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Article by DailyStocks_admin    (01-28-08 05:02 AM)

The Daily Magic Formula Stock for 01/25/2008 is EnPro Industries Inc. According to the Magic Formula Investing Web Site, the ebit yield is 21% and the EBIT ROIC is 25-50 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Background
We were incorporated under the laws of the State of North Carolina on January 11, 2002, as a wholly owned subsidiary of Goodrich Corporation (“Goodrich”) in anticipation of Goodrich’s announced distribution of its Engineered Industrial Products segment to existing Goodrich shareholders, which took place on May 31, 2002 (the “Distribution”). We are a leader in the design, development, manufacturing, and marketing of proprietary engineered industrial products. We have 32 primary manufacturing facilities located in the United States and eight countries outside the United States.

We maintain an Internet website at www.enproindustries.com . We will make this annual report, in addition to our other annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, available free of charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Corporate Governance Guidelines and the charters for each of our Board Committees (Audit and Risk Management, Compensation and Human Resources, Executive, and Nominating and Corporate Governance committees) are also available on our website, and copies of this information are available in print to any shareholder who requests it. Information included on or linked to our website is not incorporated by reference into this annual report.
Operations
We manage our business as three segments: a sealing products segment, which includes our sealing products, heavy-duty wheel end components, polytetrafluoroethylene (“PTFE”) products, and rubber products; an engineered products segment, which includes our metal polymer bearings, rotary and reciprocating air compressors, vacuum pumps, air systems and reciprocating compressor components; and an engine products and services segment, which manufactures heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines. For financial information with respect to our business segments, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations,” and Note 16 to our Consolidated Financial Statements. Item 7 and Note 16

contain information about sales and profits for each segment, and Note 16 contains information about each segment’s assets.
Sealing Products Segment
Overview . Our sealing products segment designs, manufactures and sells sealing products, including metallic, non-metallic and composite material gaskets, rotary seals, compression packing, resilient metal seals, elastomeric seals, hydraulic components and expansion joints, as well as wheel-end component systems, PTFE products, conveyor belting and sheeted rubber products. These products are used in a variety of industries, including chemical and petrochemical processing, petroleum extraction and refining, pulp and paper processing, heavy-duty trucking, power generation, food and pharmaceutical processing, primary metal manufacturing, mining, water and waste treatment and semiconductor fabrication. In many of these industries, performance and durability are vital for safety and environmental protection. Many of our products are used in applications that are highly demanding, e.g., where extreme temperatures, extreme pressures, corrosive environments and/or worn equipment make sealing difficult.
Products . Our sealing products segment includes the product lines described below, which are designed, manufactured and sold by our Garlock Sealing Technologies, Stemco, Plastomer Technologies and Garlock Rubber Technologies operations.
Gasket products are used for sealing flange joints in chemical, petrochemical and pulp and paper processing facilities where high pressures, high temperatures and corrosive chemicals create the need for specialized and highly engineered sealing products. We sell these gasket products under the Garlock®, Gylon®, Blue-Gard®, Stress-Saver®, Edge®, Graphonic® and Flexseal® brand names. These products have a long-standing reputation within the industries we serve for performance and reliability.
Rotary seals are used in rotating applications to contain the lubricants that protect the bearings from excessive friction and heat generation. Because these sealing products are utilized in dynamic applications, they are subject to wear. Durability, performance, and reliability are, therefore, critical requirements of our customers. These rotary seals are used in demanding applications in the steel industry, mining and pulp and paper processing under well-known brand names including Klozure® and Model 64®.
Compression packing is used to provide sealing in pressurized, static and dynamic applications such as pumps and valves. Major markets for compression packing products are the pulp and paper, mining, petrochemical and hydrocarbon processing industries. Branded products for these markets include EVSP™, Synthepak® and Graph-lock®.
Resilient metal seals provide extremely tight sealing performance for highly demanding applications such as nuclear power generation, semiconductor fabrication facilities, specific chemical processing applications and race car engines. Branded products for these markets include Helicoflex® and Ultraflex®.
Critical service flange gaskets, seals and electrical flange isolation kits are used in high-pressure wellhead equipment, flow lines, water injection lines, sour hydrocarbon process applications and crude oil and natural gas pipeline/transmission line applications. These products are sold under the brand names Pikotek®, VCS™, Flowlo™ and PGE™.
Stemco manufactures a variety of sealing products used by the heavy-duty trucking industry to improve the performance of wheel end systems and reduce fleet maintenance. Products for this market include hub oil seals, axle fasteners, hub caps, wheel bearings and mileage counters. We sell these sealing products under the Stemco®, Grit Guard®, Guardian®, Guardian HP®, Voyager®, Discover®, Pro-Torq®, Sentinel®, and DataTrac® brand names.
Plastomer Technologies manufactures PTFE specialty tape, formed PTFE products, and PTFE sheets and shapes. These PTFE products provide highly specialized and engineered solutions to our customers in the aircraft, fluid handling and semiconductor industries, and are sold under the Plastolon®, Texolon™ and Amicon™ brand names.
Garlock Rubber Technologies manufactures rubber bearing pads, conveyor belts and other rubber products for industrial applications under the DuraKing®, FlexKing®, Viblon™, Techflex™ and HeatKing™ brand names.
Customers . Our sealing products segment sells products to industrial agents and distributors, original equipment manufacturers (“OEMs”), engineering and construction firms and end users worldwide. Sealing products are offered to global customers, with approximately 40% of sales delivered to customers outside the United States in 2006. Representative customers include Saudi Aramco, Motion Industries, Applied Industrial Technologies, Electricite de France, AREVA, Bayer, BASF Corporation, General Electric Company, Georgia-Pacific Corporation, Eastman Chemical Company, Exxon Mobil Corporation, Minarra Resources, Queensland Alumina, AK Steel Corporation, Volvo Corporation, Utility Trailer, Great Dane, Mack Trucks, International Truck, PACCAR and Applied Materials. In 2006, no single customer accounted for more than 3% of segment revenues.
Competition . Competition in the sealing markets in which we operate is based on proven product performance and reliability, as well as price, customer service, application expertise, delivery terms, breadth of product offering, reputation for quality and the availability of the product. Our leading brand names, including Garlock® and Stemco®, have been built upon our long-standing reputation for reliability and durability. In addition, the breadth, performance and quality of our product offerings allow us to achieve premium pricing and have made us a preferred supplier among our agents and distributors. We believe that our record of product performance in the major markets in which this segment operates is a significant competitive advantage for us. Major competitors include A.W. Chesterton Company, Richard Klinger Pty, Teadit, Lamons, The Flexitallic Group, Inc., SKF USA Inc., Freudenberg-NOK, Federal-Mogul Corporation and Saint-Gobain.
Raw Materials and Components . Our sealing products segment uses PTFE resins, aramid fibers, specialty elastomers, elastomeric compounds, graphite and carbon, common and exotic metals, cold-rolled steel, leather, aluminum die castings, nitrile rubber, powdered metal components, and various fibers and resins. We believe that all of these raw materials and components are readily available from various suppliers.
Engineered Products Segment
Overview . Our engineered products segment includes operations that design, manufacture and sell self-lubricating, non-rolling, metal polymer bearing products, rotary and reciprocating air compressors, vacuum pumps, air systems and reciprocating compressor components.
Products . Our engineered products segment includes the product lines described below, which are designed, manufactured and sold by GGB, Quincy Compressor and France Compressor Products.
GGB produces self-lubricating, non-rolling, metal polymer and filament wound bearing products. The metal-backed or epoxy-backed bearing surfaces are made of PTFE or a mixture that includes PTFE to provide maintenance-free performance and reduced friction. These products typically perform as sleeve bearings or thrust washers under conditions of no lubrication, minimal lubrication or pre-lubrication.

