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.             )

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

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

 

 

March 22, 2007

 

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 Charlotte Marriott SouthPark, 2200 Rexford Road, Charlotte, North Carolina on Wednesday, May 2, 2007, at 11:00 a.m.

 

The matters to be acted upon by the shareholders at this meeting are presented in the enclosed Notice to Shareholders, and the enclosed proxy statement contains information regarding these matters. We intend to post the voting results from the meeting on our website, www.enproindustries.com, by May 7, 2007.

 

It is important that your shares be represented at this meeting. Even if you plan to attend, we encourage you to promptly sign, date and return your proxy card in the enclosed postage-paid envelope, or to cast your votes by telephone or over the Internet.

 

Sincerely,

 

 

Ernest F. Schaub

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 (the “Company”), will be held at the Charlotte Marriott SouthPark, 2200 Rexford Road, Charlotte, North Carolina on May 2, 2007 at 11:00 a.m. to:

 

 

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

 

The Board of Directors of the Company has fixed March 5, 2007 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 of Directors 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 your 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

 

March 22, 2007

 

TABLE OF CONTENTS

 

 

2007 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 Wednesday, May 2, 2007, at 11:00 a.m. at the Charlotte Marriott SouthPark, 2200 Rexford Road, Charlotte, North Carolina, and at any adjournment or postponement of the meeting. You may use the proxy card whether or not you attend the meeting. If you are a registered stockholder (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 2006 annual report, including financial statements, with this proxy statement to each registered shareholder. We will begin mailing these materials on or around March 22, 2007. 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.relations@enproindustries.com or by calling 704-731-1522.

 

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, March 5, 2007. 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, 21,359,716 shares of EnPro common stock were outstanding and eligible to vote. 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.

 

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, your 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 four 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. However, if you have obtained a legal proxy from your nominee giving you the right to vote your shares, you may change your vote by attending the meeting and voting in person.

 

Is there a minimum vote 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. New York Stock Exchange (NYSE) rules allow banks, brokers and other nominees to vote shares they hold for a customer on matters that the NYSE

determines to be routine even when the nominee has not received instructions from the customer (the beneficial owner). A broker “non-vote” occurs when a bank, broker or other nominee holding shares for a customer has not received voting instructions and cannot vote the customer’s shares on a particular matter because the matter is not considered routine under NYSE rules.

 

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 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 nominee instructions on how you want your shares to be voted, the nominee generally has the authority to vote your shares on routine matters as described above. Both proposals to be considered at the meeting are considered routine, which means that the nominee can vote your shares on these proposals if you do not timely provide voting instructions.

 

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, including shares for which a proxy has been marked “ABSTAIN” on this matter, 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.

 

In February 2006, our board amended our Corporate Governance Guidelines to add a new policy regarding director elections. Under this policy, 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.

 

A majority of votes cast at the meeting is required to approve the other proposals, for ratification of our external auditors and for approval of our two amended incentive plans. Abstentions and broker “non-votes” will not be counted as votes cast for these proposals.

 

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 March 22 through the end of the meeting. The list will also be available for inspection at the meeting.

 

What are the board’s recommendations?

 

Our board of directors recommends that you vote:

 

 

Proxy cards that are timely signed, dated and returned but do not contain instructions on how you want to vote will be voted in accordance with these recommendations.

 

With respect to any other matter that properly comes before the meeting, the proxy holders will vote as recommended by the 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 announce preliminary voting results at the meeting and will publish final voting results in our quarterly report on Form 10-Q for the second quarter of 2007. In addition, we intend to post the voting results from the meeting on our website, www.enproindustries.com, by May 7, 2007.

 

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.relations@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 2006 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.bankofny.com 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 will solicit votes and pay for the costs of this proxy solicitation?

 

We will pay the costs of the solicitation. Our officers, directors and employees may solicit proxies personally, by telephone, mail or facsimile, or via the Internet. These individuals will not receive any additional compensation for their solicitation efforts. We have hired The Proxy Advisory Group, LLC to assist us in soliciting proxies. We will pay them approximately $7,500 in fees, plus expenses, for their services. In addition, upon request we will reimburse banks, brokers and other nominees representing beneficial owners of shares for their expenses in forwarding voting materials to their customers who are beneficial owners and in obtaining voting instructions.

 

Who will count the votes?

 

The Bank of New York, our registrar and transfer agent, will count the votes.

 

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 March 5, 2007. This information is based solely on SEC filings by the individuals and entities as of that date.

