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 1934

For the quarterly period ended September 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-892

GOODRICH CORPORATION

New York		34-0252680
(State of Incorporation)		(I.R.S. Employer Identification No.)
Four Coliseum Centre 2730 West Tyvola Road Charlotte, North Carolina		28217
(Address of Principal Executive Offices)		(Zip Code)

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ            Accelerated Filer o            Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of September 30, 2007, there were 124,918,621 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

We have reviewed the condensed consolidated balance sheet of Goodrich Corporation as of September 30, 2007, and the related condensed consolidated statement of income for the three-month and nine-month periods ended September 30, 2007 and 2006, and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2007 and 2006. 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 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 as of December 31, 2006, 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 19, 2007, 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, 2006, 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
October 25, 2007

CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(Dollars in millions, except per share amounts)
Sales		$	1,601.7			$	1,395.3			$	4,724.4			$	4,224.0
Operating costs and expenses:
Cost of sales			1,102.9				1,004.3				3,293.4				3,063.8
Selling and administrative costs			262.6				217.9				777.0				679.2
			1,365.5				1,222.2				4,070.4				3,743.0
Operating Income			236.2				173.1				654.0				481.0
Interest expense			(31.5	)			(30.7	)			(93.8	)			(94.0	)
Interest income			2.2				1.3				5.5				3.5
Other income (expense) — net			(12.5	)			(16.3	)			(45.6	)			(47.9	)
Income from continuing operations before income taxes			194.4				127.4				520.1				342.6
Income tax benefit (expense)			(54.2	)			(27.3	)			(156.9	)			37.1
Income From Continuing Operations			140.2				100.1				363.2				379.7
Income (loss) from discontinued operations — net of income taxes			(13.4	)			0.6				(11.8	)			2.9
Cumulative effect of change in accounting			—				—				—				0.6
Net Income		$	126.8			$	100.7			$	351.4			$	383.2
Basic Earnings Per Share
Continuing operations		$	1.12			$	0.80			$	2.90			$	3.05
Discontinued operations			(0.11	)			0.01				(0.09	)			0.02
Cumulative effect of change in accounting			—				—				—				0.01
Net Income		$	1.01			$	0.81			$	2.81			$	3.08
Diluted Earnings Per Share
Continuing operations		$	1.10			$	0.79			$	2.84			$	3.01
Discontinued operations			(0.11	)			0.01				(0.09	)			0.02
Cumulative effect of change in accounting			—				—				—				0.01
Net Income		$	0.99			$	0.80			$	2.75			$	3.04
Dividends Declared Per Common Share		$	0.20			$	0.20			$	0.60			$	0.60

See Notes to Condensed Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)

		September 30,				December 31,
		2007				2006
		(Dollars in millions,
		except share amounts)
Current Assets
Cash and cash equivalents		$	314.3			$	201.3
Accounts and notes receivable, less allowances for doubtful receivables ($18.7 at September 30, 2007 and $19.4 at December 31, 2006)			1,015.5				897.6
Inventories — net			1,778.7				1,520.1
Deferred income taxes			247.5				247.3
Prepaid expenses and other assets			102.4				91.1
Assets from discontinued operations			106.9				124.8
Total Current Assets			3,565.3				3,082.2
Property, plant and equipment — net			1,314.7				1,256.0
Prepaid pension			2.7				2.3
Goodwill			1,362.0				1,341.3
Identifiable intangible assets — net			465.3				472.0
Deferred income taxes			43.7				35.5
Other assets			765.4				711.9
Total Assets		$	7,519.1			$	6,901.2
Current Liabilities
Short-term debt		$	12.2			$	11.8
Accounts payable			607.2				576.7
Accrued expenses			904.7				798.7
Income taxes payable			107.4				212.5
Deferred income taxes			3.4				3.3
Current maturities of long-term debt and capital lease obligations			0.8				1.4
Liabilities from discontinued operations			22.9				29.7
Total Current Liabilities			1,658.6				1,634.1
Long-term debt and capital lease obligations			1,723.1				1,721.7
Pension obligations			387.8				612.1
Postretirement benefits other than pensions			369.1				379.1
Long-term income taxes payable			134.2				—
Deferred income taxes			167.1				55.8
Other non-current liabilities			554.7				521.7
Commitments and contingent liabilities			—				—
Shareholders’ Equity
Common stock — $5 par value
Authorized 200,000,000 shares; issued 141,782,788 shares at September 30, 2007 and 139,041,884 shares at December 31, 2006 (excluding 14,000,000 shares held by a wholly owned subsidiary)			708.9				695.2
Additional paid-in capital			1,425.1				1,313.3
Income retained in the business			952.0				666.5
Accumulated other comprehensive income (loss)			29.6				(260.8	)
Common stock held in treasury, at cost (16,864,167 shares at September 30, 2007 and 14,090,913 shares at December 31, 2006)			(591.1	)			(437.5	)
Total Shareholders’ Equity			2,524.5				1,976.7
Total Liabilities And Shareholders’ Equity		$	7,519.1			$	6,901.2

See Notes to Condensed Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

		Nine Months Ended
		September 30,
		2007				2006
		(Dollars in millions)
Operating Activities
Net income		$	351.4			$	383.2
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations			11.8				(2.9	)
Cumulative effect of change in accounting			—				(0.6	)
Restructuring and consolidation:
Expenses			1.5				4.4
Payments			(2.9	)			(4.7	)
Pension and postretirement benefits:
Expenses			95.6				98.8
Contributions and benefit payments			(137.4	)			(126.0	)
Asset impairments			—				3.3
Depreciation and amortization			188.6				172.3
Excess tax benefits related to share-based payment arrangements			(11.7	)			(4.2	)
Share-based compensation expense			55.3				36.1
Loss on exchange and extinguishment of debt			—				2.0
Deferred income taxes			(11.9	)			(3.2	)
Change in assets and liabilities, net of effects of acquisitions and divestitures:
Receivables			(93.5	)			(144.7	)
Change in receivables sold, net			—				(97.1	)
Inventories, net of pre-production and excess-over-average			(120.0	)			(92.3	)
Pre-production and excess-over-average inventories			(86.7	)			(100.8	)
Other current assets			7.8				10.0
Accounts payable			11.8				36.6
Accrued expenses			76.8				28.9
Income taxes payable			68.3				(142.4	)
Other non-current assets and liabilities			1.3				(37.2	)
Net Cash Provided By Operating Activities			406.1				19.5
Investing Activities
Purchases of property, plant and equipment			(160.6	)			(152.7	)
Proceeds from sale of property, plant and equipment			0.8				1.7
Net Cash Used In Investing Activities			(159.8	)			(151.0	)
Financing Activities
Increase (decrease) in short-term debt, net			(0.3	)			67.6
Loss on exchange or extinguishment of debt			—				(4.5	)
Proceeds from issuance of long-term debt			—				512.7
Repayment of long-term debt and capital lease obligations			(1.1	)			(534.2	)
Proceeds from issuance of common stock			78.9				47.0
Purchases of treasury stock			(152.5	)			(2.1	)
Dividends			(75.9	)			(75.1	)
Excess tax benefits related to share-based payment arrangements			11.7				4.2
Distributions to minority interest holders			(3.2	)			(2.4	)
Net Cash (Used In) Provided By Financing Activities			(142.4	)			13.2
Discontinued Operations
Net cash provided by operating activities			6.6				2.5
Net cash used in investing activities			(1.4	)			(0.9	)
Net cash provided by financing activities			—				0.1
Net cash provided by discontinued operations			5.2				1.7
Effect of exchange rate changes on cash and cash equivalents			3.9				5.4
Net increase (decrease) in cash and cash equivalents			113.0				(111.2	)
Cash and cash equivalents at beginning of period			201.3				251.3
Cash and cash equivalents at end of period		$	314.3			$	140.1

See Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Interim Financial Statement Preparation and Use of Estimates

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 and nine months ended September 30, 2007 are not necessarily indicative of the results that may be achieved for the twelve months ending December 31, 2007. 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, 2006.

