SCHEDULE 14A
(Rule 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES

EXCHANGE ACT OF 1934 (Amendment No. 1)

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o Preliminary Proxy Statement

o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ Definitive Proxy Statement

o Definitive Additional Materials

o Soliciting Material under Rule 14a-12

 

EnPro Industries, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5605 Carnegie Boulevard, Suite 500
Charlotte, North Carolina 28209

 

April 25, 2008

 

To Our Shareholders:

 

On behalf of the board of directors and management of EnPro Industries, Inc., I cordially invite you to our annual meeting of shareholders. The meeting will be held at the company’s headquarters located at 5605 Carnegie Boulevard, Suite 500, Charlotte, North Carolina on Monday, June 9, 2008, at 9:00 a.m. At this year’s annual meeting, shareholders will be asked to elect eight directors, approve two amendments to our articles of incorporation and ratify the selection of auditors for this year, all as more fully described in the attached proxy statement.

 

The enclosed materials replace the notice, proxy statement and proxy card that we distributed earlier this year in the context of an election contest that was being conducted by Steel Partners II, L.P. On April 11, 2008, we entered into an agreement with Steel Partners that provided for the termination of the election contest, and we agreed that, following the 2008 annual meeting of shareholders, we would add Don DeFosset, one of Steel Partners’ nominees, to our board of directors. We also agreed to reschedule the 2008 annual meeting of shareholders to June 9, 2008, and to add an item to the agenda for the annual meeting — approval of a proposed amendment to our articles of incorporation to remove the provisions providing for the classification of our board of directors.

 

No matter how many shares you may own, it is important that your shares be represented at this meeting. The accompanying proxy statement and proxy card include this additional agenda item to approve this amendment to our articles of incorporation. Accordingly, regardless of whether or not you delivered a proxy during the election contest with Steel Partners or whether or not you plan to attend the meeting, please vote your shares as soon as possible either by marking, signing, dating and returning the enclosed proxy card in the enclosed postage-paid envelope or by casting your vote by telephone or over the Internet. Instructions for voting are provided on the proxy card.

 

Sincerely,

 

Stephen E. Macadam

President and Chief Executive Officer

 

5605 Carnegie Boulevard, Suite 500
Charlotte, North Carolina 28209

 

 

NOTICE TO SHAREHOLDERS:

 

THE ANNUAL MEETING OF SHAREHOLDERS of EnPro Industries, Inc., a North Carolina corporation, will be held at the company’s headquarters located at 5605 Carnegie Boulevard, Suite 500, Charlotte, North Carolina on Monday, June 9, 2008 at 9:00 a.m. to:

 

 

Information about these matters is contained in the proxy statement attached to this notice.

 

The board of directors has fixed April 24, 2008 as the record date for determining shareholders entitled to notice of and to vote at the meeting. Only those who were registered shareholders at the close of business on that date are entitled to notice of and to vote at the meeting or any adjournment of the meeting.

 

The board hereby solicits a proxy for use at the meeting, in the form accompanying this notice, from each holder of our common stock. Shareholders may withdraw their proxies at the meeting if they desire to vote their shares in person, and they may revoke their proxies for any reason at any time prior to the voting of the proxies at the meeting.

 

It is important that you be represented at the meeting regardless of the number of shares you own. To help us minimize the expense associated with collecting proxies, please execute and return the enclosed proxy card promptly or cast your votes by telephone or over the Internet. No postage is required if the proxy is mailed in the United States.

 

By Order of the Board of Directors,

 

 

Richard L. Magee
Secretary

 

April 25, 2008

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON JUNE 9, 2008:

 

The proxy statement and 2007 annual report to shareholders are available at www.enproindustries.com/investor.

 

TABLE OF CONTENTS

 

2008 ANNUAL MEETING OF SHAREHOLDERS
OF
ENPRO INDUSTRIES, INC.

 

 

 

 

PROXY STATEMENT

 

 

 

 

 

The enclosed proxy is solicited on behalf of the board of directors of EnPro Industries, Inc., in connection with our annual meeting of shareholders to be held on Monday, June 9, 2008, at 9:00 a.m. at the company’s headquarters located at 5605 Carnegie Boulevard, Suite 500, Charlotte, North Carolina, and at any adjournment or postponement of the meeting. You may use the enclosed proxy card whether or not you attend the meeting. If you are a registered shareholder (that is, you hold shares directly registered in your own name), you may also vote by telephone or over the Internet by following the instructions on your proxy card. If your shares are held in the name of a bank, broker or other nominee, which is referred to as holding in “street name,” you will receive separate voting instructions with your proxy materials. Although most brokers and nominees offer telephone and Internet voting, availability and specific procedures depend on their voting arrangements.

 

Your vote is very important. For this reason, we encourage you to date, sign, and return your proxy card in the enclosed envelope. Doing so will permit your shares of our common stock to be represented at the meeting by the individuals named on the enclosed proxy card.

 

This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the meeting. Please read it carefully.

 

We are mailing our 2007 annual report, including financial statements, with this proxy statement to each registered shareholder other than those shareholders who received the annual report in connection with our mailing of the proxy statement dated March 24, 2008. We will begin mailing these materials on or around May 1, 2008. Any shareholder may receive an additional copy of these materials by request to our investor relations department. You may reach the investor relations department via email to investor@enproindustries.com or by calling 704-731-1522.

 

This proxy statement replaces the proxy statement dated March 24, 2008, which we distributed in the context of an election contest that was being conducted by Steel Partners II, L.P. On April 11, 2008, we entered into an agreement with Steel Partners that provided for the termination of the election contest, and we agreed that, following the 2008 annual meeting of shareholders, we would add Don DeFosset, one of Steel Partners’ nominees, to our board of directors. This section of the proxy statement describes the events leading to the election contest, and the section immediately following describes our agreement with Steel Partners.

 

Steel Partners became the holder of more than 5% of our outstanding shares in November 2003. Since that time, we have communicated with Steel Partners in the ordinary course, as we have with many of our shareholders, about the company’s business, results of operations and management of our capital resources.

 

In April 2007, Warren Lichtenstein of Steel Partners telephoned Ernest F. Schaub, at the time our president and chief executive officer, and informed Mr. Schaub that Steel Partners had an interest in acquiring the shares of the company that it did not already own. At the time, Steel Partners reported owning 12.3% of our outstanding shares, which was down from earlier in the year when Steel Partners owned 14.8% of our outstanding shares. Mr. Lichtenstein stated that Steel Partners believed it could offer a price per share in the mid-$40s for the company, subject to satisfactory due diligence. At the time, the market price of our common stock was $37.00 to $38.50 per share. Mr. Schaub told Mr. Lichtenstein that he would inform our board of Steel Partners’ interest.

 

Mr. Schaub reported the conversation with Mr. Lichtenstein to the board. Our board retained independent financial and legal advisors to assist in evaluating our strategic alternatives in the context of Steel Partners’ expression

of interest. On July 17, 2007, the board met to receive a report from its financial advisors and to discuss our strategic alternatives. In the period between the call from Mr. Lichtenstein and July 17, 2007, the market price of our stock had increased to over $45.00 per share, and Mr. Lichtenstein had contacted Mr. Schaub and William R. Holland, our chairman, separately to indicate that Steel Partners would consider paying in the upper $40s per share for the company.

 

In considering our strategic alternatives, including a potential sale of the company, the board took into account the fact that we had significantly strengthened our financial position since our stock began public trading on June 3, 2002. This had been reflected in the market price of our stock, which, as of the July 17 board meeting, had increased dramatically since the close of the first day of public trading. The board believed, and continues to believe today, that our growth and success reflect the implementation of our long-term strategies, and the prudent investments of capital to improve facilities, equipment and infrastructure. The board believed, and continues to believe today, that our future is bright, and that a price in the range that had been suggested by Steel Partners, which represented a relatively insignificant premium to the then current market price for our stock, did not adequately compensate our shareholders for these prospects. The board decided that it was in the shareholders’ best interest for us to continue as an independent public company and to use our greater financial strength to enhance shareholder value, rather than to pursue a sale of the company at that time. This conclusion was communicated to Steel Partners.

 

At subsequent meetings, the board regularly discussed the use of capital to return value to shareholders through dividends or the repurchase of shares. Communications with Steel Partners in the ordinary course continued through January 2008. During that period of time, the market price of our common stock declined from $45.80 on July 19, 2007 to $27.67 on January 30, 2008.

 

Following the close of business on January 30, 2008, we received a letter from Steel Partners that was made publicly available the following day in an amendment to Steel Partners’ Schedule 13D. In the letter, Steel Partners requested that we engage in a recapitalization aggregating at least $150 million, by means of a tender offer for our own shares at $30 per share. Alternatively, Steel Partners requested that the board initiate a process to explore all alternatives to maximize shareholder value, including a sale of the company, and indicated that it remained interested in acquiring the company and would expect to participate in any sale process. Steel Partners stated that if the board was not willing to pursue either of these alternatives, it would nominate five individuals identified in the letter for election to the board at the 2008 annual meeting. In its letter, Steel Partners indicated that it believed that our management was doing an excellent job of improving the company’s operations, but that Steel Partners disapproved of the way we managed our balance sheet and allocated our capital.

 

The board requested that its financial adviser work with management to analyze the recapitalization proposal put forth by Steel Partners. The resulting analysis was presented to the board at a meeting on February 13, 2008. The board came to the following conclusions:

 

 

Based on these considerations, the board decided that it was not in the best interests of our shareholders to pursue the recapitalization proposed by Steel Partners. With respect to Steel Partners’ alternative suggestion that the company be put up for sale, the board re-examined, in light of the circumstances existing on February 13, 2008, the analysis of a potential sale of the company that it made at its meeting on July 17, 2007 and concluded that its analysis was still sound. Moreover, the board noted that conditions in the debt markets had made acquisition financing difficult to arrange for both strategic and private equity buyers, and that as a result conditions were not favorable for the sale of the company at a full price. Based on these factors and the fact that the market price of our common stock was very low relative to its earnings by historical standards, the board concluded that pursuing a sale of the company at that time would not maximize value for our shareholders. We communicated our analysis to Steel Partners.

 

On March 3, 2008, we announced that our board had authorized a $100 million share repurchase program, including a purchase of approximately 1.7 million shares that was effective immediately pursuant to an accelerated share repurchase contract. The company stated that the balance of the program was expected to be completed within a year, subject to market conditions, our financial results and other factors. We also announced the acquisition of V.W. Kaiser Engineering, Inc., which will be part of our Stemco division.

 

On March 4, 2008, Steel Partners filed a preliminary proxy statement with the SEC in furtherance of Steel Partners’ nomination of five individuals to our board of directors. Steel Partners amended its proxy statement on March 26, 2008 to reduce the number of its nominees from five to two, one of whom was Don DeFosset.

 

On March 10, 2008, we announced our board of directors’ appointment of Stephen E. Macadam to serve as EnPro’s Chief Executive Officer and President, which became effective on April 14, 2008. At that time, our current Chief Executive Officer and President, Mr. Schaub, stepped down from those positions in connection with his previously announced retirement plans.

