##### Table of Contents



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 2, 2005
    
    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
    
    48108(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (734) 747-7025 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o Indicate by check mark whether the Registrant is an accelerated filer.
YES þ NO o Common Stock Outstanding at May 4, 2005  28,164,832 shares, $.10 par value.




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KAYDON CORPORATION FORM 10-Q FOR THE QUARTER ENDED APRIL 2, 2005 INDEX 
 Page No.Part I  Financial Information:Item 1. Financial StatementsConsolidated Condensed Balance Sheets -
April 2, 2005 (Unaudited) and December 31, 2004
    
    1Consolidated Condensed Statements of Operations (Unaudited)-Quarter Ended April 2, 2005 and April 3, 2004
    
    2Consolidated Condensed Statements of Cash Flows (Unaudited)-Quarter Ended April 2, 2005 and April 3, 2004
    
    3Notes to Consolidated Condensed Financial Statements (Unaudited)
    
    4 -15Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    16-28Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    28Item 4. Controls and Procedures
    
    28-29Part II  Other Information:Item 1. Legal Proceedings
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    29Item 6. Exhibits
    
    30Signatures
    
    31Computation of Ratio of Earnings to Fixed ChargesCertification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 
 April 2, 2005
    
    
    December 31, 2004(Unaudited)Assets:Cash and cash equivalents
    
    $
    234,484,000
    
    
    $
    278,586,000Accounts receivable, net
    
    
    55,508,000
    
    
    
    48,786,000Inventories, net
    
    
    62,228,000
    
    
    
    55,730,000Other current assets
    
    
    9,462,000
    
    
    
    9,925,000Total current assets
    
    
    361,682,000
    
    
    
    393,027,000Property, plant and equipment, net
    
    
    88,008,000
    
    
    
    86,028,000Goodwill, net
    
    
    130,985,000
    
    
    
    113,375,000Other intangible assets, net
    
    
    27,189,000
    
    
    
    9,200,000Other assets
    
    
    15,916,000
    
    
    
    17,494,000Total assets
    
    $
    623,780,000
    
    
    $
    619,124,000Liabilities and Shareholders Equity:Accounts payable
    
    $
    15,870,000
    
    
    $
    17,735,000Taxes payable
    
    
    7,434,000
    
    
    
    5,797,000Salaries and wages
    
    
    6,968,000
    
    
    
    7,516,000Interest payable
    
    
    2,887,000
    
    
    
    844,000Other accrued expenses
    
    
    12,375,000
    
    
    
    11,804,000Total current liabilities
    
    
    45,534,000
    
    
    
    43,696,000Long-term debt
    
    
    200,052,000
    
    
    
    200,066,000Long-term liabilities
    
    
    66,246,000
    
    
    
    66,681,000Total long-term liabilities
    
    
    266,298,000
    
    
    
    266,747,000Shareholders equity:Common stock
    
    
    3,693,000
    
    
    
    3,693,000Paid-in capital
    
    
    47,818,000
    
    
    
    47,399,000Retained earnings
    
    
    456,948,000
    
    
    
    450,456,000Less  treasury stock, at cost
    
    
    (184,845,000
    )
    
    
    (184,781,000
    )Less  restricted stock awards
    
    
    (9,680,000
    )
    
    
    (6,908,000
    )Accumulated other comprehensive loss
    
    
    (1,986,000
    )
    
    
    (1,178,000
    )311,948,000
    
    
    
    308,681,000Total liabilities and shareholders equity
    
    $
    623,780,000
    
    
    $
    619,124,000
 See accompanying notes to consolidated condensed financial statements. 1




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KAYDON CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 Quarter EndedApril 2, 2005
    
    
    April 3, 2004Net sales
    
    $
    94,482,000
    
    
    $
    83,323,000Cost of sales
    
    
    58,881,000
    
    
    
    51,549,000Gross profit
    
    
    35,601,000
    
    
    
    31,774,000Selling, general and
administrative expenses
    
    
    19,464,000
    
    
    
    16,211,000Operating income
    
    
    16,137,000
    
    
    
    15,563,000Interest income
    
    
    1,527,000
    
    
    
    766,000Interest expense
    
    
    (2,418,000
    )
    
    
    (2,419,000
    )Income before income taxes
    
    
    15,246,000
    
    
    
    13,910,000Provision for income taxes
    
    
    5,367,000
    
    
    
    5,008,000Net income
    
    $
    9,879,000
    
    
    $
    8,902,000Weighted average common shares:Basic
    
    
    27,885,000
    
    
    
    27,901,000Diluted
    
    
    34,818,000
    
    
    
    34,804,000Earnings per shareBasic
    
    $
    0.35
    
    
    $
    0.32Diluted
    
    $
    0.33
    
    
    $
    0.30Dividends declared per share
    
    $
    0.12
    
    
    $
    0.12
 See accompanying notes to consolidated condensed financial statements. 2




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KAYDON CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
   Quarter EndedApril 2, 2005
    
    
    April 3, 2004Cash flows from operating activities
    
    $
    7,305,000
    
    
    $
    18,567,000Cash flows used in investing activities:Additions to property, plant and equipment, net
    
    
    (2,509,000
    )
    
    
    (2,265,000
    )Acquisition of business, net of cash acquired
    
    
    (42,664,000
    )
    
    
    Cash used in investing activities
    
    
    (45,173,000
    )
    
    
    (2,265,000
    )Cash flows used in financing activities:Cash dividends paid
    
    
    (3,384,000
    )
    
    
    (3,380,000
    )Purchase of treasury stock
    
    
    (3,600,000
    )
    
    
    (768,000
    )Proceeds from exercise of stock options
    
    
    494,000
    
    
    
    Payments on debt
    
    
    (15,000
    )
    
    
    (38,000
    )Cash used in financing activities
    
    
    (6,505,000
    )
    
    
    (4,186,000
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    271,000
    
    
    
    80,000Net increase (decrease) in cash and cash equivalents
    
    
    (44,102,000
    )
    
    
    12,196,000Cash and cash equivalents  Beginning of period
    
    
    278,586,000
    
    
    
    255,756,000Cash and cash equivalents  End of period
    
    $
    234,484,000
    
    
    $
    267,952,000Cash expended for income taxes
    
    $
    1,993,000
    
    
    $
    2,389,000Cash expended for interest
    
    $
    
    
    
    $
    
 See accompanying notes to consolidated condensed financial statements. 3




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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, 2004 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, 2004.  (2)
    Inventories are summarized as follows: April 2, 2005
    
    
    December 31, 2004Raw Material
    
    $
    20,786,000
    
    
    $
    18,019,000Work in Process
    
    
    19,611,000
    
    
    
    17,015,000Finished Goods
    
    
    21,831,000
    
    
    
    20,696,000$
    62,228,000
    
    
    $
    55,730,000
  (3)
    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 $(0.8) million and $0.6 million, resulting in
comprehensive income of $9.1 million and $9.5 million for the quarters ended April 2, 2005 and
April 3, 2004. 4




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(4)
    The following table reconciles the numerators and denominators used in the calculations of
basic and diluted earnings per share for the periods presented. Quarter EndedApril 2, 2005
    
