##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
 For Quarter Ended June 30, 2007
 Commission File No. 0-12640
 KAYDON CORPORATION
  Delaware
    
    13-3186040(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 Suite 300, 315 E. Eisenhower Parkway, Ann Arbor, Michigan
(Address of principal executive offices)
    
    48108
(Zip Code)
 (734) 747-7025
  þ o
  þ o o
  o þ




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Page No.Part I  Financial Information:Item 1. Financial Statements
    
    1Consolidated Condensed Balance Sheets -
June 30, 2007 (Unaudited) and December 31, 2006
    
    1Consolidated Condensed Statements of Operations (Unaudited) -
Quarter and First Half Ended June 30, 2007 and July 1, 2006
    
    2Consolidated Condensed Statements of Cash Flows (Unaudited) -
First Half Ended June 30, 2007 and July 1, 2006
    
    3Notes to Consolidated Condensed Financial Statements (Unaudited)
    
    4Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    15Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    24Item 4. Controls and Procedures
    
    24Part II  Other Information:Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    25Item 5.
Other Information
    
    26Item 6. Exhibits
    
    26Signatures
    
    27Exhibit Index
    
    28Eighth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift PlanKaydon Corporation Supplemental Executive Retirement Plan, as Amended & RestatedChange in Control Compensation AgreementChange in Control Compensation AgreementChange in Control Compensation AgreementChange in Control Compensation AgreementStatement Re: Computation of Ratio of Earnings to Fixed ChargesCertification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350




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ITEM 1. FINANCIAL STATEMENTS
KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 (Unaudited)June 30, 2007
    
    December 31, 2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    374,142,000
    
    
    $
    370,789,000Accounts receivable, net
    
    
    64,147,000
    
    
    
    54,066,000Inventories, net
    
    
    62,964,000
    
    
    
    56,043,000Other current assets
    
    
    11,809,000
    
    
    
    17,012,000Total current assets
    
    
    513,062,000
    
    
    
    497,910,000Property, plant and equipment, net
    
    
    109,891,000
    
    
    
    95,280,000Goodwill, net
    
    
    119,938,000
    
    
    
    119,484,000Other intangible assets, net
    
    
    19,787,000
    
    
    
    21,271,000Other assets
    
    
    2,871,000
    
    
    
    3,611,000Total assets
    
    $
    765,549,000
    
    
    $
    737,556,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    21,534,000
    
    
    $
    23,044,000Salaries and wages
    
    
    8,664,000
    
    
    
    9,961,000Taxes payable
    
    
    5,887,000
    
    
    
    4,350,000Interest payable
    
    
    822,000
    
    
    
    844,000Other accrued expenses
    
    
    13,530,000
    
    
    
    13,433,000Total current liabilities
    
    
    50,437,000
    
    
    
    51,632,000Long-term debt
    
    
    200,000,000
    
    
    
    200,000,000Long-term liabilities
    
    
    53,058,000
    
    
    
    52,744,000Total long-term liabilities
    
    
    253,058,000
    
    
    
    252,744,000Shareholders Equity:Common stock
    
    
    3,693,000
    
    
    
    3,693,000Paid-in capital
    
    
    46,853,000
    
    
    
    43,889,000Retained earnings
    
    
    597,886,000
    
    
    
    566,788,000Less  Treasury stock, at cost
    
    
    (195,107,000
    )
    
    
    (188,708,000
    )Accumulated other comprehensive income
    
    
    8,729,000
    
    
    
    7,518,000Shareholders equity
    
    
    462,054,000
    
    
    
    433,180,000Total liabilities and shareholders equity
    
    $
    765,549,000
    
    
    $
    737,556,000
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KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)
 Second Quarter Ended
    
    First Half EndedJune 30, 2007
    
    July 1, 2006
    
    June 30, 2007
    
    July 1, 2006Net sales
    
    $
    113,391,000
    
    
    $
    102,664,000
    
    
    $
    220,288,000
    
    
    $
    204,169,000Cost of sales
    
    
    65,423,000
    
    
    
    59,067,000
    
    
    
    127,482,000
    
    
    
    119,029,000Gross profit
    
    
    47,968,000
    
    
    
    43,597,000
    
    
    
    92,806,000
    
    
    
    85,140,000Selling, general and
administrative expenses
    
    
    19,619,000
    
    
    
    17,430,000
    
    
    
    38,166,000
    
    
    
    35,345,000Operating income
    
    
    28,349,000
    
    
    
    26,167,000
    
    
    
    54,640,000
    
    
    
    49,795,000Interest expense
    
    
    (2,365,000
    )
    
