##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   Form 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For The Quarterly Period Ended March 31, 2005
 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
    
    34-0252680(State of incorporation)
    
    (I.R.S. Employer Identification No.)Four Coliseum Centre
    
    282172730 West Tyvola Road
    
    (Zip Code)Charlotte, North Carolina(Address of principal executive offices)
 Registrants telephone number, including area code: (704) 423-7000 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o As of March 31, 2005, there were 120,543,337 shares of common stock outstanding (excluding
14,000,000 shares held by a wholly owned subsidiary). There is only one class of common stock.




---



##### 



PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Goodrich Corporation We have reviewed the condensed consolidated balance sheet of Goodrich Corporation as of March 31,
2005, and the related condensed consolidated statement of income for the three-month periods ended
March 31, 2005 and 2004, and the condensed consolidated statement of cash flows for the three-month
periods ended March 31, 2005 and 2004. 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 review, we are not aware of any material modifications that should be made to the
condensed consolidated financial statements referred to above 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, 2004, 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 25, 2005, 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, 2004, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP Charlotte, North Carolina
May 2, 2005 2




---



##### 



CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Three Months EndedMarch 31,2005
    
    
    2004(Dollars in millions,except per share amounts)Sales
    
    $
    1,282.0
    
    
    $
    1,162.1Operating costs and expenses:Cost of sales
    
    
    933.7
    
    
    
    869.8Selling and administrative costs
    
    
    217.1
    
    
    
    193.41,150.8
    
    
    
    1,063.2Operating Income
    
    
    131.2
    
    
    
    98.9Interest expense
    
    
    (33.9
    )
    
    
    (37.4
    )Interest income
    
    
    0.9
    
    
    
    0.8Other income (expense)  net
    
    
    (10.1
    )
    
    
    (18.0
    )Income from continuing operations before income taxes
    
    
    88.1
    
    
    
    44.3Income tax expense
    
    
    (30.6
    )
    
    
    (13.7
    )Income From Continuing Operations
    
    
    57.5
    
    
    
    30.6Cumulative effect of change in accounting
    
    
    
    
    
    
    16.2Net Income
    
    $
    57.5
    
    
    $
    46.8Basic Earnings Per Share:Continuing operations
    
    $
    0.48
    
    
    $
    0.26Cumulative effect of change in accounting
    
    
    
    
    
    
    0.14Net Income
    
    $
    0.48
    
    
    $
    0.40Diluted Earnings Per Share:Continuing operations
    
    $
    0.47
    
    
    $
    0.26Cumulative effect of change in accounting
    
    
    
    
    
    
    0.13Net Income
    
    $
    0.47
    
    
    $
    0.39Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
 See Notes to Condensed Consolidated Financial Statements (Unaudited). 3




---



##### 



CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in millions,except share amounts)Current AssetsCash and cash equivalents
    
    $
    286.4
    
    
    $
    297.9Accounts and notes receivable, less allowances for doubtful receivables ($19.5 at March
31, 2005
and at December 31, 2004)
    
    
    724.1
    
    
    
    654.4Inventories  net
    
    
    1,226.8
    
    
    
    1,166.8Deferred income taxes
    
    
    115.2
    
    
    
    118.9Prepaid expenses and other assets
    
    
    97.9
    
    
    
    118.8Total Current Assets
    
    
    2,450.4
    
    
    
    2,356.8Property, plant and equipment  net
    
    
    1,144.8
    
    
    
    1,165.0Prepaid pension
    
    
    261.2
    
    
    
    275.5Goodwill
    
    
    1,299.5
    
    
    
    1,266.3Identifiable intangible assets  net
    
    
    491.4
    
    
    
    507.0Deferred income taxes
    
    
    44.6
    
    
    
    44.7Other assets
    
    
    593.7
    
    
    
    602.2Total Assets
    
    $
    6,285.6
    
    
    $
    6,217.5Current LiabilitiesShort-term debt
    
    $
    
    
    
    $
    1.0Accounts payable
    
    
    527.2
    
    
    
    511.5Accrued expenses
    
    
    726.4
    
    
    
    733.2Income taxes payable
    
    
    317.5
    
    
    
    294.4Deferred income taxes
    
    
    22.0
    
    
    
    22.0Current maturities of long-term debt and capital lease obligations
    
    
    2.0
    
    
    
    2.4Total Current Liabilities
    
    
    1,595.1
    
    
    
    1,564.5Long-term debt and capital lease obligations
    
    
    1,893.8
    
    
    
    1,899.4Pension obligations
    
    
    765.2
    
    
    
    761.7Postretirement benefits other than pensions
    
    
    300.7
    
    
    
    302.7Deferred income taxes
    
    
    19.9
    
    
    
    33.7Other non-current liabilities
    
    
    308.4
    
    
    
    312.6Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders EquityCommon stock  $5 par value  Authorized 200,000,000 shares; issued 134,126,676 shares at
March 31, 2005 and 132,709,310 shares at December 31, 2004 (excluding 14,000,000 shares
held by a wholly owned subsidiary)
    
    
    670.6
    
    
    
    663.5Additional paid-in capital
    
    
    1,115.0
    
    
    
    1,077.9Income retained in the business
    
    
    153.0
    
    
    
    119.5Accumulated other comprehensive income/(loss)
    
    
    (121.2
    )
    
    
    (103.7
    )Common stock held in treasury, at cost (13,583,339 shares at March 31, 2005 and
13,566,071 shares at December 31, 2004)
    
    
    (414.9
    )
    
    
    (414.3
    )Total Shareholders Equity
    
    
    1,402.5
    
    
    
    1,342.9Total Liabilities And Shareholders Equity
    
    $
    6,285.6
    
    
    $
    6,217.5
 See Notes to Condensed Consolidated Financial Statements (Unaudited). 4




---



##### 



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Three Months EndedMarch 31,2005
    
    
    2004(Dollars in millions)Operating ActivitiesIncome from continuing operations
    
    $
    57.5
    
    
    $
    30.6Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:Restructuring and consolidation:Expenses
    
    
    3.2
    
    
    
    1.8Payments
    
    
    (3.4
    )
    
    
    (6.7
    )Depreciation and amortization
    
    
    54.9
    
    
    
    54.5Stock-based compensation expense
    
    
    5.3
    
    
    
    5.1Deferred income taxes
    
    
    (28.8
    )
    
    
    33.9Change in assets and liabilities, net of effects of acquisitions
and dispositions of businesses:Receivables
    
    
    (101.2
    )
    
    
    (78.5
    )Change in receivables sold, net
    
    
    24.3
    
    
    
    (14.5
    )Inventories
    
    
    (65.7
    )
    
    
    (5.9
    )Other current assets
    
    
    33.3
    
    
    
    (9.8
    )Accounts payable
    
    
    20.6
    
    
    
    12.3Accrued expenses
    
    
    (2.0
    )
    
    
    45.8Income taxes payable
    
    
    49.8
    
    
    
    (43.3
    )Tax benefit on non-qualified options
    
    
    4.5
    
    
    
    1.6Other non-current assets and liabilities
    
    
    (32.6
    )
    
    
    21.6Net Cash Provided By Operating Activities
    
    
    19.7
    
    
    
    48.5Investing ActivitiesPurchases of property, plant and equipment
    
    
    (27.0
    )
    
    
    (22.9
    )Proceeds from sale of property, plant and equipment
    
    
    0.2
    
    
    
    Payments made in connection with acquisitions, net of cash acquired
    
    
    (8.8
    )
    
    
    (0.5
    )Net Cash Used By Investing Activities
    
    
    (35.6
    )
    
    
    (23.4
    )Financing ActivitiesIncrease (decrease) in short-term debt, net
    
    
    (1.0
    )
    
    
    0.5Repayment of long-term debt and capital lease obligations
    
    
    (0.5
    )
    
    
    (65.7
    )Proceeds from issuance of common stock
    
    
    34.1
    
    
    
    13.9Purchases of treasury stock
    
    
    (0.6
    )
    
    
    Dividends
    
    
    (23.8
    )
    
    
    (23.5
    )Distributions to minority interest holders
    
    
    (2.4
    )
    
    
    Net Cash Provided (Used) By Financing Activities
    
    
    5.8
    
    
    
    (74.8
    )Discontinued OperationsNet cash
provided by discontinued operations
    
    
    
    
    
    
    Effect of exchange rate changes on cash and cash equivalents
    
    
    (1.4
    )
    
    
    0.8Net decrease in cash and cash equivalents
    
    
    (11.5
    )
    
    
    (48.9
    )Cash and cash equivalents at beginning of year
    
    
    297.9
    
    
    
    378.4Cash and cash equivalents at end of period
    
    $
    286.4
    
    
    $
    329.5
 See Notes to Condensed Consolidated Financial Statements (Unaudited). 5




---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. 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. The Company believes that all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Certain amounts in prior
year financial statements have been reclassified to conform to the current year presentation.
Operating results for the three months ended March 31, 2005 are not necessarily indicative of the
results that may be achieved for the year ending December 31, 2005. For further information, refer
to the consolidated financial statements and footnotes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2004. Unless otherwise noted, disclosures pertain to the
Companys continuing operations. Note 2. New Accounting Standards The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting
Standards No. 151 (SFAS 151), Inventory Costs, an amendment of ARB No. 43, Chapter 4. Adoption of
SFAS 151 is required by the year beginning January 1, 2006. The Company plans to adopt SFAS 151 no
later than that date. The amendments made by SFAS 151 clarify that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. While SFAS 151 enhances ARB 43 and clarifies
the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage), the statement also removes inconsistencies between ARB 43 and IAS 2 and amends
ARB 43 to clarify that abnormal amounts of costs should be recognized as period costs. Under some
circumstances, according to ARB 43, the above listed costs may be so abnormal as to require
treatment as current period charges. SFAS 151 requires these items be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal and requires allocation of
fixed production overheads to the costs of conversion. This statement will apply to the Companys
businesses if they become subject to abnormal costs as defined in SFAS 151. The Company is
currently evaluating the impact, if any, that adoption of SFAS 151 will have on its consolidated
financial statements. On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised
2004) (SFAS 123(R)), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees and amends Statement of Financial Accounting Standards No. 95, Statement
of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS
123. The Company adopted the SFAS 123 fair-value-based method of accounting for share-based
payments effective January 1, 2004 using the modified prospective method described in Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. Currently, the Company uses the Black-Scholes formula to estimate the value of stock
options granted to employees. SFAS 123(R) requires that the Company use the valuation technique
that best fits the circumstances. The Company is currently evaluating other techniques. SFAS 123(R)
requires that the benefits of tax deductions in excess of recognized compensation cost be reported
as a financing cash flow, rather than as an operating cash flow; thus, reducing net operating cash
flows and increasing net financing cash flows in the periods after the effective date. SFAS 123(R)
also requires that the Company estimate the number of awards that are expected to vest and to
revise the estimate as the actual forfeitures differ from the estimate. The effect of these items
and other changes required by SFAS 123(R) is currently being evaluated. On April 14, 2005, the SEC
announced that registrants that are not small business issuers may adopt SFAS 123(R) no later than
the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS
123(R) on January 1, 2006. 6




---



##### 



On December 21, 2004, the FASB issued FASB Staff Position 109-1 (FSP 109-1) and 109-2 (FSP 109-2).
FSP 109-1 provides guidance on the application of SFAS 109, Accounting for Income Taxes, with
regard to the tax deduction on qualified production activities provision within H.R. 4520 The
American Jobs Creation Act of 2004 (Act), that was enacted on October 22, 2004. FSP 109-2 provides
guidance on a special one-time dividends received deduction on the repatriation of certain foreign
earnings to qualifying U.S. taxpayers. The Act contains numerous provisions related to corporate
and international taxation including repeal of the Extraterritorial Income (ETI) regime, creation
of a new Domestic Production Activities (DPA) deduction and a temporary dividends received
deduction related to repatriation of foreign earnings. The Act contains various effective dates and
transition periods related to its provisions. Under the guidance provided in FSP 109-1 the new DPA
deduction will be treated as a special deduction as described in SFAS 109. As such, the special
deduction had no effect on the Companys deferred tax assets and liabilities existing at the
enactment date. Rather, the impact of this deduction will be reported in the period in which the
deduction is claimed on the Companys income tax return. The Company does not expect the net effect
of the phase-out of the ETI deduction and phase-in of the new DPA deduction to result in a material
impact on its effective income tax rate in 2005. In FSP 109-2, the FASB acknowledged that, due to
the proximity of the Acts enactment date to many companies year-ends and the fact that numerous
provisions within the Act are complex and pending further regulatory guidance, many companies may
not be in a position to assess the impact of the Act on their plans for repatriation or
reinvestment of foreign earnings. Therefore, the FSP provided companies with a practical exception
to the permanent reinvestment standards of SFAS 109 and APB No. 23 by providing additional time to
determine the amount of earnings, if any, that they intend to repatriate under the Acts
provisions. The Company is not yet in a position to decide whether, and to what extent, it might
repatriate foreign earnings to the United States. Therefore, under the guidance provided in FSP
109-2, no deferred tax liability has been recorded in connection with the repatriation provisions
of the Act. The Company is currently analyzing the impact of the temporary dividends received
deduction provisions contained in the Act and expect to complete its analysis by June 30, 2005. Note 3. Restructuring and Consolidation Costs The Company incurred restructuring and consolidation costs and activity related to two types of
restructuring and consolidation programs: (1) the Companys employee termination and facility
closure programs other than the opening balance sheet restructuring and consolidation programs
related to Aeronautical Systems; and (2) the Aeronautical Systems business restructuring programs.
Information regarding each type of restructuring program is disclosed separately as follows: Restructuring and Consolidation Costs excluding Aeronautical Systems Business Restructuring Program The Company recorded restructuring and consolidation provisions as follows: Three Months EndedMarch 31,2005
    
    
    2004(Dollars in millions)Personnel-related costs
    
    $
    2.5
    
    
    $
    1.4Facility closure and other costs
    
    
    0.7
    
    
    
    0.4$
    3.2
    
    
    $
    1.8
 The provisions were recorded across the Companys segments as follows: Three Months EndedMarch 31,2005
    
    
    2004(Dollars in millions)Airframe Systems
    
    $
    2.2
    
    
    $
    Engine Systems
    
    
    0.2
    
    
    