    
    April 3, 2004Numerators:Numerators for basic earnings per
share, net income
    
    $
    9,879,000
    
    
    $
    8,902,000Interest and debt issuance costs
amortization related to Contingent
Convertible Notes, net of taxes
    
    
    1,507,000
    
    
    
    1,488,000Numerators for diluted earnings per
share
    
    $
    11,386,000
    
    
    $
    10,390,000Denominators:Denominators for basic earnings
per share, weighted average
common shares outstanding
    
    
    27,885,000
    
    
    
    27,901,000Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units
    
    
    74,000
    
    
    
    44,000Dilutive shares resulting from
Contingent Convertible Notes
    
    
    6,859,000
    
    
    
    6,859,000Denominators for diluted
earnings per share
    
    
    34,818,000
    
    
    
    34,804,000Earnings per share:Basic
    
    $
    0.35
    
    
    $
    0.32Diluted
    
    $
    0.33
    
    
    $
    0.30
 Options to purchase 63,000 shares of common stock at prices ranging from $28.35 to
$33.31 per share were outstanding during the first quarter of 2004, but were not included in
the computation of diluted earnings per share because the options exercise price was
greater than the average market price of the common shares during that period. In May of 2003, the Company completed the sale of $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 including that Company common stock has traded
above $34.99 for 20 out of 30 trading days for specified periods of time. The Notes are
discussed further in Note 6. 5




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In October 2004, the Financial Accounting Standards Board ratified the final consensus of the
Emerging Issues Task Force (EITF) on EITF 04-8, The Effects of Contingently Convertible
Instruments on Diluted Earnings per Share, which states that the impact of contingently
convertible instruments that are convertible into common stock upon the achievement of a
specified market price of the issuers shares, such as the Companys Notes, should be
included in diluted earnings per share computations regardless of whether or not the market
price trigger has been met. Accordingly, the diluted earnings per share amount for the first
quarter 2004 previously reported as $.32, has been restated to adjust net income by adding
back the after tax interest expense, including amortization of debt issuance costs,
attributable to the Notes and to increase total shares outstanding by the number of shares
that would be issuable upon conversion.  (5)
    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 four 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. Power and Data Transmission Products-complex and standard electrical and fiber optic
products used in demanding industrial, aerospace, defense, security, medical, electronic and
marine equipment applications. Products include slip-rings, slip-ring assemblies, video and
data multiplexers, fiber optic rotary joints and printed circuit boards. 6




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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. 7




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Quarter EndedApril 2, 2005
    
    
    April 3, 2004Net salesFriction and Motion Control Products
    
    $
    44,670,000
    
    
    $
    38,804,000External customers
    
    
    130,000
    
    
    
    70,000Intersegment
    
    
    44,800,000
    
    
    
    38,874,000Velocity Control Products
    
    
    14,738,000
    
    
    
    13,594,000Sealing Products
    
    
    8,690,000
    
    
    
    9,603,000External customers
    
    
    (19,000
    )
    
    
    (10,000
    )Intersegment
    
    
    8,671,000
    
    
    
    9,593,000Power and Data Transmission Products
    
    
    10,024,000
    
    
    
    8,718,000External customers
    
    
    (104,000
    )
    
    
    (60,000
    )Intersegment
    
    
    9,920,000
    
    
    
    8,658,000Other
    
    
    16,360,000
    
    
    
    12,604,000External customers
    
    
    (7,000
    )
    
    
    Intersegment
    
    
    16,353,000
    
    
    
    12,604,000Total
consolidated net sales
    
    $
    94,482,000
    
    
    $
    83,323,000
 Quarter EndedApril 2, 2005
    
    
    April 3, 2004Operating income (loss)Friction and Motion Control Products
    
    $
    10,609,000
    
    
    $
    8,994,000Velocity Control Products
    
    
    3,441,000
    
    
    
    3,958,000Sealing Products
    
    
    1,191,000
    
    
    
    1,417,000Power and Data Transmission Products
    
    
    496,000
    
    
    
    (359,000
    )Other
    
    
    1,038,000
    
    
    
    1,570,000Total segment operating income
    
    
    16,775,000
    
    
    
    15,580,000State income tax provision
included in segment operating
income
    
    
    495,000
    
    
    
    274,000Items not allocated to segment
operating income
    
    
    (1,133,000
    )
    
    
    (291,000
    )Interest expense
    
    
    (2,418,000
    )
    
    
    (2,419,000
    )Interest income
    
    
    1,527,000
    
    
    
    766,000Income from operations before income
taxes
    
    $
    15,246,000
    
    
    $
    13,910,000
 8




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Quarter EndedApril 2, 2005
    
    
    April 3, 2004Depreciation and amortizationFriction and Motion Control Products
    
    $
    1,792,000
    
    
    $
    1,894,000Velocity Control Products
    
    
    479,000
    
    
    
    413,000Sealing Products
    
    
    268,000
    
    
    
    260,000Power and Data Transmission Products
    
    
    414,000
    
    
    
    404,000Other
    
    
    751,000
    
    
    
    275,000Corporate
    
    
    661,000
    
    
    
    398,000Total consolidated depreciation and
amortization
    
    $
    4,365,000
    
    
    $
    3,644,000
 Quarter EndedApril 2, 2005
    
    
    April 3, 2004Additions to net property, plant and
equipmentFriction and Motion Control Products
    
    $
    1,380,000
    
    
    $
    1,479,000Velocity Control Products
    
    
    203,000
    
    
    
    64,000Sealing Products
    
    
    56,000
    
    
    
    78,000Power and Data Transmission Products
    
    
    166,000
    
    
    
    128,000Other
    
    
    279,000
    
    
    
    287,000Corporate
    
    
    425,000
    
    
    
    229,000Total consolidated additions to net
property, plant and equipment
    
    $
    2,509,000
    
    
    $
    2,265,000
 April 2, 2005
    
    
    December 31, 2004Total assetsFriction and Motion Control Products
    
    $
    162,747,000
    
    
    $
    162,275,000Velocity Control Products
    
    
    80,318,000
    
    
    
    80,213,000Sealing Products
    
    
    19,478,000
    
    
    
    18,034,000Power and Data Transmission Products
    
    
    41,916,000
    
    
    
    42,165,000Other
    
    
    94,257,000
    
    
    
    46,586,000Corporate
    
    
    225,064,000
    
    
    
    269,851,000Total consolidated assets
    
    $
    623,780,000
    
    
    $
    619,124,000
 9




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(6) 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 2005. 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 2005 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 2, 2005 and December 31, 2004 was
$4.1million and $4.4 million, respectively. The Companys revolving credit facility, which is unsecured, provides for borrowings and the
issuance of letters of credit by the Company and its subsidiaries in various currencies for general
corporate purposes, including acquisitions. 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 3.0 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 2,
2005. After consideration of the facilitys covenants and $3.2 million of letters of credit issued
under the facility, the Company has available credit under its revolving credit facility of $196.8
million at April 2, 2005. The Companys outstanding debt was as follows: April 2, 2005
    