    
    (2,388,000
    )
    
    
    (4,752,000
    )
    
    
    (4,799,000
    )Interest income
    
    
    4,756,000
    
    
    
    3,927,000
    
    
    
    9,381,000
    
    
    
    7,323,000Income before income taxes
    
    
    30,740,000
    
    
    
    27,706,000
    
    
    
    59,269,000
    
    
    
    52,319,000Provision for income taxes
    
    
    11,097,000
    
    
    
    10,002,000
    
    
    
    21,396,000
    
    
    
    18,026,000Net income
    
    $
    19,643,000
    
    
    $
    17,704,000
    
    
    $
    37,873,000
    
    
    $
    34,293,000Weighted-average common shares:Basic
    
    
    27,832,000
    
    
    
    27,836,000
    
    
    
    27,853,000
    
    
    
    27,840,000Diluted
    
    
    34,789,000
    
    
    
    34,773,000
    
    
    
    34,807,000
    
    
    
    34,779,000Earnings per share:Basic
    
    $
    0.71
    
    
    $
    0.64
    
    
    $
    1.36
    
    
    $
    1.23Diluted
    
    $
    0.61
    
    
    $
    0.55
    
    
    $
    1.17
    
    
    $
    1.07Dividends declared per share
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.24
    
    
    $
    0.24
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KAYDON CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)
 First Half EndedJune 30, 2007
    
    July 1, 2006Cash flows from operating activities
    
    $
    37,212,000
    
    
    $
    37,898,000Cash flows used in investing activities:Additions to property, plant and equipment, net
    
    
    (20,180,000
    )
    
    
    (7,580,000
    )Cash used in investing activities
    
    
    (20,180,000
    )
    
    
    (7,580,000
    )Cash flows from (used in) financing activities:Cash dividends paid
    
    
    (6,763,000
    )
    
    
    (6,762,000
    )Purchase of treasury stock
    
    
    (7,186,000
    )
    
    
    (3,404,000
    )Proceeds from exercise of stock options
    
    
    75,000
    
    
    
    1,003,000Excess tax benefits from stock-based compensation
    
    
    157,000
    
    
    
    547,000Payments on debt
    
    
    
    
    
    
    (32,000
    )Cash used in financing activities
    
    
    (13,717,000
    )
    
    
    (8,648,000
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    38,000
    
    
    
    864,000Net increase in cash and cash equivalents
    
    
    3,353,000
    
    
    
    22,534,000Cash and cash equivalents  Beginning of period
    
    
    370,789,000
    
    
    
    320,804,000Cash and cash equivalents  End of period
    
    $
    374,142,000
    
    
    $
    343,338,000Cash paid for income taxes
    
    $
    12,531,000
    
    
    $
    13,344,000Cash paid for interest
    
    $
    4,000,000
    
    
    $
    4,000,000
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KAYDON CORPORATION
 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)
 (1)
    
    Basis of Presentation:The accompanying unaudited consolidated condensed financial statements of Kaydon Corporation
and subsidiaries (Kaydon or the Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included, and such adjustments are of a normal recurring
nature. The December 31, 2006 consolidated condensed balance sheet data was derived from
audited financial statements, but does not include all disclosures required by generally
accepted accounting principles. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys annual report on Form
10-K for the year ended December 31, 2006.(2)
    
    Cash and Cash Equivalents:The Company considers all highly liquid debt and investment instruments purchased with a
maturity of three months or less to be cash equivalents. At June 30, 2007, the Company had
$99.6 million invested in U.S. Government treasury bills, $121.5 million invested in various
money market and other short-term funds, $128.1 million invested in investment grade prime
commercial paper of several United States issuers, and $21.1 million invested in
time-deposits and other interest bearing accounts.(3)
    
    Inventories:Inventories are summarized as follows:
 June 30, 2007
    
    December 31, 2006Raw material
    
    $
    24,023,000
    
    
    $
    20,851,000Work in process
    
    
    14,899,000
    
    
    
    11,828,000Finished goods
    
    
    24,042,000
    
    
    
    23,364,000$
    62,964,000
    
    
    $
    56,043,000
 (4)
    
    Comprehensive Income:Comprehensive income reflects the change in equity of a business enterprise during a period
from transactions and other events, and from circumstances involving non-owner sources. For
the Company, comprehensive income consists of net income and other comprehensive income
which is comprised primarily of foreign currency translation
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adjustments. Other comprehensive income, net of tax, was approximately $0.9 million and
$2.0 million, resulting in comprehensive income of $20.6 million and $19.7 million for the
quarters ended June 30, 2007 and July 1, 2006. On a first half basis, other comprehensive
income, net of tax, was approximately $1.2 million and $2.4 million, resulting in
comprehensive income of $39.1 million and $36.7 million for the first halves ended June 30,
2007 and July 1, 2006.
 (5)
    
