e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended October 2, 2010

Commission File No. 1-11333

KAYDON CORPORATION

(Exact name of registrant as specified in its charter)


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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Common Stock Outstanding at November 1, 2010 — 33,454,189 shares, $.10 par value.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.
KAYDON CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)


	October 2, 2010		December 31, 2009

ASSETS

Current Assets:
Cash and cash equivalents	$	288,802,000	$	262,403,000
Accounts receivable, net		86,288,000		77,977,000
Inventories, net		88,558,000		88,796,000
Other current assets		14,718,000		16,601,000


Total current assets		478,366,000		445,777,000


Property, plant and equipment, net		171,336,000		175,716,000
Goodwill, net		143,770,000		143,891,000
Other intangible assets, net		18,893,000		21,552,000
Other assets		3,137,000		1,008,000


Total assets	$	815,502,000	$	787,944,000


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	19,978,000	$	21,353,000
Salaries and wages		10,787,000		5,087,000
Taxes payable		3,539,000		2,473,000
Other accrued expenses		21,542,000		19,171,000


Total current liabilities		55,846,000		48,084,000


Long-term postretirement and postemployment benefit obligations		25,218,000		28,669,000
Other long-term liabilities		11,713,000		11,226,000


Total long-term liabilities		36,931,000		39,895,000


Shareholders’ Equity:
Common stock		3,693,000		3,693,000
Other shareholders’ equity		719,032,000		696,272,000


Total shareholders’ equity		722,725,000		699,965,000


Total liabilities and shareholders’ equity	$	815,502,000	$	787,944,000

See accompanying notes to consolidated condensed financial statements.

KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	First Three Quarters Ended
	October 2, 2010			October 3, 2009


Cash flows from operating activities:
Net income	$	44,731,000		$	34,550,000
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		15,645,000			14,635,000
Amortization of intangible assets		2,713,000			3,211,000
Amortization of stock awards		2,998,000			3,104,000
Stock option compensation expense		991,000			981,000
Excess tax benefits from stock-based compensation		(186,000	)		61,000
Deferred financing fees		134,000			186,000
Non-cash postretirement benefits curtailment gain		(3,066,000	)		(6,305,000	)
Contributions to qualified pension plans		(1,614,000	)		(14,846,000	)
Net change in receivables, inventories and trade payables		(9,533,000	)		(6,744,000	)
Net change in other assets and liabilities		13,576,000			15,294,000


Net cash from operating activities		66,389,000			44,127,000


Cash flows from investing activities:
Capital expenditures		(11,280,000	)		(9,585,000	)
Dispositions of property, plant and equipment		107,000			1,186,000
Proceeds from sales of investments		0			4,063,000


Net cash used in investing activities		(11,173,000	)		(4,336,000	)


Cash flows from financing activities:
Cash dividends paid		(18,121,000	)		(17,164,000	)
Purchase of treasury stock		(8,789,000	)		(8,871,000	)
Credit facility issuance costs		(1,935,000	)		0
Excess tax benefits from stock-based compensation		186,000			(61,000	)
Proceeds from exercise of stock options		104,000			24,000


Net cash used in financing activities		(28,555,000	)		(26,072,000	)


Effect of exchange rate changes on cash and cash equivalents		(262,000	)		1,124,000


Net increase in cash and cash equivalents		26,399,000			14,843,000

Cash and cash equivalents — Beginning of period		262,403,000			232,998,000


Cash and cash equivalents — End of period	$	288,802,000		$	247,841,000

Cash paid for income taxes	$	15,082,000		$	8,296,000

Cash paid for interest		0			0

See accompanying notes to consolidated condensed financial statements.

KAYDON CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(1)

Basis of Presentation:

The accompanying unaudited consolidated condensed financial statements of Kaydon Corporation and subsidiaries (“Kaydon” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, and such adjustments are of a normal recurring nature. The December 31, 2009 consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009. Certain items in the prior year financial statements have been reclassified to conform to the presentation used in 2010.

(2)

Cash and Cash Equivalents:

The Company considers all highly liquid debt and investment instruments purchased with a maturity of three months or less to be cash equivalents.


	October 2, 2010		December 31, 2009

Cash and cash equivalents:
Money market and other short-term funds	$	276,175,000	$	248,091,000
Time deposits, other interest bearing accounts, and other cash		12,627,000		14,312,000

	$	288,802,000	$	262,403,000

(3) Inventories:


	October 2, 2010		December 31, 2009

Raw material	$	35,655,000	$	32,933,000
Work in process		25,547,000		22,857,000
Finished goods		27,356,000		33,006,000

	$	88,558,000	$	88,796,000

(4) Comprehensive Income:

For the Company, comprehensive income consists of net income and other comprehensive income (loss) which is comprised primarily of foreign currency translation adjustments.


	Third Quarter Ended				First Three Quarters Ended
	October 2, 2010		October 3, 2009		October 2, 2010		October 3, 2009

Net income	$	13,088,000	$	16,067,000	$	44,731,000	$	34,550,000
Other comprehensive income		5,415,000		106,000		875,000		3,494,000


Comprehensive income	$	18,503,000	$	16,173,000	$	45,606,000	$	38,044,000

(5) Earnings per Share:

The following table reconciles the numerators and denominators used in the calculations of basic and diluted earnings per share for the periods presented.


