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EX-21 - EX-21 - KAYDON CORP | k49851exv21.htm |
EX-31.1 - EX-31.1 - KAYDON CORP | k49851exv31w1.htm |
EX-31.2 - EX-31.2 - KAYDON CORP | k49851exv31w2.htm |
Table of Contents
FORM 10-K
United States
Securities and Exchange Commission
Securities and Exchange Commission
Washington, D.C. 20549
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2010
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. |
Securities registered pursuant to Section 12(g) of the
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 þ No o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) 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 3, 2010 (based on the July 2, 2010
closing sales price of $33.71 of the registrants Common
Stock, as reported by the New York Stock Exchange on such date)
was approximately $1,106,000,000. 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 17, 2011:
32,800,343 Shares of Common Stock, par value $0.10 per
share.
Portions of the registrants
definitive Proxy Statement to be filed for its 2011 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, specialized 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 support of our wind
energy growth initiative, we invested more than $80 million
in our wind energy capacity expansion program from 2006 through
2009. 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. Annual sales to wind energy
customers, which are recorded in the Friction Control Products
segment, were $95.9 million, $103.0 million and
$80.5 million, in 2010, 2009 and 2008, respectively,
compared to $32.9 million in 2007.
We have global operations with considerable opportunity to
further expand organically. We intend to leverage our brands,
reputation, expertise and customer base to gain a greater share
of our customers business and deeper penetration in
existing and adjacent markets. We also intend to
opportunistically pursue both complementary bolt-on
acquisitions and larger, free standing businesses that meet our
qualitative criteria within the industrial sector.
Recent
Developments
On February 24, 2011 we entered into a definitive agreement
to purchase all of the outstanding shares of HAHN-Gasfedern GmbH
and related real estate and intangible property
(Hahn) from Ulrich Hahn e.K. The acquisition is
expected to close in the second quarter of 2011 following
completion of customary closing conditions. Hahn manufactures
and sells high quality gas springs, tension springs and dampers
for diverse industrial markets. Hahns results will be
reported in Velocity Control Products.
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 to determine resource allocation and
assess 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.
Information for those operating segments that do not meet the
aggregation criteria to form a reporting segment, and for those
operating segments that do not meet the quantitative thresholds
for separate disclosure as a reporting segment, is combined and
disclosed as Other Industrial Products.
We have two 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.
KAYDON
CORPORATION
FORM 10K 1
Table of Contents
Other Industrial Products complex and
standard ring and seal products, filter elements and liquid and
gas-phase filtration systems, metal alloys, machine tool
components, presses, dies and benders used in a variety of
applications.
During 2010, we determined that our Sealing Products operating
segment no longer meets the quantitative threshold for separate
disclosure as a reporting segment. Therefore, its results are
included in Other Industrial Products. Prior period
results have been reclassified to conform to this presentation.
Net sales related to our two reportable segments and other
operating segments during 2010, 2009 and 2008 are set forth in
the following table:
2010 | 2009 | 2008 | ||||||||||
Friction Control Products
|
$ | 299,009,000 | $ | 296,420,000 | $ | 325,951,000 | ||||||
Velocity Control Products
|
60,208,000 | 46,358,000 | 69,616,000 | |||||||||
Other Industrial Products
|
104,771,000 | 98,367,000 | 126,807,000 | |||||||||
Total consolidated net sales
|
$ | 463,988,000 | $ | 441,145,000 | $ | 522,374,000 | ||||||
See the Notes to Consolidated Financial Statements
(Note 10) 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 segments in the design, engineering and manufacturing
of our products. Due to the custom engineered and 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 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 2010,
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 16.6 percent, 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 2010, 2009 or 2008. 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 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.
We believe, based on experience, that no material renegotiations
or refunds will be required under our contracts related to
military procurement. We have not made any 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 in the future.
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. We define backlog as orders
shippable in the upcoming 18 months.
Variability in backlog is affected by the timing of orders
received, particularly when larger
2 KAYDON
CORPORATION FORM 10K
Table of Contents
customers pull forward or push out major orders. Backlog by
reporting segment is presented below:
December 31, |
December 31, |
|||||||||||
2010 | 2009 | |||||||||||
Friction Control Products
|
$ | 150,954,000 | $ | 179,079,000 | ||||||||
Velocity Control Products
|
10,071,000 | 7,213,000 | ||||||||||
Other Industrial Products
|
39,848,000 | 32,233,000 | ||||||||||
Total
|
$ | 200,873,000 | $ | 218,525,000 | ||||||||
Patents
and Trademarks
We hold various patents, patent applications, licenses,
trademarks and trade names. We consider patents, patent
applications, licenses, trademarks 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 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 us with respect to
more than a few of its product lines and services.
Employees
We employ approximately 2,172 people. We generally have
satisfactory relationships with our 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 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 10) 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 us. 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 and financial condition.
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 earnings. In
addition, our military sales are dependent on government
funding. While business conditions in 2010 improved compared to
conditions in late 2008 and 2009, sales to certain industries
have not yet recovered to pre-recessionary levels. The timing
and sustainability of worldwide economic growth in 2011 is
uncertain and if economic conditions do not remain at current
levels or if conditions deteriorate
KAYDON
CORPORATION
FORM 10K 3
Table of Contents
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
operating results and 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
regulatory burdens. In addition, certain competitors, including
Eaton, Timken, SKF, Schaeffler 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 and financial
condition.
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 general
objective 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 operating results and financial condition.
Typically, sales of our products from our foreign subsidiaries
and from our domestic businesses selling to foreign locations
account for approximately 30 to 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.
4 KAYDON
CORPORATION FORM 10K
Table of Contents
Our critical performance products expose us to potential
litigation-related costs which may adversely affect our
operating results and financial condition.
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 be assured 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 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 operating results and financial
condition.
We have invested more than $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
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 and the general
economic environment may impact the timing and extent that wind
energy market customers proceed with planned projects, and, if
financial market conditions are not conducive to financing our
customers projects or economic conditions do not support
further growth, our operating results and financial condition
may be adversely affected.
We have invested in increased capacity 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. The wind energy market has been impacted by issues
associated with credit and financing availability and end user
confidence in proceeding with previously planned projects. If
financial market conditions are not conducive to financing our
customers projects or economic conditions do not support
further growth, customers may react in a manner that could
adversely affect our operating results and financial condition.
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; Muskegon, MI; Sumter, SC (3 sites); Kings Lynn, United Kingdom; Monterrey, Mexico (2 sites) |
|
Velocity Control Products
|
Farmington Hills, MI; Langenfeld, Germany |
|
Other Industrial Products
|
Baltimore, MD; 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.
Information regarding legal proceeding involving us is set forth
in the Legal Costs and Contingencies section of Note 1 to
the consolidated financial statements contained in Item 8.
Financial Statements and Supplementary Data.
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, 2010.
(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, 2010.
Name and Age of |
Data Pertaining to |
|
Executive Officer | Executive Officers | |
James OLeary(48)
|
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(47)
|
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. | |
Debra K. Crane(55)
|
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(58)
|
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. | |
Laura M. Kowalchik(41)
|
Vice President, Controller and Chief Accounting Officer. Ms. Kowalchik joined Kaydon in October 2010. Prior to joining Kaydon, she was Vice President and Corporate Controller of Dura Automotive Systems, LLC from 2008 to 2010. From 2006 to 2008 she held senior financial positions at Microheat, Inc. Ms. Kowalchik also held various positions with Metaldyne Corporation from 1998 to 2006. | |
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
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, 2010, there were 595 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 fiscal periods indicated.
2010 by Quarter | 2009 by Quarter | |||||||||||||||||||||||
Market Price |
Market Price |
Dividends |
Market Price |
Market Price |
Dividends |
|||||||||||||||||||
High | Low | Declared | High | Low | Declared | |||||||||||||||||||
Fourth
|
$ | 40.72 | $ | 33.60 | $ | 0.19 | $ | 38.31 | $ | 31.03 | $ | 0.18 | ||||||||||||
Third
|
37.99 | 32.03 | 0.19 | 36.72 | 29.70 | 0.18 | ||||||||||||||||||
Second
|
44.86 | 32.65 | 0.18 | 36.77 | 27.20 | 0.17 | ||||||||||||||||||
First
|
38.64 | 31.33 | 0.18 | 35.70 | 23.19 | 0.17 | ||||||||||||||||||
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.
The following table provides information with respect to
purchases made by the Company of shares of its common stock
during each fiscal month in the fourth quarter of 2010.
Total Number of |
Maximum Number of |
|||||||||||||||
Total Number |
Average Price |
Shares Purchased as |
Shares that May |
|||||||||||||
of Shares |
Paid |
Part of Publicly |
Yet be Purchased |
|||||||||||||
Period | Purchased | Per Share | Announced Plan | Under the Plan(1) | ||||||||||||
October 3 to October 30
|
| | | 2,787,929 | ||||||||||||
October 31 to November 27
|
300,000 | $ | 35.50 | 300,000 | 2,487,929 | |||||||||||
November 28 to December 31
|
200,500 | $ | 37.92 | 200,500 | 2,287,429 | |||||||||||
Total
|
500,500 | $ | 36.47 | 500,500 | 2,287,429 | |||||||||||
(1) | In May 2005, the Companys Board of Directors authorized management to repurchase up to 5,000,000 shares of its common stock in the open market. |
8 KAYDON
CORPORATION FORM 10K
Table of Contents
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 at
December 31, 2010, 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
|
603,000 | (1) | $ | 38.83 | 2,459,001 | (3) | ||||||
Equity compensation plans not approved by
shareholders(2)
|
23,890 | N/A | N/A | |||||||||
Total
|
626,890 | 2,459,001 | ||||||||||
(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 at December 31, 2010. | |
(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. |
KAYDON
CORPORATION
FORM 10K 9
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, 2006 and ending
December 31, 2010, assuming an investment of $100.00 at the
close of trading on December 31, 2005 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.
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Kaydon Corporation
|
$ | 100.00 | $ | 125.23 | $ | 173.83 | $ | 111.16 | $ | 118.22 | $ | 137.36 | ||||||||||||
Standard & Poors 500
|
$ | 100.00 | $ | 115.79 | $ | 122.15 | $ | 76.95 | $ | 97.31 | $ | 111.97 | ||||||||||||
Diversified Manufacturing Index
|
$ | 100.00 | $ | 125.40 | $ | 144.42 | $ | 86.22 | $ | 111.56 | $ | 141.90 |
10 KAYDON
CORPORATION FORM 10K
Table of Contents
ITEM 6. SELECTED
FINANCIAL DATA
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Income Statement
|
||||||||||||||||||||
Net Sales
|
$ | 463,988 | $ | 441,145 | $ | 522,374 | $ | 451,382 | $ | 403,992 | ||||||||||
Gross Profit
|
164,625 | 143,865 | 192,180 | 184,300 | 167,426 | |||||||||||||||
Net
Income(3)
|
$ | 56,045 | (1) | $ | 45,956 | (2) | $ | 65,063 | $ | 72,808 | (5) | $ | 65,004 | |||||||
Balance Sheet
|
||||||||||||||||||||
Total Assets
|
$ | 801,332 | $ | 787,944 | $ | 789,782 | $ | 786,565 | $ | 737,556 | ||||||||||
Cash and Cash Equivalents, and Short-term Investments
|
286,648 | 262,403 | 232,998 | 286,993 | 370,789 | |||||||||||||||
Total
Debt(3)
|
| | | 196,860 | 189,201 | |||||||||||||||
Cash Flow Data
|
||||||||||||||||||||
Net Cash From Operating Activities
|
$ | 93,864 | $ | 66,181 | $ | 57,900 | $ | 74,259 | $ | 89,860 | ||||||||||
Capital Expenditures
|
15,397 | 11,986 | 60,704 | 54,244 | 26,930 | |||||||||||||||
Depreciation and Amortization of Intangible Assets
|
24,510 | 24,119 | 21,645 | 15,002 | 14,312 | |||||||||||||||
Per Share Data
|
||||||||||||||||||||
Earnings per Share
Diluted(4)
|
$ | 1.67 | (1) | $ | 1.37 | (2) | $ | 2.06 | $ | 2.39 | (5) | $ | 2.15 | |||||||
Dividends Declared per Share
|
0.74 | 0.70 | 0.64 | 0.54 | 0.48 | |||||||||||||||
(1) | 2010 results include the after tax effect, $2.3 million or $0.07 per share, of the pre-tax $3.5 million gains related to the curtailment of certain postretirement benefits, the after tax effect, $2.7 million or $0.08 per share, of the pre-tax $4.0 million of expenses for unconsummated corporate development efforts and the after tax effect, $2.5 million or $0.08 per share, of the pre-tax $3.7 million in expenses related to our manufacturing consolidation program. | |
(2) | 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. | |
(3) | Includes the effect of the retrospective application of accounting guidance related to our former Contingent Convertible Senior Subordinated Notes. The retrospective application reduced previously reported net income for 2008, 2007 and 2006 by $2.0 million, $4.9 million and $4.5 million, respectively. The effect of this guidance also reduced total debt for 2007 and 2006 by $3.1 million and $10.8 million, respectively. | |
(4) | Includes the effect of the retrospective application of 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 for 2008, 2007 and 2006 by $0.03, $0.02 and $0.02, respectively. | |
(5) | 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. |
KAYDON
CORPORATION
FORM 10K 11
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, defense, 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.
