##### 



SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549
 Form 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934For The Quarterly Period Ended June 30, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934For the transition period from
           to
           .
 Commission file number 1-892   GOODRICH CORPORATION (Exact Name of Registrant as Specified in its Charter) New York(State or Other Jurisdiction of
Incorporation or Organization)
    
    34-0252680(I.R.S. Employer
Identification No.)Four Coliseum Centre, 2730 West Tyvola Road,
Charlotte, North Carolina(Address of Principal Executive Offices)
    
    28217(Zip Code)
 704-423-7000Registrants Telephone Number, Including Area Code Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o As of June 30, 2004, there were 118,733,588 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 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 June 30, 2004, and the related
condensed consolidated statements of income for the three-month and six-month
periods ended June 30, 2004 and 2003, and the condensed consolidated statements
of cash flows for the six-month periods ended June 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
August 2, 2004 2




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##### 



GOODRICH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Sales
    
    $
    1,134.0
    
    
    $
    1,094.5
    
    
    $
    2,296.1
    
    
    $
    2,188.7Operating Costs and Expenses:Cost of sales
    
    
    826.5
    
    
    
    819.6
    
    
    
    1,695.3
    
    
    
    1,719.5Selling and administrative costs
    
    
    201.3
    
    
    
    180.1
    
    
    
    393.9
    
    
    
    362.4Restructuring and consolidation costs
    
    
    3.1
    
    
    
    28.7
    
    
    
    4.9
    
    
    
    37.81,030.9
    
    
    
    1,028.4
    
    
    
    2,094.1
    
    
    
    2,119.7Operating Income
    
    
    103.1
    
    
    
    66.1
    
    
    
    202.0
    
    
    
    69.0Interest expense
    
    
    (35.7
    )
    
    
    (38.2
    )
    
    
    (73.1
    )
    
    
    (78.1
    )Interest income
    
    
    0.5
    
    
    
    0.5
    
    
    
    1.3
    
    
    
    5.0Other income (expense)  net
    
    
    (11.7
    )
    
    
    (2.5
    )
    
    
    (29.7
    )
    
    
    (15.1
    )Income (loss) from continuing operations before
income taxes and trust distributions
    
    
    56.2
    
    
    
    25.9
    
    
    
    100.5
    
    
    
    (19.2
    )Income tax benefit (expense)
    
    
    (17.4
    )
    
    
    (8.6
    )
    
    
    (31.1
    )
    
    
    6.3Distributions on trust preferred securities
    
    
    
    
    
    
    (2.6
    )
    
    
    
    
    
    
    (5.2
    )Income (Loss) From Continuing Operations
    
    
    38.8
    
    
    
    14.7
    
    
    
    69.4
    
    
    
    (18.1
    )Income (Loss) from discontinued operations  net
of taxes
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    62.4Cumulative effect of change in accounting
    
    
    
    
    
    
    
    
    
    
    16.2
    
    
    
    (0.5
    )Net Income
    
    $
    38.8
    
    
    $
    14.4
    
    
    $
    85.6
    
    
    $
    43.8Basic Earnings (Loss) per Share:Continuing operations
    
    $
    0.33
    
    
    $
    0.13
    
    
    $
    0.59
    
    
    $
    (0.15
    )Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    0.52Cumulative effect of change in accounting
    
    
    
    
    
    
    
    
    
    
    0.13
    
    
    
    Net Income
    
    $
    0.33
    
    
    $
    0.12
    
    
    $
    0.72
    
    
    $
    0.37Diluted Earnings (Loss) per Share:Continuing operations
    
    $
    0.32
    
    
    $
    0.12
    
    
    $
    0.58
    
    
    $
    (0.15
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.52Cumulative effect of change in accounting
    
    
    
    
    
    
    
    
    
    
    0.13
    
    
    
    Net Income
    
    $
    0.32
    
    
    $
    0.12
    
    
    $
    0.71
    
    
    $
    0.37Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.40
    
    
    $
    0.40
 See notes to unaudited condensed consolidated financial statements. 3




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##### 



GOODRICH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN MILLIONS) June 30,
    
    December 31,2004
    
    2003Current AssetsCash and cash equivalents
    
    $
    356.4
    
    
    $
    378.4Accounts and notes receivable, less allowances
for doubtful receivables ($23.9 at June 30,
2004; $28.0 at December 31, 2003)
    
    
    652.5
    
    
    
    608.5Inventories
    
    
    1,037.7
    
    
    
    964.2Deferred income taxes
    
    
    52.4
    
    
    
    53.3Prepaid expenses and other assets
    
    
    87.3
    
    
    
    82.7Total Current Assets
    
    
    2,186.3
    
    
    
    2,087.1Property, plant and equipment - net
    
    
    1,141.6
    
    
    
    1,175.9Prepaid pension
    
    
    224.7
    
    
    
    219.5Goodwill
    
    
    1,257.0
    
    
    
    1,259.5Identifiable intangible assets - net
    
    
    494.8
    
    
    
    484.7Deferred income taxes
    
    
    26.6
    
    
    
    22.9Other assets
    
    
    603.5
    
    
    
    640.3Total Assets
    
    $
    5,934.5
    
    
    $
    5,889.9Current LiabilitiesShort-term bank debt
    
    $
    2.0
    
    
    $
    2.7Accounts payable
    
    
    419.0
    
    
    
    414.5Accrued expenses
    
    
    688.5
    
    
    
    648.2Income taxes payable
    
    
    271.6
    
    
    
    259.9Current maturities of long-term debt and
capital lease obligations
    
    
    63.4
    
    
    
    75.6Total Current Liabilities
    
    
    1,444.5
    
    
    
    1,400.9Long-term debt and capital lease obligations
    
    
    2,069.9
    
    
    
    2,136.6Pension obligations
    
    
    648.5
    
    
    
    642.0Postretirement benefits other than pensions
    
    
    313.7
    
    
    
    319.2Other non-current liabilities
    
    
    202.7
    
    
    
    197.7Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders EquityCommon stock  $5 par valueAuthorized 200,000,000 shares; issued
132,285,483 shares at June 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)
    
    
    661.4
    
    
    
    656.3Additional paid-in capital
    
    
    1,060.8
    
    
    
    1,035.8Income retained in the business
    
    
    80.5
    
    
    
    42.4Accumulated other comprehensive income (loss)
    
    
    (133.7
    )
    
    
    (126.1
    )Unearned compensation
    
    
    
    
    
    
    (1.4
    )Common stock held in treasury, at cost
(13,551,895 shares at June 30, 2004, and
13,539,820 shares at December 31, 2003)
    
    
    (413.8
    )
    
    
    (413.5
    )Total Shareholders Equity
    
    
    1,255.2
    
    
    
    1,193.5Total Liabilities And Shareholders Equity
    
    $
    5,934.5
    
    
    $
    5,889.9
 See notes to unaudited condensed consolidated financial statements. 4




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##### 



GOODRICH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS) Six MonthsEndedJune 30,2004
    
    2003Operating ActivitiesIncome (loss) from continuing operations
    
    $
    69.4
    
    
    $
    (18.1
    )Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:Restructuring and consolidation:Expenses
    
    
    4.9
    
    
    
    37.8Payments
    
    
    (15.1
    )
    
    
    (21.3
    )Asset impairments
    
    
    
    
    
    
    86.1Depreciation and amortization
    
    
    110.6
    
    
    
    108.8Stock-based compensation expense (income)
    
    
    9.6
    
    
    
    (2.3
    )Deferred income taxes
    
    
    (1.6
    )
    
    
    8.5Payment-in-kind interest income
    
    
    
    
    
    
    (4.3
    )Change in assets and liabilities, net of effects of
acquisitions and dispositions of businesses:Receivables
    
    
    (43.6
    )
    
    
    40.0Change in receivables sold, net
    
    
    
    
    
    
    (2.1
    )Inventories
    
    
    (51.3
    )
    
    
    (14.3
    )Other current assets
    
    
    (11.7
    )
    
    
    (7.2
    )Accounts payable
    
    
    6.2
    
    
    
    (45.9
    )Accrued expenses
    
    
    47.4
    
    
    
    32.7Income taxes payable
    
    
    6.6
    
    
    
    25.2Tax benefit on non-qualified options
    
    
    2.2
    
    
    
    Other non-current assets and liabilities
    
    
    (3.5
    )
    
    
    (12.2
    )Net Cash Provided By Operating Activities
    
    
    130.1
    
    
    
    211.4Investing ActivitiesPurchases of property, plant and equipment
    
    
    (51.4
    )
    
    
    (46.7
    )Proceeds from sale of property, plant and equipment
    
    
    0.2
    
    
    
    3.4Proceeds from payment-in-kind notes
    
    
    
    
    
    
    151.9Payments received (made) in connection with
acquisitions, net of cash acquired
    
    
    (0.5
    )
    
    
    31.0Net Cash Provided (Used) By Investing Activities
    
    
    (51.7
    )
    
    
    139.6Financing ActivitiesIncrease (decrease) in short-term debt
    
    
    (1.8
    )
    
    
    (379.9
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    7.0Repayment of long-term debt and capital lease obligations
    
    
    (70.0
    )
    
    
    (2.0
    )Proceeds from issuance of capital stock
    
    
    18.3
    
    
    
    6.5Purchases of treasury stock
    
    
    (0.2
    )
    
    
    (0.3
    )Dividends
    
    
    (47.2
    )
    
    
    (46.9
    )Distributions on trust preferred securities
    
    
    
    
    
    
    (5.2
    )Net Cash Used By Financing Activities
    
    
    (100.9
    )
    
    
    (420.8
    )Discontinued OperationsNet cash provided (used) by discontinued operations
    
    
    
    
    
    
    185.0Effect of exchange rate changes on cash and cash equivalents
    
    
    0.5
    
    
    
    2.7Net increase (decrease) in cash and cash equivalents
    
    
    (22.0
    )
    
    
    117.9Cash and cash equivalents at beginning of period
    
    
    378.4
    
    
    
    149.9Cash and cash equivalents at end of period
    
    $
    356.4
    
    
    $
    267.8
 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 six months ended June 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. 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 pretax income by $2.3 million and $6.6
million for the three and six months ended June 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. 6




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##### 



The following table represents the effect on net income and earnings per share
if the Company had applied the fair value based method and recognition
provisions of SFAS No. 123 for the three and six months ended June 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
    
    Six MonthsEnded
    
    Ended(In millions, except per share amounts)
    
    June 30, 2003
    
    June 30, 2003Net income, as reported
    
    $
    14.4
    
    
    $
    43.8Reverse: Stock-based employee compensation expense
(income) included in net income, as reported above (net
of related tax effects)
    
    
    1.5
    
    
    
    (1.5
    )Deduct: Stock-based employee compensation (expense)
income determined under fair value method for all awards
(net of related tax effects)
    
    
    (4.0
    )
    
    
    (4.2
    )Pro forma net income
    
    $
    11.9
    
    
    $
    38.1Earnings per share:Basic, as reported
    
    $
    0.12
    
    
    $
    0.37Basic, pro forma
    
    $
    0.10
    
    
    $
    0.32Diluted, as reported
    
    $
    0.12
    
    
    $
    0.37Diluted, pro forma
    
    $
    0.10
    
    
    $
    0.32
 The Company recorded income related to stock-based compensation in the six

months ended June 30, 2003 as a result of revisions to the estimated payout on
performance share plans. Note C: Inventories Inventories consist of: June 30,
    
    December 31,2004
    
    2003(Dollars in millions)FIFO or average cost (which approximates
current costs):Finished products
    
    $
    171.4
    
    
    $
    185.2In-process
    
    
    708.9
    
    
    
    644.6Raw materials and supplies
    
    
    255.8
    
    
    
    241.6Total
    
    
    1,136.1
    
    
    
    1,071.4Less:Reserve to reduce certain inventories to
LIFO
    
    
    (40.9
    )
    
    
    (40.6
    )Progress payments and advances
    
    
    (57.5
    )
    
