• changes in the estimated liability for early-stage and potential future asbestos claims that may be received, which is highly uncertain, is based on subjective assumptions and is a point within a range of estimated values;

• general economic conditions in the markets served by our businesses, some of which are cyclical and experience periodic downturns;

• prices and availability of raw materials; and

• the amount of any payments required to satisfy contingent liabilities related to discontinued operations of our predecessors, including liabilities for certain products, environmental matters, guaranteed debt and lease payments, employee benefit obligations and other matters.

We caution our shareholders not to place undue reliance on these statements, which speak only as of the date on which such statements were made.
Whenever you read or hear any subsequent written or oral forward-looking statements attributed to us or any person acting on our behalf, you should keep in mind the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Overview and Outlook
Overview. EnPro was incorporated under the laws of the State of North Carolina on January 11, 2002. We design, develop, manufacture and market proprietary engineered industrial products. We have 43 primary manufacturing facilities located in the United States and 10 countries outside the United States.
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 bearings, solid polymer bearings, aluminum blocks for hydraulic applications, rotary and reciprocating air compressors, vacuum pumps, air systems and 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 United States government and the general markets for marine propulsion, power generation, and pump and compressor applications use these products and services.
In January 2008, we acquired certain assets and assumed certain liabilities of Sinflex Sealing Technologies, a distributor and manufacturer of industrial sealing products, located in Shanghai, China. The operation conducts business as Garlock Sealing Technologies (Shanghai) Co. Ltd. and is operated and managed as part of the global Garlock Sealing Technologies business unit in the Sealing Products segment. Sinflex was Garlock's principal distributor in China for over a decade. In February 2008, we acquired the stock of V.W. Kaiser Engineering, a manufacturer of pins, bushings and suspension kits primarily for the heavy-duty truck and bus aftermarket. V.W. Kaiser Engineering is located in Michigan. It is operated and managed as part of the Stemco business unit, also in the Sealing Products segment. In May 2008, we acquired certain assets and assumed certain liabilities of Air Perfection in California. Air Perfection is engaged in the audit, sale, distribution, rental and service of compressed air systems and the

various components that comprise such systems. The business is operated and managed as part of the Quincy Compressor business unit, which is in the Engineered Products Segment. In June 2008, we purchased the 20% ownership of the minority shareholder of Garlock Pty Limited in Australia. Subsequent to the share purchase, we own 100% of Garlock Pty Limited, which is in the Sealing Products segment.
On March 3, 2008, pursuant to a $100 million share repurchase authorization approved by our board of directors, we entered into an accelerated share repurchase ("ASR") agreement with a financial institution to provide for the immediate retirement of $50 million of our common stock. Under the ASR agreement, we purchased approximately 1.7 million shares of our common stock from a financial institution at an initial price of $29.53 per share. Total consideration paid at initial settlement to repurchase these shares, including commissions and other fees, was approximately $50.2 million and was recorded in shareholders' equity as a reduction of common stock and additional paid-in capital.
The price adjustment period under the ASR terminated on August 29, 2008. In connection with the finalization of the ASR, we remitted in cash a final settlement adjustment of $11.9 million to the financial institution that executed the ASR. The final settlement adjustment, recorded as a reduction of additional paid-in capital, was based on the average of the reported daily volume-weighted average price of our common stock during the term of the ASR. It resulted in a remittance to the financial institution because the volume-weighted average price of our common stock during the term of the ASR exceeded the initial price of $29.53 per share. After the final settlement adjustment, we had completed about $62 million of the share repurchase authorization. Pursuant to the share repurchase authorization and in accordance with the terms of a 10b5-1 plan announced on September 8, 2008, we acquired 252,400 shares of our common stock in open-market transactions at an average price of about $28.00 per share, resulting in total repurchases of approximately $7.1 million from October 1, 2008 to October 29, 2008. On October 29, 2008, in light of the volatility in the financial and credit markets, the board of directors terminated the 10b5-1 plan.
Outlook. We believe we are making progress in connection with our strategies to improve operating efficiency; to expand our product offerings, our markets, and our customer base; to strengthen the mix of our businesses; and to effectively manage asbestos claims against our subsidiaries. We believe the acquisitions we have completed contribute to the expansion of our key businesses and that they improve our mix. We expect to experience continued growth and improvement in the acquired companies. In the current economic environment, our markets are slowing and are not likely to improve before the end of the year. These conditions may affect our opportunities for organic growth in the fourth quarter, but our performance over the first nine months of 2008, our participation in a broad range of markets, our growing international presence and acquisitions we completed during the past year should lead to an improvement in our full year results when compared to 2007. At the same time, our balance sheet remains strong and we expect to have sufficient liquidity to maintain our strategic direction.
We anticipate that we will show a net decrease in our cash balance in 2008 as a result of: $62.1 million used to repurchase shares of the Company's common stock in accordance with the ASR agreement; $7.1 million used for open-market common stock purchases that we made during October 2008; and the acquisitions that were made in the first nine months of 2008 and those that may be made during the remainder of the year. We expect increases in capital expenditures and net asbestos-related payments compared to 2007 to be partially offset by an increase in operating income. Capital spending in 2008 is expected to be higher than 2007 as a result of our strategy to improve operational efficiency and continued investments to grow our businesses. We believe net asbestos-related payments will be higher in 2008 than in 2007 because we estimate that we will collect less in insurance recoveries.
In connection with the recent volatility in the equity and fixed income investment markets, we, like many companies, have experienced a significant decline in the value of the assets that fund our U.S.

