UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the securities exchange act of 1934

o		Transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934

Commission File Number 001-31225

 

ENPRO INDUSTRIES, INC.

(Exact name of registrant, as specified in its charter)

North Carolina (State or other jurisdiction of incorporation)		01-0573945 (I.R.S. Employer Identification No.)
5605 Carnegie Boulevard, Suite 500, Charlotte, North Carolina (Address of principal executive offices)		28209 (Zip Code)

(704) 731-1500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

As of November 4, 2010, there were 20,594,120 shares of common stock of the registrant outstanding. There is only one class of common stock.

 

 

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

ENPRO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarters and Nine Months Ended September 30, 2010 and 2009
(in millions, except per share amounts)

		Quarters Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net sales		$	194.5			$	189.4			$	673.5			$	579.8
Cost of sales			121.3				122.7				420.0				380.6
Gross profit			73.2				66.7				253.5				199.2
Operating expenses:
Selling, general and administrative expenses			55.8				52.4				179.5				164.0
Asbestos-related expenses			—				13.7				23.3				41.6
Goodwill impairment charge			—				—				—				113.1
Other operating expense			0.9				0.7				2.4				7.7
			56.7				66.8				205.2				326.4
Operating income (loss)			16.5				(0.1	)			48.3				(127.2	)
Interest expense			(9.6	)			(3.1	)			(17.8	)			(9.3	)
Interest income			0.4				0.4				1.2				0.6
Gain on deconsolidation of GST			—				—				54.1				—
Other income			—				—				—				19.1
Income (loss) from continuing operations before income taxes			7.3				(2.8	)			85.8				(116.8	)
Income tax benefit (expense)			(2.4	)			3.8				(30.8	)			12.5
Income (loss) from continuing operations			4.9				1.0				55.0				(104.3	)
Income from discontinued operations, net of tax			—				0.8				94.1				3.6
Net income (loss)		$	4.9			$	1.8			$	149.1			$	(100.7	)
Basic earnings (loss) per share:
Continuing operations		$	0.24			$	0.05			$	2.71			$	(5.23	)
Discontinued operations			—				0.04				4.63				0.18
Net income (loss) per share		$	0.24			$	0.09			$	7.34			$	(5.05	)
Diluted earnings (loss) per share:
Continuing operations		$	0.24			$	0.05			$	2.68			$	(5.23	)
Discontinued operations			—				0.04				4.57				0.18
Net income (loss) per share		$	0.24			$	0.09			$	7.25			$	(5.05	)

See notes to consolidated financial statements (unaudited).

ENPRO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2010 and 2009
(in millions)

		2010				2009
OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net income (loss)		$	149.1			$	(100.7	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations:
Income from discontinued operations, net of taxes			(94.1	)			(3.6	)
Taxes related to sale of discontinued operations			(50.9	)			—
Gain on deconsolidation of GST, net of taxes			(33.8	)			—
Depreciation			17.9				19.9
Amortization			12.2				9.9
Accretion of debt discount			4.2				3.9
Goodwill impairment charge			—				113.1
Deferred income taxes			9.9				(21.6	)
Stock-based compensation			5.0				0.7
Change in assets and liabilities, net of effects of acquisitions and deconsolidation of businesses:
Asbestos liabilities, net of insurance receivables			26.0				10.7
Accounts and notes receivable			(35.2	)			5.7
Inventories			(0.2	)			(3.2	)
Accounts payable			(1.7	)			(1.0	)
Other current assets and liabilities			11.5				(2.4	)
Other non-current assets and liabilities			(0.8	)			(6.7	)
Net cash provided by operating activities of continuing operations			19.1				24.7
INVESTING ACTIVITIES OF CONTINUING OPERATIONS
Purchases of property, plant and equipment			(14.3	)			(16.5	)
Proceeds from liquidation of investments			—				3.6
Divestiture of business			189.4				—
Deconsolidation of GST			(29.5	)			—
Acquisitions, net of cash acquired			(25.5	)			(6.2	)
Other			—				1.4
Net cash provided by (used in) investing activities of continuing operations			120.1				(17.7	)
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Repayments of short-term borrowings			(6.1	)			—
Repayments of debt			(0.1	)			(9.9	)
Proceeds from issuance of common stock			0.4				0.1
Net cash used in financing activities of continuing operations			(5.8	)			(9.8	)
CASH FLOWS OF DISCONTINUED OPERATIONS
Operating cash flows			1.9				10.1
Investing cash flows			(0.1	)			(2.3	)
Net cash provided by discontinued operations			1.8				7.8
Effect of exchange rate changes on cash and cash equivalents			—				2.2
Net increase in cash and cash equivalents			135.2				7.2
Cash and cash equivalents at beginning of period			76.8				76.3
Cash and cash equivalents at end of period		$	212.0			$	83.5
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	3.6			$	3.9
Income taxes		$	51.6			$	10.3
Asbestos-related claims and expenses, net of insurance recoveries		$	3.8			$	30.9

See notes to consolidated financial statements (unaudited).

ENPRO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share amounts)

		September 30,				December 31,
		2010				2009
ASSETS
Current assets
Cash and cash equivalents		$	212.0			$	76.8
Accounts and notes receivable			134.1				112.7
Asbestos insurance receivable			—				67.2
Inventories			83.0				86.1
Other current assets			38.8				52.2
Assets of discontinued operations			—				57.5
Total current assets			467.9				452.5
Property, plant and equipment			138.8				185.4
Goodwill			112.0				125.7
Other intangible assets			118.6				116.0
Investment in GST			236.9				—
Asbestos insurance receivable			—				171.4
Deferred income taxes			10.9				119.9
Other assets			48.1				50.3
Total assets		$	1,133.2			$	1,221.2
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings from GST		$	20.8			$	—
Current maturities of long-term debt			—				0.1
Accounts payable			54.0				56.5
Asbestos liability			—				85.4
Accrued interest payable			21.7				1.4
Other accrued expenses			85.5				70.3
Liabilities of discontinued operations			—				16.2
Total current liabilities			182.0				229.9
Long-term debt			134.3				130.3
Notes payable to GST			227.2				—
Asbestos liability			—				406.9
Pension liability			73.9				84.8
Other liabilities			41.1				57.7
Total liabilities			658.5				909.6
Commitments and contingencies
Shareholders’ equity
Common stock — $.01 par value; 100,000,000 shares authorized; issued, 20,559,871 shares in 2010 and 20,365,596 in 2009			0.2				0.2
Additional paid-in capital			408.1				402.7
Retained earnings (accumulated deficit)			54.4				(94.7	)
Accumulated other comprehensive income			13.4				4.8
Common stock held in treasury, at cost — 209,662 shares in 2010 and 211,860 shares in 2009			(1.4	)			(1.4	)
Total shareholders’ equity			474.7				311.6
Total liabilities and shareholders’ equity		$	1,133.2			$	1,221.2

See notes to consolidated financial statements (unaudited).

ENPRO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Overview and Basis of Presentation

     Overview

     EnPro Industries, Inc. (“EnPro” or the “Company”) is a leader in the design, development, manufacturing and marketing of proprietary engineered industrial products that include sealing products, self-lubricating, non-rolling bearing products and heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines.