 

In March and early April 2008, Mr. Holland and Mr. Lichtenstein had a number of telephone conversations during which they discussed a potential settlement of the Steel Partners proxy solicitation, and the terms on which a settlement could take place. In addition, on March 26, 2008, Mr. Macadam met with Mr. Lichtenstein to discuss his background and management philosophy. These conversations culminated in a proposal that was submitted to our board of directors at a meeting of the board on the morning of April 11, 2008. After discussion of the proposal, the board determined that it was in the best interests of the company and its shareholders to approve the settlement on the terms set forth in the proposal, and authorized the company’s officers and advisors to finalize a settlement on those terms. Later that same day, the company and Steel Partners executed a settlement agreement, which is described below, and the company issued a press release announcing the settlement.

 

The settlement agreement with Steel Partners provides:

 

 

 

What is the purpose of the annual meeting?

 

At our annual meeting, shareholders will act on proposals for the following matters:

 

 

Our board of directors has submitted these proposals. Other business may be addressed at the meeting if it properly comes before the meeting. However, we are not aware of any such other business.

 

Who is entitled to vote at the meeting?

 

You may vote if you owned EnPro common stock as of the close of business on the record date, April 24, 2008. Each share of common stock is entitled to one vote on each matter considered at the meeting. At the close of business on the record date, 19,984,572 shares of EnPro common stock were outstanding and eligible to vote, which amount does not include 220,325 shares held by a subsidiary. The enclosed proxy card shows the number of shares that you are entitled to vote.

Who can attend the meeting?

 

All registered shareholders as of the record date (or their duly appointed proxies), beneficial owners presenting satisfactory evidence of ownership as of the record date, and our invited guests may attend the meeting.

 

How do I vote?

 

If you are a registered shareholder, you have four voting options:

 

 

Even if you plan to attend the meeting, we encourage you to vote your shares by proxy. If you choose to attend the meeting, please bring proof of stock ownership and proof of identification for entrance to the meeting.

 

If you hold your EnPro shares in street name, your ability to vote by Internet or telephone depends on the voting process of the bank, broker or other nominee through which you hold the shares. Please follow their directions carefully. If you want to vote EnPro shares that you hold in street name at the meeting, you must request a legal proxy from your bank, broker or other nominee and present that proxy, together with proof of identification, for entrance to the meeting.

 

Regardless of whether or not you delivered a proxy during the election contest with Steel Partners, please vote your shares by following the directions outlined above. This proxy statement and the enclosed proxy card include a new proposal to approve amendments to our articles of incorporation to remove provisions providing for the classification of our board of directors. Votes cast by any method prior to the date of this proxy statement will not be counted at the annual meeting.

 

Every vote is important! Please vote your shares promptly.

 

How do I vote my 401(k) shares?

 

Proxies will also serve as voting instructions to the plan trustee with respect to shares held in accounts under the EnPro Industries, Inc. Retirement Savings Plan for Salaried Employees and the EnPro Industries, Inc. Retirement Savings Plan for Hourly Employees. If you participate in either of these plans, are a registered shareholder of record, and the plan account information is the same as the information we have on record with our transfer agent, the enclosed proxy card represents all of the shares you hold, both within the plan and outside it. If you hold your shares outside the plan in street name, or if your plan account information is different from the information on record with the transfer agent, then you will receive separate proxies, one for the shares held in the plan and one for shares held outside the plan.

 

What can I do if I change my mind after I vote my shares?

 

Even after you have submitted your vote, you may revoke your proxy and change your vote at any time before voting begins at the annual meeting. If you are a registered shareholder, you may do this in three ways:

 

 

Your attendance at the meeting will not automatically revoke your proxy; you must specifically revoke it.

If you hold your shares in street name, you should contact your bank, broker or other nominee to find out how to revoke your proxy. If you have obtained a legal proxy from your nominee giving you the right to vote your shares, you may vote by attending the meeting and voting in person or by sending in an executed proxy with your legal proxy form.

 

Is there a minimum quorum necessary to hold the meeting?

 

In order to conduct the meeting, a majority of EnPro shares entitled to vote must be present in person or by proxy. This is called a quorum. If you return valid proxy instructions or vote in person at the meeting, you will be considered part of the quorum. For purposes of determining whether a quorum is present, abstentions and broker “non-votes” will be counted as shares that are present and entitled to vote.

 

How will my vote be counted?

 

If you provide specific voting instructions, your EnPro shares will be voted as you have instructed. If you hold shares in your name and sign and return a proxy card or vote by telephone or Internet without giving specific voting instructions, your shares will be voted as our board of directors has recommended. If you hold your shares in your name (you are the record holder) and do not give valid proxy instructions or vote in person at the meeting, your shares will not be voted. If you hold your shares in street name and do not give your bank, broker or other nominee instructions on how you want your shares to be voted, those shares are considered “uninstructed” and a bank, broker or other nominee generally has the authority to vote those shares on matters that are determined to be “routine” under the New York Stock Exchange rules. The four proposals to be acted upon at the meeting are considered routine under the New York Stock Exchange rules, which means that a bank, broker or other nominee has voting discretion as to any uninstructed shares.

 

What vote is required to approve each item?

 

Directors are elected by a plurality of the votes cast at the meeting. “Plurality” means that the director nominees who receive the largest number of votes cast are elected, up to the maximum number of directors to be elected at the meeting. The maximum number to be elected is eight. Shares not voted will have no impact on the election of directors. Unless proper voting instructions are to “WITHHOLD” authority for any or all nominees, the proxy given will be voted “FOR” each of the nominees for director.

 

Under our Corporate Governance Guidelines, any nominee for director in an uncontested election who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election must promptly offer his or her resignation. The board’s nominating committee will then consider the resignation and recommend to the board whether to accept or reject it. The board will act on the nominating committee’s recommendation within 90 days after the shareholders’ meeting, and the board’s decision (including an explanation of the process by which the decision was reached) will be publicly disclosed on Form 8-K. Any director who offers his or her resignation may not participate in the board’s discussion or vote.

 

The affirmative vote of a majority of the shares outstanding is required to approve the proposed amendment to the articles of incorporation to clarify the provision restricting our repurchase of shares. The affirmative vote of 80% of the shares outstanding is required to approve the Article 5 Proposal. The proposal to ratify the appointment of our external auditors will be approved if more votes are cast in favor of the proposal than are cast against it.

 

How do abstentions and broker non-votes count for voting purposes?

 

For the election of directors, only votes “FOR” a nominee will count. For the ratification of the appointment of our external auditors, only votes for or against the proposal count. Broker non-votes, if any, and, in the case of the ratification of the appointment of our auditors, abstentions will not be counted as votes cast for these proposals. Because approval of the proposed amendment to the articles of incorporation to clarify the provision restricting our repurchase of shares requires the affirmative vote of a majority of the outstanding shares, abstentions and broker non-votes, if any, will have the effect of votes cast against the proposed amendment. Because approval of the Article 5 Proposal requires the affirmative vote of 80% of the shares outstanding, abstentions and broker non-votes,

if any, will have the effect of votes cast against the proposed amendment. Abstentions will count for determining whether a quorum is present.

 

Does the board plan to hold the polls open on a proposal if the company has not received the votes necessary to approve the proposal?

 

Yes. If we have not received the votes necessary to approve the Article 5 Proposal by June 9, 2008, we will adjourn the 2008 annual meeting (by keeping the polls open but for no other purpose) as reasonably necessary for up to 30 days to allow us to solicit the additional votes necessary to approve the Article 5 Proposal.

 

Is there a list of shareholders entitled to vote at the annual meeting?

 

You may examine a list of the shareholders entitled to vote at the meeting. We will make that list available at our main executive offices at 5605 Carnegie Boulevard, Suite 500, Charlotte, North Carolina, from April 29, 2008 through the end of the meeting. The list will also be available for inspection at the meeting.

 

What are the board’s recommendations?

 

Your board of directors recommends that you vote:

 

 

Proxy cards or telephone and internet instructions to vote the proxy that are validly submitted and timely received, but that do not contain instructions on how you want to vote will be voted in accordance with the board’s recommendations.

 

With respect to any other matter that properly comes before the meeting, the proxy holders will vote as recommended by your board of directors or, if no recommendation is given, in their own discretion.

 

How can I find out the results of the vote?

 

We will publish final voting results in our quarterly report on Form 10-Q for the second quarter of 2008. In addition, we intend to post the voting results from the meeting on our website, www.enproindustries.com.

 

Who pays the solicitation expenses for this proxy statement and related company materials?

 

The company does. In addition to sending you these materials, some of our directors and officers as well as management and non-management employees may contact you by telephone, mail, e-mail or in person. You may also be solicited by means of press releases issued by EnPro, postings on our website, www.enproindustries.com, and advertisements in periodicals. None of our officers or employees will receive any extra compensation for soliciting you.

 

What is “householding” and how does it affect me?

 

To reduce the expenses of delivering duplicate proxy materials to our shareholders, we are relying on SEC rules that allow us to deliver only one proxy statement and annual report to multiple shareholders who share an address unless we have received contrary instructions from any shareholder at that address. If you share an address with another shareholder and have received only one proxy statement and annual report, you may write or call us to request a separate copy of these materials and we will promptly send them to you at no cost to you. For future meetings, if you hold shares directly registered in your own name, you may request separate copies of our proxy statement and annual report. Alternatively,

you may request that we send only one set of materials if you are receiving multiple copies. You may make any of these requests by contacting us at investor@enproindustries.com or by calling 704-731-1522.

 

If your shares are held in the name of a bank, broker or other nominee and you wish to receive separate copies of our proxy statement and annual report, or request that we send only one set of these materials to you if you are receiving multiple copies, please contact your nominee.

 

Can I access these proxy materials on the Internet?

 

You can access this proxy statement and our 2007 annual report on Form 10-K, which includes our annual report to shareholders, on our Internet site at www.enproindustries.com. If you are a registered shareholder, you can choose to receive these documents over the Internet in the future by accessing www.bnymellon.com/shareowner/isd and following the instructions provided on that website. This could help us save significant printing and mailing expenses. If you choose to receive your proxy materials and annual report electronically, then prior to next year’s shareholder meeting you will receive an e-mail notification when the materials and annual report are available for on-line review, as well as the instructions for voting electronically over the Internet. Your choice for electronic distribution will remain in effect until you revoke it by sending a written request to our offices at 5605 Carnegie Boulevard, Suite 500, Charlotte, North Carolina 28209, Attention: Investor Relations.

 

If your shares are held through a bank, broker or other nominee, check the information provided by that entity for instructions on how to elect to view future proxy statements and annual reports over the Internet.

 

Who are the largest owners of our common stock?

 

The following table sets forth information about the individuals and entities who held more than 5% of our common stock as of April 24, 2008. This information is based solely on SEC filings made by the individuals and entities by that date.

 

 

 

 

 

How much stock do our directors, director nominees and executive officers own?

 

The following table sets forth information as of April 24, 2008 about the shares of our common stock that the following individuals beneficially own:

 

 

It also includes information about the shares of our common stock that our directors, director nominees and executive officers own as a group.