    Earnings per Share:The following table reconciles the numerators and denominators used in the calculations of
basic and diluted earnings per share for the periods presented.
 Second Quarter EndedJune 30, 2007
    
    July 1, 2006Numerators:Numerators for basic earnings per
share, net income
    
    $
    19,643,000
    
    
    $
    17,704,000Interest and debt issuance costs
amortization related to Contingent
Convertible Notes, net of taxes
    
    
    1,474,000
    
    
    
    1,486,000Numerators for diluted earnings per
share
    
    $
    21,117,000
    
    
    $
    19,190,000Denominators:Denominators for basic earnings
per share, weighted-average common
shares outstanding
    
    
    27,832,000
    
    
    
    27,836,000Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units
    
    
    98,000
    
    
    
    78,000Dilutive shares resulting from
Contingent Convertible Notes
    
    
    6,859,000
    
    
    
    6,859,000Denominators for diluted
earnings per share
    
    
    34,789,000
    
    
    
    34,773,000Earnings per share:Basic
    
    $
    0.71
    
    
    $
    0.64Diluted
    
    $
    0.61
    
    
    $
    0.55
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First Half EndedJune 30, 2007
    
    July 1, 2006Numerators:Numerators for basic earnings per
share, net income
    
    $
    37,873,000
    
    
    $
    34,293,000Interest and debt issuance costs
amortization related to Contingent
Convertible Notes, net of taxes
    
    
    2,962,000
    
    
    
    2,989,000Numerators for diluted earnings per
share
    
    $
    40,835,000
    
    
    $
    37,282,000Denominators:Denominators for basic earnings
per share, weighted-average common
shares outstanding
    
    
    27,853,000
    
    
    
    27,840,000Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units
    
    
    95,000
    
    
    
    80,000Dilutive shares resulting from
Contingent Convertible Notes
    
    
    6,859,000
    
    
    
    6,859,000Denominators for diluted
earnings per share
    
    
    34,807,000
    
    
    
    34,779,000Earnings per share:Basic
    
    $
    1.36
    
    
    $
    1.23Diluted
    
    $
    1.17
    
    
    $
    1.07
 The Company has outstanding $200.0 million of 4% Contingent Convertible Senior
Subordinated Notes due 2023 (the Notes). The Notes are convertible into a total of
6,858,710 shares of Company common stock at a conversion price of $29.16 per share, provided
certain contingencies are met. The Notes become convertible during any calendar quarter if
the closing sale price of Company common stock is more than $34.99 for at least 20 trading
days in a period of 30 consecutive trading days ending on the last trading day of the
preceding calendar quarter. Based on this formula, holders will be able to convert their
Notes during the third quarter of 2007. The Notes are discussed further in Note 7.(6)
    
    Business Segment Information:The Company operates through operating segments for which separate financial information is
available, and for which operating results are evaluated regularly by the Companys chief
operating decision maker in determining resource allocation and assessing performance.
Certain of the operating segments have similar economic characteristics, as well as other
common attributes, including nature of the products and production processes, distribution
patterns and classes of customers. The Company aggregates these operating segments for
reporting purposes. Certain other operating segments do not exhibit the common attributes
mentioned above and, therefore, information about them is reported separately. Still other
operating segments do not meet
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the quantitative thresholds for separate disclosure and their
information is combined and disclosed as Other.The Company has three reportable segments and other operating segments engaged in the
manufacture and sale of the following:Friction and Motion Control Products complex components used in specialized robotics,
medical, aerospace, defense, security, electronic, material handling, construction,
alternative-energy, and other industrial applications. Products include anti-friction
bearings, split roller bearings, specialty balls and retaining devices.Velocity Control Products complex components used in specialized robotics, material
handling, machine tool, medical, amusement and other industrial applications. Products
include industrial shock absorbers, safety shock absorbers, velocity controls, gas springs
and rotary dampers.Sealing Products complex and standard ring and seal products used in demanding industrial,
aerospace and defense applications. Products include engine rings, sealing rings and shaft
seals.Other filter elements and liquid and gas-phase air filtration systems, metal alloys,
machine tool components, presses, dies and benders used in a variety of industrial
applications.The accounting policies of the operating segments are the same as those of the Company.
Segment performance is evaluated based on segment operating income (which includes an
estimated provision for state income taxes) and segment assets.Items not allocated to segment operating income include certain amortization and corporate
administrative expenses, and other amounts. Corporate assets consist of cash and cash
equivalents, fixed assets and certain prepaid expenses. The selling price for transfers
between operating segments and geographic areas is generally based on cost plus a mark-up.
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Second Quarter Ended
    