As discussed in Note 5, “Discontinued Operations”, Goodrich Aviation Technical Services, Inc. (ATS) has been accounted for as a discontinued operation. Unless otherwise noted, disclosures pertain to the Company’s continuing operations.

The preparation of financial statements requires management to make estimates and assumptions that affect amounts recognized. Estimates and assumptions are reviewed and updated regularly as new information becomes available. During the three months ended September 30, 2007, the Company changed its estimate of revenue on certain long-term contracts, primarily as a result of improved cost performance. The changes in estimate increased before tax income by approximately $20 million (approximately $12 million after tax).

Note 2. New Accounting Standards Not Yet Adopted

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option would also be required to disclose, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS 159 is effective for the fiscal years beginning after November 15, 2007. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative effect adjustment to retained earnings as of the date of initial adoption. The Company is currently evaluating the impact of the adoption of SFAS 159 on the Company’s financial condition and results of operations.

Fair Value Measurement

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for the fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of the adoption of SFAS 157 on the Company’s financial condition and results of operations.

Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards

In July 2007, the FASB ratified Emerging Issues Tax Force No. 06-11 “Accounting for the Income Tax Benefits of Dividends on Share-Based Payments Awards” (EITF 06-11). EITF 06-11 requires companies to recognize the tax benefits of dividends on unvested share-based payments in equity and reclassify those tax benefits from additional paid-in capital (APIC) to the income statement when the related award is forfeited or no longer expected to vest. The amount reclassified is limited to the amount of the Company’s APIC pool balance on the reclassification date. EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of the adoption of EITF 06-11 on the Company’s financial condition and results of operations.

Accounting for Postretirement Benefits Associated with Split-Dollar Life Insurance

In September 2006, the FASB ratified Emerging Issues Task Force No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefits Associated with Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4) and in March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements.” EITF 06-4 requires deferred compensation or postretirement benefit aspects of an endorsement-type split-dollar life insurance arrangement to be recognized as a liability by the employer and states the obligation is not effectively settled by the purchase of a life insurance policy. The liability for future benefits should be recognized based on the substantive agreement with the employee, which may be either to provide a future death benefit or to pay for the future cost of the life insurance. EITF 06-10 provides recognition guidance for postretirement benefit liabilities related to collateral assignment split-dollar life insurance arrangements, as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment split -dollar life insurance arrangement. EITF 06-4 and EITF 06-10 are effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of the adoption of EITF 06-4 and EITF 06-10 on the Company’s financial condition and results of operations.

Note 3. Business Segment Information

Effective January 1, 2007, the Company realigned its businesses within its three reporting segments. Under the new organizational structure, several businesses were combined into larger strategic business units and several businesses were moved into different segments from the prior reporting structure. The segment reporting structure was designed to accelerate the Company’s focus on operational excellence and to further enhance the Company’s alignment with its key product and technology areas. Along with the segment realignment, the results of the Company’s customer services business were allocated to the business that manufactures the product or system. Additionally, Enterprise Resource Planning (ERP) implementation costs that are not directly associated with a specific business and a pension curtailment charge were reported as a component of corporate administrative expense. Prior period results have been reclassified to conform to the new organizational structure. Effective January 1, 2007, the Company’s three business segments are as follows.

	•		The Actuation and Landing Systems segment provides systems, components and related services pertaining to aircraft taxi, take-off, flight control, landing and stopping, as well as engine components, including fuel delivery systems and rotating assemblies.
	•		The Nacelles and Interior Systems segment produces products and provides maintenance, repair and overhaul services associated with aircraft engines, including thrust reversers, cowlings, nozzles and their components, and aircraft interior products, including slides, seats, cargo and lighting systems.
	•		The Electronic Systems segment produces a wide array of systems and components that provide flight performance measurements, flight management, fuel controls, electrical systems, and control and safety data, as well as reconnaissance and surveillance systems.

The Company measures each reporting segments’ profit based upon operating income. Accordingly, the Company does not allocate net interest expense, other income (expense) — net and income taxes to its reporting segments. The accounting policies of the reportable segments are the same as those for the Company’s consolidated financial statements.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(Dollars in millions)
Sales:
Actuation and Landing Systems		$	607.8			$	515.8			$	1,764.1			$	1,537.8
Nacelles and Interior Systems			545.2				464.2				1,625.8				1,472.9
Electronic Systems			448.7				415.3				1,334.5				1,213.3
		$	1,601.7			$	1,395.3			$	4,724.4			$	4,224.0
Intersegment sales:
Actuation and Landing Systems		$	8.0			$	6.6			$	21.2			$	19.3
Nacelles and Interior Systems			5.1				4.2				14.2				12.2
Electronic Systems			5.9				8.6				23.0				25.2
		$	19.0			$	19.4			$	58.4			$	56.7
Operating income:
Actuation and Landing Systems		$	73.6			$	42.3			$	182.0			$	103.3
Nacelles and Interior Systems			143.6				103.0				404.7				321.9
Electronic Systems			58.7				56.6				175.7				153.2
			275.9				201.9				762.4				578.4
Corporate general and administrative expenses			(34.5	)			(23.0	)			(95.9	)			(74.1	)
ERP implementation costs			(5.2	)			(5.8	)			(12.5	)			(12.4	)
Pension curtailment			—				—				—				(10.9	)
Total operating income		$	236.2			$	173.1			$	654.0			$	481.0

		September 30,				December 31,
		2007				2006
Total assets:
Actuation and Landing Systems		$	2,302.9			$	2,062.1
Nacelles and Interior Systems			2,380.1				2,148.6
Electronic Systems			1,992.1				1,904.3
Corporate			737.1				661.4
Discontinued Operations			106.9				124.8
		$	7,519.1			$	6,901.2

Note 4. Other Income (Expense) — Net

Other Income (Expense) — Net consisted of the following:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(Dollars in millions)
Retiree health care expenses related to previously owned businesses		$	(4.6	)		$	(4.5	)		$	(13.8	)		$	(13.5	)
Loss on exchange and extinguishment of debt			—				—				—				(4.8	)
Expenses related to previously owned businesses			(4.8	)			(6.0	)			(16.1	)			(14.0	)
Minority interest and equity in affiliated companies			(4.7	)			(3.6	)			(17.6	)			(11.0	)
Other — net			1.6				(2.2	)			1.9				(4.6	)
Other income (expense) — net		$	(12.5	)		$	(16.3	)		$	(45.6	)		$	(47.9	)

“Expenses related to previously owned businesses” primarily relates to litigation and costs to remediate environmental issues.

