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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934

|                                     |  |                            
|------------------------------------ |  | ---------------------------
|For Quarter Ended September 29, 2001 |  | Commission File No. 0-12640

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

|                                                                                                   |  |                                     
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                                                           |  | 13-3186040                          
|(State or other jurisdiction of
incorporation or organization)                                     |  | (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 X IN BALLOT BOX NO OPEN BALLOT BOX

Common Stock Outstanding at November 1, 2001  29,924,226 shares, $.10 par value.





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TABLE OF CONTENTS



|                                |                                                                                                                                |  |  |  |  |  |  | 
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|Part I - Financial Information:
|                                | Item 1. Financial Statements                                                                                                  
|                                | Consolidated Condensed Balance Sheets - September 29, 2001 and December 31, 2000                                              
|                                | Consolidated Condensed Statements of Income - Quarter and First Three Quarters Ended September 29, 2001 and September 30, 2000
|                                | Consolidated Condensed Statements of Cash Flows - First Three Quarters Ended September 29, 2001and September 30, 2000         
|                                | 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                                                                                                                    



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KAYDON CORPORATION FORM 10-Q

FOR THE QUARTER ENDED September 29, 2001

INDEX

|                                |  |                                                                                                                                |  |  |          |  | 
|------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  |  | -------- |  | 
|                                |  |                                                                                                                                |  |  | Page No. | 
|                                |  |                                                                                                                                |  |  |          | 
|Part I  Financial Information: |  |                                                                                                                                |  | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Item 1. Financial Statements                                                                                                   |  |  |          | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Consolidated Condensed Balance Sheets -
September 29, 2001 and December 31, 2000                                               |  |  | 1        | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Consolidated Condensed Statements of Income -
Quarter and First Three Quarters Ended
September 29, 2001 and September 30, 2000 |  |  | 2        | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Consolidated Condensed Statements of Cash Flows -
First Three Quarters Ended September 29, 2001
and September 30, 2000         |  |  | 3        | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Notes to Consolidated Condensed Financial Statements                                                                           |  |  | 4 - 11   | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations                                  |  |  | 12 - 16  | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                             |  |  | 16 - 17  | 
|                                |  |                                                                                                                                |  |  |          |  | 
|Part II  Other Information:    |  |                                                                                                                                |  | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Item 1.  Legal Proceedings                                                                                                    |  |  | 18       | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Item 6.  Exhibits and Reports on Form 8-K                                                                                     |  |  | 18       | 
|                                |  |                                                                                                                                |  |  |          |  | 
|                                |  | Signatures                                                                                                                     |  |  | 19       | 





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ITEM 1. FINANCIAL STATEMENTSKAYDON CORPORATION




CONSOLIDATED CONDENSED BALANCE SHEETS

|                                                                   |                                            |   |                |             |  |               |              |             | 
|------------------------------------------------------------------ | ------------------------------------------ | - | -------------- | ----------- |  | ------------- | ------------ | ----------- | 
|                                                                   |                                            |   | Sept. 29, 2001 |             |  | Dec. 31, 2000 |             
|                                                                   |                                            |   |                |             |  |               |             
|                                                                   |                                            |   | (Unaudited)    |             |  |               |              |            
|Assets:                                                            |                                            |   |                |             |  |               |              |            
|Cash and cash equivalents                                          |                                            | $ | 120,301,000    |             |  | $             | 114,965,000  |            
|Accounts receivable, net                                           |                                            |   | 49,478,000     |             |  |               | 56,986,000   |            
|Inventories, net                                                   |                                            |   | 61,591,000     |             |  |               | 60,110,000   |            
|Other current assets                                               |                                            |   | 22,037,000     |             |  |               | 9,124,000    |            
|                                                                   |                                            |   |                |             |  |              
|Total current assets                                               |                                            |   | 253,407,000    |             |  |               | 241,185,000  |            
|Plant and equipment, net                                           |                                            |   | 93,868,000     |             |  |               | 105,304,000  |            
|Cost in excess of net tangible
assets of purchased businesses, net |                                            |   | 122,874,000    |             |  |               | 103,248,000  |            
|Other assets                                                       |                                            |   | 36,315,000     |             |  |               | 25,815,000   |            
|                                                                   |                                            |   |                |             |  |              
|Total assets                                                       |                                            | $ | 506,464,000    |             |  | $             | 475,552,000  |            
|                                                                   |                                            |   |                |             |  |              
|Liabilities and Shareholders Equity:                              |                                            |   |                |             |  |               |              |            
|Accounts payable                                                   |                                            | $ | 12,060,000     |             |  | $             | 12,257,000   |            
|Accrued expenses                                                   |                                            |   | 32,339,000     |             |  |               | 47,742,000   |            
|                                                                   |                                            |   |                |             |  |              
|Total current liabilities                                          |                                            |   | 44,399,000     |             |  |               | 59,999,000   |            
|Long-term debt                                                     |                                            |   | 112,211,000    |             |  |               | 47,518,000   |            
|Long-term liabilities                                              |                                            |   | 46,322,000     |             |  |               | 45,600,000   |            
|Shareholders equity:                                              |                                            |   |                |             |  |               |              |            
|Common Stock                                                       |                                            |   | 3,685,000      |             |  |               | 3,680,000    |            
|Paid-in capital                                                    |                                            |   | 43,364,000     |             |  |               | 42,971,000   |            
|Retained Earnings                                                  |                                            |   | 408,208,000    |             |  |               | 426,657,000  |            
|Less  treasury stock, at cost                                     |                                            |   | (135,039,000   | )           |  |               | (134,618,000 | )          
|Less  restricted stock awards                                     |                                            |   | (10,199,000    | )           |  |               | (10,357,000  | )          
|Accumulated other comprehensive loss                               |                                            |   | (6,487,000     | )           |  |               | (5,898,000   | )          
|                                                                   |                                            |   |                |             |  |              
|                                                                   |                                            |   | 303,532,000    |             |  |               | 322,435,000  |            
|                                                                   |                                            |   |                |             |  |              
|                                                                   | Total liabilities and
shareholders equity |   | $              | 506,464,000 |  |               | $            | 475,552,000 | 
|                                                                   |                                            |   |                |             |  |              

