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 June 30, 2006

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

For the transition period from                 to                 .

GOODRICH CORPORATION

New York (State of incorporation)		34-0252680 (I.R.S. Employer Identification No.)

Four Coliseum Centre 2730 West Tyvola Road Charlotte, North Carolina (Address of principal executive offices)		28217 (Zip Code)

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.

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 June 30, 2006, there were 124,717,032 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 June 30, 2006, and the related condensed consolidated statement of income for the three month and six month periods ended June 30, 2006 and 2005, and the condensed consolidated statement of cash flows for the six month periods ended June 30, 2006 and 2005. 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, 2005, 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 20, 2006, 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, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

		/s/ Ernst & Young LLP

Charlotte, North Carolina
August 2, 2006

CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(Dollars in millions, except per								(Dollars in millions, except per
		share amounts)								share amounts)
Sales		$	1,483.2			$	1,352.7			$	2,907.0			$	2,628.2
Operating costs and expenses:
Cost of sales			1,088.0				990.5				2,131.9				1,920.2
Selling and administrative costs			227.3				226.1				464.5				441.8
			1,315.3				1,216.6				2,596.4				2,362.0
Operating Income			167.9				136.1				310.6				266.2
Interest expense			(31.3	)			(33.0	)			(63.3	)			(66.9	)
Interest income			1.1				1.0				2.2				1.9
Other income (expense) — net			(20.9	)			(14.3	)			(31.5	)			(24.4	)
Income from continuing operations before income taxes			116.8				89.8				218.0				176.8
Income tax benefit (expense)			(35.7	)			(27.4	)			63.4				(57.6	)
Income From Continuing Operations			81.1				62.4				281.4				119.2
Income (loss) from discontinued operations — net of income taxes			(0.1	)			13.3				0.5				14.0
Cumulative effect of change in accounting			—				—				0.6				—
Net Income		$	81.0			$	75.7			$	282.5			$	133.2
Basic Earnings Per Share:
Continuing operations		$	0.65			$	0.52			$	2.27			$	0.99
Discontinued operations			—				0.11				—				0.12
Cumulative effect of change in accounting			—				—				0.01				—
Net Income		$	0.65			$	0.63			$	2.28			$	1.11
Diluted Earnings Per Share:
Continuing operations		$	0.64			$	0.51			$	2.23			$	0.97
Discontinued operations			—				0.10				—				0.11
Cumulative effect of change in accounting			—				—				0.01				—
Net Income		$	0.64			$	0.61			$	2.24			$	1.08
Dividends Declared Per Common Share		$	0.20			$	0.20			$	0.40			$	0.40

See Notes to Condensed Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)

		June 30,				December 31,
		2006				2005
		(Dollars in millions,
		except share amounts)
Current Assets
Cash and cash equivalents		$	208.4			$	251.3
Accounts and notes receivable, less allowances for doubtful receivables ($20.1 at June 30, 2006 and $23.5 at December 31, 2005)			932.5				709.2
Inventories — net			1,485.8				1,308.4
Deferred income taxes			108.6				101.3
Prepaid expenses and other assets			73.0				55.2
Total Current Assets			2,808.3				2,425.4
Property, plant and equipment — net			1,255.7				1,194.3
Prepaid pension			295.0				337.8
Goodwill			1,333.2				1,318.4
Identifiable intangible assets — net			468.5				462.3
Deferred income taxes			49.0				42.8
Other assets			709.3				673.0
Total Assets		$	6,919.0			$	6,454.0
Current Liabilities
Short-term debt		$	31.0			$	22.3
Accounts payable			601.3				534.1
Accrued expenses			758.1				764.9
Income taxes payable			227.9				284.4
Deferred income taxes			7.2				7.2
Current maturities of long-term debt and capital lease obligations			1.4				1.7
Total Current Liabilities			1,626.9				1,614.6
Long-term debt and capital lease obligations			1,719.6				1,742.1
Pension obligations			693.7				844.2
Postretirement benefits other than pensions			290.5				300.0
Deferred income taxes			128.1				42.1
Other non-current liabilities			443.7				438.0
Commitments and contingent liabilities			—				—
Shareholders’ Equity
Common stock — $5 par value
Authorized 200,000,000 shares; issued 138,389,981 shares at June 30, 2006 and 136,727,436 shares at December 31, 2005 (excluding 14,000,000 shares held by a wholly owned subsidiary)			692.0				683.6
Additional paid-in capital			1,273.5				1,203.3
Income retained in the business			517.6				285.6
Accumulated other comprehensive income (loss)			(47.8	)			(283.0	)
Common stock held in treasury, at cost (13,672,949 shares at June 30, 2006 and 13,621,128 shares at December 31, 2005)			(418.8	)			(416.5	)
Total Shareholders’ Equity			2,016.5				1,473.0
Total Liabilities And Shareholders’ Equity		$	6,919.0			$	6,454.0

See Notes to Condensed Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

		Six Months Ended June 30,
		2006				2005
		(Dollars in millions)
Operating Activities
Net income		$	282.5			$	133.2
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations			(0.5	)			(14.0	)
Cumulative effect of change in accounting			(0.6	)			—
Restructuring and consolidation:
Expenses			3.6				3.7
Payments			(3.6	)			(5.8	)
Asset impairments			0.9				—
Depreciation and amortization			117.6				112.2
Excess tax benefits on equity instruments issued under share-based payment arrangements			(4.0	)			—
Share-based compensation expense			28.7				19.2
Loss on exchange or extinguishment of debt			1.0				5.7
Deferred income taxes			(19.4	)			(25.3	)
Change in assets and liabilities, net of effects of acquisitions and dispositions of businesses:
Receivables			(134.3	)			(136.2	)
Change in receivables sold, net			(97.1	)			28.8
Inventories			(152.8	)			(111.5	)
Other current assets			11.9				10.5
Accounts payable			64.7				29.9
Accrued expenses			(17.7	)			(27.9	)
Income taxes payable			(38.3	)			60.3
Realized tax benefit on non-qualified options			—				8.8
Other non-current assets and liabilities			12.3				15.8
Net Cash Provided By Operating Activities			54.9				107.4
Investing Activities
Purchases of property, plant and equipment			(95.1	)			(66.4	)
Proceeds from sale of property, plant and equipment			1.4				5.3
Payments received (payments made) in connection with acquisitions, net of cash acquired			—				(9.3	)
Net Cash Used In Investing Activities			(93.7	)			(70.4	)
Financing Activities
Increase (decrease) in short-term debt, net			8.0				(1.0	)
Loss on exchange or extinguishment of debt			(3.5	)			(5.2	)
Proceeds from issuance of long-term debt, net of premiums paid of $20.5 million in 2006			512.8				—
Repayment of long-term debt and capital lease obligations			(534.0	)			(100.9	)
Proceeds from issuance of common stock			46.1				51.3
Purchases of treasury stock			(1.9	)			(0.6	)
Dividends			(49.8	)			(47.9	)
Excess tax benefits on equity instruments issued under share-based payment arrangements			4.0				—
Distributions to minority interest holders			(1.9	)			(2.4	)
Net Cash Used In Financing Activities			(20.2	)			(106.7	)
Discontinued Operations (revised—see Note 1)
Net cash provided by (used in) operating activities			11.2				0.4
Net cash provided by (used in) investing activities			—				26.8
Net cash provided by (used in) financing activities			—				—
Net cash provided by discontinued operations			11.2				27.2
Effect of exchange rate changes on cash and cash equivalents			4.9				(4.1	)
Net decrease in cash and cash equivalents			(42.9	)			(46.6	)
Cash and cash equivalents at beginning of year			251.3				297.9
Cash and cash equivalents at end of period		$	208.4			$	251.3

See Notes to Condensed Consolidated Financial Statements (Unaudited)

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. The Company has separately disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis as a single amount. Operating results for the three months and six months ended June 30, 2006 are not necessarily indicative of the results that may be achieved for the twelve months ending December 31, 2006. 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, 2005. Unless otherwise noted, disclosures pertain to the Company’s continuing operations.

