• the estimated liability for current 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 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, 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. The acquisition establishes an operation presence for Garlock in China and is key to our ability to address China's fast-growing sealing products market.

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. The acquisition expands the products we offer to commercial vehicle customers. 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 acquisition improves Quincy's access to customers and opportunities for growth in important regional markets. 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. These acquisitions expand CPI's product lines and provide access to new markets. 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.
In February 2009, we purchased PTM (UK) Limited, a privately-owned manufacturer and distributor of sealing products with two locations in the United Kingdom. The acquisition of PTM continues the expansion of Garlock's presence in the U.K., increasing the scale of the U.K. sealing products business and the ability to address new market segments. PTM is included in our 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 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.
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, the weaknesses in our markets that we began to encounter in 2008 have continued into 2009. Sharp declines in volume in most of our industrial markets have significantly reduced our profitability. As our markets have deteriorated, we have acted quickly to reduce employment levels, freeze salaries and shorten work weeks, and we have taken other significant steps to lower production costs and reduce spending. While we expect to benefit from these actions, we continue to expect lower sales and operating income in 2009 compared to 2008 as we expect the weaknesses in our markets to continue throughout the year.
As a result of recent structural and organizational changes we have made in our European operations, our mix of domestic and foreign earnings, and the application of the required interim period accounting rules, we expect that our effective tax rate for 2009 may be volatile throughout 2009. The actual effective tax rate depends on our actual results versus the projections used in estimating the effective tax rate by jurisdiction, and therefore the actual effective tax rate may vary significantly as a result. For years beyond 2009, we anticipate that our effective tax rate should generally be lower than historical rates.
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. However, we may utilize our remaining credit balances, which we received in prior years for making discretionary contributions to the plans which were not required, to offset the majority of the required contributions in 2009. 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.
We are currently conducting an evaluation of goodwill to determine if it has been impaired by deterioration in the global economic environment. Preliminary results indicate potential impairments at GGB in the Engineered Products segment and at Plastomer Technologies in the Sealing Products segment. Total goodwill associated with these businesses at March 31, 2009 was $110.2 million. While the exact amount of any potential impairment charge cannot be determined at this time, the charge would be non-cash and would be recorded in our second quarter results.

Results of Operations

                                                     Quarters Ended
                                                        March 31,
                                                    2009        2008
                                                      (in millions)
               Sales
               Sealing Products                    $  97.1     $ 123.6
               Engineered Products                    88.0       133.1
               Engine Products and Services           31.7        26.5

                                                     216.8       283.2

               Intersegment sales                     (0.4 )      (0.1 )

               Total sales                         $ 216.4     $ 283.1


               Segment Profit (Loss)
               Sealing Products                    $  12.7     $  20.6
               Engineered Products                    (1.9 )      21.1
               Engine Products and Services            5.5         3.4

               Total segment profit                   16.3        45.1

               Corporate expenses                     (7.3 )      (7.7 )
               Asbestos-related expenses             (13.6 )     (12.1 )
               Interest expense, net                  (3.0 )      (2.0 )
               Other expense, net                     (0.9 )      (3.4 )


               Income (loss) before income taxes   $  (8.5 )   $  19.9

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.
First Quarter of 2009 Compared to the First Quarter of 2008 Sales of $216.4 million in the first quarter of 2009 decreased 24% from $283.1 million in the comparable quarter of 2008. The decrease in the values of foreign currencies relative to the U.S. dollar negatively impacted results by six percentage points. The additional results from the acquisitions completed since the first quarter of 2008, which contributed two percentage points to revenue on a year-over-year basis, partially offset the currency impact. The decline in sales was the result of weak automotive and industrial markets for GGB, lower air compressor unit volumes at Quincy, reduced OEM volumes at Stemco and lower demand for Garlock Sealing Technologies' and Garlock Rubber Technologies' products in North America.
Segment profit, management's primary measure of how our operations perform, decreased 64% from $45.1 million in the first quarter of 2008 to $16.3 million in 2009. Segment profit decreased primarily due to lower volumes and lower absorption of manufacturing costs due to reduced production levels. These decreases were partially offset by material cost improvements and selected price increases. Segment margins, defined as segment profit divided by sales, declined from 15.9% in 2008 to 7.5% in 2009. The weaker results at most businesses were the primary cause for the decrease in segment margins, offsetting margin improvements at Fairbanks Morse Engines.