These products are used in a wide variety of markets such as the automotive, pump and compressor, construction, power generation and machine tool markets. We have over 20,000 bearing part numbers of different designs and physical dimensions. GGB is a well recognized, leading brand name in this product area.
Quincy Compressor® designs and manufactures rotary screw and reciprocating air compressors and vacuum pumps, ranging from one-third to 500 horsepower, used in a wide range of industrial applications, including the pharmaceutical, pulp and paper, gas transmission, health, construction, petrochemical and automotive industries. Quincy® also sells a comprehensive line of dryers, filters and air treatment products. In addition, Quincy performs comprehensive compressed air system audits under the Air Science Engineering™ brand name and manufactures a complete line of pneumatic and hydraulic cylinders under the Ortman™ brand name.
France Compressor Products designs, manufactures and services components for reciprocating compressors and engines. These components (packing and wiper assemblies and rings, piston and rider rings, compressor valve assemblies and components) are primarily utilized in the refining, petrochemical, natural gas transmission and general industrial markets. France Compressor Products also designs and manufactures the Gar-Seal® family of lined butterfly valves.
Customers . Our engineered products segment sells its products to a diverse customer base using a combination of direct sales and independent distribution networks. GGB has customers worldwide in all major industrial sectors, and supplies products both directly to customers through their own local distribution system and indirectly to the market through independent agents and distributors with their own local network. Quincy Compressor products are sold through a global network of independent agents and distributors. Quincy Compressor also sells directly to national accounts, OEMs and climate control houses. France Compressor Products sells its products globally through a network of company salespersons, independent sales representatives and distributors. In 2006, no single customer accounted for more than 3% of segment revenues.
Competition . GGB has a number of competitors, including Kolbenschmidt Pierburg AG, Norton Company and Federal-Mogul Corporation. In the markets in which GGB competes, competition is based primarily on performance of the product for specific applications, product reliability, delivery and price. Quincy Compressor’s major competitors include Gardner Denver, Inc., Sullair Corporation, Ingersoll-Rand Company, Atlas Copco North America Inc. and Kaeser Compressors, Inc. In the markets in which Quincy Compressor competes, competition generally is based on reliability, quality, delivery times, energy efficiency, service and price. France Compressor Products competes against original equipment manufacturers, such as Dresser Rand, Ingersoll-Rand Company, Cooper Energy Services, Nuovo Pignone and Ariel Compressor and other component manufacturers, such as C. Lee Cook, Compressor Products International and Hoerbiger Corporation. Price, availability, product quality and reliability are the primary competitive drivers in the markets served by France Compressor Products.
Raw Materials and Components . GGB’s major raw material purchases include steel coil, bronze powder and PTFE. GGB sources components from a number of external suppliers. Quincy Compressor’s primary raw materials are iron castings. Components used by Quincy Compressor are motors, coolers and accessories such as air dryers, filters and electronic controls. France Compressor Products’ major raw material purchases include PTFE, PEEK (Polyetheretherketone), compound additives, cast iron, bronze, steel and stainless steel bar stock. We believe that all of these raw materials and components are readily available from various suppliers.

Engine Products and Services Segment
Overview . Our engine products and services segment designs, manufactures, sells and services heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines. We market our products and services under the Fairbanks Morse Engine™ brand name.
Products . Our engine products and services segment manufactures under license heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines. The reciprocating engines range in size from 1,050 to 31,970 horsepower and from five to 20 cylinders. The government and the general industrial market for marine propulsion, power generation, and pump and compressor applications use these products. We have been building engines for over 110 years under the Fairbanks Morse Engine™ brand name and we have a large installed base of engines for which we supply aftermarket parts and service. Additionally, we have been the U.S. Navy’s supplier of choice for medium-speed diesel engines and have supplied engines to the U.S. Navy for over 60 years.
Customers . Our engine products and services segment sells its products to customers worldwide, including major shipyards, municipal utilities, institutional and industrial organizations, sewage treatment plants, nuclear power plants and offshore oil and gas platforms. We market our products through a direct sales force of engineers in North America and through independent agents worldwide. Our representative customers include Northrop Grumman, General Dynamics, Lockheed Martin, the U.S. Navy, the U.S. Coast Guard and Exelon. In 2006, the largest customer accounted for approximately 16% of segment revenues.
Competition . Major competitors for our engine products and services segment include MTU, Caterpillar Inc. and Wartsila Corporation. Price, delivery time, and engine efficiency relating to fuel consumption and emissions drive competition.
Raw Materials and Components . Our engine products and services segment purchases multiple ferrous and non-ferrous castings, forgings, plate stock and bar stock for fabrication and machining into engines. In addition, we buy a considerable amount of precision-machined engine components. We believe that all of these raw materials and components are readily available from various suppliers.
Research and Development
We refer to our research and development efforts as our “EnNovation” program. The goal of the program is to strengthen our product portfolios for traditional markets while simultaneously creating distinctive and breakthrough products. “EnNovation” incorporates a process to move product innovations from concept to commercialization, and to identify, analyze, develop and implement new product concepts and opportunities aimed at business growth. An “EnNovation” steering team comprised of engineering and marketing leaders coordinates and oversees our new product development efforts.
We employ scientists, engineers and technicians throughout our operations to develop, design and test new and improved products. We work closely with our customers to identify issues and develop technical solutions. The majority of our research and development expenditures are directed toward the development of new sealing products for hostile environments, the development of truck and trailer fleet information systems, the development of bearing products and materials with superior friction and wear characteristics, and the extension of our air compressor product line. Prior to introduction, new products are subject to extensive testing at our various facilities and at beta test sites in conjunction with our customers.

Backlog
At December 31, 2006, we had a backlog of orders valued at $192.4 million compared with $212.6 million at December 31, 2005. Approximately 24% of the backlog, mainly at Fairbanks Morse Engine, is expected to be filled beyond 2007. Backlog represents orders on hand that we believe to be firm. However, there is no certainty that the backlog orders will in fact result in actual sales at the times or in the amounts ordered. In addition, for most of our business, backlog is not particularly predictive of future performance because of our short lead times and some seasonality.
Quality Assurance
We believe that product quality is among the most important factors in developing and maintaining strong, long-term relationships with our customers. In order to meet the exacting requirements of our customers, we maintain stringent standards of quality control. We routinely employ in-process inspection by using testing equipment as a process aid during all stages of development, design and production to ensure product quality and reliability. These include state-of-the-art CAD/CAM equipment, statistical process control systems, laser tracking devices, failure mode and effect analysis and coordinate measuring machines. We are also able to extract numerical quality control data as a statistical measurement of the quality of the parts being manufactured from our CNC machinery. In addition, we perform quality control tests on parts that we outsource. As a result, we are able to significantly reduce the number of defective parts and therefore improve efficiency, quality and reliability.
As of December 31, 2006, 26 of our manufacturing facilities were ISO 9000, QS 9000 and/or TS 16949 certified with the remaining facilities working towards obtaining ISO and/or TS certification. Ten of our facilities are ISO 14001 certified. OEMs are increasingly requiring these standards in lieu of individual certification procedures and as a condition of awarding business.
Patents, Trademarks and Other Intellectual Property
We maintain a number of patents and trademarks issued by the U.S. and other countries relating to the name and design of our products and have granted licenses to some of these trademarks and patents. We routinely evaluate the need to protect new and existing products through the patent and trademark systems in the U.S. and other countries. We also have proprietary information, consisting of know-how and trade secrets relating to the design, manufacture and operation of our products and their use that is not patented. We do not consider our business as a whole to be materially dependent upon any particular patent, patent right, trademark, trade secret or license.
In general, we are the owner of the rights to the products that we manufacture and sell. However, we also license patented and other proprietary technology and processes from various companies and individuals in order to broaden our product offerings. We are dependent on the ability of these third parties to diligently protect their intellectual property rights. In several cases, the intellectual property licenses are integral to the manufacture of our products. For example, Fairbanks Morse Engine licenses technology from MAN Diesel for the four-stroke reciprocating engine, and Quincy Compressor licenses from Svenska Rotor Maskiner AB its rotary screw compressor design and technology. A loss of these licenses or a failure on the part of the third party to protect its own intellectual property could reduce our revenues. Although these licenses are all long-term and subject to renewal, it is possible that we may not successfully renegotiate these licenses or that they could be terminated for a material breach. If this were to occur, our business, financial condition, results of operations and cash flows could be adversely affected.

Employees and Labor Relations
We currently have approximately 4,400 employees worldwide. Approximately 2,700 employees are located within the U.S. and approximately 1,700 employees are located outside the U.S., primarily in Europe, Canada and Mexico. Approximately 32% of our U.S. employees are members of trade unions covered by collective bargaining agreements. Union agreements relate, among other things, to wages, hours and conditions of employment. The wages and benefits furnished are generally comparable to industry and area practices.
We have collective bargaining agreements in place at five of our U.S. facilities. The hourly employees who are unionized are covered by collective bargaining agreements with a number of labor unions and with varying contract termination dates ranging from June 2007 to November 2010. In addition, some of our employees located outside the U.S. are subject to national collective bargaining agreements.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
Overview . EnPro was incorporated under the laws of the State of North Carolina on January 11, 2002. We are a leader in the design, development, manufacturing and marketing of proprietary engineered industrial products. We have 32 primary manufacturing facilities located in the United States and eight countries outside the United States.
We focus on four management initiatives: improving operational efficiencies through our Total Customer Value, or TCV, lean enterprise program; expanding our product offerings and customer base through our EnNovation initiative and new operations in new geographic markets; strengthening the mix of our business by strategic acquisitions and divestitures; and managing the asbestos settlements of our subsidiaries to minimize the impact on cash flows and enhance our liquidity. We believe these strategic initiatives will increase our organic sales growth, improve our gross profit margins, provide additional leverage over time through reduced manufacturing, selling and administrative expenses as a percent of revenue, increase our income from continuing operations, and provide the cash required to sustain and grow the Company.
We manage our business as three segments: a sealing products segment, an engineered products segment, and an engine products and services segment.
Our sealing products segment designs, manufactures and sells sealing products, including metallic, non-metallic and composite material gaskets, rotary seals, compression packing, resilient metal seals, elastomeric seals, hydraulic components and expansion joints, as well as wheel-end component systems, PTFE products, conveyor belting and sheeted rubber products. These products are used in a variety of industries, including chemical and petrochemical processing, petroleum extraction and refining, pulp and paper processing, heavy-duty trucking, power generation, food and pharmaceutical processing, primary metal manufacturing, mining, water and waste treatment and semiconductor fabrication.
Our engineered products segment includes operations that design, manufacture and sell self-lubricating, non-rolling, metal-polymer bearing and filament wound products, rotary and reciprocating air compressors, vacuum pumps, air systems and reciprocating compressor components. These products are used in a wide range of applications, including the automotive, pharmaceutical, pulp and paper, gas transmission, health, construction, petrochemical and general industrial markets.
Our engine products and services segment designs, manufactures, sells and services heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines. The government and general market for marine propulsion, power generation, and pump and compressor applications use these products and services.
As described elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we actively manage the asbestos claims against our subsidiaries and have a sizeable amount of insurance remaining for the payment of these claims. We accrue an estimated liability for both pending and future asbestos claims. During 2006, all of our remaining insurance available for asbestos-related claims was fully committed or allocated to previously paid, pending and estimated future claims. As a result, we incurred charges to income in 2006 for legal fees as well as changes in assumptions that impact our estimated liability. In addition, we incurred a significant charge in the fourth quarter of 2006 to increase the estimated liability from the low point in a broad range of estimates we previously considered to be equally-likely to the point we now believe is the best estimate in the range. For additional information on this subject, see “– Contingencies-Asbestos.”