Note 2. New Accounting Standards

Accounting for Certain Hybrid Financial Instruments

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments” (SFAS 155), which amends Statement of Financial Accounting Standards No. 133 and Statement of Financial Accounting Standards No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and simplifies the accounting for those instruments. SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company has not issued or acquired any hybrid instruments included in the scope of SFAS 155 and does not expect the adoption of SFAS 155 to have a material impact on the Company’s financial condition, results of operations or cash flows.

Accounting for Servicing of Financial Assets

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets — An Amendment of FASB Statement No. 140” (SFAS 156). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 156 to have a material impact on the Company’s financial condition, results of operations or cash flows.

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 creates a single model for accounting and disclosure of uncertain tax positions. This interpretation prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Additionally, FIN 48 provides guidance on derecognition, measurement, classification, interest and penalties, and transition of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of FIN 48 on the Company’s financial condition, results of operations and cash flows.

Note 3. Restructuring and Consolidation Costs

The Company incurred $3.6 million and $3.7 million of restructuring and consolidation costs during the six months ended June 30, 2006 and 2005, respectively. The charges in 2006 primarily relate to restructuring actions initiated during 2005 to downsize a foreign facility.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(Dollars in millions)								(Dollars in millions)
Engine Systems		$	1.4			$	0.2			$	1.6			$	0.4
Airframe Systems			—				0.2				0.4				2.4
Electronic Systems			0.7				0.1				1.6				0.9
		$	2.1			$	0.5			$	3.6			$	3.7
Personnel-related costs		$	1.9			$	0.2			$	2.6			$	2.7
Facility closure and other costs			0.2				0.3				1.0				1.0
		$	2.1			$	0.5			$	3.6			$	3.7
Cost of sales		$	0.1			$	0.3			$	1.0			$	3.3
Selling and administrative costs			2.0				0.2				2.6				0.4
		$	2.1			$	0.5			$	3.6			$	3.7

Restructuring and consolidation reserves at December 31, 2005 and June 30, 2006, and the activity during the six months ended June 30, 2006, consisted of:

		(Dollars in millions)
Reserve balance at December 31, 2005		$	6.5
Restructuring charges			3.6
Used as intended			(3.6	)
Return to profit			—
Foreign exchange adjustments			0.4
Reserve balance at June 30, 2006		$	6.9

Future Restructuring and Consolidation Costs for Programs Announced and Initiated

During 2005, the Company announced and initiated a restructuring program to downsize a German facility in the Electronic Systems segment with partial transfers of operations to existing facilities in Florida and India. The goal of this project is to reduce operating costs and foreign exchange exposure. The total restructuring cost is expected to be approximately $15 million, of which approximately $9.3 million relates to costs yet to be incurred in 2006 and in 2007. Approximately $2 million was paid in the six months ended June 30, 2006.

Additional expected costs by segment and type are as follows:

		Personnel-				Facility
		Related				Closure
		Costs				Costs				Total
		(Dollars in millions)
Engine Systems		$	0.3			$	—			$	0.3
Airframe Systems			—				—				—
Electronic Systems			5.3				4.0				9.3
Total		$	5.6			$	4.0			$	9.6

Note 4. Other Income (Expense) — Net

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(Dollars in millions)								(Dollars in millions)
Retiree health care expenses related to previously owned businesses		$	(4.2	)		$	(3.8	)		$	(9.0	)		$	(8.5	)
Loss on exchange or extinguishment of debt			(4.8	)			(5.7	)			(4.8	)			(5.7	)
Expenses related to previously owned businesses			(6.6	)			(0.1	)			(8.0	)			(1.5	)
Minority interest and equity in affiliated companies			(3.6	)			(3.9	)			(7.4	)			(6.7	)
Other — net			(1.7	)			(0.8	)			(2.3	)			(2.0	)
Other income (expense) — net		$	(20.9	)		$	(14.3	)		$	(31.5	)		$	(24.4	)

Note 5. Earnings Per Share

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(In millions, except
		per share amounts)
Numerator:
Numerator for basic and diluted earnings per share — income from continuing operations		$	81.1			$	62.4			$	281.4			$	119.2
Denominator:
Denominator for basic earnings per share — weighted- average shares			124.5				121.1				124.0				120.4
Effect of dilutive securities:
Stock options, employee stock purchase plan, restricted stock and restricted stock units			1.8				2.4				1.9				2.4
Other deferred compensation shares			0.1				0.1				0.1				0.1
			1.9				2.5				2.0				2.5
Denominator for diluted earnings per share — adjusted weighted- average shares and assumed conversion			126.4				123.6				126.0				122.9
Per share income from continuing operations:
Basic		$	0.65			$	0.52			$	2.27			$	0.99
Diluted		$	0.64			$	0.51			$	2.23			$	0.97

At June 30, 2006 and 2005, the Company had outstanding approximately 6.3 million and 8.5 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 6.3 million and 8.5 million stock options outstanding, 33 thousand and 131 thousand were anti-dilutive stock options excluded from the diluted earnings per share calculation at June 30, 2006 and 2005, respectively.

During the six months ended June 30, 2006 and 2005, the Company issued approximately 1.7 million and 2.4 million, respectively, of shares of common stock pursuant to stock option exercises and other stock-based compensation.

Note 6. Inventories

Inventories consist of the following:

		June 30,				December 31,
		2006				2005
		(Dollars in millions)
FIFO or average cost (which approximates current costs):
Finished products		$	345.1			$	218.1
In process			866.1				908.7
Raw materials and supplies			355.7				280.3
			1,566.9				1,407.1
Less:
Reserve to reduce certain inventories to LIFO basis			(44.2	)			(43.5	)
Progress payments and advances			(36.9	)			(55.2	)
Total		$	1,485.8			$	1,308.4

The pre-production and excess-over-average inventory accounted for under long-term contract accounting and deferred engineering costs recoverable under long-term contractual arrangements were $328.7 million and $276 million as of June 30, 2006 and December 31, 2005, respectively. The increase of $52.7 million from December 31, 2005 to June 30, 2006 was primarily driven by increased pre-production costs related to the Boeing 787 program. These amounts are included in “In process” inventory above.

Note 7. Goodwill

The changes in the carrying amount of goodwill by segment for the six months ended June 30, 2006 are as follows:

						Business
		Balance				Combinations				Foreign				Balance
		December 31,				Completed or				Currency				June 30,
		2005				Finalized				Translation				2006
		(Dollars in millions)
Engine Systems		$	483.1			$	(0.4	)		$	19.5			$	502.2
Airframe Systems			239.6				(0.1	)			12.1				251.6
Electronic Systems			595.7				(2.3	)			(14.0	)			579.4
		$	1,318.4			$	(2.8	) (a)		$	17.6			$	1,333.2

(a)

Represents a revision of plan provisions used in the actuarial valuation of other postretirement benefits related to the acquisition of the aeronautical systems businesses.

Note 8. Financing Arrangements

Credit Facilities

The Company has a $500 million committed global syndicated revolving credit facility that expires in May 2011. In May 2006, the Company exercised an option within the credit facility to extend the maturity of the facility by one year from May 2010 to May 2011. 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. In May 2006, Standard & Poor’s Ratings Services raised the Company’s credit rating to BBB from BBB-. The Company is required to pay a facility fee of 12.5 basis points per annum, which was reduced from 15 basis points in conjunction with the upgrade on the total $500 million committed line. Further, if the amount outstanding exceeds 50 percent of the total commitment, a usage fee of 12.5 basis points per annum on the amount 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 June 30, 2006, there were $34.9 million in borrowings and $19.7 million in letters of credit outstanding under the facility. At December 31, 2005, there were $34.9 million in borrowings and $19.6 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 June 30, 2006, the Company had borrowing capacity under this facility of $445.4 million, after reductions for borrowings and letters of credit outstanding under the facility.

