Attached files
file | filename |
---|---|
EX-32 - EX-32 - KAYDON CORP | k50727exv32.htm |
EX-31.1 - EX-31.1 - KAYDON CORP | k50727exv31w1.htm |
EX-31.2 - EX-31.2 - KAYDON CORP | k50727exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - KAYDON CORP | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2011
Commission File No. 1-11333
KAYDON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-3186040 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
Suite 300, 315 E. Eisenhower Parkway, Ann Arbor, Michigan | 48108 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (734) 747-7025
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 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.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting companyo |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Common Stock Outstanding at October 26, 2011 32,119,583 shares, $.10 par value.
KAYDON CORPORATION FORM 10-Q
INDEX
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KAYDON CORPORATION
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
October 1, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 219,088,000 | $ | 286,648,000 | ||||
Accounts receivable, net |
93,789,000 | 76,010,000 | ||||||
Inventories, net |
107,069,000 | 88,253,000 | ||||||
Other current assets |
14,782,000 | 16,384,000 | ||||||
Total current assets |
434,728,000 | 467,295,000 | ||||||
Property, plant and equipment, net |
172,121,000 | 169,597,000 | ||||||
Goodwill, net |
157,825,000 | 143,428,000 | ||||||
Other intangible assets, net |
31,748,000 | 18,047,000 | ||||||
Other assets |
4,343,000 | 2,965,000 | ||||||
Total assets |
$ | 800,765,000 | $ | 801,332,000 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 23,186,000 | $ | 16,944,000 | ||||
Salaries and wages |
8,297,000 | 11,439,000 | ||||||
Taxes payable |
7,537,000 | 3,452,000 | ||||||
Other accrued expenses |
20,094,000 | 21,194,000 | ||||||
Total current liabilities |
59,114,000 | 53,029,000 | ||||||
Long-term postretirement and
postemployment benefit obligations |
22,983,000 | 23,567,000 | ||||||
Other long-term liabilities |
19,706,000 | 15,598,000 | ||||||
Total long-term liabilities |
42,689,000 | 39,165,000 | ||||||
Shareholders Equity: |
||||||||
Common stock |
3,693,000 | 3,693,000 | ||||||
Other shareholders equity |
695,269,000 | 705,445,000 | ||||||
Total shareholders equity |
698,962,000 | 709,138,000 | ||||||
Total liabilities and shareholders equity |
$ | 800,765,000 | $ | 801,332,000 | ||||
See accompanying notes to consolidated condensed financial statements.
3
Table of Contents
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | |||||||||||||
Net sales |
$ | 121,637,000 | $ | 118,280,000 | $ | 352,007,000 | $ | 359,025,000 | ||||||||
Cost of sales |
78,795,000 | 79,894,000 | 226,359,000 | 232,933,000 | ||||||||||||
Gross profit |
42,842,000 | 38,386,000 | 125,648,000 | 126,092,000 | ||||||||||||
Selling, general and
administrative expenses |
22,498,000 | 19,812,000 | 67,358,000 | 61,578,000 | ||||||||||||
Operating income |
20,344,000 | 18,574,000 | 58,290,000 | 64,514,000 | ||||||||||||
Interest expense |
(98,000 | ) | (9,000 | ) | (293,000 | ) | (133,000 | ) | ||||||||
Interest income |
88,000 | 193,000 | 377,000 | 315,000 | ||||||||||||
Income before income taxes |
20,334,000 | 18,758,000 | 58,374,000 | 64,696,000 | ||||||||||||
Provision for income taxes |
5,830,000 | 5,670,000 | 17,722,000 | 19,965,000 | ||||||||||||
Net income |
$ | 14,504,000 | $ | 13,088,000 | $ | 40,652,000 | $ | 44,731,000 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.45 | $ | 0.39 | $ | 1.25 | $ | 1.33 | ||||||||
Diluted |
$ | 0.45 | $ | 0.39 | $ | 1.25 | $ | 1.33 | ||||||||
Dividends declared per share |
$ | 0.20 | $ | 0.19 | $ | 0.58 | $ | 0.55 | ||||||||
See accompanying notes to consolidated condensed financial statements.
4
Table of Contents
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
First Three Quarters Ended | ||||||||
October 1, 2011 | October 2, 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 40,652,000 | $ | 44,731,000 | ||||
Adjustments to reconcile net income to net cash from
operating activities: |
||||||||
Depreciation |
15,095,000 | 15,645,000 | ||||||
Amortization of intangible assets |
2,274,000 | 2,713,000 | ||||||
Amortization of stock awards |
3,125,000 | 2,998,000 | ||||||
Stock option compensation expense |
995,000 | 991,000 | ||||||
Excess tax benefits from stock-based compensation |
(95,000 | ) | (186,000 | ) | ||||
Deferred financing fees |
291,000 | 134,000 | ||||||
Non-cash postretirement benefits curtailment gain |
(142,000 | ) | (3,066,000 | ) | ||||
Contributions to qualified pension plans |
(1,952,000 | ) | (1,614,000 | ) | ||||
Net change in receivables, inventories and trade payables |
(25,466,000 | ) | (9,533,000 | ) | ||||
Net change in other assets and liabilities |
497,000 | 13,576,000 | ||||||
Net cash from operating activities |
35,274,000 | 66,389,000 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(11,865,000 | ) | (11,280,000 | ) | ||||
Dispositions of property, plant and equipment |
210,000 | 107,000 | ||||||
Acquisition of business, net of cash received |
(39,610,000 | ) | 0 | |||||
Net cash used in investing activities |
(51,265,000 | ) | (11,173,000 | ) | ||||
Cash flows from financing activities: |
||||||||
Cash dividends paid |
(18,652,000 | ) | (18,121,000 | ) | ||||
Purchase of treasury stock |
(34,719,000 | ) | (8,789,000 | ) | ||||
Credit facility issuance costs |
0 | (1,935,000 | ) | |||||
Excess tax benefits from stock-based compensation |
95,000 | 186,000 | ||||||
Proceeds from exercise of stock options |
39,000 | 104,000 | ||||||
Net cash used in financing activities |
(53,237,000 | ) | (28,555,000 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
1,668,000 | (262,000 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(67,560,000 | ) | 26,399,000 | |||||
Cash and cash equivalents Beginning of period |
286,648,000 | 262,403,000 | ||||||
Cash and cash equivalents End of period |
$ | 219,088,000 | $ | 288,802,000 | ||||
Cash paid for income taxes |
$ | 11,644,000 | $ | 15,082,000 | ||||
Cash paid for interest |
0 | 0 | ||||||
See accompanying notes to consolidated condensed financial statements.
