Kaydon Corporation Reports Second Quarter Results; Announces Additional Wind Energy Expansion and Raises Quarterly Cash Dividend 25 Percent

Kaydon Corporation (NYSE:KDN) today announced its results for the second quarter ended June 30, 2007. This year’s second quarter sales increased 10.4 percent to a record $113.4 million. Operating income increased 8.3 percent and diluted earnings per share increased 10.9 percent, to $.61, as compared to last year’s strong second quarter. Second quarter 2007 operating income included additional expenses of $1.5 million related to the Company’s recent leadership transition. Order entry during the quarter of $128.5 million was a second-quarter record, resulting in record quarter-end backlog of $201.5 million, reflecting strength in most of Kaydon’s key end-markets. The Company also announced that its Board of Directors had declared a 25 percent increase in its regular quarterly dividend, to $.15 per share from $.12 per share, and had approved an additional phase in its wind energy expansion. Highlights – Second Quarter 2007 Diluted earnings per share was $.61, versus $.55 last year. Second quarter sales equaled a record $113.4 million, versus $102.7 million during last year’s second quarter. Operating income equaled $28.3 million, or 25.0 percent of sales, compared to $26.2 million, or 25.5 percent of sales, last year. Net income equaled $19.6 million, or 17.3 percent of sales, compared to $17.7 million, or 17.2 percent of sales, last year. Order entry equaled a record $128.5 million, resulting in record quarter-end backlog of $201.5 million versus $161.5 million last year. Cash and cash equivalents equaled $374.1 million at the end of the second quarter. Additional $25 million capital expansion approved to supply the wind energy industry. Quarterly cash dividend increased 25 percent to $0.15 per share. James O’Leary, President and Chief Executive Officer commented, "We are pleased with the strong sales, operating income and orders achieved during the second quarter. Our record order intake during the quarter and resultant $201.5 million backlog position us well for the remainder of 2007. Our strong balance sheet and exceptional liquidity provide the resources to drive internal growth through strategic capital investment while selectively evaluating external opportunities. Our excellent financial position and free cash flow generation will also allow us to prudently return capital to our shareholders in the form of both share repurchases and dividends while driving profitable growth. The actions taken by our Board of Directors to raise the dividend and approve management’s increased capital expenditure program reflects its confidence in the Company’s financial strength and organic growth prospects.” Second Quarter 2007 Results Sales during the second quarter of 2007 equaled a record $113.4 million, a 10.4 percent increase compared to $102.7 million during a strong second quarter of 2006. All of the Company’s reporting segments experienced higher sales volumes. Gross profit equaled $48.0 million or 42.3 percent of sales for the second quarter of 2007 as compared to $43.6 million or 42.5 percent of sales for the second quarter of 2006. Each reporting segment reported sales and operating income above prior year’s levels due to general strength in most of the Company’s end markets. Selling, general, and administrative expenses, including $1.5 million of additional expenses related to the Company’s recent leadership transition, equaled $19.6 million or 17.3 percent of sales during the second quarter of 2007 as compared to $17.4 million or 17.0 percent of sales during the second quarter of 2006. Operating income increased 8.3 percent, to $28.3 million, in the second quarter of 2007, equal to 25.0 percent of sales, compared to $26.2 million, or 25.5 percent of sales, in the second quarter of 2006. Interest income increased to $4.8 million during the second quarter of 2007, compared with $3.9 million during the second quarter of 2006, due to higher average rates earned on higher average cash balances. The effective tax rate during the second quarter of 2007 was 36.1 percent which is expected to carry through the remainder of 2007. The effective tax rate during the second quarter of 2006 was also 36.1 percent. Net income for the second quarter of 2007 was $19.6 million or $.61 per share on a diluted basis, based on 34.8 