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EX-32 - EX-32 - KAYDON CORPk50184exv32.htm
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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 July 2, 2011                 Commission File No. 1-11333
KAYDON CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  13-3186040
(I.R.S. Employer Identification No.)
     
Suite 300, 315 E. Eisenhower Parkway, Ann Arbor, Michigan
(Address of principal executive offices)
  48108
(Zip Code)
Registrant’s telephone number, including area code: (734) 747-7025
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     Yes þ       No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
     Yes þ       No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, 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   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 of the Exchange Act).
     Yes o       No þ
     Common Stock Outstanding at July 27, 2011 — 32,324,583 shares, $.10 par value.
 
 

 


 

KAYDON CORPORATION FORM 10-Q
INDEX
         
    Page No.  
       
    3  
    3  
    4  
    5  
    6  
    13  
    20  
    20  
       
    21  
    21  
    22  
 EX-31.1
 EX-31.2
 EX-32

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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
                 
    July 2, 2011     December 31, 2010  
 
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 223,267,000     $ 286,648,000  
Accounts receivable, net
    87,256,000       76,010,000  
Inventories, net
    103,554,000       88,253,000  
Other current assets
    15,850,000       16,384,000  
 
 
               
Total current assets
    429,927,000       467,295,000  
 
 
               
Property, plant and equipment, net
    176,625,000       169,597,000  
Goodwill, net
    160,152,000       143,428,000  
Other intangible assets, net
    32,793,000       18,047,000  
Other assets
    4,557,000       2,965,000  
 
 
               
Total assets
  $ 804,054,000     $ 801,332,000  
 
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Current Liabilities:
               
Accounts payable
  $ 20,984,000     $ 16,944,000  
Salaries and wages
    8,544,000       11,439,000  
Taxes payable
    7,025,000       3,452,000  
Other accrued expenses
    20,619,000       21,194,000  
 
 
               
Total current liabilities
    57,172,000       53,029,000  
 
 
               
Long-term postretirement and postemployment benefit obligations
    23,727,000       23,567,000  
Other long-term liabilities
    19,797,000       15,598,000  
 
 
               
Total long-term liabilities
    43,524,000       39,165,000  
 
 
               
Shareholders’ Equity:
               
Common stock
    3,693,000       3,693,000  
Other shareholders’ equity
    699,665,000       705,445,000  
 
 
               
Total shareholders’ equity
    703,358,000       709,138,000  
 
 
               
Total liabilities and shareholders’ equity
  $ 804,054,000     $ 801,332,000  
 
See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
                                 
    Second Quarter Ended     First Half Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  
 
Net sales
  $ 122,029,000     $ 121,500,000     $ 230,370,000     $ 240,745,000  
Cost of sales
    78,045,000       75,563,000       147,564,000       153,039,000  
 
Gross profit
    43,984,000       45,937,000       82,806,000       87,706,000  
Selling, general and administrative expenses
    23,537,000       19,679,000       44,860,000       41,766,000  
 
Operating income
    20,447,000       26,258,000       37,946,000       45,940,000  
Interest expense
    (98,000 )     (62,000 )     (195,000 )     (124,000 )
Interest income
    110,000       98,000       289,000       122,000  
 
Income before income taxes
    20,459,000       26,294,000       38,040,000       45,938,000  
Provision for income taxes
    6,301,000       8,478,000       11,892,000       14,295,000  
 
Net income
  $ 14,158,000     $ 17,816,000     $ 26,148,000     $ 31,643,000  
 
 
                               
Earnings per share:
                               
Basic
  $ 0.44     $ 0.53     $ 0.80     $ 0.94  
 
Diluted
  $ 0.43     $ 0.53     $ 0.80     $ 0.94  
 
 
                               
Dividends declared per share
  $ 0.19     $ 0.18     $ 0.38     $ 0.36  
 
See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
                 
    First Half Ended  
    July 2, 2011     July 3, 2010  
 
Cash flows from operating activities:
               
Net income
  $ 26,148,000     $ 31,643,000  
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation
    9,967,000       10,023,000  
Amortization of intangible assets
    1,458,000       1,842,000  
Amortization of stock awards
    2,023,000       2,144,000  
Stock option compensation expense
    678,000       670,000  
Excess tax benefits from stock-based compensation
    (58,000 )     (124,000 )
Deferred financing fees
    194,000       124,000  
Non-cash postretirement benefits curtailment gain
    (142,000 )     (3,066,000 )
Contributions to qualified pension plans
    (1,112,000 )     (657,000 )
Net change in receivables, inventories and trade payables
    (16,642,000 )     (6,714,000 )
Net change in other assets and liabilities
    (1,701,000 )     16,167,000  
 