     Basis of Presentation

     The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Consolidated Balance Sheet as of December 31, 2009, was derived from the audited financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair statement of results for the periods presented, have been included. Management believes that the assumptions underlying the consolidated financial statements are reasonable. These interim financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto that are included in its annual report on Form 10-K for the year ended December 31, 2009.

     Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for a full year.

     All significant intercompany accounts and transactions between the Company’s consolidated operations have been eliminated.

2. Garlock Sealing Technologies LLC and Garrison Litigation Management Group, Ltd.

     The historical business operations of certain subsidiaries of the Company’s subsidiary, Coltec Industries Inc (“Coltec”), principally Garlock Sealing Technologies LLC (“GST LLC”) and The Anchor Packing Company (“Anchor”), have resulted in a substantial volume of asbestos litigation in which plaintiffs have alleged personal injury or death as a result of exposure to asbestos fibers. Those subsidiaries manufactured and/or sold industrial sealing products, predominately gaskets and packing, that contained encapsulated asbestos fibers. Anchor is an inactive and insolvent indirect subsidiary of Coltec. The Company’s subsidiaries’ exposure to asbestos litigation and their relationships with insurance carriers are managed through another Coltec subsidiary, Garrison Litigation Management Group, Ltd. (“Garrison”). GST LLC, Anchor and Garrison are collectively referred to as “GST.”

     On June 5, 2010 (the “Petition Date”), GST LLC, Anchor and Garrison filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of North Carolina in Charlotte (the “Bankruptcy Court”). The filings were the initial step in a claims resolution process. The goal of the process is an efficient and permanent resolution of all current and future asbestos claims through court approval of a plan of reorganization that will establish a trust to which all asbestos claims will be channeled for resolution. GST intends to seek an

agreement with asbestos claimants and other creditors on the terms of a plan for the establishment of such a trust and repayment of other creditors in full, or in the absence of such an agreement an order of the Bankruptcy Court confirming such a plan.

     GST’s financial results are included in the Company’s consolidated results through June 4, 2010, the day prior to the Petition Date. However, generally accepted accounting principles require that an entity whose financial statements were previously consolidated with those of its parent (as GST’s were with EnPro’s) that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, generally must be prospectively deconsolidated from the parent and presented on the cost method. The cost method requires the Company to present the net assets of GST as an investment and not recognize any income or loss from GST in the Company’s results of operations during the reorganization period. When GST emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based upon the applicable circumstances and facts at such time, including the terms of any plan of reorganization.

     As a result of the deconsolidation of GST, the Company conducted an analysis to compare the fair market value of GST to its book value. The excess of GST’s fair value over its book value resulted in a gain on deconsolidation. To estimate the fair value, the Company considered many factors and used both discounted cash flow and market valuation approaches. In the discounted cash flow approach, the Company used cash flow projections to calculate the fair value of GST. The key assumptions used for the discounted cash flow approach include expected cash flows based on internal business plans, historical and projected growth rates, discount rates, estimated asbestos claim values and insurance collection projections. The Company did not adjust the assumption about asbestos claims values from the assumption reflected in the liability it recorded prior to the deconsolidation. The asbestos claims value will be determined in the claims resolution process, either through negotiations with claimant representatives or by the Bankruptcy Court. The Company reviewed a wide range of possible outcomes for that determination and the $473 million liability is within that range. The Company concluded that there is no better estimate of the value a third party might ascribe to the claims. The Company’s estimates are based upon assumptions it believes to be reasonable but which by nature are uncertain and unpredictable. For the market approach, the Company used recent acquisition multiples for businesses of similar size to GST. Based on this analysis, the Company recognized a $54.1 million pre-tax gain on the deconsolidation of GST. The fair value of GST (net of taxes on the gain on deconsolidation) was $236.9 million and this investment in GST will be presented using the cost method during the reorganization period and is subject to periodic reviews for impairment.

     Financial Results

     Condensed combined financial information for GST is set forth below, presented at historical cost basis.

GST
(Debtor-in-Possession)
Condensed Combined Statements of Operations (Unaudited)
(in millions, at historical cost)

		Quarters								Nine Months
		Ended								Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net sales		$	49.9			$	40.2			$	149.2			$	119.4
Cost of sales			29.8				25.4				91.6				74.3
Gross profit			20.1				14.8				57.6				45.1
Operating expenses:
Selling, general and administrative expenses			11.4				9.4				32.7				29.4
Asbestos-related expenses			1.1				13.7				24.7				41.6
Other operating expense			—				—				0.1				0.8
			12.5				23.1				57.5				71.8
Operating income (loss)			7.6				(8.3	)			0.1				(26.7	)
Interest income			6.4				3.6				19.0				10.8
Income (loss) before income taxes			14.0				(4.7	)			19.1				(15.9	)
Income tax benefit (expense)			(4.7	)			2.2				(6.5	)			6.6
Net income (loss)		$	9.3			$	(2.5	)		$	12.6			$	(9.3	)

     As compared to the financial data included in the second quarter Form 10-Q, GST’s interest income for the six months ended June 30, 2010 has been reduced by $4.5 million and interest income for the six months ended June 30, 2009 has been increased by $0.3 million to reflect the proper accrual periods. These changes had no impact on EnPro’s results of operations, cash flows or financial position.

GST
(Debtor-in-Possession)
Condensed Combined Statement of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2010
(in millions, at historical cost)

Net cash flows from operating activities		$	44.7
Investing activities
Purchases of property, plant and equipment			(2.1	)
Net receipts from loans to affiliates			22.9
Net cash provided by investing activities			20.8
Effect of exchange rate changes on cash and cash equivalents			0.2
Net increase in cash and cash equivalents			65.7
Cash and cash equivalents at beginning of period			1.5
Cash and cash equivalents at end of period		$	67.2

GST
(Debtor-in-Possession)
Condensed Combined Balance Sheet (Unaudited)
September 30, 2010
(in millions, at historical cost)

Assets:
Current assets		$	167.2
Property, plant and equipment			40.7
Asbestos insurance receivable			157.1
Deferred income taxes			123.3
Notes receivable from affiliate			227.2
Other assets			24.2
Total assets		$	739.7
Liabilities and Shareholder’s Equity:
Current liabilities		$	14.0
Other liabilities			3.9
Liabilities subject to compromise			517.5	(A)
Total liabilities			535.4
Shareholder’s equity			204.3
Total liabilities and shareholder’s equity		$	739.7

Accounts payable		$	13.4
Accrued expenses			16.4
Asbestos liability			467.3
Other long-term liabilities			20.4
		$	517.5

     Related Party Transactions

     The Company regularly transacts business with GST, and previously, these related party transactions had been eliminated in consolidation. Due to the deconsolidation of GST, they are now reflected on the Company’s consolidated statement of operations. Sales to GST totaling $5.4 million and $7.3 million are reflected in net sales for the quarter and nine months ended September 30, 2010, respectively. Purchases from GST totaling $3.8 million and $5.0 million are reflected in cost of sales for the quarter and nine months ended September 30, 2010, respectively. The Company also provides services for GST including information technology, supply chain, treasury, tax administration, legal and human relations under a support services agreement. In addition, GST LLC’s board of managers and Garrison’s board of directors have approved a tax sharing agreement, subject to approval of the Bankruptcy Court, pursuant to which GST would be responsible for its share of income taxes included in the Company’s tax returns. Amounts due from GST resulting from their purchase of goods and services from the Company totaling $11.3 million are included in accounts and notes receivable and amounts due to GST resulting from the Company’s purchase of goods from GST totaling $4.1 million are included in accounts payable on the September 30, 2010 consolidated balance sheet.