million common shares outstanding. During the second quarter of 2006 Kaydon generated net income of $17.7 million or $.55 per share on a diluted basis, also based on 34.8 million common shares outstanding. Order entry during the second quarter of 2007 equaled a record $128.5 million. Total orders booked in last year’s second quarter equaled $119.6 million. Backlog equaled $201.5 million at the end of the second quarter 2007, a 24.7 percent increase compared to a backlog of $161.5 million at the end of the second quarter 2006. Net cash flow from operating activities during the second quarter 2007 equaled $19.1 million, or 16.8 percent of sales, compared to second quarter 2006 cash flow from operations of $22.8 million, or 22.3 percent of sales, as higher net income was more than offset by increased working capital, primarily accounts receivable, in the quarter as a result of higher sales volumes. During the second quarter 2007, the Company paid common stock dividends of $3.4 million, repurchased a total of 80,000 shares of Company common stock for $3.9 million, and invested $12.8 million in net capital expenditures. The Company’s cash and cash equivalents equaled $374.1 million at June 30, 2007. Free cash flow, as defined by the Company and a non-GAAP measure, equaled $6.3 million, or 5.6 percent of sales, during the second quarter 2007, as compared to $19.4 million, or 18.9 percent of sales, during the second quarter 2006. Capital expenditures were $9.3 million higher during this year’s second quarter. Free cash flow for the last twelve months ended June 30, 2007 totaled $50.3 million, as the Company made significant investments in certain secular growth markets, as compared to $46.0 million in the prior year’s comparable period. Readers should refer to the attached Reconciliation of Non-GAAP Measures exhibit for the calculation of free cash flow and the reconciliation of free cash flow to the most comparable GAAP measure. EBITDA, as defined by the Company and a non-GAAP measure, equaled $34.6 million, or 30.5 percent of sales, during the second quarter 2007, as compared to $30.6 million, or 29.8 percent of sales, during the second quarter 2006. Readers should refer to the attached Reconciliation of Non-GAAP Measures exhibit for the calculation of EBITDA and the reconciliation of EBITDA to the most comparable GAAP measure. Year to date 2007 Results Sales during the first half of 2007 increased $16.1 million, or 7.9 percent, to $220.3 million compared with the first half of 2006. First half operating income increased $4.8 million, or 9.7 percent, to $54.6 million. First half net income and diluted earnings per share were up 10.4 percent and 9.3 percent, respectively, compared with the first half of 2006. Segment Discussion During the second quarter of 2007, sales of the Friction and Motion Control Products segment increased $4.3 million or 7.1 percent, to $65.0 million, when compared with second quarter 2006. Sales of the Company’s split roller bearing products had a strong increase during the quarter, as recent growth in targeted international markets continued. This segment was also positively affected by increased demand for specialty bearings utilized in military, machinery, and heavy equipment markets, including the wind energy market. Second quarter 2007 operating income, impacted by the shift in product mix driven by the growth in the lower, but still high, margin split roller bearings business, increased 4.5 percent, to $18.6 million. Second quarter 2007 sales of the Velocity Control Products segment, of $16.2 million, increased 13.2 percent over the prior second quarter with continued strong demand from our distribution facility in Germany. Operating income of $4.2 million increased 28.3 percent over second quarter 2006, primarily as the result of the operating leverage experienced on the higher sales. Sales of the Sealing Products segment increased 6.4 percent, to $11.5 million, compared with last year’s second quarter sales of $10.8 million. Operating income grew 13.8 percent to $2.0 million, driven by both higher sales and cost efficiencies. Sales of the Company’s remaining businesses equaled $20.8 million during the second quarter of 2007, an increase from second quarter 2006 of $3.8 million or 22.7 percent. Sales of air and liquid filtration products were particularly strong. Operating income increased due to higher sales volume, efficiencies