##### Table of Contents



Washington, DC 20549



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|                                 |  |                            
|-------------------------------- |  | ---------------------------
|For Quarter Ended March 31, 2001 |  | Commission File No. 0-12640





|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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 |  |  | 48108      | 
|                                                         
|                                                         
|                                                         
|                                                         
|(Address of principal executive offices)                  |  |  | (Zip Code) | 

Registrants telephone number, including area code (734) 747-7025

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES        NO

Common Stock Outstanding at May 1, 2001  29,976,872 shares, $.10 par value.





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TABLE OF CONTENTS



|                               |                                                                                                  |  |  |  |  |  |  | 
|------------------------------ | ------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I - FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS                                                                    
|                               | CONSOLIDATED CONDENSED BALANCE SHEETS - MARCH 31, 2001 AND DECEMBER 31, 2000                    
|                               | CONSOLIDATED CONDENSED STATEMENTS OF INCOME - QUARTER ENDED MARCH 31, 2001 AND APRIL 1, 2000    
|                               | CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - QUARTER ENDED MARCH 31, 2001 AND APRIL 1, 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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##### Table of Contents



KAYDON CORPORATION FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2001

INDEX



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|                                |                                                                                                  |  |          |       | 
|------------------------------- | ------------------------------------------------------------------------------------------------ |  | -------- | ----- | 
|                                |                                                                                                  |  | Page No. |      
|                                |                                                                                                  |  |          |      
|Part I  Financial Information:
|                               
|                                | Item 1. Financial Statements                                                                    
|                               
|                                | Consolidated Condensed Balance Sheets -
March 31, 2001 and December 31, 2000                     |  |          | 1     | 
|                               
|                                | Consolidated Condensed Statements of Income -
Quarter Ended March 31, 2001
and April 1, 2000     |  |          | 2     | 
|                               
|                                | Consolidated Condensed Statements of Cash Flows -
Quarter Ended March 31, 2001 and
April 1, 2000 |  |          | 3     | 
|                               
|                                | Notes to Consolidated Condensed Financial Statements                                             |  |          | 4-10  | 
|                               
|                                | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations    |  |          | 11-13 | 
|                               
|                                | Item 3. Quantitative and Qualitative Disclosures About
Market Risk                               |  |          | 13    | 
|                               
|Part II  Other Information:   
|                               
|                                | Item 1.  Legal Proceedings                                                                      |  |          | 14    | 
|                               
|                                | Item 6.  Exhibits and Reports on Form 8-K                                                       |  |          | 14    | 
|                               
|                                | Signatures                                                                                       |  |          | 15    | 