    
    (66.6
    )Total
    
    $
    1,037.7
    
    
    $
    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 $238.3 million
and $192.2 million as of June 30, 2004 and December 31, 2003, respectively. The impact of the cumulative effect of change in accounting resulted in an
increase to the inventory balance of $23.3 million as of January 1, 2004. See
Note K. 7




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##### 



Note D: Business Segment Information The Companys operations are reported as three business segments: Airframe
Systems, Engine Systems and Electronic Systems. Effective January 1, 2004, the
Company realigned the business units within its three reportable segments. The
customer services business was transferred from the Airframe Systems segment to
the Engine Systems segment. In addition, the costs and sales associated with
products or services provided to customers through the customer services
business are reflected in the business providing the product or service rather
than the customer services business. Prior period amounts have been
reclassified to conform to the current year presentation. Airframe Systems:Airframe Systems provides systems and components pertaining
to aircraft taxi, take-off, landing and stopping. Several business units within
the segment are linked by their ability to contribute to the integration,
design, manufacture and service of entire aircraft undercarriage systems,
including landing gear, wheels and brakes and certain brake controls. Airframe
Systems also includes the aviation technical services business unit which
performs comprehensive total aircraft maintenance, repair, overhaul and
modification services for many commercial airlines, independent operators,
aircraft leasing companies and airfreight carriers. The segment includes the
actuation systems and flight controls business units that were acquired as part
of Aeronautical Systems. The actuation systems business unit provides systems
that control the movement of steering systems for missiles and
electro-mechanical systems that are characterized by high power, low weight,
low maintenance, resistance to extreme temperatures and vibrations and high
reliability. The actuation systems business unit also provides actuators for
primary flight control systems that operate elevators, ailerons and rudders,
and secondary flight controls systems such as flaps and slats. Engine Systems:Engine Systems includes the aerostructures business unit, a
leading supplier of nacelles, pylons, thrust reversers and related aircraft
engine housing components. The segment also produces engine and fuel controls,
pumps, fuel delivery systems, and structural and rotating components such as
discs, blisks, shafts and airfoils for both aerospace and industrial gas
turbine applications. The segment includes the cargo systems, engine controls
and customer services business units, which were acquired as part of
Aeronautical Systems. The cargo systems business unit produces fully integrated
main deck and lower lobe cargo systems for wide body aircraft. The engine
controls business unit provides engine control systems and components for jet
engines used on commercial and military aircraft, including fuel metering
controls, fuel pumping systems, electronic control software and hardware,
variable geometry actuation controls, afterburner fuel pump and metering unit
nozzles, and engine health monitoring systems. The customer services business
unit supports aftermarket products for the businesses that were acquired as
part of Aeronautical Systems. Electronic Systems:Electronic Systems produces a wide array of products that
provide flight performance measurements, flight management, and control and
safety data. Included are a variety of sensors systems that measure and manage
aircraft fuel and monitor oil debris, engine and transmission, and structural
health. The segments products also include ice detection systems, test
equipment, aircraft lighting systems, landing gear cables and harnesses,
satellite control, data management and payload systems, launch and missile
telemetry systems, airborne surveillance and reconnaissance systems, laser
warning systems, aircraft evacuation systems, de-icing systems, ejection seats,
and crew and attendant seating. The power systems business unit, which was
acquired as part of Aeronautical Systems, provides systems that produce and
control electrical power for commercial and military aircraft, including
electric generators for both main and back-up electrical power, electric
starters and electric starter generating systems and power management and
distribution systems. Also acquired as part of Aeronautical Systems was the
hoists and winches business unit, which provides airborne hoists and winches
used on both helicopters and fixed wing aircraft, and a business that produces
engine shafts primarily for helicopters. 8




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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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in millions)Net customer salesAirframe Systems
    
    $
    403.8
    
    
    $
    395.4
    
    
    $
    806.4
    
    
    $
    797.5Engine Systems
    
    
    449.2
    
    
    
    423.8
    
    
    
    947.7
    
    
    
    847.4Electronic Systems
    
    
    281.0
    
    
    
    275.3
    
    
    
    542.0
    
    
    
    543.8Total sales
    
    $
    1,134.0
    
    
    $
    1,094.5
    
    
    $
    2,296.1
    
    
    $
    2,188.7Intersegment salesAirframe Systems
    
    $
    12.3
    
    
    $
    13.7
    
    
    $
    27.9
    
    
    $
    30.7Engine Systems
    
    
    4.7
    
    
    
    8.0
    
    
    
    9.8
    
    
    
    16.6Electronic Systems
    
    
    7.8
    
    
    
    12.9
    
    
    
    15.9
    
    
    
    25.8Total intersegment sales
    
    $
    24.8
    
    
    $
    34.6
    
    
    $
    53.6
    
    
    $
    73.1Segment operating income (loss)Airframe Systems
    
    $
    25.3
    
    
    $
    22.9
    
    
    $
    46.4
    
    
    $
    44.7Engine Systems
    
    
    69.4
    
    
    
    25.8
    
    
    
    143.8
    
    
    
    (9.4
    )Electronic Systems
    
    
    31.8
    
    
    
    32.0
    
    
    
    54.7
    
    
    
    64.2126.5
    
    
    
    80.7
    
    
    
    244.9
    
    
    
    99.5Corporate general and administrative expenses
    
    
    (23.4
    )
    
    
    (14.6
    )
    
    
    (42.9
    )
    
    
    (30.5
    )Total operating income
    
    $
    103.1
    
    
    $
    66.1
    
    
    $
    202.0
    
    
    $
    69.0
 Segment assets include assets directly identifiable with each segment.
Corporate assets include assets not specifically identified with a business
segment, including cash. June 30,
    
    December 31,2004
    
    2003(Dollars in millions)AssetsAirframe Systems
    
    $
    1,682.4
    
    
    $
    1,665.8Engine Systems
    
    
    2,145.5
    
    
    
    2,078.9Electronic Systems
    
    
    1,408.7
    
    
    
    1,410.9Corporate
    
    
    697.9
    
    
    
    734.3Total Assets
    
    $
    5,934.5
    
    
    $
    5,889.9
 9




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##### 



Note E: Earnings Per Share The computation of basic and diluted earnings per share from continuing
operations is as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Numerator:Numerator for basic earnings per share  income
(loss) from continuing operations available to
common shareholders
    
    $
    38.8
    
    
    $
    14.7
    
    
    $
    69.4
    
    
    $
    (18.1
    )Denominator:Denominator for basic earnings per share -
weighted-average shares
    
    
    118.5
    
    
    
    117.4
    
    
    
    118.3
    
    
    
    117.3Effect of dilutive securities:Stock options, performance shares,
restricted shares and employee stock
purchase plan shares
    
    
    1.6
    
    
    
    0.6
    
    
    
    1.7
    
    
    
    Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions
    
    
    120.1
    
    
    
    118.0
    
    
    
    120.0
    
    
    
    117.3Earnings (loss) per share from continuing
operations:Basic
    
    $
    0.33
    
    
    $
    0.13
    
    
    $
    0.59
    
    
    $
    (0.15
    )Diluted
    
    $
    0.32
    
    
    $
    0.12
    
    
    $
    0.58
    
    
    $
    (0.15
    )
 At June 30, 2004 and 2003, the Company had outstanding stock options to acquire
10.5 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 5.3 million and 11.3 million
shares were anti-dilutive at June 30, 2004 and 2003, respectively. 10




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##### 



Note F: Comprehensive Income Total comprehensive income consists of the following: Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in millions)Net income
    
    $
    38.8
    
    
    $
    14.4
    
    
    $
    85.6
    
    
    $
    43.8Other comprehensive income:Unrealized translation adjustments during period
    
    
    (11.7
    )
    
    
    47.1
    
    
    
    3.6
    
    
    
    44.9Gain (loss) on cash flow hedges
    
    
    (8.6
    )
    
    
    22.5
    
    
    
    (11.2
    )
    
    
    19.8Gain (loss) on certain investments
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3Total Comprehensive Income
    
    $
    18.5
    
    
    $
    84.3
    
    
    $
    78.0
    
    
    $
    108.8
 Accumulated other comprehensive income consists of the following (dollars in
millions): June 30,
    
    December 31,2004
    
    2003Cumulative unrealized translation adjustments
    
    $
    126.9
    
    
    $
    123.3Minimum pension liability adjustment
    
    
    (318.3
    )
    
    
    (318.3
    )Accumulated gain (loss) on cash flow hedges
    
    
    57.6
    
    
    
    68.8Unrealized gain (loss) on certain investments
    
    
    0.1
    
    
    
    0.1$
    (133.7
    )
    
    $
    (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 $30.8 million and $31.9 million at June 30, 2004 and December 31,
2003, respectively. 11




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##### 



Note G: Restructuring and Consolidation Costs For the three and six months ended June 30, 2004, the Company recorded restructuring and
consolidation charges totaling $3.1 million and $4.9 million,
respectively. The charges were recorded across
the Companys segments as follows: Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2004
    
    June 30, 2004(Dollars in millions)Airframe Systems
    
    $
    0.1
    
    
    $
    0.1Engine Systems
    
    
    0.8
    
    
    
    1.1Electronic Systems
    
    
    2.2
    
    
    
    3.7$
    3.1
    
    
    $
    4.9
 Restructuring and consolidation reserves at December 31, 2003 and June 30,
2004, as well as activity during the six months ended June 30, 2004, consisted
of: Balance
    
    
    
    
    
    
    
    
    
    
    
    
    
    BalanceDecember 31,
    
    
    
    
    
    
    
    
    
    Other
    
    June 30,2003
    
    Provision
    
    Activity
    
    Changes
    
    2004Personnel-related
costs
    
    $
    16.4
    
    
    $
    3.6
    
    
    $
    (10.6
    )
    
    $
    2.5
    
    
    $
    11.9Facility closure
and other costs
    
    
    11.2
    
    
    
    1.3
    
    
    
    (4.5
    )
    
    
    
    
    
    
    8.0$
    27.6
    
    
    $
    4.9
    
    
    $
    (15.1
    )
    
    $
    2.5
    
    
    $
    19.9
 During the six months ended June 30, 2004, approximately 310 employees were
terminated as part of the restructuring activities described below. As of June
30, 2004, the Company expects to further reduce employment levels by
approximately 100 employees as part of those restructuring activities. Restructuring and
Consolidation Costs  Provision The following is a description of key components of the $4.9 million provision
for restructuring and consolidation costs in the first six months of 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 $1.1 million in restructuring and
consolidation costs, consisting of $0.4 million in personnel-related costs and
$0.7 million in facility closure and other costs. The $0.4 million in personnel-related charges are for employee severance and
benefits. Facility closure and other costs include $0.4 million for machinery
and equipment relocation and $0.3 million for other
 facility closure costs. Electronic Systems: The
segment recorded $3.7 million in restructuring and consolidation
costs, consisting of $3.1 million in personnel-related costs and $0.6
million in facility closure and other costs. The $3.1 million in personnel-related charges are for employee severance and
benefits. The $0.6 million in facility closure and other costs were primarily
for relocation of production equipment. 12




---



##### 



Restructuring and Consolidation Costs  Activity During the first six months of 2004, there were $15.1 million in cash payments
for restructuring and consolidation activities. Restructuring and Consolidation Costs  Other Changes The $2.5 million increase in restructuring reserves related to businesses that
utilize contract accounting and has not yet been reflected in earnings as the
amount is currently capitalized into contract costs. Note H: Asset Impairments During the first quarter 2004, the Company recorded a non-cash $7.0 million
pretax asset impairment charge to Other Income (Expense) resulting in part from insufficient collateral
value for a note receivable arising out of the divestiture of a business. During the first quarter of 2003, the Company recorded a non-cash $79.9 million
pretax asset impairment charge, 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 June 30, 2004, the Companys
remaining notes receivable of $7.0 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 June
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 pre-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 pre-tax impairment charge
which was reported in Cost of Sales on rotable
landing gear assets. 13




---



##### 



Note I: Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill for the six months ended June
30, 2004, by segment are as follows: Balance
    
