For the quarterly period ended April 3, 2010		Commission File No. 1-11333

(Exact name of registrant as specified in its charter)

Delaware		13-3186040
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
Suite 300, 315 E. Eisenhower Parkway, Ann Arbor, Michigan		48108
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes 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 o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Yes o No þ

     Common Stock Outstanding at May 3, 2010 – 33,445,927 shares, $.10 par value.

 

 

KAYDON CORPORATION FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED APRIL 3, 2010

INDEX

		Page No.
Part I – Financial Information:
Item 1. Financial Statements.			1
Consolidated Condensed Balance Sheets — April 3, 2010 (Unaudited) and December 31, 2009			1
Consolidated Condensed Statements of Income (Unaudited) — Quarters Ended April 3, 2010 and April 4, 2009			2
Consolidated Condensed Statements of Cash Flows (Unaudited) — Quarters Ended April 3, 2010 and April 4, 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.			16
Item 4. Controls and Procedures.			16
Part II – Other Information:			16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			16
Item 6. Exhibits.			17
Signatures			18
EX-10.1
EX-31.1
EX-31.2
EX-32

ITEM 1. FINANCIAL STATEMENTS.

		(Unaudited)
		April 3, 2010				December 31, 2009
ASSETS
Current Assets:
Cash and cash equivalents		$	275,013,000			$	262,403,000
Accounts receivable, net			83,983,000				77,977,000
Inventories, net			87,083,000				88,796,000
Other current assets			14,716,000				16,601,000
Total current assets			460,795,000				445,777,000
Property, plant and equipment, net			171,981,000				175,716,000
Goodwill, net			143,199,000				143,891,000
Other intangible assets, net			20,601,000				21,552,000
Other assets			1,040,000				1,008,000
Total assets		$	797,616,000			$	787,944,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	22,568,000			$	21,353,000
Salaries and wages			7,390,000				5,087,000
Taxes payable			6,743,000				2,473,000
Other accrued expenses			21,357,000				19,171,000
Total current liabilities			58,058,000				48,084,000
Long-term postretirement and postemployment benefit obligations			29,297,000				28,669,000
Other long-term liabilities			11,395,000				11,226,000
Total long-term liabilities			40,692,000				39,895,000
Shareholders’ Equity:
Common stock			3,693,000				3,693,000
Other shareholders’ equity			695,173,000				696,272,000
Total shareholders’ equity			698,866,000				699,965,000
Total liabilities and shareholders’ equity		$	797,616,000			$	787,944,000

See accompanying notes to consolidated condensed financial statements.

KAYDON CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)

		First Quarter Ended
		April 3, 2010				April 4, 2009
Net sales		$	119,245,000			$	110,335,000
Cost of sales			77,476,000				74,557,000
Gross profit			41,769,000				35,778,000
Selling, general and administrative expenses			22,087,000				20,258,000
Operating income			19,682,000				15,520,000
Interest expense			(62,000	)			(62,000	)
Interest income			24,000				130,000
Income before income taxes			19,644,000				15,588,000
Provision for income taxes			5,817,000				5,464,000
Net income		$	13,827,000			$	10,124,000
Earnings per share:
Basic		$	0.41			$	0.30
Diluted		$	0.41			$	0.30
Dividends declared per share		$	0.18			$	0.17

See accompanying notes to consolidated condensed financial statements.

KAYDON CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		First Quarter Ended
		April 3, 2010				April 4, 2009
Cash flows from operating activities:
Net income		$	13,827,000			$	10,124,000
Adjustments to reconcile net income to net cash from operating activities:
Depreciation			5,031,000				4,694,000
Amortization of intangible assets			971,000				1,070,000
Amortization of stock awards			1,072,000				1,035,000
Stock option compensation expense			297,000				330,000
Excess tax benefits from stock-based compensation			(62,000	)			22,000
Deferred financing fees			62,000				62,000
Net change in receivables, inventories and trade payables			(3,805,000	)			(14,119,000	)
Net change in other assets and liabilities			12,234,000				3,416,000
Net cash from operating activities			29,627,000				6,634,000
Cash flows from investing activities:
Capital expenditures			(1,700,000	)			(5,382,000	)
Dispositions of property, plant and equipment			21,000				6,000
Proceeds from sales of investments			0				1,416,000
Net cash used in investing activities			(1,679,000	)			(3,960,000	)
Cash flows from financing activities:
Cash dividends paid			(6,043,000	)			(5,750,000	)
Purchase of treasury stock			(7,515,000	)			(8,871,000	)
Excess tax benefits from stock-based compensation			62,000				(22,000	)
Proceeds from exercise of stock options			7,000				0
Cash used in financing activities			(13,489,000	)			(14,643,000	)
Effect of exchange rate changes on cash and cash equivalents			(1,849,000	)			(682,000	)
Net increase (decrease) in cash and cash equivalents			12,610,000				(12,651,000	)
Cash and cash equivalents – Beginning of period			262,403,000				232,998,000
Cash and cash equivalents – End of period		$	275,013,000			$	220,347,000
Cash paid for income taxes		$	745,000			$	2,391,000
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.