     Additionally, the Company and GST had outstanding foreign exchange forward contracts involving the Australian Dollar, Canadian Dollar, Mexican Peso and U.S. Dollar with a notional amount

of $8.9 million as of September 30, 2010. These related party contracts were eliminated in consolidation prior to the deconsolidation of GST.

     As discussed more fully in Note 11, the deconsolidation of GST from the Company’s results requires that $20.8 million of short-term borrowings from GST and $227.2 million of notes payable to GST that had previously been eliminated in consolidation be reflected on the Company’s consolidated balance sheet as of September 30, 2010. Interest expense related to these borrowings of $6.4 million and $8.2 million is reflected in interest expense for the quarter and nine months ended September 30, 2010, respectively, and accrued interest of $18.6 million is included in accrued interest payable on the September 30, 2010 consolidated balance sheet.

     Debtor-in-Possession Financing

     On June 8, 2010, GST entered into a Post-Petition Loan and Security Agreement with Bank of America, N.A. (the “DIP Loan Agreement”) to establish a secured revolving credit facility pursuant to which GST may from time to time obtain loans, letters of credit and bank products in an aggregate amount up to $10 million outstanding at any time (with a sublimit of $8 million for letters of credit). Actual borrowing availability at any date is determined by reference to a borrowing base of specified percentages of eligible accounts receivable and inventory, which borrowing base is reduced by loans and letters of credit outstanding and certain reserves. The obligations of GST under the DIP Loan Agreement are guaranteed by GST’s two domestic subsidiaries and secured by certain assets of GST and such domestic subsidiaries. As a result of the deconsolidation of GST from the Company’s financial results, any indebtedness incurred under the DIP Loan Agreement would not be reflected in the Company’s consolidated balance sheets.

3. Acquisitions

     In August 2010, the Company acquired CC Technology, Progressive Equipment, Inc. and Premier Lubrication Systems, Inc. These businesses design and manufacture lubrication systems used in reciprocating compressors and are included in the Company’s Engineered Products segment.

     In September 2010, the Company acquired Hydrodyne, a designer and manufacturer of machined metallic seals and other specialized components used primarily by the space, aerospace and nuclear industries. This business is included in the Company’s Sealing Products segment.

     The acquisitions completed during 2010 were paid for with $25.5 million in cash. The assets, liabilities and results of operations of these acquisitions were not material to the Company’s consolidated financial position or results of operations, so pro forma financial information and additional disclosures are not presented. The purchase price allocations of the recently acquired businesses are subject to the completion of the valuation of certain assets and liabilities and purchase price adjustments pursuant to the acquisition agreements.

4. Discontinued Operations

     During the fourth quarter of 2009, the Company announced its plans to sell the Quincy Compressor business (“Quincy”) that had been reported within the Engineered Products segment. Accordingly, the Company has reported, for all periods presented, the financial condition, results of operations and cash flows of Quincy as a discontinued operation in the accompanying consolidated financial statements.

     On March 1, 2010, the Company completed the sale of Quincy, other than the equity interests in Kunshan Q-Tech Air Systems Technologies Ltd., Quincy’s operation in China (“Q-Tech”). The sale of the equity interests in Q-Tech was completed during the second quarter. The purchase price for the assets

and equity interests sold was $189.4 million in cash. The purchaser also assumed certain liabilities of Quincy. The sale resulted in a gain of $147.8 million ($92.5 million, net of tax).

     For the quarters and nine months ended September 30, 2010 and 2009, results of operations from Quincy during the periods owned by EnPro were as follows:

		Quarters								Nine Months
		Ended								Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(in millions)
Sales		$	—			$	30.3			$	23.3			$	91.6
Income from discontinued operations			—				1.8				2.6				6.1
Income tax expense			—				(1.0	)			(1.0	)			(2.5	)
Income from discontinued operations, net of taxes			—				0.8				1.6				3.6
Gain from disposal of discontinued operations, net of tax			—				—				92.5				—
Net income from discontinued operations		$	—			$	0.8			$	94.1			$	3.6

The major classes of assets and liabilities for Quincy as of December 31, 2009 are shown below:

		2009
		(in millions)
Assets:
Accounts and notes receivable		$	18.0
Inventories			8.2
Other current assets			0.9
Property, plant and equipment			18.3
Goodwill			6.4
Other intangible assets			4.6
Other assets			1.1
Assets of discontinued operations		$	57.5
Liabilities:
Accounts payable		$	9.5
Other accrued expenses			6.4
Other liabilities			0.3
Liabilities of discontinued operations		$	16.2

5. Income Taxes

     The Company has $4.3 million of gross unrecognized tax benefits as of September 30, 2010. As of December 31, 2009, the Company had $7.2 million of gross unrecognized tax benefits. Of the gross unrecognized tax benefit balances at September 30, 2010 and December 31, 2009, approximately $4.3 million and $3.8 million, respectively, would have an impact on the effective tax rate if ultimately recognized.

     The Company records interest and penalties related to taxes as part of income tax expense. In addition to the gross unrecognized tax benefits above, the Company had approximately $1.3 million and $1.0 million accrued for interest and penalties at September 30, 2010 and December 31, 2009, respectively. Income tax expense for the nine-month period ended September 30, 2009 includes approximately $0.4 million of interest and penalties related to unrecognized tax benefits. Income tax

expense for the year ended December 31, 2009 includes approximately $0.3 million of interest and penalties related to unrecognized tax benefits. The amounts listed above for accrued interest and interest expense do not reflect the benefit of a federal tax deduction which would be available if the interest were ultimately paid.

6. Comprehensive Income (Loss)

     Total comprehensive income (loss) consists of the following:

		Quarters								Nine Months
		Ended								Ended
		September 30,								September 30,
		2010				2009				2010				2009
										(in millions)
Net income (loss)		$	4.9			$	1.8			$	149.1			$	(100.7	)
Unrealized translation adjustments			18.3				12.1				(6.8	)			18.3
Pensions and postretirement benefits			1.3				1.1				16.6				3.4
Net unrealized gains (losses) from cash flow hedges			0.1				0.4				(1.2	)			0.3
Total comprehensive income (loss)		$	24.6			$	15.4			$	157.7			$	(78.7	)

7. Earnings (Loss) Per Share

     The computation of basic and diluted earnings (loss) per share is as follows:

		Quarters								Nine Months
		Ended								Ended
		September 30,								September 30,
		2010				2009				2010				2009
			(in millions, except per share amounts)
Numerator (basic and diluted):
Continuing operations		$	4.9			$	1.0			$	55.0			$	(104.3	)
Discontinued operations			—				0.8				94.1				3.6
Net income (loss)		$	4.9			$	1.8			$	149.1			$	(100.7	)
Denominator:
Weighted-average shares — basic			20.4				20.0				20.3				19.9
Share-based awards			0.2				0.3				0.3				—
Weighted-average shares — diluted			20.6				20.3				20.6				19.9
Earnings (loss) per share — basic:
Continuing operations		$	0.24			$	0.05			$	2.71			$	(5.23	)
Discontinued operations			—				0.04				4.63				0.18
		$	0.24			$	0.09			$	7.34			$	(5.05	)
Earnings (loss) per share — diluted
Continuing operations		$	0.24			$	0.05			$	2.68			$	(5.23	)
Discontinued operations			—				0.04				4.57				0.18
		$	0.24			$	0.09			$	7.25			$	(5.05	)

     As discussed further in Note 10, the Company previously issued $172.5 million in aggregate principal amount of Convertible Senior Debentures (the “Debentures”). Under the terms of the Debentures, the Company would settle the par amount of its obligations in cash and the remaining obligations, if any, in common shares. Pursuant to applicable accounting standards, the Company includes the conversion option effect in diluted earnings per share during such periods when the Company’s average stock price exceeds the conversion price of $33.79 per share. The Company’s average stock price did not exceed $33.79 per share in any period presented, so there is no impact on diluted earnings per share from the Debentures.

     In the nine months ended September 30, 2009, there was a loss attributable to common shares. Potentially dilutive share-based awards of 0.3 million were excluded from the calculation of diluted earnings per share for this period, as they were antidilutive. There were no antidilutive shares in 2010 or the quarter ended September 30, 2009.

8. Inventories

     Inventories consist of the following:

		As of				As of
		September 30,				December 31,
		2010				2009
		(in millions)
Finished products		$	58.7			$	60.1
Deferred costs relating to long-term contracts			34.5				42.9
Work in process			16.2				16.2
Raw materials and supplies			24.4				24.4
			133.8				143.6
Reserve to reduce certain inventories to LIFO basis			(10.4	)			(14.2	)
Progress payments			(40.4	)			(43.3	)
Total		$	83.0			$	86.1

     The Company uses the last-in, first-out (“LIFO”) method of valuing certain of its inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs, which are subject to change in the final year-end LIFO inventory valuation.

9. Goodwill and Other Intangible Assets

     The changes in the net carrying value of goodwill by reportable segment for the nine months ended September 30, 2010, are as follows:

										Engine
		Sealing				Engineered				Products and
		Products				Products				Services				Total
		(in millions)
Gross goodwill as of December 31, 2009		$	112.8			$	142.3			$	7.1			$	262.2
Accumulated impairment losses			(27.8	)			(108.7	)			—				(136.5	)
Goodwill as of December 31, 2009			85.0				33.6				7.1				125.7
Foreign currency translation			(1.3	)			(0.5	)			—				(1.8	)
Deconsolidation of GST			(17.4	)			—				—				(17.4	)
Acquisitions and purchase accounting adjustments			(0.3	)			5.8				—				5.5
Gross goodwill as of September 30, 2010			93.8				147.6				7.1				248.5
Accumulated impairment losses			(27.8	)			(108.7	)			—				(136.5	)
Goodwill as of September 30, 2010		$	66.0			$	38.9			$	7.1			$	112.0

     The gross carrying amount and accumulated amortization of identifiable intangible assets is as follows:

		As of September 30, 2010								As of December 31, 2009
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
		(in millions)
Customer relationships		$	103.5			$	39.4			$	90.4			$	34.1
Existing technology			26.4				8.2				26.5				6.5
Trademarks			38.7				7.6				39.3				7.3
Other			17.0				11.8				17.4				9.7
		$	185.6			$	67.0			$	173.6			$	57.6

     Amortization expense related to these intangible assets for the quarter and nine months ended September 30, 2010, was $3.0 million and $9.9 million, respectively. Amortization expense for the quarter and nine months ended September 30, 2009, was $2.5 million and $7.4 million, respectively. The Company has trademarks with indefinite lives that are included in the table above with a carrying amount of approximately $24 million as of September 30, 2010 that are not amortized.

10. Long-Term Debt

     Debentures

     The Company has $172.5 million outstanding in aggregate principal amount of Debentures. The Debentures bear interest at the annual rate of 3.9375%, with interest due on April 15 and October 15 of each year, and will mature on October 15, 2015 unless they are converted prior to that date. The Debentures are the Company’s direct, unsecured and unsubordinated obligations and rank equal in priority with all unsecured and unsubordinated indebtedness and senior in right of payment to all subordinated indebtedness. They effectively rank junior to all 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 the Company’s common stock, under certain circumstances. The initial conversion rate, which is subject to adjustment, is 29.5972 shares of common stock per $1,000 principal amount of Debentures. This is equal to an initial conversion price of $33.79 per share. The Debentures may be converted under circumstances described more fully in the Company’s most recent Form 10-K.

     None of the conditions that permit conversion were satisfied at, or during the quarter ended September 30, 2010.

     Upon conversion of any Debentures, the principal amount would be settled in cash. To the extent the Conversion Value (defined below) exceeds $1,000, a number of shares equal to the sum of, for each day of the cash settlement period, (1) 5% of the difference between (A) the product of the conversion rate (plus any additional shares as an adjustment upon a change of control) and the closing price of the Company’s common stock for such date and (B) $1,000, divided by (2) the closing price of the Company’s common stock for such day.

     “Conversion Value” means the product of (1) the conversion rate in effect (plus any additional shares as an adjustment upon a change of control) and (2) the average of the closing prices of the Company’s common stock for the 20 consecutive trading days beginning on the second trading day after the conversion date for those Debentures.

     The Company used a portion of the net proceeds from the sale of the Debentures to enter into call options (hedge and warrant transactions), which entitle the Company to purchase shares of its stock from a financial institution at $33.79 per share and entitle the financial institution to purchase shares from the Company at $46.78 per share. This will reduce potential dilution to the Company’s common shareholders from conversion of the Debentures by increasing the effective conversion price to $46.78 per share.

     The current accounting rules require that the liability component of the Debentures be recorded at its fair value as of the issuance date. This resulted in the Company recording, as of the original issuance date, debt in the amount of $111.2 million with the $61.3 million offset to the debt discount being recorded in equity on a net of tax basis. The debt discount, $38.2 million as of September 30, 2010, is being amortized through interest expense until the maturity date of October 15, 2015, resulting in an effective interest rate of approximately 9.5% and a $134.3 million net carrying amount of the liability component at September 30, 2010. As of December 31, 2009, the unamortized debt discount was $42.5 million and the net carrying amount of the liability component was $130.0 million. Interest expense related to the Debentures for the quarters ended September 30, 2010 and 2009 includes $1.7 million of contractual interest coupon in both periods and $1.4 million and $1.3 million, respectively, of debt discount amortization. Interest expense related to the Debentures for the nine months ended September 30, 2010 and 2009 includes $5.1 million of contractual interest coupon in both periods and $4.2 million and $3.9 million, respectively, of debt discount amortization.