    Foreign
    
    BalanceDecember 31,
    
    Currency
    
    June 30,2003
    
    Translation
    
    2004(Dollars in millions)Airframe Systems
    
    $
    244.8
    
    
    $
    3.1
    
    
    $
    247.9Engine Systems
    
    
    488.1
    
    
    
    3.0
    
    
    
    491.1Electronic Systems
    
    
    526.6
    
    
    
    (8.6
    )
    
    
    518.0$
    1,259.5
    
    
    $
    (2.5
    )
    
    $
    1,257.0
 Identifiable intangible assets as of June 30, 2004 are comprised of: Gross
    
    AccumulatedAmount
    
    Amortization
    
    Net(Dollars in millions)Amortizable intangible assets:Patents, trademarks and licenses
    
    $
    180.7
    
    
    $
    54.1
    
    
    $
    126.6Customer relationships
    
    
    291.8
    
    
    
    17.5
    
    
    
    274.3Technology
    
    
    91.2
    
    
    
    1.6
    
    
    
    89.6Non-compete agreements
    
    
    6.6
    
    
    
    5.0
    
    
    
    1.6Sourcing contracts
    
    
    6.4
    
    
    
    3.7
    
    
    
    2.7$
    576.7
    
    
    $
    81.9
    
    
    $
    494.8
 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 six months ended June 30, 2004 was
$11.8 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 June 30, 2004. During the six months ended June 30, 2004, the Company acquired certain
aftermarket rights classified as patents, trademarks and licenses for
approximately $15 million. 14




---



##### 



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 (PRS) business ceased operations in the first quarter of
2003. Prior periods have been restated to reflect the Avionics and PRS
businesses as discontinued operations. The disposition of the former Avionics business and the former Passenger
Restraints Systems business each represented the disposal of a component of an
entity under Financial Accounting Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Accordingly, the revenues, costs
and expenses, assets and liabilities, and cash flows of Avionics and Passenger
Restraints Systems have been segregated in the accompanying unaudited condensed
consolidated statement of income and unaudited condensed consolidated statement
of cash flows. The following summarizes the results of discontinued operations for Avionics
and Passenger Restraints Systems: Three Months
    
    Six MonthsEnded
    
    Ended(Dollars in millions)
    
    June 30, 2003
    
    June 30, 2003Net customer sales
    
    $
    
    
    
    $
    24.3Pretax loss from operations
    
    $
    
    
    
    $
    (0.9
    )Income tax benefit
    
    
    
    
    
    
    0.3Gain on sale of Avionics (net of income tax expense of $39.1 million)
    
    
    (0.3
    )
    
    
    63.0Income from discontinued operations
    
    $
    (0.3
    )
    
    $
    62.4
 Note K: Cumulative Effect of Change in Accounting Effective January 1, 2004, the Company changed two aspects of the application
of contract accounting to preferable methods for its aerostructures business which is included in the
Engines Systems segment. The first is a change to the cumulative catch-up
method from the reallocation method for accounting for changes in contract
estimates of revenue and costs. The change was effected by adjusting contract
profit rates from the balance to complete gross profit rate to the estimated
gross profit rate at completion of the contract. The second change related to
pre-certification costs. Under the old policy, pre-certification costs
exceeding the level anticipated in the Companys original investment model used
to negotiate contractual terms were expensed when determined regardless of
overall contract profitability. Under the new policy, pre-certification costs,
including those in excess of original estimated levels, will be included in
total contract costs used to evaluate overall contract profitability. The
impact of the changes in accounting methods was to record a pretax gain of
$23.3 million ($16.2 million after tax) as a cumulative effect of 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 six
months ended June 30, 2003, as if these methods of accounting had been in
effect. Three Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2003As Reported
    
    Pro forma
    
    As Reported
    
    Pro forma(in millions)
    
    (in millions)Income (loss) from continuing operations
    
    $
    14.7
    
    
    $
    13.3
    
    
    $
    (18.1
    )
    
    $
    (21.9
    )Net income (loss)
    
    $
    14.4
    
    
    $
    13.0
    
    
    $
    43.8
    
    
    $
    40.0Earnings (loss) per share  net incomeBasic
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.37
    
    
    $
    0.34Fully-diluted
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.37
    
    
    $
    0.34
 The cumulative effect of a change in accounting , as presented after taxes, in
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. 15




---



##### 



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 June 30, 2004, there were no borrowings and $25.8
million in letters of credit outstanding under this facility. At December 31,
2003, there were no borrowings and $17.1 million in letters of credit
outstanding under 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 June 30, 2004, the
Company had borrowing capacity under this facility of $373.1 million, after
reductions for letters of credit outstanding. At June 30, 2004, the Company maintained $50 million of uncommitted domestic
money market facilities and $25.9 million of uncommitted foreign working
capital facilities with various banks to meet short-term borrowing
requirements. As of June 30, 2004 and December 31, 2003, there were no
borrowings under these facilities. However, as of June 30, 2004, there were
$3.1 million of bank guarantees outstanding under the uncommitted foreign
working capital facilities, thus reducing availability by that amount. These
uncommitted credit facilities are provided by a small number of commercial
banks that also provide the Company with committed credit through the
syndicated revolving credit facility and with various cash management, trust
and other services. The Companys credit facilities do not contain any credit rating downgrade
triggers that would accelerate the maturity of its indebtedness. However, a
ratings downgrade would result in an increase in the interest rate and fees
payable under its committed syndicated revolving credit facility. Such a
downgrade also could adversely affect the Companys ability to renew existing
or obtain access to new credit facilities in the future and could increase the
cost of such new facilities. QUIPS On March 2, 2004, the Company completed the redemption of the $63.5 million in
outstanding 8.30% Cumulative Quarterly Income Preferred Securities, Series A
(QUIPS) issued by BFGoodrich Capital, a Delaware business trust, 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 June 30, 2004, the Company had long-term debt and capital lease obligations
of $2,069.9 million with maturities ranging from 2005 to 2046. Current
maturities of long-term debt and capital lease obligations at June 30, 2004
were $63.4 million, including $60.0 million of industrial revenue bonds that
were redeemed on August 1, 2004. In May 2004, the Company redeemed $5.9 million
of industrial revenue bonds. 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. 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 June 30, 2004. At June 30, 2004, $48.3 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 $154.8 million at June 30, 2004. 16




---



##### 



Sale of Receivables At June 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 June 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 and Canadian Dollars but have
significant sales contracts that are denominated in U.S. Dollars. Periodically,
the Company enters into forward contracts to exchange U.S. Dollars for Euros,
Great Britain Pounds Sterling and Canadian Dollars. The forward contracts described above are used to mitigate the potential
volatility to earnings and cash flow arising from changes in currency exchange
rates. The forward contracts are being accounted for as cash flow hedges. The
forward contracts are recorded in the Companys condensed consolidated balance
sheet at fair value with the offset reflected in Accumulated Other
Comprehensive Income, net of deferred taxes. The notional value of the forward
contracts at June 30, 2004 was $712.5 million. The fair value of the forward
contracts at June 30, 2004 was an asset of $87.9 million, of which $52.2
million is recorded in Prepaid Expenses and Other Assets and $35.7 million is
recorded in Other Assets. The total gain of $88.4 million (before deferred taxes of $30.8 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 June 30, 2004, the portion of the $88.4 million gain that would be
reclassified into earnings to offset the effect of the hedged item as an
increase in sales in the next 12 months is a gain of $52.7 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 June 30,
2004, Accumulated Other Comprehensive Income included a gain of $0.5 million
related to these terminated contracts that will be reflected in income and
sales when the original contracts would have matured. Fair Value Hedges In July 2003, the Company entered into a $100 million fixed-to-floating
interest rate swap on the 6.45 percent senior notes due in 2007. In October
2003, the Company entered into two $50 million fixed-to-floating interest rate
swaps. One $50 million swap is on the Companys 7.50 percent senior notes due
in 2008 and the other $50 million swap is on the Companys 6.45 percent
medium-term notes due in 2008. In December 2003, the Company entered into a $50
million fixed-to-floating interest rate swap on its 7.50 percent senior notes
due in 2008. The purpose of entering into these swaps was to increase the
Companys exposure to variable interest rates. The settlement and maturity
dates on each swap are the same as those on the referenced notes. In accordance
with 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 a liability (loss) of $2.7 million at
June 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 June 30, 2004, the Company had forward contracts with a
notional value of $46.9 million to buy Great Britain Pounds Sterling, contracts
with a notional value of $56.9 million to buy Euros and contracts with a
notional value of $5.8 million to sell Canadian Dollars. 17




---



##### 



Note O: Guarantees The Company extends financial and product performance guarantees to third
parties. As of June 30, 2004, the following financial guarantees were
outstanding: CARRYINGMAXIMUM
    
    AMOUNTPOTENTIAL
    
    OF(Dollars in millions)
    
    PAYMENT
    
    LIABILITYEnvironmental remediation indemnification (Note P)
    
    No limit
    
    $
    20.5Financial Guarantees:TIDES (Note P)
    
    $
    145.0
    
    
    $
    Debt and lease payments (Note P)
    
    $
    3.0
    
    
    $
    Residual values on leases
    
    $
    54.7
    
    
    $
    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. 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
six months ended June 30, 2004, are as follows: (Dollars in millions)Balance at December 31, 2003
    
    $
    78.6Service and product warranty provision
    
    
    17.8Payments
    
    
    (13.8
    )Balance at June 30, 2004
    
    $
    82.6
 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. 18




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##### 



Environmental The Company is subject to various domestic and international environmental laws
and regulations which may require that it investigate and remediate the effects
of the release or disposal of materials at sites associated with past and
present operations, including sites at which the Company has been identified as
a potentially responsible party under the federal Superfund laws and comparable
state laws. The Company is currently involved in the investigation and
remediation of a number of sites under these laws. The measurement of environmental liabilities by the Company is based on
currently available facts, present laws and regulations and current technology.
Such estimates take into consideration the Companys prior experience in site
investigation and remediation, the data concerning cleanup costs available from
other companies and regulatory authorities and the professional judgment of the
Companys environmental specialists in consultation with outside environmental
specialists, when necessary. Estimates of the Companys environmental
liabilities are further subject to uncertainties regarding the nature and
extent of site contamination, the range of remediation alternatives available,
evolving remediation standards, imprecise engineering evaluations and estimates
of appropriate cleanup technology, methodology and cost, the extent of
corrective actions that may be required and the number and financial condition
of other potentially responsible parties, as well as the extent of their
responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceed, it is
likely that adjustments in the Companys accruals will be necessary to reflect
new information. The amounts of any such adjustments could have a material
adverse effect on the Companys results of operations in a given period, but
the amounts, and the possible range of loss in excess of the amounts accrued,
are not reasonably estimable. Based on currently available information,
however, the Company does not believe that future environmental costs in excess
of those accrued with respect to sites with which it has been identified as a
potentially responsible party are likely to have a material adverse effect on
the Companys financial condition. There can be no assurance, however, that
additional future developments, administrative actions or liabilities relating
to environmental matters will not have a material adverse effect on the
Companys results of operations or cash flows in a given period. Environmental liabilities are recorded when the Companys liability is probable
and the costs are reasonably estimable, which generally is not later than at
completion of a feasibility study or when the Company has recommended a remedy
or has committed to an appropriate plan of action. The liabilities are reviewed
periodically and, as investigation and remediation proceed, adjustments are
made as necessary. Liabilities for losses from environmental remediation
obligations do not consider the effects of inflation, and anticipated
expenditures are not discounted to their present value. The liabilities are not
reduced by possible recoveries from insurance carriers or other third parties,
but do reflect anticipated allocations among potentially responsible parties at
federal Superfund sites or similar state-managed sites and an assessment of the
likelihood that such parties will fulfill their obligations at such sites. The Companys consolidated balance sheet included an accrued liability for
environmental remediation obligations of $92.6 million and $87.8 million at
June 30, 2004 and December 31, 2003, respectively. At June 30, 2004, $22.9
million of the $92.6 million accrual was included in current liabilities as
Accrued Expenses. Of the $92.6 million, $24.6 million was associated with
ongoing operations and $68.0 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 with 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. 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. 19




