##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
 For Quarter Ended March 31, 2007
    
    Commission File No. 0-12640
 KAYDON CORPORATION
  Delaware
    
    13-3186040(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)Suite 300, 315 E. Eisenhower Parkway, Ann Arbor, Michigan
    
    48108(Address of principal executive offices)
    
    (Zip Code)
 (734) 747-7025
  þ o
  þ o o
  o þ




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##### 



Page No.Part I  Financial Information:Item 1. Financial StatementsConsolidated Condensed Balance Sheets -
March 31, 2007 (Unaudited) and December 31, 2006
    
    
    1Consolidated Condensed Statements of Operations (Unaudited) -
Quarters Ended March 31, 2007 and April 1, 2006
    
    
    2Consolidated Condensed Statements of Cash Flows (Unaudited) -
Quarters Ended March 31, 2007 and April 1, 2006
    
    
    3Notes to Consolidated Condensed Financial Statements (Unaudited)
    
    
    4 - 13Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    14 - 21Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23Part II  Other Information:Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 6. Exhibits
    
    
    25Signatures
    
    
    26Statement Re: Computation of Ratio of Earnings to Fixed ChargesCertification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 (Unaudited)March 31, 2007
    
    December 31, 2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    375,164,000
    
    
    $
    370,789,000Accounts receivable, net
    
    
    61,364,000
    
    
    
    54,066,000Inventories, net
    
    
    60,086,000
    
    
    
    56,043,000Other current assets
    
    
    10,621,000
    
    
    
    17,012,000Total current assets
    
    
    507,235,000
    
    
    
    497,910,000Property, plant and equipment, net
    
    
    99,869,000
    
    
    
    95,280,000Goodwill, net
    
    
    119,519,000
    
    
    
    119,484,000Other intangible assets, net
    
    
    20,521,000
    
    
    
    21,271,000Other assets
    
    
    3,226,000
    
    
    
    3,611,000Total assets
    
    $
    750,370,000
    
    
    $
    737,556,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    20,575,000
    
    
    $
    23,044,000Salaries and wages
    
    
    7,382,000
    
    
    
    9,961,000Taxes payable
    
    
    6,810,000
    
    
    
    4,350,000Interest payable
    
    
    2,844,000
    
    
    
    844,000Other accrued expenses
    
    
    13,458,000
    
    
    
    13,433,000Total current liabilities
    
    
    51,069,000
    
    
    
    51,632,000Long-term debt
    
    
    200,000,000
    
    
    
    200,000,000Long-term liabilities
    
    
    53,235,000
    
    
    
    52,744,000Total long-term liabilities
    
    
    253,235,000
    
    
    
    252,744,000Shareholders Equity:Common stock
    
    
    3,693,000
    
    
    
    3,693,000Paid-in capital
    
    
    44,227,000
    
    
    
    43,889,000Retained earnings
    
    
    581,636,000
    
    
    
    566,788,000Less  Treasury stock, at cost
    
    
    (191,304,000
    )
    
    
    (188,708,000
    )Accumulated other comprehensive income
    
    
    7,814,000
    
    
    
    7,518,000Shareholders equity
    
    
    446,066,000
    
    
    
    433,180,000Total liabilities and shareholders equity
    
    $
    750,370,000
    
    
    $
    737,556,000
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KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 First Quarter EndedMarch 31, 2007
    
    April 1, 2006Net sales
    
    $
    106,897,000
    
    
    $
    101,505,000Cost of sales
    
    
    62,059,000
    
    
    
    59,962,000Gross profit
    
    
    44,838,000
    
    
    
    41,543,000Selling, general and
administrative expenses
    
    
    18,547,000
    
    
    
    17,915,000Operating income
    
    
    26,291,000
    
    
    
    23,628,000Interest expense
    
    
    (2,387,000
    )
    
    
    (2,411,000
    )Interest income
    
    
    4,625,000
    
    
    
    3,396,000Income before income taxes
    
    
    28,529,000
    
    
    
    24,613,000Provision for income taxes
    
    
    10,299,000
    
    
    
    8,024,000Net income
    
    $
    18,230,000
    
    
    $
    16,589,000Weighted-average common shares:Basic
    
    
    27,874,000
    
    
    