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION




CONSOLIDATED CONDENSED STATEMENTS OF INCOME(UNAUDITED)

|                                                          |         |   |                |            |   |                            |            |            |                |   |             |                |   |   |             |            | 
|--------------------------------------------------------- | ------- | - | -------------- | ---------- | - | -------------------------- | ---------- | ---------- | -------------- | - | ----------- | -------------- | - | - | ----------- | ---------- | 
|                                                          |         |   | Quarter Ended  |            |   | First Three Quarters Ended |           
|                                                          |         |   |                |            |   |                            |           
|                                                          |         |   | Sept. 29, 2001 |            |   | Sept. 30, 2000             |            |            | Sept. 29, 2001 |   |             | Sept. 30, 2000 |  
|                                                          |         |   |                |            |   |                            |            |            |                |   |             |                |  
|Net sales                                                 |         | $ | 78,648,000     |            |   | $                          | 81,292,000 |            |                | $ | 259,602,000 |                |   | $ | 252,280,000 |           
|Cost of sales                                             |         |   | 57,638,000     |            |   |                            | 51,579,000 |            |                |   | 183,230,000 |                |   |   | 158,282,000 |           
|                                                          |         |   |                |            |   |                            |            |            |                |   |             |               
|Gross profit                                              |         |   | 21,010,000     |            |   |                            | 29,713,000 |            |                |   | 76,372,000  |                |   |   | 93,998,000  |           
|Selling, general and
administrative expenses              |         |   | 17,476,000     |            |   |                            | 10,672,000 |            |                |   | 46,290,000  |                |   |   | 35,239,000  |           
|Special charge to write-down
assets of certain businesses |         |   | 38,111,000     |            |   |                            |           |            |                |   | 38,111,000  |                |   |   |            |           
|Unusual litigation-related
charges                        |         |   |               |            |   |                            | 9,100,000  |            |                |   |            |                |   |   | 21,737,000  |           
|                                                          |         |   |                |            |   |                            |            |            |                |   |             |               
|Operating income (loss)                                   |         |   | (34,577,000    | )          |   |                            | 9,941,000  |            |                |   | (8,029,000  | )              |   |   | 37,022,000  |           
|Interest income (expense), net                            |         |   | (399,000       | )          |   |                            | 1,310,000  |            |                |   | (142,000    | )              |   |   | 4,232,000   |           
|                                                          |         |   |                |            |   |                            |            |            |                |   |             |               
|Income (loss) before income
taxes                         |         |   | (34,976,000    | )          |   |                            | 11,251,000 |            |                |   | (8,171,000  | )              |   |   | 41,254,000  |           
|Income taxes (credit)                                     |         |   | (10,590,000    | )          |   |                            | 4,164,000  |            |                |   | (672,000    | )              |   |   | 15,266,000  |           
|                                                          |         |   |                |            |   |                            |            |            |                |   |             |               
|Net income (loss)                                         |         | $ | (24,386,000    | )          |   | $                          | 7,087,000  |            |                | $ | (7,499,000  | )              |   | $ | 25,988,000  |           
|                                                          |         |   |                |            |   |                            |            |            |                |   |             |               
|Weighted Average Common Shares:                           |         |   |                |            |   |                            |            |            |                |   |             |                |   |   |             |           
|                                                          | Basic   |   |                | 29,942,000 |   |                            |            | 30,011,000 |                |   |             | 29,948,000     |   |   |             | 30,194,000 | 
|                                                          | Diluted |   |                | 29,942,000 |   |                            |            | 30,035,000 |                |   |             | 29,948,000     |   |   |             | 30,238,000 | 
|Earnings (Loss) Per Share:                                |         |   |                |            |   |                            |            |            |                |   |             |                |   |   |             |           
|                                                          | Basic   |   | $              | (.81       | ) |                            | $          | .24        |                |   | $           | (.25           | ) |   | $           | .86        | 
|                                                          | Diluted |   | $              | (.81       | ) |                            | $          | .24        |                |   | $           | (.25           | ) |   | $           | .86        | 

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION




CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

|                                                             |                                        |            |             |             |                            |   |             |                |            |   | 
|------------------------------------------------------------ | -------------------------------------- | ---------- | ----------- | ----------- | -------------------------- | - | ----------- | -------------- | ---------- | - | 
|                                                             |                                        |            |             |             | First Three Quarters Ended |  
|                                                             |                                        |            |             |             |                            |  
|                                                             |                                        |            |             |             | Sept. 29, 2001             |   |             | Sept. 30, 2000 |           
|                                                             |                                        |            |             |             |                            |   |             |                |           
|Cash flows from operating activities                         |                                        | $          | 32,334,000  |             |                            | $ | 46,666,000  |               
|                                                             |                                        |            |             |             |                            |  
|Cash flows used in investing activities:                     |                                        |            |             |             |                            |   |             |               
|                                                             | Capital expenditures, net              |            |             | (9,621,000  | )                          |   |             | (9,838,000     | )         
|                                                             | Acquisition of businesses              |            |             | (70,584,000 | )                          |   |             | (47,130,000    | )         
|                                                             |                                        |            |             |             |                            |  
|Cash used in investing activities                            |                                        |            | (80,205,000 | )           |                            |   | (56,968,000 | )             
|                                                             |                                        |            |             |             |                            |  
|Cash flows from (used in) financing activities:              |                                        |            |             |             |                            |   |             |               
|                                                             | Dividends paid                         |            |             | (10,943,000 | )                          |   |             | (10,147,000    | )         
|                                                             | Long-Term Debt:                        |            |             |             |                            |   |             |                |           
|                                                             |                                        | Issuance   |             |             | 70,750,000                 |   |             |                | 47,400,000 |  
|                                                             |                                        | Retirement |             |             | (6,053,000                 | ) |             |                | (64,000    | )
|                                                             | Proceeds from issuance of common stock |            |             | 1,107,000   |                            |   |             | 1,646,000      |           
|                                                             | Purchase of treasury stock             |            |             | (1,655,000  | )                          |   |             | (17,736,000    | )         
|                                                             |                                        |            |             |             |                            |  
|Cash from financing activities                               |                                        |            | 53,206,000  |             |                            |   | 21,099,000  |               
|                                                             |                                        |            |             |             |                            |  
|Effect of exchange rate changes on cash
and cash equivalents |                                        |            | 1,000       |             |                            |   | (508,000    | )             
|                                                             |                                        |            |             |             |                            |  
|Net increase in cash and cash equivalents                    |                                        |            | 5,336,000   |             |                            |   | 10,289,000  |               
|Cash and cash equivalents  Beginning of period              |                                        |            | 114,965,000 |             |                            |   | 89,749,000  |               
|                                                             |                                        |            |             |             |                            |  
|Cash and cash equivalents  End of period                    |                                        | $          | 120,301,000 |             |                            | $ | 100,038,000 |               
|                                                             |                                        |            |             |             |                            |  
|Cash expended for income taxes                               |                                        | $          | 14,505,000  |             |                            | $ | 20,758,000  |               
|                                                             |                                        |            |             |             |                            |  
|Cash expended for interest                                   |                                        | $          | 3,618,000   |             |                            | $ | 280,000     |               
|                                                             |                                        |            |             |             |                            |  