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and officers and people who own more than 10% of our common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock. The SEC requires these people to give us copies of all Section 16(a) reports they file.

 

We have reviewed the copies of all reports furnished to us. Based solely on this review, we believe that no director, officer, or 10% shareholder failed to timely file in 2007 any report required by Section 16(a) other than the inadvertent sale of 102 shares affected by the administrator of our Retirement Savings Plan for Salaried Employees allocated to the account of Mr. Pomeroy. Mr. Pomeroy reallocated existing balances in his accounts under this plan, which inadvertently resulted in the sale of these EnPro shares. He did not discover this transaction until after the expiration of the time period for timely filing a Form 4.

 

One of the purposes of the meeting is the election of eight directors to hold office until the annual shareholders’ meeting in 2009 or until their respective successors are elected and qualified. The board of directors has nominated the eight persons named on the following pages. All of the nominees are incumbent directors whose terms would otherwise expire upon the election of directors at the meeting. On March 10, 2008, we announced our board of directors’ appointment of Stephen E. Macadam to serve as EnPro’s Chief Executive Officer and President effective on April 14, 2008. At that time, our current Chief Executive Officer and President, Ernest F. Schaub, stepped down from those positions in connection with his previously announced retirement plans. In connection with his retirement as Chief Executive Officer and President, and consistent with our Corporate Governance Guidelines, Mr. Schaub volunteered to resign from the board of directors, and the board accepted his resignation effective April 14, 2008. Mr. Macadam was elected, effective April 14, 2008, to fill the position on the board vacated by Mr. Schaub. Properly executed proxies that do not contain voting instructions will be voted for the election of each of these nominees.

 

In connection with our settlement with Steel Partners, our board of directors has taken action to provide that, effective at the close of business on the second business day following the completion of the 2008 annual meeting of shareholders, the size of the board shall be reset from eight to nine directors and Don DeFosset shall be appointed at that time to fill the vacancy created by that increase in the size of the board of directors. In the event that Mr. DeFosset is unable or unwilling to serve as a director, the company has agreed to appoint a comparable replacement candidate to be proposed by Steel Partners that we reasonably deem to be qualified to serve on the board. Subject to applicable law and the New York Stock Exchange listing standards, the board will appoint Mr. DeFosset (or his replacement) to each of the Audit and Risk Management Committee, Compensation and Human Resources Committee, and Nominating and Corporate Governance Committee. Mr. DeFosset, age 59, is the former Chairman, President and Chief Executive Officer of Walter Industries, Inc., a diversified company with businesses in water infrastructure, flow control, water transmission products, metallurgical coal and natural gas, and homebuilding. He served as Chairman of Walter Industries from March 2002 to September 2005, and as President and Chief Executive Officer from November 2000 to September 2005. He is also a director of Regions Financial Corporation, a full-service provider of consumer and commercial banking, Terex Corporation, a diversified global manufacturer, and James Hardie Industries, N.V., a building materials manufacturer.

 

All nominees have indicated that they are willing to serve as directors if elected. If any nominee should become unable or unwilling to serve, the proxies will be voted for the election of such person as the board of directors may designate to replace such nominee.

 

The board recommends that you vote “FOR” the election of each of the nominees for director named below.

Nominees for Election

 

WILLIAM R. HOLLAND, 69

 

Mr. Holland has served as a director and as Chairman of the Board since May 2002. He was Chairman from 1987 through 2001, and Chief Executive Officer from 1986 to 2000, of United Dominion Industries Limited, a diversified manufacturing company. Mr. Holland is also a director of Goodrich Corporation and Lance, Inc., both publicly traded companies, and Crowder Construction Company, ERC, Ltd., and Cook & Boardman, Inc., all of which are privately owned companies. In addition, Mr. Holland serves as a corporate member of the Jupiter Florida Medical Center, on the Advisory Board of the Walker School of Business of Appalachian State University, and as a director of the Carolinas Healthcare Foundation.

 

STEPHEN E. MACADAM, 47

 

Mr. Macadam is our Chief Executive Officer and President, effective April 14, 2008, and has served as a director since that time. Prior to accepting these positions with EnPro, Mr. Macadam served as Chief Executive Officer of BlueLinx Holdings Inc. since October 2005. Before joining BlueLinx Holdings Inc., Mr. Macadam was the President and Chief Executive Officer of Consolidated Container Company LLC since August 2001. He served previously with Georgia-Pacific Corp. where he held the position of Executive Vice President, Pulp & Paperboard from July 2000 until August 2001, and the position of Senior Vice President, Containerboard & Packaging from March 1998 until July 2000. Mr. Macadam held positions of increasing responsibility with McKinsey and Company, Inc. from 1988 until 1998, culminating in the role of principal in charge of McKinsey’s Charlotte, North Carolina operation. Mr. Macadam is a director of Solo Cup Company.

 

J. P. BOLDUC, 68

 

Mr. Bolduc has served as a director since 2002. He has been Chairman of the Board and Chief Executive Officer of JPB Enterprises, Inc., an investment banking, private equity and real estate investment holding company, since 1995. Mr. Bolduc served as acting Chief Executive Officer of J. A. Jones, Inc. from April 2003 to September 2004. He was President and Chief Executive Officer of W. R. Grace & Co. from 1990 to 1995. Mr. Bolduc is a trustee of the William E. Simon Graduate School of Business at the University of Rochester, a member of the Advisory Council for Graduate Studies and Research at the University of Notre Dame, and a director of the Edison Preservation Foundation and Hospice of Baltimore. He is also a director of Unisys Corporation, Lance, Inc. and MCG PLC.

 

PETER C. BROWNING, 66

 

Mr. Browning has served as a director since 2002. He was the Dean of the McColl School of Business at Queens University from March 2002 through May 2005. From 1998 to 2000, Mr. Browning was President and Chief Executive Officer, and from 1995 to 1998, President and Chief Operating Officer, of Sonoco Products Company, a manufacturer of industrial and consumer packaging. He has served as lead director of Nucor Corporation, a steel manufacturer, since May 2006 and served as Non-Executive Chairman of Nucor from September 2000 to May 2006. In addition to EnPro and Nucor, Mr. Browning is a director of Wachovia Corporation, Acuity Brands, Inc., Lowe’s Companies, Inc., and The Phoenix Companies.

 

JOE T. FORD, 70

 

Mr. Ford has served as a director since May 2002. He was Chairman of ALLTEL Corporation, a provider of telecommunications, from 1991 until November 2007, and he was Chief Executive Officer of Alltel from 1987 until 2002. In addition to EnPro, Mr. Ford is also a director of Textron, Inc.

 

GORDON D. HARNETT, 65

 

Mr. Harnett has served as a director since 2002. He was Chairman and Chief Executive Officer of Brush Engineered Materials Inc., a provider of metal-related products and engineered material systems, until May 2006, and had served as Chief Executive Officer at Brush Engineered Materials or a similar position at Brush Wellman,

Inc. (a subsidiary of Brush Engineered Materials) since January 1991. Mr. Harnett is also a director of The Lubrizol Corporation and PolyOne Corporation.

 

DAVID L. HAUSER, 56

 

The board of directors appointed Mr. Hauser to a vacancy on our board in February 2007. Since April 2006, Mr. Hauser has served as Group Executive and Chief Financial Officer of Duke Energy Corporation, one of the largest electric power companies in the United States. In addition to serving as Chief Financial Officer, he was Group Vice President from February 2004 to April 2006. He was acting Chief Financial Officer from November 2003 to February 2004 and Senior Vice President and Treasurer from June 1998 to November 2003. Mr. Hauser is a director of Fairpoint Communications, Inc., a trustee of the North Carolina Blumenthal Performing Arts Center, and a member of the Business Advisory Council for the University of North Carolina at Charlotte.

 

WILBUR J. PREZZANO, JR., 67

 

Mr. Prezzano has served as a director since 2006. He retired as Vice Chairman of Eastman Kodak Company, a manufacturer of photographic equipment and supplies, in January 1997, having served in various management roles at Eastman Kodak prior to that time. He is the Non-Executive Chairman of the Board of Lance, Inc. Mr. Prezzano is also a director of Roper Industries, Inc., The Toronto-Dominion Bank, and TD AMERITRADE Holding Corporation.

 

The primary responsibility of our board of directors is to oversee and direct management in its conduct of our business. Members of the board are kept informed of our business through discussions with the Chairman and the officers, by reviewing materials provided to them, and by participating in meetings of the board and its committees. In addition, at least once per quarter, the non-management directors meet in executive session without members of management present. These sessions are presided over by the Chairman, Mr. Holland.

 

Committee Structure

 

Our board of directors has four committees: an Executive Committee, an Audit and Risk Management Committee, a Compensation and Human Resources Committee, and a Nominating and Corporate Governance Committee. In order to maximize board efficiency, our seven independent directors serve on each committee other than the Executive Committee. For a list of our independent directors, see “Corporate Governance Policies and Practices — Director Independence.”

 

Each board committee operates in accordance with a written charter that the board has approved. You may obtain these charters on our website at www.enproindustries.com by clicking on “Investor” and then “Corporate Governance” and looking under “Committee Charters.”

 

Executive Committee.  The current members of the Executive Committee are Mr. Macadam (Chairman), Mr. Browning, Mr. Harnett and Mr. Holland. The Executive Committee did not meet in 2007. The primary function of this committee is to exercise the powers of the board as and when directed by the board or when the board is not in session, except those powers which, under North Carolina corporate law, may not be delegated to a committee of directors.

 

Audit and Risk Management Committee.  The Audit and Risk Management Committee, or Audit Committee, met four times in 2007. It assists the board in monitoring the integrity of our financial statements, compliance with legal and regulatory requirements, management of significant risk areas (including insurance, pension, asbestos, environmental and litigation) and the qualifications, independence and performance of our internal and external auditors. This committee has the sole authority to appoint or replace our external auditors and to approve all fees of the external auditors. Mr. Harnett is the current committee Chairman.

 

Compensation and Human Resources Committee.  The Compensation and Human Resources Committee, or Compensation Committee, met five times in 2007. Mr. Browning is the current committee Chairman.

The primary function of the Compensation Committee is to assist the board and management in exercising oversight concerning the appropriateness and cost of our compensation and benefit programs, particularly for executives. The Compensation Committee sets the salaries and annual bonus and long-term award opportunities for our senior executives, assesses the performance of our CEO, and oversees succession planning programs. The committee has delegated responsibility for the design, administration, asset management and funding policies of our qualified and non-qualified benefit plans to a benefits committee consisting of members of management. However, the Compensation Committee has expressly retained the authority to approve benefit plan amendments (other than amendments resulting from collective bargaining agreements) that would materially affect the cost, basic nature or financing of these plans. In addition, the Compensation Committee approves all formal policies established by the benefits committee and reviews the benefits committee’s activities at least once per year.

 

Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee met three times in 2007. The primary function of this committee is to assist the board and management in exercising sound corporate governance. This committee identifies and nominates individuals who are qualified to become members of the board, assesses the effectiveness of the board and its committees, and recommends board committee assignments. It also reviews various corporate governance issues, including those items discussed below under “Corporate Governance Policies and Practices.” Mr. Holland currently chairs this committee.