	Third Quarter Ended
	October 2, 2010			October 3, 2009

Earnings per share — Basic
Net income	$	13,088,000		$	16,067,000
Less: Net earnings allocated to participating securities — Basic		(137,000	)		(174,000	)

Income available to common shareholders — Basic	$	12,951,000		$	15,893,000
Weighted average common shares outstanding — Basic		33,119,000			33,226,000

Earnings per share — Basic	$	0.39		$	0.48


Earnings per share — Diluted
Net income	$	13,088,000		$	16,067,000
Less: Net earnings allocated to participating securities — Diluted		(137,000	)		(174,000	)

Income available to common shareholders — Diluted	$	12,951,000		$	15,893,000

Weighted average common shares outstanding — Diluted
Weighted average common shares outstanding — Basic		33,119,000			33,226,000
Potential dilutive shares resulting from stock options		27,000			19,000

Weighted average common shares outstanding — Diluted		33,146,000			33,245,000

Earnings per share — Diluted	$	0.39		$	0.48


	First Three Quarters Ended
	October 2, 2010			October 3, 2009

Earnings per share — Basic
Net income	$	44,731,000		$	34,550,000
Less: Net earnings allocated to participating securities — Basic		(475,000	)		(395,000	)

Income available to common shareholders — Basic	$	44,256,000		$	34,155,000
Weighted average common shares outstanding — Basic		33,170,000			33,258,000

Earnings per share — Basic	$	1.33		$	1.03


Earnings per share — Diluted
Net income	$	44,731,000		$	34,550,000
Less: Net earnings allocated to participating securities — Diluted		(475,000	)		(395,000	)

Income available to common shareholders — Diluted	$	44,256,000		$	34,155,000

Weighted average common shares outstanding — Diluted
Weighted average common shares outstanding — Basic		33,170,000			33,258,000
Potential dilutive shares resulting from stock options		25,000			15,000

Weighted average common shares outstanding — Diluted		33,195,000			33,273,000

Earnings per share — Diluted	$	1.33		$	1.03

Certain options granted to purchase shares of common stock were excluded from the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of the common shares for the periods shown below:


	Third Quarter Ended				First Three Quarters Ended
	October 2, 2010		October 3, 2009		October 2, 2010		October 3, 2009

Shares excluded		468,000		385,500		403,000		406,500
Average exercise price	$	42.33	$	43.87	$	43.56	$	43.29

(6) Business Segment Information:


	Third Quarter Ended				First Three Quarters Ended
	October 2, 2010		October 3, 2009		October 2, 2010		October 3, 2009

Net sales
Friction Control Products	$	78,002,000	$	87,076,000	$	237,476,000	$	223,491,000
Velocity Control Products		15,932,000		12,202,000		45,279,000		34,602,000
Other Industrial Products		24,346,000		24,359,000		76,270,000		74,197,000


Total consolidated net sales	$	118,280,000	$	123,637,000	$	359,025,000	$	332,290,000


	Third Quarter Ended						First Three Quarters Ended
	October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009

Operating income
Friction Control Products	$	12,673,000		$	15,392,000		$	49,556,000		$	37,633,000
Velocity Control Products		4,095,000			2,124,000			11,422,000			5,191,000
Other Industrial Products		1,397,000			2,228,000			5,516,000			5,467,000


Total segment operating income		18,165,000			19,744,000			66,494,000			48,291,000

Items not allocated to segment operating income		409,000			4,885,000			(1,980,000	)		5,086,000

Interest expense		(9,000	)		(62,000	)		(133,000	)		(185,000	)
Interest income		193,000			190,000			315,000			429,000


Income before income taxes	$	18,758,000		$	24,757,000		$	64,696,000		$	53,621,000

Items not allocated to segment operating income in 2010 included costs associated with unconsummated corporate development efforts of $0.3 million and $3.0 million in the third quarter and the first three quarters of 2010, respectively, and also in the first three quarters of 2010 postretirement benefit curtailment gains of $3.1 million. Items not allocated to segment operating income in 2009 included postretirement benefit curtailment gains of $5.4 million and $6.3 million in the third quarter and the first three quarters of 2009, respectively. In addition to the net effect of these items, other corporate administrative expenses increased principally due to an increase in accrued incentive compensation expense in the third quarter and first three quarters of 2010 compared to the same periods of the prior year.

(7)

Long-term Debt:

On September 21, 2010, the Company entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders providing for a $250.0 million senior revolving credit facility. The Credit Agreement provides for borrowings by the Company and its subsidiaries in various currencies for working capital and other general corporate purposes, including acquisitions. The Credit Agreement matures on September 21, 2015 and is guaranteed by the Company and certain of its current domestic subsidiaries. Loans under the credit facility bear interest at a floating rate at the Company’s option as Eurocurrency rate loans or as base rate loans.

The Credit Agreement requires the Company to comply with maximum leverage and minimum interest coverage ratios. The Company was in compliance with all restrictive covenants contained in the Credit Agreement at October 2, 2010. After consideration of the covenants and $4.6 million of letters of credit issued under the Credit Agreement, the Company had available credit of $245.4 million at October 2, 2010.

(8)

Goodwill and Other Intangible Assets:

The Company annually, or more frequently if events or changes in circumstances indicate a need, tests the carrying value of goodwill and indefinite-lived intangible assets for impairment.

During the third quarter of 2010, the Company completed its annual goodwill impairment test. The fair value of each reporting unit was estimated using the expected present value of future cash flows using a weighted average cost of capital discount rate of 11.5-12.5 percent depending on the assessed risk of the reporting unit and a growth rate in perpetuity of 1.0-2.5 percent depending on the assessed long-term growth of the reporting unit. In accordance with current accounting guidance, the Company has included deferred income taxes in determining the carrying value of each reporting unit. During 2010, the Company’s goodwill impairment testing revealed that the estimated fair values of each of its reporting units exceeded their carrying values, which indicated no goodwill impairment. The Company’s goodwill impairment testing revealed that the excess of the estimated fair value of each of the reporting units tested over their carrying value (expressed as a percentage of the carrying value) as of the July 31, 2010 annual testing date ranged from approximately 38 percent to approximately 282 percent. Changes in estimates of future cash flows and the weighted average cost of capital may have a material effect on the valuation of reporting units and the results of the related impairment testing.

Certain trademarks are the Company’s only indefinite-lived intangible assets. The Company identifies impairment of these trademarks by comparing their fair values to their carrying values. The fair values of the trademarks are calculated based on estimates of discounted future cash flows related to the net amount of royalty expenses avoided due to the existence of the trademarks. As of July 31, 2010, trademarks were tested for impairment and no impairment loss was realized.