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|                                                                   |  |                |              |   |                   |   |              |  
|------------------------------------------------------------------ |  | -------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                   |  | March 31, 2001 |              |   | December 31, 2000 |  
|                                                                   |  |                |              |   |                   |  
|                                                                   |  | (Unaudited)    |             
|Assets:                                                           
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cash and cash equivalents                                          |  | $              | 122,966,000  |   |                   | $ | 114,965,000  |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Accounts receivable, net                                           |  |                | 61,655,000   |   |                   |   | 56,986,000   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Inventories, net                                                   |  |                | 72,739,000   |   |                   |   | 60,110,000   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other current assets                                               |  |                | 9,385,000    |   |                   |   | 9,124,000    |  
|                                                                   |  |                |              |   |                   |  
|                                                                  
|Total current assets                                               |  |                | 266,745,000  |   |                   |   | 241,185,000  |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Plant and equipment, net                                           |  |                | 113,604,000  |   |                   |   | 105,304,000  |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cost in excess of net tangible
assets of purchased businesses, net |  |                | 152,923,000  |   |                   |   | 103,248,000  |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other assets                                                       |  |                | 25,920,000   |   |                   |   | 25,815,000   |  
|                                                                   |  |                |              |   |                   |  
|Total assets                                                       |  | $              | 559,192,000  |   |                   | $ | 475,552,000  |  
|                                                                   |  |                |              |   |                   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Liabilities and Shareholders Equity :                            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Accounts payable                                                   |  | $              | 15,420,000   |   |                   | $ | 12,257,000   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Accrued expenses                                                   |  |                | 51,857,000   |   |                   |   | 47,742,000   |  
|                                                                   |  |                |              |   |                   |  
|                                                                  
|Total current liabilities                                          |  |                | 67,277,000   |   |                   |   | 59,999,000   |  
|                                                                  
|Long-term debt                                                     |  |                | 118,245,000  |   |                   |   | 47,518,000   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Long-term liabilities                                              |  |                | 46,093,000   |   |                   |   | 45,600,000   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Shareholders equity:                                             
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Common stock                                                       |  |                | 3,683,000    |   |                   |   | 3,680,000    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Paid-in capital                                                    |  |                | 44,105,000   |   |                   |   | 42,971,000   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Retained earnings                                                  |  |                | 433,409,000  |   |                   |   | 426,657,000  |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Less  treasury stock, at cost                                     |  |                | (134,730,000 | ) |                   |   | (134,618,000 | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Less  restricted stock awards                                     |  |                | (10,700,000  | ) |                   |   | (10,357,000  | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Accumulated other comprehensive loss                               |  |                | (8,190,000   | ) |                   |   | (5,898,000   | )
|                                                                   |  |                |              |   |                   |  
|                                                                   |  |                | 327,577,000  |   |                   |   | 322,435,000  |  
|                                                                   |  |                |              |   |                   |  
|Total liabilities and
Shareholders equity                         |  | $              | 559,192,000  |   |                   | $ | 475,552,000  |  
|                                                                   |  |                |              |   |                   |  

See accompanying notes to consolidated condensed financial statements.

1



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|                                |         |   |                |            |  |               |            |            | 
|------------------------------- | ------- | - | -------------- | ---------- |  | ------------- | ---------- | ---------- | 
|                                |         |   | Quarter Ended  |           
|                                |         |   |                |           
|                                |         |   | March 31, 2001 |            |  | April 1, 2000 |           
|                                |         |   |                |            |  |               |           
|                               
|Net sales                       |         | $ | 91,354,000     |            |  | $             | 84,920,000 |           
|                               
|Cost of sales                   |         |   | 61,762,000     |            |  |               | 52,808,000 |           
|                                |         |   |                |            |  |              
|                               
|Gross profit                    |         |   | 29,592,000     |            |  |               | 32,112,000 |           
|                               
|Operating expenses              |         |   | 13,657,000     |            |  |               | 12,553,000 |           
|                                |         |   |                |            |  |              
|                               
|Operating income                |         |   | 15,935,000     |            |  |               | 19,559,000 |           
|                               
|Interest income, net            |         |   | 564,000        |            |  |               | 1,547,000  |           
|                                |         |   |                |            |  |              
|                               
|Income before income taxes      |         |   | 16,499,000     |            |  |               | 21,106,000 |           
|                               
|Provision for income taxes      |         |   | 6,104,000      |            |  |               | 7,810,000  |           
|                                |         |   |                |            |  |              
|                               
|Net income                      |         | $ | 10,395,000     |            |  | $             | 13,296,000 |           
|                                |         |   |                |            |  |              
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|Weighted Average Common Shares:
|                               
|                               
|                               
|                               
|                                | Basic   |   |                | 29,929,000 |  |               |            | 30,461,000 | 
|                               
|                               
|                               
|                               
|                                | Diluted |   |                | 29,958,000 |  |               |            | 30,521,000 | 
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|Earnings Per Share:            
|                               
|                               
|                               
|                               
|                                | Basic   |   | $              | .35        |  |               | $          | .44        | 
|                               
|                               
|                               
|                               
|                                | Diluted |   | $              | .35        |  |               | $          | .44        | 

See accompanying notes to consolidated condensed financial statements.

