SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

KAYDON CORPORATION

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.

KAYDON CORPORATION FORM 10-Q

FOR THE QUARTER ENDED JULY 3, 2004

INDEX

ITEM 1. FINANCIAL STATEMENTS
KAYDON CORPORATION

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION

(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:

(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.

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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.

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		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

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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.

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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.

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(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:

(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

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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 C