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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 July 3, 2004
    
    Commission File No. 0-12640
 KAYDON CORPORATION  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    13-3186040
(I.R.S. Employer Identification No.)Suite 300, 315 E. Eisenhower Parkway, Ann Arbor, Michigan
(Address of principal executive offices)
    
    48108
(Zip Code)
 Registrants telephone number, including area code: (734) 747-7025 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the Registrant is an accelerated filer.
YES [X] NO [ ] Common Stock Outstanding at August 6, 2004  28,210,280 shares, $.10 par value.




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KAYDON CORPORATION FORM 10-Q FOR THE QUARTER ENDED JULY 3, 2004 INDEX  
 Page No.Part I  Financial Information:Item 1.
Financial StatementsConsolidated Condensed Balance Sheets  July 3, 2004 (Unaudited) and December 31, 2003
    
    
    1Consolidated Condensed Statements of Operations (Unaudited)  Quarter and First Half Ended July 3, 2004 and June 28, 2003
    
    
    2Consolidated Condensed Statements of Cash Flows (Unaudited)  First Half Ended July 3, 2004 and June 28, 2003
    
    
    3Notes to Consolidated Condensed Financial Statements
    
    
    4 - 15Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16-28Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    29Part II  Other Information:Item 1. Legal Proceedings
    
    
    30Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 6. Exhibits and Reports on Form 8-K
    
    
    31Signatures
    
    
    32Statement Re: Computation of Ratio of Earnings to Fixed ChargesCertification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934Certification Pursuant to 18 U.S.C. Section 1350




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ITEM 1. FINANCIAL STATEMENTS
KAYDON CORPORATION 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 July 3, 2004
    
    December 31, 2003(Unaudited)Assets:Cash and cash equivalents
    
    $
    269,111,000
    
    
    $
    255,756,000Accounts receivable, net
    
    
    46,183,000
    
    
    
    45,423,000Inventories, net
    
    
    48,733,000
    
    
    
    44,840,000Other current assets
    
    
    13,468,000
    
    
    
    14,231,000Total current assets
    
    
    377,495,000
    
    
    
    360,250,000Property, plant and equipment, net
    
    
    83,698,000
    
    
    
    84,707,000Goodwill, net
    
    
    110,523,000
    
    
    
    112,183,000Other intangible assets, net
    
    
    8,483,000
    
    
    
    8,903,000Other assets
    
    
    22,459,000
    
    
    
    24,331,000Total assets
    
    $
    602,658,000
    
    
    $
    590,374,000Liabilities and Shareholders Equity:Accounts payable
    
    $
    12,636,000
    
    
    $
    13,488,000Taxes payable
    
    
    6,867,000
    
    
    
    6,944,000Salaries and wages
    
    
    6,766,000
    
    
    
    6,544,000Accrued legal costs
    
    
    213,000
    
    
    
    2,387,000Other accrued expenses
    
    
    14,031,000
    
    
    
    12,959,000Total current liabilities
    
    
    40,513,000
    
    
    
    42,322,000Long-term debt
    
    
    200,098,000
    
    
    
    200,128,000Long-term liabilities
    
    
    68,729,000
    
    
    
    67,405,000Total long-term liabilities
    
    
    268,827,000
    
    
    
    267,533,000Shareholders equity:Common stock
    
    
    3,693,000
    
    
    
    3,693,000Paid-in capital
    
    
    47,306,000
    
    
    
    46,948,000Retained earnings
    
    
    437,717,000
    
    
    
    425,645,000Less  treasury stock, at cost
    
    
    (184,704,000
    )
    
    
    (186,048,000
    )Less  restricted stock awards
    
    
    (7,081,000
    )
    
    
    (5,312,000
    )Accumulated other comprehensive loss
    
    
    (3,613,000
    )
    
    
    (4,407,000
    )293,318,000
    
    
    
    280,519,000Total liabilities and shareholders equity
    
    $
    602,658,000
    
    
    $
    590,374,000
 See accompanying notes to consolidated condensed financial statements. 1




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KAYDON CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Quarter Ended
    
    First Half EndedJuly 3, 2004
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003Net sales
    
    $
    84,386,000
    
    
    $
    76,143,000
    
    
    $
    167,709,000
    
    
    $
    146,958,000Cost of sales
    
    
    51,548,000
    
    
    
    49,215,000
    
    
    
    103,097,000
    
    
    
    96,018,000Gross profit
    
    
    32,838,000
    
    
    
    26,928,000
    
    
    
    64,612,000
    
    
    
    50,940,000Selling, general and
administrative expenses
    
    
    15,729,000
    
    
    
    13,844,000
    
    
    
    31,940,000
    
    
    
    27,132,000Operating income
    
    
    17,109,000
    
    
    
    13,084,000
    
    
    
    32,672,000
    
    
    
    23,808,000Interest income
    
    
    802,000
    
    
    
    595,000
    
    
    
    1,568,000
    
    
    
    1,115,000Interest (expense)
    
    
    (2,374,000
    )
    
    
    (886,000
    )
    
    
    (4,793,000
    )
    
    
    (1,216,000
    )Income before income taxes
    
    
    15,537,000
    
    
    
    12,793,000
    
    
    
    29,447,000
    
    
    
    23,707,000Provision for income taxes
    
    
    5,593,000
    
    
    
    4,477,000
    
    
    
    10,601,000
    
    
    
    8,297,000Net income
    
    $
    9,944,000
    
    
    $
    8,316,000
    
    
    $
    18,846,000
    
    
    $
    15,410,000Weighted average common shares:Basic
    
    
    27,881,000
    
    
    
    28,845,000
    
    
    
    27,891,000
    
    
    
    29,387,000Diluted
    
    
    27,937,000
    
    
    
    28,860,000
    
    
    
    27,941,000
    
    
    
    29,399,000Earnings per shareBasic
    
    $
    0.36
    
    
    $
    0.29
    
    
    $
    0.68
    
    
    $
    0.52Diluted
    
    $
    0.36
    
    
    $
    0.29
    
    
    $
    0.67
    
    
    $
    0.52Dividends per share
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.24
    
    
    $
    0.24
 See accompanying notes to consolidated condensed financial statements. 2




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KAYDON CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 First Half EndedJuly 3, 2004
    
    June 28, 2003Cash flows from operating activities
    
    $
    25,713,000
    
    
    $
    22,949,000Cash flows used in investing activities:Capital expenditures, net
    
    
    (5,091,000
    )
    
    
    (5,417,000
    )Cash used in investing activities
    
    
    (5,091,000
    )
    
    
    (5,417,000
    )Cash flows used in financing activities:Dividends paid
    
    
    (6,766,000
    )
    
    
    (7,282,000
    )Purchase of treasury stock
    
    
    (768,000
    )
    
    
    (49,788,000
    )Net proceeds from convertible notes
    
    
    
    
    
    
    194,000,000Payments on long-term debt
    
    
    (60,000
    )
    
    
    (72,218,000
    )Cash used in financing activities
    
    
    (7,594,000
    )
    
    
    64,712,000Effect of exchange rate changes on cash and
cash equivalents
    
    
    327,000
    
    
    
    (461,000
    )Net increase in cash and cash equivalents
    
    
    13,355,000
    
    
    
    81,783,000Cash and cash equivalents  Beginning of period
    
    
    255,756,000
    
    
    
    146,301,000Cash and cash equivalents  End of period
    
    $
    269,111,000
    
    
    $
    228,084,0000Cash expended for income taxes
    
    $
    9,355,000
    
    
    $
    3,749,000Cash expended for interest
    
    $
    4,000,000
    
    
    $
    603,000
 See accompanying notes to consolidated condensed financial statements. 3




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KAYDON CORPORATION 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
  (1)
    
    The accompanying unaudited consolidated condensed financial statements of
Kaydon Corporation and subsidiaries (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 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,
2003.(2)
    
    Inventories are summarized as follows: July 3, 2004
    
    December 31, 2003Raw Material
    
    $
    19,375,000
    
    
    $
    16,500,000Work in Process
    
    
    13,788,000
    
    
    
    13,434,000Finished Goods
    
    
    15,570,000
    
    
    
    14,906,000$
    48,733,000
    
    
    $
    44,840,000
  (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 primarily of net income, foreign currency translation
adjustments and minimum pension liability adjustments. Other
comprehensive income, net of tax, was approximately $0.2 million and $2.4
million, resulting in comprehensive income of $10.1 million and $10.7
million for the quarters ended July 3, 2004, and June 28, 2003. On a
first half basis, other comprehensive income, net of tax, was
approximately $0.8 million and $2.0 million, resulting in comprehensive
income of $19.6 million and $17.4 million for the first halves ended July
3, 2004 and June 28, 2003. 4




