##### 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 September 30, 2000 |  | Commission File No. 0-12640

KAYDON CORPORATION
(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 13-3186040
(I.R.S. Employer Identification No.)

|                                                                                                   |  |                 
|-------------------------------------------------------------------------------------------------- |  | ----------------
|315 E. Eisenhower Parkway, Suite 300, Ann Arbor, Michigan
(Address of principal executive offices) |  | 48108
(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  NO

Common Stock Outstanding at November 3, 2000  29,906,770 shares, $.10 par
value.





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TABLE OF CONTENTS



|                               |                                                                                                                             |  |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I - FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS                                                                                               
|                               | CONSOLIDATED CONDENSED BALANCE SHEETS - SEPTEMBER 30, 2000 AND DECEMBER 31, 1999                                           
|                               | CONSOLIDATED CONDENSED STATEMENTS OF INCOME - QUARTER AND FIRST THREE QUARTERS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
|                               | CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - FIRST THREE QUARTERS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999        
|                               | NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS                                                                       
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                              
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         
|PART II. OTHER INFORMATION    
|                               | ITEM 1. LEGAL PROCEEDINGS                                                                                                  
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                                                   
|                               | SIGNATURES                                                                                                                 
|Financial Data Schedule       



---



KAYDON CORPORATION FORM 10-Q

FOR THE QUARTER ENDED September 30, 2000

INDEX

|                                |                                                                                                                             |  |          |        | 
|------------------------------- | --------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------ | 
|                                |                                                                                                                             |  | Page No.
|                                |                                                                                                                             |  |         
|Part I  Financial Information:
|                               
|                               
|                               
|                               
|                                | Item 1. Financial Statements                                                                                               
|                               
|                               
|                               
|                               
|                                | Consolidated Condensed Balance Sheets -
September 30, 2000 and December 31, 1999                                            |  |          | 1      | 
|                               
|                               
|                               
|                               
|                                | Consolidated Condensed Statements of Income -
Quarter and First Three Quarters Ended September 30, 2000
and October 2, 1999 |  |          | 2      | 
|                               
|                               
|                               
|                               
|                                | Consolidated Condensed Statements of Cash Flows -
First Three Quarters Ended September 30, 2000 and
October 2, 1999         |  |          | 3      | 
|                               
|                               
|                               
|                               
|                                | Notes to Consolidated Condensed Financial Statements                                                                        |  |          | 4 - 11 | 
|                               
|                               
|                               
|                               
|                                | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations                               |  |          | 11 -15 | 
|                               
|                               
|                               
|                               
|                                | Item 3. Quantitative and Qualitative Disclosures About
Market Risk                                                          |  |          | 15     | 
|                               
|                               
|                               
|                               
|Part II  Other Information:   
|                               
|                               
|                               
|                               
|                                | Item 1.  Legal Proceedings                                                                                                 |  |          | 16     | 
|                               
|                               
|                               
|                               
|                                | Item 6.  Exhibits and Reports on Form 8-K                                                                                  |  |          | 16     | 
|                               
|                               
|                               
|                               
|                                | Signatures                                                                                                                  |  |          | 17     | 





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##### Table of Contents









ITEM 1. FINANCIAL STATEMENTSKAYDON CORPORATION




|                                                                   |                                            |   |                    |             |                   |   |              |             | 
|------------------------------------------------------------------ | ------------------------------------------ | - | ------------------ | ----------- | ----------------- | - | ------------ | ----------- | 
|                                                                   |                                            |   | September 30, 2000 |             | December 31, 1999
|                                                                   |                                            |   |                    |             |                  
|                                                                   |                                            |   | (Unaudited)       
|Assets:                                                           
|Cash and cash equivalents                                          |                                            | $ | 100,038,000        |             |                   | $ | 89,749,000   |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Accounts receivable, net                                           |                                            |   | 55,068,000         |             |                   |   | 48,776,000   |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Inventories, net                                                   |                                            |   | 65,952,000         |             |                   |   | 61,008,000   |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other current assets                                               |                                            |   | 12,470,000         |             |                   |   | 12,020,000   |            
|                                                                   |                                            |   |                    |             |                   |   |              |            
|Total current assets                                               |                                            |   | 233,528,000        |             |                   |   | 211,553,000  |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Plant and equipment, net                                           |                                            |   | 102,958,000        |             |                   |   | 98,844,000   |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cost in excess of net tangible
assets of purchased businesses, net |                                            |   | 106,384,000        |             |                   |   | 75,081,000   |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other assets                                                       |                                            |   | 22,287,000         |             |                   |   | 21,271,000   |            
|                                                                   |                                            |   |                    |             |                   |   |              |            
|Total assets                                                       |                                            | $ | 465,157,000        |             |                   | $ | 406,749,000  |            
|                                                                   |                                            |   |                    |             |                   |   |              |            
|Liabilities and Shareholders Equity :                            
|Accounts payable                                                   |                                            | $ | 13,670,000         |             |                   | $ | 11,360,000   |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Accrued expenses                                                   |                                            |   | 45,536,000         |             |                   |   | 42,823,000   |            
|                                                                   |                                            |   |                    |             |                   |   |              |            
|Total current liabilities                                          |                                            |   | 59,206,000         |             |                   |   | 54,183,000   |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Long-term debt                                                     |                                            |   | 47,536,000         |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Long-term liabilities                                              |                                            |   | 44,815,000         |             |                   |   | 35,616,000   |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Shareholders equity:                                             
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Common stock                                                       |                                            |   | 3,676,000          |             |                   |   | 3,667,000    |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Paid-in capital                                                    |                                            |   | 41,769,000         |             |                   |   | 40,942,000   |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Retained earnings                                                  |                                            |   | 416,948,000        |             |                   |   | 401,024,000  |            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Less  treasury stock, at cost                                     |                                            |   | (132,565,000       | )           |                   |   | (114,794,000 | )          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Less- restricted stock awards                                      |                                            |   | (9,905,000         | )           |                   |   | (10,833,000  | )          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Accumulated other comprehensive loss                               |                                            |   | (6,323,000         | )           |                   |   | (3,056,000   | )          
|                                                                   |                                            |   |                    |             |                   |   |              |            
|                                                                   |                                            |   | 313,600,000        |             |                   |   | 316,950,000  |            
|                                                                   |                                            |   |                    |             |                   |   |              |            
|                                                                   | Total liabilities and
shareholders equity |   | $                  | 465,157,000 |                   |   | $            | 406,749,000 | 
|                                                                   |                                            |   |                    |             |                   |   |              |            