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION




NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS



|(1) |  | The accompanying unaudited consolidated condensed financial statements of
Kaydon Corporation and subsidiaries (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,
2000.                                                                                                                                                                                                                                                                   
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142 Goodwill and Other Intangible Assets,
were recently approved by the Financial Accounting Standards Board. These
pronouncements amend the accounting for business combinations, goodwill,
and intangible assets. SFAS No. 141 eliminates the pooling-of-interests
method of accounting for business combinations and further clarifies the
criteria to recognize intangible assets separately from goodwill. The
requirements of SFAS No. 141 are effective for any business combination
that is completed after June 30, 2001. SFAS No. 142 no longer permits
amortization of goodwill and indefinite lived intangible assets.
Separable intangible assets that are not deemed to have an indefinite
life will continue to be amortized over their useful lives. In addition,
SFAS No. 142 establishes a new method of testing goodwill for impairment
by using a fair-value approach. The amortization provisions of SFAS No.
142 apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1,
2001, companies are required to adopt the pronouncement in their fiscal
year beginning after December 15, 2001.
|   
|    |  | Total goodwill included in the Companys Financial Statements was $122.9
million at September 29, 2001 and $103.2 million at December 31, 2000.
Goodwill amortization expense was $1.3 million during the third quarter
of 2001 and $.8 million during the third quarter of 2000. Goodwill
amortization expense was $3.6 million during the first three quarters of
2001 and $2.1 million during the first three quarters of 2000. The
Company is currently assessing the effect of the new standards related to
the impairment testing of goodwill, but at this time can not estimate the
impact, if any, on the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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|    |  | Also, SFAS No. 143, Accounting for Asset Retirement Obligations, was
recently approved by the Financial Accounting Standard Board. The
standard requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. This standard is effective January 1, 2003. The Company is
currently assessing the effect of the new standard, but at this time can
not estimate the impact, if any, on the consolidated financial
statements.                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In addition, SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, was recently approved by the Financial Accounting
Standard Board. This standard replaces SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of and APB No. 30, Reporting Results of Operations- Reporting the
Effects of Disposal of a Segment of a Business. SFAS No. 144 requires
long-lived assets to be measured at the lower of either the carrying
amount or of the fair value less the cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred.
SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated
from the ongoing operations of the entity in a disposal transaction.
This standard is effective January 1, 2002 and will not change the
accounting used for previous asset impairments or disposals.
|   
|(2) |  | Inventories are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                |  |                    |            |  |                   |   |            | 
|--------------- |  | ------------------ | ---------- |  | ----------------- | - | ---------- | 
|                |  | September 29, 2001 |            |  | December 31, 2000 |  
|                |  |                    |            |  |                   |  
|Raw Material    |  | $                  | 19,841,000 |  |                   | $ | 23,076,000 | 
|Work in Process |  |                    | 12,985,000 |  |                   |   | 15,286,000 | 
|Finished Goods  |  |                    | 28,765,000 |  |                   |   | 21,748,000 | 
|                |  |                    |            |  |                   |  
|                |  | $                  | 61,591,000 |  |                   | $ | 60,110,000 | 
|                |  |                    |            |  |                   |  



|    |  | Inventory balances as of September 29, 2001 include $3.0 million of Raw
Material, $0.2 million of Work in Process, and $3.8 million of Finished
Goods related to Ace Controls, Inc. acquired on March 1, 2001.                                                                                                                                                                                  
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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 (loss), minimum pension liability
adjustments and foreign currency translation adjustments. Components of
other comprehensive income (loss), net

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|    |  | of tax, were approximately $1.6 million and $(1.1) million, resulting in
comprehensive income (loss) of $(22.8) million and $6.0 million for the
quarters ended September 29, 2001 and September 30, 2000. For the first
three quarters, other comprehensive income (loss), net of tax, was
approximately $(.6) million and $(3.3) million, resulting in year to date
comprehensive income (loss) of $(8.1) million and $22.7 million for the
first three quarters ended September 29, 2001 and September 30, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | The following table reconciles the numerators and denominators used in
the calculation of basic and diluted earnings (loss) per share for the
periods presented.                                                                                                                                                                                                                                                                                                                                                   