Note 5. Discontinued Operations

On September 21, 2007, the Company reached a definitive agreement to sell ATS to Macquarie Bank Limited, for $58.4 million. The sale is expected to close during the fourth quarter 2007. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” the Company compared the book value of the net assets of ATS to their fair value and recorded an estimated loss on the sale of $13.9 million after tax during the three and nine months ended September 30, 2007.

All periods have been reclassified to reflect ATS as a discontinued operation. The costs and revenues, assets and liabilities, and cash flows of ATS have been reported as a discontinued operation in the Condensed Consolidated Statement of Income, Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flows. ATS was previously reported in the Actuation and Landing Systems segment.

Income (loss) from discontinued operations for the three months and nine months ended September 30, 2007 and 2006 also included retained liabilities of previously owned businesses. Income from discontinued operations for the nine months ended September 30, 2006 included insurance settlements with several insurers relating to the recovery of environmental remediation costs at a plant previously recorded as a discontinued operation, net of related expenses.

Discontinued operations were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(Dollars in millions)
Sales — ATS		$	34.4			$	40.7			$	122.6			$	119.0
Before tax income from operations — ATS		$	0.8			$	1.1			$	3.8			$	3.9
Income tax benefit (expense)			(0.2	)			(0.4	)			(1.3	)			(1.4	)
Estimated loss on sale of ATS (net of income tax benefit of $37.5)			(13.9	)			—				(13.9	)			—
Insurance settlements — net of tax			—				—				—				1.1
Liabilities of previously discontinued operations — net of tax			(0.1	)			(0.1	)			(0.4	)			(0.7	)
Income (loss) from discontinued operations		$	(13.4	)		$	0.6			$	(11.8	)		$	2.9

Note 6. Earnings Per Share

The computation of basic and diluted earnings per share for income from continuing operations is as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(In millions, except per share amounts)
Numerator
Numerator for basic and diluted earnings per share — income from continuing operations		$	140.2			$	100.1			$	363.2			$	379.7
Denominator
Denominator for basic earnings per share — weighted-average shares			125.0				124.7				125.2				124.2
Effect of dilutive securities:
Stock options, employee stock purchase plan, restricted shares and restricted share units			2.6				1.5				2.5				1.8
Other deferred compensation shares			0.1				0.1				0.1				0.1
			2.7				1.6				2.6				1.9
Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversion			127.7				126.3				127.8				126.1
Per share income from continuing operations
Basic		$	1.12			$	0.80			$	2.90			$	3.05
Diluted		$	1.10			$	0.79			$	2.84			$	3.01

At September 30, 2007 and 2006, the Company had approximately 4.8 million and 6.2 million outstanding 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. For the nine months ended September 30, 2006, approximately 1.2 million anti-dilutive stock options were excluded from diluted earnings per share.

During the nine months ended September 30, 2007 and 2006, the Company issued approximately 2.7 million and 1.7 million, respectively, of shares of common stock pursuant to stock option exercises and other share-based compensation plans.

During the nine months ended September 30, 2007, the Company repurchased approximately 2.7 million shares under the share repurchase program that was approved by the Board of Directors on October 24, 2006.

Note 7. Sale of Receivables

Prior to June 30, 2006, 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. Effective June 30, 2006, the Company terminated the variable rate trade receivable securitization program and repaid the balance of $97.1 million.

Note 8. Inventories

Inventories consist of the following:

		September 30,				December 31,
		2007				2006
		(Dollars in millions)
FIFO or average cost (which approximates current costs):
Finished products		$	328.5			$	317.4
In-process			1,023.1				866.7
Raw materials and supplies			499.8				416.0
			1,851.4				1,600.1
Less:
Reserve to reduce certain inventories to LIFO basis			(50.0	)			(48.5	)
Progress payments and advances			(22.7	)			(31.5	)
Total		$	1,778.7			$	1,520.1

In-process inventory includes $486 million and $399 million as of September 30, 2007 and December 31, 2006, respectively, for the following: (1) pre-production and excess-over-average inventory accounted for under long-term contract accounting; and (2) engineering costs recoverable under long-term contractual arrangements. The September 30, 2007 balance of $486 million includes $287.6 million related to Boeing 787 contracts.

The Company uses the last-in, first-out (LIFO) method of valuing inventory at certain locations. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time.

Note 9. Goodwill and Identifiable Intangible Assets

The changes in the carrying amount of goodwill by segment are as follows:

						Business
		Balance				Combinations				Foreign				Balance
		December 31,				Completed or				Currency				September 30,
		2006				Finalized				Translation				2007
		(Dollars in millions)
Actuation and Landing Systems		$	326.3			$	—			$	8.9			$	335.2
Nacelles and Interior Systems			422.9				—				6.5				429.4
Electronic Systems			592.1				—				5.3				597.4
		$	1,341.3			$	—			$	20.7			$	1,362.0

Note 10. Financing Arrangements

The Company has a $500 million committed global syndicated revolving credit facility. In May 2007, the Company and the lenders agreed to amend the facility, which included extending the maturity of the facility by one year from May 2011 to May 2012. Interest rates under this facility vary depending upon:

	•		The amount borrowed;
	•		The Company’s public debt rating by Standard & Poor, Moody’s and Fitch; and
	•		At the Company’s option, rates tied to the agent bank’s prime rate or, for U.S. Dollar and Great Britain Pounds Sterling borrowings, the London interbank offered rate and for Euro Dollar borrowings, the EURIBO rate.

At September 30, 2007, there were $34.9 million in borrowings and $22.3 million in letters of credit outstanding under the facility. At December 31, 2006, there were $34.9 million in borrowings and $20.4 million in letters of credit outstanding under the facility. The level of unused borrowing capacity under the Company’s committed syndicated revolving credit facility varies from time to time depending in part upon its 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 September 30, 2007, the Company had borrowing capacity under this facility of $442.8 million, after reductions for borrowings and letters of credit outstanding under the facility.

At September 30, 2007, the Company also maintained $75 million of uncommitted domestic money market facilities and $175.4 million of uncommitted and committed foreign working capital facilities with various banks to meet short-term borrowing requirements. At September 30, 2007, there were $14 million in borrowings outstanding under these facilities. At December 31, 2006, there were $11.8 million in outstanding 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 described above and with various cash management, trust and other services.

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 common stock. Under the most restrictive of these covenants, $1,538 million of income retained in the business and additional paid in capital was free from such limitations at September 30, 2007.

Lease Commitments

The Company finances 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 aircraft and equipment having a maximum unamortized value of $150 million at September 30, 2007. These leases are priced at a spread over LIBOR and are extended periodically, unless notice is provided, through the end of the lease terms. At September 30, 2007, future payments under these leases total $13.8 million. At September 30, 2007, the Company had guarantees of residual values on lease obligations of $24.8 million. The Company is obligated to either purchase or remarket the leased assets at the end of the lease term.

Future minimum lease payments under standard operating leases were $135.9 million at September 30, 2007.

