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EX-32 - EX-32 - KAYDON CORP | k48904exv32.htm |
EX-21 - EX-21 - KAYDON CORP | k48904exv21.htm |
EX-23 - EX-23 - KAYDON CORP | k48904exv23.htm |
EX-31.2 - EX-31.2 - KAYDON CORP | k48904exv31w2.htm |
EX-31.1 - EX-31.1 - KAYDON CORP | k48904exv31w1.htm |
EX-10.1.9 - EX-10.1.9 - KAYDON CORP | k48904exv10w1w9.htm |
Table of Contents
FORM 10-K
United States
Securities and Exchange Commission
Securities and Exchange Commission
Washington, DC 20549
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2009
Commission file number 1-11333
Kaydon
Corporation
(Exact name of Registrant as
specified in its charter)
Delaware | 13-3186040 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Suite 300, 315 East
Eisenhower Parkway, Ann Arbor, Michigan 48108 (Address of principal executive offices) (Zip Code) |
Registrants telephone number, including area code:
(734) 747-7025
Securities registered pursuant to Section 12(b) of the
Exchange Act:
Title of each class
|
Name of each exchange on which registered
|
|
Common Stock, Par Value $0.10 per Share | New York Stock Exchange, Inc. | |
Preferred Stock Purchase Rights | New York Stock Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the
Exchange Act: None
Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in
Rule 405 under the Securities Act of
1933. Yes þ No o
Indicate by check mark if the
Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. Yes o No þ
Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the
registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer,
accelerated filer and smaller reporting
company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the
Registrant is a shell company (as defined in
Rule 12b-2
under the Exchange
Act). Yes o No þ
The aggregate market value of the
Registrants Common Stock held by non-affiliates of the
Registrant on July 4, 2009 (based on the July 2, 2009
closing sales price of $31.87 of the Registrants Common
Stock, as reported by the New York Stock Exchange on such date)
was approximately $1,055,000,000. For purposes of this
calculation only, all executive officers and directors of the
Registrant are assumed to be affiliates.
Number of shares outstanding of
the Registrants Common Stock at February 23, 2010:
33,536,473 Shares of Common Stock, par value $0.10 per share.
Portions of the Registrants
definitive Proxy Statement to be filed for its 2010 Annual
Meeting of Stockholders are incorporated by reference into
Part III of this Report.
TABLE
OF CONTENTS
Forward-Looking
Statements
This
Form 10-K
contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934 regarding the Companys
plans, expectations, estimates and beliefs. Forward-looking
statements are typically identified by words such as
believes, anticipates,
estimates, expects, intends,
will, may, should,
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 Companys financial
performance, anticipated growth and expansion, characterization
of and the Companys ability to control contingent
liabilities, and anticipated trends in the Companys
businesses. These statements are only predictions, based on the
Companys 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
Companys 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 Companys
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 except to the extent required by
applicable law. For a specific discussion of the risks and
uncertainties that could affect the Companys financial
condition
and/or
operating results, please refer to Item 1A. Risk Factors
herein.
Table of Contents
PART I
ITEM 1. | BUSINESS |
General
Development of Business
Kaydon Corporation (the Company or
Kaydon) is a leading designer and manufacturer of
custom engineered, performance-critical products supplying a
broad and diverse customer base. At the time of its 1983
incorporation, Kaydon was principally involved in the design and
manufacture of bearings and components, as well as filters and
filter housings. Since 1984, we have pursued a diversified
growth strategy in the manufacturing sector. Our principal
products now include bearings and components, filters and filter
housings, custom rings, shaft seals, linear deceleration
products, specialty balls, fuel cleansing systems, gas-phase air
filtration systems and replacement media, industrial presses and
metal alloy products. These products are used by customers in a
variety of alternative energy, robotics, medical, material
handling, machine tool positioning, aerospace, defense,
security, electronic and other industrial applications. We
perform as an extension of our customers engineering and
manufacturing functions, with a commitment to identify and
provide engineered solutions to design problems through
technical innovation, cost-effective manufacturing and
outstanding value-added service.
We have grown both organically through strategic investments in
our business and through acquisitions. In 2007, we acquired all
of the outstanding stock of Avon Bearings Corporation
(Avon) in a cash transaction valued at
$54.4 million, net of working capital adjustments recorded
in 2008. Avon is a custom designer and manufacturer of high
precision large diameter turntable bearings. Avon also
remanufactures bearings and sells replacement bearings. Avon is
included in the Friction Control Products segment for segment
reporting purposes.
In support of our wind energy growth initiative, during the
first half of 2009 we completed our wind energy capacity
expansion program. This expansion provides us with a
significantly increased capability to supply specialty bearings
to wind turbine manufacturers and will help us maintain our
leadership position in the supply of specialty bearings. We
invested approximately $80 million from 2006 through the
completion of this program in 2009. Annual sales to wind energy
customers, which are recorded in the Friction Control Products
segment, were $103.0 million, $80.5 million, and
$32.9 million in 2009, 2008, and 2007, respectively.
Industry
Segments
We operate through operating segments for which separate
financial information is available, and for which operating
results are evaluated regularly by the Companys chief
operating decision maker in determining resource allocation and
assessing performance. Certain of the operating segments have
similar economic characteristics, as well as other common
attributes, including nature of the products and production
processes, distribution patterns and classes of customers. We
aggregate these operating segments for reporting purposes.
Certain other operating segments do not exhibit the common
attributes mentioned above and, therefore, information about
them is reported separately. Still other operating segments do
not meet the quantitative thresholds for separate disclosure and
their information is combined and disclosed as Other
businesses.
We have three reportable segments and other operating segments
engaged in the manufacture and sale of the following:
Friction Control Products complex components
used in alternative energy, specialized robotics, medical,
aerospace, defense, security, electronic, material handling,
construction, and other industrial applications. Products
include anti-friction bearings, split roller bearings, and
specialty balls.
Velocity Control Products complex components
used in specialized robotics, material handling, machine tool,
medical, amusement and other industrial applications. Products
include industrial shock absorbers, safety shock absorbers,
velocity controls, gas springs and rotary dampers.
Sealing Products complex and standard ring
and seal products used in demanding industrial, aerospace and
defense applications. Products include engine rings, sealing
rings and shaft seals.
Other businesses filter elements and liquid
and gas-phase filtration systems, metal alloys, machine tool
components, presses, dies and benders used in a variety of
industrial applications.
KAYDON CORPORATION
FORM
10K 1
Table of Contents
Net sales related to our three reportable segments and other
operating segments during 2009, 2008 and 2007 are set forth in
the following table:
2009 | 2008 | 2007 | ||||||||||
(In thousands) | ||||||||||||
Friction Control Products
|
$ | 296,420 | $ | 325,951 | $ | 261,652 | ||||||
Velocity Control Products
|
46,358 | 69,616 | 63,912 | |||||||||
Sealing Products
|
37,832 | 44,985 | 46,687 | |||||||||
Other businesses
|
60,535 | 81,822 | 79,131 | |||||||||
Total consolidated net sales
|
$ | 441,145 | $ | 522,374 | $ | 451,382 | ||||||
See the Notes to Consolidated Financial Statements
(Note 11) contained in Item 8. Financial
Statements and Supplementary Data for additional information on
the Companys reportable segments.
Sophisticated industrial technology plays a significant role in
all of our reportable segments in the design, engineering and
manufacturing of our products. Due to the custom engineered,
proprietary nature of our products, critical manufacturing is
done in-house and subcontractors are utilized for occasional
specialized services. Products are manufactured utilizing a
variety of precision metalworking and other process technologies
often after working closely with customers to engineer the
required solution to their design and performance challenges.
We sell our products in each reportable segment through a sales
organization consisting of salespersons and representatives
located primarily throughout North America, Europe and Asia.
Salespersons are trained to provide technical assistance to
customers, as well as to serve as a liaison between our factory
engineering staffs and our customers. Also, a global network of
specialized distributors and agents provides local availability
of our products to serve the requirements of customers. In 2009
and 2008, several of our operating units had sales to various
business units of the General Electric Company and its
affiliates (GE) totaling, in aggregate,
approximately 19.2 percent and 12.5 percent of total
sales, respectively. No other customer accounted for
10 percent or more of our total sales in fiscal 2009, 2008
or 2007. While the loss of any substantial customer, including
GE, could have a material short-term impact on our business, we
believe that our diverse client base and diverse product
offerings should reduce the long-term impact of any such loss.
We do not consider our business in any reportable segment to be
seasonal in nature or to have special working capital
requirements. Compliance with federal, state and local
regulations relating to the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, is not expected to result in material capital
expenditures by us or to have a material adverse effect on our
earnings or competitive position. In general, raw materials
required by the Company are attainable from various sources and
in the quantities desired. Various provisions of federal law and
regulations require, under certain circumstances, the
renegotiations of military procurement contracts or the refund
of profits determined to be excessive. The Company, based on
experience, believes that no material renegotiations or refunds
will be required under its contracts related to military
procurement. Other than the wind energy capacity expansion
completed in 2009, we have not made any other public
announcement of, or otherwise made public information about, a
new product or a new industry segment which would require the
investment of a material amount of our assets or which would
otherwise result in a material cost.
Backlog
We sell certain products on a
build-to-order
basis that require substantial order lead-time. This results in
a backlog of unshipped, scheduled orders. In addition, certain
products are manufactured on the basis of sales projections or
annual blanket purchase orders. The Company defines backlog as
orders shippable in the upcoming 18 months.
Variability in backlog is affected by the timing of orders
received, particularly when larger customers pull forward or
push out major orders. Backlog by reporting segment at
December 31, 2009 and 2008 is presented below:
December 31, |
December 31, |
|||||||||||
2009 | 2008 | |||||||||||
Friction Control Products
|
$ | 179,079,000 | $ | 272,434,000 | ||||||||
Velocity Control Products
|
7,213,000 | 6,133,000 | ||||||||||
Sealing Products
|
21,717,000 | 23,834,000 | ||||||||||
Other businesses
|
10,516,000 | 10,170,000 | ||||||||||
Total
|
$ | 218,525,000 | $ | 312,571,000 | ||||||||
Patents
and Trademarks
We hold various patents, patent applications, licenses,
trademarks and trade names. We consider patents, patent
applications, licenses, trademarks
2 KAYDON
CORPORATION FORM 10K
Table of Contents
and trade names to be valuable, but do not believe that there is
any reasonable likelihood of a loss of such rights which would
have a material adverse effect on our present business as a
whole.
Competition
The major domestic and foreign markets for our products in all
reporting segments are highly competitive. Competition is based
primarily on price, product engineering and performance,
technology, quality and overall customer service, with the
relative importance of such factors varying by degree among
products. Our competitors include a large number of other
well-established diversified manufacturers, as well as other
smaller companies. Although a number of companies of varying
size compete with us, no single competitor is in substantial
competition with the Company with respect to more than a few of
its product lines and services.
Employees
We employ approximately 2,084 people. Satisfactory
relationships have generally prevailed between the Company and
its employees.
International
Operations
Certain friction control products are manufactured in Mexico and
the United Kingdom, and certain velocity control products are
assembled and distributed through a facility in Germany. In
addition, within all reporting segments, we distribute an array
of products principally throughout North America, Europe and
Asia. Our foreign operations are subject to political, monetary,
economic and other risks attendant generally to international
businesses. These risks generally vary from country to country.
See the Notes to Consolidated Financial Statements
(Note 11) contained in Item 8. Financial
Statements and Supplementary Data for additional information on
the Companys operations by geographic area.
Available
Information
Our internet address is www.kaydon.com. Our
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
proxy statements and amendments to all such reports and
statements are accessible at no charge on our website as soon as
reasonably practicable after filing with the Securities and
Exchange Commission. Also accessible on our website under
Corporate Governance are our Corporate Governance
Guidelines, our Codes of Ethics, and the charters of the various
committees of our Board of Directors. These items are also
available in print at no charge to those who direct a request in
writing to the Company. We do not intend for the information
contained on our website to be a part of this Annual Report.
ITEM 1A. | RISK FACTORS |
The following risk factors could affect our financial condition
and/or
operating results.
Our customers economic cycles may affect our operating
results.
Many of our customers are in industries that are cyclical in
nature and sensitive to changes in general economic conditions
and other factors, including capital spending levels. Such
industries include commercial aerospace, specialty electronics
manufacturing equipment, power generation, off-road and heavy
industrial equipment, and other capital equipment manufacturing.
As a result, the demand for our products by these customers
depends, in part, upon general economic conditions.
Historically, downward economic cycles have reduced customer
demand for our products, thereby reducing sales of our products
and resulting in reductions to our revenues and net earnings. In
addition, our military sales are dependent on government
funding. Business conditions worldwide worsened in late 2008 and
stabilized at lower activity levels in 2009. The timing and
sustainability of worldwide economic growth in 2010 is uncertain
and if economic conditions do not remain at current levels or if
conditions deteriorate our results of operations could be
adversely affected.
Increased competition in our key markets could result in a
reduction in our revenues and earnings and adversely affect our
financial condition.
The industries in which we operate are fragmented and we face
competition from multiple companies across our various product
lines. We expect competitive pressures from new products and
aggressive pricing to increase, which may cause us to lose
market share or compel us to reduce prices to remain
competitive, which could result in reduced levels of revenues
and earnings. Our competitors include U.S. and
non-U.S. companies,
some of which benefit from lower labor costs and fewer
KAYDON CORPORATION
FORM
10K 3
Table of Contents
regulatory burdens. In addition, certain competitors, including
Eaton, Timken, SKF, INA/FAG and ITT, are larger than Kaydon and
may have access to greater financial, technical, development,
marketing, manufacturing, sales and distribution services and
other resources. Increased competition with these companies or
new entrants to our key markets could prevent price increases
for our products or could require price reductions for our
products, which could adversely affect our financial condition,
results of operations, growth or liquidity.
Future acquisitions may require us to incur costs and
liabilities or have other unexpected consequences which may
adversely affect our operating results.
In addition to internal growth, our current strategy involves
growth through acquisitions of complementary businesses as well
as acquisitions that would diversify our product offerings. Like
other companies with similar growth strategies, we may be unable
to continue to implement our growth strategy, and this strategy
may be ultimately unsuccessful. A portion of our expected future
growth in revenues may result from acquisitions. We frequently
engage in evaluations of potential acquisitions and negotiations
for possible acquisitions, certain of which, if consummated,
could be significant to us. Although it is our policy only to
acquire companies in transactions which will be accretive to
both earnings and cash flow, any potential acquisitions may
result in material transaction expenses, increased interest and
amortization expense, increased depreciation expense and
increased operating expense, any of which could have a material
adverse effect on our operating results. Acquisitions may entail
integration and management of the acquired businesses to realize
economies of scale and control costs. In addition, acquisitions
may involve other risks, including diversion of management
resources otherwise available for ongoing development of our
business and risks associated with entering new markets. We may
not be able to identify suitable acquisition candidates in the
future, obtain acceptable financing or consummate any future
acquisitions. Finally, as a result of our acquisitions of other
businesses, we may be subject to the risk of unanticipated
business uncertainties or legal liabilities relating to those
acquired businesses for which the sellers of the acquired
businesses may not indemnify us. Future acquisitions may also
result in potentially dilutive issuances of securities.
Political, economic and regulatory conditions inherent in the
international markets in which we participate could adversely
affect our financial condition.
Typically, sales of our products from our foreign subsidiaries
and from our domestic businesses selling to foreign locations
account for approximately
30-40 percent
of net sales. These foreign sales could be adversely affected by
changes in various foreign countries political and
economic conditions, trade protection measures, differing
intellectual property rights and changes in regulatory
requirements that restrict the sales of our products or increase
our costs.
We generate significant revenues outside the United States.
Currency fluctuations between the U.S. dollar and the
currencies in which our current customers do business may have
an impact on the demand for our products in foreign countries
where the U.S. dollar has increased in value compared to
the local currency. We cannot predict the effects of exchange
rate fluctuations upon our future operating results because of
the number of currencies involved, the variability of currency
exposure and the potential volatility of currency exchange rates.
Relationships with customers and effective terms of sale
frequently vary by country, often with longer-term receivables
than are typical in the United States.
Our critical performance products expose us to potential
litigation-related costs which may adversely affect our
financial position and operating results.
As a provider of critical performance products in a variety of
industries including alternative energy, aerospace, defense,
robotics, medical, material handling, machine tool positioning,
and other industrial applications, we face a risk of exposure to
claims in the event that the failure, use or misuse of our
products results, or is alleged to result, in bodily injury
and/or
property damage.
In the past, costs related to legal proceedings and settlements
have had a material effect on our business, financial condition,
results of operations and liquidity. We cannot assure you that
the ultimate cost of current known or future unknown litigation
and claims will not exceed managements current
expectations and it is possible that such costs could have a
material adverse effect on the Company. In addition, litigation
is time consuming
4 KAYDON
CORPORATION FORM 10K
Table of Contents
and could divert management attention and resources away from
our business.
Our capacity expansion to supply custom bearings to a select
group of global customers in the wind energy market may
adversely affect our financial position and operating
results.
We have invested approximately $80 million to expand our
capacity to supply custom bearings to the wind energy market. We
face a risk of exposure to sales and earnings volatility if this
growing industry is affected by conditions in the capital
markets, attracts new competition, loses certain governmental
incentives, or matures more rapidly than currently anticipated.
The condition of the financial markets may impact the timing
and extent that wind energy market customers proceed with
planned projects, and, if financial markets do not improve, or
improve too slowly, our financial position and operating results
may be adversely affected.
We have completed our capacity expansion project to supply
custom bearings to the wind energy market. In addition to the
significant capital assets acquired, we currently have
substantial accounts receivable and inventory balances related
to certain wind energy customers. With respect to the wind
energy market, while the near term has been impacted by issues
associated with credit and financing availability, recent steps
taken to repair the health of the financial markets should
eventually improve visibility and end user confidence to proceed
with previously planned projects. If, however, the financial
markets do not improve, or they improve too slowly, the impact
this may have on our customers may adversely affect our
financial position and operating results. A bankruptcy filing by
a significant wind energy customer may result in uncollectible
accounts receivable and unusable inventory, as well as reduced
utilization of our large diameter bearing manufacturing
facilities.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
ITEM 2. | PROPERTIES |
The following list sets forth the location of our principal
manufacturing facilities for each reportable segment:
Reportable Segment | Location | |
Friction Control Products
|
Avon, OH; Dexter, MI; Mocksville, NC; Muskegon, MI; Sumter, SC (2 sites); Kings Lynn, United Kingdom; Monterrey, Mexico (2 sites) |
|
Velocity Control Products
|
Farmington Hills, MI; Langenfeld, Germany |
|
Sealing Products
|
Baltimore, MD | |
Other businesses
|
Crawfordsville, IN; Danville, IL; Doraville, GA; LaGrange, GA (2 sites); Sayreville, NJ |
|
KAYDON CORPORATION
FORM
10K 5
Table of Contents
We consider our properties to generally be in good condition,
well maintained, and suitable and adequate to carry on our
business. Except for leased facilities in Monterrey, Mexico (1
site), and LaGrange, GA (1 site), substantially all of the
properties are owned by us. None of our properties are subject
to significant encumbrances. Our manufacturing facilities
currently have sufficient capacity to meet customer demand. Our
leased executive offices are located in Ann Arbor, MI.
ITEM 3. | LEGAL PROCEEDINGS |
Various claims, arising in the normal course of business are
pending against us. Our estimated legal costs expected to be
incurred in connection with claims, lawsuits and environmental
matters are accrued in the consolidated financial statements
contained in Item 8. Financial Statements and Supplementary
Data.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of the year covered by this report.
6 KAYDON
CORPORATION FORM 10K
Table of Contents
SUPPLEMENTARY
ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
(Pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
The following are the executive officers of Kaydon Corporation as of December 31, 2009.
(Pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
The following are the executive officers of Kaydon Corporation as of December 31, 2009.
Name and Age of |
Data Pertaining to |
|
Executive Officer | Executive Officers | |
James OLeary (47)
|
Chairman of the Board, President and Chief Executive Officer. Mr. OLeary joined Kaydon in March 2007 as President and Chief Executive Officer. He was elected Chairman of the Board in May 2007. Prior to joining Kaydon, he was Executive Vice President and Chief Financial Officer of Beazer Homes, USA, Inc. since August 2003, having joined Beazer Homes in June 2002. Mr. OLeary was previously with U.S. Industries, Inc. from 1995 until 2002. He has been a Director of Kaydon since March 2005. | |
Anthony T. Behrman (46)
|
Vice President Human Resources. Mr. Behrman joined Kaydon in December 2007. Prior to joining Kaydon, he held a variety of human resources positions at companies including BorgWarner, which he joined in 2001, Thomson Consumer Electronics, GTE, and General Dynamics. | |
Donald I. Buzinkai (40)
|
Vice President, Controller and Chief Accounting Officer. Mr. Buzinkai joined Kaydon in June 2009. Prior to joining Kaydon, he was Vice President, Controller and Principal Accounting Officer of Alpharma, Inc. from 2007 to 2009. Prior to joining Alpharma, Inc., Mr. Buzinkai held a variety of accounting, financial, and human resources positions at Ingersoll Rand Company and Sony Electronics, Incorporated. | |
Debra K. Crane (54)
|
Vice President, General Counsel and Secretary. Ms. Crane joined Kaydon in January 2008. Prior to joining Kaydon, she was Senior Counsel for Parker-Hannifin Corporation from 2006 to 2007. From 2003 to 2006, Ms. Crane was with Novelis Corporation. | |
Peter C. DeChants (57)
|
Senior Vice President, Chief Financial Officer since January 2009. From May 2007 to January 2009 Mr. DeChants held the position of Senior Vice President Corporate Development and Strategy, and Treasurer. Mr. DeChants was previously Vice President Corporate Development and Treasurer since joining Kaydon in September 2002. Prior to joining Kaydon, he was the Vice President of Corporate Development and Strategic Planning of Metaldyne Corporation and its predecessor MascoTech, Inc., and Vice President and Treasurer of TriMas Corporation. | |
Executive officers, who are elected by the Board of Directors,
serve for a term of one year.
