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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

Kaydon Corporation

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

       Indicate by check mark whether the Registrant is an accelerated filer.     Yes þ          No o

       The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant on June 28, 2003 (based on the June 27, 2003 closing sales price of $20.83 of the Registrant’s Common Stock, as reported on the New York Stock Exchange Composite Tape on such date) was approximately $421,500,000.

     Number of shares outstanding of the Registrant’s Common Stock at March 3, 2004:

     28,217,768 shares of Common Stock, par value $0.10 per share.

     Portions of the Registrant’s definitive Proxy Statement to be filed for its 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.

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Forward-Looking Statements

      This Form 10-K 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,” “anticipates,” “estimates,” “expects,” “intends,” “will,” “may” and other similar expressions. 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 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 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. For a specific discussion of the risks and uncertainties that could affect the Company’s operating results, please refer to the Forward-Looking Statements section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 herein.

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PART I

Item 1.     Business

General Development of Business

      Kaydon Corporation (the “Company” or “Kaydon”) is a leading designer and manufacturer of custom-engineered, critical performance products for a broad customer base. Kaydon was incorporated under the laws of Delaware in 1983 as a wholly owned subsidiary of Bairnco Corporation, its former parent company. The Company became a separate public company in 1984 when it was spun-out of Bairnco Corporation as a dividend to Bairnco’s shareholders. At the time of its incorporation, Kaydon was principally involved in the design and manufacture of bearing systems and components as well as filters and filter housings. Since 1984, the Company has pursued a diversified growth strategy in the manufacturing sector. The Company’s principal products now include the previously mentioned bearing systems and components and filters and filter housings, and also custom rings, shaft seals, linear deceleration products, slip-rings, video and data multiplexers, fiber optic rotary joints, printed circuit boards, specialty retaining rings, specialty balls, fuel cleansing systems, industrial presses and metal alloy products. These products are used by customers in a wide variety of medical, instrumentation, material handling, machine tool positioning, aerospace, defense, security, construction, electronic, marine and other industrial applications. The Company performs as an extension of its customers’ engineering and manufacturing functions, with a commitment to identify and provide engineered solutions to design problems through technical innovation, cost-effective manufacturing and outstanding value-added service.

Recent Developments

      On December 31, 2001, the Company sold the net assets of its Fluid Power Products reporting segment, a manufacturer of hydraulic fluid power products. The reporting segment was acquired via acquisitions of five companies during the 1995 to 1997 timeframe. The sale was necessary as a result of operating losses, an outlook for prolonged weakness in the demand for hydraulic fluid power products which would have led to continuing losses, excess industry capacity, structural changes in competitive dynamics, adverse customer trends, and a competitive disadvantage in the absence of an integrated hydraulic systems capability. The Fluid Power Products reporting segment was sold to a private ownership group that already participated in the hydraulic fluid power products market.

      On March 1, 2001, the Company purchased, for $70.6 million, all of the outstanding stock of ACE Controls, Inc., and an affiliated company (“ACE”), a privately held leading manufacturer of linear deceleration products serving various industrial markets. ACE has locations in Michigan, Germany, the United Kingdom and Japan. The results of ACE are reported in the Velocity Control Products reporting segment.

Industry Segments

      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.” Prior to the fourth quarter of 2003 the Company aggregated its operating segments into three continuing and one discontinued reportable segments referred to as Specialty Metal Formed Products, Ring, Seal and Filtration Products, Other Metal Products and Fluid Power Products. During the fourth quarter of 2003, the Company changed the

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      The Company has four continuing reportable segments, one discontinued reportable segment, 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.

      Fluid Power Products — standard and custom-made hydraulic cylinders used in heavy industrial equipment applications. The Fluid Power Products business was sold on December 31, 2001.

      Other — filter elements and filtration systems, metal alloys, machine tool components, presses, dies and benders used in a variety of industrial applications.

      Net sales related to the Company’s four continuing reportable segments, one discontinued reportable segment, and other operating segments during 2003, 2002 and 2001 are set forth in the following table:

      See Notes to Consolidated Financial Statements (Note 14) contained in Item 8. Financial Statements and Supplementary Data for additional information on the Company’s reportable segments.

