Kaydon Corporation NYSE: KDN) reported results for second quarter 2008, ended June 28, 2008.

Kaydon is a diversified manufacturer of bearings, sealing products, and other precision manufactured components for the wind power, aircraft and aerospace, military and other industries.

Bearings are included in the Friction Control Products segment, which recorded sales of $87 million in the quarter, including $7 million in sales from Avon Bearings, up 34% from 2007's $65 million. Sales to the wind energy market more than tripled, while sales of split roller bearings and sales to the medical and heavy-equipment markets were also up strongly. Bearing sales for military, machinery and semiconductor manufacturing markets were up slightly.

Kaydon operates North American bearing plants in Muskegon, Michigan; Sumter, South Carolina; Mocksville, North Carolina; and Monterrey, Mexico. In late 2007, Kaydon acquired Avon Bearings for $65 million.

Sales in second quarter were $139.9 million, including Avon's $7 million which was not in last year; 2007's second quarter sales were $113.4 million.

Second quarter operating income was $32.1 million, but interest income fell to just $1.7 million.

Gross margin was hurt by changes in the product sales mix and by accounting adjustments necessary to complete the Avon acquisition. In the future, Kaydon said it expects Kaydon bearings to be as profitable as Kaydon's existing wind energy bearing sales.

Net income came under considerable pressure, at $20.3 million, or 14.5% of sales, from 2007's $19.6 million, or 17.3% of sales.

Although margins have been squeezed, Kaydon reported its quarter-end backorder list hit $324 million, up 61% from a year ago. Similarly, order entry was a second-quarter record $144 million, up 12% over 2007's second quarter.

James O'Leary, Chairman and CEO, said: "We are pleased with the record results achieve in the second quarter of 2008. Our two largest segments, Friction Control Products and Velocity Control Products, both had excellent overall performances. Friction Control Products had a record second quarter as sales of turntable bearings to the wind energy market and split roller bearings globally grew significantly."

Mr. O'Leary discussed the ultra-hot wind energy market: "Our ongoing expansion in the global wind energy infrastructure market positions us well for the balance of 2008 and beyond. We expect 2008 to be a record year in terms of revenues, net income and earnings per share. Meaningful gains are expected during the latter half of 2008 as additional capacity comes online in our growing wind energy business. We expect wind energy revenues during 2008 to approximate $90 million which compares to $32.8 million in 2007. For the first six months of 2008, we have already exceeded all of 2007 with shipments to date of $34.9 million."

Looking forward, Kaydon expects its 10%-12% EPS growth target will be a challenge to hit this year, and be highly dependent upon improving the level of ship-from-stock orders to North American industrial customers. And dependent upon landing expected military orders which have been delayed due to funding issues.

Margin pressures will continue, said Mr. O'Leary, because "while increases in material and operating costs sustained over the past year have been thus far offset through proactive remediation steps, this may become increasingly difficult absent relief in the upward pressure on these inputs."

In other words, Kaydon, like most other bearing manufacturers, has so far been able to pass on a good portion of its cost increases in the form of higher prices and/or higher margin sales, or by continuing internal efforts to become leaner and more efficient. But there may come a time when higher direct and indirect costs can no longer be offset and will erode the operating margins.

Nevertheless, Mr. O'Leary said, "we expect a record year for revenues, net income and earnings per share as growth in our wind energy business offsets the potential for softening and funding delays in our general industrial and military markets, respectively, during the second half of 2008."

In addition to organic sales growth, Kaydon made clear it believes its balance sheet remains strong enough to seek additional growth through acquisition opportunities.

Wind energy remains Kaydon's primary focus for growth opportunities, for good reason -- sales so far in 2008, at $35 million, have already outrun 2007's grand total segment sales of $32 million. The current run rate for wind energy bearing sales is $90 million. Mr. O'Leary indicated Kaydon's operating margin in this segment is in the mid-20's.

With that in mind, Kaydon acquired Avon and is considering options to expand wind energy bearing production across all of the North American facilities, and particularly the dedicated wind energy bearing plant in Monterrey, Mexico. By 2009, Kaydon said it expects to have $200 million in run rate capacity online, and is considering the potential of building an another dedicated wind energy bearing facility in the same Monterrey industrial park.

Kaydon said: "While any expansion decision and the scale, scope, and timing of any incremental investments will be dependent on finalizing customer commitments, the Company believes the long-term strength of this market and our unique position in it will result in further meaningful investments by the Company. With existing infrastructure already in place, the Company believes it is well positioned to expand its presence in this robust market to the benefit of both its customers and its shareholders."

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