian Dollars, and Polish Zlotys. The forward contracts described above are used to mitigate the potential
volatility of 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 on our condensed 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 September 30, 2004 was $600.9 million. The fair value of the
forward contracts at September 30, 2004 was an asset of $84.2 million, of which
$56.1 million is recorded in Prepaid Expenses and Other Assets and $28.1
million is recorded in Other Assets. The total fair value of the forward contracts of $84.3 million (before deferred
taxes of $29.5 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 September 30, 2004, the portion of
the $84.3 million fair value that would be reclassified into earnings as an
increase in sales to offset the effect of the hedged item in the next 12 months
is a gain of $56.2 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 September 30, 2004,
Accumulated Other Comprehensive Income included a gain of $0.1 million related
to these terminated forward contracts that will be reflected in income and
sales when the original forward contracts would have matured. 43




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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 $2.5
million at September 30, 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 September 30, 2004, we had forward contracts with a notional
value of $57.4 million to buy Great Britain Pounds Sterling, contracts with a
net notional value of $10.4 million to buy Euros and contracts with a notional
value of $1.5 million to buy Canadian Dollars. 44




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Contractual Obligations and Other Commercial Commitments The following charts reflect our contractual obligations and commercial
commitments as of September 30, 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
    
    Thereafter(Dollars in millions)Payments Due by
PeriodContractual
ObligationsShort-Term and
Long-Term Debt
    
    $
    2,031.9
    
    
    $
    1.2
    
    
    $
    2.1
    
    
    $
    686.3
    
    
    $
    1,342.3Capital Lease
Obligations
    
    
    2.1
    
    
    
    0.5
    
    
    
    1.1
    
    
    
    0.2
    
    
    
    0.3Operating Leases
    
    
    193.4
    
    
    
    11.8
    
    
    
    66.3
    
    
    
    41.0
    
    
    
    74.3Unconditional
PurchaseObligations(1)
    
    
    32.0
    
    
    
    0.6
    
    
    
    18.4
    
    
    
    13.0
    
    
    
    Other Long-TermObligations
    
    
    43.3
    
    
    
    5.3
    
    
    
    36.6
    
    
    
    1.4
    
    
    
    Total
    
    $
    2,302.7
    
    
    $
    19.4
    
    
    $
    124.5
    
    
    $
    741.9
    
    
    $
    1,416.9Amount of
Commitments that
Expire per PeriodOther Commercial
CommitmentsLines of Credit(2)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby Letters
of Credit & Bank
Guarantees
    
    
    61.3
    
    
    
    29.8
    
    
    
    31.5
    
    
    
    
    
    
    
    Guarantees(3)
    
    
    160.9
    
    
    
    0.5
    
    
    
    13.2
    
    
    
    2.2
    
    
    
    145.0Standby
Repurchase
Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Commercial
Commitments
    
    
    28.9
    
    
    
    3.3
    
    
    
    15.0
    
    
    
    10.6
    
    
    
    Total
    
    $
    251.1
    
    
    $
    33.6
    
    
    $
    59.7
    
    
    $
    12.8
    
    
    $
    145.0
  (1)
    
    At December 31, 2003, we should have reported $78.7 million of
unconditional purchase obligations. We incorrectly reported $155.3
million. It was overstated by $76.6 million at December 31, 2003.(2)
    
    As of September 30, 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) $25 million of uncommitted
domestic money market facilities; and (c) $22.2 million of uncommitted and
committed foreign working capital facilities. As of September 30, 2004, we
had borrowing capacity under our committed syndicated revolving credit
facility of $473.9 million, after reductions for outstanding letters of
credit. Foreign working capital facilities were reduced by $3.1 million of
bank guarantees as of September 30, 2004.(3)
    
    At December 31, 2003, we should have reported $214.2 million of
guarantees. We incorrectly reported $252.6 million. It was overstated by
$38.4 million at December 31, 2003. In addition, approximately $45 million
of other commercial commitments were reported as guarantees at December
31, 2003. 45