    27,843,000Diluted
    
    
    34,815,000
    
    
    
    34,761,000Earnings per share:Basic
    
    $
    0.65
    
    
    $
    0.60Diluted
    
    $
    0.57
    
    
    $
    0.52Dividends declared per share
    
    $
    0.12
    
    
    $
    0.12
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KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 First Quarter EndedMarch 31, 2007
    
    April 1, 2006Cash flows from operating activities
    
    $
    18,118,000
    
    
    $
    15,052,000Cash flows used in investing activities:Additions to property, plant and equipment, net
    
    
    (7,384,000
    )
    
    
    (4,106,000
    )Cash used in investing activities
    
    
    (7,384,000
    )
    
    
    (4,106,000
    )Cash flows from (used in) financing activities:Cash dividends paid
    
    
    (3,382,000
    )
    
    
    (3,378,000
    )Purchase of treasury stock
    
    
    (3,239,000
    )
    
    
    (2,327,000
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    802,000Excess tax benefits from stock-based compensation
    
    
    64,000
    
    
    
    462,000Payments on debt
    
    
    
    
    
    
    (16,000
    )Cash used in financing activities
    
    
    (6,557,000
    )
    
    
    (4,457,000
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    198,000
    
    
    
    289,000Net increase in cash and cash equivalents
    
    
    4,375,000
    
    
    
    6,778,000Cash and cash equivalents  Beginning of period
    
    
    370,789,000
    
    
    
    320,804,000Cash and cash equivalents  End of period
    
    $
    375,164,000
    
    
    $
    327,582,000Cash paid for income taxes
    
    $
    1,479,000
    
    
    $
    1,181,000Cash paid for interest
    
    
    
    
    
    
    
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KAYDON CORPORATION
 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (UNAUDITED)
 (1)
    
    Basis of Presentation:The accompanying unaudited consolidated condensed financial statements of Kaydon Corporation
and subsidiaries (Kaydon or the Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included, and such adjustments are of a normal recurring
nature. The December 31, 2006 consolidated condensed balance sheet data was derived from
audited financial statements, but does not include all disclosures required by generally
accepted accounting principles. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys annual report on Form
10-K for the year ended December 31, 2006.(2)
    
    Cash and Cash Equivalents:The Company considers all highly liquid debt and investment instruments purchased with a
maturity of three months or less to be cash equivalents. At March 31, 2007, the Company had
$119.3 million invested in U.S. Government treasury bills, $115.7 million invested in
various money market and other short-term funds, $116.4 million invested in investment grade
prime commercial paper of several United States issuers, and $20.4 million invested in
time-deposits and other interest bearing accounts.(3)
    
    Inventories:Inventories are summarized as follows:
 March 31, 2007
    
    December 31, 2006Raw Material
    
    $
    22,337,000
    
    
    $
    20,851,000Work in Process
    
    
    13,955,000
    
    
    
    11,828,000Finished Goods
    
    
    23,794,000
    
    
    
    23,364,000$
    60,086,000
    
    
    $
    56,043,000
 (4)
    
    Comprehensive Income:Comprehensive income reflects the change in equity of a business enterprise during a period
from transactions and other events, and from circumstances involving non-owner sources. For
the Company, comprehensive income consists of net income and other comprehensive income
which is comprised primarily of foreign currency translation
adjustments. Other comprehensive income, net of tax, was approximately $0.3 million and
$0.5 million, resulting in comprehensive income of $18.5 million and $17.0 million for the
quarters ended March 31, 2007 and April 1, 2006.
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(5)
    
    Earnings per Share:The following table reconciles the numerators and denominators used in the calculations of
basic and diluted earnings per share for the periods presented.
 First Quarter EndedMarch 31, 2007
    
    
    April 1, 2006Numerators:Numerators for basic earnings per
share, net income
    
    $
    18,230,000
    
    
    $
    16,589,000Interest and debt issuance costs
amortization related to Contingent
Convertible Notes, net of taxes
    
    
    1,488,000
    
    
    
    1,503,000Numerators for diluted earnings per
share
    
    $
    19,718,000
    
    
    $
    18,092,000Denominators:Denominators for basic earnings
per share, weighted-average common
shares outstanding
    