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(4)
    
    The following table reconciles the numerators and denominators used in
the calculation of basic and diluted earnings per share for the periods
presented. Quarter EndedJuly 3, 2004
    
    June 28, 2003Numerators:Numerators for both basic and
diluted earnings per share,
net income
    
    $
    9,944,000
    
    
    $
    8,316,000Denominators:Denominators for basic earnings
per share, weighted average
common shares outstanding
    
    
    27,881,000
    
    
    
    28,845,000Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units
    
    
    56,000
    
    
    
    15,000Denominators for diluted
earnings per share
    
    
    27,937,000
    
    
    
    28,860,000Earnings per share:Basic
    
    $
    0.36
    
    
    $
    0.29Diluted
    
    $
    0.36
    
    
    $
    0.29
 5




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First Half EndedJuly 3, 2004
    
    June 28, 2003Numerators:Numerators for both basic and
diluted earnings per share,
net income
    
    $
    18,846,000
    
    
    $
    15,410,000Denominators:Denominator for basic earnings
per share, weighted average
common shares outstanding
    
    
    27,891,000
    
    
    
    29,387,000Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units
    
    
    50,000
    
    
    
    12,000Denominator for diluted
earnings per share
    
    
    27,941,000
    
    
    
    29,399,000Earnings per share:Basic
    
    $
    0.68
    
    
    $
    0.52Diluted
    
    $
    0.67
    
    
    $
    0.52
  Options to purchase 63,000 shares of common stock at prices ranging from
$28.35 to $33.31 per share were outstanding during the second quarter of
2004, 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
382,200 shares of common stock at prices ranging from $22.60 to $33.3125
per share were outstanding during the second quarter of 2003, 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 May of 2003, the Company completed the sale of $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 including that Company common stock has traded above
$34.99 for 20 out of 30 trading days for specified periods of time.
Unless and until this contingency or other conversion contingencies are
met, the above mentioned shares of the Companys common stock underlying
the Notes will not be included in the Companys basic or diluted earnings
per share calculations. Should this contingency be met, diluted earnings
per share would, depending on the 6




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relationship between the interest on the Notes and the earnings per share
of Company common stock, be expected to decrease as a result of the
inclusion of the underlying shares in the diluted earnings per share
calculation. Volatility in the Companys stock price could cause this
condition to be met in one quarter and not in a subsequent quarter,
increasing the volatility of diluted earnings per share.5)
    
    The Company operates through operating segments for which separate
financial information is available, and for which operating results are
evaluated regularly by the Companys chief operating decision maker in
determining resource allocation and assessing performance. Certain of
the operating segments have similar economic characteristics, as well
as other common attributes, including nature of the products and
production processes, distribution patterns and classes of customers.
The Company aggregates these operating segments for reporting purposes.
Certain other operating segments do not exhibit the common attributes
mentioned above and, therefore, information about them is reported
separately. Still other operating segments do not meet the
quantitative thresholds for separate disclosure and their information
is combined and disclosed as Other. During the first three quarters
of 2003 the Company aggregated its operating segments into three
reportable segments referred to as Specialty Metal Formed Products,
Ring, Seal and Filtration Products, and Other Metal Products. During
the fourth quarter of 2003, the Company changed the aggregation of
operating segments for purposes of reporting segment information.
Prior year amounts have been reclassified to reflect the current year
presentation.The Company has four 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 medical, aerospace, defense, security, electronic, material
handling, construction and other industrial applications. Products
include anti-friction bearings, split roller bearings, specialty balls
and retaining devices.Velocity Control Products complex components used in specialized
robotics, material handling, machine tool, medical, amusement and other
industrial applications. Products include industrial shock absorbers,
safety shock absorbers, velocity controls, gas springs and rotary
dampers.Sealing Products complex and standard ring and seal products used
in demanding industrial, aerospace and defense applications. Products
include engine rings, sealing rings and shaft seals.Power and Data Transmission Products-complex and standard
electrical and fiber optic products used in demanding industrial,
aerospace, defense, security, medical, electronic and marine equipment
applications. Products include slip-rings, slip-ring assemblies, video
and data multiplexers, fiber optic rotary joints and printed circuit
boards. 7




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Other-filter elements and 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. 8




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Quarter Ended
    
    First Half EndedJuly 3, 2004
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003Net salesFriction and Motion Control ProductsExternal customers
    
    $
    42,575,000
    
    
    $
    35,728,000
    
    
    $
    81,379,000
    
    
    $
    69,834,000Intersegment
    
    
    95,000
    
    
    
    98,000
    
    
    
    165,000
    
    
    
    172,00042,670,000
    
    
    
    35,826,000
    
    
    
    81,544,000
    
    
    
    70,006,000Velocity Control Products
    
    
    12,497,000
    
    
    
    10,817,000
    
    
    
    26,091,000
    
    
    
    21,545,000Sealing ProductsExternal customers
    
    
    9,728,000
    
    
    
    10,076,000
    
    
    
    19,331,000
    
    
    
    19,137,000Intersegment
    
    
    (35,000
    )
    
    
    
    
    
    
    (45,000
    )
    
    
    9,693,000
    
    
    
    10,076,000
    
    
    
    19,286,000
    
    
    
    19,137,000Power and Data Transmission ProductsExternal customers
    
    
    7,608,000
    
    
    
    8,671,000
    
    
    
    16,326,000
    
    
    
    16,535,000Intersegment
    
    
    (53,000
    )
    
    
    (98,000
    )
    
    
    (113,000
    )
    
    
    (172,000
    )7,555,000
    
    
    
    8,573,000
    
    
    
    16,213,000
    
    
    
    16,363,000OtherExternal customers
    
    
    11,978,000
    
    
    
    10,851,000
    
    
    
    24,582,000
    
    
    
    19,907,000Intersegment
    
    
    (7,000
    )
    
    
    
    
    
    
    (7,000
    )
    
    
    11,971,000
    
    
    
    10,851,000
    
    
    
    24,575,000
    
    
    
    19,907,000Total consolidated net sales
    
    $
    84,386,000
    
    
    $
    76,143,000
    
    
    $
    167,709,000
    
    
    $
    146,958,000
 Quarter Ended
    
    First Half EndedJuly 3, 2004
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003Operating income (loss)Friction and Motion Control Products
    
    $
    11,086,000
    
    
    $
    7,032,000
    
    
    $
    20,080,000
    
    
    $
    12,729,000Velocity Control Products
    
    
    3,439,000
    
    
    
    2,393,000
    
    
    
    7,397,000
    
    
    
    4,382,000Sealing Products
    
    
    1,543,000
    
    
    
    1,373,000
    
    
    
    2,960,000
    
    
    
    2,158,000Power and Data Transmission Products
    
    
    (110,000
    )
    
    
    698,000
    
    
    
    (469,000
    )
    
    
    1,069,000Other
    
    
    (787,000
    )
    
    
    1,092,000
    
    
    
    783,000
    
    
    
    1,457,000Total segment operating income
    
    
    15,171,000
    
    
    
    12,588,000
    
    
    
    30,751,000
    
    
    
    21,795,000State income tax provision
included in segment operating
income
    
    
    279,000
    
    
    
    412,000
    
    
    
    553,000
    
    
    
    699,000Items not allocated to segment
operating income
    
    
    1,659,000
    
    
    
    84,000
    
    
    
    1,368,000
    
    
    
    1,314,000Interest (expense)
    
    
    (2,374,000
    )
    
    
    (886,000
    )
    
    
    (4,793,000
    )
    
    
    (1,216,000
    )Interest income
    
    
    802,000
    
    
    
    595,000
    
    
    
    1,568,000
    
    
    
    1,115,000Income before income taxes
    
    $
    15,537,000
    
    
    $
    12,793,000
    
    
    $
    29,447,000
    
    
    $
    23,707,000
 9




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Quarter Ended
    
    First Half EndedJuly 3, 2004
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003Depreciation and amortizationFriction and Motion Control Products
    
    $
    1,867,000
    
    
    $
    1,966,000
    
    
    $
    3,761,000
    
    
    $
    3,908,000Velocity Control Products
    
    
    423,000
    
    
    
    399,000
    
    
    
    836,000
    
    
    
    807,000Sealing Products
    
    
    298,000
    
    
    
    302,000
    
    
    