See accompanying notes to consolidated condensed financial statements.

1



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##### Table of Contents



KAYDON CORPORATION




|                                |         |   |                |            |                            |   |                |            |              |   |             |            |  |   |             |            | 
|------------------------------- | ------- | - | -------------- | ---------- | -------------------------- | - | -------------- | ---------- | ------------ | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|                                |         |   | Quarter Ended  |            | First Three Quarters Ended
|                                |         |   |                |            |                           
|                                |         |   | Sept. 30, 2000 |            | Oct. 2, 1999               |   | Sept. 30, 2000 |            | Oct. 2, 1999
|                                |         |   |                |            |                            |   |                |            |             
|Net sales                       |         | $ | 81,292,000     |            |                            | $ | 73,725,000     |            |              | $ | 252,280,000 |            |  | $ | 247,369,000 |           
|                               
|                               
|                               
|                               
|Cost of sales                   |         |   | 51,579,000     |            |                            |   | 45,893,000     |            |              |   | 158,282,000 |            |  |   | 151,508,000 |           
|                                |         |   |                |            |                            |   |                |            |              |   |             |            |  |   |             |           
|Gross profit                    |         |   | 29,713,000     |            |                            |   | 27,832,000     |            |              |   | 93,998,000  |            |  |   | 95,861,000  |           
|                               
|                               
|                               
|                               
|Operating expenses              |         |   | 19,772,000     |            |                            |   | 8,452,000      |            |              |   | 56,976,000  |            |  |   | 27,399,000  |           
|                                |         |   |                |            |                            |   |                |            |              |   |             |            |  |   |             |           
|Operating income                |         |   | 9,941,000      |            |                            |   | 19,380,000     |            |              |   | 37,022,000  |            |  |   | 68,462,000  |           
|                               
|                               
|                               
|                               
|Interest income, net            |         |   | 1,310,000      |            |                            |   | 1,404,000      |            |              |   | 4,232,000   |            |  |   | 3,629,000   |           
|                                |         |   |                |            |                            |   |                |            |              |   |             |            |  |   |             |           
|Income before income taxes      |         |   | 11,251,000     |            |                            |   | 20,784,000     |            |              |   | 41,254,000  |            |  |   | 72,091,000  |           
|                               
|                               
|                               
|                               
|Provision for income taxes      |         |   | 4,164,000      |            |                            |   | 7,794,000      |            |              |   | 15,266,000  |            |  |   | 27,034,000  |           
|                                |         |   |                |            |                            |   |                |            |              |   |             |            |  |   |             |           
|Net income                      |         | $ | 7,087,000      |            |                            | $ | 12,990,000     |            |              | $ | 25,988,000  |            |  | $ | 45,057,000  |           
|                                |         |   |                |            |                            |   |                |            |              |   |             |            |  |   |             |           
|Weighted Average Common Shares:
|                               
|                               
|                               
|                               
|                                | Basic   |   |                | 30,011,000 |                            |   |                | 31,776,000 |              |   |             | 30,194,000 |  |   |             | 31,877,000 | 
|                               
|                               
|                               
|                               
|                                | Diluted |   |                | 30,035,000 |                            |   |                | 31,934,000 |              |   |             | 30,238,000 |  |   |             | 32,063,000 | 
|                               
|                               
|                               
|                               
|Earnings Per Share:            
|                               
|                               
|                               
|                               
|                                | Basic   |   | $              | .24        |                            |   | $              | .41        |              |   | $           | .86        |  |   | $           | 1.41       | 
|                               
|                               
|                               
|                               
|                                | Diluted |   | $              | .24        |                            |   | $              | .41        |              |   | $           | .86        |  |   | $           | 1.41       | 