Outlook
We continue to make progress in connection with our strategy to improve operating efficiency through our TCV initiative, to expand our product offerings, our markets, and our customer base, to strengthen the mix of our businesses, and to manage asbestos settlements by our subsidiaries. Our strong liquidity, cash flows and relatively low leverage ratio provide us with a sound financial base upon which we can continue to grow the company.
We expect sales to increase in 2007 compared to 2006, mainly due to improved volumes associated with market growth, price increases, full year results associated with the acquisitions completed in 2006, and increased market share as a result of new products and geographic expansion. Higher sales volumes, productivity improvements and restructuring initiatives associated with our TCV lean manufacturing program, continued focus on low cost manufacturing operations, and price increases are expected to result in improved operating margins and increased operating profits in 2007.
We anticipate that cash flows in 2007 will benefit from improved operating income and lower net asbestos payments. Capital spending in 2007 is expected to be higher than 2006 levels as a result of the modernization project at our Garlock Sealing Technologies facilities in Palmyra and continued investments to improve operational efficiency and our focus on low cost manufacturing operations.
As part of our operating strategy to strengthen our mix of businesses, we will continue to evaluate strategic acquisitions and divestitures in 2007; however, the impact of such acquisitions or divestitures cannot be predicted and therefore is not reflected in this outlook.

Segment profit is total segment revenue reduced by operating expenses and restructuring and other costs identifiable with the segment. Corporate expenses include general corporate administrative costs. Expenses not directly attributable to the segments, corporate expenses, net interest expense, asbestos-related expenses, gains/losses or impairments related to the sale of assets and income taxes are not included in the computation of segment profit. The accounting policies of the reportable segments are the same as those for EnPro.
2006 Compared to 2005
Sales increased 11% from $838.6 million in 2005 to $928.4 million in 2006. Sales in 2006 were favorably impacted by increased demand in Garlock Sealing Technologies’ markets and increased activity in Stemco’s heavy-duty truck market. Sales in 2006 also benefited from strong market demand and new product introductions at Quincy Compressor, increased activities in the industrial markets of GGB Europe and the automotive markets of GGB Americas, and higher value engine shipments at Fairbanks Morse Engine. Additionally, the acquisitions completed earlier in the year and favorable foreign currency rates accounted for two percentage points of the sales increase in 2006.
Segment profit, management’s primary measure of how our operations performed during the year, increased 22% from $117.4 million in 2005 to $142.9 million in 2006. Higher volumes, price increases and cost reduction initiatives associated with our TCV program contributed to higher profitability in 2006. These favorable variances were partially offset by lower segment profit at Garlock Rubber Technologies due to productivity issues and lower aftermarket sales at Fairbanks Morse Engine. Segment margins, defined as segment profit divided by sales, were 15.4% in 2006 compared to 14.0% in 2005.
Corporate expenses for 2006 were $31.6 million compared to $25.5 million in 2005. This increase was primarily the result of higher achievement levels associated with performance-based compensation in 2006.
Asbestos expenses in 2006 were $359.4 million, compared to $11.7 million in 2005. The increase in 2006 was primarily the result of a revision to our estimated asbestos liability. Previously, we had recorded the liability at the low end of a broad ten-year range of equally likely estimates provided by an outside expert. In the fourth quarter of 2006, based on our experience over the last two years, we identified a best estimate within the expert’s range and adjusted the liability accordingly. As a result, the estimated liability recorded at December 31, 2006 was $567.9 million. For additional information on this subject, see “Contingencies – Asbestos” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Net interest expense for the year ending December 31, 2006 was $3.2 million, compared to $6.1 million in 2005. The decrease in net interest expense in 2006 was a result of lower interest rates associated with our convertible debt financing completed in the second half of 2005, as well as an increase in interest income in 2006 associated with higher short-term interest rates.
Other income, net for 2005 was $12.2 million compared to an expense of $2.3 million in 2006. The results in 2005 benefited from the receipt of $11.0 million associated with excess assets in a trust that was established for a divested business and a reduction in liabilities due to the dismissal of product liability and indemnity lawsuits associated with a previously owned subsidiary.
Our effective tax rate for the year ending December 31, 2006 was 37.5%, compared to 36.3% in 2005. The increase in 2006 was largely due to a change in the mix of our pre-tax earnings between the U.S. and non-U.S. jurisdictions.

The net loss for 2006 was $(158.9) million, or $(7.60) per share, compared to net income of $58.6 million, or $2.75 per share, in 2005. The decline was the result of the asbestos charge recorded in the fourth quarter of 2006. Earnings per share are expressed on a diluted basis.
Following is a discussion of the 2006 operating results for each segment.
Sealing Products. Sales increased 10% for the year ending December 31, 2006 to $432.5 million from $392.9 million in 2005. Sales at Stemco increased as original equipment demand in the heavy-duty truck market exceeded prior year requirements and aftermarket activity improved compared to 2005. Sales at Garlock Sealing Technologies increased in 2006 due to higher demand and selected price increases in its major markets, including the oil and gas and power generation markets. Plastomer Technologies benefited from increased demand in sheet products, machined components, and the incremental revenue from the Amicon acquisition completed early in the third quarter of 2006.
Segment profit increased from $66.1 million in 2005 to $76.5 million for the year ending December 31, 2006. Profits at Garlock Sealing Technologies were favorably impacted by higher volumes and selected price increases, partially offset by charges for the modernization project at the Palmyra, New York facility. Plastomer Technologies’ profit increased as a result of higher demand and the accretive impact of the Amicon acquisition. Stemco’s profit in 2006 was favorably impacted by increased volumes and selected price increases, partially offset by unfavorable product mix and higher manufacturing costs; while Garlock Rubber Technologies’ profit was negatively impacted by lower productivity. Segment margins increased from 16.8% in 2005 to 17.7% in 2006.
Engineered Products. Sales of $391.7 million for the year ending December 31, 2006 were 13% higher than the $346.0 million reported in 2005. Sales volumes at Quincy Compressor were significantly higher in 2006 as a result of strength in its U.S. markets and new product introductions. Sales increased at GGB in 2006 due to higher volumes in the industrial markets of Europe and increased automotive demand in the Americas. Sales at France Compressor Products exceeded 2005 levels due to higher volumes in Europe and the favorable impact associated with the Allwest acquisition completed in the second quarter of 2006.
Segment profits were $61.5 million for the year ending December 31, 2006, or 35% higher than the $45.4 million reported in 2005. Profits at Quincy Compressor increased as a result of higher sales volume, selected price increases and cost reduction initiatives. GGB’s profits increased in 2006 due to higher volumes, improved operating efficiencies at its Slovakian manufacturing facility and cost reduction initiatives associated with our TCV program. Profits at France Compressor Products exceeded 2005 levels as a result of higher volumes in Europe, selected price increases and the favorable impact associated with the Allwest acquisition. Segment margins increased from 13.1% in 2005 to 15.7% in 2006.
Engine Products and Services . Sales in 2006 were $105.2 million, compared to $101.1 million in 2005. Higher revenue associated with U.S. Navy shipbuilding programs contributed to the increase in 2006. However, this increase was partially offset by lower parts and service revenue.
The segment reported a profit of $4.9 million in 2006, compared to a profit of $5.9 million in 2005. The results in 2006 were impacted by an unfavorable product mix associated with lower aftermarket and service revenue. Results in 2006 also include a loss contract charge of $3.1 million while a loss contract charge of $3.5 million was recorded in 2005. Segment margins in 2006 were 4.7%, compared to 5.8% in 2005.

