##### 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 April 1, 2006
    
    Commission File No. 0-12640
 KAYDON CORPORATION
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    13-3186040
(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




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##### 



Page No.Part I - Financial Information:Item 1. Financial StatementsConsolidated Condensed Balance Sheets -
April 1, 2006 (Unaudited) and December 31, 2005
    
    
    1Consolidated Condensed Statements of Operations (Unaudited)-
Quarters Ended April 1, 2006 and April 2, 2005
    
    
    2Consolidated Condensed Statements of Cash Flows (Unaudited)-
Quarters Ended April 1, 2006 and April 2, 2005
    
    
    3Notes to Consolidated Condensed Financial Statements (Unaudited)
    
    
    4 -15Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    16-25Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II  Other Information:Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 6. Exhibits
    
    
    27Signatures
    
    
    28Statement Re: Computation of Ratio of Earnings to Fixed ChargesCertification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 906




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ITEM 1. FINANCIAL STATEMENTS
KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 April 1, 2006
    
    
    December 31, 2005(Unaudited)Assets:Cash and cash equivalents
    
    $
    327,582,000
    
    
    $
    320,804,000Accounts receivable, net
    
    
    61,064,000
    
    
    
    50,869,000Inventories, net
    
    
    53,081,000
    
    
    
    51,783,000Other current assets
    
    
    11,464,000
    
    
    
    14,671,000Total current assets
    
    
    453,191,000
    
    
    
    438,127,000Property, plant and equipment, net
    
    
    80,892,000
    
    
    
    79,603,000Goodwill, net
    
    
    117,282,000
    
    
    
    117,168,000Other intangible assets, net
    
    
    23,533,000
    
    
    
    24,288,000Other assets
    
    
    10,049,000
    
    
    
    11,401,000Total assets
    
    $
    684,947,000
    
    
    $
    670,587,000Liabilities and Shareholders Equity:Accounts payable
    
    $
    16,255,000
    
    
    $
    18,192,000Salaries and wages
    
    
    6,926,000
    
    
    
    8,963,000Taxes payable
    
    
    6,975,000
    
    
    
    4,507,000Interest payable
    
    
    2,867,000
    
    
    
    844,000Other accrued expenses
    
    
    12,419,000
    
    
    
    12,238,000Total current liabilities
    
    
    45,442,000
    
    
    
    44,744,000Long-term debt
    
    
    200,000,000
    
    
    
    200,000,000Long-term liabilities
    
    
    66,300,000
    
    
    
    66,167,000Total long-term liabilities
    
    
    266,300,000
    
    
    
    266,167,000Shareholders equity:Common stock
    
    
    3,693,000
    
    
    
    3,693,000Paid-in capital
    
    
    48,352,000
    
    
    
    47,702,000Retained earnings
    
    
    524,022,000
    
    
    
    510,818,000Less  treasury stock, at cost
    
    
    (185,271,000
    )
    
    
    (186,599,000
    )Less  restricted stock awards
    
    
    (9,696,000
    )
    
    
    (7,584,000
    )Accumulated other comprehensive loss
    
    
    (7,895,000
    )
    
    
    (8,354,000
    )373,205,000
    
    
    
    359,676,000Total liabilities and shareholders equity
    
    $
    684,947,000
    
    
    $
    670,587,000
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KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Quarter EndedApril 1, 2006
    
    
    April 2, 2005Net sales
    
    $
    101,505,000
    
    
    $
    84,562,000Cost of sales
    
    
    59,962,000
    
    
    
    51,167,000Gross profit
    
    
    41,543,000
    
    
    
    33,395,000Selling, general and
administrative expenses
    
    
    17,915,000
    
    
    
    18,273,000Operating income
    
    
    23,628,000
    
    
    
    15,122,000Interest income
    
    
    3,396,000
    
    
    
    1,527,000Interest expense
    
    
    (2,411,000
    )
    
    
    (2,418,000
    )Income from continuing operations before
income taxes
    
    
    24,613,000
    
    
    
    14,231,000Provision for income taxes
    
    
    8,024,000
    
    
    
    5,027,000Income from continuing operations
    
    
    16,589,000
    
    
    
    9,204,000Income from discontinued operations before
income taxes
    
    
    