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION




|                                                             |                                        |              |              |                            |              |             
|------------------------------------------------------------ | -------------------------------------- | ------------ | ------------ | -------------------------- | ------------ | ------------
|                                                             |                                        |              |              | First Three Quarters Ended
|                                                             |                                        |              |              |                           
|                                                             |                                        |              |              | Sept. 30, 2000             |              | Oct. 2, 1999
|                                                             |                                        |              |              |                           
|Cash flows from operating activities                         |                                        | $46,666,000  |              | $52,199,000               
|                                                             |                                        |              |              |                           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|Cash flows from (used in) investing activities:             
|                                                            
|                                                            
|                                                            
|                                                            
|Capital expenditures, net                                    |                                        | (9,838,000)  |              | (9,248,000)               
|                                                            
|                                                            
|                                                            
|                                                            
|Acquisitions of businesses, net                              |                                        | (47,130,000) |              |                           
|                                                             |                                        |              |              |                           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|Cash used in investing activities                            |                                        | (56,968,000) |              | (9,248,000)               
|                                                            
|                                                            
|                                                            
|                                                            
|Cash flows from (used in) financing activities:             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from issuance of common stock |              | 1,646,000    |                            | 2,598,000   
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Dividends paid                         |              | (10,147,000) |                            | (9,591,000) 
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Long-term debt:                       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                        | Issuance     |              | 47,400,000                 |             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                        | Retirement   |              | (64,000)                   |             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchase of treasury stock             |              | (17,736,000) |                            | (31,609,000)
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                        |              |              |                           
|                                                            
|                                                            
|                                                            
|                                                            
|Cash from (used in) financing activities                     |                                        | 21,099,000   |              | (38,602,000)              
|                                                             |                                        |              |              |                           
|                                                            
|                                                            
|                                                            
|                                                            
|Effect of exchange rate changes on cash
and cash equivalents |                                        | (508,000)    |              | (147,000)                 
|                                                             |                                        |              |              |                           
|                                                            
|                                                            
|                                                            
|                                                            
|Net increase in cash and cash equivalents                    |                                        | 10,289,000   |              | 4,202,000                 
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents  Beginning of period              |                                        | 89,749,000   |              | 96,203,000                
|                                                             |                                        |              |              |                           
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents  End of period                    |                                        | $100,038,000 |              | $100,405,000              
|                                                             |                                        |              |              |                           
|                                                            
|                                                            
|                                                            
|                                                            
|Cash expended for income taxes                               |                                        | $20,758,000  |              | $25,115,000               
|                                                             |                                        |              |              |                           
|                                                            
|                                                            
|                                                            
|                                                            
|Cash expended for interest                                   |                                        | $280,000     |             
|                                                             |                                        |              |              |                           

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION






|(1) |  | The accompanying unaudited consolidated condensed financial statements of
Kaydon Corporation and subsidiaries (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 year-end 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,
1999.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Inventories are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                |  |                    |            |                   |  |   |            | 
|--------------- |  | ------------------ | ---------- | ----------------- |  | - | ---------- | 
|                |  | September 30, 2000 |            | December 31, 1999
|                |  |                    |            |                  
|Raw Material    |  | $                  | 25,929,000 |                   |  | $ | 22,970,000 | 
|               
|               
|               
|               
|Work in Process |  |                    | 15,875,000 |                   |  |   | 15,372,000 | 
|               
|               
|               
|               
|Finished Goods  |  |                    | 24,148,000 |                   |  |   | 22,666,000 | 
|                |  |                    |            |                   |  |   |            | 
|                |  | $                  | 65,952,000 |                   |  | $ | 61,008,000 | 
|                |  |                    |            |                   |  |   |            | 



|(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 of net income, minimum pension liability adjustments and
foreign currency translation adjustments. Other comprehensive income, net
of tax, was approximately $(1,061,000) and $3,215,000, resulting in
comprehensive income of $6,026,000 and $16,205,000 for the quarters ended
September 30, 2000 and October 2, 1999. For the first three quarters,
other comprehensive income, net of tax, was approximately ($3,267,000) and
$243,000, resulting in year to date comprehensive income of $22,721,000
and $45,300,000 for the first three quarters ended September 30, 2000 and
October 2, 1999.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4



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##### Table of Contents





|(4) |  | The following table reconciles the numerators and denominators used in
the calculation of basic and diluted earnings per share for the periods
presented.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             |                                                                                       |  |            |                |                            |              |            |            |  | 
|-------------------------------------------- | ------------------------------------------------------------------------------------- |  | ---------- | -------------- | -------------------------- | ------------ | ---------- | ---------- |  | 
|                                             |                                                                                       |  |            | Quarter Ended 
|                                             |                                                                                       |  |            |               
|                                             |                                                                                       |  |            | Sept. 30, 2000 |                            | Oct. 2, 1999
|                                             |                                                                                       |  |            |                |                            |             
|Numerators:                                 
|                                             | Numerators for both
basic and diluted earnings                                       
|                                            
|                                            
|                                            
|                                            
|                                             | per share, net income                                                                 |  | $          | 7,087,000      |                            |              | $          | 12,990,000 | 
|                                             |                                                                                       |  |            |                |                            |              |            |           
|Denominators:                               
|                                             | Denominators for basic
earnings per share, weighted average common shares outstanding |  |            | 30,011,000     |                            |              |            | 31,776,000 | 
|                                            
|                                            
|                                            
|                                            
|                                            
|                                            
|                                            
|                                            
|                                             | Potential dilutive shares resulting
from stock options and
restricted stock awards    |  |            | 24,000         |                            |              |            | 158,000    | 
|                                             |                                                                                       |  |            |                |                            |              |            |           
|Denominators for dilutive
earnings per share |                                                                                       |  | 30,035,000 |                |                            |              | 31,934,000 |           
|                                             |                                                                                       |  |            |                |                            |              |            |           
|Earnings per share:                         
|Basic                                        |                                                                                       |  | $          | .24            |                            |              | $          | .41        | 
|                                             |                                                                                       |  |            |                |                            |              |            |           
|Diluted                                      |                                                                                       |  | $          | .24            |                            |              | $          | .41        | 
|                                             |                                                                                       |  |            |                |                            |              |            |           
|                                            
|                                            
|                                            
|                                            
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                                       |  |            |                | First Three
Quarters Ended |             
|                                             |                                                                                       |  |            |               
|                                             |                                                                                       |  |            | Sept. 30, 2000 |                            | Oct. 2, 1999
|                                             |                                                                                       |  |            |                |                            |             
|Numerators:                                 
|                                            
|                                            
|                                            
|                                            
|                                             | Numerators for both basic and
diluted earnings per share, net income                  |  | $          | 25,988,000     |                            |              | $          | 45,057,000 | 
|                                             |                                                                                       |  |            |                |                            |              |            |           
|Denominators:                               
|                                            
|                                            
|                                            
|                                            
|                                             | Denominators for basic
earnings per share, weighted average common shares outstanding |  |            | 30,194,000     |                            |              |            | 31,877,000 | 
|                                            
|                                            
|                                            
|                                            
|                                            
|                                            
|                                            
|                                            
|                                             | Potential dilutive shares
resulting from stock options and restricted stock awards    |  |            | 44,000         |                            |              |            | 186,000    | 
|                                             |                                                                                       |  |            |                |                            |              |            |           
|Denominators for dilutive
earnings per share |                                                                                       |  | 30,238,000 |                |                            |              | 32,063,000 |           
|                                             |                                                                                       |  |            |                |                            |              |            |           
|Earnings per share:                         
|                                            
|                                            
|                                            
|                                            
|Basic                                        |                                                                                       |  | $          | .86            |                            |              | $          | 1.41       | 
|                                             |                                                                                       |  |            |                |                            |              |            |           
|Diluted                                      |                                                                                       |  | $          | .86            |                            |              | $          | 1.41       | 
|                                             |                                                                                       |  |            |                |                            |              |            |           

