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 March 31, 2008

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

Large accelerated filer þ                                                                                              Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)                       Smaller reporting company 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

At March 31, 2008, there were 125,074,877 of common stock outstanding (excluding 14,000,000 shares held by a wholly owned subsidiary). There is only one class of common stock.

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have reviewed the condensed consolidated balance sheet of Goodrich Corporation as of March 31, 2008, and the related condensed consolidated statement of income for the three-month periods ended March 31, 2008 and 2007, and the condensed consolidated statement of cash flows for the three-month periods ended March 31, 2008 and 2007. 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, 2007, 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 18, 2008, 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, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Charlotte, North Carolina
April 23, 2008

CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

		Three Months Ended
		March 31,
		2008				2007
		(Dollars in millions, except per
		share amounts)
Sales		$	1,745.0			$	1,546.3
Operating costs and expenses:
Cost of sales			1,213.4				1,093.9
Selling and administrative costs			257.1				254.4
			1,470.5				1,348.3
Operating Income			274.5				198.0
Interest expense			(30.8	)			(31.6	)
Interest income			3.1				1.8
Other income (expense) — net			(14.3	)			(15.6	)
Income from continuing operations before income taxes			232.5				152.6
Income tax expense			(78.9	)			(53.4	)
Income From Continuing Operations			153.6				99.2
Income from discontinued operations — net of income taxes			4.3				0.6
Net Income		$	157.9			$	99.8
Basic Earnings Per Share
Continuing operations		$	1.23			$	0.79
Discontinued operations			0.03				0.01
Net Income		$	1.26			$	0.80
Diluted Earnings Per Share
Continuing operations		$	1.21			$	0.78
Discontinued operations			0.03				—
Net Income		$	1.24			$	0.78
Dividends Declared Per Common Share		$	0.225			$	0.20

See Notes Condensed Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)

		March 31,				December 31,
		2008				2007
		(Dollars in millions,
		except share amounts)
Current Assets
Cash and cash equivalents		$	463.2			$	406.0
Accounts and notes receivable, less allowances for doubtful receivables ($18.3 at March 31, 2008 and $14.3 at December 31, 2007)			1,123.3				1,006.2
Inventories — net			1,869.8				1,775.6
Deferred income taxes			180.2				178.2
Prepaid expenses and other assets			107.9				108.4
Income taxes receivable			35.4				74.4
Total Current Assets			3,779.8				3,548.8
Property, plant and equipment — net			1,400.7				1,387.4
Prepaid pension			20.1				16.1
Goodwill			1,377.6				1,363.2
Identifiable intangible assets — net			451.2				452.1
Deferred income taxes			11.1				11.1
Other assets			759.0				755.3
Total Assets		$	7,799.5			$	7,534.0
Current Liabilities
Short-term debt		$	10.2			$	21.9
Accounts payable			723.0				586.7
Accrued expenses			861.9				930.8
Income taxes payable			78.7				10.6
Deferred income taxes			29.7				29.7
Current maturities of long-term debt and capital lease obligations			163.2				162.9
Total Current Liabilities			1,866.7				1,742.6
Long-term debt and capital lease obligations			1,565.3				1,562.9
Pension obligations			419.2				417.8
Postretirement benefits other than pensions			360.1				358.9
Long-term income taxes payable			132.0				146.0
Deferred income taxes			170.1				170.2
Other non-current liabilities			541.8				556.2
Commitments and contingent liabilities			—				—
Shareholders’ Equity
Common stock — $5 par value
Authorized 200,000,000 shares; issued 143,099,468 shares at March 31, 2008 and 142,372,162 shares at December 31, 2007 (excluding 14,000,000 shares held by a wholly owned subsidiary)			715.5				711.9
Additional paid-in capital			1,478.8				1,453.1
Income retained in the business			1,184.1				1,054.8
Accumulated other comprehensive income			37.5				14.4
Common stock held in treasury, at cost (18,024,591 shares at March 31, 2008 and 17,761,696 shares at December 31, 2007)			(671.6	)			(654.8	)
Total Shareholders’ Equity			2,744.3				2,579.4
Total Liabilities And Shareholders’ Equity		$	7,799.5			$	7,534.0

See Notes Condensed Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

		Three Months Ended
		March 31,
		2008				2007
		(Dollars in millions)
Operating Activities
Net income		$	157.9			$	99.8
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations			(4.3	)			(0.6	)
Restructuring and consolidation:
Expenses			0.1				0.2
Payments			(0.6	)			(0.6	)
Pension and postretirement benefits:
Expenses			25.7				31.0
Contributions and benefit payments			(15.3	)			(18.7	)
Depreciation and amortization			64.1				59.9
Excess tax benefits related to share-based compensation			(5.3	)			(4.0	)
Share-based compensation expense			7.8				16.1
Deferred income taxes			(1.0	)			(9.0	)
Change in assets and liabilities, net of effects of acquisitions and divestitures:
Receivables			(114.1	)			(89.1	)
Inventories, net of pre-production and excess-over-average			(60.0	)			(59.5	)
Pre-production and excess-over-average inventories			(29.7	)			(32.8	)
Other current assets			0.6				4.0
Accounts payable			130.4				81.2
Accrued expenses			(82.8	)			6.6
Income taxes payable/receivable			98.8				51.4
Other non-current assets and liabilities			(21.4	)			(7.7	)
Net Cash Provided By Operating Activities			150.9				128.2
Investing Activities
Purchases of property, plant and equipment			(54.4	)			(36.1	)
Proceeds from sale of property, plant and equipment			—				0.1
Payments made in connection with acquisitions, net of cash acquired			(9.5	)			—
Net Cash Used In Investing Activities			(63.9	)			(36.0	)
Financing Activities
Decrease in short-term debt, net			(12.0	)			(11.8	)
Repayment of long-term debt and capital lease obligations			(0.5	)			(0.4	)
Proceeds from issuance of common stock			13.7				36.8
Purchases of treasury stock			(16.8	)			(57.8	)
Dividends paid			(28.5	)			(25.1	)
Excess tax benefits related to share-based compensation			5.3				4.0
Distributions to minority interest holders			(5.5	)			(1.7	)
Net Cash Used In Financing Activities			(44.3	)			(56.0	)
Discontinued Operations
Net cash provided by (used in) operating activities			(2.6	)			(5.4	)
Net cash provided by (used in) investing activities			16.0				(0.8	)
Net cash provided by (used in) financing activities			—				—
Net cash provided by (used in) discontinued operations			13.4				(6.2	)
Effect of exchange rate changes on cash and cash equivalents			1.1				0.6
Net increase in cash and cash equivalents			57.2				30.6
Cash and cash equivalents at beginning of period			406.0				201.3
Cash and cash equivalents at end of period		$	463.2			$	231.9

See Notes Condensed Consolidated Financial Statements (Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

The accompanying Unaudited Condensed Consolidated Financial Statements of Goodrich Corporation and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Unless indicated otherwise or the context requires, the terms “we,” “our,” “us,” “Goodrich” or “Company” refer to Goodrich Corporation and its subsidiaries. The Company believes that all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain amounts in prior year financial statements have been reclassified to conform to the current year presentation. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be achieved for the twelve months ending December 31, 2008. 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, 2007.

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

The preparation of financial statements requires management to make estimates and assumptions that affect amounts recognized. Estimates and assumptions are reviewed and updated regularly as new information becomes available. During the three months ended March 31, 2008 and 2007, the Company changed its estimates of revenues and costs on certain long-term contracts, primarily due to changes in volume, price, cost and operational performance. The changes in estimates increased income from continuing operations before income taxes during the three months ended March 31, 2008 and 2007 by approximately $41 million and $17 million, respectively (approximately $25 million and $11 million after tax, respectively).

Note 2. New Accounting Standards

Accounting Standards Adopted on January 1, 2008

Fair Value Measurements

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The adoption of SFAS 157 did not have a material impact on the Company’s financial condition and results of operations. For additional information on the fair value of certain financial assets and liabilities, see Note 7, “Fair Value Measurements”.

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

Effective January 1, 2008, the Company adopted Emerging Issues Task Force No. 06-11, “Accounting for the Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11). The adoption of EITF 06-11 did not have a material impact on the Company’s financial condition and results of operations.

Accounting for Postretirement Benefits Associated with Split-Dollar Life Insurance

Effective January 1, 2008, the Company adopted Emerging Issues Task Force No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefits Associated with Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4) and Emerging Issues Task Force No. 06-10, “Accounting for Collateral Assignment Split-Dollar Insurance Arrangements” (EITF 06-10). The adoption of EITF 06-4 and EITF 06-10 did not have a material impact on the Company’s financial condition and results of operations.

Accounting Standards Not Yet Adopted

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 requires entities to provide greater transparency through additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS 161 on the Company’s disclosures of its derivative instruments and hedging activities.

Business Combinations and Noncontrolling Interests

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)) and Statement of Financial Accounting Standards No. 160 “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 141(R) and SFAS 160 significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests. SFAS 141(R) and SFAS 160 are effective for the fiscal years beginning after December 15, 2008. SFAS 141(R) and SFAS 160 are effective prospectively; however, the reporting provisions of SFAS 160 are effective retroactively. SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS 141(R) and SFAS 160 on the Company’s financial condition and results of operations.

Note 3. Business Segment Information

The Company’s three business segments are as follows:

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

The Company measures each reporting segment’s profit based upon operating income excluding the indirect costs related to the company-wide Enterprise Resource Planning (ERP) implementation. Accordingly, the Company does not allocate net interest expense, other income (expense) — net and income taxes to its reporting segments. The accounting policies of the reportable segments are the same as those for the Company’s condensed consolidated financial statements.