    558,000
    
    
    
    592,000Power and Data Transmission Products
    
    
    405,000
    
    
    
    427,000
    
    
    
    809,000
    
    
    
    849,000Other
    
    
    279,000
    
    
    
    288,000
    
    
    
    554,000
    
    
    
    570,000Corporate
    
    
    432,000
    
    
    
    480,000
    
    
    
    830,000
    
    
    
    847,000Total consolidated depreciation and
amortization
    
    $
    3,704,000
    
    
    $
    3,862,000
    
    
    $
    7,348,000
    
    
    $
    7,573,000
 Quarter Ended
    
    First Half EndedJuly 3, 2004
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003Additions to net property, plant and
equipmentFriction and Motion Control Products
    
    $
    2,256,000
    
    
    $
    1,756,000
    
    
    $
    3,735,000
    
    
    $
    3,846,000Velocity Control Products
    
    
    (118,000
    )
    
    
    98,000
    
    
    
    (54,000
    )
    
    
    143,000Sealing Products
    
    
    127,000
    
    
    
    232,000
    
    
    
    205,000
    
    
    
    357,000Power and Data Transmission Products
    
    
    211,000
    
    
    
    429,000
    
    
    
    339,000
    
    
    
    637,000Other
    
    
    316,000
    
    
    
    200,000
    
    
    
    603,000
    
    
    
    328,000Corporate
    
    
    34,000
    
    
    
    71,000
    
    
    
    263,000
    
    
    
    106,000Total consolidated additions to net
property, plant and equipment
    
    $
    2,826,000
    
    
    $
    2,786,000
    
    
    $
    5,091,000
    
    
    $
    5,417,000
 July 3, 2004
    
    Dec. 31, 2003Total assetsFriction and Motion Control Products
    
    $
    152,547,000
    
    
    $
    146,183,000Velocity Control Products
    
    
    75,720,000
    
    
    
    71,268,000Sealing Products
    
    
    18,093,000
    
    
    
    17,094,000Power and Data Transmission Products
    
    
    37,789,000
    
    
    
    39,207,000Other
    
    
    47,206,000
    
    
    
    43,762,000Corporate
    
    
    271,303,000
    
    
    
    272,860,000Total consolidated assets
    
    $
    602,658,000
    
    
    $
    590,374,000
 10




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##### Table of Contents



(6) During May 2003, the Company completed the sale of $200.0 million of 4%
Contingent Convertible Senior Subordinated Notes due 2023 (the Notes). Interest expense on the Notes equaled $2.0 million for the second quarter of
2004. 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 2004 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 July 3, 2004
and December 31, 2003 was $5.1 million and $5.7 million, respectively. The Companys 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. Interest expense incurred
on borrowings under the revolving credit facility will be based on the London
Interbank Offered Rate. The revolving credit facility contains restrictive
financial covenants on a consolidated basis including leverage and coverage
ratios, utilizing measures of earnings and interest expense as defined in the
revolving credit facility agreement. Under the leverage ratio restriction, the
Company may not allow the ratio of total indebtedness, net of domestic cash in
excess of $15.0 million, to adjusted earnings before interest expense, taxes,
depreciation and amortization to exceed 3.0 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 July 3, 2004. After
consideration of the facilitys covenants and $3.2 million of letters of credit
issued under the facility, the Company has available credit under its revolving
credit facility of $196.8 million at July 3, 2004. The Companys outstanding debt was as follows: July 3, 2004
    
    December 31, 20034% Contingent Convertible Senior
Subordinated Notes due 2023
    
    $
    200,000,000
    
    
    $
    200,000,000Other
    
    
    158,000
    
    
    
    218,000Total debt
    
    
    200,158,000
    
    
    
    200,218,000Less current maturities
    
    
    60,000
    
    
    
    90,000Long-term debt
    
    $
    200,098,000
    
    
    $
    200,128,000
 (7) As previously reported, the Company, along with certain other companies,
was named as a defendant in a lawsuit filed in 1996 in the United States
District Court for the Southern District of New York (the Transactions
Lawsuit). Captioned Richard A. Lippe, et al. v. Bairnco Corporation, et al.,
the Transactions Lawsuit sought damages alleged by plaintiffs to be an amount
of $700 million, plus interest and punitive damages against the defendants
collectively. On March 14, 2003, the Court granted a motion for summary
judgment, dismissing the case in its entirety against all defendants. On April
14, 2003, the plaintiffs filed a notice of appeal from the Courts order
granting summary judgment and dismissing the action. On April 9, 2004, the
Court of Appeals issued its Summary Order affirming in all respects the earlier
judgment of the District Court, which granted the motion for summary judgment,
dismissing the case in its entirety against all 11




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##### Table of Contents



defendants. On July 8, 2004 the lead attorney for the plaintiffs in the
Transactions Lawsuit sent a written confirmation to the counsel of another
defendant in the case stating that the plaintiffs would not file a cert
petition, referring to a Petition for Certiorari in the United States Supreme
Court. In effect, the Company believes that the attorney was confirming that
the plaintiffs would take no further steps to appeal the decision by the Court
of Appeals affirming the dismissal of the case against all defendants,
including Kaydon. The time for filing such a Petition actually expires on
August 16, 2004, however, given the written confirmation from plaintiffs
counsel, it appears that the case has finally concluded. As a result, in the
second quarter financial statements the Company reduced its previously recorded
Transactions Lawsuit legal fee accrual by $1.7 million, leaving $0.2 million
accrued at July 3, 2004, as the Companys current and best estimate of its
remaining costs to complete this litigation. This change in estimate increased
second quarter net income by $1.1 million, or $0.04 per share on a diluted
basis. Management has always believed that the plaintiffs lawsuit was without
merit. As previously reported, in August 2000, an accident involving a MH53E
helicopter manufactured by Sikorsky Aircraft Corporation, resulted in four
deaths and two injuries during a military training mission. The Company
manufactures and sells swashplate bearings used on MH53E helicopters. In May
2002, the Company, along with Sikorsky Aircraft Corporation, The Armoloy
Corporation, Armoloy of Illinois, Inc., Armoloy of Connecticut, Inc. and
Investment Holdings, Inc., was named as a defendant in a lawsuit filed by the
relatives and the estates of the four deceased individuals, and by the two
injured individuals. The litigation currently is pending in the District Court
of Nueces County, Texas, 28th Judicial District. Armoloy of Connecticut, Inc.
is no longer a party to the litigation. The Companys insurance carrier has
retained legal counsel to respond to the lawsuit. The Company believes that
the alleged damages claimed in this lawsuit, and the associated legal costs,
will be fully covered under the Companys insurance policy. Further, the
Company believes it has meritorious defenses to these claims including, but not
limited to, the fact that the bearing utilized in the helicopter involved in
the accident was inspected and approved prior to shipment by both U.S.
government and Sikorsky Aircraft Corporation inspectors. Accordingly, an
accrual is not recorded in the consolidated financial statements related to
this legal action. The Company is involved in ongoing environmental remediation activities at
certain manufacturing sites as well as proceedings relating to the cleanup of
waste disposal sites that provide for the allocation of costs among potentially
responsible parties. One of the manufacturing sites undergoing environmental
remediation is a discontinued operation sold in December 2001, where the
Company retained the environmental liability. The Company is working with the
appropriate regulatory agencies to complete the necessary remediation or to
determine the extent of the Companys portion of the remediation necessary. As
of July 3, 2004, an undiscounted accrual in the amount of $3.2 million,
representing the Companys best estimate for ultimate resolution of these
environmental matters, remains in other long-term liabilities in the
consolidated financial statements. Various other claims, lawsuits and environmental matters arising in the normal
course of business are pending against the Company. The Companys estimated
legal costs 12




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##### Table of Contents



expected to be incurred in connection with claims, lawsuits and environmental
matters are consistently accrued in the consolidated financial statements. (8) During the second quarter of 2004, the Company determined that the fair
value of one of the Companys reporting units, as that term is defined by
Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and
Other Intangible Assets, had been reduced to an amount less than the reporting
units carrying amount. The reporting unit, one of the Companys smallest,
manufactures and markets specialty metal forming equipment for the commercial
and residential air conditioning industries both in the United States and
abroad. A change in competitive dynamics has resulted in a reduction of this reporting units estimated future
cash flows. The fair value of the reporting unit was estimated using the
expected present value of its future cash flows. As calculated in accordance
with SFAS No. 142, there is no implied fair value of the reporting units
goodwill. Therefore, during the second quarter, the Company incurred a $1.9
million pre-tax, non-cash goodwill impairment loss, which equaled $1.2 million
after tax, or $0.04 per share on a diluted basis. The changes in the carrying amount of goodwill for the first half ended July 3,
2004, are as follows: Power and DataFriction and Motion
    
