##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
 For Quarter Ended September 29, 2007
    
    Commission File No. 0-12640
 KAYDON CORPORATION
  Delaware
    
    13-3186040(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)Suite 300, 315 E. Eisenhower Parkway, Ann Arbor, Michigan
(Address of principal executive offices)
    
    48108
(Zip Code)
 (734) 747-7025
  þ o
  þ o o
  o þ




---



##### 



Page No.Part I  Financial Information:
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Condensed Balance Sheets  September 29, 2007 (Unaudited) and December 31, 2006
    
    
    1Consolidated Condensed Statements of Operations (Unaudited)  Quarter and First Three Quarters Ended September 29, 2007 and September 30, 2006
    
    
    2Consolidated Condensed Statements of Cash Flows (Unaudited)  First Three Quarters Ended September 29, 2007 and September 30, 2006
    
    
    3Notes to Consolidated Condensed Financial Statements (Unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26Part II  Other Information:
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 6. Exhibits
    
    
    28Signatures
    
    
    29Exhibit Index
    
    
    30Statement
Re: Computation of Ratio of Earnings to Fixed Charges
    
    
    31Certification
Pursuant to Rule 13a-14(a)
    
    
    32Certification
Pursuant to Rule 13a-14(a)
    
    
    34Certification
Pursuant to 18 U.S.C. Section 1350
    
    
    36




---



##### Table of Contents



PART I  FINANCIAL INFORMATION:
 
 ITEM 1. FINANCIAL STATEMENTS
 
 KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
 (Unaudited)September 29, 2007
    
    December 31, 2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    260,349,000
    
    
    $
    370,789,000Short-term investments
    
    
    90,000,000
    
    
    
    Accounts receivable, net
    
    
    59,941,000
    
    
    
    54,066,000Inventories, net
    
    
    66,744,000
    
    
    
    56,043,000Other current assets
    
    
    13,292,000
    
    
    
    17,012,000Total current assets
    
    
    490,326,000
    
    
    
    497,910,000Property, plant and equipment, net
    
    
    124,041,000
    
    
    
    95,280,000Goodwill, net
    
    
    120,209,000
    
    
    
    119,484,000Other intangible assets, net
    
    
    19,066,000
    
    
    
    21,271,000Other assets
    
    
    2,320,000
    
    
    
    3,611,000Total assets
    
    $
    755,962,000
    
    
    $
    737,556,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    23,530,000
    
    
    $
    23,044,000Salaries and wages
    
    
    8,541,000
    
    
    
    9,961,000Taxes payable
    
    
    4,345,000
    
    
    
    4,350,000Interest payable
    
    
    2,822,000
    
    
    
    844,000Other accrued expenses
    
    
    15,550,000
    
    
    
    13,433,000Total current liabilities
    
    
    54,788,000
    
    
    
    51,632,000Long-term debt
    
    
    200,000,000
    
    
    
    200,000,000Long-term liabilities
    
    
    38,034,000
    
    
    
    52,744,000Total long-term liabilities
    
    
    238,034,000
    
    
    
    252,744,000Shareholders Equity:Common stock
    
    
    3,693,000
    
    
    
    3,693,000Paid-in capital
    
    
    48,259,000
    
    
    
    43,889,000Retained earnings
    
    
    610,822,000
    
    
    
    566,788,000Less  Treasury stock, at cost
    
    
    (210,524,000
    )
    
    
    (188,708,000
    )Accumulated other comprehensive income
    
    
    10,890,000
    
    
    
    7,518,000Shareholders equity
    
    
    463,140,000
    
    
    
    433,180,000Total liabilities and shareholders equity
    
    $
    755,962,000
    
    
    $
    737,556,000
  1




---



##### Table of Contents



KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Third Quarter Ended
    
    First Three Quarters EndedSeptember 29, 2007
    
    September 30, 2006
    
    September 29, 2007
    
    September 30, 2006Net sales
    
    $
    107,365,000
    
    
    $
    99,676,000
    
    
    $
    327,653,000
    
    
    $
    303,845,000Cost of sales
    
    
    64,069,000
    
    
    
    58,795,000
    
    
    
    191,551,000
    
    
    
    177,824,000Gross profit
    
    
    43,296,000
    
    
    
    40,881,000
    
    
    
    136,102,000
    
    
    
    126,021,000Selling, general and
administrative expenses
    
    
    18,840,000
    
    
    
    16,011,000
    
    
    
    57,006,000
    
    
    
    51,356,000Operating income
    
    
    24,456,000
    
    
    
    24,870,000
    
    
    
    79,096,000
    
    
    
    74,665,000Interest expense
    
    
    (2,390,000
    )
    
    
    (2,390,000
    )
    
    
    (7,142,000
    )
    
    
    (7,189,000
    )Interest income
    
    
    4,752,000
    
    
    