2005 Compared to 2004
Sales increased to $838.6 million in 2005, compared to $826.3 million in 2004. Sales in 2005 were favorably impacted by strong demand in the heavy-duty truck market served by Stemco, increased requirements in the industrial markets served by Quincy Compressor and France Compressor Products, higher demand in the North American industrial bearing markets, and increased volumes in the upstream oil and gas markets, as well as price increases at most operations. These increases were partially offset by lower sales in the engine products and services segment due to fewer engine shipments to the U.S. Navy. The comparability of sales for the two periods is affected by the 2004 divestiture of our Haber Tool and Sterling Die operations, which contributed $11.0 million in sales in 2004.
Segment profit increased by 27% in 2005 to $117.4 million, compared to $92.1 million in 2004. Volume increases at Stemco, strong demand at Quincy Compressor and France Compressor Products, and higher aftermarket and service revenue in the engine products and service segment favorably impacted the 2005 segment profit. Price increases and cost reduction initiatives implemented at most of our operations also contributed to higher profitability in 2005. The 2005 results were negatively impacted by a contract loss provision of $3.5 million at Fairbanks Morse Engine, while the 2004 results were adversely impacted by a $7.5 million contract loss provision for expected cost overruns on engine programs. In 2005, we incurred restructuring expense of $1.0 million, compared to $9.4 million in 2004. The 2005 expense was related to restructuring activities associated with a modernization project at our Garlock Sealing Technologies manufacturing facilities in Palmyra, New York. The 2004 restructuring expense was a result of the relocation and consolidation of facilities for a domestic operation and start-up costs associated with two new foreign facilities. Segment margins were 14.0% in 2005, compared to 11.1% in 2004.
Corporate expenses decreased 5% to $25.5 million in 2005, compared to $26.8 million in 2004. The lower expense in 2005 was primarily due to a decrease in EnPro’s stock price and a corresponding decrease in expense for share-based compensation, and a decrease in consulting fees related to our compliance with the Sarbanes-Oxley Act of 2002.
Asbestos-related expenses were $11.7 million in 2005, compared to $10.4 million in 2004. An increase in legal fees and defense costs associated with 2005 trial activities was largely offset by an increase in recoveries from insolvent insurance carriers.
In 2005, we recognized a gain of $5.8 million primarily associated with the sale of a building. In 2004, we recognized a loss of $3.7 million in connection with the divestiture of our Haber Tool and Sterling Die businesses, partially offset by a gain of $1.9 million primarily associated with the sale of a building.
Net interest expense decreased from $7.1 million in 2004 to $6.1 million in 2005 primarily due to an increase in interest income associated with higher short-term interest rates in 2005.
In 2005 we recognized other income of $11.0 million from a cash distribution of excess assets in a trust that was established for a divested business. Additionally, in 2005 our results were favorably impacted by a $5.9 million reduction in liabilities due to the dismissal of product liability and indemnity lawsuits associated with a previously owned subsidiary. Our results in 2004 were favorably affected by $10.0 million we received from an insurer to settle our claims for reimbursement of past costs relating to certain environmental matters and estimated future claims.
Our effective tax rate in 2005 was 36.3%, compared to 33.7% in 2004. The rate in 2004 benefited from the reversal of previously established foreign tax accruals that were no longer necessary.

Net income was $58.6 million, or $2.75 per in 2005, compared to net income of $33.8 million, or $1.60 per share in 2004.
Following is a discussion of the 2005 operating results for each segment.
Sealing Products. Sales increased 5% in 2005 to $392.9 million from $374.7 million in 2004. Foreign currency rates accounted for one percentage point of the increase in 2005. Sales at Stemco increased as original equipment demand in the heavy-duty truck market exceeded prior year requirements and aftermarket activity improved compared to 2004. Sales at Garlock Sealing Technologies were negatively impacted by the discontinuance of unprofitable product lines in North America and customer ordering delays associated with the impact of hurricanes in the Gulf Coast region. Unfavorable volumes at Garlock Sealing Technologies were largely offset by selected price increases across several product lines and stronger demand in the upstream oil and gas production industries. Plastomer Technologies increased sales, when compared to 2004, due to higher volumes in Texolon products and specialty tapes, and selected price increases. Garlock Rubber Technologies’ sales increased in 2005 as a result of price increases implemented to offset higher raw material costs.
Segment profit increased from $58.6 million in 2004 to $66.1 million in 2005, a 13% improvement on a year-over-year basis. Profits at Garlock Sealing Technologies benefited from selected price increases, higher volumes in several markets, product rationalization activities, and cost reduction initiatives. Higher volumes and price increases at Stemco resulted in higher profits in 2005. Selected price increases at Garlock Rubber Technologies favorably impacted 2005 profits. Plastomer Technologies benefited from a favorable product mix, price increases and cost reduction initiatives. Segment margins for 2005 were 16.8%, compared to 15.6% in 2004.
Engineered Products. Sales in 2005 were 3% higher at $346.0 million, compared to $335.8 million in 2004. Foreign currency rates accounted for one percentage point of the increase in 2005. Increased industrial demand for compressors and aftermarket parts resulted in higher revenue at Quincy Compressor, while sales at France Compressor Products were higher in 2005 due to increased demand in its North American and European markets. GGB sales increased in 2005, when compared to 2004, as a result of higher shipments and price increases in the North and South American industrial markets. However, these favorable variances were partially offset by soft demand in the European industrial and automotive markets. The Haber Tool and Sterling Die operations, which we sold in 2004, contributed $11.0 million in sales in 2004.
Segment profit increased to $45.4 million in 2005 from $32.6 million in 2004. Segment profits in 2004 included $8.5 million of restructuring expenses, while 2005 results were not impacted by restructuring expenses. Profits at Quincy benefited in 2005 from an increase in volume across most of its product lines, a more favorable product mix and selected price increases. Profits at GGB in 2005 were favorably impacted by lower restructuring expense and price increases, partially offset by lower volumes, an unfavorable product mix in Europe, and activities associated with the start-up of the new Slovakian manufacturing site. Lower restructuring expenses at France Compressor Products in 2005, as well as an increase in volume, resulted in higher profits when compared to 2004. Segment margins were 13.1% in 2005, compared to 9.7% in 2004.
Engine Products and Services . Sales in 2005 were $101.1 million, compared to $116.9 million in 2004. Lower engine shipments associated with U.S. Navy shipbuilding programs contributed to the decrease in revenue during 2005. However, this decrease was partially offset by higher parts and service revenue.

The segment reported a profit of $5.9 million in 2005, compared to a profit of $0.9 million in 2004. In 2005 we recorded a $3.5 million contract loss provision associated with several engine manufacturing programs, while a $7.5 million loss provision was established in 2004. In addition, higher aftermarket and service revenue in 2005 also contributed to the increase in segment profits. Segment margins in 2005 were 5.8%, compared to 0.8% in 2004.
Restructuring and Other Costs
Restructuring expense was $2.3 million, $1.0 million and $9.4 million for 2006, 2005 and 2004, respectively. The 2006 and 2005 expense was primarily related to restructuring activities associated with a modernization project at our Garlock Sealing Technologies manufacturing facilities in Palmyra, New York. Garlock Sealing Technologies has been on its current site since the early 1900s, with the buildings dating from 1907 to 1956. The project, which is ongoing, will reduce the number of buildings on the site from 26 to 7 and eliminate 350,000 square feet of space, or approximately half of the space currently under roof. The modernization will be completed over five years at an expected cost between $30 million and $35 million, excluding the impact of grants, tax abatements and tax credits. The 2004 restructuring expense was primarily related to the relocation and consolidation of facilities for a domestic operation and start-up costs associated with two new foreign facilities. See Note 3 to the Consolidated Financial Statements for a discussion of restructuring and other costs in 2006, 2005 and 2004.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements, in accordance with accounting principles generally accepted in the United States, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures pertaining to contingent assets and liabilities. Note 1, “Overview and Significant Accounting Policies,” to the Consolidated Financial Statements describes the significant accounting policies used to prepare the Consolidated Financial Statements. On an ongoing basis we evaluate our estimates, including, but not limited to, those related to product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, restructuring, pensions and other post-retirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
We believe that the following accounting policies and estimates are the most critical. Some of them involve significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.
Revenue Recognition
Revenue is recognized at the time title and risk of ownership is transferred or when services are rendered. Any shipping costs billed to customers are recognized as revenue and expensed in cost of goods sold.
Provisions for Excess and Obsolete Inventory
We balance the need to maintain adequate inventory levels to ensure customer delivery requirements are met with the risk of excess or obsolete inventory due to changing technology and market demands. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on our estimated forecast for product demand and production requirements.