KAYDON CORPORATION
FORM
10K 7
Table of Contents
PART II
ITEM 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information and Dividends
The New York Stock Exchange is the principal market on which our
common stock is traded under the symbol KDN.
As of December 31, 2009, there were 629 holders of record
of our common stock.
The following table sets forth the high and low closing sales
prices of our common stock and the cash dividends declared per
share for the periods indicated.
2009 by Quarter | 2008 by Quarter | |||||||||||||||||||||||
Market Price |
Market Price |
Dividends |
Market Price |
Market Price |
Dividends |
|||||||||||||||||||
High | Low | Declared | High | Low | Declared | |||||||||||||||||||
Fourth
|
$ | 38.31 | $ | 31.03 | $ | 0.18 | $ | 45.22 | $ | 21.21 | $ | 0.17 | ||||||||||||
Third
|
36.72 | 29.70 | 0.18 | 59.00 | 47.09 | 0.17 | ||||||||||||||||||
Second
|
36.77 | 27.20 | 0.17 | 61.11 | 43.20 | 0.15 | ||||||||||||||||||
First
|
35.70 | 23.19 | 0.17 | 53.71 | 38.99 | 0.15 | ||||||||||||||||||
We expect that our practice of paying quarterly dividends on our
common stock will continue, although future dividends will
continue to depend upon our earnings, capital requirements,
financial condition and other factors.
There were no purchases made by the Company of shares of its
common stock during any month in the fourth quarter of 2009.
Equity
Compensation Plan Information
The following table gives information about our common stock
that may be issued upon the exercise of options, warrants and
rights under all of our existing equity compensation plans as of
December 31, 2009, including the 1999 Long Term Stock
Incentive Plan, the 2003 Non-Employee Directors Equity Plan and
the Director Deferred Compensation Plan.
(C) |
||||||||||||
Number of securities |
||||||||||||
(A) |
remaining available |
|||||||||||
Number of securities |
(B) |
for future issuance |
||||||||||
to be issued upon |
Weighted-average |
under equity |
||||||||||
exercise of |
exercise price of |
compensation plans |
||||||||||
outstanding |
outstanding options, |
(excluding securities |
||||||||||
options, warrants and |
warrants and |
reflected |
||||||||||
rights | rights | in column (A)) | ||||||||||
Equity compensation plans approved by shareholders
|
549,750 | (1) | $ | 38.67 | 2,634,647 | (3) | ||||||
Equity compensation plans not approved by
shareholders(2)
|
19,429 | N/A | N/A | |||||||||
Total
|
569,179 | 2,634,647 | ||||||||||
(1) | Includes only options outstanding under Kaydons 1999 Long Term Stock Incentive Plan and the 2003 Non-Employee Directors Equity Plan, as no warrants or rights were outstanding as of December 31, 2009. | |
(2) | Includes shares of Kaydon common stock pursuant to phantom stock units outstanding under Kaydons Director Deferred Compensation Plan adopted by the Board of Directors effective January 1, 2001. This Plan is the only equity plan that has not been approved by shareholders and provides a vehicle for a Director to defer compensation and acquire Kaydon common stock. The amount shown in column (A) above assumes these Directors elect to receive their deferred compensation in shares of Kaydon common stock. The number of shares reserved for issuance under this Plan is not limited in amount, other than by the dollar value of the non-employee Directors annual compensation. | |
(3) | Includes shares available for issuance under Kaydons 1999 Long Term Stock Incentive Plan which allows for the granting of stock options, stock appreciation rights and for awards of restricted stock, restricted stock units and stock-based performance awards to employees of and consultants to the Company, and shares available for issuance under the 2003 Non-Employee Directors Equity Plan which allows for the granting of stock options and for awards of restricted stock. |
8 KAYDON
CORPORATION FORM 10K
Table of Contents
Stock
Performance Graph
The following graph compares the cumulative, five-year
shareholder returns on our common stock to the
Standard & Poors 500 (S&P 500)
Stock Composite Index for the broad equity index and the Value
Line Diversified Manufacturing Index as an industry standard for
the five-year period commencing January 1, 2005 and ending
December 31, 2009, assuming an investment of $100.00 at the
close of trading on December 31, 2004 in our common stock,
the S&P 500 Stock Composite Index and the Value Line
Diversified Manufacturing Index (published by Value Line, Inc).
The cumulative total return assumes reinvestment of dividends.
2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
Kaydon Corporation
|
$ | 100.00 | $ | 98.93 | $ | 123.89 | $ | 171.96 | $ | 109.96 | $ | 116.95 | ||||||||||||
Standard & Poors 500
|
$ | 100.00 | $ | 104.91 | $ | 121.48 | $ | 128.15 | $ | 80.73 | $ | 102.09 | ||||||||||||
Diversified Manufacturing
|
$ | 100.00 | $ | 106.43 | $ | 133.46 | $ | 153.71 | $ | 91.76 | $ | 118.73 |
KAYDON CORPORATION
FORM
10K 9
Table of Contents
ITEM 6. SELECTED
FINANCIAL DATA
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Income Statement
|
||||||||||||||||||||
Net Sales
|
$ | 441,145 | $ | 522,374 | $ | 451,382 | $ | 403,992 | $ | 354,558 | ||||||||||
Gross Profit
|
143,865 | 192,180 | 184,300 | 167,426 | 139,030 | |||||||||||||||
Income From Continuing
Operations(2)
|
45,956 | (1) | 65,063 | 72,808 | (4) | 65,004 | 42,391 | |||||||||||||
Net
Income(2)
|
$ | 45,956 | (1) | $ | 65,063 | $ | 72,808 | (4) | $ | 65,004 | $ | 69,750 | ||||||||
Balance Sheet
|
||||||||||||||||||||
Total Assets
|
$ | 787,944 | $ | 789,782 | $ | 786,565 | $ | 737,556 | $ | 670,587 | ||||||||||
Cash and Cash Equivalents, and Short-term Investments
|
262,403 | 232,998 | 286,993 | 370,789 | 320,804 | |||||||||||||||
Total
Debt(2)
|
| | 196,860 | 189,201 | 182,226 | |||||||||||||||
Cash Flow Data
|
||||||||||||||||||||
Net Cash From Operating Activities
|
$ | 66,181 | $ | 57,900 | $ | 74,259 | $ | 89,860 | $ | 41,224 | ||||||||||
Capital Expenditures
|
11,986 | 60,704 | 54,244 | 26,930 | 12,785 | |||||||||||||||
Depreciation and Amortization of Intangible Assets
|
24,119 | 21,645 | 15,002 | 14,312 | 13,831 | |||||||||||||||
Per Share Data
|
||||||||||||||||||||
Earnings per Share From Continuing Operations
Diluted(3)
|
$ | 1.37 | (1) | $ | 2.06 | $ | 2.39 | (4) | $ | 2.15 | $ | 1.50 | ||||||||
Dividends Declared per Share
|
0.70 | 0.64 | 0.54 | 0.48 | 0.48 | |||||||||||||||
(1) | 2009 results include the after tax effect, $4.9 million or $0.15 per share, of the pre-tax $7.6 million gains related to the curtailment of certain postretirement benefits. | |
(2) | Includes the effect of the retrospective application of new accounting guidance related to our former Contingent Convertible Senior Subordinated Notes. The retrospective application reduced previously reported income from continuing operations and net income for 2008, 2007, 2006, and 2005, by $2.0 million, $4.9 million, $4.5 million, and $4.1 million, respectively. The effect of this guidance also reduced total debt for 2007, 2006, and 2005, by $3.1 million, $10.8 million, and $17.8 million, respectively. | |
(3) | Includes the effect of the retrospective application of new accounting guidance related to certain of our equity incentive awards which participate in dividends prior to vesting. The retrospective application reduced previously reported diluted earnings per share from continuing operations for 2008, 2007, 2006, and 2005, by $0.03 per share, $0.02 per share, $0.02 per share, and $0.02 per share, respectively. | |
(4) | 2007 results include the after tax effect, $3.1 million or $0.09 per share, of the pre-tax $5.0 million gain on the sale of a component of the Friction Control Products reporting segment. |
10 KAYDON
CORPORATION FORM 10K
Table of Contents
ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Our Company, Kaydon Corporation, is a leading designer and
manufacturer of custom engineered, performance-critical
products, supplying a broad and diverse group of alternative
energy, industrial, aerospace, medical and electronic equipment,
and aftermarket customers. Demand for our products depends, in
part, upon a wide range of general economic conditions, which
affect our markets in varying ways from year to year.
The global recessionary conditions that impacted the economy
during the second half of 2008 and throughout 2009 reduced
demand for our products and resulted in sales volume and
operating margin declines in each of our business segments.
These adverse macroeconomic conditions resulted in customers
acting with caution, which led to a decline in orders and
requests for deferred delivery of our product. In response to
these conditions, we have focused, and will continue to focus,
on programs to grow market share, reduce costs and improve
capacity utilization, and increase cash flow, thereby
positioning us to capitalize on future opportunities in targeted
markets when conditions improve.
While worldwide business conditions remain very challenging, our
industrial markets appear to have stabilized, albeit at
cyclically low levels. While we are confident in our strategic
positioning in each of our markets, meaningful improvements in
2010 will be dependent on an improved economy resulting in a
resumption of higher order rates in our core industrial end
markets. Because of our diverse product offerings and served
markets, as well as the general uncertainty as to the timing and
nature of any economic recovery, the specific impact of these
economic conditions on our operating results is difficult to
predict.
With respect to the wind energy market, while growth continued
in 2009, the longer term outlook will be heavily influenced by
both an improved economy, and resultant need for electricity,
and greater clarity on the public policy front. We believe that
recent actions and policy statements regarding a sustained,
committed policy towards increasing renewable energy usage in
the United States supports the confidence we have in our
investment in this market.
During 2009 our net sales totaled $441.1 million with
increased wind energy sales being more than offset by the
adverse effects of the worldwide recession on our remaining
businesses. We generated net income of $46.0 million, and
cash flow from operating activities of $66.2 million during
2009. Due to the strong cash flow from operations, cash and cash
equivalents increased $29.4 million during the year even as
we invested $12.0 million in capital expenditures,
$8.9 million for stock repurchases, $14.8 million to
fund our qualified pension plans, and increased our common stock
dividend. The total order book for 2009 equaled
$347.1 million, compared to $596.0 in 2008, and
$505.5 million in 2007, with the decrease reflecting the
macroeconomic downturn. Our 2009 year-end backlog of
$218.5 million provides a foundation for operating
performance in 2010; however, orders for our industrial products
will continue to be impacted by the timing and nature of any
economic recovery. Our investable balances provided significant
interest income in 2007 and early 2008 before financial markets
deteriorated. We responded to these adverse financial market
conditions in 2008 and 2009 with an investment strategy focused
on preserving cash balances. Market interest rates on these
investments are now near zero percent. As a result, our returns
on our investable balances were relatively insignificant in 2009
and will not improve significantly until market rates increase.
During 2009 we completed our wind energy capacity expansion
program, which provides us with the flexibility to respond to
customer requirements when markets improve.
In 2008, all of our $200.0 million 4% Contingent
Convertible Senior Subordinated Notes due 2023, (the
Notes) were converted into shares of our common
stock, which made us debt-free.
At December 31, 2009, our current ratio was 9.3 to 1 and
working capital totaled $397.7 million. We believe that our
cash and cash equivalents balance of $262.4 million at
December 31, 2009, and future cash flows from operations,
along with our borrowing capacity are adequate to fund our
strategies for future growth, including working capital,
expenditures for capital expansion and efficiencies, selected
stock repurchases, market share initiatives and corporate
development efforts.
In summary, our future performance will be impacted by general
economic conditions and the strength or weakness of the
manufacturing
KAYDON CORPORATION
FORM
10K 11
Table of Contents
environment, the success of our efforts to continue to expand
operations and improve operating efficiencies, as well as the
use of available cash and borrowing capacity for future
acquisitions.
The discussion which follows should be reviewed in conjunction
with the consolidated financial statements and the related Notes
to consolidated financial statements contained in Item 8 of
this Annual Report to assist in understanding our results of
operations, financial condition, cash flows, capital structure
and other relevant financial information.
Selected
Data For The Years 2009, 2008 and 2007
For the Years Ended December 31, | ||||||||||||||||||||||||
% of |
% of |
% of |
||||||||||||||||||||||
2009 | sales | 2008 | sales | 2007 | sales | |||||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||||||
Results from operations:
|
||||||||||||||||||||||||
Net sales
|
$ | 441,145 | $ | 522,374 | $ | 451,382 | ||||||||||||||||||
Cost of sales
|
297,280 | 330,194 | 267,082 | |||||||||||||||||||||
Gross profit
|
143,865 | 32.6 | % | 192,180 | 36.8 | % | 184,300 | 40.8 | % | |||||||||||||||
Selling, general and administrative expenses
|
72,527 | 16.4 | % | 86,669 | 16.6 | % | 73,037 | 16.2 | % | |||||||||||||||
Operating income
|
71,338 | 16.2 | % | 105,511 | 20.2 | % | 111,263 | 24.6 | % | |||||||||||||||
Interest expense
|
247 | 9,363 | 17,211 | |||||||||||||||||||||
Interest income
|
537 | 4,860 | 18,051 | |||||||||||||||||||||
Net income
|
$ | 45,956 | $ | 65,063 | $ | 72,808 | ||||||||||||||||||
Earnings per share - diluted
|
$ | 1.37 | $ | 2.06 | $ | 2.39 | ||||||||||||||||||
Analysis
of 2009 Operations Compared to 2008 Operations
Net
Sales
Net sales for 2009 equaled $441.1 million, a decrease of
$81.2 million or 15.5 percent, compared to net sales
in 2008 of $522.4 million. During 2009, the decline in net
sales was primarily attributable to a decrease in volume of
$73.2 million, or 14.0 percent, compared to 2008, as
sales gains to wind energy customers of $22.5 million or
28.0 percent were more than offset by the adverse impact of
the global economic recession on all our reporting segments and
all our other significant end markets. The adverse effects of
changes in currency exchange rates had an $8.6 million, or
1.6 percent, unfavorable impact on sales. This decrease was
principally attributable to a stronger U.S. dollar relative
to the Euro and British pound on a
year-over-year
basis. Finally, net improved pricing yielded an increase of
$0.6 million for the year. Pricing changes were favorable
in the first half of 2009 primarily as a result of price
increases on our core products, and were lower in the second
half of the year primarily due to contractual adjustments
associated with the contractual pass-through of decreased
material costs.
Gross
Margin
Gross margin in 2009 was 32.6 percent, a decrease of 4.2
points from the 36.8 percent gross margin in 2008. The
decreased sales volume and higher unabsorbed fixed costs
associated with lower production volumes accounted for 4.5
points of the decline in gross margin, and is largely due to the
global economic downturn, partially offset by the impact of cost
reduction efforts implemented across all our businesses.
Unfavorable changes in product mix accounted for an additional
0.7 points of the decline due to reduced sales volume to higher
margin industrial markets and increased sales volume to the wind
energy market, where margins are not as high. Pricing had a
favorable impact of 1.0 point on gross margin, primarily
attributable to favorable selling price increases in the first
half of 2009.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$72.5 million, or 16.4 percent of sales, in 2009,
compared to $86.7 million, or 16.6 percent of sales,
in 2008. During 2009, we recorded curtailment gains totaling
$7.6 million that were associated with changes to certain
postretirement benefit plans. The remaining decrease is
primarily attributable to the preemptive and continuing steps
that have been taken throughout the year to reduce discretionary
costs across all reporting segments as
12 KAYDON
CORPORATION FORM 10K
Table of Contents
a result of lower sales volume, partially offset by
approximately $1.8 million of one-time expenses associated
with layoffs and related severance in 2009.
Operating
Income
Our operating income was $71.3 million, or
16.2 percent of sales, in 2009, compared to
$105.5 million, or 20.2 percent of sales, in 2008. The
decrease in gross profit more than offset the decrease in
selling, general and administrative expenses.
Interest
Income
During 2009, interest income totaled $0.5 million on
average investment balances of $225.9 million as interest
rates were negligible for most of the year. This compares to
$4.9 million of interest income in 2008 when we earned
approximately 1.7 percent on average investment balances of
$272.0 million. The decrease in average investment balances
resulted from investments in our capital expenditure program,
increased working capital, contributions to our qualified
pension plans, the use of cash for our stock repurchase program,
and an increase in our dividend rate. The decrease in average
interest rates in 2009 reflects our conservative investment
strategy to preserve cash balances in response to financial
market conditions and prevailing historically low interest rates
on short term treasury securities. Interest rates for 2010 are
expected to show only modest improvement.
Interest
Expense
During 2009, interest expense totaled $0.2 million and
represented amortization of credit facility costs. During 2008,
interest expense totaled $9.4 million. The
year-over-year
difference of $9.1 million is attributable to interest and
amortization of issuance costs associated with the Notes that
were outstanding in the prior year, including a
$3.1 million adjustment of interest and amortization costs
associated with the retrospective application of new accounting
guidance effective January 1, 2009.
Provision
for Income Taxes
The effective tax rate for 2009 was 35.8 percent compared
to 35.6 percent in 2008. The effective tax rate for 2010 is
expected to decrease from the level in 2009 due to the impact of
tax credits and lower income taxes on foreign earnings.
Net
Income
Net income for 2009 was $46.0 million or $1.37 per share on
a diluted basis, which included the $4.9 million, or $0.15
per share, after tax gain associated with the curtailment of
certain postretirement benefits, based on approximately
33.3 million common shares outstanding. Net income for 2008
totaled $65.1 million or $2.06 per share on a diluted
basis, based on approximately 34.0 million common shares
outstanding. The 2008 results have been adjusted to reflect the
required retrospective application of new accounting guidance
related to convertible debt and earnings per share, which were
effective January 1, 2009, and reduced previously reported
2008 net income by $2.0 million and diluted earnings
per share by $0.03.
Analysis
of 2008 Operations Compared to 2007 Operations
Net
Sales
Net sales of $522.4 million in 2008 increased
$71.0 million or 15.7 percent compared to net sales in
2007 of $451.4 million. The increase was primarily
attributable to a $47.6 million increase in sales from our
wind energy initiative and increased sales of $22.7 million
from the inclusion of a full year of sales from the Avon
acquisition, which includes $6.4 million of increased wind
energy sales, and $5.7 million in increased sales of
velocity control products.
Gross
Margin
Gross margin for 2008 was 36.8 percent, a decrease of 4.0
points from the 40.8 percent for 2007. The lower gross
margin was due to the combined effects of product mix shifts,
the incurrence of costs to ramp up our wind energy expansion,
and the inclusion of Avon for which gross margins are not as
high as the Company average.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses totaled
$86.7 million and equaled 16.6 percent of sales.
Selling, general and administrative expenses in 2007 totaled
$73.0 million, which included a $5.0 million positive
effect of the gain on the sale of a component of the Friction
Control Products
KAYDON CORPORATION
FORM
10K 13
Table of Contents
reporting segment, and equaled 16.2 percent of sales.
Selling, general and administrative expenses increased during
2008 in support of increased sales, particularly for the
expansion of the Companys sales force, and due to
increased intangible amortization expense associated with the
Avon acquisition.
Operating
Income
Operating income totaled $105.5 million or
20.2 percent of sales compared to $111.3 million or
24.6 percent of sales during 2007, including the
aforementioned $5.0 million gain.
Interest
Income
Interest income declined to $4.9 million in 2008 compared
to $18.1 million in 2007. The decline was due to
substantially lower market interest rates, which on average were
approximately 300 basis points lower than in 2007. The
Company also had lower average cash and short-term investment
balances due to investments in property, plant, and equipment
for capacity expansion, share repurchases, pension
contributions, and increased dividend payments. In addition,
during 2008, the Company incurred losses totaling
$1.7 million, which were recorded as a reduction to
interest income.
Interest
Expense
During 2008, $9.1 million of interest and amortization of
issuance costs was charged to interest expense related to our
then outstanding $200.0 million of 4% Contingent
Convertible Senior Subordinated Notes (the Notes),
which were converted into shares of our common stock in the
third quarter of 2008. In 2007, $17.0 million of interest
and amortization of issuance costs related to the Notes was
charged to interest expense. The retrospective application of
new accounting guidance adopted, as required, on January 1,
2009, increased previously reported interest expense by
$3.1 million and $7.7 million for 2008 and 2007,
respectively.
Provision
for Income Taxes
The effective tax rate for 2008 was 35.6 percent compared
to 35.1 percent in 2007.
Net
Income
Our net income for 2008 totaled $65.1 million or $2.06 per
share on a diluted basis, based on approximately
34.0 million common shares outstanding. Net income for
2007, which included a $3.1 million, or $0.09 per share,
after tax gain on the sale of a component of a reporting
segment, was $72.8 million or $2.39 per share on a diluted
basis, based on approximately 34.6 million common shares
outstanding. The retrospective application of new accounting
guidance, adopted, as required, on January 1, 2009, reduced
previously reported 2008 net income and diluted earnings
per share by $2.0 million and $0.03 per share on a diluted
basis, respectively. The application of this new accounting
guidance reduced previously reported 2007 net income and
diluted earnings per share by $4.9 million and $0.02 per
share on a diluted basis, respectively.
Results by Business Segment
We classify our businesses into three reporting segments:
Friction Control Products, Velocity Control Products, and
Sealing Products. Our remaining operating segments are combined
and disclosed as Other businesses. The segment
discussions that follow describe the significant factors
contributing to the changes in results for each segment.
The aforementioned 2009 curtailment gains resulting from changes
to our postretirement benefit plans, which total
$7.6 million in 2009, were not allocated to our operating
segments.
Friction
Control Products
For the Years Ended December 31, | ||||||||||||||||||||
% Change |
% Change |
|||||||||||||||||||
2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||
Dollars in millions | ||||||||||||||||||||
Sales
|
$ | 296.4 | $ | 326.0 | $ | 261.7 | (9.1 | )% | 24.6 | % | ||||||||||
Operating Income
|
$ | 50.3 | $ | 73.9 | $ | 77.0 | (31.9 | )% | (4.0 | )% | ||||||||||
Operating Margin
|
17.0 | % | 22.7 | % | 29.4 | % | ||||||||||||||
14 KAYDON
CORPORATION FORM 10K
Table of Contents
2009 Compared to 2008
Sales in our Friction Control Products reporting segment were
$296.4 million during 2009 compared to $326.0 million
in 2008, reflecting a decrease of $29.5 million or
9.1 percent. Excluding sales gains to wind energy customers
of $22.5 million, sales to all other markets in 2009
decreased by $52.0 million from 2008. This decline was due
to the effects of volume declines of approximately
$47.2 million associated with adverse economic conditions
impacting industrial markets and an adverse currency exchange
rate impact of $5.4 million which offset a
$0.6 million benefit from increased pricing.
Operating income from the Friction Control Products reporting
segment during 2009 totaled $50.3 million compared to
$73.9 million in 2008. The $23.5 million decrease in
operating income was due to a $21.2 million adverse effect
of lower sales volumes, a $0.7 million adverse effect of
product mix resulting from lower sales to higher margin
industrial markets, and a $1.6 million decrease resulting
from higher costs net of cost saving initiatives and pricing
gains. The higher costs include increased depreciation
associated with our investment in capacity to support the wind
energy growth initiative, increased pension expense, and
severance and redundancy cost incurred during 2009.
2008 Compared to 2007
In 2008, sales in our Friction Control Products reporting
segment were $326.0 million, an increase of
$64.3 million or 24.6 percent compared to 2007 sales
of $261.7 million. Sales of custom engineered bearings to
the wind energy market increased $47.6 million, to the
military market increased $8.0 million, to the medical
market increased $4.8 million, and to the heavy equipment
market increased $6.3 million. Sales of split roller
bearings increased $5.4 million compared to 2007. Sales to
the machinery market declined $4.2 million, sales to the
specialty electronics market declined $2.4 million, and
sales to other markets declined $1.2 million compared to
the 2007. The inclusion of a full year of Avon sales accounted
for $22.7 million of the aforementioned $64.3 million
sales increase.
Operating income from the Friction Control Products reporting
segment was $73.9 million during 2008 as compared to
$77.0 million during 2007. The lower operating margin of
22.7 percent in 2008 compared to 29.4 percent in 2007
is the result of the mix impact of increased wind energy sales
and the inclusion of a full year of Avon sales, as both carry
margins that are not as high as those in our core industrial
business. Additionally, 2008 operating income was lower than in
2007 due to the $5.0 million gain on the sale of a
component of this reporting segment that was recorded in 2007.
Velocity
Control Products
For the Years Ended December 31, | ||||||||||||||||||||
% Change |
% Change |
|||||||||||||||||||
2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||
Dollars in millions | ||||||||||||||||||||
Sales
|
$ | 46.4 | $ | 69.6 | $ | 63.9 | (33.4 | )% | 8.9 | % | ||||||||||
Operating Income
|
$ | 6.5 | $ | 18.0 | $ | 16.2 | (64.0 | )% | 11.1 | % | ||||||||||
Operating Margin
|
14.0 | % | 25.9 | % | 25.4 | % | ||||||||||||||
2009 Compared to 2008
During 2009, sales in our Velocity Control Products reporting
segment were $46.4 million compared to $69.6 million
in 2008. The decrease of $23.3 million was due to a decline
in volume of $20.0 million caused by decreased demand in
worldwide markets for gas springs, hydraulic dampers, and other
products, especially in industrial markets, and the adverse
effects of changes in currency exchange rates of approximately
$3.3 million.
The Velocity Control Products reporting segment contributed
$6.5 million to our operating income during 2009 compared
to $18.0 million during 2008. This decrease in operating
income is principally due to the effect of the decline in sales
volume and adverse effects of exchange rate changes of
approximately $13.3 million and $0.4 million,
respectively. This decrease was partially offset by net cost
reduction savings of $2.2 million.
2008 Compared to 2007
The Velocity Control Products reporting segment achieved sales
of $69.6 million during 2008, up $5.7 million, or
8.9 percent from 2007 sales of $63.9 million,
reflecting a $2.7 million impact of favorable currency
exchange rate changes,
KAYDON CORPORATION
FORM
10K 15
Table of Contents
$1.8 million of increased sales volume of gas springs,
hydraulic dampers, and other products, particularly in European
markets, and $1.1 million of increased pricing.
The Velocity Control Products reporting segment contributed
$18.0 million to our consolidated operating income during
2008 as compared to $16.2 million during 2007 due
principally to the benefit of increased sales volume.
Sealing
Products
For the Years Ended December 31, | ||||||||||||||||||||
% Change |
% Change |
|||||||||||||||||||
2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||
Dollars in millions | ||||||||||||||||||||
Sales
|
$ | 37.8 | $ | 45.0 | $ | 46.7 | (15.9 | )% | (3.6 | )% | ||||||||||
Operating Income
|
$ | 3.9 | $ | 5.0 | $ | 8.7 | (22.1 | )% | (43.0 | )% | ||||||||||
Operating Margin
|
10.2 | % | 11.1 | % | 18.6 | % | ||||||||||||||
2009 Compared to 2008
Sales in our Sealing Products reporting segment in 2009 were
$37.8 million compared to $45.0 million in 2008, as
decreased volume associated with the global economic recession
and customer deferrals of shipments of our products of
$7.7 million was only partially offset by a
$0.6 million increase resulting from favorable pricing.
The Sealing Products reporting segment contributed
$3.9 million to our operating income during 2009 compared
to $5.0 million during 2008. The combined effect of
decreased sales volumes and an adverse change in product mix
associated with lower sales of higher margin industrial seals
totaled $4.9 million, and was partially offset by the
impact of higher pricing of $0.6 million, net cost
reductions of approximately $2.4 million, and 2008 property
and equipment impairment charges of $0.8 million.
2008 Compared to 2007
Our Sealing Products reporting segment sales totaled
$45.0 million during 2008, a decline of 3.6 percent
from 2007 sales of $46.7 million, due to lower demand in
the defense and railroad markets.
The Sealing Products reporting segment contributed
$5.0 million to our consolidated operating income during
2008 as compared to $8.7 million during 2007 due to the
decrease in sales, adverse product mix changes, and property and
equipment impairment charges totaling $0.8 million.
Other
businesses
For the Years Ended December 31, | ||||||||||||||||||||
% Change |
% Change |
|||||||||||||||||||
2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||
Dollars in millions | ||||||||||||||||||||
Sales
|
$ | 60.5 | $ | 81.8 | $ | 79.1 | (26.0 | )% | 3.4 | % | ||||||||||
Operating Income
|
$ | 4.7 | $ | 10.5 | $ | 11.1 | (55.4 | )% | (6.1 | )% | ||||||||||
Operating Margin
|
7.7 | % | 12.8 | % | 14.0 | % | ||||||||||||||
2009 Compared to 2008
Sales in our other businesses were $60.5 million during
2009 compared to $81.8 million in 2008. The
$21.3 million sales decline was principally due to the
global economic recession which resulted in decreased sales of
our liquid filtration, air filtration, metal alloy, and
metal-forming products.
Our other businesses contributed $4.7 million to our
operating income during 2009 compared to $10.5 million
during 2008. This decrease in operating income is due to the
effect of lower sales volumes of $9.0 million, partially
offset by net cost reductions of $2.2 million, and higher
pricing of $1.0 million.
2008 Compared to 2007
Sales in our other businesses were $81.8 million during
2008, up $2.7 million or 3.4 percent from 2007 sales
of $79.1 million primarily due to growth in our liquid and
air filtration businesses, and due to higher pricing in our
metal alloys business when tin prices increased in mid-2008.
16 KAYDON
CORPORATION FORM 10K
Table of Contents
Our other businesses contributed $10.5 million to our
consolidated operating income during 2008 as compared to
$11.1 million during 2007 with the decrease principally due
to an increase in product costs.
Liquidity
and Capital Resources
At December 31, 2009, our current ratio was 9.3 to 1 and
working capital totaled $397.7 million, including cash and
cash equivalents of $262.4 million. At December 31,
2008 our current ratio was 6.8 to 1 and working capital totaled
$365.3 million, including cash and cash equivalents of
$233.0 million.
We have historically generated significant cash flows from
operating activities to fund capital expenditures, dividends and
other operating requirements. Cash flow generation has been
enhanced by our continuing efforts to improve operating
efficiencies, implement cost reductions, and manage working
capital requirements. Net cash from operating activities equaled
$66.2 million in 2009, $57.9 million in 2008, and
$74.3 million in 2007. Despite difficult economic
conditions, net cash from operating activities increased in 2009
compared to 2008 as reduced investments in working capital more
than offset the adverse impact of decreased net income. Net cash
from operating activities in 2008 declined compared to 2007 as
decreased net income and increased investment in working capital
associated with sales growth more than offset the benefits of
decreased contributions to our qualified pension plans.
Net inventories at December 31, 2009 were
$88.8 million, a decrease of $9.0 million from the
$97.7 million of inventory at December 31, 2008. The
2009 decrease was principally attributable to the overall
decline in sales volumes as inventory turns were consistent on a
year-over-year
basis. Net inventories at December 31, 2008 increased
$28.9 million from the December 31, 2007 balance of
$68.9 million. The 2008 inventory increase was attributable
to sales growth and our investment in inventory to supply
bearings to wind energy turbine manufacturers.
In considering both our long-term confidence in the wind energy
market and our ongoing strategic relationships with wind energy
customers, we have made significant investments in support of
this initiative. We closely monitor our accounts receivable from
wind energy customers and are reasonably assured that our
accounts receivable are fully collectible. Additionally, we
believe that our inventory as of December 31, 2009 is fully
realizable. As such we have not established any reserve for
inventory or any allowance for doubtful accounts related to wind
energy customers as of December 31, 2009.
At December 31, 2009, we had approximately
$8.5 million of working capital invested on behalf of an
international wind energy customer, including past due accounts
receivable and inventory and purchase commitments made or
incurred on the customers behalf and designed to its
agreed upon specifications. The customer has not paid us because
the customer alleges that certain field performance issues of
its product are attributable to the quality of our supplied
bearings. We are confident that our bearings were made to the
agreed upon design specifications and that the customers
field performance issues relate to factors outside of our
control. Under the documents which comprise the sales contract,
the customer is obligated to pay its liability and to reimburse
us for inventory costs incurred and lost profits. In order to
expedite the resolution of this matter, we have agreed with the
customer to enter into a mediation process, and if necessary,
binding arbitration. As we are confident in the quality of our
supplied product and the customers financial ability to
pay, we have concluded that the receivables and inventory are
fully realizable and the purchase commitments are fully
recoverable.
Capital expenditures to expand productive capacity, improve
quality, and reduce costs equaled $12.0 million in 2009,
$60.7 million in 2008, and $54.2 million in 2007. The
decrease in capital expenditures in 2009 compared to 2008
reflects the completion of our wind energy capital expansion in
2009 and our disciplined approach to managing capital
expenditures during challenging economic conditions. The
increase in 2008 compared to 2007 reflects the capital spending
on the wind energy growth initiative. During 2009, 2008, and
2007, capital expenditures for the wind energy growth initiative
totaled $5.4 million, $33.7 million, and
$29.1 million, respectively. During 2010 we expect to
invest approximately $30 million in aggregate capital
expenditures for all segments.
At December 31, 2008, we had a net position of
$4.9 million in an enhanced cash investment. The fund
issuer had restricted the redemption of the
KAYDON CORPORATION
FORM
10K 17
Table of Contents
fund to permit its orderly liquidation. During 2009, we received
$5.1 million in proceeds from the redemption of the
remaining portion of this investment and recorded a
$0.2 million gain on the liquidation, which was recorded as
interest income. In 2008 we recorded $0.6 million in losses
as a reduction of interest income on the partial liquidation of
the fund. Also in 2008, we recorded charges as a reduction of
interest income totaling $1.0 million to reduce the gross
investment to fair value.
We continue our corporate development efforts to complement
internal growth through the acquisition of additional companies
that meet our well-disciplined criteria. In October 2007, we
acquired Avon Bearings Corporation for $54.4 million, net
of working capital adjustments recorded in 2008. An independent
appraiser was engaged to assist management in determining the
fair values of separately recognized intangible assets of Avon.
After allocating cost to other assets acquired and liabilities
assumed based on their estimated fair values, the excess cost of
the acquisition, equal to $27.4 million, was recognized as
goodwill at December 31, 2007. In 2008 we recorded purchase
price adjustments of $1.1 million associated with this
acquisition which increased the associated goodwill.
The Company paid common stock dividends totaling
$23.2 million, $18.2 million, and $14.4 million
in 2009, 2008, and 2007, respectively. The dividends paid
through the third quarter of 2007 were at a quarterly rate of
$0.12 per share. The dividends paid in the fourth quarter of
2007 and the first three quarters of 2008 were at a quarterly
rate of $0.15 per share. The dividends paid in the fourth
quarter of 2008 and in the first three quarters of 2009 were at
a quarterly rate of $0.17 per share. The dividend declared in
July 2009, paid early in the fourth quarter of 2009, was at a
quarterly rate of $0.18 per share.
We repurchased 314,047 shares of our common stock in 2009
for $8.9 million, 937,941 shares of our common stock
in 2008 for $35.9 million and 601,974 shares of our
common stock in 2007 for $30.1 million. In 2005, the
Companys Board of Directors authorized a share repurchase
program of up to 5,000,000 shares. Of the
5,000,000 shares currently authorized by the Board of
Directors for repurchase, 1,970,817 shares have been
repurchased as of December 31, 2009. We will make
opportunistic stock repurchases over time, the amount of which
will depend on the market for our common stock and our financial
position and liquidity.
Our payments to various taxing authorities were
$16.7 million, $27.4 million, and $25.1 million
during 2009, 2008, and 2007. Tax payments are expected to be
approximately $20 million during 2010. As part of
governmental efforts to react to climate change and stimulate
economic growth, The American Reinvestment and Recovery Act of
2009 authorized the Department of Treasury to award tax credits
for qualified investments in advanced energy projects, to
support new, expand, or re-equip domestic manufacturing
facilities. In 2010 we were awarded $1.8 million in tax
credits for our qualifying advanced energy investment which we
expect to utilize beginning in 2010.
In 2003, we issued $200.0 million of 4% Contingent
Convertible Senior Subordinated Notes due 2023 (the
Notes). The Notes were convertible into shares of
Company common stock provided certain contingencies were met.
During 2008, holders of the Notes converted their Notes into
Company common stock, which were issued from treasury stock.
We had no debt outstanding at any time during 2009, and
accordingly paid no cash interest. Cash paid for interest
totaled $4.0 million in 2008 and $8.0 million in 2007.
During 2008, $9.1 million of interest and amortization of
issuance costs was charged to interest expense related to the
Notes. In 2007, $17.0 million of interest and amortization
of issuance costs related to the Notes was charged to interest
expense. The retrospective application of new accounting
guidance adopted, as required, on January 1, 2009,
increased previously reported interest expense by
$3.1 million and $7.7 million for 2008 and 2007,
respectively.
We have a senior credit facility with a syndicate of lenders
providing for a $300.0 million senior unsecured revolving
credit facility. The credit facility provides for borrowings and
issuances of letters of credit by the Company and its
subsidiaries in various currencies for general corporate
purposes, including acquisitions. The credit facility matures on
July 12, 2010 and is guaranteed by the Company and certain
of our domestic subsidiaries. Interest accrues on borrowings
under the revolving credit facility based on the London
Interbank Offered Rate. The revolving credit facility contains
restrictive financial covenants on a consolidated basis
including leverage and coverage ratios, utilizing
18 KAYDON
CORPORATION FORM 10K
Table of Contents
measures of earnings and interest expense as defined in the
revolving credit facility agreement. We are in compliance with
all restrictive covenants contained in the revolving credit
facility at December 31, 2009. We have available credit
under our revolving credit facility of $300.0 million at
December 31, 2009. We are planning on establishing a new
credit facility during the first half of 2010.
Fees related to our existing revolving credit facility of
approximately $1.2 million are being amortized as a
component of interest expense over a five-year period. Revolving
credit facility fees included in other assets in the
Consolidated Balance Sheet as of December 31, 2009, equaled
$0.1 million.
We expect that our planned capital requirements, which consist
of capital expenditures, dividend payments and our stock
repurchase program, will be financed by operations and existing
cash balances. In addition, our revolving credit facility
provides additional financial strength to support our
objectives, including future acquisitions.
Our significant contractual obligations as of December 31,
2009 are set forth below:
Payments due by period | ||||||||||||||||||||
Less than |
More than |
|||||||||||||||||||
Contractual Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating leases
|
$ | 11,610 | $ | 2,345 | $ | 4,487 | $ | 2,325 | $ | 2,453 | ||||||||||
Purchase obligations for property, plant and equipment
|
1,158 | 1,158 | | | | |||||||||||||||
Total
|
$ | 12,768 | $ | 3,503 | $ | 4,487 | $ | 2,325 | $ | 2,453 | ||||||||||
We expect to make cash contributions of approximately
$2.9 million to our pension plans in 2010. We review our
funding strategy for our pension plans on an ongoing basis. We
expect to contribute approximately $0.6 million to our
postretirement benefit plans in 2010. We have $2.5 million
of liabilities for unrecognized tax benefits which are excluded
from the above table because the timing of settlement of these
liabilities cannot be reasonably estimated.
Corporate
Development
Our corporate development efforts are intended to complement
internal growth through the acquisition of additional companies
consistent with our well-disciplined criteria. We maintain a
disciplined acquisition program, which has made important
contributions to our growth. In 2007, we acquired all of the
outstanding stock of Avon Bearings Corporation
(Avon) in a cash transaction valued at
$54.4 million, net of $0.5 million of working capital
adjustments recorded in 2008. Avon is a custom designer and
manufacturer of high precision large diameter turntable
bearings. Avon also remanufactures bearings and sells
replacement bearings.
Litigation
We are a party to various pending lawsuits and other matters
arising in the normal course of business. Our estimated legal
costs expected to be incurred in connection with claims,
lawsuits and environmental matters are accrued in the
consolidated financial statements. The costs accrued at
December 31, 2009 and 2008 were not material.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity
with U.S. generally accepted accounting principles. The
preparation of these financial statements requires the use of
estimates, judgments, and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
periods presented.
We continually evaluate the estimates, judgments, and
assumptions used to prepare the consolidated financial
statements. In general, our estimates are based on: historical
experience, information from third party professionals, and
various other judgments and assumptions that are believed to be
reasonable under the current facts and circumstances. Actual
results could differ from our current estimates. We have
identified certain accounting policies and estimates, described
below, that are the most critical to the portrayal of our
current financial condition and results of operations.
Inventories Inventories are stated at the
lower of cost or market, with cost determined on a
KAYDON CORPORATION
FORM
10K 19
Table of Contents
first-in,
first-out basis. The carrying value of inventory is reduced for
estimated obsolescence by the difference between its cost and
the estimated market value based upon assumptions regarding
future demand. We evaluate the inventory carrying value for
potential excess and obsolete inventory exposures by analyzing
historical and anticipated demand. In addition, inventories are
evaluated for potential obsolescence due to the effect of known
or anticipated engineering change orders, new products, and
other factors.
We believe the accounting estimates related to inventories to be
critical accounting estimates because the assumptions used to
determine the valuation of inventories, while based on
reasonable and supportable information, may change and cause
projected outcomes to vary.
Impairment of Long-Lived Assets We
continually evaluate whether events and circumstances have
occurred that indicate the remaining estimated useful lives of
long-lived assets including fixed assets and amortizable
intangible assets may warrant revision or that remaining
balances may not be recoverable. When factors indicate that such
costs should be evaluated for possible impairment, we use an
estimate of undiscounted future cash flows over the remaining
lives of the long-lived assets that is compared to the carrying
value of the asset to evaluate whether the asset costs are
recoverable.
We believe the accounting estimates related to long-lived asset
impairment to be critical accounting estimates because the
estimate of undiscounted future cash flows, while based on
reasonable and supportable assumptions and projections, requires
our subjective judgments and the time periods for estimating
future cash flows is often lengthy, increasing the sensitivity
of assumptions made, thus projected outcomes may vary.
To better understand this accounting policy and its impact on
us, readers should refer to the Notes to Consolidated
Financial Statements (Note 1 and Note 10) in
this Annual Report for additional information regarding
long-lived assets.
Impairment of Goodwill and Indefinite-Lived Intangible
Assets We test goodwill for impairment at the
reporting unit level, which represents an operating segment or a
component of an operating segment for which discrete financial
information is available and segment management regularly
reviews the operating results. Currently eight of our reporting
units have goodwill balances.
We test for impairment of goodwill on an annual basis by
comparing the fair value of each reporting unit with the
reporting units carrying amount. The fair value of the
reporting unit is derived from an estimate of discounted future
cash flows. The discounted cash flow model for each reporting
unit requires judgmental assumptions regarding each reporting
units specific projected revenue growth, future operating
margins, and working capital and capital expenditure
requirements, in addition to assumptions of appropriate discount
rates and terminal values based on growth rates in perpetuity.
There are inherent uncertainties related to these assumptions
and managements judgment in applying them to the analysis
of goodwill impairment. While we believe we have made reasonable
estimates and assumptions to calculate the fair value of our
reporting units, it is possible a material change could occur.
Goodwill of a reporting unit is tested for impairment between
annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting
unit below its carrying amount.
In 2009, as of our annual assessment date, we used a
12 percent discount rate to calculate fair value for all of
our reporting units. In 2008 an 11 percent discount rate
was utilized. The discount rate used each year is the
value-weighted average of our estimated cost of equity and
estimated cost of debt (cost of capital) derived
using both known and estimated, customary, marketplace metrics,
including a size risk premium. The one percent increase in the
discount rate used for 2009 compared to 2008 is driven by the
use of an additional market risk premium to account for the
increased level of systematic risk prevailing in the market and
the low yield for risk-free securities as of the valuation date.
We currently utilize the same discount rate to estimate the fair
value of all of our reporting units because we believe that the
underlying similarities in the businesses within our portfolio
result in a common risk profile with regard to assumed
variability of estimated future undiscounted cash flows. Our
calculation methodology was unchanged during 2009, and the
consistent application of this methodology may result in changes
in the discount rate in future periods.
In arriving at future discounted cash flows for each reporting
unit, we evaluate the appropriate
20 KAYDON
CORPORATION FORM 10K
Table of Contents
growth rate in perpetuity for each of our reporting units to
calculate a terminal value of cash flows following each
reporting units five year planning period. The terminal
value for each reporting unit is determined based on that
units specific operating cash flow at the end of the
planning period and the units assumed growth rate in
perpetuity. We currently utilize the same assumed growth rate in
perpetuity of two percent in the discounted cash flow model of
each of our reporting units. This is based on our assumption
that the long term growth rates following our planning periods
no longer benefit from specifically-planned reporting unit
initiatives and therefore only reflect the overall approximate
long term economic growth rate.
Potential goodwill impairment is identified if a reporting
units carrying amount is more than a reporting units
fair value. If this occurs, normally a third-party valuation
specialist is utilized to assist us in determining the implied
fair value of the reporting units goodwill. The amount of
any actual impairment loss is calculated by comparing the
implied fair value of the reporting units goodwill with
the carrying amount of the reporting units goodwill.
Our goodwill impairment testing in 2009 revealed that the excess
of the estimated fair value of each of the reporting units
tested over their carrying value (expressed as a percentage of
the carrying amount) as of the July 31st annual
testing date ranged from approximately 22 percent to
approximately 475 percent. Assumptions regarding discount
rate, revenue growth rates, operating profit margins and
perpetuity growth rate may have a significant effect on the
estimated fair value of our reporting units. In order to
evaluate the sensitivity of the fair value calculations on the
goodwill impairment test, we applied a hypothetical ten percent
decrease to the fair values of each reporting unit. The results
of this ten percent hypothetical change in fair values would not
have changed our conclusion that fair values exceeded carrying
values in each case by a material amount.
Certain trademarks are our only indefinite-lived intangible
assets. We identify impairment of these trademarks by comparing
their fair value to their carrying amounts. The fair values of
the trademarks are calculated based on estimates of discounted
future cash flows related to the net amount of royalty expenses
avoided due to the existence of the trademarks.
We believe the accounting estimates related to impairment of
goodwill and indefinite-lived intangible assets to be critical
accounting estimates because: the estimate of discounted future
cash flows and terminal values, while based on reasonable and
supportable assumptions and projections, require our subjective
judgments, the time periods for estimating future cash flows is
often lengthy, which increases the sensitivity to assumptions
made, projected outcomes based on the assumptions made can vary,
and the calculation of implied fair value is inherently subject
to estimates.
To better understand this accounting policy and its impact on
us, readers should refer to the Notes to Consolidated
Financial Statements (Note 10) in this Annual
Report for additional information regarding goodwill and
intangible assets.
Retirement Benefits Our employee pension and
postretirement benefit costs and obligations recorded in the
financial statements are dependent on our estimates provided to
and used by our actuaries in calculating such amounts.
We believe the accounting estimates related to retirement
benefits to be critical accounting estimates because of the wide
range of assumptions used in deriving yearly contribution and
expense amounts as well as the amounts recorded for retirement
benefits in our financial statements. Significant assumptions
include judgments regarding discount rates, health care cost
trend rates, salary growth rates, and long-term returns on plan
assets.
We have developed estimates based on: historical experience,
information from third party professionals, and various other
judgments and assumptions that are believed to be reasonable
under the current facts and circumstances. In developing the
discount rate assumption used to determine the pension and
postretirement benefit obligations, we use the weighted average
of market-observed yields for high quality fixed income
securities with maturities that correspond to the payment of
benefits. The equivalent weighted-average discount rate is
calculated by imputing the interest rate that equates the total
present value with the stream of future cash flows. Health care
cost trend assumptions are developed based on historical data,
the near-term outlook, and on an assessment of likely long-term
trends. Salary growth assumptions reflect our long-term
experience, the near-term outlook and assumed inflation.
KAYDON CORPORATION
FORM
10K 21
Table of Contents
Long-term return on plan assets is based on an evaluation of
historical and expected returns of the individual asset classes
comprising the total plan assets. For individual categories of
equity securities, historical total and real rates of return are
considered, together with inflation and overall market factors
including dividend yield, earnings growth, changes in price to
earnings ratios and volatility of returns. For various fixed
income asset categories, expected long-term returns are
determined after consideration of current yields on fixed income
securities, inflation, historical yields relative to benchmarks,
and long-term default rates. For other asset classes, including
real estate, expected long-term returns are determined through
consideration of certain factors, which may include historical
returns, dividend yields, inflation, benchmark returns and net
asset values.
Assumed discount rates, expected rate of return on plan assets,
and rate of compensation increases have a significant effect on
the amounts reported for the pension plans. The effect of a one
percentage point increase or decrease in each factor on the
projected benefit obligation and net periodic pension cost would
have been:
1-Percentage-Point |
1-Percentage-Point |
|||||||
Increase | Decrease | |||||||
Discount rate effect on December 31, 2009 projected benefit
obligation
|
$ | (13,096,000 | ) | $ | 15,957,000 | |||
Discount rate effect on the 2009 net periodic pension cost
|
$ | (1,430,000 | ) | $ | 1,733,000 | |||
Salary scale effect on December 31, 2009 projected benefit
obligation
|
$ | 3,334,000 | $ | (2,831,000 | ) | |||
Salary scale effect on the 2009 net periodic pension cost
|
$ | 881,000 | $ | (721,000 | ) | |||
Expected return on plan assets effect on net periodic pension
cost
|
$ | (707,000 | ) | $ | 707,000 | |||
The following table summarizes certain of the Companys
assumptions:
Postretirement |
||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Weighted-average assumptions used to determine projected benefit
obligation:
|
||||||||||||||||
Discount rate qualified pension plans
|
5.93 | % | 6.25 | % | N/A | N/A | ||||||||||
Discount rate non-qualified pension plan
|
6.05 | % | 6.25 | % | N/A | N/A | ||||||||||
Discount rate postretirement benefit plans
|
N/A | N/A | 5.47 | % | 6.25 | % | ||||||||||
Rate of compensation increase age graded
|
5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||
Weighted-average assumptions used to determine net periodic
benefit cost:
|
||||||||||||||||
Discount rate qualified pension plans and
postretirement benefit plans
|
6.25 | % | 6.50 | % | 6.23 | % | 6.50 | % | ||||||||
Discount rate non-qualified pension plan
|
6.25 | % | 6.25 | % | N/A | N/A | ||||||||||
Expected long-term return on plan assets
|
8.00 | % | 8.00 | % | N/A | N/A | ||||||||||
Rate of compensation increase age graded in 2009,
average in 2008
|
5.00 | % | 4.00 | % | 5.00 | % | 4.00 | % | ||||||||
Actual results that differ from our assumptions are accumulated
and amortized over future periods and, therefore, generally
affect our recognized expense and recorded obligation in such
future periods. While we believe that the assumptions used are
appropriate, significant differences in actual experience or
significant changes in assumptions would affect our pension and
postretirement benefits costs and obligations.
The current market conditions for highly rated corporate bonds
has a significant effect on our assumption for the discount rate
used to determine projected benefit obligations and net periodic
benefit cost, where an increase (decrease) in interest rates
will result in a decrease (increase) in the projected benefit
obligation and decrease (increase) in net periodic benefit cost.
At December 31, 2009 the discount rates assumed were lower
than those at December 31, 2008, affecting plan benefit
obligations at December 31, 2009 and the net periodic
pension cost for 2010 accordingly.
Changes in current conditions in financial markets do not
significantly alter the underlying long-term expected return on
plan assets each year. However, actual returns compared to the
expected return on plan assets have a significant effect on the
funded status of the plans, and consequently the net periodic
pension cost and plan contributions in future periods. The
actual rate of return on plan assets in 2008 was significantly
below the expected long-term rate of return on plan assets
reducing the funded status at December 31, 2008 and
increasing the net periodic pension cost in 2009. We chose to
make a voluntary contribution to our qualified pension plans in
2009 using cash generated from operations. The actual rate of
return on plan assets in 2009 significantly exceeded the
expected long-term rate of return on plan assets. The combined
effect
22 KAYDON
CORPORATION FORM 10K
Table of Contents
of our voluntary contribution and the actual rate of return on
plan assets resulted in a relative improvement in the funding
status of our qualified plans at December 31, 2009 and will
result in reduced net periodic pension cost in 2010. Our cash
contributions required to fund our pension plans in 2010 are
expected to be $2.9 million. The 2010 cash contributions
and future expected contributions are expected to have only a
minor impact on our current and future liquidity as we expect to
meet funding requirements from cash generated in our operations
or our available cash resources.
To better understand this accounting policy and its impact on
us, readers should refer to the Notes to Consolidated
Financial Statements (Note 7) in this Annual
Report for additional information regarding costs, obligations,
and assumptions for employee pension and postretirement benefits.
Income Taxes We record deferred tax assets
and liabilities using enacted tax rates for the effect of
differences between the book and tax basis of recorded assets
and liabilities. These deferred tax assets and liabilities are
reviewed for recoverability by using estimates of future taxable
income streams and the impact of tax planning strategies.
Deferred tax assets are reduced by a valuation allowance if it
is more likely than not that a portion of the deferred tax asset
will not be realized. Reserves are also estimated for ongoing
audits regarding federal, state and international issues that
are currently unresolved. Income tax is provided based upon an
effective tax rate that is dependent upon tax regulations
governing the regions in which we conduct business, geographic
composition of worldwide earnings, the availability of tax
credits and other factors.
We have liabilities recorded for unrecognized tax benefits
totaling $2.5 million as of December 31, 2009, all of
which would affect the effective tax rate. It is our policy to
include interest and penalties incurred due to underpayment or
late payment of income taxes due to a taxing authority on a
net-of-tax
basis as a component of income tax expense. We have recorded
$1.0 million in liabilities for tax-related interest and
penalties on our consolidated balance sheet, as of
December 31, 2009. The Company does not expect that the
total amounts of unrecognized tax benefits will significantly
change within the next twelve months.
The Company, or one or more of its subsidiaries, operates and
files income tax returns in the United States, various states,
and foreign jurisdictions. Foreign jurisdictions significant to
the Company include Germany and the United Kingdom. With limited
exceptions, we are no longer subject to U.S. federal tax
examinations for years before 2006, state examinations for years
before 2004, German tax examinations for years before 2006, or
United Kingdom tax examinations for years before 2007.
We believe the accounting estimates related to income taxes to
be critical accounting estimates because the range of
assumptions used to determine deferred tax assets and
liabilities and to record current tax benefits and liabilities,
while based on reasonable and supportable information, may
change from year to year causing projected outcomes to vary.
To better understand this accounting policy and its impact on
us, readers should refer to the Notes to Consolidated
Financial Statements (Note 9) in this Annual
Report for additional information regarding income taxes.
Forward-Looking
Statements
This
Form 10-K
contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934 regarding our plans,
expectations, estimates and beliefs. Forward-looking statements
are typically identified by words such as believes,
anticipates, estimates,
expects, intends, will,
may, should, 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 our financial performance,
anticipated growth and expansion, characterization of and our
ability to control contingent liabilities, and anticipated
trends in our businesses. These statements are only predictions,
based on our current expectation about future events. Although
we believe the expectations reflected in the forward-looking
statements are reasonable, we 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 our actual
results,
KAYDON CORPORATION
FORM
10K 23
Table of Contents
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 our 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. We do not undertake
any responsibility to update our forward-looking statements or
risk factors to reflect future events or circumstances except to
the extent required by applicable law.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks, which exist as part of
our ongoing business operations including interest rates and
foreign currency exchange rates. The exposure to market risk for
changes in interest rates relates primarily to investments in
cash and cash equivalents, and short-term investments. All
highly liquid investments, including highly liquid debt and
investment instruments purchased with an original maturity of
three months or less, are considered cash equivalents. We place
our investments in cash equivalents with high credit quality
issuers and limit the amount of exposure to any one issuer. A
decrease in interest rates would not have a material impact on
our pre-tax earnings. We conduct business in various foreign
currencies, primarily in Europe, Mexico, and Asia. Therefore,
changes in the value of currencies in these regions affect our
financial condition and cash flows when translated into
U.S. dollars. We have mitigated and will continue to
mitigate a portion of our currency exposure through operation of
decentralized foreign operating companies in which certain costs
are local currency based. In addition, periodically, we enter
into derivative financial instruments in the form of forward
foreign exchange contracts to reduce the effect of fluctuations
in foreign exchange rates. A 10 percent change in the value
of all foreign currencies would not have a material effect on
our financial condition and cash flows.
24 KAYDON
CORPORATION FORM 10K
Table of Contents
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Kaydons management is responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined under
applicable Securities and Exchange Commission rules as a process
designed under the supervision of the Companys Chief
Executive Officer and Chief Financial Officer and effected by
the Companys Board of Directors, management and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the
Companys financial statements for external purposes in
accordance with generally accepted accounting principles. The
Companys internal control over financial reporting
includes those policies and procedures that:
| Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; | |
| Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the Directors of the Company; and | |
| Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal
Control Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2009.
Ernst & Young LLP, the independent registered public
accounting firm that audited the consolidated financial
statements of the Company included in this Annual Report on
Form 10-K,
has issued their report on the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2009. Their report is included herein under
the heading Report of Independent Registered Public
Accounting Firm Internal Control.
KAYDON CORPORATION
FORM
10K 25
Table of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INTERNAL CONTROL
INTERNAL CONTROL
The Board of
Directors and Shareholders of Kaydon Corporation
We have audited Kaydon Corporations internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Kaydon
Corporations management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management
Report On Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Kaydon Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets as of December 31, 2009 and
2008, and the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2009 of Kaydon
Corporation and our report dated February 26, 2010
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 26, 2010
26 KAYDON
CORPORATION FORM 10K
Table of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
The Board of
Directors and Shareholders of Kaydon Corporation
We have audited the accompanying consolidated balance sheets of
Kaydon Corporation as of December 31, 2009 and 2008, and
the related consolidated statements of income,
shareholders equity and cash flows for each of the three
years in the period ended December 31, 2009. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Kaydon Corporation at December 31,
2009 and 2008, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, the accompanying consolidated financial statements
have been retrospectively adjusted for the adoption of a new
accounting standard related to the Companys previously
outstanding 4% Contingent Convertible Senior Subordinated Notes.
Also, as discussed in Note 1, there have been retrospective
adjustments relating to the adoption of a new accounting
standard related to the earnings allocation to participating
securities included in calculating earnings per share under the
two-class method.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Kaydon Corporations internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 26, 2010
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 26, 2010
KAYDON CORPORATION
FORM
10K 27
Table of Contents
KAYDON
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
2009 | 2008 | |||||||
ASSETS
|
||||||||
Current Assets:
|
||||||||
Cash and cash equivalents
|
$ | 262,403,000 | $ | 232,998,000 | ||||
Accounts receivable, less allowance of $1,183,000 in 2009 and
$991,000 in 2008
|
77,977,000 | 78,918,000 | ||||||
Inventories, net
|
88,796,000 | 97,748,000 | ||||||
Other current assets
|
16,601,000 | 18,395,000 | ||||||
Total current assets
|
445,777,000 | 428,059,000 | ||||||
Property, plant and equipment, at cost:
|
||||||||
Land and improvements
|
4,823,000 | 5,221,000 | ||||||
Buildings and leasehold improvements
|
58,939,000 | 56,076,000 | ||||||
Machinery and equipment
|
278,175,000 | 272,739,000 | ||||||
341,937,000 | 334,036,000 | |||||||
Less: accumulated depreciation and amortization
|
(166,221,000 | ) | (148,394,000 | ) | ||||
175,716,000 | 185,642,000 | |||||||
Goodwill, net
|
143,891,000 | 142,424,000 | ||||||
Other intangible assets, net
|
21,552,000 | 25,746,000 | ||||||
Other assets
|
1,008,000 | 7,911,000 | ||||||
$ | 787,944,000 | $ | 789,782,000 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY
|
||||||||
Current Liabilities:
|
||||||||
Accounts payable
|
$ | 21,353,000 | $ | 35,080,000 | ||||
Accrued expenses:
|
||||||||
Salaries and wages
|
5,087,000 | 8,302,000 | ||||||
Employee benefits
|
4,055,000 | 4,601,000 | ||||||
Dividends payable
|
6,043,000 | 5,750,000 | ||||||
Other accrued expenses
|
9,073,000 | 6,186,000 | ||||||
Taxes payable
|
2,473,000 | 2,843,000 | ||||||
Total current liabilities
|
48,084,000 | 62,762,000 | ||||||
Long-term postretirement and postemployment benefit obligations
|
28,669,000 | 53,478,000 | ||||||
Deferred taxes
|
10,391,000 | | ||||||
Other long-term liabilities
|
835,000 | 912,000 | ||||||
Total long-term liabilities
|
39,895,000 | 54,390,000 | ||||||
Shareholders Equity:
|
||||||||
Preferred stock ($.10 par value,
2,000,000 shares authorized; none issued)
|
| | ||||||
Common stock ($.10 par value,
98,000,000 shares authorized; 36,925,729 shares issued
in 2009 and 2008)
|
3,693,000 | 3,693,000 | ||||||
Paid-in capital
|
103,892,000 | 100,367,000 | ||||||
Retained earnings
|
677,480,000 | 655,035,000 | ||||||
Less: Treasury stock, at cost (3,660,665 and
3,422,000 shares in 2009 and 2008)
|
(59,245,000 | ) | (52,468,000 | ) | ||||
Accumulated other comprehensive income
|
(25,855,000 | ) | (33,997,000 | ) | ||||
699,965,000 | 672,630,000 | |||||||
$ | 787,944,000 | $ | 789,782,000 | |||||
The accompanying notes are an
integral part of these statements.
28 KAYDON
CORPORATION FORM 10K
Table of Contents
KAYDON
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2009, 2008 and 2007
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2009, 2008 and 2007
2009 | 2008 | 2007 | ||||||||||
Net Sales
|
$441,145,000 | $522,374,000 | $451,382,000 | |||||||||
Cost of sales
|
297,280,000 | 330,194,000 | 267,082,000 | |||||||||
Gross Profit
|
143,865,000 | 192,180,000 | 184,300,000 | |||||||||
Selling, general and administrative expenses
|
72,527,000 | 86,669,000 | 73,037,000 | |||||||||
Operating Income
|
71,338,000 | 105,511,000 | 111,263,000 | |||||||||
Interest expense
|
(247,000 | ) | (9,363,000 | ) | (17,211,000 | ) | ||||||
Interest income
|
537,000 | 4,860,000 | 18,051,000 | |||||||||
Income Before Income Taxes
|
71,628,000 | 101,008,000 | 112,103,000 | |||||||||
Provision for income taxes
|
25,672,000 | 35,945,000 | 39,295,000 | |||||||||
Net Income
|
$ 45,956,000 | $ 65,063,000 | $ 72,808,000 | |||||||||
Earnings Per Share
|
||||||||||||
Basic
|
$1.37 | $2.17 | $2.59 | |||||||||
Diluted
|
$1.37 | $2.06 | $2.39 | |||||||||
Dividends Declared Per Share
|
$0.70 | $0.64 | $0.54 | |||||||||
The accompanying notes are an integral part of these statements.
KAYDON CORPORATION
FORM
10K 29
Table of Contents
KAYDON
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2009, 2008 and 2007
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2009, 2008 and 2007
Accumulated |
||||||||||||||||||||||||||||
Other |
||||||||||||||||||||||||||||
Comprehensive |
Common |
Paid-in |
Retained |
Treasury |
Comprehensive |
|||||||||||||||||||||||
Income | Stock | Capitalˆ | Earningsˆ | Stock | Income (Loss) | Total | ||||||||||||||||||||||
Balance, December 31, 2006
|
$ | 3,693,000 | $ | 58,535,000 | $ | 552,142,000 | $ | (188,708,000 | ) | $ | 7,518,000 | * | $ | 433,180,000 | ||||||||||||||
Net income, 2007
|
$ | 72,808,000 | | | 72,808,000 | | | 72,808,000 | ||||||||||||||||||||
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
Cumulative translation adjustments
|
4,244,000 | | | | | 4,244,000 | 4,244,000 | |||||||||||||||||||||
Postretirement benefit plans, net of ($4,951,000) tax
|
6,913,000 | | | | | 6,913,000 | 6,913,000 | |||||||||||||||||||||
Unrealized loss on
available-for-sale
investments net of ($108,000) tax
|
(179,000 | ) | | | | | (179,000 | ) | (179,000 | ) | ||||||||||||||||||
Comprehensive income
|
$ | 83,786,000 | ||||||||||||||||||||||||||
Cash dividends declared
|
| | (15,148,000 | ) | | | (15,148,000 | ) | ||||||||||||||||||||
Board of Directors deferred compensation
|
| 83,000 | | | | 83,000 | ||||||||||||||||||||||
Equity component of convertible debt
|
| 4,899,000 | | | | 4,899,000 | ||||||||||||||||||||||
Issuance of 4,250 shares of common stock under stock option
plans
|
| (96,000 | ) | | 195,000 | | 99,000 | |||||||||||||||||||||
Stock option compensation
|
| 674,000 | | | | 674,000 | ||||||||||||||||||||||
Tax benefit related to restricted stock awards
|
| 281,000 | | | | 281,000 | ||||||||||||||||||||||
Purchase of 601,974 shares of treasury stock
|
| | | (30,091,000 | ) | | (30,091,000 | ) | ||||||||||||||||||||
Restricted stock award cancellations
|
| 50,000 | | (50,000 | ) | | | |||||||||||||||||||||
Compensation cost related to restricted stock awards
|
| 5,627,000 | | | | 5,627,000 | ||||||||||||||||||||||
Vesting of post-2005 stock awards
|
| (649,000 | ) | | 649,000 | | | |||||||||||||||||||||
Balance, December 31, 2007
|
$ | 3,693,000 | $ | 69,404,000 | $ | 609,802,000 | $ | (218,005,000 | ) | $ | 18,496,000 | * | $ | 483,390,000 | ||||||||||||||
Net income, 2008
|
$ | 65,063,000 | | | 65,063,000 | | | 65,063,000 | ||||||||||||||||||||
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
Cumulative translation adjustments
|
(16,697,000 | ) | | | | | (16,697,000 | ) | (16,697,000 | ) | ||||||||||||||||||
Postretirement benefit plans, net of $20,353,000 tax
|
(35,975,000 | ) | | | | | (35,975,000 | ) | (35,975,000 | ) | ||||||||||||||||||
Recognition of unrealized loss on
available-for-sale
investments net of $108,000 tax
|
179,000 | | | | | 179,000 | 179,000 | |||||||||||||||||||||
Comprehensive income
|
$ | 12,570,000 | ||||||||||||||||||||||||||
Cash dividends declared
|
| | (19,764,000 | ) | | | (19,764,000 | ) | ||||||||||||||||||||
Equity component of convertible debt
|
| 2,008,000 | | | | 2,008,000 | ||||||||||||||||||||||
Board of Directors deferred compensation
|
| 178,000 | | | | 178,000 | ||||||||||||||||||||||
Issuance of 10,000 shares of common stock under stock
option plans
|
| (214,000 | ) | | 456,000 | | 242,000 | |||||||||||||||||||||
Stock option compensation
|
| 1,213,000 | | | | 1,213,000 | ||||||||||||||||||||||
Tax benefit related to restricted stock awards
|
| 416,000 | | | | 416,000 | ||||||||||||||||||||||
Purchase of 937,941 shares of treasury stock
|
| | | (35,916,000 | ) | | (35,916,000 | ) | ||||||||||||||||||||
Restricted stock award cancellations
|
| 18,000 | | (18,000 | ) | | | |||||||||||||||||||||
Compensation cost related to restricted stock awards
|
| 4,514,000 | | | | 4,514,000 | ||||||||||||||||||||||
Vesting of post-2005 stock awards
|
| (2,817,000 | ) | | 2,817,000 | | | |||||||||||||||||||||
Adoption of postretirement measurement date guidance, net of
$39,000 tax
|
| | (66,000 | ) | | | (66,000 | ) | ||||||||||||||||||||
Treasury stock issued on conversion of convertible debentures
|
| 25,647,000 | | 198,198,000 | | 223,845,000 | ||||||||||||||||||||||
Balance, December 31, 2008
|
$ | 3,693,000 | $ | 100,367,000 | $ | 655,035,000 | $ | (52,468,000 | ) | $ | (33,997,000 | )* | $ | 672,630,000 | ||||||||||||||
Net income, 2009
|
$ | 45,956,000 | | | 45,956,000 | | | 45,956,000 | ||||||||||||||||||||
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
Cumulative translation adjustments
|
2,111,000 | | | | | 2,111,000 | 2,111,000 | |||||||||||||||||||||
Postretirement benefit plans, net of $4,162,000 tax
|
6,031,000 | | | | | 6,031,000 | 6,031,000 | |||||||||||||||||||||
Comprehensive income
|
$ | 54,098,000 | ||||||||||||||||||||||||||
Cash dividends declared
|
| | (23,511,000 | ) | | | (23,511,000 | ) | ||||||||||||||||||||
Board of Directors deferred compensation
|
| 125,000 | | | | 125,000 | ||||||||||||||||||||||
Issuance of 1,000 shares of common stock under stock option
plans
|
| 1,000 | | 23,000 | | 24,000 | ||||||||||||||||||||||
Stock option compensation
|
| 1,300,000 | | | | 1,300,000 | ||||||||||||||||||||||
Tax benefit related to restricted stock awards
|
| 49,000 | | | | 49,000 | ||||||||||||||||||||||
Purchase of 314,047 shares of treasury stock
|
| | | (8,871,000 | ) | | (8,871,000 | ) | ||||||||||||||||||||
Restricted stock award cancellations
|
| 35,000 | | (35,000 | ) | | | |||||||||||||||||||||
Compensation cost related to restricted stock awards
|
| 4,121,000 | | | | 4,121,000 | ||||||||||||||||||||||
Vesting of post-2005 stock awards
|
| (2,106,000 | ) | | 2,106,000 | | | |||||||||||||||||||||
Balance, December 31, 2009
|
$ | 3,693,000 | $ | 103,892,000 | $ | 677,480,000 | $ | (59,245,000 | ) | $ | (25,855,000 | )* | $ | 699,965,000 | ||||||||||||||
ˆ | 2006-2008 have been adjusted, as required, for the retrospective application of accounting guidance related to the Companys former senior subordinated notes as more fully described in Note 1, which increased Paid-in Capital at December 31, 2006, by $14,646,000 and reduced Retained Earnings by $14,646,000. |
* | Comprised of: cumulative translation adjustment of $(3,392,000), $(5,503,000), and $11,194,000, at December 31, 2009, 2008, and 2007: after tax impact on pension benefits of $(27,364,000), $(37,318,000), and $(5,407,000) at December 31, 2009, 2008, and 2007; after tax impact on other postretirement benefits of $4,901,000, $8,824,000, and $12,888,000, at December 31, 2009, 2008, and 2007; and after tax unrealized loss on available-for-sale securities of $(179,000) at December 31, 2007. |
The accompanying notes are an
integral part of these statements.
30 KAYDON
CORPORATION FORM 10K
Table of Contents
KAYDON
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2009, 2008 and 2007
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2009, 2008 and 2007
2009 | 2008 | 2007 | ||||||||||
Cash Flows from Operating Activities:
|
||||||||||||
Net income
|
$ | 45,956,000 | $ | 65,063,000 | $ | 72,808,000 | ||||||
Adjustments to reconcile net income to net cash from operating
activities:
|
||||||||||||
Gain on the sale of a component of a reporting segment
|
| | (5,033,000 | ) | ||||||||
Depreciation
|
19,836,000 | 16,181,000 | 11,813,000 | |||||||||
Amortization of intangible assets
|
4,283,000 | 5,464,000 | 3,189,000 | |||||||||
Amortization of stock awards
|
4,121,000 | 4,514,000 | 5,627,000 | |||||||||
Deferred financing fees
|
248,000 | 790,000 | 1,548,000 | |||||||||
Deferred taxes
|
12,209,000 | 10,429,000 | 18,223,000 | |||||||||
Tax benefit related to stock options exercised
|
3,000 | 103,000 | 40,000 | |||||||||
Stock option compensation
|
1,300,000 | 1,213,000 | 674,000 | |||||||||
Excess tax benefits from stock-based compensation
|
(52,000 | ) | (438,000 | ) | (291,000 | ) | ||||||
Non-cash postretirement benefits curtailment gain
|
(7,613,000 | ) | | | ||||||||
Contributions to qualified pension plans
|
(14,846,000 | ) | (11,910,000 | ) | (26,140,000 | ) | ||||||
Changes in assets and liabilities, net of effects of
acquisitions and sale of businesses and business components:
|
||||||||||||
Accounts receivable
|
1,605,000 | (14,112,000 | ) | (10,469,000 | ) | |||||||
Inventories
|
9,703,000 | (30,920,000 | ) | (8,389,000 | ) | |||||||
Other assets
|
(968,000 | ) | (312,000 | ) | 3,701,000 | |||||||
Accounts payable
|
(13,885,000 | ) | 7,318,000 | 4,464,000 | ||||||||
Accrued expenses and taxes payable
|
4,281,000 | 4,517,000 | 2,494,000 | |||||||||
Net cash from operating activities
|
66,181,000 | 57,900,000 | 74,259,000 | |||||||||
Cash Flows from Investing Activities:
|
||||||||||||
Purchases of short-term investments
|
| | (398,856,000 | ) | ||||||||
Proceeds from sale of investments
|
5,145,000 | 65,407,000 | 341,856,000 | |||||||||
Acquisitions of businesses, net of cash acquired
|
| 489,000 | (54,869,000 | ) | ||||||||
Additions to property, plant and equipment
|
(11,986,000 | ) | (60,704,000 | ) | (54,244,000 | ) | ||||||
Dispositions of property, plant and equipment
|
1,229,000 | 1,194,000 | 171,000 | |||||||||
Purchases of long-term investments
|
| | (15,000,000 | ) | ||||||||
Proceeds from the sale of a component of a reporting segment
|
| | 6,500,000 | |||||||||
Net cash from (used in) investing activities
|
(5,612,000 | ) | 6,386,000 | (174,442,000 | ) | |||||||
Cash Flows from Financing Activities:
|
||||||||||||
Cash dividends paid
|
(23,207,000 | ) | (18,180,000 | ) | (14,354,000 | ) | ||||||
Purchase of treasury stock
|
(8,871,000 | ) | (35,916,000 | ) | (30,091,000 | ) | ||||||
Proceeds from exercise of stock options
|
24,000 | 242,000 | 99,000 | |||||||||
Excess tax benefits from stock-based compensation
|
52,000 | 438,000 | 291,000 | |||||||||
Net cash (used in) financing activities
|
(32,002,000 | ) | (53,416,000 | ) | (44,055,000 | ) | ||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
838,000 | (7,865,000 | ) | 3,442,000 | ||||||||
Net Increase (Decrease) in Cash and Cash Equivalents
|
29,405,000 | 3,005,000 | (140,796,000 | ) | ||||||||
Cash and Cash Equivalents Beginning of Year
|
232,998,000 | 229,993,000 | 370,789,000 | |||||||||
Cash and Cash Equivalents End of Year
|
$ | 262,403,000 | $ | 232,998,000 | $ | 229,993,000 | ||||||
Cash paid for income taxes
|
$ | 16,743,000 | $ | 27,429,000 | $ | 25,125,000 | ||||||
Cash paid for interest
|
| $ | 4,000,000 | $ | 8,000,000 | |||||||
The accompanying notes are an
integral part of these statements.
KAYDON CORPORATION
FORM
10K 31
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
NOTE 1 | ACCOUNTING POLICIES |
Principles
of Consolidation:
The consolidated financial statements include the accounts of
Kaydon Corporation and its wholly-owned domestic and foreign
subsidiaries (Kaydon or the Company).
All significant intercompany accounts and transactions have been
eliminated.
Use
of Estimates:
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. While the Company does not believe
that the ultimate settlement of its assets or liabilities will
materially affect the Companys financial condition or
results of future operations, actual results may differ from
estimates provided.
Cash
and Cash Equivalents:
The Company considers all highly liquid debt and investment
instruments purchased with a maturity of three months or less to
be cash equivalents.
Cash and cash equivalents are summarized as follows at December
31:
2009 | 2008 | |||||||
Money market and other short-term funds
|
$ | 248,091,000 | $ | 221,604,000 | ||||
Time deposits, other interest bearing accounts, and other cash
|
14,312,000 | 11,394,000 | ||||||
$ | 262,403,000 | $ | 232,998,000 | |||||
Inventories:
Inventories are valued at the lower of cost or market, with cost
determined using the
first-in,
first-out method. Inventories are summarized as follows at
December 31:
2009 | 2008 | |||||||
Raw material
|
$ | 32,933,000 | $ | 41,158,000 | ||||
Work in process
|
22,857,000 | 24,852,000 | ||||||
Finished goods
|
33,006,000 | 31,738,000 | ||||||
$ | 88,796,000 | $ | 97,748,000 | |||||
Property,
Plant and Equipment:
Property, plant and equipment are stated at cost. The cost is
depreciated over the estimated useful lives of the assets using
the straight-line method. The Company recorded depreciation
expense of $19.8 million, $16.2 million and
$11.8 million in 2009, 2008, and 2007, respectively. Useful
lives vary among the classifications, but generally fall within
the following ranges:
Buildings, land improvements and leasehold improvements
|
10-40 years | |
Machinery and equipment
|
3-15 years |
Leasehold improvements are amortized over the terms of the
respective leases or over their useful lives, whichever is
shorter. Renewals and betterments are capitalized while
maintenance and repairs are charged to operations in the year
incurred.
The Company evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful lives of
property, plant and equipment may warrant revision or that the
remaining balances may not be recoverable. When factors indicate
that such costs should be evaluated for possible impairment, the
Company uses an estimate of the undiscounted cash flows over the
remaining lives of the assets to evaluate whether the costs are
recoverable. In 2008, the Company recorded an asset impairment
charge of $0.8 million on certain property and equipment.
The Company believes that there was no impairment at
December 31, 2009.
Other
Assets:
Other assets at December 31, 2009 of $1.0 million
primarily included long term receivables. Other assets at
December 31, 2008 primarily included $2.6 million of
deferred tax assets and $4.9 million of a long-term
investment that was liquidated in 2009.
32 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
Other
Long-Term Liabilities:
Other long-term liabilities include environmental reserves.
Derivative
Financial Instruments:
The Company periodically enters into derivative financial
instruments in the form of forward exchange contracts to reduce
the effect of fluctuations in exchange rates on certain
short-term intercompany transactions as well as certain
third-party sales transactions denominated in non-functional
currencies. Based on the accounting guidance related to
derivatives and hedging activities, the Company records
derivative financial instruments at fair value. For derivative
financial instruments designated and qualifying as cash flow
hedges, the effective portion of the gain or loss on these
hedges is reported as a component of accumulated other
comprehensive income, and is reclassified into earnings when the
hedged transaction affects earnings. As of December 31,
2009, the Companys outstanding forward exchange contracts
were not material.
Fair
Value of Financial Instruments:
The carrying amounts of financial instruments included in
current assets and current liabilities approximate fair value
due to the short-term nature of these instruments.
Foreign
Currency Translation:
Assets and liabilities of the Companys international
subsidiaries are translated from the local functional currency
into U.S. dollars at the exchange rate in effect at
year-end. Income statement accounts are translated at the
weighted-average rate of exchange in effect during the year. The
resulting cumulative translation adjustment is recorded as a
separate component of accumulated other comprehensive income.
Changes in exchange rates applicable to non-functional currency
assets and liabilities are recorded as a component of exchange
gains and losses as a component of selling, general and
administrative expenses. Net exchange gains recorded in 2009,
2008 and 2007, equaled $0.7 million, $0.4 million and
$0.2 million, respectively.
Stock-Based
Compensation:
The Company measures the cost of employee services received in
exchange for an award of equity instruments based on the
grant-date fair value of the award. The cost is recognized over
the period during which an employee is required to provide
service in exchange for the award. The Companys
stock-based compensation plans are discussed further in
Note 5.
Revenue
Recognition:
Sales are recognized in accordance with generally accepted
accounting principles, including the Securities and Exchange
Commissions Staff Accounting Bulletin No. 104,
Revenue Recognition, which requires that revenue is
recognized when there is evidence of a sales agreement, the
delivery of the goods has occurred, the sales price is fixed or
determinable and the collectibility of the revenue is reasonably
assured. Sales are recorded upon shipment of product to
customers and transfer of title under standard commercial terms.
Allowances are recorded for uncollectible accounts receivable
based upon the age of the outstanding balance and the credit
standing of the related customer. The Company charges off
accounts receivable when it becomes probable that amounts will
not be collected.
Comprehensive
Income:
Comprehensive income primarily consists of net income, pension
and other postretirement benefit adjustments, and cumulative
foreign currency translation adjustments.
Legal
Costs and Contingencies:
Estimated legal costs expected to be incurred in connection with
claims, lawsuits and environmental matters are accrued in the
consolidated financial statements. The costs accrued at
December 31, 2009 and 2008, were not material.
The Company assesses the need to record contingent liabilities
on a
case-by-case
basis. Reserves are recorded when the Company, in consultation
with counsel, determines that a loss related to a matter is both
probable and reasonably estimable. If no accrual for a loss
contingency has been recorded, but there is at least a
reasonable possibility that a loss or an additional loss may
have occurred, the Company discloses, when material, the nature
of the contingency and provides an estimate of the possible loss
or range of loss or states that such an estimate cannot be made.
As of December 31, 2009 and 2008, there were no material
reserves for litigation and contingencies recorded.
KAYDON CORPORATION
FORM
10K 33
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
At December 31, 2009, the Company had approximately
$8.5 million of working capital invested on behalf of an
international wind energy customer, including past due accounts
receivable, in addition to inventory and purchase commitments
made or incurred on the customers behalf and designed to
its agreed upon specifications. The customer has not paid the
Company because it alleges that certain field performance issues
of the customers product are attributable to the quality
of the Companys bearings. The Company is confident that
its bearings were made to the agreed upon design specifications
and that the customers field performance issues relate to
factors outside of the Companys control. Under the
documents which comprise the sales contract, the customer is
obligated to pay its liability and to reimburse the Company for
inventory costs incurred and lost profits. In order to expedite
the resolution of this matter, the Company has agreed with the
customer to enter a mediation process, and if necessary, binding
arbitration. As the Company is confident in the quality of its
supplied product and the customers financial ability to
pay, the Company has concluded that the receivables and
inventory are fully realizable and the purchase commitments are
fully recoverable.
Advertising
Costs:
Advertising costs are expensed as incurred and totaled
$2.8 million, $3.6 million, and $3.4 million in
2009, 2008 and 2007, respectively.
Impact
of Recently Issued Accounting Pronouncements:
On July 1, 2009, the Company adopted the Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC). The ASC is the single
official source of nongovernmental generally accepted accounting
principles. The adoption of the ASC did not have any impact on
the financial statements of the Company.
On January 1, 2009, the Company adopted, as required, new
FASB guidance related to the Companys previously
outstanding 4% Contingent Convertible Senior Subordinated Notes,
which required the Company to separately account for the
liability and equity components of that debt instrument in a
manner that reflected the nonconvertible borrowing rate. This
resulted in the bifurcation of a component of the debt,
classification of that component in equity, and the accretion of
the resulting discount as part of interest expense. The
effective interest rate on the liability component was
determined to be 8.5 percent. The adoption of this guidance
resulted in an increase in interest expense of $3.1 million
and $7.7 million for 2008 and 2007, respectively, a
decrease in provision for income taxes of $1.1 million and
$2.8 million for 2008 and 2007, respectively, a decrease in
net income of $2.0 million and $4.9 million, for 2008
and 2007, respectively, and a decrease in basic earnings per
share of $0.07 and $0.18 for 2008 and 2007, respectively. The
adoption of this guidance resulted in an increase in paid-in
capital of $14.6 million, and a corresponding decrease in
retained earnings of $14.6 million, at December 31,
2006. These adjustments were non-cash and had no effect on
diluted earnings per share. This guidance was applied
retrospectively to all periods presented as required.
Also on January 1, 2009, the Company adopted, as required,
new FASB guidance related to certain of the Companys
equity incentive awards. The application of this guidance to
these awards, which participate in dividends, changed the
calculation of basic earnings per share and diluted earnings per
share under the two-class method of calculating earnings per
share. The adoption of this guidance resulted in a decrease in
basic earnings per share of $0.03 and $0.04 for 2008 and 2007,
respectively, and had resulted in a decrease in diluted earnings
per share of $0.03 and $0.02 for 2008 and 2007, respectively.
This guidance was applied retrospectively to all periods
presented as required.
Reclassifications:
Certain items in the prior year financial statements have been
reclassified to conform to the presentation used in 2009.
Subsequent
events:
For the year ended December 31, 2009, the Company has
evaluated subsequent events for potential recognition and
disclosure through February 26, 2010, the date the
financial statements were issued. No significant subsequent
events have occurred through this date that have not been
adjusted in the financial statements or disclosures as required.
34 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
NOTE 2 | EARNINGS PER SHARE |
The following table reconciles the numerators and denominators
used in the calculations of basic and diluted earnings per share
for each of the last three years:
2009 | 2008 | 2007 | ||||||||||
Earnings per share Basic
|
||||||||||||
Net income
|
$45,956,000 | $65,063,000 | $72,808,000 | |||||||||
Less: Net earnings allocated to participating
securities Basic
|
(527,000 | ) | (935,000 | ) | (1,072,000 | ) | ||||||
Income available to common shareholders Basic
|
$45,429,000 | $64,128,000 | $71,736,000 | |||||||||
Weighted average common shares outstanding Basic
|
33,250,000 | 29,507,000 | 27,694,000 | |||||||||
Earnings per share Basic
|
$1.37 | $2.17 | $2.59 | |||||||||
Earnings per share Diluted
|
||||||||||||
Net income
|
$45,956,000 | $65,063,000 | $72,808,000 | |||||||||
Less: Net earnings allocated to participating
securities Dilutive
|
(527,000 | ) | (923,000 | ) | (1,033,000 | ) | ||||||
Plus: Interest and debt issuance costs amortization related to
Contingent Convertible Notes, net of tax
|
| 5,833,000 | 10,852,000 | |||||||||
Income available to common shareholders Diluted
|
$45,429,000 | $69,973,000 | $82,627,000 | |||||||||
Weighted average common shares outstanding Diluted
|
||||||||||||
Weighed average common shares outstanding Basic
|
33,250,000 | 29,507,000 | 27,694,000 | |||||||||
Potential dilutive shares resulting from stock options
|
17,000 | 19,000 | 40,000 | |||||||||
Dilutive shares resulting from Contingent Convertible Notes
|
| 4,427,000 | 6,859,000 | |||||||||
Weighted average common shares outstanding Diluted
|
33,267,000 | 33,953,000 | 34,593,000 | |||||||||
Earnings per share Diluted
|
$1.37 | $2.06 | $2.39 | |||||||||
During 2009, 2008 and 2007, certain options granted to purchase
shares of common stock were excluded from the computation of
diluted earnings per share because the options exercise
prices were greater than the average market price of the common
shares. Options to purchase 406,500, 46,500, and
15,000 shares at an average price of $43.29, $51.35, and
$53.38 per share were excluded during 2009, 2008, and 2007,
respectively.