    4,363,000
    
    
    
    14,133,000
    
    
    
    11,686,000Income before income taxes
    
    
    26,818,000
    
    
    
    26,843,000
    
    
    
    86,087,000
    
    
    
    79,162,000Provision for income taxes
    
    
    9,681,000
    
    
    
    9,285,000
    
    
    
    31,077,000
    
    
    
    27,311,000Net income
    
    $
    17,137,000
    
    
    $
    17,558,000
    
    
    $
    55,010,000
    
    
    $
    51,851,000Weighted-average common shares:Basic
    
    
    27,659,000
    
    
    
    27,819,000
    
    
    
    27,789,000
    
    
    
    27,833,000Diluted
    
    
    34,655,000
    
    
    
    34,758,000
    
    
    
    34,786,000
    
    
    
    34,770,000Earnings per share:Basic
    
    $
    0.62
    
    
    $
    0.63
    
    
    $
    1.98
    
    
    $
    1.86Diluted
    
    $
    0.54
    
    
    $
    0.55
    
    
    $
    1.71
    
    
    $
    1.62Dividends declared per share
    
    $
    0.15
    
    
    $
    0.12
    
    
    $
    0.39
    
    
    $
    0.36
  2




---



##### Table of Contents



KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 First Three Quarters EndedSeptember 29, 2007
    
    
    September 30, 2006Cash flows from operating activities
    
    $
    47,362,000
    
    
    $
    55,351,000Cash flows from (used in) investing activities:Purchases of short-term investments
    
    
    (162,606,000
    )
    
    
    Proceeds from sale of short-term investments
    
    
    72,606,000
    
    
    
    Additions to property, plant and equipment, net
    
    
    (37,001,000
    )
    
    
    (15,425,000
    )Cash used in investing activities
    
    
    (127,001,000
    )
    
    
    (15,425,000
    )Cash flows from (used in) financing activities:Cash dividends paid
    
    
    (10,154,000
    )
    
    
    (10,148,000
    )Purchase of treasury stock
    
    
    (22,612,000
    )
    
    
    (3,404,000
    )Proceeds from exercise of stock options
    
    
    99,000
    
    
    
    1,003,000Excess tax benefits from stock-based compensation
    
    
    232,000
    
    
    
    585,000Payments on debt
    
    
    
    
    
    
    (49,000
    )Cash used in financing activities
    
    
    (32,435,000
    )
    
    
    (12,013,000
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    1,634,000
    
    
    
    808,000Net increase (decrease) in cash and cash equivalents
    
    
    (110,440,000
    )
    
    
    28,721,000Cash and cash equivalents  Beginning of period
    
    
    370,789,000
    
    
    
    320,804,000Cash and cash equivalents  End of period
    
    $
    260,349,000
    
    
    $
    349,525,000Cash paid for income taxes
    
    $
    15,862,000
    
    
    $
    23,647,000Cash paid for interest
    
    $
    4,000,000
    
    
    $
    4,000,000
  3




---



##### Table of Contents



KAYDON CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
 (1)
    
    Basis of Presentation:The accompanying unaudited consolidated condensed financial statements of Kaydon Corporation
and subsidiaries (Kaydon or the Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included, and such adjustments are of a normal recurring
nature. The December 31, 2006 consolidated condensed balance sheet data was derived from
audited financial statements, but does not include all disclosures required by generally
accepted accounting principles. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys annual report on Form
10-K for the year ended December 31, 2006.(2)
    
    Cash and Cash Equivalents, and Short-term Investments:The Company considers all highly liquid debt and investment instruments purchased with a
maturity of three months or less to be cash equivalents. In addition to its cash and cash
holdings, in the third quarter of 2007 the Company began investing in short-term
investments. These short-term investments are auction rate securities that are classified
as available-for-sale. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a component of shareholders equity.
 The unrealized gains and
losses at September 29, 2007, were not significant.Cash and Cash Equivalents, and Short-term Investments are summarized below:
 September 29, 2007
    
    December 31, 2006Cash and Cash Equivalents:U.S. Government treasury bills
    
    $
    54,872,000
    
    
    $
    119,384,000Money market and other short-term funds
    
    
    109,283,000
    
    
    
    106,802,000Commercial paper
    
    
    89,561,000
    
    
    
    95,667,000Time deposits and other interest
bearing accounts
    
    
    2,022,000
    
    
    
    46,638,000Other cash
    
    
    4,611,000
    
    
    
    2,298,000Cash and Cash Equivalents
    
    $
    260,349,000
    
    
    $
    370,789,000Short-term Investments:Auction rate securities
    
    
    90,000,000
    
    
    
    Short-term Investments
    
    $
    90,000,000
    
    
    
    $
    350,349,000
    
    
    $
    370,789,000
 4




---



##### Table of Contents



(3)
    
