kdn report

BABSON COLLEGE FUND

BCF - KDN 1/20

11/18/08

Rating: BUY Price Target: $30.85

Close 19-Nov-2008

Price $24.89

Shares Outstanding (mm) 34

Market Cap (mm) $900

Source: Capital IQ

Basic Information

Beta 1.4

Dividend Yield 2.8%

Diluted EPS (ttm) $2.36

Long Term EPS Growth 15%

Cash per share $7.69

LT Debt to Total Capital 0%

% of S&P 500 0%

% of Benchmark (IYJ) 0.07%

Book Value per share $21.25

ttm as of Sept. 2008

Source: Capital IQ, Northfield

Company Overview

Kaydon is a designer and

manufacturer of custom-

engineered, performance-critical

products serving many different

customers. Its three main

segments produce friction control

products, such as specialty

bearings; velocity control products,

such as industrial shock absorbers;

and sealing products, such as

engine rings.

Source: Capital IQ

Analysts

Eric S. Crawley

Kaydon Corp. (KDN) Industry: Specialty Bearings

FY06(A) FY07(A) 1Q08(A) 2Q08(A) 3Q08(A) 4Q08(E) FY08(E) FY09(E)

Sales (mm) 403,992 451,382 123,284 139,905 126,803 136,102 526,094 575,005

Rev. Growth 13.9% 11.7% 15.3% 23.4% 18.1% 10.0% 16.6% 9.3%

EBITDA Margin 28.7% 29.2% 25.7% 26.9% 23.9% 24.0% 25.1% 23.9%

ROA 8.2% 8.5% 8.9% 8.7%

ROE 14.0% 13.8% 10.0% 9.9%

Consensus EPS 2.17$ 2.41$ 0.52$ 0.63$ 0.50$ 0.53$ 2.20$ 2.11$

BCF Est. EPS 2.17$ 2.41$ 0.52$ 0.63$ 0.50$ 0.52$ 2.18$ 2.17$

Price/Earnings 11.5X 10.3X 10.5X 10.4X 10.6X 11.4X 11.4X 11.5X

Price/Sales 2.1X 1.9X 1.8X 1.7X 1.7X 1.6X 1.6X 1.5X

Price/Book 2.0X 1.8X 1.2X 1.1X

FY End: Dec 31

Investment Thesis

Kaydon is a major player in the rapidly growing wind power generation

market; however, the stock is currently not illustrating any of that business’s

potential upside. We believe the company’s end markets are more stable

than what is currently being discounted by the market. Moreover, Kaydon’s

lack of debt and almost $8 per share in cash on the balance sheet represent

the possibility of substantial short-term catalysts.

Investment Outlook and Valuation

We rate KDN a BUY. Shares currently trade at about 4.7X trailing EV/EBITDA

which marks a new valuation trough for KDN; it had bottomed out in the

last two recessions at slightly lower than 6.0X trailing EV/EBITDA. Our price

target of $30.85 represents about 6.0X 2008 EV/EBITDA. Even though

Kaydon is caught in a cyclical downturn, it should trade no lower than past

lows given its presence in the wind market which was not as large of a

percentage of its business in the past.

Risks to Outlook

Disappearance of Federal Funds – a strong driver of wind capacity

production is the Production Tax Credit (PTC) which is authorized by

Congress. Should this credit disappear, future wind capacity, and KDN, will

be harmed.

Acquisition Risk – Kaydon recently made its largest acquisition in the last

seven years and is poised to make another large one. If the company is

unable to assimilate acquisitions efficiently, or spends its money unwisely,

Kaydon’s returns could be smaller in the future.

BABSON COLLEGE FUND Kaydon Corp. (KDN)

BCF - KDN 2/20

11/18/08

RECENT FINANCIAL PERFORMANCE

Kaydon does not give formal guidance so the few analysts that cover the stock, about seven, have a hard time

predicting how the company will perform on a quarter-to-quarter basis. For example, on the past earnings

release, KDN missed the street by about $0.10 and shares soared more than 30% over the next week. The habit

of the Street and its treatment of KDN is characterized by ratcheting up estimates as the company beats, and

then cutting them sharply should the company disappoint. This is happening currently, as 2008 earnings

estimates had gone from about $3 to about $2 as the year has progressed, creating a lower hurdle.

Outside of that, Kaydon has been posting relatively solid numbers amid an increasingly weakening environment.

The company recorded about a 13% organic increase in sales for the quarter, though the 2007 comp was an easy

one. Still, anything positive in today’s economic backdrop is encouraging. The reason why net income has been

relatively stable is the company’s exposure to the wind power generation market. Sales to this industry are

expected to be about $90 million in 2008, up from about $32.8 million in 2007. They are expected to reach $140

million in 2009. These revenues, about 20% of total, are so far offsetting the company’s weaker end markets.

One drastic change throughout the past few quarters is the company’s decrease in interest income from over $4

million last year, to about $1.5 million this year in each quarter. This is mainly due to the effective interest rate

on their cash at 2.2%, down from over 5% last year. Though this decrease in interest income depressed earnings

by about $0.06 from last quarter, it is positive to see the company is not chasing unsafe yields. Cash currently

represents about $7.69 per share on the balance sheet and it is doubtful the company will remain content with

earning 2.2% on it for long. Kaydon’s acquisition strategy has been to minimize debt, accumulate cash, and then

buy something struggling. Kaydon now has no debt, plenty of cash, and there are struggling companies aplenty.

