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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

        (Mark One)

ENPRO INDUSTRIES, INC.

(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 x              No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

Yes o              No x

As of November 6, 2003, there were 20,480,429 shares of common stock of the registrant outstanding. There is only one class of common stock.

PART I, ITEM 1.

PART I. FINANCIAL INFORMATION
ENPRO INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarters and Nine Months Ended September 30, 2003 and 2002
(In millions, except per share amounts)

See notes to condensed consolidated financial statements (unaudited).

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ENPRO INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2003 and 2002
(In millions)

See notes to condensed consolidated financial statements (unaudited).

2

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

See notes to condensed consolidated financial statements (unaudited).

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

1.

Overview, Basis of Presentation and New Accounting Pronouncements

          Overview

          EnPro Industries, Inc. (“EnPro” or the “Company”) is a leader in the design, development, manufacturing and marketing of well recognized, proprietary engineered industrial products that include sealing products, metal polymer bearings, air compressors and heavy-duty diesel and natural gas engines.

          On May 31, 2002, Goodrich Corporation (“Goodrich”) completed the tax-free spin-off of its Engineered Industrial Products (“EIP”) business to its shareholders (the “Distribution”). EnPro was incorporated in North Carolina in January 2002 in anticipation of the proposed Distribution. Prior to the Distribution, Coltec Industries Inc (“Coltec”) was a wholly owned subsidiary of Goodrich and owned the EIP business and an aerospace business (“Coltec Aerospace”). During May 2002, Coltec transferred to Goodrich, by way of a dividend, all of the assets, liabilities and operations of Coltec Aerospace.

          Upon the Distribution, Coltec became a wholly owned subsidiary of EnPro. The Distribution was effected through a tax-free distribution to Goodrich shareholders of all of the capital stock of EnPro. Each Goodrich shareholder received one share of EnPro common stock, as well as an associated EnPro preferred stock purchase right, for every five shares of Goodrich common stock owned.

          Basis of Presentation

          These financial statements present Coltec’s condensed consolidated results of operations and cash flows as it operated as a wholly owned subsidiary of Goodrich prior to the Distribution on May 31, 2002, including certain adjustments and allocations necessary for a fair presentation of the business, and EnPro’s condensed consolidated results of operations, cash flows and financial condition after the Distribution. As noted above, Coltec transferred Coltec Aerospace to Goodrich prior to the Distribution. The transfer of Coltec Aerospace to Goodrich represented the disposal of a segment under APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”). Accordingly, Coltec Aerospace was accounted for as a discontinued operation and its revenues, costs and expenses, and cash flows have been segregated in the Company’s condensed consolidated statements of operations and condensed consolidated statements of cash flows. Unless otherwise noted, disclosures herein pertain to the Company’s continuing operations. There are no operations shown as discontinued operations other than Coltec Aerospace.

          All significant transactions between the Company’s operations have been eliminated.

          Certain prior year amounts have been reclassified to conform to the current year presentation.

          Management believes that the assumptions underlying the condensed consolidated financial statements are reasonable. However, the financial information in the accompanying condensed consolidated statement of operations and condensed consolidated statement of cash flows for the nine months ended September 30, 2002, does not necessarily include all of the expenses that would have been incurred by Coltec had it been a separate, stand-alone entity prior to the Distribution and may not necessarily reflect what Coltec’s results of operations and cash flows would have been had Coltec been a stand-alone entity prior to the Distribution.

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          The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.