		Three Months Ended
		March 31,
		2008				2007
		(Dollars in millions)
Sales
Actuation and Landing Systems		$	682.1			$	567.0
Nacelles and Interior Systems			620.5				546.9
Electronic Systems			442.4				432.4
TOTAL SALES		$	1,745.0			$	1,546.3
Intersegment Sales
Actuation and Landing Systems		$	8.6			$	6.5
Nacelles and Interior Systems			4.2				4.3
Electronic Systems			6.1				9.6
TOTAL INTERSEGMENT SALES		$	18.9			$	20.4
Operating Income
Actuation and Landing Systems		$	74.1			$	49.4
Nacelles and Interior Systems			178.8				126.0
Electronic Systems			48.9				54.6
			301.8				230.0
Corporate General and Administrative Expenses			(22.5	)			(28.7	)
ERP Implementation Costs			(4.8	)			(3.3	)
TOTAL OPERATING INCOME		$	274.5			$	198.0

Note 4. Other Income (Expense) — Net

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

		Three Months Ended
		March 31,
		2008				2007
		(Dollars in millions)
Retiree health care expenses related to previously owned businesses		$	(7.8	)		$	(4.8	)
Expenses related to previously owned businesses			(2.5	)			(5.7	)
Minority interest and equity in affiliated companies			(3.7	)			(5.6	)
Other — net			(0.3	)			0.5
Other income (expense) — net		$	(14.3	)		$	(15.6	)

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

Note 5. Discontinued Operations

On November 15, 2007, the Company sold ATS, which was previously reported in the Actuation and Landing Systems segment. All periods have been reclassified to reflect ATS as a discontinued operation. The costs and revenues, assets and liabilities, and cash flows of ATS have been reported as a discontinued operation in the Company’s condensed consolidated financial statements. On March 3, 2008, the Company sold a previously discontinued operation.

Discontinued operations were as follows:

		Three Months Ended
		March 31,
		2008				2007
		(Dollars in millions)
Sales — ATS		$	—			$	42.2
Operations — ATS— net of tax of $0.3 in 2007		$	—			$	0.6
Previously discontinued operations — net of tax of $0.4 in 2008			4.3				—
Income from discontinued operations		$	4.3			$	0.6

Note 6. Earnings Per Share

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

		Three Months Ended
		March 31,
		2008				2007
		(In millions, except
		per share amounts)
Numerator
Numerator for basic and diluted earnings per share — income from continuing operations		$	153.6			$	99.2
Denominator
Denominator for basic earnings per share — weighted-average shares			125.0				125.2
Effect of dilutive securities:
Stock options, employee stock purchase plan, restricted shares and restricted share units			2.4				2.5
Other deferred compensation shares			0.1				0.1
			2.5				2.6
Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversion			127.5				127.8
Per share income from continuing operations
Basic		$	1.23			$	0.79
Diluted		$	1.21			$	0.78

At March 31, 2008 and 2007, the Company had 5 million and 6.1 million outstanding stock options, respectively. Stock options are included in the diluted earnings per share calculation using the treasury stock method, unless the effect of including the stock options would be anti-dilutive. For the three months ended March 31, 2008, 908,000 anti-dilutive stock options were excluded from the diluted earnings per share calculation. For the three months ended March 31, 2007, 4,000 anti-dilutive stock options and 715,000 of stock options that vested solely based upon a market condition were excluded from the diluted earnings per share calculation.

During the three months ended March 31, 2008 and 2007, the Company issued 0.7 million and 1.4 million, respectively, of shares of common stock pursuant to share-based compensation plans.

Note 7. Fair Value Measurements

As described in Note 2, “New Accounting Standards”, the Company adopted SFAS 157 effective January 1, 2008. SFAS 157 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also describes three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets and liabilities.

Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities.

Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:

		Balance
		March 31,
		2008				Level 1				Level 2				Level 3
		(Dollars in millions)
Cash Equivalents		$	214.6			$	214.6			$	—			$	—
Derivative Financial Instruments(1)
Cash Flow Hedges			135.3				—				135.3				—
Fair Value Hedges			5.1				—				5.1				—
Other Forward Contracts			0.2				—				0.2				—
Rabbi Trust Assets (2)			45.4				45.4				—				—

Note 8. Inventories

Inventories consist of the following:

		March 31,				December 31,
		2008				2007
		(Dollars in millions)
FIFO or average cost (which approximates current costs):
Finished products		$	306.9			$	331.0
In-process			1,132.6				1,039.0
Raw materials and supplies			506.6				483.2
			1,946.1				1,853.2
Less:
Reserve to reduce certain inventories to LIFO basis			(51.4	)			(49.5	)
Progress payments and advances			(24.9	)			(28.1	)
Total		$	1,869.8			$	1,775.6

In-process inventory includes $545.2 million and $515.4 million at March 31, 2008 and December 31, 2007, respectively, for the following: (1) pre-production and excess-over-average inventory accounted for under long-term contract accounting; and (2) engineering costs recoverable under long-term contractual arrangements. The March 31, 2008 balance of $545.2 million includes $337.3 million related to Boeing 787 contracts.

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

Note 9. Goodwill

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

						Business
		Balance				Combinations				Foreign				Balance
		December 31,				Completed or				Currency				March 31,
		2007				Finalized				Translation				2008
		(Dollars in millions)
Actuation and Landing Systems		$	331.5			$	—			$	3.2			$	334.7
Nacelles and Interior Systems			433.1				2.8				8.7				444.6
Electronic Systems			598.6				—				(0.3	)			598.3
		$	1,363.2			$	2.8	(1)		$	11.6			$	1,377.6

Note 10. Financing Arrangements

The Company has a $500 million committed global syndicated revolving credit facility, which expires in May 2012. Interest rates under this facility vary depending upon:

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

At March 31, 2008, there were $34.9 million in borrowings and $22.2 million in letters of credit outstanding under the facility. At December 31, 2007, there were $34.9 million in borrowings and $22.3 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. Under the most restrictive of these covenants, $1,516.5 million of income retained in the business and additional paid-in capital was free from such limitations at March 31, 2008. At March 31, 2008, the Company had borrowing capacity under this facility of $442.9 million, after reductions for borrowings and letters of credit outstanding under the facility.

At March 31, 2008, the Company had letters of credit and bank guarantees of $64.3 million, inclusive of $22.2 million in letters of credit outstanding under the Company’s syndicated revolving credit facility, as discussed above.

At March 31, 2008, the Company also maintained $75 million of uncommitted domestic money market facilities and $181.8 million of uncommitted and committed foreign working capital facilities with various banks to meet short-term borrowing requirements. At March 31, 2008 and December 31, 2007, there were $10.2 million and $25.9 million, respectively, in borrowings outstanding 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.

Long-term Debt Repayments

The Company repaid $162 million for the following notes, which matured on April 15, 2008:

	•		$119 million principal amount of the 7.5% notes; and
	•		$43 million principal amount of the 6.45% notes.

Lease Commitments

The Company finances certain of its office and manufacturing facilities as well as machinery and equipment, including corporate aircraft, under various committed lease arrangements provided by financial institutions.

Certain of these arrangements allow the Company, rather than the lessor, to claim a deduction for tax depreciation on the assets and allow the Company to lease aircraft and equipment having a maximum unamortized value of $150 million at March 31, 2008. These leases are priced at a spread over LIBOR and are extended periodically, unless notice is provided, through the end of the lease terms. At March 31, 2008, future payments under these leases total $10.6 million. At March 31, 2008, the Company had guarantees of residual values on lease obligations of $24.8 million. The Company is obligated to either purchase or remarket the leased assets at the end of the lease term.

Future minimum lease payments under standard operating leases were $166.8 million at March 31, 2008.

Note 11. Pensions and Postretirement Benefits Other Than Pensions

Pensions

The following table sets forth the components of net periodic benefit costs. The net periodic benefit costs for divested or discontinued operations retained by the Company are included in the amounts below.

		U.S. Plans								U.K. Plans								Other Plans
		Three Months Ended								Three Months Ended								Three Months Ended
		March 31,								March 31,								March 31,
		2008				2007				2008				2007				2008				2007
		(Dollars in millions)
Service cost		$	10.3			$	11.3			$	7.2			$	7.5			$	1.2			$	1.1
Interest cost			41.4				40.0				11.0				10.0				1.7				1.3
Expected rate of return on plan assets			(50.0	)			(48.8	)			(16.9	)			(14.8	)			(1.8	)			(1.4	)
Amortization of prior service cost			1.5				1.9				(0.2	)			(0.3	)			—				—
Amortization of actuarial loss			11.8				15.6				—				—				0.3				0.3
Net periodic benefit costs		$	15.0			$	20.0			$	1.1			$	2.4			$	1.4			$	1.3

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

		U.S. Plans								U.K. Plans								Other Plans
		Three Months Ended								Three Months Ended								Three Months Ended
		March 31,								March 31,								March 31,
		2008				2007				2008				2007				2008				2007
Discount rate			6.30	%			5.89	%			5.50	%			5.00	%			5.28	%			4.88	%
Expected long-term return on assets			9.00	%			9.00	%			8.50	%			8.50	%			8.24	%			8.28	%
Rate of compensation increase			4.10	%			3.86	%			3.75	%			3.50	%			3.38	%			3.36	%

Postretirement Benefits Other Than Pensions

The following table sets forth the components of net periodic postretirement benefit costs. Other postretirement benefits (OPEB) related to divested and discontinued operations retained by the Company are included in the amounts below.

		Three Months Ended
		March 31,
		2008				2007
		(Dollars in millions)
Service cost		$	0.5			$	0.5
Interest cost			5.9				5.9
Amortization of prior service cost			(0.1	)			—
Amortization of actuarial loss			1.9				1.5
Net periodic benefit costs		$	8.2			$	7.9

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

		Three Months Ended March 31,
		2008				2007
Discount rate			6.12	%			5.79	%
Healthcare trend rate		8.3% in 2008 to 5% in 2015				9% in 2007 to 5% in 2013

Note 12. Comprehensive Income

Total comprehensive income consisted of the following:

		Three Months Ended
		March 31,
		2008				2007
		(Dollars in millions)
Comprehensive Income
Net income		$	157.9			$	99.8
Other comprehensive income (loss), net of tax:
Unrealized foreign currency translation gains during period			25.6				11.4
Pension/OPEB liability adjustments during the period, net of tax of $8.3 and $1.7, respectively			8.5				16.6
Loss on cash flow hedges, net of tax of $5.8 and $4.4, respectively			(11.0	)			(8.3	)
Total		$	181.0			$	119.5

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

		March 31,				December 31,
		2008				2007
		(Dollars in millions)
Cumulative unrealized foreign currency translation gains		$	375.2			$	349.6
Pension/OPEB liability adjustments, net of deferred taxes of $277.3 and $285.6, respectively			(424.3	)			(432.8	)
Accumulated gains on cash flow hedges, net of deferred taxes of $47.6 and $53.4, respectively			86.6				97.6
Total accumulated other comprehensive income		$	37.5			$	14.4

No income taxes are provided on unrealized foreign currency translation gains as foreign earnings are considered permanently invested.