    First Half EndedJune 30, 2007
    
    July 1, 2006
    
    June 30, 2007
    
    July 1, 2006Net salesFriction and Motion Control ProductsExternal customers
    
    $
    64,899,000
    
    
    $
    60,615,000
    
    
    $
    125,529,000
    
    
    $
    117,677,000Intersegment
    
    
    57,000
    
    
    
    32,000
    
    
    
    114,000
    
    
    
    63,00064,956,000
    
    
    
    60,647,000
    
    
    
    125,643,000
    
    
    
    117,740,000Velocity Control ProductsExternal customers
    
    
    16,156,000
    
    
    
    14,278,000
    
    
    
    31,825,000
    
    
    
    28,796,000Sealing ProductsExternal customers
    
    
    11,520,000
    
    
    
    10,808,000
    
    
    
    23,553,000
    
    
    
    21,643,000Intersegment
    
    
    (39,000
    )
    
    
    (18,000
    )
    
    
    (79,000
    )
    
    
    (41,000
    )11,481,000
    
    
    
    10,790,000
    
    
    
    23,474,000
    
    
    
    21,602,000OtherExternal customers
    
    
    20,816,000
    
    
    
    16,963,000
    
    
    
    39,381,000
    
    
    
    36,053,000Intersegment
    
    
    (18,000
    )
    
    
    (14,000
    )
    
    
    (35,000
    )
    
    
    (22,000
    )20,798,000
    
    
    
    16,949,000
    
    
    
    39,346,000
    
    
    
    36,031,000Total consolidated net sales
    
    $
    113,391,000
    
    
    $
    102,664,000
    
    
    $
    220,288,000
    
    
    $
    204,169,000
 Second Quarter Ended
    
    First Half EndedJune 30, 2007
    
    July 1, 2006
    
    June 30, 2007
    
    July 1, 2006Operating incomeFriction and Motion Control Products
    
    $
    18,581,000
    
    
    $
    17,785,000
    
    
    $
    34,921,000
    
    
    $
    33,704,000Velocity Control Products
    
    
    4,221,000
    
    
    
    3,291,000
    
    
    
    8,314,000
    
    
    
    6,983,000Sealing Products
    
    
    1,975,000
    
    
    
    1,735,000
    
    
    
    4,431,000
    
    
    
    2,735,000Other
    
    
    3,210,000
    
    
    
    1,539,000
    
    
    
    5,818,000
    
    
    
    3,458,000Total segment operating income
    
    
    27,987,000
    
    
    
    24,350,000
    
    
    
    53,484,000
    
    
    
    46,880,000State income tax provisionincluded in segment operating
income
    
    
    822,000
    
    
    
    800,000
    
    
    
    1,565,000
    
    
    
    1,511,000Items not allocated to segment
operating income
    
    
    (460,000
    )
    
    
    1,017,000
    
    
    
    (409,000
    )
    
    
    1,404,000Interest expense
    
    
    (2,365,000
    )
    
    
    (2,388,000
    )
    
    
    (4,752,000
    )
    
    
    (4,799,000
    )Interest income
    
    
    4,756,000
    
    
    
    3,927,000
    
    
    
    9,381,000
    
    
    
    7,323,000Income before income taxes
    
    $
    30,740,000
    
    
    $
    27,706,000
    
    
    $
    59,269,000
    
    
    $
    52,319,000
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Second Quarter Ended
    
    First Half EndedJune 30, 2007
    
    July 1, 2006
    
    June 30, 2007
    
    July 1, 2006Additions to net property, plant
and equipmentFriction and Motion Control Products
    
    $
    11,343,000
    
    
    $
    2,588,000
    
    
    $
    16,859,000
    
    
    $
    5,671,000Velocity Control Products
    
    
    224,000
    
    
    
    130,000
    
    
    
    491,000
    
    
    
    358,000Sealing Products
    
    
    967,000
    
    
    
    64,000
    
    
    
    2,352,000
    
    
    
    217,000Other
    
    
    182,000
    
    
    
    673,000
    
    
    
    356,000
    
    
    
    1,180,000Corporate
    
    
    80,000
    
    
    
    19,000
    
    
    
    122,000
    
    
    