          New Accounting Pronouncements

          In January 2003, FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” was issued. The interpretation provides guidance on consolidating variable interest entities and requires the consolidation of any variable interest entity in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise that has a controlling financial interest through ownership of a majority voting interest in the entity. The interpretation applied immediately to variable interests created or obtained after January 31, 2003. Effective October 9, 2003, the FASB deferred the effective date of FIN 46 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003. We are using this deferral period to continue reviewing FIN 46 to determine its impact, if any, on future reporting periods related to Coltec’s relationship with Crucible Materials Corporation (“Crucible”). Coltec’s relationship with Crucible, as discussed under “Contingencies – Crucible Materials Corporation,” includes its ownership of Crucible common stock, which was valued at zero in our condensed consolidated balance sheet as of September 30, 2003, and debt guarantees amounting to approximately $8 million. As further described in “Contingencies – Crucible Materials Corporation,” Coltec also could be subject to certain liabilities with respect to Crucible’s environmental liabilities and pension obligations under certain circumstances.

2.

Mark-to-Market Adjustment for Call Options

          In March 2002, the Company purchased call options on Goodrich common stock to provide protection against the risk that the cash required to finance conversion of the 5¼% Convertible Preferred Securities – Term Income Deferred Equity Securities (“TIDES”) into Goodrich common stock could exceed the liquidation value of the TIDES. The call options are derivative instruments and are carried at fair value in the Company’s condensed consolidated balance sheets. Changes in fair value are reflected in income. During the quarter ended September 30, 2003, the Company recorded a $0.2 million non-cash credit to earnings to reflect an increase in the fair value of these call options. The fair value of the call options declined by $10.7 million and $15.8 million during the quarter and nine months ended September 30, 2002, respectively, and corresponding non-cash charges to earnings were recorded to reflect these declines in value.

3.

Other Income (Expenses)

          In the quarter ended September 30, 2003, the Company purchased, for approximately $3.5 million, 100,000 TIDES with a carrying value of $5 million resulting in a pre-tax gain of $1.5 million.

          During the nine months ended September 30, 2002, the Company recorded pre-tax charges of a non-operating nature totaling $25.6 million. These charges consisted of two primary components. First, in connection with the Distribution, the Company conducted a review of its process for managing and estimating environmental liabilities. As a result of changes in the Company’s strategies growing out of this review, and in light of recent developments at a number of environmental sites associated with

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previously divested businesses, the Company increased its environmental reserves by approximately $12 million to reflect an increase in the estimated costs to remediate those sites. Second, based on an adverse court ruling related to severance owed as a result of the closing of a plant in 1982, the Company increased the reserve for this case by approximately $11 million.

4.

Restructuring Costs

          The Company incurred $0.8 million of restructuring costs in the first nine months of 2003. Restructuring reserves at September 30, 2003, as well as activity during the nine months ended September 30, 2003, consisted of:

          As of December 31, 2002, approximately 60 employees from previously announced workforce reductions had yet to be terminated. As of September 30, 2003, seven of these employees were still yet to be terminated.

5.

Comprehensive Income

          Total comprehensive income consisted of the following:

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6.

Earnings Per Share

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

          Basic and diluted earnings per share for the quarter and nine months ended September 30, 2002 were computed based on net loss divided by the average common shares outstanding during the period of 20.2 million shares. As of September 30, 2002, there were no dilutive common stock equivalents that would have caused diluted earnings per share to differ from basic earnings per share.

7.

Stock-Based Compensation

          The Company accounts for stock options using the intrinsic value method. Required pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method.

          For purposes of the required pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options. The Company’s pro forma information is as follows:

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8.

Inventories

          Inventories consisted of the following:

9.

Goodwill and Identifiable Intangible Assets

          During 2002, the Company completed its initial assessment of goodwill using the two-step approach described in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Goodwill was tested for impairment by comparing the fair value of the reporting units to their carrying value, including goodwill. The fair value was determined based on the discounted present value of estimated future cash flows. Since the carrying value of the assets of certain reporting units in the sealing products segment exceeded their fair value, a comparison was then made between the implied fair value of the goodwill, as defined by SFAS 142, and the carrying value of the goodwill. Goodwill related to the sealing products segment was determined to be impaired and, as required by SFAS 142, was reduced by $23.4 million ($14.6 million, net of tax) to its implied fair value. The reduction was recorded as a cumulative effect of a change in accounting principle. As required by SFAS 142, results for the quarter ended March 31, 2002, were restated to reflect the cumulative effect of the adoption of this accounting principle.