The changes in the carrying value of goodwill for the first three quarters ended October 2, 2010, were as follows:


	Friction			Velocity		Other
	Control			Control		Industrial
	Products			Products		Products			Total

Balance as of January 1, 2010
Goodwill	$	56,859,000		$	43,200,000	$	62,532,000		$	162,591,000
Accumulated impairment losses		0			0		(18,700,000	)		(18,700,000	)

	$	56,859,000		$	43,200,000	$	43,832,000		$	143,891,000
Effect of foreign currency exchange rate changes		(121,000	)		0		0			(121,000	)
Balance as of October 2, 2010
Goodwill	$	56,738,000		$	43,200,000	$	62,532,000		$	162,470,000
Accumulated impairment losses		0			0		(18,700,000	)		(18,700,000	)

	$	56,738,000		$	43,200,000	$	43,832,000		$	143,770,000

The accumulated impairment losses include impairment losses of $1.9 million recorded in 2004 and $16.8 million recorded in 2002.

Other intangible assets are summarized as follows:


	October 2, 2010				December 31, 2009
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
Amortized Intangible Assets	Value		Amortization		Value		Amortization

Customer relationships and lists	$	28,194,000	$	16,921,000	$	28,194,000	$	14,672,000
Patents and developed technology		6,570,000		3,858,000		6,516,000		3,503,000
Backlog		3,300,000		3,279,000		3,300,000		3,219,000
Distributor agreements		374,000		226,000		374,000		199,000
Product names		320,000		185,000		320,000		163,000

	$	38,758,000	$	24,469,000	$	38,704,000	$	21,756,000

The intangible assets are amortized at accelerated rates or on a straight-line basis, whichever is appropriate, over their respective useful lives. The weighted-average original useful life for customer relationships and lists is 13.6 years, and for patents and developed technology is 13.5 years. Backlog is amortized over three years.


	October 2, 2010		December 31, 2009
Unamortized Intangible Assets	Carrying Value		Carrying Value

Trademarks	$	4,604,000	$	4,604,000


Aggregate Intangible Assets Amortization Expense

For the first three quarters ended October 2, 2010	$	2,713,000
For the first three quarters ended October 3, 2009	$	3,211,000


Estimated Intangible Assets Amortization Expense

For the year ending December 31, 2010	$	3,577,000
For the year ending December 31, 2011	$	2,265,000
For the year ending December 31, 2012	$	1,983,000
For the year ending December 31, 2013	$	1,716,000
For the year ending December 31, 2014	$	1,418,000

(9) Employee Benefit Plans:

The components of net periodic benefit cost (income) are as follows:


	Third Quarter Ended						First Three Quarters Ended
Pension Benefits	October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009

Service cost	$	584,000		$	826,000		$	2,246,000		$	2,409,000
Interest cost		1,662,000			1,743,000			5,138,000			5,167,000
Expected return on plan assets		(1,918,000	)		(1,293,000	)		(5,760,000	)		(4,201,000	)
Amortization of:
Unrecognized net prior service cost		15,000			38,000			47,000			44,000
Unrecognized net loss		739,000			1,257,000			2,479,000			3,787,000

Total	$	1,082,000		$	2,571,000		$	4,150,000		$	7,206,000


	Third Quarter Ended						First Three Quarters Ended
Postretirement Benefits	October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009

Service cost	$	15,000		$	23,000		$	127,000		$	224,000
Interest cost		67,000			110,000			324,000			486,000
Amortization of:
Unrecognized net prior service cost		(343,000	)		(203,000	)		(921,000	)		(770,000	)
Unrecognized net gain		(128,000	)		(157,000	)		(314,000	)		(414,000	)
Curtailment gain		0			(5,395,000	)		(3,066,000	)		(6,305,000	)

Total	$	(389,000	)	$	(5,622,000	)	$	(3,850,000	)	$	(6,779,000	)

The Company made changes to its postretirement plans for certain employee groups in 2010 and 2009 resulting in curtailment gains which were recorded as reductions to selling, general and administrative expenses. The Company contributed $1.0 million to its qualified pension plans in the third quarter of 2010. The Company expects to contribute $2.9 million to its qualified and non-qualified pension plans in 2010, and reviews its funding strategy on an ongoing basis.

(10)

Stock-Based Compensation:

A summary of restricted stock information pursuant to the Company’s equity incentive plans for the first three quarters of 2010 is as follows:


				Wtd. Avg.
	Restricted			Grant Date
	Stock			Fair Value

Outstanding at January 1, 2010		345,970		$	35.93
Granted		124,500		$	34.78
Vested		(131,486	)	$	35.04
Canceled		(13,854	)	$	35.58

Outstanding at October 2, 2010		325,130		$	35.87

Compensation expense related to restricted stock awards was $0.9 million and $3.0 million in the third quarter and first three quarters of 2010, respectively. Compensation expense related to restricted stock awards was $1.0 million and $3.1 million in the third quarter and first three quarters of 2009, respectively.

A summary of stock option information pursuant to the Company’s equity incentive plans for the first three quarters of 2010 is as follows:


				Wtd. Avg.
	Options			Ex. Price

Outstanding at January 1, 2010		549,750		$	38.67
Granted		85,000		$	35.11
Canceled		(25,500	)	$	26.36
Exercised		(4,250	)	$	24.49

Outstanding at October 2, 2010		605,000		$	38.79

Exercisable at October 2, 2010		299,400		$	40.20

Weighted Average Fair Value of Options Granted	$	10.56

Weighted Average Remaining Contractual Life (years)
Outstanding at October 2, 2010		6.9
Exercisable at October 2, 2010		6.5

The exercise price of each option equals the closing market price of Company common stock on the date of grant. Options granted become exercisable at the rate of 10 percent, 20 percent, or 100 percent per year, commencing one year after the date of grant, and options expire ten years after the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Compensation expense related to stock options was $0.3 million and $1.0 million in the third quarter and first three quarters of 2010, respectively. Compensation expense related to stock options was $0.3 million and $1.0 million in the third quarter and first three quarters of 2009, respectively. The aggregate intrinsic value of options outstanding at October 2, 2010 was $1.1 million.

In the full year of 2009 a total of 139,008 shares of common stock were issued upon vesting of restricted stock awards and a total of 1,000 shares were issued upon exercise of stock options.