    Inventories:Inventories are summarized as follows:
 September 29, 2007
    
    December 31, 2006Raw material
    
    $
    26,860,000
    
    
    $
    20,851,000Work in process
    
    
    15,888,000
    
    
    
    11,828,000Finished goods
    
    
    23,996,000
    
    
    
    23,364,000$
    66,744,000
    
    
    $
    56,043,000
 (4)
    
    Comprehensive Income:Comprehensive income reflects the change in equity of a business enterprise during a period
from transactions and other events, and from circumstances involving non-owner sources. For
the Company, comprehensive income consists of net income and other comprehensive income
which is comprised primarily of foreign currency translation adjustments. Other
comprehensive income, net of tax, was approximately $2.2 million and $0.5 million, resulting
in comprehensive income of $19.3 million and $18.1 million for the quarters ended September
29, 2007 and September 30, 2006. On a first three quarters basis, other comprehensive
income, net of tax, was approximately $3.4 million and $2.9 million, resulting in
comprehensive income of $58.4 million and $54.8 million for the first three quarters ended
September 29, 2007 and September 30, 2006.
 5




---



##### Table of Contents



(5)
    
    Earnings per Share:The following table reconciles the numerators and denominators used in the calculations of
basic and diluted earnings per share for the periods presented.
 Third Quarter EndedSeptember 29, 2007
    
    September 30, 2006Numerators:Numerators for basic earnings per
share, net income
    
    $
    17,137,000
    
    
    $
    17,558,000Interest and debt issuance costs
amortization related to Contingent
Convertible Notes, net of taxes
    
    
    1,488,000
    
    
    
    1,521,000Numerators for diluted earnings per
share
    
    $
    18,625,000
    
    
    $
    19,079,000Denominators:Denominators for basic earnings
per share, weighted-average common
shares outstanding
    
    
    27,659,000
    
    
    
    27,819,000Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units
    
    
    137,000
    
    
    
    80,000Dilutive shares resulting from
Contingent Convertible Notes
    
    
    6,859,000
    
    
    
    6,859,000Denominators for diluted
earnings per share
    
    
    34,655,000
    
    
    
    34,758,000Earnings per share:Basic
    
    $
    0.62
    
    
    $
    0.63Diluted
    
    $
    0.54
    
    
    $
    0.55
 First Three Quarters EndedSeptember 29, 2007
    
    September 30, 2006Numerators:Numerators for basic earnings per
share, net income
    
    $
    55,010,000
    
    
    $
    51,851,000Interest and debt issuance costs
amortization related to Contingent
Convertible Notes, net of taxes
    
    
    4,451,000
    
    
    
    4,510,000Numerators for diluted earnings per
share
    
    $
    59,461,000
    
    
    $
    56,361,000Denominators:Denominators for basic earnings
per share, weighted-average common
shares outstanding
    
    
    27,789,000
    
    
    
    27,833,000Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units
    
    
    138,000
    
    
    
    78,000Dilutive shares resulting from
Contingent Convertible Notes
    
    
    6,859,000
    
    
    
    6,859,000Denominators for diluted
earnings per share
    
    
    34,786,000
    
    
    
    34,770,000Earnings per share:Basic
    
    $
    1.98
    
    
    $
    1.86Diluted
    
    $
    1.71
    
    
    $
    1.62
 The Company has outstanding $200.0 million of 4% Contingent Convertible Senior Subordinated
Notes due 2023 (the Notes). The Notes are convertible into a total of 6,858,710 shares of
Company common stock at a conversion price of $29.16 per share, provided certain contingencies are met. The Notes become convertible during any
 6




---



##### Table of Contents



calendar
quarter if the closing sale price of Company common stock is more than $34.99 for at least
20 trading days in a period of 30 consecutive trading days ending on the last trading day of
the preceding calendar quarter. Based on this formula, holders will be able to convert
their Notes during the fourth quarter of 2007. The Notes are discussed further in Note 7.
 (6)
    
    Business Segment Information:The Company operates through operating segments for which separate financial information is
available, and for which operating results are evaluated regularly by the Companys chief
operating decision maker in determining resource allocation and assessing performance.
Certain of the operating segments have similar economic characteristics, as well as other
common attributes, including nature of the products and production processes, distribution
patterns and classes of customers. The Company aggregates these operating segments for
reporting purposes. Certain other operating segments do not exhibit the common attributes
mentioned above and, therefore, information about them is reported separately. Still other
operating segments do not meet the quantitative thresholds for separate disclosure and their
information is combined and disclosed as Other.The Company has three reportable segments and other operating segments engaged in the
manufacture and sale of the following:Friction Control Products (formerly Friction and Motion Control Products) complex
components used in specialized robotics, medical, aerospace, defense, security, electronic,
material handling, construction, alternative-energy, and other industrial applications.
Products include anti-friction bearings, split roller bearings, specialty balls and
retaining devices.Velocity Control Products complex components used in specialized robotics, material
handling, machine tool, medical, amusement and other industrial applications. Products
include industrial shock absorbers, safety shock absorbers, velocity controls, gas springs
and rotary dampers.Sealing Products complex and standard ring and seal products used in demanding
industrial, aerospace and defense applications. Products include engine rings, sealing
rings and shaft seals.Other filter elements and liquid and gas-phase air filtration systems, metal alloys,
machine tool components, presses, dies and benders used in a variety of industrial
applications.The accounting policies of the operating segments are the same as those of the Company.
Segment performance is evaluated based on segment operating income (which includes an
estimated provision for state income taxes) and segment assets.Items not allocated to segment operating income include certain amortization and corporate
administrative expenses, and other amounts. Corporate assets consist of cash
 7