          The changes in the net carrying value of goodwill by reportable segment for the nine months ended September 30, 2003, are as follows:

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

          The Company has approximately $14 million of trademarks with indefinite lives as of September 30, 2003, and December 31, 2002.

          Amortization expense for the nine months ended September 30, 2003, was $3.1 million. Amortization expense for these intangible assets for 2003 through 2007 is estimated to be approximately $4 million per year.

10.

Long-Term Debt

          In the quarter ended September 30, 2003, the Company purchased 100,000 TIDES with a carrying value of $5 million. Subsequent to the purchase, the Company has outstanding approximately $145 million of TIDES.

          In April 2003, the Company executed a $4.7 million variable rate promissory note in connection with certain pre-retirement death benefits payable to the Company’s executive officers. The promissory note is collateralized by life insurance policies and a certificate of deposit. The promissory note bears interest at LIBOR plus a margin of 1.75%, which is adjusted annually. The promissory note is payable at the earliest of termination of the policies, death of persons insured under the policies, or sixty days prior to the expiration of the policies.

11.

Business Segment Information

          The Company has two reportable segments. The sealing products segment manufactures sealing and PTFE products. The engineered products segment manufactures metal polymer bearings, air compressors and components, heavy-duty diesel and natural gas engines and specialized tooling. The Company’s reportable segments are managed separately based on differences in their products and services. Segment profit is total segment revenue reduced by operating expenses and restructuring costs identifiable with the segment. Corporate expenses include general corporate administrative costs. The Company does not include income taxes or interest expense in the determination of segment profit. The accounting policies of the reportable segments are the same as those for the Company.

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12.

Discontinued Operations

          Prior to the Distribution, Coltec transferred Coltec Aerospace to Goodrich by way of a dividend. The transfer of Coltec Aerospace to Goodrich represented the disposal of a segment under APB 30. Accordingly, Coltec Aerospace has been accounted for as a discontinued operation and its revenues, costs and expenses, and cash flows have been segregated in the Company’s condensed consolidated statements of operations and condensed consolidated statements of cash flows.

          The following summarizes the results of discontinued operations, which consist solely of the results of Coltec Aerospace, for the five months ended May 31, 2002, that preceded the Distribution:

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13.

Commitments and Contingencies

          General

          There are pending or threatened against the Company or its subsidiaries various claims, lawsuits and administrative proceedings, all arising in the ordinary course of business with respect to commercial, product liability, asbestos and environmental matters, which seek remedies or damages. 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 and other matters. Gain contingencies, if any, are recognized when they are realized.

          Environmental

          The Company and its subsidiaries generate wastes, both hazardous and non-hazardous, the treatment, storage, transportation and disposal of which are subject to various laws and governmental regulations. Although past operations were in substantial compliance with the then applicable regulations, the Company has been designated as a potentially responsible party (“PRP”) by the U.S. Environmental Protection Agency, or similar state agencies, in connection with several sites.

          The Company initiates corrective and/or preventive environmental projects of its own to ensure safe and lawful activities at its current operations. It also conducts a compliance and management systems audit program. The Company believes that compliance with current laws and governmental regulations concerning the environment will not have a material adverse effect on its capital expenditures or results of operations.

          The Company’s environmental engineers and consultants review and monitor environmental issues at past and existing operating sites, as well as off-site disposal sites at which the Company has been identified as a PRP. This process includes investigation and remedial selection and implementation, as well as negotiations with other PRPs and governmental agencies.