    0.3Electronic Systems
    
    
    0.8
    
    
    
    1.5$
    3.2
    
    
    $
    1.8
 7




---



##### 



The provision recorded for the three months ended March 31, 2005 of $3.2 million included charges
of $3 million to Cost of Sales and $0.2 million to Selling and Administrative Costs in the
Unaudited Condensed Consolidated Statement of Income. The provision recorded for the three months
ended March 31, 2004 of $1.8 million included charges of $1 million to Cost of Sales and $0.8
million to Selling and Administrative Costs in the Unaudited Condensed Consolidated Statement of
Income. Restructuring and consolidation reserves at March 31, 2005, as well as activity during the three
months ended March 31, 2005, consisted of: Balance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BalanceDecember 31,
    
    
    
    
    
    
    Return to
    
    
    Cash
    
    
    March 31,2004
    
    
    Provision
    
    
    Profit
    
    
    Payments
    
    
    2005(Dollars in millions)Personnel-related costs
    
    $
    0.8
    
    
    $
    2.9
    
    
    $
    (0.4
    )
    
    $
    (2.2
    )
    
    $
    1.1Facility closure and other costs
    
    
    2.6
    
    
    
    0.7
    
    
    
    
    
    
    
    (0.5
    )
    
    
    2.8$
    3.4
    
    
    $
    3.6
    
    
    $
    (0.4
    )
    
    $
    (2.7
    )
    
    $
    3.9
 During the three months ended March 31, 2005, 43 employees were terminated as part of the
personnel-related restructuring activities. As of March 31, 2005, the Company expects to further
reduce employment levels by approximately 30 employees as part of these restructuring activities. Of the $3.9 million balance in restructuring and consolidation reserves at March 31, 2005, $1.1
million is reserved for employee terminations and benefit payments as well as benefit payments for
recently terminated employees, $1.8 million is reserved for facility closure and related costs and
$1 million is reserved for environmental expenses associated with the closure of three facilities. The balance, by segment, of the restructuring reserves at March 31, 2005 as well as the activity
during the three months ended March 31, 2005 consisted of: Balance
    
    
    
    
    
    
    
    
    
    
    Employee
    
    
    Facility
    
    
    BalanceDecember 31,
    
    
    
    
    
    
    Return to
    
    
    Termination
    
    
    Closure
    
    
    March 31,2004
    
    
    Provision
    
    
    Profit
    
    
    Benefits
    
    
    Costs
    
    
    2005(Dollars in millions)Airframe Systems
    
    $
    0.8
    
    
    $
    2.6
    
    
    $
    (0.4
    )
    
    $
    (1.3
    )
    
    $
    (0.1
    )
    
    $
    1.6Engine Systems
    
    
    1.0
    
    
    
    0.2
    
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    0.9Electronic Systems
    
    
    1.6
    
    
    
    0.8
    
    
    
    
    
    
    
    (0.8
    )
    
    
    (0.2
    )
    
    
    1.4$
    3.4
    
    
    $
    3.6
    
    
    $
    (0.4
    )
    
    $
    (2.2
    )
    
    $
    (0.5
    )
    
    $
    3.9
 Restructuring and Consolidation Costs  Provision The following is a description of key components of the $3.6 million provision for restructuring
and consolidation costs recorded during the three months ended March 31, 2005: Airframe Systems:The segment recorded a $2.6 million charge of which $2.5 million was for
employee severance and benefits and $0.1 million was for equipment relocation costs, all related to
the closure of a foreign facility. The reserve was reduced by a $0.4 million return to profit of
previously recorded employee severance and benefit charges not required. Engine Systems:The segment recorded a $0.2 million charge for facility closure costs consisting
of $0.1 million for employee relocations and $0.1 million related to the closure of a domestic
service facility. Electronic Systems:The segment recorded a $0.8 million charge which included $0.4 million for
employee benefits and severance costs and $0.3 million for facility closure costs related to the
closure of a foreign manufacturing and service facility and $0.1 million in facility closure costs
related to the closure of a domestic manufacturing and service facility. 8




---



##### 



Future Restructuring and Consolidation Costs The Company expects to incur additional expenses of approximately $2 million for restructuring
programs announced and initiated prior to January 1, 2005 related to ongoing restructuring
programs. The Company expects to incur most of these restructuring charges during the remaining
three quarters of 2005. Of the expected charges, approximately $1.3 million relates to facility
closure costs, $0.4 million is for equipment relocation and $0.3 million is for expected employee
terminations, relocations and benefits related to these facility closures. Of the $2 million in
expected charges to restructuring and consolidation costs, the Electronic Systems segment expects
to charge $1.9 million for the closure of a domestic service facility, a domestic manufacturing and
service facility and a foreign manufacturing facility and the Engine Systems segment expects to
incur $0.1 million for the closure of a domestic service facility. Opening Balance Sheet  Aeronautical Systems Business Restructuring Programs Restructuring reserves were recorded in the opening balance sheet related to the acquisition of the
Aeronautical Systems business. These consolidation and restructuring reserves relate primarily to
personnel-related costs for employee termination benefits that the Company recorded as part of its
integration effort in accordance with EITF Issue No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination. No additional restructuring reserves have been recorded related to the Aeronautical Systems
acquisition. Restructuring and consolidation reserves at March 31, 2005 as well as the activity
during the three months ended March 31, 2005 consisted of: Balance
    
    
    
    
    
    
    Foreign
    
    
    BalanceDecember 31,
    
    
    Cash
    
    
    Currency
    
    
    March 31,2004
    
    
    Payments
    
    
    Translation
    
    
    2005(Dollars in millions)Personnel-related costs
    
    $
    3.9
    
    
    $
    (0.6
    )
    
    $
    (0.1
    )
    
    $
    3.2Facility closure and other costs
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.8$
    4.7
    
    
    $
    (0.6
    )
    
    $
    (0.1
    )
    
    $
    4.0
 The balance at March 31, 2005, by segment, of the opening balance sheet restructuring reserves as
well as the activity during the three months ended March 31, 2005 consisted of: Balance
    
    
    Employee
    
    
    Employee
    
    
    Foreign
    
    
    BalanceDecember 31,
    
    
    Termination
    
    
    Relocation
    
    
    Currency
    
    
    March 31,2004
    
    
    Benefits
    
    
    Costs
    
    
    Translation
    
    
    2005(Dollars in millions)Airframe Systems
    
    $
    0.3
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.3Engine Systems
    
    
    3.5
    
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    3.0Electronic Systems
    
    
    0.9
    
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    0.7$
    4.7
    
    
    $
    (0.4
    )
    
    $
    (0.2
    )
    
    $
    (0.1
    )
    
    $
    4.0
 During the three months ended March 31, 2005, no employees were terminated as part of the
restructuring activities related to the acquisition of the Aeronautical Systems business. The $0.4
million paid for employee termination benefits were for retirement benefits related to previous
employee terminations at a foreign operation. As of March 31, 2005, the Company expects to reduce
employment levels by approximately 45 employees as part of the opening balance sheet restructuring
activities. The remaining reserves will be used for future lease payments related to a redundant
facility, costs to complete the closure of a redundant facility and return it to its original
condition and a special early retirement program at a foreign operation. 9




---



##### 



Note 4. Other Income (Expense)  Net Other Income (Expense)  Net consisted of the following: Three Months Ended March 31,2005
    
    
    2004(Dollars in millions)Retiree health care expenses related to divested businesses
    
    $
    (4.7
    )
    
    $
    (5.3
    )Expenses related to divested businesses
    
    
    (1.4
    )
    
    
    (3.4
    )Minority interest and equity in affiliated companies
    
    
    (2.8
    )
    
    
    (2.0
    )Impairment of a note receivable
    
    
    
    
    
    
    (7.0
    )Other  net
    
    
    (1.2
    )
    
    
    (0.3
    )Other income (expense)  net
    
    $
    (10.1
    )
    
    $
    (18.0
    )
 Note 5. Asset Impairments As shown in Note 4, Other Income (Expense)  Net, the Company recorded a non-cash $7 million
before tax asset impairment charge to Other Income (Expense)  Net during the first quarter 2004
which resulted from the write-off of a certain note receivable due to insufficient collateral value
arising out of the divestiture of a business. Note 6. Cumulative Effect of Change in Accounting In conjunction with the Audit Review Committee of the Companys Board of Directors, management
reassessed the application of contract accounting at its aerostructures business. Specifically,
consideration was given to whether or not the accounting methods used by the Company were
appropriate given the predominance of an alternative method used by peer companies and changes in
the nature of contractual relationships with the Companys customers. Effective January 1, 2004,
the Company changed two aspects of the application of contract accounting to preferable methods at
its aerostructures business that is included in the Engines Systems segment. The Company changed its method of accounting for revisions in estimates of total revenue, total
costs or extent of progress of a contract from the reallocation method to the cumulative catch-up
method. Although both methods are used in practice to account for changes in estimates, American
Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance
of Construction-Type and Certain Production-Type Contracts (SOP 81-1), indicates that the
cumulative catch-up method is preferable. A contemporaneous review of accounting policy disclosures
of peer companies in the same or similar industries indicated that the cumulative catch-up method
was the predominant method of accounting for changes in estimates. The Company believes that
consistency in financial reporting with peer companies, as well as with less significant business
units within the consolidated group which already use the cumulative catch-up method, will enhance
the comparability of financial data. The change was effected by adjusting contract profit rates
from the balance to complete gross profit rate to the estimated gross profit rate at completion of
the contract. The Company also changed its accounting for pre-certification costs. Under the previous policy,
pre-certification costs exceeding the level anticipated in the Companys original investment model
used to negotiate contractual terms were expensed when determined regardless of overall contract
profitability. This policy was appropriate in the past because aircraft and engine manufacturers
typically reimbursed component suppliers directly for pre-certification costs up to an agreed-upon
level. Recently, however, aircraft and engine manufacturers have begun to require component
suppliers to participate more in the initial design and certification costs for products and are no
longer specifically reimbursing non-recurring costs. Instead, the component supplier now typically
absorbs these non-recurring costs and recovers those costs over the contract term through the price
and margin of its product sales. Under the new policy, which was adopted January 1, 2004,
pre-certification costs, including those in excess of original estimated levels, are included in
total contract costs used to evaluate overall contract profitability. The Company believes the new
method better reflects the substance of its current contractual arrangements and is more consistent
with SOP 81-1, which indicates that all direct costs and indirect costs allocable to contracts
should be included in the total contract cost. 10




---



##### 



The impact of the changes in accounting methods was to record a before tax gain of $23.3 million
($16.2 million after tax) as a Cumulative Effect of Change in Accounting representing the
cumulative profit that would have been recognized prior to January 1, 2004 had these methods of
accounting been in effect in prior periods. Note 7. Earnings Per Share The computation of basic and diluted earnings per share for income from continuing operations is as
follows: Three Months EndedMarch 31,2005
    
    
    2004(In millions, exceptper share amounts)Numerator:Numerator for basic and diluted earnings per share  income from continuing operations
    
    $
    57.5
    
    
    $
    30.6Denominator:Denominator for basic earnings per share  weighted- average shares
    
    
    119.8
    
    
    
    118.2Effect of dilutive securities:Stock options, employee stock purchase plan, restricted shares and restricted
share units
    
    
    2.2
    
    
    
    1.6Other deferred compensation shares
    
    
    0.1
    
    
    
    0.12.3
    
    
    
    1.7Denominator for diluted earnings per share  adjusted weighted-average shares and
assumed conversion
    
    
    122.1
    
    
    
    119.9Per share income from continuing operations:Basic
    
    $
    0.48
    
    
    $
    0.26Diluted
    
    $
    0.47
    
    
    $
    0.26
 At March 31, 2005 and 2004, the Company had outstanding approximately 9.5 million and 10.9 million
stock options, 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 9.5 million and 10.9 million stock options outstanding, 2.8 million and
5.4 million were anti-dilutive stock options excluded from the diluted earnings per share
calculation at March 31, 2005 and 2004, respectively. Note 8. Inventories Inventories consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in millions)FIFO or average cost (which approximates current costs):Finished products
    
    $
    192.4
    
    
    $
    185.9In process
    
    
    817.1
    
    
    
    775.7Raw materials and supplies
    
    
    307.6
    
    
    
    292.0Total
    
    
    1,317.1
    
    
    
    1,253.6Less:Reserve to reduce certain inventories to LIFO basis
    
    
    (40.4
    )
    
    
    (40.3
    )Progress payments and advances
    
    
    (49.9
    )
    
    
    (46.5
    )Total
    
    $
    1,226.8
    
    
    $
    1,166.8
 The pre-production 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 $249.6 million and $239.8 million as of March 31, 2005 and December 31, 2004,
respectively. 11




---



##### 



Note 9. Goodwill The changes in the carrying amount of goodwill by segment for the three months ended March 31, 2005
are as follows: BusinessBalance
    
    
    Combinations
    
    
    Foreign
    
    
    BalanceDecember 31,
    
    
    Completed or
    
    
    Currency
    
    
    March 31,2004
    
    
    Finalized
    
    
    Translation
    
    
    2005(Dollars in millions)Airframe Systems
    
    $
    260.2
    
    
    $
    
    
    
    $
    (6.1
    )
    
    $
    254.1Engine Systems
    
    
    509.4
    
    
    
    
    
    
    
    (6.4
    )
    
    
    503.0Electronic Systems
    
    
    496.7
    
    
    
    8.8
    (a)
    
    
    36.9
    (b)
    
    
    542.4$
    1,266.3
    
    
    $
    8.8
    
    
    $
    24.4
    
    
    $
    1,299.5
   (a)
    
    During the three months ended March 31, 2005, the Company completed its acquisition of the
remaining five percent interest in Goodrich Hella Aerospace Lighting Systems Holding GmbH from
Hella Hueck & Co. KG. At the time of the transaction, the Company increased Goodwill by $8.8
million.(b)
    