		April 3, 2010				December 31, 2009
Cash and cash equivalents:
Money market and other short-term funds		$	245,735,000			$	248,091,000
Time deposits, other interest bearing accounts, and other cash			29,278,000				14,312,000
Cash and cash equivalents		$	275,013,000			$	262,403,000
(3) Inventories:
		April 3, 2010				December 31, 2009
Raw material		$	32,912,000			$	32,933,000
Work in process			24,885,000				22,857,000
Finished goods			29,286,000				33,006,000
		$	87,083,000			$	88,796,000

(4) Comprehensive Income:

Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events, and from circumstances involving non-owner sources. For the Company, comprehensive income consists of net income and other comprehensive income (loss) which is comprised primarily of foreign currency translation adjustments. Other comprehensive income (loss), net of tax, was approximately $(2.8) million and $(2.8) million, for the quarters ended April 3, 2010 and April 4, 2009, respectively, resulting in comprehensive income of $11.0 million and $7.3 million for the quarters ended April 3, 2010 and April 4, 2009, respectively.

(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.

		First Quarter Ended
		April 3, 2010				April 4, 2009
Earnings per share — Basic
Net income		$	13,827,000			$	10,124,000
Less: Net earnings allocated to participating securities – Basic			(147,000	)			(114,000	)
Income available to common shareholders – Basic		$	13,680,000			$	10,010,000
Weighted average common shares outstanding – Basic			33,273,000				33,323,000
Earnings per share – Basic		$	0.41			$	0.30
Earnings per share — Diluted
Net income		$	13,827,000			$	10,124,000
Less: Net earnings allocated to participating securities – Diluted			(147,000	)			(114,000	)
Income available to common shareholders – Diluted		$	13,680,000			$	10,010,000
Weighted average common shares outstanding — Diluted
Weighted average common shares outstanding — Basic			33,273,000				33,323,000
Potential dilutive shares resulting from stock options			24,000				7,000
Weighted average common shares outstanding – Diluted			33,297,000				33,330,000
Earnings per share — Diluted		$	0.41			$	0.30

Certain options granted to purchase shares of common stock were excluded from the computation of diluted earnings per share because the option exercise prices of these options were greater than the average market price of the common shares. In the first quarter of 2010, options to purchase 385,500 shares at an average price of $43.87 per share were excluded. In the first quarter of 2009, options to purchase 396,750 shares at an average price of $43.79 per share were excluded.

(6) Business Segment Information:

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.” The Company’s Sealing Products operating segment no longer meets the quantitative threshold for separate disclosure as a reporting segment; therefore its results are shown in the “Other Industrial Products” caption. Prior period results have been reclassified to conform to this presentation. Sales between reporting segments are not material. Items not allocated to segment operating income include certain amortization and corporate administrative expenses.

		First Quarter Ended
		April 3, 2010				April 4, 2009
Net sales
Friction Control Products		$	79,782,000			$	72,195,000
Velocity Control Products			14,233,000				12,159,000
Other Industrial Products			25,230,000				25,981,000
Total consolidated net sales		$	119,245,000			$	110,335,000

		First Quarter Ended
		April 3, 2010				April 4, 2009
Operating income
Friction Control Products		$	16,544,000			$	12,482,000
Velocity Control Products			3,375,000				2,176,000
Other Industrial Products			1,306,000				1,353,000
Total segment operating income			21,225,000				16,011,000
Items not allocated to segment operating income			(1,543,000	)			(491,000	)
Interest expense			(62,000	)			(62,000	)
Interest income			24,000				130,000
Income before income taxes		$	19,644,000			$	15,588,000

(7) Long-term Debt:

The Company has a senior credit facility with a syndicate of lenders providing for a $300.0 million senior unsecured revolving credit facility. The 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. The credit facility matures on July 12, 2010 and is guaranteed by the Company and certain of the Company’s domestic subsidiaries. Interest expense incurred on borrowings under the revolving credit facility is 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 3.5 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 was in compliance with all restrictive covenants contained in the revolving credit facility at April 3, 2010. The Company had available credit under its revolving credit facility of $300.0 million at April 3, 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 amounts of goodwill and indefinite-lived intangible assets for impairment.