Capital expenditures appear to be a tailwind for cash generation going forward. The winning servants of the

wind power generation market will not be technology leaders. Especially in windmills, the technology has been

around for quite some time. The winners will therefore have the capacity to serve the growth. Kaydon has

ramped up capital expenditures over the past three years from $12 to $70 million in order to create capacity.

The company has signaled that this is coming to an end, and capex could trail down to maintenance levels of

about $20 to $30 million over the next couple years. Certainly, an extra $50 million annually would be

beneficial.

Finally, the company completed the redemption of the remainder of its long-term debt on September 21, 2008.

Kaydon had issued $200 million of contingent-convertible bonds due 2023. All notes were converted to about

6.8 million shares. However, these shares were already included in the company’s diluted share count, so no

assumptions need to be changed going forward about the diluted share count.


BCF - KDN 3/20

11/18/08

YTD KDN price performance

Source: BigCharts.com

One year return of KDN vs. iShares Dow Jones US INDUSTRIAL ETF (IYJ), and S&P 500

Source: BigCharts.com


BCF - KDN 4/20

11/18/08

INVESTMENT OUTLOOK AND VALUATION

Cyclical Business

The company’s main products are specialized bearings. This is a highly cyclical business. Earnings compressed in

both the early 90’s and 00’s, and are expected to contract again in 2008 and 2009. This time around, however,

they are estimated to be buffeted by demand for the company’s wind related products, mainly large diameter

bearings. The wind power generation industry will be explained below in greater detail, but it is driven by

government subsidies. Another end market, defense and aerospace, is also deemed relatively stable through

the cycles as it is mainly paid for by the government as well. These markets represent about 40% of Kaydon’s

revenue footprint. The US government is certainly not infinitely rich, but it has deeper pockets than many of

Kaydon’s competitors’ other end markets, such as automotive and commercial aerospace.

Short-term Catalysts

Kaydon’s recommendation does not hinge on an acquisition it will make, but it is useful to note that the

company’s powder keg is full and primed. Kaydon’s largest acquisition to date was Ace Controls in 2001 for

$70.6 million when Kaydon had no debt and the industry was in recession. We currently find ourselves in the

same situation and KDN now has double the cash on its balance sheet as well.

Valuation

Kaydon is valued mainly on an EV/EBITDA basis. This is logical as the company’s production is highly capital

intensive, and there is a fair amount of non-cash charges like depreciation each year that skew the true measure

of Kaydon’s operations. 2008 depreciation is expected to be about $22 million, almost 25% of CFO.


BCF - KDN 5/20

11/18/08

RISKS TO INVESTMENT

The future is not automatically bright for

Kaydon, however. There are a few risks that

could seriously compromise the investment

thesis. They include:

Disappearance of Federal Funds – A strong

motivation to invest in wind power is a

current power generation subsidy that the

government offers under the Production Tax

Credit (PTC). The PTC was enacted in 1992

and has since gone through many short-term

extensions. It was most recently extended in

October 2008 by Congress and allows for a

2.1c income tax credit per kilowatt hour

generated by a wind turbine. The total

earmark in 2007 was $2.5 - $3 billion. Although the PTC has only been allowed to lapse for three individual

years since inception in 1992, the year after each lapse proved detrimental for the wind power generation

industry and its suppliers. The PTC is up for expiration again December 31, 2009 and there is no guarantee is will

be extended.

Acquisition Risk – Although Kaydon can generate organic growth, it also relies on acquisitions to drive the top

line. The company has made a series of bolt-on acquisitions over time and once in a while it levers up to

purchase something large. Below is a history of the company’s acquisitions with price paid in millions.

Kaydon Corp

Acquisitions

2007 Avon Bearings 55.0 10/28/07 Wide-dimameter bearings

2005 Purafil 42.7 1/7/05 Filtration company

2002 Printed Circuit 4.4 5/17/02 Printed circuit boards and fexible printed tapes

2001 ACE Controls 70.6 3/1/01 Linear decleration products

2000 Tridan Group 46.6 8/28/00 Specialty production AC equipment; Alloy manufacturer

1999 Focal Technologies 8.8 Q4'99 Fiber-optic and fluid transmission devices

Filterdyne 5.0 Q4'99 Filtration and vacuum distillation systems

1997 Gold Star 4.5 3/11/97 Custom designed cylinders

Great Bend 22.9 5/29/97 Custom designed cylinders

1996 Benton Harbor 10.7 2/1/96 Hydraulic cylinders and fluid power components

1995 Seabee 22.7 8/31/95 Large hydraulic cylinders and alloy steel castings

1994 Industrial Tectonics 7.3 1/28/94 Specialty balls

Most acquisitions do not meet the buyer’s expectations, and as Kaydon grows, it must make more small

acquisitions or considerably larger ones, in order to move the dial. Another risk is the double-edged nature of

Kaydon’s success. It has the highest gross margin of its peers. It prides itself with entering only businesses

where others find it too difficult to operate. As time goes by and the company grows, these opportunities

appear less frequently, and the risk rises that Kaydon will acquire something unwise.