    Included in the $36.9 million of foreign currency translation was an adjustment related to the
foreign currency translation of certain goodwill amounts that resulted in a $27.3 million increase
in Goodwill and Accumulated Other Comprehensive Income/(Loss). Note 10. Financing Arrangements Credit Facilities At March 31, 2005, the Company had a committed syndicated revolving credit facility expiring in
August 2006 that permits borrowing, including letters of credit, up to a maximum of $500 million.
Borrowings under this facility bear interest, at the Companys option, at rates tied to the agent
banks prime rate or for U.S. Dollar or Great Britain Pounds Sterling borrowings, the London
interbank offered rate, and for Euro Dollar borrowings, the EURIBO rate. The Company is required to
pay a facility fee of 20 basis points per annum on the total $500 million committed line. Further,
if the amount outstanding on the line of credit exceeds 33 percent of the total commitment, a usage
fee of 25 basis points per annum on the loan outstanding is payable by the Company. These fees and
the interest rate margin on outstanding revolver borrowings are subject to change as the Companys
credit ratings change. At March 31, 2005, there were no borrowings and $20.5 million in letters of
credit outstanding under this facility. At December 31, 2004, there were no borrowings and $26.2
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 the
consolidated net worth requirement and maximum leverage ratio. The Company is currently in
compliance with all such covenants. As of March 31, 2005, the Company had borrowing capacity under
this facility of $468.7 million, after reductions for letters of credit outstanding. The Company also maintains $25 million of uncommitted domestic money market facilities and $33.2
million of uncommitted and committed foreign working capital facilities with various banks to meet
short-term borrowing requirements. At March 31, 2005 and December 31, 2004, there were no
borrowings under these facilities. These credit facilities are provided by a small number of
commercial banks that also provide the Company with committed credit through the syndicated
revolving credit facility and with various cash management, trust and other services. The Companys credit facilities do not contain any credit rating downgrade triggers that would
accelerate the maturity of its indebtedness. However, a ratings downgrade would result in an
increase in the interest rate and fees payable under its committed syndicated revolving credit
facility. Such a downgrade also could adversely affect the Companys ability to renew existing or
obtain access to new credit facilities in the future and could increase the cost of such new
facilities. Weighted-average interest rates on short-term borrowings were 3.1 percent as of March
31, 2005. 12




---



##### 



The Company has an outstanding contingent liability for guaranteed debt and lease payments of $2.7
million, outstanding Coltec Capital Trust 51/4 % convertible trust preferred securities (TIDES) for
$145 million, and letters of credit and bank guarantees of $53.6 million. It was not practical to
obtain independent estimates of the fair values for the contingent liability for guaranteed debt
and lease payments and for letters of credit. In the opinion of management, non-performance by the
other parties to the contingent liabilities will not have a material effect on the Companys
results of operations or financial condition. The Companys committed syndicated revolving credit facility contains various restrictive covenants
that, among other things, place limitations on the payment of cash dividends and the repurchase of
the Companys capital stock. Under the most restrictive of these covenants, $591.2 million of
income retained in the business and additional capital was free from such limitations at March 31,
2005. Long-Term Debt 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. Senior Notes In March 2005, the Company called for the redemption of $100 million in aggregate principal amount
of its 6.45 percent senior notes due in 2007 and entered into a $100 million reverse treasury lock
to protect itself against movements in treasury rates prior to the redemption date. As further
discussed in Note 16, Derivatives and Hedging Activities and Note 19, Subsequent Events, the
notes were redeemed and the reverse treasury lock matured during April 2005. The Company also
terminated $17.9 million of a $100 million fixed-to-floating interest rate swap on its 6.45 percent
senior notes due in 2007 in April 2005. Medium Term Notes Payable From time to time, the Company has issued long-term debt securities in the public markets through a
medium-term note (MTN) program. MTN notes outstanding at March 31, 2005 consisted entirely of
fixed-rate non-callable debt securities. All MTN notes outstanding were issued between 1995 and
1998, with interest rates ranging from 6.5 percent to 8.7 percent and maturity dates ranging from
2008 to 2046. Note 11. Off Balance Sheet Arrangements Lease Commitments The Company finances its use of certain of its office and manufacturing facilities as well as
machinery and equipment, including corporate aircraft, under various committed lease arrangements
provided by financial institutions. Certain of these arrangements allow the Company to claim a
deduction for 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 March 31, 2005. At March 31,
2005, $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 $153.9 million at March 31, 2005. Sale of Receivables At March 31, 2005, 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 $96.6 million at March 31, 2005.
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. 13




---



##### 



Note 12. Pensions and Postretirement Benefits Pensions The following table sets forth the components of net periodic benefit costs (income) for the three
months ended March 31, 2005 and 2004: Other Non-U.S.U.S. Plans
    
    
    U.K. Plans
    
    
    PlansMarch 31,
    
    
    March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in millions)Service cost
    
    $
    10.8
    
    
    $
    10.4
    
    
    $
    6.1
    
    
    $
    5.0
    
    
    $
    0.8
    
    
    $
    0.6Interest cost
    
    
    36.4
    
    
    
    35.9
    
    
    
    7.7
    
    
    
    6.1
    
    
    
    1.1
    
    
    
    0.9Expected rate of return on plan assets
    
    
    (42.6
    )
    
    
    (40.4
    )
    
    
    (10.9
    )
    
    
    (9.0
    )
    
    
    (0.9
    )
    
    
    (0.8
    )Amortization of transition obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    2.2
    
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of actuarial (gain) loss
    
    
    11.2
    
    
    
    9.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Periodic benefit cost (income)
    
    
    18.0
    
    
    
    17.3
    
    
    
    2.9
    
    
    
    2.1
    
    
    
    1.0
    
    
    
    0.7Settlements and curtailments (gain) loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special termination benefit charge (credit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net benefit cost (income)
    
    $
    18.0
    
    
    $
    17.3
    
    
    $
    2.9
    
    
    $
    2.1
    
    
    $
    1.0
    
    
    $
    0.7
 The following table provides the weighted average assumptions used to determine the net periodic
benefit costs. U.S. Plans
    
    
    U.K. Plans
    
    
    Other Non-U.S. PlansThree Months Ended
    
    
    Three Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Discount rate
    
    
    5.875
    %
    
    
    6.25
    %
    
    
    5.50
    %
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    6.25
    %Expected long-term return on assets
    
    
    9.00
    %
    
    
    9.00
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %Rate of compensation increase
    
    
    3.63
    %
    
    
    3.63
    %
    
    
    3.50
    %
    
    
    3.25
    %
    
    
    3.50
    %
    
    
    3.25
    %
 Postretirement Benefits Other Than Pensions The following table sets forth the components of net periodic benefit costs (income) for the three
months ended March 31, 2005 and 2004: Three Months EndedMarch 31,2005
    
    
    2004(Dollars in millions)Service cost
    
    $
    0.3
    
    
    $
    0.3Interest cost
    
    
    6.3
    
    
    
    6.8Expected return on plan assets
    
    
    
    
    
    
    Amortization of transition obligation
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    Amortization of actuarial (gain) loss
    
    
    0.5
    
    
    
    0.9Periodic benefit cost (income)
    
    
    7.1
    
    
    
    8.0Settlements and curtailments (gain) loss
    
    
    
    
    
    
    Special termination benefit charge (credit)
    
    
    
    
    
    
    Net benefit cost (income)
    
    $
    7.1
    
    
    $
    8.0
 14




---



##### 



The following table provides the weighted average assumptions used to determine the net periodic
benefit costs. Three Months EndedMarch 31,2005
    
    
    2004Discount rate
    

    5.875%
    
    

        6.25%Healthcare trend rate
    
    9% in 2005 to 5% in 2008
    
    
    10% in 2004 to 5% in 2008
 Payments for retiree health care and life insurance benefits are classified as contributions for
reporting purposes. Note 13. Comprehensive Income/(Loss) Total comprehensive income consisted of the following: Three Months EndedMarch 31,2005
    
    
    2004(Dollars in millions)Comprehensive Income/(Loss)Net income
    
    $
    57.5
    
    
    $
    46.8Other comprehensive income/(loss):Unrealized foreign currency translation gains during period
    
    
    0.7
    
    
    
    15.3Loss on cash flow hedges
    
    
    (18.2
    )
    
    
    (2.7
    )Total
    
    $
    40.0
    
    
    $
    59.4
 Accumulated other comprehensive income/(loss) consisted of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in millions)Accumulated Other Comprehensive Income/(Loss)Cumulative unrealized foreign currency translation gains
    
    $
    213.4
    
    
    $
    212.7Minimum pension liability adjustments
    
    
    (388.1
    )
    
    
    (388.1
    )Accumulated gain on cash flow hedges
    
    
    53.5
    
    
    
    71.7Total
    
    $
    (121.2
    )
    
    $
    (103.7
    )
 The minimum pension liability amounts above are net of deferred taxes of $209 million at March 31,
2005 and December 31, 2004. The accumulated gain on cash flow hedges above is net of deferred taxes
of $28.8 million and $38.6 million at March 31, 2005 and December 31, 2004, respectively. No income
taxes are provided on foreign currency translation gains as foreign earnings are considered
permanently invested. Note 14. Income Taxes The Companys effective tax rate was 34.8 percent during the three months ended March 31, 2005 and
31 percent during the three months ended March 31, 2004. The Companys effective tax rate increase
resulted from recording valuation allowances against losses in certain foreign jurisdictions,
growth in before tax book income relative to the Companys significant permanent items, and the
estimated impact of the phase-in of the American Jobs Creation Act of 2004, which replaced certain
export sales deductions with a deduction for income from qualified domestic production activities. In accordance with SFAS 5, the Company records tax contingencies when the exposure item becomes
probable and the amount is reasonably estimable. As of December 31, 2004, the Company had tax
contingency reserves of approximately $315.8 million. During the three months ended March 31, 2005,
the Company recorded a provision of $5.5 million and made payments of $2.6 million (net of federal
tax benefit). As of March 31, 2005, the Company had recorded tax contingency reserves of
approximately $318.7 million. The contingencies that comprise the reserves are more fully described
in Note 17, Contingencies. 15




---



##### 



On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the Act). The
Act provides a deduction for income from qualified domestic production activities, which will be
phased in from 2005 through 2010. The Act provides for a two-year phase-out of the existing
Extraterritorial Income (ETI) deduction for export sales that was ruled by the World Trade
Organization to be inconsistent with international trade protocols. Under the guidance provided in
FASB Staff Position No. FAS 109-1, Application of SFAS 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of
2004, the deduction will be treated as a special deduction as described in SFAS 109. As such,
the special deduction had no effect on the Companys deferred tax assets and liabilities existing
at the enactment date. Rather, the impact of this deduction will be reported in the period in which
the deduction is claimed on the Companys tax return. The Act also created a temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing an 85 percent dividends received deduction for certain dividends from
controlled foreign corporations. The deduction is subject to a number of limitations and, as of
March 31, 2005, the Company remains uncertain as to how to interpret numerous provisions in the
Act. It is the Companys current intention to continue to indefinitely reinvest its undistributed
earnings and, accordingly, no deferred tax liability has been recorded in connection therewith. The
Company is currently analyzing the impact of the temporary dividends received deduction provisions
in the Act and expects to complete its analysis by June 30, 2005. The Company has not provided for U.S. federal and foreign withholding taxes on $347 million of
foreign subsidiaries undistributed earnings as of December 31, 2004, because such earnings are
intended to be reinvested indefinitely. It is not practical to determine the amount of income tax
liability that would result if such earnings actually were repatriated. On repatriation, certain
foreign countries impose withholding taxes. The amount of withholding tax that would be payable on
remittance of the entire amount of undistributed earnings would approximate $25.3 million. Note 15. Business Segment Information The Company has three business segments: Airframe Systems, Engine Systems and Electronic Systems. Airframe Systems Airframe Systems provides systems and components pertaining to aircraft taxi, take-off, landing and
stopping. Several business units within the segment are linked by their ability to contribute to
the integration, design, manufacture and service of entire aircraft undercarriage systems,
including landing gear, wheels and brakes and certain brake controls. Airframe Systems also
includes the aviation technical services business unit, which performs comprehensive total aircraft
maintenance, repair, overhaul and modification services for many commercial airlines, independent
operators, aircraft leasing companies and airfreight carriers. The segment includes the actuation
systems and flight controls business units that were acquired as part of Aeronautical Systems. The
actuation systems business unit provides systems that control the movement of steering systems for
missiles and electro-mechanical systems that are characterized by high power, low weight, low
maintenance, resistance to extreme temperatures and vibrations and high reliability. The actuation
systems business unit also provides actuators for primary flight control systems that operate
elevators, ailerons and rudders, and secondary flight controls systems such as flaps and slats. The
engineered polymer products business unit provides large-scale marine composite structures, marine
acoustic materials, acoustic/vibration damping structures, fireproof composites and high
performance elastomer formulations to government and commercial customers. Engine Systems Engine Systems includes the aerostructures business unit, a leading supplier of nacelles, pylons,
thrust reversers and related aircraft engine housing components. The segment also produces engine
and fuel controls, pumps, fuel delivery systems, and structural and rotating components such as
discs, blisks, shafts and airfoils for both aerospace and industrial gas turbine applications. The
segment includes the cargo systems, engine controls and customer services business units, which
were acquired as part of Aeronautical Systems. The cargo systems business unit produces fully
integrated main deck and lower lobe cargo systems for wide body aircraft. The engine controls
business unit provides engine control systems and components for jet engines used on commercial and
military 16




---



##### 



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 provides support for
aftermarket products and services for the Company. 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. Segment operating income is total segment revenue reduced by operating expenses identifiable with
that business segment. The accounting policies of the reportable segments are the same as those for
Goodrich consolidated. Three Months EndedMarch 31,2005
    
    
    2004(Dollars in millions)Net customer sales:Airframe Systems
    
    $
    442.7
    
    
    $
    402.6Engine Systems
    
    
    528.1
    
    
    
    498.5Electronic Systems
    
    
    311.2
    
    
    
    261.0Total sales
    
    $
    1,282.0
    
    
    $
    1,162.1Intersegment sales:Airframe Systems
    
    $
    12.9
    
    
    $
    15.6Engine Systems
    
    
    9.1
    
    
    
    5.1Electronic Systems
    
    
    7.9
    
    
    
    8.1Total intersegment sales
    
    $
    29.9
    
    
    $
    28.8Segment operating income:Airframe Systems
    
    $
    27.8
    
    
    $
    21.1Engine Systems
    
    
    90.5
    
    
    
    74.4Electronic Systems
    
    
    33.4
    
    
    
    22.9151.7
    
    
    