Asbestos
Beginning in 2004, we recorded a liability related to asbestos claims at the low end of a broad ten-year range of equally likely estimates provided by the firm of Bates White, LLC (“Bates White”), a recognized expert in the field of estimating asbestos-related liabilities. Due to the uncertain nature of the estimated liability, we and Bates White believed that no single amount in the range was a better estimate than any other amount in the range. In accordance with the applicable accounting rules, we recorded a liability for these claims at the lower end of the range of estimated potential liability. In the fourth quarter of 2006, based on our experience over the last two years and other factors, we identified a best estimate within the Bates White range and adjusted the liability accordingly.
The significant assumptions underlying the material components of the estimated liability include: the number and trend of claims to be asserted; the mix of alleged diseases or impairment; the trend in the number of claims for non-malignant cases; the probability that some existing and potential future claims will eventually be dismissed without payment; the estimated amount to be paid per claim; and the timing and impact of large amounts that will become available for the payment of claims from the 524(g) trusts of former defendants in bankruptcy. The actual number of future actions filed per year and the payments made to resolve those claims could exceed those reflected in our estimate.
With the assistance of Bates White, we periodically review the period over which we can make a reasonable estimate, the assumptions underlying our estimate, the range of reasonably possible potential liabilities and management’s estimate of the liability, and we adjust the liability if necessary. Changing circumstances and new data that may become available could cause a change in the estimated liability in the future by an amount that cannot currently be reasonably estimated, and that increase could be significant and material. Additional discussion is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in “Contingencies – Asbestos.”
Foreign Currency Translation
The financial statements of our operations whose functional currency is a foreign currency are translated into U.S. dollars using the current rate method. Under this method, all assets and liabilities are translated in U.S. dollars using current exchange rates, and income statement items are translated using weighted average exchange rates. The foreign currency translation adjustment is reflected in our Consolidated Statements of Changes in Shareholders’ Equity and is included in accumulated other comprehensive income in the Consolidated Balance Sheets.
Derivative Instruments and Hedging Activities
We have entered into foreign currency forward contracts to hedge forecasted transactions occurring at various dates through June 2008 that are denominated in foreign currencies. These contracts are accounted for as cash flow hedges. As cash flow hedges, the effective portion of the gain or loss on the contracts is reported in other comprehensive income and the ineffective portion is reported in income. Amounts in accumulated other comprehensive income are reclassified into income in the period when the hedged transactions occur.
Pensions and PostRetirement Benefits
We and certain of our subsidiaries sponsor domestic and foreign defined benefit pension and other postretirement plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets, rate of increase in employee compensation levels and assumed health care cost trend rates. Assumptions are determined based on data available to us and

appropriate market indicators, and are evaluated each year as of the plans’ measurement date. A change in any of these assumptions could have a material effect on net periodic pension and postretirement benefit costs reported in the Consolidated Statements of Operations, as well as amounts recognized in the Consolidated Balance Sheets. See Note 13 to the Consolidated Financial Statements for a discussion of pension and postretirement benefits, including changes in our 2006 balance sheet resulting from the implementation of SFAS 158.
Income Taxes
We use the asset and liability method of accounting for income taxes. Temporary differences arising from the difference between the tax and book basis of an asset or liability are used to compute future tax assets or liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income (losses) in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the period that includes the enactment date. See Note 6 to the Consolidated Financial Statements for a discussion of income taxes.
New Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a description of new accounting pronouncements, including the expected dates of adoption and the expected effects on results of operations, cash flows and financial condition, if any.
Liquidity and Capital Resources
Operating Cash Flows
Operating activities provided $75.8 million, $76.4 million and $41.1 million in 2006, 2005 and 2004, respectively. In 2006, working capital increased primarily due to higher inventories and customer receivables at several of our operations. Inventory levels were higher in 2006 primarily due to higher material requirements for engine programs at Fairbanks Morse Engine. Although the 2006 working capital was impacted by an increase in accounts receivable relating to increased sales activity, the days’ sales outstanding of receivables remained constant on a year-over-year basis at 51 days. Payments for asbestos-related claims and expenses, net of insurance recoveries, were $38.0 million in 2006 compared to $21.8 million in 2005 and $40.3 million in 2004.
Investing Cash Flows
We used $27.5 million, $64.1 million and $26.8 million in investing activities in 2006, 2005 and 2004, respectively. Our investing activities in 2006 related to capital expenditures of $41.3 million associated with our manufacturing facilities, compared to $32.2 million in 2005 and $36.9 million in 2004. The increase in capital expenditures in 2006 reflects spending associated with the modernization activities at our manufacturing facility in Palmyra, New York and our continued strategy to increase investments in our operations as part of an effort to improve customer satisfaction and reduce costs. Investing activities in 2006 also include payments of $27.3 million associated with acquisitions, while results in 2005 include payments associated with the acquisition of the minority interest in our operation in Mexico. The results in 2005 were impacted by a $41.1 million reclassification of unrestricted cash balances to restricted cash balances as a result of posting cash collateral required to secure bonds associated with adverse asbestos verdicts on appeal. The 2006 results benefited from the reclassification of $39.8 million from restricted cash to unrestricted cash due to the resolution of several verdicts on appeal. During 2005, we received proceeds of $7.9 million primarily related to the sale of a property

associated with a previously owned business. In 2004, we received proceeds of $9.8 million primarily from the sale of a surplus building and the divestiture of our Haber Tool and Sterling Die businesses.
Financing Cash Flows
Financing activities used $9.1 million and $3.9 million in 2005 and 2004, respectively, compared to net cash provided by financing activities of $0.7 million in 2006. Financing cash flows in 2005 included proceeds from the sale of $172.5 million of our convertible debentures. We used a substantial portion of the net proceeds from this sale to redeem the $145 million of outstanding Convertible Preferred Securities – Term Income Deferred Equity Securities, or TIDES. We also used a portion of the net proceeds from the sale of the debentures to enter into hedge and warrant transactions, which will reduce potential dilution of our common stock from the conversion of the debentures by increasing their effective conversion price. Debt issuance costs associated with this transaction were $5.2 million and are being amortized over the term of the debentures. Subsequent to the debenture offering, we sold our Goodrich call options and received proceeds of $3.0 million (which is included in net cash used in investing activities described above). Financing cash flows in 2004 were impacted primarily by the repayment of certain industrial revenue bonds.
Capital Resources
Our primary U.S. operating subsidiaries have a senior secured revolving credit facility with a group of banks. We have not borrowed against this facility, which matures on April 21, 2011. The facility is secured by our receivables, inventories, intellectual property, insurance receivables and all other personal property assets (other than fixed assets), and by pledges of 65% of the capital stock of our direct foreign subsidiaries and 100% of the capital stock of our direct and indirect U.S. subsidiaries. The facility contains covenants and restrictions that are customary for an asset-based loan, including limitations on dividends, limitations on incurrence of indebtedness and maintenance of a fixed charge coverage financial ratio. Certain of the covenants and restrictions apply only if availability under the facility falls below certain levels.
The maximum initial amount available for borrowings under the facility is $75 million. Under certain conditions, the borrowers may request that the facility be increased by up to $25 million, to $100 million in total. Actual borrowing availability at any date is determined by reference to a borrowing base of specified percentages of eligible accounts receivable and inventory and is reduced by usage of the facility (including outstanding letters of credit) and any reserves. The actual borrowing availability at December 31, 2006 under our senior secured revolving credit facility was $73.9 million; we have not borrowed against this facility.
We issued $172.5 million of convertible debentures in 2005. The debentures bear interest at an annual rate of 3.9375%, and we pay accrued interest on April 15 and October 15 of each year. The debentures will mature on October 15, 2015. The debentures are direct, unsecured and unsubordinated obligations and rank equal in priority with all of our unsecured and unsubordinated indebtedness and will be senior in right of payment to all subordinated indebtedness. They effectively rank junior to all of our secured indebtedness to the extent of the value of the assets securing such indebtedness. The debentures do not contain any financial covenants. Holders may convert the debentures into cash and shares of our common stock, if any, at an initial conversion rate of 29.5972 shares of common stock per $1,000 principal amount of debentures (which is equal to an initial conversion price of $33.79 per share), subject to adjustment, before the close of business on October 15, 2015. Upon conversion, we would deliver (i) cash equal to the lesser of the aggregate principal amount of the debentures to be converted or our total conversion obligation, and (ii) shares of our common stock in respect of the remainder, if any, of our conversion obligation. Conversion is permitted only under certain circumstances that had not occurred at December 31, 2006.

