| GOODRICH CORP Item 1A Risk Factors Our business, financial condition, results of operations and cash flows can be affected by a number of factors, including but not limited to those set forth below and elsewhere in this Annual Report on Form 10-K, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results |
| Our future success is dependent on demand for and market acceptance of new commercial and military aircraft programs |
| We are currently under contract to supply components and systems for a number of new commercial, general aviation and military aircraft programs, including the Airbus A380 and 8 _________________________________________________________________ A350, the Boeing 787 Dreamliner, the Embraer 190, the Dassault Falcon 7X and the Lockheed Martin F-35 JSF and F-22 Raptor |
| We have made and will continue to make substantial investments and incur substantial development costs in connection with these programs |
| We cannot provide assurance that each of these programs will enter full-scale production as expected or that demand for the aircraft will be sufficient to allow us to recoup our investment in these programs |
| In addition, we cannot assure you that we will be able to extend our contracts relating to these programs beyond the initial contract periods |
| If any of these programs are not successful, it could have a material adverse effect on our business, financial condition or results of operations |
| The market segments we serve are cyclical and sensitive to domestic and foreign economic considerations that could adversely affect our business and financial results |
| The market segments in which we sell our products are, to varying degrees, cyclical and have experienced periodic downturns in demand |
| For example, certain of our commercial aviation products sold to aircraft manufacturers have experienced downturns during periods of slowdowns in the commercial airline industry and during periods of weak general economic conditions, as demand for new aircraft typically declines during these periods |
| Although we believe that aftermarket demand for many of our products may reduce our exposure to these business downturns, we have experienced these conditions in our business in the recent past and may experience downturns in the future |
| Capital spending by airlines and aircraft manufacturers may be influenced by a variety of factors including current and predicted traffic levels, load factors, aircraft fuel pricing, labor issues, competition, the retirement of older aircraft, regulatory changes, terrorism and related safety concerns, general economic conditions, worldwide airline profits and backlog levels |
| Also, since a substantial portion of commercial airplane OE deliveries are scheduled beyond 2006, changes in economic conditions may cause customers to request that firm orders be rescheduled or canceled |
| Aftermarket sales and service trends are affected by similar factors, including usage, pricing, regulatory changes, the retirement of older aircraft and technological improvements that increase reliability and performance |
| A reduction in spending by airlines or aircraft manufacturers could have a significant effect on the demand for our products, which could have an adverse effect on our business, financial condition, results of operations or cash flows |
| Current conditions in the airline industry could adversely affect our business and financial results |
| Increases in fuel costs, high labor costs and heightened competition from low cost carriers have adversely affected the financial condition of some commercial airlines |
| Recently, several airlines have declared bankruptcy or indicated that bankruptcy may be imminent |
| A portion of our sales are derived from the sale of products directly to airlines, and we sometimes provide sales incentives to airlines and record unamortized sales incentives as other assets |
| If an airline declares bankruptcy, we may be unable to collect our outstanding accounts receivable from the airline and we may be required to record a charge related to unamortized sales incentives to the extent they cannot be recovered |
| A significant decline in business with Airbus or Boeing could adversely affect our business and financial results |
| For the year ended December 31, 2005, approximately 16 percent and 12 percent of our sales were made to Airbus and Boeing, respectively, for all categories of products, including original equipment (OE) and aftermarket products for commercial and military aircraft and space applications |
| Accordingly, a significant reduction in purchases by either of these customers could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| 9 _________________________________________________________________ Demand for our defense and space-related products is dependent upon government spending |
| Approximately 28 percent of our sales for the year ended December 31, 2005 were derived from the military and space market segments |
| Included in that category are direct and indirect sales to the US Government, which represented approximately 18 percent of our sales for the year ended December 31, 2005 |
| The military and space market segments are largely dependent upon government budgets, particularly the US defense budget |
| We cannot assure you that an increase in defense spending will be allocated to programs that would benefit our business |
| Moreover, we cannot assure you that new military aircraft programs in which we participate will enter full-scale production as expected |
| A change in levels of defense spending or levels of military flight operations could curtail or enhance our prospects in these market segments, depending upon the programs affected |
| Our business could be adversely affected if we are unable to obtain the necessary raw materials and components |
| We purchase a variety of raw materials and components for use in the manufacture of our products, including aluminum, titanium, steel and carbon fiber |
| The loss of a significant supplier or the inability of a supplier to meet our performance and quality specifications or delivery schedules could affect our ability to complete our contractual obligations to our customers on a satisfactory, timely and/or profitable basis |
| These events may adversely affect our operating results, result in the termination of one or more of our customer contracts or damage our reputation and relationships with our customers |
| We use a number of estimates in accounting for some long-term contracts |