Net cash from operating activities
    20,813,000       52,052,000  
 
Cash flows from investing activities:
               
Capital expenditures
    (7,731,000 )     (7,191,000 )
Dispositions of property, plant and equipment
    77,000       40,000  
Acquisition of business, net of cash received
    (39,047,000 )     0  
 
Net cash used in investing activities
    (46,701,000 )     (7,151,000 )
 
Cash flows from financing activities:
               
Cash dividends paid
    (12,509,000 )     (12,100,000 )
Purchase of treasury stock
    (28,150,000 )     (8,789,000 )
Excess tax benefits from stock-based compensation
    58,000       124,000  
Proceeds from exercise of stock options
    39,000       55,000  
 
Net cash used in financing activities
    (40,562,000 )     (20,710,000 )
 
 
               
Effect of exchange rate changes on cash and cash equivalents
    3,069,000       (2,898,000 )
 
Net increase (decrease) in cash and cash equivalents
    (63,381,000 )     21,293,000  
Cash and cash equivalents — Beginning of period
    286,648,000       262,403,000  
 
Cash and cash equivalents — End of period
  $ 223,267,000     $ 283,696,000  
 
Cash paid for income taxes
  $ 7,238,000     $ 7,890,000  
 
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.
                 
    July 2, 2011     December 31, 2010  
 
Cash and cash equivalents:
               
Money market and other short-term funds
  $ 210,473,000     $ 275,547,000  
Time deposits, other interest bearing accounts, and other cash
    12,794,000       11,101,000  
 
 
  $ 223,267,000     $ 286,648,000  
 
(3) Inventories:
                 
    July 2, 2011     December 31, 2010  
 
Raw material
  $ 39,057,000     $ 33,429,000  
Work in process
    31,709,000       23,797,000  
Finished goods
    32,788,000       31,027,000  
 
 
  $ 103,554,000     $ 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.
                                 
    Second Quarter Ended     First Half Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  
 
Net income
  $ 14,158,000     $ 17,816,000     $ 26,148,000     $ 31,643,000  
Other comprehensive income (loss)
    1,941,000       (1,711,000 )     5,749,000       (4,540,000 )
 
Comprehensive income
  $ 16,099,000     $ 16,105,000     $ 31,897,000     $ 27,103,000  
 

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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.
                 
    Second Quarter Ended  
    July 2, 2011     July 3, 2010  
 
Earnings per share — Basic
               
Net income
  $ 14,158,000     $ 17,816,000  
Less: Net earnings allocated to participating securities — Basic
    (141,000 )     (187,000 )
 
Income available to common shareholders — Basic
  $ 14,017,000     $ 17,629,000  
Weighted average common shares outstanding — Basic
    32,205,000       33,119,000  
 
Earnings per share — Basic
  $ 0.44     $ 0.53  
 
Earnings per share — Diluted
               
Net income
  $ 14,158,000     $ 17,816,000  
Less: Net earnings allocated to participating securities — Diluted
    (141,000 )     (187,000 )
 
Income available to common shareholders — Diluted
  $ 14,017,000     $ 17,629,000  
 
Weighted average common shares outstanding — Diluted
               
Weighted average common shares outstanding — Basic
    32,205,000       33,119,000  
Potential dilutive shares resulting from stock options
    28,000       28,000  
 
Weighted average common shares outstanding — Diluted
    32,233,000       33,147,000  
 
Earnings per share — Diluted
  $ 0.43     $ 0.53  
 
                 
    First Half Ended  
    July 2, 2011     July 3, 2010  
 
Earnings per share — Basic
               
Net income
  $ 26,148,000     $ 31,643,000  
Less: Net earnings allocated to participating securities — Basic
    (270,000 )     (339,000 )
 
Income available to common shareholders — Basic
  $ 25,878,000     $ 31,304,000  
Weighted average common shares outstanding — Basic
    32,406,000       33,225,000  
 
Earnings per share — Basic
  $ 0.80     $ 0.94  
 
 
               