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##### 



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. Guarantees The Company has guaranteed amounts owed by Coltec Capital Trust with respect to
the $145 million of outstanding Coltec Capital Trust 51⁄4% convertible trust
preferred securities (TIDES) and has guaranteed Coltecs performance of its
obligations with respect to the TIDES and the underlying Coltec convertible
subordinated debentures. Following the spin-off of the EIP segment, the TIDES
remained outstanding as an obligation of Coltec Capital Trust and the Companys
guarantee with respect to the TIDES remains an obligation of the Company.
EnPro, Coltec and Coltec Capital Trust have agreed to indemnify the Company for
any costs and liabilities arising under or related to the TIDES after the
spin-off. In addition to the Companys guarantee of the TIDES, at June 30, 2004, the
Company has an outstanding contingent liability for guarantees of debt and
lease payments of $3.0 million, letters of credit and bank guarantees of $59.4
million, residual value of leases of $54.7 million and executive loans to
purchase the Companys stock of $4.5 million. 20




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##### 



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 June 30, 2004, the Company had
recorded a receivable from Northrop Grumman for approximately $39 million for
such claims. During the quarter ended June 30, 2004, Northrop Grumman prepaid
$10 million of the receivable, subject to an audit of the Companys claims, and
that amount was recorded in Accrued Expenses. Commercial Airline Customers The downturn in the commercial air transport market, the terrorist attacks on
September 11, 2001, the military conflict in Iraq and the outbreak of Severe
Acute Respiratory Syndrome (SARS) have adversely affected the financial
condition of many of the Companys commercial airline customers. The Company
performs ongoing credit evaluations on the financial condition of its customers
and maintains reserves for uncollectible accounts receivable based upon
expected collectibility. Although the Company believes its reserves are
adequate, the Company is not able to predict the future financial stability of
these customers. Any material change in the financial status of any one or
group of customers could have a material adverse effect on the Companys
financial condition, results of operations or cash flows. The extent to which
extended payment terms are granted to customers may negatively affect future
cash flow. Super 27 Program The Companys Aerostructures business unit, included in the Engine Systems
segment, includes a business to re-engine 727 aircraft to meet sound
attenuation requirements and improve their fuel efficiency (Super 27 program).
At December 31, 2002, the Company had an investment in the Super 27 program of
$105.9 million consisting of $44.7 of inventory and $61.2 million of notes
receivable. The inventory included three Super 27 aircraft, seven nacelle kits
and other spare parts. In March 2003, the Company repossessed four 727 aircraft from a receivable
obligor who was in financial difficulty and also received a revised cash flow
forecast indicating a significant decline in the financial strength of another
receivable obligor. In addition, the deterioration in the commercial airline
market resulting from the military conflict in Iraq and SARS made available
more aircraft that compete with or are newer than these aircraft. Because of
these events, the Company concluded that its ability to recover the recorded
values of its inventory and notes receivable was significantly affected. In the
first quarter 2003, based on an independent appraisal and the Companys
assessment of market conditions, the Company wrote down the carrying value of
its inventory to equal the estimated market value of $12.2 million. Also in the
first quarter 2003, the Company reserved $0.4 million of related trade
receivables and $46.1 million of notes receivable from a receivable obligor. As of June 30, 2004, the Companys remaining notes receivable of $7.0 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 June 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. 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 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 the Company could recognize a pretax loss on the
contract of approximately $10 million to $20 million. The range of loss, if
any, is dependent upon a number of factors, including additional orders
received or exercise of existing options from Boeing, timing of deliveries,
realization of cost efficiencies related to expected volume and collection of
program termination costs should the contract be terminated prematurely. 21




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##### 



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
IRS 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. To date, no decision has
been rendered. Coltec has agreed to pay to the Company an amount equal to any
refunds or credits of taxes and interest received by it as a result of the
litigation. If the IRS prevails in this case, Coltec will not owe any
additional interest or taxes with respect to 1996. A reasonable estimation of a
potential refund for 1996, if any, cannot be made at this time and,
accordingly, no receivable has been recorded. 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 potential tax liability for 1997 through 2000 has been 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 will go to trial in 2005 and that it will ultimately
be successful in these cases. However, if Rohr is not successful in these
cases, the Company believes that the net cost to Rohr at the time of the final
determination by the court would not exceed $100 million, including interest,
as the court will take into account the timing benefit of the disallowed tax
deductions at that time. The Company has reserved for its best estimate of the
liability resulting from these cases. Note Q: New Accounting Standards There are no new accounting standards that have not been adopted by the
Company. 22




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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 six months ended June 30, 2004 and 2003,
respectively. Other Non-U.S.U.S. Plans
    
    U.K. Plans
    
    PlansThree Months Ended
    
    Three Months Ended
    
    Three Months EndedJune 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003(In millions)Service cost
    
    $
    8.9
    
    
    $
    10.1
    
    
    $
    5.0
    
    
    $
    5.4
    
    
    $
    0.6
    
    
    $
    0.4Interest cost
    
    
    38.1
    
    
    
    40.2
    
    
    
    6.5
    
    
    
    6.5
    
    
    
    1.0
    
    
    
    0.7Expected rate of return on plan assets
    
    
    (40.9
    )
    
    
    (42.0
    )
    
    
    (10.1
    )
    
    
    (9.7
    )
    
    
    (0.9
    )
    
    
    (0.5
    )Amortization of transition obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    2.4
    
    
    
    2.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of actuarial (gain) loss
    
    
    12.7
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Periodic benefit cost (income)
    
    
    21.2
    
    
    
    21.0
    
    
    
    1.4
    
    
    
    2.2
    
    
    
    0.7
    
    
    
    0.7Settlements and curtailments (gain) loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special termination benefit charge
(credit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net benefit cost (income)
    
    $
    21.2
    
    
    $
    21.0
    
    
    $
    1.4
    
    
    $
    2.2
    
    
    $
    0.7
    
    
    $
    0.7
 Other Non-U.S.U.S. Plans
    
    U.K. Plans
    
    PlansSix Months Ended
    
    Six Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003(In millions)Service cost
    
    $
    19.3
    
    
    $
    18.4
    
    
    $
    10.0
    
    
    $
    11.0
    
    
    $
    1.2
    
    
    $
    0.8Interest cost
    
    
    74.0
    
    
    
    73.4
    
    
    
    12.6
    
    
    
    13.1
    
    
    
    1.9
    
    
    
    1.4Expected rate of return on plan assets
    
    
    (81.3
    )
    
    
    (75.4
    )
    
    
    (19.1
    )
    
    
    (19.6
    )
    
    
    (1.7
    )
    
    
    (1.0
    )Amortization of transition obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    4.8
    
    
    
    5.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of actuarial (gain) loss
    
    
    21.7
    
    
    
    18.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Periodic benefit cost (income)
    
    
    38.5
    
    
    
    39.5
    
    
    
    3.5
    
    
    
    4.5
    
    
    
    1.4
    
    
    
    1.3Settlements and curtailments (gain) loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special termination benefit charge
(credit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net benefit cost (income)
    
    $
    38.5
    
    
    $
    39.5
    
    
    $
    3.5
    
    
    $
    4.5
    
    
    $
    1.4
    
    
    $
    1.3
 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 Six
    
    Three and Six
    
    Three and SixMonths Ended
    
    Months Ended
    
    Months EndedJune 30,
    
    June 30,
    
    June 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
    %
 The Company has not changed its expectations for pension contributions to its
Trust funds since the issuance of the 2003 financial statements. The Company
continues to expect to make voluntary contributions totaling $35 to $50 million
to its U.S. qualified defined benefit pension plans in 2004. During the six
months ended June 30, 2004, the Company contributed $35 million to the U.S.
Trust fund of which $25 million was contributed during the second quarter. The
Company continues to expect that contributions to non-U.S. defined benefit
plans will total less than $5 million in 2004. In addition to contributions to Trust funds, the Company also makes lump sum
and annuity pension benefit payments directly to participants as part of its
U.S. non-qualified plans and certain foreign plans. These payments are
classified as contributions for reporting purposes and are estimated to be
approximately $10 million in 2004. 23




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##### 



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 June 30, 2004, approximately $74 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. Postretirement Benefits Other Than Pensions The following table sets forth the components of net periodic benefit costs
(income) for the three and six months ended June 30, 2004 and 2003,
respectively. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In millions)Service cost
    
    $
    0.3
    
    
    $
    0.3
    
    
    $
    0.7
    
    
    $
    0.6Interest cost
    
    
    5.7
    
    
    
    7.5
    
    
    
    12.5
    
    
    
    14.1Expected return on plan assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Amortization of actuarial (gain) loss
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.9
    
    
    
    1.2Periodic benefit cost (income)
    
    
    6.1
    
    
    
    8.4
    
    
    
    14.1
    
    
    
    15.8Settlements and curtailments (gain) loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special termination benefit charge (credit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net benefit cost (income)
    
    $
    6.1
    
    
    $
    8.4
    
    
    $
    14.1
    
    
    $
    15.8
 The following table provides the weighted average assumptions used to determine
the net periodic benefit costs. Three and Six MonthsEnded June 30,2004
    
    2003Discount rate
    
    
    6.25
    %
    
    
    6.875
    %Healthcare trend rate
    
    10% in 2004
    
    
    10% in 2003to 5% in 2008
    
    
    to 5% in 2007
 The Company pays retiree health care and life insurance benefits as they are
incurred. These payments are classified as contributions for reporting purposes
and are estimated to be approximately $40 million in 2004. 24




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##### 



Medicare Prescription Drug, Improvement and Modernization Act of 2003 The U.S. Medicare Prescription Drug Improvement and Modernization Act of 2003
(the 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 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 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 $2.5 million ($1.7 million after tax) for the three and six
months ended June 30, 2004, respectively. The following table provides the effect of the Act on the net periodic benefit
costs. Three Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2004(In millions)Service cost
    
    $
    
    
    
    $
    (0.1
    )Interest cost
    
    
    (0.5
    )
    
    
    (1.0
    )Amortization of actuarial (gain)
loss
    
    
    (0.7
    )
    
    
    (1.4
    )Net benefit cost (income)
    
    $
    (1.2
    )
    
    $
    (2.5
    )
 Note S: Income Tax Rate The effective income tax rate from continuing operations was 31.0 percent
during the three months and six months ended June 30, 2004 and 33.0 percent
during the three months and six months ended June 30, 2003. The lower rate in
the three months and six months ended June 30, 2004 as compared to the three
months and six months ended June 30, 2003 was due to an expected increase in
export activity and higher research tax credits. 25




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##### 



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 on
a global basis with manufacturing, service and sales undertaken in various
locations throughout the world. Our products and services are principally sold
to customers in North America, Europe and Asia. For the second quarter 2004, we reported net income of $39 million, or $0.32
per diluted share. Sales for the second quarter 2004 were $1,134 million. For
the second quarter 2003, we reported net income of $14 million, or $0.12 per
diluted share. Sales for the second quarter 2003 were $1,095 million. Foreign
currency translation was responsible for approximately $14 million of the $39
million increase in sales. The remaining increase resulted primarily from
increased sales of military and space products, large commercial aircraft
original equipment products and large commercial aircraft aftermarket products
and services. Net income for both quarters included certain charges as
described in the Results of Operations and Business Segment Performance
sections. In addition, in the first quarter 2004, we changed certain aspects of
our contract accounting policy and adopted expensing of stock-based
compensation. Income from continuing operations for the second quarter 2004 increased $24
million over the same period in 2003. The increase was primarily due to reduced
charges for facility closure and headcount reduction actions, reduced asset
impairment expenses, improved operating income from higher sales volume for
commercial aftermarket and military and space products partially offset by
decreased commercial aircraft original equipment products. In the second
quarter 2004, we experienced reduced earnings relating to foreign currency
translation of net non-U.S. dollar exposure of approximately $4 million
after tax, or $0.04 per diluted share, compared to the same period in 2003.
After tax costs for certain medical expenses, liability insurance premiums,
litigation costs and performance-based management incentive compensation
expenses were $3 million, or $0.03 per diluted share, higher in the second
quarter 2004, compared to the same period in 2003. During the second quarter
2004, stock-based compensation expense reduced diluted earnings per share by
$0.01. In the second quarter 2004, we implemented FASB Staff Position No. FAS
106-2 Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, which resulted
in an increase in after tax income of $1 million, or $0.01 per diluted share.
We also provided for income taxes using an effective rate of 31 percent, a
decrease of 2 percentage points from the 33 percent rate in the same quarter
last year. For the first half 2004,we reported net income of $86 million, or $0.71 per
diluted share. Sales for the first half of 2004 were $2,296 million. For the
first half 2003, we reported net income of $44 million, or $0.37 per diluted
share. Sales for the first half 2003 were $2,189 million. Foreign currency
translation was responsible for approximately $41 million of the $107 million
increase in sales. The remaining increase resulted primarily from increased
sales of military and space products, commercial 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. 26