Global economic conditions improved in 2010 from the
recessionary conditions experienced in the latter part of 2008
and the majority of 2009. This contributed to the sales volume
and operating income increases achieved in each of our business
segments. Order rates also improved, as customers have gradually
moved from the level of extreme caution at which they were
operating in 2009. As we did at the initial stages of the
recession, we have continued to focus on programs to grow market
share, reduce costs and improve capacity utilization and
increase cash flow, thereby allowing us to capitalize on the
improved industrial environment in 2010 and positioning us to
capitalize on future opportunities in targeted markets as
economic conditions continue to improve.
The improved 2010 industrial environment benefited our
businesses selling to industrial end-markets which more than
offset the anticipated moderation in our wind energy and
military businesses that occurred in the second half of 2010,
after having been robust throughout the recent recession. Our
performance during 2011 remains dependent on the continued
strengthening of general economic and industrial conditions.
Sales to the wind energy market moderated in the second half of
2010 as was expected, but the longer term outlook will be
heavily influenced by both continued improvement in the economy
and the resultant need for electricity, and greater clarity
around public policy regarding alternative energy. We believe
that continuing actions and policy statements from the
U.S. Government 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 2010 our net sales totaled $464.0 million, as we
were able to take advantage of the effects of the improved
economic conditions in several of our markets. We generated net
income of $56.0 million and cash flow from operating
activities of $93.9 million during 2010. Due to the strong
cash flow from operating activities, cash and cash equivalents
increased $24.2 million during the year even as we invested
$15.4 million in capital expenditures, $27.0 million
for stock repurchases and $24.5 million in our common stock
dividend. The total order book for 2010 equaled
$446.3 million, compared to $347.1 million in 2009
with the increase reflecting the economic recovery experienced
to varying degrees within our businesses and markets served. Our
2010 year-end backlog totaled $200.9 million. Our
investable balances provided significant interest income in
early 2008 before financial markets deteriorated. We responded
to these adverse financial market conditions 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 both 2009 and 2010 and will not improve
significantly until market rates increase.
At December 31, 2010, our current ratio was 8.8 to 1 and
working capital totaled $414.3 million. We believe that our
cash and cash equivalents balance of $286.6 million at
December 31, 2010 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 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.
12 KAYDON
CORPORATION FORM 10K
Table of Contents
Selected
Data For The Years 2010, 2009 and 2008
For the Years Ended December 31, | ||||||||||||||||||||||||
% of |
% of |
% of |
||||||||||||||||||||||
2010 | sales | 2009 | sales | 2008 | sales | |||||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||||||
Results from operations:
|
||||||||||||||||||||||||
Net sales
|
$ | 463,988 | $ | 441,145 | $ | 522,374 | ||||||||||||||||||
Cost of sales
|
299,363 | 297,280 | 330,194 | |||||||||||||||||||||
Gross profit
|
164,625 | 35.5% | 143,865 | 32.6% | 192,180 | 36.8% | ||||||||||||||||||
Selling, general and administrative expenses
|
83,006 | 17.9% | 72,527 | 16.4% | 86,669 | 16.6% | ||||||||||||||||||
Operating income
|
81,619 | 17.6% | 71,338 | 16.2% | 105,511 | 20.2% | ||||||||||||||||||
Interest expense
|
231 | 247 | 9,363 | |||||||||||||||||||||
Interest income
|
486 | 537 | 4,860 | |||||||||||||||||||||
Provision for income taxes
|
25,829 | 25,672 | 35,945 | |||||||||||||||||||||
Net income
|
$ | 56,045 | $ | 45,956 | $ | 65,063 | ||||||||||||||||||
Earnings per share - diluted
|
$ | 1.67 | $ | 1.37 | $ | 2.06 | ||||||||||||||||||
Analysis
of 2010 Operations Compared to 2009 Operations
Net
Sales
Net sales for 2010 equaled $464.0 million, an increase of
$22.8 million or 5.2 percent, compared to net sales in
2009 of $441.1 million. The growth in 2010 was attributable
primarily to a $40.8 million increase in sales volumes to
customers across several of our principal end markets including
the specialized robotic, machinery, semiconductor and medical
markets, partially offset by $16.7 million in net pricing
reductions and $1.8 million from the unfavorable effect of
changes in foreign exchange rates. The net pricing reductions
were due primarily to the contractual pass-through of reduced
material costs within the wind energy market. The decrease
resulting from foreign exchange rate changes was principally
attributable to a stronger U.S. dollar relative to the Euro
and British pound on a
year-over-year
basis.
Gross
Margin
Gross margin in 2010 was 35.5 percent, an increase of 2.9
points from the 32.6 percent gross margin in 2009. The
increased sales volume increased gross margin by 2.1 points as a
result of the operating leverage on the additional sales. Net
cost reduction efforts across our businesses increased gross
margin by 2.4 points. Pricing had a favorable impact of 0.6
points on gross margin. These increases were partially offset by
a 1.1 point reduction in gross margin due to unfavorable changes
in product mix with greater growth in sales of certain lower
margin products relative to higher margin products, a 0.7 point
reduction due to the impact of our manufacturing consolidation
program (see Note 12 to the Consolidated Financial
Statements) and a 0.4 point reduction from the effects of
foreign exchange rate changes.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$83.0 million, or 17.9 percent of sales, in 2010,
compared to $72.5 million, or 16.4 percent of sales,
in 2009. The $10.5 million increase was attributable to a
$5.6 million increase in accrued incentive compensation
expense compared to 2009 resulting from our improved financial
performance, $4.1 million of lower net gains associated
with the curtailment of certain postretirement benefits in 2010
compared to 2009, $3.8 million of higher costs incurred for
unconsummated corporate development efforts in 2010 compared to
2009 and $0.4 million of costs related to our 2010
manufacturing consolidation program (see Note 12 to the
Consolidated Financial Statements). Partially offsetting these
cost increases were $3.4 million of other cost reductions.
Operating
Income
Our operating income was $81.6 million, or
17.6 percent of sales, in 2010, compared to
$71.3 million, or 16.2 percent of sales, in 2009. The
increase in gross profit more than offset the increase in
selling, general and administrative expenses.
KAYDON
CORPORATION
FORM 10K 13
Table of Contents
Interest
Income
During 2010, interest income totaled $0.5 million on
average investment balances of $260.1 million. This
compares to $0.5 million of interest income in 2009 on
average investment balances of $225.9 million. Interest
rates on our investments, principally in low yielding money
market funds, are currently negligible, but our investment
balances continue to provide significant liquidity during this
period of historically low interest rates.
Interest
Expense
During 2010, interest expense totaled $0.2 million and
represented the amortization of costs associated with our
current and prior credit facilities. During 2009, interest
expense totaled $0.2 million and represented amortization
of costs associated with our prior credit facility.
Provision
for Income Taxes
The effective tax rate for 2010 was 31.5 percent compared
to 35.8 percent in 2009 with the reduction largely
attributable to the tax effect of our planned permanent
reinvestment of earnings of certain international operations,
tax credits for qualified investments in advanced energy
projects and the full availability of the Domestic Manufacturing
Deduction. The effective tax rate is expected to increase
modestly in 2011 due primarily to the absence of tax credits for
qualified investments in advanced energy projects.
Net
Income
Net income for 2010 was $56.0 million or $1.67 per share on
a diluted basis, which included the after tax expenses of
$2.7 million, or $0.08 per share, for unconsummated
corporate development efforts and $2.5 million, or $0.08
per share, for costs related to our manufacturing consolidation
program (see Note 12 to the Consolidated Financial
Statements) and the after tax gain of $2.3 million, or
$0.07 per share, associated with the curtailment of certain
postretirement benefits, based on approximately
33.1 million common shares outstanding. 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.
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 foreign 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, but were unfavorable in the
second half of the year primarily due to contractual adjustments
associated with the 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 largely due to the
global economic downturn accounted for 4.5 points of the decline
in gross margin, but was 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 gains
14 KAYDON
CORPORATION FORM 10K
Table of Contents
totaling $7.6 million that were associated with the
curtailment of certain postretirement benefits. The remaining
decrease was primarily attributable to the preemptive steps
taken throughout the year to reduce discretionary costs across
all reporting segments as 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 adverse
financial market conditions and prevailing historically low
interest rates on short-term treasury securities.
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 our
$200.0 million 4% Contingent Convertible Senior
Subordinated Notes due 2023, prior to their conversion into
shares of our common stock in 2008, 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.
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.
Results by Business Segment
We classify our businesses into two reporting segments: Friction
Control Products and Velocity Control Products. The
Companys remaining operating segments, which do not meet
the quantitative thresholds for separate disclosure and do not
meet the criteria for aggregation with other operating segments
to create an additional reporting segment, are combined and
disclosed as Other Industrial Products. During 2010,
we determined that our Sealing Products operating segment no
longer meets the quantitative threshold for separate disclosure
as a reporting segment. Therefore, its results are included in
Other Industrial Products. Prior period results have
been reclassified to conform to this presentation. Sales between
reporting segments are not material. Items not allocated to
segment operating income include certain amortization, corporate
administrative expenses and other amounts. Items not allocated
to segment operating income in 2010 included costs associated
with unconsummated corporate development efforts of
$4.0 million and postretirement benefit curtailment gains
of $3.5 million. In 2009, unallocated items also included
postretirement benefit curtailment gains of $7.6 million
and costs associated with unconsummated corporate development
efforts of $0.2 million. The segment discussions that
follow describe the significant factors contributing to the
changes in results for each segment.
KAYDON
CORPORATION
FORM 10K 15
Table of Contents
Friction
Control Products
For the Years Ended December 31, | ||||||||||||||||||||
% Change |
% Change |
|||||||||||||||||||
2010 | 2009 | 2008 | 2010 to 2009 | 2009 to 2008 | ||||||||||||||||
Dollars in millions | ||||||||||||||||||||
Sales
|
$ | 299.0 | $ | 296.4 | $ | 326.0 | 0.9% | (9.1)% | ||||||||||||
Operating Income
|
$ | 61.3 | $ | 50.3 | $ | 73.9 | 21.9% | (31.9)% | ||||||||||||
Operating Margin
|
20.5 | % | 17.0 | % | 22.7 | % | ||||||||||||||
2010 Compared to 2009
Sales in our Friction Control Products reporting segment were
$299.0 million during 2010 compared to $296.4 million
during 2009, an increase of $2.6 million or
0.9 percent. Sales increased to the semiconductor,
machinery and medical markets, and to the industrial markets
served by our split-roller bearings and specialty ball
businesses, while sales to the military, wind energy and heavy
equipment markets decreased. The sales increases were net of
$17.8 million in decreased wind energy pricing principally
due to the contractual pass-through of material cost decreases
and $2.3 million in price declines to other customers.
Sales to wind energy customers decreased by $7.1 million
compared to the prior year, as the volume increase of
$10.7 million was more than offset by this
$17.8 million in reduced pricing.
Operating income from the Friction Control Products reporting
segment during 2010 totaled $61.3 million compared to
$50.3 million in 2009. The $11.0 million increase in
operating income was due to $12.4 million from increased
sales volume, $9.8 million in net cost reductions and
$0.3 million in reduced other severance and other costs
compared to the prior period, partially offset by
$3.3 million in decreased pricing, $3.7 million in
costs related to our manufacturing consolidation program (see
Note 12 to the Consolidated Financial Statements),
$2.5 million in adverse product mix as volumes of
relatively lower margin products grew faster than those of
higher margin products and $2.0 million from the
unfavorable effects of changes in foreign exchange rates.
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 compared to 2008. This decline
was due to the effects of volume reductions of approximately
$47.2 million associated with adverse economic conditions
impacting industrial markets and an adverse foreign 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 a decline in 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.