 

 

 

 

How much stock do our directors and executive officers own?

 

The following table sets forth information as of March 5, 2007 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 and executive officers own as a group.

 

 

 

 

 

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 SEC 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 2006 any report required by Section 16(a).

 

One of the purposes of the meeting is the election of eight directors to hold office until the annual shareholders’ meeting in 2008 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 whom are now directors and whose terms would otherwise expire at the conclusion of the meeting. Properly executed proxies that do not contain voting instructions will be voted for the election of each of these nominees.

 

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 these nominees for director.

 

NOMINEES FOR ELECTION

 

WILLIAM R. HOLLAND, 68

 

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 and Cook & Boardman, Inc., both privately owned

companies. In addition, Mr. Holland serves as a corporate member of the Jupiter Florida Medical Center and on the Advisory Board of the Walker School of Business of Appalachian State University.

 

ERNEST F. SCHAUB, 63

 

Mr. Schaub has served as a director since January 2002, and as Chief Executive Officer since May 2002. From 1999 until he joined our company, Mr. Schaub was Executive Vice President of Goodrich Corporation and President and Chief Operating Officer of Goodrich Corporation’s Engineered Industrial Products segment. He is also a director of Manufacturers Alliance/MAPI and Discovery Place Museum, and a member of the Board of Advisors of the McColl School of Business at Queens University.

 

J. P. BOLDUC, 67

 

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 Management Consulting Group PLC.

 

PETER C. BROWNING, 65

 

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, 69

 

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

 

GORDON D. HARNETT, 64

 

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. In addition to EnPro, Mr. Harnett is also a director of The Lubrizol Corporation and PolyOne Corporation.

 

DAVID L. HAUSER, 55

 

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. He was Group Vice President and Chief Financial Officer of Duke Energy Corporation from February 2004 to April 2006, 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., 66

 

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, TD AMERITRADE Holding Corporation and TD Banknorth, Inc.

 

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 April 2006, the board decided that our seven independent directors would make up each committee other than the Executive Committee. It adopted this structure to maximize board efficiency. 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. Schaub (Chairman), Mr. Bolduc, Mr. Harnett and Mr. Holland. The Executive Committee did not meet in 2006. 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 statutes, a committee of directors has no authority to exercise.

 

Audit and Risk Management Committee.  The Audit and Risk Management Committee, or Audit Committee, met four times in 2006. 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 four times in 2006. Mr. Bolduc 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 2006. 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 2006. 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 then-current directors attended our annual shareholders’ meeting in 2006.

 

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:

 

 

In 2006, the board modified the Corporate Governance Guidelines to 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. See “General Information — What vote is required to approve each item?”

 

The board has also adopted 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 director and all of our employees, including our principal executive, financial and accounting officers. 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 2007; each officer certified compliance without exception in the fourth quarter of 2006.

 

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 2007 meeting, the board of directors made a determination as to the independence of each of its members in 2006. It also made a determination as to the independence of Mr. Hauser, the candidate whom the Nominating and Corporate Governance Committee had recommended to fill the vacancy resulting from Mr. Hance’s retirement (and whom the board in fact appointed to fill that vacancy). 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. Hance, 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. Hance served as Vice Chairman of Bank of America Corporation until January 2005, that Mr. Browning currently serves as a director of Wachovia Corporation, and that both of these banks are lenders under our revolving credit facility. The board determined that each of these relationships is immaterial. Mr. Schaub’s role as CEO automatically disqualifies him 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 2007 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).

 

In the case of Mr. Hauser, whom the board appointed in February 2007 to fill a vacancy, the Chairman of the Nominating and Corporate Governance Committee met with Mr. Hauser at the suggestion of Mr. Hance. Mr. Hauser also met with our CEO and director Mr. Schaub. In addition, the Nominating and Corporate Governance Committee determined that Mr. Hauser met the qualifications for board membership specified in our Corporate Governance Guidelines and that his training and financial expertise would complement the background and experience of the other board members. Based on the recommendation of the Nominating and Corporate Governance Committee, the board unanimously appointed Mr. Hauser to the board at its February 2007 meeting and resolved that he be nominated for election by the shareholders at the annual meeting.

 

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

 

Our sole employee director, Mr. Schaub, receives no compensation for serving on our board. Our non-employee directors receive the following compensation:

 

 

Phantom shares are generally granted to non-employee directors at the first board meeting each year. These phantom shares, which we award under our Amended and Restated 2002 Equity Compensation Plan, are fully vested. When a director retires from the board, we will pay him one share of our common stock for each phantom share in his account that we awarded in 2005 or after (with any fractional phantom share paid in cash). We will pay in cash the value of phantom shares granted prior to 2005.