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##### 



Income from continuing operations increased $88 million over the first half
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 $88 million, after tax, during the first half of 2003, were
reduced to $8 million, after tax, during the first half 2004. In the first half
2004, we experienced reduced earnings relating to foreign currency translation
of net non-U.S. dollar exposure of approximately $10 million after tax, or
$0.09 per diluted share, compared to the first half 2003. Also in the first
half 2004, we experienced reduced earnings totaling approximately $8 million
after tax, or $0.07 per diluted share, compared to the first half 2003,
relating to certain medical expenses, liability insurance premiums, litigation
costs and performance-based management incentive compensation expenses. During
first half 2004, we began expensing stock-based compensation, which reduced our
diluted earnings per share by $0.04, and we adjusted our effective tax rate to
31 percent, a decrease of 2 percentage points from the 33 percent rate in the
same period last year. We recorded income from discontinued operations of $62 million during the first
half 2003, associated with the gain on the sale of our Avionics business. No
income from discontinued operations was recorded during the first half 2004. Net cash from operating activities was $130 million in the first half 2004 and
$211 million in the first half 2003. Net cash from operating activities
included tax refunds of $55 million in the first half 2003. There were no
significant tax refunds during the first half 2004. Worldwide pension
contributions increased from $36 million in the first half 2003 to $41 million
in the first half 2004. Net cash from operating activities in the first half
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 $101 million in the first half 2004 primarily
due to the repayment of the 8.30% Cumulative Quarterly Preferred Securities,
Series A (QUIPS Debentures) and $421 million in the first half 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 June 30, 2004 was $2,133
million compared to $2,212 million at December 31, 2003. At June 30, 2004, we
had cash and marketable securities of $356 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. 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 June 30, 2004, there were no borrowings and $25.8 million in
letters of credit outstanding under this facility. At June 30, 2004, we had
borrowing capacity under this facility of $373.1 million, after reductions for
letters of credit outstanding. At June 30, 2004, we maintained $50 million of
uncommitted domestic money market facilities and $25.9 million of uncommitted
foreign working capital facilities with various banks to meet short-term
borrowing requirements. At June 30, 2004, there were $3.1 million of bank
guarantees outstanding under the uncommitted 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. Our outlook for operating income and earnings per share (EPS) is based upon
many external and internal factors that may have a material impact on operating
income and EPS. See Outlook for a list of certain of these factors. We expect
our 2004 sales to be in the $4.70 billion to $4.75 billion range. We expect
2004 fully diluted EPS to be in the range of $1.30 to $1.40. We expect cash
flow from operations, minus capital expenditures, to approximate net income in
2004. We expect capital expenditures in 2004 to be 20 to 30 percent higher than
the 2003 capital expenditures of $125 million. Our business balance across the aerospace and defense markets continues to be
an important strategic aspect of our business. The three major market areas for
our products and services each represents around one-third of total sales, and
we believe that trends in these markets will have an important impact on future
sales. Looking at our first half 2004 sales by market channel, military and
space sales represented 29 percent of sales, total commercial aircraft original
equipment sales, including regional, business and general aviation original
equipment sales, represented 30 percent of our sales and total commercial
aircraft aftermarket sales for these same aircraft and for aircraft heavy
maintenance represented 35 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 between 45 to 50 percent of total sales. 27




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##### 



In 2004, we remain focused on improving our operational and financial
performance and on specific enterprise-wide goals, including margin improvement
and strong cash flow. We continue to invest in new products and systems that
are expected to fuel our future growth. OUTLOOK Our 2004 outlook for sales and fully diluted EPS has been revised upward, based
on improving 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 deliveries are expected to
increase in 2005. We expect to begin our deliveries in late 2004 to
support these increases, which should positively impact our sales during
the second half of 2004. Total sales to the large commercial aircraft
manufacturers are expected to be slightly higher in 2004 than they were
in 2003.
    
    We expect capacity growth in the global airline system, as measured
by available seat miles (ASMs), to continue to be strong, although the
capacity increase experienced during the second quarter should moderate
during the third and fourth quarters of 2004. 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, as a
result of these increases in capacity.
    
    Regional and business new aircraft production is expected to increase
by about 8 to 10 percent when compared to 2003.
    
    Military sales (OE and aftermarket) should increase slightly greater
than global military budgets, in the 10 to 12 percent range, when
compared to 2003. Based on current expectations for these key market trends, 2004 sales are
expected to be in the $4.70 to $4.75 billion range. 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 those
measures. These factors include, but are not limited to:  
    
    Foreign exchange  We are currently hedged on approximately 93
percent of our estimated foreign exchange exposure for the balance of
2004. We now expect our unfavorable earnings impact from foreign
currency translation of net non-U.S. dollar exposure for 2004 to be
approximately $15 million pre-tax, compared to 2003, assuming
continuation of current exchange rates. All of this impact occurred
during the first half of 2004.
    
    Pension expense  Based on actuarial adjustments for 2004, we now
expect 2004 pension costs to decline by about $2 million, when compared
to 2003. Previously, pre-tax pension expense was expected to decline by
about $7 million for the full year 2004 compared to 2003.
    
    Certain expenses included in Corporate G&A, Other Income (Expense)
and segment operating results  We previously indicated that these costs
were expected to increase, on a pre-tax basis, by about $30 million.
This increase is now expected to be approximately $20 to $25 million.
The improvement is primarily the result of decreased expectations for
retiree medical cost increases and the second quarter 2004
implementation of FASB Staff Position No. FAS 106-2 Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, the implementation of which
is expected to result in a reduction in pre-tax medical expenses for the
full year 2004 of approximately $5 million, spread evenly across all
four quarters. As required by the FASB Staff Position, the impact
reflected in the second quarter does not include the retroactive impact
on the first quarter reported results, which is included in the
year-to-date results. On a year-to-date basis, the impact of
implementation of the FASB Staff Position was $2 million, pre-tax.
    
    7E7 and A380 research and development expense  Combined research and
development expense on these two programs is expected to be relatively
flat, depending upon the level and timing of 7E7 program awards, in 2004
compared to 2003 as the reductions in research and development expense
on the Airbus A380 program are expected to be largely offset by
increased research and development expense on the Boeing 7E7 program.   28




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Taking into account the increase in sales discussed earlier, coupled with the items noted above, we now expect 2004 fully diluted
EPS to be in the range of $1.30 to $1.40. EPS from continuing operations,
including the new methodology of accounting for contracts at our aerostructures
business and stock-based compensation expensing, but excluding the one-time
gain from the cumulative effect of change in accounting, is expected to be
between $1.17 to $1.27. We continue to expect cash flow from operations, minus capital expenditures, to
approximate net income in 2004. We expect capital expenditures in 2004 to be 20
to 30 percent higher than the 2003 capital expenditures of $125 million. We
expect to continue to pursue opportunities to reduce our long-term
indebtedness. The current earnings and cash flow from operations outlook does not include any
impact of potential curtailment of production for the Boeing 717 program,
premiums associated with potential early retirement of debt, resolution of the
previously disclosed Rohr and Coltec tax litigation or potential contractual
disputes with Northrop Grumman related to the purchase of Aeronautical Systems
from TRW. RESULTS OF OPERATIONS Changes in Accounting Methods Effective January 1, 2004, we changed two aspects of the application of
contract accounting 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 pre-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 second quarter 2003 would have been $2.1 million lower and the total
operating income for the second quarter 2003 would have been $2.1 million lower
and segment operating loss for the six months ended June 30, 2003 would have
been $5.7 million higher and the total operating income for the six months
ended June 30, 2003 would have been $5.7 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
pre-tax income by $2.3 million for the second quarter 2004 and $6.6 million for
the six months ended June 30, 2004. The U.S. Medicare Prescription Drug Improvement and Modernization Act of 2003
(the 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 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 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 $1.3 million ($0.9 million after tax) and
$2.5 million ($1.7 million after tax) for the second quarter 2004 and the six
months ended June 30, 2004, respectively.  29




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Quarter Ended June 30, 2004 Compared with the Quarter Ended June 30, 2003 Quarter EndedJune 30,2004
    
    2003(Dollars in millions)Sales
    
    $
    1,134.0
    
    
    $
    1,094.5Segment Operating Income
    
    $
    126.5
    
    
    $
    80.7Corporate General and Administrative Costs
    
    
    (23.4
    )
    
    
    (14.6
    )Total Operating Income
    
    
    103.1
    
    
    
    66.1Net Interest Expense
    
    
    (35.2
    )
    
    
    (37.7
    )Other Income (Expense)  net
    
    
    (11.7
    )
    
    
    (2.5
    )Income Tax Expense
    
    
    (17.4
    )
    
    
    (8.6
    )Distribution on Trust Preferred Securities
    
    
    
    
    
    
    (2.6
    )Income from Continuing Operations
    
    
    38.8
    
    
    
    14.7Income (Loss) from Discontinued Operations
    
    
    
    
    
    
    (0.3
    )Cumulative Effect of an Accounting Change
    

    
    
    
    
    
    Net Income
    
    $
    38.8
    
    
    $
    14.4
 Changes in sales and segment operating income are discussed within the
Business Segment Performance section below. Corporate general and administrative costs of $23.4 million for the second
quarter 2004 increased $8.8 million, or 60.3 percent, from $14.6 million for
the second quarter 2003 primarily due to higher incentive compensation costs
including expensing of stock-based compensation and higher tax litigation
expenses. Corporate general and administrative costs as a percentage of sales
were 2.1 percent in the second quarter 2004 and 1.3 percent in the second
quarter 2003. Net interest expense decreased $2.5 million, or 6.6 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 $9.2 million, or 368.0 percent, to
expense of $11.7 million in the second quarter 2004 from expense of $2.5
million in the second quarter 2003. The increase in expense resulted primarily
from $2.4 million of higher life insurance costs, $2.4 million of lower
earnings of affiliated companies, $3.0 million of unfavorable foreign currency
exchange and $1.2 million of higher minority interest expense. Our effective tax rate from continuing operations was 31.0 percent during the
second quarter 2004 and 33.0 percent during the second quarter 2003. The lower
rate in the second quarter 2004 as compared to the second quarter 2003 was due
to an expected increase in export activity and higher research tax credits. Income (loss) from discontinued operations, after tax, was a loss of $0.3
million during the second quarter 2003 primarily representing an adjustment to
the gain on the sale of the Avionics business that was sold in the first
quarter 2003. 30




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Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003 Six Months EndedJune 30,2004
    
    2003(Dollars in millions)Sales
    
    $
    2,296.1
    
    
    $
    2,188.7Segment Operating Income
    
    $
    244.9
    
    
    $
    99.5Corporate General and Administrative Costs
    
    
    (42.9
    )
    
    
    (30.5
    )Total Operating Income
    
    
    202.0
    
    
    
    69.0Net Interest Expense
    
    
    (71.8
    )
    
    
    (73.1
    )Other Income (Expense)  net
    
    
    (29.7
    )
    
    
    (15.1
    )Income Tax (Expense) Benefit
    
    
    (31.1
    )
    
    
    6.3Distribution on Trust Preferred Securities
    
    
    
    
    
    
    (5.2
    )Income (Loss) from Continuing Operations
    
    
    69.4
    
    
    