(11) Other Matters:

At October 2, 2010, the Company had approximately $8.5 million of working capital invested on behalf of an international wind energy customer, including past due accounts receivable and inventory made on the customer’s behalf and designed to its agreed upon specifications. The customer has not paid the Company and has made a claim for damages alleging that certain field performance issues of its product are attributable to the quality of the Company’s supplied bearings. The Company is confident that its bearings were made to the agreed upon design specifications and that the customer’s field performance issues relate to factors outside of the Company’s control. Under the documents which comprise the sales contract, the customer is obligated to pay its liability and to reimburse the Company for inventory costs incurred and lost profits. In order to expedite the resolution of this matter, the Company agreed with the customer to enter into a mediation process, and if necessary, binding arbitration to resolve the parties’ claims. The mediation process was completed in March 2010, but was unsuccessful in resolving the matter. During the second quarter of 2010, a notice of arbitration was filed, and an arbitration panel was selected in the third quarter of 2010. In the third quarter of 2010 the arbitration tribunal issued a procedural schedule that anticipates final resolution of the parties’ claims in the fourth quarter of 2011, unless it is resolved sooner by agreement of the parties. As the Company continues to remain confident in the quality of its supplied product and the customer’s financial ability to pay, the Company continues to conclude that the receivables and inventory are fully realizable and the customer’s claims are without merit and payment of the damages claimed is remote.

(12) Taxes:

The effective tax rate for the third quarter of 2010 equaled 30.2 percent compared to 35.1 percent in the third quarter of 2009. The decrease from the prior year is principally attributable to the full availability of the Domestic Manufacturing Deduction and the tax effect of the Company’s planned permanent reinvestment of earnings of certain international operations.

(13) Manufacturing Consolidation Program:

On May 18, 2010 the Company announced a plan to optimize its custom bearings manufacturing capacity by expanding its manufacturing capacity in Sumter, South Carolina. This new facility, with Kaydon’s existing Sumter facilities, is designed to create a custom bearings center of excellence and is expected to allow the Company to grow its market share, realize overhead cost reductions and leverage its engineering capabilities. In connection with this plan, the Company has formally initiated the closure of its Mocksville, North Carolina manufacturing facility. This manufacturing consolidation program is within the Friction Control Products reporting segment. Through the third quarter of 2010 the Company incurred $0.4 million in selling, general and administrative expense for one-time termination benefits earned by employees in Mocksville and expects to incur less than $0.1 million in additional one-time termination benefits through the closure of the facility.


	One-time
	termination benefits

Balance at April 3, 2010	$	0
Severance, retention, and outplacement charge — Second Quarter 2010		199,000

Balance at July 3, 2010	$	199,000
Severance, retention, and outplacement charge — Third Quarter 2010		229,000
Severance, retention, and outplacement payments — Third Quarter 2010		(148,000	)

Balance at October 2, 2010	$	280,000

The Company recognized non-cash cost of sales expense of $0.8 million in additional depreciation in the third quarter of 2010 and expects to recognize $0.3 million in additional depreciation in the fourth quarter of 2010 associated with the closure of the facility.

During the second quarter of 2010 and third quarter of 2010, the Company incurred $0.5 million and $1.2 million, respectively, in cost of sales for engineering, relocation, recruiting, travel, training and other start-up costs in Sumter associated with the manufacturing consolidation program. The Company expects to incur approximately $2.0 million in additional start-up costs, net of state and local incentives, associated with this program through its completion in 2011.

The voluntary attrition of certain Mocksville staff resulted in a decrease of $0.2 million in expected one-time termination benefits, but resulted in additional expected start-up costs of approximately $0.3 million through the completion of the manufacturing consolidation program.

The Company now expects to incur approximately $0.2 million in annual costs for insurance, property taxes, utilities and security at the Mocksville facility until its disposal.

(14) Fair Value Measurement:

The Company adopted fair value measurement guidance on January 1, 2008, as extended on January 1, 2009. The Company had no material nonfinancial assets or liabilities recorded at fair value at October 2, 2010.

(15) Impact of Recently Issued Accounting Pronouncements:

No recently issued accounting pronouncements had a material impact on the financial statements of the Company.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Our Company, Kaydon Corporation, is a leading designer and manufacturer of custom engineered, performance-critical products, supplying a broad and diverse group of alternative energy, industrial, aerospace, medical and electronic equipment, and aftermarket customers. Demand for our products depends, in part, upon a wide range of general economic conditions, which affect our markets in varying ways from quarter to quarter.

Our performance in the third quarter of 2010 compared to 2009’s third quarter, reflected moderation in our wind energy and military businesses as previously expected. Continued benefits to operating income and margins were realized as a result of actions initiated and completed in the last two years to structurally improve our long-term competitiveness. Items affecting comparison to the prior third quarter include $2.6 million of costs in the third quarter of 2010 primarily associated with our previously announced manufacturing consolidation program and the absence of a $5.4 million pre-tax gain recorded in the third quarter of 2009 resulting from changes in certain benefit plans.

At October 2, 2010, our current ratio was 8.6 to 1 and working capital totaled $422.5 million. We believe that our current cash and cash equivalents balance of $288.8 million at October 2, 2010, our future cash flows from operations, and our borrowing capacity are adequate to fund our strategies for future growth, including working capital, expenditures for capital expansion and efficiencies, selected stock repurchases, market share initiatives and corporate development efforts.

In summary, our future performance will be impacted by general economic conditions, the strength or weakness of the manufacturing environment, the success of our efforts to continue to expand operations and improve operating efficiencies, as well as the use of available cash and borrowing capacity for future 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 our 2009 Annual Report on Form 10-K, particularly “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to assist in understanding our results of operations, our financial position, cash flows, capital structure and other relevant financial information.

Results of Operations

Third Quarter Results


	Third Quarter Ended
	Oct. 2,		% of			Oct. 3,		% of
Dollars in millions, except per share amounts	2010		Sales			2009		Sales

Net sales	$	118.3				$	123.6
Cost of sales		79.9					85.6

Gross profit		38.4		32.5	%		38.0		30.8	%
Selling, general and administrative expenses		19.8		16.7	%		13.4		10.9	%

Operating income		18.6		15.7	%		24.6		19.9	%
Interest, net		0.2					0.2

Income before income taxes		18.8		15.9	%		24.8		20.0	%
Provision for income taxes		5.7					8.7

Net income	$	13.1		11.1	%	$	16.1		13.0	%

Earnings per share:
Basic	$	0.39				$	0.48

Diluted	$	0.39				$	0.48

Amounts and percentages in the above table may not total due to rounding.