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|                                                             |                                          |            |             |               |            |   |              |             |         |  
|------------------------------------------------------------ | ---------------------------------------- | ---------- | ----------- | ------------- | ---------- | - | ------------ | ----------- | ------- | -
|                                                             |                                          |            |             | Quarter Ended |           
|                                                             |                                          |            |             |               |           
|                                                             |                                          |            |             | Mar. 31, 2001 |            |   | Apr. 1, 2000 |            
|                                                             |                                          |            |             |               |            |   |              |            
|Cash flows from operating activities                         |                                          | $          | 15,707,000  |               |            | $ | 24,264,000   |            
|                                                             |                                          |            |             |               |            |  
|                                                             | Cash flows used in investing activities:
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Capital expenditures, net                |            |             | (4,453,000    | )          |   |              | (3,075,000  | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Acquisitions of businesses, net          |            |             | (70,497,000   | )          |   |              | (1,008,000  | )      
|                                                             |                                          |            |             |               |            |  
|                                                            
|                                                            
|                                                            
|                                                            
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|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|Cash used in investing activities                            |                                          |            | (74,950,000 | )             |            |   | (4,083,000   | )          
|                                                             |                                          |            |             |               |            |  
|Cash flows from (used in) financing activities:             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from issuance of common stock   |            |             | 713,000       |            |   |              | 452,000     |        
|                                                            
|                                                            
|                                                            
|                                                            
|Dividends paid                                               |                                          |            | (3,643,000  | )             |            |   | (3,427,000   | )          
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Long-term debt:                         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                          | Issuance   |             |               | 70,750,000 |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                          | Retirement |             |               | (18,000    | ) |              |             | (18,000 | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchase of treasury stock               |            |             | (173,000      | )          |   |              | (13,242,000 | )      
|                                                             |                                          |            |             |               |            |  
|                                                            
|                                                            
|                                                            
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|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|Cash from (used in) financing activities                     |                                          |            | 67,629,000  |               |            |   | (16,235,000  | )          
|                                                             |                                          |            |             |               |            |  
|                                                            
|                                                            
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|Effect of exchange rate changes on cash
and cash equivalents |                                          |            | (385,000    | )             |            |   | (118,000     | )          
|                                                             |                                          |            |             |               |            |  
|                                                            
|                                                            
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|Net increase in cash and cash equivalents                    |                                          |            | 8,001,000   |               |            |   | 3,828,000    |            
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents  Beginning of period              |                                          |            | 114,965,000 |               |            |   | 89,749,000   |            
|                                                             |                                          |            |             |               |            |  
|Cash and cash equivalents  End of period                    |                                          | $          | 122,966,000 |               |            | $ | 93,577,000   |            
|                                                             |                                          |            |             |               |            |  
|Cash expended for income taxes                               |                                          | $          | 5,141,000   |               |            | $ | 515,000      |            
|                                                             |                                          |            |             |               |            |  
|Cash expended for interest                                   |                                          | $          | 600,000     |               |            | $ | 8,000        |            
|                                                             |                                          |            |             |               |            |  

See accompanying notes to consolidated condensed financial statements.

3



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|(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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Inventories are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                |  |                |            |  |                   |   |            | 
|--------------- |  | -------------- | ---------- |  | ----------------- | - | ---------- | 
|                |  | March 31, 2001 |            |  | December 31, 2000 |  
|                |  |                |            |  |                   |  
|Raw Material    |  | $              | 28,252,000 |  |                   | $ | 23,076,000 | 
|               
|               
|               
|               
|Work in Process |  |                | 16,025,000 |  |                   |   | 15,286,000 | 
|               
|               
|               
|               
|Finished Goods  |  |                | 28,462,000 |  |                   |   | 21,748,000 | 
|                |  |                |            |  |                   |  
|                |  | $              | 72,739,000 |  |                   | $ | 60,110,000 | 
|                |  |                |            |  |                   |  



|(3) |  | Comprehensive income reflects the change in equity of a business
enterprise during a period from transactions and other events, and from
circumstances involving nonowner sources. For the Company, comprehensive
income consists of net income, minimum pension liability adjustments and
foreign currency translation adjustments. Other comprehensive income, net
of tax, was approximately $(2.3) million and $(.5) million, resulting in
comprehensive income of $8.1 million and $12.8 million for the quarters
ended March 31, 2001 and April 1, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | The following table reconciles the numerators and denominators used in
the calculation of basic and diluted earnings per share for the periods
presented.                                                                                                                                                                                                                                                                                                                                                                                                    