    (18.1
    )Income from Discontinued Operations
    
    
    
    
    
    
    62.4Cumulative Effect of an Accounting Change
    
    
    16.2
    
    
    
    (0.5
    )Net Income
    
    $
    85.6
    
    
    $
    43.8
 Changes in sales and segment operating income are discussed within the
Business Segment Performance section below. Corporate general and administrative costs of $42.9 million for the six months
ended June 30, 2004 increased $12.4 million, or 40.7 percent, from $30.5
million for the six months ended June 30, 2003 primarily due to higher
incentive compensation costs including expensing of stock-based compensation
and higher tax litigation expenses. Corporate general and administrative costs
as a percentage of sales were 1.9 percent in the six months ended June 30, 2004
and 1.4 percent in the six months ended June 30, 2003. Net interest expense decreased $1.3 million, or 1.8 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. Other income (expense)  net increased by $14.6 million, or 96.7 percent, to
expense of $29.7 million in the six months ended June 30, 2004 from expense of
$15.1 million in the six months ended June 30, 2003. The increase in expense
resulted from a $7.0 million impairment of a note receivable we received in
connection with the sale of a business, the absence in the six months ended
June 30, 2004 of the $6.9 million gain on the sale of the Noveon PIK Notes,
which was recognized in the first quarter 2003, $5.3 million in costs
associated with businesses previously sold, including settlement of a lawsuit
and higher life insurance, $2.7 million of lower income from affiliated
companies and $1.7 million of higher minority interest expense. Included in
the first quarter 2003 was the write-off of our equity investment in Cordiem
LLC of $11.7 million. Our effective tax rate from continuing operations was 31.0 percent during the
six months ended June 30, 2004 and 33.0 percent during the six months ended
June 30, 2003. The lower rate in the six months ended June 30, 2004 as compared
to the six months ended June 30, 2003 was due to an expected increase in export
activity and higher research tax credits. Income (loss) from discontinued operations, after tax, was $62.4 million during
the six months ended June 30, 2003 primarily representing the $63.0 million
gain on the sale of the Avionics business. Income (loss) from discontinued
operations for the Avionics and PRS operating results was a loss of $0.6
million in the six months ended June 30, 2003. Our PRS business ceased
operations in the first quarter of 2003. 31




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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 pre-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 six months ended June
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. In the following tables, segment operating income is total segment revenue
reduced by operating expenses directly identifiable with that business segment. Quarter Ended June 30, 2004 Compared with the Quarter Ended June 30, 2003 Quarter Ended June 30,%
    
    % of Sales2004
    
    2003
    
    Change
    
    2004
    
    2003(Dollars in millions)NET CUSTOMER SALESAirframe Systems
    
    $
    403.8
    
    
    $
    395.4
    
    
    
    2.1Engine Systems
    
    
    449.2
    
    
    
    423.8
    
    
    
    6.0Electronic Systems
    
    
    281.0
    
    
    
    275.3
    
    
    
    2.1Total Sales
    
    $
    1,134.0
    
    
    $
    1,094.5
    
    
    
    3.6SEGMENT OPERATING
INCOMEAirframe Systems
    
    $
    25.3
    
    
    $
    22.9
    
    
    
    10.5
    
    
    
    6.3
    
    
    
    5.8Engine Systems
    
    
    69.4
    
    
    
    25.8
    
    
    
    169.0
    
    
    
    15.4
    
    
    
    6.1Electronic Systems
    
    
    31.8
    
    
    
    32.0
    
    
    
    (0.6
    )
    
    
    11.3
    
    
    
    11.6Segment Operating
Income
    
    $
    126.5
    
    
    $
    80.7
    
    
    
    56.8
    
    
    
    11.2
    
    
    
    7.4
 32




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##### 



Airframe Systems:Airframe Systems segment sales of $403.8 million in the
second quarter 2004 increased $8.4 million, or 2.1 percent, from $395.4 million
in the second 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 of aircraft wheels and brakes; and  
    
    Higher sales of engineered polymer products and increases in airframe heavy maintenance activity. Partially offsetting these higher sales were decreases in actuation systems and
landing gear sales volumes. Airframe Systems segment operating income increased $2.4 million, or 10.5
percent, from $22.9 million in the second quarter 2003 to $25.3 million in the
second quarter 2004. The increase in operating income for the second quarter
2004 as compared to the second quarter 2003 was primarily due to the following:  
    
    Increased sales as noted above for aircraft wheels and brakes,
engineered polymer products and airframe heavy maintenance;  
    
    Lower operating costs; and  
    
    Lower asset impairment, facility closure and headcount reduction
charges. There were asset impairment, facility closure and headcount
reduction charges of approximately $2.7 million recorded in the second
quarter 2003 and $0.1 million in the second quarter 2004. This was partially offset by:  
    
    Lower sales volume in our actuation systems and landing gear businesses;  
    
    The impact of foreign currency translation of the segments net non-U.S. dollar exposure; and  
    
    Higher new program research and development expenditures. Engine Systems:Engine Systems segment sales in the second quarter 2004 of
$449.2 million increased $25.4 million, or 6.0 percent, from $423.8 million in
the second quarter 2003. The increase was due to the following:  
    
    Higher aerostructures aftermarket sales;  
    
    Favorable currency translation on non-U.S. dollar sales, primarily in the engine controls business;  
    
    Higher sales of turbine fuel engine components to the U.S. military;  
    
    Increased sales of cargo systems in the commercial aftermarket and for passenger to freighter conversions; and  
    
    Increased aircraft maintenance, repair and overhaul services sales. This was partially offset by:  
    
    Lower commercial OE sales to Boeing and Airbus at our aerostructures business;  
    
    Lower turbomachinery repair sales and unfavorable pricing; and  
    
    Lower engine controls commercial original equipment sales and lower
demand for initial spares for new aircraft deliveries in 2004. 33




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##### 



Engine Systems segment operating income increased $43.6 million, or 169.0
percent, from $25.8 million in the second quarter 2003 to $69.4 million in the
second quarter 2004. Segment operating income was higher due to:  
    
    There were asset impairment, facility closure and headcount reduction
charges of approximately $23 million recorded in the second quarter 2003
and $1 million in the second quarter 2004;  
    
    Higher sales volume and favorable mix as described above; and  
    
    Lower operating costs, primarily at our aerostructures business, due
to the implementation of cost controls over various supply chain
elements in key programs. The increase in Engine Systems segment operating income was partially offset
by:  
    
    The effect of the change in contract accounting at our Aerostructures business;  
    
    Unfavorable foreign currency translation of the segments net non-U.S. dollar exposure; and  
    
    Higher new program research and development expenditures. Electronic Systems:Electronic Systems segment sales of $281.0 million in the
second quarter 2004 increased $5.7 million, or 2.1 percent, from $275.3 million
in the second quarter 2003. The increase was primarily due to:  
    
    Higher sales volume of regional and business jet aircraft original
equipment and aftermarket products for the aircraft interior products,
de-icing and specialty systems, sensors and power systems businesses;
and  
    
    Higher original equipment sales in our power transmission and power systems businesses. Partially offsetting the increase in sales were:  
    
    Decreases in sales in the commercial original equipment market for Boeing programs;  
    
    Reduced sales to the military and space market for our sensors and
optical and space systems business due to a program completion;  
    
    Lower spares and repairs requirements; and  
    
    The winding down of a program as it nears completion at our
optical and space systems business. Electronic Systems segment operating income decreased $0.2 million, or 0.6
percent, from $32.0 million in the second quarter 2003 to $31.8 million in the
second quarter 2004. Segment operating income was unfavorably affected by the
following:  
    
    The unfavorable mix from military and space original equipment and aftermarket and commercial aftermarket sales;  
    
    Increased investments in research and development costs and bid and proposal costs in an effort to win new programs;  
    
    Operational inefficiencies in our propulsion products business; and  
    
    Lower profits from the effects of a two-week labor strike in our de-icing business. Partially offsetting the decrease in segment operating profit was the profit
from the increase in sales as noted above and lower asset impairment facility
closure and headcount reduction charges. 34




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##### 



Six Months Ended June 30, 2004 Compared with the Six Months Ended June 30, 2003 Six Months Ended June 30,%
    
    % of Sales2004
    
    2003
    
    Change
    
    2004
    
    2003(Dollars in millions)NET CUSTOMER SALESAirframe Systems
    
    $
    806.4
    
    
    $
    797.5
    
    
    
    1.1Engine Systems
    
    
    947.7
    
    
    
    847.4
    
    
    
    11.8Electronic Systems
    
    
    542.0
    
    
    
    543.8
    
    
    
    (0.3
    )Total Sales
    
    $
    2,296.1
    
    
    $
    2,188.7
    
    
    
    4.9SEGMENT OPERATING
INCOME (LOSS)Airframe Systems
    
    $
    46.4
    
    
    $
    44.7
    
    
    
    3.8
    
    
    
    5.8
    
    
    
    5.6Engine Systems
    
    
    143.8
    
    
    
    (9.4
    )
    
    
    1,629.8
    
    
    
    15.2
    
    
    
    (1.1
    )Electronic Systems
    
    
    54.7
    
    
    
    64.2
    
    
    
    (14.8
    )
    
    
    10.1
    
    
    
    11.8Segment Operating
Income
    
    $
    244.9
    
    
    $
    99.5
    
    
    
    146.1
    
    
    
    10.7
    
    
    
    4.5
 Airframe Systems:Airframe Systems segment sales of $806.4 million in the six
months ended June 30, 2004 increased $8.9 million, or 1.1 percent, from $797.5
million in the six months ended June 30, 2003. The increase was due to:  
    
    Favorable currency translation on non-U.S. dollar sales, primarily in the actuation systems business;  
    
    Higher demand for large commercial aircraft wheels and brakes; and  
    
    Higher sales 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 $1.7 million, or 3.8
percent, from $44.7 million in the six months ended June 30, 2003 to $46.4
million in the six months ended June 30, 2004. The increase in operating income
for the six months ended June 30, 2004 as compared to the six months ended June
30, 2003 was primarily due to the following:  
    
    Lower asset impairment, facility closure and headcount reduction
charges. Asset impairment, facility closure and headcount reduction
charges were $12.6 million for the six months ended June 30, 2003 and
$0.1 million for the six months ended June 30, 2004. Partially offsetting the increase in segment operating income were the
following:  
    
    Unfavorable foreign exchange translation of net non-U.S. dollar exposure;  
    
    Higher new program research and development expenditures; and  
    
    Decreased sales volume for military aircraft wheels and brakes, actuation systems and landing gear. Engine Systems:Engine Systems segment sales in the six months ended June 30,
2004 of $947.7 million increased $100.3 million, or 11.8 percent, from $847.4
million in the six months ended June 30, 2003. The increase was due to the
following:  
    
    Higher aerostructures original equipment and aftermarket sales;  
    
    Favorable currency translation on non-U.S. dollar sales, primarily in the engine controls business;  
    
    Increased sales of U.S. military original equipment and aftermarket engine controls; 35




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##### 




    
    Higher sales of turbine fuel engine components for U.S. military and
regional aircraft applications and to the power generation market; and  
    
    Increased aircraft maintenance, repair and overhaul services sales. This was partially offset by the following:  
    
    Lower aftermarket turbomachinery repair sales; and  
    
    Lower commercial sales to Boeing at our aerostructures business. Engine
Systems segment operating income increased $153.2 million, or
1,629.8 percent, from a loss of $9.4 million in the six months ended June 30, 2003 to
income of $143.8 million in the six months ended June 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 six months ended June 30,
2004. The write-down of the Super 27 re-engining program is described in
detail in Contingencies  Super 27 Program;  
    
    Higher volume as described above;  
    
    Lower costs, primarily in our aerostructures business from the
implementation of cost controls over various supply chain elements in
key programs;  
    