defined benefit pension plans. We have been analyzing the effect of the decline on our pension funding status, our future pension expense and our cash contribution requirements. We will continue to analyze the situation and update the accounting for our pension plans in our Form 10-K for the year ended December 31, 2008. Based on currently available data, which is subject to change, we estimate that we will be required to make cash contributions in 2009 totaling $9.0 million. We estimate that the annual U.S. pension expense will increase from about $5 million in the year ended December 31, 2008, to approximately $8 - 10 million in 2009. We anticipate an increase in our pension liability and a reduction of shareholders' equity at December 31, 2008, to reflect the increase in the underfunding of the pension plans.

Results of Operations

                                         Quarters Ended          Nine Months Ended
                                          September 30,            September 30,
                                        2008        2007          2008         2007
                                                       (in millions)
        Sales
        Sealing Products               $ 127.1     $ 112.6     $    387.6     $ 346.5
        Engineered Products              131.0       111.5          408.9       326.1
        Engine Products and Services      21.1        28.9           83.4        82.7

                                         279.2       253.0          879.9       755.3
        Intersegment sales                (0.6 )      (0.3 )         (1.4 )      (0.9 )

        Total sales                    $ 278.6     $ 252.7     $    878.5     $ 754.4


        Segment Profit
        Sealing Products               $  21.1     $  20.5     $     73.8     $  64.0
        Engineered Products               17.0        17.3           60.7        54.5
        Engine Products and Services       3.0         2.6           11.0         8.0

        Total segment profit              41.1        40.4          145.5       126.5

        Corporate expenses                (7.4 )      (9.0 )        (29.2 )     (26.0 )
        Asbestos-related expenses        (13.0 )     (11.5 )        (37.3 )     (37.5 )
        Interest expense, net             (1.6 )      (0.1 )         (3.7 )         -
        Other income (expense), net       (0.9 )       0.1           (4.0 )      (1.6 )


        Income before income taxes     $  18.2     $  19.9     $     71.3     $  61.4

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 2008 Compared to the Third Quarter of 2007 Sales of $278.6 million in the third quarter of 2008 increased 10% from $252.7 million in the comparable quarter of 2007. The results of acquisitions completed since the third quarter of 2007 added five percentage points of the sales increase. Two percentage points of growth were primarily the result of selected price increases and additional volume at some businesses partially offset by lower volume at Fairbanks Morse Engine principally due to the timing of engine shipments. In addition, a decline in demand from OEM heavy-duty truck and trailer manufacturers and aftermarket customers continued to negatively impact Stemco's volume. The increase in the values of foreign currencies relative to the U.S. dollar contributed the remaining three percentage points to the increase.