    
    27,874,000
    
    
    
    27,843,000Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units
    
    
    82,000
    
    
    
    59,000Dilutive shares resulting from
Contingent Convertible Notes
    
    
    6,859,000
    
    
    
    6,859,000Denominators for diluted
earnings per share
    
    
    34,815,000
    
    
    
    34,761,000Earnings per share:Basic
    
    $
    0.65
    
    
    $
    0.60Diluted
    
    $
    0.57
    
    
    $
    0.52
 The Company has outstanding $200.0 million of 4% Contingent Convertible Senior
Subordinated Notes due 2023 (the Notes). The Notes are convertible into a total of
6,858,710 shares of Company common stock at a conversion price of $29.16 per share, provided
certain contingencies are met. The Notes become convertible during any calendar quarter if
the closing sale price of Company common stock is more than $34.99 for at least 20 trading
days in a period of 30 consecutive trading days ending on the last trading day of the
preceding calendar quarter. Based on this formula, holders will be able to convert their
Notes during the second quarter of 2007. The Notes are discussed further in Note 7.
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(6)
    
    Business Segment Information:The Company operates through operating segments for which separate financial information is
available, and for which operating results are evaluated regularly by the Companys chief
operating decision maker in determining resource allocation and assessing performance.
Certain of the operating segments have similar economic characteristics, as well as other
common attributes, including nature of the products and production processes, distribution
patterns and classes of customers. The Company aggregates these operating segments for
reporting purposes. Certain other operating segments do not exhibit the common attributes
mentioned above and, therefore, information about them is reported separately. Still other
operating segments do not meet the quantitative thresholds for separate disclosure and their
information is combined and disclosed as Other.The Company has three reportable segments and other operating segments engaged in the
manufacture and sale of the following:Friction and Motion Control Products complex components used in specialized robotics,
medical, aerospace, defense, security, electronic, material handling, construction and other
industrial applications. Products include anti-friction bearings, split roller bearings,
specialty balls and retaining devices.Velocity Control Products complex components used in specialized robotics, material
handling, machine tool, medical, amusement and other industrial applications. Products
include industrial shock absorbers, safety shock absorbers, velocity controls, gas springs
and rotary dampers.Sealing Products complex and standard ring and seal products used in demanding industrial,
aerospace and defense applications. Products include engine rings, sealing rings and shaft
seals.Other filter elements and liquid and gas-phase air filtration systems, metal alloys,
machine tool components, presses, dies and benders used in a variety of industrial
applications.The accounting policies of the operating segments are the same as those of the Company.
Segment performance is evaluated based on segment operating income (which includes an
estimated provision for state income taxes) and segment assets.Items not allocated to segment operating income include certain amortization and corporate
administrative expenses, and other amounts. Corporate assets consist of cash and cash
equivalents, fixed assets and certain prepaid expenses. The selling price for transfers
between operating segments and geographic areas is generally based on cost plus a mark-up.
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First Quarter EndedMarch 31, 2007
    
    April 1, 2006Net salesFriction and Motion Control ProductsExternal customers
    
    $
    60,630,000
    
    
    $
    57,062,000Intersegment
    
    
    57,000
    
    
    
    31,00060,687,000
    
    
    
    57,093,000Velocity Control ProductsExternal customers
    
    
    15,669,000
    
    
    
    14,518,000Sealing ProductsExternal customers
    
    
    12,033,000
    
    
    
    10,835,000Intersegment
    
    
    (40,000
    )
    
    
    (23,000
    )11,993,000
    
    
    
    10,812,000OtherExternal customers
    
    
    18,565,000
    
    
    
    19,090,000Intersegment
    
    
    (17,000
    )
    
    
    (8,000
    )18,548,000
    
    
    
    19,082,000Total consolidated net sales
    
    $
    106,897,000
    
    
    $
    101,505,000
 First Quarter EndedMarch 31, 2007
    
    April 1, 2006Operating incomeFriction and Motion Control Products
    
    $
    16,340,000
    
    
    $
    15,919,000Velocity Control Products
    
    
    4,093,000
    
    
    
    3,692,000Sealing Products
    
    
    2,456,000
    
    
    
    1,000,000Other
    
    
    2,608,000
    
    
    