|                                                    |                                                                                              |                                                                                    |            |                    |             |   |                    |            |           | 
|--------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ---------- | ------------------ | ----------- | - | ------------------ | ---------- | --------- | 
|                                                    |                                                                                              |                                                                                    |            | Quarter Ended      |            
|                                                    |                                                                                              |                                                                                    |            |                    |            
|                                                    |                                                                                              |                                                                                    |            | September 29, 2001 |             |   | September 30, 2000 |           
|                                                    |                                                                                              |                                                                                    |            |                    |             |   |                    |           
|Numerators:                                         |                                                                                              |                                                                                    |            |                    |             |   |                    |           
|                                                    |                                                                                              | Numerators for both
basic and diluted earnings (loss)
per share, net income (loss) |            | $                  | (24,386,000 | ) |                    | $          | 7,087,000 | 
|                                                    |                                                                                              |                                                                                    |            |                    |             |  
|Denominators:                                       |                                                                                              |                                                                                    |            |                    |             |   |                    |           
|                                                    | Denominators for basic earnings
(loss) per share, weighted average
common shares outstanding |                                                                                    |            | 29,942,000         |             |   |                    | 30,011,000 |          
|                                                    | Potential dilutive shares resulting
from stock options and
restricted stock awards           |                                                                                    |            |                   |             |   |                    | 24,000     |          
|                                                    |                                                                                              |                                                                                    |            |                    |             |  
|Denominators for dilutive
earnings (loss) per share |                                                                                              |                                                                                    | 29,942,000 |                    |             |   | 30,035,000         |           
|                                                    |                                                                                              |                                                                                    |            |                    |             |  
|Earnings (loss) per share:                          |                                                                                              |                                                                                    |            |                    |             |   |                    |           
|Basic                                               |                                                                                              | $                                                                                  | (.81       | )                  |             | $ | .24                |           
|                                                    |                                                                                              |                                                                                    |            |                    |             |  
|Diluted                                             |                                                                                              | $                                                                                  | (.81       | )                  |             | $ | .24                |           
|                                                    |                                                                                              |                                                                                    |            |                    |             |  

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|                                                                                   |  |                            |            |   |                    |   |            |  |  |  |  | 
|---------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------ | - | ---------- |  |  |  |  | 
|                                                                                   |  | First Three Quarters Ended |            |   |                    |   |           
|                                                                                   |  |                            |            |   |                    |   |           
|                                                                                   |  | September 29, 2001         |            |   | September 30, 2000 |   |            |  |  | 
|                                                                                   |  |                            |            |   |                    |   |            |  |  | 
|Numerators:                                                                        |  |                            |            |   |                    |   |            | 
|Numerators for both
basic and diluted earnings (loss)
per share, net income (loss) |  | $                          | (7,499,000 | ) |                    | $ | 25,988,000 | 
|                                                                                   |  |                            |            |   |                    |  
|Denominators:                                                                      |  |                            |            |   |                    |   |            | 
|Denominators for basic earnings                                                    |  |                            |            |   |                    |   |            | 
|(loss) per share, weighted average
common shares outstanding                       |  |                            | 29,948,000 |   |                    |   | 30,194,000 | 
|Potential dilutive shares resulting
from stock options and
restricted stock awards |  |                            |           |   |                    |   | 44,000     | 
|                                                                                   |  |                            |            |   |                    |  
|Denominators for dilutive
earnings (loss) per share                                |  |                            | 29,948,000 |   |                    |   | 30,238,000 | 
|                                                                                   |  |                            |            |   |                    |  
|Earnings (loss) per share:                                                         |  |                            |            |   |                    |   |            | 
|Basic                                                                              |  | $                          | (.25       | ) |                    | $ | .86        | 
|                                                                                   |  |                            |            |   |                    |  
|Diluted                                                                            |  | $                          | (.25       | ) |                    | $ | .86        | 
|                                                                                   |  |                            |            |   |                    |  



|    |  | Options to purchase 564,900 shares of common stock were outstanding
during the third quarter of 2001, but were not included in the
computation of diluted earnings (loss) per share because the Company
recorded an operating loss during the quarter. If the Company had
recorded operating income during the quarter, options to purchase 414,200
shares of common stock at prices ranging from $24.25 to $33.3125 per
share would not have been 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 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 (loss) 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 (loss) before taxes includes net
interest, goodwill amortization, depreciation and unallocated corporate
administrative expenses. The goodwill associated with an operating unit
is on the balance sheet of the respective operating unit. The
amortization expense for acquisitions prior to 1999 is charged to the
Corporate office. The amortization expense for                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

7



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| |  | acquisitions since 1999 is charged to the respective operating unit.
| |  | --------------------------------------------------------------------

Segment financial data (in thousands):

|                                                |  |                    |         |   |                    |   |      |        |              |   |          |            |         |           |        |   |        |   |              |   |  |   |        |   |  |  |  | 
|----------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ---- | ------ | ------------ | - | -------- | ---------- | ------- | --------- | ------ | - | ------ | - | ------------ | - |  | - | ------ | - |  |  |  | 
|                                                |  | Quarter Ended      |        
|                                                |  |                    |        
|                                                |  | September 29, 2001 |         |   | September 30, 2000 |   |      |        |              |  
|                                                |  |                    |         |   |                    |   |      |        |              |  
|                                                |  | Custom-            |         |   |                    |   |      |        |              |   |          |            | Custom- |           |        |   |        |   |              |   |  |  
|                                                |  | Engineered         |         |   |                    |   |      |        | Consolidated |   |          | Engineered |         |           |        |   |        |   | Consolidated |  
|                                                |  | Products           |         |   | Corporate          |   |      | Totals |              |   | Products |            |         | Corporate |        |   | Totals |  
|                                                |  |                    |         |   |                    |   |      |        |              |   |          |            |         |           |        |   |        |  
|Sales                                           |  | $                  | 81,595  |   |                    |   |      |        |              | $ | 81,595   |            |         | $         | 81,609 |   |        |   |              |   |  | $ | 81,609 |  
|Elimination of
intercompany
sales               |  |                    | (2,947  | ) |                    |   |      |        |              |   | (2,947   | )          |         |           | (317   | ) |        |   |              |   |  |   | (317   | )
|                                                |  |                    |         |   |                    |   |      |        |              |   |          |            |         |           |        |   |        |  
|Total net sales                                 |  | $                  | 78,648  |   |                    |   |      |        |              | $ | 78,648   |            |         | $         | 81,292 |   |        |   |              |   |  | $ | 81,292 |  
|                                                |  |                    |         |   |                    |   |      |        |              |   |          |            |         |           |        |   |        |  
|Segment earnings (loss)
before interest
and tax |  | $                  | (34,141 | ) |                    |   |      |        |              | $ | (34,141  | )          |         | $         | 19,213 |   |        |   |              |   |  | $ | 19,213 |  
|Unallocated
amounts                             |  |                    |        |   |                    | $ | (835 | )      |              |   | (835     | )          |         |           |       |   |        | $ | (7,962       | ) |  | $ | (7,962 | )
|                                                |  |                    |         |   |                    |   |      |        |              |   |          |            |         |           |        |   |        |  
|Income (loss) before
income taxes               |  | $                  | (34,141 | ) |                    | $ | (835 | )      |              | $ | (34,976  | )          |         | $         | 19,213 |   |        | $ | (7,962       | ) |  | $ | 11,251 |  
|                                                |  |                    |         |   |                    |   |      |        |              |   |          |            |         |           |        |   |        |  