Segment profit, management's primary measure of how our operations perform, increased 2% from $40.4 million in the third quarter of 2007 to $41.1 million in 2008. Segment profit increased primarily due to selected price increases, contributions from acquisitions and cost reductions. These improvements were largely offset by cost increases in several areas, particularly raw materials and other manufacturing input costs. Segment margins, defined as segment profit divided by sales, decreased from 16.0% in 2007 to 14.8% in 2008.
The decrease in corporate expenses from $9.0 million in the third quarter of 2007 to $7.4 million in 2008 was primarily the result of severance expenses in 2007 that did not recur in 2008 and lower incentive compensation expenses in 2008.
Our effective tax rate for the third quarter of 2008 was 28% compared to 38.5% in 2007. The change in the rate is principally a result of the reversal of reserves for uncertain tax positions in connection with the settlement of various jurisdictional tax audits and the benefit of reductions in statutory income tax rates in several countries.
Net income was $13.1 million, or $0.62 per share, in the third quarter of 2008 compared to $12.3 million, or $0.54 per share, in the same quarter of 2007. 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 $127.1 million in the third quarter of 2008 were 13% higher than the $112.6 million reported in the comparable quarter of 2007. Acquisitions completed since the third quarter of 2007 added five percentage points of the growth while organic growth contributed six percentage points. The favorable impact of foreign currency exchange rates versus the U.S. dollar accounted for two percentage points of the growth. Sales at Garlock Sealing Technologies increased 13%. Its sales were favorably impacted by increased demand in European markets; strength in the oil and gas, energy, mining and primary metals sectors; selected price increases; and increases in the value of foreign currencies. Stemco's sales during the quarter increased 11% year-over-year primarily as a result of the acquisition of the V.W. Kaiser business in late February and price increases. Its OEM and aftermarket sales for the U.S. heavy-duty truck market continued to be lower compared to 2007 as the number of new trailers built and usage of existing trucks decreased as a result of the U.S. economic slowdown. Garlock Rubber Technologies experienced a sales increase of 26%. Increased activity in its key markets and products contributed to the improvement. Sales for Plastomer Technologies were flat during the third quarter of 2008 compared to the same quarter last year.
Segment profit of $21.1 million in the third quarter of 2008 increased 3% compared to the $20.5 million reported in the third quarter of 2007. A 12% increase in profit at Garlock Sealing Technologies reflected the benefits of its higher sales and selected price increases. Stemco reported a slight decline in profit primarily due to the slowdown in the heavy-duty vehicle markets partially offset by the addition of the V.W. Kaiser business. As a result of its increase in sales, Garlock Rubber Technologies contributed to the increase in segment profit. Manufacturing and SG&A costs negatively impacted Plastomer Technologies' results as they reported a decline in earnings compared to last year. Operating margins for the segment decreased to 16.6% in 2008 from 18.2% in 2007 as a result of the earnings declines at Stemco and Plastomer Technologies.
Engineered Products. Sales of $131.0 million in the third quarter of 2008 were 17% higher than 2007 third quarter sales of $111.5 million. Acquisitions completed since the third quarter of 2007 favorably impacted revenue by seven percentage points and increased activity in the segment's operations added six percentage points. The year-over-year increase in the value of foreign currencies contributed