          As of September 30, 2003, and December 31, 2002, the Company had an accrued liability of $35.7 million and $37.2 million, respectively, for probable future expenditures relating to environmental sites. These amounts include a partial indemnification of Crucible’s environmental liabilities. However, Coltec could be deemed responsible for additional environmental costs as a previous owner of Crucible if Crucible is unable to pay its share of these costs. The amounts recorded in the condensed consolidated financial statements have been recorded on an undiscounted basis. The Company believes that its reserves are adequate based on currently available information. Management believes that it is possible that additional costs may be incurred beyond the amounts accrued as a result of new information that may become available in the future. However, the amounts, if any, cannot be estimated and management believes that they would not be material to the Company’s consolidated financial condition, but could be material to the Company’s consolidated results of operations and 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 the Company’s former Colt Firearms subsidiary for firearms manufactured prior to its divestiture in 1990 and the Company’s former Central Moloney subsidiary for electrical transformers manufactured prior to its divestiture in 1994. No material product liability claims are currently pending against the Company

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related to Central Moloney or Colt Firearms. Colt Firearms has been named as a defendant in approximately 33 cases filed by municipalities seeking to recover costs arising from gun related injuries. Many of these cases have been dismissed or are inactive. Colt Firearms is seeking indemnification from Coltec for these claims to the extent they involve firearms manufactured prior to March 1990. The Company has rejected Colt Firearms’ claims for indemnification relating to the municipal gun cases in all instances on various legal grounds.

          The Company also has ongoing obligations, which are included in retained liabilities of previously owned businesses in the condensed 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

          The Company, through its Coltec subsidiary, owns 44% of the outstanding common stock of Crucible through an irrevocable non-voting trust (the “Ownership Trust”). 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. The Ownership Trust expires in May 2004, at which time Coltec will own the Crucible common stock directly. Under the terms of the Ownership Trust, Coltec has not participated in the management of Crucible’s affairs and the Company has exercised no influence over the ongoing activities and business strategies of Crucible.

          Based on an evaluation of the recoverability of its investment in Crucible’s common stock, the investment is valued at zero in the Company’s condensed consolidated balance sheets. In addition, due to the lack of any oversight of Crucible’s activities, and due to the uncertainty surrounding the future recoverability of its investment in Crucible, the Company does not include its proportionate share of Crucible’s net income (loss) in its results of operations.

          A portion of the remaining 56% of the shares of Crucible are owned by Crucible-sponsored pension and profit sharing plans and the Crucible Employee Stock Ownership Plan. As Crucible’s employees retire, they are entitled to redeem those shares and be paid the fair value of the shares by Crucible. In addition, provided certain conditions are met, Crucible’s pension plans have the right to sell their shares of Crucible common stock to Crucible. When shares are purchased by Crucible, the shares are retired and Coltec’s percentage ownership in Crucible increases.

          If Coltec’s percentage ownership of Crucible’s common stock were ever to exceed 50%, it may be deemed to be a “controlling person” with respect to the Crucible pension funds. As such, Coltec could be subject to certain liabilities with respect to Crucible’s pension obligations. If Crucible’s pension plans were to be terminated and the plans’ assets were not sufficient to cover the plans’ liabilities, Crucible and all members of its “controlled group” would be responsible for the unfunded termination liability. To the extent that Crucible could not fund any shortfall, Coltec and the Company could become responsible for funding the shortfall.

          The combined fair value of the assets in Crucible’s pension plans was approximately $20 million less than the accumulated benefit obligations at December 31, 2002. This amount is subject to change as the market value of the assets and interest rates fluctuate, as employees’ benefits change based on either plan amendments or additional credited service, and if contributions are made to the plans. In addition, in the event of a plan termination, the calculation of the actual termination liability would be based on more conservative interest rate assumptions and the deficit would likely be higher than the amount reflected above.

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          Coltec’s ownership of Crucible’s common stock might never exceed 50% and Coltec might never become part of a “controlled group.” In addition, Crucible’s pension plans might never be terminated and Coltec might never bear any liability for any unfunded termination liability.