 

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 March 5, 2007: Mr. Bolduc, 1,520 stock units; Mr. Browning, 7,599 stock units; Mr. Ford, 6,457 stock units; and Mr. Harnett, $144,600 and 6,483 stock units.

 

The following table presents the compensation we paid to our non-employee directors for their service in 2006.

 

2006 Non-Employee Director Compensation

 

 

 

 

 

 

 

In February 2003, the SEC and our director Mr. Bolduc settled public administrative and cease-and-desist proceedings. Without admitting or denying the SEC’s findings, Mr. Bolduc consented to the entry of a cease-and-desist order in which the SEC found that, between 1991 and 1995, while Mr. Bolduc was president and either chief operating officer or chief executive officer of W. R. Grace & Co. and a member of its board of directors, W. R. Grace fraudulently used reserves to defer income earned by a subsidiary, primarily to smooth earnings of its health care segment. The SEC found that this violated the antifraud provisions of the federal securities laws, as well as the provisions that require public companies to keep accurate books and records, maintain appropriate internal accounting controls, and file accurate annual and quarterly reports. The order generally finds that Mr. Bolduc, through his actions or omissions, was a cause of these violations. The order also notes that during the period in question, Mr. Bolduc did not sell any of the substantial number of W. R. Grace shares that he owned. The SEC ordered Mr. Bolduc to cease and desist from committing or causing any violation or future violation of the antifraud and reporting requirements of the federal securities laws. It did not impose any fines on Mr. Bolduc, nor did it prohibit Mr. Bolduc from continuing to serve in any capacity on public company boards of directors.

 

Our shareholders have reelected Mr. Bolduc to the board each year since 2003, and the Nominating and Corporate Governance Committee and the full board support the nomination of Mr. Bolduc for reelection to the board in 2007.

 

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 for issuing an attestation report on management’s assessment 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 2006, regarding our audited 2006 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, 2006. 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 2006 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, 2006 to be filed with the SEC.

 

Audit and Risk Management Committee

 

J.P. Bolduc
Peter C. Browning
Joe T. Ford
James H. Hance, Jr.
Gordon D. Harnett
William R. Holland
Wilbur J. Prezzano, Jr.

 

February 13, 2007

 

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, 2006.

 

Compensation and Human Resources Committee

 

J.P. Bolduc
Peter C. Browning
Joe T. Ford
James H. Hance, Jr.
Gordon D. Harnett
William R. Holland
Wilbur J. Prezzano, Jr.

 

February 13, 2007

 

Compensation Overview and Objectives

 

At our inception as a new public company with an uncertain future, 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, our former corporate parent and the prior employer of a number of our executive officers. We believe this compensation program is competitive, and in fact that it helped us recruit management with the experience and skills we sought.

 

Now, five years later, a primary objective of our executive compensation program is to retain these officers, and to be in a position to replace them with other high-caliber individuals should that need arise. Again, a competitive pay package is vitally important to meet this objective. 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.

 

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

 

 

The following graph compares this shareholder return to similar returns for the Russell 2000^® Stock Index and a group of our manufacturing company peers consisting of Flowserve Corporation, Robbins & Myers, Inc., Gardner Denver, Inc., Circor International, Inc., IDEX Corporation and The Gormann-Rupp Company:

 

 

Thus, while our executive officers have benefited from our compensation program, we believe the benefits to our shareholders more than justify the cost of the program.

 

Program Governance

 

Composition of the Compensation and Human Resources Committee

 

In 2006, for the first time, all seven of our non-management directors sat on our Compensation and Human Resources Committee. Of the seven committee members, five have served on the compensation committees of other public companies. In February 2006 and February 2007, our board of directors determined that all seven are “independent” directors under the standards of the New York Stock Exchange and our Corporate Governance Guidelines.

 

Committee Function and Primary Responsibilities

 

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. For our CEO, Mr. Schaub, the committee exercises this responsibility by setting the level of his salary and his annual bonus and long-term incentive award opportunities. For all other executive officers, 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. The committee also approves all perquisites (perks) for executive officers, all change in control agreements, the officers’ participation in all benefit and retirement plans and all material changes to these plans.