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CASH FLOW The following table summarizes our cash flow activity for the nine months ended
September 30, 2004 and September 30, 2003. Nine Months Ended September 30,Net Cash Provided by (Used by):
    
    2004
    
    2003(Dollars in millions)Operating activities of continuing operations
    
    $
    239.9
    
    
    $
    338.8Investing activities of continuing operations
    
    $
    (73.2
    )
    
    $
    108.9Financing activities of continuing operations
    
    $
    (200.1
    )
    
    $
    (435.7
    )Discontinued operations
    
    $
    
    
    
    $
    161.5
 Operating Activities of Continuing Operations Net cash provided by operating activities of continuing operations decreased
$98.9 million from $338.8 million during the nine months ended September 30,
2003 to $239.9 million during the nine months ended September 30, 2004. Net
cash provided by operating activities of continuing operations in the nine
months ended September 30, 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. Net cash provided by
operating activities of continuing operations in the nine months ended
September 30, 2003 included tax refunds of $55 million. There were net income
tax payments during the nine months ended September 30, 2004 of approximately
$38 million. Net cash provided by operating activities of continuing operations
was reduced by worldwide pension contributions of $50 million in the nine
months ended September 30, 2004 and $42 million in the nine months ended
September 30, 2003. Net cash provided by operating activities of continuing
operations includes a $10 million payment from Northrop Grumman  see
Contingencies  Potential Contractual Dispute with Northrop Grumman. Higher
working capital, including higher account receivables and inventory, also
contributed to lower net cash provided by operating activities of continuing
operations in the nine months ended September 30, 2004. Investing Activities of Continuing Operations Net cash provided by (used by) investing activities of continuing operations
was a use of cash of $73.2 million in the nine months ended September 30, 2004
and an inflow of cash of $108.9 million in the nine months ended September 30,
2003. Net cash used by investing activities of continuing operations for the
nine months ended September 30, 2004 included capital expenditures of $82.4
million. Net cash provided by investing activities of continuing operations in
the nine months ended September 30, 2003 included proceeds from the sale of the
Noveon PIK Notes of $151.9 million offset in part by capital expenditures of
$75.0 million. Financing Activities of Continuing Operations Net cash used by financing activities of continuing operations was $200.1
million in the nine months ended September 30, 2004, compared to net cash used
by financing activities of continuing operations of $435.7 million for the nine
months ended September 30, 2003. The balance of the QUIPS of $63.5 million was
repaid during the nine months ended September 30, 2004. In addition, we
redeemed $60 million principal amount of Special Facilities Airport Revenue
Bonds, repurchased $15 million principal amount of long-term debt on the open
market and redeemed $5.9 million of industrial revenue bonds during the nine
months ended September 30, 2004. Short-term debt was repaid during the nine
months ended September 30, 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 $161.5 million in the nine
months ended September 30, 2003 included $157.5 million of proceeds from the
sale of the Avionics business. 46




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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
tax, 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 for 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. Our unaudited condensed consolidated balance sheet included an accrued
liability for environmental remediation obligations of $89.1 million and $87.8
million at September 30, 2004 and December 31, 2003, respectively. At September
30, 2004, $17.8 million of the $89.1 million accrual was included in current
liabilities as Accrued Expenses. Of the $89.1 million, $24.8 million was
associated with ongoing operations and $64.3 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 in up to 30 years of all sites for which we have been identified as
a potentially responsible party. This period includes operation and monitoring
costs that are generally incurred over 15 to 25 years. 47




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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 fibers 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, the primary layer of insurance coverage for
some of 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. Kemper has also indicated
that it is currently operating under a run-off plan approved by the Illinois
Department of Insurance. We cannot predict the impact of Kempers financial
position on the availability of the Kemper insurance. Liabilities of Divested Businesses Asbestos At the time of the EIP spin-off in 2002, 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 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. 48