Sales equaled $118.3 million in the third quarter of 2010, a decrease of $5.4 million or 4.3 percent compared to the third quarter of 2009. The decrease was principally attributable to the $11.9 million reduction in sales to wind energy customers along with smaller reductions in sales to our military, liquid filtration, and heavy equipment markets, only partially offset by increased sales across the majority of our remaining principal end markets.

Reduced wind energy sales in the third quarter of 2010 compared to the third quarter of 2009 were affected by the significant wind energy sales that were deferred from the second quarter of 2009 to the third quarter of 2009 due to the adverse financial and economic conditions in early 2009. The decrease was comprised of $7.7 million in reduced sales volume and $4.2 million in reduced pricing contractually tied to raw material cost decreases.

Gross profit during the third quarter of 2010 increased $0.3 million over the third quarter of 2009 after giving effect to $2.0 million in costs related to our manufacturing consolidation program (see Note 13 to the Consolidated Condensed Financial Statements). In addition, we realized $5.0 million of net cost reductions compared to the third quarter of 2009 offset in part by $1.2 million in reduced pricing, a net unfavorable change of $0.4 million in volume and product mix, and a $1.0 million unfavorable impact of changes in foreign exchange rates.

Selling, general and administrative expenses were $19.8 million or 16.7 percent of sales during the third quarter of 2010, compared to $13.4 million or 10.9 percent of sales in the third quarter of 2009. The $6.4 million increase was principally attributable to the absence of $5.4 million in gains in the third quarter of 2009 associated with certain benefit plan changes, a $1.0 million increase in accrued incentive compensation expense compared to the prior year, and $0.2 million of costs related to our manufacturing consolidation program (see Note 13 to the Consolidated Condensed Financial Statements).

The Company’s operating income was $18.6 million in the third quarter of 2010 compared to $24.6 million in the third quarter of 2009, as the $2.3 million of manufacturing consolidation costs, and the absence of the $5.4 million third quarter 2009 benefit plans gains more than offset the increase in gross profit.

During the third quarter of 2010, interest income was $0.2 million on average investment balances of $269.3 million. Interest income in the third quarter of 2009 was $0.2 million on average investment balances of $223.0 million. Interest rates on our investments, principally in low yielding money market funds, are currently negligible, but our investment balances continue to provide significant liquidity during this period of historically low interest rates.

On September 21, 2010, we entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders providing for a $250.0 million senior revolving credit facility. The Credit Agreement provides for borrowings by the Company and its subsidiaries in various currencies for working capital and other general corporate purposes, including acquisitions. The Credit Agreement matures on September 21, 2015 and is guaranteed by the Company and certain of our current domestic subsidiaries. We did not have any borrowings against the Credit Agreement during the third quarter of 2010 or any other debt outstanding during the third quarters of 2010 or 2009. After consideration of the covenants and $4.6 million of letters of credit issued under the Credit Agreement, we had available credit under the Credit Agreement of $245.4 million at October 2, 2010. Interest expense in the third quarter of 2010 was negligible and represents the amortization of costs associated with our current credit facility. Interest expense of $0.1 million in the third quarter of 2009 represents the amortization of costs associated with our prior credit facility.

The effective tax rate for the third quarter of 2010 equaled 30.2 percent compared to 35.1 percent in the third quarter of 2009 with the decrease from the prior year being largely attributable to the tax effect of our planned permanent reinvestment of earnings of certain international operations and the full availability of the Domestic Manufacturing Deduction. The effective tax rate for the fourth quarter of 2010, before discrete items, is expected to be approximately 32 percent.

Net income for the third quarter of 2010 was $13.1 million, or $0.39 per share on a diluted basis, as compared to net income for the third quarter of 2009 of $16.1 million, or $0.48 per share on a diluted basis. The effect of the items affecting comparability and noted above reduced diluted earnings per share by approximately $0.05 per share in the third quarter of 2010, and increased diluted earnings per share by approximately $0.10 per share in the third quarter of 2009.

First Three Quarters Results


	First Three Quarters Ended
	Oct. 2,		% of			Oct. 3,		% of
Dollars in millions, except per share amounts	2010		Sales			2009		Sales

Net sales	$	359.0				$	332.3
Cost of sales		232.9					226.1

Gross profit		126.1		35.1	%		106.2		32.0	%
Selling, general and administrative expenses		61.6		17.2	%		52.8		15.9	%

Operating income		64.5		18.0	%		53.4		16.1	%
Interest, net		0.2					0.2

Income before income taxes		64.7		18.0	%		53.6		16.1	%
Provision for income taxes		20.0					19.0

Net income	$	44.7		12.5	%	$	34.6		10.4	%

Earnings per share:
Basic	$	1.33				$	1.03

Diluted	$	1.33				$	1.03

Amounts and percentages in the above table may not total due to rounding.

Sales during the first three quarters of 2010 equaled $359.0 million, an increase of $26.7 million or 8.0 percent compared to the first three quarters of 2009. The growth was attributable to a $45.4 million increase in sales volumes to customers across the majority of our principal end markets, partially offset by $17.6 million in reduced pricing and $1.1 million from the unfavorable effect of changes in foreign exchange rates.

First three quarters 2010 sales to the strategically important wind energy market increased $1.7 million over the first three quarters of 2009 to $83.4 million. The growth was comprised of $19.0 million in increased volume, partially offset by $17.3 million in reduced pricing contractually tied to material cost decreases.

Gross profit during the first three quarters of 2010 increased $19.9 million over the first three quarters of 2009 with $18.0 million of the growth attributable to the net increase in sales volume and product mix, and $9.3 million due to net cost reductions. These items were offset in part by $3.0 million in reduced pricing, $1.8 million of unfavorable effect of changes in foreign exchange rates and $2.5 million of costs related to our manufacturing consolidation program.