At June 30, 2006, the Company also maintained $75 million of uncommitted domestic money market facilities and $128.3 million of uncommitted and committed foreign working capital facilities with various banks to meet short-term borrowing requirements. At June 30, 2006, there was $31 million outstanding in borrowings under these facilities. At December 31, 2005, the Company maintained $75 million of uncommitted domestic money market facilities and $111.5 million of uncommitted and committed foreign working capital facilities with $22.4 million outstanding in 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 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.

At June 30, 2006, the Company has an outstanding contingent liability for guaranteed debt and lease payments of $2.3 million and letters of credit and bank guarantees of $54.7 million (inclusive of $19.7 million in letters of credit outstanding under the Company’s syndicated revolving credit facility, as discussed above). 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.

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, $1,074.7 million of income retained in the business and additional paid in capital was free from such limitations at June 30, 2006.

Long-term Debt

In June 2006, the Company exchanged the following notes for $290.7 million principal amount of a new series of 6.29 percent notes due in 2016:

	•		$177.9 million principal amount of its 7.50 percent notes due in 2008;
	•		$32.7 million principal amount of its 6.45 percent notes due in 2008; and
	•		$80.1 million principal amount of its 6.60 percent notes due in 2009.

In June 2006, the Company also exchanged $242.5 million principal amount of its 7.625 percent notes due 2012 for $254.6 million principal amount of a new series of 6.80 percent notes due in 2036. The Company paid an aggregate cash premium of $8.6 million in connection with the exchange of the 6.29 percent notes due in 2016 and paid an aggregate premium of $24 million, including $12 million in cash and $12 million financed by issuing additional notes, in connection with the exchange of the 6.80 percent notes due 2036. The premiums will be amortized over the lives of the new notes. The Company recorded $4.8 million of transaction costs associated with the exchange offers in other income (expense) – net during the three months ended June 30, 2006.

In June 2006, the Company entered into $288.5 million of treasury locks to offset changes in the issue price of the 6.29 percent notes due 2016 and entered into $288.5 million of reverse treasury locks to offset changes in the exchange prices of the 7.50 percent notes due in 2008, 6.45 percent notes due in 2008 and 6.60 percent notes due in 2009 due to movements in treasury rates prior to the exchange date. The Company paid $0.3 million in cash to settle the treasury locks, and the amount was recorded in accumulated other comprehensive income during the three months ended June 30, 2006 and will be amortized over the life of the 6.29 percent notes due 2016. In June 2006, the Company also entered into $235.5 million of treasury locks to offset changes in the issue price of the 6.80 percent notes due 2036 and entered into $235.5 million of reverse treasury locks to offset changes in the exchange price of the 7.625 percent notes due in 2012 due to movements in treasury rates prior to the exchange date. The Company paid $1.9 million in cash to settle the locks and the amount was recorded in accumulated other comprehensive income during the three months ended June 30, 2006 and will be amortized over the life of the 6.80 percent notes due 2036.

The 6.29 percent notes due in 2016 and the 6.80 percent notes due in 2036 were issued in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act). As required by a registration rights agreement entered into with the holders of the new notes, the Company is required to register under the Securities Act additional notes of the same series to be offered in exchange for the currently outstanding 6.29 percent notes due in 2016 and 6.80 percent notes due in 2036.

In June 2006, the Company terminated $7 million of a $50 million fixed-to-floating interest rate swap on its 6.45 percent notes due in 2008. The Company paid $0.3 million in cash to terminate this portion of the interest rate swap and the amount was recorded as an expense in other income (expense) – net during the three months ended June 30, 2006. This portion of the interest rate swap was terminated so that the outstanding notional amount of the fixed-to-floating interest rate swap would match the outstanding principal amount, subsequent to the exchange, of the 6.45 percent notes due in 2008.

At June 30, 2006 and December 31, 2005 long-term debt and capital lease obligations, excluding the current maturities of long-term debt and capital lease obligations, consisted of:

		June 30, 2006				December 31, 2005
		(Dollars in millions)
Medium-term notes payable		$	639.3			$	672.1
7.5% senior notes, maturing in 2008			115.4				294.0
6.6% senior notes, maturing in 2009			131.5				213.5
7.625% senior notes, maturing in 2012			256.9				498.8
6.29% senior notes, maturing in 2016			282.2				—
6.80% senior notes, maturing in 2036			230.0				—
Other debt, maturing through 2020 (interest rates from 2.8% to 5.3%)			55.5				55.3
			1,710.8				1,733.7
Capital lease obligation			8.8				8.4
Total		$	1,719.6			$	1,742.1

Note 9. 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 aircraft and equipment having a maximum unamortized value of $55 million at June 30, 2006. At June 30, 2006, $19.3 million of future minimum lease payments was outstanding under these arrangements. Additionally, the Company has residual value guarantees under these arrangements of $24.8 million (see Note 16, “Guarantees”). The Company is obligated to either purchase or remarket the leased corporate aircraft and equipment at the end of the lease term. The residual values were established at lease inception. The lease terms mature in 2011 and 2012. The other arrangements are standard operating leases. Future minimum lease payments under the standard operating leases approximated $133.4 million at June 30, 2006.

Sale of Receivables

Effective June 30, 2006, the Company terminated the variable rate trade receivables securitization program. The balance of $97.1 million was repaid during the three months ended June 30, 2006.

Note 10. Pensions and Postretirement Benefits

Pensions

The following table sets forth the components of net periodic benefit costs (income) for the three months and six months ended June 30, 2006 and 2005. 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
		June 30,								June 30,								June 30,
		2006				2005				2006				2005				2006				2005
		(Dollars in millions)
Service cost		$	12.2			$	13.1			$	7.2			$	6.2			$	1.0			$	0.7
Interest cost			37.9				37.7				8.2				7.8				1.3				1.1
Expected return on plan assets			(43.5	)			(43.0	)			(12.8	)			(10.7	)			(1.2	)			(1.1	)
Amortization of transition obligation			—				—				—				—				—				—
Amortization of prior service cost			2.5				2.2				(0.5	)			—				—				—
Amortization of actuarial (gain) loss			10.2				13.0				(0.3	)			(0.1	)			0.3				0.3
Periodic benefit cost (income)			19.3				23.0				1.8				3.2				1.4				1.0
Settlements and curtailments (gain) loss			10.9				—				—				—				—				—
Special termination benefit charge (credit)			—				—				0.2				—				—				—
Net benefit cost (income)		$	30.2			$	23.0			$	2.0			$	3.2			$	1.4			$	1.0

		U.S. Plans								U.K. Plans								Other Non-U.S. Plans
		Six Months								Six Months								Six Months
		Ended								Ended								Ended
		June 30,								June 30,								June 30,
		2006				2005				2006				2005				2006				2005
		(Dollars in millions)
Service cost		$	25.9			$	23.9			$	14.4			$	12.3			$	2.1			$	1.5
Interest cost			76.2				74.1				16.3				15.5				2.5				2.2
Expected return on plan assets			(89.4	)			(85.6	)			(24.6	)			(21.6	)			(2.6	)			(2.0	)
Amortization of transition obligation			—				—				—				—				—				—
Amortization of prior service cost			4.7				4.4				(0.5	)			—				—				—
Amortization of actuarial (gain) loss			26.2				24.2				—				(0.1	)			0.6				0.3
Periodic benefit cost (income)			43.6				41.0				5.6				6.1				2.6				2.0
Settlements and curtailments (gain) loss			10.9				—				—				—				—				—
Special termination benefit charge (credit)			—				—				0.2				—				—				—
Net benefit cost (income)		$	54.5			$	41.0			$	5.8			$	6.1			$	2.6			$	2.0

The following table provides the weighted average assumptions used to determine the net periodic benefit costs (income).