    
    December 31, 20044% Contingent Convertible Senior
Subordinated Notes due 2023
    
    $
    200,000,000
    
    
    $
    200,000,000Other
    
    
    113,000
    
    
    
    128,000Total debt
    
    
    200,113,000
    
    
    
    200,128,000Less current maturities
    
    
    61,000
    
    
    
    62,000Long-term debt
    
    $
    200,052,000
    
    
    $
    200,066,000
 (7) As previously reported, in August 2000, an accident involving a MH53E helicopter manufactured
by Sikorsky Aircraft Corporation, resulted in four deaths and two injuries during a military
training mission. The Company manufactures and sells swashplate bearings used on MH53E
helicopters. In May 2002, the Company, along with Sikorsky Aircraft Corporation, The Armoloy
Corporation, Armoloy of Illinois, Inc., Armoloy of Connecticut, Inc. and Investment Holdings, Inc.,
was named as a defendant in a lawsuit filed by the relatives and the estates of the four deceased
individuals, and by the two injured individuals. The litigation currently is pending in the
District Court of Nueces County, Texas, 28th Judicial District. Armoloy of Connecticut,
Inc. is no longer a party to the litigation. The Company believes it has meritorious defenses to
these claims including, but not limited to, the fact that the bearing utilized in the helicopter
involved in 10




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the accident was inspected and approved prior to shipment by both U.S. government and Sikorsky
Aircraft Corporation inspectors. Accordingly, an accrual is not recorded in the consolidated
financial statements related to this legal action. Further, the Companys insurance carrier has
retained legal counsel to respond to the lawsuit. The Company believes that the alleged damages
claimed in this lawsuit will be fully covered under the Companys insurance policy. The Company is involved in ongoing environmental remediation activities at certain manufacturing
sites as well as proceedings relating to the cleanup of waste disposal sites that provide for the
allocation of costs among potentially responsible parties. One of the manufacturing sites
undergoing environmental remediation is a discontinued operation sold in December 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 2, 2005, an undiscounted accrual in
the amount of $2.0 million, representing the Companys best estimate for ultimate resolution of
these environmental matters, is included in 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 consistently accrued in the consolidated financial statements. (8) 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. Based on the preliminary
allocation of the purchase price, $11.2 million was assigned to customer relationships, $5.1
million was assigned to developed technology, $1.6 million was assigned to trademarks, $0.4 million
was assigned to backlog, $0.3 million was assigned to product names, and $18.1 million was
recognized as goodwill. The trademarks are not being amortized as they are deemed to have
indefinite useful lives, but will be subject to annual impairment testing. The other intangible
assets will be amortized over their respective useful lives ranging from one year for backlog to 12
years for developed technology and product names. 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. 11




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The changes in the carrying amount of goodwill for the first quarter ended April 2, 2005, are as
follows: Friction and
    
    
    
    
    
    
    
    
    
    
    Power and DataMotion Control
    
    
    Velocity Control
    
    
    
    
    
    
    TransmissionProducts
    
    
    Products
    
    
    Sealing Products
    
    
    Products
    
    
    Other
    
    
    TotalBalance as of
December 31, 2004
    
    $
    32,040,000
    
    
    $
    42,879,000
    
    
    $
    186,000
    
    
    $
    13,115,000
    
    
    $
    25,155,000
    
    
    $
    113,375,000Effect of foreign
currency exchange
rate changes
    
    
    (376,000
    )
    
    
    
    
    
    
    
    
    
    
    (138,000
    )
    
    
    
    
    
    
    (514,000
    )Goodwill acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,124,000
    
    
    
    18,124,000Balance as of
April 2, 2005
    
    $
    31,664,000
    
    
    $
    42,879,000
    
    
    $
    186,000
    
    
    $
    12,977,000
    
    
    $
    43,279,000
    
    
    $
    130,985,000
 Other intangible assets are summarized as follows: April 2, 2005
    
    
    December 31, 2004Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmortized Intangible Assets
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationCustomer relationships and lists
    
    $
    19,064,000
    
    
    $
    3,432,000
    
    
    $
    7,834,000
    
    
    $
    2,970,000Patents and developed technology
    
    
    6,308,000
    
    
    
    392,000
    
    
    
    1,233,000
    
    
    
    263,000Backlog
    
    
    381,000
    
    
    
    11,000
    
    
    
    11,000
    
    
    
    11,000Distributor agreements
    
    
    374,000
    
    
    
    21,000
    
    
    
    374,000
    
    
    
    12,000Product names
    
    
    320,000
    
    
    
    6,000
    
    
    
    
    
    
    
    $
    26,447,000
    
    
    $
    3,862,000
    
    
    $
    9,452,000
    
    
    $
    3,256,000
 The intangible assets are being amortized at accelerated rates or on a straight-line basis, whichever is appropriate, over periods of 1 to 20 years. April 2, 2005
    
    
    December 31, 2004Carrying
    
    
    CarryingUnamortized Intangible Assets
    
    Amount
    
    
    AmountTrademarks
    
    $
    4,604,000
    
    
    $
    3,004,000
 Aggregate Intangible Assets Amortization ExpenseFor the first quarter ended April 2, 2005
    
    $
    606,000For the first quarter ended April 3, 2004
    
    $
    210,000
 Estimated Intangible Assets Amortization ExpenseFor the year ending December 31, 2005
    
    $
    2,519,000For the year ending December 31, 2006
    
    $
    2,503,000For the year ending December 31, 2007
    
    $
    2,499,000For the year ending December 31, 2008
    
    $
    2,499,000For the year ending December 31, 2009
    
    $
    2,499,000
 12




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##### Table of Contents



(9) The components of net periodic benefit costs are as follows: Quarter EndedPension Benefits
    
    April 2, 2005
    
    
    April 3, 2004Service cost
    
    $
    636,000
    
    
    $
    589,000Interest cost
    
    
    1,270,000
    
    
    
    1,244,000Expected return on plan assets
    
    
    (1,083,000
    )
    
    
    (952,000
    )Amortization of:Unrecognized net prior service cost
    
    
    49,000
    
    
    
    190,000Unrecognized net loss
    
    
    220,000
    
    
    
    274,000Total
    
    $
    1,092,000
    
    
    $
    1,345,000
 Quarter EndedPostretirement Benefits
    
    April 2, 2005
    
    
    April 3, 2004Service cost
    
    $
    111,000
    
    
    $
    190,000Interest cost
    
    
    221,000
    
    
    
    374,000Amortization of:Unrecognized
net prior service cost
    
    
    (358,000

    )
    
    
    (273,000
    )Unrecognized net gain
    
    
    (176,000
    )
    
    
    (45,000
    )Total
    
    $
    (202,000
    )
    
    $
    246,000
 The Company expects to contribute approximately $4.3 million to its pension plans in 2005. 13




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##### Table of Contents



(10) The Company accounts for stock-based compensation granted to employees and Directors using
the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25. The following
table details the effect on net income and earnings per share had compensation cost for stock-based
awards been recognized based on the fair value method prescribed under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation: Quarter EndedApril 2, 2005
    
    
    April 3, 2004Reported net income
    
    $
    9,879,000
    
    
    $
    8,902,000Add: Total stock-based compensation
expense included in reported net
income, net of tax
    