 

The Role of Executive Officers

 

Our CEO does not recommend any of his compensation, including target bonus or incentive award levels, to the committee. Moreover, the CEO’s compensation is established 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.

 

All executive officers, acting together as a group, recommend to the board the performance measures and performance goals for the annual bonus and long-term incentive award. The committee independently reviews management’s recommendations and makes the final determination of which performance measures will be used for each incentive award and what the goals will be.

 

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. The committee does not delegate any of its decision making authority to executive officers or other members of management.

 

Our CEO, who is also a member of the board, and our Senior Vice President, Human Resources and Administration attend each meeting of the committee. Each committee meeting includes an executive session during which the committee meets without any member of management present.

 

Committee Meetings in 2006

 

In 2006, the committee met four times. The committee chair helped develop and approved the agenda for each meeting and received most committee materials weeks in advance of the meeting. Other committee members received their materials approximately one week in advance of each meeting.

The Role of the Executive Compensation Consultant

 

The committee directly engages our executive compensation consultant, Watson Wyatt Worldwide. The committee’s charter gives it express authority over this engagement, as well as the ability to engage other advisors as it sees fit. In addition, management engages Watson Wyatt for compensation consulting work on broad-based compensation programs like our pension plan and 401(k) plans. This work, which is not requested or overseen by the committee, is generally performed by an entirely separate Watson Wyatt office. Management also engages other consultants to perform work related to broad-based benefits programs (for example, our health and welfare benefits) and compensation of employees who work overseas.

 

Watson Wyatt 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 Watson Wyatt team who perform work on our executive compensation program.

 

Watson Wyatt’s work for the committee on executive compensation for 2006 included:

 

 

Compensation Program Design and Tools

 

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

 

Policies Regarding Executive Compensation

 

First, since our inception, the committee has adhered to a policy of attempting to set targeted in-service compensation to 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 are at-risk, and that an executive may in fact never receive. 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

2006 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 2006-2008 cycle:

 

 

Moreover, our executive officers’ variable compensation is truly at-risk. 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, really 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.

 

In addition, 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. Smith and Mr. Childress, who joined the company in December 2005. Under the guidelines, Mr. Smith has more than three years left to acquire the suggested minimum number of shares.

 

Our CEO, Mr. Schaub, has recently implemented a 10b5-1 plan 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. The plan covers less than 35% of the shares Mr. Schaub beneficially owns, and after it is completed he will continue to own far more than the minimum number of shares that our ownership guidelines suggest.

Study of Internal Pay Fairness

 

In 2005, we completed an internal study comparing total direct, in-service compensation — salary, target annual bonus and target long-term incentive award — among our executive officers and other senior managers. The purpose of the study was to determine whether these total compensation levels were set fairly among the group, based on each individual’s responsibility and contribution to the company’s overall performance. The committee concluded that the compensation levels were in fact equitable and consistent with relative responsibilities and contributions. As a result, the committee concluded that internal pay equity considerations did not compel a significant change in the compensation of any executive officer for 2006.

 

We expect to do a similar internal study in the future, this time comparing the spread in earning power among our executive officers and senior managers at our operating divisions to the spreads at similarly sized diversified manufacturing companies.

 

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. Watson Wyatt’s 2005 market study helped inform the committee’s executive compensation decisions for 2006. For that study, the peer group consisted of Flowserve Corporation, Ametek, Inc., Barnes Group, Inc., JLG Industries, Inc., Claror, Inc., Watts Water Technologies, Inc., Nordson Corporation, Actuant Corporation, Robbins & Myers, Inc., Gardner Denver, Inc., Circor International, Inc., IDEX Corporation and The Gormann-Rupp Company.

 

Watson Wyatt first compared 2004 performance data (the most recent data then available) among us and the members of the group: operating income before depreciation, sales growth, operating margin before depreciation and two-year total shareholder return. Each performance measure received equal weight. Based on these measures, our total performance score placed us in the second quartile, i.e., the top 50%. Watson Wyatt also noted specifically that our operating income, sales growth and operating margin were all very close to the median performance level, but that our two-year total shareholder return was the highest in the group.

 

The consultant then analyzed the three specific compensation elements we awarded our named executive officers for 2005 (base salary, annual bonus and long-term incentive opportunity) to those awarded by each member of the peer group. Its conclusions, as presented to the committee, were as follows:

 

 

In the case of Mr. Schaub, Mr. Dries and Mr. Magee, Watson Wyatt concluded that individual variances from these general patterns, all modest, resulted from the pay levels that originated at the time of our spin-off from Goodrich.

