information, future events or otherwise. 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. 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, aerospace, medical, filtration and semiconductor fabrication.
Our Engineered Products segment includes operations that design, manufacture and sell self-lubricating, non-rolling, metal-polymer, solid polymer and filament wound bearing products, 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, natural gas, health, pump and compressor construction, power generation, machine tools, air treatment, refining, 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, which is 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.
In October and November 2008, we acquired certain assets of and assumed certain liabilities of three businesses which provide components and aftermarket services for reciprocating compressors to customers in the petroleum, natural gas, PET bottle molding and chemical processing industries. The acquired businesses are Horizon Compressor Services, Inc., located in Houston, Texas; RAM Air, Inc., located in New Smyrna Beach, Florida; and C&P Services (Northern) Limited, located in Warrington, UK. The businesses are operated and managed as part of the CPI business unit in the Engineered Products segment.
In December 2008, we acquired certain assets and assumed certain liabilities of Northern Gaskets and Mouldings Limited (NGM), a distributor of sealing products and a manufacturer of gaskets, located in Batley, UK. NGM operates as part of Garlock (Great Britain) Limited in the Sealing Products segment. NGM increases Garlock's presence in the petrochemical, pharmaceutical and oil and gas industries in the UK.
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 plan to repurchase shares 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, including commissions and fees, 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 share repurchase plan.
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 the remaining insurance assets available for the payment of these claims. We accrue an estimated liability for both pending and future asbestos claims for the next ten years. For additional information on this subject discussed in this section, see "Contingencies - Asbestos." Outlook
We believe we are making progress in connection with our business priorities to pursue operational, commercial, pricing and sourcing excellence; to accelerate growth through new products, new markets and acquisitions; and to effectively manage cash. We believe the acquisitions we have

completed contribute to the geographic expansion of our key businesses and that they improve our product offerings. However, in the current economic environment, activity in our markets has slowed significantly. Short lead times for most of our products give us a very limited view of the future, which is made even more uncertain by the deterioration of many of our markets in recent months. Circumstances that include facility shutdowns by customers in the automotive industry, curtailed demand for many of our industrial products, and less favorable foreign exchange rates lead us to expect lower sales and operating income in 2009 compared to 2008.
As a result of recent structural and organizational changes we have made in our European operations, we anticipate that our effective tax rate for 2009 should be less than 30%. The actual effective tax rate will depend on several factors, including our mix of domestic and foreign earnings and our actual results versus the projections used in estimating the effective tax rate. Due to these factors, the actual effective tax rate may vary significantly from the estimate. For years beyond 2009, we anticipate that our effective tax rate should generally be lower than historical rates, but may not be as low as we expect to experience in 2009.
We anticipate that cash flows in 2009 should benefit from reduced expenditures for share repurchases and lower capital expenditures partially offset by reduced operating income.
Due to 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 and an increase in the value of plan liabilities. Based on currently available data, which is subject to change, we estimate that we will be required to make cash contributions in 2009 totaling $6.4 million. We estimate that the annual U.S. pension expense will increase to approximately $14.0 - $15.0 million in 2009 compared to $4.8 million in 2008.
In connection with our business strategy to accelerate growth, we will continue to evaluate acquisitions and divestitures in 2009; however, the impact of such acquisitions and divestitures cannot be predicted and therefore is not reflected in this outlook.

Results of Operations

                                                      Years Ended December 31,
                                                  2008          2007          2006
                                                           (in millions)
      Sales
      Sealing Products                          $   503.5     $   457.3     $  432.5
      Engineered Products                           524.1         445.5        391.7
      Engine Products and Services                  142.1         128.1        105.2

                                                  1,169.7       1,030.9        929.4
      Intersegment sales                             (1.9 )        (0.9 )       (1.0 )

      Total sales                               $ 1,167.8     $ 1,030.0     $  928.4


      Segment Profit
      Sealing Products                          $    90.4     $    78.0     $   76.5
      Engineered Products                            68.1          69.4         61.5
      Engine Products and Services                   20.8          15.3          4.9

      Total segment profit                          179.3         162.7        142.9

      Corporate expenses                            (34.5 )       (34.1 )      (31.6 )
      Asbestos-related expenses                     (52.1 )       (68.4 )     (359.4 )
      Interest income (expense), net                 (5.3 )         0.2         (3.2 )
      Other income (expense), net                    (6.7 )        (2.4 )       (2.9 )


      Income (loss) before income taxes              80.7          58.0       (254.2 )
      Income tax benefit (expense)                  (27.2 )       (20.3 )       95.3


      Income (loss) before extraordinary item        53.5          37.7       (158.9 )
      Extraordinary item, net of taxes                  -           2.5            -

      Net income (loss)                         $    53.5     $    40.2     $ (158.9 )