      Sophisticated technology plays a significant role in all of Kaydon’s reportable segments in the design, engineering and manufacturing of its products. Due to the custom-engineered, proprietary nature of the Company’s products, substantially all of the manufacturing is done in-house and subcontractors are

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      Kaydon sells its products in each reportable segment through a sales organization consisting of salespersons and representatives located throughout North America, Europe and Asia. Salespersons are trained to provide technical assistance to customers, as well as to serve as a liaison between the factory engineering staffs of Kaydon and its customers. Also, a global network of specialized distributors and agents provides local availability of Kaydon products to serve the requirements of customers. During 2003, 2002 and 2001, sales to no single customer exceeded 10 percent of Kaydon net sales. However, during 2003, sales to three customers exceeded 10 percent (19.8 percent, 17.3 percent, and 10.3 percent) of net sales in the Sealing Products reporting segment, and two customers exceeded 10 percent (11.7 percent and 11.4 percent) of net sales in the Power and Data Transmission Products reporting segment.

      The Company does not consider its business in any reportable segment to be seasonal in nature or to have special working capital requirements. Compliance with federal, state and local regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to result in material capital expenditures by the Company or to have a material adverse effect on the Company’s earnings or competitive position. In general, raw materials required by the Company are attainable from various sources and in the quantities desired. Various provisions of federal law and regulations require, under certain circumstances, the renegotiations of military procurement contracts or the refund of profits determined to be excessive. The Company, based on experience, believes that no material renegotiations or refunds will be required. The Company has not made any public announcement of, or otherwise made public information about, a new product or a new industry segment which would require the investment of a material amount of the Company’s assets or which would otherwise result in a material cost.

Backlog

      The Company sells certain products on a build-to-order basis that requires substantial order lead-time. This results in a backlog of unshipped, scheduled orders. In addition, certain products are manufactured on the basis of sales projections or annual blanket purchase orders. Backlog in the Friction and Motion Control Products reporting segment was $55.2 million at December 31, 2003 and $46.3 million at December 31, 2002. Backlog in the Velocity Control Products reporting segment was $5.5 million at December 31, 2003 and $4.2 million at December 31, 2002. Backlog in the Sealing Products reporting segment was $13.6 million at December 31, 2003 and $16.3 million at December 31, 2002. Backlog in the Power and Data Transmission Products reporting segment was $15.9 million at December 31, 2003 and $15.2 million at December 31, 2002. Backlog in other businesses was $6.7 million at December 31, 2003 and $6.3 million at December 31, 2002. The Company expects to ship approximately 75 percent of the year-end backlog over the following twelve months. Backlog has become less indicative of future results as the Company has made efforts to shorten manufacturing lead times, creating a faster response to customer orders.

Patents and Trademarks

      The Company holds various patents, patent applications, licenses, trademarks and trade names. The Company considers its patents, patent applications, licenses, trademarks and trade names to be valuable, but does not believe that there is any reasonable likelihood of a loss of such rights which would have a material adverse effect on the Company’s present business as a whole.

Competition

      The major domestic and foreign markets for the Company’s products in all reporting segments are highly competitive. Competition is based primarily on price, product engineering and performance, technology, quality and overall customer service, with the relative importance of such factors varying by

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Employees

      The Company employs approximately 1,860 people. Satisfactory relationships have generally prevailed between the Company and its employees.

International Operations

      Certain friction and motion control products are manufactured in Mexico and the United Kingdom, certain velocity control products are assembled and distributed through a facility in Germany, and certain power and data transmission products are manufactured in Canada, the United Kingdom and Mexico. In addition, within all reporting segments, the Company distributes a wide array of products throughout North America, Europe and Asia. The Company’s foreign operations are subject to political, monetary, economic and other risks attendant generally to international businesses. These risks generally vary from country to country.

      See Notes to Consolidated Financial Statements (Note 14) contained in Item 8. Financial Statements and Supplementary Data for additional information on the Company’s operations by geographic area.

Available Information

      The Company’s internet address is www.kaydon.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to all such reports and statements are accessible at no charge on the Company’s website as soon as reasonably practicable after filing with the Securities and Exchange Commission.

Item 2.     Properties

      The following list sets forth the location of the Company’s principal manufacturing facilities for each reportable segment:

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      The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company’s business. Substantially all of the properties are owned by the Company and are not subject to significant encumbrances. The Company’s manufacturing facilities have sufficient capacity to meet increased customer demand. The Company’s leased executive offices are located in Ann Arbor, Michigan.