|                                                |  |                            |         |   |                    |   |        |        |              |   |          |            |         |           |         |   |        |   |              |   |  |   |         |   |  |  |  | 
|----------------------------------------------- |  | -------------------------- | ------- | - | ------------------ | - | ------ | ------ | ------------ | - | -------- | ---------- | ------- | --------- | ------- | - | ------ | - | ------------ | - |  | - | ------- | - |  |  |  | 
|                                                |  | First Three Quarters Ended |         |   |                    |   |       
|                                                |  |                            |         |   |                    |   |       
|                                                |  | September 29, 2001         |         |   | September 30, 2000 |   |        |        |              |  
|                                                |  |                            |         |   |                    |   |        |        |              |  
|                                                |  | Custom-                    |         |   |                    |   |        |        |              |   |          |            | Custom- |           |         |   |        |   |              |   |  |   |         |   |  | 
|                                                |  | Engineered                 |         |   |                    |   |        |        | Consolidated |   |          | Engineered |         |           |         |   |        |   | Consolidated |   |  |   |         |  
|                                                |  | Products                   |         |   | Corporate          |   |        | Totals |              |   | Products |            |         | Corporate |         |   | Totals |   |              |   |  |  
|                                                |  |                            |         |   |                    |   |        |        |              |   |          |            |         |           |         |   |        |   |              |   |  |  
|Sales                                           |  | $                          | 267,167 |   |                    |   |        |        |              | $ | 267,167  |            |         | $         | 253,458 |   |        |   |              |   |  | $ | 253,458 |  
|Elimination of
intercompany
sales               |  |                            | (7,565  | ) |                    |   |        |        |              |   | (7,565   | )          |         |           | (1,178  | ) |        |   |              |   |  |   | (1,178  | )
|                                                |  |                            |         |   |                    |   |        |        |              |   |          |            |         |           |         |   |        |   |              |  
|Total net sales                                 |  | $                          | 259,602 |   |                    |   |        |        |              | $ | 259,602  |            |         | $         | 252,280 |   |        |   |              |   |  | $ | 252,280 |  
|                                                |  |                            |         |   |                    |   |        |        |              |   |          |            |         |           |         |   |        |   |              |  
|Segment earnings (loss)
before interest
and tax |  | $                          | (7,161  | ) |                    |   |        |        |              | $ | (7,161   | )          |         | $         | 59,654  |   |        |   |              |   |  | $ | 59,654  |  
|Unallocated
amounts                             |  |                            |        |   |                    | $ | (1,010 | )      |              |   | (1,010   | )          |         |           |        |   |        | $ | (18,400      | ) |  | $ | (18,400 | )
|                                                |  |                            |         |   |                    |   |        |        |              |   |          |            |         |           |         |   |        |  
|Income (loss) before
income taxes               |  | $                          | (7,161  | ) |                    | $ | (1,010 | )      |              | $ | (8,171   | )          |         | $         | 59,654  |   |        | $ | (18,400      | ) |  | $ | 41,254  |  
|                                                |  |                            |         |   |                    |   |        |        |              |   |          |            |         |           |         |   |        |  



| |  | There has been no change in the basis or measurement of segmentation
since
| |  | --------------------------------------------------------------------------

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|    |  | the last annual report. Companies newly acquired during 2001 are
reported as part of the Custom-Engineered Products segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(6) |  | At September 29, 2001, borrowings under the Companys revolving
credit facility totaled $112.2 million. The credit facility permits
the Company to borrow under several different interest rate options.
The interest rate on borrowings equaled a weighted average 4.81 percent
during the third quarter of 2001 based on the London Interbank Offered
Rate (LIBOR). The credit facility contains certain restrictive
covenants. The Company is in compliance with all restrictive covenants
contained in the credit facility at September 29, 2001. After
consideration of outstanding standby letters of credit, the Company has
available credit under its revolving credit facility of $185.7 million
at September 29, 2001.                                                                                                                                                                                     
|   
|(7) |  | On March 1, 2001, the Company purchased for $70.8 million, all of
the outstanding stock of ACE Controls, Inc. and its affiliated company
ACE Controls International, Inc. (collectively known as ACE)
headquartered in Farmington Hills, Michigan, with additional facilities
in Germany, the United Kingdom and Japan. ACE manufactures a wide
range of linear deceleration products serving various industrial
markets. The Company utilized its revolving credit facility to finance
the acquisition. The acquisition has been accounted for using the
purchase method of accounting and accordingly the results of operations
have been included in the financial statements since the effective
acquisition date. Goodwill and intangible assets acquired of $53.6
million is being amortized on a straight-line basis over periods
ranging from 10 to 40 years.                                                 
|   
|    |  | On a pro forma, unaudited basis, as if the ACE acquisition had occurred
as of January 1, 2000, net sales, net income, basic earnings per share
and diluted earnings per share for the third quarter of 2000 would have
been $92.3 million, $7.5 million, $.25 and $.25. Net sales, net loss,
basic loss per share and diluted loss per share for the first three
quarters of 2001 would have been $265.8 million, $(7.4) million, $(.24)
and $(.24), and net sales, net income, basic earnings per share and
diluted earnings per share for the first three quarters of 2000 would
have been $285.4 million, $27.3 million, $.90 and $.90.                                                                                                                                                                                                                                                                            
|   
|(8) |  | During the third quarter of 2001, the Company recorded a special non-cash
charge of $38.1 million pre-tax, $26.4 million after tax, or $.88 per
share on a diluted basis to write-down the value of assets of our Fluid Power Products Group. The
write-down was necessary as a result of recent operating and cash flow
losses, an outlook for prolonged weakness in the demand for hydraulic
fluid power products which likely will lead to continuing losses,
structural changes in competitive dynamics, and adverse customer trends.
The majority of the special charge, $34.6 million, resulted from the
write-down of intangible and fixed assets to estimated fair value in
accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of. The estimated fair value of intangible and
fixed assets was