 

Meetings and Attendance

 

The board met five times in 2007. All directors attended at least 75% of the total number of meetings of the full board and of the board committees on which they serve. All of our directors attended our annual shareholders’ meeting in 2007.

 

Agreement to Nominate

 

Pursuant to Mr. Macadam’s employment agreement, which we entered into on March 10, 2008, we have agreed to nominate Mr. Macadam for election as a director at subsequent annual shareholders’ meetings during his period of employment.

 

Our board of directors and management firmly embrace good and accountable corporate governance and believe that an attentive, performing board is a tangible competitive advantage. To that end, the board has undertaken substantial efforts to ensure the highest standards of corporate governance.

 

Corporate Governance Guidelines and Code of Business Conduct

 

The board regularly reviews our Corporate Governance Guidelines, taking into account recent trends in corporate governance and any new rules adopted by the New York Stock Exchange (NYSE) and the SEC. Among other things, these guidelines specify that:

 

 

Our Corporate Governance Guidelines require any nominee for director in an uncontested election who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election to tender a resignation to the board Chairman.

 

We also have a Code of Business Conduct. The Code covers, among other things, conflicts of interest, corporate opportunities, confidentiality, protection and proper use of company assets, fair dealing, compliance with

laws (including insider trading laws), the accuracy and reliability of our books and records, and the reporting of illegal or unethical behavior. It applies to our directors and all of our employees, including our principal executive, financial and accounting officers. Pursuant to the Code, all conflict of interest transactions, including related party transactions we would be required to disclose in our proxy statement, must be presented to a member of our internal Corporate Compliance Committee or an attorney in our legal department, who are authorized by the Code to present such transactions to our Chief Executive Officer and the Audit Committee. The Code does not otherwise establish specific procedures and policies for the approval or ratification of conflict of interest transactions, and we would develop such procedures on a case-by-case basis as the need arises. Each year, we ask all members of the board and all officers to certify their compliance with the Code. Each member of the board certified compliance without exception in the first quarter of 2008; each officer certified compliance without exception in the fourth quarter of 2007.

 

Copies of our Corporate Governance Guidelines and Code of Business Conduct are available on our website at www.enproindustries.com. From our home page, click on the “Investor” tab and then on “Corporate Governance.”

 

Director Independence

 

As described in our Corporate Governance Guidelines, the board believes that a substantial majority of the board should consist of independent directors. At its February 2008 meeting, the board of directors made a determination as to the independence of each of its members in 2007. In making these determinations, the board used the definition of an “independent director” in the NYSE listing standards and the categorical standards set forth in our Corporate Governance Guidelines. Under these guidelines, a director will be independent only if the board affirmatively determines that the director has no material relationship with our company (either directly or as a director, partner, shareholder or officer of an organization that has a relationship with us).

 

Under our Corporate Governance Guidelines, a director will not fail to be deemed independent solely as a result of a relationship we have with an organization with which the director is affiliated as a director, partner, shareholder or officer, so long as:

 

(1) the relationship is in the ordinary course of our business and is on substantially the same terms as those generally prevailing at the time for comparable transactions with non-affiliated persons, and

 

(2) in the event of a relationship involving extensions of credit to us, the extensions of credit have complied with all applicable laws and no event of default has occurred.

 

In addition, under the guidelines, the board cannot conclude that a director is independent if he or she falls into one of the following categories:

 

 

 

To assist in the board’s independence determinations, each director completed a questionnaire that included questions to identify any relationships with us or with any of our executive officers or other directors. After discussing all relationships disclosed in the responses to these questionnaires, the board determined that Mr. Bolduc, Mr. Browning, Mr. Ford, Mr. Harnett, Mr. Hauser, Mr. Holland, and Mr. Prezzano are independent because none has a material relationship with the company other than as a director. The board noted that Mr. Browning currently serves as a director of Wachovia Corporation, and that this bank is one of three lenders under our revolving credit facility. The board determined that each of these relationships is immaterial. As our Chief Executive Officer and President, Mr. Macadam is automatically disqualified from being an independent director.

 

“Audit Committee Financial Expert”

 

The board of directors has determined that Mr. Hauser is an “audit committee financial expert” as that term is defined in Item 401(h) of the SEC’s Regulation S-K. At its February 2008 meeting, the board determined that Mr. Hauser, through his education and experience as a certified public accountant and his experience as the Chief Financial Officer of Duke Energy Corporation, has all of the following attributes:

 

 

Director Candidate Qualifications

 

When considering candidates for director, the Nominating and Corporate Governance Committee takes into account a number of factors, including whether the candidate is independent from management and the company, whether the candidate has relevant business experience, the composition of the existing board, and the candidate’s existing commitments to other businesses. In addition, all candidates must meet the requirements set forth in our Corporate Governance Guidelines. Those requirements include the following:

 

 

The Nominating and Corporate Governance Committee will consider recommending for nomination director candidates recommended by shareholders. Shareholders who wish to suggest that the board nominate a particular candidate should send a written statement addressed to our Secretary at 5605 Carnegie Boulevard, Suite 500, Charlotte, North Carolina 28209 in accordance with the timeline and procedures set forth in our bylaws for shareholders to nominate directors themselves. See “Shareholder Proposals” for a description of the requirements to be followed in submitting a candidate and the content of the required statements.

 

Nomination Process

 

Before recommending a sitting director for re-election, the Nominating and Corporate Governance Committee considers whether the director’s re-election would be consistent with the criteria for board membership in our Corporate Governance Guidelines (as described above) and applicable rules and requirements of the SEC and NYSE. This process includes a review on behalf of the Nominating and Corporate Governance Committee of the responses to the annual director questionnaires.

 

When seeking candidates for director, the Nominating and Corporate Governance Committee may solicit suggestions from incumbent directors, management or others. The Nominating and Corporate Governance Committee may also engage the services of a third party to identify and evaluate candidates. After conducting an initial evaluation of a candidate, the Nominating and Corporate Governance Committee (or the committee Chairman) interviews that candidate if the committee believes the candidate might be a suitable director. The Nominating and Corporate Governance Committee may also ask the candidate to meet with management. If the Nominating and Corporate Governance Committee concludes that a candidate would be a valuable addition to the board and that the candidate meets all of the requirements for board membership, it will recommend to the full board that the candidate be nominated for election (or appointed, if the purpose of the committee’s search was to fill a vacancy).

 

Communications with the Board

 

Shareholders and other interested parties can send communications to the board anonymously and confidentially by means of the EnTegrity Assistance Line. You can find instructions for using the EnTegrity Assistance Line on our website at www.enproindustries.com. An independent third party staffs the line. We have instructed this third party that any report addressed to the board of directors be forwarded to the Chairman of the Audit Committee, a non-management director. Reports not addressed to the board of directors are forwarded to our Director of Internal Audit, who reports directly to the Audit Committee. The Director of Internal Audit periodically updates the Audit Committee regarding the investigation and resolution of all reports of alleged misconduct (financial or otherwise).

 

Shareholders and other interested parties also may send written correspondence to the board care of our Secretary, addressed to 5605 Carnegie Boulevard, Suite 500, Charlotte, North Carolina 28209. The board has established procedures for the handling of communications from shareholders and other interested parties and directed our Secretary to act as the board’s agent in processing these communications. All communications regarding matters that are within the scope of the board’s responsibilities are forwarded to the board Chairman, a non-management director. Communications regarding matters that are the responsibility of one of the board’s committees are also forwarded to the Chairman of that committee. Communications that relate to ordinary business matters, such as customer complaints, are sent to the appropriate business. Solicitations, junk mail and obviously frivolous or inappropriate communications are not forwarded, but the Secretary will make them available to any director who wishes to review them.

 

In addition, security holders and other interested parties who attend our annual shareholders’ meeting will have an opportunity to communicate directly with the board.

Director Compensation

 

Directors who are also employees receive no compensation for serving on our board. Our non-employee directors receive the following compensation:

 

 

The board conducted a review of its compensation at the February 2008 meeting. Based on data presented by the board’s compensation consultant, the board determined that it was appropriate to increase the fees payable to directors by adding $50,000 to the equity component. The additional $50,000 is in phantom shares. Because of limitations under our Amended and Restated 2002 Equity Compensation Plan, the additional phantom shares will be paid out in cash at retirement from the board, based on the price of our common stock at that time.

 

Phantom shares are generally granted to non-employee directors at the first board meeting each year. Phantom shares are fully vested and are paid when a director retires from the board. Since 2005, phantom shares with a value of $25,000 have been awarded each year to each director under our Amended and Restated 2002 Equity Compensation Plan for which we will pay the director one share of our common stock for each phantom share in his account (with any fractional phantom share paid in cash). The value of all phantom shares granted prior to 2005 are payable in cash, as are the additional $50,000 of phantom shares that we awarded in 2008.

 

The board adopted stock ownership guidelines for directors at its February 2008 meeting. Under these guidelines, each director has five years from the time he becomes a director to accumulate EnPro equity equal in market value to five times the annual cash retainer. Phantom shares count toward meeting the equity threshold established under the new stock ownership guidelines. All directors who have served on the board for at least five years comply with the guidelines.

 

Non-employee directors may participate in our Deferred Compensation Plan for Non-Employee Directors. Under this plan, non-employee directors may defer receipt of all or part of the cash portion of their annual retainer fee. Participants choose between two investment alternatives, a cash account and a stock account. Deferred fees in a director’s cash account are credited with an investment return based on the director’s selection from the same menu of investment options available under our Retirement Savings Plan for Salaried Employees (excluding our common stock). Deferred fees in a director’s stock account are credited with stock units that each have a value on a given date equal to the fair market value of one share of our common stock on that date. All amounts deferred are payable when a director retires from the board. The following non-employee directors have deferred compensation under the plan as of December 31, 2007: Mr. Bolduc, 1,520 stock units; Mr. Browning, 7,599 stock units; Mr. Ford, 8,473 stock units; and Mr. Harnett, $159,437 and 6,483 stock units.

The following table presents the compensation we paid to our non-employee directors for their service in 2007.

 

2007 Non-Employee Director Compensation

 

 

 

 

 

Directors who participate in our Deferred Compensation Plan for Non-Employee Directors direct the investment of all funds they defer into the plan. The investment options are the same ones available under our tax-qualified Retirement Savings Plan for Salaried Employees. Accordingly, no director earns interest on his deferrals at an above-market rate.

 

The Audit Committee oversees the quality and integrity of our financial reporting processes and our systems of internal accounting controls. Management is responsible for preparing our financial statements and for establishing and maintaining adequate internal control over financial reporting. The external auditors are responsible for performing an independent audit of those financial statements and an independent audit of the effectiveness of our internal control over financial reporting.

 

The Audit Committee has met and held discussions with management and PricewaterhouseCoopers LLP (PwC), our external auditors for 2007, regarding our audited 2007 consolidated financial statements and our internal control over financial reporting. Management represented to the Audit Committee that our consolidated financial statements were prepared in accordance with generally accepted accounting principles and that our internal control over financial reporting was effective as of December 31, 2007. The Audit Committee has reviewed and discussed the consolidated financial statements and our system of internal control over financial reporting with management and PwC.