Note 11. Pensions and Postretirement Benefits

Pensions

The following table sets forth the components of net periodic benefit costs (income) for the three and nine months ended September 30, 2007 and 2006. The net periodic benefit costs (income) for divested or discontinued operations retained by the Company are included in the amounts below.

		U.S. Plans								U.K. Plans								Other Non-U.S. Plans
		Three Months								Three Months								Three Months
		Ended								Ended								Ended
		September 30,								September 30,								September 30,
		2007				2006				2007				2006				2007				2006
		(Dollars in millions)
Service cost		$	11.4			$	9.5			$	7.4			$	7.5			$	1.3			$	1.1
Interest cost			39.5				39.6				10.0				8.5				1.4				1.2
Expected rate of return on plan assets			(47.7	)			(46.3	)			(15.2	)			(12.8	)			(1.6	)			(1.4	)
Amortization of prior service cost			1.8				1.9				(0.3	)			(0.2	)			—				0.1
Amortization of actuarial (gain) loss			14.3				10.2				—				—				0.3				0.3
Periodic benefit cost (income)			19.3				14.9				1.9				3.0				1.4				1.3
Settlements and curtailments (gain) loss			6.0				0.1				—				—				—				—
Special termination benefit charge (credit)			—				—				—				0.3				—				—
Net benefit cost (income)		$	25.3			$	15.0			$	1.9			$	3.3			$	1.4			$	1.3

		U.S. Plans								U.K. Plans								Other Non-U.S. Plans
		Nine Months								Nine Months								Nine Months
		Ended								Ended								Ended
		September 30,								September 30,								September 30,
		2007				2006				2007				2006				2007				2006
		(Dollars in millions)
Service cost		$	34.9			$	35.4			$	21.9			$	21.9			$	3.6			$	3.2
Interest cost			120.0				115.8				29.5				24.8				4.0				3.7
Expected rate of return on plan assets			(146.3	)			(135.7	)			(45.0	)			(37.4	)			(4.5	)			(4.0	)
Amortization of prior service cost			5.6				6.6				(0.8	)			(0.7	)			—				0.1
Amortization of actuarial (gain) loss			47.0				36.4				—				—				0.8				0.9
Periodic benefit cost (income)			61.2				58.5				5.6				8.6				3.9				3.9
Settlements and curtailments (gain) loss			6.0				11.0				—				—				—				—
Special termination benefit charge (credit)			—				—				—				0.5				—				—
Net benefit cost (income)		$	67.2			$	69.5			$	5.6			$	9.1			$	3.9			$	3.9

On September 21, 2007, a definitive agreement to divest ATS was reached and assumptions for the U.S. qualified pension plans were reevaluated to remeasure the plan obligations and assets using an updated discount rate of 6.30%, which was an increase to the discount rate of 5.89% on January 1, 2007. In connection with the remeasurement, there was a curtailment loss of $6 million reported in discontinued operations. The remeasurement and curtailment increased accumulated other comprehensive income by $150.4 million before tax, or $91.9 million after tax.

Three events occurred in 2006 which required remeasurement of plan obligations and assets for the U.S. pension plans. Assumptions were reevaluated at April 11, 2006 to remeasure plan obligations and assets in connection with the Company’s definitive agreement to divest the turbomachinery products business (which agreement was subsequently terminated). On May 19, 2006, pension assumptions were again reevaluated to remeasure plan obligations and assets due to the closure of the election period for the Company’s Retirement Choice Program. Pension assumptions were again reevaluated on July 21, 2006 for the remeasurement of a U.S. nonqualified plan due to retirement settlements.

Postretirement Benefits Other Than Pensions

The following table sets forth the components of net periodic postretirement benefit costs for the three months and nine months ended September 30, 2007 and 2006. Other postretirement benefits (OPEB) related to divested and discontinued operations retained by the Company are included in the amounts below.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(Dollars in millions)
Service cost		$	0.4			$	0.6			$	1.4			$	1.3
Interest cost			5.6				5.5				17.1				15.3
Amortization of prior service cost			—				—				(0.1	)			(0.1	)
Amortization of actuarial (gain) loss			1.4				1.0				2.2				1.6
Periodic benefit cost			7.4				7.1				20.6				18.1
Settlements and curtailments (gain) loss			—				—				—				—
Special termination benefit charge (credit)			—				—				—				—
Net periodic benefit cost		$	7.4			$	7.1			$	20.6			$	18.1

The following table provides the assumptions used to determine the net periodic postretirement benefit costs.

		Three and Nine Months Ended
		September 30,
		2007				2006
Discount rate			5.79	%			5.55	%
Healthcare trend rate		9% in 2007 to 5% in 2013				9% in 2006 to 5% in 2010

Note 12. Comprehensive Income (Loss)

Total comprehensive income consisted of the following:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(Dollars in millions)
Net income		$	126.8			$	100.7			$	351.4			$	383.2
Other comprehensive income (loss):
Unrealized foreign currency translation gains (losses) during period			51.4				5.9				109.6				81.8
Pension/OPEB liability adjustments during the period			100.9				0.4				127.4				109.7
Gain (loss) on cash flow hedges			29.1				(12.5	)			53.4				37.6
Gain (loss) on certain investments			—				—				—				(0.1	)
Total comprehensive income		$	308.2			$	94.5			$	641.8			$	612.2

Accumulated other comprehensive income (loss) consisted of the following:

		September 30,				December 31,
		2007				2006
		(Dollars in millions)
Cumulative unrealized foreign currency translation gains (losses)		$	358.0			$	248.4
Pension/OPEB liability adjustments			(436.2	)			(563.6	)
Accumulated gains (losses) on cash flow hedges			107.8				54.4
Total accumulated other comprehensive income (loss)		$	29.6			$	(260.8	)

The pension/OPEB liability amounts above are net of deferred taxes of $271.3 million and $341.8 million at September 30, 2007 and December 31, 2006, respectively. The accumulated gain on cash flow hedges above is net of deferred taxes of $58.3 million and $30.1 million at September 30, 2007 and December 31, 2006, respectively. No income taxes are provided on foreign currency translation gains as foreign earnings are considered permanently invested.