Earnings per share — Diluted
               
Net income
  $ 26,148,000     $ 31,643,000  
Less: Net earnings allocated to participating securities — Diluted
    (270,000 )     (339,000 )
 
Income available to common shareholders — Diluted
  $ 25,878,000     $ 31,304,000  
 
Weighted average common shares outstanding — Diluted
               
Weighted average common shares outstanding — Basic
    32,406,000       33,225,000  
Potential dilutive shares resulting from stock options
    28,000       28,000  
 
 
               
Weighted average common shares outstanding — Diluted
    32,434,000       33,253,000  
 
Earnings per share — Diluted
  $ 0.80     $ 0.94  
 

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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:
                                 
    Second Quarter Ended     First Half Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  
 
Shares excluded
    420,500       385,500       403,000       385,500  
(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.
                                 
    Second Quarter Ended     First Half Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  
 
Net sales
                               
Friction Control Products
  $ 65,797,000     $ 79,692,000     $ 126,692,000     $ 159,474,000  
Velocity Control Products
    25,331,000       15,114,000       44,957,000       29,347,000  
Other Industrial Products
    30,901,000       26,694,000       58,721,000       51,924,000  
 
Total consolidated net sales
  $ 122,029,000     $ 121,500,000     $ 230,370,000     $ 240,745,000  
 
                                 
    Second Quarter Ended     First Half Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  
 
Operating income
                               
Friction Control Products
  $ 11,526,000     $ 20,339,000     $ 21,400,000     $ 36,883,000  
Velocity Control Products
    5,884,000       3,952,000       11,710,000       7,327,000  
Other Industrial Products
    4,395,000       2,813,000       6,932,000       4,119,000  
 
 
                               
Total segment operating income
    21,805,000       27,104,000       40,042,000       48,329,000  
 
                               
Items not allocated to segment operating income
    (1,358,000 )     (846,000 )     (2,096,000 )     (2,389,000 )
 
                               
Interest expense
    (98,000 )     (62,000 )     (195,000 )     (124,000 )
Interest income
    110,000       98,000       289,000       122,000  
 
 
                               
Income before income taxes
  $ 20,459,000     $ 26,294,000     $ 38,040,000     $ 45,938,000  
 

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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 July 2, 2011. Taking into account $4.7 million of letters of credit issued under the credit agreement, the Company had available credit of $245.3 million at July 2, 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 2010, the Company’s goodwill impairment testing revealed that the estimated fair values of each of its reporting units exceeded their carrying values, which indicated no goodwill impairment. The Company’s goodwill impairment testing revealed that the excess of the estimated fair value of each of the reporting units tested over their carrying value (expressed as a percentage of the carrying value) at the July 31, 2010 annual testing date ranged from approximately 38 percent to approximately 282 percent. Changes in estimates of future cash flows and the weighted average cost of capital may have a material effect on the valuation of reporting units and the results of the related impairment testing.
Certain trademarks are the Company’s only indefinite-lived intangible assets. The Company identifies impairment of these trademarks by comparing their fair values to their carrying values. The fair values of the trademarks are calculated based on estimates of discounted future cash flows related to the net amount of royalty expenses avoided due to the existence of the trademarks. At July 31, 2010, trademarks were tested for impairment and no impairment loss was realized.
The changes in the carrying value of goodwill for the first half ended July 2, 2011, were as follows:
                                 
    Friction Control     Velocity 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
    582,000       227,000       0       809,000  
Goodwill acquired
    0       15,915,000       0       15,915,000  
Balance at July 2, 2011
                               
Goodwill
  $ 56,978,000     $ 59,342,000     $ 62,532,000     $ 178,852,000  
Accumulated impairment losses
    0       0       (18,700,000 )     (18,700,000 )
 
 
  $ 56,978,000     $ 59,342,000     $ 43,832,000     $ 160,152,000  
 
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 $15.9 million in the second quarter of 2011 associated with its April 8, 2011 acquisition of Hahn-Gasfedern GmbH. The Company also acquired other intangible assets related to that acquisition. A value of $15.0 million was assigned to customer relationships and lists which is being amortized over 17 years. A value of $0.7 million was assigned to non-amortizing trademarks.

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Other intangible assets are summarized as follows:
                                 
    July 2, 2011     December 31, 2010  
    Gross             Gross        
    Carrying     Accumulated     Carrying     Accumulated  
Amortized Intangible Assets   Value     Amortization     Value     Amortization  
 
Customer relationships and lists
  $ 43,421,000     $ 18,824,000     $ 28,194,000     $ 17,638,000  
Patents and developed technology
    6,856,000       4,212,000       6,596,000       3,974,000  
Distributor agreements
    374,000       257,000       374,000       237,000  
Product names
    320,000       206,000       320,000       192,000  
 
 
  $ 50,971,000     $ 23,499,000     $ 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.
                 
    July 2, 2011     December 31, 2010  
Unamortized Intangible Assets   Carrying Value     Carrying Value  
 
Trademarks
  $ 5,321,000     $ 4,604,000  
         
Aggregate Intangible Assets Amortization Expense        
 
For the first half ended July 2, 2011
  $ 1,458,000  
For the first half ended July 3, 2010
  $ 1,842,000  
         
Estimated Intangible Assets Amortization Expense        
 
For the year ending December 31, 2011
  $ 3,094,000  
For the year ending December 31, 2012
  $ 3,033,000  
For the year ending December 31, 2013
  $ 2,712,000  
For the year ending December 31, 2014
  $ 2,412,000  
For the year ending December 31, 2015
  $ 2,076,000  
(9) Employee Benefit Plans:
The components of net periodic benefit cost (income) are as follows:
                                 
Pension Benefits   Second Quarter Ended     First Half Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  
 
Service cost
  $ 776,000     $ 831,000     $ 1,553,000     $ 1,662,000  
Interest cost
    1,715,000       1,738,000       3,429,000       3,476,000  
Expected return on plan assets
    (2,120,000 )     (1,921,000 )     (4,240,000 )     (3,842,000 )
Amortization of:
                               
Unrecognized net prior service cost
    16,000       16,000       32,000       32,000  
Unrecognized net actuarial loss
    810,000       870,000       1,620,000       1,740,000  
 
Total
  $ 1,197,000     $ 1,534,000     $ 2,394,000     $ 3,068,000  
 

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Postretirement Benefits   Second Quarter Ended     First Half Ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  
 
Service cost
  $ 23,000     $ 50,000     $ 46,000     $ 112,000  
Interest cost
    73,000       121,000       147,000       257,000  
Amortization of:
                               
Unrecognized net prior service credit
    (325,000 )     (289,000 )     (650,000 )     (578,000 )
Unrecognized net actuarial gain
    (112,000 )     (111,000 )     (225,000 )     (186,000 )
Curtailment gain
    (142,000 )     (3,066,000 )     (142,000 )     (3,066,000 )
 
Total
  $ (483,000 )   $ (3,295,000 )   $ (824,000 )   $ (3,461,000 )
 
The Company contributed $0.6 million and $1.1 million to its qualified pension plans in the second quarter and first half of 2011. 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 half 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 July 2, 2011
    312,878     $ 36.20  
 
Compensation expense related to restricted stock awards was $1.1 million and $2.0 million in the second quarter and first half of 2011, respectively. Compensation expense related to restricted stock awards was $1.1 million and $2.1 million in the second quarter and first half of 2010, respectively.
A summary of stock option information pursuant to the Company’s equity incentive plans for the first half 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 July 2, 2011
    619,000     $ 38.83  
 
Exercisable at July 2, 2011
    413,700     $ 39.92  
 
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 $0.4 million and $0.7 million in the second quarter and first half of 2011, respectively. Compensation expense related to stock options was $0.4 million and $0.7 million in the second quarter and the first half of 2010, respectively.

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(11) Other Matters:
At July 2, 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 us of the damages claimed is remote.
(12) Taxes:
The effective tax rate for the second quarter of 2011 equaled 30.8 percent compared to 32.2 percent in the second 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 second quarter 2011 effective tax rate decreased as compared to the second 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 second quarter and first half of 2011 the Company incurred $0.5 million and $1.4 million, respectively, in cost of sales for engineering, relocation, recruiting, travel, training and other start-up costs in Sumter associated with the manufacturing consolidation program, which substantially completes the program.
(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 July 2, 2011.
(16) Impact of Recently Issued Accounting Pronouncements:
During the second quarter of 2011 new accounting guidance was issued to require more prominent disclosure of Other Comprehensive Income. This guidance which is 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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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 second quarter of 2011 compared to 2010’s second quarter reflected continued moderation in our wind energy and military businesses as expected, offset by sales growth of products serving industrial markets including increased sales as a result of our April 8, 2011 acquisition of HAHN-Gasfedern GmbH and related real estate and intangible property (“Hahn”). Other items affecting the comparison of the second quarter 2011 results to the 2010 second quarter results included $2.9 million of lower gains in 2011 associated with the curtailment of certain postretirement benefits, partially offset by $2.2 million lower costs in 2011 associated with due diligence efforts for acquisitions.
At July 2, 2011, after our cash acquisition of Hahn, our current ratio was 7.5 to 1 and working capital totaled $372.8 million. We believe that our current cash and cash equivalents balance of $223.3 million at July 2, 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
Second Quarter Results
                                 
      Second Quarter Ended  
    July 2,     % of     July 3,     % of  
Dollars in millions, except per share amounts   2011     Sales     2010     Sales  
 
Net sales
  $ 122.0             $ 121.5          
Cost of sales
    78.0               75.6          
 
Gross profit
    44.0       36.0 %     45.9       37.8 %
Selling, general and administrative expenses
    23.5       19.3 %     19.7       16.2 %
 
Operating income
    20.4       16.8 %     26.3       21.6 %
Interest, net
    0.0               0.0          
 
Income before income taxes
    20.5       16.8 %     26.3       21.6 %
Provision for income taxes
    6.3               8.5          
 
Net income
  $ 14.2       11.6 %   $ 17.8       14.7 %
 
Earnings per share:
                               
Basic
  $ 0.44             $ 0.53          
 
Diluted
  $ 0.43             $ 0.53          
 
Amounts and percentages in the above table may not total due to rounding.
Sales equaled $122.0 million in the second quarter of 2011, an increase of $0.5 million or 0.4 percent compared to the second quarter of 2010. The increase was principally attributable to $10.2 million of increased sales of our velocity control products, as worldwide demand for these products was strong, including the results from the acquisition of Hahn which contributed $5.9 million to the velocity control products sales increase. We also achieved increased sales across the majority of our principal industrial end markets, particularly in heavy equipment and industrial machinery end markets. Second quarter 2011 sales also

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included $1.7 million of favorable changes in foreign exchange rates. These sales increases were offset by an $11.8 million reduction in sales to wind energy customers, a reduction in sales to our military end market of $5.5 million, including the absence of a key military program that benefited 2010, and decreased sales of our filtration products.
Gross profit during the second quarter of 2011 decreased $2.0 million or 4.3 percent compared to the second quarter of 2010. Gross profit comparisons were negatively affected by volume reductions of $2.5 million, net pricing reductions of $1.4 million, and other net operating cost increases. These decreases were partially offset by the contribution of the Hahn acquisition and a $0.4 million favorable impact due to changes in foreign exchange rates. Gross margin decreased to 36.0 percent in the second quarter of 2011 from 37.8 percent in the prior second quarter due primarily to the aforementioned net pricing reductions.
Selling, general and administrative expenses were $23.5 million or 19.3 percent of sales during the second quarter of 2011, compared to $19.7 million or 16.2 percent of sales in the second quarter of 2010. Selling expenses, excluding the effect of the Hahn acquisition, increased approximately $1.9 million primarily attributable to increased revenue and investments in personnel, advertising and travel related to focused global sales and marketing initiatives. General and administrative expenses, excluding the effect of the Hahn acquisition, in the second quarter of 2011 were approximately equal to last year’s second quarter except that we experienced curtailment gains of $0.1 million and $3.1 million in 2011 and 2010, respectively, and due diligence costs of $0.4 million and $2.6 million in 2011 and 2010, respectively.
The Company’s operating income was $20.4 million in the second quarter of 2011 compared to $26.3 million in the second quarter of 2010.
During the second quarter of 2011, interest income was $0.1 million on average investment balances of $216.3 million. Interest income in the second quarter of 2010 also equaled $0.1 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 both the second quarter of 2011 and 2010, and represents the amortization of our credit facility costs.
The effective tax rate for the second quarter of 2011 equaled 30.8 percent compared to 32.2 percent in the second quarter of 2010. The tax rate in 2011 decreased primarily as a result of increased 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 31 percent.
Net income for the second quarter of 2011 was $14.2 million, or $0.43 per share on a diluted basis, as compared to net income for the second quarter of 2010 of $17.8 million, or $0.53 per share on a diluted basis.
First Half Results
                                 