    Velocity Control
    
    
    
    
    
    TransmissionControl Products
    
    Products
    
    Sealing Products
    
    Products
    
    Other
    
    TotalBalance as of
December 31, 2003
    
    $
    30,697,000
    
    
    $
    41,817,000
    
    
    $
    186,000
    
    
    $
    16,094,000
    
    
    $
    23,389,000
    
    
    $
    112,183,000Effect of foreign
currency exchange
rate changes
    
    
    462,000
    
    
    
    
    
    
    
    
    
    
    
    (140,000
    )
    
    
    
    
    
    
    322,000Balance as of
April 3, 2004
    
    $
    31,159,000
    
    
    $
    41,817,000
    
    
    $
    186,000
    
    
    $
    15,954,000
    
    
    $
    23,389,000
    
    
    $
    112,505,000Effect of foreign
currency exchange
rate changes
    
    
    21,000
    
    
    
    
    
    
    
    
    
    
    
    (69,000
    )
    
    
    
    
    
    
    (48,000
    )Impairment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,934,000
    )
    
    
    (1,934,000
    )Balance as of
July 3, 2004
    
    $
    31,180,000
    
    
    $
    41,817,000
    
    
    $
    186,000
    
    
    $
    15,885,000
    
    
    $
    21,455,000
    
    
    $
    110,523,000
 Goodwill is stated net of accumulated amortization of $13.3 million at July 3,
2004 and December 31, 2003. 13




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##### Table of Contents



Other intangible assets are summarized as follows: July 3, 2004
    
    December 31, 2003Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmortized Intangible Assets
    
    Amount
    
    Amortization
    
    Amount
    
    AmortizationCustomer lists
    
$
    7,740,000
    
    
$
    2,580,000
    
    
    $
    7,740,000
    
    
    $
    2,193,000Patents
    
    
    1,124,000
    
    
    
    197,000
    
    
    
    1,124,000
    
    
    
    164,000$
    8,864,000
    
    
    $
    2,777,000
    
    
    $
    8,864,000
    
    
    $
    2,357,000
 The intangible assets are being amortized on a straight-line basis over periods of 10 to 20 years. July 3, 2004
    
     December 31, 2003Carrying
    
    CarryingUnamortized Intangible Assets
    
    Amount
    
    AmountTrademarks
    
    $
    2,396,000
    
    
    $
    2,396,000
 Aggregate Intangible Assets
Amortization ExpenseFor the first half ended July 3, 2004
    
    $
    420,000For the first half ended June 28, 2003
    
    $
    420,000Estimated Intangible Assets Amortization ExpenseFor the year ending December 31, 2004
    
    $
    840,000For the year ending December 31, 2005
    
    $
    840,000For the year ending December 31, 2006
    
    $
    840,000For the year ending December 31, 2007
    
    $
    840,000For the year ending December 31, 2008
    
    $
    840,000
 (9) The components of net periodic benefit costs are as follows: Pension Benefits Quarter Ended
    
    First Half EndedJuly 3, 2004
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003Service cost
    
    $
    589,000
    
    
    $
    601,000
    
    
    $
    1,178,000
    
    
    $
    1,171,000Interest cost
    
    
    1,243,000
    
    
    
    1,357,000
    
    
    
    2,487,000
    
    
    
    2,645,000Expected return on plan assets
    
    
    (951,000
    )
    
    
    (1,022,000
    )
    
    
    (1,903,000
    )
    
    
    (1,992,000
    )Amortization of:Unrecognized net transition
obligation
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    11,000Unrecognized net prior
service cost
    
    
    190,000
    
    
    
    290,000
    
    
    
    380,000
    
    
    
    566,000Unrecognized net loss
    
    
    274,000
    
    
    
    288,000
    
    
    
    548,000
    
    
    
    561,000Total
    
    $
    1,345,000
    
    
    $
    1,520,000
    
    
    $
    2,690,000
    
    
    $
    2,962,000
 14




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##### Table of Contents



Postretirement Benefits Quarter Ended
    
    First Half EndedJuly 3, 2004
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003Service cost
    
    $
    187,000
    
    
    $
    203,000
    
    
    $
    377,000
    
    
    $
    405,000Interest cost
    
    
    368,000
    
    
    
    425,000
    
    
    
    742,000
    
    
    
    849,000Amortization of:Unrecognized net prior
service cost
    
    
    (269,000
    )
    
    
    (309,000
    )
    
    
    (542,000
    )
    
    
    (617,000
    )Unrecognized net gain
    
    
    (44,000
    )
    
    
    (85,000
    )
    
    
    (89,000
    )
    
    
    (170,000
    )Total
    
    $
    242,000
    
    
    $
    234,000
    
    
    $
    488,000
    
    
    $
    467,000
 During the second quarter of 2004 the Financial Accounting Standards Board
issued their Staff Position No. FAS 106-2 which provides guidance on the
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act). As allowed under FAS 106-2, the Company
has elected the prospective application method for recognizing the effects of
the Act on its postretirement benefit plans. Under the prospective application
method the Companys postretirement benefit costs were not affected during the
second quarter. Currently, the Company estimates that the effects of the Act
will result in reducing net periodic postretirement benefit costs by $0.2 -
$0.3 million in each of the third and fourth quarters of 2004. (10) The Company accounts for stock-based compensation granted to employees
and Directors using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25. The following table details the effect on net
income and earnings per share had compensation cost for stock-based awards been
recognized based on the fair value method prescribed under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation: Quarter Ended
    
    First Half EndedJuly 3, 2004
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003Reported net income
    
    $
    9,944,000
    
    
    $
    8,316,000
    
    
    $
    18,846,000
    
    
    $
    15,410,000Add: Total stock-based compensation
expense included in reported net
income, net of tax
    
    
    205,000
    
    
    
    210,000
    
    
    
    410,000
    
    
    
    420,000Deduct: Total stock-based
compensation expense
determined
under fair value method for all
awards, net of tax
    
    
    (236,000
    )
    
    
    (255,000
    )
    
    
    (472,000
    )
    
    
    (508,000
    )Pro-forma net income
    
    $
    9,913,000
    
    
    $
    8,271,000
    
    
    $
    18,784,000
    
    
    $
    15,322,000Earnings per share- Basic:As reported
    
    $
    0.36
    
    
    $
    0.29
    
    
    $
    0.68
    
    
    $
    0.52Pro-forma
    
    $
    0.35
    
    
    $
    0.29
    
    
    $
    0.67
    
    
    $
    0.52Earnings per share- Diluted:As reported
    
    $
    0.36
    
    
    $
    0.29
    
    
    $
    0.67
    
    
    $
    0.52Pro-forma
    
    $
    0.35
    
    
    $
    0.29
    
    
    $
    0.67
    
    
    $
    0.52
 15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Kaydon Corporation and subsidiaries (Kaydon or the Company) provides an
array of proprietary, value added products to a diverse customer base covering
a broad spectrum of industries. This strategic diversification means that
demand for the Companys products depends, in part, upon a wide range of
general economic conditions, which affect the Companys markets in varying ways
from quarter to quarter. During the second quarter 2004, the Company was
favorably impacted as the economy continued to rebound from the manufacturing
slowdown of the last four years. The general economic rebound, both in the
United States and in certain international markets, meant that during the
quarter the Company experienced increased demand from various markets including
specialty electronics, machinery, heavy equipment, industrial, and other key
commercial markets. During the second quarter of 2004 the Company continued to
experience a high level of incoming customer orders. Although second quarter
orders did not equal the record level experienced in the first quarter of this
year, which included a higher military and defense component, they were
substantially higher than those received in last years comparable period.
During 2004, the Company expects to continue to benefit from a general economic
rebound in the manufacturing sector, continued strength in military and defense
spending, as well as other factors including relatively low inflation and
interest rates; however, because of the Companys diverse product offerings,
the specific impact these factors may have on the Companys operating results
is difficult to predict. As a result of recent events, during the second quarter the Company reduced its
previously recorded Transactions Lawsuit legal fee accrual by $1.7 million,
pre-tax, in order to properly reflect its current and best estimate of the
remaining costs to complete this litigation. Also during the second quarter,
due to a change in the competitive dynamics affecting one of its reporting
units, the Company incurred a $1.9 million pre-tax, non-cash goodwill
impairment loss. The combination of these two transactions reduced the
Companys second quarter operating income by $0.2 million. The Company continues to focus on programs intended to reduce costs, improve
capacity utilization, increase efficiencies, and grow market share and cash
flow, thereby positioning the Company to capitalize on future opportunities in
targeted end-markets, especially during a period of sustained economic growth.
During the second quarter 2004, the Company continued its investments in the
Company-wide Six Sigma effort, lean manufacturing, and information system
upgrades to strengthen the Companys operational excellence. Maintaining the Companys strong balance sheet and financial flexibility
remains a key strategy of the Company. In 2003, the Company issued $200.0
million of 4% Contingent Convertible Senior Subordinated Notes due 2023 (the
Notes) and also negotiated a new $200.0 million revolving credit agreement.
The Companys current cash balances, $269.1 million at July 3, 2004, and the
$200.0 million revolving credit 16