Item 3.     Legal Proceedings

      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. In the ruling, the Court held, among other things, that plaintiffs had failed to support their fraudulent conveyance claims against the Company with any concrete evidence, so that no reasonable jury could find against the Company. On April 14, 2003, the plaintiffs filed a notice of appeal from the Court’s order granting summary judgment and dismissing the action. Briefing on the appeal is complete, and the appeal is expected to be heard by the Court of Appeals during the first quarter of 2004. Management has always believed that the Company had meritorious defenses to the claims pending against it in this litigation and believes the Court’s dismissal of the action will be upheld on appeal. Accordingly, no provision has been reflected in the consolidated financial statements for any alleged damages. Expenditures to litigate this matter equaled $2.9 million in 2003, $6.6 million in 2002 and $3.9 million in 2001. During the second quarter of 2002, a $7.5 million provision was recorded in order to support the Company’s most current and best estimate of the cost to continue to litigate the Transactions Lawsuit. As of December 31, 2003, a $2.4 million accrual remains as a current liability in the consolidated financial statements, reflecting the estimated remaining costs to litigate this matter.

      As previously reported, in July 2001, the Company, the Company’s insurance provider and the plaintiff agreed to a settlement of a product liability lawsuit, with the settlement payment to the plaintiff being shared between the Company and the Company’s insurance provider. The Company believed that the majority of its portion of the settlement payment, which equaled $2.8 million, was covered under the Company’s commercial general liability policy, and, therefore, filed a legal claim in August 2001 in an attempt to recover $2.6 million from the Company’s insurance provider. Subsequently, the Company’s insurance provider filed a counterclaim in an attempt to recover its portion of the settlement payment, $2.6 million, from the Company. Because of the uncertainties involved, and based on a demand from the Company’s insurance provider to settle this case out of court, the Company recorded a $1.3 million charge to cost of sales and a corresponding credit to other accrued expenses during December 2001. Throughout 2002 and most of 2003 there was very little activity in this case.

      On December 1, 2003, the court granted the Company’s motion for summary judgment, and after the Company’s insurance provider filed a notice of appeal from the court’s decision, the Company and the Company’s insurance provider agreed to settle the case for $2.5 million, which the Company’s insurance provider paid to the Company in January 2004. The Company has recorded the $2.5 million settlement amount, as well as the reversal of the $1.3 million accrual recorded in 2001, a total of $3.8 million, as a credit to cost of sales in the Consolidated Income Statement for the year ended December 31, 2003.

      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, 28^th Judicial District. Armoloy of Connecticut, Inc. is no longer a party to the litigation. The Company’s insurance provider has

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      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 December 31, 2003, an undiscounted accrual in the amount of $3.3 million representing the Company’s best estimate for ultimate resolution of these environmental matters is included 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 expected to be incurred in connection with claims, lawsuits and environmental matters are consistently accrued in the consolidated financial statements.

Item 4.     Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2003.

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      Executive officers, who are elected by the Board of Directors, serve for a term of one year.

PART II

Item 5.     Market for the Registrant’s Common Equity and Related Stockholder Matters

Market Information and Dividends

      The New York Stock Exchange is the principal market on which the Company’s common stock is traded under the symbol KDN. The following table sets forth high and low closing sales prices of the

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      The Company expects that its practice of paying quarterly dividends on its common stock will continue, although future dividends will continue to depend upon the Company’s earnings, capital requirements, financial condition and other factors.

      As of December 31, 2003, there were 995 holders of record of the Company’s common stock.

Equity Compensation Plan Information

      The following table gives information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under all of its existing equity compensation plans as of December 31, 2003, including Kaydon’s 1999 Long-Term Stock Incentive Plan, 1993 Non-Employee Directors Stock Option Plan, the 2003 Non-Employee Directors Equity Plan and the Director Deferred Compensation Plan.

(1)	Includes only options outstanding under Kaydon’s 1999 Long-Term Stock Incentive Plan, the 1993 Non-Employee Directors Stock Option Plan and the 2003 Non-Employee Directors Equity Plan, as no warrants or rights were outstanding as of December 31, 2003.
(2)	Includes shares of Kaydon common stock pursuant to phantom stock units outstanding under Kaydon’s Director Deferred Compensation Plan. This Plan is the only equity plan that has not been approved by shareholders and provides a vehicle for a director to defer compensation and acquire Kaydon common stock. The amount shown in column (A) above assumes these Directors elect to receive their deferred compensation in shares of Kaydon common stock. The number of shares reserved for issuance under this Plan is not limited in amount, other than by the dollar value of the non-employee Directors’ annual compensation.
(3)	Includes shares available for issuance under Kaydon’s 1999 Long-Term Stock Incentive Plan which allows for the granting of stock options, stock appreciation rights and for awards of restricted stock, restricted stock units and stock-based performance awards to employees of and consultants to the Company and shares available for issuance under the 2003 Non-Employee Directors Equity Plan which allows for the granting of stock options and for awards of restricted stock.

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Item 6.     Selected Financial Data