     Credit Facility

     The Company’s primary U.S. operating subsidiaries, excluding GST, as discussed below, have a senior secured revolving credit facility with a group of banks, which matures on April 21, 2011. The Company has not borrowed against this facility, but it has $4.1 million of letters of credit outstanding thereunder as of September 30, 2010. Except for the assets of GST, excluded as collateral by the fifth amendment to the senior secured revolving credit facility described below, the facility is collateralized by the Company’s 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 its direct foreign subsidiaries and 100% of the capital stock of its direct and indirect U.S. subsidiaries. The facility contains covenants and restrictions that are customary for an asset-based loan, including negative covenants limiting fundamental changes (such as merger transactions), loans, incurrence of debt other than specifically permitted debt, transactions with affiliates that are not on arms- length terms, incurrence of liens other than specifically permitted liens, repayment of subordinated debt

(except for scheduled payments in accordance with applicable subordination documents), prepayments of other debt, dividends, asset dispositions other than as specifically permitted, and acquisitions and other investments other than as specifically permitted. However, in the event that the amount available for borrowing under the facility exceeds $20 million, the limitations on acquisitions, investments in foreign subsidiaries, fixed asset dispositions, dividends (including those required to make payments on the Company’s convertible debentures), incurrence of certain cash collateral liens and prepayment of debt other than subordinated debt are generally not applicable. In addition, the facility requires the Company to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 in the event the amount available for borrowing, as defined under the facility, drops below $15 million.

     The maximum amount available for borrowings under the facility was $75 million until June 8, 2010, on which date the maximum amount was reduced to $60 million in connection with the fifth amendment described below. Under certain conditions, the Company may request that the facility be increased by up to $25 million, to $85 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. The actual borrowing availability at September 30, 2010 under the senior secured revolving credit facility was $55.9 million after giving consideration to the $4.1 million of letters of credit outstanding thereunder.

     In June 2010 the Company entered into a fifth amendment to its senior secured credit facility that provided for the following primary changes to the facility:

	•		The waiver of any default or event of default arising from the filing of voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code, with the intention of creating a trust pursuant to Section 524(g) of the U.S Bankruptcy Code to address and resolve all current and future asbestos claims, by GST;
	•		The reduction of the commitments of the lenders under such facility from $75 million to $60 million;
	•		The elimination of GST as a borrower, the release of GST from the covenants under the facility, and the release of all liens on the assets of GST as collateral under the facility;
	•		The elimination of GST’s accounts receivable and inventory from the borrowing base under the facility;
	•		The rollover of a letter of credit in the face amount of $4.7 million for the account of GST and certain bank product obligations of GST to Bank of America, N.A. and its affiliates from such facility to the DIP Loan Agreement described in Note 2;
	•		The increase of the interest rate on borrowings, with the applicable margin on LIBOR-based loans ranging from 2.00% to 2.50% per annum and the applicable margin on base rate, or “prime rate,” loans ranging from 1.00% to 1.50%; and
	•		The increase of the fee with respect to the unused portion of the commitment under such facility from 0.25% to 0.50% per annum.

11. Short-Term Borrowings from GST and Notes Payable to GST

     The deconsolidation of GST from the Company’s financial results requires that certain intercompany indebtedness described below be reflected on the Company’s consolidated balance sheets.

     As of September 30, 2010, Coltec Finance Company Ltd., a wholly-owned subsidiary of Coltec, had aggregate, short-term borrowings of $20.8 million from GST’s foreign subsidiaries in Mexico, Canada and Australia. The unsecured obligations are denominated in the currency of the lending party, and bear interest based on the applicable one-month interbank offered rate for each foreign currency involved.

     Effective as of January 1, 2010, Coltec entered into a $73.4 million Amended and Restated Promissory Note due January 1, 2017 (the “Coltec Note”) in favor of GST, and the Company’s subsidiary Stemco LP entered into a $153.8 million Amended and Restated Promissory Note due January 1, 2017 in favor of GST (the “Stemco Note”, and together with the Coltec Note, the “Intercompany Notes”). The Intercompany Notes amended and replaced promissory notes in the same principal amounts that were initially issued in March 2005 as consideration for the transfer of certain GST LLC subsidiary assets.

     The Intercompany Notes bear interest at 11% per annum, of which 6.5% is payable in cash and 4.5% is added to the principal amount of the Intercompany Notes as payment-in-kind (“PIK”) interest. If GST is unable to pay ordinary course operating expenses, under certain conditions, GST can require Coltec and Stemco to pay in cash the accrued PIK interest necessary to meet such ordinary course operating expenses, subject to a cap of 1% of the principal balance of each Intercompany Note in any calendar month and 4.5% of the principal balance of each Intercompany Note in any year. The interest due under the Intercompany Notes may be satisfied through offsets of amounts due under intercompany services agreements pursuant to which the Company provides certain corporate services and insurance coverages to GST, makes advances to third party providers related to payroll and certain benefit plans sponsored by GST, and permits employees of GST to participate in certain of the Company’s benefit plans.

     The Coltec Note is secured by Coltec’s pledge of certain of its equity ownership in specified U.S. subsidiaries. The Stemco Note is guaranteed by Coltec and secured by Coltec’s pledge of its interest in Stemco. The Notes are subordinated to any obligations under the Company’s senior secured revolving credit facility described in Note 10.

12. Pensions and Postretirement Benefits

     The components of net periodic benefit cost for the Company’s U.S. and foreign defined benefit pension and other postretirement plans for the quarters and nine months ended September 30, 2010 and 2009, are as follows:

		Quarters Ended September 30,
		Pension Benefits								Other Benefits
		2010				2009				2010				2009
		(in millions)
Service cost		$	1.0			$	1.6			$	0.2			$	0.2
Interest cost			2.0				2.9				0.1				0.2
Expected return on plan assets			(1.5	)			(2.2	)			—				—
Prior service cost component			0.1				0.2				—				—
Net loss component			1.2				1.5				—				0.1
		$	2.8			$	4.0			$	0.3			$	0.5

		Nine Months Ended September 30,
		Pension Benefits								Other Benefits
		2010				2009				2010				2009
		(in millions)
Service cost		$	3.8			$	5.0			$	0.6			$	0.7
Interest cost			8.2				9.1				0.5				0.7
Expected return on plan assets			(6.2	)			(7.2	)			—				—
Prior service cost component			0.5				0.6				0.1				0.1
Net loss component			4.6				4.7				0.1				0.2
Curtailment loss			0.7				—				—				—
		$	11.6			$	12.2			$	1.3			$	1.7

     The Company anticipates that there will be a required funding of $2.0 million to its U.S. defined benefit plans in 2010. The Company expects to make total contributions of approximately $0.6 million in 2010 to its foreign pension plans.

13. Derivative Instruments

     The Company uses derivative financial instruments to manage its exposure to various risks. The use of these financial instruments modifies the exposure with the intent of reducing the risk to the Company. The Company does not use financial instruments for trading purposes, nor does it use leveraged financial instruments. The counterparties to these contractual arrangements are major financial institutions and GST as described in Note 2. The Company uses multiple financial institutions for derivative contracts to minimize the concentration of counterparty credit risk. The current accounting rules require that all derivative instruments be reported in the Consolidated Balance Sheets at fair value and that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge criteria are met.