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.
2008 Compared to 2007
Sales of $1.17 billion in 2008 increased 13% from $1.03 billion in 2007. The results of acquisitions added six percentage points of the sales increase. Five percentage points of growth were primarily the result of selected price increases and additional volume at several businesses partially offset by lower volume at Stemco due to a decline in demand from OEM heavy-duty truck and trailer manufacturers and aftermarket customers. The increase in the values of foreign currencies relative to the U.S. dollar contributed the remaining two percentage points to the increase.
Segment profit, management's primary measure of how our operations perform, increased 10% from $162.7 million in 2007 to $179.3 million in 2008. Segment profit increased primarily due to selected price increases, increased volume and acquisitions. These improvements were partially 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 15.8% in 2007 to 15.4% in 2008.
Asbestos expenses in 2008 were $52.1 million and included net cash outlays of $26.2 million for legal fees and expenses incurred during the year and $25.9 million in non-cash charges to maintain a ten-year liability estimate for future claims and to reflect an adjustment in insurance value, asbestos trust interest income and accrued legal fees. In 2007, asbestos expenses were $68.4 million. The higher expense in 2007 was primarily the result of adjustments made to management's estimation model in the fourth quarter of 2007.
Net interest expense in 2008 was $5.3 million compared to net interest income of $0.2 million in 2007. The net interest expense was a result of the decrease in invested cash balances and lower yields on investments.
Our effective tax rate for 2008 was 33.7% compared to 35.0% 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 tax audits and the benefit of reductions in statutory income tax rates in several countries.
Net income was $53.5 million, or $2.54 per share, in 2008 compared to $40.2 million, or $1.80 per share, in 2007. Earnings per share are expressed on a diluted basis.
Following is a discussion of operating results for each segment during the year:
Sealing Products. Sales of $503.5 million in 2008 were 10% higher than the $457.3 million reported in 2007, however, the year-to-year improvement decelerated as the year progressed. Acquisitions added three percentage points of the growth while organic growth contributed five 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 12%. 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 year increased 10% as a result of the acquisition of the V.W. Kaiser business in late February. 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 16% due to strong demand for belt and sheet products. Sales for Plastomer Technologies were down 12% in 2008 compared to last year due to slowdowns in its semi-conductor markets.
Segment profit of $90.4 million in 2008 increased 16% compared to the $78.0 million reported in 2007. An increase in profit at Garlock Sealing Technologies resulted from lower restructuring charges and reflects the benefits of its higher sales volumes. Stemco reported a 6% increase in profit due to the impact of the addition of the V.W. Kaiser business, partially offset by the slowdown in the heavy-duty vehicle markets. As a result of its increase in sales, Garlock Rubber Technologies contributed to the increase in segment profit. Costs associated with the consolidation of its facilities and lower volumes negatively impacted Plastomer Technologies' results compared to last year. Operating margins for the segment increased to 18.0% in 2008 from 17.1% in 2007 primarily as a result of the earnings improvement at Garlock Sealing Technologies.
Engineered Products. Sales of $524.1 million in 2008 were 18% higher than 2007 sales of $445.5. Acquisitions favorably impacted revenue by nine percentage points and increased activity in the segment's operations added five percentage points. The increase in the value of foreign currencies contributed four percentage points of the sales increase. Sales for Compressor Products International in 2008 were higher than 2007 due to acquisitions and increased volumes. Despite a significant decline late in the year, GGB sales in 2008 exceeded 2007 sales due to favorable foreign exchange rates and an acquisition. Quincy Compressor's sales increased as a result of the acquisition completed in the second quarter of 2008 and more shipments of higher-priced compressors than in 2007.
Segment profits were $68.1 million in 2008, which compares to $69.4 million reported in 2007. GGB's profits decreased in 2008 due to material cost increases that exceeded price increases. Significant market declines in the second half largely negated first half volume gains and resulted in lower productivity. Quincy Compressor reported slightly lower profit as a result of material and other cost increases and competitive pricing conditions which offset the benefit of more favorable sales mix. Profits at Compressor Products International increased as a result of higher volumes and acquisitions. Operating margins for the segment decreased from 15.6% in 2007 to 13.0% in 2008.
Engine Products and Services. Sales increased from $128.1 million in 2007 to $142.1 million in 2008. The increase in sales was principally due to higher revenue from engines and higher parts sales in 2008.
The segment reported a profit of $20.8 million in 2008 compared to $15.3 million in 2007. The improvement resulted from higher margins on engine sales, increased parts volumes and productivity improvements in 2008 compared to 2007. Operating margins for the segment increased to 14.6% in 2008 from 11.9% in 2007.
2007 Compared to 2006