Note 13. Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2008 was 34%. Significant items that impacted the Company’s effective tax rate as compared to the U.S. federal statutory rate of 35% included a benefit from interest related to the 2000 to 2004 tax years under the look-back method for completed long-term contracts which reduced the effective tax rate by approximately 3 percentage points, foreign and domestic tax credits which reduced the effective tax rate by approximately 2 percentage points, earnings in foreign jurisdictions taxed at rates different from the statutory U.S. federal rate which reduced the effective tax rate by approximately 3 percentage points, deemed repatriation of non-U.S. earnings which increased the effective tax rate by approximately 2 percentage points, adjustments to reserves for tax contingencies, including interest thereon (net of related tax benefit), which increased the effective tax rate by approximately 2 percentage points and state income taxes (net of related tax benefit) which increased the effective tax rate by approximately 3 percentage points. The Company’s effective tax rate during the three months ended March 31, 2008 was not reduced for the benefit of the U.S. Research and Development Credit (R&D Credit) because the federal statute authorizing the R&D Credit has not been extended beyond December 31, 2007. The Company estimates that the effective tax rate at March 31, 2008 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 had a $241.9 million liability recorded for unrecognized tax benefits at December 31, 2007, which included interest and penalties of $135.6 million. The Company reports interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of unrecognized benefits that, if recognized, would have affected the effective tax rate was $176.2 million. At March 31, 2008, the Company had a $230.7 million liability recorded for unrecognized tax benefits, which included interest and penalties of $140.1 million. The total amount of unrecognized benefits that, if recognized, would have affected the effective tax rate was $163.8 million.

Note 14. Contingencies

General

There are pending or threatened against the Company or its subsidiaries various claims, lawsuits and administrative proceedings, arising from the ordinary course of business, which seek remedies or damages. Although no assurance can be given with respect to the ultimate outcome of these matters, the Company believes that any liability that may finally be determined with respect to commercial and non-asbestos product liability claims should not have a material effect on its consolidated financial position, results of operations or cash flows. Legal costs are expensed as incurred.

Environmental

The Company is subject to environmental laws and regulations which may require that the Company investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. At certain sites, the Company has been identified as a potentially responsible party under the federal Superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under applicable laws.

Estimates of the Company’s environmental liabilities are based on current facts, laws, regulations and technology. These estimates take into consideration the Company’s prior experience and professional judgment of the Company’s environmental specialists. Estimates of the Company’s environmental liabilities are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and cost estimates, the extent of corrective actions that may be required and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation.

Accordingly, as investigation and remediation proceed, it is likely that adjustments in the Company’s accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company’s results of operations or cash flows in a given period. Based on currently available information, however, the Company does not believe that future environmental costs in excess of those accrued with respect to sites for which the Company has been identified as a potentially responsible party are likely to have a material adverse effect on the Company’s financial condition.

Environmental liabilities are recorded when the liability is probable and the costs are reasonably estimable, which generally is not later than at completion of a feasibility study or when the Company has recommended a remedy or has committed to an appropriate plan of action. The liabilities are reviewed periodically and, as investigation and remediation proceed, adjustments are made as necessary. Liabilities for losses from environmental remediation obligations do not consider the effects of inflation and anticipated expenditures are not discounted to their present value. The liabilities are not reduced by possible recoveries from insurance carriers or other third parties, but do reflect anticipated allocations among potentially responsible parties at federal Superfund sites or similar state-managed sites, third party indemnity obligations, and an assessment of the likelihood that such parties will fulfill their obligations at such sites.

The Company’s Condensed Consolidated Balance Sheet includes an accrued liability for environmental remediation obligations of $69.1 million and $69.6 million at March 31, 2008 and December 31, 2007, respectively. At March 31, 2008 and December 31, 2007, $18.7 million and $18.6 million, respectively, of the accrued liability for environmental remediation were included in current liabilities as accrued expenses. At March 31, 2008 and December 31, 2007, $29.1 million and $29.4 million, respectively, was associated with ongoing operations and $40 million and $40.2 million, respectively, was associated with previously owned businesses.

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

Recently, certain states in the U.S. and countries globally are promulgating or proposing new or more demanding regulations or legislation impacting the use of various chemical substances by all companies. The Company is currently evaluating the potential impact, if any, of complying with such regulations and legislation.

Asbestos

The Company and some of its subsidiaries have been named as defendants in various actions by plaintiffs alleging damages as a result of exposure to asbestos fibers in products or at 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. The Company believes that pending and reasonably anticipated future actions are not likely to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There can be no assurance, however, that future legislative or other developments will not have a material adverse effect on the Company’s results of operations in a given period.

Insurance Coverage

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

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

At March 31, 2008 and December 31, 2007, the deferred settlement credit was $52.7 million and $53.6 million, respectively, for which $7.8 million and $7.6 million, respectively, was reported in accrued expenses and $44.9 million and $46 million, respectively, was reported in other non-current liabilities. The proceeds from such insurance settlements were reported as a component of net cash provided by operating activities in the period payments were received.

Liabilities of Divested Businesses

Asbestos

In May 2002, the Company completed the tax-free spin-off of its Engineered Industrial 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 prior to the Company’s ownership. 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. 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 and other such claims. 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 would ultimately be found responsible for the asbestos-related liabilities of Coltec’s subsidiaries, the Company believes such finding would not have a material adverse effect on its financial condition, but could have a material adverse effect on its results of operations and cash flows in a particular period. However, because of the uncertainty as to the number, timing and payments related to future asbestos-related claims, there can be no assurance that any such claims will not have a material adverse effect on the Company’s financial condition, results of operations and

cash flows. If a claim related to the dividend of Coltec’s aerospace business were successful, it could have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

Other

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

Aerostructures Long-Term Contracts

The Company’s aerostructures business in the Nacelles and Interior Systems segment has several long-term contracts in the pre-production phase including the Boeing 787 and Airbus A350 XWB, and in the early production phase including the Airbus A380. These contracts are accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1).

The pre-production phase includes design of the product to meet customer specifications as well as design of the processes to manufacture the product. Also involved in this phase is securing the supply of material and subcomponents produced by third party suppliers that are generally accomplished through long-term supply agreements.

Contracts in the early production phase include excess-over-average inventories, which represent the excess of current manufactured cost over the estimated average manufactured cost during the life of the contract.

Cost estimates over the lives of contracts are affected by estimates of future cost reductions including learning curve efficiencies. Because these contracts cover manufacturing periods of up to 20 years or more, there is risk associated with the estimates of future costs made during the pre-production and early production phases. These estimates may be different from actual costs due to the following:

	•		Ability to recover costs incurred for change orders and claims;
	•		Costs, including material and labor costs and related escalation;
	•		Labor improvements due to the learning curve experience;
	•		Anticipated cost productivity improvements related to new manufacturing methods and processes;
	•		Supplier pricing including escalation where applicable and the supplier’s ability to perform;
	•		The cost impact of product design changes that frequently occur during the flight test and certification phases of a program; and
	•		Effect of foreign currency exchange fluctuations.

Additionally, total contract revenue is based on estimates of future units to be delivered to the customer and sales price escalation where applicable. There is a risk that there could be differences between the actual units delivered and the estimated total units to be delivered under the contract and differences in actual sales escalation compared to estimates. Changes in estimates could have a material impact on the Company’s results of operations and cash flows.

Provisions for estimated losses on uncompleted contracts are recorded in the period such losses are determined to the extent total estimated costs exceed total estimated contract revenues.

Tax

The Company is continuously undergoing examination by the IRS as well as various state and foreign jurisdictions. The IRS and other taxing authorities routinely challenge certain deductions and credits reported by the Company on its income tax returns. The Company establishes reserves for tax contingencies in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109) and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). See Note 13 “Income Taxes”, for additional detail.

Tax Years 2000 to 2004

During 2007, the IRS and the Company reached agreement on substantially all of the issues raised with respect to the examination of taxable years 2000 to 2004. The Company submitted a protest to the Appeals Division of the IRS with respect to the remaining unresolved issues. The Company believes the amount of the estimated tax liability if the IRS were to prevail is fully reserved. The Company cannot predict the timing or ultimate outcome of a final resolution of the remaining unresolved issues.

Tax Years Prior to 2000

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

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

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

Rohr has been under examination by the State of California for the tax years ended July 31, 1985, 1986 and 1987. The State of California has disallowed certain expenses incurred by one of Rohr’s subsidiaries in connection with the lease of certain tangible property. California’s Franchise Tax Board held that the deductions associated with the leased equipment were non-business deductions. The additional tax associated with the Franchise Tax Board’s position is $4.5 million. The amount of accrued interest associated with the additional tax is approximately $24 million at March 31, 2008. In addition, the State of California enacted an amnesty provision that imposes nondeductible penalty interest equal to 50% of the unpaid interest amounts relating to taxable years ended before 2003. The penalty interest is approximately $12 million at March 31, 2008. The tax and interest amounts continue to be contested by Rohr. The Company believes that it is adequately reserved for this contingency. No payment has been made for the $24 million of interest or $12 million of penalty interest. The Franchise Tax Board took the position that under California law, Rohr was required to pay the full amount of interest prior to filing any suit for refund. In April 2008, the Supreme Court of California denied the Franchise Tax Board’s final appeal on this procedural matter and Rohr can now proceed with its refund suit without paying any interest.