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|                                             |                                                                                       |   |               |            |  |              |            |            | 
|-------------------------------------------- | ------------------------------------------------------------------------------------- | - | ------------- | ---------- |  | ------------ | ---------- | ---------- | 
|                                             |                                                                                       |   | Quarter Ended |           
|                                             |                                                                                       |   |               |           
|                                             |                                                                                       |   | Mar. 31, 2001 |            |  | Apr. 1, 2000 |           
|                                             |                                                                                       |   |               |            |  |              |           
|Numerators:                                 
|                                            
|                                            
|                                            
|                                            
|                                             | Numerators for both
basic and diluted earnings
per share, net income                  |   | $             | 10,395,000 |  |              | $          | 13,296,000 | 
|                                             |                                                                                       |   |               |            |  |             
|Denominators:                               
|                                            
|                                            
|                                            
|                                            
|                                             | Denominators for basic earnings
per share, weighted average
common shares outstanding |   |               | 29,929,000 |  |              |            | 30,461,000 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Potential dilutive shares resulting
from stock options and
restricted stock awards    |   |               | 29,000     |  |              |            | 60,000     | 
|                                             |                                                                                       |   |               |            |  |             
|Denominators for dilutive
earnings per share |                                                                                       |   | 29,958,000    |            |  |              | 30,521,000 |           
|                                             |                                                                                       |   |               |            |  |             
|Earnings per share:                         
|                                            
|                                            
|                                            
|                                            
|Basic                                        |                                                                                       | $ | .35           |            |  | $            | .44        |           
|                                             |                                                                                       |   |               |            |  |             
|Diluted                                      |                                                                                       | $ | .35           |            |  | $            | .44        |           
|                                             |                                                                                       |   |               |            |  |             



|    |  | Options to purchase 111,400 shares of common stock at prices ranging from
$31.4375 to $33.3125 per share were outstanding during the first quarter
of 2001, but were not included in the computation of diluted earnings per
share because the options exercise price was greater than the average
market price of the common shares during that period. Options to purchase
145,850 shares of common stock at prices ranging from $31.4375 to
$33.3125 per share were outstanding during the first quarter of 2000, but
were not included in the computation of diluted earnings per share
because the options exercise price was greater than the average market
price of the common shares during that period.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 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.                                                                                                                                                                                                                                                                                                                       

5



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

Segment financial data (in thousands):

|                                         |  |                |        |   |               |   |     |        |              |   |          |            |         |           |        |   |        |   |              |  |  |   |        |  
|---------------------------------------- |  | -------------- | ------ | - | ------------- | - | --- | ------ | ------------ | - | -------- | ---------- | ------- | --------- | ------ | - | ------ | - | ------------ |  |  | - | ------ | -
|                                         |  | Quarter Ended  |       
|                                         |  |                |       
|                                         |  | March 31, 2001 |        |   | April 1, 2000 |  
|                                         |  |                |        |   |               |  
|                                         |  | Custom-        |        |   |               |   |     |        |              |   |          |            | Custom- |          
|                                         |  | Engineered     |        |   |               |   |     |        | Consolidated |   |          | Engineered |         |           |        |   |        |   | Consolidated | 
|                                         |  | Products       |        |   | Corporate     |   |     | Totals |              |   | Products |            |         | Corporate |        |   | Totals |  
|                                         |  |                |        |   |               |   |     |        |              |   |          |            |         |           |        |   |        |  
|Sales                                    |  | $              | 92,798 |   |               |   |     |        |              | $ | 92,798   |            |         | $         | 85,425 |   |        |   |              |  |  | $ | 85,425 |  
|                                        
|                                        
|                                        
|                                        
|Elimination of
intercompany
sales        |  |                | (1,444 | ) |               |   |     |        |              |   | (1,444   | )          |         |           | (505   | ) |        |   |              |  |  |   | (505   | )
|                                         |  |                |        |   |               |   |     |        |              |   |          |            |         |           |        |   |        |   |              | 
|Total net sales                          |  | $              | 91,354 |   |               |   |     |        |              | $ | 91,354   |            |         | $         | 84,920 |   |        |   |              |  |  | $ | 84,920 |  
|                                         |  |                |        |   |               |   |     |        |              |   |          |            |         |           |        |   |        |   |              | 
|Segment earnings
before interest
and tax |  | $              | 16,126 |   |               |   |     |        |              | $ | 16,126   |            |         | $         | 20,249 |   |        |   |              |  |  | $ | 20,249 |  
|                                        
|                                        
|                                        
|                                        
|Unallocated
amounts                      |  |                | 0      |   |               | $ | 373 |        |              |   | 373      |            |         |           | 0      |   |        | $ | 857          |  |  |   | 857    |  
|                                         |  |                |        |   |               |   |     |        |              |   |          |            |         |           |        |   |        |  
|Income before
income taxes               |  | $              | 16,126 |   |               | $ | 373 |        |              | $ | 16,499   |            |         | $         | 20,249 |   |        | $ | 857          |  |  | $ | 21,106 |  
|                                         |  |                |        |   |               |   |     |        |              |   |          |            |         |           |        |   |        |  