The Company identifies impairment of goodwill by comparing the fair value of each of its reporting units with the reporting unit’s carrying amount. During 2009, the Company’s goodwill impairment testing revealed that the estimated fair values of all 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 amount) as of the July 31st annual testing date ranged from approximately 22 percent to approximately 475 percent.

Certain trademarks are the Company’s only indefinite-lived intangible assets. The Company identifies impairment of these trademarks by comparing their fair value to their carrying amounts. 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. During 2009, trademarks were tested for impairment with no impairment loss being realized.

The changes in the carrying amount of goodwill for the quarter ended April 3, 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			(692,000	)			0				0				(692,000	)
Balance as of April 3, 2010
Goodwill		$	56,167,000			$	43,200,000			$	62,532,000			$	161,899,000
Accumulated impairment losses			0				0				(18,700,000	)			(18,700,000	)
		$	56,167,000			$	43,200,000			$	43,832,000			$	143,199,000

The accumulated impairment losses include impairment losses of $1.9 million recorded in 2004 and $16.8 million recorded in 2002 as a result of the Company’s annual testing of goodwill.

Other intangible assets are summarized as follows:

		April 3, 2010								December 31, 2009
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
Amortized Intangible Assets		Amount				Amortization				Amount				Amortization
Customer relationships and lists		$	28,194,000			$	15,488,000			$	28,194,000			$	14,672,000
Patents and developed technology			6,536,000				3,622,000				6,516,000				3,503,000
Backlog			3,300,000				3,239,000				3,300,000				3,219,000
Distributor agreements			374,000				208,000				374,000				199,000
Product names			320,000				170,000				320,000				163,000
		$	38,724,000			$	22,727,000			$	38,704,000			$	21,756,000

The intangible assets are being 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 being amortized over three years.

		April 3, 2010				December 31, 2009
Unamortized Intangible Assets		Carrying Amount				Carrying Amount
Trademarks		$	4,604,000			$	4,604,000

Aggregate Intangible Assets Amortization Expense
For the first quarter ended April 3, 2010		$	971,000
For the first quarter ended April 4, 2009		$	1,070,000

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:

		First Quarter Ended
Pension Benefits		April 3, 2010				April 4, 2009
Service cost		$	831,000			$	791,000
Interest cost			1,738,000				1,712,000
Expected return on plan assets			(1,921,000	)			(1,411,000	)
Amortization of:
Unrecognized net prior service cost			16,000				3,000
Unrecognized net loss			870,000				1,265,000
Total		$	1,534,000			$	2,360,000

		First Quarter Ended
Postretirement Benefits		April 3, 2010				April 4, 2009
Service cost		$	62,000			$	79,000
Interest cost			136,000				172,000
Amortization of:
Unrecognized net prior service cost			(289,000	)			(301,000	)
Unrecognized net gain			(75,000	)			(128,000	)
Total		$	(166,000	)		$	(178,000	)

During 2009, the Company contributed $14.8 million to its qualified pension plans. No contributions were made to the Company’s qualified pension plans in the first quarter of 2010. The Company expects to contribute $2.9 million to its 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 quarter of 2010 is as follows:

		First Quarter Ended
		April 3, 2010
						Wtd.-Avg.
		Restricted				Grant Date
		Stock				Fair Value
Outstanding at January 1, 2010			345,970			$	35.93
Granted			119,500			$	34.70
Vested			(131,486	)		$	35.04
Canceled			(5,003	)		$	34.38
Outstanding at April 3, 2010			328,981			$	35.87

Compensation expense related to restricted stock awards was $1.1 million and $1.0 million in the first quarter of 2010 and in the first quarter of 2009, respectively.