Selling, general and administrative expenses were $61.6 million or 17.2 percent of sales during the first three quarters of 2010, compared to $52.8 million or 15.9 percent of sales in the first three quarters of 2009. The $8.8 million increase was attributable to a $4.0 million increase in accrued incentive compensation expense compared to the prior year first three quarters, $3.2 million of higher net gains associated with changes to certain postretirement benefit programs in the first three quarters of 2009 compared to the first three quarters of 2010, $2.8 million for costs incurred for unconsummated corporate development efforts and $0.4 million of costs related to our manufacturing consolidation program (see Note 13 to the Consolidated Condensed Financial Statements). Partially offsetting these cost increases is $1.6 million of other cost reductions.

The Company’s operating income was $64.5 million in the first three quarters of 2010 compared to $53.4 million in the first three quarters of 2009, as the increased gross profit more than offset the increased selling, general and administrative expenses.

During the first three quarters of 2010, interest income was $0.3 million on average investment balances of $255.7 million. Interest income in the first three quarters of 2009 was $0.4 million on average investment balances of $218.6 million. Interest rates on our investments, principally in low yielding money market funds, are currently negligible, but our investment balances continue to provide significant liquidity during this period of historically low interest rates.

Interest expense during the first three quarters of 2010 was $0.1 million and represents the amortization of costs associated with our current and prior credit facilities. During the first three quarters of 2009, interest expense of $0.2 million represented the amortization of costs associated with our prior credit facility.

The effective tax rate for the first three quarters of 2010 equaled 30.9 percent compared to 35.6 percent in the first three quarters of 2009. Discrete items recorded in the first three quarters of 2010 resulted in a net tax benefit of $0.5 million, and included a qualifying advanced energy investment tax credit of $1.4 million that was partly offset by an adjustment of $0.3 million for the reduced deductibility of postretirement prescription drug coverage related to

Medicare Part D subsidies under the Patient Protection and Affordable Care Act, and other adjustments to deferred tax assets. Additionally, the decrease from the prior year is largely attributable to the tax effect of our planned permanent reinvestment of earnings of certain international operations and the full availability of the Domestic Manufacturing Deduction. The effective tax rate for the fourth quarter of 2010, before discrete items, is expected to be approximately 32 percent.

Net income for the first three quarters was $44.7 million, or $1.33 per share on a diluted basis, as compared to net income for the first three quarters of 2009 of $34.6 million, or $1.03 per share on a diluted basis.

Results of Business Segments

The Company has two reporting segments: Friction Control Products and Velocity Control Products. The Company’s remaining operating segments, which do not meet the quantitative thresholds for separate disclosure and do not meet the criteria for aggregation with other operating segments to create an additional reporting segment, are combined and disclosed as “Other Industrial Products.” Sales between reporting segments are not material. Items not allocated to segment operating income include certain amortization, corporate administrative expenses, and other amounts. Items not allocated to segment operating income in 2010 included costs associated with unconsummated corporate development efforts of $0.3 million and $3.0 million in the third quarter and first three quarters of 2010, respectively, and also in the first three quarters of 2010 postretirement benefit curtailment gains of $3.1 million. In 2009 unallocated items also included postretirement benefit curtailment gains of $5.4 million and $6.3 million in the third quarter and first three quarters, respectively. Additionally, other corporate administrative expenses increased principally due to an increase in accrued incentive compensation expense in the third quarter and first three quarters of 2010 compared to the same periods of the prior year.

Friction Control Products


	Third Quarter Ended									First Three Quarters Ended
Dollars in millions	Oct. 2, 2010			Oct. 3, 2009			% Change			Oct. 2, 2010			Oct. 3, 2009			% Change

Sales	$	78.0		$	87.1			(10.4	)%	$	237.5		$	223.5			6.3	%
Operating Income	$	12.7		$	15.4			(17.7	)%	$	49.6		$	37.6			31.7	%
Operating Margin		16.2	%		17.7	%					20.9	%		16.8	%

Third Quarter

During the third quarter of 2010 sales from our Friction Control Products reporting segment equaled $78.0 million, a decrease of $9.1 million compared to the third quarter of 2009. The decrease was due to $4.6 million in reduced sales volume, $4.2 million in reduced pricing and an unfavorable $0.3 million effect from changes in foreign exchange rates. Lower sales volumes were experienced in the wind energy, military and heavy equipment markets, partially offset by increased sales volume to the machinery, semiconductor, and medical markets.

Third quarter 2010 sales to the wind energy market decreased $11.9 million to $29.1 million compared to the third quarter of 2009. The decrease was comprised of $7.7 million in reduced volume and $4.2 million in reduced pricing contractually tied to material cost decreases. The third quarter of 2009 included significant wind energy sales that were deferred from the second quarter of 2009 due to the unfavorable trade credit conditions that existed during last year’s economic crisis.

During the third quarter of 2010 operating income for the segment decreased $2.7 million to $12.7 million compared to the third quarter of 2009. Of this decrease, $2.9 million was attributable to reduced sales volume and product mix changes, $2.3 million was related to manufacturing consolidation program costs (see Note 13 to the Consolidated Condensed Financial Statements), $1.1 million in reduced pricing and $0.5 million from the unfavorable effects of changes in foreign exchange rates. These operating income decreases were partly offset by other net cost reductions of $4.1 million.

First Three Quarters

During the first three quarters of 2010 sales from our Friction Control Products reporting segment increased $14.0 million to $237.5 million compared to the first three quarters of 2009. The increase was due to higher sales across all markets, with the exception of heavy equipment. The sales increases were net of $17.3 million in reduced wind

energy pricing contractually tied to material costs decreases and $2.3 million in price declines to other customers. Sales to wind energy customers increased by $1.7 million, as the volume increase of $19.0 million was partially offset by the aforementioned $17.3 million in reduced pricing.

During the first three quarters of 2010 operating income for the segment increased $11.9 million to $49.6 million compared to the first three quarters of 2009. This increase was due to $13.0 million related to sales volume and product mix changes, and $6.9 million for net cost reductions compared to the prior period, partially offset by $3.5 million in reduced pricing, $2.9 million in costs related to our manufacturing consolidation program (see Note 13 to the Consolidated Condensed Financial Statements) and $1.6 million from the unfavorable effects of changes in foreign exchange rates.