9



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|    |  | determined by the Companys management based on current and projected
operating performance, tangible asset values and other relevant factors.
The remaining $3.5 million comprised reductions in the carrying amount of
certain current assets, reflecting recent adverse credit trends of
certain customers, changes in product manufacturing and customer service
strategies, product pricing challenges caused by new competitive
pressures, and other factors. Further, at its October 10, 2001 meeting,
the Companys Board of Directors approved managements plan to review and
execute strategic alternatives for these businesses, including possible
disposition. In a disposition scenario, future charges to operations
related to exit costs, including severance, could be as much as an
additional $3 million, which would be recorded in future periods as a
component of income from continuing operations.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(9) |  | As previously reported, the Company, along with certain other companies,
is a defendant in a lawsuit filed in 1995 and pending in the United States
District Court for the Southern District of New York captioned Richard A.
Lippe, et al. v. Bairnco Corporation, et al.(the Transactions Lawsuit).
The current status of the Transactions Lawsuit is that fact depositions
and fact discovery have been substantially completed, with expert
discovery to follow. Management continues to believe that 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. The total accrual in the consolidated
financial statements related to the Transactions Lawsuit is $4.1 million
at September 29, 2001. Such amount represents the Companys most current
and best estimate to litigate this legal matter.                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | As previously reported, in June 1996, the U.S. government commenced a
grand jury investigation relating to a May 9, 1996 accident involving a
Sikorsky Aircraft Corporation CH-53E helicopter, and in July 1998,
Sikorsky commenced a lawsuit against the Company claiming damages which
they were alleged to have incurred following the accident (collectively,
the Sikorsky Matter).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | During the second quarter of 2000, a $12.6 million provision was recorded
in order to support the Companys best estimates to litigate the
Transactions Lawsuit and the Sikorsky Matter discussed above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Regarding the Sikorsky Matter, during the third quarter of 2000, Kaydon
reached a settlement with Sikorsky Aircraft Corporation and recorded an
additional $9.1 million provision to reflect both the amount of the
settlement with Sikorsky and the estimated amount of a potential
settlement with the U.S. government, less amounts the Company had
previously reserved to litigate these matters. In April 2001, the
Company reached a settlement with the U.S. government regarding their
investigation of inspection and product certification procedures at the
Companys Muskegon, Michigan facility. The settlement included the
payment of $7.5 million to the U.S. government, including a $1.0 million
fine. The payment to the U.S. government was completed during April 2001
and was offset by the previously recorded provisions without any impact
on year 2001 earnings. In addition to the U.S. government settlement, Kaydon will enter into a
three- year agreement with the U.S. Department of Navy, on behalf of the
U.S. Department of Defense, which confirms that Kaydon is presently
eligible to contract with the U.S. government, insures that Kaydon has,
and will continue to have, a program of acceptable contracting policies
and procedures, and establishes and implements a program of compliance
reviews, audits and reports.

10



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##### Table of Contents





| |  | As previously reported, in October 1995, Cooper Split Roller Bearing
Corporation (Cooper), a subsidiary of the Company, was named as a
defendant in a lawsuit commenced in the U.S. District Court for the
Western District of Pennsylvania. The lawsuit related to the failure of
a Cooper split roller bearing at a customers facility in July 1994. In
July 2001, Kaydon, Kaydons insurance provider and the plaintiff agreed
to a settlement of the lawsuit, with the settlement payment to the
plaintiff being shared between Kaydon and Kaydons insurance provider.
Kaydons portion of the settlement payment was offset by amounts
previously recorded to litigate this legal action. The Company believes
that the loss sustained in the settlement of the lawsuit is covered under
Kaydons commercial general liability policy, and that the ultimate
resolution of any litigation related to this matter between Kaydon and
Kaydons insurance provider will not have a material effect on the
Companys consolidated financial statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Various other claims, lawsuits and environmental matters arising in the
normal course of business are pending against the Company. An accrual 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 2001, Kaydon Corporation and subsidiaries (the
Company) achieved sales of $78.6 million, down 3.3 percent from $81.3 million
in the third quarter of 2000. Excluding results from businesses acquired
during the third quarter last year and the first quarter this year, sales
during the third quarter of 2001 for the remaining Kaydon divisions were down
$16.8 million or 21.4 percent from the third quarter of 2000. These sales
results continue to reflect the broad-based slowdown in industrial
manufacturing activity in this country and abroad. Sales to virtually all of
the Companys key markets display continuing weakness. Specifically, the
Company experienced reduced demand for specialty bearings products,
particularly from the semiconductor manufacturing equipment market and
off-highway equipment markets, and for the Companys fluid power products,
which are sold primarily to the construction equipment and other heavy
equipment markets. Also, the third quarter 2001 results reflect reduced demand
for our Cooper Bearing product line offerings, Filtration group product
offerings, and our specialty ball products, especially to the export market.
Kaydons high value-added products and resultant strong contribution margins
make the Companys profit performance very volume sensitive. The reduction in
sales by many of our business units contributed significantly to declines in
gross profit and operating income.