5



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##### Table of Contents





| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Options to purchase 392,350 shares of common stock at prices ranging from
$24.8125 to $33.3125 per share were outstanding during the third quarter
of 2000, 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. Options to purchase
169,350 shares of common stock at prices ranging from $31.4375 to $33.3125 per share were
outstanding during the third quarter of 1999, 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 accordance with the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share, potential dilutive shares
resulting from stock option plans used in the calculation of dilutive
earnings per share are based on an average of the potential dilutive
shares resulting from stock option plans for the periods presented.



|    |  |                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) |  | The Company operates through individual operating units which serve four
key market sectors. The market sectors served by the Company have several
related economic characteristics and attributes, including similar
products, distribution patterns and classes of customers. As a result,
the Company aggregates its operating units into a single segment of
Custom-Engineered Products.



| |  |                                                                                                                                                                
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The corporate component of income before taxes includes interest income,
goodwill amortization, depreciation and unallocated corporate
administrative expenses.

6



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Segment financial data (in thousands):

|                                         |  |                |        |              |  |        |        |              |  |            |        |         |  |   |        |              |  |   |       |  |  |   |        |  
|---------------------------------------- |  | -------------- | ------ | ------------ |  | ------ | ------ | ------------ |  | ---------- | ------ | ------- |  | - | ------ | ------------ |  | - | ----- |  |  | - | ------ | -
|                                         |  | Quarter Ended 
|                                         |  |               
|                                         |  | Sept. 30, 2000 |        | Oct. 2, 1999
|                                         |  |                |        |             
|                                         |  | Custom-        |        |              |  |        |        |              |  |            |        | Custom-
|                                         |  | Engineered     |        |              |  |        |        | Consolidated |  | Engineered |        |         |  |   |        | Consolidated
|                                         |  | Products       |        | Corporate    |  | Totals |        | Products     |  | Corporate  |        | Totals 
|                                         |  |                |        |              |  |        |        |              |  |            |        |        
|Sales                                    |  | $              | 81,609 |              |  |        |        |              |  | $          | 81,609 |         |  | $ | 76,040 |              |  |   |       |  |  | $ | 76,040 |  
|                                        
|                                        
|                                        
|                                        
|Elimination of intercompany sales        |  |                | (317   | )            |  |        |        |              |  |            | (317   | )       |  |   | (2,315 | )            |  |   |       |  |  |   | (2,315 | )
|                                         |  |                |        |              |  |        |        |              |  |            |        |         |  |   |        |              |  |   |       |  |  |   |        |  
|Total net sales                          |  | $              | 81,292 |              |  |        |        |              |  | $          | 81,292 |         |  | $ | 73,725 |              |  |   |       |  |  | $ | 73,725 |  
|                                         |  |                |        |              |  |        |        |              |  |            |        |         |  |   |        |              |  |   |       |  |  |   |        |  
|Segment earnings
before interest
and tax |  | $              | 19,213 |              |  |        |        |              |  | $          | 19,213 |         |  | $ | 19,655 |              |  |   |       |  |  | $ | 19,655 |  
|                                        
|                                        
|                                        
|                                        
|Unallocated amounts                      |  |                | 0      |              |  | $      | (7,962 | )            |  |            | (7,962 | )       |  |   | 0      |              |  | $ | 1,129 |  |  |   | 1,129  |  
|                                         |  |                |        |              |  |        |        |              |  |            |        |         |  |   |        |              |  |   |       |  |  |   |        |  
|Income before income taxes               |  | $              | 19,213 |              |  | $      | (7,962 | )            |  | $          | 11,251 |         |  | $ | 19,655 |              |  | $ | 1,129 |  |  | $ | 20,784 |  
|                                         |  |                |        |              |  |        |        |              |  |            |        |         |  |   |        |              |  |   |       |  |  |   |        |  