Note 15. Guarantees

The Company extends financial and product performance guarantees to third parties. At March 31, 2008, the following environmental remediation and other indemnifications and financial guarantees were outstanding, in millions:

		Maximum				Carrying
		Potential				Amount of
		Payment				Liability
Environmental remediation and other indemnifications (Note 14)		No limit				$	22.9
Residual value on leases (Note 10)		$	24.8			$	—

Service and Product Warranties

The Company provides service and warranty policies on certain of its products. The Company accrues liabilities under service and warranty policies based upon specific claims and a review of historical warranty and service claim experience in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”. Adjustments are made to accruals as claim data and historical experience change. In addition, the Company incurs discretionary costs to service its products in connection with product performance issues.

The changes in the carrying amount of service and product warranties for the three months ended March 31, 2008, in millions, are as follows:

Balance at December 31, 2007		$	164.3
Net provisions for warranties issued during the period			13.1
Net provisions for warranties existing at the beginning of the year			0.3
Payments			(7.4	)
Foreign currency translation			2.2
Balance at March 31, 2008		$	172.5

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

		March 31, 2008				December 31, 2007
		(Dollars in millions)
Short-term liabilities		$	73.1			$	66.3
Long-term liabilities			99.4				98.0
Total		$	172.5			$	164.3

Note 16. Derivatives and Hedging Activities

The Company utilizes certain financial instruments to manage risk, including foreign currency and interest rate exposures that exist as part of ongoing business operations. A detailed description of the Company’s use of derivative instruments is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Cash Flow Hedges

The notional value of the forward contracts accounted for as cash flow hedges at March 31, 2008 was $1,812.6 million. At March 31, 2008, the amount of accumulated other comprehensive income that would be reclassified into earnings as an increase in sales to offset the effect of the hedged item in the next 12 months was a gain of $74.5 million. These forward contracts mature on a monthly basis with maturity dates that range from April 2008 to December 2012. The total fair value of the Company’s forward contracts, accounted for as cash flow hedges, of $135.3 million at March 31, 2008, (before deferred taxes of $47.6 million), combined with $1.1 million of gains from forward contracts terminated prior to the original maturity dates, is recorded in accumulated other comprehensive income.

Fair Value Hedges

The notional amounts of outstanding interest rate swaps accounted for as fair value hedges at March 31, 2008 totaled $193 million with maturity dates ranging from April 2008 to July 2016. The fair value of the interest rate swaps was a net asset of $5.1 million at March 31, 2008.

Other Forward Contracts

At March 31, 2008, the Company had other forward contracts not designated as hedges with a notional value of $22.8 million, which mature on a monthly basis with maturity dates ranging from June 2008 to February 2011. The fair value of the other forward contracts was a net liability of $0.2 million at March 31, 2008.

Note 17. Share-Based Compensation

During the three months ended March 31, 2008 and 2007, the Company expensed share-based compensation awards under the Goodrich Corporation 2001 Equity Compensation Plan and the Goodrich Corporation Employee Stock Purchase Plan for employees and under the Outside Director Deferral and Outside Director Phantom Share plans for non-employee directors. A detailed description of the awards under these plans is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Share-Based Compensation Expense

The compensation cost recorded for all of the Company’s share-based compensation plans during the three months ended March 31, 2008 and 2007 was as follows:

		Three Months Ended
		March 31,
		2008				2007
		(In millions, except per
		share amounts)
Compensation cost before taxes		$	7.8			$	16.1
Compensation cost after taxes		$	5.1			$	10.1
Compensation cost per diluted share		$	0.04			$	0.08

Grants

A summary of the Company’s grants during the three months ended March 31, 2008 and 2007 and the weighted-average fair value are as follows:

		Stock Options								Restricted Stock Units												Performance Units
						Weighted												Weighted												Weighted
						Average												Average												Average
Three months ended:		Shares				Fair Value				Shares								Fair Value				Shares								Fair Value
March 31, 2008			917,000			$	21.35								490,600			$	69.68								149,800			$	77.12
March 31, 2007			1,346,350	(1)		$	13.29								555,900			$	46.08								149,700			$	51.46

The grant date fair value for the stock options with the three-year service condition was estimated under the Black-Scholes-Merton formula using the following weighted-average assumptions:

		2008				2007
Risk-free interest rate (%)			3.3				4.5
Expected dividend yield (%)			1.3				1.7
Historical volatility factor (%)			31.2				34.6
Weighted-average expected life of the options (years)			5.6				5.5

Note 18. Subsequent Event

On April 17, 2008, the Company acquired TEAC Aerospace Holdings, Inc. (TEAC), a leading provider of proprietary airborne mission data, video recording and debrief products for the defense industry, and cabin video systems for commercial airlines, for approximately $80 million. TEAC will be reported in the Electronic Systems segment.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS DOCUMENT.

THIS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS. SEE “FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY” FOR A DISCUSSION OF CERTAIN OF THE UNCERTAINTIES, RISKS AND ASSUMPTIONS ASSOCIATED WITH THESE STATEMENTS.

GOODRICH AVIATION TECHNICAL SERVICES, INC. (ATS) HAS BEEN ACCOUNTED FOR AS A DISCONTINUED OPERATION. UNLESS OTHERWISE NOTED HEREIN, DISCLOSURES PERTAIN ONLY TO OUR CONTINUING OPERATIONS.

OVERVIEW

We are one of the largest worldwide suppliers of aerospace components, systems and services to the commercial and general aviation airplane markets. We are also a leading supplier of systems and products to the global defense and space markets. Our business is conducted globally with manufacturing, service and sales undertaken in various locations throughout the world. Our products and services are principally sold to customers in North America, Europe and Asia.

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

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

Commercial, Regional, Business and General Aviation Airplane OE

Commercial, regional, business and general aviation airplane OE includes sales of products and services for new airplanes produced by Airbus and Boeing, and regional, business and small airplane manufacturers.

The key growth drivers in this market channel include the number of orders for new airplanes, which will be delivered to the manufacturers’ customers over a period of several years, OE manufacturer

production and delivery rates and introductions of new airplane models such as the Boeing 787 and 747-8, the Airbus A380 and A350 XWB, the Embraer 190 and other newly launched or anticipated regional airplanes.

We have significant sales content on most of the airplanes manufactured in this market channel. We have benefited from increased production rates and deliveries of Airbus and Boeing airplanes and from our substantial content on many of the regional and general aviation airplanes.

The commercial airplane manufacturers have a significant backlog of orders and continue to experience strong new order flow. Airlines worldwide are expected to continue to increase capacity in 2008 and beyond. These trends bode very well for large commercial aircraft production over the next several years.

Commercial, Regional, Business and General Aviation Airplane Aftermarket

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

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

Capacity in the global airline system, as measured by ASMs, is expected to grow at about 4% to 5% annually in 2008 through 2012. We expect that the global airplane fleet will continue to grow in 2008 and beyond, as the OE manufacturers are expected to deliver more airplanes than are retired.

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

Defense and Space

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

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

The market for our defense and space products is global, and is not dependent on any single program, platform or customer. We anticipate fewer new fighter and transport aircraft platform starts over the next several years, which are expected to negatively affect OE sales. We anticipate that the introduction of the F-35 Lightning II and new helicopter platforms, along with upgrades on existing defense and space platforms, will be necessary and will provide long-term growth in this market channel. Additionally, we are participating in, and developing new products for, the rapidly expanding homeland security and intelligence, surveillance and reconnaissance sectors, which should further strengthen our position in this market channel.

Long-term Sustainable Growth

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

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

First Quarter 2008 Sales Content by Market Channel

During the first quarter 2008, approximately 94% of our sales were from our three primary market channels described above. Following is a summary of the percentage of sales by market channel:

Airbus Commercial OE			16	%
Boeing Commercial OE			10	%
Regional, Business and General Aviation Airplane OE			8	%
Total Commercial, Regional, Business and General Aviation Airplane OE			34	%
Large Commercial Airplane Aftermarket			29	%
Regional, Business and General Aviation Airplane Aftermarket			7	%
Total Commercial, Regional, Business and General Aviation Airplane Aftermarket			36	%
Total Defense and Space			24	%
Other			6	%
Total			100	%

Summary Performance — First Quarter 2008 as Compared to First Quarter 2007

		First Quarter
		2008				2007				% Change
		(Dollars in millions, except diluted EPS)
Sales		$	1,745.0			$	1,546.3				12.9
Segment operating income(1)		$	301.8			$	230.0				31.2
Percent of sales			17.3	%			14.9	%
Income from continuing operations before income taxes		$	232.5			$	152.6				52.4
Income from continuing operations		$	153.6			$	99.2				54.8
Net income		$	157.9			$	99.8				58.2
Effective tax rate			34	%			35	%
Diluted EPS:
Continuing operations		$	1.21			$	0.78				55.1
Net income		$	1.24			$	0.78				59.0

The sales increase in the first quarter 2008 as compared to the first quarter 2007 was driven by changes in each of our major market channels as follows:

	•		Large commercial airplane original equipment sales increased by approximately 13%;
	•		Regional, business and general aviation airplane original equipment sales increased by approximately 23%;
	•		Large commercial, regional and general aviation airplane aftermarket sales increased by approximately 10%; and
	•		Defense and space sales of both original equipment and aftermarket products and services increased by approximately 13%.

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

The change in income from continuing operations during the first quarter 2008 as compared to the first quarter 2007 was also impacted by the following items:

		Increase (Decrease)
		Before				After				Diluted
		Tax				Tax				EPS
		(Dollars in millions, except
		diluted EPS)
Changes in estimates on long-term contracts		$	23.8			$	14.9			$	0.12
Lower share-based compensation		$	8.3			$	5.0			$	0.04
Foreign exchange rate impact, including net monetary asset remeasurement		$	(15.5	)		$	(9.7	)		$	(0.07	)

Changes in estimates on long-term contracts

During the first quarter 2008, we revised our estimates on certain of our long-term contracts, primarily in our aerostructures and aircraft wheels and brakes business units, resulting in higher income of approximately $24 million compared to the first quarter 2007. These revised estimates were primarily due to changes in volume, price, cost and operational performance.