Velocity
Control Products
For the Years Ended December 31, | ||||||||||||||||||||
% Change |
% Change |
|||||||||||||||||||
2010 | 2009 | 2008 | 2010 to 2009 | 2009 to 2008 | ||||||||||||||||
Dollars in millions | ||||||||||||||||||||
Sales
|
$ | 60.2 | $ | 46.4 | $ | 69.6 | 29.9% | (33.4)% | ||||||||||||
Operating Income
|
$ | 14.3 | $ | 6.5 | $ | 18.0 | 119.9% | (64.0)% | ||||||||||||
Operating Margin
|
23.7 | % | 14.0 | % | 25.9 | % | ||||||||||||||
16 KAYDON
CORPORATION FORM 10K
Table of Contents
2010 Compared to 2009
During 2010, sales in our Velocity Control Products reporting
segment were $60.2 million compared to $46.4 million
in 2009. The increase of $13.8 million was due to
$14.3 million in increased volumes to North American and
European markets and $0.8 million in price increases
initiated in 2009, but was partially offset by the adverse
effect of changes in foreign exchange rates of $1.3 million.
The Velocity Control Products reporting segment contributed
$14.3 million to our operating income during 2010 compared
to $6.5 million during 2009. The increase was attributable
to an $8.1 million impact of increased sales and
$0.8 million in price increases initiated in 2009. This
increase was partially offset by the adverse effect of changes
in foreign exchange rates of $0.8 million and net cost
increases of $0.3 million primarily due to spending related
to sales growth initiatives.
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 foreign 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 foreign exchange rate changes of
approximately $13.3 million and $0.4 million,
respectively. This decrease was partially offset by net cost
savings of $2.2 million.
Other
Industrial Products
For the Years Ended December 31, | ||||||||||||||||||||
% Change |
% Change |
|||||||||||||||||||
2010 | 2009 | 2008 | 2010 to 2009 | 2009 to 2008 | ||||||||||||||||
Dollars in millions | ||||||||||||||||||||
Sales
|
$ | 104.8 | $ | 98.4 | $ | 126.8 | 6.5% | (22.4)% | ||||||||||||
Operating Income
|
$ | 9.0 | $ | 8.5 | $ | 15.4 | 5.8% | (44.7)% | ||||||||||||
Operating Margin
|
8.6 | % | 8.7 | % | 12.2 | % | ||||||||||||||
2010 Compared to 2009
Sales of our other industrial products were $104.8 million
during 2010 compared to $98.4 million in 2009. The
$6.4 million sales increase was principally due to a
recovery from reduced sales levels in 2009 in our sealing, air
filtration, metal alloy and metal-forming products businesses
caused by the recession, which more than offset declines in our
liquid filtration and machine tool components businesses. Our
metal alloy business sales increase was due to the effect of
higher raw material pricing on certain metals that was passed on
to our customers.
Our other industrial products contributed $9.0 million to
our operating income during 2010 compared to $8.5 million
during 2009. This increase in operating income was attributable
to $2.0 million from increased sales volumes and
$0.7 million from net cost reductions, but was partially
offset by $2.0 million from the adverse effect of product
mix and $0.2 million from the impact of pricing changes.
The unfavorable product mix in 2010 is largely related to the
highly competitive aerospace seals market within our sealing
products business which typically has lower margins, but which
grew at a faster pace in 2010 relative to higher margin products.
2009 Compared to 2008
Sales of our other industrial products were $98.4 million
during 2009 compared to $126.8 million in 2008. The
$28.4 million sales decline was principally due to the
global economic recession which resulted in decreased sales of
our sealing, liquid filtration, air filtration, metal alloy and
metal-forming products.
Our other industrial products contributed $8.5 million to
our operating income during 2009 compared to $15.4 million
during 2008. This decrease in operating income was due to the
effect
KAYDON
CORPORATION
FORM 10K 17
Table of Contents
of lower sales volumes and an adverse change in product mix
associated with lower sales of higher margin industrial seals of
$13.9 million, partially offset by net cost reductions of
$4.6 million, higher pricing of $1.6 million and
property and equipment impairment charges of $0.8 million
recorded in 2008.
Liquidity
and Capital Resources
At December 31, 2010, our current ratio was 8.8 to 1 and
working capital totaled $414.3 million, including cash and
cash equivalents of $286.6 million. 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.
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
$93.9 million in 2010, $66.2 million in 2009 and
$57.9 million in 2008. Net cash from operating activities
in 2010 increased compared to 2009 primarily due to increased
net income, decreased contributions to our qualified pension
plans and increased accrued liabilities at the end of 2010.
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 inventories at December 31, 2010 were
$88.3 million, a decrease of $0.5 million from the
$88.8 million of inventory at December 31, 2009. The
2010 decrease was principally attributable to a reduction in
inventory within our Friction Control Products segment, which
more than offset increases in the Velocity Control Products
segment and Other Industrial Products businesses to support
higher sales levels. Net inventories at December 31, 2009
decreased $9.0 million from the December 31, 2008
balance of $97.7 million. The 2009 inventory decrease was
principally attributable to the overall decline in sales volumes
as inventory turns were consistent on a
year-over-year
basis.
Due to 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 our wind
energy market initiative. We closely monitor our accounts
receivable from wind energy customers and are reasonably
confident that our accounts receivable are fully collectible.
Additionally, we believe that our inventory as of
December 31, 2010 is fully realizable.
At December 31, 2010, 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 made on the customers behalf and
designed to its agreed upon specifications. The customer has not
paid us and has made a claim for material damages alleging 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 agreed with the customer to enter into a mediation
process, and if necessary, binding arbitration to resolve the
parties claims. The mediation process was completed in
March 2010, but was unsuccessful in resolving the matter. During
the second quarter of 2010, a notice of arbitration was filed,
and an arbitration panel was selected in the third quarter of
2010. In the third quarter of 2010 the arbitration tribunal
issued a procedural schedule that anticipates final resolution
of the parties claims in the fourth quarter of 2011,
unless resolved sooner by agreement of the parties. As we
continue to remain confident in the quality of our supplied
product and the customers financial ability to pay, we
continue to believe that the receivables and inventory are fully
realizable and the customers claims are without merit and
payment by us of the damages claimed is remote.
Capital expenditures to expand productive capacity, improve
quality and reduce costs equaled $15.4 million in 2010,
$12.0 million in 2009 and $60.7 million in 2008. The
increase in capital expenditures in 2010 compared to 2009
reflects spending related to our manufacturing consolidation
program (see Note 12 to the Consolidated Financial
Statements). The decrease in capital expenditures
18 KAYDON
CORPORATION FORM 10K
Table of Contents
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. During 2011 we expect to invest approximately $20 to
$25 million in aggregate capital expenditures for all
segments.
The Company paid common stock dividends totaling
$24.5 million, $23.2 million and $18.2 million in
2010, 2009 and 2008, respectively. The dividends paid through
the third quarter of 2008 were at a quarterly rate of $0.15 per
share. The dividends paid in the fourth quarter of 2008 and the
first three quarters of 2009 were at a quarterly rate of $0.17
per share. The dividends paid in the fourth quarter of 2009 and
in the first three quarters of 2010 were at a quarterly rate of
$0.18 per share. The dividend declared in July 2010, paid early
in the fourth quarter of 2010, was at a quarterly rate of $0.19
per share.
We repurchased 741,754 shares of our common stock in 2010
for $27.0 million, 314,047 shares of our common stock
in 2009 for $8.9 million and 937,941 shares of our
common stock in 2008 for $35.9 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, 2,712,571 shares have been
repurchased as of December 31, 2010. We may make
opportunistic stock repurchases over time, the amount of which
will depend on the market for our common stock and our financial
condition and liquidity.
Our payments to various taxing authorities were
$19.2 million, $16.7 million and $27.4 million
during 2010, 2009 and 2008. Tax payments are expected to be
approximately $27 million during 2011. 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 are
being recognized using the flow-through method.
We had no debt outstanding at any time during 2010 and 2009 and
accordingly paid no cash interest. Cash payments of interest
totaled $4.0 million in 2008. During 2008,
$9.1 million of interest and amortization of issuance costs
was charged to interest expense related to our previously
outstanding 4% Contingent Convertible Senior Subordinated Notes
due 2023 (see Note 4 to the Consolidated Financial
Statements).
In September 2010, we entered into a credit agreement with a
syndicate of lenders providing for a $250.0 million senior
revolving credit facility. The credit agreement provides for
borrowings by the Company and its subsidiaries in various
currencies for working capital and other general corporate
purposes, including acquisitions, and matures on
September 21, 2015 (see Note 4 to the Consolidated
Financial Statements).
Fees related to our credit agreement of approximately
$1.9 million are being amortized as a component of interest
expense over a five-year period. Credit agreement fees included
in other assets in the Consolidated Balance Sheet at
December 31, 2010, equaled $1.8 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, the ability to borrow under our
credit agreement provides additional financial strength to
support our objectives, including future acquisitions.
Our significant contractual obligations at December 31,
2010 are set forth below:
Payments due by period | ||||||||||||||||||||
2012- |
2014- |
More than |
||||||||||||||||||
Contractual Obligations | Total | 2011 | 2013 | 2015 | 5 years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating leases
|
$ | 9,580 | $ | 2,170 | $ | 3,038 | $ | 2,091 | $ | 2,281 | ||||||||||
Purchase obligations for property, plant and equipment
|
3,882 | 3,882 | | | | |||||||||||||||
Total
|
$ | 13,462 | $ | 6,052 | $ | 3,038 | $ | 2,091 | $ | 2,281 | ||||||||||
KAYDON
CORPORATION
FORM 10K 19
Table of Contents
We expect to make cash contributions of approximately
$3.3 million to our pension plans in 2011. We regularly
review our funding strategy for our pension plans. We expect to
contribute approximately $0.5 million to our postretirement
benefit plans in 2011. We have $2.1 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.
On February 24, 2011 we entered into a definitive agreement
to acquire HAHN-Gasfedern GmbH and related real estate and
intangible property, which is expected to close in the second
quarter of 2011.
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, 2010 and 2009 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
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 9) in
this Annual Report for additional information regarding
long-lived assets.
20 KAYDON
CORPORATION FORM 10K
Table of Contents
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 value. In accordance with current
accounting guidance, we have included deferred income taxes in
determining the carrying value of each reporting unit. 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 value.
In 2010, as of our annual assessment date, a discount rate was
developed which 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.
In 2010, depending on the assessed risk of the reporting unit,
we increased the discount rate used to calculate the fair value
of certain reporting units and used discount rates of 11.5 to
12.5 percent to calculate the fair value of each reporting
unit. In 2009 a 12 percent discount rate was utilized for
all reporting units, which reflected a higher level of
systematic risk prevailing in the market in 2009 compared to
2010.
In arriving at future discounted cash flows for each reporting
unit, we evaluate the appropriate 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 reporting units specific
operating cash flow at the end of the planning period and the
reporting units assumed growth rate in perpetuity. In
2010, as of our annual assessment date, we used a growth rate in
perpetuity of 1.0 to 2.5 percent depending on the assessed
long-term growth of the reporting unit. In 2009, a growth rate
in perpetuity of 2.0 percent was utilized for all reporting
units.
Potential goodwill impairment is identified if a reporting
units carrying value 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 value of the reporting units goodwill.
Our goodwill impairment testing in 2010 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 value) as of the July 31 annual testing date ranged
from approximately 38 percent to approximately
282 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 values. 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
KAYDON
CORPORATION
FORM 10K 21
Table of Contents
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 9) 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.
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.
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, 2010 projected benefit
obligation
|
$ | (14,095,000 | ) | $ | 17,175,000 | |||
Discount rate effect on the 2010 net periodic pension cost
|
$ | (1,391,000 | ) | $ | 1,636,000 | |||
Salary scale effect on December 31, 2010 projected benefit
obligation
|
$ | 2,885,000 | $ | (2,418,000 | ) | |||
Salary scale effect on the 2010 net periodic pension cost
|
$ | 614,000 | $ | (519,000 | ) | |||
Expected return on plan assets effect on the 2010 net
periodic pension cost
|
$ | (998,000 | ) | $ | 998,000 | |||
The following table summarizes certain of the Companys
assumptions:
Pension Benefits | Postretirement Benefits | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average assumptions used to determine obligations:
|
||||||||||||||||
Discount rate qualified pension plans and
postretirement benefit plans
|
5.46% | 5.93% | 4.50% | 5.47% | ||||||||||||
Discount rate non-qualified pension plan
|
5.50% | 6.05% | N/A | N/A | ||||||||||||
Rate of compensation increase age-graded
|
4.50% | 5.00% | 4.50% | 5.00% | ||||||||||||
Weighted average assumptions used to determine net periodic
benefit cost:
|
||||||||||||||||
Discount rate qualified pension plans and
postretirement benefit plans
|
5.93% | 6.25% | 5.35% | 6.23% | ||||||||||||
Discount rate non-qualified pension plan
|
6.05% | 6.25% | N/A | N/A | ||||||||||||
Expected long-term return on plan assets
|
7.70% | 8.00% | N/A | N/A | ||||||||||||
Rate of compensation increase age-graded
|
5.00% | 5.00% | 5.00% | 5.00% | ||||||||||||
22 KAYDON
CORPORATION FORM 10K
Table of Contents
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, 2010, the discount rates assumed were lower
than those at December 31, 2009, affecting plan benefit
obligations at December 31, 2010 and the net periodic
pension cost for 2011 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 2010 and 2009
significantly exceeded the expected long-term rate of return on
plan assets. 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 combined
effect of our voluntary contribution and the actual rate of
return on plan assets during the last two years resulted in a
relative improvement in the funding status of our qualified
plans at December 31, 2010 and 2009 and reduced net
periodic pension cost in 2010. Our cash contributions required
to fund our pension plans in 2011 are expected to be
$3.3 million. The 2011 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 6) 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 $2.1 million as of December 31, 2010, 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
$0.9 million in liabilities for tax-related interest and
penalties on our consolidated balance sheet, as of
December 31, 2010. 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 2007, state examinations for years
before 2005, German tax examinations for years before 2006, or
United Kingdom tax examinations for years before 2008.