BCF - KDN 6/20

11/18/08

BUSINESS DESCRIPTION

Kaydon is a designer and manufacturer of custom-

engineered, performance-critical products serving many

different customers. About 70% of sales are domestic. Its

three main segments produce friction control products,

velocity control products, and sealing products.

Friction Control Products – These are the most identifiable

products with Kaydon. They include specialty bearings for

many end markets, and include products like anti-friction

bearings, split roller bearings, and specialty balls.

Velocity Control Products – Products include industrial shock

absorbers (like what lies at the end of a metro line), safety

shock absorbers, gas springs, and rotary dampers.

Sealing Products – These are mostly for the aerospace and defense markets and include products like standard

ring and seal products.

Other businesses include gas filtration systems, machine tool components, dies, presses, and benders.

Kaydon benefits from a diverse customer base in many different industries. The smaller end markets, along with

the catch-all, General Industrial, have been the most negatively affected by the current economic downturn

while the Defense and Power Generation markets have been the most stable. The defense market is actually

where Kaydon initially made a name for itself as a mission-critical, custom manufacturer. In 1941 it began

making the bearing housings for different rotating deck guns for the US Navy. Since then it has expanded into

providing bearings for tank turrets and helicopters, but the largest piece of its current defense business is for the

HMMWV and its successor, the MRAP.

This is notable because the Mine Resistant Ambush

Protected (MRAP) vehicle has been instrumental in saving

US soldiers’ lives in Iraq and in Afghanistan. In June 2008,

USA Today noted that roadside bomb attacks and

fatalities were down almost 90%, partially due to the

added protection of the MRAP on patrol instead of the

traditional or up-armored Humvee. Given this vehicle’s

success in saving lives, it is unlikely the current orders will

be trimmed due to potential military spending cutbacks.


BCF - KDN 7/20

11/18/08

INDUSTRY DYNAMICS AND COMPETITION

The ball bearing was invented by Leonardo da Vinci and throughout time has become something of a

commodity. Kaydon has found success, however, not in what it makes, but rather where the company applies it.

In short, Kaydon does not like competition. It would rather fill all the orders of a smaller run than just a few of a

larger run.

There are two ways to compete with a commodity product: be the low-price, high-volume player, or the high-

price, custom player. Kaydon has found itself in the latter niche. For example, two larger companies, SKR ($3

billion market cap) and Timkin ($1 billion market cap) have much lower EBITDA margins. SKR returns 15.5% and

Timkin returns 14%. This compares to Kaydon’s 24% EBITDA margin in Q3’08. A major driver of this is that the

two larger companies compete heavily in the automotive and commercial aerospace markets which are more

highly competitive. Kaydon has been able to string together enough niche applications that it can generate

strong cash flow and returns on a larger basis.

In this sense, the wind power generation market is

a logical fit for Kaydon. There is no standard size

for wind turbines, and it becomes more difficult to

build stable bearings in larger applications. KDN’s

last acquisition, Avon, specializes in this

application, and can build bearings 240 inches in

diameter. This fits the custom-engineered part of

Kaydon’s strategy. Wind turbines are also mission

critical. The larger towers are 80 meters tall and

the last thing an owner of a wind farm needs is to

be clambering up them in order to un-jam a rotor.

Less friction equals more revolutions which equals

more energy production. These parts cannot fail.

20% by 2030

There is a goal floating around Congress that the country should be producing 20% of its energy needs via

renewable power by 2030. The PTC was enacted to encourage this goal. An interesting feature of this mandate

is that it is state controlled, not federal. So some states like Oregon have a target of 25%, and Massachusetts

has set a target of 4%. According to Dr. James Walker, the current president of the American Wind Energy

Association, only about 1.5% of our nation’s energy needs are generated by wind power, but capacity is growing

quickly. There is a current wind installed base of 18k megawatts. Four years ago there was 6k.

At the moment, a kilowatt of wind power is the cheapest type of alternative energy to create. Hydro is

hampered by location, and solar is coming down in price quickly, but there still needs to be technological

advances before it is more competitive than wind power.


BCF - KDN 8/20

11/18/08

VALUATION

Discounted Cash Flow Analysis

Kaydon Discounted Cash Flow

Year 2008 2009 2010 2011 2012 2013 Operating Income 110,301 113,699 131,310 152,727 189,611 233,828 Income Tax Expense 38,350 39,795 45,959 53,454 66,364 81,840 EBIAT 71,951 73,904 85,352 99,273 123,247 151,988

Depreciation 22,000 24,000 26,000 27,300 28,665 30,098

Capex 70,000 40,000 30,000 30,600 31,212 31,836

Change in WC 3,078 14,582 10,649 9,584 9,105 9,105

FCF to Enterprise 20,873 43,322 70,703 86,389 111,595 141,145

Terminal Value 1,425,290

FCF to Enterprise 20,873 43,322 70,703 86,389 111,595 1,566,436

NPV 958,082

Less Debt 0

Shareholders' Equity 958,082

Shares Out 34,165

Value per Share $28.04

Assumptions

Year 2008 2009 2010 2011 2012 2013

Op. Inc. Growth 3.08% 15.49% 16.31% 24.15% 23.32%

Tax Rate 35.00% 35.00% 35.00% 35.00% 35.00%

Net Income 4.11% 15.49% 16.31% 24.15% 23.32%

Depreciation 9.09% 8.33% 5.00% 5.00% 5.00%

Capex -42.86% -25.00% 2.00% 2.00% 2.00%

Change in WC 373.76% -26.97% -10.00% -5.00% 0.00%

g 3.00%

Beta 1.4

Risk Free Rate 3.40%

Market Risk Premium 7.00%

Cost of Capital 13.20%

The discounted cash flow yields a price of $28.04. The driving assumptions behind this model are that wind