 

The Audit Committee also has discussed with PwC the matters required to be discussed by Statement on Auditing Standards No. 61 (Codification of Statements on Accounting Standards), as amended. In addition, the

Audit Committee has received the written disclosures and the letter from PwC relating to the independence of that firm that are required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and has discussed with PwC that firm’s independence from us.

 

The Audit Committee has further discussed with our internal auditors and PwC the overall scope and plans for their respective 2007 audits. The Audit Committee met with the internal auditors and PwC, with and without management present, to discuss the results of their examinations, the evaluations of our internal control over financial reporting, and the overall quality of our financial reporting.

 

In reliance upon the Audit Committee’s discussions with management and PwC and the Audit Committee’s review of the representation of management and the report of PwC to the Audit Committee, the Audit Committee recommended that the board of directors include our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007 to be filed with the SEC.

 

Audit and Risk Management Committee

 

J.P. Bolduc
Peter C. Browning
Joe T. Ford
Gordon D. Harnett
David L. Hauser
William R. Holland
Wilbur J. Prezzano, Jr.

 

February 12, 2008

 

The Compensation and Human Resources Committee is responsible for developing and overseeing the implementation of our compensation philosophy and strategy. The committee assists the board of directors by exercising oversight concerning the appropriateness and cost of our compensation and benefit programs, particularly for the CEO and the other senior executives.

 

The section entitled “Compensation Discussion and Analysis” explains the material elements of our compensation program and provides an analysis of the material factors underlying the committee’s compensation policies and decisions. The committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussion with management, the committee has recommended to our board of directors that the Compensation Discussion and Analysis be included in this proxy statement and in our annual report on Form 10-K for the year ended December 31, 2007.

 

Compensation and Human Resources Committee

 

J.P. Bolduc
Peter C. Browning
Joe T. Ford
Gordon D. Harnett
David L. Hauser
William R. Holland
Wilbur J. Prezzano, Jr.

 

February 12, 2008

 

Executive Summary

 

In this Compensation Discussion and Analysis section, we describe our objectives, policies and practices for paying our executive officers the compensation reported below, focusing on how and why we arrived at those objectives and policies and our specific executive compensation decisions. We first discuss how we set compensation, including our specific compensation practices and what we look at in making our compensation decisions. We then analyze why we pay each element of compensation, focusing first on in-service compensation and then addressing compensation to be paid following retirement or other termination of employment.

 

This Compensation Discussion and Analysis discusses these matters as they apply to compensation paid to executive officers for 2007. Ernest F. Schaub was our Chief Executive Officer and President until his retirement on April 14, 2008. Accordingly, this Compensation Discussion and Analysis includes a discussion of the compensation paid to Mr. Schaub, and not his successor, Stephen E. Macadam, who became our Chief Executive Officer and President on April 14, 2008.

 

In this Compensation Discussion and Analysis section we refer to compensation programs and arrangements that we describe in more detail in the pages following this section, which include several tables presenting specific compensation data. We have not repeated the details of those programs here and urge you to review those sections of this proxy statement for a more complete description of those programs and arrangements.

 

At our inception in 2002 as a new public company being spun-off by Goodrich Corporation, our future was uncertain. At that time, the objective of our executive compensation program was to attract management with proven experience in our industry and the skill sets to foster our success as a standalone entity. To achieve this objective, we believed a competitive compensation package was paramount. Accordingly, we tailored our compensation program to be comparable to the compensation program at Goodrich Corporation, which was not only our former corporate parent but also the prior employer of a number of our executive officers.

 

A primary objective of our executive compensation program now is to retain these officers, and to be in a position to replace them with other high-caliber individuals should that need arise. A competitive pay package is vitally important to meet this objective, and, accordingly, we set the targeted level of each component of in-service compensation for our executive officers at or near the market median.

 

A concurrent objective of our executive compensation program is to contribute to our continued success as a company. We seek to accomplish this objective through our incentive plans, by rewarding performance that enhances shareholder value and furthers our strategic and financial objectives. We use both annual and three-year plans to provide incentives for both short-term and long-term performance. We use our annual budget and strategic plans to set incentive target levels, taking into account anticipated sales and income growth. If our performance exceeds these targets, our executive officers earn incentive awards above the market median.

 

In the six years since our spin-off from Goodrich, our operating performance has increased significantly:

 

 

 

As a result of our strong performance over this period, our executive officers have been compensated above median levels. Our compensation program has been instrumental in driving this performance. Simply stated, we have paid for and gotten outstanding results. Thus, while our executive officers have benefited from our compensation programs, we believe their performance has significantly benefited our shareholders.

Our record sales and earnings levels in 2007 continued this trend and exceeded the goals that we had set for the year. Based on our strong performance relative to our annual incentive plans’ performance goals, the committee awarded the named executive officers the bonuses reported in column (g) (see footnote 2) of the summary compensation table that begins on page 34. These annual bonuses equaled 138% of each named executive officer’s target bonus. The company has also performed well relative to the goals established three years ago under our long-term incentive plan. Based on that performance, the committee awarded a cash LTIP payment equal to 121% of each executive officer’s target cash award and performance shares equal to 132% of each executive officer’s target share award.

 

Compensation Practices

 

All seven of our non-management directors sit on our Compensation and Human Resources Committee. The committee’s primary function, as delegated to it by our board, involves oversight concerning the appropriateness and cost of our compensation programs, particularly the program for executive officers. The committee also approves all change in control agreements, the officers’ participation in all benefit and retirement plans and all material changes to these plans.

 

The Role of the Executive Officers

 

For all executive officers other than the CEO, the committee considers proposals by the CEO as to the appropriate levels of salary and incentive award opportunities. It then approves these compensation elements as proposed or, in its discretion, revises them. In reviewing the compensation of the CEO and the other executive officers, the committee is advised by its outside compensation consultant and our human resources staff. Our CEO does not recommend any of his compensation, including target bonus or incentive award levels, to the committee. The committee establishes the CEO’s compensation independently of that of the other executive officers, so that an increase in the compensation of those officers, as proposed by the CEO, does not form the basis for a corresponding increase in the CEO’s compensation.

 

To set performance measures and levels for our annual and long-term incentive plans, our executive officers review the budgets for each of our operating units, key economic indicators affecting our businesses, historical performance, recent trends, and our strategic plans. Our executive team proposes performance measures that it believes to be most important and meaningful to the achievement of our strategic goals. The executive team also proposes what it believes to be the appropriate weighting to give to each factor in the calculation of the overall incentive awards, and minimum, target and maximum payout levels appropriate for each of the performance measures we choose.

 

At its December meeting each year, the committee reviews the proposed performance measures and weightings and approves them, either as recommended or with revisions the committee suggests. In addition, the committee previews preliminary minimum, target and maximum payout levels for each performance measure at the December meeting. The committee and its consultant provide the executive officers with feedback on the preliminary payout levels, and the executive team then reviews the committee’s recommendations in conjunction with year-end financial results, revised budgets and economic forecasts. Management makes its final recommendations at the committee’s February meeting, at which time the committee independently reviews management’s recommendations, and makes the final determination of what performance measures, weightings and payout levels will be used for each incentive award.

 

The committee often directs members of management to work with our executive compensation consultant to provide information and otherwise help with the consultant’s analyses. However, the committee does not delegate any of its decision making authority to executive officers or other members of management.

 

The Role of the Executive Compensation Consultant

 

The committee directly engages our executive compensation consultant, and it engaged Watson Wyatt Worldwide to assist it with compensation planning for 2007. The committee replaced Watson Wyatt with Pearl Meyer & Partners in May 2007. The committee’s charter gives it express authority over the engagement of executive compensation consultants, as well as the ability to engage other advisors as it sees fit.

The executive compensation consultant reports directly to the committee on all work assignments from the committee. In addition, the committee chair engages in a direct dialogue with the members of the consulting firm’s team who perform work on our executive compensation program.

 

Watson Wyatt’s work for the committee on executive compensation for 2007 included:

 

 

In addition, management engaged Watson Wyatt for compensation and benefits consulting work on broad-based employee benefit programs like our pension plan and 401(k) plans. This work, which was not requested or overseen by the committee, was performed by an entirely separate team at Watson Wyatt from the team that provides information to the committee.

 

Pearl Meyer and Partner’s work for the committee on executive compensation for 2007 included:

 

 

At the committee’s request, Pearl Meyer does not provide services to our company other than the assistance it provides to the committee.

 

Compensation Program Design and Tools

 

The committee has used a number of tools and considered the regulatory environment in designing our executive compensation program, including corporate policies regarding executive compensation, studies of internal pay fairness, external market studies, “tally sheets,” long-term compensation histories and tax and accounting rules.

 

Policies Regarding Executive Compensation

 

First, the committee sets targeted in-service compensation for our executive officers at or near the market median. This policy covers base salaries as well as the incentive awards that officers will receive if we meet annual or three-year business goals. Under this policy, if our performance exceeds our goals — as it has every year, in the case of the annual bonus, and every performance period but one, in the case of the LTIP — our executive officers earn incentive awards above the median. When this happens, of course, their total compensation exceeds the median. On the other hand, if we were to fail to meet our business goals, executive compensation levels would fall below the market median.

 

Second, the committee has a policy of making variable compensation a significant component of each executive officer’s total compensation. The term “variable compensation” refers to amounts that vary in amount depending on performance — poor performance leads to little or no awards while superior performance leads to superior awards. The more responsibility an executive has, the higher is his variable compensation as a percentage of his total compensation. Correspondingly, with more responsibility comes a lower percentage of fixed compensation that the executive is more or less guaranteed to earn for doing his job. The following graph shows the percentage of direct compensation awarded to each member of senior management in 2007 that is variable versus

fixed. For purposes of this graph, “direct compensation” means the individual’s salary plus his target annual bonus and target LTIP payout for the 2007-2009 cycle:

 

 

The committee generally believes “target” performance levels should be ones that represent significant performance improvements, and that the company will not easily achieve.

 

The policy of making variable compensation a significant portion of our executive officers’ total compensation helps us implement a culture in which the officers know that their pay, to a large extent, depends on the company’s performance.

 

Third, the committee has policies aimed at more closely aligning management’s interests with those of our shareholders. One such policy is to systematically include some form of equity grant, or potential equity grant, as part of our executive compensation program. If our officers own shares of our common stock with values that are significant to them, we believe they will be more likely to act to maximize longer-term shareholder value instead of short-term gain. Executive officers currently have the opportunity to earn performance shares for each three-year cycle under our LTIP.

 

Stock Ownership Guidelines

 

Our stock ownership guidelines suggest that each executive officer hold shares of our common stock with a market value at least equal to a specified multiple of his base salary. The multiple of salary rises with one’s job responsibility. The suggested minimum ownership level for our CEO is three times his base salary, and the suggested minimum levels for the other executive officers range from 0.75 times to 1.5 times salary. In light of these guidelines, the committee has believed it appropriate to provide officers with an opportunity to earn shares as part of the long-term incentive award. All of our named executive officers currently hold at least the suggested minimum number of shares except Mr. Childress, who joined the company in December 2005, and therefore has not received any long-term incentive payments to date. Under the guidelines, Mr. Childress has more than two years left to acquire the suggested minimum number of shares.