---



##### Table of Contents



and cash
equivalents, short-term investments, certain prepaid expenses and fixed assets. The selling
price for transfers between operating segments and geographic areas is generally based on
cost plus a mark-up.
 Third Quarter Ended
    First Three Quarters EndedSeptember 29, 2007
    
    September 30, 2006
    
    September 29, 2007
    
    September 30, 2006Net salesFriction Control ProductsExternal customers
    
    $
    59,990,000
    
    
    $
    57,456,000
    
    
    $
    185,519,000
    
    
    $
    175,133,000Intersegment
    
    
    31,000
    
    
    
    83,000
    
    
    
    145,000
    
    
    
    146,00060,021,000
    
    
    
    57,539,000
    
    
    
    185,664,000
    
    
    
    175,279,000Velocity Control ProductsExternal customers
    
    
    16,534,000
    
    
    
    14,623,000
    
    
    
    48,359,000
    
    
    
    43,419,000Sealing ProductsExternal customers
    
    
    12,018,000
    
    
    
    10,339,000
    
    
    
    35,571,000
    
    
    
    31,982,000Intersegment
    
    
    (18,000
    )
    
    
    (30,000
    )
    
    
    (97,000
    )
    
    
    (71,000
    )12,000,000
    
    
    
    10,309,000
    
    
    
    35,474,000
    
    
    
    31,911,000OtherExternal customers
    
    
    18,823,000
    
    
    
    17,258,000
    
    
    
    58,204,000
    
    
    
    53,311,000Intersegment
    
    
    (13,000
    )
    
    
    (53,000
    )
    
    
    (48,000
    )
    
    
    (75,000
    )18,810,000
    
    
    
    17,205,000
    
    
    
    58,156,000
    
    
    
    53,236,000Total consolidated net sales
    
    $
    107,365,000
    
    
    $
    99,676,000
    
    
    $
    327,653,000
    
    
    $
    303,845,000
 Third Quarter Ended
    First Three Quarters EndedSeptember 29, 2007
    
    September 30, 2006
    
    September 29, 2007
    
    September 30, 2006Operating incomeFriction Control Products
    
    $
    14,977,000
    
    
    $
    16,882,000
    
    
    $
    49,898,000
    
    
    $
    50,586,000Velocity Control Products
    
    
    4,478,000
    
    
    
    3,477,000
    
    
    
    12,792,000
    
    
    
    10,460,000Sealing Products
    
    
    2,182,000
    
    
    
    1,653,000
    
    
    
    6,613,000
    
    
    
    4,388,000Other
    
    
    2,158,000
    
    
    
    799,000
    
    
    
    7,976,000
    
    
    
    4,257,000Total segment operating income
    
    
    23,795,000
    
    
    
    22,811,000
    
    
    
    77,279,000
    
    
    
    69,691,000State income tax provision
included in segment operating
income
    
    
    664,000
    
    
    
    745,000
    
    
    
    2,229,000
    
    
    
    2,256,000Items not allocated to segment
operating income
    
    
    (3,000
    )
    
    
    1,314,000
    
    
    
    (412,000
    )
    
    
    2,718,000Interest expense
    
    
    (2,390,000
    )
    
    
    (2,390,000
    )
    
    
    (7,142,000
    )
    
    
    (7,189,000
    )Interest income
    
    
    4,752,000
    
    
    
    4,363,000
    
    
    
    14,133,000
    
    
    
    11,686,000Income before income taxes
    
    $
    26,818,000
    
    
    $
    26,843,000
    
    
    $
    86,087,000
    
    
    $
    79,162,000
 8




---



##### Table of Contents



Third Quarter Ended
    First Three Quarters EndedSeptember 29, 2007
    
    September 30, 2006
    
    September 29, 2007
    
    September 30, 2006Additions to net
property, plant and
equipmentFriction Control Products
    
    $
    15,822,000
    
    
    $
    6,607,000
    
    
    $
    32,681,000
    
    
    $
    12,278,000Velocity Control Products
    
    
    175,000
    
    
    