    Lower development costs in our cargo business; and  
    
    Lower costs in our turbomachinery and engine controls businesses resulting from restructuring activities. The increase in Engine Systems segment operating income was partially offset by
the effect of the change in contract accounting at our aerostructures
business and unfavorable foreign exchange translation of net non-U.S.
dollar exposure. Electronic Systems:Electronic Systems segment sales of $542.0 million in the
six months ended June 30, 2004 decreased $1.8 million, or 0.3 percent, from
$543.8 million in the six months ended June 30, 2003. The decrease was
primarily due to:  
    
    Lower volume for the space electronics programs in the optical and space business;  
    
    Lower volume for our propulsion products business; and  
    
    Lower volume in commercial aftermarket in our fuel and utility business. Partially offsetting the decrease in sales were increases in sales in our
regional and business jet market in most of our businesses. Electronic Systems segment operating income decreased $9.5 million, or 14.8
percent, from $64.2 million in the six months ended June 30, 2003 to $54.7
million in the six months ended June 30, 2004. Segment operating income was
unfavorably affected by:  
    
    The decline in sales as listed above;  
    
    Weaker product mix in the commercial aftermarket;  
    
    Unfavorable costs from operating inefficiencies in our propulsion product line;  
    
    Increased investments in research and development costs and bid and proposal costs in an effort to win new programs; and  
    
    Lower profits from the effect of a two-week labor strike in our de-icing business. 36




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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 June 30, 2004, we had cash and marketable securities of $356.4 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 June 30, 2004, there were no borrowings and $25.8 million in
letters of credit outstanding under this facility. At December 31, 2003, there
were no borrowings and $17.1 million in letters of credit outstanding under
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 June 30, 2004, we had borrowing
capacity under this facility of $373.1 million, after reductions for letters of
credit outstanding. At June 30, 2004, we maintained $50 million of uncommitted domestic money
market facilities and $25.9 million of uncommitted foreign working capital
facilities with various banks to meet short-term borrowing requirements. As of
June 30, 2004 and December 31, 2003, there were no borrowings under these
facilities. However, as of June 30, 2004 there were $3.1 million of bank
guarantees outstanding under the uncommitted foreign working capital
facilities, thus reducing availability by that amount. These uncommitted credit
facilities are provided by a small number of commercial banks that also provide
us with committed credit through the syndicated revolving credit facility and
with various cash management, trust and other services. Our credit facilities do not contain any credit rating downgrade triggers that
would accelerate the maturity of our indebtedness. However, a ratings downgrade
would result in an increase in the interest rate and fees payable under our
committed syndicated revolving credit facility. Such a downgrade also could
adversely affect our ability to renew existing or obtain access to new credit
facilities in the future and could increase the cost of such new facilities. QUIPS On March 2, 2004, we completed the redemption of all of the $63.5 million in
outstanding 8.30% Cumulative Quarterly Income Preferred Securities, Series A
(QUIPS) issued by BFGoodrich Capital, a Delaware business trust, 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 June 30, 2004, we had long-term debt and capital lease obligations of
$2,069.9 million with maturities ranging from 2005 to 2046. Current maturities
of long-term debt and capital lease obligations at June 30, 2004 were $63.4
million, including $60 million of industrial revenue bonds that were redeemed
on August 1, 2004. In May 2004, we redeemed $5.9 million of industrial revenue
bonds. 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. We expect to continue to pursue opportunities to reduce our long-term
indebtedness. 37




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##### 



Off-Balance Sheet Arrangements We utilize several forms of off-balance sheet financing arrangements. At June
30, 2004, these arrangements included: UndiscountedMinimumFuture Lease
    
    ReceivablesPayments
    
    Sold(In millions)Tax Advantaged Operating Leases
    
    $
    48.3Standard Operating Leases
    
    
    154.8$
    203.1Short-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 June 30, 2004. At June 30, 2004,
$48.3 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 $154.8
million at June 30, 2004. Sale of Receivables At June 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 June 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 and Canadian Dollars, but have significant
sales contracts that are denominated in U.S. Dollars. Periodically, we enter
into forward contracts to exchange U.S. Dollars for Euros, Great Britain Pounds
Sterling and Canadian Dollars. The forward contracts described above are used to mitigate the potential
volatility 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 June 30, 2004 was $712.5 million. The fair value of the forward
contracts at June 30, 2004 was an asset of $87.9 million, of which $52.2
million is recorded in Prepaid Expenses and Other Assets and $35.7 million is
recorded in Other Assets. The total gain of $88.4 million (before deferred taxes of $30.8 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 June 30, 2004, the portion of the $88.4 million gain that would be
reclassified into earnings to offset the effect of the hedged item as an
increase in sales in the next 12 months is a gain of $52.7 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 June 30, 2004,
Accumulated Other Comprehensive Income included a gain of $0.5 million related
to these terminated forward contracts that will be reflected in income and
sales when the original forward contracts would have matured. 38




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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 a liability (loss) of $2.7
million at June 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 June 30, 2004, we had forward contracts with a notional value of
$46.9 million to buy Great Britain Pounds Sterling, contracts with a notional
value of $56.9 million to buy Euros and contracts with a notional value of $5.8
million to sell Canadian Dollars. 39




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##### 



Contractual Obligations and Other Commercial Commitments The following charts reflect our contractual obligations and commercial
commitments as of June 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
    
    ThereafterPayments Due by
PeriodContractual
ObligationsShort-Term and
Long-Term Debt
    
    $
    2,133.2
    
    
    $
    63.5
    
    
    $
    3.1
    
    
    $
    698.4
    
    
    $
    1,368.2Capital Lease
Obligations
    
    
    2.1
    
    
    
    0.8
    
    
    
    0.9
    
    
    
    0.1
    
    
    
    0.3Operating Leases
    
    
    203.1
    
    
    
    29.3
    
    
    
    62.1
    
    
    
    37.7
    
    
    
    74.0Unconditional
Purchase
Obligations(1)
    
    
    33.6
    
    
    
    1.9
    
    
    
    18.7
    
    
    
    13.0
    
    
    
    Other Long-Term
Obligations
    
    
    3.3
    
    
    
    1.1
    
    
    
    2.1
    
    
    
    0.1
    
    
    
    Total
    
    $
    2,375.3
    
    
    $
    96.6
    
    
    $
    86.9
    
    
    $
    749.3
    
    
    $
    1,442.5Amount of
Commitments that
Expire per PeriodOther Commercial
CommitmentsLines of Credit(2)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby Letters
of Credit & Bank
Guarantees
    
    
    59.5
    
    
    
    36.7
    
    
    
    22.5
    
    
    
    0.3
    
    
    
    Guarantees(3)
    
    
    160.3
    
    
    
    0.7
    
    
    
    12.4
    
    
    
    2.2
    
    
    
    145.0Standby
Repurchase
Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Commercial
Commitments
    
    
    77.8
    
    
    
    26.2
    
    
    
    36.4
    
    
    
    14.5
    
    
    
    0.7Total
    
    $
    297.6
    
    
    $
    63.6
    
    
    $
    71.3
    
    
    $
    17.0
    
    
    $
    145.7
  (1)
    
    At December 31, 2003, we should have reported $78.7 million of
unconditional purchase obligations. We incorrectly reported $155.3 million
due to an overstatement of $77.6 million at December 31, 2003.(2)
    
    As of June 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) $50 million of uncommitted domestic money
market facilities, and (c) $25.9 million of uncommitted foreign working
capital facilities. As of June 30, 2004, we had borrowing capacity under
our committed syndicated revolving credit facility of $373.1 million,
after reductions for outstanding letters of credit. Foreign uncommitted
working capital facilities were reduced by $3.1 million of bank guarantees
as of June 30, 2004.(3)
    
    At December 31, 2003, we should have reported $214.2 million of
guarantees. We incorrectly reported $252.6 million due to an overstatement
of $38.4 million at December 31, 2003. In addition,
approximately $45
million of other commercial commitments were reported as guarantees at
December 31, 2003. 40




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##### 



CASH FLOW The following table summarizes our cash flow activity for the six months ended
June 30, 2004 and June 30, 2003. Six Months Ended June 30,Net Cash Provided by (Used by):
    
    2004
    
    2003Operating activities of continuing operations
    
    $
    130.1
    
    
    $
    211.4Investing activities of continuing operations
    
    $
    (51.7
    )
    
    $
    139.6Financing activities of continuing operations
    
    $
    (100.9
    )
    
    $
    (420.8
    )Discontinued operations
    
    $
    
    
    
    $
    185.0
 Operating Activities of Continuing Operations Net cash provided by operating activities of continuing operations decreased
$81.3 million from $211.4 million during the six months ended June 30, 2003 to
$130.1 million during the six months ended June 30, 2004. Net cash provided by
operating activities of continuing operations in the six months ended June 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 six months ended June 30, 2003 included tax
refunds of $55 million. There were no significant tax refunds during the six
months ended June 30, 2004. Net cash provided by operating activities of
continuing operations was reduced by worldwide pension contributions of $41
million in the six months ended June 30, 2004 and $36 million in the six months
ended June 30, 2003. Net cash provided by operating activities of continuing
operations includes a $10 million prepayment of the receivable 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 six months ended June 30, 2004. Investing Activities of Continuing Operations Net cash provided by (used by) investing activities of continuing operations
was a use of cash of $51.7 million in the six months ended June 30, 2004 and an
inflow of cash of $139.6 million in the six months ended June 30, 2003. Net
cash used by investing activities of continuing operations for the six months
ended June 30, 2004 included capital expenditures of $51.4 million. Net cash
provided by investing activities of continuing operations in the six months
ended June 30, 2003 included proceeds from the sale of the Noveon PIK Notes of
$151.9 million offset in part by capital expenditures of $46.7 million. Financing Activities of Continuing Operations Net cash used by financing activities of continuing operations was $100.9
million in the six months ended June 30, 2004, compared to net cash used by
financing activities of continuing operations of $420.8 million for the six
months ended June 30, 2003. The balance of the QUIPS of $63.5 million was
repaid during the six months ended June 30, 2004. Short-term debt was repaid
during the six months ended June 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 $185.0 million in the six
months ended June 30, 2003 included $181.0 million of proceeds from the sale of
the Avionics business. 41




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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 with which we have been identified as a potentially responsible party are
likely to have a material adverse effect on our financial condition. There can
be no assurance, however, that additional future developments, administrative
actions or liabilities relating to environmental matters will not have a
material adverse effect on our results of operations or cash flows in a given
period. Environmental liabilities are recorded when our liability is probable and the
costs are reasonably estimable, which generally is not later than at completion
of a feasibility study or when we have recommended a remedy or have committed
to an appropriate plan of action. The liabilities are reviewed periodically
and, as investigation and remediation proceed, adjustments are made as
necessary. Liabilities for losses from environmental remediation obligations do
not consider the effects of inflation, and anticipated expenditures are not
discounted to their present value. The liabilities are not reduced by possible
recoveries from insurance carriers or other third parties, but do reflect
anticipated allocations among potentially responsible parties at federal
Superfund sites or similar state-managed sites and an assessment of the
likelihood that such parties will fulfill their obligations at such sites. Our unaudited condensed consolidated balance sheet included an accrued
liability for environmental remediation obligations of $92.6 million and $87.8
million at June 30, 2004 and December 31, 2003, respectively. At June 30, 2004,
$22.9 million of the $92.6 million accrual was included in current liabilities
as Accrued Expenses. Of the $92.6 million, $24.6 million was associated with
ongoing operations and $68.0 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 with 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. 42




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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 fibres in products, or which may have been present in our facilities.
A number of these cases involve maritime claims, which have been and are
expected to continue to be administratively dismissed by the court. These
actions primarily relate to previously owned businesses. We believe that
pending and reasonably anticipated future actions, net of anticipated insurance
recoveries, are not likely to have a material adverse effect on our financial
condition, results of operations or cash flows. We believe that we have substantial insurance coverage available to us related
to any remaining claims. However, 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. 43