		U.S. Plans								U.K. Plans								Other Non-U.S. Plans
		Three Months and Six Months								Three Months and Six Months								Three Months and Six Months
		Ended								Ended								Ended
		June 30,								June 30,								June 30,
		2006				2005				2006				2005				2006				2005
Discount rate 1/1/06-4/10/06			5.64%				N.A.				4.75%				N.A.				4.76%				N.A.
Discount rate 4/11/06-5/18/06			6.01%				N.A.				4.75%				N.A.				4.76%				N.A.
Discount rate 5/19/06-6/30/06			6.34%				N.A.				4.75%				N.A.				4.76%				N.A.
Discount rate 2005			N.A.				5.875%				N.A.				5.50%				N.A.				5.75%
Expected long-term return on plan assets			9.00%				9.00%				8.50%				8.50%				8.34%				8.50%
Rate of compensation increase			3.63%				3.63%				3.50%				3.50%				3.34%				3.50%

Two significant events occurred in the second quarter of 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 Retirement Choice Program as described below.

The remeasurements increased accumulated other comprehensive income by $164.7 million before tax or $109.3 million after tax.

U.S. Retirement Plan Changes in 2006

In the fourth quarter of 2005, the Company changed certain aspects of its U.S. qualified and non-qualified defined benefit pension plans and U.S. qualified and non-qualified defined contribution plans. This change generally does not apply to employees who are members of a collective bargaining unit. Non-union employees hired on and after January 1, 2006, will not participate in the Company’s qualified and non-qualified defined benefit plans. These new employees will receive a higher level of company contribution in the Company’s qualified and non-qualified defined contribution plans. New employees will receive a dollar for dollar match on the first 6 percent of eligible pay contributed, plus an automatic annual employer contribution of 2 percent of eligible pay. The 2 percent employer contribution is subject to a 3-year vesting requirement for new employees.

During the second quarter of 2006, persons employed by the Company as of December 31, 2005 and continuously thereafter employed, elected whether they wanted to continue with their current benefits in the defined benefit and defined contribution plans or freeze pension benefit service as of June 30, 2006 and receive a higher level of company contributions in the defined contribution plans. For those employees choosing the latter option, eligible pay after June 30, 2006 will continue to be included in their final average earnings used to calculate their pension benefits. The Retirement Choice Program election period closed on May 19, 2006 and approximately 41 percent of the eligible employees chose the latter option with the enhanced company contribution to the defined contribution plans.

This change in retirement benefits resulted in a pension curtailment charge in the second quarter of 2006 of $10.9 million and a revision to 2006 pension expense for the remainder of the year after the May 19, 2006 curtailment date. The curtailment charge is based on the unrecognized prior service cost attributable to the employees who elected the new arrangement.

Postretirement Benefits Other Than Pensions

The following table sets forth the components of net periodic benefit costs (income) for the three months and six months ended June 30, 2006 and 2005. The postretirement benefit related to divested and discontinued operations retained by the Company are included in the amounts below.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(Dollars in millions)								(Dollars in millions)
Service cost		$	0.7			$	0.5			$	0.7			$	0.8
Interest cost			5.2				5.0				9.8				11.3
Amortization of prior service cost			—				(0.1	)			(0.1	)			(0.1	)
Amortization of actuarial (gain) loss			0.8				0.3				0.6				0.8
Periodic benefit cost (income)			6.7				5.7				11.0				12.8
Settlements and curtailments (gain) loss			—				—				—				—
Special termination benefit charge (credit)			—				—				—				—
Net benefit cost (income)		$	6.7			$	5.7			$	11.0			$	12.8

The net periodic benefit cost for the six months ended June 30, 2006 includes a non-recurring reduction of $3.2 million for a revision in the plan provisions used in the actuarial valuation of other postretirement benefits related to the acquisition of the aeronautical systems businesses. The $3.2 million reduction of net periodic benefit cost consists of $0.4 million reduction to service cost, $1.2 million reduction to interest cost and $1.6 million reduction to the amortization of actuarial (gains) losses.

The following table provides the assumptions used to determine the net periodic benefit costs (income).

		Three Months and Six Months Ended
		June 30,
		2006				2005
Discount rate			5.55	%			5.875	%
Healthcare trend rate		9% in 2006 to 5% in 2010				9% in 2005 to 5% in 2008

Note 11. Comprehensive Income/(Loss)

Total comprehensive income consisted of the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(Dollars in millions)								(Dollars in millions)
Comprehensive Income/(Loss)
Net income		$	81.0			$	75.7			$	282.5			$	133.2
Other comprehensive income/(loss):
Unrealized foreign currency translation gains (losses) during period			64.1				(48.0	)			75.9				(47.3	)
Minimum pension liability adjustments during period (Note 10)			109.3				—				109.3				—
Gains (losses) on cash flow hedges			46.5				(28.7	)			50.1				(46.9	)
Gains (losses) on certain investments			(0.1	)			—				(0.1	)			—
Total		$	300.8			$	(1.0	)		$	517.7			$	39.0

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

		June 30,				December 31,
		2006				2005
		(Dollars in millions)
Accumulated Other Comprehensive Income/(Loss)
Cumulative unrealized foreign currency translation gains (losses)		$	211.1			$	135.2
Minimum pension liability adjustments			(314.8	)			(424.1	)
Accumulated gains (losses) on cash flow hedges			56.0				5.9
Accumulated unrealized gains (losses) on certain investments			(0.1	)			—
Total		$	(47.8	)		$	(283.0	)

The minimum pension liability amounts above are net of deferred taxes of $192.4 million and $247.8 million at June 30, 2006 and December 31, 2005, respectively. The accumulated gain on cash flow hedges above is net of deferred taxes of $31.3 million and $3.2 million at June 30, 2006 and December 31, 2005, respectively. No income taxes are provided on foreign currency translation gains as foreign earnings are considered permanently invested.

Note 12. Income Taxes

The Company’s effective tax rate for the three months ended June 30, 2006 was 30.6 percent. The effective tax rate varied from the statutory rate of 35 percent due to favorable tax settlements which reduced the effective tax rate by approximately 5 percentage points, tax benefits from export sales and domestic production activities which reduced the effective rate by approximately 5 percentage points, earnings in foreign jurisdictions taxed at rates different from the statutory U.S. federal rate, including the impact of tax holidays, which reduced the effective rate by approximately 2 percentage points, adjustments to valuation allowances associated with certain deferred tax assets in foreign jurisdictions which increased the effective tax rate by approximately 2 percentage points, other adjustments to reserves for tax contingencies, including interest thereon, net of tax, which increased the effective rate by approximately 3 percentage points, and state income taxes which increased the effective tax rate by approximately 2 percentage points. The Company’s effective tax rate during the three months ended June 30, 2006 was not reduced for the benefit of U.S. Research and Development (R&D) Credits because the federal statute authorizing the R&D Credit has not been extended beyond December 31, 2005. The Company estimates that the effective tax rate for the three months ended June 30, 2006 would have been approximately 1 percentage point lower had the Company been able to consider the tax benefits associated with the R&D Credit.