 

In addition to its normal annual market study, in 2005 Watson Wyatt also provided market pricing analyses of the base salary, target annual bonus opportunities and aggregate long-term incentive grant levels that members of our peer group offered to their senior human resources and strategic planning officers. The committee used this information to determine the annual compensation packages for Mr. Smith and Mr. Childress, both of whom we hired in the fourth quarter of 2005.

Tally Sheets

 

At its February 2006 meeting, the committee reviewed and discussed a “tally sheet” for each of our executive officers. Each tally sheet showed:

 

 

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 2006.

 

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. The committee intends for all regular annual bonus and long-term incentive awards to qualify for this exception in order to maximize our tax deductions for executive compensation.

 

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 Program Elements — 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.

 

Similarly, the committee decided in 2004 to discontinue annual stock option grants in part because of stock options’ effect on our financial statements under new accounting rules that we adopted effective January 1, 2005.

 

Compensation Program Elements

 

The following section 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. Initially, some of our named executive officers’ base salaries were set based on their salaries at our former corporate parent, Goodrich, which was also their prior employer. At the time of the spin-off, the base salaries of those of our executive officers who did not come to us from Goodrich careers were set slightly above the market median, as determined by our executive compensation consultant. In each case, the committee believed these initial

base salaries to be commensurate with the officer’s skills, experience and seniority. The committee also believed salaries set slightly above the median to be appropriate in light of the risks associated with our asbestos liability and with working for a new standalone company. Since that time, the committee has maintained each executive officer’s base salary at or near the market median.

 

In February 2006, the committee decided to add an amount to the executive officers’ base salaries to compensate them for the elimination of perks, as described below. In addition, it determined that our CEO’s base salary was already near the market median, and accordingly that no adjustment was warranted. The committee also determined to approve the CEO’s recommendations that the other named executive officers’ salaries be continued at the same level (apart from the increase for lost perks), and that other executive officers receive increases corresponding roughly to the annual inflation level. Prior to 2006, the committee had not increased the salaries of our named executive officers since 2003 (although a change in payroll methodology in 2004 resulted in some officers earning slightly more in base salary than they had in 2003).

 

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, Mr. Smith and Mr. Driscoll are made under our senior executive bonus plan, which our shareholders approved in 2004. Bonus awards for Mr. Childress 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 2006, 40% of the annual performance plan bonus opportunity for all executive officers was tied to a goal for free cash flow before asbestos, 40% was tied to net income before asbestos and the remaining 20% to a sales growth goal. The committee set the performance goals and the corresponding bonus opportunities for officers at its February 2006 meeting, after taking into account management’s recommendation. It chose free cash flow before asbestos, net income before asbestos and sales growth as the criteria because all three were central to our 2006 business plan. 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. Net income before asbestos is and has been important because net income figures demonstrate the quality of our earnings as well as our profitability. Sales growth, on the other hand, has recently gained importance as a performance metric because we have begun to shift some of our focus towards achieving significant growth. The committee also chose these three criteria because it believed our executive officers could significantly affect our annual performance in these areas.

 

The goals that corresponded to the threshold, 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 80% of their actual 2006 base salaries. The target bonuses, as percentages of base salary, for the named executive officers were as follows:

 

 

Each executive officer’s threshold 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 market studies Watson Wyatt had presented in 2005. First, it set each named executive officer’s target award at or near the median for his position in the market study. The committee then added 5% to each executive officer’s target award opportunity to potentially help offset the effect of its decision to eliminate perks. The committee based the threshold 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, 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 bonus permits both positive and negative discretionary changes by the CEO. The committee did not use its discretion to change the amount of any bonus awarded to an executive officer for 2006. Based on our performance relative to the plans’ performance goals, the committee awarded the named executive officers the bonuses reported in column (g) (see footnote 2) of the summary compensation table on page 29. These bonuses equaled 176% of each named executive officer’s target bonus.

 

Mr. Childress, whom we hired in December 2005, received a hiring bonus of $81,250 in 2006. The committee determined to award this bonus to offset potential compensation he forfeited by leaving his prior employer.

 

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. These awards also provide the officers with a long-term stake in our success. The committee makes these awards under our long-term incentive plan or LTIP, which our shareholders approved in 2004. The committee established the performance goals and corresponding potential award levels for the 2006-2008 LTIP cycle at its February 2006 meeting. For this cycle, as for the previous two, the committee determined that half of the target award to each executive would consist of performance shares and half of cash. 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 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. While free cash flow before asbestos was a goal for the 2006 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 short-term results. The goal for return on capital focuses management on maximizing the efficiency of our assets and capital structure. Because asbestos liabilities have continued to require significant cash outflows, we also have a goal for net cash flow for asbestos.