    118.4Corporate general and administrative expenses
    
    
    (20.5
    )
    
    
    (19.5
    )Total operating income
    
    $
    131.2
    
    
    $
    98.9
 17




---



##### 



Segment assets include assets directly identifiable with each segment. Corporate assets include
assets not specifically identified with a business segment, including cash. March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in millions)AssetsAirframe Systems
    
    $
    1,819.1
    
    
    $
    1,796.1Engine Systems
    
    
    2,287.8
    
    
    
    2,266.7Electronic Systems
    
    
    1,460.1
    
    
    
    1,419.0Corporate
    
    
    718.6
    
    
    
    735.7Total assets
    
    $
    6,285.6
    
    
    $
    6,217.5
 Note 16. Derivatives and Hedging Activities Cash Flow Hedges The Company has subsidiaries that conduct a substantial portion of their business in Euros, Great
Britain Pounds Sterling, Canadian Dollars and Polish Zlotys, but have significant sales contracts
that are denominated in U.S. Dollars. Periodically, the Company enters into forward contracts to
exchange U.S. Dollars for Euros, Great Britain Pounds Sterling, Canadian Dollars and Polish Zlotys. The forward contracts described above are used to mitigate the potential volatility to earnings and
cash flow arising from changes in currency exchange rates. The forward contracts are being
accounted for as cash flow hedges. The forward contracts are recorded in the Companys Unaudited
Condensed Consolidated Balance Sheet at fair value with the offset reflected in Accumulated Other
Comprehensive Income/(Loss), net of deferred taxes. The notional value of the forward contracts at
March 31, 2005 was $690.1 million. The fair value of the forward contracts at March 31, 2005 was an
asset of $82.2 million, of which $63.4 million was recorded in Prepaid Expenses and Other Assets
and $19.4 million was recorded in Other Assets offset by $0.6 million recorded in Accrued Expenses. The total fair value of the forward contracts of $82.2 million (before deferred taxes of $28.8
million) was recorded in Accumulated Other Comprehensive Income/(Loss) and will be reflected in
income as the individual contracts mature which will offset the earnings effect of the hedged item.
As of March 31, 2005, the portion of the $82.2 million fair value that would be reclassified into
earnings as an increase in sales to offset the effect of the hedged item in the next 12 months is a
gain of $62.8 million. In March 2005, the
Company called for redemption of $100 million in aggregate principal amount of its
6.45 percent senior notes due in 2007 and entered into a $100 million reverse treasury lock to
protect itself against movements in treasury rates prior to the redemption date of April 26, 2005.
In accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133), at March 31, 2005, the reverse treasury lock was
accounted for as a cash flow hedge and was recorded in the Companys Unaudited Condensed
Consolidated Balance Sheet at fair value with the offset reflected in Accumulated Other
Comprehensive Income/(Loss), net of deferred taxes. The fair value of the reverse treasury lock at
March 31, 2005 was an asset of $0.2 million, which was recorded in Prepaid Expenses and Other
Assets. See Note 19, Subsequent Events. 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 7.5 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 another $50 million fixed-to-floating
interest rate swap on its 7.5 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 SFAS
133, the interest rate swaps are being accounted for as fair value hedges and the carrying value of
the notes has been adjusted 18




---



##### 



to reflect the fair values of the interest rate swaps. The fair value of the interest rate swaps
was a liability (loss) of $5.2 million at March 31, 2005. As further discussed in Note 19, Subsequent Events, in April 2005 the Company terminated $17.9
million of a $100 million fixed-to-floating interest rate swap on its 6.45 percent notes due in
2007. Other Forward Contracts As a supplement to the foreign exchange cash flow hedging program, in January 2004 the Company
began to enter 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. Under this program, as of March 31, 2005, the
Company had forward contracts with a notional value of $89.8 million to buy Great Britain Pounds
Sterling, contracts with a net notional value of $10.3 million to buy Euros, contracts with a
notional value of $23.1 million to sell Canadian Dollars and contracts with a notional value of
$6.2 million to buy Singapore Dollars. Note 17. 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 flows. 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.
Legal costs are generally expensed when incurred. 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 it 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 results of operations in a given period,
but the amounts, and the possible range of loss in excess of the amounts accrued, are not
reasonably estimable. Based on currently available information, however, the Company does not
believe that future environmental costs in excess of those accrued with respect to sites for which
it has been identified as a potentially responsible party are likely to have a material adverse
effect on its financial condition. There can be no assurance, however, that additional future
developments, administrative actions or 19




---



##### 



liabilities relating to environmental matters will not have a material adverse effect on the
results of operations or cash flows in a given period. Environmental liabilities, including legal costs, are recorded when the liability is probable and
the costs are reasonably estimable, which generally is not later than at completion of a
feasibility study or when the Company has recommended a remedy or has committed to an appropriate
plan of action. The liabilities are reviewed periodically and, as investigation and remediation
proceed, adjustments are made as necessary. Liabilities for losses from environmental remediation
obligations do not consider the effects of inflation and anticipated expenditures are not
discounted to their present value. The liabilities are not reduced by possible recoveries from
insurance carriers or other third parties, but do reflect anticipated allocations among potentially
responsible parties at federal Superfund sites or similar state-managed sites and an assessment of
the likelihood that such parties will fulfill their obligations at such sites. The Companys Unaudited Condensed Consolidated Balance Sheet included an accrued liability for
environmental remediation obligations of $86.4 million and $88.5 million at March 31, 2005 and
December 31, 2004, respectively. At March 31, 2005 and December 31, 2004, $15.5 million and $16.2
million, respectively, of the accrued liability for environmental remediation was included in
current liabilities as Accrued Expenses. At March 31, 2005 and December 31, 2004, $29.6 million was
associated with ongoing operations and $56.8 million and $58.9 million, respectively, 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 less than 30 years on all sites for which it has been identified as a
potentially responsible party. This period includes operation and monitoring costs that are
generally incurred over 15 to 25 years. 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 its 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. There can be no assurance, however, that future legislative or other developments will not
have a material adverse effect on the results of operations in a given period. The Company believes that substantial insurance coverage is 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 In May 2002, the Company completed the tax free spin-off of its Engineered Products (EIP) segment,
which at the time of the spin-off included Enpro Industries, Inc. (EnPro) and Coltec Industries
Inc. (Coltec). At that time, 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 the Company on the theory
that it has 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 the Companys
ownership of any of 20




---



##### 



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, it believes it would not have a material adverse effect on
its financial condition, but could have a material adverse effect on the 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 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 the Companys obligation. EnPro, Coltec and
Coltec Capital Trust have agreed to indemnify the Company for any costs and liabilities arising
under or related to the TIDES after the spin-off. In addition to the Companys guarantee of the TIDES, at March 31, 2005, the Company has an
outstanding contingent liability for guarantees of debt and lease payments of $2.7 million, letters
of credit and bank guarantees of $53.6 million, residual value of leases of $51.8 million and
executive loans to purchase the Companys stock of $1 million. See Note 18, Guarantees. Commercial Airline Customers Several of the Companys commercial airline customers are experiencing financial difficulties. The
Company performs ongoing credit evaluations on the financial condition of all of its customers and
maintains reserves for uncollectible accounts receivable based upon expected collectibility.
Although the Company believes its reserves are adequate, it 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 flows. 21




---



##### 



Tax In 2000, Coltec, the Companys former subsidiary, made a $113.7 million payment to the Internal
Revenue Service (IRS) for an income tax assessment and the related accrued interest arising out of
certain capital loss deductions and tax credits taken in 1996. On February 13, 2001, Coltec filed
suit against the U.S. Government in the U.S. Court of Federal Claims seeking a refund of this
payment. The trial portion of the case was completed in May 2004. On November 2, 2004, the Company
was notified that the trial court ruled in favor of Coltec and ordered the Government to refund
federal tax payments of $82.8 million to Coltec. This tax refund will also bear interest to the
date of payment. As of March 31, 2005, the interest amount was approximately $47.1 million before
tax, or $30.6 million after tax. A final judgment was entered in this case by the U.S. Court of
Federal Claims on February 15, 2005. The Government provided notice on April 15, 2005 of its
intention to appeal the decision to the United States Court of Appeals for the Federal Circuit. If
the trial courts decision is ultimately upheld, the Company will be entitled to this tax refund
and related interest pursuant to an agreement with Coltec. If the Company receives these amounts,
it expects to record net income of approximately $146 million, based on interest through March 31,
2005, and including the release of previously established reserves. If the IRS were to ultimately
prevail in this case, Coltec will not owe any additional interest or taxes with respect to 1996.
The Company may, however, be required by the IRS to pay up to $32.7 million plus accrued interest
with respect to the same items claimed by Coltec in its tax returns for 1997 through 2000. The
amount of the previously estimated tax liability if the IRS were to prevail for the 1997 through
2000 period remains fully reserved. In 2000, the IRS issued a statutory notice of deficiency asserting that Rohr, Inc. (Rohr), the
Companys subsidiary, was liable for $85.3 million of additional income taxes for the fiscal years
ended July 31, 1986 through 1989. In 2003, the IRS issued an additional statutory notice of
deficiency asserting that Rohr was liable for $23 million of additional income taxes for the fiscal
years ended July 31, 1990 through 1993. The proposed assessments relate primarily to the timing of
certain tax deductions and tax credits. Rohr has filed petitions in the U.S. Tax Court opposing the
proposed assessments. Rohr expects that these cases may be scheduled for trial in 2005 and that it
will ultimately be successful in these cases. At the time of settlement or final determination by
the court, there will be a net cash cost to the Company due at least in part to the reversal of a
timing item. The Company believes that its total net cash cost is unlikely to exceed $100 million.
The Company is reserved for the estimated liability associated with these cases and as a result, it
does not expect a charge to earnings to result from the resolution of these matters. The Company is continuously undergoing examination by the IRS, as well as various state and foreign
jurisdictions. The IRS and other taxing authorities routinely challenge certain deductions and
credits reported by the Company on its income tax returns. In accordance with SFAS 109, Accounting
for Income Taxes, and SFAS 5, Accounting for Contingencies, the Company establishes reserves for
tax contingencies that reflect its best estimate of the deductions and credits that it may be
unable to sustain, or that it could be willing to concede as part of a broader tax settlement. As
of March 31, 2005, the Company had recorded tax contingency reserves of approximately $318.7
million. The current IRS examination audit cycle began in March 2002 and relates to the following
consolidated income tax groups for the following years: Rohr, Inc. and Subsidiaries
    
    July, 1995  December, 1997 (through
date of acquisition)Coltec Industries Inc and Subsidiaries
    
    December, 1997  July, 1999 (through
date of acquisition)Goodrich Corporation and Subsidiaries
    
    1998-1999 (including Rohr and Coltec)
 There are numerous tax issues that have been raised during the examination by the IRS, including,
but not limited to, transfer pricing, research and development credits, foreign tax credits, tax
accounting for long-term contracts, tax accounting for inventory, tax accounting for stock options,
depreciation, amortization and the proper timing for certain other deductions for income tax
purposes. Rohr has been under examination by the State of California for the tax years ending July 31, 1985,
1986 and 1987. The State of California has disallowed certain expenses incurred by one of Rohrs
subsidiaries in connection with the lease of certain tangible property. Californias State Board of
Equalization has held that the deductions 22




---



##### 



associated with the leased equipment were non-business deductions. As of March 31, 2005 the Company
made a voluntary payment of approximately $3.9 million related to items that were not being
contested. Approximately $0.6 million related to tax and approximately $3.3 million related to
interest on the tax. The remaining tax assessment of approximately $4.9 million continues to be
contested by the Company. The amount of interest on the remaining tax assessment is approximately
$17.7 million. The Company believes that it is adequately reserved for this contingency. Note 18. Guarantees The Company extends financial and product performance guarantees to third parties. As of March 31,
2005, the following environmental remediation indemnification and financial guarantees were
outstanding: Maximum
    
    
    CarryingPotential
    
    
    Amount ofPayment
    
    
    Liability(Dollars in millions)Environmental remediation indemnification (Note 17, Contingencies)
    
    No limit
    
    $
    17.7Financial Guarantees:TIDES
    
    $
    145.0
    
    
    $
    Debt and lease payments
    
    $
    2.7
    
    
    $
    Residual value on leases
    
    $
    51.8
    
    
    $
    Executive loans to purchase company stock
    
    $
    1.0
    
    
    $
    
 TIDES In connection with the Companys acquisition of Coltec on July 12, 1999, the Company guaranteed
amounts owed by Coltec Capital Trust with respect to the $145 million of outstanding TIDES and has
guaranteed Coltecs performance of its obligations with respect to Coltecs guarantee of the TIDES
and the underlying Coltec convertible junior subordinated debentures. Following the spin-off of the
Companys 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 relating to the TIDES after the spin-off. The Companys guarantee requires that the Company pay, to the extent not paid by Coltec Capital
Trust, distributions or other payments on the TIDES to the extent that Coltec Capital Trust has
funds available therefore at such time, and that it pay or perform, to the extent not paid or
performed by Coltec, Coltecs obligations under its guarantee of the TIDES and under the underlying
Coltec convertible junior subordinated debentures. The Companys guarantee is unsecured and is
subordinated in right of payment to all of the Companys senior debt that is currently outstanding
or that may be incurred in the future. The Companys guarantee will terminate upon full payment of the redemption price for the TIDES, the
distribution of the Coltec convertible junior subordinated debentures or full payment of the
amounts payable upon liquidation of Coltec Capital Trust. Debt and Lease Payments The debt and lease payments primarily represent obligations of the Company under industrial
development revenue bonds to finance additions to facilities that have since been divested. Each of
these obligations was assumed by a third party in connection with the Companys divestiture of the
related facilities. If the assuming parties default, the Company will be liable for payment of the
obligations. The industrial development revenue bonds mature in February 2008. 23