The Company’s effective tax rate for the six months ended June 30, 2006 was a benefit of (29.1) percent. The effective tax rate varies from the statutory rate of 35 percent primarily due to the reversal of tax reserves in connection with favorable tax settlements related to the IRS examinations of Rohr, Inc. and Subsidiaries (for the period from July, 1986 through December, 1997), and Coltec Industries Inc and Subsidiaries (for the period December, 1997 through July, 1999), and miscellaneous other tax settlements which reduced the tax rate by approximately 63 percentage points (see Note 15, “Contingencies” for further discussion related to these contingencies). The effective tax rate also varied from the statutory rate of 35 percent due to tax benefits from export sales and domestic production activities which reduced the effective rate by approximately 5 percentage points, earnings in foreign jurisdictions taxed at rates different from the statutory U.S. federal rate, including the impact of tax holidays, which reduced the effective rate by approximately 2 percentage points, adjustments to valuation allowances associated with certain deferred tax assets in foreign jurisdictions which increased the effective tax rate by approximately 2 percentage points, other adjustments to reserves for tax contingencies, including interest thereon, net of tax, which increased the effective rate by approximately 2 percentage points,

17

and state income taxes which increased the effective tax rate by approximately 2 percentage points. The Company’s effective tax rate during the six months ended June 30, 2006 was not reduced for the benefit of R&D Credits because the federal statute authorizing the R&D Credit has not been extended beyond December 31, 2005. The Company estimates that the effective tax rate as of June 30, 2006 would have been approximately 1 percentage point lower had the Company been able to consider the tax benefits associated with the R&D Credit.

In accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (SFAS 5), the Company records tax contingencies when the exposure item becomes probable and the amount is reasonably estimable. As of December 31, 2005, the Company had tax contingency reserves of approximately $325.6 million. During the six months ended June 30, 2006, the Company recorded a net benefit of $86.9 million, made payments of $0.6 million (net of federal tax benefit), and had other miscellaneous adjustments of $2.3 million. The net benefit primarily related to the reversal of tax reserves in connection with favorable tax settlements discussed above and in Note 15, “Contingencies.” As of June 30, 2006, the Company had recorded tax contingency reserves of approximately $240.4 million. The contingencies that comprise the reserves are more fully described in Note 15, “Contingencies.”

Note 13. Business Segment Information

The company has three business segments: Engine Systems, Airframe Systems and Electronic Systems.

Engine Systems

The Engine Systems segment produces products associated with aircraft engines, including cowlings and their components, fuel delivery systems, and structural and rotating components. The segment includes the following business units:

•

Aerostructures, which:

	—		Produces nacelle systems, pylons, thrust reversers and related engine housing components; and
	—		Performs maintenance, repair and overhaul services.

•

Engine control systems, which provides:

	—		Fuel metering controls, fuel pumping systems and afterburner fuel pump and metering unit nozzles; and
	—		Electronic control software and hardware, variable geometry actuation controls and engine health monitoring systems.

•

Turbomachinery products, which produces complete rotating assemblies including quality metallic and thermal barrier coatings for the aircraft and industrial gas turbine engine industries.

•

Turbine fuel technologies, which provides:

	—		Fuel nozzles, injectors, valves and manifolds for aerospace and industrial gas turbine engines; and
	—		Non-aerospace applications that require liquid atomization.

•

Cargo systems, which provides complete cargo handling systems including conveyor rollers and tracks, side rail guides, side and end latches and power drive control units.

Airframe Systems

The Airframe Systems segment provides systems and components pertaining to aircraft taxi, take-off, flight control, landing, stopping and airframe maintenance. The segment includes the following business units:

•

Actuation systems, which provides:

	—		Actuators for primary flight control systems that operate elevators, ailerons and rudders, and secondary flight controls systems such as flaps and slats; and
	—		Systems that control the movement of steering systems for missiles and electromechanical systems that are characterized by high power, low weight, low maintenance, resistance to extreme temperatures and vibrations and reliability.

	•		Landing gear systems, which designs, manufactures and services complete landing gear systems on both commercial and military aircraft.
	•		Aircraft wheels and brakes, which provides:

	—		Wheel and brake systems containing durable wheels, long-lasting steel brake designs, light weight and low cost carbon brakes, one source brake control systems, and state-of-the-art electric brake development; and
	—		Original equipment manufacturing (OEM) and overhauls and repairs as well as full technical and aircraft on ground support through a worldwide network of wheel and brake service centers.

•

Aviation technical services, which provides:

	—		Comprehensive heavy airframe maintenance, component repair and overhaul, aircraft painting, engineering and certification services; and
	—		Aircraft modification services that include VIP interior completion and passenger to freight conversions.

•

Engineered polymer products, which provides:

	—		Large-scale marine composite structures and acoustic materials;
	—		Acoustic absorbing and reflecting materials along with vibration dampening material; and
	—		Fireproof composites.

Electronic Systems

The Electronic Systems segment produces a wide array of systems and components that provide flight performance measurements, flight management and control and safety data. The segment includes the following business units:

•

Optical & space systems, which:

	—		Provides intelligence, surveillance and reconnaissance systems and electro-optical defense, scientific and commercial applications; and
	—		Designs and builds custom engineered electronics, optics, shortwave infrared cameras and arrays.

•

Sensor systems, which provides:

	—		Numerous sensors for a wide variety of commercial and military aircraft that measure mass flow, inertia and altitude, liquid level, position, speed, and temperature; and
	—		Air data heading reference systems, angle of attack and stall protection systems, windshield heater controllers, ice detection systems, micro electromechanical systems, and windshield wiper and washer systems.

•

Power systems, which provides:

	—		Constant frequency and variable frequency AC and DC electrical generating systems; and
	—		Rescue hoist and cargo winches.

•

Aircraft interior products, which provides:

	—		Evacuations slides and life rafts for several types of aircraft;
	—		Complete aircrew escape systems primarily for military aircraft including canopy removal, sequencing systems and ejection seats;

	—		Component products such as gas generators, rocket motors, linear explosives, catapults and numerous cartridge actuated or propellant actuated devices for a wide variety of applications; and
	—		Seating systems that include cockpit crew and cabin attendant seats.

•

Fuel & utility systems, which provides:

	—		Fuel measurement and management systems, fuel system safety devices, and fire protection systems; and
	—		Health and usage management systems, motion controls and actuators, proximity sensing systems, braking and steering systems and computer interfaces.

•

De-Icing & specialty systems, which provides:

	—		Pneumatic and electrothermal ice protection application;
	—		Heated aircraft components, including heated drain masts, lavatory and galley water heaters and specialty air heaters; and
	—		Potable water systems and components, aerospace composites and molding resin.

•

Lighting systems, which provides:

	—		Interior lighting systems that include cabin and compartment lights, cockpit lights and controllers along with information signs;
	—		External lighting systems include anti-collision lights and power supplies, wing and tail strobe lights, navigation and flood lights, and eternal emergency lights; and
	—		Night vision imaging systems, covert lighting, main landing gear cables and nose gear steering cables.

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. The pension curtailment was not allocated to the segments.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(Dollars in millions)								(Dollars in millions)
Net customer sales:
Engine Systems		$	634.6			$	565.8			$	1,245.1			$	1,093.9
Airframe Systems			488.6				464.0				958.9				906.7
Electronic Systems			360.0				322.9				703.0				627.6
		$	1,483.2			$	1,352.7			$	2,907.0			$	2,628.2
Intersegment sales:
Engine Systems		$	5.9			$	7.3			$	10.8			$	16.4
Airframe Systems			12.3				13.0				24.4				25.9
Electronic Systems			8.3				9.1				21.1				17.0
		$	26.5			$	29.4			$	56.3			$	59.3
Segment operating income:
Engine Systems		$	128.9			$	108.8			$	247.6			$	199.3
Airframe Systems			28.0				10.8				42.3				38.6
Electronic Systems			45.8				37.7				82.7				70.0
			202.7				157.3				372.6				307.9
Corporate general and administrative expenses			(23.9	)			(21.2	)			(51.1	)			(41.7	)
Pension curtailment (Note 10)			(10.9	)			—				(10.9	)			—
Total operating income		$	167.9			$	136.1			$	310.6			$	266.2

Note 14. 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 to hedge a portion of the Company’s exposure from U.S. Dollar sales.