    1,919,000Total segment operating income
    
    
    25,497,000
    
    
    
    22,530,000State income tax provision
included in segment operating
income
    
    
    743,000
    
    
    
    711,000Items not allocated to segment
operating income
    
    
    51,000
    
    
    
    387,000Interest expense
    
    
    (2,387,000
    )
    
    
    (2,411,000
    )Interest income
    
    
    4,625,000
    
    
    
    3,396,000Income before income taxes
    
    $
    28,529,000
    
    
    $
    24,613,000
 7




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First Quarter EndedMarch 31, 2007
    
    April 1, 2006Depreciation and amortizationFriction and Motion Control Products
    
    $
    1,958,000
    
    
    $
    1,976,000Velocity Control Products
    
    
    467,000
    
    
    
    461,000Sealing Products
    
    
    283,000
    
    
    
    280,000Other
    
    
    933,000
    
    
    
    928,000Corporate
    
    
    810,000
    
    
    
    777,000Total consolidated depreciation and
amortization
    
    $
    4,451,000
    
    
    $
    4,422,000
 First Quarter EndedMarch 31, 2007
    
    April 1, 2006Additions to net property, plant and
equipmentFriction and Motion Control Products
    
    $
    5,516,000
    
    
    $
    3,083,000Velocity Control Products
    
    
    267,000
    
    
    
    228,000Sealing Products
    
    
    1,385,000
    
    
    
    153,000Other
    
    
    174,000
    
    
    
    507,000Corporate
    
    
    42,000
    
    
    
    135,000Total consolidated additions to net
property, plant and equipment
    
    $
    7,384,000
    
    
    $
    4,106,000
 March 31, 2007
    
    December 31, 2006Total assetsFriction and Motion Control Products
    
    $
    187,658,000
    
    
    $
    177,061,000Velocity Control Products
    
    
    89,610,000
    
    
    
    85,759,000Sealing Products
    
    
    24,699,000
    
    
    
    21,445,000Other
    
    
    93,822,000
    
    
    
    94,003,000Corporate
    
    
    354,581,000
    
    
    
    359,288,000Total consolidated assets
    
    $
    750,370,000
    
    
    $
    737,556,000
 (7)
    
    Long-term Debt:Interest expense on the Companys 4% Contingent Convertible Senior Subordinated Notes due
2023 (the Notes) equaled $2.0 million for the first quarter of 2007. Note issuance costs
of approximately $6.5 million are being amortized over a five-year period. Amortization of
Note issuance costs during the first quarter of 2007 was $0.3 million. Amortization of Note
issuance costs is recorded as a component of interest expense. Note issuance costs included
in other assets in the Consolidated Condensed Balance Sheets as of March 31, 2007 and
December 31, 2006 were $1.5 million and $1.8 million.
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The Companys $300.0 million senior unsecured revolving credit facility provides for
borrowings and issuance of letters of credit by the Company and its subsidiaries in various
currencies for general corporate purposes, including acquisitions. The credit facility
matures on July 12, 2010 and is guaranteed by the Company and certain of the Companys
domestic subsidiaries. Interest expense incurred on borrowings under the revolving credit
facility will be based on the London Interbank Offered Rate. The revolving credit facility
contains restrictive financial covenants on a consolidated basis including leverage and
coverage ratios, utilizing measures of earnings and interest expense as defined in the
revolving credit facility agreement. Under the leverage ratio restriction, the Company may
not allow the ratio of total indebtedness, net of domestic cash in excess of $15.0 million,
to adjusted earnings before interest expense, taxes, depreciation and amortization to exceed
3.5 to 1.0. Under the interest coverage ratio restriction, the Company may not allow the
ratio of adjusted earnings before interest expense and taxes to interest expense to be less
than 3.0 to 1.0. The Company is in compliance with all restrictive covenants contained in
the revolving credit facility at March 31, 2007. After consideration of the facilitys
covenants and $4.5 million of letters of credit issued under the facility, the Company has
available credit under its revolving credit facility of $295.5 million at March 31, 2007.The Companys outstanding debt was as follows:
 March 31, 2007
    
    December 31, 20064% Contingent Convertible Senior
Subordinated Notes due 2023
    
    $
    200,000,000
    
    
    $
    200,000,000
 (8)
    