revenues will continue to be strong and offset the drop off of Kaydon’s other businesses until they pick up again

a couple years out. Also, capital expenditures are set to drop off to near maintenance levels over the next five

years as management has prescribed. Note that KDN’s cost of capital, 13.2% is relatively high due to the fact

that it has no debt. None of the aforementioned catalysts are modeled in, so this could be considered a base

case scenario. If the company decided to make an acquisition, buy back stock, or lever up for an intelligent

reason, the implied share price could be considerably higher.


BCF - KDN 9/20

11/18/08

Peer Group Analysis

Kaydon Comparison of Peers DuPont Drivers 11/19/2008

Return Asset Leverage LTM LTM

Company Market Cap

LTM GM Debt/Cap on Sales Turnover A / E ROA ROE EV/EBITDA P/E

Emerson Electric (EMR) 25,404 36.8% 33.1% 16.5% 1.2X 2.31 19.8% 45.7% 5.9X 10.5X

Franklin Electric (FELE) 737 30.1% 33.3% 10.9% 1.1X 1.85 12.0% 22.2% 8.3X 16.1X

Kennametal (KMT) 1,220 33.8% 24.5% 11.1% 1.0X 1.83 11.1% 20.3% 4.1X 7.7X

RBC Bearings (ROLL) 412 33.6% 17.4% 18.6% 1.1X 1.45 20.5% 29.7% 5.8X 9.8X

Mean 6,943 33.6% 27.1% 14.3% 1.1X 1.86 15.8% 29.5% 6.0X 11.0X

Kaydon (KDN) 900 37.8% 0.0% 22.4% 0.7X 1.13 15.7% 17.7% 4.7X 11.9X

Implied Valuation

Current Price $25.00

Forward EBITDA 137,699

Current EV / EBITDA 4.7X

Mean Multiple 6.0X

Forward EBITDA 137,699

Implied Price $31.75

The above peer group was chosen for the following reasons. Emerson Electric is much larger than Kaydon, but it

is known as a premiere engineered products company and at a level where Kaydon could reach some day.

Franklin Electric manufactures mission critical, submersible pumps. Kennametal manufactures customized tools

and dies. RBC is in the bearings market, but in the more mainstream markets.

The implied value of Kaydon from its peers is $31.75. We feel KDN should be valued at least at 6.0X EV/EBITDA

because KDN has higher gross and operating margins than its peers, generates a comparable return on assets,

and does this with no debt. Yet, the company trades at a discount.


BCF - KDN 10/20

11/18/08

Price Target

Valuation Method Price Weight

DCF 28.04 40%

Comp Co 31.75 30%

Historical Multiple 33.68 30%

Price Target 30.85

Historical Multiple Analysis

Kaydon is valued primarily on an

EV/EBITDA basis. To the right is a graph

of the stock’s historical multiple

performance. The graph demonstrates

the effect of three recessions on the

company’s multiple: around 1993, 2000,

and 2008. EV/EBITDA appears to bottom

out at just below 6.0X trailing EV/EBITDA.

At $24.89, shares trade at about 4.7X

trailing EV/EBITDA which represents a new multiple trough. This is reasonable as today’s economic environment

seems more uncertain than in the early 90’s or even after September 11th. The past does not always predict the

future, but this graph states that shares of KDN are trading at about where they should be when the economy is

in a recession. We believe, however, it does not take into account the potential upside from wind revenues

going forward.

Implied Valuation

Each of the three valuations contains certain strengths and weaknesses. To derive a final price target, we feel it

prudent to take a weighted average of each output. Given this method, we propose a 12-month price target of

$30.85. This represents about 6.0X trailing EV/EBITDA. Since

Kaydon generates stable cash flow, even in recessionary

environments, we thought it appropriate to weight the DCF the

heaviest. However, it does not take into account potential

catalysts of making an acquisition or buying back stocks. The

comparison of peers is valuable, but the definition of a niche business is one that is not mainstream, and since

Kaydon is a collection of them, finding the correct companies for comparison is challenging. We feel as though

Kaydon’s current valuation relative to its history represents a bargain, but today’s economic environment

appears more uncertain, so present and future recessions may not necessarily mirror past economic

contractions. Therefore, we feel the above blend is a reasonable combination of valuation methodologies.


BCF - KDN 11/20

11/18/08

WALL STREET ANALYST RECOMMENDATION TRENDS

Management does not give formal guidance, so Kaydon’s analyst core (about seven) tends to raise expectations

until the company misses, then sharply reel them in. This situation is playing out now.

The bar graph above illustrates Kaydon beating expectations throughout the year until it sorely missed this past

quarter. Analysts have moved swiftly to take in expectations for about $3 EPS in 2009 to about $2. Analysts

remain generally bullish, however.