    166,000
    
    
    
    666,000
    
    
    
    524,000Sealing Products
    
    
    386,000
    
    
    
    314,000
    
    
    
    2,738,000
    
    
    
    531,000Other
    
    
    344,000
    
    
    
    654,000
    
    
    
    700,000
    
    
    
    1,834,000Corporate
    
    
    94,000
    
    
    
    104,000
    
    
    
    216,000
    
    
    
    258,000Total consolidated
additions to net
property, plant
and equipment
    
    $
    16,821,000
    
    
    $
    7,845,000
    
    
    $
    37,001,000
    
    
    $
    15,425,000
 September 29, 2007
    
    December 31, 2006Total assetsFriction Control Products
    
    $
    219,024,000
    
    
    $
    177,061,000Velocity Control Products
    
    
    96,531,000
    
    
    
    85,759,000Sealing Products
    
    
    24,817,000
    
    
    
    21,445,000Other
    
    
    91,834,000
    
    
    
    94,003,000Corporate
    
    
    323,756,000
    
    
    
    359,288,000Total consolidated assets
    
    $
    755,962,000
    
    
    $
    737,556,000
 (7)
    
    Long-term Debt:The Company has outstanding $200.0 million of 4% Contingent Convertible Senior Subordinated
Notes due 2023 (the Notes). Holders of the Notes may require us to repurchase all or a
portion of their Notes on May 23, 2008, 2013, and 2018, at 100 percent of the principal
amount of the Notes, plus accrued but unpaid interest (including contingent interest and
liquidated damages, if any) to the date of repurchase, payable in cash. If the Holders of
the Notes exercise their right to require us to repurchase all or a portion of their Notes
on May 23, 2008, the Company intends to refinance the obligation on a long-term basis with
its revolving credit facility. Because the Company has the ability and intent to refinance
the obligation on a long-term basis, the Notes continue to be reported as long-term debt at
September 29, 2007.Interest expense on the Notes equaled $2.0 million for the third quarter of 2007. Note
issuance costs of approximately $6.5 million are being amortized over a five-year period.
Amortization of Note issuance costs during the third quarter of 2007 was $0.3 million.
Amortization of Note issuance costs is recorded as a component of interest expense. Note
issuance costs included in other assets in the Consolidated Condensed Balance Sheets as of
September 29, 2007 and December 31, 2006 were $0.9 million and $1.8 million.The Companys $300.0 million senior unsecured revolving credit facility provides for
borrowings by and issuance of letters of credit for the account of the  Company and its subsidiaries in various
currencies for general corporate purposes, including acquisitions. The credit
 9




---



##### Table of Contents



facility
matures on July 12, 2010 and is guaranteed by the Company and certain of the Companys
domestic subsidiaries. Interest expense incurred on borrowings under the revolving credit
facility will be based on the London Interbank Offered Rate. The revolving credit facility
contains restrictive financial covenants on a consolidated basis including leverage and
coverage ratios, utilizing measures of earnings and interest expense as defined in the
revolving credit facility agreement. Under the leverage ratio restriction, the Company may
not allow the ratio of total indebtedness, net of domestic cash in excess of $15.0 million,
to adjusted earnings before interest expense, taxes, depreciation and amortization to exceed
3.5 to 1.0. Under the interest coverage ratio restriction, the Company may not allow the
ratio of adjusted earnings before interest expense and taxes to interest expense to be less
than 3.0 to 1.0. The Company is in compliance with all restrictive covenants contained in
the revolving credit facility at September 29, 2007. After consideration of the facilitys
covenants and $4.9 million of letters of credit issued under the facility, the Company has
available credit under its revolving credit facility of $295.1 million at September 29,
2007.
 The Companys outstanding long-term debt was as follows:
 September 29, 2007
    
    December 31, 20064% Contingent Convertible Senior
Subordinated Notes due 2023
    
    $
    200,000,000
    
    
    $
    200,000,000
 (8)
    
    Contingencies:The Company is involved in ongoing environmental remediation activities at certain
manufacturing sites. As of September 29, 2007, an undiscounted accrual in the amount of
$1.0 million, representing the Companys best estimate for ultimate resolution of these
environmental matters, is recorded in other long-term liabilities in the Consolidated
Condensed Balance Sheet.Various other claims arising in the normal course of business are pending against the
Company. The Companys estimated legal costs expected to be incurred in connection with
claims, lawsuits and environmental matters are accrued in the Consolidated Condensed Balance
Sheet.(9)
    
