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

KAYDON CORPORATION

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

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

Common Stock Outstanding at May 4, 2000 – 30,120,891 shares, $.10 par value.

KAYDON CORPORATION FORM 10-Q

FOR THE QUARTER ENDED April 1, 2000

INDEX

KAYDON CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

      See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(UNAUDITED)

      See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

      See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1)		The accompanying unaudited consolidated condensed financial statements of Kaydon Corporation and subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, and such adjustments are of a normal recurring nature. The year- end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 1999.
(2)		Inventories are summarized as follows:

(3)

Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events, and from circumstances involving nonowner sources. For the Company, comprehensive income consists of net income, minimum pension liability adjustments and foreign currency translation adjustments. Other comprehensive income, net of tax, was approximately ($475,000) and ($923,000) resulting in comprehensive income of $12,821,000 and $15,201,000 for the quarters ended April 1, 2000 and April 3, 1999.

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(4)

The following table reconciles the numerators and denominators used in the calculation of basic and diluted earnings per share for the periods presented.

Options to purchase 145,850 shares of common stock at prices ranging from $31.4375 to $33.3125 per share were outstanding during the first quarter of 2000, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares during that period. Options to purchase 145,800 shares of common stock at a price of $33.00 per share were outstanding during the first quarter of 1999, but were not included in the computation of first quarter 1999 diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares during that period.

In accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share”, potential dilutive shares resulting from stock option plans used in the calculation of dilutive earnings per share are based on an average of the potential dilutive shares resulting from stock option plans for the periods presented.

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(5)		The Company operates through individual operating units which serve four key market sectors. The market sectors served by the Company have several related economic characteristics and attributes, including similar products, distribution patterns and classes of customers. As a result, the Company aggregates its operating units into a single segment of Custom-Engineered Products.
		The corporate component of income before taxes includes interest income, goodwill amortization, depreciation and unallocated corporate administrative expenses. The Company maintains an asymmetrical allocation between its corporate office and its plants with respect to goodwill. The goodwill associated with an operating unit is on the balance sheet of the respective operating unit while the amortization expense associated with the goodwill is charged to the corporate office.
		Segment financial data (in thousands):

	There has been no change in the basis or measurement of segmentation since the last annual report.

(6)

In June of 1995, the Company, along with certain former officers and directors of the Company and certain other companies and organizations, was named as a defendant in a lawsuit commenced in Bankruptcy Court in the Southern District of New York. The plaintiff was the Creditors Committee formed in connection with the Chapter 11 Bankruptcy

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		Proceeding of Keene Corporation (“Keene”). That action, identified as the “Transactions Lawsuit”, asserted claims against the Company arising from the Company’s 1983 acquisition of certain assets of Keene, and Bairnco Corporation’s 1984 spin-off of the Company’s common stock. As originally filed, the Transactions Lawsuit alleged claims against the Company under state fraudulent conveyance laws, tort claims under successor liability law, and civil RICO claims. The Transactions Lawsuit seeks damages alleged by plaintiffs to be an amount of $700 million, plus interest and punitive damages against the defendants collectively. The RICO claims sought trebling of those damages. The claims asserted in the Transactions Lawsuit are similar to, and supplant, claims previously asserted in certain class actions brought against the Company in 1993, purportedly on behalf of certain persons with asbestos-related claims against Keene.
		In 1997, in connection with the Bankruptcy Court’s confirmation of Keene’s Plan of Reorganization, the Keene Creditors Trust was created to, among other things, prosecute this lawsuit, and the Trustees of that Trust were substituted as the plaintiffs in place of the Keene Creditors Committee. In addition, the case was transferred from the Bankruptcy Court to the United States District Court for the Southern District of New York. Subsequently, the Company and certain other defendants filed motions to dismiss the complaint for failure to state a claim, and for summary judgment on the grounds that the fraudulent conveyance claims and certain related causes of action were barred by the statute of limitations.
		On October 13, 1998, the Court granted in part and denied in part the Company’s motion to dismiss the complaint, and denied the Company’s motion for summary judgment. With respect to the motion for summary judgment, the Court found that certain groups of asbestos claimants had claims that were not time-barred, and therefore the plaintiffs could assert claims against the Company for both actual fraudulent conveyance and constructive fraudulent conveyance. With respect to the motion to dismiss, the Court granted the Company’s motion to dismiss the fraudulent conveyance claim against it in connection with Bairnco Corporation’s 1984 spin-off of the Company’s common stock, and dismissed all the RICO claims asserted against the Company. The Court denied the Company’s motion to dismiss the successor liability claim, but noted the plaintiffs’ ability to pursue such a claim was subject to their ability to pursue a fraudulent conveyance claim.
		On October 29, 1998, the Company filed a motion for reargument of the Court’s ruling that the plaintiffs’ claims for actual and constructive fraudulent conveyance against the Company are not barred by the applicable statute of limitations. On January 5, 1999, the Court issued a decision on the Company’s motion for reargument, which granted the