Share-based compensation

The decrease in share-based compensation was primarily due to changes in our share price.

Foreign exchange rate impact

The net unfavorable foreign exchange rate impact was primarily due to approximately $18 million of unfavorable foreign currency translation of net costs in currencies other than the U.S. Dollar, partially offset by approximately $5 million of higher net gains on cash flow hedges settled during the first quarter of 2008.

2008 Outlook

We expect the following results for the year ending December 31, 2008:

		2008 Outlook		2007 Actual
Sales		$7.2 to $7.3 billion		$6.4 billion
Diluted EPS — Net Income		$4.30 to $4.45 per share		$3.78 per share
Capital Expenditures		$275 to $325 million		$282.6 million
Operating Cash Flow net of Capital Expenditures		Exceed 75% of net income		64% of net income

We expect that full year 2008 sales will be in the range of $7.2 to $7.3 billion, compared with prior expectations of $7.1 to $7.2 billion as reported in our 2007 Form 10-K. The outlook for 2008 net income per diluted share has been increased to $4.30 to $4.45, compared with prior expectations of $4.15 to $4.30, reflecting income expansion associated with sales growth in all major market channels and improved operating efficiencies.

The 2008 outlook assumes, among other factors, a full-year effective tax rate of 33% to 35%, which includes the benefit of an extension of the U.S. Research and Development Credit (R&D Credit). This compares with an effective tax rate of 31% for 2007.

We continue to expect net cash provided by operating activities, net of capital expenditures, to be in excess of 75 percent of net income in 2008. This outlook reflects a continuation of cash investments to support the Boeing 787 and the Airbus A350 XWB programs and capital expenditures for low cost country manufacturing and productivity initiatives that are expected to enhance margins over the near and long-term. We now expect capital expenditures for 2008 to be in a range of $275 to $325 million, compared with prior expectations of $250 to $270 million. The increase in capital spending is primarily due to a decision to purchase rather than lease certain equipment, increased spending on low cost country manufacturing and MRO facilities and acceleration of U.S. capital spending to take advantage of bonus depreciation on 2008 capital spending as part of the U.S. Government stimulus plan.

Our 2008 sales outlook and market assumptions for each of our major market channels compared with the full year 2007 include the following:

	•		Large commercial airplane OE sales are expected to increase by approximately 20%;
	•		Regional, business and general aviation airplane OE sales are expected to increase by approximately 15%;
	•		Large commercial, regional, business and general aviation airplane aftermarket sales are expected to increase by approximately 8% to 11%; and
	•		Defense and space sales of both OE and aftermarket products and services are expected to increase by approximately 9% to 11%, excluding potential sales resulting from the acquisition of TEAC Aerospace Holdings, Inc. (TEAC).

RESULTS OF OPERATIONS

First Quarter 2008 Compared with First Quarter 2007

		First Quarter								$
		2008				2007				Change
		(Dollars in millions)
Sales		$	1,745.0			$	1,546.3			$	198.7
Segment Operating Income		$	301.8			$	230.0			$	71.8
Corporate General and Administrative Costs			(22.5	)			(28.7	)			6.2
ERP Implementation Costs			(4.8	)			(3.3	)			(1.5	)
Total Operating Income			274.5				198.0				76.5
Net Interest Expense			(27.7	)			(29.8	)			2.1
Other Income (Expense) — Net			(14.3	)			(15.6	)			1.3
Income Tax Expense			(78.9	)			(53.4	)			(25.5	)
Income from Continuing Operations			153.6				99.2				54.4
Income from Discontinued Operations			4.3				0.6				3.7
Net Income		$	157.9			$	99.8			$	58.1

Changes in sales and segment operating income are discussed within the “Business Segment Performance” section below.

Corporate general and administrative costs decreased for the first quarter 2008 as compared to the first quarter 2007 primarily due to lower incentive and share-based compensation expense.

Net interest expense decreased for the first quarter 2008 as compared to the first quarter 2007 primarily due to higher interest income as a result of higher cash balances in the first quarter of 2008.

Other income (expense) — net decreased for the first quarter 2008 as compared to the first quarter 2007, primarily as a result of the following:

	•		Lower expenses related to previously owned businesses of approximately $3 million, primarily for environmental litigation and remediation costs; and
	•		Higher income from equity in affiliated companies of approximately $2 million; partially offset by
	•		Higher retiree health care expenses related to previously owned businesses of approximately $3 million.

For the first quarter of 2008 and 2007, we reported an effective tax rate of 34% and 35%, respectively. The decrease in the rate for the first quarter of 2008 was primarily due to a benefit from interest related to the 2000 to 2004 tax years under the look-back method for completed long-term contracts. This decrease was partially offset by the absence of the R&D Credit because the federal statute authorizing the R&D Credit has not been extended beyond December 31, 2007.

BUSINESS SEGMENT PERFORMANCE

Our three business segments are as follows:

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

We measure each reporting segments’ profit based upon operating income, excluding the indirect costs related to the company-wide ERP implementation. Accordingly, we do not allocate net interest expense, other income (expense) — net and income taxes to the reporting segments. The accounting policies of the reportable segments are the same as those for our Condensed Consolidated Financial Statements. For a reconciliation of total segment operating income to total operating income, see Note 3, “Business Segment Information” to our Condensed Consolidated Financial Statements.

First Quarter 2008 Compared with First Quarter 2007

		First Quarter								Increase/				%				% of Sales
		2008				2007				(Decrease)				Change				2008				2007
NET CUSTOMER SALES
Actuation and Landing Systems		$	682.1			$	567.0			$	115.1				20.3
Nacelles and Interior Systems			620.5				546.9				73.6				13.5
Electronic Systems			442.4				432.4				10.0				2.3
		$	1,745.0			$	1,546.3			$	198.7				12.9
SEGMENT OPERATING INCOME
Actuation and Landing Systems		$	74.1			$	49.4			$	24.7				50.0				10.9				8.7
Nacelles and Interior Systems			178.8				126.0				52.8				41.9				28.8				23.0
Electronic Systems			48.9				54.6				(5.7	)			(10.4	)			11.1				12.6
		$	301.8			$	230.0			$	71.8				31.2				17.3				14.9

Actuation and Landing Systems:  Actuation and Landing Systems segment sales for the first quarter 2008 increased from the first quarter 2007 primarily due to the following:

	•		Higher large commercial airplane OE sales of approximately $42 million, primarily in our landing gear and actuation systems business units;
	•		Higher defense and space OE and aftermarket sales of approximately $33 million, primarily in our landing gear, aircraft wheels and brakes and actuation systems business units;
	•		Higher large commercial, regional, business and general aviation airplane aftermarket sales of approximately $11 million, primarily in our landing gear business unit; and
	•		Higher regional, business and general aviation airplane OE sales of approximately $10 million, primarily in our landing gear and actuation systems business units.

Actuation and Landing Systems segment operating income for the first quarter 2008 increased from the first quarter 2007 primarily as a result of the following:

	•		Higher sales volume and favorable product mix across all business units, which resulted in higher income of approximately $18 million;
	•		Higher operating income of approximately $14 million, driven primarily by higher pricing across most of our business units and improved brake-life performance in the aircraft wheels and brakes business unit, partially offset by increased operating costs across all business units; and
	•		Unfavorable foreign exchange of approximately $7 million.

Nacelles and Interior Systems:  Nacelles and Interior Systems segment sales for the first quarter 2008 increased from the first quarter 2007 primarily due to the following:

	•		Higher large commercial airplane aftermarket sales, including spare parts and MRO volume of approximately $46 million, primarily in our aerostructures business unit;
	•		Higher defense and space OE and aftermarket sales of approximately $12 million, primarily in our interiors business unit;
	•		Higher regional, business, and general aviation airplane OE sales of approximately $11 million, primarily in our aerostructures business unit; and
	•		Higher large commercial airplane OE sales of approximately $5 million, primarily in our interiors business unit.

Nacelles and Interior Systems segment operating income for the first quarter 2008 increased from the first quarter 2007 primarily due to the following:

	•		Higher sales volume, primarily in our aerostructures and interiors business units, which resulted in higher income of approximately $32 million;
	•		Favorable changes in estimates for certain long-term contracts at our aerostructures business unit of approximately $20 million, primarily due to changes in volume, price, cost and operational performance; and
	•		Settlement of a claim with a customer at our interiors business unit which resulted in higher income of approximately $4 million; partially offset by
	•		Unfavorable foreign exchange of approximately $4 million.

Electronic Systems:  Electronic Systems segment sales for the first quarter 2008 increased from the first quarter 2007 primarily due to the following:

	•		Higher regional, business and general aviation airplane OE sales of approximately $5 million in our sensors and integrated systems and engine control and electrical power business units; and
	•		Higher large commercial airplane OE sales of approximately $5 million in our engine control and electrical power and sensors and integrated systems and business units.

Electronic Systems segment operating income for the first quarter 2008 decreased from the first quarter 2007 primarily due to the following:

	•		Unfavorable foreign exchange of approximately $5 million; and
	•		Higher operating costs of approximately $4 million, primarily in our sensors and integrated systems business unit; partially offset by
	•		Higher sales volume and pricing partially offset by unfavorable product mix, across most business units, which resulted in higher income of approximately $3 million.

LIQUIDITY AND CAPITAL RESOURCES

We currently expect to fund expenditures for capital requirements, as well as other liquidity needs from a combination of cash, internally generated funds and financing arrangements. We believe that our internal liquidity, together with access to external capital resources, will be sufficient to satisfy existing plans and commitments including our stock repurchase program, and also provide adequate financial flexibility.

On April 17, 2008, we completed the acquisition of TEAC, a leading provider of proprietary airborne mission data, video recording and debrief products for the defense industry, and cabin video systems for commercial airlines, for approximately $80 million. TEAC will be reported in the Electronic Systems Segment.