A summary of stock option information for the first quarter of 2010 is as follows:

		First Quarter Ended
		April 3, 2010
						Wtd.-Avg.
		Options				Ex. Price
Outstanding at January 1, 2010			549,750			$	38.67
Granted			67,500			$	34.70
Canceled			(21,000	)		$	25.58
Exercised			(250	)		$	28.41
Outstanding at April 3, 2010			596,000			$	38.68
Exercisable at April 3, 2010			271,400			$	40.60
Weighted-Avg. Fair Value of Options Granted		$	10.42
Weighted-Avg. Remaining Contractual Life (years)
Outstanding at April 3, 2010			7.5
Exercisable at April 3, 2010			6.8

The exercise price of each fixed 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 fixed stock options was $0.3 million in the first quarter of 2010 and $0.3 million in the first quarter of 2009. The aggregate intrinsic value of options outstanding at April 3, 2010 was $1.9 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) Fair Value Measurement:

The Company adopted fair value measurement guidance on January 1, 2008, which, among other things, requires enhanced disclosures about assets and liabilities measured at fair value. In 2008, the adoption was limited to financial assets and liabilities, and on January 1, 2009, it was extended to certain other nonfinancial assets and liabilities. In 2009, the Company liquidated its remaining position in a long-term investment which had been measured at fair value. The Company had no material nonfinancial assets or liabilities recorded at fair value at April 3, 2010.

(12) Other Matters:

At April 3, 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 because it claims that certain field performance issues of the customer’s product are attributable to the quality of the Company’s 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 a mediation process, and if necessary, binding arbitration. The mediation process was completed in March 2010, but was unsuccessful in resolving the matter, thus both parties are preparing for an arbitration process that the Company expects will be completed in the next year. 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.

(13) Taxes:

The effective tax rate for the first quarter of 2010 net of discrete items equaled 29.6 percent compared to 35.1 percent in the first quarter of 2009. Discrete items recorded in the first quarter of 2010 resulted in a net benefit of $0.5 million, or $0.01 per share on a diluted basis, 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. Excluding discrete items, the projected full year 2010 tax rate was calculated to be 31.5 percent with the decrease from the prior year being largely attributable to the tax effect of the Company’s planned permanent reinvestment of earnings of certain international operations and the full phase-in of the Domestic Manufacturing Deduction.

(14) 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. In the first quarter of 2010, the economy began to show signs of recovery from the global recessionary conditions that impacted the economy during the second half of 2008, and virtually all of 2009, as incoming orders and sales volumes increased in many of our key industrial markets. However, meaningful growth in 2010 remains dependent on continued improvements in economic conditions and a resulting increase in our customers’ capital spending.

With respect to the wind energy market, while the first quarter of 2010 reflected sequential and year-over-year quarterly sales growth, it is important to note that the longer term outlook will be heavily influenced by government policy and increased demand for electricity from a continued economic recovery. While shipments to the wind energy market continue to be subject to our customers’ delivery schedules, we expect 2010 sales to the wind energy market comparable to the level attained in 2009.

At April 3, 2010, our current ratio was 7.9 to 1 and working capital totaled $402.7 million. We believe that our current cash and cash equivalents balance of $275.0 million at April 3, 2010, and future cash flows from operations, along with 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

		For the first quarters ended
		April 3,				% of				April 4,				% of
Dollars in millions, except per share amounts		2010				Sales				2009				Sales
Net sales		$	119.2							$	110.3
Cost of sales			77.5								74.6
Gross profit			41.8				35.0	%			35.8				32.4	%
Selling, general and administrative expenses			22.1				18.5	%			20.3				18.4	%
Operating income			19.7				16.5	%			15.5				14.1	%
Interest, net			0.0								0.1
Income before income taxes			19.6								15.6
Provision for income taxes			5.8								5.5
Net income		$	13.8							$	10.1
Earnings per share:
Basic		$	0.41							$	0.30
Diluted		$	0.41							$	0.30

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

Sales during the first quarter of 2010 increased $8.9 million or 8.1% compared to the first quarter of 2009. This represents the first year-over-year increase in sales since the fourth quarter of 2008. The increase was attributable to $8.4 million in increased sales to customers in the strategically important wind energy market with the remainder of the increase principally due to a $0.9 million favorable impact of changes in foreign exchange rates partially offset by $0.3 million in reduced pricing to industrial markets. The $8.4 million increase in sales to wind energy customers was comprised of $16.5 million in increased volume, partially offset by $8.1 million in pricing adjustments

contractually tied to raw material cost decreases.

Gross profit during the first quarter of 2010 increased $6.0 million over the first quarter of 2009 with $4.6 million of the increase attributable to increased sales volume and $2.0 million due to net cost reductions. These items were offset in part by a combined $0.6 million in unfavorable product mix, reduced pricing and other items.