---



##### 



Residual Value on Leases Residual value on leases relate to corporate aircraft and production equipment leases pursuant to
which the Company is obligated to either purchase the leased equipment at the end of the lease term
or remarket the leased equipment. The residual values were established at lease inception. The
lease terms for the corporate aircraft mature in 2011 and 2012. The lease term for the production
equipment matures in July 2005 but may be extended. Executive Loans to Purchase Company Stock The executive loans to purchase Company stock are full-recourse bank loans made pursuant to the
Companys Executive Stock Purchase Program (the Program). The Company has guaranteed the loans in
the event of default, but has recourse to the executives if the Company incurs a loss under the
guarantee. Participants in the Program are fully liable for any losses, as well as for the
repayment of the loans when they come due. Two loans were outstanding at March 31, 2005. One loan
had a maturity date of March 31, 2005 and the other loan matures on September 30, 2006. The loan
that matured on March 31, 2005 was paid in full on April 4, 2005. The Program was suspended
effective August 16, 2002, and no further loans may be made under the Program. None of the loans
has been modified since the Company suspended the Program. Service and Product Warranties The Company provides service and warranty policies on its products. Liability under service and
warranty policies is based upon specific claims and a review of historical warranty and service
claim experience. Adjustments are made to accruals as claim data and historical experience change.
In addition, the Company incurs discretionary costs to service its products in connection with
product performance issues. The changes in the carrying amount of service and product warranties for the three months ended
March 31, 2005 are as follows: (Dollars in millions)Balance at December 31, 2004
    
    $
    166.5Service and product warranty provision
    
    
    11.3Return to profit
    
    
    (5.2
    )Payments
    
    
    (13.5
    )Foreign currency translation
    
    
    (0.7
    )Balance at March 31, 2005
    
    $
    158.4
 The current and long-term portions of service and product warranties were as follows: March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in millions)Short-term liabilities
    
    $
    62.9
    
    
    $
    69.0Long-term liabilities
    
    
    95.5
    
    
    
    97.5Total
    
    $
    158.4
    
    
    $
    166.5
 Note 19. Subsequent Events Redemption of Outstanding 6.45% Notes due 2007 On March 24, 2005, the Company called for the redemption of $100 million in aggregate principal
amount of its 6.45 percent senior notes due in 2007. The notes were redeemed on April 26, 2005 and
the Company will record $6.3 million of debt premiums and associated costs in Other Income
(Expense)  Net in the second quarter of 2005. The redemption price per $1,000 principal amount of
notes was $1,058.25 plus accrued and unpaid interest to the redemption date. On March 29, 2005, the
Company entered into a $100 million reverse treasury lock to protect itself against movements in
treasury rates prior to the redemption date of the 6.45 percent senior notes. The reverse treasury
lock matured on April 21, 2005 and the Company will record a $0.7 million gain in Other Income
(Expense)  Net in the second quarter 2005. 24




---



##### 



Termination of Fixed-to-Floating Interest Rate Swap On April 4, 2005, the Company terminated $17.9 million of a $100 million fixed-to-floating interest
rate swap on its 6.45 percent notes due in 2007. The Company will record a $0.4 million loss
related to the termination in Other Income (Expense)  Net in the second quarter of 2005. This
portion of the interest rate swap was terminated so that the outstanding notional amount of the
fixed-to-floating interest rate swap would be proportional to the outstanding principal amount,
subsequent to the redemption, of the 6.45 percent notes due in 2007. Sale of JcAIR Test Systems On April 19, 2005, the Company completed the sale of its JcAIR Test Systems business (Test Systems)
to Aeroflex Incorporated of Plainview, New York, for $35 million in cash. The purchase price is
subject to certain purchase price adjustments. Test Systems is reported in the Electronic Systems
Segment. The Company expects to report an after tax gain on the sale of the business of
approximately $13 million, or $0.11 per diluted share. The Company will report the gain on the sale
and results of operations for all prior periods of JcAIR Test Systems as discontinued operations
beginning in the second quarter of 2005. Sales and operating income for Test Systems were as
follows: Three Months EndedMarch 31,2005
    
    
    2004(Dollars in millions)Sales
    
    $
    6.5
    
    
    $
    5.6Operating income
    
    $
    1.1
    
    
    $
    0.2
 25




---



##### 



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. 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
systems and products to the global military and space markets. Our business is conducted globally
with manufacturing, service and sales undertaken in various locations throughout the world. Our
products and services are principally sold to customers in North America, Europe and Asia. For the quarter ended March 31, 2005, we reported net income of $58 million, or $0.47 per diluted
share. Sales for the quarter ended March 31, 2005 were $1,282 million. For the quarter ended March
31, 2004, we reported net income of $47 million, or $0.39 per diluted share. Sales for the quarter
ended March 31, 2004 were $1,162 million. Foreign currency translation was responsible for
approximately $9 million of the $120 million increase in sales. The remaining increase resulted
primarily from increased sales of commercial aerospace aftermarket products and services. Income from continuing operations for the quarter ended March 31, 2005, increased $27 million over
the quarter ended March 31, 2004. The increase was primarily due to the increased sales of
commercial aerospace aftermarket products and services. During the quarter ended March 31, 2004, we
wrote off notes and accounts receivable of $5 million after tax. There were no similar write-offs
during the first quarter of 2005. Our effective tax rate was 34.8 percent during the quarter ended
March 31, 2005 and 31 percent during the quarter ended March 31, 2004. The increase in our
effective tax rate resulted from recording valuation allowances against losses in certain foreign
jurisdictions, growth in before tax book income relative to our significant permanent items, and
the estimated impact of the phase-in of the American Jobs Creation Act of 2004, which replaced
certain export sales deductions with a deduction for income from qualified domestic production
activities. Effective January 1, 2004, we changed two aspects of the application of contract accounting for our
aerostructures business which resulted in a $16.2 million after tax gain ($23.3 million before tax
gain) that was recorded as a Cumulative Effect of Change in Accounting in the quarter ended March
31, 2004. Net cash provided by operating activities of continuing operations decreased $28.8 million from
$48.5 million during the quarter ended March 31, 2004 to $19.7 million during the quarter ended
March 31, 2005. Net cash provided by operating activities in the quarter ended March 31, 2005
included an increase in the sale of accounts receivable under our securitization program of $24.3
million offset in part by worldwide pension contributions of $3.3 million. Net cash provided by
operating activities in the quarter ended March 31, 2005 was also reduced by higher working capital
requirements primarily for accounts receivable and inventory. Net cash provided by operating
activities in the quarter ended March 31, 2004 included cash received from the termination of
certain life insurance policies of $23.4 million, offset in part by the acquisition of certain
aftermarket rights of $15 million, a reduction in the accounts receivable sold under our
securitization program of $14.5 million, worldwide pension contributions of $13.2 million and the
pre-funding of the redemption of certain industrial revenue bonds of $4 million. 26




---



##### 



Net cash used by investing activities of continuing operations was $35.6 million in the
quarter ended March 31, 2005 and $23.4 million in the quarter ended March 31, 2004. Net cash used
by investing activities of continuing operations for the quarter ended March 31, 2005 included
capital expenditures of $27 million and the acquisition of the minority interest in one of our
businesses of $8.8 million. Net cash used by investing activities of continuing operations in the
quarter ended March 31, 2004 included capital expenditures of $22.9 million. Net cash provided by financing activities of continuing operations was $5.8 million in the quarter
ended March 31, 2005, compared to a $74.8 million use of cash by financing activities of continuing
operations for the quarter ended March 31, 2004. During the quarter ended March 31, 2005, we issued
common stock of $34.1 million, primarily in connection with the exercise of stock options, and paid
dividends to shareholders of $23.8 million. During the quarter ended March 31, 2004, we repaid the
balance of the 8.30% Cumulative Quarterly Income Preferred Securities, Series A (QUIPS) of $63.5
million. Long-term debt and capital lease obligations, including current maturities of long-term debt and
capital lease obligations, at March 31, 2005 was $1,896 million compared to $1,902 million at
December 31, 2004. At March 31, 2005, we had cash and marketable securities of $286 million as
compared to $298 million at December 31, 2004. We maintain a committed syndicated revolving credit facility expiring in August 2006 that permits
borrowing, including letters of credit, up to a maximum of $500 million. At March 31, 2005, there
were no borrowings and $20.5 million in letters of credit outstanding under this facility. At March
31, 2005, we had borrowing capacity under this facility of $468.7 million, after reductions for
letters of credit outstanding. At March 31, 2005, we maintained $25 million of uncommitted domestic
money market facilities and $33.2 million of uncommitted and committed foreign working capital
facilities with various banks to meet short-term borrowing requirements. At March 31, 2005, there
were no borrowings under these facilities. We maintain a shelf registration that allows us to issue
up to $1.4 billion of debt securities, series preferred stock, common stock, stock purchase
contracts and stock purchase units. Our sales for 2005 are expected to grow about 8 to 10 percent from 2004 levels, to a range of $5.1
billion to $5.2 billion. Margin growth in excess of the growth in sales is expected to result in
diluted earnings per share from continuing operations in the range of $1.80 per share to $1.95 per
share, an increase of 26 to 36 percent from the 2004 diluted earnings from continuing operations.
We expect cash flow from operations, minus capital expenditures, to exceed 75 percent of net income
in 2005. We expect 2005 capital expenditures to be in the range of $190 million to $210 million. We
also expect our effective tax rate for the full year 2005 to be approximately 34 percent. The
current earnings and cash flow from operations outlook for 2005 does not include the resolution of
the previously disclosed Rohr and Coltec tax litigation or divestitures other than the JcAir Test
Systems business. The outlook includes the impact of all completed and anticipated debt
retirements. Refer to Outlook for specific assumptions relating to our outlook for 2005. Our business balance across the aerospace and defense markets continues to be an important
strategic aspect of our business. We believe that trends in these markets will have an important
impact on future sales. Looking at the quarter ended March 31, 2005 sales by market channel,
military and space sales represented approximately 27 percent of sales, total commercial aircraft
original equipment (OE) sales, including regional, business and general aviation original equipment
sales, represented approximately 31 percent of our sales and total commercial aircraft aftermarket
sales for these same aircraft and for aircraft heavy maintenance represented approximately 36
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 military and space markets
represented approximately 44 percent of total sales. We are currently under contract to supply components and systems for a number of new commercial and
military aircraft programs, including the Airbus A380 and A350, the Boeing 787 Dreamliner, the
Embraer 190 and the Lockheed Martin F-35 Joint Striker Fighter, which should fuel consistent
long-term growth. We expect continued growth in our key markets in 2005. In this environment, we are carefully
focused on resource allocation to deliver maximum long-term value for all of our stakeholders. 27




---



##### 



OUTLOOK We have increased our 2005 outlook from that provided in our 2004 Annual Report on Form 10-K. The
full year 2005 outlook for sales has been increased from a range of $5 billion to $5.1 billion to a
range of $5.1 billion to $5.2 billion. The current outlook represents a sales increase of about 8
to 10 percent from 2004 levels. Expected margin growth in excess of the growth in sales has
resulted in an increase in our outlook for diluted earnings per share (EPS) from $1.60 to $1.80 per
diluted share to $1.80 to $1.95 per diluted share, an increase of 26 to 36 percent from 2004
diluted EPS. This outlook includes the impact of the sale of JcAIR Test Systems and all completed and
anticipated debt retirements, neither of which were included in our prior outlook. The net impact
of these two items for the full year 2005 is expected to be income of approximately $0.04 to $0.05
per diluted share. We currently expect an effective tax rate for the full year 2005 of approximately 34 percent,
compared to the 32 percent rate that we assumed in our prior 2005 outlook. Our current 2005 outlook is based on the following market assumptions:  
    Deliveries of Airbus and Boeing large commercial aircraft are expected to increase by 10
to 15 percent annually in both 2005 and 2006, based on the announced plans by Airbus and
Boeing. Our commercial aircraft original equipment (OE) sales are projected to increase by
more than 15 percent in 2005, compared to 2004.
    Capacity in the global airline system, as measured by available seat miles (ASMs), is
expected to continue to grow. Our sales to airlines for large commercial and regional
aircraft aftermarket parts and service are expected to grow approximately 6 percent in
2005, compared to 2004, and in-line with expectations for global ASM increases.
    Total regional and business aircraft production is expected to be relatively flat in
2005, compared to 2004, as deliveries of business jets are expected to increase, offsetting
the expected decrease in regional aircraft deliveries. Deliveries to Embraer in support of
its EMBRAER 190 aircraft, which includes significant content of our products, are expected
to enable us to increase our OE sales in this market channel for the full year 2005,
compared to 2004.
    Military sales (OE and aftermarket) are expected to increase 5 to 6 percent in 2005,
compared to 2004, representing a growth rate slightly greater than global military budgets. We continue to expect cash flow from operations, minus capital expenditures, to exceed 75 percent
of net income in 2005. We continue to expect 2005 capital expenditures to be in the range of $190
million to $210 million. The current earnings and cash flow from operations outlook for 2005 does not include resolution of
the previously disclosed Rohr and Coltec tax litigation or divestitures other than the JcAIR Test
Systems business. RESULTS OF OPERATIONS Changes in Accounting Method 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 28




---



##### 



accounting method was to record a $16.2 million after tax gain ($23.3 million before tax gain) as a
Cumulative Effect of Change in Accounting. Quarter Ended March 31, 2005 Compared with Quarter Ended March 31, 2004 Quarter EndedMarch 31,2005
    
    
    2004(Dollars in millions)Sales
    
    $
    1,282.0
    
    
    $
    1,162.1Segment Operating Income
    
    $
    151.7
    
    
    $
    118.4Corporate General and Administrative Costs
    
    
    (20.5
    )
    
    
    (19.5
    )Total Operating Income
    
    
    131.2
    
    
    
    98.9Net Interest Expense
    
    
    (33.0
    )
    
    
    (36.6
    )Other Income (Expense)  Net
    
    
    (10.1
    )
    
    
    (18.0
    )Income from Continuing Operations Before Income Taxes
    
    
    88.1
    
    
    
    44.3Income Tax (Expense)
    
    
    (30.6
    )
    
    
    (13.7
    )Income from Continuing Operations
    
    
    57.5
    
    
    
    30.6Cumulative Effect of Change in Accounting
    
    
    
    
    