    
    
    
    1,015,000Provision for income taxes
    
    
    
    
    
    
    340,000Income from discontinued operations
    
    
    
    
    
    
    675,000Net income
    
    $
    16,589,000
    
    
    $
    9,879,000Weighted average common shares:Basic
    
    
    27,843,000
    
    
    
    27,885,000Diluted
    
    
    34,761,000
    
    
    
    34,818,000Earnings per share  continuing
operations:Basic
    
    $
    0.60
    
    
    $
    0.33Diluted
    
    $
    0.52
    
    
    $
    0.31Earnings per share  discontinued
operations:Basic
    
    
    
    
    
    $
    0.02Diluted
    
    
    
    
    
    $
    0.02Earnings per share:Basic
    
    $
    0.60
    
    
    $
    0.35Diluted
    
    $
    0.52
    
    
    $
    0.33Dividends declared per share
    
    $
    0.12
    
    
    $
    0.12
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KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Quarter EndedApril 1, 2006
    
    
    April 2, 2005Cash flows from operating activities
    
    $
    15,052,000
    
    
    $
    5,563,000Cash flows used in investing activities:Additions to property, plant and equipment, net
    
    
    (4,106,000
    )
    
    
    (2,343,000
    )Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (42,664,000
    )Cash used in investing activities
    
    
    (4,106,000
    )
    
    
    (45,007,000
    )Cash flows used in financing activities:Cash dividends paid
    
    
    (3,378,000
    )
    
    
    (3,384,000
    )Purchase of treasury stock
    
    
    (2,327,000
    )
    
    
    (3,600,000
    )Proceeds from exercise of stock options
    
    
    802,000
    
    
    
    494,000Excess tax benefits from stock-based compensation
    
    
    462,000
    
    
    
    Payments on debt
    
    
    (16,000
    )
    
    
    (15,000
    )Cash used in financing activities
    
    
    (4,457,000
    )
    
    
    (6,505,000
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    289,000
    
    
    
    333,000Discontinued Operations:Operating cash flows
    
    
    
    
    
    
    1,742,000Investing cash flows
    
    
    
    
    
    
    (166,000
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    
    
    
    
    (62,000
    )Net cash flows from discontinued operations
    
    
    
    
    
    
    1,514,000Net increase (decrease) in cash and cash equivalents
    
    
    6,778,000
    
    
    
    (44,102,000
    )Cash and cash equivalents  Beginning of period
    
    
    320,804,000
    
    
    
    278,586,000Cash and cash equivalents  End of period
    
    $
    327,582,000
    
    
    $
    234,484,000Cash expended for income taxes
    
    $
    1,181,000
    
    
    $
    1,993,000Cash expended for interest
    
    $
    
    
    
    $
    
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KAYDON CORPORATION
 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (1)
    
    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, 2005 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, 2005.
 (2)
    
    The Company considers all highly liquid debt and investment instruments purchased with a
maturity of three months or less to be cash equivalents. At April 1, 2006, the Company had
$109.4 million invested in U.S. Government treasury bills, $100.1 million invested in various
money market and other short-term funds, $81.7 million invested in investment grade prime
commercial paper of several United States issuers, and $32.2 million invested in time-deposits
and other interest bearing accounts.
  April 1, 2006
    
    
    December 31, 2005Raw Material
    
    $
    19,879,000
    
    
    $
    19,094,000Work in Process
    
    
    13,097,000
    
    
    
    12,593,000Finished Goods
    
    
    20,105,000
    
    
    
    20,096,000$
    53,081,000
    
    
    $
    51,783,000
 (4)
    
    Comprehensive income reflects the change in equity of a business enterprise during a period
from transactions and other events, and from circumstances involving nonowner sources. For
the Company, comprehensive income consists primarily of net income, foreign currency
translation adjustments and minimum pension liability adjustments. Other comprehensive income
(loss), net of tax, was approximately $0.5 million and $(0.8) million, resulting in
comprehensive income of $17.0 million and $9.1 million for the quarters ended April 1, 2006
and April 2, 2005.
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(5)
    
    The following table reconciles the numerators and denominators used in the calculations of
basic and diluted earnings per share from continuing operations for the periods presented.
 Quarter EndedApril 1, 2006
    