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##### Table of Contents



facility provide financial strength to support the Companys objectives
including strategic acquisitions. In summary, the Companys future performance will be impacted by general
economic conditions, the length and breadth of a sustained industrial
manufacturing recovery, military and defense spending, the success of the
Companys cost reduction and capacity utilization efforts, as well as the
utilization of current liquidity levels in completing strategic acquisitions. The discussion that follows should be read in conjunction with the unaudited
Consolidated Condensed Financial Statements (and the Notes thereto), included
elsewhere in this report, and the Companys Annual Report for the year ended
December 31, 2003, particularly Item 7- Managements Discussion and Analysis
of Results of Operations and Financial Condition, to assist in understanding
the Companys results of operations, its financial position, cash flows,
capital structure and other relevant financial information. Results of Operations During the second quarter of 2004, the Company achieved sales of $84.4 million,
as compared to $76.1 million in the second quarter of 2003, an increase of $8.2
million or 10.8 percent. The quarter was favorably impacted by increased
demand across many of the Companys product lines, including specialty
bearings, split bearing products, specialty balls, linear deceleration
products, filtration products, and metal alloys. Specifically, Kaydons Friction and Motion Control Products reporting segment
achieved sales of $42.7 million during the second quarter of 2004 as compared
with $35.8 million during the second quarter of 2003, an increase of $6.8
million or 19.1 percent, as the Company experienced increased demand for
custom-engineered bearings and split bearing products from various specialty
electronics, machinery, heavy equipment, and industrial markets. During the second quarter 2004, the Companys Velocity Control Products
reporting segment sales increased $1.7 million or 15.5 percent, to $12.5
million, when compared with second quarter 2003 sales of $10.8 million.
Increased product demand from a variety of industrial markets, both in the
United States and Europe contributed $1.2 million of the increase, while
favorable foreign currency translation, primarily related to the continuing
strength of the Euro, accounted for $0.5 million of the sales increase. The Companys Sealing Products reporting segment achieved sales of $9.7 million
during the second quarter 2004, down $0.4 million or 3.8 percent from second
quarter 2003 sales of $10.1 million, primarily as a result of decreased
shipments to certain defense markets. During the second quarter of 2004, sales of Kaydons Power and Data
Transmission Products reporting segment decreased $1.0 million or 11.9 percent,
to $7.6 million, when compared with second quarter 2003 sales of $8.6 million,
primarily as a result of decreased demand from certain aerospace and defense
markets. 17




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##### Table of Contents



Sales of the Companys remaining businesses equaled $12.0 million during the
second quarter of 2004, an increase from the second quarter 2003 of $1.1
million or 10.3 percent. Increased demand for metal alloys utilized in the
plumbing industry, along with material price increases that were passed along
to customers, were partially offset by reduced demand for metal forming
equipment. Gross profit during the second quarter of 2004 of $32.8 million was 38.9
percent of sales, compared with $26.9 million or 35.4 percent of sales in the
second quarter of 2003. Compared to the second quarter of 2003, the second
quarter 2004 gross margin was positively impacted by increased sales volume,
favorable product mix, and Six Sigma cost reduction initiatives. Selling, general and administrative expenses during the second quarter of 2004
were $15.7 million, or 18.6 percent of sales, as compared to $13.8 million, or
18.2 percent of sales, during the second quarter of 2003. Second quarter 2004 selling, general, and administrative expenses included two
items, a $1.9 million goodwill impairment loss at one of the Companys
reporting units, and the reversal of $1.7 million of the previously recorded
legal fee accrual related to the Transactions Lawsuit. During the second
quarter, the Company determined that the fair value of one of the Companys
reporting units, as that term is defined by Statement of Financial Accounting
Standards (SFAS) No. 142 Goodwill and Other Intangible Assets, had been
reduced to an amount less than the reporting units carrying amount. The
reporting unit, one of the Companys smallest, manufactures and markets
specialty metal forming equipment for the commercial and residential air
conditioning industries both in the United States and abroad. A change in
competitive dynamics has resulted in a
reduction of this reporting units estimated future cash flows. The fair value
of the reporting unit was estimated using the expected present value of its
future cash flows. As calculated in accordance with SFAS No. 142, there is no
implied fair value of the reporting units goodwill. Therefore, during the
second quarter, the Company incurred a $1.9 million pre-tax, non-cash goodwill
impairment loss. On July 8, 2004 the lead attorney for the plaintiffs in the
Transactions Lawsuit sent a written confirmation to the counsel of another
defendant in the case stating that the plaintiffs would not file a cert
petition, referring to a Petition for Certiorari in the United States Supreme
Court. In effect, the Company believes that the attorney was confirming that
the plaintiffs would take no further steps to appeal an earlier decision
regarding the dismissal of the case against all defendants, including Kaydon.
The time for filing such a Petition actually expires on August 16, 2004,
however, given the written confirmation from plaintiffs counsel, it appears
that the case has finally concluded. As a result, in the second quarter
financial statements the Company reduced its previously recorded Transactions
Lawsuit legal fee accrual by $1.7 million, leaving $0.2 million accrued at July
3, 2004, as the Companys current and best estimate of its remaining costs to
complete this litigation. Also affecting second quarter selling, general, and administrative expenses
were consulting charges, including those related to Sarbanes-Oxley compliance
and Six Sigma project management, which increased approximately $0.3 million
compared to last years second quarter. The differential in consulting charges
will continue during the remainder of 2004, primarily as a result of completing
our Sarbanes-Oxley Section 18




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##### Table of Contents



404 implementation. In the future, absent Sarbanes-Oxley-related and other
non-recurrent charges, the Company expects its selling, general, and
administrative expenses to approximate 18 percent of sales. The Companys operating income was $17.1 million for the second quarter of 2004
compared to operating income of $13.1 million in the second quarter of 2003, an
increase of $4.0 million or 30.8 percent. Depreciation and amortization during the second quarter 2004 was $3.7 million,
compared to $3.9 million during the second quarter of 2003. On a reporting segment basis, operating income from the Friction and Motion
Control Products reporting segment was $11.1 million during the second quarter
of 2004 as compared to $7.0 million during the comparable period last year.
Operating income was positively impacted by increased sales, as the profit
metrics for this segment are very volume sensitive, and favorable product mix. The Velocity Control Products reporting segment contributed $3.4 million to the
Companys operating income during the second quarter of 2004 as compared to
$2.4 million during the comparable period last year. Increases in operating
income were primarily due to increased product demand. The Sealing Products reporting segment contributed $1.5 million to the
Companys operating income during the second quarter of 2004 as compared to
$1.4 million during the comparable period last year. Operating income was
positively impacted by improved operating efficiencies. The Power and Data Transmission Products reporting segment reported an
operating loss of ($0.1) million during the second quarter of 2004 as compared
to operating income of $0.7 million during the comparable period last year. As
previously disclosed, one business unit within this segment has been undergoing
significant changes in its customers, and product offerings. Corrective
actions continue to be implemented at this business focusing on increased
efficiencies, overhead reductions, and a management reorganization. Including the aforementioned $1.9 million goodwill impairment loss, the
Companys other businesses generated an operating loss of ($0.8) million during
the second quarter of 2004 as compared to operating income $1.1 million during
the comparable period last year. Second quarter 2004s results include a full quarters effect of the Companys
May 2003 issuance of the Notes. Last years second quarter included a little
over one months worth of the effect, which accounts for the majority of the
difference between interest expense and interest income on a comparable basis.
Interest expense during the second quarter of 2004 was $2.4 million as compared
to $0.9 million during the second quarter of 2003. Interest income during the
second quarter of 2004 was $0.8 million as compared to $0.6 million during the
second quarter of 2003. The Companys effective income tax rate in the second quarter of 2004 was 36
percent 19