Selling, general, and administrative expenses were $22.1 million or 18.5 percent of sales during the first quarter of 2010, compared to $20.3 million or 18.4 percent of sales in the first quarter of 2009. The $1.8 million increase was attributable to a $1.2 million increase in accrued incentive compensation expense associated with the anticipated achievement of certain incentive compensation related targets in 2010 while similar targets were not expected to be achieved in 2009, and $0.9 million in professional fees accrued in the first quarter of 2010 related to the expected resolution of a dispute with a wind energy customer through binding arbitration (see Note 12 to the Consolidated Condensed Financial Statements contained in Item 1. Financial Statements), partially offset by $0.3 million in net other reductions.

The Company’s operating income was $19.7 million in the first quarter of 2010 compared to $15.5 million in the first quarter of 2009, as the increased gross profit more than offset the increased selling, general, and administrative expenses.

During the first quarter of 2010, interest income was less than $0.1 million on average investment balances of $246.4 million. Interest income in the first quarter of 2009 was approximately $0.1 million on average investment balances of $219.3 million. Interest rates on our investments, principally in low yielding treasury money market funds, are currently negligible, but our investment balances continue to provide significant liquidity during this period of historically low interest rates.

We did not have any debt outstanding during the first quarters of 2010 and 2009. Interest expense of $0.1 million in both periods represents the amortization of costs associated with our credit facility.

The effective tax rate for the first quarter of 2010 net of discrete items equaled 29.6 percent compared to 35.1 percent in the first quarter of 2009. Discrete items recorded in the first quarter of 2010 resulted in a net benefit of $0.5 million, or $0.01 per share on a diluted basis, 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. Excluding discrete items, the projected full year 2010 tax rate was calculated to be 31.5 percent 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 phase-in of the Domestic Manufacturing Deduction.

Net income for the first quarter was $13.8 million, or $0.41 per share on a diluted basis, as compared to net income for the first quarter of 2009 of $10.1 million, or $0.30 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.” The Company’s Sealing Products operating segment no longer meets the quantitative threshold for separate disclosure as a reporting segment; therefore its results are shown in the “Other Industrial Products” caption. Prior period results have been reclassified to conform to this presentation. Sales between reporting segments are not material. Items not allocated to segment operating income include certain amortization and corporate administrative expenses.

Friction Control Products

		For the first quarter ended
		April 3,				April 4,				%
Dollars in millions		2010				2009				Change
Sales		$	79.8			$	72.2				10.5	%
Operating Income		$	16.5			$	12.5				32.5	%
Operating Margin			20.7	%			17.3	%

During the first quarter of 2010 sales from our Friction Control Products reporting segment increased $7.6 million to $79.8 million compared to the first quarter of 2009. The increase is due to $8.4 million in increased sales to wind energy customers and a favorable $0.4 million effect from changes in foreign exchange rates, partially offset by $1.1 million in price declines to non-wind energy customers and a net decrease of $0.1 million in sales volume to other end markets, as declines in heavy equipment sensitive markets were substantially offset by increased demand in the semiconductor and military bearings markets. The $8.4 million increase in sales to wind energy customers was comprised of $16.5 million in increased volume, partially offset by $8.1 million in pricing adjustments contractually tied to raw material cost decreases.

During the first quarter of 2010 operating income for the segment increased $4.0 million to $16.5 million compared to the first quarter of 2009. Of such increase, $4.8 million was attributable to increased sales volume and $0.4 million was attributable to net cost reductions. These operating income increases were partly offset by $1.1 million in reduced pricing.

Velocity Control Products

		For the first quarter ended
		April 3,				April 4,				%
Dollars in millions		2010				2009				Change
Sales		$	14.2			$	12.2				17.1	%
Operating Income		$	3.4			$	2.2				55.1	%
Operating Margin			23.7	%			17.9	%

During the first quarter of 2010 sales from our Velocity Control Products reporting segment increased $2.0 million to $14.2 million compared to the first quarter of 2009. The increase was due to $1.1 million in increased volumes to North American and European markets, a favorable $0.5 million effect from changes in foreign exchange rates and $0.4 million in price increases initiated at the end of the first quarter of 2009.

During the first quarter of 2010 operating income for the segment increased $1.2 million to $3.4 million compared to the first quarter of 2009. The increase was attributable to $0.4 million in increased pricing, $0.6 million in net cost reductions and $0.2 million associated with increased sales volume.