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		Company’s motion for reargument with regard to the plaintiffs’ claims for constructive fraudulent conveyance, and, with one minor exception, held those claims were barred by the applicable statute of limitations and dismissed them. However, the Court denied the Company’s motion to dismiss the actual fraudulent conveyance claims. Accordingly, as a result of the Company’s motions, the only claims remaining against the Company are plaintiffs’ claims for actual fraudulent conveyance and for successor liability. In addition, there is, on behalf of certain individual judgment creditors, a limited claim for constructive fraudulent conveyance. The Company does not believe any recovery on this limited claim will be material. The discovery stay previously in place has been lifted, and discovery is in its preliminary stages.
		In other decisions, the Court also dismissed the claims against all the individual defendants except one, and against the professional organizations that had been named as defendants in the case. However, Bairnco and its other subsidiaries and former subsidiaries remain as defendants in the case.
		Management believes it has meritorious defenses to the claims pending against it in this litigation. Accordingly, no provision has been reflected in the consolidated financial statements for any alleged damages. Management further believes that the outcome of this litigation will not have a material adverse effect on the Company’s financial position.
		Since June 1996, the Company and certain employees have received subpoenas issued by the U.S. District Court in Bridgeport, Connecticut on behalf of a grand jury investigating a May 9, 1996 accident involving a Sikorsky helicopter (CH-53E) in which four persons died. The grand jury requested and received documents and records, and Kaydon employee testimony relating to bearings manufactured by Kaydon and used in the Sikorsky helicopter. In addition, a “Mishap Board” led by Sikorsky Aircraft Corporation personnel alleged that product quality problems or deficiencies existed with respect to the Kaydon bearing used in the Sikorsky helicopter described above. Kaydon personnel were excluded from participation on this “Mishap Board”. However, Kaydon has independently evaluated the available evidence and refuted the “Mishap Board” findings in reports submitted to the Navy. Subsequent incidents have occurred in the helicopter fleet even though the bearings used were newly manufactured, inspected and approved by Sikorsky and Navy personnel, reinforcing the Company’s position that the bearing quality was not the causative action in the May 9, 1996 accident. During the first half of 1997, the estates of the four deceased individuals filed civil suits against the Company. On July 6, 1998, Sikorsky filed a claim against the Company in those same civil cases claiming damages which they are alleged to have incurred following the May 9, 1996 accident. In October 1998, Kaydon’s insurance company reached

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		settlement agreements with the estates of each plaintiff in the four civil suits. All settlement amounts were fully covered under Company insurance. In September 1998, Kaydon received the Judge Advocate General’s Report (the “JAG Report”) and the Naval Air Systems Command First Endorsement to the JAG Report dated July 28, 1998 wherein the U.S. Navy reviewed the crash of the Sikorsky CH-53E on May 9, 1996. A supplemental review dated November 30, 1999 with a First Endorsement dated December 10, 1999 further reviewed the JAG investigation and the Sikorsky “Mishap Board” investigation. The Supplemental Review and related First Endorsement contradict certain findings contained in the earlier JAG Report and related First Endorsement. Management believes that none of the findings contained in these reviews are conclusive, and management further believes it has meritorious defenses against any claims relating to alleged quality problems or deficiencies in its products. Management also believes that the outcome of this matter will not have a material adverse effect on the Company’s financial position.
		Various other claims, lawsuits and environmental matters arising in the normal course of business are pending against the Company. Management believes that the outcome of these matters will not have a material adverse effect on the Company’s financial position.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

