Attached files
file | filename |
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EX-32 - EX-32 - KAYDON CORP | k48492exv32.htm |
EX-31.1 - EX-31.1 - KAYDON CORP | k48492exv31w1.htm |
EX-31.2 - EX-31.2 - KAYDON CORP | k48492exv31w2.htm |
EX-10.1 - EX-10.1 - KAYDON CORP | k48492exv10w1.htm |
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 3, 2009
Commission File No. 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 E. Eisenhower Parkway, Ann Arbor, Michigan (Address of principal executive offices) |
48108 (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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer or a smaller company. See the definition 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 company o |
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
Common Stock Outstanding at October 30, 2009 33,226,077 shares, $.10 par value.
KAYDON CORPORATION FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 2009
INDEX
Table of Contents
ITEM 1. FINANCIAL STATEMENTS.
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited) | ||||||||
October 3, 2009 | December 31, 2008 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 247,841,000 | $ | 232,998,000 | ||||
Accounts receivable, net |
75,907,000 | 78,918,000 | ||||||
Inventories, net |
95,070,000 | 97,748,000 | ||||||
Other current assets |
15,256,000 | 18,395,000 | ||||||
Total current assets |
434,074,000 | 428,059,000 | ||||||
Property, plant and equipment, net |
178,101,000 | 185,642,000 | ||||||
Goodwill, net |
143,868,000 | 142,424,000 | ||||||
Other intangible assets, net |
22,584,000 | 25,746,000 | ||||||
Other assets |
1,602,000 | 7,911,000 | ||||||
Total assets |
$ | 780,229,000 | $ | 789,782,000 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 21,380,000 | $ | 35,080,000 | ||||
Salaries and wages |
5,990,000 | 8,302,000 | ||||||
Taxes payable |
6,657,000 | 2,843,000 | ||||||
Other accrued expenses |
17,865,000 | 16,537,000 | ||||||
Total current liabilities |
51,892,000 | 62,762,000 | ||||||
Long-term postretirement and
postemployment benefit obligations |
35,565,000 | 53,478,000 | ||||||
Other long-term liabilities |
4,299,000 | 912,000 | ||||||
Total long-term liabilities |
39,864,000 | 54,390,000 | ||||||
Shareholders Equity: |
||||||||
Common stock |
3,693,000 | 3,693,000 | ||||||
Other shareholders equity |
684,780,000 | 668,937,000 | ||||||
Total shareholders equity |
688,473,000 | 672,630,000 | ||||||
Total liabilities and shareholders equity |
$ | 780,229,000 | $ | 789,782,000 | ||||
See accompanying notes to consolidated condensed financial statements.
1
Table of Contents
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
As Adjusted | As Adjusted | |||||||||||||||
(Note 1) | (Note 1) | |||||||||||||||
October 3, 2009 | September 27, 2008 | October 3, 2009 | September 27, 2008 | |||||||||||||
Net sales |
$ | 123,637,000 | $ | 126,803,000 | $ | 332,290,000 | $ | 389,992,000 | ||||||||
Cost of sales |
85,590,000 | 82,270,000 | 226,113,000 | 243,969,000 | ||||||||||||
Gross profit |
38,047,000 | 44,533,000 | 106,177,000 | 146,023,000 | ||||||||||||
Selling, general and
administrative expenses |
13,418,000 | 19,754,000 | 52,800,000 | 62,942,000 | ||||||||||||
Operating income |
24,629,000 | 24,779,000 | 53,377,000 | 83,081,000 | ||||||||||||
Interest expense |
(62,000 | ) | (1,393,000 | ) | (185,000 | ) | (9,302,000 | ) | ||||||||
Interest income |
190,000 | 1,520,000 | 429,000 | 5,198,000 | ||||||||||||
Income before income taxes |
24,757,000 | 24,906,000 | 53,621,000 | 78,977,000 | ||||||||||||
Provision for income taxes |
8,690,000 | 8,571,000 | 19,071,000 | 27,691,000 | ||||||||||||
Net income |
$ | 16,067,000 | $ | 16,335,000 | $ | 34,550,000 | $ | 51,286,000 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.48 | $ | 0.54 | $ | 1.03 | $ | 1.80 | ||||||||
Diluted |
$ | 0.48 | $ | 0.50 | $ | 1.03 | $ | 1.65 | ||||||||
Dividends declared per share |
$ | 0.18 | $ | 0.17 | $ | 0.52 | $ | 0.47 | ||||||||
See accompanying notes to consolidated condensed financial statements.