BCF - KDN 12/20

11/18/08

MANAGEMENT AND MAJOR SHAREHOLDERS

Management Bios

The current President and CEO of Kaydon is James O’Leary (45). He was appointed by the Board in March of

2007 and has been a director of the company since 2005. Before Kaydon, he was the CFO of Beazer, a top-10

public homebuilder in the southeastern US from 2002 – 2005. His prior work experience is in the industrial

space. He has been the champion of ramping up capacity for the wind market over the past two years.

O’Leary took over for Brian Campbell who retired from Kaydon after 10 years at the helm at 66. He was the

company’s Chairman, CEO, and CFO. Some have speculated that he was forced out because he did not want to

give up his role as CFO. 66 does not seem that old for someone so involved in the company, but it is not

necessarily a young ago to retire either. In any case, his departure was unexpected and speculation because of

this is natural.

We believe Kaydon’s current management team to be solid but nothing groundbreaking. O’Leary does not have

a magnificent track record, but that does not mean he cannot create one at Kaydon.

Major Shareholders


BCF - KDN 13/20

11/18/08

Analyst Certification

The analysts on the cover of this report certify that all of the views expressed in this report accurately reflect

their personal views about all the subject matter inside and that all assumptions were made with the highest

level of due diligence possible.

Explanation of Equity Research Ratings

The Babson College Fund uses the following rating system:

Buy – The stock is expected to outperform its sector over the next 12 months by more than 10%.

Hold – The stock is expected to perform no more or less than 10% of it sector over the next 12 months.

Sell – The stock is expected to underperform its sector over the next 12 months by more than 10%.

The sector benchmark is IYJ for the Industrial sector.

The Babson College Fund Portfolio Managers equity research rating distribution as of 11/18/08:

Buy Hold Sell

100% 0% 0%

References

1. BCF Estimates

2. Company website – www.kaydon.com

3. Company SEC filings

4. Earnings calls

5. Thomson ONE Banker

6. Capital IQ

7. BigCharts.com

8. Northfield


BCF - KDN 14/20

11/18/08

APPENDIX - SUPPORTING ANALYSIS

Consolidated Statements of Income

Kaydon Corp

Income Statement

2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E

Sales 285,603 279,410 294,092 333,811 354,558 403,992 451,382 526,094 575,005 632,505

COGS 185,758 184,061 188,508 204,668 215,528 236,566 267,082 332,435 367,986 395,316

Gross Profit 99,845 95,349 105,584 129,143 139,030 167,426 184,300 193,659 207,019 237,189

SG&A 54,348 49,493 49,862 63,606 68,854 68,746 73,037 83,357 93,320 105,879

Operating Income 45,497 45,856 55,722 65,537 70,176 98,680 111,263 110,301 113,699 131,310

EBITDA 60,927 59,581 69,588 80,201 86,689 116,106 131,892 132,301 137,699 157,310

Interest expense 4,968 1,885 6,289 9,589 9,579 9,554 9,552 7,662 6,000 6,000

Interest income 4,676 2,695 2,493 3,987 8,747 16,253 18,051 6,698 6,000 6,000

Pretax Income 45,205 46,666 51,926 59,935 69,344 105,379 119,762 109,337 113,699 131,310

Taxes 16,725 16,380 18,174 21,577 22,814 35,871 42,055 38,350 39,795 45,959

Tax rate 37.0% 35.1% 35.0% 36.0% 32.9% 34.0% 35.1% 35.1% 35.0% 35.0%

Net Income 28,480 30,286 33,752 38,358 46,530 69,508 77,707 70,987 73,904 85,352

Basic EPS 0.95$ 1.01$ 1.18$ 1.38$ 1.67$ 2.50$ 2.81$ 2.49$ 2.46$ 2.58$

Diluted EPS 0.95$ 1.01$ 1.18$ 1.27$ 1.52$ 2.17$ 2.41$ 2.18$ 2.17$ 2.28$

Basic Sharecount 29,949 29,989 28,579 27,872 27,800 27,829 27,694 28,589 30,000 30,000

Diluted Sharecount 29,982 30,004 28,601 34,789 34,706 34,768 34,670 34,165 34,000 34,000

Gross margin 35.0% 34.1% 35.9% 38.7% 39.2% 41.4% 40.8% 36.8% 36.0% 37.5%

SG&A % sales 19.0% 17.7% 17.0% 19.1% 19.4% 17.0% 16.2% 15.8% 16.2% 16.7%

EBITDA margin 21.3% 21.3% 23.7% 24.0% 24.4% 28.7% 29.2% 25.1% 23.9% 24.9%

Operating margin 15.9% 16.4% 18.9% 19.6% 19.8% 24.4% 24.6% 21.0% 19.8% 20.8%

Net margin 10.0% 10.8% 11.5% 11.5% 13.1% 17.2% 17.2% 13.5% 12.9% 13.5%

Sales -15.8% -2.2% 5.3% 13.5% 6.2% 13.9% 11.7% 16.6% 9.3% 10.0%

SG&A 15.6% -8.9% 0.7% 27.6% 8.3% -0.2% 6.2% 14.1% 12.0% 13.5%

EBITDA -36.6% -2.2% 16.8% 15.3% 8.1% 33.9% 13.6% 0.3% 4.1% 14.2%

Operating income -42.3% 0.8% 21.5% 17.6% 7.1% 40.6% 12.8% -0.9% 3.1% 15.5%

Net income -46.3% 6.3% 11.4% 13.6% 21.3% 49.4% 11.8% -8.6% 4.1% 15.5%

EPS -46.0% 6.3% 16.9% 7.9% 19.0% 43.2% 11.1% -9.7% -0.2% 4.7%


BCF - KDN 15/20

11/18/08

Quarterly Income Statement

Kaydon Corp

Qtrly Income Statement

Q1'08 Q2'08 Q3'08 Q4'08E Q1'09E Q2'09E Q3'09E Q4'09E Q1'10E Q2'10E Q3'10E Q4'10E

Sales 123,284 139,905 126,803 136,102 131,914 153,896 139,483 149,712 145,105 169,285 153,432 164,683

COGS 75,965 85,734 82,270 88,466 85,084 99,263 88,572 95,067 90,691 105,803 95,895 102,927

Gross Profit 47,319 54,171 44,533 47,636 46,829 54,633 50,911 54,645 54,414 63,482 57,537 61,756

SG&A 21,155 22,033 19,754 20,415 22,425 24,623 22,317 23,954 24,668 28,778 26,083 26,349

Operating Income 26,164 32,138 24,779 27,220 24,404 30,010 28,594 30,691 29,747 34,703 31,453 35,407

EBITDA 31,664 37,638 30,279 32,720 30,404 36,010 34,594 36,691 36,247 41,203 37,953 41,907

Interest expense 2,387 2,382 1,393 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

Interest income 1,936 1,742 1,520 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

Pretax Income 25,713 31,498 24,906 27,220 24,404 30,010 28,594 30,691 29,747 34,703 31,453 35,407

Taxes 9,102 11,150 8,571 9,527 8,541 10,503 10,008 10,742 10,411 12,146 11,009 12,392

Tax rate 35.4% 35.4% 34.4% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%

Net Income 16,611 20,348 16,335 17,693 15,863 19,506 18,586 19,949 19,335 22,557 20,445 23,014

Basic EPS 0.61$ 0.75$ 0.55$ 0.59$ 0.53$ 0.65$ 0.62$ 0.66$ 0.64$ 0.75$ 0.68$ 0.77$

Diluted EPS 0.52$ 0.63$ 0.50$ 0.52$ 0.47$ 0.57$ 0.55$ 0.59$ 0.57$ 0.66$ 0.60$ 0.68$

Basic Sharecount 27,384 27,291 29,679 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000

Diluted Sharecount 34,350 34,237 34,072 34,000 34,000 34,000 34,000 34,000 34,000 34,000 34,000 34,000

Gross margin 38.4% 38.7% 35.1% 35.0% 35.5% 35.5% 36.5% 36.5% 37.5% 37.5% 37.5% 37.5%

SG&A % sales 17.2% 15.7% 15.6% 15.0% 17.0% 16.0% 16.0% 16.0% 17.0% 17.0% 17.0% 16.0%

EBITDA margin 25.7% 26.9% 23.9% 24.0% 23.0% 23.4% 24.8% 24.5% 25.0% 24.3% 24.7% 25.4%

Operating margin 21.2% 23.0% 19.5% 20.0% 18.5% 19.5% 20.5% 20.5% 20.5% 20.5% 20.5% 21.5%

Net margin 13.5% 14.5% 12.9% 13.0% 12.0% 12.7% 13.3% 13.3% 13.3% 13.3% 13.3% 14.0%

Sales 15.3% 23.4% 18.1% 10.0% 7.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

SG&A 14.1% 12.3% 4.9% 27.3% 6.0% 11.8% 13.0% 17.3% 10.0% 16.9% 16.9% 10.0%

EBITDA 0.7% 12.3% 2.2% -12.3% -4.0% -4.3% 14.3% 12.1% 19.2% 14.4% 9.7% 14.2%

Operating income -0.5% 13.4% 1.3% -15.4% -6.7% -6.6% 15.4% 12.8% 21.9% 15.6% 10.0% 15.4%

Net income -8.9% 3.6% -4.7% -22.0% -4.5% -4.1% 13.8% 12.8% 21.9% 15.6% 10.0% 15.4%

EPS -8.7% 4.9% -6.6% -25.6% -10.9% -9.6% 9.5% 12.8% 21.9% 15.6% 10.0% 15.4%


BCF - KDN 16/20

11/18/08

Consolidated Balance Sheet

Kaydon Corp

Balance Sheet

Q3'08

Assets 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E

Cash 152,570 146,301 255,756 278,586 320,804 370,789 286,993 262,731 250,000 250,000

Accounts receivable 38,432 38,334 45,423 48,786 50,869 54,066 67,574 75,591 78,768 83,179

Inventories 55,066 47,019 44,840 55,730 51,783 56,043 68,896 94,863 90,736 95,309

Other current assets 15,706 12,396 14,231 9,925 14,671 17,012 15,411 15,305 23,000 25,300

Total current assets: 261,774 244,050 360,250 393,027 438,127 497,910 438,874 448,490 442,504 453,788

PP&E 84,273 84,380 84,707 86,028 79,603 95,280 145,826 178,359 218,359 248,359

Goodwill 121,708 108,770 112,183 113,375 117,168 119,484 146,922 146,396 146,396 146,396

Intangibles 9,744 8,903 9,200 24,288 21,271 31,162 27,113 27,113 27,113

Other assets 30,043 30,203 24,331 17,494 11,401 3,611 23,781 15,748 15,748 15,748

Total assets: 497,798 477,147 590,374 619,124 670,587 737,556 786,565 816,106 850,120 891,404

Liabilities

Current LT debt 0 0 0 0 0 0 0 0

Short-term debt 0 0 0 0 0 0 0 0

Accounts payable 10,117 10,724 13,488 17,735 18,192 23,044 28,498 34,107 37,303 34,658

Accrued expenses 21,528 29,709 28,834 25,961 26,552 28,588 30,000 30,980 44,158 47,438

Total current liabilities: 31,645 40,433 42,322 43,696 44,744 51,632 58,498 65,087 81,461 82,096

Post-retirement obligation 44,652 61,139 63,890 64,524 64,765 46,083 17,401 28,453 20,000 20,000

Long-term debt 112,194 72,367 200,128 200,066 200,000 200,000 200,000 0

Other long-term liabilities 5,503 4,459 3,515 2,157 1,402 6,661 27,276 0

Total liabilities: 193,994 178,398 309,855 310,443 310,911 304,376 303,175 93,540 101,461 102,096

Equity

Total shareholders equity: 303,804 298,749 280,519 308,681 359,676 433,180 483,390 722,566 748,659 789,308

Total liabilities and equity: 497,798 477,147 590,374 619,124 670,587 737,556 786,565 816,106 850,120 891,404


BCF - KDN 17/20

11/18/08

Statement of Cash Flows

Kaydon Corp

Cash Flows

Operating cash flow 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E

Net income 28,480 12,204 33,752 38,358 46,530 69,508 77,707 70,987 73,904 85,352

D&A 15,430 13,725 13,866 14,664 16,513 17,426 20,629 22,000 24,000 26,000

Accounting changes 13,222 5,033

Deferred taxes 9 787 8,401 7,009 5,551 9,889 18,223

Accounts receivable 13,191 1,087 6,084 2,144 7,030 2,469 10,469 3,052 8,141 4,411

Inventories 3,544 8,987 3,338 8,993 2,146 3,417 8,389 7,610 14,231 4,573

Other current assets 2,025 10,945 2,391 2,253 1,029 1,650 5,249 6,685 904 2,300

Accounts payable 844 109 2,485 3,817 2,130 4,627 4,464 3,379 5,425 2,645

Accrued expenses 7,497 487 3,055 46 17,565 1,053 4,102 10,890 3,269 3,280

Post-retirement oblig. 948 2,265 4,206 1,027 1,730 3,001 24,020

Total operating CF: 51,236 62,244 60,628 53,983 41,224 89,860 74,259 89,909 83,322 100,703

Investing cash flow

ST investments 57,000

Capex 9,562 8,821 11,918 12,365 12,560 26,294 54,073 70,000 40,000 30,000

Acquisitions, net 54,274 5,104 3,864 32,574 54,869

Other 8,500

Total Investing CF: 63,836 13,925 11,918 16,229 20,014 26,294 174,442 70,000 40,000 30,000

Financing cash flow

LT-debt payments 6,053 40,160 72,282 90 62 66

Dividends 14,596 14,616 14,017 13,541 13,528 13,530 14,354 15,000 15,750 16,538

Line of credit borrowing

Common stock issuance 2,239 475 5,104 115 1,000 1,626 390

Stock repurchases 1,655 20 52,193 2,117 6,102 3,404 30,091 10,000 10,000 10,000

LT-debt issuance 70,750 192,674 940

Other

Total financing CF: 50,685 54,321 59,286 15,633 19,632 15,374 44,055 25,000 25,750 26,538

FX effect 480 267 1,459 709 612 1,793 3,442 1,200 1,200 1,200

Net change in cash 37,605 6,269 109,455 22,830 42,218 49,985 140,796 3,891 18,772 45,365

Beginning cash 114,965 152,570 146,301 255,756 278,586 320,804 370,789 229,993 226,102 244,874

Ending cash 152,570 146,301 255,756 278,586 320,804 370,789 229,993 226,102 244,874 290,239


BCF - KDN 18/20

11/18/08

Working Capital Worksheet

Kaydon Corp

Working Capital Worksheet

2004 2005 2006 2007 2008E 2009E 2010E

Sales 333,811 354,558 403,992 451,382 526,094 575,005 632,505

Cost of Sales 204,668 215,528 236,566 267,082 332,435 367,986 395,316

Working Capital Balances

Accounts Receivable, net 48,786 50,869 54,066 67,574 70,626 78,768 83,179

Inventories 55,730 51,783 56,043 68,896 76,506 90,736 95,309

Other Current Assets 9,925 14,671 17,012 15,411 22,096 23,000 25,300

Total Non-Cash Current Assets: 114,441 117,323 127,121 151,881 169,228 192,504 203,788

Accounts Payable 17,735 18,192 23,044 28,498 31,877 37,303 34,658

Accrued Expenses 25,961 26,552 28,588 30,000 40,890 44,158 47,438

Total Non-Debt Current Liabilities: 43,696 44,744 51,632 58,498 72,767 81,461 82,096

NET WORKING CAPITAL / (DEFICIT) 70,745 72,579 75,489 93,383 96,461 111,043 121,692

(Increase)/Decrease in Working Capital 1,834 2,910 17,894 3,078 14,582 10,649

Ratios and Assumptions, actual, not average

Accounts Receivable, net (Collection period in days) 53.3 52.4 48.8 54.6 49.0 50.0 48.0

Inventories (Days) 99.4 87.7 86.5 94.2 84.0 90.0 88.0

Other Current Assets as % of Sales 3.0% 4.1% 4.2% 3.4% 4.2% 4.0% 4.0%

Accounts Payable (Days outstanding) 31.6 30.8 35.6 38.9 35.0 37.0 32.0

Accrued Liabilities as % of Cost of Sales 12.7% 12.3% 12.1% 11.2% 12.3% 12.0% 12.0%

Cash Flows by Individual Accounts

Accounts Receivable, net 2,083 3,197 13,508 3,052 8,141 4,411

Inventories 3,947 4,260 12,853 7,610 14,231 4,573

Other Current Assets 4,746 2,341 1,601 6,685 904 2,300

Accounts Payable 457 4,852 5,454 3,379 5,425 2,645

Accrued Liabilities 591 2,036 1,412 10,890 3,269 3,280

(Increase)/Decrease in Working Capital 1,834 2,910 17,894 3,078 14,582 10,649


BCF - KDN 19/20

11/18/08

Ratios

Q3'08

Ratio 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E

Current Ratio 827.2% 603.6% 851.2% 899.5% 979.2% 964.3% 750.2% 689.1% 543.2% 552.8%

Cash Ratio 482.1% 361.8% 604.3% 637.6% 717.0% 718.1% 490.6% 403.7% 306.9% 304.5%

Cash per Share 5.09 4.88 8.94 8.01 9.24 10.66 8.28 7.69 7.35 7.35

Debt to Equity 36.9% 24.2% 71.3% 64.8% 55.6% 46.2% 41.4% 0.0% 0.0% 0.0%

Net Debt to Equity -13.3% -24.7% -19.8% -25.4% -33.6% -39.4% -18.0% -36.4% -33.4% -31.7%

Debt to Capital 27.0% 19.5% 41.6% 39.3% 35.7% 31.6% 29.3% 0.0% 0.0% 0.0%

Net Debt to Capital -9.7% -19.9% -11.6% -15.4% -21.6% -27.0% -12.7% -36.4% -33.4% -31.7%

ROE - Extended DuPont15.9% 16.4% 18.9% 19.6% 19.8% 24.4% 24.6% 21.0% 19.8% 20.8%

57.4% 58.6% 49.8% 53.9% 52.9% 54.8% 57.4% 64.5% 67.6% 71.0%

-0.1% 0.2% -0.6% -0.9% -0.1% 0.9% 1.1% -0.1% 0.0% 0.0%

163.9% 159.7% 210.5% 200.6% 186.4% 170.3% 162.7% 112.9% 113.6% 112.9%

63.0% 64.9% 65.0% 64.0% 67.1% 66.0% 64.9% 64.9% 65.0% 65.0%

9.5% 9.8% 13.8% 14.7% 13.2% 14.0% 13.8% 10.0% 9.9% 10.8%

ROA 5.8% 6.1% 6.6% 7.4% 7.1% 8.2% 8.5% 8.9% 8.7% 9.6%

ROCE 9.8% 10.5% 10.2% 11.4% 11.2% 14.4% 15.3% 14.7% 14.8% 16.2%

Receivables Turn 7.4x 7.3x 6.5x 6.8x 7.0x 7.5x 6.7x 7.0x 7.3x 7.6x

Collection Period 49.1 50.1 56.4 53.3 52.4 48.8 54.6 52.4 50.0 48.0

Inventory Turn 3.4x 3.9x 4.2x 3.7x 4.2x 4.2x 3.9x 3.5x 4.1x 4.1x

Inventory Proc. Period 108.2 93.2 86.8 99.4 87.7 86.5 94.2 104.2 90.0 88.0

Payables Turn 18.4x 17.2x 14.0x 11.5x 11.8x 10.3x 9.4x 9.7x 9.9x 11.4x

Payment Period 19.9 21.3 26.1 31.6 30.8 35.6 38.9 37.4 37.0 32.0

Cash Conversion Cycle 177.2 164.6 169.3 184.4 170.9 170.9 187.7 194.0 177.0 168.0


BCF - KDN 20/20

11/18/08

Valuation

Price to Earnings

Price 2007 2008 2009

22.00$ EPS 2.41 2.18 2.17

9.12X 10.10X 10.12X

Price to Sales

2007 2008 2009

Sales/share 13.02 15.40 16.91

1.69X 1.43X 1.30X

Enterprise Value to EBITDA

2007 2008 2009

Shares out 34,670 34,165 34,000

+ Debt 200,000 0 0

- Cash 286,993 262,731 250,000

EV 675,753 488,894 498,000

EBITDA 131,892 132,301 137,699

5.12X 3.70X 3.62X

Enterprise Value to Sales

2007 2008 2009

Shares out 34,670 34,165 34,000

+ Debt 200,000 0 0

- Cash 286,993 262,731 250,000

EV 675,753 488,894 498,000

Sales 451,382 526,094 575,005

1.50X 0.93X 0.87X