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In addition to our guarantee of the TIDES, at September 30, 2004, we have an
outstanding contingent liability for guarantees of debt and lease payments of
$2.9 million, letters of credit and bank guarantees of $61.3 million, residual
value of leases of $54.6 million and executive loans to purchase our stock of
$4.5 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
September 30, 2004, we had recorded a receivable from Northrop Grumman for
approximately $45 million for such claims. During the quarter ended June 30,
2004, Northrop Grumman made a payment of $10 million of the receivable. Since
the payment is subject to an audit of our claims, that amount was recorded as a
deposit in Accrued Expenses. Commercial Airline Customers Several of our commercial airline customers are experiencing financial
difficulties. 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 September 30, 2004, our remaining balance of notes receivable were $6.6
million. The total carrying value of inventory related to the Super 27 business
was $4.6 million at September 30, 2004 and represents our assessment of the
current market value of the remaining inventory. Collection of the notes may be negatively affected by adverse developments in
the commercial aerospace market. We will continue to assess the value of these
assets and their ultimate recovery. 49




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Boeing 717 We have a long-term contract with Boeing for nacelle systems used on the Boeing
717 aircraft that 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 before tax loss on the contract of up to approximately $17
million. The loss, if any, is dependent upon a number of factors,
including additional orders received or exercise of existing options from
Boeing, timing of deliveries, 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, our former subsidiary, 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 U.S. Government in the U.S. Court of Federal Claims seeking a refund of this payment.
 The trial
portion of the case was completed in May 2004. On November 2,
2004, we were notified that the trial court ruled in favor of Coltec
and ordered the Government to refund federal tax payments of $82.8
million to Coltec. This tax refund will also bear interest to the
date of payment. As of November 3, 2004, the interest amount was
approximately $46.2 million before tax, or $30.0 million after tax.
The Government has 90 days following the entry of a final judgment
to appeal the decision. If the Government does not appeal the
decision or Judge Bradens decision is ultimately upheld, we
will be entitled to this tax refund and related interest pursuant to
an agreement with Coltec. Upon receipt of these amounts, we expect to
record net income of approximately $145 million, based on interest
through November 3, 2004, and including the release of previously
established reserves described below. If the IRS were to appeal the judgment and
ultimately prevail in this case, Coltec will not owe any additional
interest or taxes with respect to 1996. We may, however, 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 amount of the previously estimated tax liability if the
IRS were to prevail for the 1997 through 2000 period remains fully
reserved. 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 may be scheduled for trial in 2005 and that it will ultimately be
successful in these cases. At the time of settlement or final determination by
the court, there will be a net cash cost to us due at least in part to the
reversal of a timing item. We believe that our total net cash cost is unlikely
to exceed $100 million. We are reserved for the estimated liability associated
with these cases and as a result, we do not expect a charge to earnings to
result from the resolution of these matters. NEW ACCOUNTING STANDARDS Except as reflected elsewhere, there are no new accounting standards that have
been adopted by us during the nine months ended September 30, 2004. NEW TAX LAW On October 22, 2004, the President signed H.R. 4520, the American Jobs Creation
Act of 2004 (the Act). The Act contains numerous provisions related to
corporate and international taxation including repeal of the Extraterritorial
Income (ETI) regime, creation of a new Domestic Production Activities
deduction and a temporary dividends received deduction related to repatriation
of foreign earnings. The Act contains various effective dates and transition
periods related to its provisions. We do not expect the Act, and in particular, the
 repeal of ETI and its
replacement with a Domestic Production Activities (DPA) deduction to have a material
impact on our income tax provision for the twelve months ended December 31,
2004. However, we expect that the transitional repeal of the ETI
benefit, which begins in 2005, will increase our 2005 effective tax
rate slightly. We are currently analyzing the Act and awaiting Financial Accounting
Standards Board guidance to determine whether it will require a
revaluation of our deferred taxes. We do not expect that any revaluation, if
required, would have a material effect on our balance sheet. 50