    
    April 2, 2005Numerators:Numerators for basic earnings per
share from continuing operations,
income from continuing operations
    
    $
    16,589,000
    
    
    $
    9,204,000Interest and debt issuance costs
amortization related to Contingent
Convertible Notes, net of taxes
    
    
    1,503,000
    
    
    
    1,507,000Numerators for diluted earnings per
share from continuing operations
    
    $
    18,092,000
    
    
    $
    10,711,000Denominators:Denominators for basic earnings
per share from continuing
operations, weighted average
common shares outstanding
    
    
    27,843,000
    
    
    
    27,885,000Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units
    
    
    59,000
    
    
    
    74,000Dilutive shares resulting from
Contingent Convertible Notes
    
    
    6,859,000
    
    
    
    6,859,000Denominators for diluted
earnings per share from continuing
operations
    
    
    34,761,000
    
    
    
    34,818,000Earnings per share from continuing operations:Basic
    
    $
    0.60
    
    
    $
    0.33Diluted
    
    $
    0.52
    
    
    $
    0.31
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(6)
    
    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.Following the sale of its Power and Data Transmission Products segment in July 2005, the
Company has three reportable segments and other operating segments engaged in the
manufacture and sale of the following:Friction and Motion Control Products complex components used in specialized medical,
aerospace, defense, security, electronic, material handling, construction 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 and cash
equivalents, fixed assets and certain prepaid
expenses. The selling price for transfers between operating segments and geographic areas is
generally based on cost plus a mark-up.
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Quarter EndedApril 1, 2006
    
    
    April 2, 2005Net salesFriction and Motion Control ProductsExternal customers
    
    $
    57,062,000
    
    
    $
    44,670,000Intersegment  continuing operations
    
    
    31,000
    
    
    
    26,000Intersegment  discontinued operations
    
    
    
    
    
    
    104,00057,093,000
    
    
    
    44,800,000Velocity Control Products
    
    
    14,518,000
    
    
    
    14,738,000Sealing ProductsExternal customers
    
    
    10,835,000
    
    
    
    8,690,000Intersegment  continuing operations
    
    
    (23,000
    )
    
    
    (19,000
    )10,812,000
    
    
    
    8,671,000OtherExternal customers
    
    
    19,090,000
    
    
    
    16,360,000Intersegment  continuing operations
    
    
    (8,000
    )
    
    
    (7,000
    )19,082,000
    
    
    
    16,353,000Total consolidated net sales
    
    $
    101,505,000
    
    
    $
    84,562,000
 Quarter EndedApril 1, 2006
    
    
    April 2, 2005Operating incomeFriction and Motion Control Products
    
    $
    15,919,000
    
    
    $
    10,609,000Velocity Control Products
    
    
    3,692,000
    
    
    
    3,441,000Sealing Products
    
    
    1,000,000
    
    
    
    1,191,000Other
    
    
    1,919,000
    
    
    
    1,038,000Total segment operating income
    
    
    22,530,000
    
    
    
    16,279,000State income tax provision
included in segment operating
income
    
    
    711,000
    
    
    
    495,000Items not allocated to segment
operating income
    
    
    387,000
    
    
    
    (1,652,000
    )Interest expense
    
    
    (2,411,000
    )
    
    
    (2,418,000
    )Interest income
    
    
    3,396,000
    
    
    
    1,527,000Income from continuing operations
before income taxes
    
    $
    24,613,000
    
    
    $
    14,231,000
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Quarter EndedApril 1, 2006
    
    
    April 2, 2005Depreciation and amortizationFriction and Motion Control Products
    
    $
    1,976,000
    
    
    $
    1,792,000Velocity Control Products
    
    
    461,000
    
    
    
    479,000Sealing Products
    
    
    280,000
    
    
    
    268,000Other
    
    
    928,000
    
    
    
    751,000Corporate
    
    
    777,000
    
    
    
    661,000Total consolidated depreciation and
amortization of continuing operations
    
    $
    4,422,000
    
    
    $
    3,951,000
 Quarter EndedApril 1, 2006
    
    
    April 2, 2005Additions to net property, plant and
equipmentFriction and Motion Control Products
    