    Contingencies:The Company is involved in ongoing environmental remediation activities at certain
manufacturing sites. As of March 31, 2007, an undiscounted accrual in the amount of $1.0
million, representing the Companys best estimate for ultimate resolution of these
environmental matters, is recorded in other long-term liabilities in the Consolidated
Condensed Balance Sheet.Various other claims arising in the normal course of business are pending against the
Company. The Companys estimated legal costs expected to be incurred in connection with
claims, lawsuits and environmental matters are accrued in the Consolidated Condensed Balance
Sheet.(9)
    
    Goodwill and Other Intangible AssetsAnnually during the third quarter, or between annual tests if certain circumstances exist,
the Company tests the carrying amounts of goodwill and certain intangible assets, deemed to
have indefinite useful lives, for impairment.
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The changes in the carrying amount of goodwill for the first quarter ended March 31, 2007,
were as follows:
 Friction and
    
    VelocityMotion Control
    
    Control
    
    SealingProducts
    
    Products
    
    Products
    
    Other
    
    TotalBalance as of
January 1, 2007
    
    $
    32,452,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    119,484,000Effect of foreign
currency exchange
rate changes
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,000Balance as of
March 31, 2007
    
    $
    32,487,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    119,519,000
 Other intangible assets are summarized as follows:
 March 31, 2007
    
    December 31, 2006Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmortized Intangible Assets
    
    Amount
    
    Amortization
    
    Amount
    
    AmortizationCustomer relationships and lists
    
    $
    18,694,000
    
    
    $
    7,856,000
    
    
    $
    18,694,000
    
    
    $
    7,273,000Patents and developed technology
    
    
    6,318,000
    
    
    
    1,765,000
    
    
    
    6,299,000
    
    
    
    1,596,000Distributor agreements
    
    
    374,000
    
    
    
    96,000
    
    
    
    374,000
    
    
    
    87,000Product names
    
    
    320,000
    
    
    
    72,000
    
    
    
    320,000
    
    
    
    64,000$
    25,706,000
    
    
    $
    9,789,000
    
    
    $
    25,687,000
    
    
    $
    9,020,000
 The intangible assets are being amortized at accelerated rates or on a straight-line basis,
whichever is appropriate, over their respective useful lives. The weighted-average original useful
life for customer relationships and lists is 10 years, and for patents and developed technology is
13 years.
 March 31, 2007
    
    December 31, 2006Unamortized Intangible Assets
    
    Carrying Amount
    
    Carrying AmountTrademarks
    
    $
    4,604,000
    
    
    $
    4,604,000
 Aggregate Intangible Assets Amortization ExpenseFor the first quarter ended March 31, 2007
    

    $
    769,000For the first quarter ended April 1, 2006
    

    $
    769,000Estimated Intangible Assets Amortization ExpenseFor the year ending December 31, 2007
    

    $
    3,027,000For the year ending December 31, 2008
    

    $
    2,957,000For the year ending December 31, 2009
    

    $
    2,633,000For the year ending December 31, 2010
    

    $
    2,272,000For the year ending December 31, 2011
    

    $
    1,448,000
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(10)
    
    Employee Benefit Plans:The components of net periodic benefit cost (income) are as follows:
 First Quarter EndedPension Benefits
    
    March 31, 2007
    
    April 1, 2006Service cost
    
    $
    693,000
    
    
    $
    759,000Interest cost
    
    
    1,459,000
    
    
    
    1,394,000Expected return on plan assets
    
    
    (1,345,000
    )
    
    
    (1,168,000
    )Amortization of:Unrecognized net prior service cost
    
    
    8,000
    
    
    
    50,000Unrecognized net loss
    
    
    255,000
    
    
    
    362,000Total
    
    $
    1,070,000
    
    
    $
    1,397,000
 First Quarter EndedPostretirement Benefits
    
    March 31, 2007
    
    April 1, 2006Service cost
    
    $
    91,000
    
    
    $
    92,000Interest cost
    
    
    201,000
    
    
    
    203,000Amortization of:Unrecognized net prior service cost
    
    
    (440,000
    )
    
    
    (442,000
    )Unrecognized net gain
    
    
    (121,000
    )
    