      First Half Ended  
    July 2,     % of     July 3,     % of  
Dollars in millions, except per share amounts   2011     Sales     2010     Sales  
 
Net sales
  $ 230.4             $ 240.7          
Cost of sales
    147.6               153.0          
 
Gross profit
    82.8       35.9 %     87.7       36.4 %
Selling, general and administrative expenses
    44.9       19.5 %     41.8       17.3 %
 
Operating income
    37.9       16.5 %     45.9       19.1 %
Interest, net
    0.1               0.0          
 
Income before income taxes
    38.0       16.5 %     45.9       19.1 %
Provision for income taxes
    11.9               14.3          
 
Net income
  $ 26.1       11.4 %   $ 31.6       13.1 %
 
Earnings per share:
                               
Basic
  $ 0.80             $ 0.94          
 
Diluted
  $ 0.80             $ 0.94          
 
Amounts and percentages in the above table may not total due to rounding.

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Sales during the first half of 2011 decreased $10.4 million or 4.3 percent compared to the first half of 2010. The net decrease in sales was comprised of a $28.9 million decrease in wind energy sales and smaller reductions in sales to our military and liquid filtration markets, partially offset by increased sales to industrial markets, the contribution of Hahn, favorable currency effects of $1.8 million and positive net pricing.
Gross profit during the first half of 2011 decreased $4.9 million compared to the first half of 2010 largely attributable to the decreased sales volume discussed above, as the contribution of Hahn and favorable sales mix offset the effects of lower pricing and net cost increases.
Selling, general, and administrative expenses were $44.9 million or 19.5 percent of sales during the first half of 2011, compared to $41.8 million or 17.3 percent of sales in the first half of 2010. The $3.1 million increase was primarily attributable to $2.9 million in increased selling expenses compared to the prior period, largely attributable to the inclusion of Hahn as well as increased revenue and investments in personnel, advertising and travel related to focused global sales and marketing initiatives. General and administrative expenses in the first half of 2011 compared to the first half of 2010 included $2.9 million lower gains associated with the curtailment of certain postretirement benefits and the effect of Hahn expenses in 2011. These first half 2011 expense increases compared to the first half of 2010 were partially offset by $1.7 million lower costs associated with due diligence efforts for acquisitions, a $1.6 million decrease in accrued incentive compensation expense, and lower professional fees, all in the first half of 2011 relative to the first half of 2010.
The Company’s operating income was $37.9 million in the first half of 2011 compared to $45.9 million in the first half of 2010.
During the first half of 2011, interest income was $0.3 million on average investment balances of $241.1 million. Interest income in the first half of 2010 was $0.1 million on average investment balances of $248.9 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.
We did not have any debt outstanding during the first half of 2011 or 2010. Interest expense of $0.2 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 half of 2011 equaled 31.3 percent compared to 31.1 percent in the first half of 2010. The projected full year 2011 tax rate is expected to be approximately 31 percent.
Net income for the first half of 2011 was $26.1 million, or $0.80 per share on a diluted basis, as compared to net income for the first half of 2010 of $31.6 million, or $0.94 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
                                                 
    Second Quarter Ended     First Half Ended  
                %                 %  
Dollars in millions   July 2, 2011     July 3, 2010     Change     July 2, 2011     July 3, 2010     Change  
 
Sales
  $ 65.8     $ 79.7       (17.4 )%   $ 126.7     $ 159.5       (20.6 )%
Operating Income
  $ 11.5     $ 20.3       (43.3 )%   $ 21.4     $ 36.9       (42.0 )%
Operating Margin
    17.5 %     25.5 %             16.9 %     23.1 %        