 

Mr. Schaub, in anticipation of his retirement, implemented a Rule 10b5-1 plan in February 2007 to systematically exercise stock options he has received from us and sell a portion of the shares of our common stock he receives upon exercise. Through the date of his retirement, Mr. Schaub continued to own far more than the minimum number of shares that our ownership guidelines suggest.

Market Competitiveness Analyses

 

Each year the committee asks our executive compensation consultant to compare our named executive officers’ salary, target annual bonus and target long-term incentive awards to those granted to officers in the same positions at other similarly sized diversified manufacturing companies. The goal of these studies is to determine whether our pay levels for these compensation elements is competitive. For the study used to make compensation decisions in 2007, Watson Wyatt used 2005 data (the most recent data then available) from a broad survey group and for a peer group consisting of the following manufacturing companies ranging in revenues from approximately half to approximately twice our annual revenues, with 12 of the 19 companies having revenues greater than the company’s:

 

 

The peer group selected by Watson Wyatt and approved by the chairman of the committee is broader than the peer group we use in preparing our five-year performance chart included in our annual report because not all of the companies in our performance-chart peer group report compensation of officers in comparable positions as our executive officers, and by limiting a comparison to those peers we would not have a statistically valid sample group for compensation comparisons for those officers. In addition, we believe that for executive compensation purposes, the relative size and complexity of a company, not the specific category of products manufactured, is more important for compensation comparisons, so this broader group of industrial manufacturers is appropriate for this purpose.

 

Watson Wyatt compared 2005 data among us and the members of the peer group, calculating our percentile rank on each of these measures versus the group, for operating income before depreciation, sales growth, growth in operating margin before depreciation, growth in net income, growth in free cash flow, ratio of working capital to sales, three-year total shareholder return and return on investment. Based on these performance measures, with each measure receiving equal weight, Watson Wyatt calculated our total performance score, which placed us well above the median, near the top of the second quartile. Comparing the percentile ranking of our base salary and annual incentive compensation to our named executive officers as compared to the peer group to our total performance score ranking indicated that our relative performance was slightly stronger than our relative executive compensation, while a similar calculation for our long-term incentive compensation indicated an even stronger relative performance compared to relative executive compensation.

 

The consultant also analyzed the three specific compensation elements we awarded each of our named executive officers for 2006 (base salary, annual bonus and long-term incentive opportunity) as compared to those awarded to executive officers with similar responsibilities of each member of the peer group and the broader survey group. Based on that analysis and the comparisons to the relevant medians of the peer group and survey group, Watson Wyatt made specific recommendations to the committee with respect to each of the named executive officers regarding adjustments to base salary, annual incentive award and long-term incentive award for each of those components of compensation to be at or near the market median for each such component.

 

At its October 2007 meeting, the committee requested that management review the compensation of senior executives and key employees of our subsidiaries who are not named executive officers. Management’s compensation consultant gathered survey data and other relevant information which management used to conduct its review. The committee considered the results of this study when it met in February 2008 to review the compensation for our executive officers. The committee also considered the results in connection with its approval of base salaries and incentive opportunities at its meeting in February 2008.

Tally Sheets

 

At its February 2007 meeting, the committee reviewed and discussed a “tally sheet” for each of our executive officers that summarized total compensation for each officer. With the aid of these tally sheets, the committee considered each element of each executive officer’s compensation, as well as compensation totals and potential wealth accumulation from vested equity grants, before setting salaries and target bonus and long-term incentive awards for 2007.

 

Five-Year Compensation History

 

At its December 2007 and February 2008 meetings, prior to approving payment on annual incentive and LTIP awards for 2007, the committee reviewed and discussed with the compensation consultant five-year comprehensive compensation data for our executive officers as well as comparative survey compensation data. The committee analyzed this data to confirm whether compensation paid over that longer term was consistent with our objectives and policies or whether current period adjustments to compensation should be made. The committee determined that compensation paid over this longer term is appropriate given our strong financial performance. The committee considered this data in setting base salaries and establishing incentive compensation awards for 2008.

 

Impact of Tax and Accounting Rules

 

Regulatory considerations often affect the design of our executive compensation program. The primary example is the limit under Section 162(m) of the federal tax code on the deductibility of compensation in excess of $1 million granted to top officers. There is an exception to the $1 million compensation ceiling for performance-based compensation that is granted in compliance with specified rules. While the committee intends for all compensation to be tax deductible, there may be instances where potentially non-deductible compensation is provided to reward executives consistent with our compensation philosophy for each compensation element.

 

Section 162(m) factors into other executive compensation actions as well. For example, when the committee decided in 2005 to schedule systematic life insurance policy transfers to four named executive officers, it realized that the value of each policy transfer would be included in the recipient’s compensation for purposes of the $1 million limit on deductibility. (For more information about these policy transfers, including which benefits they will replace, see below under “— Compensation Analysis — Retirement and Other Post-Termination Compensation — Supplemental Retirement and Death Benefit Agreements.”) To avoid losing any of our tax deductions, the committee added a special provision to each of the relevant agreements. Under this provision, if a policy transfer would cause the recipient’s compensation to exceed $1 million for purposes of the Section 162(m) deductibility limit, the portion of that transfer that would have exceeded the limit automatically will be delayed until a later year.

 

Compensation Analysis

 

We view our compensation program in two discrete categories — in-service compensation paid to our officers while they remain employed by our company and post-termination compensation to be received by our officers after they have retired or their employment is otherwise terminated. In making decisions regarding the amount of in-service compensation to be paid to the executive officers, the committee analyzes each component and the total amount of in-service compensation against benchmarks and survey data. The amount that executive officers may receive as retirement and other post-employment compensation is also considered. The committee uses tally sheets to confirm that the overall compensation package is reasonable.

 

The following section discusses and analyzes each element of our executive compensation program.

 

In-Service Compensation

 

Salary

 

We pay each of our executive officers a base salary to give them a relatively secure baseline level of compensation. For 2007, the committee sought to set each executive officer’s base salary at or near the market median. The committee increased the base salaries of the named executive officers by approximately three percent, in line with the recommendations of Watson Wyatt based on its analysis of market studies that would place the base salaries at or near the median peer group and survey results.

Annual Bonus Opportunity

 

Payment of annual bonuses to our executive officers depends entirely on our corporate performance. The committee provides them with a bonus opportunity each year so that they will have a personal financial incentive to help us reach annual business goals. Annual bonus awards for Mr. Schaub, Mr. Dries, Mr. Magee, and Mr. Smith are made under our senior executive bonus plan, which our shareholders approved in 2007. Bonus awards for Mr. Childress, Mr. Byrne and Mr. Pomeroy are made under a similar plan for other members of management. We refer to these plans as the annual performance plans or annual plans.

 

For 2007, 40% of the annual performance plan bonus opportunity for all executive officers was tied to a goal for adjusted net income, 30% was tied to a goal for free cash flow before asbestos and taxes and the remaining 30% to a sales growth goal. The committee set the performance goals and the corresponding bonus opportunities for officers after taking into account management’s recommendation, and adjusting the free cash flow before asbestos goal to eliminate the impact of taxes. It chose adjusted net income, free cash flow before asbestos and taxes and sales growth as the criteria because all three were central to our 2007 business plan.

 

Adjusted net income is and has been important because net income figures demonstrate the quality of our earnings as well as our profitability. The committee adjusts this measure to eliminate the impact of asbestos expense and other items because it believes that those adjustments result in a more accurate measure of the operating performance of our businesses. Free cash flow before asbestos historically has been important for the company, and remains important, as an indicator that we can cover our asbestos and other liabilities, reinvest appropriately in our businesses, and still produce additional free cash flow. This metric was adjusted for 2007 to also eliminate the impact of taxes because the committee concluded that tax rates are largely beyond the control of management, and had selected this metric as a more direct measure of operating performance. Sales growth, on the other hand, has recently gained importance as a performance metric because we wish to emphasize achieving significant profitable growth. The sales growth metric selected by the committee eliminates the impact of fluctuations in foreign currency exchange rates, which is beyond management’s control, and did not include the sales growth of our Fairbanks Morse Engine^tm unit. Sales at Fairbanks Morse Engine^tm are volatile as they depend on the timing of large engine shipments. The committee also chose these three criteria because it believed our executive officers could significantly affect our annual performance in these areas.

 

The 2007 goals that corresponded to the minimum, target and maximum bonus payout levels are set out in the following table:

 

 

 

 

Our executive officers’ annual performance plan bonus opportunities ranged from 40% to 85% of their actual 2007 base salaries. The target bonuses, as percentages of base salary, for the named executive officers were as follows:

 

 

Each executive officer’s minimum bonus was one half of his target bonus, his maximum bonus was twice the target amount and performance between any of the established goals yielded a proportional award.

 

The committee set the target award levels for our named executive officers based on the results of the Watson Wyatt market studies and management recommendations. It set each named executive officer’s target award at or near the median for his position in the market study. The committee based the minimum and maximum award levels on information from Watson Wyatt about prevailing market practices in setting the range of annual bonus opportunity around an established target.

 

Under the terms of the senior executive annual performance plan, which governs the bonus to all of our named executive officers except Mr. Childress, Mr. Pomeroy and Mr. Byrne, the committee can use negative discretion to reduce the size of a bonus award but cannot use discretion to increase any bonus. The management bonus plan under which we awarded Mr. Childress’s, Mr. Pomeroy’s and Mr. Byrne’s bonuses permits both positive and negative discretionary changes by the CEO. In the case of Mr. Pomeroy, who served as Vice President — Finance at our Garlock Sealing Technologies subsidiary for the first eight months of 2007 before returning to our corporate office in September 2007, the committee approved an increase of $50,000 over the calculated amount under the management annual performance plan. The committee adjusted Mr. Pomeroy’s bonus upward in part because he gave up an opportunity to earn a cash LTIP award when he joined the Garlock Sealing Technologies management team, and in part because he continued to lead Garlock’s finance department for several months while also serving as our corporate controller. The committee also approved ex gratia bonuses to Mr. Dries and Mr. Magee of $20,000 and $65,000, respectively, in recognition of the additional duties undertaken by them since the departure of Mr. Smith.

 

Long-Term Incentives

 

Each year the committee grants long-term incentive performance awards, in overlapping three-year cycles, to our executive officers to provide them with personal financial motivation to help us reach our longer-term goals. In addition to providing the officers with a long-term stake in our success, we believe these awards serve as a significant retention tool to dissuade them from joining another company. In view of our higher ratio of the amount of equity awards outstanding to the total number of outstanding shares as compared to peer companies, the committee believes that use of these long-term performance incentive awards are preferable to options or other equity based awards that may further increase this dilution ratio relative to our peers.