|                                         |  |                |         |              |  |        |         |              |  |            |         |         |  |   |         |              |  |   |       |  |  |   |         |  
|---------------------------------------- |  | -------------- | ------- | ------------ |  | ------ | ------- | ------------ |  | ---------- | ------- | ------- |  | - | ------- | ------------ |  | - | ----- |  |  | - | ------- | -
|                                         |  | Quarter Ended 
|                                         |  |               
|                                         |  | Sept. 30, 2000 |         | Oct. 2, 1999
|                                         |  |                |         |             
|                                         |  | Custom-        |         |              |  |        |         |              |  |            |         | Custom-
|                                         |  | Engineered     |         |              |  |        |         | Consolidated |  | Engineered |         |         |  |   |         | Consolidated
|                                         |  | Products       |         | Corporate    |  | Totals |         | Products     |  | Corporate  |         | Totals 
|                                         |  |                |         |              |  |        |         |              |  |            |         |        
|Sales                                    |  | $              | 253,458 |              |  |        |         |              |  | $          | 253,458 |         |  | $ | 252,632 |              |  |   |       |  |  | $ | 252,632 |  
|                                        
|                                        
|                                        
|                                        
|Elimination of intercompany sales        |  |                | (1,178  | )            |  |        |         |              |  |            | (1,178  | )       |  |   | (5,263  | )            |  |   |       |  |  |   | (5,263  | )
|                                         |  |                |         |              |  |        |         |              |  |            |         |         |  |   |         |              |  |   |       |  |  |   |         |  
|Total net sales                          |  | $              | 252,280 |              |  |        |         |              |  | $          | 252,280 |         |  | $ | 247,369 |              |  |   |       |  |  | $ | 247,369 |  
|                                         |  |                |         |              |  |        |         |              |  |            |         |         |  |   |         |              |  |   |       |  |  |   |         |  
|Segment earnings before interest and tax |  | $              | 59,654  |              |  |        |         |              |  | $          | 59,654  |         |  | $ | 69,530  |              |  |   |       |  |  | $ | 69,530  |  
|                                        
|                                        
|                                        
|                                        
|Unallocated Amounts                      |  |                | 0       |              |  | $      | (18,400 | )            |  |            | (18,400 | )       |  |   | 0       |              |  | $ | 2,561 |  |  |   | 2,561   |  
|                                         |  |                |         |              |  |        |         |              |  |            |         |         |  |   |         |              |  |   |       |  |  |   |         |  
|Income before income taxes               |  | $              | 59,654  |              |  | $      | (18,400 | )            |  | $          | 41,254  |         |  | $ | 69,530  |              |  | $ | 2,561 |  |  | $ | 72,091  |  
|                                         |  |                |         |              |  |        |         |              |  |            |         |         |  |   |         |              |  |   |       |  |  |   |         |  



| |  |                                                                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | There has been no change in the basis or measurement of segmentation
since the last annual report. Companies newly acquired during 2000 are
reported as part of the Custom-Engineered Products segment.



|(6) |  | At September 30, 2000, borrowings under the Companys revolving credit
facility totaled $47,400,000. The credit facility permits the Company to
borrow under several different interest rate options. The interest rate
on borrowings equaled 6.87 percent during the third quarter of 2000. The
credit facility contains certain restrictive covenants. The Company is in
compliance with all restrictive covenants contained in the credit facility
at
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |                                                                                                                                                                                               
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | September 30, 2000. After consideration of outstanding standby letters
of credits, the Company has available credit under its revolving credit
facility of $249,566,000 at September 30, 2000.



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) |  | On August 28, 2000, the Company acquired three businesses, which had
substantially identical ownership, known as the Tridan Group of companies.
The acquisition included the purchase of substantially all of the assets
of Tridan International, Inc., a manufacturer of specialty production
equipment for the commercial and residential air conditioning industry,
and the purchase of substantially all of the assets of Canfield
Technologies, Inc., and Affiliates, a manufacturer of environmentally safe
lead-free solders sold into the electronics, construction and specialty
manufacturing industries. In addition, the acquisition
included the purchase of all of the outstanding stock and certain real
estate formerly leased by Indiana Precision, Inc., a manufacturer of
specialty tooling for the plastic packaging industry. The purchase
price, net of cash acquired, for the Tridan Group of companies was $45.9
million. The Company utilized its revolving credit facility to finance
the acquisitions. The acquisitions have been accounted for using the
purchase method of accounting and accordingly the results of operations
have been included in the third quarter 2000 financial statements since
the effective acquisition date. The excess of cost over net assets
acquired of $34.3 million is being amortized on a straight-line basis
over 30 years.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On a pro forma, unaudited basis, as if the Tridan Group acquisition had
occurred as of January 1, 1999, net sales, net income, basic earnings per
share and diluted earnings per share for the first three quarters of 2000
would have been $271.8 million, $26.5 million, $.88 and $.88, and net
sales, net income, basic earnings per share and diluted earnings per
share for the 1999 year would have been $354.3 million, $59.8 million,
$1.89 and $1.88.