Gross profit during the third quarter of 2001 was $21.0 million or 26.7 percent
of sales, compared with $29.7 million or 36.6 percent of sales in the third
quarter of 2000. The gross profit percentage achieved in the third quarter of
2001 was negatively impacted by reduced sales volumes and unfavorable product
mix especially at our Fluid Power Products Group.

Selling, general and administrative expenses during the third quarter of 2001,
were $17.5 million or 22.2 percent of sales as compared to $10.7 million or
13.1 percent of sales during the third quarter of 2000. Operating expenses
during the third quarter of 2001 increased primarily due to recently acquired
companies and additional expenses incurred by our Fluid Power Products Group.

During the third quarter of 2001, the Company recorded a special non-cash
charge of $38.1 million pre-tax, $26.4 million after tax, or $.88 per share on
a diluted basis to write-down the value of assets of our Fluid Power Products
Group. The write-down was necessary as a result of recent operating and cash
flow losses, an outlook for prolonged weakness in the demand for hydraulic
fluid power products which likely will lead to continuing losses, structural
changes in competitive dynamics, and adverse customer trends. The majority of
the special charge, $34.6 million, resulted from the write-down of intangible
and fixed assets to estimated fair value in accordance with Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of. The estimated
fair value of intangible and fixed assets was determined by the Companys
management

12



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##### Table of Contents



based on current and projected operating performance, tangible asset values and
other relevant factors. The remaining $3.5 million comprised reductions in the
carrying amount of certain current assets, reflecting recent adverse credit
trends of certain customers, changes in product manufacturing and customer
service strategies, product pricing challenges caused by new competitive
pressures, and other factors. Further, at its October 10, 2001 meeting, the
Companys Board of Directors approved managements plan to review and execute
strategic alternatives for these businesses, including possible disposition.
In a disposition scenario, future charges to operations related to exit costs,
including severance, could be as much as an additional $3 million, which would
be recorded in future periods as a component of income from continuing
operations.

During the third quarter of 2000, Kaydon recorded a $9.1 million unusual
litigation-related provision to reflect both the amount of a settlement with
Sikorsky Aircraft Corporation and the estimated amount of a potential
settlement with the U.S. government, less amounts the Company had previously
reserved to litigate these matters.

Operating loss during the third quarter of 2001, including the $38.1 million
write-down of assets of certain businesses was $34.6 million. Operating income
during the third quarter of 2000, including the unusual litigation-related
charge of $9.1 million, was $9.9 million or 12.2 percent of sales.

Net interest expense of $0.4 million during the third quarter of 2001 compares
to net interest income of $1.3 million during the third quarter of 2000. The
fluctuation in net interest from last years comparable period is due to higher
interest expense on bank borrowings related to recent acquisitions.



The effective rate of the tax credit generated during the third quarter of 2001
was 30.3 percent. This rate differs from the Companys recent effective tax
rate of 37.0 percent because a portion of the special $38.1 million charge will
not be deductible for tax purposes.

Third quarter 2001 net loss, including the after tax effect, $26.4 million, of
the write-down of assets of certain businesses, was $24.4 million. Loss per
share on a diluted basis, including the after tax effect, $.88, of the
write-down of assets, equaled $.81. Third quarter 2000 net income, including
the after tax effect, $5.7 million, of the unusual litigation-related charge,
was $7.1 million. Earnings per share on a diluted basis, including the after
tax effect, $.19, of the litigation-related charge, equaled $.24.

Sales for the first three quarters of 2001 were $259.6 million, an increase of
2.9 percent over sales in the comparable period last year of $252.3 million.
Excluding results from businesses acquired during the third quarter last year
and the first quarter this year, sales during the first three quarters of 2001
for the remaining Kaydon divisions were down $33.8 million or 13.5 percent from
the comparable period in 2000. As a result of the lower sales volume and mix of
products sold, higher energy costs, and lower absorption, gross profit for the
first three quarters of 2001 decreased to $76.4 million or 29.4 percent of
sales as compared to $94.0 million or 37.3 percent of sales during the first
three quarters of 2000. Operating loss during the first three quarters of
2001,

13



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##### Table of Contents



including the $38.1 million write-down of assets of certain businesses recorded
in the third quarter, was $8.0 million. Operating income for the first three
quarters of 2000, including unusual litigation-related charges recorded in the
second and third quarters of $21.7, million was $37.0 million.

Net loss for the first three quarters of 2001, including the after tax effect,
$26.4 million, of the write-down of assets of certain businesses, was $7.5
million. Loss per share on a diluted basis, including the after tax effect,
$.88, of the write-down of assets, equaled $.25. Net income for the first
three quarters of 2000, including the after tax effect, $13.7 million, of the
unusual litigation-related charges, was $26.0 million. Earnings per share on a
diluted basis, including the after tax effect, $.45, of the unusual
litigation-related charges, equaled $.86.

Liquidity and Capital Resources

Working capital was $209.0 million at September 29, 2001 reflecting a current
ratio of 5.7 to 1 compared to $181.2 million and a current ratio of 4.0 to 1 at
year-end 2000. Cash flow from operations was $32.3 million during the first
three quarters of 2001, compared to $46.7 million for the same period in 2000.

Depreciation and amortization for the first three quarters of 2001 totaled
$16.1 million compared to $13.1 million in the first three quarters of 2000.
Increases are primarily due to recent acquisitions completed in late 2000 and
during the first quarter of 2001.

Cash and cash equivalents equaled $120.3 million at September 29, 2001, up $5.3
million over the balance at year-end 2000 of $115.0 million. This increase
reflects strong operating cash flow offset by capital expenditures of $9.6
million, dividend payments of $10.9 million, a previously disclosed $7.5
million payment to the U.S. government, and debt reduction payments
of $6.1
million.