On April 22, 2008, our Board of Directors declared a quarterly dividend of $0.225 per share of common stock, payable July 1, 2008 to shareholders of record on June 2, 2008.

Cash

At March 31, 2008, we had cash and cash equivalents of $463.2 million, as compared to $406 million at December 31, 2007.

Credit Facilities

We have the following amounts available under our credit facilities:

	•		$500 million committed global revolving credit facility that expires in May 2012, of which $442.9 million was available at March 31, 2008; and
	•		$75 million of uncommitted domestic money market facilities and $181.8 million of uncommitted and committed foreign working capital facilities with various banks to meet short-term borrowing requirements, of which $246.8 million was available at March 31, 2008.

Off-Balance Sheet Arrangements

Lease Commitments

We finance certain of our 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 us, rather than the lessor, to claim a deduction for tax depreciation on the assets and allow us to lease aircraft and equipment having a maximum unamortized value of $150 million at March 31, 2008. These leases are priced at a spread over LIBOR and are extended periodically, unless notice is provided, through the end of the lease terms. At March 31, 2008, future payments under these leases total $10.6 million through the end of the lease terms. At March 31, 2008, we had guarantees of residual values on lease obligations of $24.8 million. We are obligated to either purchase or remarket the leased assets at the end of the lease term.

Future minimum lease payments under standard operating leases were $166.8 million at March 31, 2008.

Derivatives

We utilize certain derivative financial instruments to enhance our ability to manage risk, including foreign currency and interest rate exposures that exist as part of ongoing business operations as follows:

	•		Foreign Currency Contracts Designated as Cash Flow Hedges:  At March 31, 2008, our contracts had a notional amount of $1,812.6 million, fair value of a $135.3 million net asset and maturity dates ranging from April 2008 to December 2012. The amount of accumulated other comprehensive income that would be reclassified into earnings in the next 12 months was a gain of $74.5 million. During the first quarter of 2008 and 2007, we realized net gains of $20.3 million and $15.5 million respectively, related to contracts that settled.
	•		Interest Rate Swaps Designated as Fair Value Hedges:  At March 31, 2008, our contracts had a notional amount of $193 million, a fair value of a $5.1 million net asset and maturity dates ranging from April 2008 to July 2016.
	•		Foreign Currency Contracts not Designated as Hedges:  At March 31, 2008, our contracts had a notional amount of $22.8 million with maturity dates ranging from June 2008 to February 2011. During the first quarter of 2008 and 2007, we realized a net gain of $8.3 million compared to a net loss of $1 million, respectively. The fair value of these contracts was a net liability of $0.2 million at March 31, 2008.

Estimates of the fair value of our derivative financial instruments represent our best estimates based on our valuation models, which incorporate industry data and trends and relevant market rates and transactions. Counterparties to these financial instruments expose us to credit loss in the event of nonperformance; however, we do not expect any of the counterparties to fail to meet their obligations. Counterparties, in most cases, are large commercial banks that also provide us with our committed credit facilities. To manage this credit risk, we select counterparties based on credit ratings, limit our exposure to any single counterparty and monitor our market position with each counterparty.

Contractual Obligations and Other Commercial Commitments

There have been no material changes to the table presented in our Annual Report on Form 10-K for the year ended December 31, 2007. The table excludes our liability for unrecognized tax benefits, which totaled $230.7 million at March 31, 2008, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.

Long-term Debt Repayments

In April 2008, we repaid $162 million for the following notes, which matured on April 15, 2008:

	•		$119 million principal amount of the 7.0% notes; and
	•		$43 million principal amount of the 6.45% notes.

CASH FLOW

The following table summarizes our cash flow activity for the first quarter 2008 and 2007:

		First Quarter								$
		2008				2007				Change
		(Dollars in millions)
Operating activities of continuing operations		$	150.9			$	128.2			$	22.7
Investing activities of continuing operations		$	(63.9	)		$	(36.0	)		$	(27.9	)
Financing activities of continuing operations		$	(44.3	)		$	(56.0	)		$	11.7
Discontinued operations		$	13.4			$	(6.2	)		$	19.6

Operating Activities of Continuing Operations

The increase in net cash provided by operating activities for the first quarter 2008 as compared to the first quarter 2007 was primarily due to lower net tax payments of approximately $30 million. Higher before tax income was offset by working capital requirements.

Investing Activities of Continuing Operations

Net cash used by investing activities for the first quarter 2008 as compared to the first quarter 2007 included capital expenditures of $54.4 million and $36.1 million, respectively. Also, on January 18, 2008, we completed the acquisition of Skyline Industries, Inc. for $9.5 million.

Financing Activities of Continuing Operations

The decrease in net cash used in financing activities for the first quarter 2008 as compared to the first quarter 2007 primarily consisted of the following:

	•		Lower purchases of our common stock of approximately $41 million; partially offset by
	•		A decrease of proceeds from the issuance of our common stock of approximately $23 million; and
	•		Higher dividends to our shareholders and distributions to minority interest holders of approximately $7 million.

As of March 31, 2008, we have purchased approximately 4 million shares for approximately $234 million under our share repurchase program.

On February 19, 2008, our Board of Directors declared a quarterly dividend of $0.225 per share of common stock, payable April 1, 2008 to shareholders of record on March 3, 2008.

Discontinued Operations

Net cash provided by discontinued operations in the first quarter of 2008 primarily consisted of the finalization of the purchase price for ATS and proceeds from the sale of a previously discontinued operation. Net cash used in discontinued operations in the first quarter of 2007, primarily consisted of cash flow used in the operations of ATS.

CONTINGENCIES

General

There are pending or threatened against us or our subsidiaries various claims, lawsuits and administrative proceedings, arising in the ordinary course of business, which seek remedies or damages. Although no assurance can be given with respect to the ultimate outcome of these matters, we believe that any liability that may finally be determined with respect to commercial and non-asbestos product liability claims should not have a material effect on our consolidated financial position, results of operations or cash flows. Legal costs are expensed when incurred.

Environmental

We are subject to environmental laws and regulations which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. At certain sites we have been identified as a potentially responsible party under the federal Superfund laws and comparable state laws. We are currently involved in the investigation and remediation of a number of sites under applicable laws.

Estimates of our environmental liabilities are based on current facts, laws, regulations and technology. These estimates take into consideration our prior experience and professional judgment of our environmental specialists. Estimates of our environmental liabilities are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and cost estimates, the extent of corrective actions that may be required and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation.

Accordingly, as investigation and remediation proceed, it is likely that adjustments in our accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on our results of operations or cash flows in a given period. Based on currently available information, however, we do not believe that future environmental costs in excess of those accrued with respect to sites for which we have been identified as a potentially responsible party are likely to have a material adverse effect on our financial condition.

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 we have recommended a remedy or have committed to an appropriate plan of action. The liabilities are reviewed periodically and, as investigation and remediation proceed, adjustments are made as necessary. Liabilities for losses from environmental remediation obligations do not consider the effects of inflation and anticipated expenditures are not discounted to their present value. The liabilities are not reduced by possible recoveries from insurance carriers or other third parties, but do reflect anticipated allocations among potentially responsible parties at federal Superfund sites or similar state-managed sites, third party indemnity obligations, and an assessment of the likelihood that such parties will fulfill their obligations at such sites.

Our Condensed Consolidated Balance Sheet includes an accrued liability for environmental remediation obligations of $69.1 million and $69.6 million at March 31, 2008 and December 31, 2007, respectively. At March 31, 2008 and December 31, 2007, $18.7 million and $18.6 million, respectively, of the accrued liability for environmental remediation were included in current liabilities as accrued expenses. At March 31, 2008 and December 31, 2007, $29.1 million and $29.4 million, respectively, was associated with ongoing operations and $40 million and $40.2 million, respectively, was associated with previously owned businesses.

We expect that we will expend present accruals over many years, and will generally complete remediation in less than 30 years at sites for which we have been identified as a potentially responsible party. This period includes operation and monitoring costs that are generally incurred over 15 to 25 years.

Certain states in the U.S. and countries globally are promulgating or proposing new or more demanding regulations or legislation impacting the use of various chemical substances by all companies. We are currently evaluating the potential impact, if any, of complying with such regulations and legislation.

Asbestos

We and some of our subsidiaries have been named as defendants in various actions by plaintiffs alleging damages as a result of exposure to asbestos fibers in products or at our facilities. A number of these cases involve maritime claims, which have been and are expected to continue to be administratively dismissed by the court. We believe that pending and reasonably anticipated future actions are not likely to have a material adverse effect on our financial condition, results of operations or cash flows. There can be no assurance, however, that future legislative or other developments will not have a material adverse effect on our results of operations in a given period.

Insurance Coverage

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

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

At March 31, 2008 and December 31, 2007, the deferred settlement credit was $52.7 million and $53.6 million, respectively, for which $7.8 million and $7.6 million, respectively, was reported in accrued expenses and $44.9 million and $46 million, respectively, was reported in other non-current liabilities. The proceeds from such insurance settlements were reported as a component of net cash provided by operating activities in the period payments were received.

Liabilities of Divested Businesses

Asbestos

In May 2002, we completed the tax-free spin-off of our Engineered Industrial 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 prior to our ownership. It is possible that asbestos-related claims might be asserted against us on the theory that we have some responsibility for the asbestos-related liabilities of EnPro, Coltec or its subsidiaries. Also, it is possible that a claim might be asserted against us that Coltec’s dividend of its aerospace business to us prior to the spin-off was made at a time when Coltec was insolvent or caused Coltec to become insolvent. Such a claim could seek recovery from us on behalf of Coltec of the fair market value of the dividend.

A limited number of asbestos-related claims have been asserted against us as “successor” to Coltec or one of its subsidiaries. We believe that we have substantial legal defenses against these and other such claims. In addition, the agreement between EnPro and us that was used to effectuate the spin-off provides us with an indemnification from EnPro covering, among other things, these liabilities. The success of any such asbestos-related claims would likely require, as a practical matter, that Coltec’s subsidiaries were unable to satisfy their asbestos-related liabilities and that Coltec was found to be responsible for these liabilities and was unable to meet its financial obligations. We believe any such claims would be without merit and that Coltec was solvent both before and after the dividend of its aerospace business to us. If we would ultimately be found responsible for the asbestos-related liabilities of Coltec’s subsidiaries, we believe such finding would not have a material adverse effect on our financial condition, but could have a material adverse effect on our results of operations and cash flows in a particular period. However, because of the uncertainty as to the number, timing and payments related to future asbestos-related claims, there can be no assurance that any such claims will not have a material adverse effect on our financial condition, results of operations and cash flows. If a claim related to the dividend of Coltec’s aerospace business were successful, it could have a material adverse impact on our financial condition, results of operations and cash flows.

Other

In connection with the divestiture of 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 March 31, 2008, we had letters of credit and bank guarantees of $64.3 million and residual value guarantees of lease obligations of $24.8 million. See Note 10, “Financing Arrangements” to our Condensed Consolidated Financial Statements.

Aerostructures Long-Term Contracts

Our aerostructures business in the Nacelles and Interior Systems segment has several long-term contracts in the pre-production phase including the Boeing 787 and Airbus A350 XWB, and in the early production phase including the Airbus A380. These contracts are accounted for in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1).

The pre-production phase includes design of the product to meet customer specifications as well as design of the processes to manufacture the product. Also involved in this phase is securing the supply of material and subcomponents produced by third party suppliers that are generally accomplished through long-term supply agreements.

Contracts in the early production phase include excess-over-average inventories, which represent the excess of current manufactured cost over the estimated average manufactured cost during the life of the contract.

Cost estimates over the lives of contracts are affected by estimates of future cost reductions including learning curve efficiencies. Because these contracts cover manufacturing periods of up to 20 years or more, there is risk associated with the estimates of future costs made during the pre-production and early production phases. These estimates may be different from actual costs due to the following:

	•		Ability to recover costs incurred for change orders and claims;
	•		Costs, including material and labor costs and related escalation;
	•		Labor improvements due to the learning curve experience;
	•		Anticipated cost productivity improvements related to new manufacturing methods and processes;
	•		Supplier pricing including escalation where applicable and the supplier’s ability to perform;
	•		The cost impact of product design changes that frequently occur during the flight test and certification phases of a program; and
	•		Effect of foreign currency exchange fluctuations.

Additionally, total contract revenue is based on estimates of future units to be delivered to the customer and sales price escalation where applicable. There is a risk that there could be differences between the actual units delivered and the estimated total units to be delivered under the contract and differences in actual sales escalation compared to estimates. Changes in estimates could have a material impact on our results of operations and cash flows.

Provisions for estimated losses on uncompleted contracts are recorded in the period such losses are determined to the extent total estimated costs exceed total estimated contract revenues.

Tax

We are continuously undergoing examination by the IRS, as well as various state and foreign jurisdictions. The IRS and other taxing authorities routinely challenge certain deductions and credits reported by us on our income tax returns.

Tax Years 2000 to 2004

During 2007, we reached agreement with the IRS on substantially all of the issues raised with respect to the examination of taxable years 2000 to 2004. We submitted a protest to the Appeals Division of the IRS with respect to the remaining unresolved issues. We believe the amount of the estimated tax liability if the IRS were to prevail is fully reserved. We cannot predict the timing or ultimate outcome of a final resolution of the remaining unresolved issues.

Tax Years Prior to 2000

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

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

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

Rohr has been under examination by the State of California for the tax years ended July 31, 1985, 1986 and 1987. The State of California has disallowed certain expenses incurred by one of Rohr’s subsidiaries in connection with the lease of certain tangible property. California’s Franchise Tax Board held that the deductions associated with the leased equipment were non-business deductions. The additional tax associated with the Franchise Tax Board’s position is approximately $4.5 million. The amount of accrued interest associated with the additional tax is approximately $24 million at March 31, 2008. In addition, the State of California enacted an amnesty provision that imposes nondeductible penalty interest equal to 50% of the unpaid interest amounts relating to taxable years ended before 2003. The penalty interest is approximately $12 million at March 31, 2008. The tax and interest amounts continue to be contested by Rohr. We believe that we are adequately reserved for this contingency. No payment has been made for the $24 million of interest or $12 million of penalty interest. The Franchise Tax Board took the position that under California law, Rohr was required to pay the full amount of interest prior to filing any suit for refund. In April 2008, the Supreme Court of California denied the Franchise Tax Board’s final appeal on this procedural matter and Rohr can now proceed with its refund suit without paying any interest.

NEW ACCOUNTING STANDARDS NOT YET ADOPTED

The following accounting standards, effective for fiscal year 2009, have not yet been adopted:

	•		Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”.
	•		Statement of Financial Accounting Standards No. 141(R), “Business Combinations”.
	•		Statement of Financial Accounting Standards No. 160 “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”.

See Note 2, “New Accounting Standards” to our Condensed Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, goodwill and intangible assets, income taxes, financing obligations, warranty obligations, excess component order cancellation costs, restructuring, long-term service contracts, share-based compensation, pensions and other postretirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements.

Contract Accounting-Percentage of Completion

Revenue Recognition

We have sales under long-term contracts, many of which contain escalation clauses, requiring delivery of products over several years and frequently providing the buyer with option pricing on follow-on orders. Sales and profits on each contract are recognized in accordance with the percentage-of-completion method of accounting, primarily using the units-of-delivery method. We follow the requirements of SOP 81-1, using the cumulative catch-up method in accounting for revisions in estimates. Under the cumulative catch-up method, the impact of revisions in estimates related to units shipped to date is recognized immediately when changes in estimated contract profitability are known.

Estimates of revenue and cost for our contracts span a period of many years from the inception of the contracts to the date of actual shipments and are based on a substantial number of underlying assumptions. We believe that the underlying factors are sufficiently reliable to provide a reasonable estimate of the profit to be generated. However, due to the significant length of time over which revenue streams will be generated, the variability of the assumptions of the revenue and cost streams can be significant if the factors change. The factors include but are not limited to estimates of the following:

	•		Escalation of future sales prices under the contracts;
	•		Ability to recover costs incurred for change orders and claims;
	•		Costs, including material and labor costs and related escalation;
	•		Labor improvements due to the learning curve experience;
	•		Anticipated cost productivity improvements related to new manufacturing methods and processes;
	•		Supplier pricing including escalation where applicable and the supplier’s ability to perform;
	•		The cost impact of product design changes that frequently occur during the flight test and certification phases of a program; and
	•		Effect of foreign currency exchange fluctuations.

Inventory

Inventoried costs on long-term contracts include certain pre-production costs, consisting primarily of tooling and design costs and production costs, including applicable overhead. The costs attributed to units delivered under long-term commercial contracts are based on the estimated average cost of all units expected to be produced and are determined under the learning curve concept, which anticipates a predictable decrease in unit costs as tasks and production techniques become more efficient through repetition. During the early years of a contract, manufacturing costs per unit delivered are typically greater than the estimated average unit cost for the total contract. This excess manufacturing cost for units shipped results in an increase in inventory (referred to as “excess-over-average”) during the early years of a contract.

If in-process inventory plus estimated costs to complete a specific contract exceed the anticipated remaining sales value of such contract, such excess is charged to cost of sales in the period recognized, thus reducing inventory to estimated realizable value.

Income Taxes

In accordance with SFAS 109, Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” and FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods,” as of each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full fiscal year. In addition, we establish reserves for tax contingencies in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). The estimate of our effective income tax rate involves significant judgments regarding the application of complex tax regulations across many jurisdictions and estimates as to the amount and jurisdictional source of income expected to be earned during the full fiscal year. Further influencing this estimate are evolving interpretations of new and existing tax laws, rulings by taxing authorities and court decisions. Due to the subjective and complex nature of these underlying issues, our actual effective tax rate and related tax liabilities may differ from our initial estimates. Differences between our estimated and actual effective income tax rates and related liabilities are recorded in the period they become known. The resulting adjustment to our income tax expense could have a material effect on our results of operations in the period the adjustment is recorded.

Goodwill and Identifiable Intangible Assets

Impairments of identifiable intangible assets are recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable and our estimate of undiscounted cash flows over the assets’ remaining useful lives is less than the carrying value of the assets. The determination of undiscounted cash flow is based on our segments’ plans. The revenue growth is based upon aircraft build projections from aircraft manufacturers and widely available external publications. The profit margin assumption is based upon the current cost structure and anticipated cost reductions. Changes to these assumptions could result in the recognition of impairment.

Goodwill is not amortized but is tested for impairment annually, or when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. Our annual testing date is November 30. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the related reporting units. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The amount of the fair value below carrying value represents the amount of goodwill impairment.

We estimate the fair values of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future sales and operating costs, based primarily on existing firm orders, expected future orders, contracts with suppliers, labor agreements and general market conditions. Changes in these forecasts could significantly change the amount of impairment recorded, if any impairment exists. The cash flow forecasts are adjusted by a long-term growth rate and a discount rate derived from our weighted average cost of capital at the date of evaluation.

Other Assets

As with any investment, there are risks inherent in recovering the value of participation payments, entry fees, sales incentives and flight certification costs. Such risks are consistent with the risks associated in acquiring a revenue-producing asset in which market conditions may change or the risks that arise when a manufacturer of a product on which a royalty is based has business difficulties and cannot produce the product. Such risks include but are not limited to the following:

	•		Changes in market conditions that may affect product sales under the program, including market acceptance and competition from others;
	•		Performance of subcontract suppliers and other production risks;
	•		Bankruptcy or other less significant financial difficulties of other program participants, including the aircraft manufacturer, the OE manufacturers (OEM) and other program suppliers or the aircraft customer; and
	•		Availability of specialized raw materials in the marketplace.