 

For details about the threshold, target and maximum award payouts for our executive officers, see “Executive Compensation — Grants of Plan-Based Awards.” Each executive officer’s threshold 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 threshold 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 established the performance goals for the target payouts at a level it believed would be reasonably achievable if operating performance continued to be strong over the 3-year period. The goals for the threshold payouts are set at a level the committee expected would probably be achieved, and the maximum payout goals at a level the committee expected would probably not be achieved.

 

The committee set the target LTIP awards for each executive officer based on the results of the market studies Watson Wyatt had presented in 2005. The target awards were set at or near the median study results. The committee based the threshold 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. The committee did not exercise its negative discretion to reduce the size of the LTIP awards that were paid to the executive officers in 2006 based on the 2003-2005 LTIP cycle.

 

Since our first full year as a public company, the committee has consistently made LTIP awards at its February meeting. Our February board and committee meetings always occur either shortly before or shortly after we release to the public our financial results for the fourth quarter and the full year. If the meetings occur prior to the earnings release, as they did in February 2006, committee members generally possess non-public information, which may be material, when they make the LTIP awards. To determine the numbers of performance shares that will make up the threshold, target and maximum levels of each award, the committee begins with dollar figures. It then calculates the numbers of performance shares using our common stock price at the time. Changes in the price of our common stock after our earnings release affect the value of these performance share awards. Because these awards, if earned, will not be paid out for three years, the committee has never considered whether or which way it expected our stock price to move when it made the LTIP awards.

 

Perquisites

 

In February 2006, the committee concluded that because of the public disclosure of perks, and the unfavorable attention perks had received in the recent past, their potential negative impact far outweighs the actual value they provide to the benefit recipients. For this reason, the committee decided to eliminate 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. In place of the eliminated perks, the committee determined to increase each executive officer’s target annual bonus opportunity by five percent and to raise each officer’s salary by the value of the automobile payments. 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 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. Specifically, under this plan, each executive can defer portions of his salary, annual bonuses and cash LTIP payouts that he cannot defer under our 401(k) plan, 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 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, the committee 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. Based in part on data provided by

Watson Wyatt, the committee believes this plan, or a similar arrangement, is an important part of a competitive executive compensation package.

 

SERP

 

Our initial top five executive officers all participated in supplemental executive retirement plans (SERPs) at their prior employers. In addition, two of these officers, Mr. Schaub and Mr. Driscoll, were in the later stages of their careers and stood to receive substantial additional pension benefits if they had remained with their prior employer. Accordingly, we believe a SERP was an important tool in recruiting these five officers to join our company. No other executive officers participate in the SERP.

 

The committee modeled our SERP after the plan provided by our former shareholder, Goodrich Corporation, which was also Mr. Schaub’s and Mr. Driscoll’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. Although we have not conducted any formal inquiry, the committee in its collective experience believes the benefit formula is reasonable and not excessive for plans of this type.

 

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, Mr. Magee and Mr. Driscoll. 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, 2006, 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 four 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 2006 for Mr. Schaub and in 2007 for Mr. Dries and Mr. Magee, continuing each year thereafter through retirement. We paid Mr. Driscoll’s benefits in full during 2006 following his retirement. 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 compensate them for taking on this risk, 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.

 

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). If we or our successor were to terminate the individual’s employment for reasons other than “cause” during this continued employment period, 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, other than either for “cause” or 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.

 

Conclusion

 

The committee has given careful thought to our executive compensation program, including each element of compensation for each executive officer for 2006. In the committee’s view, the program accomplishes our objectives for it. First, the committee considers the program as a whole to be competitive and believes that it has contributed to our strong retention level for executive officers over the past five years as well as our ability to recruit new executive officers as needed. Second, the committee feels 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. The committee believes that the program has contributed significantly to the superior returns our shareholders have received over the past five years.

 

Finally, based on those same factors, as well as our superior operating results, the committee has concluded that the amount of total compensation paid or awarded to each executive for 2006 was reasonable.

 

The following information relates to compensation paid or payable for 2006 to:

 

 

We refer to these individuals as the “named executive officers.”