    
    (97,000
    )Total
    
    $
    (269,000
    )
    
    $
    (244,000
    )
 The Company expects to contribute approximately $7.7 million to its pension plans in
2007.(11)
    
    Stock-Based CompensationA summary of restricted stock information pursuant to the Companys equity incentive plans
for the first quarter of 2007 is as follows:
 First Quarter EndedMarch 31, 2007Wtd.-Avg.Restricted
    
    Grant DateStock
    
    Fair ValueOutstanding at January 1, 2007
    
    
    365,267
    
    
    $
    28.98Granted
    
    
    179,980
    
    
    $
    43.97Vested
    
    
    (105,812
    )
    
    $
    27.69Canceled
    
    
    (1,755
    )
    
    $
    42.48Outstanding at March 31, 2007
    
    
    437,680
    
    
    $
    35.40
 Restricted stock awards granted pursuant to the Companys equity incentive plans allow
for continued annual vesting if a grantee retires at or after the age of 65, even though the
grantee is no longer providing services to the Company. For awards made prior to January
1, 2006, compensation cost associated with these restricted stock awards is being amortized
ratably over the awards normal five- to ten-year vesting periods, or up to the date of
actual retirement of the grantee, when applicable. Concurrent with the adoption of the
revision to Statement of Financial Accounting Standards No. 123(R), Share-Based Payments,
the Company changed this approach for new awards granted after January 1, 2006, so that
compensation cost related to grantees who become retirement
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eligible during the normal
vesting period is amortized ratably over the period from the grant date to the date
retirement eligibility is achieved. Compensation expense is recognized immediately for
awards granted to retirement eligible employees. Had the Company recognized compensation
cost under this new approach for all outstanding restricted stock awards, the expense would
have decreased $0.1 million during the first quarter of 2007, and would have decreased $0.2
million during the first quarter of 2006.A summary of stock option information for the first quarter of 2007 is as follows:
 First Quarter EndedMarch 31, 2007Wtd.-Avg.Options
    
    Ex. PriceOutstanding at January 1, 2007
    
    
    75,250
    
    
    $
    28.35Granted
    
    
    250,000
    
    
    $
    43.03Outstanding at March 31, 2007
    
    
    325,250
    
    
    $
    39.63Exercisable at March 31, 2007
    
    
    25,750
    
    
    $
    24.79Weighted-Avg. Fair Value of Options Granted
    
    $
    12.68Weighted-Avg. Remaining Contractual Life (years)Outstanding at March 31, 2007
    
    
    9.1Exercisable at March 31, 2007
    
    
    4.6
 The exercise price of each fixed option equals the market price of Company common stock
on the date of grant. Options granted become exercisable at the rate of 10.0 percent, 20.0
percent or 25.0 percent per year, commencing one year after the date of grant, and options
expire five or ten years after the date of grant. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. Compensation
expense related to fixed stock options was less than $0.1 million during the first quarter
of 2007.The aggregate intrinsic value of options outstanding at March 31, 2007 is $1.1 million.(12)
    
    Assets Held for SaleDuring the fourth quarter of 2005, the Company classified certain land and building assets
that are in the process of being sold as assets held for sale as required under Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal
of Long Lived Assets. These assets, reported as part of the Companys Other businesses
for segment reporting purposes have a net book value of $0.3 million at March 31, 2007. The
opportunity to sell these assets arose due to the consolidation of the Companys liquid
filtration products business. The Company originally expected to sell
these assets during 2006. The Company now expects to dispose of these assets during 2007.
During the third quarter of 2006, the Company classified certain other land and building
assets that are in the process of being sold as assets held for sale as required under SFAS
No. 144. These assets, reported as part of the Companys Sealing Products segment, have a
net book value of $0.3 million at March 31, 2007. The Company expects to sell these assets
during 2007.
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(13)
    