          In conjunction with the closure of a Crucible plant in the early 1980s, Coltec was required to fund two irrevocable trusts for retiree medical benefits for union employees at the plant. The first trust (the “Benefits Trust”) pays for these retiree medical benefits on an ongoing basis. Coltec has no continuing connection to the Benefits Trust, and thus the assets and liabilities of this trust are not included in the Company’s condensed consolidated balance sheets. Under the terms of the trust agreement, the trustees retained an actuary to assess the adequacy of the assets in the Benefits Trust in 1995, and another actuarial report will be required in 2005 and 2015. If, at either or both of the future valuation dates, it is determined that the trust assets are not adequate to fund the payment of the medical benefits, Coltec will be required to contribute additional amounts. Based on preliminary information, an additional contribution in 2005 is not anticipated. In the event there are ever excess assets in the Benefits Trust, those excess assets will not revert to Coltec.

          Because of the possibility of future contributions to the Benefits Trust, Coltec was required to establish a second trust (the “Back-Up Trust”) to cover potential shortfalls in the Benefits Trust. The assets and liabilities of the Back-Up Trust are reflected on the Company’s condensed consolidated balance sheets in other non-current assets and in retained liabilities of previously owned businesses, respectively, and amounted to $26.6 million each at September 30, 2003. If the actuary determines that there are excess assets in the Back-Up Trust at the Benefits Trust valuation dates, the excess assets will revert to Coltec based on a distribution formula and will be recorded in income upon receipt.

          The Company also has ongoing obligations, which are included in retained liabilities of previously owned businesses in the condensed consolidated balance sheets, with regard to 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 this operation.

          Debt and Capital Lease Guarantees

          As of September 30, 2003, the Company had contingent liabilities for potential payments on guarantees of certain debt and lease obligations totaling $11.1 million. These guarantees arose from the divestiture of Crucible and Central Moloney and expire at various dates through 2010. There is no liability for these guarantees reflected in the Company’s condensed consolidated balance sheets. In the event that Crucible or Central Moloney does not fulfill its obligations under its debt and/or lease agreements, the Company could be responsible for these obligations.

          Product Warranties

          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. The Company adjusts this liability based on changes in the claims data and historical experience.

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          Changes in the carrying amount of the product warranty liability for the nine months ended September 30, 2003, are as follows:

          Asbestos

          History. Certain of the Company’s subsidiaries, primarily Garlock Sealing Technologies, LLC (“Garlock”) and The Anchor Packing Company (“Anchor”), are among a number of defendants (typically 15 to 40 and sometimes more than 100) in actions filed in various states by plaintiffs alleging injury or death as a result of exposure to asbestos fibers. Among the products at issue in these actions are industrial sealing products, predominantly gaskets and packing products. The damages claimed vary from action to action and in some cases plaintiffs seek both compensatory and punitive damages. To date, neither Garlock nor Anchor has been required to pay any punitive damage awards, although there can be no assurance that they will not be required to do so in the future. Liability for compensatory damages has historically been allocated among all responsible defendants, thus limiting the potential monetary impact of a particular judgment or settlement on any individual defendant. Since the first asbestos-related lawsuits were filed against Garlock in 1975, Garlock and Anchor have processed more than 500,000 asbestos claims to conclusion (including judgments, settlements and dismissals) and, together with their insurers, have paid approximately $900 million in settlements and judgments at a cost in fees and expenses of an additional $300 million.

          Claims Mix. Of those claims resolved, less than 3% have been claims of plaintiffs alleging the disease mesothelioma, approximately 6% have been claims of plaintiffs with lung or other cancers, and more than 90% have been claims of plaintiffs alleging asbestosis, pleural plaques or other impairment of the respiratory system. Because the more serious disease cases tend to work through the system more quickly than the non-malignancy cases and the cases filed by those who are not impaired, the Company believes that the disease mix in our current open caseload, on a percentage basis, is even more skewed toward pleural plaques and includes a large number of claims made by plaintiffs who have suffered no disease and have no measurable impairment of any kind. In fact, while there are many cases in our current open caseload about which we have no disease information, we are aware of only approximately 12,000 that involve a claimant with mesothelioma, lung cancer or some other cancer.