5
Table of Contents
KAYDON CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation:
The accompanying unaudited consolidated condensed financial statements of Kaydon Corporation and
subsidiaries (Kaydon or the Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation have
been included, and such adjustments are of a normal recurring nature. The December 31, 2010
consolidated condensed balance sheet data was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting principles. For further
information, refer to the consolidated financial statements and footnotes thereto included in the
Companys annual report on Form 10-K for the year ended December 31, 2010.
(2) 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.
October 1, 2011 | December 31, 2010 | |||||||
Cash and cash equivalents: |
||||||||
Money market and other short-term funds |
$ | 196,410,000 | $ | 275,547,000 | ||||
Time deposits, other interest bearing accounts, and other cash |
22,678,000 | 11,101,000 | ||||||
$ | 219,088,000 | $ | 286,648,000 | |||||
(3) Inventories:
October 1, 2011 | December 31, 2010 | |||||||
Raw material |
$ | 41,184,000 | $ | 33,429,000 | ||||
Work in process |
30,277,000 | 23,797,000 | ||||||
Finished goods |
35,608,000 | 31,027,000 | ||||||
$ | 107,069,000 | $ | 88,253,000 | |||||
(4) Comprehensive Income:
For the Company, comprehensive income consists of net income and other comprehensive income (loss)
which is comprised primarily of cumulative foreign currency translation adjustments.
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | |||||||||||||
Net income |
$ | 14,504,000 | $ | 13,088,000 | $ | 40,652,000 | $ | 44,731,000 | ||||||||
Other comprehensive
income (loss) |
(7,369,000 | ) | 5,415,000 | (1,620,000 | ) | 875,000 | ||||||||||
Comprehensive income |
$ | 7,135,000 | $ | 18,503,000 | $ | 39,032,000 | $ | 45,606,000 | ||||||||
6
Table of Contents
(5) Earnings per Share:
The following table reconciles the numerators and denominators used in the calculations of basic
and diluted earnings per share for the periods presented.
Third Quarter Ended | ||||||||
October 1, 2011 | October 2, 2010 | |||||||
Earnings per share Basic |
||||||||
Net income |
$ | 14,504,000 | $ | 13,088,000 | ||||
Less: Net earnings allocated to participating
securities Basic |
(144,000 | ) | (137,000 | ) | ||||
Income available to common shareholders Basic |
$ | 14,360,000 | $ | 12,951,000 | ||||
Weighted average common shares outstanding Basic |
31,931,000 | 33,119,000 | ||||||
Earnings per share Basic |
$ | 0.45 | $ | 0.39 | ||||
Earnings per share Diluted |
||||||||
Net income |
$ | 14,504,000 | $ | 13,088,000 | ||||
Less: Net earnings allocated to participating
securities Diluted |
(144,000 | ) | (137,000 | ) | ||||
Income available to common shareholders Diluted |
$ | 14,360,000 | $ | 12,951,000 | ||||
Weighted average common shares outstanding Diluted |
||||||||
Weighted average common shares outstanding Basic |
31,931,000 | 33,119,000 | ||||||
Potential dilutive shares resulting from stock options |
19,000 | 27,000 | ||||||
Weighted average common shares outstanding Diluted |
31,950,000 | 33,146,000 | ||||||
Earnings per share Diluted |
$ | 0.45 | $ | 0.39 | ||||
First Three Quarters Ended | ||||||||
October 1, 2011 | October 2, 2010 | |||||||
Earnings per share Basic |
||||||||
Net income |
$ | 40,652,000 | $ | 44,731,000 | ||||
Less: Net earnings allocated to participating
securities Basic |
(422,000 | ) | (475,000 | ) | ||||
Income available to common shareholders Basic |
$ | 40,230,000 | $ | 44,256,000 | ||||
Weighted average common shares outstanding Basic |
32,229,000 | 33,170,000 | ||||||
Earnings per share Basic |
$ | 1.25 | $ | 1.33 | ||||
Earnings per share Diluted |
||||||||
Net income |
$ | 40,652,000 | $ | 44,731,000 | ||||
Less: Net earnings allocated to participating
securities Diluted |
(422,000 | ) | (475,000 | ) | ||||
Income available to common shareholders Diluted |
$ | 40,230,000 | $ | 44,256,000 | ||||
Weighted average common shares outstanding Diluted |
||||||||
Weighted average common shares outstanding Basic |
32,229,000 | 33,170,000 | ||||||
Potential dilutive shares resulting from stock options |
25,000 | 25,000 | ||||||
Weighted average common shares outstanding Diluted |
32,254,000 | 33,195,000 | ||||||
Earnings per share Diluted |
$ | 1.25 | $ | 1.33 | ||||
7
Table of Contents
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 shares for the periods shown below:
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | |||||||||||||
Shares excluded |
506,500 | 468,000 | 420,500 | 403,000 |
(6) Business Segment Information:
The Company has two reporting segments: Friction Control Products and Velocity Control Products.
On April 8, 2011, the Company completed the acquisition of all of the outstanding shares of
HAHN-Gasfedern GmbH and related real estate and intangible property (Hahn) from Ulrich Hahn e.K.
Hahn, based in Aichwald, Germany, manufactures and sells high quality gas springs, tension springs
and dampers for diverse industrial markets. Hahns results are included in the Velocity Control
Products segment. 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. Sales between reporting segments are not material. Items not allocated to
segment operating income include certain amortization and corporate administrative expenses.