 

The committee makes these awards under our long-term incentive plan or LTIP, which our shareholders most recently approved in 2007. The committee established the performance goals and corresponding potential award levels for the 2007-2009 LTIP cycle at its March 2007 meeting. For this cycle, as for the previous three, the committee determined that half of the target award to each executive would consist of performance shares and half of cash, other than Mr. Pomeroy, whose entire LTIP award was in performance shares. The committee believes that both types of awards align officers’ long-term interests with those of our shareholders, and that the specific target mix of one half cash, one half shares is appropriate to increase management’s ownership stake in our company.

The performance factors and weightings for the cash portion of the awards are as follows:

 

 

For the performance share portion of the awards, the performance factors and weightings are:

 

 

The 2007 — 2009 goals that corresponded to the minimum, target and maximum payout levels are set out in the following table, with different maximum payout levels for the cash and performance share portions of the awards:

 

 

 

 

The committee chose these criteria because of their importance to our long-term performance and because it believes our executive officers can significantly affect our performance in these areas over the three-year period. The goal for return on capital focuses management on maximizing the efficiency of our assets and capital structure. While free cash flow before asbestos and taxes was a goal for the 2007 annual bonus, the committee also made it an LTIP goal in order to focus management on the need for continuous strength in this area as opposed to just short-term results. Because asbestos liabilities have continued to require significant cash outflows, we also have a goal for net cash flow for asbestos.

 

Each executive officer’s minimum cash award is one-fifth of his target award, and his maximum cash award is twice the target amount. For the performance share awards, each officer has a minimum award of one half the targeted number of shares and a maximum award of 150% of the target number. In both cases, actual performance that falls between the maximum and minimum established goals will yield a proportional award.

 

The committee set the target LTIP awards for each executive officer based on the results of the Watson Wyatt market studies. The target awards were set at or near the median study results. The committee based the minimum and maximum award levels on information from Watson Wyatt about prevailing market practices in setting the range of long-term incentive opportunity around an established target.

 

Once the company’s performance results are determined at the end of the award cycle, the committee cannot use discretion to increase the size of any LTIP award. However, it can use negative discretion to reduce the award that would otherwise be payable to any of the executive officers. In light of our strong results during the relevant performance period, which the committee concluded reflected desired performance improvements, the committee did not exercise its negative discretion to reduce the size of the LTIP awards that were paid to the executive officers in 2007 based on the 2004-2007 LTIP cycle.

 

Until 2007, the committee consistently made LTIP awards at its February meeting. In 2007, the committee reviewed but did not finally approve LTIP awards at its February meeting as in previous years. During the February meeting, it determined that certain performance metrics for the awards should be calculated on a pre-tax basis rather than on an after-tax basis. The committee concluded that tax rates are largely beyond the control of management and that pre-tax metrics would result in the more direct measure of operating performance that the committee desired. The information presented to the committee at that time was on an after-tax basis, and the committee chose to wait until it had an opportunity to review the pre-tax information to approve the 2007-2009 LTIP awards.

The committee reconvened on March 19, 2007 to review and finally approve the 2007-2009 LTIP awards. The average of our high and low stock prices immediately preceding the March meeting had increased to $36.72 per share from the $33.51 average per share price on the date immediately preceding the February 13 meeting. The committee recognized that using the higher stock price to calculate the number of performance shares would reduce the number of performance shares awarded as compared to the amount preliminarily approved at the regularly scheduled February meeting. The committee chose to adjust the number of performance shares downward to reflect the higher stock price in order to keep the initial value of the LTIP awards the same as the initial value as presented at the February meeting.

 

Perquisites

 

In February 2006, the committee eliminated a number of perks that we had traditionally provided to our executive officers: reimbursement for an automobile and related expenses, financial planning, tax preparation and estate planning expenses and social club dues. Any remaining perks, which include an umbrella liability policy, are minimal.

 

Other In-Service Benefits

 

Our executive officers also receive the following benefits, which we provide to all salaried employees as compensation for their services to us:

 

 

We provide these insurance benefits because we believe at a company of our size they are a standard part of the compensation package available to salaried employees.

 

Retirement and Other Post-Termination Compensation

 

401(k) Plan

 

We sponsor two broad-based 401(k) plans, one for salaried employees and one for non-salaried employees. We offer these plans to help employees save for retirement. Each of our executive officers participates in the plan for salaried employees. Under this plan, each participant can defer into his 401(k) plan account a portion of his plan-eligible compensation (generally, base salary and annual bonuses), up to the annual limit set by the IRS and can then direct how his account will be invested. We match each participant’s deferrals under this plan, other than catch-up contributions, on a monthly basis at a rate of 100% up to the first 6% of compensation contributed by the participant. Our matching contributions are fully vested.

 

Deferred Compensation Plan

 

We provide a non-qualified, deferred compensation plan for our executive officers to permit them to save for retirement on a tax-deferred basis beyond what the 401(k) plan permits, because of either federal tax code limits or the design of the 401(k) plan. In addition, the plan makes up for matching contributions that cannot be made to the 401(k) plan because of federal tax code limits. The committee believes this type of additional deferral and matching opportunity is part of a competitive compensation package for public company executive officers.

 

This plan is unsecured, and the officers’ plan accounts would be available to satisfy our creditors in the event of our insolvency. This means that the officers have voluntarily placed at risk all funds they have deferred under the plan.

Pension and Defined Benefit Restoration Plans

 

Our executive officers, like many of our salaried employees, participate in a defined benefit pension plan that will give them a retirement benefit based on their years of service with the company and their final average compensation (salary plus annual bonus). For salaried employees who do not participate in this pension plan, we make a contribution equal to 2% of compensation each payroll period to our 401(k) plan instead. In the case of Mr. Pomeroy, he receives the additional 401(k) benefit in lieu of accruing any additional pension benefits.

 

In addition, we provide our executive officers and others with a defined benefit restoration plan to give them the benefits they would have under our pension plan were it not for limitations under the pension plan. The federal tax code places caps on the amount of annual compensation that the pension plan can take into account and on the amount of annual benefits that the pension plan can provide. We are required to include these caps in our pension plan in order to maintain its tax-qualified status. In addition, the pension plan does not take into account amounts that an individual defers under our non-qualified deferred compensation plan.

 

Despite these limitations, we would like our executive officers to receive a retirement pension benefit that takes into account their full salaries and annual bonuses. Otherwise, in our view, their retirement pension will not accurately reflect their contributions and service to our company. Accordingly, we provide the restoration plan to make up what we see as a shortfall under the pension plan and view this as an important part of a competitive executive compensation package.

 

SERP

 

Our initial top five executive officers — of which Messrs. Dries and Magee remain with the company — all participated in supplemental executive retirement plans (SERPs) at their prior employers. In addition, Mr. Schaub, our former CEO, was in the later stage of his career and stood to receive substantial additional pension benefits if he had remained with his prior employer. Accordingly, we believe a SERP was an important tool in recruiting these officers to join our company. No other executive officers participate in the SERP.

 

We modeled our SERP after the plan provided by our former shareholder, Goodrich Corporation, which was also Mr. Schaub’s prior employer. It pays an additional retirement benefit equal to the combined benefit under our pension plan and restoration plan for the participant’s first 15 years of service. This benefit is based on the retiring executive’s base salary and annual bonus. LTIP payments and gains from equity grants do not factor into the benefit formula.

 

Supplemental Retirement and Death Benefits Agreements

 

At the time we established the SERP and the restoration plan in 2002, the committee intended to enter into split-dollar life insurance arrangements with each plan participant. It had two purposes for doing so. The first was to fund benefits under these plans in a manner with tax advantages for the participants. The second was to provide the officers with an appropriate level of death benefits as part of a competitive public company compensation package. However, shortly after we established the SERP and the restoration plan, new IRS regulations and the Sarbanes-Oxley Act made split-dollar arrangements unattractive for executive officers of public companies. As a result, the committee decided not to enter into the split-dollar insurance arrangements.

 

Instead, we purchased life insurance policies on the lives of the SERP participants. We own these policies and hold the right to receive any death benefits that are paid under them. The committee believes the policies provide a financially advantageous means for us to finance our obligations under the SERP and the restoration plan.

 

When we acquired these policies, we also entered into death benefits agreements with Mr. Schaub, Mr. Dries and Mr. Magee. The purpose of these agreements was to provide these individuals with competitive death benefits that would provide security for their beneficiaries. Under these agreements, we must pay a stated lump sum death benefit to each officer’s designated beneficiary if the executive dies while employed with us. The amount of each death benefit is based on the death benefit under the corresponding insurance policy we own on the officer’s life, but minus a cushion that allows us to recover the policy premiums we have paid. Working with an insurance consultant, the committee determined these amounts by projecting the retirement benefits each executive would accumulate if he worked with us until retirement. For the death benefits that would have been payable if the agreements had been

triggered on December 31, 2007, see “Executive Compensation — Potential Payments Upon Termination or Change in Control — Death Benefits Agreements.” To avoid duplication, the agreements provide that these death benefits are in lieu of any death benefits otherwise payable under the restoration plan and the SERP.

 

In 2005, we entered into supplemental retirement and death benefits agreements with these same officers. Under these agreements, we agreed to pay each officer’s vested benefits accrued under the SERP and the restoration plan in annual lump-sum payments, beginning in 2007 for Mr. Dries and Mr. Magee, and continuing each year thereafter through retirement. Mr. Schaub elected to defer all lump sum payments until his retirement in 2008. We make these annual lump-sum payments by transferring to the executive ownership of a portion of the life insurance policy we own on the officer’s life. The portion transferred has a cash value equal to the lump-sum value of SERP and restoration plan benefits being paid. The death benefit of the transferred policy also reduces the amount that might otherwise become payable under the officer’s death benefits agreement. To the extent any policy transfer would cause the recipient’s compensation to exceed $1 million for purposes of the federal tax deductibility limit, the portion of the transfer that would have exceeded the limit automatically will be delayed until a later year. We entered into these supplemental agreements in order to meet our obligations under the SERP, restoration plan and death benefits agreements in the most cost-effective manner.

 

These supplemental agreements also require us to make a tax gross-up payment each year to cover the officer’s income taxes resulting from the policy transfer. The committee decided to provide this tax gross-up for two reasons. First, without the tax gross-up the executive might have to cover income taxes from the policy cash value, reducing the policy’s death benefits. Second, the tax gross-up allows us to approximate the tax-advantaged outcome for the executive that we had originally intended to accomplish through split-dollar arrangements.

 

Change-In-Control Agreements

 

In a situation involving a change in control of our company, our executive officers would face a far greater risk of termination than the average salaried employee. To attract qualified executives that could have other job alternatives that may appear to them to be less risky absent these arrangements, and to provide them with an incentive to stay with us in the event of an actual or potential change in control, we have entered into a management continuity agreement with each of them. In addition, we view management continuity agreements for our executive officers as an important part of a competitive executive compensation package. In establishing the terms of these agreements, we looked at similar arrangements established by peer companies and by our former corporate parent. Our inclusion of particular terms in these agreements, including the applicable continuation period and provisions increasing the amount payable to account for excise taxes, reflected our subjective judgment regarding the terms offered in comparable agreements by peer companies and the desire to offer competitive arrangements.