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##### Table of Contents



as compared to a 35 percent tax rate during the second quarter of 2003,
primarily as a result of higher foreign taxes. Second quarter 2004 net income and diluted earnings per share were $9.9 million
and $0.36 based on 27.9 million common shares outstanding. Second quarter 2003
net income and diluted earnings per share were $8.3 million and $0.29 based on
28.9 million common shares outstanding. Sales during the first half
of 2004 were $167.7 million, an increase of 14.1
percent over last years first half sales of $147.0 million. As a result of
the higher sales volume, gross profit for the first half of 2004 increased to
$64.6 million or 38.5 percent of sales as compared to $50.9 million or 34.7
percent of sales during the first half of 2003. Operating income for the first
half of 2004 was $32.7 million or 19.5 percent of sales. Operating income for
the first half of 2003 was $23.8 million, or 16.2 percent of sales. Net income for the first half of 2004 was $18.8 million or $0.68 per common
share on a diluted basis. First half 2003 net income and diluted earnings per
common share were $15.4 million and $0.52. Liquidity and Capital Resources At July 3, 2004, the Companys current ratio was 9.3 to 1 and working capital
totaled $337.0 million, including $269.1 million of cash and cash equivalents.
At December 31, 2003, the current ratio was 8.5 to 1 and working capital
totaled $317.9 million, including cash and cash equivalents of $255.8 million.
Total debt outstanding at the end of the second quarter 2004, and at year-end
2003, was $200.1 million. Maintaining the Companys strong balance sheet and
financial flexibility remains a key strategy of the Company. Cash flow from operations during the first half of 2004 was $25.7 million. As
previously reported, first half 2004 cash flow from operations includes the
receipt of a legal settlement in the amount of $2.5 million. Cash flow from
operations during the first half of 2003 was $22.9 million. During the first
half of 2004, the Company paid common stock dividends of $6.8 million, invested
$5.1 million in net capital expenditures, and repurchased 28,700 shares of
Company common stock for $0.8 million. Management expects that the Companys planned capital requirements, which
consist of capital expenditures, dividend payments and its stock repurchase
program, will be financed by operations and existing cash balances. In
addition, the Companys revolving credit facility provides additional financial
strength to support the Companys objectives including strategic acquisitions. Outlook Orders booked during the first half of 2004 equaled $178.4 million versus
$153.1 million during the first half of 2003, resulting in a backlog of $107.6
million at July 3, 2004. The Companys strong order intake during the first
half is further evidence of positive momentum from the recovery in the
manufacturing economy. Expected operating cash 20




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flows coupled with the Companys current cash reserves and available credit
under the Companys $200.0 million revolving credit facility will provide
substantial resources to fund the Companys ongoing business development
efforts which include internal and external growth initiatives as well as
selected stock repurchases. Critical Accounting Policies and Estimates The Companys consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires the use of estimates, judgments, and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. The Company continually evaluates the estimates, judgments, and assumptions
used to prepare the consolidated financial statements. In general, the
Companys estimates are based on historical experience, on information from
third party professionals and on various other judgments and assumptions that
are believed to be reasonable under the current facts and circumstances.
Actual results could differ from the current estimates made by the Company.
The Company has identified certain accounting policies and estimates, described
below that are the most critical to the portrayal of the Companys current
financial condition and results of operations Loss Contingencies and Legal Costs-The Company records loss contingencies as a
liability when it is probable that a liability has been incurred and the amount
of the loss is reasonably estimable. Estimated legal costs expected to be
incurred in connection with loss contingencies are accrued in the consolidated
financial statements. The Company believes the accounting estimates related to loss contingencies and
legal costs to be a critical accounting estimate as contingent liabilities are
often resolved over long time periods and estimation of probable losses and
costs to litigate requires forecasts that often depend on judgments from third
party experts and are based on potential actions by other third parties such as
plaintiffs, juries, and regulators.
To better understand this accounting policy and its historic impact on the
Company, readers should refer to Notes to Consolidated Condensed Financial
Statements (Note 7) in this quarterly report on Form 10-Q as well as Notes to
Consolidated Financial Statements (Note 11) in the 2003 Annual Report on Form
10-K for additional information regarding loss contingencies and legal costs. Impairment of Goodwill and Indefinite-Lived Intangible Assets-The Company
annually, or more frequently if events or changes in circumstances indicate a
need, tests the carrying amounts of goodwill and indefinite-lived intangible
assets for impairment. The Company identifies impairment of goodwill by comparing the fair value of
each of the Companys reporting units with the reporting units carrying
amount. The fair value of each of the Companys reporting units is derived
from an estimate of discounted future cash flows including an estimate for
terminal value. The Company utilizes a 10 21




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percent discount rate, and a growth assumption of 2 percent in perpetuity to
calculate terminal value. Potential goodwill impairment is identified if a
reporting units carrying amount is more than a reporting units fair value.
If this occurs, normally a third-party valuation specialist is utilized to
assist the Company in determining the implied fair value of the reporting
units goodwill. The amount of any actual impairment loss is calculated by
comparing the implied fair value of the reporting units goodwill with the
carrying amount of the reporting units goodwill. A trademark is the Companys only indefinite-lived intangible asset. The
Company identifies impairment of this trademark by comparing its fair value to
its carrying amount. The fair value of the trademark is calculated based on an
estimate of discounted future cash flows including an estimate for terminal
value related to the net amount of royalty expense avoided due to the existence
of the trademark. The Company believes the accounting estimates related to impairment of goodwill
and indefinite-lived intangible assets to be critical accounting estimates
because: the estimate of discounted future cash flows and terminal values,
while based on reasonable and supportable assumptions and projections, requires
the Companys subjective judgments; the time periods for estimating future cash
flows is often lengthy which increases the sensitivity to assumptions made;
projected outcomes based on the assumptions made can vary; and the calculation
of implied fair value is inherently subject to estimates. To better understand this accounting policy and its impact on the Company,
readers should refer to Notes to Consolidated Condensed Financial Statements
(Note 8) in this quarterly report on Form 10-Q as well as Notes to Consolidated
Financial Statements (Note 12) in the 2003 Annual Report on Form 10-K for
additional information regarding goodwill and intangible assets. Impairment of Long-Lived Assets-The Company continually evaluates whether
events and circumstances have occurred that indicate the remaining estimated
useful lives of long-lived assets including fixed assets and amortizable
intangible assets may warrant revision or that remaining balances may not be
recoverable. When factors indicate that such costs should be evaluated for
possible impairment, the Company uses an estimate of undiscounted future cash
flows over the remaining lives of the long-lived assets that are compared to
the carrying value of the asset to evaluate whether the asset costs are
recoverable. The Company believes the accounting estimates related to long-lived asset
impairment to be a critical accounting estimate because: the estimate of
undiscounted future cash flows, while based on reasonable and supportable
assumptions and projections, requires the Companys subjective judgments; the
time periods for estimating future cash flows is often lengthy which increases
the sensitivity to assumptions made; and projected outcomes based on the
assumptions made can vary. To better understand this accounting policy and its impact on the Company,
readers should refer to Notes to Consolidated Condensed Financial Statements
(Note 8) in this quarterly report on Form 10-Q as well as Notes to Consolidated
Financial Statements (Note 1 and Note 12) in the 2003 Annual Report on Form
10-K for additional 22