We believe the accounting estimates related to income taxes to
be critical accounting estimates
KAYDON
CORPORATION
FORM 10K 23
Table of Contents
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 8) 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, 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 changes in 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, 2010.
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, 2010. Their report is included herein.
KAYDON
CORPORATION
FORM 10K 25
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Shareholders of Kaydon Corporation
We have audited Kaydon Corporations internal control over
financial reporting as of December 31, 2010, 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, 2010, 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, 2010 and
2009, and the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2010 of Kaydon
Corporation and our report dated February 25, 2011
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 25, 2011
26 KAYDON
CORPORATION FORM 10K
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Shareholders of Kaydon Corporation
We have audited the accompanying consolidated balance sheets of
Kaydon Corporation as of December 31, 2010 and 2009, and
the related consolidated statements of income,
shareholders equity and cash flows for each of the three
years in the period ended December 31, 2010. 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,
2010 and 2009, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2010, 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.
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, 2010, 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 25, 2011
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 25, 2011
KAYDON
CORPORATION
FORM 10K 27
Table of Contents
KAYDON
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
2010 | 2009 | |||||||
ASSETS
|
||||||||
Current Assets:
|
||||||||
Cash and cash equivalents
|
$ | 286,648,000 | $ | 262,403,000 | ||||
Accounts receivable, less allowance of $945,000 in 2010 and
$1,183,000 in 2009
|
76,010,000 | 77,977,000 | ||||||
Inventories, net
|
88,253,000 | 88,796,000 | ||||||
Other current assets
|
16,384,000 | 16,601,000 | ||||||
Total current assets
|
467,295,000 | 445,777,000 | ||||||
Property, plant and equipment, at cost:
|
||||||||
Land and improvements
|
4,673,000 | 4,823,000 | ||||||
Buildings and leasehold improvements
|
60,042,000 | 58,939,000 | ||||||
Machinery and equipment
|
289,084,000 | 278,175,000 | ||||||
353,799,000 | 341,937,000 | |||||||
Less: accumulated depreciation and amortization
|
(184,202,000 | ) | (166,221,000 | ) | ||||
169,597,000 | 175,716,000 | |||||||
Goodwill, net
|
143,428,000 | 143,891,000 | ||||||
Other intangible assets, net
|
18,047,000 | 21,552,000 | ||||||
Other assets
|
2,965,000 | 1,008,000 | ||||||
$ | 801,332,000 | $ | 787,944,000 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY
|
||||||||
Current Liabilities:
|
||||||||
Accounts payable
|
$ | 16,944,000 | $ | 21,353,000 | ||||
Accrued expenses:
|
||||||||
Salaries and wages
|
11,439,000 | 5,087,000 | ||||||
Employee benefits
|
3,951,000 | 4,055,000 | ||||||
Dividends payable
|
6,279,000 | 6,043,000 | ||||||
Other accrued expenses
|
10,964,000 | 9,073,000 | ||||||
Taxes payable
|
3,452,000 | 2,473,000 | ||||||
Total current liabilities
|
53,029,000 | 48,084,000 | ||||||
Long-term postretirement and postemployment benefit obligations
|
23,567,000 | 28,669,000 | ||||||
Deferred taxes
|
12,547,000 | 10,391,000 | ||||||
Other long-term liabilities
|
3,051,000 | 835,000 | ||||||
Total long-term liabilities
|
39,165,000 | 39,895,000 | ||||||
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)
|
3,693,000 | 3,693,000 | ||||||
Paid-in capital
|
106,818,000 | 103,892,000 | ||||||
Retained earnings
|
708,807,000 | 677,480,000 | ||||||
Less: Treasury stock, at cost (4,303,370 and
3,660,665 shares in 2010 and 2009)
|
(83,382,000 | ) | (59,245,000 | ) | ||||
Accumulated other comprehensive income
|
(26,798,000 | ) | (25,855,000 | ) | ||||
709,138,000 | 699,965,000 | |||||||
$ | 801,332,000 | $ | 787,944,000 | |||||
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, 2010, 2009 and 2008
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2010, 2009 and 2008
2010 | 2009 | 2008 | ||||||||||
Net Sales
|
$463,988,000 | $441,145,000 | $522,374,000 | |||||||||
Cost of sales
|
299,363,000 | 297,280,000 | 330,194,000 | |||||||||
Gross Profit
|
164,625,000 | 143,865,000 | 192,180,000 | |||||||||
Selling, general and administrative expenses
|
83,006,000 | 72,527,000 | 86,669,000 | |||||||||
Operating Income
|
81,619,000 | 71,338,000 | 105,511,000 | |||||||||
Interest expense
|
(231,000 | ) | (247,000 | ) | (9,363,000 | ) | ||||||
Interest income
|
486,000 | 537,000 | 4,860,000 | |||||||||
Income Before Income Taxes
|
81,874,000 | 71,628,000 | 101,008,000 | |||||||||
Provision for income taxes
|
25,829,000 | 25,672,000 | 35,945,000 | |||||||||
Net Income
|
$56,045,000 | $45,956,000 | $65,063,000 | |||||||||
Earnings Per Share
|
||||||||||||
Basic
|
$1.67 | $1.37 | $2.17 | |||||||||
Diluted
|
$1.67 | $1.37 | $2.06 | |||||||||
Dividends Declared Per Share
|
$0.74 | $0.70 | $0.64 | |||||||||
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, 2010, 2009 and 2008
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2010, 2009 and 2008
Accumulated |
||||||||||||||||||||||||||||
Other |
||||||||||||||||||||||||||||
Comprehensive |
Common |
Paid-in |
Retained |
Treasury |
Comprehensive |
|||||||||||||||||||||||
Income | Stock | Capital | Earnings | Stock | Income (Loss) | Total | ||||||||||||||||||||||
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 | ||||||||||||||
Net income, 2010
|
$ | 56,045,000 | | | 56,045,000 | | | 56,045,000 | ||||||||||||||||||||
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
Cumulative translation adjustments
|
(2,712,000 | ) | | | | | (2,712,000 | ) | (2,712,000 | ) | ||||||||||||||||||
Postretirement benefit plans, net of $583,000 tax
|
1,769,000 | | | | | 1,769,000 | 1,769,000 | |||||||||||||||||||||
Comprehensive income
|
$ | 55,102,000 | ||||||||||||||||||||||||||
Cash dividends declared
|
| | (24,702,000 | ) | | | (24,702,000 | ) | ||||||||||||||||||||
Board of Directors deferred compensation
|
| 126,000 | (16,000 | ) | | | 110,000 | |||||||||||||||||||||
Issuance of 6,250 shares of common stock under stock option
plans
|
| (66,000 | ) | | 237,000 | | 171,000 | |||||||||||||||||||||
Stock option compensation
|
| 1,314,000 | | | | 1,314,000 | ||||||||||||||||||||||
Tax benefit related to restricted stock awards
|
| 186,000 | | | | 186,000 | ||||||||||||||||||||||
Purchase of 741,754 shares of treasury stock
|
| | | (27,043,000 | ) | | (27,043,000 | ) | ||||||||||||||||||||
Restricted stock award cancellations
|
| 7,000 | | (7,000 | ) | | | |||||||||||||||||||||
Compensation cost related to restricted stock awards
|
| 4,035,000 | | | | 4,035,000 | ||||||||||||||||||||||
Vesting of post-2005 stock awards
|
| (2,676,000 | ) | | 2,676,000 | | | |||||||||||||||||||||
Balance, December 31, 2010
|
$ | 3,693,000 | $ | 106,818,000 | $ | 708,807,000 | $ | (83,382,000 | ) | $ | (26,798,000 | )* | $ | 709,138,000 | ||||||||||||||
* | Comprised of: cumulative translation adjustments of $(6,104,000), $(3,392,000) and $(5,503,000), at December 31, 2010, 2009 and 2008; after tax impact on pension benefits of $(25,008,000), $(27,364,000) and $(37,318,000) at December 31, 2010, 2009 and 2008; and after tax impact on other postretirement benefits of $4,314,000, $4,901,000 and $8,824,000, at December 31, 2010, 2009 and 2008. |
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, 2010, 2009 and 2008
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2010, 2009 and 2008
2010 | 2009 | 2008 | ||||||||||
Cash Flows from Operating Activities:
|
||||||||||||
Net income
|
$ | 56,045,000 | $ | 45,956,000 | $ | 65,063,000 | ||||||
Adjustments to reconcile net income to net cash from operating
activities:
|
||||||||||||
Depreciation
|
20,925,000 | 19,836,000 | 16,181,000 | |||||||||
Amortization of intangible assets
|
3,585,000 | 4,283,000 | 5,464,000 | |||||||||
Amortization of stock awards
|
4,035,000 | 4,121,000 | 4,514,000 | |||||||||
Deferred financing fees
|
231,000 | 248,000 | 790,000 | |||||||||
Deferred taxes
|
3,756,000 | 12,209,000 | 10,429,000 | |||||||||
Tax benefit related to stock options exercised
|
28,000 | 3,000 | 103,000 | |||||||||
Stock option compensation
|
1,314,000 | 1,300,000 | 1,213,000 | |||||||||
Excess tax benefits from stock-based compensation
|
(186,000 | ) | (52,000 | ) | (438,000 | ) | ||||||
Non-cash postretirement benefits curtailment gains
|
(3,451,000 | ) | (7,613,000 | ) | | |||||||
Contributions to qualified pension plans
|
(2,271,000 | ) | (14,846,000 | ) | (11,910,000 | ) | ||||||
Changes in assets and liabilities, net of effects of
acquisitions and sale of businesses and business components:
|
||||||||||||
Accounts receivable
|
1,868,000 | 1,605,000 | (14,112,000 | ) | ||||||||
Inventories
|
56,000 | 9,703,000 | (30,920,000 | ) | ||||||||
Other assets
|
3,064,000 | (968,000 | ) | (312,000 | ) | |||||||
Accounts payable
|
(4,341,000 | ) | (13,885,000 | ) | 7,318,000 | |||||||
Accrued expenses and taxes payable
|
9,206,000 | 4,281,000 | 4,517,000 | |||||||||
Net cash from operating activities
|
93,864,000 | 66,181,000 | 57,900,000 | |||||||||
Cash Flows from Investing Activities:
|
||||||||||||
Additions to property, plant and equipment
|
(15,397,000 | ) | (11,986,000 | ) | (60,704,000 | ) | ||||||
Dispositions of property, plant and equipment
|
141,000 | 1,229,000 | 1,194,000 | |||||||||
Proceeds from sale of investments
|
| 5,145,000 | 65,407,000 | |||||||||
Acquisitions of businesses, net of cash acquired
|
| | 489,000 | |||||||||
Net cash from (used) in investing activities
|
(15,256,000 | ) | (5,612,000 | ) | 6,386,000 | |||||||
Cash Flows from Financing Activities:
|
||||||||||||
Cash dividends paid
|
(24,477,000 | ) | (23,207,000 | ) | (18,180,000 | ) | ||||||
Purchase of treasury stock
|
(27,043,000 | ) | (8,871,000 | ) | (35,916,000 | ) | ||||||
Credit facility issuance costs
|
(1,948,000 | ) | | | ||||||||
Proceeds from exercise of stock options
|
153,000 | 24,000 | 242,000 | |||||||||
Excess tax benefits from stock-based compensation
|
186,000 | 52,000 | 438,000 | |||||||||
Net cash (used in) financing activities
|
(53,129,000 | ) | (32,002,000 | ) | (53,416,000 | ) | ||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
(1,234,000 | ) | 838,000 | (7,865,000 | ) | |||||||
Net Increase (Decrease) in Cash and Cash Equivalents
|
24,245,000 | 29,405,000 | 3,005,000 | |||||||||
Cash and Cash Equivalents Beginning of Year
|
262,403,000 | 232,998,000 | 229,993,000 | |||||||||
Cash and Cash Equivalents End of Year
|
$ | 286,648,000 | $ | 262,403,000 | $ | 232,998,000 | ||||||
Cash paid for income taxes
|
$ | 19,215,000 | $ | 16,743,000 | $ | 27,429,000 | ||||||
Cash paid for interest
|
| | $ | 4,000,000 | ||||||||
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:
2010 | 2009 | |||||||
Money market and other short-term funds
|
$ | 275,547,000 | $ | 248,091,000 | ||||
Time deposits, other interest bearing accounts and other cash
|
11,101,000 | 14,312,000 | ||||||
$ | 286,648,000 | $ | 262,403,000 | |||||
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:
2010 | 2009 | |||||||
Raw material
|
$ | 33,429,000 | $ | 32,933,000 | ||||
Work in process
|
23,797,000 | 22,857,000 | ||||||
Finished goods
|
31,027,000 | 33,006,000 | ||||||
$ | 88,253,000 | $ | 88,796,000 | |||||
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 $20.9 million, $19.8 million and
$16.2 million in 2010, 2009, and 2008, 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. The Company believes that there was no impairment
at December 31, 2010.