| Changes in our estimates could materially affect our future financial results |
| We account for sales and profits on some long-term contracts in accordance with the percentage-of-completion method of accounting, using the cumulative catch-up method to account for revisions in estimates |
| The percentage-of-completion method of accounting involves the use of various estimating techniques to project revenues and costs at completion and various assumptions and projections relative to the outcome of future events, including the quantity and timing of product deliveries, future labor performance and rates, and material and overhead costs |
| These assumptions involve various levels of expected performance improvements |
| Under the cumulative catch-up method, the impact of revisions in our estimates related to units shipped to date is recognized immediately |
| Because of the significance of the judgments and estimates described above, it is likely that we could record materially different amounts if we used different assumptions or if the underlying circumstances or estimates were to change |
| Accordingly, changes in underlying assumptions, circumstances or estimates may materially affect our future financial performance |
| Competitive pressures may adversely affect our business and financial results |
| The aerospace industry in which we operate is highly competitive |
| We compete worldwide with a number of US and foreign companies that are both larger and smaller than we are in terms of resources and market share, and some of which are our customers |
| While we are the market and technology leader in many of our products, in certain areas some of our competitors may have more extensive or more specialized engineering, manufacturing or marketing capabilities and lower manufacturing cost |
| As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products than we can |
| 10 _________________________________________________________________ The significant consolidation occurring in the aerospace industry could adversely affect our business and financial results |
| The aerospace industry in which we operate has been experiencing significant consolidation among suppliers, including us and our competitors, and the customers we serve |
| Commercial airlines have increasingly been merging and creating global alliances to achieve greater economies of scale and enhance their geographic reach |
| Aircraft manufacturers have made acquisitions to expand their product portfolios to better compete in the global marketplace |
| In addition, aviation suppliers have been consolidating and forming alliances to broaden their product and integrated system offerings and achieve critical mass |
| This supplier consolidation is in part attributable to aircraft manufacturers and airlines more frequently awarding long-term sole source or preferred supplier contracts to the most capable suppliers, thus reducing the total number of suppliers from whom components and systems are purchased |
| Our business and financial results may be adversely impacted as a result of consolidation by our competitors or customers |
| Expenses related to employee and retiree medical and pension benefits may continue to rise |
| We have periodically experienced significant increases in expenses related to our employee and retiree medical and pension benefits |
| Although we have taken action seeking to contain these cost increases, including making material changes to some of these plans, there are risks that our expenses will rise as a result of continued increases in medical costs due to increased usage of medical benefits and medical cost inflation in the US Pension expense may increase if investment returns on our pension plan assets do not meet our long-term return assumption, if there are further reductions in the discount rate used to determine the present value of our benefit obligation, or if other actuarial assumptions are not realized |
| The aerospace industry is highly regulated |
| The aerospace industry is highly regulated in the US by the Federal Aviation Administration and in other countries by similar regulatory agencies |
| We must be certified by these agencies and, in some cases, by individual OE manufacturers in order to engineer and service systems and components used in specific aircraft models |
| If material authorizations or approvals were revoked or suspended, our operations would be adversely affected |
| New or more stringent governmental regulations may be adopted, or industry oversight heightened, in the future, and we may incur significant expenses to comply with any new regulations or any heightened industry oversight |
| We may have liabilities relating to environmental laws and regulations that could adversely affect our financial results |
| We are subject to various domestic and international environmental laws and regulations which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations |
| We are currently involved in the investigation and remediation of a number of sites for which we have been identified as a potentially responsible party under these laws |
| Based on currently available information, we do not believe that future environmental costs in excess of those accrued with respect to such sites will have a material adverse effect on our financial condition |
| We cannot assure you that additional future developments, administrative actions or liabilities relating to environmental matters will not have a material adverse effect on our results of operations and/or cash flows in a given period |
| 11 _________________________________________________________________ Third parties may not satisfy their contractual obligations to indemnify us for environmental and other claims arising out of our divested businesses |
| In connection with the divestiture of our tire, vinyl and other businesses, we received contractual rights of indemnification from third parties for environmental and other claims arising out of the divested businesses |
| If these third parties do not honor their indemnification obligations to us, it could have a material adverse effect on our financial condition, results of operations and/or cash flows |
| Any material product liability or environmental claims in excess of insurance may adversely affect us |
| We are exposed to potential liability for personal injury or death with respect to products that have been designed, manufactured, serviced or sold by us, including potential liability for asbestos and other toxic tort claims |