    
    16.2Net Income
    
    $
    57.5
    
    
    $
    46.8
 Changes in sales and segment operating income are discussed within the Business Segment
Performance section below. Corporate general and administrative costs of $20.5 million for the quarter ended March 31, 2005
increased $1 million, or 5.1 percent, from $19.5 million for the quarter ended March 31, 2004
primarily due to higher incentive compensation and audit fees offset in part by lower tax
litigation costs and foreign exchange gains. Corporate general and administrative costs as a
percentage of sales were 1.6 percent in the quarter ended March 31, 2005 and 1.7 percent in the

quarter ended March 31, 2004. Net interest expense decreased $3.6 million, or 9.8 percent, primarily due to lower debt levels. Other Income (Expense)  Net decreased by $7.9 million, or 43.9 percent, to expense of $10.1
million in the quarter ended March 31, 2005 from expense of $18 million in the quarter ended March
31, 2004. The decrease in expense resulted primarily from the absence in the quarter ended March
31, 2005 of a $7 million impairment of a note receivable that was recorded in the quarter ended
March 31, 2004. Our effective tax rate was 34.8 percent during the quarter ended March 31, 2005 and 31 percent
during the quarter ended March 31, 2004. The increase in our effective tax rate resulted from
recording valuation allowances against losses in certain foreign jurisdictions, growth in before
tax book income relative to our significant permanent items, and the estimated impact of the
phase-in of the American Jobs Creation Act of 2004, which replaced certain export sales deductions
with a deduction for income from qualified domestic production activities. As noted above, effective January 1, 2004, we changed two aspects of the application of contract
accounting for our aerostructures business which resulted in a $16.2 million after tax gain ($23.3
million before tax gain) that was recorded as a Cumulative Effect of Change in Accounting in the
quarter ended March 31, 2004. 29




---



##### 



BUSINESS SEGMENT PERFORMANCE Our operations are reported as three business segments: Airframe Systems, Engine Systems and
Electronic Systems. In the following table, segment operating income represents total segment revenue reduced by
operating expenses directly identifiable with the applicable business segment. Quarter Ended March 31, 2005 Compared with the Quarter Ended March 31, 2004 Quarter Ended March 31,%
    
    
    % of Sales2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004(Dollars in millions)NET CUSTOMER SALESAirframe Systems
    
    $
    442.7
    
    
    $
    402.6
    
    
    
    10.0Engine Systems
    
    
    528.1
    
    
    
    498.5
    
    
    
    5.9Electronic Systems
    
    
    311.2
    
    
    
    261.0
    
    
    
    19.3Total Sales
    
    $
    1,282.0
    
    
    $
    1,162.1
    
    
    
    10.3SEGMENT OPERATING INCOMEAirframe Systems
    
    $
    27.8
    
    
    $
    21.1
    
    
    
    31.8
    
    
    
    6.3
    
    
    
    5.2Engine Systems
    
    
    90.5
    
    
    
    74.4
    
    
    
    21.6
    
    
    
    17.1
    
    
    
    14.9Electronic Systems
    
    
    33.4
    
    
    
    22.9
    
    
    
    45.9
    
    
    
    10.7
    
    
    
    8.8Segment Operating Income
    
    $
    151.7
    
    
    $
    118.4
    
    
    
    28.1
    
    
    
    11.8
    
    
    
    10.2
 Airframe Systems:Airframe Systems segment sales of $442.7 million in the quarter ended March 31,
2005 increased $40.1 million, or 10 percent, from $402.6 million in the quarter ended March 31,
2004. The increase was primarily due to the following:  
    Higher landing gear commercial OE sales volume;
    Higher military and commercial aircraft wheel and brake sales volume;
    Higher sales of airframe heavy maintenance services; and
    Favorable currency translation on non-U.S. dollar sales, primarily in the actuation
systems and landing gear businesses. Airframe Systems segment operating income increased $6.7 million, or 31.8 percent, from $21.1
million in the quarter ended March 31, 2004 to $27.8 million in the quarter ended March 31, 2005.
Segment operating income increased primarily as a result of the higher sales volume as described
above. Engine Systems:Engine Systems segment sales of $528.1 million in the quarter ended March 31, 2005
increased $29.6 million, or 5.9 percent, from $498.5 million in the quarter ended March 31, 2004.
The increase was due to the following:  
    Higher aerostructures engine OE, U.S. military and commercial spares and maintenance,
repair and overhaul (MRO) sales volume;
    Higher cargo systems commercial OE sales volume;
    Higher sales volume of turbine fuel engine components and turbomachinery products for
U.S. military and regional aircraft applications and in the power generation market;
    Higher revenues from asset management arrangements with airlines for aftermarket support
from customer services; and
    Favorable currency translation on non-U.S. dollar sales, primarily in the engine
controls business. 30




---



##### 



The increase in Engine Systems segment sales was partially offset by decreased sales volume of
military OE and aftermarket engine controls. Engine Systems segment operating income increased $16.1 million, or 21.6 percent, from $74.4
million in the quarter ended March 31, 2004 to $90.5 million in the quarter ended March 31, 2005.
Segment operating income was higher due to:  
    Higher sales volume as described above; and
    Improved aftermarket sales mix, primarily for aerostructures products. The increase in Engine Systems segment operating income was partially offset by:  
    Increased aerostructures contract costs for certain U.S. military and commercial jet
applications resulting in a $5.1 million cumulative catch-up charge; and  
    Decreased sales volume of military OE and aftermarket engine controls. Electronic Systems:Electronic Systems segment sales of $311.2 million in the quarter ended March
31, 2005 increased $50.2 million, or 19.3 percent, from $261 million in the quarter ended March 31,
2004. The increase was primarily due to:  
    Higher sales volume of regional and business jet aircraft OE and aftermarket products
for the aircraft interior products, de-icing & specialty systems, sensor systems and power
systems businesses;  
    Higher sales volume of military OE and aftermarket sales in nearly all of our business
units; and  
    Higher sales volume of commercial OE for the aircraft interior products, sensors, fuel &
utility systems, lighting and power systems businesses. Electronic Systems segment operating income increased $10.5 million, or 45.9 percent, from $22.9
million in the quarter ended March 31, 2004 to $33.4 million in the quarter ended March 31, 2005.
The increased volume from sales described above favorably affected segment operating income. The increase in segment operating income was partially offset by:  
    Unfavorable sales mix shift from commercial and military aftermarket towards
proportionately more OE sales in military, regional and business and commercial markets;
and  
    Increased investments in research and development costs for new programs that have been
won. Subsequent Event On April 19, 2005, we completed the sale of our JcAIR Test Systems business (Test Systems) to
Aeroflex Incorporated of Plainview, New York, for $35 million in cash. The purchase price is
subject to certain purchase price adjustments. Test Systems is reported in the Electronic Systems
Segment. We expect to report an after-tax gain on the sale of the business of approximately $13
million, or $0.11 per diluted share. We will report the gain on the sale and results of operations
for all prior periods of Test Systems as discontinued operations beginning in the quarter ending
June 30, 2005. Sales and contribution to segment operating income for Test Systems were $6.5
million and $1.1 million, respectively, in the quarter ended March 31, 2005. 31




---



##### 



LIQUIDITY AND CAPITAL RESOURCES We currently expect to fund expenditures for capital requirements as well as liquidity needs from a
combination of cash, internally generated funds and financing arrangements. We believe that our
internal liquidity, together with access to external capital resources, will be sufficient to
satisfy existing commitments and plans and also provide adequate financial flexibility. Cash At March 31, 2005, we had cash and cash equivalents of $286.4 million, as compared to $297.9
million at December 31, 2004. 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 March 31, 2005, there
were no borrowings and $20.5 million in letters of credit outstanding under this facility. At
December 31, 2004, there were no borrowings and $26.2 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 the consolidated net
worth requirement and maximum leverage ratio. We are currently in compliance with all such
covenants. As of March 31, 2005, we had borrowing capacity under this facility of $468.7 million,
after reductions for letters of credit outstanding. At March 31, 2005, we maintained $25 million of uncommitted domestic money market facilities and
$33.2 million of uncommitted and committed foreign working capital facilities with various banks to
meet short-term borrowing requirements. As of March 31, 2005 and December 31, 2004, there were no
borrowings under these facilities. These credit facilities are provided by a small number of
commercial banks that also provide us with committed credit through the syndicated revolving credit
facility and with various cash management, trust and other services. Our credit facilities do not contain any credit rating downgrade triggers that would accelerate the
maturity of our indebtedness. However, a ratings downgrade would result in an increase in the
interest rate and fees payable under our committed syndicated revolving credit facility. Such a
downgrade also could adversely affect our ability to renew existing or obtain access to new credit
facilities in the future and could increase the cost of such new facilities. Long-Term Financing At March 31, 2005, we had long-term debt and capital lease obligations, including current
maturities, of $1,895.8 million with maturities ranging from 2005 to 2046. 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. On March 24, 2005, we called for redemption $100 million in aggregate principal amount of our
6.45 percent senior notes due in 2007. The notes were redeemed on April 26, 2005 and we will
record $6.3 million of debt premiums and associated costs in Other Income (Expense)  Net in
the quarter ending June 30, 2005. On March 29, 2005, we entered into a $100 million reverse
treasury lock to protect us against movements in treasury rates prior to the redemption date of
the 6.45 percent senior notes. The reverse treasury lock matured on April 21, 2005 and we
received $0.7 million in cash, which will be recorded as a gain in Other Income (Expense)  Net
in the quarter ending June 30, 2005. On April 4, 2005, we terminated $17.9 million of a $100
million fixed-to-floating interest rate swap on our 6.45 percent notes due in 2007. We paid
$0.4 million in cash to terminate this portion of the interest rate swap and the amount will be
recorded as an expense in Other Income (Expense)  Net in the quarter ending June 30, 2005.
This portion of the interest rate swap was terminated so that the outstanding notional amount 32




---



##### 



of the fixed-to-floating interest rate swap would be proportional to the outstanding principal
amount, subsequent to the redemption, of the 6.45 percent notes due in 2007. We expect to retire up to an additional $100 million of long-term debt during the remainder of
2005. Off-Balance Sheet Arrangements We utilize several forms of off-balance sheet financing arrangements. At March 31, 2005, these
arrangements included: UndiscountedMinimumFuture Lease
    
    
    ReceivablesPayments
    
    
    Sold(Dollars in millions)Tax Advantaged Operating Leases
    
    $
    48.3Standard Operating Leases
    
    
    153.9$
    202.2Short-term Receivables Securitization Program
    
    
    
    
    
    $
    96.6
 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 March 31, 2005. At March 31, 2005,
$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 $153.9 million at March 31, 2005. Under certain operating lease agreements, we receive rent holidays, which represent periods of free
or reduced rent. Rent holidays are recorded as a liability and recognized on a straight-line basis
over the lease term. In addition, we may receive incentives or allowances from the lessor as part
of the lease agreement. We recognize these payments as a liability and amortize them as reductions
to lease expense over the lease term. We capitalize leasehold improvements and amortize them over
the lesser of the lease term or the assets useful life. Sale of Receivables At March 31, 2005, 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 $96.6 million at March 31, 2005. Continued availability of the
securitization program is conditioned upon compliance with covenants, related primarily to
operation of the securitization, set forth in the related agreements. We are currently in
compliance with all such covenants. The securitization does not contain any credit rating downgrade
triggers pursuant to which the program could be terminated. Cash Flow Hedges We have subsidiaries that conduct a substantial portion of their business in Euros, Great Britain
Pounds Sterling, Canadian Dollars and Polish Zlotys, but have significant sales contracts that are
denominated in U.S. Dollars. Approximately 10 percent of our revenues and approximately 25 percent
of our costs are denominated in currencies other than the U.S. Dollar. Over 95 percent of these net
costs are in Euros, Great Britain Pounds Sterling and Canadian Dollars. Periodically, we enter into
forward contracts to exchange U.S. Dollars for Euros, Great Britain Pounds Sterling, Canadian
Dollars, and Polish Zlotys to hedge a portion of our exposure. When the U.S. Dollar weakens, our
unhedged net costs rise in U.S. Dollar terms and our average hedge rates also rise over time. 33




---



##### 



The forward contracts described above are used to mitigate the potential volatility of earnings and
cash flow arising from changes in currency exchange rates that impact our non-U.S. Dollar sales and
expenses. The forward contracts are being accounted for as cash flow hedges. The forward contracts
are recorded on our Unaudited Condensed Consolidated Balance Sheet at fair value with the net
change in fair value reflected in Accumulated Other Comprehensive Income/(Loss), net of deferred
taxes. The notional value of the forward contracts at March 31, 2005 was $690.1 million. The fair
value of the forward contracts at March 31, 2005 was an asset of $82.2 million, of which $63.4
million is recorded in Prepaid Expenses and Other Assets, $19.4 million is recorded in Other Assets
and $0.6 is recorded in Accrued Expenses. The total fair value of the forward contracts of $82.2 million (before deferred taxes of $28.8
million) is recorded in Accumulated Other Comprehensive Income/(Loss) and will be reflected in
income as the individual contracts mature, which will offset the earnings effect of the hedged
item. As of March 31, 2005, the portion of the $82.2 million fair value that would be reclassified
into earnings as an increase in sales to offset the effect of the hedged item in the next 12 months
is a gain of $62.8 million. In March 2005, we called for redemption $100 million in aggregate principal amount of our 6.45
percent senior notes due in 2007 and entered into a $100 million reverse treasury lock to
protect us against movements in treasury rates prior to the redemption date of April 26, 2005.
In accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133), at March 31,
2005, the reverse treasury lock was accounted for as a cash flow hedge and was recorded in our
Unaudited Condensed Consolidated Balance Sheet at fair value with the offset reflected in
Accumulated Other Comprehensive Income/(Loss), net of deferred taxes. The fair value of the
reverse treasury lock at March 31, 2005 was an asset of $0.2 million, which was recorded in
Prepaid Expenses and Other Assets. See Liquidity and Capital Resources-Long-Term Financing. Fair Value Hedges In July 2003, we entered into a $100 million fixed-to-floating interest rate swap on the 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 7.5 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 another $50 million fixed-to-floating interest rate swap on our 7.5
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 SFAS 133, 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 $5.2 million at March 31, 2005. In April 2005, we terminated $17.9 million of a $100 million fixed-to-floating interest rate
swap on our 6.45 percent notes due in 2007. See Liquidity and Capital Resources-Long-Term
Financing. Other Forward Contracts As a supplement to our foreign exchange cash flow hedging program, in January 2004 we began to
enter 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. Under this program, as of March 31, 2005, we had forward
contracts with a notional value of $89.8 million to buy Great Britain Pounds Sterling, forward
contracts with a notional value of $10.3 million to buy Euros, forward contracts with a notional
value of $23.1 million to sell Canadian Dollars and forward contracts with a notional value of $6.2
million to buy Singapore Dollars. 34