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | |||||||||||||
Net sales |
||||||||||||||||
Friction Control Products |
$ | 69,898,000 | $ | 78,002,000 | $ | 196,590,000 | $ | 237,476,000 | ||||||||
Velocity Control Products |
24,373,000 | 15,932,000 | 69,330,000 | 45,279,000 | ||||||||||||
Other Industrial Products |
27,366,000 | 24,346,000 | 86,087,000 | 76,270,000 | ||||||||||||
Total consolidated net sales |
$ | 121,637,000 | $ | 118,280,000 | $ | 352,007,000 | $ | 359,025,000 | ||||||||
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | |||||||||||||
Operating income |
||||||||||||||||
Friction Control Products |
$ | 11,080,000 | $ | 12,673,000 | $ | 32,480,000 | $ | 49,556,000 | ||||||||
Velocity Control Products |
6,050,000 | 4,095,000 | 17,760,000 | 11,422,000 | ||||||||||||
Other Industrial Products |
2,937,000 | 1,397,000 | 9,869,000 | 5,516,000 | ||||||||||||
Total segment operating income |
20,067,000 | 18,165,000 | 60,109,000 | 66,494,000 | ||||||||||||
Items not allocated to segment
operating income |
277,000 | 409,000 | (1,819,000 | ) | (1,980,000 | ) | ||||||||||
Interest expense |
(98,000 | ) | (9,000 | ) | (293,000 | ) | (133,000 | ) | ||||||||
Interest income |
88,000 | 193,000 | 377,000 | 315,000 | ||||||||||||
Income before income taxes |
$ | 20,334,000 | $ | 18,758,000 | $ | 58,374,000 | $ | 64,696,000 | ||||||||
8
Table of Contents
(7) 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 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 October 1, 2011. Taking into account $4.5 million of letters of credit issued
under the credit agreement, the Company had available credit of $245.5 million at October 1, 2011.
(8) | 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.
During the third quarter of 2011, the Company completed its annual goodwill impairment test. The
fair value of each reporting unit was estimated using the expected present value of future cash
flows using a weighted average cost of capital discount rate of 11.5-12.5 percent depending on the
assessed risk of the reporting unit and a growth rate in perpetuity of 1.0-2.5 percent depending on
the assessed long-term growth of the reporting unit. In accordance with current accounting
guidance, the Company has included deferred taxes in determining the carrying value of each
reporting unit. During 2011, the Companys goodwill impairment testing revealed that the estimated
fair values of each 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) as of the July 30, 2011 annual testing date ranged from
approximately 43 percent to approximately 309 percent. Changes in estimates of future cash flows
and the weighted average cost of capital may have a material effect on the valuation of reporting
units and the results of the related impairment testing.
Certain trademarks are the Companys only indefinite-lived intangible assets. The Company
identifies impairment of these trademarks by comparing their fair values 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. At
July 30, 2011, trademarks were tested for impairment and no impairment loss was realized.
The changes in the carrying value of goodwill for the first three quarters ended October 1, 2011,
were as follows:
Friction | Velocity | |||||||||||||||
Control | Control | Other Industrial | ||||||||||||||
Products | Products | Products | Total | |||||||||||||
Balance at January 1, 2011 |
||||||||||||||||
Goodwill |
$ | 56,396,000 | $ | 43,200,000 | $ | 62,532,000 | $ | 162,128,000 | ||||||||
Accumulated impairment losses |
0 | 0 | (18,700,000 | ) | (18,700,000 | ) | ||||||||||
$ | 56,396,000 | $ | 43,200,000 | $ | 43,832,000 | $ | 143,428,000 | |||||||||
Effect of foreign currency
exchange rate changes |
134,000 | (835,000 | ) | 0 | (701,000 | ) | ||||||||||
Goodwill acquired |
0 | 15,098,000 | 0 | 15,098,000 | ||||||||||||
Balance at October 1, 2011 |
||||||||||||||||
Goodwill |
$ | 56,530,000 | $ | 57,463,000 | $ | 62,532,000 | $ | 176,525,000 | ||||||||
Accumulated impairment losses |
0 | 0 | (18,700,000 | ) | (18,700,000 | ) | ||||||||||
$ | 56,530,000 | $ | 57,463,000 | $ | 43,832,000 | $ | 157,825,000 | |||||||||
The accumulated impairment losses include impairment losses of $1.9 million recorded in 2004 and
$16.8 million recorded in 2002. The Company acquired goodwill of $15.1 million in the second
quarter of 2011 associated with its April 8, 2011 acquisition of Hahn. The Company also acquired
other intangible assets as part of the acquisition. A value of $15.0 million was assigned to
customer relationships and lists which is being amortized over 17 years. A value of $1.5 million
was assigned to non-amortizing trademarks.
9
Table of Contents
Other
intangible assets are summarized as follows:
October 1, 2011 | December 31, 2010 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amortized Intangible Assets | Value | Amortization | Value | Amortization | ||||||||||||
Customer relationships and lists |
$ | 42,377,000 | $ | 19,464,000 | $ | 28,194,000 | $ | 17,638,000 | ||||||||
Patents and developed technology |
6,917,000 | 4,341,000 | 6,596,000 | 3,974,000 | ||||||||||||
Distributor agreements |
374,000 | 267,000 | 374,000 | 237,000 | ||||||||||||
Product names |
320,000 | 212,000 | 320,000 | 192,000 | ||||||||||||
$ | 49,988,000 | $ | 24,284,000 | $ | 35,484,000 | $ | 22,041,000 | |||||||||
The intangible assets are being amortized at pro rata rates or on a straight-line basis, whichever
is appropriate, over their respective useful lives.