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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. In addition to our guarantee of the TIDES, at June 30, 2004, we have an
outstanding contingent liability for guarantees of debt and lease payments of
$3.0 million, letters of credit and bank guarantees of $59.4 million, residual
value of leases of $54.7 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
June 30, 2004, we had recorded a receivable from Northrop Grumman for
approximately $39 million for such claims. During the quarter ended June 30,
2004, Northrop Grumman prepaid us $10 million of the receivable, subject to an
audit of our claims, and that amount was recorded in Accrued Expenses. Commercial Airline Customers The downturn in the commercial air transport market, the terrorist attacks on
September 11, 2001, the military conflict in Iraq and the outbreak of Severe
Acute Respiratory Syndrome (SARS) have adversely affected the financial
condition of many of our commercial airline customers. We perform ongoing
credit evaluations on the financial condition of all of our customers and
maintain reserves for uncollectible accounts receivable based upon expected
collectibility. Although we believe our reserves are adequate, we are not able
to predict the future financial stability of these customers. Any material
change in the financial status of any one or group of customers could have a
material adverse effect on our financial condition, results of operations or
cash flows. The extent to which extended payment terms are granted to customers
may negatively affect future cash flow. Super 27 Program Our Aerostructures business unit, included in the Engine Systems segment,
includes a business to re-engine 727 aircraft to meet sound attenuation
requirements and improve their fuel efficiency (Super 27 program). At December
31, 2002, we had an investment in the Super 27 program of $105.9 million
consisting of $44.7 of inventory and $61.2 million of notes receivable. The
inventory included three Super 27 aircraft, seven nacelle kits and other spare
parts. In March 2003, we repossessed four 727 aircraft from a receivable obligor who
was in financial difficulty and also received a revised cash flow forecast
indicating a significant decline in the financial strength of another
receivable obligor. In addition, the deterioration in the commercial airline
market resulting from the military conflict in Iraq and SARS made available
more aircraft that compete with or are newer than these aircraft. Because of
these events, we concluded that our ability to recover the recorded values of
our inventory and notes receivable was significantly affected. In the first
quarter 2003, based on an independent appraisal and our assessment of market
conditions, we wrote-down the carrying value of our inventory to equal the
estimated market value of $12.2 million. Also in the first quarter 2003, we
reserved $0.4 million of related trade receivables and $46.1 million of notes
receivable from a receivable obligor. As of June 30, 2004, our remaining notes receivable of $7.0 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 June 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. 44




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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 pretax loss on the contract of approximately $10 million to $20
million. The range of loss, if any, is dependent upon a number of factors,
including additional orders received or exercise of existing options from
Boeing, 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 IRS 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. To date, no decision has been
rendered. Coltec has agreed to pay us an amount equal to any refunds or
credits of taxes and interest received by it as a result of the litigation. If
the IRS prevails in this case, Coltec will not owe any additional interest or
taxes with respect to 1996. A reasonable estimation of a potential refund for
1996, if any, cannot be made at this time and, accordingly, no receivable has
been recorded. 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 potential tax liability for 1997
through 2000 has been 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 will go to trial in 2005 and that it will ultimately be successful in
these cases. However, if Rohr is not successful in these cases, we believe that
the net cost to Rohr at the time of the final determination by the court would
not exceed $100 million, including interest, as the court will take into
account the timing benefit of the disallowed tax deductions at that time. We
have reserved for our best estimate of the liability resulting from these
cases. NEW ACCOUNTING STANDARDS There are no new accounting standards that have not been adopted by us. 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. 45




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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. Profit is estimated based on the difference between total estimated revenue and
total estimated cost of a contract, excluding that reported in prior periods,
and is recognized immediately in the period when changes in estimated contract
profitability is known for shipments to date. Current revenue does not
anticipate higher or lower future prices, but includes units delivered at
actual sales prices. Cost includes the estimated cost of the preproduction
effort, primarily tooling and design, plus the estimated cost of manufacturing
a specified number of production units. The specified number of production
units used to establish the profit margin is predicated upon contractual terms
adjusted for market forecasts and does not exceed the lesser of those
quantities assumed in original contract pricing or those quantities which we
now expect to deliver in the timeframe/period assumed in the original contract
pricing. Our policies only allow the estimated number of production units to be
delivered to exceed the quantity assumed within the original contract pricing
when we receive firm orders for additional units. The timeframe/period assumed
in the original contract pricing is generally equal to the period specified in
the contract. If the contract is a life of program contract, then such period
is equal to the time period used in the original pricing model which generally
equals the time period required to recover our preproduction costs. Option
quantities are combined with prior orders when follow-on orders are released. The contract method of accounting involves the use of various estimating
techniques to project costs at completion and includes estimates of recoveries
asserted against the customer for changes in specifications. These estimates
involve various assumptions and projections relative to the outcome of future
events, including the quantity and timing of product deliveries. Also included
are assumptions relative to future labor performance and rates, and projections
relative to material and overhead costs. These assumptions involve various
levels of expected performance improvements. We 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. 46




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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. 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 an up-front
cash investment in a new program. The payment effectively demonstrates our
commitment to participate in new product programs and is part of the exclusive
supply agreement. In return, we receive a percentage of the product sales in
the supply periods after flight certification. Entry fees differ from sales
incentives, as entry fees are an investment in a program that will generate a
benefit from the total sales of the program, not just sales from our products,
while sales incentives that are capitalized are recovered during the contract
period of our products pursuant to a specific guarantee of recovery by the
customer. The entry fees are recognized as Other Assets and amortized on a
straight-line basis over the programs useful life following certification,
which approximates 20 years. The value of the investment is evaluated for
impairment based on the criteria in Identifiable Intangible Assets above. The
estimated lives are reviewed periodically based upon the expected program lives
as communicated by the customer. 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. 47




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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 Joint Strike Fighter, the Boeing 7E7, the
Embraer 190 and the Boeing 717;  
    
    the health of the commercial aerospace industry, including the impact of bankruptcies in the airline industry;  
    
    global demand for aircraft spare parts and aftermarket services;  
    
    threats associated with and efforts to combat terrorism, including the current situation in Iraq;  
    
    the impact of Severe Acute Respiratory Syndrome (SARS) or other airborne respiratory illnesses on global travel;  
    
    potential cancellation of orders by customers;  
    
    successful development of products and advanced technologies;  
    
    the extent to which expenses relating to employee and retiree medical and pension benefits continue to rise;  
    
    competitive product and pricing pressures;  
    
    the payment of premiums by us in connection with the early retirement of debt;  
    
    the resolution of tax litigation involving Coltec Industries Inc and Rohr, Inc.;  
    
    our ability to recover from third parties under contractual rights of
indemnification for environmental and other claims arising out of the
divestiture of our tire, vinyl and other businesses;  
    
    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; 48




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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. 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 June 30, 2004, a hypothetical 100 basis point unfavorable change in interest
rates would increase annual interest expense by approximately $3.7 million. At
June 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 $75.6 million. The fair value of these forward contracts was $87.9
million at June 30, 2003. 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. 49




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PART II. OTHER INFORMATION Item 1. Legal Proceedings We and certain of our subsidiaries are defendants in various claims, lawsuits
and administrative proceedings. In addition, we have been notified that we are
among potentially responsible parties under federal environmental laws, or
similar state laws, relative to the cost of investigating and in some cases
remediating contamination by hazardous materials at several sites. See the
disclosure under the captions General, Environmental, Asbestos,
Liabilities of Divested Businesses-Asbestos and Tax Litigation in Note P to
the accompanying unaudited condensed consolidated financial statements, which
disclosure is incorporated herein by reference. Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity
Securities The following table summarizes Goodrich Corporations purchases of its common
stock for the quarter ending June 30, 2004: ISSUER PURCHASES OF EQUITY SECURITIES (c) Total Number of
    
    (d) Maximum NumberShares Purchased as
    
    (or Approximate Dollar(a) Total Number
    
    
    
    
    
    Part of Publicly
    
    Value) of Shares that Mayof Shares
    
    (b) Average Price
    
    Announced Plans or
    
    Yet Be Purchased UnderPeriod
    
    Purchased (1)
    
    Paid Per Share
    
    Programs (2)
    
    the Plans or Programs (2)April 2004
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/AMay 2004
    
    
    5,032
    
    
    $
    29.06
    
    
    
    N/A
    
    
    
    N/AJune 2004
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    5,032
    
    
    $
    29.06
    
    
    
    N/A
    
    
    
    N/A
  (1)
    
    The issuer purchases during the period covered by this report represent
shares delivered to Goodrich by employees to pay withholding taxes due
upon vesting of a restricted stock award and the payout of a long-term
incentive plan award.(2)
    
    In connection with the exercise and vesting of stock option and
restricted stock awards and payout of long-term incentive plan awards,
Goodrich from time to time accepts delivery of shares to pay the exercise
price of employee stock options or to pay withholding taxes due upon the
exercise of employee stock options, the vesting of restricted stock awards
or the payout of long-term incentive plan awards. Goodrich does not
otherwise have any plan or program to purchase its common stock. 50




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Item 4. Submission of Matters to a Vote of Security Holders. The 2004 Annual Meeting of Shareholders was held on April 27, 2004 at 10:00
a.m. Eastern time at Goodrich Corporations headquarters in Charlotte, North
Carolina. As described in the 2004 Proxy Statement, the following actions were
taken:  
    
    The eleven nominees for director were elected.  
    
    The appointment of Ernst & Young LLP as independent auditors for the year 2004 was ratified. The votes were as follows: For Director: Number of
    
    Number ofShares
    
    SharesVoted For
    
    Vote WithheldDiane C. Creel
    
    
    106,597,408
    
    
    
    1,865,279George A. Davidson, Jr.
    
    
    105,609,753
    
    
    
    2,852,934Harris E. DeLoach, Jr.
    
    
    105,482,303
    
    
    
    2,980,384James J. Glasser
    
    
    105,478,727
    
    
    
    2,983,962James W. Griffith
    
    
    105,433,711
    
    
    
    3,028,976William R. Holland
    
    
    104,935,243
    
    
    
    3,527,444Marshall O. Larsen
    
    
    105,079,116
    
    
    
    3,383,571Douglas E. Olesen
    
    
    105,842,886
    
    
    
    2,619,801Alfred M. Rankin, Jr.
    
    
    104,168,200
    
    
    
    4,294,487James R. Wilson
    
    
    106,908,423
    
    
    
    1,554,264A. Thomas Young
    
    
    105,475,810
    
    
    
    2,986,877
 For ratification of independent auditors: 102,490,005 shares voted for; 1,094,637 shares voted against; and 4,878,045
shares abstained from voting. There were no broker non-votes. 51




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Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit 3.1
    
    Restated Certificate of Incorporation of Goodrich Corporation,
filed as Exhibit 3.1 to Goodrich Corporations Quarterly Report on Form
10-Q for the quarter ended September 30, 2003 (File No. 1-892), is
incorporated herein by reference.Exhibit 3.2
    
    By-Laws of Goodrich Corporation, as amended, filed as Exhibit
4(B) to Goodrich Corporations Registration Statement on Form S-3 (File
No. 333-98165), is incorporated herein by reference.Exhibit 10.1
    
    Form of Award Letter for 2004
Stock-Based Compensation Awards to Executive Officers.Exhibit 10.2
    
    Directors Deferred Compensation Plan.Exhibit 15
    
    Letter Re: Unaudited Interim Financial Information.Exhibit 31
    
    Rule 13a-14(a)/15d-14(a) Certifications.Exhibit 32
    
    Section 1350 Certifications.
 (b) Reports on Form 8-K. No Current Reports on Form 8-K were filed during the period covered by this
report. 52




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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. August 5, 2004
    
    GOODRICH CORPORATION/s/ ULRICH SCHMIDTUlrich SchmidtExecutive Vice President and Chief Financial Officer/s/ ROBERT D. KONEY, JRRobert D. Koney, Jr.Vice President &
Controller (Chief Accounting Officer)
 53




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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 10.1
    
    Form of Award Letter for 2004
Stock-Based Compensation Awards to Executive Officers.Exhibit 10.2
    
    Directors Deferred Compensation Plan.Exhibit 15
    
    Letter Re: Unaudited Interim Financial Information.Exhibit 31
    
    Rule 13a-14(a)/15d-14(a) Certifications.Exhibit 32
    
    Section 1350 Certifications.
 54