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,
2010, the Companys outstanding forward exchange contracts
were not material.
32 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. In 2010 a net exchange loss of
$0.1 million was recorded. In 2009 and 2008, net exchange
gains equaled $0.7 million and $0.4 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 on specifically identified accounts receivable balances
and an estimate of other uncollectible balances based on a
retrospective review of historical credits issued and bad debt
write-offs. 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, 2010 and 2009, 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.
At December 31, 2010 and 2009, there were no material
reserves for litigation and contingencies recorded.
At December 31, 2010 and 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 and inventory made on the
customers behalf and designed to its agreed upon
specifications. The customer has not paid the Company and has
made a claim for material damages alleging that certain field
performance issues of its product are attributable to the
quality of the Companys supplied 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 agreed
with the customer to enter into a mediation process, and if
necessary, binding arbitration to resolve the parties
claims. The mediation process was completed in March 2010, but
was unsuccessful in resolving the matter. During the second
quarter of
KAYDON
CORPORATION
FORM 10K 33
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
2010, a notice of arbitration was filed, and an arbitration
panel was selected in the third quarter of 2010. In the third
quarter of 2010 the arbitration tribunal issued a procedural
schedule that anticipates final resolution of the parties
claims in the fourth quarter of 2011, unless resolved sooner by
agreement of the parties. As the Company continues to remain
confident in the quality of its supplied product and the
customers financial ability to pay, the Company continues
to conclude that the receivables and inventory are fully
realizable and the customers claims are without merit and
payment by the Company of the damages claimed is remote.
Advertising
Costs:
Advertising costs are expensed as incurred and totaled
$2.7 million, $2.8 million and $3.6 million in
2010, 2009 and 2008, respectively.
Impact
of Recently Issued Accounting Pronouncements:
No new accounting guidance was issued that had, or is expected
to have, a material effect on the financial condition, results
of operations, or cash flows of the Company.
Reclassifications:
Certain items in the prior year financial statements have been
reclassified to conform to the presentation used in 2010.
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:
2010 | 2009 | 2008 | ||||||||||
Earnings per share Basic
|
||||||||||||
Net income
|
$56,045,000 | $45,956,000 | $65,063,000 | |||||||||
Less: Net earnings allocated to participating
securities Basic
|
(602,000 | ) | (527,000 | ) | (935,000 | ) | ||||||
Income available to common shareholders Basic
|
$55,443,000 | $45,429,000 | $64,128,000 | |||||||||
Weighted average common shares outstanding Basic
|
33,112,000 | 33,250,000 | 29,507,000 | |||||||||
Earnings per share Basic
|
$1.67 | $1.37 | $2.17 | |||||||||
Earnings per share Diluted
|
||||||||||||
Net income
|
$56,045,000 | $45,956,000 | $65,063,000 | |||||||||
Less: Net earnings allocated to participating
securities Dilutive
|
(602,000 | ) | (527,000 | ) | (923,000 | ) | ||||||
Plus: Interest and debt issuance costs amortization related to
Contingent Convertible Notes, net of tax
|
| | 5,833,000 | |||||||||
Income available to common shareholders Diluted
|
$55,443,000 | $45,429,000 | $69,973,000 | |||||||||
Weighted average common shares outstanding Diluted
|
||||||||||||
Weighed average common shares outstanding Basic
|
33,112,000 | 33,250,000 | 29,507,000 | |||||||||
Potential dilutive shares resulting from stock options
|
25,000 | 17,000 | 19,000 | |||||||||
Dilutive shares resulting from Contingent Convertible Notes
|
| | 4,427,000 | |||||||||
Weighted average common shares outstanding Diluted
|
33,137,000 | 33,267,000 | 33,953,000 | |||||||||
Earnings per share Diluted
|
$1.67 | $1.37 | $2.06 | |||||||||
Certain options granted to purchase shares of common stock were
excluded from the computation of diluted earnings per share
because the exercise prices of these options were greater than
the average market price of the common stock for the periods
shown below:
2010 | 2009 | 2008 | ||||||||||
Shares excluded
|
403,000 | 406,500 | 46,500 | |||||||||
Average exercise price
|
$ | 43.56 | $ | 43.29 | $ | 51.35 | ||||||
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
34 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
average basis for the periods that the Notes were outstanding
prior to conversion.
NOTE 3 | ACQUISITIONS |
In 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. 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 September 2010, the Company entered into a credit agreement
with a syndicate of lenders providing for a $250.0 million
senior revolving credit facility. The credit agreement provides
for borrowings by the Company and its subsidiaries in various
currencies for working capital and other general corporate
purposes, including acquisitions. The credit agreement matures
on September 21, 2015 and is guaranteed by the Company and
certain of its domestic subsidiaries. Loans under the credit
facility bear interest at a floating rate at the Companys
option as Eurocurrency rate loans or as base rate loans. The
credit agreement requires the Company to comply with maximum
leverage and minimum interest coverage ratios. The Company was
in compliance with all restrictive covenants contained in the
credit agreement at December 31, 2010. After consideration
of the covenants and $4.7 million of letters of credit
issued under the credit agreement, the Company had available
credit of $245.3 million at December 31, 2010.
Deferred debt issuance costs related to the credit agreement of
approximately $1.9 million are being amortized as a
component of interest expense over a five-year period. Deferred
debt issuance costs included in other assets in the Consolidated
Balance Sheet as of December 31, 2010, equaled
$1.8 million.
In 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 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. 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 accounting
guidance regarding convertible debt. Note issuance costs of
approximately $6.5 million were amortized over a five-year
period ending in May 2008.
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 2010 is as
follows:
Wtd. Avg. Grant |
||||||||||||
Restricted |
Date Fair Value |
|||||||||||
Stock | per Share | |||||||||||
Outstanding at
January 1, 2010 |
345,970 | $35.93 | ||||||||||
Granted
|
131,000 | $34.78 | ||||||||||
Vested
|
(131,486 | ) | $35.04 | |||||||||
Canceled
|
(14,854 | ) | $35.52 | |||||||||
Outstanding at December 31, 2010
|
330,630 | $35.85 | ||||||||||
Pursuant to the Incentive Plan, the Company granted restricted
stock awards for 126,000 shares, 93,000 shares and
90,790 shares, of Company common stock during 2010, 2009
and 2008, respectively, to key employees of the Company.
Pursuant to the
KAYDON
CORPORATION
FORM 10K 35
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Directors Plan, the Company granted restricted stock awards for
5,000 shares, 6,000 shares and 6,000 shares of
Company common stock during 2010, 2009 and 2008, respectively,
to non-employee members of the Companys Board of
Directors. During 2009, 5,602 shares of restricted stock
were canceled and 139,008 shares of restricted stock
vested. During 2008, 741 shares of restricted stock were
canceled and 142,485 shares of restricted stock vested. The
weighted average fair value per share of the restricted stock
awards granted, on the date of grant, was $26.43 in 2009 and
$43.01 in 2008.
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 unrecognized compensation cost related
to unvested restricted stock awards aggregated $7.7 million
at December 31, 2010 and is expected to be amortized over a
weighted average period of 2.5 years. The net value of
unrecognized compensation cost related to unvested restricted
stock awards aggregated $7.7 million at December 31,
2009 and $9.4 million at December 31, 2008.
Compensation cost related to restricted stock awards during
2010, 2009 and 2008, was $4.0 million, $4.1 million
and $4.5 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 2010, 2009 and 2008, was $4.6 million,
$5.0 million and $4.7 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.
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 23,890 shares, 19,429 shares and
16,515 shares of Company common stock, known as phantom
stock units, as of December 31, 2010, 2009 and 2008,
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 2010,
$0.1 million in 2009 and $0.2 million in 2008.
Compensation expense related to outstanding stock options
totaled $1.3 million in 2010, $1.3 million in 2009 and
$1.2 million in 2008.
A summary of stock option information is as follows:
2010 | 2009 | 2008 | ||||||||||||||||||||||
Wtd. Avg. |
Wtd. Avg. |
Wtd. Avg. |
||||||||||||||||||||||
Options | Ex. Price | Options | Ex. Price | Options | Ex. Price | |||||||||||||||||||
Outstanding at Beginning of Year
|
549,750 | $ | 38.67 | 443,750 | $ | 41.87 | 346,500 | $ | 40.64 | |||||||||||||||
Granted
|
85,000 | $ | 35.11 | 120,500 | $ | 26.70 | 107,250 | $ | 44.22 | |||||||||||||||
Canceled
|
(25,500 | ) | $ | 26.36 | (13,500 | ) | $ | 38.24 | | | ||||||||||||||
Exercised
|
(6,250 | ) | $ | 24.42 | (1,000 | ) | $ | 24.25 | (10,000 | ) | $ | 24.29 | ||||||||||||
Outstanding at End of Year
|
603,000 | $ | 38.83 | 549,750 | $ | 38.67 | 443,750 | $ | 41.87 | |||||||||||||||
Exercisable at End of Year
|
298,400 | $ | 40.36 | 190,250 | $ | 41.10 | 92,600 | $ | 37.36 | |||||||||||||||
Weighted Average Fair Value of Options Granted
|
$ | 10.56 | $ | 7.66 | $ | 11.22 | ||||||||||||||||||
Weighted Average Remaining Contractual Life (years):
|
||||||||||||||||||||||||
Outstanding at End of Year
|
6.7 | 7.6 | 8.0 | |||||||||||||||||||||
Exercisable at End of Year
|
6.3 | 6.8 | 6.9 | |||||||||||||||||||||
The exercise price of each option equals the closing market
price of Company common stock on the date of grant. Options
granted typically become exercisable at the rate of
10.0 percent, 20.0 percent,
36 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 2010, less than $0.1 million in
2009 and $0.3 million in 2008. The intrinsic value of
options outstanding as of December 31, 2010 equaled
$2.4 million, and the intrinsic value of options
exercisable as of December 31, 2010 equaled
$0.9 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:
2010 | 2009 | 2008 | ||||||||||
Risk-free interest rate
|
2.7% | 2.2% | 3.1% | |||||||||
Expected dividend yield
|
2.1% | 2.6% | 1.4% | |||||||||
Expected life
|
6 years | 6 years | 6 years | |||||||||
Expected volatility
|
34.5% | 36.2% | 25.1% | |||||||||
At December 31, 2010, 2,333,601 shares remained
available for grant under the Incentive Plan, and
125,400 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 | EMPLOYEE BENEFIT PLANS |
The Company sponsors several defined contribution plans for
various employee groups. Company contributions are discretionary
and 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 $0.4 million,
$1.3 million and $1.3 million in 2010, 2009 and 2008,
respectively.
The Company maintains several defined benefit pension plans,
which cover the majority of U.S. employees hired prior to
the closure of certain plans to new entrants. 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 insurance coverage over the active service period of the
employee.
KAYDON
CORPORATION
FORM 10K 37
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
(ABO) for this plan was $8.9 million at
December 31, 2010 and $8.4 million at
December 31, 2009.