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information regarding long-lived assets. Retirement Benefits-The Companys employee pension and postretirement benefit
costs and obligations recorded in the financial statements are dependent on the
Companys estimates provided to and used by the Companys actuaries in
calculating such amounts. The Company believes the accounting estimates related to retirement benefits to
be critical accounting estimates because of the wide range of assumptions used
in deriving yearly contribution and expense amounts as well as the amounts
recorded for retirement benefits in the Companys financial statements.
Significant assumptions include judgments regarding discount rates, health care
cost trend rates, inflation rates, salary growth rates, long-term return on
plan assets, retirement rates, mortality rates and other factors. The Company has developed estimates based on historical experience, on
information from third party professionals and on various other judgments and
assumptions that are believed to be reasonable under the current facts and
circumstances. Discount rate assumptions are based on investment yields
available on long-term bonds. Health care cost trend assumptions are developed
based on historical data, the near-term outlook, and on an assessment of likely
long-term trends. Inflation assumptions are based on an evaluation of external market indicators.
Salary growth assumptions reflect the Companys long-term experience, the
near-term outlook and assumed inflation. Long-term return on plan assets is
based on an evaluation of historical and expected returns of the individual
asset classes comprising the total plan assets. Retirement and mortality
rates are based primarily on actual plan experience and mortality tables. Actual results that differ from the Companys assumptions are accumulated and
amortized over future periods and, therefore, generally affect the Companys
recognized expense and recorded obligation in such future periods. While the
Company believes that the assumptions used are appropriate, significant
differences in actual experience or significant changes in assumptions would
affect the Companys pension and postretirement benefits costs and obligations. To better understand this accounting policy and its historic impact on the
Company, readers should refer to Notes to Consolidated Condensed Financial Statements
(Note 9) in this quarterly report on Form 10-Q as well as Notes to Consolidated
Financial Statements (Note 8) in the 2003 Annual Report on Form 10-K for
additional information regarding costs, obligations, and assumptions for
employee pension and postretirement benefits. 4% Contingent Convertible Senior Subordinated Notes-In May of 2003, the
Company completed the sale of $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 including that
Kaydon common stock has traded above $34.99 for 20 out of 30 trading days for
specified periods of time. Unless and until this contingency or other
conversion contingencies are met, the above 23




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mentioned shares of the Companys common stock underlying the Notes will not be
included in the Companys basic or diluted earnings per share calculations.
Should this contingency be met, diluted earnings per share would, depending on
the relationship between the interest on the Notes and the earnings per share
of Kaydon common stock, be expected to decrease as a result of the inclusion of
the underlying shares in the diluted earnings per share calculation. In addition, the contingent interest feature of the Notes requires the Company
to deduct for tax purposes an amount of interest expense that is greater than
the stated coupon rate on the Notes. The deductibility for tax purposes of the
additional interest beyond the stated coupon rate may have to be recaptured, in
part or in whole, if the Notes are redeemed for cash instead of converted into
Company common stock. Should this happen, depending on other factors, tax
payments may increase. The Company believes that the current and potential future impact the Notes
have on the accounting for the Companys diluted earnings per share
calculations, and tax-related account balances as discussed above are critical
to the understanding of the Companys current financial condition and results
of operations. Volatility in the Companys stock price could cause the
underlying shares to be included in the diluted earnings per share calculation
in one quarter, and not in a subsequent quarter. Redemption of the Notes for
cash may cause volatility in tax payments, cash flows and the liquidity of the
Company. To better understand the Notes and their impact on the Companys financial
reporting, readers should refer to Notes to Consolidated Financial Statements
(Note 2 and Note 5) in the 2003 Annual Report on Form 10-K and other
discussions in this quarterly report on Form 10-Q. Income Taxes The Company records deferred tax assets and liabilities using
enacted tax rates for the effect of differences between the book and tax basis
of recorded assets and liabilities. These deferred tax assets and liabilities
are reviewed for recoverability by using estimates of future taxable income
streams and the impact of tax planning strategies. Deferred tax assets are
reduced by a valuation allowance if it is more likely than not that a portion
of the deferred tax asset will not be realized. Reserves are also estimated
for ongoing audits regarding federal, state and international issues that are
currently unresolved. Income tax is provided based upon an effective tax rate
that is dependent upon tax regulations governing the regions in which the
Company conducts business, geographic composition of worldwide earnings, the
availability of tax credits and other factors. The Company believes the accounting estimates related to income taxes to be a
critical accounting estimate because the range of assumptions used to determine
deferred tax assets and liabilities and to record current reserves and tax
rates, while based on reasonable and supportable information, may change from
year to year causing projected outcomes based on the assumptions to vary. To better understand this accounting policy and its impact on the Company,
readers should refer to Notes to Consolidated Financial Statements (Note 10) in
the 2003 Annual Report on Form 10-K for additional information regarding income
taxes. 24




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Inventories Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis. The carrying value of inventory is
reduced for estimated obsolescence by the difference between its cost and the
estimated market value based upon assumptions regarding future demand. The
Company evaluates the inventory carrying value for potential excess and
obsolete inventory exposures by analyzing historical and anticipated demand.
In addition, inventories are evaluated for potential obsolescence due to the
effect of known or anticipated engineering change orders, new products, and
other factors. The Company believes the accounting estimates related to inventories to be a
critical accounting estimate because the range of assumptions used to determine
the valuation of inventories, while based on reasonable and supportable
information, may change causing projected outcomes based on the assumptions to
vary. Forward-Looking Statements This Form 10-Q contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934 regarding the Companys plans, expectations,
estimates and beliefs. Forward-looking statements are typically identified by
words such as believes, expects, anticipates, intends, will, may,
potential and other similar expressions, including statements regarding
pending litigation, general economic conditions, competitive dynamics and the
adequacy of capital resources. These forward-looking statements may include,
among other things, projections of the Companys financial performance,
anticipated growth, characterization of and the Companys ability to control
contingent liabilities, and anticipated trends in the Companys businesses.
These statements are only predictions, based on the Companys current
expectation about future events. Although the Company believes the
expectations reflected in the forward-looking statements are reasonable, it
cannot guarantee future results, performance or achievements or that
predictions or current expectations will be accurate. These forward-looking
statements involve risks and uncertainties, including those specifically listed
below, that could cause the Companys actual results, performance or
achievements to differ materially from those expressed or implied by the
forward-looking statements. In addition, the Company or persons acting on its behalf may from time to time
publish or communicate other items that could also be construed to be
forward-looking statements. Statements of this sort are or will be based on
the Companys estimates, assumptions, and projections and are subject to risks
and uncertainties, including those specifically listed below, that could cause
actual results to differ materially from those included in the forward-looking
statements. Kaydon does not undertake any responsibility to update its
forward-looking statements or risk factors to reflect future events or
circumstances. The following risk factors could affect the Companys operating
results. The Companys customers economic cycles may affect Kaydons operating results. Many of the Companys customers are in industries that are cyclical in nature
and sensitive to changes in general economic conditions and other factors,
including capital 25




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spending levels. Such industries include commercial and military aerospace,
semiconductor manufacturing, power generation, off-road and heavy industrial
equipment, and other capital equipment manufacturing. As a result, the demand
for the Companys products by these customers depends, in part, upon general
economic conditions. Historically, downward economic cycles have reduced
customer demand for the Companys products, thereby reducing sales of the
Companys products and resulting in reductions to the Companys revenues and
net earnings. Increased competition in the Companys key markets could result in a reduction
in Kaydons revenues and earnings and adversely affect the Companys financial
condition. The industries in which the Company operates are fragmented and the Company
faces competition from multiple companies across its diverse product lines.
Kaydon expects competitive pressures from new products and aggressive pricing
to increase, which may cause the Company to lose market share or compel the
Company to reduce prices to remain competitive, which could result in reduced
levels of revenues and earnings. The Companys competitors include U.S. and
non-U.S. companies, some of which benefit from lower labor costs and fewer
regulatory burdens. In addition, certain competitors, including Perkin Elmer,
Timken, SKF, and INA/FAG, are larger than Kaydon and may have access to greater
financial, technical, development, marketing, manufacturing, sales and
distribution services and other resources. Increased competition with these
companies or new entrants to the Companys key markets could prevent price
increases for the Companys products or could require price reductions for the
Companys products, which could adversely affect the Companys financial
condition, results of operations, growth or liquidity. Future acquisitions may require Kaydon to incur costs and liabilities, which
may adversely affect the Companys operating results. In addition to internal growth, Kaydons current strategy involves growth
through acquisitions of complementary businesses as well as acquisitions that
diversify the Companys product offerings. Like other companies with similar
growth strategies, Kaydon may be unable to continue to implement its growth
strategy, and this strategy may be ultimately unsuccessful. A portion of the
Companys expected future growth in revenues may result from acquisitions. The
Company frequently engages in evaluations of potential acquisitions and
negotiations for possible acquisitions, certain of which, if consummated, could
be significant to the Company. Although it is the Companys policy only to
acquire companies in transactions which are accretive to both earnings and cash
flow, any potential acquisitions may result in material transaction expenses,
increased interest and amortization expense, increased depreciation expense and
increased operating expense, any of which could have a material adverse effect
on the Companys operating results. Acquisitions may entail integration and
management of the new businesses to realize economies of scale and control
costs. In addition, acquisitions may involve other risks, including diversion
of management resources otherwise available for ongoing development of our
business and risks associated with entering new markets. The Company may not
be able to identify suitable acquisition candidates in the future, obtain
acceptable financing or consummate any future acquisitions. In addition, as a
result of the Companys acquisitions of other businesses, the Company may be
subject to the risk of 26