     The Company is exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances on its foreign subsidiaries’ balance sheets, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies. The Company strives to control its exposure to these risks through its normal operating activities and, where appropriate, through derivative instruments. The Company has entered into contracts to hedge forecasted transactions occurring at various dates through May 2012 that are denominated in foreign currencies. The notional amount of foreign exchange contracts hedging foreign currency transactions was $138.3 million and $106.0 million at September 30, 2010 and December 31, 2009, respectively. At September 30, 2010, foreign exchange contracts with notional amounts totaling $95.0 million 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 accumulated other comprehensive income and the ineffective portion is reported in income. Amounts in accumulated other comprehensive income are reclassified into income, primarily cost of sales, in the period that the hedged transactions affect earnings. The balances of derivative assets are generally recorded in other current assets and the balances of derivative liabilities are generally recorded in other accrued expenses in the Consolidated Balance Sheets. The remaining notional amounts of $43.3 million of foreign exchange contracts, all of which have a maturity date of a month or less, are recorded at their fair market value with changes in market value recorded in income.

14. Business Segment Information

     The Company has three reportable segments. The Sealing Products segment manufactures sealing products, heavy-duty wheel end components, polytetrafluoroethylene (“PTFE”) products and rubber products. The Engineered Products segment manufactures self-lubricating, non-rolling bearing

products, aluminum blocks for hydraulic applications and compressor components. The Engine Products and Services segment manufactures and services heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines. The Company’s reportable segments are managed separately based on differences in their products and services and their end-customers. 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 related to the sale of assets, impairments 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 the Company.

     GST’s results, prior to their deconsolidation on June 5, 2010, are included in the Sealing Products segment. Segment operating results and other financial data for the quarters and nine months ended September 30, 2010 and 2009, are as follows:

		Quarters Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(in millions)
Sales
Sealing Products		$	82.5			$	99.9			$	309.5			$	295.1
Engineered Products			73.7				57.7				225.4				172.7
Engine Products and Services			38.5				32.0				139.4				113.1
			194.7				189.6				674.3				580.9
Intersegment sales			(0.2	)			(0.2	)			(0.8	)			(1.1	)
Total sales		$	194.5			$	189.4			$	673.5			$	579.8
Segment Profit (Loss)
Sealing Products		$	15.5			$	15.1			$	54.5			$	42.1
Engineered Products			2.9				(2.1	)			14.6				(14.7	)
Engine Products and Services			8.8				5.7				31.5				20.9
Total segment profit			27.2				18.7				100.6				48.3
Corporate expenses			(8.6	)			(5.2	)			(24.3	)			(20.1	)
Asbestos-related expenses			—				(13.7	)			(23.3	)			(41.6	)
Goodwill impairment charge			—				—				—				(113.1	)
Gain on deconsolidation of GST			—				—				54.1				—
Interest expense, net			(9.2	)			(2.7	)			(16.6	)			(8.7	)
Other income (expense), net			(2.1	)			0.1				(4.7	)			18.4
Income (loss) from continuing operations before income taxes		$	7.3			$	(2.8	)		$	85.8			$	(116.8	)

     Segment assets are as follows:

		September 30,				December 31,
		2010				2009
Sealing Products		$	251.7			$	321.1
Engineered Products			339.9				314.1
Engine Products and Services			83.0				87.9
Corporate			458.6				440.6
Discontinued operations			—				57.5
		$	1,133.2			$	1,221.2

15. Fair Value Measurements

     The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

	•		Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
	•		Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
	•		Level 3: Unobservable inputs that reflect the Company’s own assumptions.

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

		Fair Value Measurements as of
		September 30, 2010
		Total				Level 1				Level 2				Level 3
		(in millions)
Assets
Cash equivalents:
U.S. government money market		$	54.9			$	54.9			$	—			$	—
Money market			37.7				37.7				—				—
Time deposits			28.1				28.1				—				—
			120.7				120.7				—				—
Crucible back-up trust assets			19.7				19.7				—				—
Foreign currency derivatives			1.5				—				1.5				—
Deferred compensation assets			2.4				2.4				—				—
		$	144.3			$	142.8			$	1.5			$	—
Liabilities
Deferred compensation liabilities		$	4.7			$	4.7			$	—			$	—
Foreign currency derivatives			1.7				—				1.7				—
		$	6.4			$	4.7			$	1.7			$	—

		Fair Value Measurements as of
		December 31, 2009
		Total				Level 1				Level 2				Level 3
						(in millions)
Assets
Cash equivalents:
U.S. government money market		$	42.6			$	42.6			$	—			$	—
Time deposits			28.6				28.6				—				—
			71.2				71.2				—				—
Crucible back-up trust assets			18.7				18.7				—				—
Foreign currency derivatives			1.2				—				1.2				—
Deferred compensation assets			2.6				2.6				—				—
		$	93.7			$	92.5			$	1.2			$	—
Liabilities
Deferred compensation liabilities		$	4.9			$	4.9			$	—			$	—
Foreign currency derivatives			0.2				—				0.2				—
		$	5.1			$	4.9			$	0.2			$	—

     The Company’s cash equivalents, Crucible back-up trust assets and deferred compensation assets and liabilities are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. For further discussion of the Crucible back-up trust, see Note 16, “Commitments and Contingencies – Crucible Materials Corporation.” The fair values for foreign currency derivatives are based on quoted market prices from various banks for similar instruments.

     As previously discussed in Note 2, upon the deconsolidation of GST, an investment was recorded for $236.9 million which represented the fair value of GST as of June 5, 2010. This amount exceeded the carrying amount of GST’s net assets resulting in a $54.1 million pre-tax gain, which was included in earnings for the second quarter of 2010. The fair value measurements were calculated using unobservable inputs (primarily discounted cash flow analyses) and classified as Level 3, requiring significant management judgment due to the absence of quoted market prices or observable inputs for assets of a similar nature.

     The carrying values of the Company’s significant financial instruments reflected in the Consolidated Balance Sheet approximate their respective fair values at September 30, 2010 and December 31, 2009, except for the following:

		September 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
						(in millions)
Long-term debt		$	134.3			$	189.1			$	130.4			$	175.9
Notes payable to GST			227.2				234.5				—				—
		$	361.5			$	423.6			$	130.4			$	175.9

     The fair values for long-term debt are based on quoted market prices, so this would be considered a Level 1 computation. The Notes payable to GST computation would be considered Level 2 since it is based on rates available to the Company for debt with similar terms and maturities.

16. Commitments and Contingencies

     General

     Various claims, lawsuits and administrative proceedings, all arising in the ordinary course of business with respect to commercial, product liability and environmental matters, are pending or threatened against the Company or its subsidiaries and seek monetary damages and/or other remedies. In addition, asbestos litigation against certain of the Company’s subsidiaries is described in this section in more detail. The Company believes 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 the Company’s consolidated financial condition or results of operations. From time to time, the Company and its subsidiaries are also involved as plaintiffs in legal proceedings involving contract, patent protection, environmental, insurance and other matters.

     Environmental

     The Company’s facilities and operations are subject to federal, state and local environmental and occupational health and safety requirements of the U.S. and foreign countries. The Company takes a proactive approach in its efforts to comply with environmental, health and safety laws as they relate to its manufacturing operations and in proposing and implementing any remedial plans that may be necessary.