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(8) |  | In June of 1995, the Company, along with certain former officers and
directors of the Company and certain other companies and organizations,
was named as a defendant in a lawsuit commenced in Bankruptcy Court in the
Southern District of New York. The plaintiff was the Creditors Committee
formed in connection with the Chapter 11 Bankruptcy Proceeding of Keene
Corporation (Keene). That action, identified as the Transactions
Lawsuit, asserted claims against the Company arising from the Companys
1983 acquisition of certain assets of Keene, and Bairnco Corporations
1984 spin-off of the Companys common stock. As originally filed, the
Transactions Lawsuit alleged claims against the Company under state
fraudulent conveyance laws, tort claims under successor liability law, and
civil RICO claims. The Transactions Lawsuit seeks damages alleged by
plaintiffs to be an amount of $700 million, plus interest and punitive

8



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| |                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | damages against the defendants collectively. The RICO claims sought
trebling of those damages. The claims asserted in the Transactions
Lawsuit are similar to, and supplant, claims previously asserted in
certain class actions brought against the Company in 1993, purportedly on
behalf of certain persons with asbestos-related claims against Keene.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 1997, in connection with the Bankruptcy Courts confirmation of
Keenes Plan of Reorganization, the Keene Creditors Trust was created to,
among other things, prosecute this lawsuit, and the Trustees of that
Trust were substituted as the plaintiffs in place of the Keene Creditors
Committee. In addition, the case was transferred from the Bankruptcy
Court to the United States District Court for the Southern District of
New York. Subsequently, the Company and certain other defendants filed
motions to dismiss the complaint for failure to state a claim, and for
summary judgment on the grounds that the fraudulent conveyance claims and
certain related causes of action were barred by the statute of
limitations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 13, 1998, the Court granted in part and denied in part the
Companys motion to dismiss the complaint, and denied the Companys
motion for summary judgment. With respect to the motion for summary
judgment, the Court found that certain groups of asbestos claimants had
claims that were not time-barred, and therefore the plaintiffs could
assert claims against the Company for both actual fraudulent conveyance
and constructive fraudulent conveyance. With respect to the motion to
dismiss, the Court granted the Companys motion to dismiss the fraudulent
conveyance claim against it in connection with Bairnco Corporations 1984
spin-off of the Companys common stock, and dismissed all the RICO claims
asserted against the Company. The Court denied the Companys motion to
dismiss the successor liability claim, but noted the plaintiffs ability
to pursue such a claim was subject to their ability to pursue a
fraudulent conveyance claim.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 29, 1998, the Company filed a motion for reargument of the
Courts ruling that the plaintiffs claims for actual and constructive
fraudulent conveyance against the Company are not barred by the
applicable statute of limitations. On January 5, 1999, the Court issued
a decision on the Companys motion for reargument, which granted the
Companys motion for reargument with regard to the plaintiffs claims for
constructive fraudulent conveyance, and, with one minor exception, held
those claims were barred by the applicable statute of limitations and
dismissed them. However, the Court denied the Companys motion to
dismiss the actual fraudulent conveyance claims. Accordingly, as a
result of the Companys motions, the only claims remaining against the
Company are plaintiffs claims for actual fraudulent conveyance and for
successor liability. In addition, there is, on behalf of certain
individual judgment creditors, a

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| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | limited claim for constructive fraudulent conveyance. The Company does
not believe any recovery on this limited claim will be material. The
discovery stay previously in place has been lifted, and the discovery
phase is well underway.



| |                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In other decisions, the Court also dismissed the claims against all the
individual defendants except one, and against the professional
organizations that had been named as defendants in the case. However,
Bairnco and its other subsidiaries and former subsidiaries remain as
defendants in the case.



| |                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management believes it has meritorious defenses to the claims pending
against it in this litigation. Accordingly, no provision has been
reflected in the consolidated financial statements for any alleged
damages. A provision is recorded in the consolidated financial statements
equal to the Companys most current and best estimates to litigate these
legal actions.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Since June 1996, the Company and certain employees have received
subpoenas issued by the U.S. District Court in Bridgeport, Connecticut on
behalf of a grand jury investigating a May 9, 1996 accident involving a
Sikorsky helicopter (CH-53E) in which four persons died. The grand jury
requested and received documents and records, and Kaydon employee
testimony relating to inspection and product certification procedures at
the Kaydon facility that manufactured the bearings used in the Sikorsky
helicopter. In addition, a Mishap Board led by Sikorsky Aircraft Corporation personnel alleged
that product quality problems or deficiencies existed with respect to the
Kaydon bearing used in the Sikorsky helicopter described above. Kaydon
personnel were excluded from participation on this Mishap Board.
However, Kaydon has independently evaluated the available evidence and
refuted the Mishap Board findings in reports submitted to the Navy.
Subsequent incidents have occurred in the helicopter fleet even though
the bearings used were newly manufactured, inspected and approved by
Sikorsky and Navy personnel, reinforcing the Companys position that the
bearing quality was not the causative action in the May 9, 1996 accident.
During the first half of 1997, the estates of the four deceased
individuals filed civil suits against the Company. On July 6, 1998,
Sikorsky filed a claim against the Company in those same civil cases
claiming damages which they are alleged to have incurred following the
May 9, 1996 accident. In October 1998, Kaydons insurance company
reached settlement agreements with the estates of each plaintiff in the
four civil suits. All settlement amounts were fully covered under
Company insurance.



| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the second quarter of 2000, a $12,637,000 provision was recorded
in order to support the Companys most current and best estimates to
litigate the Transactions Lawsuit and the Sikorsky matter discussed
above. The change in the estimates during the second quarter of 2000
resulted