from the 2006 consolidation of our liquid filtration business, and the absence of certain duplicative costs and manufacturing inefficiencies experienced during that 2006 consolidation. Wind Energy Expansion The Company also announced that its Board had approved an additional phase of major capital expansion to supply the rapidly growing wind energy industry. This expansion, together with its previously announced expansion will provide Kaydon with substantially increased manufacturing capabilities to satisfy the rapidly growing wind turbine business. This phase will entail additional capital expenditures of approximately $25 million over the next 18 months to meet wind turbine manufacturers’ requirements for advanced custom bearing assemblies up to 11 feet in diameter for new, larger wind turbines up to 3 megawatts capacity. The Company’s total investment in these expansion programs will be approximately $78 million when completed. For calendar 2007, Kaydon now expects total capital expenditures to approximate $56 million as compared to $26.3 million in 2006. Increased Cash Dividend Kaydon Corporation today announced that its Board of Directors declared a 25 percent increase in its regular quarterly dividend, to $.15 per share from $.12 per share. The dividend is payable on October 1, 2007 to shareholders of record as of the close of business on September 10, 2007. The indicated annual dividend rate will now be $.60 per share for the upcoming year. The Company expects to periodically reevaluate the cash dividend in future periods and will consider its future earnings and cash flow, on-going capital needs, and alternatives for shareholder returns when determining the actual amount of future dividends. About Kaydon Kaydon Corporation is a leading designer and manufacturer of custom-engineered, performance-critical products, supplying a broad and diverse group of industrial, aerospace, medical and electronic equipment, alternative-energy, and aftermarket customers. Conference call information: At 11:00 a.m. Eastern time today, Kaydon will host a second quarter 2007 earnings conference call. The conference call can be accessed telephonically in a listen-only mode by dialing 1-800-500-0920 and providing the following passcode number: 800500. Participants are asked to dial in 10 minutes prior to the scheduled start time of the call. Alternatively, interested parties are invited to listen to the conference call on the Internet at: http://www.vcall.com/IC/CEPage.asp?ID=118936 or by logging on to the Kaydon Corporation website at: http://www.kaydon.com and accessing the conference call at the "Second Quarter 2007 Conference Call” icon. To accommodate those that are unable to listen at the scheduled start time, a replay of the conference call will be available telephonically beginning at 1:30 p.m. Eastern time today through Friday, August 3, 2007 at 11:59 p.m. Eastern time. The replay is accessible by dialing 1-888-203-1112 and providing the following passcode number: 4919777. Additionally, interested parties can access an archive of the conference call on the Kaydon Corporation website at http://www.kaydon.com. This press release contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 regarding the Company’s plans, expectations, estimates and beliefs. Forward-looking statements are typically identified by words such as "believes,” "anticipates,” "estimates,” "expects,” "intends,” "will,” "may,” "could,” "potential,” "projects,” "approximately,” and other similar expressions, including statements regarding pending litigation, general economic conditions, competitive dynamics and the adequacy of capital resources. These forward-looking statements may include, among other things, projections of the Company’s financial performance, anticipated growth, characterization of and the Company’s ability to control contingent liabilities, and anticipated trends in the Company’s businesses. These statements are only predictions, based on the Company’s current expectation about future events. Although the Company believes the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, performance or achievements or that predictions or current expectations will be accurate. These forward-looking statements involve risks and uncertainties that could cause the Company’s actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. In addition, the Company or persons acting on its behalf may from time to time publish or communicate other items that could also be construed to be forward-looking statements. Statements of this sort are or will be based on the Company’s estimates, assumptions, and projections and are subject to risks and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. Kaydon does not undertake any responsibility to update its forward-looking statements or risk factors to reflect future events or circumstances. Certain non-GAAP measures are presented in this press release. These measures should be viewed as supplemental data, rather than as substitutes or alternatives to the most comparable GAAP measures. KAYDON CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME                     Second Quarter Ended First Half Ended   June 30, July 1, June 30, July 1, 2007   2006   2007   2006   Net sales $113,391,000 $102,664,000 $220,288,000 $204,169,000   Cost of sales 65,423,000   59,067,000   127,482,000   119,029,000     Gross profit 47,968,000 43,597,000 92,806,000 85,140,000   Selling, general, and administrative expenses 19,619,000   17,430,000   38,166,000   35,345,000     Operating income 28,349,000 26,167,000 54,640,000 49,795,000   Interest expense (2,365,000 ) (2,388,000 ) (4,752,000 ) (4,799,000 )   Interest income 4,756,000   3,927,000   9,381,000   7,323,000     Income before income taxes 30,740,000 27,706,000 59,269,000 52,319,000   Provision for income taxes 11,097,000   10,002,000   21,396,000   18,026,000     Net income $ 19,643,000   $ 17,704,000   $ 37,873,000   $ 34,293,000           Weighted average common shares outstanding Basic 27,832,000 27,836,000 27,853,000 27,840,000 Diluted 34,789,000 34,773,000 34,807,000 34,779,000   Earnings per share Basic $0.71   $0.64   $1.36   $1.23   Diluted $0.61   $0.55   $1.17   $1.07       Dividends declared per share $0.12   $0.12   $0.24   $0.24   KAYDON CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION             June 30, December 31, 2007 2006 Assets: Cash and cash equivalents $374,142,000 $370,789,000 Accounts receivable, net 64,147,000 54,066,000 Inventories, net 62,964,000 56,043,000 Other current assets 11,809,000 17,012,000   Total current assets 513,062,000 497,910,000     Property, plant and equipment, net 109,891,000 95,280,000   Goodwill, net 119,938,000 119,484,000 Other intangible assets, net 19,787,000 21,271,000 Other assets 2,871,000 3,611,000   Total assets $765,549,000 $737,556,000     Liabilities and Shareholders' Equity:   Accounts payable $ 21,534,000 $ 23,044,000 Accrued expenses 28,903,000 28,588,000 Total current liabilities 50,437,000 51,632,000   Long-term debt 200,000,000 200,000,000 Long-term liabilities 53,058,000 52,744,000 Total long-term liabilities 253,058,000 252,744,000   Shareholders' equity 462,054,000 433,180,000   Total liabilities and shareholders' equity $765,549,000 $737,556,000 KAYDON CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS                     Second Quarter Ended First Half Ended   June 30, July 1, June 30, July 1, 2007   2006   2007   2006   Cash flows from operating activities: Net income $ 19,643,000 $ 17,704,000 $ 37,873,000 $ 34,293,000 Adjustments to reconcile net income to net cash from operating activities: Depreciation 2,936,000 2,827,000 5,746,000 5,693,000 Amortization of intangible assets 745,000 769,000 1,514,000 1,538,000 Amortization of stock awards 2,332,000 806,000 3,204,000 1,593,000 Stock option compensation expense 242,000 80,000 270,000 216,000 Excess tax benefit from stock-based compensation (93,000 ) (85,000 ) (157,000 ) (547,000 ) Deferred financing fees 387,000 387,000 774,000 774,000   Net change in receivables, inventories and trade payables (4,508,000 ) 3,600,000 (18,219,000 ) (9,674,000 ) Net change in other assets and liabilities (2,590,000 ) (3,242,000 ) 6,207,000   4,012,000     Net cash from operating activities 19,094,000 22,846,000 37,212,000 37,898,000   Cash flows used in investing activities: Additions to property, plant and equipment, net (12,796,000 ) (3,474,000 ) (20,180,000 ) (7,580,000 )           Net cash used in investing activities (12,796,000 ) (3,474,000 ) (20,180,000 ) (7,580,000 )   Cash flows from (used in) financing activities: Cash dividends paid (3,381,000 ) (3,384,000 ) (6,763,000 ) (6,762,000 ) Payments on debt - (16,000 ) - (32,000 ) Excess tax benefit from stock-based compensation 93,000 85,000 157,000 547,000 Proceeds from