    $
    3,083,000
    
    
    $
    1,380,000Velocity Control Products
    
    
    228,000
    
    
    
    203,000Sealing Products
    
    
    153,000
    
    
    
    56,000Other
    
    
    507,000
    
    
    
    279,000Corporate
    
    
    135,000
    
    
    
    425,000Total consolidated additions to net
property, plant and equipment of
continuing operations
    
    $
    4,106,000
    
    
    $
    2,343,000
 April 1, 2006
    
    
    December 31, 2005Total assetsFriction and Motion Control Products
    
    $
    162,112,000
    
    
    $
    153,055,000Velocity Control Products
    
    
    82,814,000
    
    
    
    79,494,000Sealing Products
    
    
    20,883,000
    
    
    
    21,329,000Other
    
    
    95,450,000
    
    
    
    94,528,000Corporate
    
    
    323,688,000
    
    
    
    322,181,000Total consolidated assets
    
    $
    684,947,000
    
    
    $
    670,587,000
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(7)
    
    Interest expense on the Companys 4% Contingent Convertible Senior Subordinated Notes due
2023 (the Notes) equaled $2.0 million for the first quarter of 2006. Note issuance costs of
approximately $6.5 million are being amortized over a five-year period. Amortization of Note
issuance costs during the first quarter of 2006 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 April 1, 2006 and December
31, 2005 was $2.8 million and $3.1 million, respectively.The Companys $300.0 million senior unsecured revolving credit facility provides for
borrowings and issuance of letters of credit by the Company and its subsidiaries in various
currencies for general corporate purposes, including acquisitions. The credit 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 April 1, 2006. After consideration of the facilitys
covenants and $4.2 million of letters of credit issued under the facility, the Company has
available credit under its revolving credit facility of $295.8 million at April 1, 2006.The Companys outstanding debt was as follows:
 April 1, 2006
    
    
    December 31, 20054%
Contingent Convertible Senior Subordinated Notes due 2023
    
    $
    200,000,000
    
    
    $
    200,000,000Other
    
    
    50,000
    
    
    
    66,000Total debt
    
    
    200,050,000
    
    
    
    200,066,000Less current maturities
    
    
    50,000
    
    
    
    66,000Long-term debt
    
    $
    200,000,000
    
    
    $
    200,000,000
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(8)
    
    The Company is involved in ongoing environmental remediation activities at certain
manufacturing sites. One of the manufacturing sites undergoing environmental remediation is a
discontinued operation sold in 2001, where the Company retained the environmental liability.
The Company is working with the appropriate regulatory agencies to complete the necessary
remediation or to determine the extent of the Companys portion of the remediation necessary.
As of April 1, 2006, an undiscounted accrual in the amount of $1.4 million, representing the
Companys best estimate for ultimate resolution of these environmental matters, remains in
other long-term liabilities in the consolidated financial statements.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 financial
statements.
 (9)
    
    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.In January 2005, the Company acquired Purafil Inc. for $42.7 million. A portion of the
purchase price was allocated to various intangible assets, and $18.5 million was recognized
as goodwill. The goodwill is being reported as part of the Companys Other businesses and
will not be amortized, but will be subject to annual impairment testing.The changes in the carrying amount of goodwill for the first quarter ended April 1, 2006,
are as follows:
 Friction andMotion Control
    
    
    Velocity Control
    
    
    SealingProducts
    
    
    Products
    
    
    Products
    
    
    Other
    
    
    TotalBalance as of
January 1, 2006
    
    $
    30,136,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    117,168,000Effect of foreign
currency exchange
rate changes
    
    
    114,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,000Balance as of
April 1, 2006
    
    $
    30,250,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    117,282,000
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April 1, 2006
    
    
    December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmortized Intangible Assets
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationCustomer relationships and lists
    
    $
    18,694,000
    
    
    $
    5,523,000
    
    
    $
    18,694,000
    
    
    $
    4,940,000Patents and developed technology
    
    
    6,252,000
    
    
    
    1,089,000
    
    
    
    6,238,000
    
    
    
    920,000Distributor agreements
    
    
    374,000
    
    
    
    59,000
    
    
    
    374,000
    
    
    