    154,000Total consolidated additions to net
property, plant and equipment
    
    $
    12,796,000
    
    
    $
    3,474,000
    
    
    $
    20,180,000
    
    
    $
    7,580,000
 June 30, 2007
    
    December 31, 2006Total assetsFriction and Motion Control Products
    
    $
    203,408,000
    
    
    $
    177,061,000Velocity Control Products
    
    
    92,866,000
    
    
    
    85,759,000Sealing Products
    
    
    25,204,000
    
    
    
    21,445,000Other
    
    
    93,436,000
    
    
    
    94,003,000Corporate
    
    
    350,635,000
    
    
    
    359,288,000Total consolidated assets
    
    $
    765,549,000
    
    
    $
    737,556,000
 (7)
    
    Long-term Debt:The Company has outstanding $200.0 million of 4% Contingent Convertible Senior Subordinated
Notes due 2023 (the Notes). Holders of the Notes may require us to repurchase all or a
portion of their Notes on May 23, 2008, 2013, and 2018, at 100 percent of the principal
amount of the Notes, plus accrued but unpaid interest (including contingent interest and
liquidated damages, if any) to the date of repurchase, payable in cash. If the Holders of
the Notes exercise their right to require us to repurchase all or a portion of their Notes
on May 23, 2008, the Company intends to refinance the obligation on a long-term basis with
its revolving credit facility. Because the Company has the ability and intent to refinance
the obligation on a long-term basis, the Notes continue to be reported as long-term debt at
June 30, 2007.Interest expense on the Notes equaled $2.0 million for the second quarter of 2007. Note
issuance costs of approximately $6.5 million are being amortized over a five-year period.
Amortization of Note issuance costs during the second quarter of 2007 was $0.3 million.
Amortization of Note issuance costs is recorded as a component of interest expense. Note
issuance costs included in other assets in the Consolidated Condensed Balance Sheets as of
June 30, 2007 and December 31, 2006 were $1.2 million and $1.8 million.The Companys $300.0 million senior unsecured revolving credit facility provides for
borrowings and issuance of letters of credit by the Company and its subsidiaries in various
currencies for general corporate purposes, including acquisitions. The credit facility
matures on July 12, 2010 and is guaranteed by the Company and certain of the Companys
domestic subsidiaries. Interest expense incurred on borrowings under the revolving credit
facility will be based on the London Interbank Offered Rate. The
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revolving credit facility
contains restrictive financial covenants on a consolidated basis including leverage and
coverage ratios, utilizing measures of earnings and interest expense as defined in the
revolving credit facility agreement. Under the leverage ratio restriction, the Company may
not allow the ratio of total indebtedness, net of domestic cash in excess of $15.0 million,
to adjusted earnings before interest expense, taxes, depreciation and amortization to exceed
3.5 to 1.0. Under the interest coverage ratio restriction, the Company may not allow the
ratio of adjusted earnings before interest expense and taxes to interest expense to be less
than 3.0 to 1.0. The Company is in compliance with all restrictive covenants contained in
the revolving credit facility at June 30, 2007. After consideration of the
facilitys covenants and $4.9 million of letters of credit issued under the facility, the
Company has available credit under its revolving credit facility of $295.1 million at June
30, 2007.The Companys outstanding debt was as follows:
 June 30, 2007
    
    December 31, 20064% Contingent Convertible Senior
Subordinated Notes due 2023
    
    $
    200,000,000
    
    
    $
    200,000,000
 (8)
    
    Contingencies:The Company is involved in ongoing environmental remediation activities at certain
manufacturing sites. As of June 30, 2007, an undiscounted accrual in the amount of $1.0
million, representing the Companys best estimate for ultimate resolution of these
environmental matters, is recorded in other long-term liabilities in the Consolidated
Condensed Balance Sheet.Various other claims arising in the normal course of business are pending against the
Company. The Companys estimated legal costs expected to be incurred in connection with
claims, lawsuits and environmental matters are accrued in the Consolidated Condensed Balance
Sheet.(9)
    
    Goodwill and Other Intangible AssetsAnnually during the third quarter, or between annual tests if certain circumstances exist,
the Company tests the carrying amounts of goodwill and certain intangible assets, deemed to
have indefinite useful lives, for impairment.
 10




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##### Table of Contents



The changes in the carrying amount of goodwill for the first half ended June 30, 2007, were
as follows: Friction andMotion
    
    VelocityControl
    
    Control
    
    SealingProducts
    
    Products
    
    Products
    
    Other
    
    TotalBalance as of
January 1, 2007
    
    $
    32,452,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    119,484,000Effect of foreign
currency exchange
rate changes
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,000Balance as of
March 31, 2007
    