Obligations
and Funded Status:
Pension Benefits | Postretirement Benefits | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Change in Benefit Obligation:
|
||||||||||||||||
Benefit obligation, beginning of period
|
$ | (120,022,000 | ) | $ | (112,454,000 | ) | $ | (10,368,000 | ) | $ | (13,257,000 | ) | ||||
Service cost
|
(2,830,000 | ) | (3,239,000 | ) | (144,000 | ) | (295,000 | ) | ||||||||
Interest cost
|
(6,800,000 | ) | (6,948,000 | ) | (395,000 | ) | (630,000 | ) | ||||||||
Plan amendments
|
| (143,000 | ) | 1,318,000 | 2,918,000 | |||||||||||
Actuarial gain (loss)
|
(5,749,000 | ) | (3,122,000 | ) | 1,217,000 | (2,421,000 | ) | |||||||||
Benefits paid
|
6,378,000 | 5,884,000 | 332,000 | 302,000 | ||||||||||||
Liability change due to curtailment
|
342,000 | | 1,287,000 | 3,015,000 | ||||||||||||
Benefit obligation, December 31
|
(128,681,000 | ) | (120,022,000 | ) | (6,753,000 | ) | (10,368,000 | ) | ||||||||
Change in Plan Assets:
|
||||||||||||||||
Fair value of plan assets, beginning of period
|
101,562,000 | 72,247,000 | | | ||||||||||||
Actual return on plan assets
|
13,570,000 | 19,687,000 | | | ||||||||||||
Company contributions
|
2,936,000 | 15,512,000 | 332,000 | 302,000 | ||||||||||||
Plan participants contributions
|
| | 203,000 | 322,000 | ||||||||||||
Benefits paid
|
(6,378,000 | ) | (5,884,000 | ) | (535,000 | ) | (624,000 | ) | ||||||||
Fair value of plan assets, December 31
|
111,690,000 | 101,562,000 | | | ||||||||||||
Net liability, December 31
|
$ | (16,991,000 | ) | $ | (18,460,000 | ) | $ | (6,753,000 | ) | $ | (10,368,000 | ) | ||||
Amounts Recognized in the Consolidated
|
||||||||||||||||
Balance Sheets Consist of:
|
||||||||||||||||
Employee benefits
|
$ | (663,000 | ) | $ | (671,000 | ) | $ | (451,000 | ) | $ | (595,000 | ) | ||||
Long-term postretirement and postemployment benefit obligations
|
$ | (16,328,000 | ) | $ | (17,789,000 | ) | $ | (6,302,000 | ) | $ | (9,773,000 | ) | ||||
Accumulated other comprehensive income:
|
||||||||||||||||
Prior service cost (credit), net of tax
|
$ | 66,000 | $ | 108,000 | $ | (2,188,000 | ) | $ | (3,440,000 | ) | ||||||
Net actuarial (gain) loss, net of tax
|
$ | 24,942,000 | $ | 27,256,000 | $ | (2,126,000 | ) | $ | (1,461,000 | ) | ||||||
At December 31, 2010, three of the Companys qualified
defined benefit pension plans had a shortfall of plan assets
compared to the ABO with an aggregate ABO of $53.2 million
and aggregate plan assets of $50.3 million, and one
qualified defined benefit plan had plan assets of
$61.4 million which exceeded the ABO of $60.5 million.
At December 31, 2009 three of the Companys qualified
defined benefit pension plans had a shortfall of plan assets
compared to the ABO with an aggregate ABO of $48.5 million
and aggregate 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.
Pension Benefits | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Components of Net Periodic Benefit Cost:
|
||||||||||||
Service cost
|
$ | 2,830,000 | $ | 3,239,000 | $ | 2,861,000 | ||||||
Interest cost
|
6,800,000 | 6,948,000 | 6,352,000 | |||||||||
Expected return on plan assets
|
(7,678,000 | ) | (5,648,000 | ) | (7,770,000 | ) | ||||||
Amortization of:
|
||||||||||||
Unrecognized net prior service cost
|
62,000 | 59,000 | 26,000 | |||||||||
Unrecognized net actuarial loss
|
3,218,000 | 5,093,000 | 3,000 | |||||||||
Curtailment loss
|
6,000 | | | |||||||||
Net periodic benefit cost
|
$ | 5,238,000 | $ | 9,691,000 | $ | 1,472,000 | ||||||
38 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net periodic benefit cost for the non-qualified supplemental
pension plan was $0.8 million, $0.9 million and
$0.7 million in 2010, 2009 and 2008, respectively.
Postretirement Benefits | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Components of Net Periodic Benefit Cost (Income):
|
||||||||||||
Service cost
|
$ | 145,000 | $ | 295,000 | $ | 291,000 | ||||||
Interest cost
|
395,000 | 630,000 | 657,000 | |||||||||
Amortization of:
|
||||||||||||
Unrecognized net prior service credit
|
(1,325,000 | ) | (1,078,000 | ) | (1,718,000 | ) | ||||||
Unrecognized net actuarial gain
|
(459,000 | ) | (555,000 | ) | (909,000 | ) | ||||||
Curtailment gain
|
(3,457,000 | ) | (7,613,000 | ) | | |||||||
Net periodic benefit cost (income)
|
$ | (4,701,000 | ) | $ | (8,321,000 | ) | $ | (1,679,000 | ) | |||
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 2010 cost | For determining 2010 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
|
8.00 | % | 8.50 | % | 9.00 | % | N/A | |||||||||
Ultimate rate to which the cost trend rate is to decline
|
5.00 | % | 5.00 | % | 5.20 | % | N/A | |||||||||
Year that the rate reaches the ultimate trend rate
|
2017 | 2017 | 2019 | N/A | ||||||||||||
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
|
$ | 25,000 | $ | ( 23,000 | ) | |||
Effect on postretirement benefit obligation
|
$ | 388,000 | $ | (362,000 | ) | |||
The Company made changes to its postretirement benefit plans
which resulted in curtailment gains totaling $3.5 million
in 2010 and $7.6 million in 2009. These gains were recorded
as reductions to selling, general and administrative expenses.
The postretirement health care benefits provided to eligible
participants cease when the participants reach 65 years of
age.
The amounts in accumulated other comprehensive income expected
to be recognized as components of net periodic benefit cost in
2011 include the amortization of $3.2 million and
$0.1 million of the unrecognized net actuarial loss and
prior service cost, respectively, related to the pension plans.
The amounts in accumulated other comprehensive income expected
to be recognized as components of net periodic benefit cost in
2011 include the amortization of $1.3 million and
$0.5 million of the prior service credit and unrecognized
net actuarial gain, respectively, related to the other
postretirement benefit plans.
KAYDON
CORPORATION
FORM 10K 39
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Additional
Information:
Pension |
Postretirement |
|||||||||||||||
Benefits | Benefits | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average assumptions used to determine benefit
obligations:
|
||||||||||||||||
Discount rate qualified pension plans and
postretirement benefit plans
|
5.46% | 5.93% | 4.50% | 5.47% | ||||||||||||
Discount rate non-qualified pension plan
|
5.50% | 6.05% | N/A | N/A | ||||||||||||
Rate of compensation increase age-graded
|
4.50% | 5.00% | 4.50% | 5.00% | ||||||||||||
Weighted average assumptions used to determine net periodic
benefit cost:
|
||||||||||||||||
Discount rate qualified pension plans and
postretirement benefit plans
|
5.93% | 6.25% | 5.35% | 6.23% | ||||||||||||
Discount rate non-qualified pension plan
|
6.05% | 6.25% | N/A | N/A | ||||||||||||
Expected long-term return on plan assets
|
7.70% | 8.00% | N/A | N/A | ||||||||||||
Rate of compensation increase age-graded
|
5.00% | 5.00% | 5.00% | 5.00% | ||||||||||||
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 4.5 percent at December 31, 2010
and 5.0 percent at December 31, 2009. An age-graded
salary scale with a weighted average of 5.0 percent was
used to determine pension and postretirement benefit costs in
2010 and 2009.
The December 31, 2010 pension and postretirement benefit
obligations were computed using the RP-2000 Combined Healthy
Mortality table with future mortality improvement projections to
2011. The December 31, 2009 pension and postretirement
benefit obligations and the pension and postretirement benefit
costs in 2010 were computed using the RP-2000 Combined Healthy
Mortality table with future mortality improvement projections to
2010. The pension and postretirement net periodic benefit costs
in 2009 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.
Plan
assets:
The assets of the Companys qualified defined benefit
pension 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 full 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).
40 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 allocation ranges of from 40 to
70 percent U.S. equities, zero to 25 percent of
non-U.S. equities,
10 to 40 percent core bonds and zero to 20 percent in
high yield and real estate investments. This new allocation
provides a more dynamic asset allocation approach which reflects
and incorporates plan liabilities to reduce the volatility of
plan expense and contributions. At December 31, 2010, the
Companys target allocation was 75 percent equities
and 25 percent bonds.
A summary of actual allocations of plan assets is as follows:
Plan Assets at | ||||||||
December 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
Asset Category:
|
||||||||
Domestic equity large cap
|
44 | % | 35 | % | ||||
Domestic equity mid cap
|
12 | % | 14 | % | ||||
Domestic equity small cap
|
5 | % | 13 | % | ||||
International equity
|
15 | % | 9 | % | ||||
Core fixed income
|
24 | % | 19 | % | ||||
Collective short term investment fund
|
| | ||||||
High yield bonds
|
| 4 | % | |||||
Real estate
|
| 5 | % | |||||
Cash
|
| 1 | % | |||||
Total
|
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 at December 31,
2009 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. The investments
held at December 31, 2009 were liquidated during 2010 and
reinvested into common and collective funds. The pension plans
own proportional shares of these common and collective funds
which are valued using the net asset values provided by the
trustee of the funds. While the net asset values represent fair
value, the prices are not all published daily on an active
market. Therefore, these investments are included in
level 2 of the fair value hierarchy. The Company tested
selected valuations of underlying assets of each fund family at
December 31, 2010.
Plan Assets at | ||||||||||||||||
Total Fair Value |
Quoted Prices in |
Significant Other |
Significant |
|||||||||||||
Measurement at |
Active Markets |
Observable Inputs |
Unobservable Inputs |
|||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Asset Category:
|
||||||||||||||||
Domestic equity large cap
|
$ | 48,709,000 | | $ | 48,709,000 | | ||||||||||
Domestic equity mid cap
|
13,854,000 | | 13,854,000 | | ||||||||||||
Domestic equity small cap
|
5,763,000 | | 5,763,000 | | ||||||||||||
International equity
|
16,607,000 | | 16,607,000 | | ||||||||||||
Core fixed income
|
26,265,000 | | 26,265,000 | | ||||||||||||
Collective short term investment fund
|
492,000 | | 492,000 | | ||||||||||||
Total
|
$ | 111,690,000 | | $ | 111,690,000 | | ||||||||||
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,
|
||||||||
2011
|
$ | 6,631,000 | $ | 451,000 | ||||
2012
|
$ | 6,849,000 | $ | 468,000 | ||||
2013
|
$ | 7,095,000 | $ | 521,000 | ||||
2014
|
$ | 7,409,000 | $ | 637,000 | ||||
2015
|
$ | 7,746,000 | $ | 701,000 | ||||
2016-2020
|
$ | 44,187,000 | $ | 4,347,000 | ||||
The Company expects to make cash contributions of approximately
$3.3 million to its pension plans in 2011. The Company
reviews its funding strategy on an ongoing basis. The Company
expects to contribute approximately $0.5 million to its
postretirement benefit plans in 2011.
NOTE 7 | LEASE COMMITMENTS |
Total minimum rentals payable under operating leases that have
initial or remaining noncancelable lease terms in excess of one
year at December 31, 2010 are as follows:
Year ending December 31,
|
||||
2011
|
$ | 2,170,000 | ||
2012
|
$ | 1,792,000 | ||
2013
|
$ | 1,246,000 | ||
2014
|
$ | 1,074,000 | ||
2015
|
$ | 1,017,000 | ||
Thereafter
|
$ | 2,281,000 | ||
Aggregate rental expense was $2.5 million,
$2.5 million and $2.3 million in 2010, 2009 and 2008,
respectively.