    Goodwill and Other Intangible Assets:Annually during the third quarter, or between annual tests if certain circumstances exist,
the Company tests the carrying amounts of goodwill and certain intangible assets, deemed to
have indefinite useful lives, for impairment.During the third quarter of 2007, the Company completed its annual goodwill impairment test.
Fair values of reporting units were estimated using the expected present value of
future cash flows. The fair value of all reporting units exceeded their carrying value,
which indicated no goodwill impairment. Also during the third quarter of 2007, intangible
assets deemed to have indefinite useful lives were tested for impairment with
 10




---



##### Table of Contents



no impairment loss being realized.
 The changes in the carrying amount of goodwill for the first three quarters ended September
29, 2007, were as follows:
 Friction
    
    VelocityControl
    
    Control
    
    SealingProducts
    
    Products
    
    Products
    
    Other
    
    TotalBalance as of
January 1, 2007
    
    $
    32,452,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    119,484,000Effect of foreign
currency exchange
rate changes
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,000Balance as of
March 31, 2007
    
    $
    32,487,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    119,519,000Effect of foreign
currency exchange
rate changes
    
    
    419,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    419,000Balance as of
June 30, 2007
    
    $
    32,906,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    119,938,000Effect of foreign
currency exchange
rate changes
    
    
    271,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271,000Balance as of
September 29, 2007
    
    $
    33,177,000
    
    
    
    $43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    
    $120,209,000
 Other intangible assets are summarized as follows:
 September 29, 2007
    
    December 31, 2006Amortized Intangible Assets
    
    Gross Carrying Amount
    
    Accumulated Amortization
    
    Gross Carrying Amount
    
    Accumulated AmortizationCustomer relationships and lists
    
    $
    18,694,000
    
    
    $
    8,972,000
    
    
    $
    18,694,000
    
    
    $
    7,273,000Patents and developed technology
    
    
    6,366,000
    
    
    
    2,115,000
    
    
    
    6,299,000
    
    
    
    1,596,000Distributor agreements
    
    
    374,000
    
    
    
    114,000
    
    
    
    374,000
    
    
    
    87,000Product names
    
    
    320,000
    
    
    
    91,000
    
    
    
    320,000
    
    
    
    64,000$
    25,754,000
    
    
    $
    11,292,000
    
    
    $
    25,687,000
    
    
    $
    9,020,000
 The intangible assets are being amortized at accelerated rates or on a straight-line basis, whichever is appropriate, over their respective useful lives. The weighted-average original useful life
for customer relationships and lists is 10 years, and for patents and developed technology is 13 years.
 September 29, 2007
    
    December 31, 2006Unamortized Intangible Assets
    
    Carrying Amount
    
    Carrying AmountTrademarks
    
    $
    4,604,000
    
    
    $
    4,604,000
 Aggregate Intangible Assets Amortization ExpenseFor the first three quarters ended September 29, 2007
    
    $
    2,272,000For the first three quarters ended September 29, 2006
    
    $
    2,308,000
 11




---



##### Table of Contents



Estimated Intangible Assets Amortization ExpenseFor the year ending December 31, 2007
    
    $
    3,027,000For the year ending December 31, 2008
    
    $
    2,957,000For the year ending December 31, 2009
    
    $
    2,633,000For the year ending December 31, 2010
    
    $
    2,272,000For the year ending December 31, 2011
    
    $
    1,448,000
 (10)
    
    Employee Benefit Plans:The components of net periodic benefit cost (income) are as follows:
 Pension Benefits
    
    Third Quarter Ended
    
    First Three Quarters EndedSeptember 29, 2007
    
    September 30, 2006
    
    September 29, 2007
    
    September 30, 2006Service cost
    
    $
    693,000
    
    
    $
    760,000
    
    
    $
    2,079,000
    
    
    $
    2,278,000Interest cost
    
    
    1,460,000
    
    
    
    1,392,000
    
    
    
    4,378,000
    
    
    
    4,180,000Expected return on plan assets
    
    
    (1,421,000
    )
    
    
    (1,168,000
    )
    
    
    (4,111,000
    )
    
    
    (3,504,000
    )Amortization of:Unrecognized net prior service cost
    
    
    8,000
    
    
    
    50,000
    
    
    
    24,000
    
    
    
    150,000Unrecognized net loss
    
    
    255,000
    
    
    
    363,000
    
    
    
    765,000
    
    
    
    1,087,000Total
    
    $
    995,000
    
    
    $
    1,397,000
    
    
    $
    3,135,000
    
    
    $
    4,191,000
 Postretirement Benefits
    
    Third Quarter Ended
    
    First Three Quarters EndedSeptember 29, 2007
    
    September 30, 2006
    
    September 29, 2007
    
    September 30, 2006Service cost
    
    $
    92,000
    
    
    $
    92,000
    
    
    $
    274,000
    
    
    $
    276,000Interest cost
    
    
    199,000
    
    
    
    203,000
    
    
    
    601,000
    
    
    
    609,000Amortization of:Unrecognized net
prior service cost
    
    
    (439,000
    )
    
