Sample Research Report

1. BABSON
COLLEGE FUND
Rating: BUY Kaydon Corp. (KDN)
Price Target: $30.85 Industry: Specialty Bearings
FY06(A) FY07(A) 1Q08(A) 2Q08(A) 3Q08(A) 4Q08(E) FY08(E) FY09(E)
Close 19-Nov-2008
Sales (mm) 403,992 451,382 123,284 139,905 126,803 136,102 526,094 575,005
Price $24.89
Rev. Growth 13.9% 11.7% 15.3% 23.4% 18.1% 10.0% 16.6% 9.3%
Shares Outstanding (mm) 34 EBITDA Margin 28.7% 29.2% 25.7% 26.9% 23.9% 24.0% 25.1% 23.9%
Market Cap (mm) $900 ROA 8.2% 8.5% 8.9% 8.7%
Source: Capital IQ 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
Basic Information
Price/Sales 2.1X 1.9X 1.8X 1.7X 1.7X 1.6X 1.6X 1.5X
Beta 1.4 Price/Book 2.0X 1.8X 1.2X 1.1X
FY End: Dec 31
Dividend Yield 2.8%
Diluted EPS (ttm) $2.36
Investment Thesis
Long Term EPS Growth 15%
Kaydon is a major player in the rapidly growing wind power generation
Cash per share $7.69
market; however, the stock is currently not illustrating any of that business’s
LT Debt to Total Capital 0%
% of S&P 500 0% potential upside. We believe the company’s end markets are more stable
% of Benchmark (IYJ) 0.07% than what is currently being discounted by the market. Moreover, Kaydon’s
Book Value per share $21.25
lack of debt and almost $8 per share in cash on the balance sheet represent
ttm as of Sept. 2008
the possibility of substantial short-term catalysts.
Source: Capital IQ, Northfield
Investment Outlook and Valuation
Company Overview
We rate KDN a BUY. Shares currently trade at about 4.7X trailing EV/EBITDA
Kaydon is a designer and
which marks a new valuation trough for KDN; it had bottomed out in the
manufacturer of custom-
last two recessions at slightly lower than 6.0X trailing EV/EBITDA. Our price
engineered, performance-critical
target of $30.85 represents about 6.0X 2008 EV/EBITDA. Even though
products serving many different
customers. Its three main Kaydon is caught in a cyclical downturn, it should trade no lower than past
segments produce friction control
lows given its presence in the wind market which was not as large of a
products, such as specialty
percentage of its business in the past.
bearings; velocity control products,
such as industrial shock absorbers;
Risks to Outlook
and sealing products, such as
engine rings. Disappearance of Federal Funds – a strong driver of wind capacity
production is the Production Tax Credit (PTC) which is authorized by
Source: Capital IQ
Congress. Should this credit disappear, future wind capacity, and KDN, will
be harmed.
Analysts
Acquisition Risk – Kaydon recently made its largest acquisition in the last
Eric S. Crawley
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.
BCF - KDN 1/20
11/18/08

2. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 2/20
11/18/08

3. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 3/20
11/18/08

4. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 4/20
11/18/08

5. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 5/20
11/18/08

6. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 6/20
11/18/08

7. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 7/20
11/18/08

8. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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
$28.04
Value per Share
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 8/20
11/18/08

9. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
Peer Group Analysis
DuPont Drivers 11/19/2008
Kaydon Comparison of Peers
Return Asset Leverage LTM LTM
Market LTM
Company Cap 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 9/20
11/18/08

10. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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
Price Target
Valuation Method Price Weight Kaydon generates stable cash flow, even in recessionary
DCF 28.04 40%
environments, we thought it appropriate to weight the DCF the
Comp Co 31.75 30%
heaviest. However, it does not take into account potential
Historical Multiple 33.68 30%
Price Target 30.85
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 10/20
11/18/08

11. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 11/20
11/18/08

12. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 12/20
11/18/08

13. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 13/20
11/18/08

14. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 14/20
11/18/08

15. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 15/20
11/18/08

16. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
Consolidated Balance Sheet
Kaydon Corp
Balance Sheet
Q3'08
2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E
Assets
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 16/20
11/18/08

17. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
Statement of Cash Flows
Kaydon Corp
Cash Flows
2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Operating cash flow
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 17/20
11/18/08

18. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 18/20
11/18/08

19. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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 DuPont
15.9% 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 19/20
11/18/08

20. BABSON
Kaydon Corp. (KDN)
COLLEGE FUND
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
BCF - KDN 20/20
11/18/08