 

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 — the 2004-2006, 2005-2007 and 2006-2008 cycles. 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 2007, we paid out awards for our 2004-2006 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 2004. Participants in this LTIP cycle, including the named executive officers, earned the awards as of December 31, 2006. 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 2006 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 2006 to the named executive officers under our 2006 annual performance bonus plans and our LTIP for the 2006 — 2008 performance cycle.

 

 

 

 

Annual Performance Plan Awards

 

The Compensation Committee granted each named executive officer an annual performance bonus opportunity for 2006 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, Mr. Smith and Mr. Driscoll participated in our Senior Executive Annual Performance Plan. Mr. Childress 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 February 2006. 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 2006 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 2006 which resulted in annual bonus payments at 176% 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 February 2006, 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 2006-2008 performance cycle.

 

One half of each target award was in the form of 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 2006 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 2008 at least meets the threshold level. The performance goals and weightings for the performance share target awards are:

 

 

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. We use the fair market value on the prior day because this is the way option exercise prices are set under the plan. The plan uses the prior day’s value, instead of the same-day value, to correspond to the definition the NYSE used for “market value” at the time we adopted the plan. By contrast, the SEC’s rules provide that the “market value” of our common stock on any date is the closing price on that same date. This means the value we place on our common stock for purposes of making these performance share awards may be higher or lower on any date than the “market value” under SEC rules. This year, it was slightly lower, resulting in the recipients receiving a slightly higher target number of shares: Mr. Schaub, 20,899 instead of 20,797; Mr. Dries, 6,966 instead of 6,932; Mr. Magee and Mr. Driscoll, 6,095 instead of 6,066; Mr. Smith, 5,225 instead of 5,199; and Mr. Childress, 2,438 instead of 2,426.

 

The other half of each target award for the 2006-2008 cycle was in cash. The performance goals and weightings for the target cash awards are:

 

 

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

 

The potential payouts increase with the level of the job. For the 2006-2008 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 2006-2008 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, 2008 to earn an award for the 2006-2008 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 2008. This means Mr. Driscoll can earn only about 1/9 of the award shown for him in the table because he retired at the end of April 2006.

 

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 2006 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 2006 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, 2006, 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 Footnote 13 to our Consolidated Financial Statements in our 2006 annual report.

 

 

We maintain three defined benefit plans. One, which we refer to as our pension plan, is a broad-based plan that provides funded, tax-qualified benefits up to the limits on compensation and benefits under the Internal Revenue Code. The second provides unfunded, non-qualified benefits in excess of the limits that apply to the pension plan. We call this one the restoration plan. The third is a supplemental executive retirement plan, or SERP, that provides additional unfunded, non-qualified benefits to certain officers.

 

Pension Plan

 

Benefits under our pension plan are paid as a life annuity, with monthly payments. Benefit amounts for salaried employees depend on a participant’s pay and credited service with our company. For benefits accrued due to service with the company through December 31, 2006, the monthly payments may begin as early as age 62 with no reduction in the amount of the payment. For benefits accrued due to service after December 31, 2006, the monthly payments will be reduced if they begin before age 65.

 

Pay used to determine a salaried participant’s benefit amount is the average compensation over the final 60 months of employment, or the highest consecutive 60 months of compensation during the last 120 months of employment, whichever is greater. For purposes of the plan, “compensation” means base pay plus annual bonus awards. However, compensation for the pension plan is limited under the federal tax code. The limit was $220,000 in 2006. In addition, benefits provided under the pension plan may not exceed a benefit limit under the federal tax code. In 2006, this limit was $175,000, payable as a single life annuity beginning at normal retirement age.

 

We established the pension plan to provide tax-qualified retirement benefits for most of our full-time employees of the Company. In 2006, we began to phase out participation in this plan for salaried employees, replacing it with an additional benefit under our 401(k) plan. However, salaried employees who were hired prior to January 1, 2006, and who were at least age 40 on December 31, 2006, were offered a choice to continue to accrue benefits under the pension plan. Each of the named executive officers chose to continue to accrue future benefits under the pension plan rather than to receive the additional benefit under our 401(k) plan.

 

As required by federal pension laws, benefits under the pension plan are funded by assets held in a tax-exempt trust.

 

Restoration Plan

 

The restoration plan provides a benefit that is equal to the benefit that would be provided under the pension plan if the federal tax code compensation and benefit limits did not exist, minus the benefit actually provided under the pension plan. In addition, the restoration plan provides benefits on compensation that is deferred and not taken into account under the pension plan.