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| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | from current spending levels and substantial new information
regarding forecasted spending levels to complete the discovery stages of
these cases, and to try the cases by the end of 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Regarding the Sikorsky matter, during the third quarter of 2000, Kaydon
reached a settlement with Sikorsky Aircraft Corporation, and has been
engaged in negotiations toward a resolution of the U.S. government
investigation. During the third quarter, the Company recorded an
additional $9,100,000 provision to reflect the amount of the settlement
with Sikorsky Aircraft Corporation and the current estimated amount of a
potential settlement with the U.S. government, less amounts the Company
had previously reserved to litigate these matters. Kaydon has pursued a
global settlement in these matters even though it believes it has
meritorious defenses against claims relating to alleged quality problems
or deficiencies in its products. Company management believes that
resolving this protracted and costly litigation is in the best interest
of Kaydon. Absent any movement toward a resolution of these matters,
Kaydon would be faced with a multi-year litigation process.



| |                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Various other claims, lawsuits and environmental matters arising in the
normal course of business are pending against the Company. A provision is
recorded in the consolidated financial statements equal to the Companys
most current and best estimates to litigate these legal actions.

11



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##### Table of Contents






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

Results of Operations

During the third quarter of 2000, Kaydon Corporation and subsidiaries (the
Company) achieved sales of $81,292,000, up 10.3 percent from $73,725,000 in
the third quarter of 1999. Results for the quarter reflect recent acquisitions
and recoveries in certain markets served by Kaydon including sales of specialty
bearings to the semiconductor equipment market, industrial rings sold to the
railroad market, as well as sales to the specialty ball market. However, these
improvements were offset by the absence of recoveries in certain other key
markets including the heavy construction equipment and offshore oil markets.

Gross profit during the third quarter of 2000 of $29,713,000 was 36.6 percent
of sales, compared with $27,832,000 or 37.8 percent of sales in the third
quarter of 1999. The gross profit percentage achieved in the third quarter of
2000 was slightly below the gross profit percentages achieved during the last
several quarters, and reflects, in part, the effect of recently completed
acquisitions. Operating income during the third quarter of 2000 was $9,941,000
or 12.2 percent of sales as compared to $19,380,000 or 26.3 percent of sales in
the 1999 third quarter.

The operating income results were negatively impacted by a pre-tax $9,100,000
provision recorded during the third quarter of 2000 in connection with claims
related to the previously disclosed May 1996 accident involving a CH-53E
helicopter, which Sikorsky Aircraft Corporation was manufacturing for the U.S.
Navy (the Sikorsky Matter). The Sikorsky Matter involves a private civil
lawsuit and a U.S. government investigation. Sikorsky Aircraft Corporation
filed a lawsuit against the Company in 1998 claiming damages that Sikorsky
allegedly incurred following the accident. In addition, the U.S. Attorneys
Office in Bridgeport, Connecticut has been conducting a grand jury and civil
investigation of inspection and product certification procedures at one of
Kaydons manufacturing facilities.

During the third quarter, Kaydon reached a settlement with Sikorsky Aircraft
Corporation, and has been engaged in negotiations toward a resolution of the
U.S. government investigation. The $9,100,000 provision recorded during the
third quarter of 2000 reflects the amount of the settlement with Sikorsky
Aircraft Corporation and the current estimated amount of a potential settlement
with the U.S. government, less amounts the Company had previously reserved to
litigate these matters. The after tax effect of this charge was $5,733,000 or
$.19 per share. These legal actions as well as others are further discussed in
detail in the Notes to Consolidated Condensed Financial Statements.

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Kaydon has pursued a global settlement in the Sikorsky matter even though it
believes it has meritorious defenses against claims relating to alleged quality
problems or deficiencies in its products. Company management believes that
resolving this protracted and costly litigation is in the best interest of
Kaydon. Absent any movement toward a resolution of these matters, Kaydon would
be faced with a multi-year litigation process.

Third quarter sales and operating income results continue to reflect the
effects of softness in many of the heavy industrial equipment markets that
Kaydon products serve, including construction, mining, forestry and power
generation equipment. Particularly effected by the lack of demand from these
markets are Kaydons Cooper Roller Bearings subsidiary in the United Kingdom
and its Fluid Power Products division.

Certain charges for headcount reductions and fixed asset write-offs were
recorded during the first quarter of 2000 at Cooper Roller Bearings related to
the discontinuance of their power transmission parts business, and additional
charges related to further headcount reductions were recorded during the third
quarter of 2000. Also, as previously reported, during the second quarter the
Company began a restructuring of its Fluid Power Products division. The
restructuring involves the closing of one of the divisions four facilities
with its operations integrated into the other three divisional locations. The
restructuring of the Fluid Power Products division, involving total estimated
expenditures of approximately $2.0 million during 2000, is expected to result
in future annualized cost savings in excess of $2.0 million when fully
implemented. These changes will leave these operations leaner and more
focused, with greater operating efficiencies.

Amortization expense related to goodwill generated as a result of the two
strategic acquisitions completed by the Company in late 1999, as well as the
strategic acquisition completed in the third quarter of 2000 of the Tridan
Group of companies, negatively affected the third quarter compared to the same
period last year. The 1999 acquisitions on a whole, while currently adding
sales volume have yet to have a comparable operating income impact as the
Company is in the process of fully integrating the new businesses.

Net interest income of $1,310,000 during the third quarter of 2000 was down
$94,000 from $1,404,000 during last years comparable period, as higher
prevailing investment rates were offset by slightly lower cash balances and
interest expense on new bank borrowings related to the acquisition of the
Tridan Group of companies.

Third quarter 2000 net income, including the after tax effect of the litigation
charge of $5,733,000, was $7,087,000, or 8.7 percent of sales. Earnings per
share on a diluted basis, including the after tax effect of the litigation
charge of $.19, equaled $.24. Third quarter 1999 net income and diluted
earnings per share were $12,990,000 and $.41.