October 1, 2011 | December 31, 2010 | |||||||
Unamortized Intangible Assets | Carrying Value | Carrying Value | ||||||
Trademarks |
$ | 6,044,000 | $ | 4,604,000 | ||||
Aggregate Intangible Assets Amortization Expense |
||||||||
For the first three quarters ended October 1, 2011 |
$ | 2,274,000 | ||||||
For the first three quarters ended October 2, 2010 |
$ | 2,713,000 | ||||||
Estimated Intangible Assets Amortization Expense |
||||||||
For the year ending December 31, 2011 |
$ | 3,081,000 | ||||||
For the year ending December 31, 2012 |
$ | 3,017,000 | ||||||
For the year ending December 31, 2013 |
$ | 2,697,000 | ||||||
For the year ending December 31, 2014 |
$ | 2,397,000 | ||||||
For the year ending December 31, 2015 |
$ | 2,061,000 |
(9) Employee Benefit Plans:
The components of net periodic benefit cost (income) are as follows:
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
Pension Benefits | October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | ||||||||||||
Service cost |
$ | 673,000 | $ | 584,000 | $ | 2,226,000 | $ | 2,246,000 | ||||||||
Interest cost |
1,726,000 | 1,662,000 | 5,155,000 | 5,138,000 | ||||||||||||
Expected return on plan assets |
(2,121,000 | ) | (1,918,000 | ) | (6,361,000 | ) | (5,760,000 | ) | ||||||||
Amortization of: |
||||||||||||||||
Unrecognized net prior
service cost |
17,000 | 15,000 | 49,000 | 47,000 | ||||||||||||
Unrecognized net actuarial loss |
839,000 | 739,000 | 2,459,000 | 2,479,000 | ||||||||||||
Total |
$ | 1,134,000 | $ | 1,082,000 | $ | 3,528,000 | $ | 4,150,000 | ||||||||
10
Table of Contents
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
Postretirement Benefits | October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | ||||||||||||
Service cost |
$ | 14,000 | $ | 15,000 | $ | 60,000 | $ | 127,000 | ||||||||
Interest cost |
73,000 | 67,000 | 220,000 | 324,000 | ||||||||||||
Amortization of: |
||||||||||||||||
Unrecognized net prior
service credit |
(291,000 | ) | (343,000 | ) | (941,000 | ) | (921,000 | ) | ||||||||
Unrecognized net
actuarial gain |
(136,000 | ) | (128,000 | ) | (361,000 | ) | (314,000 | ) | ||||||||
Curtailment gain |
0 | 0 | (142,000 | ) | (3,066,000 | ) | ||||||||||
Total |
$ | (340,000 | ) | $ | (389,000 | ) | $ | (1,164,000 | ) | $ | (3,850,000 | ) | ||||
The Company contributed $0.8 million and $2.0 million to its qualified pension plans in the third
quarter and first three quarters of 2011, respectively. The Company expects to contribute an
aggregate of $3.3 million to its qualified and non-qualified pension plans in 2011, and reviews its
funding strategy on an ongoing basis.
(10) Stock-Based Compensation:
A summary of restricted stock award information pursuant to the Companys equity incentive plans
for the first three quarters of 2011 is as follows:
Wtd. Avg. | ||||||||
Restricted | Grant Date | |||||||
Stock | Fair Value | |||||||
Outstanding at January 1, 2011 |
330,630 | $ | 35.85 | |||||
Granted |
98,250 | 38.53 | ||||||
Vested |
(113,652 | ) | 37.29 | |||||
Canceled |
(2,350 | ) | 32.48 | |||||
Outstanding at October 1, 2011 |
312,878 | $ | 36.20 | |||||
Compensation expense related to restricted stock awards was $1.1 million and $3.1 million in the
third quarter and first three quarters of 2011, respectively. Compensation expense related to
restricted stock awards was $0.9 million and $3.0 million in the third quarter and first three
quarters of 2010, respectively.
A summary of stock option information pursuant to the Companys equity incentive plans for the
first three quarters of 2011 is as follows:
Wtd. Avg. | ||||||||
Options | Ex. Price | |||||||
Outstanding at January 1, 2011 |
603,000 | $ | 38.83 | |||||
Granted |
17,500 | 37.75 | ||||||
Canceled |
0 | 0 | ||||||
Exercised |
(1,500 | ) | 26.01 | |||||
Outstanding at October 1, 2011 |
619,000 | $ | 38.83 | |||||
Exercisable at October 1, 2011 |
415,700 | $ | 39.99 | |||||
The exercise price of each option equals the closing market price of Company common stock on the
date of grant. Options granted become exercisable at the rate of 20 percent or 100 percent per
year, commencing one year after the date of grant, and options expire ten years after the date of
grant. The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. Compensation expense related to stock options was $0.3 million
and $1.0 million in the third quarter and first three quarters of 2011, respectively. Compensation
expense related to stock options was $0.3 million and $1.0 million in the third quarter and the
first three quarters of 2010, respectively.
11
Table of Contents
(11) Other Matters:
At October 1, 2011, the Company had approximately $8.3 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 2010, a notice of binding 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 calls for completion of the binding
arbitration hearings in the fourth quarter of 2011, followed by a final decision of the arbitration
panel, 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 believe 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.
(12) Taxes:
The effective tax rate for the third quarter of 2011 equaled 28.7 percent compared to 30.2 percent
in the third quarter of 2010. The difference between the U.S. federal statutory income tax rate and
the Companys effective tax rate is due primarily to taxation of permanently reinvested foreign
earnings at lower rates than the U.S. rate. The third quarter 2011 effective tax rate decreased as
compared to the third quarter 2010 effective tax rate due primarily to an increase in permanently
reinvested foreign earnings taxed at lower rates than in the U.S.
(13) Acquisition:
On April 8, 2011 the Company completed the purchase of all of the outstanding shares of
HAHN-Gasfedern GmbH and related real estate and intangible property from Ulrich Hahn e.K. Hahn,
based in Aichwald, Germany, manufactures and sells high quality gas springs, tension springs and
dampers for diverse industrial markets. Hahns results are included in the Velocity Control
Products reporting segment.
(14) Manufacturing Consolidation Program:
In May 2010 the Company announced a plan to optimize its custom bearings manufacturing capacity by
expanding its manufacturing capacity in Sumter, South Carolina. This 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 closed its
Mocksville, North Carolina manufacturing facility. This manufacturing consolidation program is
within the Friction Control Products reporting segment.