 

The definition of compensation is the same as the definition used for the pension plan, except that compensation includes amounts deferred pursuant to our non-qualified deferred compensation plan.

 

Vested benefits are generally payable in an actuarially equivalent single cash payment following termination of employment. For certain executive officers with whom we have entered into supplemental retirement and death benefits agreements, payments will be made annually as benefits accrue up to retirement. However, under the agreements, we may delay these annual pre-retirement payments to the extent that Section 162(m) of the federal tax code would limit our tax deduction for them. See “Compensation Discussion and Analysis — Compensation Program Design and Tools — Impact of Tax and Accounting Rules.”

 

Employees participate in the restoration plan only with board approval. All of the current named executive officers participate in this plan.

 

Because this a non-qualified plan, benefits are unsecured, and a participant’s claim for benefits under the plan is no greater than the claim of a general creditor.

 

SERP

 

There are only three participants in the SERP — Mr. Schaub, Mr. Dries and Mr. Magee. Mr. Driscoll was a participant in the SERP, but received a distribution of his benefit during 2006. These officers earn an additional benefit under the SERP equal to the combined benefit under our pension plan and restoration plan for their first 15 years of service. The SERP takes into account service only for periods beginning on or after June 1, 2002 for this purpose.

 

Under the supplemental retirement and death benefits agreements we have entered into with each of the SERP participants, we will pay SERP benefits annually as they accrue, up to retirement. However, under the agreements,

we may delay the annual pre-retirement payments to the extent that Section 162(m) of the federal tax code would limit our tax deduction for them. See “Compensation Discussion and Analysis — Compensation Program Design and Tools — Impact of Tax and Accounting Rules.”

 

Like the restoration plan, the SERP is unsecured, and a participant’s claim for benefits under the SERP is no greater than the claim of a general creditor.

 

Non-Qualified Deferred Compensation

 

We provide a plan that allows our executive officers to defer compensation each year beyond the limits that apply to deferrals under our tax-qualified 401(k) plan for salaried employees. We also make contributions to the officers’ plan accounts to match some of their contributions.

 

This table provides information about amounts we and the executives contributed to the plan in 2006, and about earnings and withdrawals under the plan. The last column shows each officer’s total account balance as of the end of the year.

 

 

 

 

Under this plan, each officer can defer up to 25% of his salary each year and up to 50% of his annual bonus and any cash LTIP payout. Deferrals of base salary and bonus can be made only after the officer has contributed the maximum amount to our 401(k) plan. We match contributions each year in an amount equal to the match the officer would have received under our 401(k) plan in the absence of federal tax code limitations on that plan, minus the actual 401(k) match the officer received for that year.

 

Each executive officer who participates in the plan also directs how the money in his plan account will be invested. The investment options available under the plan are the same as those available under the 401(k) plan (excluding our common stock). All participants’ accounts are credited with their actual investment earnings or

losses. We do not guarantee any investment return on the accounts. The following table shows the investment options currently available under the plan, as well as the 2006 return for each option.

 

 

Participants are generally entitled to receive payment of their account balances under this plan only upon termination of employment and only in one of the following ways:

 

 

Participants can choose among these payment options. Once a participant makes a payment election, he can change it only in accordance with federal tax laws that apply to non-qualified plans. In limited circumstances, withdrawals due to an unforeseeable emergency are permitted.

 

Because this a non-qualified plan, benefits are unsecured. This means that a participant’s claim for benefits is no greater than the claim of a general creditor.

 

Potential Payments Upon Termination or Change in Control

 

Management Continuity Agreements

 

We are party to management continuity agreements with each of our current executive officers. The purpose of these continuity agreements is to encourage the individuals to carry out their duties in the event of the possibility of a change in control of our company. The agreements are not ordinary employment agreements. Unless there is a change in control, they do not provide any assurance of continued employment, or any severance beyond the severance that we provide generally to our salaried employees.

 

Under these agreements, any of the following events would be a “change in control”:

 

 

Each continuity agreement generally provides for the officer’s employment to continue, in the same position and with the same responsibilities and authority, for a period of time following the change in control. It also provides for the officer to maintain the same benefits and level of compensation, including average annual increases. The continuation periods for our named executive officers are as follows:

 

 

If we or our successor terminated an executive officer’s employment during his continuation period, other than for “cause,” or he voluntarily terminated his employment for a “good reason” (in each case as defined in the agreement), he would be entitled to the following payments and benefits: