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Table of Contents

 
 
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 1, 2011
Commission File No. 1-11333
KAYDON CORPORATION
(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 þ       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.
             
Large accelerated filer þ    Accelerated filer o    Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting companyo 
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 October 26, 2011 — 32,119,583 shares, $.10 par value.
 
 


 

KAYDON CORPORATION FORM 10-Q
INDEX
         
    Page No.  
  3  
     
  3  
     
  3  
     
  4  
     
  5  
     
  6  
     
  14  
     
  21  
     
  21  
     
  22  
     
  22  
     
  22  
     
  23  
 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
 EX-101 DEFINITION LINKBASE DOCUMENT

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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
                 
    October 1, 2011   December 31, 2010
 
ASSETS
               
 
               
Current Assets:
               
Cash and cash equivalents
  $ 219,088,000     $ 286,648,000  
Accounts receivable, net
    93,789,000       76,010,000  
Inventories, net
    107,069,000       88,253,000  
Other current assets
    14,782,000       16,384,000  
 
 
               
Total current assets
    434,728,000       467,295,000  
 
Property, plant and equipment, net
    172,121,000       169,597,000  
Goodwill, net
    157,825,000       143,428,000  
Other intangible assets, net
    31,748,000       18,047,000  
Other assets
    4,343,000       2,965,000  
 
Total assets
  $ 800,765,000     $ 801,332,000  
 
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Current Liabilities:
               
Accounts payable
  $ 23,186,000     $ 16,944,000  
Salaries and wages
    8,297,000       11,439,000  
Taxes payable
    7,537,000       3,452,000  
Other accrued expenses
    20,094,000       21,194,000  
 
Total current liabilities
    59,114,000       53,029,000  
 
Long-term postretirement and postemployment benefit obligations
    22,983,000       23,567,000  
Other long-term liabilities
    19,706,000       15,598,000  
 
 
               
Total long-term liabilities
    42,689,000       39,165,000  
 
 
               
Shareholders’ Equity:
               
Common stock
    3,693,000       3,693,000  
Other shareholders’ equity
    695,269,000       705,445,000  
 
 
               
Total shareholders’ equity
    698,962,000       709,138,000  
 
 
               
Total liabilities and shareholders’ equity
  $ 800,765,000     $ 801,332,000  
 
See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
                                 
    Third Quarter Ended   First Three Quarters Ended
    October 1, 2011   October 2, 2010   October 1, 2011   October 2, 2010
 
Net sales
  $ 121,637,000     $ 118,280,000     $ 352,007,000     $ 359,025,000  
Cost of sales
    78,795,000       79,894,000       226,359,000       232,933,000  
 
Gross profit
    42,842,000       38,386,000       125,648,000       126,092,000  
Selling, general and administrative expenses
    22,498,000       19,812,000       67,358,000       61,578,000  
 
Operating income
    20,344,000       18,574,000       58,290,000       64,514,000  
Interest expense
    (98,000 )     (9,000 )     (293,000 )     (133,000 )
Interest income
    88,000       193,000       377,000       315,000  
 
Income before income taxes
    20,334,000       18,758,000       58,374,000       64,696,000  
Provision for income taxes
    5,830,000       5,670,000       17,722,000       19,965,000  
 
Net income
  $ 14,504,000     $ 13,088,000     $ 40,652,000     $ 44,731,000  
 
 
                               
Earnings per share:
                               
Basic
  $ 0.45     $ 0.39     $ 1.25     $ 1.33  
 
Diluted
  $ 0.45     $ 0.39     $ 1.25     $ 1.33  
 
Dividends declared per share
  $ 0.20     $ 0.19     $ 0.58     $ 0.55  
 
See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
                 
    First Three Quarters Ended
    October 1, 2011   October 2, 2010
 
Cash flows from operating activities:
               
Net income
  $ 40,652,000     $ 44,731,000  
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation
    15,095,000       15,645,000  
Amortization of intangible assets
    2,274,000       2,713,000  
Amortization of stock awards
    3,125,000       2,998,000  
Stock option compensation expense
    995,000       991,000  
Excess tax benefits from stock-based compensation
    (95,000 )     (186,000 )
Deferred financing fees
    291,000       134,000  
Non-cash postretirement benefits curtailment gain
    (142,000 )     (3,066,000 )
Contributions to qualified pension plans
    (1,952,000 )     (1,614,000 )
Net change in receivables, inventories and trade payables
    (25,466,000 )     (9,533,000 )
Net change in other assets and liabilities
    497,000       13,576,000  
 
Net cash from operating activities
    35,274,000       66,389,000  
 
 
               
Cash flows from investing activities:
               
Capital expenditures
    (11,865,000 )     (11,280,000 )
Dispositions of property, plant and equipment
    210,000       107,000  
Acquisition of business, net of cash received
    (39,610,000 )     0  
 
Net cash used in investing activities
    (51,265,000 )     (11,173,000 )
 
Cash flows from financing activities:
               
Cash dividends paid
    (18,652,000 )     (18,121,000 )
Purchase of treasury stock
    (34,719,000 )     (8,789,000 )
Credit facility issuance costs
    0       (1,935,000 )
Excess tax benefits from stock-based compensation
    95,000       186,000  
Proceeds from exercise of stock options
    39,000       104,000  
 
Net cash used in financing activities
    (53,237,000 )     (28,555,000 )
 
Effect of exchange rate changes on cash and cash equivalents
    1,668,000       (262,000 )
 
Net increase (decrease) in cash and cash equivalents
    (67,560,000 )     26,399,000  
Cash and cash equivalents — Beginning of period
    286,648,000       262,403,000  
 
Cash and cash equivalents — End of period
  $ 219,088,000     $ 288,802,000  
 
Cash paid for income taxes
  $ 11,644,000     $ 15,082,000  
 
Cash paid for interest
    0       0  
 
See accompanying notes to consolidated condensed financial statements.

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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, 2010 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, 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 1, 2011   December 31, 2010
 
Cash and cash equivalents:
               
Money market and other short-term funds
  $ 196,410,000     $ 275,547,000  
Time deposits, other interest bearing accounts, and other cash
    22,678,000       11,101,000  
 
 
  $ 219,088,000     $ 286,648,000  
 
(3) Inventories:
                 
    October 1, 2011   December 31, 2010
 
Raw material
  $ 41,184,000     $ 33,429,000  
Work in process
    30,277,000       23,797,000  
Finished goods
    35,608,000       31,027,000  
 
 
  $ 107,069,000     $ 88,253,000  
 
(4) Comprehensive Income:
For the Company, comprehensive income consists of net income and other comprehensive income (loss) which is comprised primarily of cumulative foreign currency translation adjustments.
                                 
    Third Quarter Ended   First Three Quarters Ended
    October 1, 2011   October 2, 2010   October 1, 2011   October 2, 2010
 
Net income
  $ 14,504,000     $ 13,088,000     $ 40,652,000     $ 44,731,000  
Other comprehensive income (loss)
    (7,369,000 )     5,415,000       (1,620,000 )     875,000  
 
Comprehensive income
  $ 7,135,000     $ 18,503,000     $ 39,032,000     $ 45,606,000  
 

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(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 1, 2011   October 2, 2010
 
Earnings per share — Basic
               
Net income
  $ 14,504,000     $ 13,088,000  
Less: Net earnings allocated to participating securities – Basic
    (144,000 )     (137,000 )
 
Income available to common shareholders – Basic
  $ 14,360,000     $ 12,951,000  
Weighted average common shares outstanding – Basic
    31,931,000       33,119,000  
 
Earnings per share – Basic
  $ 0.45     $ 0.39  
 
 
               
Earnings per share — Diluted
               
Net income
  $ 14,504,000     $ 13,088,000  
Less: Net earnings allocated to participating securities – Diluted
    (144,000 )     (137,000 )
 
Income available to common shareholders – Diluted
  $ 14,360,000     $ 12,951,000  
 
Weighted average common shares outstanding – Diluted
               
Weighted average common shares outstanding – Basic
    31,931,000       33,119,000  
Potential dilutive shares resulting from stock options
    19,000       27,000  
 
Weighted average common shares outstanding – Diluted
    31,950,000       33,146,000  
 
Earnings per share – Diluted
  $ 0.45     $ 0.39  
 
                 
    First Three Quarters Ended
    October 1, 2011   October 2, 2010
 
Earnings per share — Basic
               
Net income
  $ 40,652,000     $ 44,731,000  
Less: Net earnings allocated to participating securities – Basic
    (422,000 )     (475,000 )
 
Income available to common shareholders – Basic
  $ 40,230,000     $ 44,256,000  
Weighted average common shares outstanding – Basic
    32,229,000       33,170,000  
 
Earnings per share – Basic
  $ 1.25     $ 1.33  
 
 
               
Earnings per share — Diluted
               
Net income
  $ 40,652,000     $ 44,731,000  
Less: Net earnings allocated to participating securities – Diluted
    (422,000 )     (475,000 )
 
Income available to common shareholders – Diluted
  $ 40,230,000     $ 44,256,000  
 
Weighted average common shares outstanding – Diluted
               
Weighted average common shares outstanding – Basic
    32,229,000       33,170,000  
Potential dilutive shares resulting from stock options
    25,000       25,000  
 
Weighted average common shares outstanding – Diluted
    32,254,000       33,195,000  
 
Earnings per share – Diluted
  $ 1.25     $ 1.33  
 

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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 1, 2011   October 2, 2010   October 1, 2011   October 2, 2010
 
Shares excluded
    506,500       468,000       420,500       403,000  
(6) Business Segment Information:
The Company has two reporting segments: Friction Control Products and Velocity Control Products. On April 8, 2011, the Company completed the acquisition of all of the outstanding shares of HAHN-Gasfedern GmbH and related real estate and intangible property (“Hahn”) from Ulrich Hahn e.K. Hahn, based in Aichwald, Germany, manufactures and sells high quality gas springs, tension springs and dampers for diverse industrial markets. Hahn’s results are included in the Velocity Control Products segment. 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 and corporate administrative expenses.
                                 
    Third Quarter Ended   First Three Quarters Ended
    October 1, 2011   October 2, 2010   October 1, 2011   October 2, 2010
 
Net sales
                               
Friction Control Products
  $ 69,898,000     $ 78,002,000     $ 196,590,000     $ 237,476,000  
Velocity Control Products
    24,373,000       15,932,000       69,330,000       45,279,000  
Other Industrial Products
    27,366,000       24,346,000       86,087,000       76,270,000  
 
Total consolidated net sales
  $ 121,637,000     $ 118,280,000     $ 352,007,000     $ 359,025,000  
 
                                 
    Third Quarter Ended   First Three Quarters Ended
    October 1, 2011   October 2, 2010   October 1, 2011   October 2, 2010
 
Operating income
                               
Friction Control Products
  $ 11,080,000     $ 12,673,000     $ 32,480,000     $ 49,556,000  
Velocity Control Products
    6,050,000       4,095,000       17,760,000       11,422,000  
Other Industrial Products
    2,937,000       1,397,000       9,869,000       5,516,000  
 
 
                               
Total segment operating income
    20,067,000       18,165,000       60,109,000       66,494,000  
 
                               
Items not allocated to segment operating income
    277,000       409,000       (1,819,000 )     (1,980,000 )
 
                               
Interest expense
    (98,000 )     (9,000 )     (293,000 )     (133,000 )
Interest income
    88,000       193,000       377,000       315,000  
 
 
                               
Income before income taxes
  $ 20,334,000     $ 18,758,000     $ 58,374,000     $ 64,696,000  
 

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(7) Long-term Debt:
In September 2010, the Company entered into a 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 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 1, 2011. Taking into account $4.5 million of letters of credit issued under the credit agreement, the Company had available credit of $245.5 million at October 1, 2011.
(8)   Goodwill and Other Intangible Assets:
The Company annually, or more frequently if events or changes in circumstances indicate a need, tests the carrying values of goodwill and indefinite-lived intangible assets for impairment.
During the third quarter of 2011, 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 taxes in determining the carrying value of each reporting unit. During 2011, 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 30, 2011 annual testing date ranged from approximately 43 percent to approximately 309 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. At July 30, 2011, 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 1, 2011, were as follows:
                                 
    Friction   Velocity        
    Control   Control   Other Industrial    
    Products   Products   Products   Total
 
Balance at January 1, 2011
                               
Goodwill
  $ 56,396,000     $ 43,200,000     $ 62,532,000     $ 162,128,000  
Accumulated impairment losses
    0       0       (18,700,000 )     (18,700,000 )
 
 
  $ 56,396,000     $ 43,200,000     $ 43,832,000     $ 143,428,000  
Effect of foreign currency exchange rate changes
    134,000       (835,000 )     0       (701,000 )
Goodwill acquired
    0       15,098,000       0       15,098,000  
Balance at October 1, 2011
                               
Goodwill
  $ 56,530,000     $ 57,463,000     $ 62,532,000     $ 176,525,000  
Accumulated impairment losses
    0       0       (18,700,000 )     (18,700,000 )
 
 
  $ 56,530,000     $ 57,463,000     $ 43,832,000     $ 157,825,000  
 
The accumulated impairment losses include impairment losses of $1.9 million recorded in 2004 and $16.8 million recorded in 2002. The Company acquired goodwill of $15.1 million in the second quarter of 2011 associated with its April 8, 2011 acquisition of Hahn. The Company also acquired other intangible assets as part of the acquisition. A value of $15.0 million was assigned to customer relationships and lists which is being amortized over 17 years. A value of $1.5 million was assigned to non-amortizing trademarks.

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Other intangible assets are summarized as follows:
                                 
    October 1, 2011   December 31, 2010
    Gross           Gross    
    Carrying   Accumulated   Carrying   Accumulated
Amortized Intangible Assets   Value   Amortization   Value   Amortization
 
Customer relationships and lists
  $ 42,377,000     $ 19,464,000     $ 28,194,000     $ 17,638,000  
Patents and developed technology
    6,917,000       4,341,000       6,596,000       3,974,000  
Distributor agreements
    374,000       267,000       374,000       237,000  
Product names
    320,000       212,000       320,000       192,000  
 
 
  $ 49,988,000     $ 24,284,000     $ 35,484,000     $ 22,041,000  
 
The intangible assets are being amortized at pro rata rates or on a straight-line basis, whichever is appropriate, over their respective useful lives.
                 
    October 1, 2011   December 31, 2010
Unamortized Intangible Assets   Carrying Value   Carrying Value
 
Trademarks
  $ 6,044,000     $ 4,604,000  
 
               
Aggregate Intangible Assets Amortization Expense
               
 
For the first three quarters ended October 1, 2011
          $ 2,274,000  
For the first three quarters ended October 2, 2010
          $ 2,713,000  
 
               
Estimated Intangible Assets Amortization Expense
               
 
For the year ending December 31, 2011
          $ 3,081,000  
For the year ending December 31, 2012
          $ 3,017,000  
For the year ending December 31, 2013
          $ 2,697,000  
For the year ending December 31, 2014
          $ 2,397,000  
For the year ending December 31, 2015
          $ 2,061,000  
(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 1, 2011   October 2, 2010   October 1, 2011   October 2, 2010
 
Service cost
  $ 673,000     $ 584,000     $ 2,226,000     $ 2,246,000  
Interest cost
    1,726,000       1,662,000       5,155,000       5,138,000  
Expected return on plan assets
    (2,121,000 )     (1,918,000 )     (6,361,000 )     (5,760,000 )
Amortization of:
                               
Unrecognized net prior service cost
    17,000       15,000       49,000       47,000  
Unrecognized net actuarial loss
    839,000       739,000       2,459,000       2,479,000  
 
Total
  $ 1,134,000     $ 1,082,000     $ 3,528,000     $ 4,150,000  
 

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    Third Quarter Ended   First Three Quarters Ended
Postretirement Benefits   October 1, 2011   October 2, 2010   October 1, 2011   October 2, 2010
 
Service cost
  $ 14,000     $ 15,000     $ 60,000     $ 127,000  
Interest cost
    73,000       67,000       220,000       324,000  
Amortization of:
                               
Unrecognized net prior service credit
    (291,000 )     (343,000 )     (941,000 )     (921,000 )
Unrecognized net actuarial gain
    (136,000 )     (128,000 )     (361,000 )     (314,000 )
Curtailment gain
    0       0       (142,000 )     (3,066,000 )
 
Total
  $ (340,000 )   $ (389,000 )   $ (1,164,000 )   $ (3,850,000 )
 
The Company contributed $0.8 million and $2.0 million to its qualified pension plans in the third quarter and first three quarters of 2011, respectively. The Company expects to contribute an aggregate of $3.3 million to its qualified and non-qualified pension plans in 2011, and reviews its funding strategy on an ongoing basis.
(10) Stock-Based Compensation:
A summary of restricted stock award information pursuant to the Company’s equity incentive plans for the first three quarters of 2011 is as follows:
                 
            Wtd. Avg.
    Restricted   Grant Date
    Stock   Fair Value
 
Outstanding at January 1, 2011
    330,630     $ 35.85  
Granted
    98,250       38.53  
Vested
    (113,652 )     37.29  
Canceled
    (2,350 )     32.48  
 
Outstanding at October 1, 2011
    312,878     $ 36.20  
 
Compensation expense related to restricted stock awards was $1.1 million and $3.1 million in the third quarter and first three quarters of 2011, respectively. 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.
A summary of stock option information pursuant to the Company’s equity incentive plans for the first three quarters of 2011 is as follows:
                 
            Wtd. Avg.
    Options   Ex. Price
 
Outstanding at January 1, 2011
    603,000     $ 38.83  
Granted
    17,500       37.75  
Canceled
    0       0  
Exercised
    (1,500 )     26.01  
 
Outstanding at October 1, 2011
    619,000     $ 38.83  
 
Exercisable at October 1, 2011
    415,700     $ 39.99  
 
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 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 2011, respectively. Compensation expense related to stock options was $0.3 million and $1.0 million in the third quarter and the first three quarters of 2010, respectively.

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(11) Other Matters:
At October 1, 2011, the Company had approximately $8.3 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 material 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 binding 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 calls for completion of the binding arbitration hearings in the fourth quarter of 2011, followed by a final decision of the arbitration panel, unless 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 believe that the receivables and inventory are fully realizable and the customer’s claims are without merit and payment by the Company of the damages claimed is remote.
(12) Taxes:
The effective tax rate for the third quarter of 2011 equaled 28.7 percent compared to 30.2 percent in the third quarter of 2010. The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate is due primarily to taxation of permanently reinvested foreign earnings at lower rates than the U.S. rate. The third quarter 2011 effective tax rate decreased as compared to the third quarter 2010 effective tax rate due primarily to an increase in permanently reinvested foreign earnings taxed at lower rates than in the U.S.
(13) Acquisition:
On April 8, 2011 the Company completed the purchase of all of the outstanding shares of HAHN-Gasfedern GmbH and related real estate and intangible property from Ulrich Hahn e.K. Hahn, based in Aichwald, Germany, manufactures and sells high quality gas springs, tension springs and dampers for diverse industrial markets. Hahn’s results are included in the Velocity Control Products reporting segment.
(14) Manufacturing Consolidation Program:
In May 2010 the Company announced a plan to optimize its custom bearings manufacturing capacity by expanding its manufacturing capacity in Sumter, South Carolina. This 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 closed its Mocksville, North Carolina manufacturing facility. This manufacturing consolidation program is within the Friction Control Products reporting segment.
During the third quarter and first three quarters of 2011 the Company incurred $0.8 million and $2.4 million, respectively, for engineering, relocation, recruiting, travel, training and other start-up costs in Sumter and carrying and other costs in Mocksville associated with the manufacturing consolidation program, including an adjustment to the carrying value of the real property.
(15) 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 non-financial assets or liabilities recorded at fair value at October 1, 2011.
(16) Impact of Recently Issued Accounting Pronouncements:
New accounting guidance was issued in 2011 to require more prominent disclosure of Comprehensive Income. This guidance which will be effective for the Company beginning in the first quarter of 2012, requires the presentation of net income, items of other comprehensive income and total comprehensive income in one continuous statement or two separate but consecutive statements. The Company is evaluating the effects and implementation of this new presentation.

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In addition, new accounting guidance was issued in 2011, which is intended to reduce the complexity and costs of performing annual goodwill testing by allowing companies the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. This guidance will be effective for the Company beginning in 2012. The Company does not expect that this guidance will have a material effect on the financial position, results of operations, or cash flows of the Company.

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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, military, 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 2011 compared to 2010’s third quarter reflected continued sales growth of products serving industrial markets including increased sales as a result of our acquisition of HAHN-Gasfedern GmbH and related real estate and intangible property (“Hahn”) during the second quarter of 2011, partially offset by moderation in our wind energy business as expected. Other items affecting the comparison of the third quarter 2011 results to the 2010 third quarter results included $0.9 million of costs associated with a previously announced manufacturing consolidation program and due diligence efforts for acquisitions in the third quarter of 2011 compared to $2.6 million of costs in the third quarter of 2010.
At October 1, 2011, after our cash acquisition of Hahn earlier in the year, our current ratio was 7.4 to 1 and working capital totaled $375.6 million. We believe that our current cash and cash equivalents balance of $219.1 million at October 1, 2011, 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, national policy steps regarding renewable energy, national budgets for military expenditures, 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 2010 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, financial position, cash flows, capital structure and other relevant financial information.
Results of Operations
Third Quarter Results
                                 
    Third Quarter Ended
    Oct. 1,   % of   Oct. 2,   % of
Dollars in millions, except per share amounts   2011   Sales   2010   Sales
 
Net sales
  $ 121.6             $ 118.3          
Cost of sales
    78.8       64.8 %     79.9       67.5 %
 
Gross profit
    42.8       35.2 %     38.4       32.5 %
Selling, general and administrative expenses
    22.5       18.5 %     19.8       16.7 %
 
Operating income
    20.3       16.7 %     18.6       15.7 %
Interest, net
    0.0               0.2          
 
Income before income taxes
    20.3       16.7 %     18.8       15.9 %
Provision for income taxes
    5.8               5.7          
 
Net income
  $ 14.5       11.9 %   $ 13.1       11.1 %
 
Earnings per share:
                               
Basic
  $ 0.45             $ 0.39          
 
Diluted
  $ 0.45             $ 0.39          
 
Amounts and percentages in the above table may not total due to rounding.
Sales equaled $121.6 million in the third quarter of 2011, an increase of $3.4 million or 2.8 percent compared to the third quarter of 2010. The increase was principally attributable to $8.4 million of additional sales of our velocity control products, as worldwide demand for these products was strong, including the results of Hahn which

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contributed $5.1 million to the velocity control products sales increase. We also achieved increased sales across the majority of our principal industrial end markets. Third quarter 2011 sales also included $0.8 million of favorable changes in foreign exchange rates. These sales increases were offset by a $9.9 million reduction in sales to wind energy customers and a small reduction in sales to liquid filtration markets.
Gross profit during the third quarter of 2011 increased $4.5 million or 11.6 percent compared to the third quarter of 2010. Gross profit comparisons were positively affected by sales mix of $2.7 million, volume increases of $2.0 million, the contribution of the Hahn acquisition, and a decrease in costs associated with the manufacturing consolidation program. These increases were partially offset by net pricing reductions of $1.5 million. Gross margin increased to 35.2 percent in the third quarter of 2011 from 32.5 percent in the third quarter of 2010.
Selling, general and administrative expenses were $22.5 million or 18.5 percent of sales during the third quarter of 2011, compared to $19.8 million or 16.7 percent of sales in the third quarter of 2010. Selling expenses increased $1.8 million primarily attributable to increased revenue, investments in personnel related to focused global sales and marketing initiatives and the effect of the Hahn acquisition. General and administrative expenses increased $0.9 million when compared to the third quarter of 2010. Modestly higher compensation costs, the adverse effect of adjusting the value of fixed assets to fair value and the inclusion of Hahn were partially offset by reduced fees for professional services.
The Company’s operating income was $20.3 million in the third quarter of 2011, compared to $18.6 million in the third quarter of 2010.
During the third quarter of 2011, interest income was $0.1 million on average investment balances of $195.4 million. Interest income in the third quarter of 2010 equaled $0.2 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 equaled $0.1 million in the third quarter of 2011, and represents the amortization of our credit facility costs.
The effective tax rate for the third quarter of 2011 equaled 28.7 percent compared to 30.2 percent in the third quarter of 2010. The tax rate in 2011 decreased primarily as a result of an increase in permanently reinvested foreign earnings which are taxed at lower rates than earnings in the U.S. The projected full year 2011 tax rate is expected to be approximately 30.3 percent.
Net income for the third quarter of 2011 was $14.5 million, or $0.45 per share on a diluted basis, compared to net income for the third quarter of 2010 of $13.1 million, or $0.39 per share on a diluted basis.
First Three Quarters Results
                                 
    First Three Quarters Ended
    Oct. 1,   % of   Oct. 2,   % of
Dollars in millions, except per share amounts   2011   Sales   2010   Sales
 
Net sales
  $ 352.0             $ 359.0          
Cost of sales
    226.4       64.3 %     232.9       64.9 %
 
Gross profit
    125.6       35.7 %     126.1       35.1 %
Selling, general and administrative expenses
    67.4       19.1 %     61.6       17.2 %
 
Operating income
    58.3       16.6 %     64.5       18.0 %
Interest, net
    0.1               0.2          
 
Income before income taxes
    58.4       16.6 %     64.7       18.0 %
Provision for income taxes
    17.7               20.0          
 
Net income
  $ 40.7       11.5 %   $ 44.7       12.5 %
 
Earnings per share:
                               
Basic
  $ 1.25             $ 1.33          
 
Diluted
  $ 1.25             $ 1.33          
 
Amounts and percentages in the above table may not total due to rounding.
Sales during the first three quarters of 2011 decreased $7.0 million or 2.0 percent compared to the first three quarters of 2010. The net decrease in sales was comprised of a $38.8 million decrease in wind energy sales and smaller

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reductions in sales to our military and liquid filtration markets, significantly offset by increased sales to industrial markets, the contribution of Hahn, favorable currency effects of $2.6 million and positive net pricing.
Gross profit during the first three quarters of 2011 decreased $0.4 million compared to the first three quarters of 2010 as the effects of lower sales volume, and net cost increases were almost completely offset by the contribution of Hahn and favorable sales mix.
Selling, general, and administrative expenses were $67.4 million or 19.1 percent of sales during the first three quarters of 2011, compared to $61.6 million or 17.2 percent of sales in the first three quarters of 2010. The $5.8 million increase was primarily attributable to $5.5 million in increased selling expenses compared to the prior period, largely due to increased investments in personnel, advertising and travel related to focused global sales and marketing initiatives and the inclusion of Hahn. General and administrative expenses in the first three quarters of 2010 included a $3.1 million postretirement curtailment gain compared to a curtailment gain of only $0.1 million in the first three quarters of 2011. These increases were partially offset by a $1.7 million decrease in compensation expense and a $1.4 million decrease in costs associated with due diligence efforts and acquisition purchase accounting costs. In addition, the first three quarters of 2011 includes the effect of the Hahn acquisition.
Operating income was $58.3 million in the first three quarters of 2011 compared to $64.5 million in the first three quarters of 2010.
During the first three quarters of 2011, interest income was $0.4 million on average investment balances of $225.9 million. Interest income in the first three quarters of 2010 was $0.3 million on average investment balances of $255.7 million.
We did not have any debt outstanding during the first three quarters of 2011 or 2010. Interest expense of $0.3 million in 2011 and $0.1 million in 2010 represents the amortization of costs associated with our credit facility.
The effective tax rate for the first three quarters of 2011 equaled 30.4 percent compared to 30.9 percent in the first three quarters of 2010.
Net income for the first three quarters of 2011 was $40.7 million, or $1.25 per share on a diluted basis, compared to net income for the first three quarters of 2010 of $44.7 million, or $1.33 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 and corporate administrative expenses.
Friction Control Products
                                                 
    Third Quarter Ended   First Three Quarters Ended
                    %                   %
Dollars in millions   Oct. 1, 2011   Oct. 2, 2010   Change   Oct. 1, 2011   Oct. 2, 2010   Change
 
Sales
  $ 69.9     $ 78.0       (10.4 )%   $ 196.6     $ 237.5       (17.2 )%
Operating Income
  $ 11.1     $ 12.7       (12.6 )%   $ 32.5     $ 49.6       (34.5 )%
Operating Margin
    15.9 %     16.2 %             16.5 %     20.9 %        
Third Quarter
During the third quarter of 2011 sales from our Friction Control Products reporting segment equaled $69.9 million, a decrease of $8.1 million compared to the third quarter of 2010. The decrease was due primarily to a $6.2 million decline in sales volume and $1.7 million in pricing reductions. Sales to the wind energy market declined by $9.9 million to $19.2 million, which was partially offset by increased sales volume primarily to the machinery and heavy equipment markets.