Participation Payments

Certain of our businesses make cash payments under long-term contractual arrangements to OEM or system contractors in return for a secured position on an aircraft program. Participation payments are capitalized, when a contractual liability has been incurred, as other assets and amortized to cost of sales, or as a reduction to sales, as appropriate. At March 31, 2008 and December 31, 2007, the carrying amount of participation payments was $123.1 million and $123.7 million, respectively. The carrying amount of participation payments is evaluated for recovery at least annually or when other indicators of impairment exist, such as a change in the estimated number of units or a revision in the economics of the program. If such estimates change, amortization expense is adjusted and/or an impairment charge is recorded, as appropriate, for the effect of the revised estimates. No impairment charges were recorded in the first quarter of 2008 or 2007.

Entry Fees

Certain businesses in our Nacelles and Interior Systems and Electronic Systems segments make cash payments to an OEM under long-term contractual arrangements related to new engine programs. The payments are referred to as entry fees and entitle us to a controlled access supply contract and a percentage of total program revenue generated by the OEM. Entry fees are capitalized in other assets and are amortized on a straight-line basis as a reduction to sales. At March 31, 2008 and December 31, 2007, the carrying amount of entry fees was $131.1 million and $132.1 million, respectively. The carrying amount of entry fees is evaluated for recovery at least annually or when other significant assumptions or economic conditions change. Recovery of entry fees is assessed based on the expected cash flow from the program over the remaining program life as compared to the recorded amount of entry fees. If the carrying value of the entry fees exceeds the cash flow to be generated from the program, a charge would be recorded to reduce the entry fees to their recoverable amounts. No impairment charges were recorded in the first quarter of 2008 or 2007.

Sales Incentives

We offer sales incentives such as up-front cash payments, merchandise credits and/or free products to certain airline customers in connection with sales contracts. The cost of these incentives is recognized in the period incurred unless recovery of these costs is specifically guaranteed by the customer in the contract. If the contract contains such a guarantee, then the cost of the sales incentive is capitalized as other assets and amortized to cost of sales, or as a reduction to sales, as appropriate. At March 31, 2008 and December 31, 2007, the carrying amount of sales incentives was $59.7 million and $60.2 million, respectively. The carrying amount of sales incentives is evaluated for recovery when indicators of potential impairment exist. The carrying value of the sales incentives is also compared annually to the amount recoverable under the terms of the guarantee in the customer contract. If the amount of the carrying value of the sales incentives exceeds the amount recoverable in the contract, the carrying value is reduced. No material impairment charges were recorded in the first quarter of 2008 or 2007.

Flight Certification Costs

When a supply arrangement is secured, certain of our businesses may agree to supply hardware to an OEM to be used in flight certification testing and/or make cash payments to reimburse an OEM for costs incurred in testing the hardware. The flight certification testing is necessary to certify aircraft systems/components for the aircraft’s airworthiness and allows the aircraft to be flown and thus sold in the country certifying the aircraft. Flight certification costs are capitalized in other assets and are amortized to cost of sales, or as a reduction to sales, as appropriate. At March 31, 2008 and December 31, 2007, the carrying amount of sales flight certification costs was $40.9 million and $35.8 million, respectively. The carrying amount of flight certification costs is evaluated for recovery when indicators of impairment exist or when the estimated number of units to be manufactured changes. No impairment charges were recorded in the first quarter of 2008 or 2007.

Service and Product Warranties

We provide service and warranty policies on certain of our products. We accrue liabilities under service and warranty policies based upon specific claims and a review of historical warranty and service claim experience in accordance with Statement of Financial Accounting Standards No 5, “Accounting for Contingencies”. Adjustments are made to accruals as claim data and historical experience change. In addition, we incur discretionary costs to service our products in connection with product performance issues.

Our service and product warranty reserves are based upon a variety of factors. Any significant change in these factors could have a material impact on our results of operations. Such factors include but are not limited to the following:

	•		The historical performance of our products and changes in performance of newer products;
	•		The mix and volumes of products being sold; and
	•		The impact of product changes.

Share-Based Compensation

We utilize the fair value method of accounting to account for share-based compensation awards.

Stock Options

Our Black-Scholes-Merton formula estimates the expected value our employees will receive from the options based on a number of assumptions, such as interest rates, employee exercises, our stock price and expected dividend yield. Our weighted average assumptions include:

		2008				2007
Risk-free interest rate %			3.3				4.5
Expected dividend yield %			1.3				1.7
Historical volatility factor %			31.2				34.6
Weighted-average expected life of the options (years)			5.6				5.5

The expected life is a significant assumption as it determines the period for which the risk-free interest rate, historical volatility and expected dividend yield must be applied. The expected life is the period over which our employees are expected to hold their options. It is based on our historical experience with similar grants. The risk free interest rate is based on the expected U.S. Treasury rate over the expected life. Historical volatility reflects movements in our stock price over the most recent historical period equivalent to the expected life. Expected dividend yield is based on the stated dividend rate as of the date of grant.

Restricted Stock Units

The fair value of the restricted stock units is determined based upon the average of the high and low grant date fair value. The weighted average grant date fair value during the first quarter of 2008 and 2007 was $69.68 and $46.08 per unit, respectively.

Performance Units

The value of each award is determined based upon the average of the high and low fair value of our stock, as adjusted for either a performance condition or a market condition. The performance condition is applied to one-half of the awards and is based upon our actual return on invested capital (ROIC) as compared to a target ROIC. The market condition is applied to the other half of the awards and is based on our relative total shareholder return (RTSR) as compared to the RTSR of a peer group of companies. Performance share units awarded to our senior management are paid in cash. Since the awards will be paid in cash, they are recorded as a liability award in accordance with SFAS 123(R) and are marked to market each reporting period. As such, assumptions are revalued for each award on an ongoing basis.

Pension and Postretirement Benefits Other Than Pensions

We consult with an outside actuary as to the appropriateness for many of the assumptions used in determining the benefit obligations and the annual expense for our pension and postretirement benefits other than pensions. Assumptions such as the rate of compensation increase and the long-term rate of return on plan assets are based upon our historical and benchmark data, as well as our outlook for the future. Health care cost projections and the mortality rate assumption are evaluated annually. The U.S. discount rate was determined based on a customized yield curve approach. Our projected pension and postretirement benefit payment cash flows were each plotted against a yield curve composed of a large, diverse group of Aa-rated corporate bonds. The resulting discount rate was used to determine the benefit obligations. In Canada and the U.K., a similar approach was utilized. The appropriate benchmarks by applicable country were used for pension plans other than those in the U.S., U.K. and Canada to determine the discount rate assumptions.

FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY

Certain statements made in this document are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding our future plans, objectives and expected performance. Specifically, statements that are not historical facts, including statements accompanied by words such as “believe,” “expect,” “anticipate,” “intend,” “should,” “estimate,” or “plan,” are intended to identify forward-looking statements and convey the uncertainty of future events or outcomes. We caution readers that any such forward-looking statements are based on assumptions that we believe are reasonable, but are subject to a wide range of risks, and actual results may differ materially.

Important factors that could cause actual results to differ from expected performance include, but are not limited to:

	•		demand for and market acceptance of new and existing products, such as the Airbus A350 XWB and A380, the Boeing 787, the Embraer 190, the Dassault Falcon 7X and the Lockheed Martin F-35 Lightning II and F-22 Raptor;
	•		our ability to extend our commercial OE contracts beyond the initial contract periods;
	•		cancellation or delays of orders or contracts by customers or with suppliers, including delays or cancellations associated with the Boeing 787 and the Airbus A380 aircraft programs;
	•		the financial viability of key suppliers and the ability of our suppliers to perform under existing contracts;
	•		successful development of products and advanced technologies;
	•		the health of the commercial aerospace industry, including the impact of bankruptcies and/or consolidations in the airline industry;
	•		global demand for aircraft spare parts and aftermarket services;
	•		changing priorities or reductions in the defense budgets in the U.S. and other countries, U.S. foreign policy and the level of activity in military flight operations;
	•		the possibility of restructuring and consolidation actions;
	•		threats and events associated with and efforts to combat terrorism;
	•		the extent to which expenses relating to employee and retiree medical and pension benefits change;

	•		competitive product and pricing pressures;
	•		our ability to recover under contractual rights of indemnification for environmental and other claims arising out of the divestiture of our tire, vinyl and other businesses;
	•		possible assertion of claims against us on the theory that we, as the former corporate parent of Coltec Industries Inc, bear some responsibility for the asbestos-related liabilities of Coltec and its subsidiaries, or that Coltec’s dividend of its aerospace business to us prior to the EnPro spin-off was made at a time when Coltec was insolvent or caused Coltec to become insolvent;
	•		the effect of changes in accounting policies or tax legislation;
	•		cumulative catch-up adjustments or loss contract reserves on long-term contracts accounted for under the percentage of completion method of accounting;
	•		domestic and foreign government spending, budgetary and trade policies;
	•		economic and political changes in international markets where we compete, such as changes in currency exchange rates, inflation, deflation, recession and other external factors over which we have no control; and
	•		the outcome of contingencies including completion of acquisitions, divestitures, tax audits, litigation and environmental remediation efforts.

We caution you not to place undue reliance on the forward-looking statements contained in this document, which speak only as of the date on which such statements are made. We undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date on which such statements were made or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates and foreign currency exchange rates, which could impact our financial condition, results of operations and cash flows. We manage our exposure to these and other market risks through regular operating and financing activities and through the use of derivative financial instruments. We intend to use such derivative financial instruments as risk management tools and not for speculative investment purposes. Our discussion of market risk in our 2007 Annual Report on Form 10-K provides more discussion as to the types of instruments used to manage risk. Refer to Note 16, “Derivatives and Hedging Activities” of our Condensed Consolidated Financial Statements in Part 1 — Item 1 of this Form 10-Q for a description of current developments involving our hedging activities.

At March 31, 2008, a hypothetical 100 basis point increase in reference interest rates would increase annual interest expense by $2.5 million. At March 31, 2008, a hypothetical 10 percent strengthening of the U.S. dollar against other foreign currencies would decrease the value of our forward contracts by $195.9 million. The fair value of these foreign currency forward contracts was $135.3 million at March 31, 2008. Because we hedge only a portion of our exposure, a strengthening of the U.S. Dollar as described above would have a more than offsetting benefit to our financial results in future periods.