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unanticipated business uncertainties or legal liabilities relating to those
acquired businesses for which the sellers of the acquired businesses may not
indemnify the Company. Future acquisitions may also result in potentially
dilutive issuances of securities. Political, economic and regulatory conditions inherent in the international
markets in which Kaydon participates could adversely affect the Companys
financial condition. Typically, sales of the Companys products from the Companys foreign
subsidiaries and from the Companys domestic subsidiaries selling to foreign
locations accounts for approximately 30 percent of net sales. These foreign
sales could be adversely affected by changes in various foreign countries
political and economic conditions, trade protection measures, differing
intellectual property rights and changes in regulatory requirements that
restrict the sales of the Companys products or increase the Companys costs. The Company generates significant revenues outside the United States. Currency
fluctuations between the U.S. dollar and the currencies in which those
customers do business may have an impact on the demand for the Companys
products in foreign countries where the U.S. dollar has increased in value
compared to the local currency. The Company cannot predict the effects of
exchange rate fluctuations upon the Companys future operating results because
of the number of currencies involved, the variability of currency exposure and
the potential volatility of currency exchange rates. Relationships with customers and effective terms of sale frequently vary by
country, often with longer-term receivables than are typical in the United
States. Kaydons manufactured critical performance products expose the Company to
potential litigation-related costs, which may adversely affect the Companys
financial position and operating results. As a provider of critical performance products in a variety of industries
including aerospace, defense, construction, marine, medical, material handling,
machine tool positioning and other industrial applications, the Company faces a
risk of exposure to claims in the event that the failure, use or misuse of the
Companys products results, or is alleged to result, in bodily injury and/or
property damage. The Company, along with certain other companies, is named as
a defendant in a lawsuit arising from an August 2000 fatal accident involving a
MH53E helicopter manufactured by Sikorsky Aircraft Corporation. The Company
believes that the alleged damages claimed in this lawsuit, and the associated
legal costs, will be fully covered under the Companys insurance policy, but it
is possible that such costs will not be covered by insurance and, if so, the
Company will incur unknown additional direct costs. These claims have not been
finally resolved or settled. In the past, costs related to legal proceedings and settlements have had a
material effect on the Companys business, financial condition, results of
operations and liquidity. The Company cannot assure you that the ultimate cost
of current known or future unknown litigation and claims will not exceed
managements current expectations and it is possible that such costs could have
a material adverse effect on the Company. 27




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In addition, litigation is time
consuming and could divert management attention and resources away from the
Companys business. The Transactions Lawsuit could materially adversely affect the Company
if the trial courts dismissal of the claims in such suit is reversed on appeal
and if an adverse ruling is entered on appeal. The Company, along with certain other companies, was a defendant in a lawsuit
filed in 1996 asserting claims for fraudulent conveyance and successor
liability relating to the Companys acquisition of certain assets in 1983 and
the Companys 1984 spin-off from Bairnco Corporation (the Transactions
Lawsuit). The plaintiffs in the Transactions Lawsuit alleged and sought
damages of $700 million, plus interest and punitive damages against the
defendants collectively. As previously disclosed, the plaintiffs claims were
dismissed with prejudice by the trial court on March 14, 2003. On April 14,
2003, the plaintiffs filed a notice of appeal. On March 24, 2004, oral
arguments were heard by the Court of Appeals and on April 9, 2004 the Court of
Appeals issued its Summary Order affirming in all respects the earlier judgment
of the trial court which granted the motion for summary judgment, dismissing
the case in its entirety against all defendants. On July 8, 2004 the lead
attorney for the plaintiffs in the Transaction Lawsuit sent a written
confirmation to the counsel of another defendant in the case stating that the
plaintiffs would not file a cert petition, referring to a Petition for
Certiorari in the United States Supreme Court. In effect, the Company believes
that the attorney was confirming that the plaintiffs would take no further
steps to appeal the decision by the Court of Appeals affirming the dismissal of
the case against all defendants, including Kaydon. The time for filing such a
Petition actually expires on August 16, 2004, so the plaintiffs still have the
technical right to seek further review of the Court of Appeals decision. If
an unfavorable outcome were to occur, the impact could be material to the
Company. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks, which exist as part of its
ongoing business operations including interest rates and foreign currency
exchange rates. The exposure to market risk for changes in interest rates
relates primarily to investments in cash and cash equivalents. All highly
liquid investments, including highly liquid debt and investment instruments
purchased with an original maturity of three months or less, are considered
cash equivalents. The Company places its investments in cash equivalents with
high credit quality issuers and limits the amount of exposure to any one
issuer. A 9 basis point decrease in interest rates (10 percent of the
Companys weighted average investment interest rate for the second quarter of
2004) would have an immaterial impact on the Companys pre-tax earnings. The
Company conducts business in various foreign currencies, primarily in Europe,
Canada, Mexico, and Japan. Therefore, changes in the value of currencies of
these countries affect the Companys financial position and cash flows when
translated into U.S. dollars. The Company has mitigated and will continue to
mitigate a portion of its currency exposure through operation of decentralized
foreign operating companies in which many costs are local currency based. In
addition, periodically the Company enters into derivative financial instruments
in the form of forward foreign exchange contracts to reduce the 28




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effect of
fluctuations in foreign exchange rates. A 10 percent change in the value of
all foreign currencies would have an immaterial effect on the Companys
financial position and cash flows. 
 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Companys disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon
that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures provide
reasonable assurance that the material information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Commissions rules and forms. Except for the
implementation of new enterprise resource planning (ERP) software at several
locations, there have been no changes in the Companys internal controls over
financial reporting that occurred during the most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. The aforementioned ERP
software is not new to the Company, it was recently implemented at several
locations as part of the Companys ongoing program to update systems at all of
its locations. The Company believes that the new ERP software will improve its
internal control over financial reporting. 29




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS  See the discussion in Notes to Consolidated Condensed Financial
Statements (Note 7), which discussion is incorporated herein by
reference. 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES  (e)
    
    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 2004: 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 4 to May 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,072,736May 2 to May 29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,072,736May 30 to July 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,072,736Total
    
    
    
    
    
    
    
    
    
    
    
  (1)
    
    On September 29, 1999, 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  The Company held its Annual Meeting of Shareholders on May 7,
2004, at which the shareholders voted on the election of
Directors and ratification of the appointment of Ernst & Young
LLP as the Companys independent auditors for 2004. The results
were as follows:Each of the nominees for Director was an incumbent and all
nominees were elected. The following table sets forth the number
of shares voted for and withheld with respect to each nominee. Nominee
    
    Votes For
    
    Votes WithheldDavid A. Brandon
    
    
    26,045,061
    
    
    
    403,251Gerald J. Breen
    
    
    25,326,386
    
    
    
    1,121,926Brian P. Campbell
    
    
    25,582,152
    
    
    
    866,160Thomas C. Sullivan
    
    
    25,773,516
    
    
    
    674,796Robert M. Teeter
    
    
    26,033,599
    
    
    
    414,713B. Joseph White
    
    
    25,775,316
    
    
    
    672,996
 30




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The stockholders approved the appointment of Ernst & Young LLP as the
Companys independent auditors for 2004 with the following vote:
25,969,816 votes for, 415,041 votes against, and 63,455 votes
abstained. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a).   Exhibits  Exhibit No.
    
    Description12
    
    
    Statement Re: Computation of Ratio of Earnings to
Fixed Charges31
    
    
    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
 (b). Reports on Form 8-K  The Company filed a current report on Form 8-K on April 12, 2004,
reporting under Items 5 and 7 the issuance of a press release
reporting a favorable court ruling in Richard A. Lippe, et al. v.
Bairnco Corporation, et. al.The Company filed a current report on Form 8-K on April 30, 2004,
reporting under Items 7 and 12 the issuance of a press release
disclosing material, non-public information regarding results of
operations for the quarter ended April 3, 2004. 31




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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 CORPORATIONAugust 11, 2004
    
    /s/ Brian P. CampbellBrian P. CampbellChairman, President, Chief ExecutiveOfficer and Chief Financial OfficerAugust 11, 2004
    
    /s/ Kenneth W. CrawfordKenneth W. CrawfordVice President and Corporate Controller(Principal Accounting Officer)
 32




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EXHIBIT INDEX Exhibit No.
    
    Description12
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31
    
    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
 33