| In addition, we are exposed to potential liability pursuant to various domestic and international environmental laws and regulations |
| While we believe that we have substantial insurance coverage available to us related to any such claims, our insurance may not cover all liabilities |
| Additionally, insurance coverage may not be available in the future at a cost acceptable to us |
| Any material liability not covered by insurance or for which third-party indemnification is not available could have a material adverse effect on our financial condition, results of operations and/or cash flows |
| Our operations expose us to potential liability for warranty claims made by third parties with respect to aircraft components that have been designed, manufactured, distributed or serviced by us |
| Any material product warranty obligations could have a material adverse effect on our financial condition, results of operations and/or cash flows |
| Our operations depend on our production facilities throughout the world |
| These production facilities are subject to physical and other risks that could disrupt production |
| Our production facilities could be damaged or disrupted by a natural disaster, labor strike, war, political unrest, terrorist activity or a pandemic |
| Although we have obtained property damage and business interruption insurance, a major catastrophe such as an earthquake or other natural disaster at any of our sites, or significant labor strikes, work stoppages, political unrest, war or terrorist activities in any of the areas where we conduct operations, could result in a prolonged interruption of our business |
| Any disruption resulting from these events could cause significant delays in shipments of products and the loss of sales and customers |
| We cannot assure you that we will have insurance to adequately compensate us for any of these events |
| We have significant international operations and assets and are therefore subject to additional financial and regulatory risks |
| We have operations and assets throughout the world |
| In addition, we sell our products and services in foreign countries and seek to increase our level of international business activity |
| Accordingly, we are subject to various risks, including: US-imposed embargoes of sales to specific countries; foreign import controls (which may be arbitrarily imposed or enforced); price and currency controls; exchange rate fluctuations; dividend remittance restrictions; expropriation of assets; war, civil uprisings and riots; government instability; the necessity of obtaining governmental approval for new and continuing products and operations; legal systems of decrees, laws, taxes, regulations, interpretations and court decisions that are not always fully developed and that may be retroactively or arbitrarily applied; and difficulties in managing a global enterprise |
| We may also be subject to unanticipated income taxes, excise duties, import taxes, export taxes or other governmental assessments |
| Any of these events could result in a loss 12 _________________________________________________________________ of business or other unexpected costs that could reduce sales or profits and have a material adverse effect on our financial condition, results of operations and/or cash flows |
| We are exposed to foreign currency risks that arise from normal business operations |
| These risks include transactions denominated in foreign currencies and the translation of certain non-functional currency balances of our subsidiaries |
| Our international operations also expose us to translation risk when the local currency financial statements are translated to US Dollars, our parent company’s functional currency |
| As currency exchange rates fluctuate, translation of the statements of income of international businesses into US Dollars will affect comparability of revenues and expenses between years |
| Creditors may seek to recover from us if the businesses that we spun off are unable to meet their obligations in the future, including obligations to asbestos claimants |
| Prior to the spin-off, we contributed the capital stock of Coltec to EnPro |
| At the time of the spin-off, two subsidiaries of Coltec were defendants in a significant number of personal injury claims relating to alleged asbestos-containing products sold by those subsidiaries |
| It is possible that asbestos-related claims might be asserted against us on the theory that we have some responsibility for the asbestos-related liabilities of EnPro, Coltec or its subsidiaries, even though the activities that led to those claims occurred prior to our ownership of any of those subsidiaries |
| Also, it is possible that a claim might be asserted against us that Coltec’s dividend of its aerospace business to us prior to the spin-off was made at a time when Coltec was insolvent or caused Coltec to become insolvent |
| A limited number of asbestos-related claims have been asserted against us as “successor” to Coltec or one of its subsidiaries |
| We believe that we have substantial legal defenses against these claims, as well as against any other claims that may be asserted against us on the theories described above |
| In addition, the agreement between EnPro and us that was used to effectuate the spin-off provides us with an indemnification from EnPro covering, among other things, these liabilities |
| The success of any such asbestos-related claims would likely require, as a practical matter, that Coltec’s subsidiaries were unable to satisfy their asbestos-related liabilities and that Coltec was found to be responsible for these liabilities and was unable to meet its financial obligations |
| We believe any such claims would be without merit and that Coltec was solvent both before and after the dividend of its aerospace business to us |
| If we are ultimately found to be responsible for the asbestos-related liabilities of Coltec’s subsidiaries, we believe it would not have a material adverse effect on our financial condition, but could have a material adverse effect on our results of operations and cash flows in a particular period |
| However, because of the uncertainty as to the number, timing and payments related to future asbestos-related claims, there can be no assurance that any such claims will not have a material adverse effect on our financial condition, results of operations and cash flows |
| If a claim related to the dividend of Coltec’s aerospace business were successful, it could have a material adverse impact on our financial condition, results of operations and/or cash flows |