NOTE 8 | 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:
2010 | 2009 | 2008 | ||||||||||
Domestic
|
$ | 59,392,000 | $ | 60,881,000 | $ | 73,542,000 | ||||||
Foreign
|
22,482,000 | 10,747,000 | 27,466,000 | |||||||||
$ | 81,874,000 | $ | 71,628,000 | $ | 101,008,000 | |||||||
The provision for income taxes consisted of the following:
2010 | 2009 | 2008 | ||||||||||
Current:
|
||||||||||||
U.S. Federal
|
$ | 15,812,000 | $ | 9,952,000 | $ | 15,725,000 | ||||||
State
|
992,000 | 963,000 | 1,863,000 | |||||||||
Foreign
|
5,269,000 | 2,548,000 | 7,928,000 | |||||||||
22,073,000 | 13,463,000 | 25,516,000 | ||||||||||
Deferred:
|
||||||||||||
U.S. Federal
|
3,738,000 | 11,198,000 | 9,794,000 | |||||||||
State
|
87,000 | 576,000 | 930,000 | |||||||||
Foreign
|
(69,000 | ) | 435,000 | (295,000 | ) | |||||||
3,756,000 | 12,209,000 | 10,429,000 | ||||||||||
$ | 25,829,000 | $ | 25,672,000 | $ | 35,945,000 | |||||||
The following is a reconciliation of the U.S. federal
statutory income tax rate to the Companys effective tax
rate:
2010 | 2009 | 2008 | ||||||||||
U.S. federal statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes, net of federal benefit
|
1.1 | 1.3 | 1.9 | |||||||||
U.S. federal tax benefit of domestic production activities
deduction
|
(1.4 | ) | (0.5 | ) | (0.7 | ) | ||||||
Differences in income taxes on foreign earnings, losses and
remittances
|
(3.6 | ) | (0.5 | ) | (1.1 | ) | ||||||
Other, net
|
0.4 | 0.5 | 0.5 | |||||||||
Effective tax rate
|
31.5 | % | 35.8 | % | 35.6 | % | ||||||
The Company has liabilities recorded for unrecognized tax
benefits totaling $2.1 million at December 31, 2010,
all of which would affect the effective tax rate. It is the
Companys 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. The Company has
recorded $0.9 million in liabilities for tax-related
interest and penalties on its consolidated balance sheet, at
December 31, 2010. The Company does not expect that the
total amounts of unrecognized tax benefits will significantly
change within the next twelve months.
42 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a reconciliation of the total amounts of
unrecognized tax benefits for 2010, 2009 and 2008:
2010 | 2009 | 2008 | ||||||||||
Unrecognized tax benefits at January 1
|
$ | 2,463,000 | $ | 2,581,000 | $ | 2,804,000 | ||||||
Increase in unrecognized tax benefits as a result of:
|
||||||||||||
Tax positions taken in the current period
|
111,000 | 150,000 | | |||||||||
Tax positions taken in a prior period
|
| | 428,000 | |||||||||
Decrease in unrecognized tax benefits as a result of:
|
||||||||||||
Tax positions taken in a prior period
|
(208,000 | ) | (167,000 | ) | (114,000 | ) | ||||||
Settlements with taxing authorities
|
| | (127,000 | ) | ||||||||
Lapse of the applicable statute of limitations
|
(270,000 | ) | (101,000 | ) | (410,000 | ) | ||||||
Unrecognized tax benefits at December 31
|
$ | 2,096,000 | $ | 2,463,000 | $ | 2,581,000 | ||||||
The tax effect and type of significant temporary differences by
component which gave rise to the net deferred tax asset
(liability) at December 31, 2010 and 2009 were as follows:
2010 | 2009 | |||||||
Deferred tax assets:
|
||||||||
Postretirement and postemployment benefit obligations
|
$ | 9,276,000 | $ | 11,575,000 | ||||
Financial accruals and reserves not currently deductible
|
5,078,000 | 4,428,000 | ||||||
Inventory basis differences
|
6,522,000 | 6,853,000 | ||||||
Foreign operating loss carryforwards
|
400,000 | 276,000 | ||||||
Federal tax credit carryforwards
|
145,000 | 145,000 | ||||||
State tax credit carryforwards
|
967,000 | 701,000 | ||||||
Other
|
1,315,000 | 936,000 | ||||||
23,703,000 | 24,914,000 | |||||||
Valuation allowance
|
(1,343,000 | ) | (737,000 | ) | ||||
22,360,000 | 24,177,000 | |||||||
Deferred tax liabilities:
|
||||||||
Plant and equipment basis differences
|
(12,650,000 | ) | (14,263,000 | ) | ||||
Intangibles
|
(13,735,000 | ) | (11,775,000 | ) | ||||
(26,385,000 | ) | (26,038,000 | ) | |||||
Net deferred tax asset (liability)
|
$ | (4,025,000 | ) | $ | (1,861,000 | ) | ||
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 2007, state
examinations for years before 2005, German tax examinations for
years before 2006, or United Kingdom tax examinations for years
before 2008.
The Company had available foreign net operating loss
carryforwards of $0.4 million ($1.2 million pre-tax)
and $0.3 million ($0.8 million pre-tax) at
December 31, 2010 and 2009, respectively. In addition, the
Company had federal tax credit carryforwards of
$0.1 million, at December 31, 2010 and 2009. The
Company also had available state tax credit carryforwards of
$1.0 million ($1.5 million pre-tax) and
$0.7 million ($1.1 million pre-tax) at
December 31, 2010 and 2009, respectively. The Company has a
valuation allowance recorded of $0.3 million on foreign net
operating loss carryforwards, $0.1 million on federal tax
credit carryforwards and $0.9 million on state tax credit
carryforwards at December 31, 2010. The valuation
allowances represent carryforwards for which utilization is
uncertain because it is unlikely that the credits will be
utilized given certain projected tax liabilities, tax
utilization limitations and limited carryforward periods. Tax
benefits of foreign operating loss carryforwards, federal 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 $8.5 million at December 31,
2010 and 2009, respectively. The net deferred tax liability
recorded as an other liability was $12.5 million and
$10.4 million at December 31, 2010 and 2009,
respectively. Undistributed earnings of foreign subsidiaries
were $56.1 million at December 31, 2010. 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
KAYDON
CORPORATION
FORM 10K 43
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
earnings as dividends would be partially offset by available
foreign tax credits.
NOTE 9 GOODWILL
AND OTHER INTANGIBLE ASSETS
The Company annually, or more frequently if events or changes in
circumstances indicate a need, tests the carrying values 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 value.
During 2010, 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 value) at the July 31
annual testing date ranged from approximately 38 percent to
approximately 282 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
value. 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 2010, trademarks were tested for impairment
with no impairment loss being realized.
The changes in the carrying amount of goodwill for the years
ended December 31, 2010 and 2009 are as follows:
Friction |
Velocity |
Other |
||||||||||||||
Control |
Control |
Industrial |
||||||||||||||
Products | Products | Products | Total | |||||||||||||
Balance at January 1, 2009
|
||||||||||||||||
Goodwill
|
$ | 55,392,000 | $ | 43,200,000 | $ | 62,532,000 | $ | 161,124,000 | ||||||||
Accumulated impairment losses
|
| | (18,700,000 | ) | (18,700,000 | ) | ||||||||||
$ | 55,392,000 | $ | 43,200,000 | $ | 43,832,000 | $ | 142,424,000 | |||||||||
Effect of foreign currency exchange rate changes
|
1,467,000 | | | 1,467,000 | ||||||||||||
Balance at December 31, 2009
|
$ | 56,859,000 | $ | 43,200,000 | $ | 43,832,000 | $ | 143,891,000 | ||||||||
Effect of foreign currency exchange rate changes
|
(463,000 | ) | | | (463,000 | ) | ||||||||||
Balance at December 31, 2010
|
||||||||||||||||
Goodwill
|
$ | 56,396,000 | $ | 43,200,000 | $ | 62,532,000 | $ | 162,128,000 | ||||||||
Accumulated impairment losses
|
| | (18,700,000 | ) | (18,700,000 | ) | ||||||||||
Balance at December 31, 2010
|
$ | 56,396,000 | $ | 43,200,000 | $ | 43,832,000 | $ | 143,428,000 | ||||||||
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.
Other intangible assets are summarized as follows:
2010 | 2009 | |||||||||||||||
Gross |
Gross |
|||||||||||||||
Carrying |
Accumulated |
Carrying |
Accumulated |
|||||||||||||
Amortized Intangible Assets | Amount | Amortization | Amount | Amortization | ||||||||||||
Customer relationships and lists
|
$ | 28,194,000 | $ | 17,638,000 | $ | 28,194,000 | $ | 14,672,000 | ||||||||
Patents and developed technology
|
6,596,000 | 3,974,000 | 6,516,000 | 3,503,000 | ||||||||||||
Backlog
|
3,300,000 | 3,300,000 | 3,300,000 | 3,219,000 | ||||||||||||
Distributor agreements
|
374,000 | 237,000 | 374,000 | 199,000 | ||||||||||||
Product names
|
320,000 | 192,000 | 320,000 | 163,000 | ||||||||||||
$ | 38,784,000 | $ | 25,341,000 | $ | 38,704,000 | $ | 21,756,000 | |||||||||
44 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
The intangible assets are being amortized at pro rata rates or
on a straight-line basis, whichever is appropriate, over their
respective useful lives. Backlog was amortized over
three years.
2010 |
2009 |
|||||||
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, 2009
|
$ | 4,283,000 | ||||||
For the year ended December 31, 2010
|
$ | 3,585,000 | ||||||
Estimated Intangible Assets Amortization Expense
|
||||||||
For the year ending December 31, 2011
|
$ | 2,275,000 | ||||||
For the year ending December 31, 2012
|
$ | 1,992,000 | ||||||
For the year ending December 31, 2013
|
$ | 1,725,000 | ||||||
For the year ending December 31, 2014
|
$ | 1,426,000 | ||||||
For the year ending December 31, 2015
|
$ | 1,102,000 |
NOTE 10 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 and are aggregated into reporting segments.
Information for those operating segments that do not meet the
aggregation criteria to form a reporting segment, and for those
operating segments that do not meet the quantitative thresholds
for separate disclosure as a reporting segment, is combined and
disclosed as Other Industrial Products. The
Companys Sealing Products operating segment no longer
meets the quantitative threshold for separate disclosure as a
reporting segment. Therefore its results are included in
Other Industrial Products. Prior period results have
been reclassified to conform to this presentation.
The Company has two 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.
Other Industrial Products complex and
standard ring and seal products, filter elements and liquid and
gas-phase air filtration systems, metal alloys, machine tool
components, presses, dies and benders used in a variety of
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 expenses, certain corporate 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
16.6 percent, 19.2 percent and 12.5 percent of
total consolidated net sales in 2010, 2009 and 2008,
respectively. Certain sales to this customer were included in
the Friction Control Products segment and in the Companys
Other Industrial Products businesses.
2010 | 2009 | 2008 | ||||||||||
Net sales
|
||||||||||||
Friction Control Products
|
$ | 299,009,000 | $ | 296,420,000 | $ | 325,951,000 | ||||||
Velocity Control Products
|
60,208,000 | 46,358,000 | 69,616,000 | |||||||||
Other Industrial Products
|
104,771,000 | 98,367,000 | 126,807,000 | |||||||||
Total consolidated net sales
|
$ | 463,988,000 | $ | 441,145,000 | $ | 522,374,000 | ||||||
KAYDON
CORPORATION
FORM 10K 45
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
2010 | 2009 | 2008 | ||||||||||
Operating income
|
||||||||||||
Friction Control Products
|
$ | 61,317,000 | $ | 50,314,000 | $ | 73,856,000 | ||||||
Velocity Control Products
|
14,265,000 | 6,488,000 | 18,045,000 | |||||||||
Other Industrial Products
|
9,031,000 | 8,536,000 | 15,431,000 | |||||||||
Total segment operating income
|
84,613,000 | 65,338,000 | 107,332,000 | |||||||||
Items not allocated to segment operating income
|
(2,994,000 | ) | 6,000,000 | (1,821,000 | ) | |||||||
Interest expense
|
(231,000 | ) | (247,000 | ) | (9,363,000 | ) | ||||||
Interest income
|
486,000 | 537,000 | 4,860,000 | |||||||||
Income before income taxes
|
$ | 81,874,000 | $ | 71,628,000 | $ | 101,008,000 | ||||||
Items not allocated to segment operating income included
curtailment gains totaling $3.5 million and
$7.6 million in 2010 and 2009, respectively, related to
certain changes in the Companys postretirement benefit
plans and costs associated with unconsummated corporate
development efforts of $4.0 million and $0.2 million
in 2010 and 2009, respectively.