Note 13. Income Taxes

The Company’s effective tax rate for the three months ended September 30, 2007 was 27.9%. Significant items that had an impact on the Company’s effective tax rate as compared to the U.S. federal statutory rate of 35% included a benefit from a tax settlement related to the IRS examination of the Company’s 2000-2004 income tax returns which reduced the effective tax rate by approximately 8 percentage points, foreign and domestic tax credits which reduced the effective tax rate by approximately 4 percentage points, earnings in foreign jurisdictions taxed at rates different from the statutory U.S. federal rate which reduced the effective tax rate by approximately 3 percentage points, deemed repatriation of non-U.S. earnings which increased the effective tax rate by approximately 2 percentage points, adjustments to reserves for tax contingencies, including interest thereon (net of related tax benefit), which increased the effective tax rate by approximately 2 percentage points and state income taxes (net of related tax benefit) which increased the effective tax rate by approximately 3 percentage points.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $10 million increase to the January 1, 2007 balance of retained earnings with a corresponding decrease to reserves for tax contingencies. The Company had a $209.2 million liability recorded for unrecognized tax benefits as of January 1, 2007, which included interest and penalties of $118 million. The Company continues to record interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of unrecognized benefits that, if recognized, would have affected the effective tax rate was $163 million. At September 30, 2007, the Company had a $235.7 million liability recorded for unrecognized tax benefits, which includes interest and penalties of $132.4 million. The total amount of unrecognized benefits that, if recognized, would have affected the effective tax rate was $166.8 million.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and foreign jurisdictions. The Company is no longer subject to U.S. federal examination for years before 2005 and with few exceptions, state and local examinations for years before 2000 and non-U.S. income tax examinations for years before 2002. During the three months ended September 30, 2007, the IRS and the Company reached agreement on substantially all of the issues raised with respect to the examination of the taxable years 2000-2004. The Company submitted a protest to the Appeals Division of the IRS with respect to the remaining unresolved issues. In addition, during the three months ended September 30, 2007, the Company filed a petition with the U.S. Tax Court with respect to the unresolved issues associated with the 1997-1999 examination cycle. See Note 14, “Contingencies”, for further detail. The Company cannot predict the timing or ultimate outcome of these matters. However, it is reasonably possible that during the next 12 months some portion of previously unrecognized tax benefits could be recognized which could be material to the Company’s results of operations and cash flows.

Note 14. Contingencies

General

There are pending or threatened against the Company or its subsidiaries various claims, lawsuits and administrative proceedings, arising from the ordinary course of business, including commercial, product liability, asbestos and environmental matters, which seek remedies or damages. Although no assurance can be given with respect to the ultimate outcome of these matters, the Company believes that any liability that may finally be determined with respect to commercial and non-asbestos product liability claims should not have a material effect on its consolidated financial position, results of operations or cash flow. From time to time, the Company is also involved in legal proceedings as a plaintiff involving tax, contract, patent protection, environmental and other matters. Gain contingencies, if any, are recognized when they are realized. Legal costs are expensed as incurred.

Environmental

The Company is subject to various domestic and international environmental laws and regulations which may require that the Company investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including divested sites for which the Company has contractual obligations relating to the environmental conditions of such site. At certain sites, the Company has been identified as a potentially responsible party under the federal Superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under these laws.

Estimates of the Company’s environmental liabilities are based on current facts, laws, regulations and technology, and take into consideration the Company’s prior experience and 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 cost estimates, 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 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 and cash flows in a given period. 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 the Company 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 future developments will not have a material adverse effect on its results of operations or cash flows in a given period.

Environmental liabilities 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, third party indemnity obligations, and an assessment of the likelihood that such parties will fulfill their obligations at such sites.

The Company’s Condensed Consolidated Balance Sheet included an accrued liability for environmental remediation obligations of $71.1 million and $74.3 million at September 30, 2007 and at December 31, 2006, respectively. At September 30, 2007 and December 31, 2006, $19 million and $17.7 million, respectively, of the accrued liability for environmental remediation were included in current liabilities as accrued expenses. At September 30, 2007 and December 31, 2006, $30.4 million and $31 million, respectively, was associated with ongoing operations and $40.7 million and $43.3 million, respectively, was associated with previously owned businesses.

The Company expects that it will expend present accruals over many years, and will generally complete remediation in less than 30 years at 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. 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.

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 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 Company’s results of operations or cash flows in a given period.

Insurance Coverage

The Company maintains a comprehensive portfolio of insurance policies, including aviation products liability insurance which covers most of its products. The aviation products liability insurance provides first dollar coverage for defense and indemnity of third party claims.

Kemper Insurance (Kemper) provided the Company’s pre-1976 primary layer of insurance coverage for third party claims. Kemper is currently operating under a “run-off” plan under the supervision of the Illinois Division of Insurance. On May 1, 2007, the Company commuted the Kemper policies in return for a cash payment. The agreement with Kemper was approved by the State of Illinois.

In addition, a portion of the Company’s primary and excess layers of pre-1986 insurance coverage for third party claims was provided by certain insurance carriers who are either insolvent or undergoing solvent schemes of arrangement. The Company has entered into settlement agreements with a number of these insurers pursuant to which the Company agreed to give up its rights with respect to certain insurance policies in exchange for negotiated payments. These settlements represent negotiated payments for the Company’s loss of insurance coverage, as it no longer has insurance available for claims that may have qualified for coverage. A portion of these settlements was recorded as income for reimbursement of past claim payments under the settled insurance policies and a portion was recorded as a deferred settlement credit for future claim payments.

At September 30, 2007, the deferred settlement credit was approximately $54.6 million for which approximately $8.9 million was reported in accrued expenses and approximately $45.7 million was reported in other non-current liabilities. The proceeds from such insurance settlements were reported as a component of net cash provided by operating activities in the period payments were received.

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 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 such finding would not have a material adverse effect on its financial condition, but could have a material adverse effect on its results of operations and cash flows in a particular period. However, because of the uncertainty as to the number, timing and payments related to future asbestos-related claims, there can be no assurance that any such claims will not have a material adverse effect on the Company’s financial condition, results of operations and cash flows. If a claim related to the dividend of Coltec’s aerospace business were successful, it could have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

Other

In connection with the divestiture of the Company’s tire, vinyl and other businesses, the Company has received contractual rights of indemnification from third parties for environmental and other claims arising out of the divested businesses. Failure of these third parties to honor their indemnification obligations could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

Aerostructures Long-Term Contracts

The aerostructures business has several long-term contracts in the pre-production and early production phases (e.g., Boeing 787, Airbus A380 and A350 XWB). The pre-production phase includes design of the product to meet customer specifications as well as design of the processes to manufacture the product. Also involved in this phase is securing the supply of material and subcomponents produced by third party suppliers that are generally accomplished through long-term supply agreements. In addition to these factors, contracts in the early production phase include excess-over-average inventories, which represent the excess of current manufactured cost over the estimated average manufactured cost during the life of the contract. Cost estimates over the life of contracts are affected by estimates of future cost reductions including learning curve efficiencies. Because these contracts cover periods of up to 20 years or more, there is risk that estimates of future costs made during the pre-production and early production phases will be different from actual costs and that difference could have a material adverse impact on the Company’s results of operations and cash flows .

Tax

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.

During the three months ended September 30, 2007, the IRS and the Company reached agreement on substantially all of the issues raised with respect to the examination of taxable years 2000-2004 and recorded a tax benefit, resulting primarily from the reversal of related tax reserves of approximately $15.7 million. The Company submitted a protest to the Appeals Division of the IRS with respect to the remaining unresolved issues. The Company cannot predict the timing or ultimate outcome of a final resolution of the remaining unresolved issues.

The previous examination cycle included the consolidated income tax groups in the audit periods identified below:

Coltec Industries Inc and Subsidiaries		December, 1997 — July, 1999 (through date of acquisition)
Goodrich Corporation and Subsidiaries		1998-1999 (including Rohr and Coltec)

The IRS and the Company previously reached final settlement on all but one of the issues raised in this examination cycle. The Company received statutory notices of deficiency dated June 14, 2007 related to the remaining unresolved issue which involves the proper timing of certain deductions. The Company filed a petition with the U.S. Tax Court in September 2007 to contest the notices of deficiency. The Company believes the amount of the estimated tax liability if the IRS were to prevail is fully reserved. The Company cannot predict the timing or ultimate outcome of this matter.