Sales were $1.03 billion in 2007, an 11% increase compared to the $928.4 million recorded in 2006. Increases in foreign currency exchange rates relative to the U.S. dollar, with the euro being the most significant, and acquisitions added approximately six percentage points to revenue growth on a year-over-year basis. The five percentage points of organic growth were the result of stronger demand from Garlock Sealing Technologies' U.S. and European markets, higher shipments from GGB's European operations, continued strong demand in the energy-related markets of Compressor Products International, increased engine and parts shipments from 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 small decrease in shipments from Quincy Compressor, coming off of a strong year in 2006, for key markets such as energy, industrial and contractors.
Segment profit, one of management's primary measures of how our operations perform, increased 14% from $142.9 million in 2006 to $162.7 million in 2007. Segment profit was impacted by selected price increases and increased sales volume at several businesses, improved margins on Fairbanks Morse Engine shipments, 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 acquisitions, and favorable foreign currency exchange rates. The defined benefit pension expense declined because amendments to our U.S. salaried defined benefit plan implemented in the first quarter of 2007 lowered service costs and because returns on pension assets improved. Despite the lower demand experienced by Quincy Compressor and Garlock Rubber Technologies, each contributed to the year-over-year increase in segment profit as a result of cost savings and price increases. Volume declines at Stemco and Plastomer Technologies and an increase in restructuring expenses in 2007 partially offset the favorable affects of the previously mentioned items. Restructuring expenses in 2007 were $6.0 million compared to $2.3 million in 2006. The restructuring costs in each year were primarily for the modernization project at the Garlock Sealing Technologies facilities in Palmyra, New York. Segment margins, defined as segment profit divided by sales, increased from 15.4% in 2006 to 15.8% in 2007.
Asbestos expenses in 2007 were $68.4 million and included net cash outlays of $25.8 million for legal fees and expenses incurred during the year and $42.6 million in non-cash charges to maintain a ten-year liability estimate for future claims and to reflect an adjustment to our internal estimate of the liability. In 2006, asbestos expenses were $359.4 million. The higher expense in 2006 was primarily the result of an adjustment we made to record the asbestos liability at a point that we believe to be the best estimate within our outside expert's range of equally likely estimates for the next ten years. For a further discussion of asbestos expenses, see "- Contingencies - Asbestos." Net interest income in 2007 was $0.2 million compared to net interest expense of $3.2 million last year. The net interest income was a result of the increase in invested cash balances while the yield on those funds was essentially flat.
Our effective tax rate for 2007 was 35.0% compared to 37.5% in 2006. The decrease in the rate for 2007 was principally due to the effect on our deferred tax balances of the enactment of reduced income and trade tax rates in Germany. This was partially offset by an unfavorable change in the mix of foreign and U.S. state and local taxable income.
In 2007, we recorded an extraordinary gain of $2.5 million, net of $1.6 million of taxes, related to the acquisition of the outstanding shares of a subsidiary held by minority shareholders.
Following is a discussion of operating results for each segment during the year:
Sealing Products. Sales of $457.3 million in 2007 were 6% higher than the $432.5 million reported in 2006. The favorable impact of the euro accounted for three percentage points of the growth. Sales at Garlock Sealing Technologies benefited from increased demand in its European markets, continued strength in the oil and gas sector, selected price increases and the stronger euro. Aftermarket and OEM sales decreased at Stemco due to lower demand in the U.S. heavy-duty truck market. Fewer new trucks and trailers were built as usage of existing trucks declined. A decline in sales to Plastomer Technologies' semiconductor market partially offset the increase attributable to including the Amicon business, acquired in July 2006, for a full year in 2007.
Segment profit increased by 2% from $76.5 million in 2006 to $78.0 million in 2007. Profits at Garlock Sealing Technologies benefited from higher volumes and selected price increases. These

benefits were partially offset by increased restructuring costs for the modernization project at the Garlock Sealing Technologies facilities in Palmyra, NY and additional spending in marketing, business development and R&D. Stemco reported a decline in profit in connection with its sales decrease and increased costs, but the decline was partially mitigated by price increases. Garlock Rubber Technologies increased its profit significantly in 2007 by focusing on cost reductions that increased operating margins. Lower volumes negatively impacted Plastomer Technologies' results, as did increased restructuring expenses for the reorganization of its facilities. Segment margins decreased from 17.7% in 2006 to 17.1% in 2007.
Engineered Products. Sales of $445.5 million in 2007 were 14% higher than the $391.7 million reported in 2006. The increase in the value of the euro and the acquisitions completed in 2007 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 2006 and 2007 and increased activity in its North American and European markets. In 2007, GGB benefited from the favorable euro exchange rate and increased volume in Europe. Quincy Compressor's sales were below the record levels of 2006 as demand declined in energy and construction markets. . . .