During the third quarter and first three quarters of 2011 the Company incurred $0.8 million and
$2.4 million, respectively, for engineering, relocation, recruiting, travel, training and other
start-up costs in Sumter and carrying and other costs in Mocksville associated with the
manufacturing consolidation program, including an adjustment to the carrying value of the real
property.
(15) Fair Value Measurement:
The Company adopted fair value measurement guidance on January 1, 2008, as extended on January 1,
2009. The Company had no material non-financial assets or liabilities recorded at fair value at
October 1, 2011.
(16) Impact of Recently Issued Accounting Pronouncements:
New accounting guidance was issued in 2011 to require more prominent disclosure of Comprehensive
Income. This guidance which will be effective for the Company beginning in the first quarter of
2012, requires the presentation of net income, items of other comprehensive income and total
comprehensive income in one continuous statement or two separate but consecutive statements. The
Company is evaluating the effects and implementation of this new presentation.
12
Table of Contents
In addition, new accounting guidance was issued in 2011, which is intended to reduce the
complexity and costs of performing annual goodwill testing by allowing companies the option to make
a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should
calculate the fair value of a reporting unit. This guidance will be effective for the Company
beginning in 2012. The Company does not expect that this guidance will have a material effect on
the financial position, results of operations, or cash flows of the Company.
13
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, military,
industrial, aerospace, medical and electronic equipment, and aftermarket customers. Demand for our
products depends, in part, upon a wide range of general economic conditions, which affect our
markets in varying ways from quarter to quarter.
Our performance in the third quarter of 2011 compared to 2010s third quarter reflected continued
sales growth of products serving industrial markets including increased sales as a result of our
acquisition of HAHN-Gasfedern GmbH and related real estate and intangible property (Hahn) during
the second quarter of 2011, partially offset by moderation in our wind energy business as expected.
Other items affecting the comparison of the third quarter 2011 results to the 2010 third quarter
results included $0.9 million of costs associated with a previously announced manufacturing
consolidation program and due diligence efforts for acquisitions in the third quarter of 2011
compared to $2.6 million of costs in the third quarter of 2010.
At October 1, 2011, after our cash acquisition of Hahn earlier in the year, our current ratio was
7.4 to 1 and working capital totaled $375.6 million. We believe that our current cash and cash
equivalents balance of $219.1 million at October 1, 2011, our future cash flows from operations,
and 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, national policy
steps regarding renewable energy, national budgets for military expenditures, 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 that follows should be read in conjunction with the unaudited Consolidated Condensed
Financial Statements (and the Notes thereto), included elsewhere in this report, and our 2010
Annual Report on Form 10-K, particularly Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations, to assist in understanding our results of operations,
financial position, cash flows, capital structure and other relevant financial information.
Results of Operations
Third Quarter Results
Third Quarter Ended | ||||||||||||||||
Oct. 1, | % of | Oct. 2, | % of | |||||||||||||
Dollars in millions, except per share amounts | 2011 | Sales | 2010 | Sales | ||||||||||||
Net sales |
$ | 121.6 | $ | 118.3 | ||||||||||||
Cost of sales |
78.8 | 64.8 | % | 79.9 | 67.5 | % | ||||||||||
Gross profit |
42.8 | 35.2 | % | 38.4 | 32.5 | % | ||||||||||
Selling, general and administrative expenses |
22.5 | 18.5 | % | 19.8 | 16.7 | % | ||||||||||
Operating income |
20.3 | 16.7 | % | 18.6 | 15.7 | % | ||||||||||
Interest, net |
0.0 | 0.2 | ||||||||||||||
Income before income taxes |
20.3 | 16.7 | % | 18.8 | 15.9 | % | ||||||||||
Provision for income taxes |
5.8 | 5.7 | ||||||||||||||
Net income |
$ | 14.5 | 11.9 | % | $ | 13.1 | 11.1 | % | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.45 | $ | 0.39 | ||||||||||||
Diluted |
$ | 0.45 | $ | 0.39 | ||||||||||||
Amounts and percentages in the above table may not total due to rounding.
Sales equaled $121.6 million in the third quarter of 2011, an increase of $3.4 million or 2.8
percent compared to the third quarter of 2010. The increase was principally attributable to $8.4
million of additional sales of our velocity control products, as worldwide demand for these
products was strong, including the results of Hahn which
14
Table of Contents
contributed $5.1 million to the velocity control products sales increase. We also achieved
increased sales across the majority of our principal industrial end markets. Third quarter 2011
sales also included $0.8 million of favorable changes in foreign exchange rates. These sales
increases were offset by a $9.9 million reduction in sales to wind energy customers and a small
reduction in sales to liquid filtration markets.
Gross profit during the third quarter of 2011 increased $4.5 million or 11.6 percent compared to
the third quarter of 2010. Gross profit comparisons were positively affected by sales mix of $2.7
million, volume increases of $2.0 million, the contribution of the Hahn acquisition, and a decrease
in costs associated with the manufacturing consolidation program. These increases were partially
offset by net pricing reductions of $1.5 million. Gross margin increased to 35.2 percent in the
third quarter of 2011 from 32.5 percent in the third quarter of 2010.
Selling, general and administrative expenses were $22.5 million or 18.5 percent of sales during the
third quarter of 2011, compared to $19.8 million or 16.7 percent of sales in the third quarter of
2010. Selling expenses increased $1.8 million
primarily attributable to increased revenue, investments in personnel related to focused global
sales and marketing initiatives and the effect of the Hahn
acquisition. General and administrative expenses increased $0.9
million when compared to the third quarter of 2010. Modestly higher
compensation costs, the adverse effect of adjusting the value of
fixed assets to fair value and the inclusion of Hahn were partially
offset by reduced fees for professional services.
The Companys operating income was $20.3 million in the third quarter of 2011, compared to $18.6
million in the third quarter of 2010.