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Second Quarter
During the second quarter of 2011 sales from our Friction Control Products reporting segment equaled $65.8 million, a decrease of $13.9 million compared to the second quarter of 2010. The decrease was due to a $12.8 million decline in sales volume and $1.4 million in pricing reductions. Sales to the wind energy market declined by $11.8 million to $13.3 million, and smaller decreases were experienced in the military market, including the absence of a key military program that benefited 2010, and in semiconductor markets partially offset by increased sales volume to the machinery and heavy equipment markets.
During the second quarter of 2011, operating income for the segment decreased $8.8 million to $11.5 million compared to the second quarter of 2010. Of this decrease, $5.9 million was attributable to declines in sales volume, $1.5 million was attributable to pricing reductions, and the remainder was attributable to other net cost increases and unfavorable changes in foreign exchange rates.
First Half
During the first half of 2011 sales from our Friction Control Products reporting segment decreased $32.8 million to $126.7 million compared to the first half of 2010. The decrease was due to a $28.9 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 half of 2011 operating income for the segment decreased $15.5 million to $21.4 million compared to the first half of 2010. This decrease was primarily comprised of $12.5 million related to decreases in sales volume, $2.9 million in reduced pricing, and $0.9 million in increased costs related to our manufacturing consolidation program (see Note 14 to the Consolidated Condensed Financial Statements), partially offset by a $1.3 million favorable effect from changes in sales mix.
Velocity Control Products
                                                 
    Second Quarter Ended     First Half Ended  
                %                 %  
Dollars in millions   July 2, 2011     July 3, 2010     Change     July 2, 2011     July 3, 2010     Change  
 
Sales
  $ 25.3     $ 15.1       67.6 %   $ 45.0     $ 29.3       53.2 %
Operating Income
  $ 5.9     $ 4.0       48.9 %   $ 11.7     $ 7.3       59.8 %
Operating Margin
    23.2 %     26.1 %             26.1 %     25.0 %        
Second Quarter
During the second quarter of 2011, sales from our Velocity Control Products reporting segment increased $10.2 million to $25.3 million compared to the second quarter of 2010. The sales growth was due to increased volumes in our international markets and the $5.9 million benefit from the acquisition of Hahn.
During the second quarter of 2011 operating income for the segment increased $1.9 million to $5.9 million compared to the second quarter of 2010. The increase was attributable to increased sales including the contribution of Hahn in the quarter and a $0.4 million favorable effect from changes in foreign exchange rates. These increases were partially offset by net cost increases of $1.3 million, including the second quarter of 2011 investment in sales and marketing costs of $0.8 million to add to our global sales team and advertising plan to support the growth of this business, including the addition of Hahn.
First Half
During the first half of 2011 sales from our Velocity Control Products reporting segment increased $15.6 million to $45.0 million compared to the first half of 2010. The increase was due to increased volumes to North American and European markets, the benefit of the Hahn acquisition, and $1.3 million from favorable changes in foreign exchange rates.
During the first half of 2011 operating income for the segment increased $4.4 million to $11.7 million compared to the first half of 2010. The increase was attributable to increased sales volumes including the benefit of the Hahn acquisition in the second quarter, and $0.3 million from favorable changes in foreign exchange rates, partially offset by $2.0 million in net cost increases, including investments in sales and marketing costs to add sales personnel and increased advertising.

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Other Industrial Products
                                                 
    Second Quarter Ended     First Half Ended  
                %                 %  
Dollars in millions   July 2, 2011     July 3, 2010     Change     July 2, 2011     July 3, 2010     Change  
 
Sales
  $ 30.9     $ 26.7       15.8 %   $ 58.7     $ 51.9       13.1 %
Operating Income
  $ 4.4     $ 2.8       56.2 %   $ 6.9     $ 4.1       68.3 %
Operating Margin
    14.2 %     10.5 %             11.8 %     7.9 %        
Second Quarter
Second quarter 2011 sales of our remaining operating segments, which are combined and shown above as Other Industrial Products, equaled $30.9 million compared to $26.7 million in the second quarter of 2010. The improvement was due principally to higher demand for sealing products of $2.5 million, higher demand for machine tool and die components of $1.8 million, a $1.7 million increase in sales of metal alloy products, primarily related to commodity pricing, partially offset by decreased sales of $1.7 million of filtration products.
Operating income of Other Industrial Products equaled $4.4 million during the second quarter of 2011, compared to $2.8 million in the second quarter of 2010. The increase was due to a $1.0 million favorable impact of volume increases and a $0.6 million favorable impact from changes in sales mix and net cost reductions.
First Half
During the first half of 2011 sales from our Other Industrial Products increased $6.8 million to $58.7 million compared to the first half of 2010. The increase was due to higher demand for sealing products of $4.7 million, a $3.6 million increase in sales of metal alloy products, primarily related to commodity pricing, and higher demand for machine tool and die components of $2.1 million, partially offset by decreased sales of $3.6 million of filtration products.
Operating income for the first half of 2011 for Other Industrial Products increased $2.8 million to $6.9 million compared to the first half of 2010. The increase was due to a $2.2 million favorable impact of volume increases and a $0.6 million favorable impact from changes in sales mix.
Liquidity and Capital Resources
At July 2, 2011, after the cash acquisition of Hahn, the Company’s current ratio was 7.5 to 1 and working capital totaled $372.8 million, including $223.3 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 half of 2011 equaled $20.8 million, compared to first half 2010 net cash from operating activities of $52.1 million due largely to changes in working capital items and other assets and liabilities. The increase in working capital items in the first half of 2011 was $9.9 million greater than the increase in the first half of 2010 principally due to higher inventory to support future growth. Cash used for other assets and liabilities increased by $17.9 million compared to the first half of 2010 resulting from lower cash generated from reductions in prepaid assets, decreases in salaries and wages accruals principally related to incentive compensation, and accruals for professional fees, compared to increases in the prior first half.
Net inventories at July 2, 2011 were $103.6 million, an increase of $15.3 million compared to the $88.3 million of inventory at December 31, 2010. Second quarter 2011 inventory turns equaled 3.0 turns compared to the second quarter 2010 inventory turns of 3.3 turns. The Company selectively increased inventory during the second quarter 2011 to satisfy anticipated higher demand.
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 July 2, 2011 is fully realizable.