    
    (443,000
    )
    
    
    (1,319,000
    )
    
    
    (1,327,000
    )Unrecognized net gain
    
    
    (122,000
    )
    
    
    (96,000
    )
    
    
    (364,000
    )
    
    
    (290,000
    )Total
    
    $
    (270,000
    )
    
    $
    (244,000
    )
    
    $
    (808,000
    )
    
    $
    (732,000
    )
 The Company contributed $23.2 million to its qualified pension plans in the third quarter
2007 and $26.1 million in the first three quarters. These contributions have resulted in
the qualified pension plans being fully funded and are expected to substantially eliminate
contributions for the next five years.
 12




---



##### Table of Contents



(11)
    
    Stock-Based Compensation:A summary of restricted stock information pursuant to the Companys equity incentive plans
for the first three quarters of 2007 is as follows:
 First Three Quarters EndedSeptember 29, 2007Wtd.-Avg.Restricted
    
    Grant DateStock
    
    Fair ValueOutstanding at January 1, 2007
    
    
    365,267
    
    
    $
    28.98Granted
    
    
    179,980
    
    
    $
    43.97Vested
    
    
    (105,812
    )
    
    $
    27.69Canceled
    
    
    (1,755
    )
    
    $
    42.48Outstanding at March 31, 2007
    
    
    437,680
    
    
    $
    35.40Granted
    
    
    3,000
    
    
    $
    46.54Outstanding at June 30, 2007
    
    
    440,680
    
    
    $
    35.48Canceled
    
    
    (2,584
    )
    
    $
    31.68Outstanding at September 29, 2007
    
    
    438,096
    
    
    $
    35.50
 Restricted stock awards granted pursuant to the Companys equity incentive plans allow for
continued annual vesting if a grantee retires at or after the age of 65, even though the
grantee is no longer providing services to the Company. For awards made prior to January 1,
2006, compensation cost associated with these restricted stock awards is being amortized
ratably over the awards normal five- to ten-year vesting periods, or up to the date of
actual retirement of the grantee, when applicable. Concurrent with the adoption of the
revision to Statement of Financial Accounting Standards No. 123(R), Share-Based Payments,
the Company changed this approach for new awards granted after January 1, 2006, so that
compensation cost related to grantees who become retirement eligible during the normal
vesting period is amortized ratably over the period from the grant date to the date
retirement eligibility is achieved. Compensation expense is recognized immediately for
awards granted to retirement eligible employees. Had the Company recognized compensation
cost under this new approach for all outstanding restricted stock awards, the expense would
have been essentially unchanged during the third quarter of 2007, would have decreased $1.4
million during the first three quarters of 2007, and would have decreased $0.2 million and
$0.5 million during the third quarter and first three quarters of 2006.
 13




---



##### Table of Contents



First Three Quarters EndedSeptember 29, 2007Wtd.-Avg.Options
    
    Ex. PriceOutstanding at January 1, 2007
    
    
    75,250
    
    
    $
    28.35Granted
    
    
    250,000
    
    
    $
    43.03Outstanding at March 31, 2007
    
    
    325,250
    
    
    $
    39.63Granted
    
    
    10,500
    
    
    $
    46.54Exercised
    
    
    (3,250
    )
    
    $
    23.04Outstanding at June 30, 2007
    
    
    332,500
    
    
    $
    40.01Granted
    
    
    10,000
    
    
    $
    52.42Exercised
    
    
    (1,000
    )
    
    $
    24.25Outstanding at September 29, 2007
    
    
    341,500
    
    
    $
    40.42Exercisable at September 29, 2007
    
    
    30,900
    
    
    $
    26.78Weighted-Avg. Fair Value of Options Granted
    
    $
    12.82Weighted-Avg. Remaining Contractual Life (years)Outstanding at September 29, 2007
    
    
    8.7Exercisable at September 29, 2007
    
    
    5.4
 The exercise price of each fixed option equals the market price of Company common stock on
the date of grant. Options granted become exercisable at the rate of 10.0 percent or 20.0
percent per year, commencing one year after the date of grant, and options expire ten years
after the date of grant. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. Compensation expense related to fixed
stock options was $0.2 million and $0.5 million during the third quarter and first three
quarters of 2007.The aggregate intrinsic value of options outstanding at September 29, 2007 is $4.0 million.(12)
    
    Impact of Recently Issued Accounting Pronouncements:In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return, and provides guidance regarding
subsequent de-recognition of a tax position, classification, interest and penalties,
accounting in interim periods, and disclosure. The Company adopted the provisions of FIN 48
effective January 1, 2007. The adoption of FIN 48 was immaterial to the Company.The Company had liabilities recorded for unrecognized tax benefits totaling $2,563,000 as of
January 1, 2007, all of which would affect the effective tax rate. It is the Companys
policy to include interest and penalties incurred due to underpayment or late payment of
income taxes due to a taxing authority on a net-of-tax basis as a component of income tax
expense. The Company has recorded $557,000 in liabilities for tax related
 14