exercise of stock options 75,000 201,000 75,000 1,003,000 Purchase of treasury stock (3,947,000 ) (1,077,000 ) (7,186,000 ) (3,404,000 )   Net cash used in financing activities (7,160,000 ) (4,191,000 ) (13,717,000 ) (8,648,000 )     Effect of exchange rate changes on cash and cash equivalents (160,000 ) 575,000   38,000   864,000     Net increase (decrease) in cash and cash equivalents (1,022,000 ) 15,756,000 3,353,000 22,534,000   Cash and cash equivalents - Beginning of period 375,164,000   327,582,000   370,789,000   320,804,000     Cash and cash equivalents - End of period $374,142,000   $343,338,000   $374,142,000   $343,338,000   KAYDON CORPORATION Reportable Segment Information (Amounts in thousands)   Second Quarter Ended First Half Ended   June 30, July 1, June 30, July 1, Net sales 2007   2006   2007   2006     Friction and Motion Control Products External customers $64,899 $60,615 $125,529 $117,677 Intersegment 57   32   114   63   64,956 60,647 125,643 117,740   Velocity Control Products External customers 16,156 14,278 31,825 28,796   Sealing Products External customers 11,520 10,808 23,553 21,643 Intersegment (39 ) (18 ) (79 ) (41 ) 11,481 10,790 23,474 21,602   Other External customers 20,816 16,963 39,381 36,053 Intersegment (18 ) (14 ) (35 ) (22 ) 20,798 16,949 39,346 36,031     Total consolidated net sales $113,391   $102,664   $220,288   $204,169     Second Quarter Ended First Half Ended   June 30, July 1, June 30, July 1, Operating income 2007   2006   2007   2006     Friction and Motion Control Products $18,581 $17,785 $34,921 $33,704 Velocity Control Products 4,221 3,291 8,314 6,983 Sealing Products 1,975 1,735 4,431 2,735 Other 3,210   1,539   5,818   3,458   Total segment operating income 27,987 24,350 53,484 46,880   State income tax provision included in segment operating income 822 800 1,565 1,511 Items not allocated to segment operating income (460 ) 1,017 (409 ) 1,404 Interest expense (2,365 ) (2,388 ) (4,752 ) (4,799 ) Interest income 4,756   3,927   9,381   7,323     Income before income taxes $30,740   $27,706   $59,269   $52,319   Kaydon Corporation Reconciliation of Non-GAAP Measures (Amounts in Thousands)   Free cash flow, as defined (non-GAAP) Second Quarter Ended First Half Ended LTM   June 30, July 1, June 30, July 1, June 30, July 1, 2007 2006 2007 2006 2007 2006 Net cash from operating activities (GAAP) $ 19,094 $ 22,846 $ 37,212 $ 37,898 $ 89,174 $ 60,972 Capital expenditures (12,796 ) (3,474 ) (20,180 ) (7,580 ) (38,894 ) (14,925 )   Free cash flow, as defined (non-GAAP) $ 6,298   $ 19,372   $ 17,032   $ 30,318   $ 50,280   $ 46,047         Kaydon's management believes free cash flow, as defined above and a non-GAAP liquidity measure, is an important indicator of the Company's ability to generate excess cash above levels required for capital investment to support future growth. However, it should be viewed as supplemental data, rather than as a substitute or alternative to the comparable GAAP measure.       EBITDA, as defined (non-GAAP) Second Quarter Ended First Half Ended LTM   June 30, July 1, June 30, July 1, June 30, July 1, 2007 2006 2007 2006 2007 2006 Cash flow from operating activities (GAAP) $ 19,094 $ 22,846 $ 37,212 $ 37,898 $ 89,174 $ 60,972 Net change in receivables, inventories and trade payables 4,508 (3,600 ) 18,219 9,674 9,804 5,593 Net change in other assets and liabilities 2,590 3,242 (6,207 ) (4,012 ) (5,181 ) 12,090 Other, net (294 ) (382 ) (645 ) (443 ) (1,401 ) (1,217 ) Net interest (income) /expense (2,391 ) (1,539 ) (4,629 ) (2,524 ) (8,804 ) (3,246 ) Income tax expense 11,097   10,002   21,396   18,026   39,241   29,645     EBITDA, as defined (non-GAAP) $ 34,604   $ 30,569   $ 65,346   $ 58,619   $ 122,833   $ 103,837         Kaydon's management believes EBITDA, as defined above and a non-GAAP liquidity measure, is a determinant of the Company's capacity to incur additional senior capital to enhance future profit growth and cash flow growth. In addition, EBITDA is widely used by financial analysts and investors, and is utilized in measuring compliance with financial covenants in the Company's credit agreement. Also, EBITDA is the metric used to determine payments under the Company's annual incentive compensation program for senior managers. However, EBITDA, as defined, should be viewed as supplemental data, rather than as a substitute or alternative to the comparable GAAP measure.