Velocity Control Products


	Third Quarter Ended									First Three Quarters Ended
Dollars in millions	Oct. 2, 2010			Oct. 3, 2009			% Change			Oct. 2, 2010			Oct. 3, 2009			% Change

Sales	$	15.9		$	12.2			30.6	%	$	45.3		$	34.6			30.9	%
Operating Income	$	4.1		$	2.1			92.8	%	$	11.4		$	5.2			120.0	%
Operating Margin		25.7	%		17.4	%					25.2	%		15.0	%

Third Quarter

During the third quarter of 2010 sales from our Velocity Control Products reporting segment increased $3.7 million to $15.9 million compared to the third quarter of 2009. The increase was due to $4.5 million in increased volumes to North American and European markets, partially offset by unfavorable changes in foreign exchange rates of $0.8 million.

During the third quarter of 2010 operating income for the segment increased $2.0 million to $4.1 million compared to the third quarter of 2009. The increase was attributable to $2.6 million from increased sales, which was partially offset by net cost increases of $0.4 million and $0.2 million unfavorable effect of changes in foreign exchange rates.

First Three Quarters

During the first three quarters of 2010 sales from our Velocity Control Products reporting segment increased $10.7 million to $45.3 million compared to the first three quarters of 2009. The increase was due to $10.6 million in increased volumes to North American and European markets and $0.8 million in price increases initiated in 2009. For the first three quarters of 2010, the effect of changes in foreign exchange rates on sales was unfavorable by $0.7 million.

During the first three quarters of 2010 operating income for the segment increased $6.2 million to $11.4 million compared to the first three quarters of 2009. The increase was attributable to $5.5 million from increased sales volumes, $0.7 million in net cost reductions and $0.8 million in increased pricing, which were partially offset by a $0.8 million unfavorable effect of changes in foreign exchange rates.

Other Industrial Products


	Third Quarter Ended									First Three Quarters Ended
Dollars in millions	Oct. 2, 2010			Oct. 3, 2009			% Change			Oct. 2, 2010			Oct. 3, 2009			% Change

Sales	$	24.3		$	24.4			(0.0	)%	$	76.3		$	74.2			2.8	%
Operating Income	$	1.4		$	2.2			(37.3	)%	$	5.5		$	5.5			0.9	%
Operating Margin		5.7	%		9.1	%					7.2	%		7.4	%

Third Quarter

Third quarter 2010 sales of our remaining operating segments, which are combined and shown above as Other Industrial Products, equaled $24.3 million compared to $24.4 million in the third quarter of 2009. The change was due principally to lower demand of $1.7 million for filtration products, offset by increased sales of $1.1 million of sealing products, and $0.6 million of metal alloy products.

Operating income of Other Industrial Products equaled $1.4 million during the third quarter of 2010, compared to $2.2 million in the third quarter of 2009. The decrease was due to a net unfavorable impact of volume, mix and pricing of $0.3 million and net cost increases of $0.5 million.

First Three Quarters

During the first three quarters of 2010 sales from our Other Industrial Products increased $2.1 million to $76.3 million compared to the first three quarters of 2009. The increase was due to higher sales of $1.6 million of filtration products and $1.8 million of metal alloy products, partially offset by sales declines of $0.6 million for sealing products, $0.4 million for metal forming equipment and $0.3 million for machine tool components.

Operating income for Other Industrial Products equaled $5.5 million in both the first three quarters of 2010 and 2009. Net cost reductions equaled $1.1 million including lower severance, amortization and other costs, which were offset by the net $1.1 million unfavorable impact of volume, mix and pricing.

Liquidity and Capital Resources

At October 2, 2010, the Company’s current ratio was 8.6 to 1 and working capital totaled $422.5 million, including $288.8 million of cash and cash equivalents. At December 31, 2009, the current ratio was 9.3 to 1 and working capital totaled $397.7 million, including cash and cash equivalents of $262.4 million.

Net cash from operating activities during the first three quarters of 2010 equaled $66.4 million, compared to first three quarters 2009 net cash from operating activities of $44.1 million. The year-over-year increase was principally attributable to improved earnings of $10.2 million, the $13.2 million reduction in qualified pension plan contributions as 2009 included an additional voluntary contribution, and $5.7 million of changes to all other net assets and liabilities. Partially offsetting this increase were higher tax payments of $6.8 million.

Net inventories at October 2, 2010 were $88.6 million, a decrease of $0.2 million from the $88.8 million of inventory at December 31, 2009. Third quarter 2010 inventory turns equaled the third quarter 2009 inventory turns of 3.6 turns.

Based on both our long-term confidence in the wind energy market and our ongoing strategic relationships with wind energy customers, we have made significant investments in support of this business. We closely monitor our accounts receivable from wind energy customers and are reasonably assured that our accounts receivable are fully collectible. Additionally, we believe that our inventory as of October 2, 2010 is fully realizable.

At October 2, 2010, we had approximately $8.5 million of working capital invested on behalf of an international wind energy customer, including past due accounts receivable and inventory made on the customer’s behalf and designed to its agreed upon specifications. The customer has not paid us and has made a claim for damages alleging that certain field performance issues of its product are attributable to the quality of our supplied bearings. We are confident that our bearings were made to the agreed upon design specifications and that the customer’s field performance issues relate to factors outside of our control. Under the documents which comprise the sales contract, the customer is obligated to pay its liability and to reimburse us for inventory costs incurred and lost profits. In order to expedite the resolution of this matter, we agreed with the customer to enter into a mediation process, and if necessary, binding arbitration to resolve the parties’ claims. The mediation process was completed in March 2010, but was unsuccessful in resolving the matter. During the second quarter of 2010, a notice of arbitration was filed, and an arbitration panel was selected in the third quarter of 2010. In the third quarter of 2010 the arbitration tribunal issued a procedural schedule that anticipates final resolution of the parties’ claims in the fourth quarter of 2011, unless it is resolved sooner by agreement of the parties. As we continue to remain confident in the quality of our supplied product and the customer’s financial ability to pay, we continue to conclude that the receivables and inventory are fully realizable and the customer’s claims are without merit and payment of the damages claimed is remote.