    
    434,000
    
    
    
    205,000Deduct: Total stock-based
compensation
expense determined
under fair value method for all
awards, net of tax
    
    
    (455,000
    )
    
    
    (236,000
    )Pro-forma net income
    
    $
    9,858,000
    
    
    $
    8,871,000Earnings per share- Basic:As reported
    
    $
    0.35
    
    
    $
    0.32Pro-forma
    
    $
    0.35
    
    
    $
    0.32Earnings per share- Diluted:As reported
    
    $
    0.33
    
    
    $
    0.30Pro-forma
    
    $
    0.33
    
    
    $
    0.30
 (11) In December 2004, the Financial Accounting Standards Board issued a revision to Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. This
revision will require 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 will be
recognized over the period during which an employee is required to provide service in exchange for
the award. This revised Statement is effective as of the beginning of the first annual reporting
period that begins after June 15, 2005, but earlier adoption is allowed for periods for which
financial statements have not been issued. This revised Statement will apply to all awards granted
after the required effective date and to awards modified, repurchased or canceled after that date.
As of the required effective date, Kaydon will apply this revised Statement using a modified
version of prospective application. Under that transition method, compensation cost is recognized
on or after the required effective date for the portion of outstanding awards for which the
requisite service has not yet been rendered, based on the grant-date fair value of those awards
calculated under SFAS No. 123 for either recognition or pro-forma disclosures. For periods before
the effective date, Kaydon anticipates that it will not restate the financial statements to reflect
compensation cost previously reported in the pro-forma footnote
disclosures under the 14




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provisions of SFAS No. 123. The Company does not expect the impact of adoption to be
significant. (12) On January 7, 2005 Kaydon Corporation acquired all of the outstanding capital stock of Purafil, Inc.
(Purafil) in a cash transaction valued at $42.7 million. Purafil manufactures and distributes
gas-phase air filtration systems and media for industrial and commercial applications throughout
the world. On a reportable segment basis, Purafils results will be reported in Other. 15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 Overview Kaydon Corporation and subsidiaries (Kaydon or the Company) provide an array of proprietary,
value added products to a diverse customer base covering a broad spectrum of industries. This
strategic diversification means that demand for the Companys products depends, in part, upon a
wide range of general economic conditions, which affect the Companys markets in varying ways from
quarter to quarter. During the first quarter 2005, the Company continued to benefit from a strong
manufacturing environment and experienced increased demand from various markets including defense,
machinery, heavy equipment, industrial, and other key commercial markets. During the first quarter
of 2005, the Company also benefited from the acquisition of Purafil, Inc. completed January 7,
2005. The Company continues to experience a high level of incoming customer orders, which during
the first quarter of 2005 were higher than those received in last years comparable period. During
the remainder of 2005, the Company expects to continue to benefit from a strong manufacturing
economy, however, because of the Companys diverse product offerings, the specific impact this
factor may have on the Companys operating results is difficult to predict. During the first quarter of 2005, the Companys gross profit and operating margins were negatively
affected by several items, including higher material costs, moderately higher health care costs,
ramp up costs of new programs in the specialty bearings business, and integration and other
acquisition related costs associated with the Companys recently completed acquisitions. Maintaining the Companys strong balance sheet and financial flexibility remains a key strategy of
the Company. At April 2, 2005 the Companys current ratio was 7.9 to 1 and working capital totaled
$316.1 million. The Companys current cash balance of $234.5 million at April 2, 2005, along with
our $200.0 million revolving credit facility provide financial strength to support the Companys
objectives including strategic acquisitions. In summary, the Companys future performance will be impacted by general economic conditions, the
strength of the manufacturing environment, the success of the Companys efforts to improve
operating efficiencies, as well as the utilization of current liquidity levels in completing
strategic acquisitions. The discussion that follows should be read in conjunction with the unaudited Consolidated Condensed
Financial Statements (and the Notes thereto), included elsewhere in this report, and the Companys
Annual Report for the year ended December 31, 2004, particularly Item 7- Managements Discussion
and Analysis of Results of Operations and Financial Condition, to assist in understanding the
Companys results of operations, its financial position, cash flows, capital structure and other
relevant financial information. 16




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##### Table of Contents



Results of Operations Sales during the first quarter of 2005 were $94.5 million, an increase of 13.4 percent as compared
to $83.3 million in 2004s first quarter. The improvement was the result of sales increases across
most of the Companys product lines, including specialty bearings, as well as linear deceleration,
and slip-ring products, and was aided by $4.6 million of sales from Purafil Inc. (Purafil),
acquired January 7, 2005. These increases were partially offset by the effects of a previously
disclosed work stoppage at the Companys Baltimore, Maryland facility, which was settled on January
22, 2005, and a decrease in demand for certain filtration products utilized in military
applications, which experienced unusually strong demand in the first quarter of 2004. Purafils
sales are seasonally slowest during the first quarter as installation of new outdoor air filtration
systems and the replacement of filtration media in existing outdoor systems at water and waste
treatment facilities is inhibited by the colder weather. Specifically, Kaydons Friction and Motion Control Products reporting segment achieved sales of
$44.8 million during the first quarter of 2005 as compared with $38.9 million during the first
quarter of 2004, an increase of $5.9 million or 15.2 percent. This segment was positively affected
by increased demand for specialty bearings utilized in defense, machinery and heavy equipment
markets, including the wind power market, and by increased demand for split roller bearings used
globally in various industrial markets. During the first quarter 2005, the Companys Velocity Control Products reporting segment sales
increased $1.1 million or 8.4 percent, to $14.7 million, when compared with first quarter 2004
sales of $13.6 million. The increase is primarily due to a small product line acquisition
completed in the third quarter of 2004 and the impact of favorable foreign currency translation,
primarily related to the continuing strength of the Euro. Primarily as a result of the previously mentioned work stoppage at the Baltimore, Maryland
facility, first quarter sales of the Sealing Products segment decreased $0.9 million, or 9.6
percent, to $8.7 million, when compared with 2004. During the first quarter of 2005, sales of Kaydons Power and Data Transmission Products reporting
segment increased $1.3 million or 14.6 percent, to $9.9 million, when compared with first quarter
2004 sales of $8.7 million. This segment was positively affected by increased demand for
traditional rotary and electronic products. Sales of the Companys remaining businesses equaled $16.4 million during the first quarter of 2005,
an increase from the first quarter 2004 of $3.7 million or 29.8 percent. Purafil sales of $4.6
million and higher prices on sales of metal alloys caused by the pass through of higher raw
material prices, were offset by decreases in sales of metal forming equipment, due primarily to
customer-initiated delays of shipments of firm orders into the second quarter of this year, and of
certain filtration products, primarily due to a decrease in government military spending for these
items compared with the first quarter of 2004. 17