          Product Defenses. The asbestos-containing products formerly sold by Garlock and Anchor were encapsulated, which means the asbestos fibers were incorporated into the product during the manufacturing process and sealed in a binder. They are also nonfriable, which means they cannot be crumbled by hand pressure. The 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 Garlock’s gaskets. Notwithstanding that no warning label has been required, Garlock included one on all of its asbestos-containing products beginning in 1978. Further, gaskets such as those previously manufactured and sold by Garlock are one of the few asbestos-containing products still permitted to be manufactured under regulations of the Environmental Protection Agency. Since the mid-1980s, U.S. sales of asbestos-containing industrial sealing products have not been a material part of Garlock’s sales and sales of asbestos-containing products have been predominantly to sophisticated purchasers such as the U.S. Navy and large petrochemical facilities. These purchasers generally have extensive health and safety procedures and are familiar with the risks associated with the use and handling

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of industrial sealing products that contain asbestos. Garlock discontinued distributing asbestos-containing products in the U.S. during 2000 and worldwide in mid-2001.

          Since the beginning of 2003, Garlock’s product defenses have enabled it to win defense verdicts in all four cases that it tried to verdict. Those trials were in California, Kentucky (two) and Texas. In all four cases, the jury determined that Garlock’s products were not defective and that Garlock was not negligent.

          Settlements. Garlock settles and disposes of actions on a regular basis. Garlock’s historical settlement strategy has been to try to match the timing of payments with recoveries received from insurance, which, as described later, were limited to $80 million per year through the second quarter of 2003. This limit increased by 8% to $86.4 million per year beginning in the third quarter of 2003. However, in 1999 and 2000, Garlock implemented a short-term aggressive settlement strategy. The purpose of this short-term strategy was to achieve a permanent reduction in the number of overall asbestos claims through the settlement of a larger than normal number of claims, including some claims not yet filed as lawsuits. Mainly due to this short-term aggressive settlement strategy, but also because of a significant overall increase in claims filings, the settlement amounts paid in each of the years 1999 through 2002 were greater than the amounts paid in any year prior to 1999. In 2001, Garlock resumed its historical settlement strategy. In fact, Garlock reduced new settlement commitments from $180 million in 2000, to $94 million in 2001, and to $86 million in 2002. However, because of commitments made in 1999 and 2000 that will be paid over a number of years, the settlement amounts that Garlock will pay in 2003 through 2005 will continue to include amounts for settlements made during 1999, 2000 and early 2001.

          Settlements are made without any admission of liability and are generally made on a group basis with payments made to individual claimants over a period of one to four years. Settlement amounts vary depending upon a number of factors, including the jurisdiction where the action was brought, the nature and extent of the disease alleged and the associated medical evidence, the age and occupation of the plaintiff, the presence or absence of other possible causes of the plaintiff’s alleged illness, the availability of legal defenses, and whether the action is an individual one or part of a group.

          Before any payment on a settled claim is made, the claimant is required to submit a medical report acceptable to Garlock substantiating the asbestos-related illness and meeting specific criteria of disability. In addition, sworn testimony or other evidence that the claimant worked with or around Garlock asbestos-containing products is required. The claimant is also required to sign a full and unconditional release of Garlock, its subsidiaries, parent, officers, directors, affiliates and related parties from any liability for asbestos-related injuries or claims.

          When a settlement demand is not reasonable given the totality of the circumstances, Garlock generally will try the case. Garlock has been successful in winning a substantial majority of the cases it has tried to verdict. Garlock’s share of adverse verdicts in these cases in the years 2000 through 2002 totaled approximately $6 million in the aggregate, and some of those verdicts are on appeal. As previously reported, Garlock won defense verdicts in all four cases it tried to verdict in the first nine months of 2003.