13



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The effective tax rate during the 2000 third quarter was 37.0 percent compared
to 37.5 percent in the third quarter 1999. The lower rate is due to more state
tax planning efforts.

Sales for the first three quarters of 2000 were $252,280,000, an increase of
2.0 percent over last years $247,369,000. Year to date sales increases over
last year reflect the impact of recent acquisitions, and recoveries in certain
markets served by Kaydon including sales of specialty bearings to the
semiconductor equipment market, industrial
rings sold to the railroad market, industrial sealing products and repairs, and
sales to the specialty ball market. However, these improvements were offset by
the absence of recoveries in certain other key markets including the heavy
construction equipment and offshore oil markets. As a result of the new
acquisitions and mix of products sold, gross profit for the first three
quarters of 2000 decreased to $93,998,000 or 37.3 percent of sales as compared
to $95,861,000 or 38.8 percent of sales during the first three quarters of
1999. Operating income during the first three quarters of 2000, including
special charges for litigation and settlement costs recorded in the second and
third quarters in the amount of $21,737,000, was $37,022,000 or 14.7 percent of
sales as compared to $68,462,000 or 27.7 percent of sales during the first
three quarters of 1999.

Net income for the first three quarters of 2000, including the after tax effect
($13.7 million or $.45 per share on a diluted basis) of the previously
mentioned litigation and settlement costs, was $25,988,000 (10.3 percent of
sales) or $.86 per share on a diluted basis. Net income for the first three
quarters of 1999 was $45,057,000 or 18.2 percent of sales, while earnings per
share on a diluted basis equaled $1.41.

Liquidity and Capital Resources

Working capital was $174,322,000 at September 30, 2000 reflecting a current
ratio of 3.9 to 1 compared to $157,370,000 and a current ratio of 3.9 to 1 at
year-end 1999. Cash flow from operations was $46,666,000 during the first
three quarters of 2000, down from a record operating cash flow of $52,199,000
for the same period in 1999.

Depreciation and amortization for the first three quarters of 2000 totaled
$13,134,000 compared to $11,931,000 in the first three quarters of 1999.
Increases are primarily due to the previously mentioned acquisitions completed
in late 1999 and during the third quarter of 2000.

Cash and cash equivalents equaled $100,038,000 at September 30, 2000, up
$10,289,000 over the balance at year-end 1999 of $89,749,000. This increase
reflects strong operating cash flow offset by capital expenditures of
$9,838,000, dividend payments of $10,147,000, and the repurchase of 769,472
shares of

14



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##### Table of Contents



common stock for $17,736,000.

Management expects that the Companys planned capital requirements for the
remainder of 2000, which consists of capital expenditures, dividend payments
and its stock repurchase program will be financed by operations and existing
cash balances.

Outlook

The Companys backlog at September 30, 2000 was $122,172,000 compared to
$117,621,000 at the end of 1999. Based upon current business indications,
including quoting activity and future business forecasts for Kaydon customers
end-markets, we believe orders will increase only slightly for the fourth
quarter of 2000 with a more significant increase not expected until 2001.
Specifically, it is expected that we will benefit from a rebound of capital
spending in the offshore oil market and growth in the construction equipment
market. Expected operating cash flows coupled with the
Companys current cash reserves and available credit under the Companys
$300,000,000 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.

Certain information in this Form 10-Q is forward-looking, such as the Companys
expectations regarding future financial performance, litigation expenses and
business development activity. The Company may not update these expectations to
reflect subsequent events. Such forward-looking information involves risks and
uncertainties that could significantly affect expected results. These risks
and uncertainties include, but are not limited to, uncertainties as to economic
conditions, market acceptance of new or enhanced versions of the Companys
products, the pricing of raw materials, changes in the competitive environments
in which the Companys businesses operate and the outcome of pending and future
litigation and governmental proceedings. Readers are cautioned to consider
these factors when relying on such forward-looking information.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to certain market risks which exist as part of its
ongoing business operations including interest rates and foreign currency
exchange rates. The Company believes that the potential effect of these risks
in the near term should not materially affect the Companys financial position.

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|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                            | 
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | 
|PART II. |  | OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|Item 1.  |  | Legal Proceedings See the discussion in the Notes to Consolidated Condensed Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                           
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|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|A.       |  | Exhibit No.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Description                               
|         |  | (27)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Financial Data Schedule (for SEC use only)
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|B.       |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|         |  | On September 5, 2000, the Company filed a Form 8-K under Item 5 reporting the
acquisition of Tridan International, Inc., a manufacturer of specialty
production equipment for the commercial and residential air conditioning
industry, the acquisition of Canfield Technologies, Inc., a manufacturer of
lead-free solders for the electronic and specialty manufacturing industries,
and the acquisition of Indiana Precision, Inc, a manufacturer of specialty
tooling for the plastic packaging industry

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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.

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|----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|                  |  | KAYDON CORPORATION                                                                                                                                                            
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|November 13, 2000 |  | /s/ Brian P. Campbell
Brian P. Campbell
Chairman, President, Chief Executive
Officer and Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)
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|November 13, 2000 |  | /s/ Kenneth W. Crawford
Kenneth W. Crawford
Vice President and Corporate Controller
(Principal Accounting Officer)                                                            

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Exhibit Index

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|----------- |  | ----------------------- |  | 
|Exhibit No. |  | Description            
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|27          |  | Financial Data Schedule
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