---



##### 



CASH FLOW The following table summarizes our cash flow activity for the quarters ended March 31, 2005 and
2004. Quarter Ended March 31,Net Cash Provided by (Used by):
    
    2005
    
    
    2004(Dollars in millions)Operating activities
    
    $
    19.7
    
    
    $
    48.5Investing activities
    
    $
    (35.6
    )
    
    $
    (23.4
    )Financing activities
    
    $
    5.8
    
    
    $
    (74.8
    )
 Operating Activities Net cash provided by operating activities decreased $28.8 million from $48.5 million during the
quarter ended March 31, 2004 to $19.7 million during the quarter ended March 31, 2005. Net cash
provided by operating activities in the quarter ended March 31, 2005 included an increase in the
accounts receivable sold under our securitization program of $24.3 million offset in part by
worldwide pension contributions of $3.3 million. Net cash provided by operating activities in the
quarter ended March 31, 2005 was also reduced by higher working capital requirements primarily for
accounts receivable and inventory. Net cash provided by operating activities in the quarter ended
March 31, 2004 included cash received from the termination of certain life insurance policies of
$23.4 million offset in part by the acquisition of certain aftermarket rights of $15 million, a
reduction in the accounts receivable sold under our securitization program of $14.5 million,
worldwide pension contributions of $13.2 million and the pre-funding of the redemption of certain
industrial revenue bonds of $4 million. Investing Activities Net cash used by investing activities was $35.6 million in the quarter ended March 31, 2005 and
$23.4 million in the quarter ended March 31, 2004. Net cash used by investing activities for the
quarter ended March 31, 2005 included capital expenditures of $27 million and an acquisition of the
minority interest in one of our businesses of $8.8 million. Net cash used by investing activities
in the quarter ended March 31, 2004 included capital expenditures of $22.9 million. Financing Activities Net cash provided by financing activities was $5.8 million in the quarter ended March 31, 2005,
compared to a $74.8 million use of cash by financing activities for the quarter ended March 31,
2004. During the quarter ended March 31, 2005, we issued common stock of $34.1 million, primarily
from the exercise of stock options, and paid dividends to shareholders of $23.8 million. During the
quarter ended March 31, 2004, we repaid the balance of the QUIPS of $63.5 million. 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. Legal costs are
generally expensed when incurred. 35




---



##### 



Environmental We are subject to various domestic and international environmental laws and regulations which may
require that we investigate and remediate the effects of the release or disposal of materials at
sites associated with past and present operations, including sites at which we have been identified
as a potentially responsible party under the federal Superfund laws and comparable state laws. We
are currently involved in the investigation and remediation of a number of sites under these laws. The measurement of environmental liabilities by us is based on currently available facts, present
laws and regulations and current technology. Such estimates take into consideration our prior
experience in site investigation and remediation, the data concerning cleanup costs available from
other companies and regulatory authorities and the professional judgment of our environmental
specialists in consultation with outside environmental specialists, when necessary. Estimates of
our environmental liabilities are further subject to uncertainties regarding the nature and extent
of site contamination, the range of remediation alternatives available, evolving remediation
standards, imprecise engineering evaluations and estimates of appropriate cleanup technology,
methodology and cost, the extent of corrective actions that may be required and the number and
financial condition of other potentially responsible parties, as well as the extent of their
responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceed, it is likely that adjustments
in our accruals will be necessary to reflect new information. The amounts of any such adjustments
could have a material adverse effect on our results of operations in a given period, but the
amounts, and the possible range of loss in excess of the amounts accrued, are not reasonably
estimable. Based on currently available information, however, we do not believe that future
environmental costs in excess of those accrued with respect to sites for which we have been
identified as a potentially responsible party are likely to have a material adverse effect on our
financial condition. There can be no assurance, however, that additional future developments,
administrative actions or liabilities relating to environmental matters will not have a material
adverse effect on our results of operations or cash flows in a given period. Environmental liabilities, including legal costs, 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 $86.4 million and $88.5 million at March 31, 2005 and December 31, 2004,
respectively. At March 31, 2005 and December 31, 2004, $15.5 million and $16.2 million,
respectively, of the accrued liability for environmental remediation was included in current
liabilities as Accrued Expenses. At March 31, 2005 and December 31, 2004, $29.6 million was
associated with ongoing operation and $56.8 million and $58.9 million, respectively, 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 less than 30 years on all sites for which we have been identified as a potentially
responsible party. This period includes operation and monitoring costs that are generally incurred
over 15 to 25 years. 36




---



##### 



Asbestos We and a number of our subsidiaries have been named as defendants in various actions by plaintiffs
alleging injury or death as a result of exposure to asbestos fibers in products, or which may have
been present in our facilities. A number of these cases involve maritime claims, which have been
and are expected to continue to be administratively dismissed by the court. These actions primarily
relate to previously owned businesses. We believe that pending and reasonably anticipated future
actions, net of anticipated insurance recoveries, are not likely to have a material adverse effect
on our financial condition, results of operations or cash flows. There can be no assurance,
however, that future legislative or other developments will not have a material adverse effect on
our results of operations in a given period. 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 In May 2002, we completed the tax free spin-off of our Engineered Products (EIP) segment, which at
the time of the spin-off included Enpro Industries, Inc. (EnPro) and Coltec Industries Inc.
(Coltec). At that time, 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 the 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. 37




---



##### 



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 March 31, 2005, we have an outstanding contingent
liability for guarantees of debt and lease payments of $2.7 million, letters of credit and bank
guarantees of $53.6 million, residual value of leases of $51.8 million and executive loans to
purchase our stock of $1 million. Commercial Airline Customers Several of our commercial airline customers are experiencing financial difficulties. We perform
ongoing credit evaluations on the financial condition of all of our customers and maintain reserves
for uncollectible accounts receivable based upon expected collectibility. Although we believe our
reserves are adequate, we are not able to predict the future financial stability of these
customers. Any material change in the financial status of any one or group of customers could have
a material adverse effect on our financial condition, results of operations or cash flows. The
extent to which extended payment terms are granted to customers may negatively affect future cash
flow. Tax In 2000, Coltec, our former subsidiary, made a $113.7 million payment to the Internal Revenue
Service (IRS) for an income tax assessment and the related accrued interest arising out of certain
capital loss deductions and tax credits taken in 1996. On February 13, 2001, Coltec filed suit
against the U.S. Government in the U.S. Court of Federal Claims seeking a refund of this payment.
The trial portion of the case was completed in May 2004. On November 2, 2004, we were notified that
the trial court ruled in favor of Coltec and ordered the Government to refund federal tax payments
of $82.8 million to Coltec. This tax refund will also bear interest to the date of payment. As of
March 31, 2005, the interest amount was approximately $47.1 million before tax, or $30.6 million
after tax. A final judgment was entered in this case by the U.S. Court of Federal Claims on
February 15, 2005. The Government provided notice on April 15, 2005 of its intention to appeal the
decision to the United States Court of Appeals for the Federal Circuit. If the trial courts
decision is ultimately upheld, we will be entitled to this tax refund and related interest pursuant
to an agreement with Coltec. If we receive these amounts, we expect to record net income of
approximately $146 million, based on interest through March 31, 2005, and including the release of
previously established reserves. If the IRS were to ultimately prevail in this case, Coltec will
not owe any additional interest or taxes with respect to 1996. We may, however, be required by the
IRS to pay up to $32.7 million plus accrued interest with respect to the same items claimed by
Coltec in its tax returns for 1997 through 2000. The amount of the previously estimated tax
liability if the IRS were to prevail for the 1997 through 2000 period remains fully reserved. In 2000, the IRS issued a statutory notice of deficiency asserting that Rohr, Inc. (Rohr), our
subsidiary, was liable for $85.3 million of additional income taxes for the fiscal years ended July
31, 1986 through 1989. In 2003, the IRS issued an additional statutory notice of deficiency
asserting that Rohr was liable for $23 million of additional income taxes for the fiscal years
ended July 31, 1990 through 1993. The proposed assessments relate primarily to the timing of
certain tax deductions and tax credits. Rohr has filed petitions in the U.S. Tax Court opposing the
proposed assessments. Rohr expects that these cases may be scheduled for trial in 2005 and that it
will ultimately be successful in these cases. At the time of settlement or final determination by
the court, there will be a net cash cost to us due at least in part to the reversal of a timing
item. We believe that our total net cash cost is unlikely to exceed $100 million. We are reserved
for the estimated liability associated with these cases and as a result, we do not expect a charge
to earnings to result from the resolution of these matters. 38




---



##### 



We are continuously undergoing examination by the IRS, as well as various state and foreign
jurisdictions. The IRS and other taxing authorities routinely challenge certain deductions and
credits reported by us on our income tax returns. In accordance with SFAS 109, Accounting for
Income Taxes, and SFAS 5, Accounting for Contingencies, we establish reserves for tax
contingencies that reflect our best estimate of the deductions and credits that we may be unable to
sustain, or that we could be willing to concede as part of a broader tax settlement. As of March
31, 2005, we had recorded tax contingency reserves of approximately $318.7 million. The current IRS examination audit cycle began in March, 2002 and relates to the following
consolidated income tax groups for the following years: Rohr, Inc. and Subsidiaries
    
    July, 1995  December, 1997 (through
date of acquisition)Coltec Industries Inc and Subsidiaries
    
    December, 1997  July, 1999 (through
date of acquisition)Goodrich Corporation and Subsidiaries
    
    1998-1999 (including Rohr and Coltec)
 There are numerous tax issues that have been raised during the examination by the IRS, including,
but not limited to, transfer pricing, research and development credits, foreign tax credits, tax
accounting for long-term contracts, tax accounting for inventory, tax accounting for stock options,
depreciation, amortization and the proper timing for certain other deductions for income tax
purposes. Rohr has been under examination by the State of California for the tax years ending July 31, 1985,
1986 and 1987. The State of California has disallowed certain expenses incurred by one of Rohrs
subsidiaries in connection with the lease of certain tangible property. Californias State Board of
Equalization has held that the deductions associated with the leased equipment were non-business
deductions. As of March 31, 2005 we made a voluntary payment of approximately $3.9 million related
to items that were not being contested. Approximately $0.6 million related to tax and approximately
$3.3 million related to interest on the tax. The remaining tax assessment of approximately $4.9
million continues to be contested by us. The amount of interest on the remaining tax assessment is
approximately $17.7 million. We believe that we are adequately reserved for this contingency. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting
Standards No. 151 (SFAS 151), Inventory Costs, an amendment of ARB No. 43, Chapter 4. Adoption of
SFAS 151 is required by the year beginning January 1, 2006. We plan to adopt SFAS 151 no later than
that date. The amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage) should be recognized as current-period
charges and requires the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. While SFAS 151 enhances ARB 43 and clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and wasted material
(spoilage), the statement also removes inconsistencies between ARB 43 and IAS 2 and amends ARB 43
to clarify that abnormal amounts of costs should be recognized as period costs. Under some
circumstances, according to ARB 43, the above listed costs may be so abnormal as to require
treatment as current period charges. SFAS 151 requires these items be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal and requires allocation of
fixed production overheads to the costs of conversion. This statement will apply to our businesses
if they become subject to abnormal costs as defined in SFAS 151. We are currently evaluating the
impact, if any, that adoption of SFAS 151 will have on our consolidated financial statements. On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised
2004) (SFAS 123(R)), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees and amends Statement of Financial Accounting Standards No. 95, Statement
of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS
123. We adopted the SFAS 123 fair-value-based method of accounting for share-based payments
effective January 1, 2004 using the modified prospective method described in Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. Currently, we use the Black-Scholes formula to estimate the value of stock options
granted to employees. SFAS 123(R) requires that we use the valuation technique that best fits the
circumstances. We are currently evaluating other techniques. SFAS 123(R) requires that the benefits
of tax deductions in excess of recognized compensation cost be reported as a financing cash flow,
rather than as an 39




---



##### 



operating cash flow; thus, reducing net operating cash flows and increasing net financing cash
flows in the periods after the effective date. SFAS 123(R) also requires that we estimate the
number of awards that are expected to vest and to revise the estimate as the actual forfeitures
differ from the estimate. The effect of these items and other changes required by SFAS 123(R) is
currently being evaluated. On April 14, 2005, the SEC announced that registrants that are not small
business issuers may adopt SFAS 123(R) no later than the beginning of the first fiscal year
beginning after June 15, 2005. We will adopt SFAS 123(R) on January 1, 2006. On December 21, 2004, the FASB issued FASB Staff Position 109-1 (FSP 109-1) and 109-2 (FSP 109-2).
FSP 109-1 provides guidance on the application of SFAS 109, Accounting for Income Taxes, with
regard to the tax deduction on qualified production activities provision within H.R. 4520 The
American Jobs Creation Act of 2004 (Act), that was enacted on October 22, 2004. FSP 109-2 provides
guidance on a special one-time dividends received deduction on the repatriation of certain foreign
earnings to qualifying U.S. taxpayers. The Act contains numerous provisions related to corporate
and international taxation including repeal of the Extraterritorial Income (ETI) regime, creation
of a new Domestic Production Activities (DPA) deduction and a temporary dividends received
deduction related to repatriation of foreign earnings. The Act contains various effective dates and
transition periods related to its provisions. Under the guidance provided in FSP 109-1 the new DPA
deduction will be treated as a special deduction as described in SFAS 109. As such, the special
deduction had no effect on our deferred tax assets and liabilities existing at the enactment date.
Rather, the impact of this deduction will be reported in the period in which the deduction is
claimed on our income tax return. We do not expect the net effect of the phase-out of the ETI
deduction and phase-in of the new DPA deduction to result in a material impact on our effective
income tax rate in 2005. In FSP 109-2, the FASB acknowledged that, due to the proximity of the
Acts enactment date to many companies year-ends and the fact that numerous provisions within the
Act are complex and pending further regulatory guidance, many companies may not be in a position to
assess the impact of the Act on their plans for repatriation or reinvestment of foreign earnings.
Therefore, the FSP provided companies with a practical exception to the permanent reinvestment
standards of SFAS 109 and APB No. 23 by providing additional time to determine the amount of
earnings, if any, that they intend to repatriate under the Acts provisions. We are not yet in a
position to decide whether, and to what extent, we might repatriate foreign earnings to the United
States. Therefore, under the guidance provided in FSP 109-2, no deferred tax liability has been
recorded in connection with the repatriation provisions of the Act. We are currently analyzing the
impact of the temporary dividends received deduction provisions contained in the Act and expect to
complete our analysis by June 30, 2005. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations is based upon our
Unaudited Condensed 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 Unaudited Condensed Consolidated Financial Statements. REVENUE RECOGNITION For revenues not recognized under the contract method of accounting, we recognize revenues from the
sale of products at the point of passage of title, which typically is at the time of shipment.
Revenues earned from providing maintenance service are recognized when the service is complete. 40