 

Each of these continuity agreements provides for the individual to continue employment for a specified period after a change in control, with the same responsibilities and authorities and generally the same benefits and compensation as he had immediately prior to the change in control (including average annual increases). The term “change in control” is defined in the management continuity agreements to include various corporate transactions resulting in a change in ownership in the company and would also include the election of a majority of the board of directors not nominated by the incumbent board of directors. The length of the period was set based on the relative responsibilities of the executive officers. The period is three years for our CEO, CFO and General Counsel and ranges from one and a half to two years for the other executive officers. If during this continued employment period we or our successor were to terminate the individual’s employment for reasons other than “cause”, or the individual voluntarily terminated his employment for a “good reason” (in each case as defined in the agreements), he would be entitled to certain payments and other benefits.

 

Because the executive must leave the company before becoming entitled to these payments and benefits, the agreement has a “double trigger” — the first trigger is the change in control, and the second trigger is the termination, either by the company other than for “cause” or by the executive for “good reason.” The requirement of the second trigger provides the incentive for the executive to stay with us in the event of a change in control. For more information about these payments and other benefits, see “Executive Compensation — Potential Payments Upon Termination or Change in Control.” The committee has reviewed the amounts that are potentially payable under these agreements and believes that they are reasonable.

Severance Policy

 

We have written severance policies under which we provide severance benefits to all full-time employees at our corporate office, including our executive officers. Under these policies, an executive officer whom we terminate without cause is entitled to continue receiving his or her base salary for a specified period. The terminated officer is also entitled to receive a pro rata portion of the bonus payable for the year in which the officer is terminated, along with a pro rata payout of all LTIP awards based on the number of completed months in each performance cycle. The period was set based on the relative responsibilities of the executive officers. The period is 24 months for our CEO and 12 months for our other executive officers. An executive officer may not receive any payments under the severance policy if the executive officer is entitled to receive payments under the change-in-control continuity agreements described above.

 

We maintain this severance policy because we believe that such a policy is consistent with market compensation packages for executive officers and therefore is an important component of a competitive compensation package.

 

Changes for 2008 Compensation Program

 

In February 2008, in connection with our CEO succession process, the committee approved a one-time award of restricted shares of our common stock to our executives who report directly to the CEO, including Messrs. Dries, Magee and Childress. The face value of each award was approximately equal to one times his base salary in 2007. Mr. Dries received 11,220 shares with a face value of $344,000, Mr. Magee received 10,209 shares with a face value of $313,000, and Mr. Childress received 7,926 shares with a face value of $243,000. The restrictions on one-third of the restricted shares lapse on February 12, 2009, the restrictions on another one-third lapse on February 12, 2010, and the restrictions on the remaining one-third lapse on February 12, 2011. If the executive officer’s employment with the company terminates prior to February 12, 2011, any restricted shares that have not already become unrestricted shares are forfeited and surrendered to the company. However, all restrictions lapse immediately in the case of death, disability, retirement or termination other than “for cause.” All restrictions also lapse immediately in connection with a change of control of the company. The committee believes that these awards provide a meaningful incentive for the executive officers to continue as members of the senior management team during the transition to our new CEO.

 

Conclusion

 

We have given careful thought to our executive compensation program, including each element of compensation for each executive officer for 2007. In our view, the program accomplishes our objectives for it. First, we consider the program as a whole to be competitive and believe that it has contributed to our strong retention level for executive officers over the past six years as well as our ability to recruit new executive officers as needed. Second, we feel that the program provides appropriate incentives for the executive officers, based on the officers’ responsibility levels, our short- and longer-term business goals and their ability to contribute to achieving these goals. We believe that the program has contributed significantly to the superior returns our shareholders have received over the past six years.

 

Finally, based on those same factors, as well as our superior operating results, we have concluded that the amount of total compensation paid or awarded to each executive for 2007 was reasonable.

 

The following information relates to compensation paid or payable for 2007 to:

 

 

We refer to these individuals as the “named executive officers.” We have also included information relating to compensation for 2006 for the named executive officers who were also named executive officers in 2006.

 

Summary Compensation Table

 

The following table sets forth for the named executive officers:

 

 

 

 

 

 

 

 

 

 

 

The “Stock Awards” values shown in column (e) of this table include grants of performance shares for three long-term incentive cycles. For 2007, the performance cycles cover the three-year periods from 2005-2007, 2006-2008 and 2007-2009 cycles, and for 2006, the performance cycles cover the three-year periods from 2004-2006, 2005-2007 and 2006-2008. The officers will not actually earn these performance shares unless we achieve pre-established corporate performance goals, and the number of shares they actually earn will be based on our performance as compared to those goals. For more information about our long-term incentive plan, or LTIP, under which we granted these performance share awards, see below under “— Grants of Plan-Based Awards — LTIP Awards.”

 

In February 2008, we paid out awards for our 2005-2007 long-term incentive cycle. We paid a portion of each award in cash and a portion in performance shares, in each case based on achievement of performance goals the Compensation Committee set in early 2005. Participants in this LTIP cycle, including the named executive officers, earned the awards as of December 31, 2007. For this reason, the cash portion of the awards to the named executive officers appears in column (g) of the summary compensation table (see note 2 for the exact amounts). As described above, column (e) includes the amounts we recognized in our annual financial statements for the performance share portion of these awards. For information about the payout of these performance shares, see below under “— Option Exercises and Stock Vested.”

 

For more information about our annual performance plan bonuses, which are part of the amounts shown in column (g) above (see note 2), see the section below entitled “— Grants of Plan-Based Awards — Annual Performance Plan Awards.” That section also describes the plans under which we granted the bonuses.

 

Grants of Plan-Based Awards

 

The following table provides additional information about awards we granted in 2007 to the named executive officers under our 2007 annual performance bonus plans and our LTIP for the 2007-2009 performance cycle.

 

 

 

 

Annual Performance Plan Awards

 

The Compensation Committee granted each named executive officer an annual performance bonus opportunity for 2007 under our management bonus plans. Information about these bonus opportunities is reported in the line beside each officer’s name in the table above. Mr. Schaub, Mr. Dries, Mr. Magee and Mr. Smith participated in our Senior Executive Annual Performance Plan. Mr. Childress, Mr. Pomeroy and Mr. Byrne participated in our Management Annual Performance Plan. The two plans operate identically in all material respects.

The committee established objective corporate performance goals under the plans and communicated them to plan participants in March 2007. For each goal, the committee also assigned a specific weight, i.e., the percentage of the participants’ total bonuses that the goal would contribute. Under both plans, the 2007 performance goals and weightings were:

 

 

The committee set the threshold performance levels for the first two goals — that is, the levels below which participants would not earn a bonus related to these goals — at 85% of target. It set the maximum performance level for each of these goals at 120% of target. For sales growth, the committee set the threshold performance level at 80% of target and the maximum performance level for this goal at 130% of target.

 

At the same time, the committee communicated to each participant a total cash bonus opportunity, expressed as a percentage of his base salary. The percentages of salary increased with the level of the job. Each participant had the opportunity to earn 50% of his target bonus for corporate performance at the threshold level, 100% of his target bonus for performance at the target level and 200% of his target bonus for maximum performance. The table above shows the threshold, target and maximum bonus for each named executive officer.

 

We exceeded our performance goals for 2007 which resulted in annual bonus payments at 138% of target. These bonuses are reported in column (g) of the summary compensation table (see note 2).

 

LTIP Awards

 

Under our LTIP, the committee may provide a long-term incentive opportunity for plan participants in any year. Each opportunity is in the form of a target award based on corporate performance over a three-year cycle. The committee establishes the performance goals and their weightings at the time it grants the awards, which is generally in the first part of the first year in the cycle. For each award, there is also a threshold level of performance below which the participants will earn no award and a maximum performance level that corresponds to the maximum award they can earn.

 

In March 2007, the committee made target awards under the LTIP to a number of participants, including all of the named executive officers. These awards were for the 2007-2009 performance cycle.

 

One half of each target award was in performance shares, other than Mr. Pomeroy whose entire LTIP award was in performance shares. Each performance share, if earned, will be paid in the form of a share of our common stock. The amount of this potential stock award that we have recognized in our 2007 financial statements for each named executive officer is included in column (e) to the summary compensation table. The award recipients will not actually own any of these shares, however, unless our corporate performance through the end of 2009 at least meets the threshold level. The performance goals and weightings for the performance share target awards are:

 

 

We set the threshold performance level for each of these goals at 80% of target, and the maximum level at 120% of target.

 

Our 2002 Amended and Restated Equity Compensation Plan governs the performance share awards. In determining the number of performance shares that make up our target awards, the committee begins with target dollar values and divides those values by the fair market value of our common stock. This plan defines “fair market value” as the average of the high and low sales prices of our common stock on the day prior to the date of grant.

 

The other half of each target award for the 2007-2009 cycle was in cash. The performance goals and weightings for the target cash awards are:

 

We set the threshold performance level for each of these goals at 80% of target, and the maximum level at 130% of target.

 

The potential payouts increase with the level of the job. For the 2007-2009 cash awards, each participant has the opportunity to earn 20% of his target award for corporate performance at the threshold level, 100% of his target award for performance at the target level and 200% of his target award for maximum performance. For the 2007-2009 performance share awards, each participant has the opportunity to earn 50% of the targeted number of shares for threshold performance and 150% for maximum performance. The table above shows the threshold, target and maximum cash and performance share payouts for this cycle. This information appears on the line below each officer’s name.

 

An award recipient generally must be employed with us on December 31, 2009 to earn an award for the 2007-2009 cycle. The only exceptions under the plan are for death, disability or retirement during the cycle. In any of those events, a recipient will receive a pro rata portion of the award he would have received had he remained employed through the end of 2009.

 

If we pay any common stock dividends during the performance period, recipients will not receive any dividends on their performance share awards for this cycle unless and until they earn the shares. At that time, they will receive the value of any dividends we have paid during the performance period in the form of additional shares of our common stock (with cash in lieu of fractional shares).

 

All shares of our common stock that we pay out for this cycle will reduce the number of shares available to be issued under our Amended and Restated 2002 Equity Compensation Plan.

 

Outstanding Equity Awards at Fiscal Year-End

 

The next table gives a snapshot as of the end of 2007 of equity awards to our named executive officers, the ultimate outcomes of which the officers have not yet realized. In fact, other than the option awards in column (b), these awards either have not vested or the officers have not yet earned them.

 

 

 

 

Option Exercises and Stock Vested

 

This table provides information about amounts the named executive officers realized in 2007 from equity awards.

 

 

 

 

Pension Benefits

 

The next table shows information about the named executive officers’ accumulated benefits under our defined benefit pension plans. The information includes the present value of accumulated benefit for each officer under each plan. This is the lump sum value, as of December 31, 2007, of the annual benefit earned as of that date that would be payable under each plan at the officer’s retirement, assuming he retired at the earliest age at which his benefits would not be reduced. The present value of accumulated benefit is an estimate only. Each officer’s actual benefit under these plans will depend on his compensation and years of service at retirement or termination, and on other data used in the benefit calculations. The assumptions used to estimate these benefits are the same as those assumptions used in Note 13 to our Consolidated Financial Statements in our 2007 annual report.