We used a portion of the net proceeds from the sale of the debentures to enter into call options (hedge and warrant transactions), which entitle us to purchase shares of our stock from a financial institution at $33.79 per share and entitle the financial institution to purchase shares of our stock from us at $46.78 per share. This will reduce potential dilution to our common stock from conversion of the debentures and have the effect to us of increasing the conversion price of the debentures to $46.78 per share.
Dividends
To date, we have not paid dividends. If availability under our senior secured revolving credit facility falls below $20 million, we would be limited in our ability to pay dividends. The indenture that governs the convertible debentures does not restrict us from paying dividends.
Contingencies
General
Various claims, lawsuits and administrative proceedings with respect to commercial, product liability, asbestos and environmental matters, all arising in the ordinary course of business, are pending or threatened against us or our subsidiaries and seek monetary damages and/or other remedies. 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 condition or results of operations. From time to time, we and our subsidiaries are also involved as plaintiffs in legal proceedings involving contract, patent protection, environmental, insurance and other matters.
Environmental
Our facilities and operations are subject to federal, state and local environmental and occupational health and safety requirements of the U.S. and foreign countries. We take a proactive approach in our efforts to comply with all environmental, health and safety laws as they relate to our manufacturing operations and in proposing and implementing any remedial plans that may be necessary. We also conduct comprehensive compliance and management system audits at our facilities to maintain compliance and improve operational efficiency.
Although we believe past operations were in substantial compliance with the then applicable regulations, we or one of our subsidiaries have been named as a potentially responsible party, or are otherwise involved, at 19 sites at each of which the costs to us are expected to exceed the $100,000 threshold for required reporting in this discussion and analysis. Investigations have been completed for 15 sites and are in progress at the other four sites. The majority of these sites relate to remediation projects at former operating facilities that were sold or closed and primarily deal with remediation of soil and groundwater contamination. The laws governing investigation and remediation of these sites can impose joint and several liability for the associated costs. Liability for these costs can be imposed on present and former owners or operators of the properties or on parties that generated the wastes that contributed to the contamination.
We accrue environmental investigation and remediation costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. The measurement of the liability is based on an evaluation of currently available facts with respect to each individual situation and takes into consideration factors such as existing technology, presently enacted laws and regulations and prior experience in remediation of contaminated sites. Liabilities are established for all sites based on the factors discussed above. As assessments and remediation progress at individual sites, these liabilities are

reviewed periodically and adjusted to reflect additional technical data and legal information. As of December 31, 2006 and 2005, EnPro had accrued liabilities of $33.2 million and $34.1 million, respectively, for estimated future expenditures relating to environmental contingencies. Of the December 31, 2006 amount, $14.7 million represents our share of liability as a potentially responsible party at a former industrial property located in Farmingdale, New York. The amounts recorded in the Consolidated Financial Statements have been recorded on an undiscounted basis.
We believe that our reserves for environmental contingencies are adequate based on currently available information. Actual costs to be incurred for identified situations in future periods may vary from estimates because of the inherent uncertainties in evaluating environmental exposures due to unknown conditions, changing government regulations and legal standards regarding liability. Subject to the imprecision in estimating future environmental costs, we believe that maintaining compliance with current environmental laws and government regulations will not require significant capital expenditures or have a material adverse effect on our financial condition, but could be material to our results of operations or cash flows in a given period.
Colt Firearms and Central Moloney
We have contingent liabilities related to divested businesses for which certain of our subsidiaries retained liability or are obligated under indemnity agreements. These contingent liabilities include, but are not limited to, potential product liability and associated claims related to Coltec’s former Colt Firearms subsidiary for firearms manufactured prior to its divestiture in 1990 and Coltec’s former Central Moloney subsidiary for electrical transformers manufactured prior to its divestiture in 1994. No product liability claims are currently pending against Coltec related to Colt Firearms or Central Moloney. Coltec also has ongoing obligations, which are included in retained liabilities of previously owned businesses in our Consolidated Balance Sheets, with regard to workers’ compensation, retiree medical and other retiree benefit matters that relate to Coltec’s periods of ownership of these operations.
Crucible Materials Corporation
Crucible Materials Corporation (“Crucible”), which is engaged primarily in the manufacture and distribution of high technology specialty metal products, was a wholly owned subsidiary of Coltec until 1985 when a majority of the outstanding shares were sold. Coltec sold its remaining minority interest in 2004.
In conjunction with the closure of a Crucible plant in the early 1980s, Coltec was required to fund two trusts for retiree medical benefits for union employees at the plant. The first trust (the “Benefits Trust”) pays for these retiree medical benefits on an ongoing basis. Coltec has no ownership interest in the Benefits Trust, and thus the assets and liabilities of this trust are not included in our Consolidated Balance Sheets. Under the terms of the Benefits Trust agreement, the trustees retained an actuary to assess the adequacy of the assets in the Benefits Trust in 1995, another actuarial report was completed in 2005, and a third report will be required in 2015. The actuarial reports in 1995 and 2005 determined that there were adequate assets to fund the payment of future benefits. If it is determined in 2015 that the trust assets are not adequate to fund the payment of future medical benefits, Coltec will be required to contribute additional amounts to the Benefits Trust. In the event there are ever excess assets in the Benefits Trust, those excess assets will not revert to Coltec.
Because of the possibility that Coltec could be required to make additional contributions to the Benefits Trust to cover potential shortfalls, Coltec was required to establish a second trust (the “Back-Up Trust”). The trust assets and a corresponding liability of the Back-Up Trust are reflected on our Consolidated Balance Sheets in other non-current assets and in retained liabilities of previously owned businesses, respectively, and amounted to $19.8 million each at December 31, 2006. As noted above, based on the valuation completed in early 2005, the actuary determined that there were adequate assets in the Benefits Trust to fund the estimated payments by the trust until the next valuation date. Until such time as a payment is required or the remaining excess trust assets revert to Coltec, the trust assets and liabilities will be kept equal to each other on our Consolidated Balance Sheets.
Coltec also has ongoing obligations, which are included in retained liabilities of previously owned businesses in our Consolidated Balance Sheets, with regard to workers’ compensation, retiree medical and other retiree benefit matters, in addition to those mentioned previously, that relate to its period of ownership of this operation.
Debt and Capital Lease Guarantees
As of December 31, 2006, we had contingent liabilities for potential payments on guarantees of certain debt and lease obligations totaling $10.6 million. These guarantees arose from the divestitures of Crucible, Central Moloney and Haber Tool, and expire at various dates through 2010. There is no liability for these guarantees reflected in our Consolidated Balance Sheets. In the event that the other parties do not fulfill their obligations under the debt or lease agreements, we could be responsible for these obligations.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview and Outlook
Overview . EnPro was incorporated under the laws of the State of North Carolina on January 11, 2002. We are a leader in the design, development, manufacturing and marketing of proprietary engineered industrial products. We have 33 primary manufacturing facilities located in the United States and 11 countries outside the United States.
We focus on four management initiatives: improving operational efficiencies through our Total Customer Value, or TCV, lean enterprise program; expanding our product offerings and customer base through our EnNovation initiative and new operations in new geographic markets; strengthening the mix of our business by strategic acquisitions and divestitures; and managing the asbestos claims against our subsidiaries to minimize the impact on cash flows and enhance our liquidity. We believe these strategic initiatives will increase our organic sales growth, improve our gross profit margins, reduce manufacturing, selling and administrative expenses as a percent of revenue over time, increase our income from continuing operations, and provide the cash required to sustain and grow the Company.
We manage our business as three segments: a sealing products segment, an engineered products segment, and an engine products and services segment.
Our sealing products segment designs, manufactures and sells sealing products, including metallic, non-metallic and composite material gaskets, rotary seals, compression packing, resilient metal seals, elastomeric seals, hydraulic components and expansion joints, as well as wheel-end component systems, PTFE products, conveyor belting and sheeted rubber products. These products are used in a variety of industries, including chemical and petrochemical processing, petroleum extraction and refining, pulp and paper processing, heavy-duty trucking, power generation, food and pharmaceutical processing, primary metal manufacturing, mining, water and waste treatment and semiconductor fabrication.
Our engineered products segment includes operations that design, manufacture and sell self-lubricating, non-rolling, metal-polymer bearings, filament wound solid polymer bearings, aluminum blocks for hydraulic applications, rotary and reciprocating air compressors, vacuum pumps, air systems and reciprocating compressor components. These products are used in a wide range of applications, including the automotive, pharmaceutical, pulp and paper, gas transmission, health, construction, petrochemical and general industrial markets.
On July 31, 2007, we acquired Compressor Products International Ltd. and combined these operations with our existing France Compressor Products operations. Since May 2006, we completed four smaller acquisitions for France Compressor Products that included Allwest Compressor Services, Southwest Compressor Services, H.A.R. Compressor Products and Texflo Machining Ltd. This combination of companies creates the world’s leading manufacturer of reciprocating compressor sealing components and one of the world’s largest producers of reciprocating compressor valves. To more accurately reflect the combined company’s products, international presence and objectives for growth, we will conduct business under the Compressor Products International brand name. We will refer to these operations as Compressor Products International, or CPI, from this time forward. The newly constituted Compressor Products International is included in the engineered products segment as were France Compressor Products and the other smaller acquired companies.
Our engine products and services segment designs, manufactures, sells and services heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines. The United States government and general market for marine propulsion, power generation, and pump and compressor applications use these products and services.
As described elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we actively manage the asbestos claims against our subsidiaries and have a sizeable amount of insurance remaining for the payment of these claims. We accrue an estimated liability for both pending and future asbestos claims. For additional information on this subject, see “– Contingencies-Asbestos.”
Outlook . We expect sales to increase in 2007 compared to 2006, mainly due to: higher volumes associated with market growth in certain key markets; the additional sales associated with the acquisitions completed in 2006 and 2007; the strength of currencies used by our international operations versus the U.S. dollar; and selected price increases. Higher sales volume, productivity and cost improvements associated with our TCV lean manufacturing program, reduced pension expenses in connection with changes to our U.S. salaried defined benefit plan, and price increases are expected to result in improved operating margins and increased operating profits in 2007.
We anticipate that cash flows in 2007 will benefit from improved operating income and lower net asbestos payments. Capital spending in 2007 is expected to be higher than 2006 levels as a result of continued investments to improve operational efficiency, our focus on low cost manufacturing operations and geographic expansion, and the modernization project at our Garlock Sealing Technologies facilities in Palmyra, New York. In addition, we have invested in acquisitions to grow and strengthen the mix of our businesses. As a result, we expect to experience a reduction of our cash balance compared to the beginning of 2007.
As part of our operating strategy to strengthen our mix of businesses, we will continue to evaluate strategic acquisitions and divestitures; however, the future impact of such acquisitions or divestitures cannot be predicted and therefore is not reflected in this outlook.