2
Table of Contents
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
First Three Quarters Ended | ||||||||
October 3, 2009 | September 27, 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 34,550,000 | $ | 51,286,000 | ||||
Adjustments to reconcile net income to net cash from
operating activities: |
||||||||
Depreciation |
14,635,000 | 11,844,000 | ||||||
Amortization of intangible assets |
3,211,000 | 4,097,000 | ||||||
Amortization of stock awards |
3,104,000 | 3,353,000 | ||||||
Stock option compensation expense |
981,000 | 901,000 | ||||||
Excess tax benefits from stock-based compensation |
61,000 | (179,000 | ) | |||||
Deferred financing fees |
186,000 | 728,000 | ||||||
Net change in receivables, inventories and trade payables |
(6,744,000 | ) | (30,261,000 | ) | ||||
Contributions to qualified pension plans |
(14,846,000 | ) | | |||||
Net change in other assets and liabilities |
8,989,000 | 7,929,000 | ||||||
Net cash from operating activities |
44,127,000 | 49,698,000 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(9,585,000 | ) | (45,949,000 | ) | ||||
Dispositions of property, plant, and equipment |
1,186,000 | 99,000 | ||||||
Proceeds from sales of investments |
4,063,000 | 63,408,000 | ||||||
Acquisition of business, net of cash received |
| 489,000 | ||||||
Net cash from (used in) investing activities |
(4,336,000 | ) | 18,047,000 | |||||
Cash flows from financing activities: |
||||||||
Cash dividends paid |
(17,164,000 | ) | (12,485,000 | ) | ||||
Purchase of treasury stock |
(8,871,000 | ) | (21,837,000 | ) | ||||
Excess tax benefits from stock-based compensation |
(61,000 | ) | 179,000 | |||||
Proceeds from exercise of stock options |
24,000 | 242,000 | ||||||
Cash used in financing activities |
(26,072,000 | ) | (33,901,000 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
1,124,000 | (1,106,000 | ) | |||||
Net increase in cash and cash equivalents |
14,843,000 | 32,738,000 | ||||||
Cash and cash equivalents Beginning of period |
232,998,000 | 229,993,000 | ||||||
Cash and cash equivalents End of period |
$ | 247,841,000 | $ | 262,731,000 | ||||
Cash paid for income taxes |
$ | 8,296,000 | $ | 23,511,000 | ||||
Cash paid for interest |
| $ | 4,000,000 | |||||
See accompanying notes to consolidated condensed financial statements.
3
Table of Contents
KAYDON CORPORATION
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, 2008
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, 2008. Certain items in the
prior year financial statements have been reclassified to conform to the presentation used in 2009.
On July 1, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC). The ASC is the single official source of nongovernmental generally
accepted accounting principles. The adoption of the ASC did not have any impact on the financial
statements of the Company. On January 1, 2009, the Company adopted, as required, new FASB guidance
related to the Companys previously outstanding 4% Contingent Convertible Senior Subordinated Notes
which required the Company to separately account for the liability and equity components of that
debt instrument in a manner that reflected the nonconvertible borrowing rate. This resulted in the
bifurcation of a component of the debt, classification of that component in equity, and the
accretion of the resulting discount as part of interest expense. The effective interest rate on
the liability component was determined to be 8.5 percent. The adoption of this guidance resulted
in an increase in interest expense of $3.1 million, a decrease in provision for income taxes of
$1.1 million, a decrease in net income of $2.0 million, and a decrease in basic earnings per share
of $0.07 for the first three quarters ended September 27, 2008. These adjustments were non-cash and
had no effect on diluted earnings per share.