|    |  | There has been no change in the basis or measurement of segmentation
since the last annual report. Companies newly acquired during 2001 are
reported as part of the Custom-Engineered Products segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(6) |  | At March 31, 2001, borrowings under the Companys revolving credit
facility totaled $118.2 million. The credit facility permits the Company
to borrow under several different interest rate options. The interest
rate on borrowings equaled a weighted average 5.86 percent during the first quarter of 2001.
The credit facility contains certain restrictive covenants. The Company
is in compliance with all restrictive covenants contained in the credit
facility at March 31, 2001. After consideration of outstanding standby
letters of credit, the Company has available credit under its revolving
credit facility of $180.2 million at March 31, 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 manufacturers 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 first
quarter 2001 financial statements since the effective acquisition date.
The excess of cost over net assets acquired of $52.0 million is

6



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|    |  | being
amortized on a straight-line basis over 30 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 first quarter of 2001 would have
been $97.6 million, $10.5 million, $.35 and $.35, and net sales, net
income, basic earnings per share and diluted earnings per share for the
first quarter of 2000 would have been $96.0 million, $13.8 million, $.45
and $.45.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(8) |  | In June of 1995, the Company, along with certain former officers and
directors of the Company and certain other companies and organizations,
was named as a defendant in a lawsuit commenced in Bankruptcy Court in the
Southern District of New York. The plaintiff was the Creditors Committee
formed in connection with the Chapter 11 Bankruptcy Proceeding of Keene
Corporation (Keene). That action, identified as the Transactions
Lawsuit, asserted claims against the Company arising from the Companys
1983 acquisition of certain assets of Keene, and Bairnco Corporations
1984 spin-off of the Companys common stock. As originally filed, the
Transactions Lawsuit alleged claims against the Company under state
fraudulent conveyance laws, tort claims under successor liability law, and
civil RICO claims. The Transactions Lawsuit seeks damages alleged by
plaintiffs to be an amount of $700 million, plus interest and punitive
damages against the defendants collectively. The RICO claims sought
trebling of those damages. The claims asserted in the Transactions
Lawsuit are similar to, and supplant, claims previously asserted in
certain class actions brought against the Company in 1993, purportedly on
behalf of certain persons with asbestos-related claims against Keene.
|   
|    |  | In 1997, in connection with the Bankruptcy Courts confirmation of
Keenes Plan of Reorganization, the Keene Creditors Trust was created to,
among other things, prosecute this lawsuit, and the Trustees of that
Trust were substituted as the plaintiffs in place of the Keene Creditors
Committee. In addition, the case was transferred from the Bankruptcy
Court to the United States District Court for the Southern District of
New York. Subsequently, the Company and certain other defendants filed
motions to dismiss the complaint for failure to state a claim, and for
summary judgment on the grounds that the fraudulent conveyance claims and
certain related causes of action were barred by the statute of
limitations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | In October of 1998, the Court granted in part and denied in part the
Companys motion to dismiss the complaint, and denied the Companys
motion for summary judgment. With respect to the motion for summary
judgment, the Court found that certain groups of asbestos claimants had
claims that were not time-barred, and therefore the plaintiffs could
assert claims against the Company for both actual fraudulent conveyance
and constructive fraudulent conveyance. With respect to the motion to
dismiss, the Court granted the Companys motion to dismiss the fraudulent
conveyance claim against it in connection with Bairncos 1984 spin-off of
the Companys common stock, and dismissed all the RICO claims asserted
against the Company. The Court denied the Companys motion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