Rohr has been under examination by the State of California for the tax years ended 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 Franchise Tax Board held that the deductions associated with the leased equipment were non-business deductions. The additional tax associated with the Franchise Tax Board’s position is approximately $4.5 million. The amount of accrued interest associated with the additional tax is approximately $22 million as of September 30, 2007. In addition, the State of California enacted an amnesty provision that imposes nondeductible penalty interest equal to 50% of the unpaid interest amounts relating to taxable years ended before 2003. The penalty interest is approximately $11 million as of September 30, 2007. The tax and interest amounts continue to be contested by Rohr. The Company believes that it is adequately reserved for this contingency. During 2005, Rohr made payments of approximately $3.9 million ($0.6 million for tax and $3.3 million for interest) related to items that were not being contested and approximately $4.5 million related to items that are being contested. No payment has been made for the $22 million of interest or $11 million of penalty interest. Under California law, Rohr may be required to pay the full amount of interest prior to filing any suit for refund. If required, Rohr expects to make this payment and file suit for a refund in 2008.

Note 15. Guarantees

The Company extends financial and product performance guarantees to third parties. As of September 30, 2007, the following environmental remediation indemnification and financial guarantees were outstanding:

		Maximum				Carrying
		Potential				Amount of
		Payment				Liability
Environmental remediation indemnification (Note 14)		No limit				$	16.6
Debt and lease payments		$	2.0			$	—
Residual value on leases (Note 10)		$	24.8			$	—
Letter of credit and bank guarantees		$	54.5			$	—

The letters of credit and bank guarantees of $54.5 million are inclusive of $22.3 million in letters of credit outstanding under the Company’s syndicated revolving credit facility, which are discussed in Note 10, “Financing Arrangements”. 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. It is 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.

Service and Product Warranties

The Company provides service and warranty policies on certain of its products. The Company accrues liabilities under service and warranty policies based upon specific claims and a review of historical warranty and service claim experience in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”. 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 nine months ended September 30, 2007 are as follows:

		(Dollars in millions)
Balance at December 31, 2006		$	160.3
Net provisions for warranties issued during the year			38.5
Net (benefit) provisions for warranties existing at the beginning of the year			(7.9	)
Payments			(30.5	)
Foreign currency translation			5.7
Balance at September 30, 2007		$	166.1

The current and long-term portions of service and product warranties were as follows:

		September 30,				December 31,
		2007				2006
		(Dollars in millions)
Short-term liabilities		$	65.3			$	57.5
Long-term liabilities			100.8				102.8
Total		$	166.1			$	160.3

Note 16. Derivatives and Hedging Activities

The Company utilizes certain financial instruments to manage risk, including foreign currency and interest rate exposures that exist as part of ongoing business operations. A description of the Company’s use of derivative instruments is included in Note 19, “Derivatives and Hedging Activities” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Foreign Currency Contracts

The Company enters forward contracts to manage its Great Britain Pounds Sterling, Euros, Canadian Dollars and Polish Zloty foreign currency exposures.

The total fair value of the Company’s forward contracts accounted for as cash flow hedges was a gain of $168.1 million (before deferred taxes of $58.3 million) at September 30, 2007. The notional value of the forward contracts at September 30, 2007 was $1,960.1 million. As of September 30, 2007, the amount of accumulated other comprehensive income that would be reclassified into earnings as an increase in sales to offset the effect of the hedged item in the next 12 months was a gain of $69.4 million. These forward contracts mature on a monthly basis with maturity dates that range from October 2007 to December 2011.

The Company also uses 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 contracts are not designated as hedges. Accordingly, the gains or losses on these contracts are recorded in cost of sales. The notional amounts are adjusted periodically to reflect changes in net monetary asset balances. Under this program, as of September 30, 2007, the Company had forward contracts with a notional value of $241.7 million, which mature on a monthly basis with maturity dates ranging from October 2007 to December 2011.

Interest Rate Swaps

The notional amounts of outstanding interest rate swaps accounted for as fair value hedges at September 30, 2007 totaled $193 million with maturity dates ranging from 2008 to 2016. The fair value of the interest rate swaps was a net liability/loss of $0.6 million at September 30, 2007.

Note 17. Share-Based Compensation

During the three and nine months ended September 30, 2007 and 2006, the Company expensed share-based compensation awards under the Goodrich Corporation 2001 Equity Compensation Plan and the Goodrich Corporation Employee Stock Purchase Plan for employees and under the Outside Director Deferral and Outside Director Phantom Share plans for non-employee directors. A detailed description of the awards under these plans is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

In January 2007, the Company granted special stock options with a seven-year term that included a market condition whereby the options vest when the price per share of the Company’s stock closes at or above $65.00 per share for any 5 business days during a 20 consecutive-business-day period. During the three months ended September 30, 2007, the market condition was met. The compensation cost recorded for the special stock options during the three months ended September 30, 2007 was $5.5 million, of which $4.1 million would have been recorded in future periods had the market condition not been met. The compensation cost recorded for the special stock options during the nine months ended September 30, 2007 was $8.2 million.

The compensation cost recorded for share-based compensation plans during the three months ended September 30, 2007 and 2006 totaled $23.2 million and $7.9 million, respectively. The compensation cost recorded for share-based compensation plans during the nine months ended September 30, 2007 and 2006 totaled $55.3 million and $36.1 million, respectively.

Note 18. Subsequent Event

On October 23, 2007, the Goodrich Board of Directors declared a quarterly dividend of $0.225 per share of common stock, payable January 2, 2008 to shareholders of record on December 3, 2007. This dividend declaration represents a 12.5 percent increase over the previous quarterly dividend of $0.20 per share of common stock.

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.

GOODRICH AVIATION TECHNICAL SERVICES, INC. (ATS) HAS BEEN ACCOUNTED FOR AS A DISCONTINUED OPERATION. 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 and general aviation airplane markets. We are also a leading supplier of systems and products to the global defense 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.

Key Market Channels for Products and Services, Growth Drivers and Industry and our Highlights

We participate in three key market channels: commercial and general aviation airplane original equipment (OE); commercial and general aviation airplane aftermarket; and defense and space.

Commercial and General Aviation Airplane OE

Commercial and general aviation airplane OE includes sales of products and services for new airplanes produced by Airbus S.A.S. (Airbus) and The Boeing Company (Boeing), as well as regional, business and small airplane manufacturers.

The key growth drivers in this market channel include the number of orders for new airplanes, which will be delivered to the manufacturers’ customers over a period of several years, OE manufacturer production and delivery rates and introductions of new airplane models such as the Boeing 787 and 747-8, the Airbus A380 and A350 XWB and the Embraer 190 airplanes.

We have significant sales content on most of the airplanes manufactured in this market channel. We have benefited from increased production rates and deliveries of Airbus and Boeing airplanes and from our substantial content on many of the regional and general aviation airplanes. We were also awarded several new contracts for our products on airplanes currently in a pre-production or early development stage, including the Boeing 787 and 747-8 and the Airbus A350 XWB, which should provide substantial future sales growth for us.