On August 21, 2008, the Company announced that it was
exercising its right to redeem all of the remaining outstanding
4% Contingent Convertible Senior Subordinated Notes due 2023
(the Notes). On September 19, 2008, the Company
announced that it had completed its redemption of the Notes as
the holders of all of the outstanding Notes exercised their
rights to convert their Notes into shares of Company common
stock at a conversion price of $29.16 per share. The Company
issued a total of 6,858,683 shares of Company common stock
from treasury stock in 2008 in satisfaction of the conversions.
The Notes are included in the calculation of diluted earnings
per share for 2008 on a weighted average basis for the periods
that the Notes were outstanding prior to conversion. In 2007,
the Notes were convertible into a total of 6,858,710 shares
of common stock and were included in the diluted earnings per
share calculation. The Notes are discussed further in
Note 4.
NOTE 3 | ACQUISITIONS |
On October 26, 2007, the Company acquired all of the
outstanding stock of Avon Bearings Corporation
(Avon) in a cash transaction valued at
$54.4 million, net of $0.5 million of working capital
adjustments recorded in 2008. Avon is a custom designer and
manufacturer of high precision large diameter turntable
bearings. Avon also remanufactures bearings and sells
replacement bearings. Goodwill and other intangible assets
acquired, including purchase price adjustments of
$1.1 million recorded in 2008, aggregated
$41.4 million. Avon is included in the Friction Control
Products segment for segment reporting purposes.
NOTE 4 | LONG-TERM DEBT |
In May 2003, the Company issued $200.0 million of 4%
Contingent Convertible Senior Subordinated Notes due 2023 (the
Notes). The Notes were convertible into shares of
Company common
KAYDON CORPORATION
FORM
10K 35
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
stock provided certain contingencies were met. During 2008 the
Notes were converted into 6,858,683 shares of Company
common stock which were issued from treasury stock.
Interest expense and amortization of note issuance costs on the
Notes was recorded through the applicable conversion dates of
the Notes and equaled $9.1 million for 2008, including
$3.1 million of additional interest expense and note
issuance cost adjustments associated with the retrospective
application of new accounting guidance as more fully discussed
in Note 1. The holders of the Notes forfeited their rights
to the interest upon the conversion of their Notes. The accrued
interest liability at the date of the respective Note
conversions that totaled $2.3 million was reclassified to
paid-in capital in accordance with applicable financial
accounting guidance regarding convertible debt. Interest expense
and amortization of note issuance costs on the Notes equaled
$17.0 million in 2007, including $7.7 million of
additional interest associated with the retrospective
application of new accounting guidance as more fully discussed
in Note 1. Note issuance costs of approximately
$6.5 million were amortized over a five-year period ending
in May 2008.
The Company has a senior credit facility with a syndicate of
lenders providing for a $300.0 million senior unsecured
revolving credit facility. The credit facility provides for
borrowings and issuances of letters of credit by the Company and
its subsidiaries in various currencies for general corporate
purposes, including acquisitions. The credit facility matures on
July 12, 2010 and is guaranteed by the Company and certain
of the Companys domestic subsidiaries. Interest accrues on
borrowings under the credit facility based on the London
Interbank Offered Rate. The credit facility contains restrictive
financial covenants on a consolidated basis including leverage
and coverage ratios, utilizing measures of earnings and interest
expense as defined in the credit facility agreement. The Company
is in compliance with all restrictive covenants contained in the
credit facility at December 31, 2009. The Company has
available credit under its credit facility of
$300.0 million at December 31, 2009.
NOTE 5 | STOCK-BASED COMPENSATION |
The Companys 1999 Long Term Stock Incentive Plan
(Incentive Plan), provides for the issuance of
2,000,000 shares of Company common stock, plus an
additional 2,000,000 shares resulting from certain
reacquisitions of shares by the Company, for stock-based
incentives in various forms. The Companys 2003
Non-Employee Directors Equity Plan (Directors Plan)
provides for the issuance of 300,000 shares of Company
common stock in various forms to non-employee members of the
Companys Board of Directors. The Company has granted both
restricted stock awards and stock options pursuant to its equity
incentive plans. In addition, the Companys Director
Deferred Compensation Plan (Director Deferred Plan)
provides for the issuance of Company common stock to
non-employee members of the Companys Board of Directors
who elect to defer all or a portion of their fees for services
earned as a member of the Board of Directors into a common stock
account.
A summary of restricted stock award information for 2009 is as
follows:
Wtd. Avg. Grant |
||||||||||||
Restricted |
Date Fair Value |
|||||||||||
Stock | per Share | |||||||||||
Outstanding at January 1, 2009
|
391,580 | $38.33 | ||||||||||
Granted
|
99,000 | $26.43 | ||||||||||
Vested
|
(139,008 | ) | $35.91 | |||||||||
Canceled
|
(5,602 | ) | $35.66 | |||||||||
Outstanding at December 31, 2009
|
345,970 | $35.93 | ||||||||||
Pursuant to the Incentive Plan, the Company granted restricted
stock awards for 93,000 shares, 90,790 shares, and
179,980 shares, of Company common stock during 2009, 2008
and 2007, respectively, to key employees of the Company.
Pursuant to the Directors Plan, the Company granted restricted
stock awards for 6,000 shares, 6,000 shares and
3,000 shares of Company common stock during 2009, 2008 and
2007, respectively, to non-employee members of the
Companys Board of Directors. During 2008, 741 shares
of restricted stock were canceled and 142,485 shares of
restricted stock vested. During 2007, 4,419 shares of
restricted stock were canceled and 105,812 shares of
restricted stock vested. The weighted-average fair value per
share of the restricted stock awards granted, on the date of
grant, was $43.01 in 2008, and $44.02 in 2007.
Grant-date fair value of restricted stock awards equals the
closing market price of Company common stock on the date of
grant. The net value of
36 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
unrecognized compensation cost related to unvested restricted
stock awards aggregated $7.7 million at December 31,
2009 and is expected to be amortized over a weighted-average
period of 2.4 years. The net value of unrecognized
compensation cost related to unvested restricted stock awards
aggregated $9.4 million at December 31, 2008 and
$9.7 million at December 31, 2007. Compensation cost
related to restricted stock awards during 2009, 2008, and 2007,
was $4.1 million, $4.5 million, and $5.6 million,
respectively. Restricted stock awards normally vest annually,
but they also vest upon the occurrence of certain events,
including the disability or death of a grantee while employed at
the Company, or, in certain circumstances, a change in control
of the Company under defined conditions. The total grant-date
fair value of restricted stock that vested during 2009, 2008,
and 2007, was $5.0 million, $4.7 million, and
$2.9 million, respectively.
Restricted stock awards granted pursuant to the Companys
equity incentive plans allow for continued annual vesting if a
grantee retires at or after the age of 65, even though the
grantee is no longer providing services to the Company. For
awards made prior to January 1, 2006, compensation cost
associated with these restricted stock awards is being amortized
ratably over the awards normal five-to ten-year vesting
periods, or up to the date of actual retirement of the grantee,
when applicable. Compensation cost related to grantees who
become retirement eligible during the normal vesting period is
amortized ratably over the period from the grant date to the
date retirement eligibility is achieved. Compensation expense is
recognized immediately for awards granted to retirement eligible
employees.
Pursuant to the Director Deferred Plan, the Company has provided
for 19,429 shares, 16,515 shares, and
12,338 shares of Company common stock, known as phantom
stock units, as of December 31, 2009, 2008, and 2007,
respectively, which may be issued at some future date as elected
by the members of the Board of Directors participating in this
plan. Annual compensation expense related to providing for these
phantom stock units totaled $0.1 million in 2009,
$0.2 million in 2008, and $0.1 million in 2007.
Compensation expense related to outstanding stock options
totaled $1.3 million in 2009, $1.2 million in 2008,
and $0.7 million in 2007.
A summary of stock option information is as follows:
2009 | 2008 | 2007 | ||||||||||||||||||||||
Wtd.-Avg. |
Wtd.-Avg. |
Wtd.-Avg. |
||||||||||||||||||||||
Options | Ex. Price | Options | Ex. Price | Options | Ex. Price | |||||||||||||||||||
Outstanding at Beginning of Year
|
443,750 | $ | 41.87 | 346,500 | $ | 40.64 | 75,250 | $ | 28.35 | |||||||||||||||
Granted
|
120,500 | $ | 26.70 | 107,250 | $ | 44.22 | 275,500 | $ | 43.73 | |||||||||||||||
Canceled
|
(13,500 | ) | $ | 38.24 | | | ||||||||||||||||||
Exercised
|
(1,000 | ) | $ | 24.25 | (10,000 | ) | $ | 24.29 | (4,250 | ) | $ | 23.32 | ||||||||||||
Outstanding at End of Year
|
549,750 | $ | 38.67 | 443,750 | $ | 41.87 | 346,500 | $ | 40.64 | |||||||||||||||
Exercisable at End of Year
|
190,250 | $ | 41.10 | 92,600 | $ | 37.36 | 33,900 | $ | 26.56 | |||||||||||||||
Weighted-Avg. Fair Value of Options Granted
|
$7.66 | $11.22 | $12.87 | |||||||||||||||||||||
Weighted-Avg. Remaining Contractual Life (years):
|
||||||||||||||||||||||||
Outstanding at End of Year
|
7.6 | 8.0 | 8.5 | |||||||||||||||||||||
Exercisable at End of Year
|
6.8 | 6.9 | 5.0 | |||||||||||||||||||||
The exercise price of each option equals the closing market
price of Company common stock on the date of grant. Options
granted become exercisable at the rate of 10.0 percent,
20.0 percent, or 100.0 percent per year, commencing
one year after the date of grant, and options expire ten years
after the date of grant. The intrinsic value of options
exercised totaled less than $0.1 million in 2009,
$0.3 million in 2008, and $0.1 million in 2007. The
intrinsic value of options outstanding as of
KAYDON CORPORATION
FORM
10K 37
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
December 31, 2009 equaled $1.5 million, and the
intrinsic value of options exercisable as of December 31,
2009 equaled $0.4 million. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average
assumptions, which are updated to reflect current expectations
of the risk-free interest rate, expected dividend yield,
expected life, and using historical volatility to project
expected volatility:
2009 | 2008 | 2007 | ||||||||||
Risk-free interest rate
|
2.2% | 3.1% | 4.6% | |||||||||
Expected dividend yield
|
2.6% | 1.4% | 1.1% | |||||||||
Expected life
|
6 years | 6 years | 6 years | |||||||||
Expected volatility
|
36.2% | 25.1% | 23.7% | |||||||||
At December 31, 2009, 2,486,747 shares remained
available for grant under the Incentive Plan, and
147,900 shares remained available for grant under the
Directors Plan. The number of shares available for grant under
the Director Deferred Plan is not limited in amount, other than
by the dollar value of the Directors annual compensation.
The Companys practice is to purchase its shares on the
open market for issuance under its various equity incentive
plans.
NOTE 6 | SHAREHOLDERS RIGHTS PLAN |
On May 4, 2000, the Board of Directors of the Company
adopted a shareholders rights plan, which attached one right to
each share of Company common stock held by shareholders of
record at the close of business on June 12, 2000. If the
rights become exercisable, each registered holder will be
entitled to purchase from the Company additional common stock
having a value of twice the exercise price upon payment of the
exercise price. The rights will become exercisable only if a
person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, 15 percent or
more of the outstanding shares of Company common stock. Each
right will entitle the shareholder to purchase one
one-thousandth of a share of a new series of preferred stock at
an exercise price of one hundred dollars ($100.00) per right.
The rights will expire at the close of business on May 4,
2010, unless earlier redeemed by the Company.
NOTE 7 | EMPLOYEE BENEFIT PLANS |
The Company sponsors several defined contribution plans for
various employee groups. Contributions may be based on a match
on employee deferrals or as a percentage of each covered
employees salary in accordance with the provisions of each
plan and totaled $1.3 million, $1.3 million and
$1.1 million in 2009, 2008 and 2007, respectively.
The Company maintains several defined benefit pension plans,
which cover the majority of all U.S. employees. Benefits
paid under these plans are based generally on employees
years of service and compensation during the final years of
employment.
The Company provides certain retiree health care and life
insurance benefits covering certain U.S. employees. Certain
employees are generally eligible for benefits upon retirement or
long-term disability and completion of a specified number of
years of credited service. These benefits are subject to
cost-sharing provisions and other limitations. The Company does
not pre-fund these benefits and has the right to modify or
terminate certain of these benefits in the future. The Company
accrues for the cost of providing postretirement benefits for
medical, dental and life insurance coverage over the active
service period of the employee.
Included in the following table is a
non-qualified
supplemental pension plan covering certain active and retired
employees. This non-qualified pension plan provides for benefits
in addition to those provided by the qualified plans. This
non-qualified plan has no plan assets. The accumulated benefit
obligation for this plan was $8.4 million at both
December 31, 2009 and December 31, 2008.
38 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
Obligations
and Funded Status:
Pension Benefits | Postretirement Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Change in Benefit Obligation:
|
||||||||||||||||
Benefit obligation, beginning of period
|
$ | (112,454,000 | ) | $ | (99,531,000 | ) | $ | (13,257,000 | ) | $ | (10,419,000 | ) | ||||
Service cost
|
(3,239,000 | ) | (3,577,000 | ) | (295,000 | ) | (363,000 | ) | ||||||||
Interest cost
|
(6,948,000 | ) | (7,940,000 | ) | (630,000 | ) | (821,000 | ) | ||||||||
Plan amendments
|
(143,000 | ) | | 2,918,000 | | |||||||||||
Actuarial gain/(loss)
|
(3,122,000 | ) | (8,353,000 | ) | (2,421,000 | ) | (2,135,000 | ) | ||||||||
Benefits paid
|
5,884,000 | 6,947,000 | 302,000 | 481,000 | ||||||||||||
Liability change due to curtailment
|
| | 3,015,000 | | ||||||||||||
Benefit obligation, December 31
|
(120,022,000 | ) | (112,454,000 | ) | (10,368,000 | ) | (13,257,000 | ) | ||||||||
Change in Plan Assets:
|
||||||||||||||||
Fair value of plan assets, beginning of period
|
72,247,000 | 99,377,000 | | | ||||||||||||
Actual return on plan assets
|
19,687,000 | (33,024,000 | ) | | | |||||||||||
Company contributions
|
15,512,000 | 12,841,000 | 302,000 | 481,000 | ||||||||||||
Plan participants contributions
|
| | 322,000 | 419,000 | ||||||||||||
Benefits paid
|
(5,884,000 | ) | (6,947,000 | ) | (624,000 | ) | (900,000 | ) | ||||||||
Fair value of plan assets, December 31
|
101,562,000 | 72,247,000 | | | ||||||||||||
Net asset (liability), December 31
|
$ | (18,460,000 | ) | $ | (40,207,000 | ) | $ | (10,368,000 | ) | $ | (13,257,000 | ) | ||||
Amounts Recognized in the Consolidated
|
||||||||||||||||
Balance Sheets Consist of:
|
||||||||||||||||
Employee benefits
|
$ | (671,000 | ) | $ | (674,000 | ) | $ | (595,000 | ) | $ | (620,000 | ) | ||||
Long-term postretirement and postemployment benefit obligations
|
$ | (17,789,000 | ) | $ | (39,533,000 | ) | $ | (9,773,000 | ) | $ | (12,637,000 | ) | ||||
Accumulated other comprehensive income:
|
||||||||||||||||
Prior service cost (credit), net of tax
|
$ | 108,000 | $ | 56,000 | $ | (3,440,000 | ) | $ | (4,738,000 | ) | ||||||
Net actuarial (gain) loss, net of tax
|
$ | 27,256,000 | $ | 37,262,000 | $ | (1,461,000 | ) | $ | (4,086,000 | ) | ||||||
At December 31, 2009 three of the Companys qualified
defined benefit pension plans had a shortfall of plan assets
compared to the accumulated benefit obligation (ABO)
with an aggregate ABO of $48.5 million and plan assets of
$46.7 million, and one qualified defined benefit pension
plan had plan assets of $54.8 million which exceeded the
ABO of $54.6 million. At December 31, 2008, all four
of the Companys qualified defined benefit pension plans
had an aggregate ABO of $94.4 million which exceeded the
plan assets of $72.2 million. The change in relative plan
funding from 2008 to 2009 was due principally to the actual
return on plan assets and Company contributions to the qualified
plans in 2009, which more than offset the increased ABO.
Pension Benefits | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Components of Net Periodic Benefit Cost:
|
||||||||||||
Service cost
|
$ | 3,239,000 | $ | 2,861,000 | $ | 2,770,000 | ||||||
Interest cost
|
6,948,000 | 6,352,000 | 5,838,000 | |||||||||
Expected return on plan assets
|
(5,648,000 | ) | (7,770,000 | ) | (5,461,000 | ) | ||||||
Amortization of:
|
||||||||||||
Unrecognized net prior service cost
|
59,000 | 26,000 | 33,000 | |||||||||
Unrecognized net loss
|
5,093,000 | 3,000 | 1,020,000 | |||||||||
Net periodic benefit cost
|
$ | 9,691,000 | $ | 1,472,000 | $ | 4,200,000 | ||||||
Net periodic benefit cost for the non-qualified supplemental
pension plan was $0.9 million, $0.7 million and
$0.3 million in 2009, 2008 and 2007, respectively.
Postretirement Benefits | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Components of Net Periodic Benefit Cost (Income):
|
||||||||||||
Service cost
|
$ | 295,000 | $ | 291,000 | $ | 365,000 | ||||||
Interest cost
|
630,000 | 657,000 | 802,000 | |||||||||
Amortization of:
|
||||||||||||
Unrecognized net prior service credit
|
(1,078,000 | ) | (1,718,000 | ) | (1,759,000 | ) | ||||||
Unrecognized net gain
|
(555,000 | ) | (909,000 | ) | (486,000 | ) | ||||||
Curtailment gain
|
(7,613,000 | ) | | | ||||||||
Net periodic benefit cost (income)
|
$ | (8,321,000 | ) | $ | (1,679,000 | ) | $ | (1,078,000 | ) | |||
KAYDON CORPORATION
FORM
10K 39
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
The factors related to the assumed annual rate of increase in
covered health care costs for determining the annual cost and
the year end benefit obligation are as follows:
For determining 2009 cost | For determining 2009 obligation | |||||||||||||||
Assumed health care cost trend rates | Under age 65 | Age 65 and over | Under age 65 | Age 65 and over | ||||||||||||
Annual rate of increase for next year
|
9.0 | % | 10.0 | % | 8.0 | % | 8.5 | % | ||||||||
Ultimate rate to which the cost trend rate is to decline
|
5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | ||||||||
Year that the rate reaches the ultimate trend rate
|
2013 | 2013 | 2017 | 2017 | ||||||||||||
Assumed health care cost trend rates may have a significant
effect on the amounts reported for the postretirement health
care plans. A 1.0 percent change in the assumed health care
cost trend rates would have the following effects:
1-Percentage-Point |
1-Percentage-Point |
|||||||
Increase | Decrease | |||||||
Effect on net service cost and interest cost
|
$ | 83,000 | $ | (71,000 | ) | |||
Effect on postretirement benefit obligation
|
$ | 885,000 | $ | (775,000 | ) | |||
The Company made changes to its postretirement benefit plans
which resulted in curtailment gains totaling $7.6 million
for the year ended December 31, 2009. These gains were
recorded as reductions to selling, general and administrative
expenses.
The amounts in accumulated other comprehensive income expected
to be recognized as components of net periodic benefit cost in
2010 include the amortization of unrecognized net loss of
$3.5 million related to the pension plans. The amounts in
accumulated other comprehensive income expected to be recognized
as components of net periodic benefit cost in 2010 include the
amortization of $1.2 million and $0.3 million of the
prior service credit and unrecognized net actuarial gain related
to the other postretirement benefit plans.
Additional
Information:
Pension Benefits | Postretirement Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Weighted-average assumptions used to determine benefit
obligations
|
||||||||||||||||
Discount rate qualified pension plans and
postretirement benefit plans
|
5.93 | % | 6.25 | % | 5.47 | % | 6.25 | % | ||||||||
Discount rate non-qualified pension plan
|
6.05 | % | 6.25 | % | N/A | N/A | ||||||||||
Rate of compensation increase
|
5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||
Weighted-average assumptions used to determine net periodic
benefit cost:
|
||||||||||||||||
Discount rate qualified pension plans and
postretirement benefit plans
|
6.25 | % | 6.50 | % | 6.23 | % | 6.50 | % | ||||||||
Discount rate non-qualified pension plan
|
6.25 | % | 6.25 | % | N/A | N/A | ||||||||||
Expected long-term return on plan assets
|
8.00 | % | 8.00 | % | N/A | N/A | ||||||||||
Rate of compensation increase
|
5.00 | % | 4.00 | % | 5.00 | % | 4.00 | % | ||||||||
In developing the discount rate assumption used to determine the
pension and postretirement benefit obligations, the Company uses
the weighted average of market-observed yields for high quality
fixed income securities with maturities that correspond to the
payment of benefits. The equivalent weighted-average discount
rate is calculated by imputing the interest rate that equates
the total present value with the stream of future cash flows.
The rate of compensation increase used to determine benefit
obligations was developed using an age-graded salary scale with
a weighted average of 5.00 percent at December 31,
2009 and December 31, 2008. An age-graded salary scale with
a weighted average of 5.00 percent was used to determine
pension and postretirement benefit costs in 2009. An average
rate of compensation increase of 4.00 percent was used to
determine pension and postretirement benefit costs in 2008.
The December 31, 2009 pension and postretirement benefit
obligations were computed using the RP-2000 Combined Healthy
Mortality table with
40 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
future mortality improvement projections to 2010. The
December 31, 2008 pension and postretirement benefit
obligations and the pension and postretirement net periodic
benefit costs in 2009 and 2008 were computed using the RP-2000
Combined Healthy Mortality table with future mortality
improvement projections to 2009.