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##### Table of Contents



Gross profit equaled $35.6 million or 37.7 percent of sales for the first quarter of 2005 as
compared to $31.8 million or 38.1 percent of sales for the first quarter of 2004. First quarter
2005 gross profit was negatively affected by several items, including higher material costs,
moderately higher health care costs, ramp up costs of new programs in the specialty bearings
business, and integration and other acquisition related costs associated with the Companys
recently completed acquisitions. The Company has experienced increases in material prices,
including stainless steel, aluminum, titanium, and nickel based materials. We have passed these
price increases through to our customers to the extent possible, but the net result has been a
negative effect on our gross profit percentage. Selling, general, and administrative (SG&A) expenses, equaled $19.5 million or 20.6 percent of
sales during the first quarter of 2005 as compared to $16.2 million or 19.5 percent of sales during
the first quarter of 2004. First quarter 2005 SG&A expenses were affected by the addition of
Purafil, which historically has had a higher SG&A component than existing Kaydon companies because
of its extensive marketing, engineering and distribution activities. Included in the first quarter
2005 SG&A expenses are additional amortization costs associated with the preliminary allocation of
$18.6 million of the purchase price to Purafils intangible assets. First quarter 2005 SG&A
expenses for the Company were also affected by $1.0 million of costs associated with Sarbanes-Oxley
compliance, ongoing acquisition initiatives, and moderately higher health care costs. The Companys operating income equaled $16.1 million in the first quarter of 2005, as compared to
$15.6 million in the first quarter of 2004. Depreciation and amortization during the first quarter 2005 equaled $4.4 million, compared to $3.6
million during the first quarter of 2004. The increase was due primarily to the additional
amortization expense associated with the intangible assets recognized when Purafil was acquired. On a reporting segment basis, operating income from the Friction and Motion Control Products
reporting segment was $10.6 million during the first quarter of 2005 as compared to $9.0 million
during the comparable period last year. Operating income was positively affected by increased
demand for specialty bearings utilized in defense, machinery and heavy equipment markets, including
the wind power market, and for split roller bearings used globally in various industrial markets.
The growth of first quarter operating income was reduced by higher material costs and by additional
start up costs associated with new program introductions for military and wind power applications.
The Company anticipates operating efficiencies and production costs associated with these new
programs to improve during the year. The Velocity Control Products reporting segment contributed $3.4 million to the Companys operating
income during the first quarter of 2005 as compared to $4.0 million during the comparable period
last year. The decrease in operating income was primarily due to higher material costs and costs
associated with the physical integration of a product line acquisition into existing facilities. 18




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##### Table of Contents



The Sealing Products reporting segment contributed $1.2 million to the Companys operating income
during the first quarter of 2005 as compared to $1.4 million during the comparable period last
year. The decrease is primarily the result of the previously mentioned work stoppage at the
Baltimore, Maryland facility. Aided by the increase in sales, the Power and Data Transmission Products reporting segment reported
an operating income of $0.5 million during the first quarter of 2005 as compared to an operating
loss of $(0.4) million during the first quarter of 2004, which included certain inventory related
write-offs. The Companys other businesses contributed $1.0 million to the Companys operating income during
the first quarter of 2005 as compared to $1.6 million during the comparable period last year,
primarily as a result of the previously mentioned lower sales of metal forming equipment and
certain filtration products. In addition, as mentioned previously, the first quarter is seasonally
the slowest quarter for Purafil because of the effects of the colder weather. Interest expense during both the first quarter of 2005 and 2004 was $2.4 million. As a result of
higher interest rates, interest income during the first quarter of 2005 was $1.5 million, as
compared to $0.8 million during the first quarter of 2004. Primarily due to reduced taxes on foreign earnings and remittances, and additional deductions
available for the first time under the American Jobs Creation Act of 2004, the effective tax rate
during the first quarter of 2005 was 35.2 percent, compared with 36.0 percent for the first quarter
of 2004. Our net income for the first quarter of 2005 was $9.9 million or $.33 per common share on a diluted
basis, based on 34.8 million common shares outstanding, an increase in diluted earnings per share
of 10.0 percent when compared with first quarter 2004 net income of $8.9 million or $.30 per common
share on a diluted basis, also based on 34.8 million common shares outstanding. Diluted earnings per common share calculations reflect the provisions of the final consensus of the
Emerging Issues Task Force (EITF) on EITF 04-8, The Effects of Contingently Convertible
Instruments on Diluted Earnings per Share, which states that the impact of contingently
convertible instruments that are convertible into common stock upon the achievement of a specified
market price of the issuers shares, such as the Companys 4% Contingent Convertible Senior
Subordinated Notes due 2023, should be included in diluted earnings per share computations
regardless of whether or not the market price trigger has been met. Accordingly, the first quarter
2004 diluted earnings per share figure, previously reported as $.32, has been restated in
accordance with EITF 04-8. 19




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##### Table of Contents



Liquidity and Capital Resources At April 2, 2005, the Companys current ratio was 7.9 to 1 and working capital totaled $316.1
million, including $234.5 million of cash and cash equivalents. At December 31, 2004, the current
ratio was 9.0 to 1 and working capital totaled $349.3 million, including cash and cash equivalents
of $278.6 million. Total debt outstanding at the end of the first quarter 2005 and at year-end
2004 was $200.1 million. Net cash flow from operating activities during the first quarter 2005 equaled $7.3 million,
compared to first quarter 2004 cash flow from operations of $18.6 million, which included the
positive impact of a legal settlement of $2.5 million, as increased net income in the first quarter
of 2005 was more than offset by increased working capital levels resulting from higher sales and
order activity. During the first quarter 2005, the Company acquired Purafil for $42.7 million, paid
common stock dividends of $3.4 million, repurchased a total of 117,271 shares of Company common
stock for $3.6 million, and invested $2.5 million in net capital expenditures. Management expects that the Companys planned capital requirements, which consist of capital
expenditures, dividend payments and its stock repurchase program, will be financed by operations
and existing cash balances. In addition, the Companys revolving credit facility provides
additional financial strength to support the Companys objectives including strategic acquisitions. Outlook Orders booked during the first quarter of 2005 equaled $116.4 million versus $92.0 million during
the first quarter of 2004, resulting in a backlog of $143.9 million at the end of the first quarter
2005. The Companys strong order intake during the quarter is further evidence of a strong
manufacturing economy. Expected operating cash flows coupled with the Companys current cash
reserves and available credit under the Companys $200.0 million revolving credit facility will
provide substantial resources to fund the Companys ongoing business development efforts which
include internal and external growth initiatives as well as selected stock repurchases. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in conformity with U.S. generally accepted
accounting principles. The preparation of these financial statements requires the use of
estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the periods presented. We continually evaluate the estimates, judgments, and assumptions used to prepare the consolidated
financial statements. In general, our estimates are based on historical experience, on information
from third party professionals and on various other judgments and assumptions that are believed to
be reasonable under the current facts and circumstances. Actual results could differ from the
current estimates made by the Company. We have identified certain accounting policies and
estimates, described
below, that are the most critical to the portrayal of our current financial condition and results
of operations. 20