---



##### Table of Contents



interest and penalties on its consolidated balance sheet, as of January 1, 2007. In the first three
quarters of 2007 there were no material changes to the Companys unrecognized tax benefits,
including related interest and penalties. The Company does not expect that the total
amounts of unrecognized tax benefits will significantly change within the next 12 months.The Company, or one of its subsidiaries, operates and files income tax returns in the United
States, various states, and foreign jurisdictions. Foreign jurisdictions significant to the
Company include Germany and the United Kingdom. With limited exceptions, the Company is no
longer subject to U.S. federal tax examinations for years before 2003, state examinations
for years before 2001, German tax examinations for years before 2005, or United Kingdom tax
examinations for years before 2004.In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.
SFAS No. 158 requires plan sponsors of defined benefit pension and other postretirement
benefit plans (collectively, postretirement benefit plans) to recognize the funded status
of their postretirement benefit plans on the balance sheet, to measure the fair value of
plan assets and benefit obligations as of the date of the plan sponsors fiscal year-end,
and to provide additional disclosures. Kaydon adopted the recognition and disclosure
provisions of SFAS No. 158 on December 31, 2006. The requirement for the Company to measure
the fair value of plan assets and benefit obligations as of its fiscal year-end is effective
for fiscal years ending after December 15, 2008.(13)
    
    Subsequent Event:On October 26, 2007 Kaydon Corporation acquired Avon Bearings Corporation, Avon, in a cash
transaction valued at $55 million. Headquartered in Ohio, Avon is a leading custom designer
and manufacturer of high precision large diameter turntable bearings. Avon also
remanufactures bearings, sells replacement bearings, and is known globally for its focus on
engineering support, product quality, and proprietary manufacturing capabilities. Avon is
expected to add approximately $30 million to Kaydons fiscal 2008 sales. On a reportable
segment basis, Avons results will be included in the Friction Control Products segment.
Kaydon is currently in the process of evaluating the allocation of the purchase price.
 15




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
      16




---



##### Table of Contents



Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
 Results of Operations
 Third Quarter Results
      17




---



##### Table of Contents



18




---



##### Table of Contents



First Three Quarters Results
  Liquidity and Capital Resources
   19




---



##### Table of Contents



Outlook
  Critical Accounting Policies and Estimates
   20




---



##### Table of Contents



Inventories 
  Impairment of Long-Lived Assets
  Notes to Consolidated Financial Statements (Note 1 and Note 11)
 Impairment of Goodwill and Indefinite-Lived Intangible Assets
  21




---



##### Table of Contents



Notes to Consolidated Financial Statements (Note 11)
 4% Contingent Convertible Senior Subordinated Notes
   22




---



##### Table of Contents



Notes to Consolidated Financial Statements (Note 2 and Note 4)
 Retirement Benefits
   23




---



##### Table of Contents



Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations Notes to Consolidated
Financial Statements (Note 7)
   Notes to Consolidated Financial Statements (Note 7)
 Income Taxes
  Notes to Consolidated Financial Statements (Note 9)
 24




---



##### Table of Contents



Forward-Looking Statements
   25




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  26




---



##### Table of Contents



PART II  OTHER INFORMATION:
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number of
    
    Maximum Number ofTotal Number
    
    Average Price
    
    Shares Purchased as
    
    Shares that MayOf Shares
    
    Paid
    
    Part of Publicly
    
    Yet be PurchasedPeriod
    
    Purchased
    
    Per Share
    
    Announced Plan
    
    Under the Plan (1)July 1 to July 28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,723,971July 29 to August 25
    
    
    163,100
    
    
    $
    53.84
    
    
    
    
    
    
    
    4,560,871August 26 to September 29
    
    
    132,700
    
    
    $
    50.08
    
    
    
    
    
    
    
    4,428,171Total
    
    
    295,800
    
    
    $
    52.15
    
    
    
    
    
    
    
    4,428,171
 (1)
    
    On May 6, 2005, the Companys Board of Directors authorized management to purchase up to
5,000,000 shares of its common stock in the open market.
 27




---



##### Table of Contents



ITEM 6. EXHIBITS
 Exhibit No.
    
    Description12
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 28




---



##### Table of Contents



KAYDON CORPORATIONNovember 7, 2007
    /s/ James OLearyJames OLearyPresident and Chief Executive Officer
(Principal Executive Officer)November 7, 2007
    /s/ Kenneth W. CrawfordKenneth W. CrawfordSenior Vice President  Chief Financial Officer and
Corporate Controller
(Principal Financial and Accounting Officer) 29




---



##### Table of Contents



Exhibit No.
    
    Description12
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 30