          Status of Anchor. Anchor is an inactive and insolvent indirect subsidiary of Coltec. The insurance coverage available to Anchor of approximately $5 million as of September 30, 2003, is fully committed. Anchor has not committed to settle any further actions since 1998. As cases reach the trial stage, Anchor is typically dismissed without payment.

          Insurance Coverage. The insurance coverage available to Garlock is substantial. As of September 30, 2003, Garlock had available $831 million of insurance coverage from carriers that it

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believes to be solvent. Garlock classifies $69 million of otherwise available insurance as insolvent. The Company believes Garlock will recover some of the insolvent insurance over time. In fact, Garlock recovered $2.0 million from an insolvent carrier during the year ended December 31, 2002, and $2.1 million during the first nine months of 2003. Of the solvent insurance, $640 million (77%) is with US-based carriers whose credit rating by S&P is investment grade (BBB) or better, and whose AM Best rating is excellent (A-) or better, $63 million (8%) is with other solvent US carriers and $128 million (15%) is with various solvent London market carriers. Of the $831 million, $171 million is allocated to claims that have been paid by Garlock and submitted to its insurance companies for reimbursement and $88 million has been committed to claim settlements not yet paid by Garlock. Thus, at September 30, 2003, $572 million remains available for future asbestos-related settlements.

          Arrangements with Garlock’s insurance carriers limit the amount of insurance proceeds that it is entitled to receive in any one year. The amount of insurance available to cover asbestos-related payments by Garlock was limited to $80 million per year through the second quarter of 2003. This limit increases by 8% every three years and now is at $86.4 million per year ($21.6 million per quarter). Because Garlock collects some insolvent insurance and because some of Garlock’s carriers pay as if there were no annual limit, Garlock receives amounts in excess of the cap amount in some periods. Amounts paid by Garlock in excess of insurance recoveries in any year that would be recoverable from insurance but for the limit may be collected from the insurance companies in subsequent years so long as insurance is available, subject to the annual limit available in each subsequent year. To the extent that Garlock pays such amounts in a given year, these payments are recorded as a receivable. The amounts paid in excess of insurance recoveries thus far in 2003 that were recorded as a receivable amounted to $17.5 million. Garlock is pursuing various options, such as raising the annual limit, commuting policies at discounted values, and pursuing insolvent coverages, to reduce or eliminate the gap between payments by Garlock and recoveries received from insurance carriers. There can be no assurance that Garlock will be successful as to any or all of these options.

          Insurance coverage for asbestos claims is not available to cover exposures initially occurring on and after July 1, 1984. Garlock and Anchor continue to be named as defendants in new actions, a few of which allege initial exposure after July 1, 1984. To date, no payments have been made with respect to these claims, pursuant to a settlement or otherwise. In addition, Garlock and Anchor believe that they have substantial defenses to these claims and therefore automatically reject them for settlement. However, there can be no assurance that any or all of these defenses will be successful in the future.

          Quantitative Claims Information. In accordance with internal procedures for the processing of asbestos product liability actions and due to the proximity to trial or settlement, certain outstanding actions against Garlock have progressed to a stage where the Company believes it can reasonably estimate the cost to dispose of these actions. These actions are classified as actions in advanced stages and the estimated costs to dispose of them are included in the table below. With respect to outstanding actions against Garlock that are in preliminary procedural stages, as well as any actions that may be filed in the future, the Company believes that insufficient information exists upon which judgments can be made as to the validity or ultimate disposition of such actions. Therefore, the Company believes that it is impossible to estimate with any degree of accuracy or reasonableness what, if any, potential liability or costs may be incurred. Accordingly, the Company has not included any estimate of future liability for such claims in the table below.

          The Company records an accrual for liabilities related to Garlock and Anchor asbestos-related matters that are deemed probable and can be reasonably estimated, which consist of settled claims and actions in advanced stages of processing. The Company also records an asset for the amount of those liabilities that it expects Garlock and Anchor to recover from insurance. A table is provided below depicting quantitatively the items discussed above.

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