During the third quarter of 2011, interest income was $0.1 million on average investment balances
of $195.4 million. Interest income in the third quarter of 2010 equaled $0.2 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 equaled $0.1 million in the third quarter of 2011, and represents the
amortization of our credit facility costs.
The effective tax rate for the third quarter of 2011 equaled 28.7 percent compared to 30.2 percent
in the third quarter of 2010. The tax rate in 2011 decreased
primarily as a result of an increase in
permanently reinvested foreign earnings which are taxed at lower rates than earnings in the U.S.
The projected full year 2011 tax rate is expected to be approximately 30.3 percent.
Net income for the third quarter of 2011 was $14.5 million, or $0.45 per share on a diluted basis,
compared to net income for the third quarter of 2010 of $13.1 million, or $0.39 per share on a
diluted basis.
First Three Quarters Results
First Three Quarters Ended | ||||||||||||||||
Oct. 1, | % of | Oct. 2, | % of | |||||||||||||
Dollars in millions, except per share amounts | 2011 | Sales | 2010 | Sales | ||||||||||||
Net sales |
$ | 352.0 | $ | 359.0 | ||||||||||||
Cost of sales |
226.4 | 64.3 | % | 232.9 | 64.9 | % | ||||||||||
Gross profit |
125.6 | 35.7 | % | 126.1 | 35.1 | % | ||||||||||
Selling, general and administrative expenses |
67.4 | 19.1 | % | 61.6 | 17.2 | % | ||||||||||
Operating income |
58.3 | 16.6 | % | 64.5 | 18.0 | % | ||||||||||
Interest, net |
0.1 | 0.2 | ||||||||||||||
Income before income taxes |
58.4 | 16.6 | % | 64.7 | 18.0 | % | ||||||||||
Provision for income taxes |
17.7 | 20.0 | ||||||||||||||
Net income |
$ | 40.7 | 11.5 | % | $ | 44.7 | 12.5 | % | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 1.25 | $ | 1.33 | ||||||||||||
Diluted |
$ | 1.25 | $ | 1.33 | ||||||||||||
Amounts and percentages in the above table may not total due to rounding.
Sales during the first three quarters of 2011 decreased $7.0 million or 2.0 percent compared to the
first three quarters of 2010. The net decrease in sales was comprised of a $38.8 million decrease
in wind energy sales and smaller
15
Table of Contents
reductions in sales to our military and liquid filtration markets, significantly offset by
increased sales to industrial markets, the contribution of Hahn, favorable currency effects of $2.6
million and positive net pricing.
Gross profit during the first three quarters of 2011 decreased $0.4 million compared to the first
three quarters of 2010 as the effects of lower sales volume, and net cost increases were almost
completely offset by the contribution of Hahn and favorable sales mix.
Selling, general, and administrative expenses were $67.4 million or 19.1 percent of sales during
the first three quarters of 2011, compared to $61.6 million or 17.2 percent of sales in the first
three quarters of 2010. The $5.8 million increase was primarily attributable to $5.5 million in
increased selling expenses compared to the prior period, largely due to increased investments in
personnel, advertising and travel related to focused global sales and marketing initiatives and the
inclusion of Hahn. General and administrative expenses in the first three quarters of
2010 included a $3.1 million postretirement curtailment gain
compared to a curtailment gain of only $0.1 million in the first three quarters of 2011.
These increases were partially offset by a $1.7 million decrease in compensation expense and a $1.4
million decrease in costs associated with due diligence efforts and acquisition purchase accounting
costs. In addition, the first three quarters of 2011 includes the
effect of the Hahn acquisition.
Operating income was $58.3 million in the first three quarters of 2011 compared to $64.5 million in
the first three quarters of 2010.
During the first three quarters of 2011, interest income was $0.4 million on average investment
balances of $225.9 million. Interest income in the first three quarters of 2010 was $0.3 million on
average investment balances of $255.7 million.
We did not have any debt outstanding during the first three quarters of 2011 or 2010. Interest
expense of $0.3 million in 2011 and $0.1 million in 2010 represents the amortization of costs
associated with our credit facility.
The effective tax rate for the first three quarters of 2011 equaled 30.4 percent compared to 30.9
percent in the first three quarters of 2010.
Net income for the first three quarters of 2011 was $40.7 million, or $1.25 per share on a diluted
basis, compared to net income for the first three quarters of 2010 of $44.7 million, or $1.33 per
share on a diluted basis.
Results of Business Segments
The Company has 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.
Sales between reporting segments are not material. Items not allocated to segment operating income
include certain amortization and corporate administrative expenses.
Friction Control Products
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||||||||||
% | % | |||||||||||||||||||||||
Dollars in millions | Oct. 1, 2011 | Oct. 2, 2010 | Change | Oct. 1, 2011 | Oct. 2, 2010 | Change | ||||||||||||||||||
Sales |
$ | 69.9 | $ | 78.0 | (10.4 | )% | $ | 196.6 | $ | 237.5 | (17.2 | )% | ||||||||||||
Operating Income |
$ | 11.1 | $ | 12.7 | (12.6 | )% | $ | 32.5 | $ | 49.6 | (34.5 | )% | ||||||||||||
Operating Margin |
15.9 | % | 16.2 | % | 16.5 | % | 20.9 | % |
Third Quarter
During the third quarter of 2011 sales from our Friction Control Products reporting segment equaled
$69.9 million, a decrease of $8.1 million compared to the third quarter of 2010. The decrease was
due primarily to a $6.2 million decline in sales volume and $1.7 million in pricing reductions.
Sales to the wind energy market declined by $9.9 million to $19.2 million, which was partially
offset by increased sales volume primarily to the machinery and heavy equipment markets.
16
Table of Contents
During the third quarter of 2011, operating income for the segment decreased $1.6 million compared
to the third quarter of 2010, to $11.1 million. This decrease was comprised of $1.9 million
attributable to a decline in sales volume, $1.7 million attributable to pricing reductions,
$0.5 million attributable to the effect of unfavorable changes in foreign exchange rates, and other
cost increases of $1.4 million, partially offset by the $2.4 million positive effect of sales mix and
$1.5 million in decreased costs associated with the manufacturing consolidation program.