Segment profit is total segment revenue reduced by operating expenses and restructuring and other costs identifiable with the segment. Corporate expenses include general corporate administrative costs. Expenses not directly attributable to the segments, corporate expenses, net interest expense, asbestos-related expenses, gains/losses or impairments related to the sale of assets and income taxes are not included in the computation of segment profit. The accounting policies of the reportable segments are the same as those for EnPro.
Third Quarter of 2007 Compared to the Third Quarter of 2006
Sales of $252.7 million in the third quarter of 2007 increased 11% from $228.6 million in the comparable quarter of 2006. The increase in the value of the euro relative to the U.S. dollar and the addition of the acquisitions completed in 2007 added approximately six percentage points to revenue on a year-over-year basis. The five percentage points of organic growth was the result of stronger demand in the U.S. and European markets for Garlock Sealing Technologies, higher shipments at GGB’s European operations, continued strong demand in the energy-related markets of Compressor Products International, increased parts shipments at Fairbanks Morse Engine, and selected price increases at several businesses. These favorable variances were partially offset by lower OEM and aftermarket volumes in Stemco’s heavy duty truck market, a drop in demand for Plastomer Technologies’ products in the semiconductor and industrial markets, and a decrease in shipments at Quincy Compressor for key markets such as energy, industrial and contractors.
Segment profit, management’s primary measure of how our operations perform, increased 30% from $31.1 million in the third quarter of 2006 to $40.4 million in 2007. Segment profit was primarily impacted by selected price increases and higher volumes, a contract loss provision for Fairbanks Morse Engine in 2006 that did not recur this year, a reduction in U.S. defined benefit pension expense, contributions from the acquisitions, and the favorable foreign exchange rates. The defined benefit pension expense declined due to improved returns on pension assets and lower service-related costs as a result of amendments to our U.S. salaried defined benefit plan implemented in the first quarter of 2007. Segment margins, defined as segment profit divided by sales, increased from 13.6% in 2006 to 16.0% in 2007.
Asbestos expenses in the third quarter of 2007 were $11.5 million and included net cash outlays of $5.9 million of legal fees and expenses incurred during the quarter and a $5.6 million non-cash charge primarily to add an additional quarter in order to maintain a ten-year liability estimate for future claims. In the comparable quarter of 2006, asbestos expenses were $28.7 million. For a further discussion of asbestos expenses, see “– Contingencies – Asbestos.”
Net interest expense in the third quarter of 2007 was $0.1 million compared to $0.9 million in the same quarter last year. The decrease was a result of more interest income earned on higher cash balances.
Our effective tax rate in the third quarter of 2007 was 38.5% compared to 36.5% in the same quarter of 2006. The increase in the rate for the third quarter of 2007 increased the effective tax rate to 37.5% for the nine months ended September 30, 2007.
Net income was $12.3 million, or $0.54 per share, in the third quarter of 2007 compared to a loss of $4.3 million, or $0.20 per share, in the same quarter of 2006. Earnings per share are expressed on a diluted basis.
Following is a discussion of operating results for each segment during the quarter:
Sealing Products . Sales of $112.6 million in the third quarter of 2007 were 5% higher than the $107.3 million reported in the same quarter of 2006. The favorable impact of the euro accounted for three percentage points of the growth. Sales at Garlock Sealing Technologies were favorably impacted by increased demand in its European markets, continued strength in the oil and gas sectors, selected price increases and a stronger euro. Aftermarket and OEM sales decreased at Stemco due to cyclical lower demand in the U.S. heavy-duty truck market as the number of new trucks and trailers built was down as was the usage of existing trucks. A decline in demand from Plastomer Technologies’ semiconductor market resulted in a year-over-year decrease in its sales.
Segment profit increased by 15% from $17.9 million in the third quarter of 2006 to $20.5 million in 2007. Profits at Garlock Sealing Technologies benefited from higher volumes and selected price increases. Stemco reported a decline in profit in connection with its sales decrease, but the profit decline was mitigated by price increases and because the sales decline was primarily in the lower margin OEM market. Garlock Rubber Technologies turned to a profit this year from a loss last year due to lower manufacturing expenses primarily in connection with cost reduction activities and lower warranty expenses. Lower volumes negatively impacted Plastomer Technologies’ results, as did increased restructuring expenses for the reorganization of the Plastomer Technologies facilities. Operating margins for the segment increased from 16.7% in 2006 to 18.2% in 2007.
Engineered Products . Sales of $111.5 million in the third quarter of 2007 were 15% higher than the $97.2 million reported in 2006. The year-over-year increase in the value of the euro and the acquisitions completed this year favorably impacted revenue by eleven percentage points when compared to 2006. Sales for Compressor Products International were higher in 2007 due to the additional volume from the acquisitions completed in 2007 and increased activity in the North American and European markets. In 2007, GGB benefited nearly equally from favorable foreign currency exchange rates, increased volume in Europe and selected price increases. Quincy Compressor’s sales were lower than its 2006 record levels as demand in several key markets and across nearly all product lines declined on a year-over-year basis.

Segment profits were $17.3 million in the third quarter of 2007, or 15% higher than the $15.0 million reported in the same quarter of 2006. GGB’s profits increased in 2007, when compared to 2006, due to increased volumes, selected price increases, cost reduction initiatives and a stronger euro. Profits at Compressor Products International improved as a result of higher sales volume, selected price increases, and the acquisitions. However, amortization of intangible assets associated with the acquisitions resulted in increased expenses and lower operating margins at CPI. Despite the decline in revenue, Quincy Compressor was essentially able to maintain its profitability as a result of price increases and cost reductions. Operating margins for the segment were flat at 15.5% in 2007 and 15.4% in 2006.
Engine Products and Services. Sales increased 19% from the $24.2 million reported in the third quarter of 2006 to $28.9 million in the third quarter of 2007. The increase primarily was attributable to additional parts shipments. Engine sales were nearly flat.
The segment reported a profit of $2.6 million in the third quarter of 2007 compared to a loss of $1.8 million in the third quarter of 2006. The year-over-year improvement was a result of $3.1 million of contract losses on a U.S. Navy engine program in 2006 that did not recur in 2007, and the higher volume of parts shipments this year, which have better margins than engine sales. Operating margins for the segment in 2007 were 9.0% compared to (7.4)% in 2006.
Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006
Sales increased 10% to $754.4 million in 2007 from $683.6 million in 2006. The year-over-year increase in the value of the euro and the acquisitions during the past twelve months increased revenue by five percentage points when compared to the prior year. Garlock Sealing Technologies’ revenues increased in 2007 as a result of continued strength in the oil and gas market, strong customer demand in Europe and favorable exchange rates. Plastomer Technologies’ revenue increased in 2007 due to the acquisition of Amicon completed in July 2006. Compressor Products International’s sales were higher in 2007 due to its acquisitions in 2006 and 2007 and continued strength in the North American and European energy-related markets. GGB’s sales exceeded 2006 levels as a result of favorable market conditions in Europe, selected price increases and the increase in the value of the euro. Fairbanks Morse Engine’s revenue was higher in 2007 due to more engine shipments for U.S. Navy programs and additional demand for aftermarket parts and service. These increases were partially offset by lower sales at Stemco as a result of a cyclical downturn in heavy-duty truck OEM and aftermarket demand.
Segment profit increased 20% to $126.5 million in 2007 from $105.4 million in 2006. Segment profit in 2007 benefited from higher volumes in all segments, selected price increases at several operations, the acquisitions mentioned previously, cost reduction initiatives and a decline in our U.S defined benefit pension plan expenses. Segment margins in 2007 were 16.8% compared to 15.4% in 2006.
Asbestos expenses in the first nine months of 2007 were $37.5 million and included net cash outlays of $19.6 million of legal fees and expenses incurred in 2007 and a $17.9 million non-cash charge primarily to maintain a ten-year liability estimate for future claims. In 2006, asbestos expenses were $54.3 million for the first nine months of the year. Had our insurance been fully allocated prior to 2006, and if we had been recording the ten-year liability based on the internal estimate, asbestos expenses for the first nine months of 2006 would have been $62.4 million. For a further discussion of asbestos expenses, see “– Contingencies – Asbestos.”
Net interest expense during the first nine months of 2007 was zero compared to $2.5 million in 2006. The decrease was a result of more interest income earned on higher cash balances.