    Impact of Recently Issued Accounting PronouncementsIn July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return, and provides guidance regarding
subsequent de-recognition of a tax position, classification, interest and penalties,
accounting in interim periods, and disclosure. The Company adopted the provisions of FIN 48
effective January 1, 2007. The adoption of FIN 48 was immaterial to the Company.The Company had liabilities recorded for unrecognized tax benefits totaling $2,563,000 as of
January 1, 2007, all of which would affect the effective tax rate. It is the Companys
policy to include interest and penalties incurred due to underpayment or late payment of
income taxes due to a taxing authority on a net-of-tax basis as a component of income tax
expense. The Company has recorded $557,000 in liabilities for tax related interest and
penalties on its consolidated balance sheet, as of January 1, 2007. The Company does not
expect that the total amounts of unrecognized tax benefits will significantly change within
the next 12 months.The Company, or one of its subsidiaries, operates and files income tax returns in the United
States, various states, and foreign jurisdictions. Foreign jurisdictions significant to the
Company include Germany and the United Kingdom. With limited exceptions, the Company is no
longer subject to U.S. federal tax examinations for years before 2003, state examinations
for years before 2001, German tax examinations for years before 2005, or United Kingdom tax
examinations for years before 2004.In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.
SFAS No. 158 requires plan sponsors of defined benefit pension and other postretirement
benefit plans (collectively, postretirement benefit plans) to recognize the funded status
of their postretirement benefit plans on the balance sheet, to measure the fair value of
plan assets and benefit obligations as of the date of the plan sponsors fiscal year-end,
and to provide additional disclosures. Kaydon adopted the recognition and disclosure
provisions of SFAS No. 158 on December 31, 2006. The requirement for the Company to measure
the fair value of plan assets and benefit obligations as of its fiscal year-end is effective
for fiscal years ending after December 15, 2008.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
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Item 7  Managements Discussion and Analysis of
Results of Operations and Financial Condition
 Results of Operations
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Liquidity and Capital Resources
     Outlook
  Critical Accounting Policies and Estimates
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Inventories 
  Impairment of Long-Lived Assets
  Notes to Consolidated Financial Statements (Note 1 and Note 11)
 Impairment of Goodwill and Indefinite-Lived Intangible Assets
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Notes to Consolidated Financial Statements (Note 11)
 4% Contingent Convertible Senior Subordinated Notes
  19




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Notes to Consolidated Financial Statements (Note 2 and Note 4)
 Retirement Benefits
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Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations Notes to Consolidated
Financial Statements (Note 7)
  Notes to Consolidated Financial Statements (Note 7)
 Income Taxes
  Notes to Consolidated Financial Statements (Note 9)
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Forward-Looking Statements
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 4. CONTROLS AND PROCEDURES
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PART II. OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 The following table provides the information with respect to
purchases made by the Company of shares of its common stock
during each month in the first quarter of 2007:
 Total
    
    Average
    
    Total Number of
    
    Maximum Number ofNumber
    
    Price
    
    Shares Purchased as
    
    Shares that MayOf Shares
    
    Paid
    
    Part of Publicly
    
    Yet be PurchasedPeriod
    
    Purchased
    
    Per Share
    
    Announced Plan
    
    Under the Plan (1)January 1 to January 27
    
    
    34,174
    
    
    $
    39.65
    
    
    
    34,174
    
    
    
    4,848,971January 28 to February 24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,848,971February 25 to March 31
    
    
    45,000
    
    
    $
    41.86
    
    
    
    45,000
    
    
    
    4,803,971Total
    
    
    79,174
    
    
    $
    40.91
    
    
    
    79,174
 
 (1)
    
    On May 6, 2005, the Companys Board of Directors authorized management to purchase up to
5,000,000 shares of its common stock in the open market. 24




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ITEM 6. EXHIBITS
 Exhibit No.
    
    Description10
    
    Employment Agreement, dated March 23, 2007, between Kaydon
Corporation and James OLeary (previously filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K filed March 23, 2007 and incorporated
herein by reference)12
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 200231.2
    
    Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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KAYDON CORPORATIONMay 9, 2007
    /s/ James OLearyJames OLearyPresident and Chief Executive Officer
(Principal Executive Officer)May 9, 2007
    /s/ Kenneth W. CrawfordKenneth W. CrawfordVice President and Corporate Controller
(Principal Financial and Accounting Officer) 26




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Exhibit No.
    
    Description10
    
    Employment Agreement, dated March 23, 2007, between Kaydon Corporation and James OLeary
(previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed March 23,
2007 and incorporated herein by reference)12
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 27