    50,000Backlog
    
    
    351,000
    
    
    
    351,000
    
    
    
    351,000
    
    
    
    351,000Product names
    
    
    320,000
    
    
    
    40,000
    
    
    
    320,000
    
    
    
    32,000$
    25,991,000
    
    
    $
    7,062,000
    
    
    $
    25,977,000
    
    
    $
    6,293,000
  April 1, 2006
    
    
    December 31, 2005Carrying
    
    
    CarryingUnamortized Intangible Assets
    
    Amount
    
    
    AmountTrademarks
    
    $
    4,604,000
    
    
    $
    4,604,000
 Aggregate Intangible Assets Amortization ExpenseFor the first quarter ended April 1, 2006
    
    $
    769,000For the first quarter ended April 2, 2005
    
    $
    602,000
 Estimated Intangible Assets Amortization ExpenseFor the year ending December 31, 2006
    
    $
    3,076,000For the year ending December 31, 2007
    
    $
    3,022,000For the year ending December 31, 2008
    
    $
    2,951,000For the year ending December 31, 2009
    
    $
    2,628,000For the year ending December 31, 2010
    
    $
    2,267,000
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(10)
    
    The components of net periodic benefit cost (income) are as follows:
 Quarter EndedApril 1, 2006
    
    
    April 2, 2005Pension BenefitsService cost
    
    $
    759,000
    
    
    $
    636,000Interest cost
    
    
    1,394,000
    
    
    
    1,270,000Expected return on plan assets
    
    
    (1,168,000
    )
    
    
    (1,083,000
    )Amortization of:Unrecognized net prior service cost
    
    
    50,000
    
    
    
    49,000Unrecognized net loss
    
    
    362,000
    
    
    
    220,000Total
    
    $
    1,397,000
    
    
    $
    1,092,000
 Quarter EndedApril 1, 2006
    
    
    April 2, 2005Postretirement BenefitsService cost
    
    $
    92,000
    
    
    $
    111,000Interest cost
    
    
    203,000
    
    
    
    221,000Amortization of:Unrecognized net prior service cost
    
    
    (442,000
    )
    
    
    (358,000
    )Unrecognized net gain
    
    
    (97,000
    )
    
    
    (176,000
    )Total
    
    ($
    244,000
    )
    
    ($
    202,000
    )
  (11)
    
    As of January 1, 2006 the Company adopted the revision to Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. This revision, SFAS No.
123 (R), requires Kaydon to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. The cost is
recognized over the period during which an employee is required to provide service in exchange
for the award. SFAS No. 123 (R) applies to all awards granted after January 1, 2006 and to
awards modified, repurchased or canceled after that date. The impact of the adoption was not
significant.The Companys 1999 Long Term Stock Incentive Plan provides for the issuance of 2,000,000
shares of Company common stock, plus an additional 2,000,000 shares resulting from certain
reacquisitions of shares by the Company, for stock-based incentives in various forms. The
Companys 2003 Non-Employee Directors Equity Plan provides for the issuance of 300,000
shares of Company
common stock in various forms to non-employee members of the Companys Board of Directors.
The Company has granted both restricted stock awards and fixed stock options pursuant to its
equity incentive plans.
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A summary of restricted stock information pursuant to the Companys equity incentive plans
for the first quarter 2006 is as follows:
 Quarter EndedApril 1, 2006Wtd. Avg.Restricted
    
    
    Grant DateStock
    
    
    Fair ValueOutstanding at January 1, 2006
    
    
    381,427
    
    
    $
    26.73Granted
    
    
    87,020
    
    
    $
    34.18Vested
    
    
    (102,131
    )
    
    $
    25.58Canceled
    
    
    (2,400
    )
    
    $
    31.12Outstanding at April 1, 2006
    
    
    363,916
    
    
    $
    28.81
 th
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Quarter EndedApril 1, 2006Option
    
    
    Wtd. Avg.Shares
    
    
    Ex. PriceOutstanding at January 1, 2006
    
    
    102,000
    
    
    $
    25.04Granted
    
    
    
    
    
    
    Exercised
    
    
    (32,000
    )
    
    $
    25.06Canceled
    
    
    
    
    
    
    Outstanding at April 1, 2006
    
    
    70,000
    
    
    $
    25.03Exercisable at April 1, 2006
    
    
    23,150
    
    
    $
    23.98
  14




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##### Table of Contents



Wtd.Wtd.
    