Other expense, net was lower in the first quarter of 2009 primarily due to $2.4 million of expenses incurred in the first quarter of 2008 for external advisors and service providers engaged in connection with the contested election of directors, which was subsequently resolved. There were no such expenses in the first quarter of 2009.
The income tax provision for the interim periods presented is computed at the effective rate expected to be applicable in each respective full year using the statutory rates on a country-by-country basis. The effective tax rate on continuing operations was a 138.0% benefit for the three months ended March 31, 2009, as compared to a 37.3% expense for the same period in the prior year. Our effective tax rate fluctuates due to a variety of factors, including state income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates, various changes in estimates of permanent differences and valuation allowances and the relative size of our consolidated income before income taxes.
The primary factor impacting our effective tax rate is the mix of earnings between the various tax jurisdictions in which we do business. Each tax jurisdiction has its own set of tax laws and tax rates. The income earned by our subsidiaries in each jurisdiction is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the jurisdictions that we operate in range from 0% to 38%. Therefore, the amount of income tax expense in each jurisdiction as compared to our consolidated income
(loss) before income taxes has a significant impact on our annual effective tax rate. Net income was $3.2 million, or $0.16 per share, in the first quarter of 2009 compared to $12.5 million, or $0.58 per share, in the same quarter of 2008. 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 $97.1 million in the first quarter of 2009 were 21% lower than the $123.6 million reported in the same quarter of 2008. Organic decreases caused seventeen percentage points of the reduction and the unfavorable impact of foreign currency exchange rates versus the U.S. dollar accounted for five percentage points of the reduction. Acquisitions completed since the first quarter of 2008 favorably impacted revenue by one percentage point. Sales at Garlock Sealing Technologies decreased 19%. Its sales were unfavorably impacted by reduced demand in U.S. and Asian markets; weakness in the steel sector; and decreases in the value of foreign currencies. Stemco's sales during the quarter decreased 20% year-over-year primarily as a result of the lower volumes, partially offset by the inclusion of the V.W. Kaiser business for a full quarter in 2009. Its OEM and aftermarket sales for the U.S. heavy-duty truck market were lower compared to 2008 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 and Plastomer Technologies experienced sales decreases during the first quarter of 2009 compared to the same quarter last year due to reduced volumes in their key markets.
Segment profit of $12.7 million in the first quarter of 2009 decreased 38% compared to the $20.6 million reported in the first quarter of 2008. A 32% decrease in profit at Garlock Sealing Technologies reflected the impact of lower sales and lower absorption of manufacturing costs due to reduced production levels. Stemco reported a decline in profit primarily due to the slowdown in the heavy-duty vehicle markets and the resulting lower volume and absorption of manufacturing costs partially offset by selected price increases. Garlock Rubber Technologies reported a slight decrease in segment profit. Manufacturing costs and volume decline negatively impacted Plastomer Technologies' results as they reported a decline in earnings compared to last year. Operating margins for the segment decreased to 13.1% in 2009 from 16.7% in 2008 as a result of the earnings declines at these operations.

Engineered Products. Sales of $88.0 million in the first quarter of 2009 were 34% lower than the $133.1 million reported in 2008. Acquisitions completed since the first quarter of 2008 favorably impacted revenue by three percentage points. This was more than offset by reduced activity in the segment's other operations, which reduced sales by 30 percentage points, and the year-over-year decrease in the value of foreign currencies, which produced seven percentage points of the sales decrease. Sales for GGB in the first quarter of 2009 were 47% lower than the amount reported in the comparable quarter of 2008 primarily due to reduced volume in automotive and industrial markets. Quincy Compressor's sales decreased as a result of reduced volumes in its key markets, which were partially offset by the sales from an acquisition completed in the second quarter of 2008. Sales for Compressor Products International in the first quarter of 2009 were 19% lower due to lower volume in its natural gas and other markets and unfavorable foreign exchange rates.
The segment loss in the first quarter of 2009 was $1.9 million, compared to the $21.1 million segment profit reported in the same quarter of 2008. GGB's profits decreased in 2009 due to lower volume in its automotive and industrial markets, lower absorption of manufacturing costs due to reduced production levels, and cost increases. Quincy Compressor reported a decrease in its profit as a result of lower volume and lower absorption of manufacturing costs. Profits at Compressor Products International decreased as a result of lower volume, unfavorable foreign exchange rates and higher costs. The negative operating margins in the quarter for the segment compare to 15.9% margins in the first quarter of 2008.
Engine Products and Services. Sales increased 20% from $26.5 million in the first quarter of 2008 to $31.7 million in the first quarter of 2009. The increase was attributable to higher parts, service and engine sales.
The segment reported a profit of $5.5 million in the first quarter of 2009 compared to $3.4 million in the first quarter of 2008. The year-over-year improvement consisted of higher aftermarket sales and engine volumes, partially offset by higher material costs in the current quarter compared to the first quarter of 2008. Operating margins for the segment increased to 17.4% in 2009 from 12.8% in 2008.
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. The Company intends to continue to consider acquisition opportunities, some of which may be of a size that would exceed available cash balances. 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 $0.5 million in the first quarter of 2009 compared to $9.4 million in the same period last year. The decrease in operating cash flows was primarily attributable to lower earnings before interest, taxes, depreciation and amortization (EBITDA) resulting from lower volumes in the first quarter of 2009 compared to 2008. The decrease in EBITDA was partially offset by a lower increase in working capital.
Investing activities used $10.6 million and $39.4 million of cash during the first quarter of 2009 and 2008, respectively. We made net payments for acquisitions of $5.3 million in 2009 compared to $27.2 million in 2008. In addition, capital expenditures in 2009 were $5.4 million less than in 2008 due to reduced spending at GGB in Europe and on Garlock's Palmyra modernization project, as well as the Company's actions to reduce spending in response to the current economic environment. We also received $2.0 million from the distribution of proceeds from an investment.

In the first quarter of 2009, we paid off $9.6 million in industrial revenue bonds that matured during the period. This transaction was included 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, 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, 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 . . .