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During the third quarter of 2011, operating income for the segment decreased $1.6 million compared to the third quarter of 2010, to $11.1 million. This decrease was comprised of $1.9 million attributable to a decline in sales volume, $1.7 million attributable to pricing reductions, $0.5 million attributable to the effect of unfavorable changes in foreign exchange rates, and other cost increases of $1.4 million, partially offset by the $2.4 million positive effect of sales mix and $1.5 million in decreased costs associated with the manufacturing consolidation program.
First Three Quarters
During the first three quarters of 2011 sales from our Friction Control Products reporting segment decreased $40.9 million compared to the first three quarters of 2010, to $196.6 million. The decrease was due to a $38.8 million decline in sales to wind energy customers and a smaller decrease in sales to the military market, partially offset by increased sales to other principal end markets.
During the first three quarters of 2011 operating income for the segment decreased $17.1 million compared to the first three quarters of 2010, to $32.5 million. This decrease was primarily comprised of $14.4 million related to decreases in sales volume, $4.6 million in reduced pricing, and $1.0 million of net cost increases, partially offset by a $3.6 million favorable effect from changes in sales mix.
Velocity Control Products
                                                 
    Third Quarter Ended   First Three Quarters Ended
                    %                   %
Dollars in millions   Oct. 1, 2011   Oct. 2, 2010   Change   Oct. 1, 2011   Oct. 2, 2010   Change
 
Sales
  $ 24.4     $ 15.9       53.0 %   $ 69.3     $ 45.3       53.1 %
Operating Income
  $ 6.1     $ 4.1       47.7 %   $ 17.8     $ 11.4       55.5 %
Operating Margin
    24.8 %     25.7 %             25.6 %     25.2 %        
Third Quarter
During the third quarter of 2011 sales from our Velocity Control Products reporting segment increased $8.4 million compared to the third quarter of 2010, to $24.4 million. The sales growth was due to increased volumes in our international markets and the $5.1 million contribution of Hahn.
During the third quarter of 2011 operating income for the segment increased $2.0 million compared to the third quarter of 2010, to $6.1 million. The increase was attributable to increased sales, including the contribution of Hahn. This increase was partially offset by net cost increases of $2.2 million, including Hahn and the investment in sales and marketing initiatives to add to our global sales team and advertising plan to support the growth of this business.
First Three Quarters
During the first three quarters of 2011 sales from our Velocity Control Products reporting segment increased $24.1 million compared to the first three quarters of 2010, to $69.3 million. The increase was due to increased volumes to North American and European markets, the contribution of Hahn and $2.3 million from favorable changes in foreign exchange rates.
During the first three quarters of 2011 operating income for the segment increased $6.3 million compared to the first three quarters of 2010, to $17.8 million. The increase was attributable to increased sales volumes including the contribution of Hahn, and $0.3 million from favorable changes in foreign exchange rates, partially offset by $5.9 million in net cost increases, including Hahn and investments in sales and marketing costs to add sales personnel and increased advertising.

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Other Industrial Products
                                                 
    Third Quarter Ended   First Three Quarters Ended
                    %                   %
Dollars in millions   Oct. 1, 2011   Oct. 2, 2010   Change   Oct. 1, 2011   Oct. 2, 2010   Change
 