The Company also conducts comprehensive compliance and management system audits at its facilities to maintain compliance and improve operational efficiency.

     Although the Company believes past operations were in substantial compliance with the then applicable regulations, the Company or one of its subsidiaries has been named as a potentially responsible party or is otherwise involved at 15 sites at each of which the costs to the Company or its subsidiary are expected to exceed $100,000. Investigations have been completed for 11 sites and are in progress at the other 4 sites. The majority of these sites relate to remediation projects at former operating facilities that were sold or closed and primarily deal with 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.

     The Company’s 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 these factors. 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, 2010 and December 31, 2009, EnPro had accrued liabilities of $15.3 million and $20.5 million, respectively, for estimated future expenditures relating to environmental contingencies. These amounts have been recorded on an undiscounted basis in the Consolidated Financial Statements.

     The Company believes that its accruals for 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, the Company believes that maintaining compliance with current environmental laws and government regulations will not require significant capital expenditures or have a material adverse effect on its financial condition, but could be material to its results of operations or cash flows in a given period.

     Colt Firearms and Central Moloney

     The Company has contingent liabilities related to divested businesses for which certain of its 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 firearms manufactured prior to 1990 by Colt Firearms, a former operation of Coltec, and for electrical transformers manufactured prior to 1994 by Central Moloney, another former Coltec operation. The Company also has ongoing obligations, which are included in retained liabilities of previously owned businesses in the Consolidated Balance Sheets, with regard to workers’ compensation, retiree medical and other retiree benefit matters that relate to the Company’s periods of ownership of these operations.

     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 divested its remaining minority interest in 2004. Crucible filed for Chapter 11 bankruptcy protection in May 2009.

     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 certain 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 the Company’s 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 and 2005. A third and final report will be required in 2015. The actuarial reports in 1995 and 2005 determined that the Benefits Trust owns adequate assets to fund the payment of future benefits.

     Because of the possibility there could be insufficient funds in the Benefits Trust, Coltec was required to establish and make a contribution to a second trust (the “Back-Up Trust”). The trust assets of the Back-Up Trust are reflected in the Company’s Consolidated Balance Sheets in other non-current assets and amounted to $19.7 million at September 30, 2010. As noted above, based on the valuation completed in early 2005, an actuary determined there were adequate assets in the Benefits Trust to fund the estimated obligations of the trust until the final valuation date in 2015.

     On July 27, 2010, the Company received court approval of a settlement agreement with the trustees of the Benefits Trust. As a result, the Company is no longer obligated to maintain the Back-Up Trust. As a result of the agreement, the assets of the Back-Up Trust, primarily a Guaranteed Investment Contract (“GIC”), will be distributed. Pursuant to the agreement, the Company will receive $17.4 million of the GIC and $2.3 million of the GIC will be placed into escrow in case of a shortfall in the Benefits Trust. In addition, the Company contributed $0.9 million directly to the Benefits Trust.

     The Company also has ongoing obligations, which are included in other liabilities in the Consolidated Balance Sheets, including workers’ compensation, retiree medical and other retiree benefit matters, in addition to those mentioned previously, that relate to the Company’s period of ownership of Crucible.

     Other Contingent Liability Matters

     The Company provides warranties on many of its products. The specific terms and conditions of these warranties vary depending on the product and the market in which the product is sold. The Company records a liability based upon estimates of the costs that may be incurred under its warranties after a review of historical warranty experience and information about specific warranty claims. Adjustments are made to the liability as claims data and historical experience warrant.

     Changes in the carrying amount of the product warranty liability for the nine months ended September 30, 2010 and 2009 are as follows:

		2010				2009
		(in millions)
Balance at beginning of year		$	3.6			$	2.4
Charges to expense			3.2				1.8
Settlements made (primarily payments)			(2.5	)			(1.2	)
Deconsolidation of GST			(0.4	)			—
Balance at end of period		$	3.9			$	3.0

     Asbestos

     Background on Asbestos-Related Litigation and Recent Developments. The historical business operations of GST LLC and Anchor have resulted in a substantial volume of asbestos litigation in which plaintiffs have alleged personal injury or death as a result of exposure to asbestos fibers. Those subsidiaries manufactured and/or sold industrial sealing products that contained encapsulated asbestos fibers.

The Company’s subsidiaries’ exposure to asbestos litigation and their relationships with insurance carriers are managed through Garrison.

     On the Petition Date, GST LLC, Garrison and Anchor filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of North Carolina in Charlotte. (GST LLC, Anchor and Garrison are sometimes collectively referred to as “GST.”) The filings were the initial step in a claims resolution process. See Note 2 for additional information about this process and its impact on the Company.

     As a result of the initiation of the Chapter 11 proceedings, the resolution of asbestos claims is subject to the jurisdiction of the Bankruptcy Court. The filing of the Chapter 11 cases automatically stayed the prosecution of pending asbestos products liability lawsuits, and initiation of new such lawsuits, against GST. Further, the Bankruptcy Court has issued an order enjoining plaintiffs from bringing or further prosecuting asbestos products liability actions against affiliates of GST, including EnPro, Coltec and all their subsidiaries, during the pendency of the Chapter 11 proceedings, subject to further order of the Bankruptcy Court.

     GST LLC and Anchor have been among a large number of defendants in actions filed in various states by plaintiffs alleging injury or death as a result of exposure to asbestos fibers. Among the many products at issue in these actions are industrial sealing products, including gaskets and packing. The damages claimed have varied from action to action, and in some cases plaintiffs seek both compensatory and punitive damages. To date, neither GST LLC nor Anchor has been required to pay any punitive damage awards. Since the first asbestos-related lawsuits were filed against GST LLC in 1975, GST LLC and Anchor have processed more than 900,000 asbestos claims to conclusion (including judgments, settlements and dismissals) and, together with their insurers, have paid over $1.4 billion in settlements and judgments and over $400 million in fees and expenses.

     Beginning in 2000, the top-tier asbestos defendants—companies that paid most of the plaintiffs’ damages because they produced and sold huge quantities of highly friable asbestos products—sought bankruptcy protection and stopped paying asbestos claims in the tort system. The bankruptcies of many additional producers of friable asbestos products followed. The plaintiffs could no longer pursue actions against these large defendants during the pendency of their bankruptcy proceedings, even though these defendants had historically been determined to be the largest contributors to asbestos-related injuries. Many plaintiffs pursued GST LLC in civil court actions to recover the full amounts of their alleged damages under state law principles of joint and several liability and began identifying GST LLC’s non-friable sealing products as a primary cause of their asbestos diseases while generally denying exposure to the friable products of companies in bankruptcy. GST LLC believes this targeting strategy effectively shifted damages caused by top tier defendants that produced friable asbestos products to GST LLC, thereby materially increasing GST LLC’s cost of defending and resolving claims.