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At July 2, 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 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 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 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 second quarter of 2011 we paid cash dividends of $6.2 million compared to $6.1 million in the second quarter of 2010, reflecting an increased dividend rate of $0.19 per common share paid in the second quarter of 2011 compared to the dividend rate of $0.18 per common share paid in the second quarter of 2010. Dividends for the first half of 2011 totaled $12.5 million compared to $12.1 million for the first half of 2010. Share repurchases in the second quarter of 2011 totaled 385,000 shares for $14.2 million. Share repurchases in the second quarter of 2010 totaled 33,817 shares for $1.3 million. First half of 2011 share repurchases totaled 742,091 shares for $28.2 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 July 2, 2011. Taking into account $4.7 million of letters of credit issued under the credit agreement, we had available credit under the credit agreement of $245.3 million at July 2, 2011.
Outlook
Our performance during the first half 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 second quarter of 2011 compared to both this year’s first quarter and the 2010 second quarter as strength in our industrial businesses, including the contribution of Hahn, more than offset the more challenged renewable energy and military businesses. We continue to expect improvement through the second half of 2011 as comparisons against strong wind and military performances experienced last year normalize and the contribution from our industrial businesses continues.
We continue to see strength in most of our industrial end markets, notably industrial machinery, heavy equipment and medical. 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 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 previously disclosed in that report.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 regarding our plans, expectations, estimates and beliefs. Forward-looking statements are typically identified by words such as “believes,” “anticipates,” “estimates,” “expects,” “intends,” “will,” “may,” “should,” “could,” “potential,” “projects,” “approximately,” and other similar expressions, including statements regarding pending litigation, general economic conditions, competitive dynamics and the adequacy of capital resources. These forward-looking statements may include, among other things, projections of our financial performance, anticipated growth, characterization of and our ability to control contingent liabilities and anticipated trends in our businesses. These statements are only predictions, based on our current expectation about future events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements or that our predictions or current expectations will be accurate. These forward-looking statements involve risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements.
In addition, we or persons acting on our behalf may from time to time publish or communicate other items that could also be construed to be forward-looking statements. Statements of this sort are or will be based on our estimates, assumptions, and projections and are subject to risks and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. We do not undertake any responsibility to update our forward-looking statements or risk factors to reflect future events or circumstances.

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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 second 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)  
 
April 3 to April 30
    95,000     $ 38.48       95,000       1,835,338  
May 1 to May 28
    130,000     $ 37.45       130,000       1,705,338  
May 29 to July 2
    160,000     $ 35.30       160,000       1,545,338  
 
Total
    385,000     $ 36.81       385,000       1,545,338  
 
 
(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

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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
 
 
July 29, 2011  /s/ Peter C. DeChants    
  Peter C. DeChants   
  Senior Vice President, Chief Financial Officer   
 
     
July 29, 2011  /s/ Laura M. Kowalchik    
  Laura M. Kowalchik   
  Vice President, Chief Accounting Officer   
 

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