Other Industrial Products

		For the first quarter ended
		April 3,				April 4,				%
Dollars in millions		2010				2009				Change
Sales		$	25.2			$	26.0				(2.9	)%
Operating Income		$	1.3			$	1.4				(3.5	)%
Operating Margin			5.2	%			5.2	%

First quarter 2010 sales of our remaining operating segments, which are combined and shown above as Other Industrial Products, decreased $0.8 million to $25.2 million compared to the first quarter of 2009. The decrease was primarily due to sales declines in sealing products of $1.5 million and metal forming equipment of $0.7 million which offset sales increases of $1.1 million in air and liquid filtration products and $0.3 million in metal alloy products.

Operating income of Other Industrial Products equaled $1.3 million during the first quarter of 2010, consistent with the $1.4 million of operating income earned during the comparable period last year. Both shipments and operating income were negatively affected by disruptions associated with the record Mid-Atlantic snowfall in the first quarter

of 2010 which resulted in six lost shipping days at our sealing products facility.

Liquidity and Capital Resources

At April 3, 2010, the Company’s current ratio was 7.9 to 1 and working capital totaled $402.7 million, including $275.0 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 quarter of 2010 equaled $29.6 million, compared to first quarter 2009 net cash from operating activities of $6.6 million. The year-over-year increase was principally attributable to improved earnings of $3.7 million, a $10.3 million reduction in the use of cash associated with our management of accounts receivable, inventory and trade payables and an $8.8 million increase in cash flow associated with a net change in other assets and liabilities which was principally due to an increase in accrued expenses and reduced tax payments.

Net inventories at April 3, 2010 were $87.1 million, a decrease of $1.7 million from the $88.8 million of inventory at December 31, 2009. First quarter 2010 inventory turns improved to 3.6 turns from 2.6 turns in the first quarter of 2009 due to the improved management of our inventory levels relative to the timing of shipments of product to customers.

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 initiative. 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 April 3, 2010 is fully realizable. As such we have not established any reserve for inventory or any allowance for doubtful accounts related to wind energy customers as of April 3, 2010.

At April 3, 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 because the customer claims 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. The mediation process was completed in March 2010, but was unsuccessful in resolving the matter, thus both parties are preparing for an arbitration process that we expect will be completed in the next year. 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.

During the first quarter of 2010 we paid cash dividends of $6.0 million compared to $5.8 million in the first quarter of 2009, reflecting an increased dividend rate of $0.18 per common share paid in the first quarter of 2010 compared to the dividend rate of $0.17 per common share paid in the first quarter of 2009. During the first quarter of 2010 we also paid $7.5 million to repurchase 207,437 shares of common stock compared to $8.9 million to repurchase 314,047 shares of common stock in the first quarter of 2009.

Management expects 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.

Outlook

While we believe that economic conditions are improving as evidenced by our improved order rate, we still believe conditions are weaker than before the downturn. While business conditions in the last year were challenging, we are beginning to realize some of the benefits of the cost containment efforts initiated during the recession. Consequently, we believe that we are well positioned to benefit if industrial market improvement continues.

With respect to the wind energy market, as noted above, growth in this market will depend on both increased demand for electricity as the economy recovers, and the potential impact of anticipated legislative action. For 2010, we expect shipments to wind energy customers to be comparable to the level attained in 2009.

Our strong balance sheet and leadership positions should allow us to take advantage of improving conditions through the remainder of 2010.

Critical Accounting Policies and Estimates

The Company’s 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.

The Company continually evaluates 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 the current estimates made by the Company. The Company’s critical accounting policies and estimates are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 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 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,” “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 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.

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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table provides the information with respect to purchases made by the Company of shares of its common stock during each month in the first quarter of 2010:

										Total Number of				Maximum Number
		Total Number				Average Price				Shares Purchased as				of Shares that May
		Of Shares				Paid				Part of Publicly				Yet be Purchased
Period		Purchased				Per Share				Announced Plan				Under the Plan (1)
January 1 to January 30			35,574			$	36.17				35,574				2,993,609
January 31 to February 27			0				0				0				2,993,609
February 28 to April 3			171,863			$	36.24				171,863				2,821,746
Total			207,437			$	36.23				207,437				2,821,746

 

ITEM 6. EXHIBITS.

Exhibit No.		Description
10.1*		Fourteenth Amendment to the Amended and Restated Kaydon Employee Stock Ownership and Thrift Plan Effective January 4, 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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.