Management expects that the Companys planned capital requirements for the
remainder of 2001, which consists of capital expenditures, dividend payments
and its stock repurchase program will be financed by operating cash flow and
existing cash balances.

Outlook

The Companys backlog at September 29, 2001 was $108.1 million compared to
$117.9 million at the end of 2000. Based upon current business indications,
including quoting activity and future business forecasts for Kaydon customers
end-markets, management believes that the Company, along with most industrial
companies, will continue to be negatively affected by the broad-based slowdown
of economic activity in the United States. Management expects orders will be
relatively flat for the fourth quarter of 2001, with an increase not expected
until late in 2002. Expected operating cash flows coupled with the Companys
current cash reserves and the funds available

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under existing financing arrangements 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.

Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142 Goodwill and Other Intangible Assets, were
recently approved by the Financial Accounting Standards Board. These
pronouncements amend the accounting for business combinations, goodwill, and
intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. The requirements of SFAS
No. 141 are effective for any business combination that is completed after June
30, 2001. SFAS No. 142 no longer permits amortization of goodwill and
indefinite lived intangible assets. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. In addition, SFAS No. 142 establishes a new method of testing
goodwill for impairment by using a fair-value approach. The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, companies are required to adopt the pronouncement in
their fiscal year beginning after December 15, 2001.

Total goodwill included in the Companys Financial Statements was $122.9
million at September 29, 2001 and 103.2 million at December 31, 2000. Goodwill
amortization expense was $1.3 million during the third quarter of 2001 and $0.8
million during the third quarter of 2000. Goodwill amortization expense was
$3.6 million during the first three quarters of 2001 and $2.1 million during
the first three quarters of 2000. The Company is currently assessing the
effect of the new standards related to the impairment testing of goodwill, but
at this time can not estimate the impact, if any, on the consolidated financial
statements.

Also, SFAS No. 143, Accounting for Asset Retirement Obligations, was recently
approved by the Financial Accounting Standard Board. The standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted
to its present value each period, and the capitalized cost is depreciated over
the useful life of the related asset. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs a gain
or loss upon settlement. This standard is effective January 1, 2003. The
Company is currently assessing the effect of the new standard, but at this time
can not estimate the impact, if any, on the consolidated financial statements.

In addition, SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, was recently approved by the Financial Accounting Standard
Board. This standard replaces SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of and APB No. 30,
Reporting Results of Operations- Reporting the Effects of Disposal of a
Segment of a Business. SFAS No. 144 requires long-lived assets to be measured
at the lower of either the carrying amount or of the fair value less the cost
to sell, whether reported in continuing

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operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. This standard is effective January 1, 2002 and will not change
the accounting used for previous asset impairments or disposals.

Certain information in this Form 10-Q is forward-looking within the meaning of
the federal securities laws. While the Company believes any forward-looking
statements made are reasonable, actual results could differ materially since
the statements are based on our current expectations and are subject to risks
and uncertainties. These risks and uncertainties include, but are not limited
to, uncertainties relating to economic conditions, future financial
performance, 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, the outcome of pending and future
litigation and governmental proceedings, the estimated fair value of the
Companys assets and possible disposition of certain businesses. The Company
does not undertake, and expressly disclaims any obligation, to update or alter
its forward-looking statements whether as a result of new information, future
events or otherwise, except as required by applicable law. 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 exposure to market risk for changes in interest rates
relates primarily to the Companys long-term debt borrowings under the
revolving credit facility and investments in cash and cash equivalents. The
interest rate on the long-term debt borrowings under the credit facility is
variable and is based on the London Interbank Offered Rate (LIBOR). A 52 basis
point increase in interest rates (10 percent of the Companys weighted average
long-term debt interest rate for the first three quarters ended September 29,
2001) would have an immaterial effect on the Companys pre-tax earnings. All
highly liquid investments, including highly liquid debt instruments purchased
with an original maturity of three months or less, are considered cash
equivalents. The Company places its investments in cash equivalents with high
credit quality issuers and limits the amount of exposure to any one issuer. A
46 basis point decrease in interest rates (10 percent of the Companys weighted
average investment interest rate for the first three quarters ended September
29, 2001) would have an immaterial impact on the Companys pre-tax earnings.
The Company does not enter into derivative financial or derivative commodity
instruments for trading or speculative purposes. The Company conducts business
in various foreign currencies, primarily in Europe, Canada, and Japan.
Therefore, changes in the value of currencies of these countries affect the
Companys financial position and cash flows when translated into U.S. dollars.
As of September 29, 2001, the Company had not established a foreign-currency
hedging program. The Company has mitigated and will continue to mitigate a
portion of its currency exposure through operation of decentralized foreign
operating companies in

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which all costs are local currency based. A 10 percent change in the value of
all foreign currencies would have an immaterial effect on the Companys
financial position and cash flows.

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PART II. OTHER INFORMATION






| |  | Item 1. Legal
Proceedings. See the discussion in Note 9 to the Notes to
Consolidated Condensed Financial Statements.
| |  | --------------------------------------------------------------------------------------------------------------------
|
| |  | Item 6. Exhibits and Reports on Form 8-K                                                                            



| | A. |  | Exhibit No.  Description
| | -- |  | ------------------------



| |      
| | -----
| | None.



| | B. |  | Reports on Form 8-K
| | -- |  | -------------------



| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On July 10, 2001, the Company filed a Form 8-K under Item 5 reporting that
second quarter 2001 earnings would be 40-45 percent below the consensus
estimate due to a continuing broad-based slowdown in industrial manufacturing
activity.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                  |  |                                                                                                                                                                              
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  |  | KAYDON CORPORATION                                                                                                                                                           
|                 
|November 13, 2001 |  | /s/ Brian P. CampbellBrian P. Campbell
Chairman, President, Chief Executive
Officer and Chief Financial Officer
(Principal Executive Officer and Principal
Financial Officer)
|                 
|November 13, 2001 |  | /s/ Kenneth W. CrawfordKenneth W. Crawford
Vice President and Corporate Controller
(Principal Accounting Officer)                                                            

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