    Avg.Avg.
    
    RemainingOption
    
    
    Lowest
    
    
    Highest
    
    
    Exercise
    
    ContractualShares
    
    
    Price
    
    
    Price
    
    
    Price
    
    Life (years)Exercise price per
share:Under $25.00:Exercisable
    
    
    15,050
    
    
    $
    21.10
    
    
    $
    24.40
    
    
    $
    22.82
    
    
    
    2.58Non-exercisable
    
    
    20,450
    
    
    $
    21.10
    
    
    $
    24.25
    
    
    $
    23.72
    
    
    
    4.8635,500
    
    
    $
    21.10
    
    
    $
    24.40
    
    
    $
    23.34
    
    
    
    3.89Over $25.00:Exercisable
    
    
    8,100
    
    
    $
    26.01
    
    
    $
    26.19
    
    
    $
    26.13
    
    
    
    5.07Non-exercisable
    
    
    26,400
    
    
    $
    26.01
    
    
    $
    27.95
    
    
    $
    26.97
    
    
    
    8.4934,500
    
    
    $
    26.01
    
    
    $
    27.95
    
    
    $
    26.77
    
    
    
    7.68Total options
    
    
    70,000
    
    
    $
    21.10
    
    
    $
    27.95
    
    
    $
    25.03
    
    
    
    5.76
   (12)
    
    During the fourth quarter of 2005, the Company classified certain land and building assets
that are in the process of being sold as assets held for sale as
required under Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets. These assets, reported as part of the
Companys Other businesses for segment reporting purposes are immaterial at April 1, 2006.
The opportunity to sell these assets arose due to the consolidation of the Companys liquid
filtration products business. The Company expects to sell these assets before December 31,
2006.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
      16




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Results of Operations
       17




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18




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Liquidity and Capital Resources
     19




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Outlook
  Critical Accounting Policies and Estimates
   Inventories 
  Impairment of Long-Lived Assets -
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Notes to Consolidated Financial Statements (Note 1 and Note 11)
 Impairment of Goodwill and Indefinite-Lived Intangible Assets -
    21




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Notes to Consolidated Financial Statements (Note 11)
 4% Contingent Convertible Senior Subordinated Notes-
     Notes to Consolidated Financial Statements (Note 2 and Note 4)
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Retirement Benefits -
     23




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Notes to Consolidated Financial Statements (Note 7)
 Income Taxes -
  Notes to Consolidated Financial Statements (Note 9)
 Forward-Looking Statements
  24




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  25




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PART II. OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (c)
    
    The following table provides the information with respect to purchases made by the Company of
shares of its common stock during each month in the first quarter of 2006:
 Total
    
    Average
    
    Total Number of
    
    Maximum NumberNumber
    
    Price
    
    Shares Purchased as
    
    of Shares that MayOf Shares
    
    Paid
    
    Part of Publicly
    
    Yet be PurchasedPeriod
    
    Purchased
    
    Per Share
    
    Announced Plan
    
    Under the Plan (1)January 1 to January 28
    
    
    30,855
    
    
    $
    32.70
    
    
    
    30,855
    
    
    
    4,948,645January 29 to February 25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,948,645February 26 to April 1
    
    
    35,500
    
    
    $
    37.13
    
    
    
    35,500
    
    
    
    4,913,145Total
    
    
    66,355
    
    
    $
    35.04
    
    
    
    66,355
 
 (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. 26




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ITEM 6. EXHIBITS
 Exhibit No.
    
    Description12
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31
    
    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
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KAYDON CORPORATIONMay 9, 2006
    
    /s/ Brian P. CampbellBrian P. CampbellChairman, President, Chief Executive Officer and
Chief Financial Officer(Principal Executive Officer and Principal
Financial Officer)May 9, 2006
    
    /s/ Kenneth W. CrawfordKenneth W. CrawfordVice President and Corporate Controller(Principal Accounting Officer)
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Exhibit No.
    
    Description12
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31
    
    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