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##### Table of Contents



Loss Contingencies and Legal Costs We record loss contingencies as a liability when it is
probable that a liability has been incurred and the amount of the loss is reasonably estimable.
Estimated legal costs expected to be incurred in connection with loss contingencies are accrued in
the consolidated financial statements. We believe the accounting estimates related to loss contingencies and legal costs to be critical
accounting estimates as contingent liabilities are often resolved over long time periods and
estimation of probable losses and costs to litigate requires forecasts that often depend on
judgments from third party experts and are based on potential actions by other third parties such
as plaintiffs, juries, and regulators. To better understand this accounting policy and its historic impact on the Company, readers should
refer to the Notes to Consolidated Condensed Financial Statements (Note 7) in this quarterly report
on Form 10-Q as well as Notes to Consolidated Financial Statements (Note 9)in the 2004 Annual
Report on Form 10-K for additional information regarding loss contingencies and legal costs. Impairment of Goodwill and Indefinite-Lived Intangible Assets The Company annually, or more
frequently if events or changes in circumstances indicate a need, tests the carrying amounts of
goodwill and indefinite-lived intangible assets for impairment. We identify impairment of goodwill by comparing the fair value of each of our reporting units with
the reporting units carrying amount. The fair value of each of our reporting units is derived
from an estimate of future discounted cash flows including an estimate for terminal value. We
utilize a 10 percent discount rate, and a growth assumption of 2 percent in perpetuity to calculate
terminal value. Potential goodwill impairment is identified if a reporting units carrying amount
is more than a reporting units fair value. If this occurs, normally a third-party valuation
specialist is utilized to assist the Company in determining the implied fair value of the reporting
units goodwill. The amount of any actual impairment loss is calculated by comparing the implied
fair value of the reporting units goodwill with the carrying amount of the reporting units
goodwill. Trademarks are the Companys only indefinite-lived intangible assets. We identify impairment of
these trademarks by comparing their fair value to their carrying amounts. The fair value of the
trademarks are calculated based on estimates of discounted future cash flows including an estimates
for terminal values related to the net amount of royalty expenses avoided due to the existence of
the trademarks. We believe the accounting estimates related to impairment of goodwill and indefinite-lived
intangible assets to be critical accounting estimates because: the estimate of discounted future
cash flows and terminal values, while based on reasonable and supportable assumptions and
projections, requires the Companys subjective judgments; the time periods for estimating future
cash flows is often lengthy which increases the sensitivity to assumptions made; projected outcomes
based on the assumptions made can vary; and the calculation of implied fair value is inherently
subject to estimates. 21




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##### Table of Contents



To better understand this accounting policy and its impact on the Company, readers should refer to
Notes to Consolidated Condensed Financial Statements (Note 8) in this quarterly report on Form 10-Q
as well as Notes to Consolidated Financial Statements (Note 10)in the 2004 Annual Report on Form
10-K for additional information regarding goodwill and intangible assets. Impairment of Long-Lived Assets We continually evaluate whether events and circumstances have
occurred that indicate the remaining estimated useful lives of long-lived assets including fixed
assets and amortizable intangible assets may warrant revision or that remaining balances may not be
recoverable. When factors indicate that such costs should be evaluated for possible impairment, we
use an estimate of undiscounted future cash flows over the remaining lives of the long-lived assets
that are compared to the carrying value of the asset to evaluate whether the asset costs are
recoverable. We believe the accounting estimates related to long-lived asset impairment to be critical
accounting estimates because: the estimate of undiscounted future cash flows, while based on
reasonable and supportable assumptions and projections, requires the Companys subjective
judgments; the time periods for estimating future cash flows is often lengthy which increases the
sensitivity to assumptions made; and projected outcomes based on the assumptions made can vary. To better understand this accounting policy and its impact on the Company, readers should refer to
Notes to Consolidated Condensed Financial Statements (Note 8) in this quarterly report on Form 10-Q
as well as Notes to Consolidated Financial Statements (Note 1 and Note 10)in the 2004 Annual
Report on Form 10-K for additional information regarding long-lived assets. Retirement Benefits Our employee pension and postretirement benefit costs and obligations
recorded in the financial statements are dependent on the Companys estimates provided to and used
by our actuaries in calculating such amounts. We believe the accounting estimates related to retirement benefits to be critical accounting
estimates because of the wide range of assumptions used in deriving yearly contribution and expense
amounts as well as the amounts recorded for retirement benefits in our financial statements.
Significant assumptions include judgments regarding discount rates, health care cost trend rates,
inflation rates, salary growth rates, long-term return on plan assets, retirement rates, mortality
rates and other factors. We have developed estimates based on historical experience, on information from third party
professionals and on various other judgments and assumptions that are believed to be reasonable
under the current facts and circumstances. Discount rate assumptions are based on investment
yields available on long-term bonds. Health care cost trend assumptions are developed based on
historical data, the near-term outlook, and on an assessment of likely long-term trends. 22




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##### Table of Contents



Inflation assumptions are based on an evaluation of external market indicators. Salary growth
assumptions reflect our long-term experience, the near-term outlook and assumed inflation.
Long-term return on plan assets is based on an evaluation of historical and expected returns of the
individual asset classes comprising the total plan assets. Retirement and mortality rates are
based primarily on actual plan experience and mortality tables. Actual results that differ from our assumptions are accumulated and amortized over future periods
and, therefore, generally affect our recognized expense and recorded obligation in such future
periods. While we believe that the assumptions used are appropriate, significant differences in
actual experience or significant changes in assumptions would affect our pension and postretirement
benefits costs and obligations. To better understand this accounting policy and its historic impact on the Company, readers should
refer to Notes to Consolidated Financial Statements (Note 9) in this quarterly report on form 10-Q
as well as Notes to Consolidated Financial Statements (Note 6)in the 2004 Annual Report on Form
10-K for additional information regarding costs, obligations, and assumptions for employee pension
and postretirement benefits. 4% Contingent Convertible Senior Subordinated Notes-In 2003, we sold $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 our common stock at a conversion price of $29.16 per share,
provided certain contingencies are met including that our common stock has traded above $34.99 for
20 out of 30 trading days for specified periods of time. In October 2004, the Financial Accounting Standards Board ratified the final consensus of the
Emerging Issues Task Force (EITF) on EITF 04-8, The Effects of Contingently Convertible
Instruments on Diluted Earnings per Share, which states that the impact of contingently
convertible instruments that are convertible into common stock upon the achievement of a specified
market price of the issuers shares, such as the Companys Notes, should be included in diluted
earnings per share computations regardless of whether or not the market price trigger has been met.
The provisions are now effective and, accordingly, prior period diluted earnings per share amounts
have been restated to adjust net income by adding back the after tax interest expense, including
amortization of debt issuance costs, attributable to the Notes and to increase total shares
outstanding by the number of shares that would be issuable upon conversion. In addition, the contingent interest feature of the Notes requires the Company to deduct for tax
purposes an amount of interest expense that is greater than the stated coupon rate on the Notes.
The deductibility for tax purposes of the additional interest beyond the stated coupon rate may
have to be recaptured, in part or in whole, if the Notes are redeemed for cash instead of converted
into Company common stock. Should this happen, depending on other factors, tax payments may
increase. 23