The Company determines the overall expected long-term rate of
return for plan assets by evaluating the historical and expected
returns of the individual asset classes comprising the total
plan assets. For individual categories of equity securities,
historical total and real rates of return are considered,
together with inflation and overall market factors including
dividend yield, earnings growth, changes in price to earnings
ratios and volatility of returns. For various fixed income asset
categories expected long-term returns are determined after
consideration of current yields on fixed income securities,
inflation, historical yields relative to benchmarks, and
long-term default rates. For other asset classes, including real
estate, expected long-term returns are determined through
consideration of certain factors, which may include historical
returns, dividend yields, inflation, benchmark returns and net
asset values.
Plan
assets:
The Company sponsors qualified defined benefit pension plans
that provide benefits to participating employees and retirees
(collectively, the Plans). The assets of the Plans
are invested with an investment program objective to maintain a
level of plan funding consistent with actuarial recommendations
sufficient to fund future pension liabilities, achieve a rate of
return that matches or exceeds the benchmark over a full market
cycle, and minimize risk for the expected level of return.
The overall investment performance objective for each investment
category is to exceed the total fund policy benchmark index
return over a market cycle. For investments in domestic
equities, fixed income investments and international equities,
actively managed investment returns are expected to exceed the
designated benchmark index returns over a full market cycle, and
indexed investment returns are expected to closely replicate the
investment return of the designated benchmark index. To
diversify investments and to limit exposure to any one manager,
investment style, or security, actively managed domestic equity
investments are allocated to investment managers within each
sector of the domestic equity market (large capitalization, mid
capitalization, and small capitalization stocks).
Effective January 1, 2010 the Company revised the asset
allocation policy to transition from the previous allocation of
75 percent equities, 20 percent fixed income
investments, and 5 percent real estate, to an asset
allocation permitting an allocation of 60 percent equities
and 40 percent fixed income investments. The transition to
this new allocation during 2010 will provide a more dynamic
asset allocation approach which reflects and incorporates plan
liabilities to reduce the volatility of plan expense and
contributions.
A summary of target and actual allocations of plan assets is as
follows:
Plan Assets at | ||||||||||||
December 31, |
December 31, |
December 31, |
||||||||||
2009 |
2009 |
2008 |
||||||||||
Target |
Actual |
Actual |
||||||||||
Allocation | Allocation | Allocation | ||||||||||
Asset Category:
|
||||||||||||
Domestic equity large cap
|
35 | % | 35 | % | 30 | % | ||||||
Domestic equity mid cap
|
15 | % | 14 | % | 12 | % | ||||||
Domestic equity small cap
|
15 | % | 13 | % | 11 | % | ||||||
International equity
|
10 | % | 9 | % | 8 | % | ||||||
Core fixed income
|
16 | % | 19 | % | 17 | % | ||||||
High yield bonds
|
4 | % | 4 | % | 4 | % | ||||||
Real estate
|
5 | % | 5 | % | 4 | % | ||||||
Cash
|
| 1 | % | 14 | % | |||||||
Total
|
100 | % | 100 | % | 100 | % | ||||||
At December 31, 2009 plan assets were invested in publicly
traded common stocks, publicly traded mutual funds, and cash and
cash equivalent balances. All investments were in level 1
of the fair value hierarchy and valued using observable inputs
including quoted prices in active markets for identical assets
or liabilities.
Total |
||||
Fair Value |
||||
Measurement at |
||||
December 31, |
||||
2009 | ||||
Domestic equity
|
$ | 62,677,000 | ||
International equity
|
9,647,000 | |||
Core fixed income
|
19,344,000 | |||
High yield bonds
|
4,223,000 | |||
Real estate
|
5,052,000 | |||
Cash
|
619,000 | |||
KAYDON CORPORATION
FORM
10K 41
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
Cash
Flows:
The following are expected net benefit payments:
Pension |
Postretirement |
|||||||
Benefits | Benefits | |||||||
Year ending December 31,
|
||||||||
2010
|
$ | 6,245,000 | $ | 610,000 | ||||
2011
|
$ | 6,502,000 | $ | 664,000 | ||||
2012
|
$ | 6,786,000 | $ | 689,000 | ||||
2013
|
$ | 7,040,000 | $ | 759,000 | ||||
2014
|
$ | 7,391,000 | $ | 894,000 | ||||
2015-2019
|
$ | 42,763,000 | $ | 5,625,000 | ||||
The Company has included in the postretirement benefits, shown
in the table above, the estimated future Medicare Part D
direct subsidy payments available under the Medicare
Prescription Drug, Improvement and Modernization Act of 2003.
The Company expects to make cash contributions of approximately
$2.9 million to its pension plans in 2010. The Company
reviews its funding strategy on an ongoing basis. The Company
expects to contribute approximately $0.6 million to its
postretirement benefit plans in 2010.
NOTE 8 | LEASE COMMITMENTS |
Total minimum rentals payable under operating leases that have
initial or remaining noncancelable lease terms in excess of one
year as of December 31, 2009 are as follows:
Year ending December 31,
|
||||
2010
|
$ | 2,345,000 | ||
2011
|
$ | 1,762,000 | ||
2012
|
$ | 1,588,000 | ||
2013
|
$ | 1,137,000 | ||
2014
|
$ | 1,132,000 | ||
Thereafter
|
$ | 3,646,000 | ||
Aggregate rental expense was $2.5 million,
$2.3 million and $1.7 million in 2009, 2008 and 2007,
respectively.
NOTE 9 | INCOME TAXES |
The Company recognizes deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the consolidated financial statements or tax
returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the consolidated
financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The components of income before income taxes are as follows:
2009 | 2008 | 2007 | ||||||||||
Domestic
|
$ | 60,881,000 | $ | 73,542,000 | $ | 90,517,000 | ||||||
Foreign
|
10,747,000 | 27,466,000 | 21,586,000 | |||||||||
$ | 71,628,000 | $ | 101,008,000 | $ | 112,103,000 | |||||||
The provision for income taxes consisted of the following:
2009 | 2008 | 2007 | ||||||||||
Current:
|
||||||||||||
U.S. Federal
|
$ | 9,952,000 | $ | 15,725,000 | $ | 13,324,000 | ||||||
State
|
963,000 | 1,863,000 | 1,206,000 | |||||||||
Foreign
|
2,548,000 | 7,928,000 | 6,542,000 | |||||||||
13,463,000 | 25,516,000 | 21,072,000 | ||||||||||
Deferred:
|
||||||||||||
U.S. Federal
|
11,198,000 | 9,794,000 | 16,324,000 | |||||||||
State
|
576,000 | 930,000 | 1,155,000 | |||||||||
Foreign
|
435,000 | (295,000 | ) | 744,000 | ||||||||
12,209,000 | 10,429,000 | 18,223,000 | ||||||||||
$ | 25,672,000 | $ | 35,945,000 | $ | 39,295,000 | |||||||
The following is a reconciliation of the U.S. federal
statutory income tax rate to the Companys effective tax
rate:
2009 | 2008 | 2007 | ||||||||||
U.S. federal statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes, net of federal benefit
|
1.3 | 1.9 | 2.0 | |||||||||
U.S. federal tax benefit of domestic production activities
deduction
|
(0.5 | ) | (0.7 | ) | (1.0 | ) | ||||||
Differences in income taxes on foreign earnings, losses and
remittances
|
(0.5 | ) | (1.1 | ) | (0.4 | ) | ||||||
Other, net
|
0.5 | 0.5 | (0.5 | ) | ||||||||
Effective tax rate
|
35.8 | % | 35.6 | % | 35.1 | % | ||||||
Accounting guidance prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken in a tax return, and
also the subsequent derecognition of a tax position,
classification, interest and penalties, accounting in interim
periods, and related disclosure.
The Company has liabilities recorded for unrecognized tax
benefits totaling $2.5 million as of December 31,
2009, all of which would affect the effective tax rate. It is
the Companys policy to include interest and penalties
incurred due to
42 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
underpayment or late payment of income taxes due to a taxing
authority on a
net-of-tax
basis as a component of income tax expense. The Company has
recorded $1.0 million in liabilities for tax related
interest and penalties on its consolidated balance sheet, as of
December 31, 2009. The Company does not expect that the
total amounts of unrecognized tax benefits will significantly
change within the next twelve months.
The following is a reconciliation of the total amounts of
unrecognized tax benefits for 2009, 2008, and 2007:
2009 | 2008 | 2007 | ||||||||||
Unrecognized tax benefits at Beginning of Year
|
$ | 2,581,000 | $ | 2,804,000 | $ | 2,563,000 | ||||||
Increase in unrecognized tax benefits as a result of:
|
||||||||||||
Tax positions taken in the current period
|
150,000 | | 388,000 | |||||||||
Tax positions taken in a prior period
|
| 428,000 | 49,000 | |||||||||
Decrease in unrecognized tax benefits as a result of:
|
||||||||||||
Tax positions taken in a prior period
|
(167,000 | ) | (114,000 | ) | (27,000 | ) | ||||||
Settlements with taxing authorities
|
| (127,000 | ) | | ||||||||
Lapse of the applicable statute of limitations
|
(101,000 | ) | (410,000 | ) | (169,000 | ) | ||||||
Unrecognized tax benefits at End of Year
|
$ | 2,463,000 | $ | 2,581,000 | $ | 2,804,000 | ||||||
The tax effect and type of significant temporary differences by
component which gave rise to the net deferred tax asset
(liability) as of December 31, 2009 and 2008 were as
follows:
2009 | 2008 | |||||||
Deferred tax assets:
|
||||||||
Postretirement and postemployment benefit obligations
|
$ | 11,575,000 | $ | 21,323,000 | ||||
Financial accruals and reserves not currently deductible
|
4,428,000 | 4,385,000 | ||||||
Inventory basis differences
|
6,853,000 | 6,480,000 | ||||||
Foreign operating loss carryforwards
|
276,000 | 108,000 | ||||||
Federal tax credit carryforwards
|
145,000 | 2,904,000 | ||||||
State tax credit carryforwards
|
701,000 | | ||||||
Other
|
936,000 | | ||||||
24,914,000 | 35,200,000 | |||||||
Valuation allowance
|
(737,000 | ) | | |||||
24,177,000 | 35,200,000 | |||||||
Deferred tax liabilities:
|
||||||||
Plant and equipment basis differences
|
(14,263,000 | ) | (12,059,000 | ) | ||||
Intangibles
|
(11,775,000 | ) | (9,493,000 | ) | ||||
Other
|
| (303,000 | ) | |||||
(26,038,000 | ) | (21,855,000 | ) | |||||
Net deferred tax asset (liability)
|
$ | (1,861,000 | ) | $ | 13,345,000 | |||
The Company, or one of its subsidiaries, operates and files
income tax returns in the United States, various states, and
foreign jurisdictions. Foreign jurisdictions significant to the
Company include Germany and the United Kingdom. With limited
exceptions, the Company is no longer subject to
U.S. federal tax examinations for years before 2006, state
examinations for years before 2004, German tax examinations for
years before 2006, or United Kingdom tax examinations for years
before 2007.
The Company had available foreign net operating loss
carryforwards of $0.3 million ($0.8 million pre-tax)
and $0.1 million ($0.4 million pre-tax) at
December 31, 2009 and 2008, respectively. In addition, at
December 31, 2008 the Company had federal tax credit
carryforwards of $2.9 million, of which $2.8 million
were realized at December 31, 2009. The Company had
available state tax credit carryforwards of approximately
$0.7 million at December 31, 2009. The valuation
allowance generally represents state tax credit carryforwards
for which utilization is uncertain because it is unlikely that
the credits will be utilized given certain projected state tax
liabilities, state tax utilization limitations, and limited
carryforward periods. Tax benefits of foreign operating loss
carryforwards, federal tax credit carryforwards, and state tax
credit carryforwards are evaluated on an ongoing basis,
including a review of the historical and projected future
operating results, the eligible carryforward period, and other
circumstances.
The net deferred tax asset recorded as an other current asset
was $8.5 million and $10.8 million at
December 31, 2009 and 2008, respectively. The net deferred
tax asset recorded as an other liability was
KAYDON CORPORATION
FORM
10K 43
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
$10.4 million at December 31, 2009 and as an other
asset of $2.6 million at December 31, 2008.
Undistributed earnings of foreign subsidiaries were
$41.2 million at December 31, 2009. The Company has
not provided for U.S. income taxes on these undistributed
earnings of foreign subsidiaries as these earnings are intended
to be permanently reinvested. The amounts subject to
U.S. taxation upon remittance of these earnings as
dividends would be partially offset by available foreign tax
credits.
NOTE 10 GOODWILL
AND OTHER INTANGIBLE ASSETS
The Company annually, or more frequently if events or changes in
circumstances indicate a need, tests the carrying amounts of
goodwill and indefinite-lived intangible assets for impairment.
The Company identifies impairment of goodwill by comparing the
fair value of each of its reporting units with the reporting
units carrying amount.
During 2009, the Companys goodwill impairment testing
revealed that the estimated fair values of all of its reporting
units exceeded their carrying values, which indicated no
goodwill impairment. The Companys goodwill impairment
testing revealed that the excess of the estimated fair value of
each of the reporting units tested over their carrying value
(expressed as a percentage of the carrying amount) as of the
July 31st annual testing date ranged from
approximately 22 percent to approximately 475 percent.
Certain trademarks are the Companys only indefinite-lived
intangible assets. The Company identifies impairment of these
trademarks by comparing their fair value to their carrying
amounts. The fair values of the trademarks are calculated based
on estimates of discounted future cash flows related to the net
amount of royalty expenses avoided due to the existence of the
trademarks. During 2009, trademarks were tested for impairment
with no impairment loss being realized.
The Company acquired Avon Bearings Corporation in 2007 valued at
$54.4 million, net of $0.5 million of working capital
adjustments recorded in 2008. A portion of the purchase price
was allocated to various intangible assets including,
$9.5 million to customer relationships, $3.3 million
to backlog, and $0.2 million to trademarks. The Company
recorded goodwill totaling $28.5 million, including
purchase price adjustments of $1.1 million recorded in
2008. The intangible assets are being amortized over their
respective useful lives. The goodwill is being reported as part
of the Companys Friction Control Products reporting
segment and will not be amortized, but is subject to annual
impairment testing.
The changes in the carrying amount of goodwill for the years
ended December 31, 2009 and 2008 are as follows:
Friction |
Velocity |
|||||||||||||||||||
Control |
Control |
Sealing |
||||||||||||||||||
Products | Products | Products | Other | Total | ||||||||||||||||
Balance as of January 1, 2008
|
||||||||||||||||||||
Goodwill
|
$ | 59,890,000 | $ | 43,200,000 | $ | 186,000 | $ | 62,346,000 | $ | 165,622,000 | ||||||||||
Accumulated impairment losses
|
| | | (18,700,000 | ) | (18,700,000 | ) | |||||||||||||
$ | 59,890,000 | $ | 43,200,000 | $ | 186,000 | $ | 43,646,000 | $ | 146,922,000 | |||||||||||
Purchase price adjustment
|
1,065,000 | | | | 1,065,000 | |||||||||||||||
Effect of foreign currency exchange rate changes
|
(5,563,000 | ) | | | | (5,563,000 | ) | |||||||||||||
Balance as of December 31, 2008
|
$ | 55,392,000 | $ | 43,200,000 | $ | 186,000 | $ | 43,646,000 | $ | 142,424,000 | ||||||||||
Effect of foreign currency exchange rate changes
|
1,467,000 | | | | 1,467,000 | |||||||||||||||
Balance as of December 31, 2009
|
||||||||||||||||||||
Goodwill
|
$ | 56,859,000 | $ | 43,200,000 | $ | 186,000 | $ | 62,346,000 | $ | 162,591,000 | ||||||||||
Accumulated impairment losses
|
| | | (18,700,000 | ) | (18,700,000 | ) | |||||||||||||
Balance as of December 31, 2009
|
$ | 56,859,000 | $ | 43,200,000 | $ | 186,000 | $ | 43,646,000 | $ | 143,891,000 | ||||||||||
The accumulated impairment losses include impairment losses of
$1.9 million recorded in 2004 and $16.8 million
recorded in 2002 as a result of the Companys annual
testing of goodwill.
44 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
Other intangible assets are summarized as follows:
2009 | 2008 | |||||||||||||||
Gross |
Gross |
|||||||||||||||
Carrying |
Accumulated |
Carrying |
Accumulated |
|||||||||||||
Amortized Intangible Assets | Amount | Amortization | Amount | Amortization | ||||||||||||
Customer relationships and lists
|
$ | 28,194,000 | $ | 14,672,000 | $ | 28,194,000 | $ | 11,761,000 | ||||||||
Patents and developed technology
|
6,516,000 | 3,503,000 | 6,427,000 | 3,004,000 | ||||||||||||
Backlog
|
3,300,000 | 3,219,000 | 3,300,000 | 2,519,000 | ||||||||||||
Distributor agreements
|
374,000 | 199,000 | 374,000 | 162,000 | ||||||||||||
Product names
|
320,000 | 163,000 | 320,000 | 130,000 | ||||||||||||
Trademarks
|
200,000 | 200,000 | 200,000 | 97,000 | ||||||||||||
$ | 38,904,000 | $ | 21,956,000 | $ | 38,815,000 | $ | 17,673,000 | |||||||||
The intangible assets are being amortized at accelerated rates
or on a straight-line basis, whichever is appropriate, over
their respective useful lives. The weighted-average original
useful life for customer relationships and lists is
13.6 years, and for patents and developed technology is
13.5 years. Backlog is being amortized over three years.
2009 |
2008 |
|||||||
Carrying |
Carrying |
|||||||
Unamortized Intangible Assets | Amount | Amount | ||||||
Trademarks
|
$ | 4,604,000 | $ | 4,604,000 | ||||
Aggregate Intangible Assets Amortization Expense
|
||||||||
For the year ended December 31, 2008
|
$ | 5,464,000 | ||||||
For the year ended December 31, 2009
|
$ | 4,283,000 | ||||||
Estimated Intangible Assets Amortization Expense
|
||||||||
For the year ending December 31, 2010
|
$ | 3,573,000 | ||||||
For the year ending December 31, 2011
|
$ | 2,265,000 | ||||||
For the year ending December 31, 2012
|
$ | 1,983,000 | ||||||
For the year ending December 31, 2013
|
$ | 1,716,000 | ||||||
For the year ending December 31, 2014
|
$ | 1,418,000 |
NOTE 11 BUSINESS
SEGMENT INFORMATION
The Company operates through operating segments for which
separate financial information is available, and for which
operating results are evaluated regularly by the Companys
chief operating decision maker in determining resource
allocation and assessing performance. Certain of the operating
segments have similar economic characteristics, as well as other
common attributes, including nature of the products and
production processes, distribution patterns and classes of
customers. The Company aggregates these operating segments for
reporting purposes. Certain other operating segments do not
exhibit the common attributes mentioned above and, therefore,
information about them is reported separately. Still other
operating segments do not meet the quantitative thresholds for
separate disclosure and their information is combined and
disclosed as Other businesses.
The Company has three reportable segments and other operating
segments engaged in the manufacture and sale of the following:
Friction Control Products complex components
used in alternative energy, specialized robotics, medical,
aerospace, defense, security, electronic, material handling,
construction, and other industrial applications. Products
include anti-friction bearings, split roller bearings, and
specialty balls.
Velocity Control Products complex components
used in specialized robotics, material handling, machine tool,
medical, amusement and other industrial applications. Products
include industrial shock absorbers, safety shock absorbers,
velocity controls, gas springs and rotary dampers.
Sealing Products complex and standard ring
and seal products used in demanding industrial, aerospace and
defense applications. Products include engine rings, sealing
rings and shaft seals.
Other businesses filter elements and liquid
and gas-phase air filtration systems, metal alloys, machine tool
components, presses, dies and benders used in a variety of
industrial applications.
The accounting policies of the operating segments are the same
as those described in Note 1. Segment performance is
evaluated based on segment operating income and segment assets.
Items not allocated to segment operating income include certain
amortization and corporate
KAYDON CORPORATION
FORM
10K 45
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
administrative expenses, and other amounts. Corporate assets
consist of cash and cash equivalents, certain prepaid expenses,
other assets and fixed assets. The selling price for transfers
between operating segments and geographic areas is generally
based on cost plus a
mark-up.
Sales between reporting segments are not material.
Included in net sales were sales to one customer representing
19.2 percent and 12.5 percent of total consolidated
net sales in 2009 and 2008, respectively. Certain sales to this
customer were included in the Friction Control Products segment,
the Sealing Products segment, and in our other businesses. No
customer accounted for more than 10 percent of net sales in
2007.
2009 | 2008 | 2007 | ||||||||||
Net sales
|
||||||||||||
Friction Control Products
|
$ | 296,420,000 | $ | 325,951,000 | $ | 261,652,000 | ||||||
Velocity Control Products
|
46,358,000 | 69,616,000 | 63,912,000 | |||||||||
Sealing Products
|
37,832,000 | 44,985,000 | 46,687,000 | |||||||||
Other businesses
|
60,535,000 | 81,822,000 | 79,131,000 | |||||||||
Total consolidated net sales
|
$ | 441,145,000 | $ | 522,374,000 | $ | 451,382,000 | ||||||
2009 | 2008 | 2007 | ||||||||||
Operating income
|
||||||||||||
Friction Control Products
|
$ | 50,314,000 | $ | 73,856,000 | $ | 76,956,000 | ||||||
Velocity Control Products
|
6,488,000 | 18,045,000 | 16,240,000 | |||||||||
Sealing Products
|
3,875,000 | 4,974,000 | 8,721,000 | |||||||||
Other businesses
|
4,661,000 | 10,457,000 | 11,141,000 | |||||||||
Total segment operating income
|
65,338,000 | 107,332,000 | 113,058,000 | |||||||||
Items not allocated to segment operating income
|
6,000,000 | (1,821,000 | ) | (1,795,000 | ) | |||||||
Interest expense
|
(247,000 | ) | (9,363,000 | ) | (17,211,000 | ) | ||||||
Interest income
|
537,000 | 4,860,000 | 18,051,000 | |||||||||
Income before income taxes
|
$ | 71,628,000 | $ | 101,008,000 | $ | 112,103,000 | ||||||
Items not allocated to segment operating income in 2009 included
curtailment gains totaling $7.6 million related to certain
changes in the Companys postretirement benefit plans.