The forward contracts described above are used to mitigate the potential volatility to earnings and cash flow arising from changes in currency exchange rates that impact the Company’s U.S. Dollar sales for certain foreign operations. 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 June 30, 2006 was $1,715 million. The fair value of the forward contracts at June 30, 2006, was a net asset of $89.2 million, including:

	•		$47.3 million recorded as a current asset in Prepaid expenses and
	•		$51.7 million recorded as a non-current asset in other assets; partially offset by,
	•		$9.7 million recorded as a current liability in accrued expenses and

•

$0.1 million recorded as a non-current liability in other non-current liabilities.

The total fair value of the Company’s forward contracts of $89.2 million (before deferred taxes of $31.3 million) at June 30, 2006, combined with $0.3 million of gains on previously matured hedges of intercompany sales and gains from forward contracts terminated prior to the original maturity dates, is recorded in accumulated other comprehensive income and will be reflected in income as earnings are affected by the hedged items. As of June 30, 2006, the portion of the $89.5 million 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 $37.9 million. These forward contracts mature on a monthly basis with maturity dates that range from July 2006 to December 2010.

In June 2006, the Company entered into treasury locks and reverse treasury locks in connection with its long-term debt exchange offers. In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), the treasury locks were accounted for as cash flow hedges. The Company entered into $288.5 million of treasury locks to offset changes in the issue price of the 6.29 percent notes due 2016 and entered into $288.5 million of reverse treasury locks to offset changes in the exchange prices of the 7.50 percent notes due in 2008, 6.45 percent notes due in 2008 and 6.60 percent notes due in 2009 due to movements in treasury rates prior to the exchange date. The Company paid $0.3 million in cash to settle the locks, and the amount was recorded in accumulated other comprehensive income during the three months ended June 30, 2006 and will be amortized over the life of the 6.29 percent notes due 2016. In June 2006, the Company also entered into $235.5 million of treasury locks to offset changes in the issue price of the 6.80 percent notes due 2036 and entered into $235.5 million of reverse treasury locks to offset changes in the exchange price of the 7.625 percent notes due in 2012 due to movements in treasury rates prior to the exchange date. The Company paid $1.9 million in cash to settle the locks, and the amount was recorded in accumulated other comprehensive income during the three months ended June 30, 2006 and will be amortized over the life of the 6.80 percent notes due 2036.

Fair Value Hedges

The Company enters into interest rate swaps to increase the Company’s exposure to variable interest rates. The Company has the following interest rate swaps outstanding as of June 30, 2006.

	•		A $43 million fixed-to-floating interest rate swap on the 6.45 percent notes due in 2008; and
	•		Two $50 million fixed-to-floating interest rate swaps on the 7.50 percent notes due in 2008

In June 2006, the Company terminated $7 million of a $50 million fixed-to-floating interest rate swap on its 6.45 percent notes due in 2008 in connection with its long-term debt exchange offers. The Company paid $0.3 million in cash to terminate this portion of the interest rate swap, which was recorded as an expense in other income (expense) – net during the three months ended June 30, 2006. This portion of the interest rate swap was terminated so that the outstanding notional amount of the fixed-to-floating interest rate swap would match the outstanding principal amount, subsequent to the exchange, of the 6.45 percent notes due in 2008.

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 June 30, 2006.

Other Forward Contracts

As a supplement to the foreign exchange cash flow hedging program, the Company enters 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 cost of sales in order to mitigate the earnings impact of the translation of net monetary assets and liabilities. Under this program, as of June 30, 2006, the Company had forward contracts with a notional value of $76.6 million to buy Great Britain Pounds Sterling, forward contracts with a notional value of $154 million to buy Euros and forward contracts with a notional value of $29.9 million to sell Canadian Dollars.

Note 15. Contingencies

General

There are pending or threatened against the Company or its subsidiaries various claims, lawsuits and administrative proceedings, all arising from the ordinary course of business with respect to commercial, product liability, asbestos and environmental matters, which seek remedies or damages. The Company believes that any liability that may finally be determined with respect to commercial and non-asbestos product liability claims should not have a material effect on its consolidated financial position, results of operations or cash flow. From time to time, the Company is also involved in legal proceedings as a plaintiff involving tax, contract, patent protection, environmental and other matters. Gain contingencies, if any, are recognized when they are realized. Legal costs are generally expensed as 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 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 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 liabilities relating to environmental matters 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 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 $78.2 million and $81 million at June 30, 2006 and December 31, 2005, respectively. At June 30, 2006 and December 31, 2005, $15.1 million and $18.3 million, respectively, of the accrued liability for environmental remediation was included in current liabilities as accrued expenses. At June 30, 2006 and December 31, 2005, $32.6 and $31.4 million, respectively, was associated with ongoing operations and $45.6 million and $49.6 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 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.

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 Company’s 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 most 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.

In addition, a portion of the Company’s primary and excess layers of general liability insurance coverage for most of these claims was provided by insurance subsidiaries of London United Investments plc (KWELM). KWELM is insolvent and in the process of distributing its assets and dissolving. In September 2004, the Company entered into a settlement agreement with KWELM pursuant to which the Company agreed to give up its rights with respect to the KWELM insurance policies in exchange for $18.3 million, subject to increase under certain circumstances. The settlement represents a negotiated payment for the Company’s loss of insurance coverage, as it no longer has the KWELM insurance available for claims that would have qualified for coverage. The initial settlement amount of $18.3 million was paid to the Company during 2004, was recorded as a deferred settlement credit and will be used to offset asbestos and other toxic tort claims in future periods.

The KWELM insolvent fund managers made additional settlement distributions to the Company during the six months ended June, 30, 2006 and during the year ended December 31, 2005 totaling $1.8 million and $11.3 million, respectively, following completion of the insolvent scheme of arrangement process in the United Kingdom. The additional distribution was recorded as a deferred settlement credit and will be used to offset asbestos and other toxic tort claims in future periods. One final distribution may be made depending on the final valuation of KWELM.

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.

Guarantees

At June 30, 2006, the Company had an outstanding contingent liability for guarantees of debt and lease payments of $2.3 million, letters of credit and bank guarantees of $54.7 million and residual value of lease obligations of $24.8 million (see Note 16, “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 that 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 flow.

Aerostructures Long-Term Contracts

The aerostructures business has several long-term contracts in the pre-production phase. This phase includes design of the product to meet customer specifications as well as design of the manufacturing processes to manufacture the product. Also involved in this phase is securing supply of material and subcomponents produced by third party suppliers that are generally accomplished through long-term supply agreements. Because these contracts cover periods of up to 15 years or more, there is risk that estimates of future costs made during the pre-production phase will be different from actual costs and that difference could be significant.

Compliance with Specialty Metals Clause in U.S. Defense Contracts and Subcontracts

Many companies in the aerospace industry are experiencing challenges regarding compliance with certain provisions set forth in Department of Defense (DoD) Appropriations Acts that are often referred to generally as the Berry Amendment. The Berry Amendment provisions are implemented through the Department of Defense Federal Acquisition Regulation Supplement (DFARS). One of the DFARS clauses (252.225-7014 (Alternate I)) implementing the Berry Amendment restricts the country of origin for certain specialty metals used in certain products to be delivered to the DoD. This DFARS clause requires that any specialty metals (in most cases involving stainless steel or titanium) incorporated into an article to be delivered under a DoD contract must be melted in the United States or its outlying areas, or must be melted or incorporated into an article manufactured in a list of qualifying countries. The “Alternate I” version of this clause applies to DoD contracts involving, among other items, aircraft and missile and space systems, and requires all subcontractors at any tier to comply with the clause’s requirements regarding the use of specialty metals. Compliance with this requirement is especially difficult in connection with stainless steel fasteners purchased from global sources.