During the first quarter of 2000, Kaydon Corporation and subsidiaries (the “Company”) achieved sales of $84,920,000, down 3.6 percent from $88,120,000 in the first quarter of 1999. Results for the quarter reflect recent acquisitions and modest recoveries in certain markets served by Kaydon including semiconductor equipment, railroad, industrial repair, and the specialty ball market. However, these improvements were offset by the absence of recoveries in certain other key industrial markets including heavy construction equipment, offshore oil, and aerospace.

Gross profit during the first quarter of 2000 of $32,112,000 was 37.8 percent of sales, compared with $34,456,000 or 39.1 percent of sales in the first quarter of 1999. While below the 1999 first quarter levels, the gross profit percentage achieved in the first quarter of 2000 was relatively consistent with gross profit percentages achieved during the third and fourth quarters of 1999. Operating income during the first quarter of 2000 was $19,559,000 or 23.0 percent of sales as compared to $24,748,000 or 28.1 percent of sales in the 1999 first quarter.

The first quarter 2000 gross profit and operating income results were negatively impacted by the decrease in sales from 1999, as well as several unusual charges associated with product line and facility consolidations. Charges of approximately $1.1 million were recorded at the Cooper Roller Bearing subsidiary in the United Kingdom related to headcount reductions, and for fixed asset write-offs related to the discontinuance of the subsidiary’s power transmission parts business. In addition, beginning in the second quarter of 2000, the Company will begin a restructuring of its Fluid Power Products division. This restructuring involves the closing of one of the division’s four facilities with its operations integrated into the other three divisional locations. The restructuring of the Fluid Power Products division, involving total estimated expenditures of approximately $2.0 million, is expected to result in future annualized cost savings in excess of $2.0 million. The changes described at the Cooper and Fluid Power locations follow senior management changes at these locations that took place during the fourth quarter of 1999.

Legal expenses incurred in connection with ongoing litigation matters also negatively impacted first quarter results when compared to the same period in 1999. Amortization expense related to goodwill generated as a result of the two strategic acquisitions completed by the Company in late 1999 also negatively affected the first quarter compared to the same period last year. The 1999

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acquisitions on a whole, while currently adding sales volume have yet to have a comparable operating income impact as the Company is in the process of fully integrating the new businesses.

Net interest income in the first quarter of 2000 of $1,547,000 increased $497,000 from $1,050,000 in last year’s comparable period due to marginally higher interest rates as well as $311,000 related to interest earned on a federal tax refund.

First quarter 2000 net income was $13,296,000, or 15.7 percent of sales. Earnings per share on a diluted basis equaled $.44. First quarter 1999 net income was $16,124,000, or 18.3 percent of sales, while earnings per share on a diluted basis equaled $.50.

The effective tax rate during the first quarter of 2000 was 37.0 percent compared to 37.5 percent in the first quarter 1999. The lower rate is due to more state tax planning efforts.

Liquidity and Capital Resources

Working capital was $156,612,000 as of April 1, 2000, reflecting a current ratio of 3.3 to 1 compared to $157,370,000 and a current ratio of 3.9 to 1 at year-end 1999. The Company realized an increase in accounts receivable during the first quarter of $7,587,000. This was mainly due to an increase in sales volumes of 8.4 percent during the first quarter of 2000 compared to the fourth quarter of 1999. Offsetting this increase in accounts receivable was an increase in the Company’s accounts payable balance of $5,459,000, which reflects more aggressive payment terms the Company has negotiated with its suppliers.

Cash flow from operations was a first quarter record $24,264,000, up from $19,343,000 for the same period in 1999. The record cash flow in the first quarter of 2000 continues the trend the Company experienced during 1999’s record operating cash flow year.