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##### Table of Contents



We believe that the impact the Notes have on the accounting for our diluted earnings per share
calculations, and tax-related account balances as discussed above are critical to the understanding
of our current financial condition and results of operations. Application of EITF 04-8 has caused
further dilution to our diluted earnings per share calculation, and redemption of the Notes for
cash may cause volatility in tax payments, cash flows and the liquidity of the Company. To better understand the Notes and their impact on the Companys financial reporting, readers
should refer to Notes to Consolidated Financial Statements (Note 2 and Note 3)in the 2004 Annual
Report on Form 10-K and other discussions in this quarterly report on Form 10-Q. Income Taxes We record deferred tax assets and liabilities using enacted tax rates for the effect
of differences between the book and tax basis of recorded assets and liabilities. These deferred
tax assets and liabilities are reviewed for recoverability by using estimates of future taxable
income streams and the impact of tax planning strategies. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that a portion of the deferred tax asset will not
be realized. Reserves are also estimated for ongoing audits regarding federal, state and
international issues that are currently unresolved. Income tax is provided based upon an effective
tax rate that is dependent upon tax regulations governing the regions in which we conduct business,
geographic composition of worldwide earnings, the availability of tax credits and other factors. We believe the accounting estimates related to income taxes to be critical accounting estimates
because the range of assumptions used to determine deferred tax assets and liabilities and to
record current tax benefits and liabilities, while based on reasonable and supportable information,
may change from year to year causing projected outcomes based on the assumptions to vary. To better understand this accounting policy and its impact on the Company, readers should refer to
the Notes to Consolidated Financial Statements (Note 8)in the 2004 Annual Report on Form 10-K for
additional information regarding income taxes. Inventories Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out basis. The carrying value of inventory is reduced for estimated obsolescence
by the difference between its cost and the estimated market value based upon assumptions regarding
future demand. We evaluate the inventory carrying value for potential excess and obsolete
inventory exposures by analyzing historical and anticipated demand. In addition, inventories are
evaluated for potential obsolescence due to the effect of known or anticipated engineering change
orders, new products, and other factors. We believe the accounting estimates related to inventories to be critical accounting estimates
because the range of assumptions used to determine the valuation of inventories, while based on
reasonable and supportable information, may change causing projected outcomes based on the
assumptions to vary. 24




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Forward-Looking
Statements

This Form 10-Q contains forward-looking statements within the meaning of the Securities
Exchange Act of 1934 regarding the Companys plans, expectations, estimates and beliefs.
Forward-looking statements are typically identified by words such as believes, anticipates,
estimates, expects, intends, will, may, potential, projects and other similar
expressions, including statements regarding pending litigation, general economic conditions,
competitive dynamics and the adequacy of capital resources. These forward-looking statements may
include, among other things, projections of the Companys financial performance, anticipated
growth, characterization of and the Companys ability to control contingent liabilities and
anticipated trends in the Companys businesses. These statements are only predictions, based on
the Companys current expectation about future events. Although the Company believes the
expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future
results, performance or achievements or that predictions or current expectations will be accurate.
These forward-looking statements involve risks and uncertainties, including those specifically
listed below, that could cause the Companys actual results, performance or achievements to differ
materially from those expressed or implied by the forward-looking statements. In addition, the Company or persons acting on its behalf may from time to time publish or
communicate other items that could also be construed to be forward-looking statements. Statements
of this sort are or will be based on the Companys estimates, assumptions, and projections and are
subject to risks and uncertainties, including those specifically listed below, that could cause
actual results to differ materially from those included in the forward-looking statements. Kaydon
does not undertake any responsibility to update its forward-looking statements or risk factors to
reflect future events or circumstances. The following risk factors could affect the Companys
operating results. The Companys customers economic cycles may affect Kaydons operating results. Many of our customers are in industries that are cyclical in nature and sensitive to changes in
general economic conditions and other factors, including capital spending levels. Such industries
include commercial and military aerospace, specialty electronics manufacturing equipment, power
generation, off-road and heavy industrial equipment, and other capital equipment manufacturing. As
a result, the demand for our products by these customers depends, in part, upon general economic
conditions. Historically, downward economic cycles have reduced customer demand for our products,
thereby reducing sales of our products and resulting in reductions to our revenues and net
earnings. Increased competition in the Companys key markets could result in a reduction in Kaydons revenues
and earnings and adversely affect the Companys financial condition. The industries in which we operate are fragmented and we face competition from multiple companies
across our diverse product lines. We expect competitive pressures from new products and aggressive
pricing to increase, which may cause us to lose market share or compel us to reduce prices to
remain competitive, which could result in
reduced levels of revenues and earnings. Our competitors include U.S. and non-U.S. 25




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companies, some
of which benefit from lower labor costs and fewer regulatory burdens. In addition, certain
competitors, including Perkin Elmer, Timken, SKF, and INA/FAG, are larger than Kaydon and may have
access to greater financial, technical, development, marketing, manufacturing, sales and
distribution services and other resources. Increased competition with these companies or new
entrants to our key markets could prevent price increases for our products or could require price
reductions for our products, which could adversely affect our financial condition, results of
operations, growth or liquidity. Future acquisitions may require Kaydon to incur costs and liabilities which may adversely affect
the Companys operating results. In addition to internal growth, our current strategy involves growth through acquisitions of
complementary businesses as well as acquisitions that diversify our product offerings. Like other
companies with similar growth strategies, we may be unable to continue to implement our growth
strategy, and this strategy may be ultimately unsuccessful. A portion of our expected future
growth in revenues may result from acquisitions. We frequently engage in evaluations of potential
acquisitions and negotiations for possible acquisitions, certain of which, if consummated, could be
significant to the Company. Although it is our policy only to acquire companies in transactions
which are accretive to both earnings and cash flow, any potential acquisitions may result in
material transaction expenses, increased interest and amortization expense, increased depreciation
expense and increased operating expense, any of which could have a material adverse effect on our
operating results. Acquisitions may entail integration and management of the new businesses to
realize economies of scale and control costs. In addition, acquisitions may involve other risks,
including diversion of management resources otherwise available for ongoing development of our
business and risks associated with entering new markets. We may not be able to identify suitable
acquisition candidates in the future, obtain acceptable financing or consummate any future
acquisitions. In addition, as a result of our acquisitions of other businesses, we may be subject
to the risk of unanticipated business uncertainties or legal liabilities relating to those acquired
businesses for which the sellers of the acquired businesses may not indemnify the Company. Future
acquisitions may also result in potentially dilutive issuances of securities. Political, economic and regulatory conditions inherent in the international markets in which Kaydon
participates could adversely affect the Companys financial condition. Typically, sales of our products from our foreign subsidiaries and from our domestic subsidiaries
selling to foreign locations account for approximately 33.0 percent of net sales. These foreign
sales could be adversely affected by changes in various foreign countries political and economic
conditions, trade protection measures, differing intellectual property rights and changes in
regulatory requirements that restrict the sales of our products or increase our costs. We generate significant revenues outside the United States. Currency fluctuations between the U.S.
dollar and the currencies in which those customers do business may have an impact on the demand for
our products in foreign countries where the U.S. dollar has increased in value compared to the
local currency. We cannot predict the
effects of exchange rate fluctuations upon our future operating results because of the 26