The commercial airplane manufacturers have a significant backlog of orders and are continuing to experience strong new order flow. Airlines worldwide continue to increase capacity, and it now appears that the U.S. airlines will largely return to profitability in 2007. These trends bode very well for large commercial aircraft production over the next several years.

Commercial and General Aviation Airplane Aftermarket

The commercial and general aviation airplane aftermarket channel includes sales of products and services for existing commercial and general aviation airplanes, primarily to airlines and package carriers around the world.

The key growth drivers in this channel include worldwide passenger capacity growth measured by Available Seat Miles (ASM) and the size and activity level of the airplane fleet. Other important factors affecting growth in this market channel are the age of the airplanes in the fleet and Gross Domestic Product (GDP) trends in countries and regions around the world.

Capacity in the global airline system, as measured by ASMs, is expected to grow at about 4% to 5% in 2007. Goodrich sales to airline and package carriers for large commercial and regional aircraft aftermarket parts and services are expected to grow by about 17% in 2007 compared to 2006.

We have significant product content on most of the airplane models that are currently in service. We have benefited from growth in ASMs, especially in Asia, and from the aging of the worldwide fleet of airplanes.

Defense and Space

Worldwide defense and space sales include sales to prime contractors such as Boeing, Northrop Grumman, Lockheed Martin, the U.S. Government and foreign companies and governments.

The key growth drivers in this channel include the level of defense spending by the U.S. and foreign governments, the number of new platform starts, the level of military flight operations and the level of upgrade, overhaul and maintenance activities associated with existing platforms.

The market for our defense and space products is global, and is not dependent on any single program, platform or customer. While we anticipate fewer new platform starts over the next several years, which are expected to negatively affect OE sales, we anticipate that upgrades on existing defense and space platforms will be necessary and will provide long-term growth in this market channel. Additionally, we are participating in, and developing new products for the rapidly expanding homeland security and intelligence, surveillance and reconnaissance sectors, which should further strengthen our position in this market channel.

Long-term Sustainable Growth

We believe that we are well positioned to continue to grow our commercial airplane OE and aftermarket and defense and space sales due to:

	•		Awards for key products on important new and expected programs, including the Airbus A380 and A350 XWB, the Boeing 787 and 747-8, the Embraer 190, the Dassault Falcon 7X and the Lockheed Martin F-35 Lightning II and F-22 Raptor;
	•		Growing commercial airplane fleet, which should fuel sustained aftermarket strength;
	•		Balance in the large commercial airplane market, with strong sales to both Airbus and Boeing;
	•		Aging of the existing large commercial and regional airplane fleets, which should result in increased aftermarket support;
	•		Increased number of long-term agreements for product sales on new and existing commercial airplanes;
	•		Increased opportunities for aftermarket growth due to airline outsourcing;
	•		Growth in global maintenance, repair and overhaul opportunities for our systems and components, particularly in Europe, Asia and the Middle East, where we are expanding our capacity; and
	•		Expansion of our product offerings in support of high growth areas in the defense and space market channel, such as helicopter products and systems and intelligence, surveillance and reconnaissance products.

Third Quarter 2007 Sales Content by Market Channel

During the third quarter 2007, approximately 96% of our sales were from our three primary market channels described above. Following is a summary of the percentage of sales by market channel:

Airbus Commercial OE			14	%
Boeing Commercial OE			11	%
Regional and General Aviation Airplane OE			8	%
Total Commercial and General Aviation Airplane OE			33	%
Large Commercial Airplane Aftermarket			29	%
Regional and General Aviation Airplane Aftermarket			8	%
Total Commercial and General Aviation Airplane Aftermarket			37	%
Total Defense and Space			26	%
Other			4	%
Total			100	%

Summary Performance — Third Quarter 2007 as Compared to Third Quarter 2006

		Third Quarter
		2007				2006				% Change
		(Dollars in millions, except diluted EPS)
Sales		$	1,601.7			$	1,395.3				14.8
Segment operating income(1)		$	275.9			$	201.9				36.7
Percent of sales			17.2	%			14.5	%
Income from continuing operations before income taxes		$	194.4			$	127.4				52.6
Income from continuing operations		$	140.2			$	100.1				40.1
Net income		$	126.8			$	100.7				25.9
Effective tax rate			27.9	%			21.4	%
Diluted EPS:
Continuing operations		$	1.10			$	0.79				39.2
Net income		$	0.99			$	0.80				23.8

The sales increase of 14.8% in the third quarter 2007 as compared to the third quarter 2006 was driven by changes in each of our major market channels as follows:

	•		Large commercial airplane original equipment sales increased by approximately 18%;
	•		Regional, business and general aviation airplane original equipment sales increased by approximately 20%;
	•		Large commercial, regional and general aviation airplane aftermarket sales increased by approximately 16%; and
	•		Defense and space sales of both original equipment and aftermarket products and services increased by approximately 9%.

The segment operating income growth of 36.7% was generated by increased sales and improved operational performance in most business units as discussed in the “Business Segment Performance” section.

The change in income from continuing operations before income taxes during the third quarter 2007 as compared to the third quarter 2006 was also impacted by the following items:

		Increase (Decrease)
		Before				After				Diluted
		Tax				Tax				EPS
		(Dollars in millions, except diluted EPS)
Settlement of customer claims		$	21.6			$	13.5			$	0.11
Changes in estimate on long-term contracts		$	17.8			$	11.1			$	0.09
Higher share-based compensation		$	(15.3	)		$	(9.6	)		$	(0.07	)

Settlement of customer claims

During the third quarter 2007, we settled certain claims with a customer resulting in an increase in operating income of $21.6 million.

Changes in estimate on long-term contracts

During the third quarter 2007, we revised our estimates on certain of our long-term contracts, primarily in our aerostructures and aircraft wheels and brakes business units, resulting in higher income of approximately $18 million compared to the third quarter 2006. These changes were primarily due to favorable cost performance.

Share-based compensation

The increase in share-based compensation was primarily due to the following:

	•		Approximately $9 million of increased costs resulting from an increase in our share price and favorable performance against plan targets; and
	•		Approximately $4 million of costs related to the accelerated vesting of the 2007 special stock options.

Summary Performance — Nine Months Ended September 30, 2007 as Compared to Nine Months Ended September 30, 2006

		Nine Months Ended,
		September 30
		2007				2006				% Change
		(Dollars in millions, except diluted EPS)
Sales		$	4,724.4			$	4,224.0				11.8
Segment operating income(1)		$	762.4			$	578.4				31.8
Percent of sales			16.1	%			13.7	%
Income from continuing operations before income taxes		$	520.1			$	342.6				51.8
Income from continuing operations		$	363.2			$	379.7				(4.3	)
Net income		$	351.4			$	383.2				(8.3	)
Effective tax rate (benefit)(2)			30.2	%			(10.8	)%
Diluted EPS:
Continuing operations		$	2.84			$	3.01				(5.6	)
Net income		$	2.75			$	3.04				(9.5	)

The sales increase of 11.8% during the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 was driven primarily by growth in each of our major market channels as follows:

	•		Large commercial airplane original equipment sales increased by approximately 7%;
	•		Regional, business and general aviation airplane original equipment sales increased by approximately 17%;
	•		Large commercial, regional and general aviation airplane aftermarket sales increased by approximately 17%; and
	•		Defense and space sales of both original equipment and aftermarket products and services increased by approximately 8%.