Depreciation and amortization for the first quarter of 2000 totaled $4,477,000 compared to $4,125,000 in the first quarter of 1999. Quarter over quarter increases are primarily due to the previously mentioned acquisitions completed in late 1999.

Cash and cash equivalents equaled $93,577,000 as of April 1, 2000, up $3,828,000 over the balance at year-end 1999 of $89,749,000. This increase reflects strong operating cash flow offset by capital expenditures of $3,075,000, dividend payments of $3,427,000, the repurchase of 559,542 shares of common stock for $13,242,000, and the acquisition of the assets of a small manufacturer of fuel cleansing systems for $1,008,000.

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Management expects that the Company’s planned capital requirements for the remainder of 2000, which consists of capital expenditures, dividend payments and its stock repurchase program will be financed by operations and existing cash balances.

Year 2000

This year 2000 disclosure is the most current information available and replaces all previous disclosures made by the Company in its filings with the Securities and Exchange Commission on Form 10-Q and Form 10-K, and in any previous Annual Report to shareholders.

The Company believes that it has successfully managed the readiness of its systems with respect to the requirements for transaction processing in the Year 2000. The proprietary Company internal system was modified to be Year 2000 compliant in 1997. Review and testing of the modifications was completed during 1998. All modifications were reviewed a final time during 1999. The costs for these modifications were expensed as routine internal programming costs during the period incurred and were not material. No material additional costs were incurred by the Company. Embedded technology in facilities systems and machinery and equipment were inventoried and assessed. Also, in accordance with the Company’s Year 2000 readiness plan, the Company assessed the Year 2000 systems readiness of its customers, vendors and suppliers and developed contingency plans as needed for those who were not expected to be Year 2000 compliant. Any costs for remediation of third party systems issues were borne by those third parties. The Company has experienced no material adverse effects related to the readiness of its systems for the Year 2000. Furthermore, any impact on the financial condition or results of operations for periods presented as a result of the advent of Year 2000 is not material.

Outlook

The Company’s backlog at April 1, 2000 was $119,052,000 compared to $117,621,000 at the end of 1999. This is the first quarterly increase in backlog registered by the Company since the first quarter of 1998. Based upon current business indications, including quoting activity and future business forecasts for Kaydon customers’ end-markets, the Company believes that orders will increase only slightly for the second quarter of 2000, but should rebound during the second half of this year especially in the Fluid Power Products division and the Cooper Bearings subsidiary in the United Kingdom. The actions taken at the Cooper facility and future actions to be completed at the Fluid Power Products division should position these operations to take advantage of the expected rebound in their businesses during the second half of this year. Expected operating cash flows coupled with the Company’s current cash reserves and the Company’s $300,000,000 credit facility will provide substantial resources to fund the Company’s ongoing business development efforts which include internal and

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external growth initiatives as well as selected stock repurchases.

Certain information in this Form 10-Q is forward looking, such as the Company’s expectations regarding future financial performance and business development activity. The Company may not update these expectations to reflect subsequent events. Such forward-looking information involves risks and uncertainties that could significantly affect expected results. These risks and uncertainties include, but are not limited to, uncertainties as to economic conditions, market acceptance of new enhanced versions of the Company’s products, the pricing of raw materials and changes in the competitive environments in which the Company’s businesses operate. Readers are cautioned to consider these factors when relying on such forward-looking information.

Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to certain market risks which exist as part of its ongoing business operations including interest rates and foreign currency exchange rates. The Company believes that the potential effect of these risks in the near term should not materially affect the Company’s financial position.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings. See the discussion in the Notes to Consolidated Condensed Financial Statements.

Item 6. Exhibits and Reports on Form 8-K

	A.      Exhibit No.	Description

	(27)	Financial Data Schedule (for SEC use only)

	B.      Reports on Form 8-K

	No reports on Form 8-K were filed during the quarter ended April 1, 2000.

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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

May 11, 2000		/s/ Brian P. Campbell
		Brian P. Campbell
		Chairman, President, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
May 11, 2000		/s/ Kenneth W. Crawford
		Kenneth W. Crawford Vice President and Corporate Controller (Principal Accounting Officer)

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Exhibit Index