7



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##### Table of Contents





| |  | to dismiss
the successor liability claim, but noted the plaintiffs ability to
pursue such a claim was subject to their ability to pursue a fraudulent
conveyance claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Also in October of 1998, the Company filed a motion for reargument of the
Courts ruling that the plaintiffs claims for actual and constructive
fraudulent conveyance against the Company are not barred by the
applicable statute of limitations. In January of 1999, the Court issued
a decision on the Companys motion for reargument, which granted the
Companys motion for reargument with regard to the plaintiffs claims for
constructive fraudulent conveyance, and, with one minor exception, held
those claims were barred by the applicable statute of limitations and
dismissed them. However, the Court denied the Companys motion to
dismiss the actual fraudulent conveyance claims. Accordingly, as a
result of the Companys motions, the only claims remaining against the
Company are plaintiffs claims for actual fraudulent conveyance and for
successor liability. In addition, there is, on behalf of certain
individual judgment creditors, a limited claim for constructive
fraudulent conveyance. The Company does not believe any recovery on this
limited claim will be material. The discovery stay previously in place
has been lifted, and the discovery phase is well underway.                                                                                                                          
|
| |  | In other decisions, the Court also dismissed the claims against all the
individual defendants except one, and against the professional
organizations that had been named as defendants in the case. However,
Bairnco and its other subsidiaries and former subsidiaries remain as
defendants in the case.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Management believes it has meritorious defenses to the claims pending
against it in this litigation. Accordingly, no provision has been
reflected in the consolidated financial statements for any alleged
damages. An accrual is recorded in the consolidated financial statements
equal to the Companys most current and best estimate to litigate this
legal action.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Beginning in June 1996, the Company and certain employees received
subpoenas issued by the U.S. District Court in Bridgeport, Connecticut on
behalf of a grand jury investigating a May 9, 1996 accident involving a
Sikorsky helicopter (CH-53E) in which four persons died. The grand jury
requested and received documents and records relating to inspection and
product certification procedures at the Kaydon facility that manufactured
the bearings used in the Sikorsky helicopter. In addition, a Mishap
Board led by Sikorsky Aircraft Corporation personnel alleged that
product quality problems or deficiencies existed with respect to the
Kaydon bearing used in the Sikorsky helicopter described above. Kaydon
personnel were excluded from participation on this Mishap Board.
However, Kaydon has independently evaluated the available evidence and
refuted the Mishap Board findings in reports submitted to the Navy.
Subsequent incidents have occurred in the helicopter fleet even though
the bearings used were newly manufactured, inspected and approved by
Sikorsky and Navy personnel, reinforcing the Companys position that the
bearing quality was not the causative action in the May 9, 1996 accident.
During the first half of 1997, the estates of the four deceased
individuals filed civil suits