Sales
  $ 27.4     $ 24.3       12.4 %   $ 86.1     $ 76.3       12.9 %
Operating Income
  $ 2.9     $ 1.4       110.2 %   $ 9.9     $ 5.5       78.9 %
Operating Margin
    10.7 %     5.7 %             11.5 %     7.2 %        
Third Quarter
Third quarter 2011 sales of our remaining operating segments, which are combined and shown above as Other Industrial Products, equaled $27.4 million, compared to $24.3 million in the third quarter of 2010. The improvement was due to higher demand for sealing products of $1.6 million, a $1.2 million increase in sales of metal alloy products, primarily related to commodity pricing, and higher demand for machine tool and die components of $0.7 million, which were partially offset by decreased sales of $0.5 million of filtration products.
Operating income of Other Industrial Products equaled $2.9 million during the third quarter of 2011, compared to $1.4 million in the third quarter of 2010. The increase was due to a $0.6 million favorable impact in sales mix, $1.6 million favorable impact of volume increases and a smaller favorable impact from price increases, partially offset by net cost increases.
First Three Quarters
During the first three quarters of 2011 sales from our Other Industrial Products increased $9.8 million compared to the first three quarters of 2010, to $86.1 million. The increase was due to higher demand for sealing products of $6.3 million, a $4.8 million increase in sales of metal alloy products, primarily related to commodity pricing, and higher demand for machine tool and die components of $2.8 million, which were partially offset by decreased sales of $4.1 million of filtration products.
Operating income for the first three quarters of 2011 for Other Industrial Products increased $4.4 million compared to the first three quarters of 2010, to $9.9 million. The increase was primarily due to a $3.9 million favorable impact of volume increases and a $1.2 million favorable impact from changes in sales mix.
Liquidity and Capital Resources
At October 1, 2011, after the cash acquisition of Hahn earlier in the year, the Company’s current ratio was 7.4 to 1 and working capital totaled $375.6 million, including $219.1 million of cash and cash equivalents. At December 31, 2010, the current ratio was 8.8 to 1 and working capital totaled $414.3 million, including cash and cash equivalents of $286.6 million.
Net cash from operating activities during the first three quarters of 2011 equaled $35.3 million, compared to first three quarters 2010 net cash from operating activities of $66.4 million due largely to changes in working capital items and other assets and liabilities. The increase in working capital items in the first three quarters of 2011 exceeded the increase in the first three quarters of 2010 by $15.9 million, principally due to increased inventory. Cash from the change in other assets and liabilities decreased by $13.1 million compared to the first three quarters of 2010 resulting from lower cash generated from reductions in prepaid assets and accruals for compensation and professional services.
Net inventories at October 1, 2011 were $107.1 million, an increase of $18.8 million compared to the $88.3 million of inventory at December 31, 2010. Third quarter 2011 inventory turns equaled 2.9 turns compared to the third quarter 2010 inventory turns of 3.6 turns. The Company selectively increased inventory during the third quarter 2011 to support sales initiatives.
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 at October 1, 2011 is fully realizable.
At October 1, 2011, we had approximately $8.3 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

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designed to its agreed upon specifications. The customer has not paid us and has made a claim for material 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 third quarter of 2010, a notice of binding 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 calls for completion of the binding arbitration hearings in the fourth quarter of 2011, followed by a final decision of the arbitration panel, unless 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 believe that the receivables and inventory are fully realizable and the customer’s claims are without merit and payment by us of the damages claimed is remote.
During the third quarter of 2011 we paid cash dividends of $6.1 million compared to $6.0 million in the third quarter of 2010, reflecting an increased dividend rate of $0.19 per common share paid in the third quarter of 2011 compared to $0.18 per common share paid in the third quarter of 2010. Dividends for the first three quarters of 2011 totaled $18.7 million compared to $18.1 million for the first three quarters of 2010. Share repurchases in the third quarter of 2011 totaled 205,000 shares for $6.6 million. There were no share repurchases in the third quarter of 2010. Share repurchases during the first three quarters of 2011 totaled 947,091 shares for $34.7 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 growth objectives, including strategic acquisitions.
We have a 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. 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 1, 2011. Taking into account $4.5 million of letters of credit issued under the credit agreement, we had available credit under the credit agreement of $245.5 million at October 1, 2011.
Outlook
Our performance during the first three quarters of 2011, while impacted by an anticipated moderation in our wind energy and military businesses, reflects the benefits of market leadership in sound industrial 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.
Sales increased in the third quarter of 2011 compared to the 2010 third quarter as strength in our industrial businesses, including the contribution of Hahn, more than offset the more challenged renewable energy business. Improvement for the remainder of 2011 and into 2012 will continue to be dependent on the renewed strengthening of general economic and industrial conditions.
We continue to see strength in most of our industrial end markets, notably industrial machinery and heavy equipment. In addition, we are extremely pleased with the performance of Hahn, which was acquired in April 2011, and expect considerable further opportunity as it is fully integrated into our Velocity Control Products segment.
Our market leadership positions, robust cash from operating activities, and strong balance sheet position us well for the future.
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.

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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, 2010. There have been no material changes to the critical accounting policies 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.

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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.

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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 fiscal month in the third quarter of 2011:
                                 
                    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)
 
July 3 to July 30
    0       0       0       1,545,338  
July 31 to August 27
    120,000     $ 31.89       120,000       1,425,338  
August 28 to October 1
    85,000     $ 32.27       85,000       1,340,338  
 
Total
    205,000     $ 32.05       205,000       1,340,338  
 
 
(1)   On May 6, 2005, the Company’s Board of Directors authorized management to purchase up to 5,000,000 shares of its common stock in the open market.
ITEM 6. EXHIBITS.
     
Exhibit No.   Description
 
   
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

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  KAYDON CORPORATION
 
 
October 28, 2011  /s/ Peter C. DeChants    
  Peter C. DeChants   
  Senior Vice President, Chief Financial Officer   
 
     
October 28, 2011  /s/ Laura M. Kowalchik    
  Laura M. Kowalchik   
  Vice President, Chief Accounting Officer   
 

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