First Three Quarters
During the first three quarters of 2011 sales from our Friction Control Products reporting segment
decreased $40.9 million compared to the first three quarters of 2010, to $196.6 million. The
decrease was due to a $38.8 million decline in sales to wind energy customers and a smaller
decrease in sales to the military market, partially offset by increased sales to other principal
end markets.
During the first three quarters of 2011 operating income for the segment decreased $17.1 million
compared to the first three quarters of 2010, to $32.5 million. This decrease was primarily
comprised of $14.4 million related to decreases in sales volume, $4.6 million in reduced pricing,
and $1.0 million of net cost increases, partially offset by a $3.6 million favorable effect from
changes in sales mix.
Velocity Control Products
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||||||||||
% | % | |||||||||||||||||||||||
Dollars in millions | Oct. 1, 2011 | Oct. 2, 2010 | Change | Oct. 1, 2011 | Oct. 2, 2010 | Change | ||||||||||||||||||
Sales |
$ | 24.4 | $ | 15.9 | 53.0 | % | $ | 69.3 | $ | 45.3 | 53.1 | % | ||||||||||||
Operating Income |
$ | 6.1 | $ | 4.1 | 47.7 | % | $ | 17.8 | $ | 11.4 | 55.5 | % | ||||||||||||
Operating Margin |
24.8 | % | 25.7 | % | 25.6 | % | 25.2 | % |
Third Quarter
During the third quarter of 2011 sales from our Velocity Control Products reporting segment
increased $8.4 million compared to the third quarter of 2010, to $24.4 million. The sales growth
was due to increased volumes in our international markets and the $5.1 million contribution of
Hahn.
During the third quarter of 2011 operating income for the segment increased $2.0 million compared
to the third quarter of 2010, to $6.1 million. The increase was attributable to increased sales,
including the contribution of Hahn. This increase was partially
offset by net cost increases of $2.2 million, including Hahn and the investment in sales and marketing initiatives to add
to our global sales team and advertising plan to support the growth of this business.
First Three Quarters
During the first three quarters of 2011 sales from our Velocity Control Products reporting segment
increased $24.1 million compared to the first three quarters of 2010, to $69.3 million. The
increase was due to increased volumes to North American and European markets, the contribution of
Hahn and $2.3 million from favorable changes in foreign exchange rates.
During the first three quarters of 2011 operating income for the segment increased $6.3 million
compared to the first three quarters of 2010, to $17.8 million. The increase was attributable to
increased sales volumes including the contribution of Hahn, and $0.3 million from favorable changes
in foreign exchange rates, partially offset by $5.9 million in
net cost increases, including Hahn and investments in sales and marketing costs to add sales personnel and increased advertising.
17
Table of Contents
Other Industrial Products
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||||||||||
% | % | |||||||||||||||||||||||
Dollars in millions | Oct. 1, 2011 | Oct. 2, 2010 | Change | Oct. 1, 2011 | Oct. 2, 2010 | Change | ||||||||||||||||||
Sales |
$ | 27.4 | $ | 24.3 | 12.4 | % | $ | 86.1 | $ | 76.3 | 12.9 | % | ||||||||||||
Operating Income |
$ | 2.9 | $ | 1.4 | 110.2 | % | $ | 9.9 | $ | 5.5 | 78.9 | % | ||||||||||||
Operating Margin |
10.7 | % | 5.7 | % | 11.5 | % | 7.2 | % |
Third Quarter
Third quarter 2011 sales of our remaining operating segments, which are combined and shown above as
Other Industrial Products, equaled $27.4 million, compared to $24.3 million in the third quarter of
2010. The improvement was due to higher demand for sealing products of $1.6 million, a $1.2
million increase in sales of metal alloy products, primarily related to commodity pricing, and
higher demand for machine tool and die components of $0.7 million, which were partially offset by
decreased sales of $0.5 million of filtration products.
Operating income of Other Industrial Products equaled $2.9 million during the third quarter of
2011, compared to $1.4 million in the third quarter of 2010. The increase was due to a $0.6
million favorable impact in sales mix, $1.6 million favorable impact of volume increases and a
smaller favorable impact from price increases, partially offset by net cost increases.
First Three Quarters
During the first three quarters of 2011 sales from our Other Industrial Products increased $9.8
million compared to the first three quarters of 2010, to $86.1 million. The increase was due to
higher demand for sealing products of $6.3 million, a $4.8 million increase in sales of metal alloy
products, primarily related to commodity pricing, and higher demand for machine tool and die
components of $2.8 million, which were partially offset by decreased sales of $4.1 million of
filtration products.
Operating income for the first three quarters of 2011 for Other Industrial Products increased $4.4
million compared to the first three quarters of 2010, to $9.9 million. The increase was primarily
due to a $3.9 million favorable impact of volume increases and a $1.2 million favorable impact from
changes in sales mix.
Liquidity and Capital Resources
At October 1, 2011, after the cash acquisition of Hahn earlier in the year, the Companys current
ratio was 7.4 to 1 and working capital totaled $375.6 million, including $219.1 million of cash and
cash equivalents. At December 31, 2010, the current ratio was 8.8 to 1 and working capital totaled
$414.3 million, including cash and cash equivalents of $286.6 million.
Net cash from operating activities during the first three quarters of 2011 equaled $35.3 million,
compared to first three quarters 2010 net cash from operating activities of $66.4 million due
largely to changes in working capital items and other assets and liabilities. The increase in
working capital items in the first three quarters of 2011 exceeded the increase in the first three
quarters of 2010 by $15.9 million, principally due to increased inventory. Cash from the change in
other assets and liabilities decreased by $13.1 million compared to the first three quarters of
2010 resulting from lower cash generated from reductions in prepaid assets and accruals for
compensation and professional services.