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number of
currencies involved, the variability of currency exposure and the potential volatility of currency
exchange rates. Relationships with customers and effective terms of sale frequently vary by country, often with
longer-term receivables than are typical in the United States. Kaydons manufactured critical performance products expose the Company to potential
litigation-related costs which may adversely affect the Companys financial position and operating
results. As a provider of critical performance products in a variety of industries including aerospace,
defense, construction, marine, medical, material handling, machine tool positioning and other
industrial applications, we face a risk of exposure to claims in the event that the failure, use or
misuse of our products results, or is alleged to result, in bodily injury and/or property damage.
The Company, along with certain other companies, is named as a defendant in a lawsuit arising from
an August 2000 fatal accident involving a MH53E helicopter manufactured by Sikorsky Aircraft
Corporation. We believe that the Company has meritorious defenses to these claims including, but
not limited to, the fact that the bearing utilized in the helicopter involved in the accident was
inspected and approved prior to shipment by both U.S. government and Sikorsky Aircraft Corporation
inspectors. Further, we believe that the alleged damages claimed in this lawsuit, and the
associated legal costs, will be fully covered under our insurance policy, but it is possible that
such costs will not be covered by insurance and, if so, we will incur unknown additional direct
costs. These claims have not been finally resolved or settled. In the past, costs related to legal proceedings and settlements have had a material effect on our
business, financial condition, results of operations and liquidity. We cannot assure you that the
ultimate cost of current known or future unknown litigation and claims will not exceed managements
current expectations and it is possible that such costs could have a material adverse effect on the
Company. In addition, litigation is time consuming and could divert management attention and
resources away from our business. Failing to continue to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 may adversely affect investor perceptions and the market value of Company common stock. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report of
managements assessment of the effectiveness of our system of internal control over financial
reporting as part of our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
Our independent registered public accounting firm has included two reports, one on their assessment
of the effectiveness of our system of internal control, and one on their evaluation of managements
assessment. In order to issue our report, we must document both the design of the system of
internal control, and the testing processes that support our evaluation and conclusion. While we
and our independent registered public accounting firm believe that we maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2004,
based on the criteria established by the Committee of Sponsoring Organizations of the 27




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Treadway
Commission, the requirements of Section 404 are ongoing, and, if subsequent to December 31, 2004 we
or our independent registered public accounting firm determine that the internal controls are not
effective, as defined under Section 404, investor perceptions of Kaydon may be adversely affected. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks, which exist as part of our ongoing business operations
including interest rates and foreign currency exchange rates. The exposure to market risk for
changes in interest rates relates primarily to investments in cash and cash equivalents. All
highly liquid investments, including highly liquid debt and investment instruments purchased with
an original maturity of three months or less, are considered cash equivalents. We place our
investments in cash equivalents with high credit quality issuers and limit the amount of exposure
to any one issuer. A 26 basis point decrease in interest rates (10 percent of the Companys
weighted average investment interest rate for 2005) would have an immaterial impact on the
Companys pre-tax earnings. We conduct business in various foreign currencies, primarily in
Europe, Canada, Mexico, and Japan. Therefore, changes in the value of currencies of these
countries affect our financial position and cash flows when translated into U.S. dollars. We have
mitigated and will continue to mitigate a portion of our currency exposure through operation of
decentralized foreign operating companies in which many costs are local currency based. In
addition, periodically, we enter into derivative financial instruments in the form of forward
foreign exchange contracts to reduce the effect of fluctuations in foreign exchange rates. A 10
percent change in the value of all foreign currencies would have an immaterial effect on the
Companys financial position and cash flows. 
 ITEM 4. CONTROLS AND PROCEDURES Kaydons management is responsible for establishing and maintaining effective disclosure controls
and procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934. As of the
end of the period covered by this report, the Company performed an evaluation, under the
supervision and with the participation of the Companys management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and
procedures, provided that the evaluation of Kaydons disclosure controls and procedures did not
include an evaluation of the effectiveness of the internal control over financial reporting for the
Purafil business, as described further below. Based upon that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures provide reasonable assurance that the material information required to be disclosed by
the Company in the reports that it files or submits to the Securities and Exchange Commission under
the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Commissions rules and forms. No changes were made to the Companys
internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting. On January
7, 2005 Kaydon purchased Purafil, Inc. for $42.7 million. Purafil reported financial results that
are included in this report for the quarter
ended April 2, 2005. Purafils sales during the quarter ended April 2, 2005 equaled $4.6 28




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million.
Because it had been a privately held company, Purafils internal controls over financial reporting
have not been documented and tested. As part of our integration process we will incorporate our
controls and procedures into Purafil by December 31, 2005. 
 PART II. OTHER INFORMATION 
 ITEM 1.
    
    LEGAL PROCEEDINGS
 See the discussion in Notes to Consolidated Condensed Financial
Statements (Note 7), which discussion is incorporated herein by
reference. 
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (a) None (b) Not applicable (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 2005: Total Number ofTotal
    
    
    Average
    
    
    Shares Purchased
    
    
    Maximum Number ofNumber
    
    
    Price
    
    
    as
    
    
    Shares that MayOf Shares
    
    
    Paid
    
    
    Part of Publicly
    
    
    Yet be PurchasedPeriod
    
    Purchased
    
    
    Per Share
    
    
    Announced Plan
    
    
    Under the Plan (1)January 1 to January 29
    
    
    17,771
    
    
    $
    31.37
    
    
    
    17,771
    
    
    
    1,008,065January 30 to February 26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,008,065February 27 to April 2
    
    
    99,500
    
    
    
    30.51
    
    
    
    99,500
    
    
    
    908,565Total
    
    
    117,271
    
    
    $
    30.64
    
    
    
    117,271
    
    
    
    908,565
    29




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ITEM 6.
    
    EXHIBITS
 (a) Exhibit No.
    
    Description2
    
    Stock Purchase Agreement dated as of January 7, 2005 by and
among the Company, the shareholders of Purafil, Inc. and Purafil Europa B.V.
(previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
filed January 10, 2005 and incorporated herein by reference)10
    
    Kaydon Corporation Executive Management Bonus Program
(previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
filed March 7, 2005 and incorporated herein by reference)12
    
    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
 30




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. KAYDON CORPORATIONMay 10, 2005
    
    /s/ Brian P. CampbellBrian P. CampbellChairman, President, Chief Executive Officer and
Chief Financial Officer(Principal Executive Officer and Principal
Financial Officer)May 10, 2005
    
    /s/ Kenneth W. CrawfordKenneth W. CrawfordVice President and Corporate
Controller

(Principal Accounting Officer)
 31




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EXHIBIT INDEX Exhibit No.
    
    Description2
    
    Stock Purchase Agreement dated as of January 7, 2005 by and among the Company, the
shareholders of Purafil, Inc. and Purafil Europa B.V. (previously filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K filed January 10, 2005 and incorporated herein by
reference)10
    
    Kaydon Corporation Executive Management Bonus Program (previously filed as Exhibit 10.1 to
the Companys Current Report on Form 8-K filed March 7, 2005 and incorporated herein by
reference)12
    
    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