During the third quarter of 2010 we paid cash dividends of $6.0 million compared to $5.7 million in the third quarter of 2009, reflecting an increased dividend rate of $0.18 per common share paid in the third quarter of 2010 compared to the dividend rate of $0.17 per common share paid in the third quarter of 2009. First three quarters of 2010 dividends totaled $18.1 million compared to $17.2 million for the first three quarters of 2009. There were no repurchases on common stock during the third quarter of 2010. Share repurchases in the first three quarters of 2010 totaled 241,254 shares for $8.8 million. We expect that our planned capital requirements, which consist of capital

expenditures, dividend payments and our stock repurchase program, will be financed by operations and existing cash balances. In addition, we believe that our available cash and borrowing capacity will be sufficient to support our objectives, including strategic acquisitions.

During the third quarter of 2010, we entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders providing for a $250.0 million senior revolving credit facility. The Credit Agreement provides for borrowings by the Company and our subsidiaries for working capital and other general corporate purposes, including acquisitions. Our previous $300.0 million senior unsecured credit facility matured on July 12, 2010. The Credit Agreement requires us to comply with maximum leverage and minimum interest coverage ratios. We were in compliance with all restrictive covenants contained in the Credit Agreement at October 2, 2010. After consideration of the covenants and $4.6 million of letters of credit issued under the Credit Agreement, we had available credit under the Credit Agreement of $245.4 million at October 2, 2010.

Outlook

Our performance during the fiscal first three quarters of 2010 reflects the benefits of market leadership in sound end markets together with the impact of aggressive management of costs and spending. Our manufacturing consolidation program is an example of our ongoing efforts to improve efficiencies in our cost structure.

Improvement for the remainder of 2010 and into 2011 will continue to be dependent on the further strengthening of general economic and industrial conditions. Further ongoing improvement in our industrial businesses will be required to maintain favorable comparisons against prior periods as we expect the moderation in our wind energy and military businesses to continue.

Specifically for wind energy, comparisons to the prior year were difficult for the third quarter, as the third quarter of 2009 had significant wind energy sales that were deferred from the second quarter of 2009 as customers were affected by the adverse financial and economic conditions in early 2009. First three quarters 2010 wind energy sales were $83.4 million compared to $81.7 million in the first three quarters of 2009. The Company expects wind energy shipments for the full year of 2010 to be approximately $95 million compared to the $103.0 million of wind energy shipments in the full year of 2009. Longer term, the enactment of a clear, actionable Renewable Electricity Standard and a sustained economic recovery are prerequisites for meaningful growth in future wind energy shipments.

Our market leadership positions, robust cash from operating activities, and strong balance sheet position us well for the future despite broader macroeconomic uncertainty.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. 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.

We continually evaluate the estimates, judgments, and assumptions used to prepare the consolidated financial statements. In general, these 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 our current estimates. Our critical accounting policies and estimates are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material changes to the critical accounting policies previously disclosed in that report.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 regarding our plans, expectations, estimates and beliefs. Forward-looking statements are typically identified by words such as “believes,” “anticipates,” “estimates,” “expects,” “intends,” “will,” “may,” “should,” “could,” “potential,” “projects,” “approximately,” 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 our financial performance, anticipated growth, characterization of and our ability to control contingent liabilities and anticipated trends in our businesses. These statements are only predictions, based on our current expectation about future events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements or that our predictions or current expectations will be accurate. These forward-looking statements involve risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements.

In addition, we or persons acting on our 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 our estimates, assumptions, and projections and are subject to risks and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. We do not undertake any responsibility to update our forward-looking statements or risk factors to reflect future events or circumstances.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is exposed to certain market risks, which exist as part of the Company’s 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 10 percent decrease in the weighted average interest rates earned by the Company would not have a material impact on the Company’s pre-tax earnings. The Company conducts business in various foreign currencies, primarily in Europe, Mexico, and Asia. Therefore, changes in the value of currencies of countries in these regions 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 the Company’s currency exposure through operation of decentralized foreign operating companies in which many costs are local currency based. In addition, the Company periodically enters into derivative financial instruments in the form of forward foreign exchange contracts to reduce the effect of fluctuations in foreign exchange rates. A 10 percent change in the value of all foreign currencies would not have a material effect on the Company’s financial position and cash flows.

ITEM 4. CONTROLS AND PROCEDURES.

Kaydon’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this report, the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including its principal executive and principal financial officers, of the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits to the Securities and Exchange Commission 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, and that such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. No changes were made to the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS.


Exhibit No.		Description

10.1*		Kaydon Corporation Employee Stock Ownership and Thrift Plan Superseding Provisions Addendum dated September 8, 2010, and effective June 1, 2010

10.2		Credit Agreement dated as of September 21, 2010 among the Company, the subsidiary borrowers from time to time party thereto, the alternate currency borrowers from time to time party thereto, the institutions from time to time parties thereto as lenders, JP Morgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. Comerica Bank, SunTrust Bank, and Wells Fargo Bank, National Association, as Syndication Agents, and J.P. Morgan Securities LLC as Sole Lead Arranger and Sole Book Runner (Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 22, 2010

31.1		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		Interactive Data File


		Those exhibits with an asterisk (*) designate the Company’s management contracts or compensatory plans or arrangements required to be filed herewith.


		Page No.
Part I —	Financial Information:

	Item 1. Financial Statements.		1

	Consolidated Condensed Balance Sheets (Unaudited) — October 2, 2010 and December 31, 2009		1

	Consolidated Condensed Statements of Income (Unaudited) — Quarters and First Three Quarters Ended October 2, 2010 and October 3, 2009		2

	Consolidated Condensed Statements of Cash Flows (Unaudited) — First Three Quarters Ended October 2, 2010 and October 3, 2009		3

	Notes to Consolidated Condensed Financial Statements (Unaudited)		4

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		11

	Item 3. Quantitative and Qualitative Disclosures About Market Risk.		18

	Item 4. Controls and Procedures.		18

Part II —	Other Information:		19

	Item 6. Exhibits.		19

	Signature		20
EX-10.1
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT


	KAYDON CORPORATION
November 4, 2010	/s/ Peter C. DeChants
	Peter C. DeChants
	Senior Vice President, Chief Financial Officer

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