Operating income of the Friction Control Products reporting
segment in 2007 included a $5.0 million pre-tax gain on the
sale of a component of the segment which was recorded as a
reduction in selling, general, and administrative expenses. The
component of the segment that was sold was not material to the
Company and represented less than one percent of the
Companys net sales and operating income for 2007, and less
than one percent of total assets on the date of disposition.
2009 | 2008 | 2007 | ||||||||||
Depreciation and amortization of intangible assets
|
||||||||||||
Friction Control Products
|
$ | 17,256,000 | $ | 14,727,000 | $ | 8,245,000 | ||||||
Velocity Control Products
|
2,162,000 | 1,860,000 | 1,690,000 | |||||||||
Sealing Products
|
840,000 | 868,000 | 987,000 | |||||||||
Other businesses
|
3,500,000 | 3,796,000 | 3,619,000 | |||||||||
Corporate
|
361,000 | 394,000 | 461,000 | |||||||||
Total consolidated depreciation and amortization of intangible
assets
|
$ | 24,119,000 | $ | 21,645,000 | $ | 15,002,000 | ||||||
2009 | 2008 | 2007 | ||||||||||
Additions to property, plant and equipment
|
||||||||||||
Friction Control Products
|
$ | 9,745,000 | $ | 50,005,000 | $ | 46,905,000 | ||||||
Velocity Control Products
|
985,000 | 7,805,000 | 2,474,000 | |||||||||
Sealing Products
|
522,000 | 763,000 | 3,193,000 | |||||||||
Other businesses
|
517,000 | 1,924,000 | 1,406,000 | |||||||||
Corporate
|
217,000 | 207,000 | 266,000 | |||||||||
Total consolidated additions to property, plant and equipment
|
$ | 11,986,000 | $ | 60,704,000 | $ | 54,244,000 | ||||||
46 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
2009 | 2008 | |||||||
Total assets
|
||||||||
Friction Control Products
|
$ | 346,266,000 | $ | 353,555,000 | ||||
Velocity Control Products
|
80,549,000 | 79,890,000 | ||||||
Sealing Products
|
22,916,000 | 25,190,000 | ||||||
Other businesses
|
81,448,000 | 85,873,000 | ||||||
Corporate
|
256,765,000 | 245,274,000 | ||||||
Total consolidated assets
|
$ | 787,944,000 | $ | 789,782,000 | ||||
Geographic
Information:
The Company attributes net sales to different geographic areas
on the basis of the location of the customer. Long-lived
tangible assets are shown based on the physical location of the
assets. Amounts in 2008 and 2007 have been adjusted to conform
to this presentation. Net sales and long-lived tangible assets
by geographic area are listed below. Long-lived tangible assets
primarily include net property, plant and equipment:
2009 | 2008 | 2007 | ||||||||||
Net Sales
|
||||||||||||
United States
|
$ | 300,126,000 | $334,191,000 | $308,284,000 | ||||||||
Germany
|
32,213,000 | 51,313,000 | 42,007,000 | |||||||||
Other Countries
|
108,806,000 | 136,870,000 | 101,091,000 | |||||||||
Total
|
$ | 441,145,000 | $522,374,000 | $451,382,000 | ||||||||
Long-lived Tangible Assets
|
||||||||||||
United States
|
$ | 86,540,000 | $94,444,000 | $90,543,000 | ||||||||
Mexico
|
73,029,000 | 75,461,000 | 45,319,000 | |||||||||
Other Countries
|
16,160,000 | 15,752,000 | 10,439,000 | |||||||||
Total
|
$ | 175,729,000 | $185,657,000 | $146,301,000 | ||||||||
NOTE 12 | FAIR VALUE MEASUREMENT |
The Company adopted fair value measurement guidance on
January 1, 2008, which, among other things, requires
enhanced disclosures about assets and liabilities measured at
fair value. In 2008, the adoption was limited to financial
assets and liabilities, and on January 1, 2009, was
extended to certain other nonfinancial assets and liabilities,
including the Companys pension assets as more fully
described in Note 7. In 2009, the Company liquidated its
remaining position of a long-term investment which had been
measured at fair value. The Company has no material nonfinancial
assets or liabilities recorded at fair value at
December 31, 2009.
KAYDON CORPORATION
FORM
10K 47
Table of Contents
NOTES TO
CONSOLIDATED
Financial
Statements
(continued)
NOTE 13 | UNAUDITED QUARTERLY FINANCIAL INFORMATION |
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||||||||||||||||||||||
ended | ended | ended | ended | |||||||||||||||||||||||||||||
April 4, |
March 29, |
July 4, |
June 28, |
October 3, |
September 27, |
December 31, |
December 31, |
|||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||||||||||||
Income Statement Data
|
||||||||||||||||||||||||||||||||
Net sales
|
$ | 110,335 | $ | 123,284 | $ | 98,318 | $ | 139,905 | $ | 123,637 | $ | 126,803 | $ | 108,855 | $ | 132,382 | ||||||||||||||||
Gross profit
|
35,778 | 47,319 | 32,352 | 54,171 | 38,047 | 44,533 | 37,688 | 46,157 | ||||||||||||||||||||||||
Net
income(1)(2)
|
$ | 10,124 | $ | 15,319 | $ | 8,359 | $ | 19,632 | $ | 16,067 | $ | 16,335 | $ | 11,406 | $ | 13,777 | ||||||||||||||||
Per Share Data
|
||||||||||||||||||||||||||||||||
Earnings per share
basic(1)(2)(3)
|
$ | 0.30 | $ | 0.55 | $ | 0.25 | $ | 0.71 | $ | 0.48 | $ | 0.54 | $ | 0.34 | $ | 0.40 | ||||||||||||||||
Earnings per share
diluted(3)
|
0.30 | 0.52 | 0.25 | 0.63 | 0.48 | 0.50 | 0.34 | 0.40 | ||||||||||||||||||||||||
Dividends declared per share
|
0.17 | 0.15 | 0.17 | 0.15 | 0.18 | 0.17 | 0.18 | 0.17 | ||||||||||||||||||||||||
(1) | The net income and basic earnings per share include after tax gains related to the curtailment of certain postretirement benefits. These after tax gains equaled $0.6 million, $3.5 million, and $0.8 million for second quarter 2009, third quarter 2009, and fourth quarter 2009, respectively. The basic earnings per share effect equaled $0.02 per share, $0.10 per share, and $0.03 per share for the second quarter 2009, third quarter 2009, and fourth quarter 2009, respectively. | |
(2) | The 2008 quarterly net income and basic earnings per share include the effect of the retrospective application of accounting guidance adopted as required on January 1, 2009. This guidance, as more fully described in Note 1, related to the Companys former 4% Contingent Senior Subordinated Notes. The application of this guidance reduced previously reported net income by $1.3 million and $0.7 million for the first quarter and second quarter of 2008, respectively. The application of this guidance also reduced previously reported basic earnings per share by $0.05 and $0.03 for the first quarter and second quarter of 2008, respectively, and had no effect on diluted earnings per share. | |
(3) | The 2008 quarterly basic earnings per share and diluted earnings per share also include the effect of the retrospective application of accounting guidance adopted, as required, on January 1, 2009 related to certain of the Companys equity incentive awards, as more fully described in Note 1. The application of this guidance reduced previously reported basic earnings per share by $0.01 per share in each of the first, second, third, and fourth quarters of 2008. The application of this guidance also reduced previously reported diluted earnings per share by $0.01 per share in each of the first, second, and fourth quarters of 2008. The application of this guidance did not change previously reported third quarter 2008 diluted earnings per share. |
48 KAYDON
CORPORATION FORM 10K
Table of Contents
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A.
CONTROLS AND PROCEDURES
Kaydons management is responsible for establishing and
maintaining effective disclosure controls and procedures, as
defined under
Rule 13a-15(e)
of the Securities Exchange Act of 1934. As of the end of the
period covered by this report, the Company performed an
evaluation, under the supervision and with the participation of
the Companys management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures. Based upon,
and as of the date of that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective
to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the
Securities and Exchange Commission under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commissions rules
and forms, and that such information is accumulated and
communicated to the Companys management, including its
Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure. No changes were made to the Companys internal
control over financial reporting (as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934) during the last
fiscal quarter that materially affected, or are reasonably
likely to materially affect, the Companys internal control
over financial reporting.
Managements report on internal control over financial
reporting, and Ernst & Young LLPs report on the
Companys internal control over financial reporting are
included in Item 8 of this Report and incorporated herein
by reference.
ITEM 9B.
OTHER INFORMATION
None
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information regarding executive officers required by
Item 10 is set forth as a Supplementary Item at the end of
Part I hereof (pursuant to Instruction 3 to
Item 401(b) of
Regulation S-K).
Other information required by this Item is included in the Proxy
Statement for the 2010 Annual Meeting of Shareholders of the
Company, which will be filed with the Securities and Exchange
Commission on or about April 6, 2010 and is incorporated
herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is included in the
Proxy Statement for the 2010 Annual Meeting of Shareholders of
the Company, which will be filed with the Securities and
Exchange Commission on or about April 6, 2010 and is
incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is included in the
Proxy Statement for the 2010 Annual Meeting of Shareholders of
the Company, which will be filed with the Securities and
Exchange Commission on or about April 6, 2010 and is
incorporated herein by reference. The Company also incorporates
herein by reference the Equity Compensation Plan Information
contained in Item 5 of this Report.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is included in the
Proxy Statement for the 2010 Annual Meeting of Shareholders of
the Company, which will be filed with the Securities and
Exchange Commission on or about April 6, 2010 and is
incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is included in the
Proxy Statement for the 2010 Annual Meeting of Shareholders of
the Company, which will be filed with the Securities and
Exchange Commission on or about April 6, 2010 and is
incorporated herein by reference.
KAYDON CORPORATION
FORM
10K 49
Table of Contents
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company
are included in Item 8. Financial Statements and
Supplementary Data:
Consolidated Balance Sheets at December 31, 2009 and 2008
Consolidated Statements of Income for the years ended
December 31, 2009, 2008 and 2007
Consolidated Statements of Shareholders Equity for the
years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting
Firm Internal Control
Report of Independent Registered Public Accounting
Firm Financial Statements
2. Financial Statement Schedules
The following Financial Statement Schedule of the Company is
filed with this Report:
II. Valuation and Qualifying Accounts for the years ended
December 31, 2009, 2008 and 2007
3. Exhibits
The following exhibits are filed as part of this Report. Those
exhibits with an asterisk (*) designate the Companys
management contracts or compensatory plans or arrangements
required to be filed herewith.
Certain of the following exhibits have been previously filed
with the Securities and Exchange Commission by the Company
pursuant to the requirements of the Securities Act of 1933 and
the Securities Exchange Act of 1934. Such exhibits are
identified by the parenthetical references following the listing
of each such exhibit and are incorporated herein by reference.
The Companys Commission file number is 1-11333.
Exhibit |
||||
Number
|
Description of Document | |||
3 | .1 | Second Restated Certificate of Incorporation of the Company (previously filed as Exhibit 3.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference) | ||
3 | .2 | Amended and Restated By-Laws of Kaydon Corporation, (previously filed as Exhibit 3.1 to the Companys Current Report on Form 8-K filed May 26, 2009 and incorporated herein by reference) | ||
4 | .1 | Rights Agreement dated as of May 4, 2000 between the Company and Continental Stock Transfer & Trust Company, as Rights Agent (previously filed as Exhibit 4.1 to the Companys Current Report on Form 8-K filed May 24, 2000 and incorporated herein by reference) | ||
4 | .2 | Notice Letter dated June 23, 2000 from the Company to Continental Stock Transfer & Trust Company regarding the change of the Rights Agent under the Companys Rights Agreement dated as of May 4, 2000 (previously filed as Exhibit 4.3 to Amendment No. 2 to the Companys Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference) | ||
10 | .1* | Kaydon Corporation Employee Stock Ownership and Thrift Plan, as amended and restated February 19, 2002 (previously filed as Exhibit 4.4 to the Companys S-8 Registration Statement filed October 8, 2004 and incorporated herein by reference) | ||
10 | .1.1* | Fifth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan dated November 1, 2004 (previously filed as Exhibit 10.1.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference) | ||
10 | .1.2* | Sixth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan dated December 21, 2005 (previously filed as Exhibit 10.1.2 to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference) | ||
10 | .1.3* | Seventh Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan dated December 21, 2006 (previously filed as Exhibit 10.1.3 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference) |
50 KAYDON
CORPORATION FORM 10K
Table of Contents
Exhibit |
||||
Number
|
Description of Document | |||
10 | .1.4* | Eighth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan dated June 5, 2007 (previously filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference) | ||
10 | .1.5* | Ninth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan effective January 1, 2007. (previously filed as Exhibit 10.1.5 to the Companys Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference) | ||
10 | .1.6* | Tenth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan dated November 18, 2008 (previously filed as Exhibit 10.1.6 to the Companys Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference) | ||
10 | .1.7* | Eleventh Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan effective March 29, 2009 (previously filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended April 4, 2009 and incorporated herein by reference) | ||
10 | .1.8* | Twelfth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan effective September 14, 2009 (previously filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended October 3, 2009 and incorporated herein by reference) | ||
10 | .1.9* | Thirteenth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan dated December 22, 2009 | ||
10 | .2* | Amended and Restated Executive Management Bonus Program (previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed May 26, 2009 and incorporated herein by reference) | ||
10 | .3* | Kaydon Corporation Supplemental Executive Retirement Plan, as amended and restated (previously filed as Exhibit 10.2 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .3.1* | First Amendment of the Kaydon Corporation Supplemental Executive Retirement Trust (previously filed as Exhibit 10.3 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .4* | Kaydon Corporation 1999 Long Term Stock Incentive Plan, amended and restated effective October 23, 2008 (previously filed as Exhibit 10.6 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .4.1* | Forms of restricted stock agreement (other than for CEO) to be entered into by the Company and award recipients under the Kaydon Corporation 1999 Long Term Stock Incentive Plan (previously filed as Exhibit 10.10 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .4.2* | Form of non-qualified stock option agreement to be entered into by the Company and award recipients under the Kaydon Corporation 1999 Long Term Stock Incentive Plan (previously filed as Exhibit 10.11 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .4.3* | Form of Restricted Stock Agreement for Kaydon Corporation 1999 Long Term Stock Incentive Plan for James OLeary (previously filed as Exhibit 10.12 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .4.4* | Form of Phantom Share Award Agreement for Kaydon Corporation 1999 Long Term Stock Incentive Plan (previously filed as Exhibit 10.13 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .5* | Kaydon Corporation Director Deferred Compensation Plan, amended and restated effective October 28, 2008 (previously filed as Exhibit 10.4 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .6* | Form of Letter Agreement for Change in Control Compensation Agreements (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed May 12, 2008 and incorporated herein by reference) | ||
10 | .7* | Amended and Restated Change in Control Compensation Agreement dated October 23, 2008 between the Company and John R. Emling (previously filed as Exhibit 10.5.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 27, 2008 and incorporated herein by reference) | ||
10 | .8* | Amended and Restated Change in Control Compensation Agreement dated October 23, 2008 between the Company and Peter C. DeChants (previously filed as Exhibit 10.5.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 27, 2008 and incorporated herein by reference) | ||
10 | .9 | Amended and Restated Credit Agreement dated as of July 12, 2005 among the Company, the subsidiary borrowers from time to time party thereto, the alternate currency borrowers from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Wachovia Bank, National Association, as Syndication Agent, and Bank of America, N.A., Comerica Bank and SunTrust Bank, as Documentation Agents, J.P. Morgan Securities, Inc., as Joint Lead Arranger and Sole Book Runner and Wachovia Capital Markets, LLC, as Joint Lead Arranger (previously filed as Exhibit 10 to the Companys Current Report on Form 8-K filed July 15, 2005 and incorporated herein by reference) | ||
10 | .10* | Kaydon Corporation 2003 Non-Employee Directors Equity Plan, amended and restated effective October 23, 2008 (previously filed as Exhibit 10.7 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .11* | Form of 2003 Non-Employee Directors Equity Plan Restricted Stock Agreement (previously filed as Exhibit 10.8 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .11.1* | Form of 2003 Non-Employee Directors Equity Plan Nonstatutory Stock Option Agreement (previously filed as Exhibit 10.9 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .11.2* | Kaydon Corporation Non-Employee Directors Compensation (previously filed as Exhibit 10.14 to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference) | ||
10 | .12* | Kaydon Corporation Executive Medical Reimbursement Insurance Plan (previously filed as Exhibit 10.18 to the Companys Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference) |
KAYDON CORPORATION
FORM
10K 51
Table of Contents
Exhibit |
||||
Number
|
Description of Document | |||
10 | .13* | Employment Agreement entered into March 23, 2007 effective March 26 2007, as amended February 14, 2008 and October 23, 2008 by and between Kaydon Corporation and James OLeary (previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed October 28, 2008 and incorporated herein by reference) | ||
10 | .14* | Form of Letter Agreement relating to Employment Agreement with James OLeary (previously filed as Exhibit 10.3 to the Companys Current Report on Form 8-K filed May 12, 2008 and incorporated herein by reference) | ||
10 | .15* | Amended and Restated Change in Control Compensation Agreement dated October 23, 2008 between the Company and Debra K. Crane (previously filed as Exhibit 10.5.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 27, 2008 and incorporated herein by reference) | ||
10 | .16* | Amended and Restated Change in Control Compensation Agreement dated October 23, 2008 between the Company and Anthony T. Behrman (previously filed as Exhibit 10.5.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 27, 2008 and incorporated herein by reference) | ||
10 | .17* | Employment Continuation, Consulting and Non-Compete Agreement between Kaydon Corporation and Kenneth W. Crawford dated January 27, 2009 (previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed January 29, 2009 and incorporated by reference) | ||
10 | .18* | Change in Control Compensation Agreement between the Company and Donald Buzinkai, dated June 11, 2009 (previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed June 15, 2009 and incorporated herein by reference) | ||
21 | Subsidiaries of the Company | |||
23 | Consent of Independent Registered Public Accounting Firm | |||
31 | .1 | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31 | .2 | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
52 KAYDON
CORPORATION FORM 10K
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KAYDON CORPORATION | ||
Date: February 26, 2010
|
By:
/s/ James
OLeary James
OLeary
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
|
Date: February 26, 2010
|
By:
/s/ Peter
C. DeChants Peter
C. DeChants
Senior Vice President, Chief Financial Officer (Principal Financial Officer) |
|
Date: February 26, 2010
|
By:
/s/ Donald
I. Buzinkai Donald
I. Buzinkai
Vice President, Chief Accounting Officer (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Mark
A. Alexander Mark A. Alexander Director |
Date: February 26, 2010 | |||
/s/ David
A. Brandon David A. Brandon Director |
Date: February 26, 2010 | |||
/s/ Patrick
P. Coyne Patrick P. Coyne Director |
Date: February 26, 2010 | |||
/s/ William
K. Gerber William K. Gerber Director |
Date: February 26, 2010 | |||
/s/ Timothy
J. ODonovan Timothy J. ODonovan Director |
Date: February 26, 2010 | |||
/s/ James
OLeary James OLeary Chairman |
Date: February 26, 2010 | |||
/s/ Thomas
C. Sullivan Thomas C. Sullivan Director |
Date: February 26, 2010 |
KAYDON CORPORATION
FORM
10K 53
Table of Contents
SCHEDULE II.
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER
31, 2009, 2008 AND 2007
Balance at |
Charged to Costs |
Balance at |
||||||||||||||
Description | Beginning of Period | and Expenses | Deductions(A) | End of Period | ||||||||||||
Allowance for doubtful accounts, deducted from accounts
receivable in the balance sheet:
|
||||||||||||||||
2009
|
$ | 991,000 | $ | 629,000 | $ | (437,000 | ) | $ | 1,183,000 | |||||||
2008
|
$ | 826,000 | $ | 413,000 | $ | (248,000 | ) | $ | 991,000 | |||||||
2007
|
$ | 1,029,000 | $ | (50,000 | ) | $ | (153,000 | ) | $ | 826,000 | ||||||
(A) | Deductions, representing uncollectible accounts written off, less recoveries of accounts receivable written off in prior years, and reclassifications. |
Balance at |
Charged to Costs |
Balance at |
||||||||||||||
Description | Beginning of Period | and Expenses | Deductions(B) | End of Period | ||||||||||||
Inventory reserve account, deducted from inventories in the
balance sheet:
|
||||||||||||||||
2009
|
$ | 17,236,000 | $ | (394,000 | ) | $ | (933,000 | ) | $ | 15,909,000 | ||||||
2008
|
$ | 13,671,000 | $ | 4,141,000 | $ | (576,000 | ) | $ | 17,236,000 | |||||||
2007
|
$ | 13,561,000 | $ | 595,000 | $ | (485,000 | ) | $ | 13,671,000 | |||||||
(B) | Deductions, representing disposal of physical inventories previously reserved, and reclassifications. |
Balance at |
Charged to Costs |
Balance at |
||||||||||||||
Description | Beginning of Period | and Expenses(C) | Deductions(C) | End of Period | ||||||||||||
Deferred tax assets valuation allowance:
|
||||||||||||||||
2009
|
$ | | $ | 737,000 | $ | | $ | 737,000 | ||||||||
(C) | Charges to Costs and Expenses, representing state tax credit and federal state tax credit carryforwards established in 2009. No deductions were recorded in 2009. |
54 KAYDON
CORPORATION FORM 10K