8



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| |  | against the Company. In July of 1998,
Sikorsky filed a claim against the Company in those same civil cases
claiming damages which they are alleged to have incurred following the
May 9, 1996 accident. The Sikorsky claim and the U.S. government
investigation are hereinafter identified as the Sikorsky Matter. In
October of 1998, Kaydons insurance company reached settlement agreements
with the estates of each plaintiff in the four civil suits. All
settlement amounts were fully covered under Company insurance.                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the second quarter of 2000, a $12.6 million provision was recorded
in order to support the Companys most current and best estimates to
litigate the Transactions Lawsuit and the Sikorsky Matter discussed
above. The change in the estimates during the second quarter of 2000
resulted from current spending levels and substantial new information
regarding forecasted spending levels to complete the discovery stages of
these cases, and to try the cases by the end of 2002.                                                                                                                                                                                                                                                                        
|
| |  | Regarding the Sikorsky Matter, during the third quarter of 2000, Kaydon
reached a settlement with Sikorsky Aircraft Corporation, and was engaged
in negotiations toward a resolution of the U.S. government investigation,
including potential civil claims. During the third quarter, the Company
recorded an additional $9.1 million provision to reflect the amount of
the 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.                                                                                                                                                                                
|
| |  | On April 10, 2001, the Company reached a settlement of claims with the
U.S. government regarding their investigation of inspection and product
certification procedures at the Companys Muskegon, Michigan facility.
As part of the settlement, the Company entered a plea to two counts of
improper certification of the raceway surface finish of three bearings
shipped in 1995 and 1996. The bearings that were the subject of the plea
have not been involved in any accident. The settlement entails 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 will be offset by the previously recorded provisions without any
impact on year 2001 earnings.
|
| |  | The Company pursued a global settlement in the Sikorsky Matter because
management believed that resolving this protracted and costly litigation
was in the best interest of Kaydon. Absent a resolution of this matter,
Kaydon would have been faced with a multi-year litigation process.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The total accrual in the financial statements related to the Transaction
Lawsuit and the Sikorsky Matter is $14.3 million at March 31, 2001. Of
this amount, $11.1 million is recorded as a current liability in accrued
expenses and $3.2 million is recorded in long-term liabilities. After
the payment to the U.S. government in April, the total accrual in the
financial statements is $6.8 million.                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In October 1995, Cooper Split Roller Bearing Corporation (Cooper), a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

9



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| |  | 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 relates to the failure of a Cooper split
roller bearing at a customers facility in July of 1994. The lawsuit
alleges negligence, strict liability and breach of contract, and seeks
recovery of damages including both property damage and business
interruption, that are claimed to be in excess of $8 million, plus
interest from the date of the incident which to-date totals in excess of
$3.3 million.                                                                                                                                                                                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Kaydons insurance provider has defended this lawsuit since its
inception. In August 1998, Kaydon received a letter from its insurance
provider indicating that the provider believed the failure of the split
roller bearing was not a covered loss under the terms of Kaydons
commercial general liability policy. In May 1999, Kaydon filed a lawsuit
in the U.S. District Court for the Western District of Pennsylvania
requesting that the Court enter a declaratory judgment that the claim
against Cooper for the split roller bearing failure was an insured loss
under the Companys insurance policy. In January 2000, the Court
dismissed this case without prejudice because the Court believed the
underlying product liability lawsuit against Cooper had to be further
developed before the case relating to the insurance coverage could be
decided.
|
| |  | In January of 2001, Kaydon, Kaydons insurance provider and the plaintiff
agreed to mediate their disputes at a hearing, which was held on February
20-21, 2001. The mediation hearing was not successful in reaching a
settlement, and it is now expected that a trial date will be set for
sometime in 2001. Kaydon believes that it has meritorious defenses to
the underlying claim relating to the split roller bearing product
litigation and intends to vigorously defend this matter if it cannot be
settled. In addition, the Company believes that any potential loss
sustained in connection with the claim against Cooper will be covered
under Kaydons commercial general liability policy.                                                                                                                                                             
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

10



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Results of Operations

During the first quarter of 2001, Kaydon Corporation and subsidiaries (the
Company) achieved sales of $91.4 million, up 7.6 percent from $84.9 million
in the first quarter of 2000. Results for the quarter reflect sales of $11.2
million from companies recently acquired. Excluding the positive impact of
these acquisitions, sales during the first quarter of 2001 for the remaining
Kaydon divisions were down $4.7 million or 5.6 percent from the first quarter
of 2000, reflecting the broad based slowdown in industrial manufacturing
activity. Specifically, the Company noticed reduced demand for specialty
bearings products, particularly from the semiconductor equipment manufacturing
market, and for the Companys fluid power products, which are sold primarily to
the construction equipment and other heavy equipment markets.