     Almost all of the top-tier defendants that sought bankruptcy relief in the early 2000s have now emerged, or are positioning to emerge, from bankruptcy. Their asbestos liabilities have been assumed by wealthy 524(g) trusts created in the bankruptcies with assets contributed by the emerging former defendants and their affiliates. With the emergence of these companies from bankruptcy, plaintiffs may seek to recover damages from the trusts. The top-tier defendants funded 524(g) trusts which have aggregate assets exceeding $20 billion specifically set aside to compensate individuals with asbestos diseases caused by the friable products of those defendants. The Company previously believed that as billions of dollars of trust assets became available to claimants, GST LLC would be able to obtain significant reductions in the costs to defend and resolve claims. While 524(g) trusts have begun making substantial payments to the claimants, GST LLC has not experienced a reduction in the damages being sought from GST LLC. The distribution procedures of the 524(g) trusts do not permit GST LLC and other tort-system co-defendants to have access to claims made against the trusts or the accompanying evidence of exposure to the asbestos-containing products addressed by such trusts. GST LLC believes

that the trust procedures enable claimants to “double dip”—that is, collect payments from GST LLC and other defendants in the tort system for injuries caused by the former top-tier defendants while also collecting substantial additional amounts from 524(g) trusts established by those former defendants to pay asbestos claims.

     In light of GST LLC’s experience that (a) its cost of defending and resolving claims has not declined as anticipated although 524(g) trusts have begun making substantial payments to claimants, and (b) new mesothelioma claims filings against it in recent years have not declined consistent with declines in disease incidence, GST initiated the Chapter 11 proceedings as a means to determine and comprehensively resolve their asbestos liability.

     During the pendency of the Chapter 11 proceedings, certain actions proposed to be taken by GST LLC, Garrison and Anchor not in the ordinary course of business will be subject to approval by the Bankruptcy Court. As a result, during the pendency of these proceedings, the Company will not have exclusive control over GST. Accordingly, under generally accepted accounting principles, the Company’s investment in GST was deconsolidated from its financial results beginning on the Petition Date. As a result, the Company’s financial results for the six months ended June 30, 2010, which include GST only through the Petition Date, may not be comparable to those of the prior year period.

     Much of the remaining portion of this section updates information about the Company’s subsidiaries’ asbestos claims management experience prior to the Petition Date.

     Claims Mix. Of the more than 90,000 open cases at the Petition Date, the Company is aware of approximately 5,600 (6.3%) that involve claimants alleging mesothelioma. A large majority of the amount of settlement payments made by GST LLC in recent years have been paid in connection with mesothelioma claims.

     Product Defenses. The asbestos in products formerly sold by GST LLC and Anchor was encapsulated, which means the asbestos fibers were incorporated into the products during the manufacturing process and sealed in a binder. The products were also nonfriable, which means they could not be crumbled by hand pressure. The U.S. Occupational Safety and Health Administration, which began generally requiring warnings on asbestos-containing products in 1972, has never required that a warning be placed on products such as GST LLC’s gaskets. Even though no warning label was required, GST LLC included one on all of its asbestos-containing products beginning in 1978. Further, gaskets such as those previously manufactured and sold by GST LLC are one of the few asbestos-containing products still permitted to be manufactured under regulations of the U.S. Environmental Protection Agency. Nevertheless, GST LLC discontinued all manufacture and distribution of asbestos-containing products in the U.S. during 2000 and worldwide in mid-2001.

     Recent Trial Results. During the first half of 2010, GST LLC began three trials. In a Texas mesothelioma case, the jury awarded the plaintiff $3 million; GST LLC’s 45% share of this verdict was $1,350,000. GST LLC appealed. Two mesothelioma trials in Philadelphia settled prior to a jury returning a verdict.

     GST LLC won defense verdicts in ten of seventeen cases tried to verdict in the years 2006 through 2009. In the ten successful jury trials, the juries determined that either GST LLC’s products were not defective, that GST LLC was not negligent, or that the claimant was not exposed to GST LLC’s products. GST LLC’s share of the eight adverse verdicts, most of which are being appealed, ranged from $0 to $1,350,000 and averaged about $490,000.

     Appeals. In March 2010, the Illinois Court of Appeals, in a unanimous decision, overturned a $500,000 verdict that was entered against GST LLC in 2008, granting a new trial. At June 4, 2010, five GST LLC appeals were pending from adverse verdicts totaling $3.6 million.

     Insurance Coverage. At September 30, 2010, the Company had $175.5 million of insurance coverage that the Company believes is available to cover current and future asbestos claims against GST LLC and certain expense payments. GST has collected insurance payments totaling $16.9 million since the Petition Date. In addition, at the Petition Date, the Company had classified $4.2 million of otherwise available insurance as insolvent. Of the $175.5 million of collectible insurance coverage and trust assets, the Company considers $172.0 million (98%) to be of high quality because the insurance policies are written or guaranteed by U.S.-based carriers whose credit rating by S&P is investment grade (BBB) or better, and whose AM Best rating is excellent (A-) or better. The Company considers $3.4 million (2%) to be of moderate quality because the insurance policies are written with various London market carriers. Of the $175.5 million, $139.4 million is allocated to claims that have been paid by GST LLC and submitted to insurance companies for reimbursement and the remainder is allocated to pending and estimated future claims, subject to potential competing claims of other covered subsidiaries and their assignees.

     Liability Estimate. Prior to mid-2004, the Company maintained that its subsidiaries’ liability for unasserted claims was not reasonably estimable. The Company estimated and recorded liabilities only for pending claims in advanced stages of processing, for which it believed it had a basis for making a reasonable estimate. The Company disclosed the significance of the total potential liability for unasserted claims in considerable detail. During 2004, the Company authorized counsel to retain Bates White, a recognized expert, to assist in estimating its subsidiaries’ liability for pending and future asbestos claims. Beginning in the fourth quarter of 2004, the Company has updated its estimate of the subsidiary liability regularly.

     For the year to date prior to the Petition Date, the Company recorded a pre-tax charge of $23.3 million in connection with the update of GST LLC’s asbestos liability. The charge reflects $13.8 million of fees and expenses paid during the period and a $9.5 million non-cash charge. In the first nine months of 2009, the Company recorded a pre-tax charge of $41.6 million to reflect cash outlays of $22.0 million for fees and expenses and a $19.6 million non-cash charge.

     Quantitative Claims and Insurance Information. The Company’s recorded asbestos liability at the Petition Date was $472.1 million. As of the Petition Date, the Company had remaining insurance and trust coverage of $192.4 million, which it believes will be available for the payment of asbestos-related claims. Included is $156.3 million in insured claims and expenses that the Company’s subsidiaries have paid out in excess of amounts recovered from insurance. These amounts are recoverable under the terms of its insurance policies, subject to potential competing claims of other covered subsidiaries and their assignees, and have been billed to the insurance carriers.

     The table below quantitatively depicts the asbestos-related cash flows and the amount that the Company expects to be available from insurance related to this liability (see Note 2 for condensed combined financial data of GST LLC and Garrison).

		As of and for the
		Period Ended
		June 4,				September 30,
		2010				2009
Cash Flow (dollars in millions)
Payments (1)		$	(52.5	)		$	(86.6	)
Insurance recoveries (2)			48.7				55.7
Net cash flow (outflow)		$	(3.8	)		$	(30.9	)
Solvent Insurance and Trust Assets (dollars in millions)
Insurance receivable for previously paid claims (3)		$	156.3			$	197.7
Insurance available for pending and future claims			36.1				55.0
Remaining solvent insurance and trust assets		$	192.4			$	252.7