    $
    32,487,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    119,519,000Effect of foreign
currency exchange
rate changes
    
    
    419,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    419,000Balance as of
June 30, 2007
    
    $
    32,906,000
    
    
    $
    43,200,000
    
    
    $
    186,000
    
    
    $
    43,646,000
    
    
    $
    119,938,000
 Other intangible assets are summarized as follows:
 June 30, 2007
    
    
    December 31, 2006Amortized Intangible Assets
    
    Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationCustomer relationships and lists
    
    $
    18,694,000
    
    
    $
    8,406,000
    
    
    $
    18,694,000
    
    
    $
    7,273,000Patents and developed technology
    
    
    6,329,000
    
    
    
    1,942,000
    
    
    
    6,299,000
    
    
    
    1,596,000Distributor agreements
    
    
    374,000
    
    
    
    105,000
    
    
    
    374,000
    
    
    
    87,000Product names
    
    
    320,000
    
    
    
    81,000
    
    
    
    320,000
    
    
    
    64,000$
    25,717,000
    
    
    $
    10,534,000
    
    
    $
    25,687,000
    
    
    $
    9,020,000
  June 30, 2007
    
    December 31, 2006Unamortized Intangible Assets
    
    Carrying Amount
    
    Carrying AmountTrademarks
    
    $
    4,604,000
    
    
    $
    4,604,000
 Aggregate Intangible Assets Amortization ExpenseFor the first half ended June 30, 2007
    
    $
    1,514,000For the first half ended July 1, 2006
    
    $
    1,539,000
 Estimated Intangible Assets Amortization ExpenseFor the year ending December 31, 2007
    
    $
    3,027,000For the year ending December 31, 2008
    
    $
    2,957,000For the year ending December 31, 2009
    
    $
    2,633,000For the year ending December 31, 2010
    
    $
    2,272,000For the year ending December 31, 2011
    
    $
    1,448,000
 11




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##### Table of Contents



(10)
    
    Employee Benefit Plans:The components of net periodic benefit cost (income) are as follows:
 Second Quarter Ended
    
    
    First Half EndedPension Benefits
    
    June 30, 2007
    
    
    July 1, 2006
    
    
    June 30, 2007
    
    
    July 1, 2006Service cost
    
    $
    693,000
    
    
    $
    759,000
    
    
    $
    1,386,000
    
    
    $
    1,518,000Interest cost
    
    
    1,459,000
    
    
    
    1,394,000
    
    
    
    2,918,000
    
    
    
    2,788,000Expected return on plan assets
    
    
    (1,345,000
    )
    
    
    (1,168,000
    )
    
    
    (2,690,000
    )
    
    
    (2,336,000
    )Amortization of:Unrecognized net prior service cost
    
    
    8,000
    
    
    
    50,000
    
    
    
    16,000
    
    
    
    100,000Unrecognized net loss
    
    
    255,000
    
    
    
    362,000
    
    
    
    510,000
    
    
    
    724,000Total
    
    $
    1,070,000
    
    
    $
    1,397,000
    
    
    $
    2,140,000
    
    
    $
    2,794,000
 Postretirement Benefits
    
    Second Quarter Ended
    
    
    First Half EndedJune 30, 2007
    
    July 1, 2006
    
    June 30, 2007
    
    July 1, 2006Service cost
    
    $
    91,000
    
    
    $
    92,000
    
    
    $
    182,000
    
    
    $
    184,000Interest cost
    
    
    201,000
    
    
    
    203,000
    
    
    
    402,000
    
    
    
    406,000Amortization of:Unrecognized net
prior service cost
    
    
    (440,000
    )
    
    
    (442,000
    )
    
    
    (880,000
    )
    
    
    (884,000
    )Unrecognized net gain
    
    
    (121,000
    )
    
    
    (97,000
    )
    
    
    (242,000
    )
    
    
    (194,000
    )Total
    
    $
    (269,000
    )
    
    $
    (244,000
    )
    
    $
    (538,000
    )
    
    $
    (488,000
    )
 The Company expects to contribute approximately $26.1 million to its qualified pension
plans in 2007, with $23.2 million being contributed during the third quarter.(11)
    
    Stock-Based CompensationA summary of restricted stock information pursuant to the Companys equity incentive plans
for the first half of 2007 is as follows:
 First Half EndedJune 30, 2007Wtd.-Avg.Restricted
    