The Company has certain contracts and subcontracts that contain DFARS 252.225-7014 (Alternate I). Delivering supplies and/or submitting payment requests for supplies that do not comply with DFARS 252.225-7014 (Alternate I), when applicable, could subject the Company to potentially significant penalties if the non-compliance is not disclosed to the purchaser. In addition, disclosing any non-compliance with this DFARS clause can result in customers not accepting or conditionally accepting the non-compliant supplies. The Company is continuing to evaluate its compliance with the clause and is unable at this time to estimate the financial effect on the Company that may be associated with any non-compliance.

Tax

The Company is continuously undergoing examination by the Internal Revenue Service (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. Differences between the reserves for tax contingencies and the amounts ultimately owed by the Company are recorded in the period they become known. Adjustments to the Company’s reserves could have a material effect on the Company’s financial statements. As of June 30, 2006, the Company had recorded tax contingency reserves of approximately $240.4 million.

In 2000, Coltec, the Company’s former subsidiary, made a $113.7 million payment to the 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. On November 2, 2004, the Company was notified that the trial court ruled in favor of Coltec. During 2005, the Government appealed the decision with the U.S. Court of Appeals for the Federal Circuit. The U.S. Court of Appeals for the Federal Circuit entered a final judgment in this case on July 12, 2006, reversing the decision of the U.S. Court of Federal Claims. The Company intends to seek a review of this decision. If the Company is unsuccessful in contesting the decision, Coltec will not owe any additional interest or taxes with respect to 1996. However, the Company would be required by the IRS to pay up to $32.7 million of tax plus accrued interest, which was $24.7 million through June 30, 2006, before federal benefit, with respect to the same items claimed by Coltec in its tax returns for 1997 through 2000. On August 2, 2006 the Company paid the tax plus accrued interest of approximately $50 million, net of related federal tax benefit, in order to stop the accrual of interest. The amount of the previously estimated tax liability if the IRS were to prevail for the 1997 through 2000 period remains fully reserved. If the Company is successful in contesting the decision of the U.S. Court of Appeals for the Federal Circuit, the Company will be entitled to any tax refund and related interest pursuant to an agreement with Coltec. If the Company receives these amounts, it would record income of approximately $163 million, after tax, based on interest through June 30, 2006, including the release of previously established reserves.

In 2000, the IRS issued a statutory notice of deficiency asserting that Rohr, Inc. (Rohr), a subsidiary of the Company, 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 filed petitions in the U.S. Tax Court opposing the proposed assessments. The Company previously reached a tentative settlement agreement with the IRS with regard to the proposed assessments that required further review by the Joint Committee on Taxation (JCT). On March 15, 2006 the Company received notification that the JCT approved the tentative settlement agreement entered into with the IRS. As a result of receiving the JCT notification, the Company recorded a tax benefit of approximately $72.2 million, primarily related to the reversal of tax reserves, during the six months ended June 30, 2006.

The current IRS examination cycle began on September 29, 2005 and involves the taxable years ended December 31, 2000 through December 31, 2004. The prior examination cycle which began in March 2002, includes the consolidated income tax groups in the audit periods identified below:

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 were numerous tax issues that had been raised by the IRS as part of the prior examination, 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. The IRS and the Company previously reached tentative settlement agreements on substantially all of the issues raised with respect to the prior examination cycle. Due to the amount of tax involved, certain portions of the tentative settlement agreements were required to be reviewed by the JCT. The Company received notification on April 25, 2006 that the JCT approved the tentative settlement agreement entered into with the IRS with regard to Rohr, Inc. and Subsidiaries (for the period from July, 1995 through December, 1997). As a result of receiving the JCT notification, the Company recorded a tax benefit of approximately $14.9 million, primarily related to the reversal of tax reserves, during the six months ended June 30, 2006. In addition to the JCT approvals with regard to Rohr, the Company reached agreement with the IRS regarding most of the issues with respect to Coltec Industries Inc and Subsidiaries (for the period from December, 1997 through July, 1999). Consequently, the Company recorded a tax benefit of approximately $44.4 million, primarily related to the reversal of tax reserves, during the six months ended June 30, 2006. The Company cannot predict the timing or ultimate outcome of a final settlement of the remaining unresolved issues. If the Company settles pursuant to previous discussions, the Company would anticipate reversing some portion of previously established reserves.

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 $19 million as of June 30, 2006. In addition, the State of California enacted an amnesty provision that imposes nondeductible penalty interest equal to 50 percent of the unpaid interest amounts relating to taxable years ended before 2003. The penalty interest is approximately $10 million as of June 30, 2006. The tax and interest amounts continue to be contested by Rohr. The Company believes that it is adequately reserved for this contingency. Rohr made a voluntary payment during the six months ended June 30, 2005 of approximately $3.9 million related to items that were not being contested, consisting of approximately $0.6 million related to tax and approximately $3.3 million related to interest on the tax. Rohr made an additional payment during the three months ended December 31, 2005 of approximately $4.5 million related to the contested tax amount pursuant to the State’s assessment notice dated October 20, 2005. No payment has been made for the $19 million of interest or $10 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 before the end of 2007.

Note 16. Guarantees

The Company extends financial and product performance guarantees to third parties. As of June 30, 2006, the following environmental remediation indemnification and financial guarantees were outstanding:

		Maximum				Carrying
		Potential				Amount of
		Payment				Liability
		(Dollars in millions)
Environmental remediation indemnification (Note 15)		No limit				$	14.6
Financial Guarantees:
Debt and lease payments (Note 8)		$	2.3			$	—
Residual value on leases (Note 9)		$	24.8			$	—
Letter of credit and bank guarantees (Note 8)		$	54.7			$	—

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 SFAS 5. 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 six months ended June 30, 2006 are as follows:

		(Dollars in millions)
Balance at December 31, 2005		$	162.4
Service and product warranty provision			28.1
Return to profit			(2.8	)
Used as intended			(33.1	)
Foreign currency translation			6.3
Balance at June 30, 2006		$	160.9

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

		June 30,				December 31,
		2006				2005
		(Dollars in millions)
Short-term liabilities		$	59.6			$	61.0
Long-term liabilities			101.3				101.4
Total		$	160.9			$	162.4

Note 17. Share-Based Compensation Plans

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 Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). 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”. 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”. The Company adopted SFAS 123(R) on January 1, 2006 using the modified-prospective transition method.

At June 30, 2006, the Company has seven types of share-based compensation awards outstanding, which are described more fully below. Because the Company adopted the accounting provisions of SFAS 123 effective January 1, 2004, the compensation cost recognized in accordance with SFAS 123 during the years ended December 31, 2004 and 2005 was consistent with the cost that would have been recorded under SFAS 123(R), except for the following differences:

	•		SFAS 123(R) requires entities to apply the same attribution method to all awards subject to graded vesting. The Company has two types of share-based compensation awards that are subject to graded vesting: stock options and restricted stock units. In the years prior to January 1, 2006, stock options were accounted for under the straight-line attribution method and restricted stock units were accounted for under the accelerated attribution method. Effective upon the adoption of SFAS 123(R), the Company made a policy election to apply the straight-line method to all share-based awards that are subject to graded vesting. As a result of this election, the straight-line method being applied to restricted stock unit grants would have calculated higher before tax compensation expense during the six months ended June 30, 2005 than if the previous method of accounting had been used by approximately $1.6 million ($1 million after tax). As a result of applying the straight-line method, the Company expects that before tax compensation expense recognized during the year ending December 31, 2006 will be approximately $1 million lower than under the accelerated method.
	•		The Company previously accounted for forfeitures as they occurred. Under SFAS 123(R), the Company is required to estimate expected forfeitures at the grant date and recognize compensation cost only for those awards expected to vest. Effective January 1, 2006, the Company recorded income of $1.8 million ($1.1 million after tax, or $0.01 per diluted share) to adjust previously recognized compensation cost on unvested awards to the amount of compensation cost recognized had forfeitures been estimated. This amount was recorded as a cumulative effect of a change in accounting.
	•		In accordance with SFAS 123, the Company previously recorded compensation cost on performance unit awards using the intrinsic-value method. However, SFAS 123(R) requires liability awards to be accounted for using the fair value method. One-half of the Company’s performance unit awards have a market condition, which must be considered in the determination of fair value. Effective January 1, 2006, the Company recorded expense of $0.9 million ($0.5 million after tax) to adjust previously recognized compensation cost on vested performance unit awards to the amount of compensation recognized had the fair value of the awards been recorded prior to the adoption of SFAS 123(R). This amount was recorded as a cumulative effect of a change in accounting.