four percentage points of the sales increase. Sales for Compressor Products International in the third quarter of 2008 were 27% higher than the amount reported in the comparable quarter of 2007 primarily due to acquisitions and increased volume in Canadian and French markets. In 2008, GGB benefited mainly from favorable foreign currency exchange rates, the addition of an acquired product line and solid demand in certain markets and regions. Quincy Compressor's sales increased as a result of the acquisition completed in the second quarter of 2008, selected price increases and more shipments of higher priced compressors than in 2007.
Segment profits were $17.0 million in the third quarter of 2008, which compares to $17.3 million reported in the same quarter of 2007. GGB's profits decreased in 2008 due to cost increases in the European operations that exceeded their price increases. Quincy Compressor reported a decrease in its profit as a result of net cost increases. Profits at Compressor Products International increased as a result of acquisitions and improved volume and product mix. The entire segment experienced significant upward cost pressure in raw materials and other manufacturing costs that was partially offset by selected price increases and cost reductions resulting from operational excellence improvements. Operating margins for the segment decreased from 15.5% in 2007 to 13.0% in 2008.
Engine Products and Services. Sales were down from $28.9 million in the third quarter of 2007 to $21.1 million in the third quarter of 2008. The quarter-over-quarter decrease in sales was principally due to fewer shipments of engines in the third quarter of 2008.
The segment reported a profit of $3.0 million in the third quarter of 2008 compared to $2.6 million in the third quarter of 2007. The year-over-year improvement consisted of net cost reductions and price increases in the current quarter compared to the third quarter of 2007. Operating margins for the segment increased to 14.2% in 2008 from 9.0% in 2007.
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Sales increased 16% from $754.4 million in 2007 to $878.5 million in 2008. Acquisitions completed since the third quarter of 2007 contributed six percentage points of the 2008 growth. Another six percentage points of growth were principally a result of the same factors that influenced the organic growth in the third quarter of 2008. The year-over-year increase in the values of foreign currencies relative to the U.S. dollar added four percentage points to the total growth rate.
Segment profit increased 15% from $126.5 million in 2007 to $145.5 million in 2008. Segment profit in the first nine months of 2008 benefited primarily from the same changes that resulted in the increase in segment profit in the third quarter of 2008. In addition, segment profit increased as a result of a one-time $2.5 million warranty claim settlement received from a supplier in the second quarter of 2008. Segment margins in 2007 were 16.8% compared to 16.6% in 2008.
The increase in corporate expenses from $26.0 million in the first nine months of 2007 to $29.2 million in the same period of 2008 was primarily the result of recording expenses in connection with the chief executive officer transition that took place during the second quarter of 2008. In addition, higher estimates for 2008 incentive compensation expenses contributed to the increase compared to 2007. This was partially offset by severance expenses in 2007 that did not recur in 2008.
Net interest expense during the first nine months of 2008 was $3.7 million compared to zero in 2007. The increase in net increase expense was caused by decreases in our cash balance and the yields on cash and cash equivalent investments.

Other income (expense), net included a $2.2 million gain on the sale of fixed assets related to the disposal of the former Plastomer Technologies facility in Newtown, Pennsylvania in the first nine months of 2008. Other income (expense), net also included $3.4 million of expenses incurred in the first nine months of 2008 for external advisors and service providers engaged in connection with the contested election of directors that was resolved in April 2008.
Our effective tax rate for the nine months ended September 30, 2008, was 33.6% compared to 37.5% in 2007. The change in the rate is principally a result of the same factors that affected the third quarter comparison.
Net income was $47.4 million, or $2.22 per share, for the first nine months of 2008 compared to $38.4 million, or $1.71 per share, in the same period last year. Earnings per share are expressed on a diluted basis. Liquidity and Capital Resources
Cash requirements for working capital, capital expenditures, acquisitions, debt repayments and common stock repurchases have been and continue to be funded from cash balances on hand and cash generated from operations. Should we need additional capital in the future, we have other resources available, which are discussed under the heading of "Capital Resources." Cash Flows
Operating activities generated cash in the amount of $68.8 million in the first nine months of 2008 compared to $75.0 million in the same period last year. The decrease in operating cash flows was primarily attributable to an increase in working capital during the first half of 2008 in line with normal seasonal patterns and lower asbestos-related insurance collections in 2008. We made a $10 million contribution to the U.S. defined benefit pension plans in 2007 but no contribution payment in 2008. As expected, asbestos-related insurance collections were lower in 2008 than in 2007 and amounted to $58.8 million and $77.3 million, respectively. The decrease in insurance collections was partially offset by a decrease in asbestos-related payments, which amounted to $78.9 million in 2008 and 91.4 million in 2007.
Investing activities used $60.0 million and $101.5 million of cash during the first nine months of 2008 and 2007, respectively. We made net payments for acquisitions of $37.4 million in 2008 compared to $72.1 million in 2007. In addition, capital expenditures in 2008 were approximately $6 million more than in 2007 as we continue to invest in growth opportunities and operational efficiencies.
In the first nine months of 2008, we paid $62.1 million in connection with the repurchase of approximately 1.7 million shares of our common stock under the ASR agreement. This transaction was reflected in financing activities in the Consolidated Statements of Cash Flows.
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 collateralized 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, which includes outstanding letters of credit, and any reserves.
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 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 . . .