    Grant DateStock
    
    Fair ValueOutstanding at January 1, 2007
    
    
    365,267
    
    
    $
    28.98Granted
    
    
    179,980
    
    
    $
    43.97Vested
    
    
    (105,812
    )
    
    $
    27.69Canceled
    
    
    (1,755
    )
    
    $
    42.48Outstanding at March 31, 2007
    
    
    437,680
    
    
    $
    35.40Granted
    
    
    3,000
    
    
    $
    46.54Outstanding at June 30, 2007
    
    
    440,680
    
    
    $
    35.48
 Restricted stock awards granted pursuant to the Companys equity incentive plans allow
for continued annual vesting if a grantee retires at or after the age of 65, even though the
grantee is no longer providing services to the Company. For awards made prior to January 1,
2006, compensation cost associated with these restricted stock awards is being amortized
ratably over the awards normal five- to ten-year vesting periods, or up to the date of
actual retirement of the grantee, when applicable. Concurrent with the adoption of the
revision to Statement of Financial Accounting Standards No. 123(R), Share-Based Payments,
the Company changed this approach for new awards granted after January 1, 2006, so that
compensation cost related to grantees who become retirement eligible during the normal
vesting period is amortized ratably over the period from the grant date to the date
retirement eligibility is achieved. Compensation expense is
 12




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##### Table of Contents



recognized immediately for
awards granted to retirement eligible employees. Had the Company recognized compensation
cost under this new approach for all outstanding restricted stock awards, the expense would
have decreased $1.2 million and $1.4 million during the second quarter and first half of
2007, and would have decreased $0.2 million and $0.3 million during the second quarter and
first half of 2006.
 A summary of stock option information for the first half of 2007 is as follows:
 First Half EndedJune 30, 2007Wtd.-Avg.Options
    
    Ex. PriceOutstanding at January 1, 2007
    
    
    75,250
    
    
    $
    28.35Granted
    
    
    250,000
    
    
    $
    43.03Outstanding at March 31, 2007
    
    
    325,250
    
    
    $
    39.63Granted
    
    
    10,500
    
    
    $
    46.54Exercised
    
    
    (3,250
    )
    
    $
    23.04Outstanding at June 30, 2007
    
    
    332,500
    
    
    $
    40.01Exercisable at June 30, 2007
    
    
    30,900
    
    
    $
    26.66Weighted-Avg. Fair Value of Options Granted
    
    $
    12.73Weighted-Avg. Remaining Contractual Life (years)Outstanding at June 30, 2007
    
    
    8.9Exercisable at June 30, 2007
    
    
    4.7
 The exercise price of each fixed option equals the market price of Company common stock
on the date of grant. Options granted become exercisable at the rate of 10.0 percent, 20.0
percent or 25.0 percent per year, commencing one year after the date of grant, and options
expire five or ten years after the date of grant. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. Compensation
expense related to fixed stock options was $0.2 million and $0.3 during the second quarter
and first half of 2007.The aggregate intrinsic value of options outstanding at June 30, 2007 is $4.0 million.(12)
    
    Impact of Recently Issued Accounting PronouncementsIn July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return, and provides guidance regarding
subsequent de-recognition of a tax position, classification, interest and penalties,
accounting in interim periods, and disclosure. The Company
 13