2010 | 2009 | 2008 | ||||||||||
Depreciation and amortization of intangible assets
|
||||||||||||
Friction Control Products
|
$ | 18,119,000 | $ | 17,256,000 | $ | 14,727,000 | ||||||
Velocity Control Products
|
2,197,000 | 2,162,000 | 1,860,000 | |||||||||
Other Industrial Products
|
3,861,000 | 4,340,000 | 4,664,000 | |||||||||
Corporate
|
333,000 | 361,000 | 394,000 | |||||||||
Total consolidated depreciation and amortization of intangible
assets
|
$ | 24,510,000 | $ | 24,119,000 | $ | 21,645,000 | ||||||
2010 | 2009 | 2008 | ||||||||||
Additions to property, plant and equipment
|
||||||||||||
Friction Control Products
|
$ | 10,679,000 | $ | 9,745,000 | $ | 50,005,000 | ||||||
Velocity Control Products
|
1,496,000 | 985,000 | 7,805,000 | |||||||||
Other Industrial Products
|
2,972,000 | 1,039,000 | 2,687,000 | |||||||||
Corporate
|
250,000 | 217,000 | 207,000 | |||||||||
Total consolidated additions to property, plant and equipment
|
$ | 15,397,000 | $ | 11,986,000 | $ | 60,704,000 | ||||||
2010 | 2009 | |||||||
Total assets
|
||||||||
Friction Control Products
|
$ | 338,754,000 | $ | 346,266,000 | ||||
Velocity Control Products
|
87,891,000 | 80,549,000 | ||||||
Other Industrial Products
|
106,711,000 | 104,364,000 | ||||||
Corporate
|
267,976,000 | 256,765,000 | ||||||
Total consolidated assets
|
$ | 801,332,000 | $ | 787,944,000 | ||||
46 KAYDON
CORPORATION FORM 10K
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. Net sales and long-lived tangible assets by geographic
area are listed below. Long-lived tangible assets primarily
include net property, plant and equipment:
2010 | 2009 | 2008 | ||||||||||
Net Sales
|
||||||||||||
United States
|
$ | 295,854,000 | $300,126,000 | $334,191,000 | ||||||||
Germany
|
39,978,000 | 32,213,000 | 51,313,000 | |||||||||
Other Countries
|
128,156,000 | 108,806,000 | 136,870,000 | |||||||||
Total
|
$ | 463,988,000 | $441,145,000 | $522,374,000 | ||||||||
Long-lived Tangible Assets
|
||||||||||||
United States
|
$ | 85,581,000 | $86,540,000 | $94,444,000 | ||||||||
Mexico
|
68,766,000 | 73,029,000 | 75,461,000 | |||||||||
Other Countries
|
15,264,000 | 16,160,000 | 15,752,000 | |||||||||
Total
|
$ | 169,611,000 | $175,729,000 | $185,657,000 | ||||||||
NOTE 11 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 6. The Company has no material nonfinancial assets or
liabilities recorded at fair value at December 31, 2010.
NOTE 12 MANUFACTURING
CONSOLIDATION PROGRAM
On May 18, 2010 the Company announced a plan to optimize
its custom bearings manufacturing capacity by expanding its
manufacturing capacity in Sumter, South Carolina. This new
facility, with Kaydons existing Sumter facilities, is
designed to create a custom bearings center of excellence and is
expected to allow the Company to grow its market share, realize
overhead cost reductions and leverage its engineering
capabilities. In connection with this plan, the Company has
closed its Mocksville, North Carolina manufacturing facility.
This manufacturing consolidation program is within the Friction
Control Products reporting segment. In 2010 the Company incurred
$0.4 million in selling, general and administrative expense
for one-time termination benefits earned by employees in
Mocksville.
One-time |
||||
termination |
||||
benefits | ||||
Balance at January 1, 2010
|
$ | | ||
Severance, retention and outplacement charges
|
387,000 | |||
Severance, retention and outplacement payments
|
(361,000 | ) | ||
Balance at December 31, 2010
|
$ | 26,000 | ||
The Company recognized non-cash cost of sales expense of
$1.1 million in additional depreciation in 2010 associated
with the closure of the facility. In 2010, the Company also
incurred $2.1 million in cost of sales for engineering,
relocation, recruiting, travel, training and other
start-up
costs in Sumter associated with the manufacturing consolidation
program. The Company expects to incur approximately
$1.4 million in additional
start-up
costs associated with this program through its completion in
2011.
The Company expects to incur approximately $0.2 million in
annual costs for insurance, property taxes, utilities and
security at the Mocksville facility until its disposal.
KAYDON
CORPORATION
FORM 10K 47
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 SUBSEQUENT
EVENT
On February 24, 2011 the Company entered into a definitive
agreement to purchase all of the outstanding shares of
HAHN-Gasfedern GmbH and related real estate and intangible
property (Hahn) from Ulrich Hahn e.K. The
acquisition is expected to close in the second quarter of 2011
following completion of customary closing conditions. Hahn,
based in Aichwald, Germany, manufactures and sells high quality
gas springs, tension springs and dampers for diverse industrial
markets. Hahns results will be reported in Velocity
Control Products.
NOTE 14 UNAUDITED
QUARTERLY FINANCIAL INFORMATION
First Quarter ended | Second Quarter ended | Third Quarter ended | Fourth Quarter ended | |||||||||||||||||||||||||||||
April 3, |
April 4, |
July 3, |
July 4, |
Oct. 2, |
Oct. 3, |
Dec. 31, |
Dec. 31, |
|||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||||||||||||
Income Statement Data
|
||||||||||||||||||||||||||||||||
Net sales
|
$ | 119,245 | $ | 110,335 | $ | 121,500 | $ | 98,318 | $ | 118,280 | $ | 123,637 | $ | 104,963 | $ | 108,855 | ||||||||||||||||
Gross profit
|
41,769 | 35,778 | 45,937 | 32,352 | 38,386 | 38,047 | 38,533 | 37,688 | ||||||||||||||||||||||||
Net income
(1)(2)(3)
|
$ | 13,827 | $ | 10,124 | $ | 17,816 | $ | 8,359 | $ | 13,088 | $ | 16,067 | $ | 11,314 | $ | 11,406 | ||||||||||||||||
Per Share Data
|
||||||||||||||||||||||||||||||||
Earnings per share basic
(1)(2)(3)
|
$ | 0.41 | $ | 0.30 | $ | 0.53 | $ | 0.25 | $ | 0.39 | $ | 0.48 | $ | 0.34 | $ | 0.34 | ||||||||||||||||
Earnings per share diluted
(1)(2)(3)
|
0.41 | 0.30 | 0.53 | 0.25 | 0.39 | 0.48 | 0.34 | 0.34 | ||||||||||||||||||||||||
Dividends declared per share
|
0.18 | 0.17 | 0.18 | 0.17 | 0.19 | 0.18 | 0.19 | 0.18 | ||||||||||||||||||||||||
(1) | Net income and earnings per share include after tax gains related to the curtailment of certain postretirement benefits. These after tax gains equaled $2.1 million and $0.3 million for second quarter 2010 and fourth quarter 2010, respectively. The earnings per share effect equaled $0.06 and $0.01 for the second quarter 2010 and fourth quarter 2010, respectively. 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 earnings per share effect equaled $0.02, $0.10 and $0.03 for the second quarter 2009, third quarter 2009 and fourth quarter 2009, respectively. | |
(2) | Net income and earnings per share include after tax costs related to unconsummated corporate development efforts. These after tax costs equaled $1.8 million, $0.2 million and $0.7 million for second quarter 2010, third quarter 2010 and fourth quarter 2010, respectively. The earnings per share effect equaled $0.05, $0.01 and $0.02 for the second quarter 2010, third quarter 2010 and fourth quarter 2010, respectively. | |
(3) | Net income and earnings per share include after tax costs related to the Companys manufacturing consolidation program. These after tax costs equaled $0.5 million, $1.6 million and $0.5 million for second quarter 2010, third quarter 2010 and fourth quarter 2010, respectively. The earnings per share effect equaled $0.01, $0.04 and $0.01 for the second quarter 2010, third quarter 2010 and fourth quarter 2010, respectively. |
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 2011 Annual Meeting of Shareholders of the
Company, which will be filed with the Securities and Exchange
Commission on or about April 6, 2011 and is incorporated
herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is included in the
Proxy Statement for the 2011 Annual Meeting of Shareholders of
the Company, which will be filed with the Securities and
Exchange Commission on or about April 6, 2011 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 2011 Annual Meeting of Shareholders of
the Company, which will be filed with the Securities and
Exchange Commission on or about April 6, 2011 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 2011 Annual Meeting of Shareholders of
the Company, which will be filed with the Securities and
Exchange Commission on or about April 6, 2011 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 2011 Annual Meeting of Shareholders of
the Company, which will be filed with the Securities and
Exchange Commission on or about April 6, 2011 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, 2010 and 2009
Consolidated Statements of Income for the years ended
December 31, 2010, 2009 and 2008
Consolidated Statements of Shareholders Equity for the
years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
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, 2010, 2009 and 2008
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 | .1.1 | Certificate of Elimination with respect to the Companys Series A Preferred Stock (previously filed as Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended July 3, 2010 and incorporated hereby 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) | ||
10 | .1* | Kaydon Corporation Employee Stock Ownership and Thrift Plan effective June 1, 2010 (previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed June 7, 2010 and incorporated herein by reference) | ||
10 | .1.1* | Kaydon Corporation Employee Stock Ownership and Thrift Plan superseding Provisions Addendum dated September 8, 2010, and effective June 1, 2010 (previously filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended October 2, 2010 and incorporated herein by reference) |
50 KAYDON
CORPORATION FORM 10K
Table of Contents
Exhibit |
||||
Number | Description of Document | |||
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 | Credit Agreement dated as of September 21, 2010 among the Company, the subsidiary borrowers from time to time party thereto, the alternate currency borrowers from time to time party thereto, the institutions from time to time parties thereto as lenders, J.P. Morgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., Comerica Bank, SunTrust Bank, and Wells Fargo Bank, National Association, as Syndication Agents, and J.P. Morgan Securities LLC as Sole Lead Arranger and Sole Book Runner (previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed September 22, 2010 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) |
KAYDON
CORPORATION
FORM 10K 51
Table of Contents
Exhibit |
||||
Number | Description of Document | |||
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) | ||
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* | 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) | ||
10 | .17.1* | Separation Agreement between the Company and Donald Buzinkai dated October 5, 2010 (previously filed as Exhibit 10.01 to the Companys Current Report on Form 8-K filed October 5, 2010 and incorporated herein by reference) | ||
10 | .18* | Change in Control Compensation Agreement between Kaydon Corporation and Laura Kowalchik, dated October 29, 2010 (previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed October 29, 2010 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 | |||
100 | XBRL-related Documents | |||
101 | Interactive Data File |
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 25, 2011
|
By:
/s/ James
OLeary James
OLeary
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
|
Date: February 25, 2011
|
By:
/s/ Peter
C. DeChants Peter
C. DeChants
Senior Vice President, Chief Financial Officer (Principal Financial Officer) |
|
Date: February 25, 2011
|
By:
/s/ Laura
M. Kowalchik Laura
M. Kowalchik
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 25, 2011 | |||
/s/ David
A. Brandon David A. Brandon Director |
Date: February 25, 2011 | |||
/s/ Patrick
P. Coyne Patrick P. Coyne Director |
Date: February 25, 2011 | |||
/s/ William
K. Gerber William K. Gerber Director |
Date: February 25, 2011 | |||
/s/ Timothy
J. ODonovan Timothy J. ODonovan Director |
Date: February 25, 2011 | |||
/s/ James
OLeary James OLeary Chairman |
Date: February 25, 2011 |
KAYDON
CORPORATION
FORM 10K 53
Table of Contents
SCHEDULE II.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009
AND 2008
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:
|
||||||||||||||||
2010
|
$ | 1,183,000 | $ | 103,000 | $ | (341,000 | ) | $ | 945,000 | |||||||
2009
|
$ | 991,000 | $ | 629,000 | $ | (437,000 | ) | $ | 1,183,000 | |||||||
2008
|
$ | 826,000 | $ | 413,000 | $ | (248,000 | ) | $ | 991,000 | |||||||
(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:
|
||||||||||||||||
2010
|
$ | 15,909,000 | $ | 1,434,000 | $ | (1,145,000 | ) | $ | 16,198,000 | |||||||
2009
|
$ | 17,236,000 | $ | (394,000 | ) | $ | (933,000 | ) | $ | 15,909,000 | ||||||
2008
|
$ | 13,671,000 | $ | 4,141,000 | $ | (576,000 | ) | $ | 17,236,000 | |||||||
(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 | End of Period | ||||||||||||
Deferred tax assets valuation allowance:
|
||||||||||||||||
2010
|
$ | 737,000 | $ | 606,000 | | $ | 1,343,000 | |||||||||
2009
|
| $ | 737,000 | | $ | 737,000 | ||||||||||
(C) | Charges to Costs and Expenses, representing foreign net operating loss, state tax credit and federal tax credit carryforwards for which utilization is uncertain. |
54 KAYDON
CORPORATION FORM 10K