Net income was $38.4 million, or $1.71 per share, for the first nine months of 2007 compared to $14.7 million, or $0.68 per share, in 2006. Earnings per share are expressed on a diluted basis.
Liquidity and Capital Resources
Cash requirements for working capital, capital expenditures, acquisitions and debt repayments are funded from cash balances on hand and cash generated from operations. We have additional capital resources available, which are discussed under the heading of “Capital Resources.”
Cash Flows
Operating activities generated cash in the amount of $75.0 million in the first nine months of 2007 compared to $42.5 million in the same period last year. Working capital increased by $4.7 million in 2007 compared to an increase of $17.4 million in 2006. The working capital increase in 2006 primarily was a result of an increase in inventory in the Engine Products and Services segment. In 2007, that segment’s inventory declined and was the principal contributor to the reduction in working capital usage. In addition, working capital normally builds during the first half of the year as seasonal activity increases in many of our markets. We usually experience decreases in working capital levels during the second half of the year. In 2007, payments for asbestos-related claims and expenses, net of insurance recoveries, were $14.1 million, down from $35.7 million in 2006 due to a combination of lower asbestos-related payments and higher insurance collections. The collections included a payment in 2007 related to a settlement reached in late 2006 with a group of U.S. insurers that had previously withheld payments. Cash paid for environmental liabilities, primarily related to previously owned businesses, which was included in the change in other non-current assets and liabilities, increased from $1.4 million in 2006 to $5.4 million in 2007.
Investing activities used $101.5 million and $16.6 million of cash during the first nine months of 2007 and 2006, respectively. Capital expenditures in 2007 were $30.1 million compared to $30.3 million during the same period of 2006. The capital investments in both years included spending associated with modernization activities at our Garlock Sealing Technologies manufacturing facility in Palmyra, New York. We also made net payments of $72.1 million and $27.3 million in 2007 and 2006, respectively, related to acquisitions. See Note 2 to our Consolidated Financial Statements for a further discussion on acquisitions.
Contractual Obligations
In addition to our contractual obligations disclosed in Form 10-K for the fiscal year ended December 31, 2006, we had a $17.0 million and $21.2 million reserve for unrecognized tax benefits at September 30, 2007 and December 31, 2006, respectively. Substantially all of this tax reserve is classified in other long-term liabilities and deferred income taxes in our Consolidated Balance Sheets at September 30, 2007 and December 31, 2006, respectively.
Capital Resources
Our primary U.S. operating subsidiaries have a senior secured revolving credit facility with a group of banks, which matures on April 21, 2011. We have not borrowed against this facility. The facility is secured by our receivables, inventories, intellectual property, insurance receivables and all other personal property assets (other than fixed assets), and by pledges of 65% of the capital stock of our direct foreign subsidiaries and 100% of the capital stock of our direct and indirect U.S. subsidiaries. The facility contains covenants and restrictions that are customary for an asset-based loan, including limitations on dividends, limitations on incurrence of indebtedness and maintenance of a fixed charge coverage financial ratio. Certain of the covenants and restrictions apply only if availability under the facility falls below certain levels.
The maximum initial amount available for borrowings under the facility is $75 million. Under certain conditions, we may request that the facility be increased by up to $25 million, to $100 million in total. Actual borrowing availability at any date is determined by reference to a borrowing base of specified percentages of eligible accounts receivable and inventory and is reduced by usage of the facility (including outstanding letters of credit) and any reserves. At September 30, 2007, the actual borrowing availability under our senior secured revolving credit facility was approximately $75 million.
We issued $172.5 million of convertible debentures in 2005. The debentures bear interest at an annual rate of 3.9375%. We pay accrued interest on April 15 and October 15 of each year. The debentures will mature on October 15, 2015. The debentures are direct, unsecured and unsubordinated obligations and rank equal in priority with our unsecured and unsubordinated indebtedness and will be senior in right of payment to all subordinated indebtedness. They effectively rank junior to our secured indebtedness to the extent of the value of the assets securing such indebtedness. The debentures do not contain any financial covenants. Holders may convert the debentures into cash and shares of our common stock, if any, at an initial conversion rate of 29.5972 shares of common stock per $1,000 principal amount of debentures (which is equal to an initial conversion price of $33.79 per share), subject to adjustment, before the close of business on October 15, 2015. Upon conversion, we would deliver (i) cash equal to the lesser of the aggregate principal amount of the debentures to be converted or our total conversion obligation, and (ii) shares of our common stock in respect of the remainder, if any, of our conversion obligation. Conversion is permitted only under certain circumstances, which had not occurred as of September 30, 2007.
We used a portion of the net proceeds from the sale of the debentures to enter into call options (hedge and warrant transactions), which entitle us to purchase shares of our stock from a financial institution at $33.79 per share and entitle the financial institution to purchase shares of our stock from us at $46.78 per share. This will reduce potential dilution to our common stockholders from conversion of the debentures and have the effect to us of increasing the conversion price of the debentures to $46.78 per share.
Critical Accounting Policies and Estimates
Please refer to our annual report on Form 10-K for the fiscal year ended December 31, 2006, for a complete list of our critical accounting policies and estimates.
Contingencies
General
Various claims, lawsuits and administrative proceedings with respect to commercial, product liability, asbestos and environmental matters, all arising in the ordinary course of business, are pending or threatened against us or our subsidiaries and seek monetary damages and/or other remedies. 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 condition or results of operations. From time to time, we and our subsidiaries are also involved as plaintiffs in legal proceedings involving contract, patent protection, environmental, insurance and other matters.

Environmental
Our facilities and operations are subject to federal, state and local environmental and occupational health and safety requirements of the U.S. and foreign countries. We take a proactive approach in our efforts to comply with all environmental, health and safety laws as they relate to our manufacturing operations and in proposing and implementing any remedial plans that may be necessary. We also conduct comprehensive compliance and management system audits at our facilities to maintain compliance and improve operational efficiency.
Although we believe past operations were in substantial compliance with the then applicable regulations, we or one of our subsidiaries have been named as a potentially responsible party, or are otherwise involved, at 19 sites at each of which the costs to us are expected to exceed $100,000. Investigations have been completed for 15 sites and are in progress at the other four sites. The majority of these sites relate to remediation projects at former operating facilities that were sold or closed and primarily deal with remediation of soil and groundwater contamination. The laws governing investigation and remediation of these sites can impose joint and several liability for the associated costs. Liability for these costs can be imposed on present and former owners or operators of the properties or on parties that generated the wastes that contributed to the contamination.
Our policy is to accrue environmental investigation and remediation costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. The measurement of the liability is based on an evaluation of currently available facts with respect to each individual situation and takes into consideration factors such as existing technology, presently enacted laws and regulations and prior experience in remediation of contaminated sites. Liabilities are established for all sites based on the factors discussed above. As assessments and remediation progress at individual sites, these liabilities are reviewed periodically and adjusted to reflect additional technical data and legal information. As of September 30, 2007 and December 31, 2006, EnPro had accrued liabilities of $27.4 million and $33.2 million, respectively, for estimated future expenditures relating to environmental contingencies. Of the September 30, 2007 amount, $10.1 million represents our share of liability as a potentially responsible party at a former industrial property located in Farmingdale, New York. The amounts recorded in the Consolidated Financial Statements have been recorded on an undiscounted basis.
We believe that our accrued environmental liabilities are adequate based on currently available information. Actual costs to be incurred for identified situations in future periods may vary from estimates because of the inherent uncertainties in evaluating environmental exposures due to unknown conditions, changing government regulations and legal standards regarding liability. Subject to the imprecision in estimating future environmental costs, we believe that maintaining compliance with current environmental laws and government regulations will not require significant capital expenditures or have a material adverse effect on our financial condition, but could be material to our results of operations or cash flows in a given period.
Colt Firearms and Central Moloney
We have contingent liabilities related to divested businesses for which certain of our subsidiaries retained liability or are obligated under indemnity agreements. These contingent liabilities include, but are not limited to, potential product liability and associated claims related to Coltec’s former Colt Firearms subsidiary for firearms manufactured prior to its divestiture in 1990 and Coltec’s former Central Moloney subsidiary for electrical transformers manufactured prior to its divestiture in 1994. No product liability claims are currently pending against Coltec related to Colt Firearms or Central Moloney. Coltec also has ongoing obligations, which are included in retained liabilities of previously owned businesses in our Consolidated Balance Sheets, with regard to workers’ compensation, retiree medical and other retiree benefit matters that relate to Coltec’s periods of ownership of these operations.

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