---



##### 



Contract Accounting-Percentage of Completion Revenue Recognition Included in contract costs, or estimated revenues, are the expected impact of specific
contingencies that we believe are probable. In the event that actual experience differs from
estimates or facts and circumstances change, estimated costs or revenues will be revised. 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 are known. Profit is estimated based on the difference between total estimated revenue and total estimated
cost of a contract. Changes in estimated total revenue and estimated total cost are recognized as
business or economic conditions change and the impact on contract profitability is recorded
immediately in that period using the cumulative catch-up method. Cost includes the estimated cost
of the preproduction effort, primarily tooling and design, plus the estimated cost of manufacturing
a specified number of production units. The specified number of production units used to establish
the profit margin is predicated upon contractual terms adjusted for market forecasts and does not
exceed the lesser of those quantities assumed in original contract pricing as adjusted to the date
of certification, or those quantities which we now expect to deliver in the timeframe/period
assumed in the original contract pricing or at the date of certification. Our policies only allow
the estimated number of production units to be delivered to exceed the quantity assumed within the
original contract pricing or at date of certification when we receive firm orders for additional
units or we are required to begin manufacturing of units under contractual production lead time.
The assumed timeframe/period 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 adjusted, if appropriate, to the expected period of production estimated at
the date of certification. Option quantities are combined with prior orders when follow-on orders
are released. The contract method of accounting involves the use of various estimating techniques to project
costs at completion and includes estimates of recoveries asserted against the customer for changes
in specifications. These estimates involve various assumptions and projections relative to the
outcome of future events, including the quantity and timing of product deliveries. Also included
are assumptions relative to future labor performance and rates, and projections relative to
material and overhead costs. These assumptions involve various levels of expected performance
improvements. We re-evaluate our contract estimates periodically and reflect changes in estimates
immediately under the cumulative catch-up method for the impact on shipments to date. Included in sales are amounts arising from contract terms that provide for invoicing a portion of
the contract price at a date after delivery. Also included are negotiated values for units
delivered and anticipated price adjustments for contract changes, claims, escalation and estimated
earnings in excess of billing provisions, resulting from the percentage-of-completion method of
accounting. Certain contract costs are estimated based on the learning curve concept discussed
below. Inventory Inventoried costs on long-term contracts include certain preproduction costs, consisting primarily
of tooling and design costs and production costs, including applicable overhead. The costs
attributed to units delivered under long-term commercial contracts are based on the estimated
average cost of all units expected to be produced and are determined under the learning curve
concept, which anticipates a predictable decrease in unit costs as tasks and production techniques
become more efficient through repetition. This usually results in an increase in inventory
(referred to as excess-over-average) during the early years of a contract. 41




---



##### 



If in-process inventory plus estimated costs to complete a specific contract exceeds the
anticipated remaining sales value of such contract, such excess is charged to current earnings,
thus reducing inventory to estimated realizable value. Income Taxes In accordance with SFAS 109, APB Opinion No. 28, and FIN No. 18, as of each reporting period, we
estimate an effective income tax rate that is expected to be applicable for the full fiscal year.
The estimate of our effective income tax rate involves significant judgments regarding the
application of complex tax regulations across many jurisdictions and estimates as to the amount and
jurisdictional source of income expected to be earned during the full fiscal year. Further
influencing this estimate are evolving interpretations of new and existing tax laws, rulings by
taxing authorities and court decisions. Due to the subjectivity and complex nature of these
underlying issues our actual effective tax rate and related tax liabilities may differ from our
initial estimates. Differences between our estimated and actual effective income tax rates and
related liabilities are recorded in the period they become known. The resulting adjustment to our
income tax expense could have a material effect on our results of operations in the period the
adjustment is recorded. In accordance with SFAS 5, we record tax contingencies when the exposure item becomes probable and
the amount is reasonably estimable. As of March 31, 2005 and December 31, 2004, we had recorded tax
contingency reserves of approximately $319 million and $316 million, respectively. In accordance with SFAS 109, deferred tax assets and liabilities are recorded for tax carryforwards
and the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes are measured using enacted tax laws and
rates. A valuation allowance is provided on deferred tax assets if it is determined that it is more
likely than not that the asset will not be realized. 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 on or 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 airline 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 as Other Assets and amortized as Cost of Sales
over the contract period. At March 31, 2005 and December 31, 2004, the carrying amount of sales
incentives were $66.6 million and $56.5 million, respectively. 42




---



##### 



Entry Fees-Investment in Risk and Revenue Sharing Programs Certain businesses in our Engine Systems Segment make cash payments, referred to as entry fees, to
an original equipment manufacturer (OEM) under long-term contractual arrangements related to new
engine programs. In return, we receive a controlled access supply contract and a percentage of
program revenue generated by the OEM as part of these arrangements. The program revenue generated
by the OEM may result from the sale of components produced by us or other program participants by
selling original equipment or aftermarket products (spares). At the time of payment, the aircraft manufacturer has launched a new aircraft platform, critical
suppliers have been selected and we have deemed our product to be technologically feasible.
Although our product is technologically feasible, we do not have access to information on the
technological feasibility of the products of the OEMs other critical suppliers. However, we are
not aware of any program for which we have entered into a contract that has been cancelled prior to
engine delivery due to the lack of technological feasibility of the engine. In our agreement with the OEM, there are no restrictions on the use of the entry fees by the OEM;
however, in the OEMs annual report, it states that entry fees have enabled it to build a broad
portfolio of engines, thereby reducing its exposure to individual product risk. The OEM also states
that the primary financial benefit of entry fees to it is a reduction of its own funding of
research and development on new programs. We account for entry fees similar to an investment in future cash flows. We begin to receive cash
payments from the OEM, at the latest, after aircraft certification, which typically occurs
approximately four years after payment of the entry fee. However, if the OEMs customers place
orders with the OEM prior to that time, which frequently occurs, we will receive a percentage of
any related deposits. Activities during the four-year period following our initial payment of entry
fees include continued refinement of the engine systems, certification of the engine systems,
flight certification of the engine, flight certification of the aircraft and entry into service of
the aircraft. As with any investment, there are risks inherent in recovering the value of entry fees. Such risks
are consistent with the risks associated in acquiring a revenue-producing asset in which market
conditions may change or the risks that arise when a manufacturer of a product on which a royalty
is based has business difficulties and cannot produce the product. Such risks include but are not
limited to the following:  
    Changes in market conditions that may affect product sales under the program, including
market acceptance and competition from others;
    Performance of subcontract suppliers and other production risks;
    Bankruptcy or other less significant financial difficulties of other program
participants, including the aircraft manufacturer, the OEM and other program suppliers or
the aircraft customer; and
    Availability of specialized raw materials in the marketplace. Entry fees are recorded as Other Assets and are amortized on a straight-line basis to Cost of Sales
over the programs estimated useful life following aircraft certification, which typically
approximates 20 years. The net carrying amount of entry fees were $109 million and $111.3 million
at March 31, 2005 and December 31, 2004, respectively. The carrying amount of entry fees is
evaluated for impairment at least annually or when other indicators of impairment exist. Impairment
is assessed based on the expected undiscounted cash flow from the program over the remaining
program life as compared to the recorded amount of entry fees. If impairment exists, a charge would
be recorded for the amount by which the carrying amount of the entry fee exceeds its fair value. No
such impairment charges were recorded in the quarters ended March, 31, 2005 and 2004. 43




---



##### 



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 such as the rate of compensation increase and the long-term rate of
return on plan assets are based upon our historical and benchmark data. Health care cost
projections are evaluated annually. The discount rate is evaluated at the end of the year using the
appropriate index (e.g., Moodys Aa long-term high quality bond rate for the U.S. Plans and iBoxx
AA long-term high quality bond rate for the U.K. plans). The appropriate assumptions are used for
the applicable country. 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, should, 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:  
    demand for and market acceptance of new and existing products, such as the Airbus A350
and A380, the Boeing 787 Dreamliner, the Embraer 190, and the Lockheed Martin F-35 Joint
Strike Fighter and F-22 Raptor;
    our ability to extend our contracts with Boeing relating to the 787 Dreamliner beyond
the initial contract period;
    potential cancellation of orders by customers;
    successful development of products and advanced technologies;
    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;
    the possibility of additional contractual disputes with Northrop Grumman related to the
purchase of Aeronautical Systems;
    the payment of premiums and associated costs by us in connection with the early retirement of debt;
    the resolution of tax litigation involving Coltec Industries Inc and Rohr, Inc.;
    the actual amount of future liabilities assumed by us pursuant to the partial settlement
with Northrop Grumman related to the purchase of Aeronautical Systems;
    the possibility of restructuring and consolidation actions beyond those previously
announced by us;
    threats and events associated with and efforts to combat terrorism, including the
current situation in Iraq;
    the extent to which expenses relating to employee and retiree medical and pension
benefits continue to rise;
    competitive product and pricing pressures;
    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;
    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). 44




---



##### 



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 are 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
2004 Annual Report on Form 10-K provides more discussion as to the types of instruments used to
manage risk. Refer to Note 16, 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 March 31, 2005, a hypothetical 100 basis point unfavorable change in interest rates would
increase annual interest expense by approximately $3.6 million. At March 31, 2005, a hypothetical
10 percent strengthening of the U.S. dollar against other foreign currencies would decrease the
value of our forward contracts by $72.5 million. The fair value of these forward contracts was
$82.2 million at March 31, 2005. 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. 45




---



##### 



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 in Note 17, Contingencies to the accompanying unaudited condensed
consolidated financial statements, which disclosure is incorporated herein by reference. Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds. (c) The following table summarizes Goodrich Corporations purchases of its common stock for the
quarter ended March 31, 2005: ISSUER PURCHASES OF EQUITY SECURITIES (c) Total Number of
    
    
    (d) Maximum NumberShares Purchased as
    
    
    (or Approximate Dollar(a) Total Number
    
    
    
    
    
    
    Part of Publicly
    
    
    Value) of Shares that Mayof Shares
    
    
    (b) Average Price
    
    
    Announced Plans or
    
    
    Yet Be Purchased UnderPeriod
    
    Purchased (1)
    
    
    Paid Per Share
    
    
    Programs (2)
    
    
    the Plans or Programs (2)January 2005
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/AFebruary 2005
    
    
    16,156
    
    
    $
    36.61
    
    
    
    N/A
    
    
    
    N/AMarch 2005
    
    
    112
    
    
    
    35.66
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    16,268
    
    
    $
    36.14
    
    
    
    N/A
    
    
    
    N/A
   (1)
    
    The issuer purchases during the period covered by this report represent shares delivered to
us by employees to pay withholding taxes due upon the vesting of restricted stock and deferred
long-term incentive plan awards and to pay the exercise price of a stock option.(2)
    
    In connection with the exercise and vesting of stock options and restricted stock awards, we
from time to time accept delivery of shares to pay the exercise price of employee stock
options or to pay withholding taxes due upon the exercise of employee stock options or the
vesting of restricted stock awards or deferred long-term incentive plan awards. We do not
otherwise have any plan or program to purchase our common stock. Item 5. Other Information. Non-Audit Services in the United Kingdom Performed by Ernst & Young LLP Ernst & Young LLP has notified us that certain non-audit work Ernst & Young LLP previously
performed for us in the United Kingdom has raised questions regarding its independence with respect
to its performance of audit services. Beginning in 1990, an affiliated firm of Ernst & Young LLP
provided registered office and certain company secretarial services for our United Kingdom
subsidiaries. The provision of these services may have involved the performance of management
functions and the custody of our assets, which are not permitted under SEC auditor independence
rules. These services were discontinued in February 2004. Our Audit Review Committee has reviewed the facts surrounding these services provided by Ernst &
Young LLP. We and the Audit Review Committee have concluded that Ernst & Young LLPs independence
was not impaired by the performance of these services in view of the de minimisfees paid to Ernst
& Young LLP (less than $50,000 per year) and the ministerial nature of the actions performed by it. Ernst & Young LLP has also
concluded that its independence was not impaired by the performance of these services. 46




---



##### 



As we have previously disclosed, Ernst & Young LLP has also notified the SEC, the Public Company
Accounting Oversight Board and us that certain non-audit work previously performed in China and
Japan for us and other companies has also raised questions regarding Ernst & Young LLPs
independence. We, our Audit Review Committee and Ernst & Young
LLP have concluded that the independence of Ernst & Young LLP
was not impaired by the performance of those services. For more information, please refer to our
definitive proxy statement, dated March 7, 2005, under the caption Proposals to Shareholders  2.
Ratification of Appointment of Independent Auditors  Non-Audit Services in China and Japan
Performed by Ernst & Young LLP. Item 6. Exhibits Exhibit 3.1
    
    Restated Certificate of Incorporation of Goodrich Corporation,
filed as Exhibit 3.1 to Goodrich Corporations Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003
(File No. 1-892), is incorporated herein by reference.Exhibit 3.2
    
    By-Laws of Goodrich Corporation, as amended, filed as Exhibit
4(B) to Goodrich Corporations Registration Statement on Form
S-3 (File No. 333-98165), is incorporated herein by reference.Exhibit 15
    
    Letter Re: Unaudited Interim Financial Information.Exhibit 31
    
    Rule 13a-14(a)/15d-14(a) Certifications.Exhibit 32
    
    Section 1350 Certifications.
 47




---



##### 



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. May 5, 2005
    GOODRICH CORPORATION/s/ ULRICH SCHMIDTUlrich SchmidtExecutive Vice President and Chief Financial Officer /s/ SCOTT E. KUECHLEScott E. KuechleVice President & Controller (Chief Accounting Officer) 48




---



##### 



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