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##### Table of Contents



adopted the provisions of FIN 48
effective January 1, 2007. The adoption of FIN 48 was immaterial to the Company.The Company had liabilities recorded for unrecognized tax benefits totaling $2,563,000 as of
January 1, 2007, all of which would affect the effective tax rate. It is the Companys
policy to include interest and penalties incurred due to underpayment or late payment of
income taxes due to a taxing authority on a net-of-tax basis as a component of income tax
expense. The Company has recorded $557,000 in liabilities for tax
related interest and penalties on its consolidated balance sheet, as of January 1, 2007. In the first half of
2007 there were no material changes to the Companys unrecognized tax benefits, including
related interest and penalties. The Company does not expect that the total amounts of
unrecognized tax benefits will significantly change within the next 12 months.The Company, or one of its subsidiaries, operates and files income tax returns in the United
States, various states, and foreign jurisdictions. Foreign jurisdictions significant to the
Company include Germany and the United Kingdom. With limited exceptions, the Company is no
longer subject to U.S. federal tax examinations for years before 2003, state examinations
for years before 2001, German tax examinations for years before 2005, or United Kingdom tax
examinations for years before 2004.In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.
SFAS No. 158 requires plan sponsors of defined benefit pension and other postretirement
benefit plans (collectively, postretirement benefit plans) to recognize the funded status
of their postretirement benefit plans on the balance sheet, to measure the fair value of
plan assets and benefit obligations as of the date of the plan sponsors fiscal year-end,
and to provide additional disclosures. Kaydon adopted the recognition and disclosure
provisions of SFAS No. 158 on December 31, 2006. The requirement for the Company to measure
the fair value of plan assets and benefit obligations as of its fiscal year-end is effective
for fiscal years ending after December 15, 2008.
 14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
      15
    Table of Contents  Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
 Results of Operations
 Second Quarter Results
       16
    Table of Contents  17
    Table of Contents    First Half Results
  Liquidity and Capital Resources
     18
    Table of Contents    Outlook
  Critical Accounting Policies and Estimates
   Inventories 
  Impairment of Long-Lived Assets 19
    Table of Contents     Notes to Consolidated Financial Statements (Note 1 and Note 11)
 Impairment of Goodwill and Indefinite-Lived Intangible Assets
    20
    Table of Contents  Notes to Consolidated Financial Statements (Note 11)
 4% Contingent Convertible Senior Subordinated Notes
     Notes to Consolidated Financial Statements (Note 2 and Note 4)
 Retirement Benefits
 21
    Table of Contents  Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations Notes to Consolidated
Financial Statements (Note 7)
  Notes to Consolidated Financial Statements (Note 7)
 22
    Table of Contents  Income Taxes
  Notes to Consolidated Financial Statements (Note 9)
 Forward-Looking Statements
   23
    Table of Contents  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  24
    Table of Contents  PART II.
    
    OTHER INFORMATION
 
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 The following table provides the information with respect to
purchases made by the Company of shares of its common stock
during each month in the second quarter of 2007:
 Total Number of
    
    Maximum Number ofTotal Number
    
    Average Price
    
    Shares Purchased as
    
    Shares that MayOf Shares
    
    Paid
    
    Part of Publicly
    
    Yet be PurchasedPeriod
    
    Purchased
    
    Per Share
    
    Announced Plan
    
    Under the Plan (1)April 1 to April 28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,803,971April 29 to May 26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,803,971May 27 to June 30
    
    
    80,000
    
    
    $
    49.33
    
    
    
    80,000
    
    
    
    4,723,971Total
    
    
    80,000
    
    
    $
    49.33
    
    
    
    80,000
 (1)
    
    On May 6, 2005, the Companys Board of Directors authorized management to purchase up to
5,000,000 shares of its common stock in the open market. 
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Nominee
    
    Votes For
    
    
    Votes WithheldDavid A. Brandon
    
    
    19,174,227
    
    
    
    7,303,256Timothy J. ODonovan
    
    
    26,136,839
    
    
    
    340,644James OLeary
    
    
    26,159,605
    
    
    
    317,878Thomas C. Sullivan
    
    
    25,653,514
    
    
    
    823,969
  25
    Table of Contents  ITEM 5. OTHER INFORMATION
  
 ITEM
6. EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Eighth Amendment to the Kaydon Corporation Employee Stock
Ownership and Thrift Plan10.2
    
    Kaydon Corporation Supplemental Executive Retirement Plan, as
Amended and Restated10.3
    
    Change in Control Compensation Agreement dated May 31, 2007
between the Company and John F. Brocci10.4
    
    Change in Control Compensation Agreement dated May 31, 2007
between the Company and John R. Emling10.5
    
    Change in Control Compensation Agreement dated May 31, 2007
between the Company and Kenneth W. Crawford10.6
    
    Change in Control Compensation Agreement dated May 31, 2007
between the Company and Peter C. DeChants12
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 200231.2
    
    Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 26
    Table of Contents  KAYDON CORPORATIONAugust 8, 2007
    /s/ James OLearyJames OLearyPresident and Chief Executive Officer
(Principal Executive Officer)August 8, 2007
    /s/ Kenneth W. CrawfordKenneth W. CrawfordSenior Vice President  Chief Financial Officer and
Corporate Controller
(Principal Financial and Accounting Officer) 27
    Table of Contents  Exhibit No.
    
    Description10.1
    
    Eighth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan10.2
    
    Kaydon Corporation Supplemental Executive Retirement Plan, as Amended and Restated10.3
    
    Change in Control Compensation Agreement dated May 31, 2007 between the Company and John F.
Brocci10.4
    
    Change in Control Compensation Agreement dated May 31, 2007 between the Company and John R.
Emling10.5
    
    Change in Control Compensation Agreement dated May 31, 2007 between the Company and Kenneth
W. Crawford10.6
    
    Change in Control Compensation Agreement dated May 31, 2007 between the Company and Peter C.
DeChants12
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 28