Net inventories at October 1, 2011 were $107.1 million, an increase of $18.8 million compared to
the $88.3 million of inventory at December 31, 2010. Third quarter 2011 inventory turns equaled
2.9 turns compared to the third quarter 2010 inventory turns of 3.6 turns. The Company selectively
increased inventory during the third quarter 2011 to support sales initiatives.
Based on both our long-term confidence in the wind energy market and our ongoing strategic
relationships with wind energy customers, we have made significant investments in support of this
initiative. We closely monitor our accounts receivable from wind energy customers and are
reasonably assured that our accounts receivable are fully collectible. Additionally, we believe
that our inventory at October 1, 2011 is fully realizable.
At October 1, 2011, we had approximately $8.3 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
18
Table of Contents
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 third quarter of 2010, a notice of binding 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 calls for completion of the binding arbitration hearings
in the fourth quarter of 2011, followed by a final decision of the arbitration panel, 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.
During the third quarter of 2011 we paid cash dividends of $6.1 million compared to $6.0 million in
the third quarter of 2010, reflecting an increased dividend rate of $0.19 per common share paid in
the third quarter of 2011 compared to $0.18 per common share paid in the third quarter of 2010.
Dividends for the first three quarters of 2011 totaled $18.7 million compared to $18.1 million for
the first three quarters of 2010. Share repurchases in the third quarter of 2011 totaled 205,000
shares for $6.6 million. There were no share repurchases in the third quarter of 2010. Share
repurchases during the first three quarters of 2011 totaled 947,091 shares for $34.7 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, we believe that our available cash and borrowing capacity will be
sufficient to support our growth objectives, including strategic acquisitions.
We have 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 our
subsidiaries for working capital and other general corporate purposes, including acquisitions. The
credit agreement requires us to comply with maximum leverage and minimum interest coverage
ratios. We were in compliance with all restrictive covenants contained in the credit agreement at
October 1, 2011. Taking into account $4.5 million of letters of credit issued under the credit
agreement, we had available credit under the credit agreement of $245.5 million at October 1, 2011.
Outlook
Our performance during the first three quarters of 2011, while impacted by an anticipated
moderation in our wind energy and military businesses, reflects the benefits of market leadership
in sound industrial end markets together with the impact of aggressive management of costs and
spending. Our manufacturing consolidation program is an example of our ongoing efforts to improve
efficiencies in our cost structure.
Sales increased in the third quarter of 2011 compared to the 2010 third quarter as strength in our
industrial businesses, including the contribution of Hahn, more than offset the more challenged
renewable energy business. Improvement for the remainder of 2011 and into 2012 will continue to be
dependent on the renewed strengthening of general economic and industrial conditions.
We continue to see strength in most of our industrial end markets, notably industrial machinery and
heavy equipment. In addition, we are extremely pleased with the performance of Hahn, which was
acquired in April 2011, and expect considerable further opportunity as it is fully integrated into
our Velocity Control Products segment.
Our market leadership positions, robust cash from operating activities, and strong balance sheet
position us well for the future.
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.
19
Table of Contents
We continually evaluate the estimates, judgments, and assumptions used to prepare the consolidated
financial statements. In general, these estimates are based on historical experience, on
information from third party professionals and on 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. Our critical accounting policies and estimates are discussed in Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations of our
Annual Report on Form 10-K for the year ended December 31, 2010. There have been no material
changes to the critical accounting policies disclosed in that report.
Forward-Looking Statements
This Form 10-Q 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, 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
our 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, we or persons acting on our 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.
20
Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to certain market risks, which exist as part of the Companys ongoing
business operations including interest rates and foreign currency exchange rates. The exposure to
market risk for changes in interest rates relates primarily to investments in cash and cash
equivalents. 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. The Company places its investments in cash equivalents with high credit quality
issuers and limits the amount of exposure to any one issuer. A 10 percent decrease in the weighted
average interest rates earned by the Company would not have a material impact on the Companys
pre-tax earnings. The Company conducts business in various foreign currencies, primarily in
Europe, Mexico, and Asia. Therefore, changes in the value of currencies of countries in these
regions affect the Companys financial position and cash flows when translated into U.S. dollars.
The Company has mitigated and will continue to mitigate a portion of the Companys currency
exposure through operation of decentralized foreign operating companies in which many costs are
local currency based. In addition, the Company periodically enters 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 the Companys financial position and cash flows.
ITEM 4. 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 principal
executive and principal financial officers, of the effectiveness of the Companys disclosure
controls and procedures. Based upon that evaluation, the Companys principal executive and
principal financial officers 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 principal executive and principal financial officers, 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.
21
Table of Contents
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides the information with respect to purchases made by the Company of
shares of its common stock during each fiscal month in the third quarter of 2011:
Total Number of | Maximum Number | |||||||||||||||
Total Number | Average Price | Shares Purchased as | of Shares that May | |||||||||||||
Of Shares | Paid | Part of Publicly | Yet be Purchased | |||||||||||||
Period | Purchased | Per Share | Announced Plan | Under the Plan (1) | ||||||||||||
July 3 to July 30 |
0 | 0 | 0 | 1,545,338 | ||||||||||||
July 31 to August 27 |
120,000 | $ | 31.89 | 120,000 | 1,425,338 | |||||||||||
August 28 to October 1 |
85,000 | $ | 32.27 | 85,000 | 1,340,338 | |||||||||||
Total |
205,000 | $ | 32.05 | 205,000 | 1,340,338 | |||||||||||
(1) | On May 6, 2005, the Companys Board of Directors authorized management to purchase up to 5,000,000 shares of its common stock in the open market. |
ITEM
6. EXHIBITS.
Exhibit No. | Description | |
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 | |
101
|
Interactive Data File |
22
Table of Contents
SIGNATURES
Pursuant to the requirements 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 |
||||
October 28, 2011 | /s/ Peter C. DeChants | |||
Peter C. DeChants | ||||
Senior Vice President, Chief Financial Officer | ||||
October 28, 2011 | /s/ Laura M. Kowalchik | |||
Laura M. Kowalchik | ||||
Vice President, Chief Accounting Officer | ||||
23