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While we are currently studying the impact of the temporary dividends received
deduction provisions contained in the Act, as of September 30, 2004 and based
on the tax laws in effect at that time, it was our intention to continue to
indefinitely reinvest our undistributed foreign earnings and, accordingly, no
deferred tax liability has been recorded in connection therewith. 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
obligations, 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. 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 typically 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. Pre-certification costs,
including those in excess of original estimated levels, are now included in
total contract costs used to evaluate overall contract profitability. 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. 51




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Profit is estimated based on the difference between total estimated revenue and
total estimated cost of a contract. Changes in estimated total revenue and
estimated total cost are recognized as business or economic conditions change
and the impact on contract profitability is recorded immediately in that period
using the cumulative catch-up method. 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 as adjusted to the date of certification, 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 or
we are required to begin manufacturing of units under contractual production
lead time. 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. 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 re-evaluate our contract
estimates periodically and reflect changes in estimates immediately under the
cumulative catch-up method for the impact on shipments to date. 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 the amount of 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 is 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. 52




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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 recovery of these costs is
specifically guaranteed by the customer in the contract. 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 a cash
investment to acquire a portion of a future revenue stream 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 capitalized sales
incentives are recovered during the contract period of our products pursuant to
a specific guarantee of recovery by the customer. 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. 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. 53




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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 Boeing 7E7, the Joint Strike Fighter, the
Embraer 190 and the Boeing 717;
    
    our ability to extend our contracts with Boeing relating to the 7E7 beyond the initial contract periods;
    
    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 and events 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;
    
    possible assertion of claims against us on the theory that we, as the
former corporate parent of Coltec Industries Inc, bear 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; 54




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
    
    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. 55




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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 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 Activities in Part 1  Item 1 of
this Form 10-Q for a description of current developments involving our hedging
activities. At September 30, 2004, a hypothetical 100 basis point unfavorable change in
interest rates would increase annual interest expense by approximately $3.7
million. At September 30, 2004, a hypothetical 10 percent strengthening of the
U.S. dollar against other foreign currencies would decrease the value of our
forward contracts by $63.6 million. The fair value of these forward contracts
was $84.2 million at September 30, 2004. Because we hedge only a portion of our
exposure, a strengthening of the U.S. Dollar as described above would have a
more than offsetting benefit to our financial results in future periods. 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. 56




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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 5. Other Information  (a)
    
    The Companys independent auditor, Ernst & Young LLP (E&Y), has recently
notified the Securities and Exchange Commission (SEC), the Public Company
Accounting Oversight Board and the Company that certain non-audit work E&Y
previously performed in China, for the Company and other companies, has
raised questions regarding E&Ys independence with respect to its
performance of audit services. With respect to the Company, prior to March 2001 an affiliated firm of E&Y performed tax calculation and
tax return preparation services and made tax payments in China for
representative offices of one of the Companys subsidiaries. The payment
of these taxes involved the custody of Company funds, which is not
permitted under SEC auditor independence rules. These services were
discontinued in March 2001. The Audit Review Committee of the Companys
Board of Directors has reviewed the facts surrounding these services
provided by E&Y. The Company and the Audit Review Committee
have concluded that E&Ys independence was not impaired by the performance
of these services in view of the de minimisfees paid to E&Y (e.g., $2,000
in 2001), the ministerial nature of the actions performed by E&Y, and the
fact that the representative offices and subsidiary involved were not
material to the Companys consolidated financial statements.
E&Y has also concluded that its independence was not impaired.
The Company continues to monitor the SECs consideration of this
matter. Item 6. 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 31
    
    Rule 13a-14(a)/15d-14(a) Certifications.Exhibit 32
    
    Section 1350 Certifications.
 57




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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. November 4, 2004
    GOODRICH CORPORATION/s/ ULRICH SCHMIDTUlrich SchmidtExecutive Vice President and Chief Financial Officer /s/ SCOTT E. KUECHLEScott E. KuechleVice President & Controller (Chief Accounting Officer) 58




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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 31
    
    Rule 13a-14(a)/15d-14(a) Certifications.Exhibit 32
    
    Section 1350 Certifications.
 59