The segment operating income growth of 31.8% was generated by higher sales volume in all of our segments including strong aftermarket sales growth in all of our major businesses, and improved operational performance in most business units as discussed in the “Business Segment Performance” section.

The change in income from continuing operations before income taxes during the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006, was also impacted by the following items:

		Increase (Decrease)
		Before				After				Diluted
		Tax				Tax				EPS
		(Dollars in millions, except diluted EPS)
Changes in estimate on long-term contracts		$	41.5			$	25.9			$	0.20
Settlement of customer claims		$	21.6			$	13.5			$	0.11
Foreign exchange rate impact, including net monetary asset remeasurement		$	(19.7	)		$	(12.3	)		$	(0.10	)
Higher share-based compensation		$	(19.1	)		$	(12.0	)		$	(0.09	)

Changes in estimate on long-term contracts

During the nine months ended September 30, 2007, we revised our estimates on certain of our long-term contracts, primarily in our aerostructures and aircraft wheels and brakes business units, resulting in higher income of approximately $42 million compared to the nine months ended September 30, 2006. These changes were primarily due to favorable cost performance.

Settlement of customer claims

During the nine months ended September 30, 2007, we settled certain claims with a customer resulting in an increase in operating income of $21.6 million.

Foreign exchange rate impact

The net unfavorable foreign exchange rate impact was due to the following:

	•		Approximately $44 million related to unfavorable foreign currency translation of net costs in currencies other than the U.S. Dollar, partially offset by approximately $21 million of higher net gains on cash flow hedges settled during the nine months ended September 30, 2007; and
	•		Approximately $3 million of increased net transaction losses relating to re-measuring U.S. Dollar denominated monetary assets/liabilities into the local functional currency, offset by approximately $6 million of higher net gains on forward contracts we entered into to offset the impact of net monetary asset gains/losses.

Share-based compensation

The increase in share-based compensation was primarily due to the following:

	•		Approximately $20 million of increased costs resulting from an increase in our share price and favorable performance against plan targets; and
	•		Approximately $8 million of costs related to the 2007 special stock options; partially offset by
	•		Approximately $10 million of costs that resulted from accelerated expense on awards granted to employees who were retirement eligible on the grant date in the first quarter of 2006.

2007 Outlook

We expect the following results for the year ending December 31, 2007:

		2007 Outlook		2006 Actual
Sales		$6.4-$6.5 billion		$5.7 billion
Diluted EPS — Income from Continuing Operations		$3.65-$3.70 per share		$3.78 per share*
Capital Expenditures		$270-$290 million		$254.6 million
Operating Cash Flow net of Capital Expenditures		60%-75% of income from continuing operations		2% of income from continuing operations**

Full year 2007 sales expectations have been adjusted to $6.4 to $6.5 billion. The change in outlook compared to the prior range of $6.5 to $6.6 billion provided in our Form 10-Q for the quarter ended June 30, 2007 is primarily due to the expected sale of ATS, which is now being reported as a discontinued operation. The outlook for 2007 income from continuing operations per diluted share is now $3.65 to $3.70. The income outlook reflects sales growth in all major market channels and margin expansion driven by sales growth, favorable mix and improved operating efficiencies.

The 2007 outlook assumes, among other factors, a full-year effective tax rate of approximately 31% to 32%, which may vary depending on many factors, including settlements with state, federal and international tax authorities.

To provide the most meaningful comparison between 2006 results and the outlook for 2007 income from continuing operations per diluted share, we believe that the 2006 income from operations per diluted share of $3.78 should be adjusted for the impact of the $1.15 per diluted share related to tax settlements that were completed during 2006. Excluding these tax settlements, income from continuing operations per diluted share for 2006 was $2.63, compared to expected results of $3.65 to $3.70 for 2007.

We continue to expect net cash provided by operating activities, minus capital expenditures, to be in the range of 60% to 75% of income from continuing operations in 2007. This outlook reflects a continuation of cash expenditures for investments in the Boeing 787 Dreamliner and the Airbus A350 XWB and capital expenditures for facility expansions to support increased aftermarket demand, low cost country manufacturing and productivity initiatives that are expected to enhance margins over the near and long-term. We continue to expect capital expenditures for 2007 to be in a range of $270 to $290 million. Of these capital expenditures, approximately 40% are expected to be associated with investments in low cost country manufacturing, previously announced Maintenance, Repair and Operation (MRO) facility expansions and new facilities to support aftermarket sales growth, and expenditures related to the implementation of a company-wide ERP system.

The current sales, net income and net cash provided by operating activities outlooks for 2007 do not include the impact of acquisitions or divestitures, other than the completion of the recently announced sale of ATS, or resolution of an A380 claim against Northrop Grumman.

2008 Outlook

Our sales outlook is based on market assumptions for each of our major market channels. The current assumptions for the full year 2008, compared with the full year 2007 outlook, are:

	•		Large commercial airplane original equipment sales are expected to increase by slightly more than 20%;
	•		Regional business and general aviation airplane original equipment sales are expected to increase by about 13%;
	•		Large commercial, regional and general aviation airplane aftermarket sales are expected to increase by about 8% to 10%; and
	•		Defense and space sales of both original equipment and aftermarket products and services are expected to increase by about 5% to 8%.

We expect that full year 2008 sales will be in the range of $7.1 to $7.2 billion, which represents an increase of about 11% from the current outlook for 2007. We expect our 2008 net income per diluted share to be in the range of $4.15 to $4.30, reflecting strong sales growth in all of our major market channels.

Our 2008 outlook assumes, among other factors, an effective tax rate of 33% to 35%, including extension of the U.S. research tax credit. We expect net cash provided by operating activities, minus capital expenditures to exceed 75% of net income. Our outlook reflects a continuation of working capital investments to support the Boeing 787 Dreamliner and Airbus A380 programs, cash expenditures for investments in the Airbus A350 XWB and capital expenditures for low cost country manufacturing and productivity initiatives that are expected to enhance margins over the near and long-term.

The current sales, net income and net cash provided by operating activities outlooks for 2008 do not include the impact of acquisitions or divestitures, other than the completion of the previously announced sale of ATS, or resolution of an A380 claim against Northrop Grumman.

RESULTS OF OPERATIONS

Third Quarter 2007 Compared with Third Quarter 2006

		Third Quarter								$
		2007				2006				Change
		(Dollars in millions)
Sales		$	1,601.7			$	1,395.3			$	206.4
Segment Operating Income		$	275.9			$	201.9			$	74.0
Corporate General and Administrative Costs			(34.5	)			(23.0	)			(11.5	)
ERP Implementation Costs			(5.2	)			(5.8	)			0.6
Total Operating Income			236.2				173.1				63.1
Net Interest Expense			(29.3	)			(29.4	)			0.1
Other Income (Expense) — Net			(12.5	)			(16.3	)			3.8
Income Tax (Expense) Benefit			(54.2	)			(27.3	)			(26.9	)
Income from Continuing Operations			140.2				100.1				40.1
Income (loss) from Discontinued Operations — Net of Income Taxes			(13.4	)			0.6				(14.0	)
Net Income		$	126.8			$	100.7			$	26.1