Gross profit during the first quarter of 2001 was $29.6 million or 32.4 percent
of sales, compared with $32.1 million or 37.8 percent of sales in the first
quarter of 2000. The gross profit percentage achieved in the first quarter of
2001 was negatively impacted by unfavorable sales mix, higher energy costs, the
broad-based slowdown in industrial manufacturing activity, and recent
acquisitions which have lower gross profit margins than those achieved by Kaydon historically.

Operating income during the first quarter of 2001 was $15.9 million or 17.4
percent of sales as compared to $19.6 million or 23.0 percent of sales in the
first quarter of 2000.

Amortization expense related to goodwill generated as a result of the recent
acquisitions completed in the first quarter of 2001 and in the third quarter of
2000, negatively affected the first quarter compared to the same period last
year.

Net interest income of $.6 million during the first quarter of 2001 was down
$1.0 million from last years comparable period due to higher interest expense
on new bank borrowings related to the recent acquisitions.

First quarter 2001 net income was $10.4 million, or 11.4 percent of sales.
Earnings per share on a diluted basis equaled $.35. First quarter 2000 net
income and diluted earnings per share were $13.3 million and $.44.

The effective tax rate during the 2001 and 2000 first quarter, was 37.0
percent.

On April 10, 2001, the Company reached a settlement of claims with the U.S.
government regarding the previously disclosed investigation of inspection and
product certification procedures at a Kaydon manufacturing facility. As part
of the settlement, the Company entered a plea to two counts of improper
certification of the raceway

11



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##### Table of Contents



surface finish of three bearings shipped in 1995
and 1996. The bearings that were the subject of the plea have not been
involved in any accident. The settlement entails 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 in April 2001 and will be offset by previously
recorded provisions without any impact on year 2001 earnings.

The Company pursued a settlement in this matter because management believed
that resolving this protracted and costly litigation was in the best interest
of Kaydon. Absent a resolution of this matter, Kaydon would have been faced
with a multi-year litigation process.

Liquidity and Capital Resources

Working capital was $199.5 million at March 31, 2001 reflecting a current ratio
of 4.0 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 $15.7 million during the first
quarter of 2001, down from a record operating cash flow of $24.3 million for
the same period in 2000. Cash flow from operations was negatively impacted
during the first quarter of 2001 compared to the comparable period last year
due to higher inventory levels and the timing of tax payments.

Depreciation and amortization for the first quarter of 2001 totaled $5.1
million compared to $4.5 million in the first quarter of 2000. Increases are
primarily due to the previously mentioned acquisitions completed in late 2000
and during the first quarter of 2001.

Cash and cash equivalents equaled $123.0 million at March 31, 2001, up $8.0
over the balance at year-end 2000 of $115.0 million. This increase reflects
strong operating cash flow offset by capital expenditures of $4.5 million and
dividend payments of $3.6 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 operations and existing
cash balances.

Outlook

The Companys backlog at March 31, 2001 was $114.7 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 slowdown of economic activity in
the United States. Management expects orders to be relatively flat in the second quarter of
2001, with a more significant increase not expected until the second half of
2001. Expected operating cash flows coupled with the Companys current cash
reserves and available credit under the Companys $300.0 million credit
facility will provide substantial resources to fund the Companys ongoing

12



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##### Table of Contents



business development efforts which include internal and external growth
initiatives as well as selected stock repurchases.

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




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

13



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PART II. OTHER INFORMATION




Item 1. Legal Proceedings See the discussion in 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 March 7, 2001, the Company filed a Form 8-K under Item 5 reporting the
acquisition of ACE Controls, Inc., and its affiliated company ACE Controls
International, Inc., a leading manufacturer of linear deceleration products
serving various industrial markets.

14



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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                                                                        
|            
|            
|May 14, 2001 |  | /s/ Brian P. Campbell                                                                     
|             |  |                                                                                           
|             |  | Brian P. Campbell                                                                         
|             |  | Chairman, President, Chief Executive
Officer and Chief Financial Officer                  
|             |  | (Principal Executive Officer and
Principal Financial Officer)                             
|            
|            
|May 14, 2001 |  | /s/ Kenneth W. Crawford                                                                   
|             |  |                                                                                           
|             |  | Kenneth W. Crawford
Vice President and Corporate Controller
(Principal Accounting Officer)

15