	•		Prior to the adoption of SFAS 123(R), the Company presented all excess tax benefits of deductions resulting from share-based payments as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows from tax deductions in excess of compensation cost to be classified as financing cash flows. The $4 million excess pro forma tax benefit was classified as a financing cash inflow during the six months ended June 30, 2006.
	•		Compensation expense on share-based payment grants made subsequent to January 1, 2006 to retirement eligible individuals will be recognized over the requisite service period (i.e., through date of retirement eligibility). In accordance with SEC guidance, expense related to grants prior to the adoption of SFAS 123(R) will continue to be recognized over the explicit vesting period, which is generally three or five years, with acceleration of any remaining unrecognized compensation cost when an employee actually retires. As a result of applying this provision of SFAS 123(R), before tax compensation cost of approximately $12 million ($7 million after tax, or $0.06 per diluted share) was recognized during the six months ended June 30, 2006, which is approximately $10 million higher than recorded under the previous method. Applying this provision to all awards granted subsequent to December 31, 1994 (the effective date of SFAS 123) would have calculated higher before tax compensation cost during the six months ended June 30, 2005 by approximately $7 million. For the year ending December 31, 2006, the Company expects that before tax compensation cost will be approximately $9 million higher than under the previous method.

The compensation cost recorded for share-based compensation plans during the six months ended June 30, 2006 totaled $28.7 million ($17.9 million after tax, or $0.14 per diluted share) as compared to $19.2 million ($12 million after tax, or $0.10 per diluted share) during the six months ended June 30, 2005. The increase of $9.5 million was primarily driven by approximately $10 million incremental compensation expense recognized during the six months ended June 30, 2006 as a result of recognizing an accelerated portion of the total compensation expense on 2006 awards granted to employees who are retirement eligible or will become retirement eligible prior to the normal vesting date. The compensation cost recorded for share-based compensation during the three months ended June 30, 2006 totaled $6.9 million as compared to $7.8 million during the three months ended June 30, 2005.

The total income tax benefit recognized in the income statement for share-based compensation awards was $10.7 million and $6.9 million for the six months ended June 30, 2006 and 2005, respectively. There was no compensation cost related to share-based plans capitalized as part of inventory and fixed assets during the six months ended June 30, 2006 and 2005. As of June 30, 2006, total compensation cost related to nonvested share-based compensation awards not yet recognized totaled $50.6 million, which is expected to be recognized over a weighted-average period of 1.9 years.

The Company administers the Goodrich Equity Compensation Plan (the Plan) as part of its long-term incentive compensation program. The Plan, as approved by the Company’s shareholders, permits the Company to issue stock options, performance shares, restricted stock awards, restricted stock units and several other equity-based compensation awards. Currently, the Plan, which will expire on April 17, 2011, unless renewed, makes 11,000,000 shares of common stock of the Company available for grant, together with shares of common stock available as of April 17, 2001 for future awards under the Company’s 1999 Stock Option Plan, and any shares of common stock representing outstanding 1999 Stock Option Plan awards as of April 17, 2001 that are not issued or otherwise are returned to the Company after that date. Historically, the Company has issued shares upon exercise of options or vesting of other share-based compensation awards. During the six months ended June 30, 2006, the Company only repurchased shares to the extent required to meet the minimum statutory tax withholding requirements.

Stock Options

Generally, options granted on or after January 1, 2004 are exercisable at the rate of 33 1/3 percent after one year, 66 2/3 percent after two years and 100 percent after three years. Options granted to employees who are eligible for retirement on the date of grant or will become retirement eligible prior to the end of the vesting term are expensed over the period through which the employee will become retirement eligible because the awards are earned upon retirement from the Company. Compensation expense for options granted to employees who are not retirement eligible is recognized on a straight-line basis over three years. The term of each stock option cannot exceed 10 years from the date of grant. All options granted under the Plan have an exercise price that is not less than 100 percent of the market value of the stock on the date of grant, as determined pursuant to the plan. Dividends are not paid or earned on stock options.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton formula. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar options giving consideration to the contractual terms, vesting schedules and expectations of future employee exercise behavior. The Company does not issue traded options. Accordingly, the Company uses historical volatility instead of implied volatility. The historical volatility is calculated over a term commensurate with the expected term of the options. The risk-free rate during the option term is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the expected annual dividends during the term of the options divided by the fair value of the stock on the grant date. The fair value for options issued during the six months ended June 30, 2006 and 2005 was based upon the following weighted-average assumptions:

		2006				2005
Risk-free interest rate (%)			4.3				4.0
Dividend yield (%)			2.0				2.6
Volatility factor (%)			36.1				40.6
Weighted-average expected life of the options (years)			5.5				7.0

A summary of option activity during the six months ended June 30, 2006 is presented below:

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term				Value
		(in thousands)												(in millions)
Outstanding at January 1, 2006			6,951.7			$	30.85
Granted			696.3				40.43
Exercised			(1,324.8	)			29.91
Forfeited or expired			(47.0	)			31.08
Outstanding at June 30, 2006			6,276.2			$	32.11			5.5 years				$	50.0
Vested or expected to vest (1)			6,239.3			$	32.07			5.5 years				$	49.9
Exercisable at June 30, 2006			4,978.9			$	31.01			4.6 years				$	44.6

As of June 30, 2006, the total compensation expense related to nonvested options not yet recognized totaled $9.6 million. The weighted-average grant date fair value of options granted was $13.43 per option during the six months ended June 30, 2006 and $11.79 per option during the six months ended June 30, 2005.

During the six months ended June 30, 2006, the amount of cash received from exercise of stock options totaled $39.6 million and the tax benefit realized from stock options exercised totaled $6.5 million. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $19.3 million and $19.9 million, respectively.

Restricted Stock Units

Generally, 50 percent of the Company’s restricted stock units vest and are converted to stock at the end of the third year, an additional 25 percent at the end of the fourth year and the remaining 25 percent at the end of the fifth year. In certain circumstances, the vesting term is three years. Restricted stock units granted to employees who are eligible for retirement on the date of grant or will become retirement eligible prior to the end of the vesting term are expensed over the period through which the employee will become retirement eligible because the awards vest upon retirement from the Company. Compensation expense for restricted stock units granted to employees who are not retirement eligible is recognized on a straight-line basis over the vesting period. Cash dividend equivalents are paid to participants each quarter. Dividend equivalents paid on units expected to vest are recognized as a reduction in retained earnings.

The fair value of the restricted stock units is determined based upon the average of the high and low grant date fair value of the Company’s units on the grant date. The weighted-average grant date fair value of units granted during the six months ended June 30, 2006 was $40.48 per unit as compared to $32.44 per unit during the six months ended June 30, 2005.

A summary of the status of the Company’s restricted stock units as of June 30, 2006 and changes during the six months then ended is presented below:

						Weighted-
						Average
						Grant date
		Shares				Fair Value
		(in thousands)
Nonvested at January 1, 2006			1,095.1			$	31.55
Granted			591.8				40.48
Vested			(74.9	)			33.72
Forfeited			(29.5	)			34.56
Nonvested at June 30, 2006			1,582.5				34.75