Also on January 1, 2009, the Company adopted, as required, new FASB guidance related to certain of
the Companys equity incentive awards. The application of this guidance to these awards, which
participate in dividends, changed the calculation of basic earnings per share and diluted earnings
per share under the two-class method of calculating earnings per share. The adoption of this
guidance resulted in a $0.01 decrease in basic earnings per share and had no effect on diluted
earnings per share for the third quarter ended September 27, 2008 and in a $0.03 decrease in basic
earnings per share and a $0.02 decrease in diluted earnings per share for the first three quarters
ended September 27, 2008. The two accounting changes discussed above were applied retrospectively
to all periods presented as required.
(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 3, 2009 | December 31, 2008 | |||||||
Cash and cash equivalents: |
||||||||
Money market and other short-term funds |
$ | 241,333,000 | $ | 221,604,000 | ||||
Time deposits, other interest bearing accounts, and other cash |
6,508,000 | 11,394,000 | ||||||
Cash and cash equivalents |
$ | 247,841,000 | $ | 232,998,000 | ||||
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Table of Contents
(3) Inventories:
October 3, 2009 | December 31, 2008 | |||||||
Raw material |
$ | 36,670,000 | $ | 41,158,000 | ||||
Work in process |
24,765,000 | 24,852,000 | ||||||
Finished goods |
33,635,000 | 31,738,000 | ||||||
$ | 95,070,000 | $ | 97,748,000 | |||||
(4) Comprehensive Income:
Comprehensive income reflects the change in equity of a business enterprise during a period from
transactions and other events, and from circumstances involving non-owner sources. For the Company,
comprehensive income consists of net income and other comprehensive income which is comprised
primarily of foreign currency translation adjustments. Other comprehensive income (loss), net of
tax, was approximately $0.1 million and $(6.5) million, for the quarters ended October 3, 2009 and
September 27, 2008, respectively, resulting in comprehensive income of $16.2 million and $9.8
million for the quarters ended October 3, 2009 and September 27, 2008, respectively. Other
comprehensive income (loss), net of tax, was approximately $3.5 million and $(7.0) million, for the
first three quarters ended October 3, 2009 and September 27, 2008, respectively, resulting in
comprehensive income of $38.0 million and $44.3 million for the first three quarters ended October
3, 2009 and September 27, 2008, respectively.
(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 | ||||||||
As adjusted | ||||||||
(Note 1) | ||||||||
October 3, 2009 | September 27, 2008 | |||||||
Earnings per share Basic |
||||||||
Net income |
$ | 16,067,000 | $ | 16,335,000 | ||||
Less: Net earnings allocated to participating securities Basic |
(174,000 | ) | (218,000 | ) | ||||
Income available to common shareholders Basic |
$ | 15,893,000 | $ | 16,117,000 | ||||
Weighted average common shares outstanding Basic |
33,226,000 | 29,679,000 | ||||||
Earnings per share Basic |
$ | 0.48 | $ | 0.54 | ||||
Earnings per share Diluted |
||||||||
Net income |
$ | 16,067,000 | $ | 16,335,000 | ||||
Less: Net earnings allocated to participating securities Diluted |
(174,000 | ) | (210,000 | ) | ||||
Plus: Interest and debt issuance costs amortization related to
Contingent Convertible Notes, net of tax |
| 852,000 | ||||||
Income available to common shareholders Diluted |
$ | 15,893,000 | $ | 16,977,000 | ||||
Weighted average common shares outstanding Diluted |
||||||||
Weighted average common shares outstanding Basic |
33,226,000 | 29,679,000 | ||||||
Potential dilutive shares resulting from stock options |
19,000 | 57,000 | ||||||
Dilutive shares resulting from Contingent Convertible Notes |
| 4,255,000 | ||||||
Weighted average common shares outstanding Diluted |
33,245,000 | 33,991,000 | ||||||
Earnings per share Diluted |
$ | 0.48 | $ | 0.50 | ||||
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Table of Contents
First Three Quarters Ended | ||||||||
As adjusted | ||||||||
(Note 1) | ||||||||
October 3, 2009 | September 27, 2008 | |||||||
Earnings per share Basic |
||||||||
Net income |
$ | 34,550,000 | $ | 51,286,000 | ||||
Less: Net earnings allocated to participating securities Basic |
(395,000 | ) | (767,000 | ) | ||||
Income available to common shareholders Basic |
$ | 34,155,000 | $ | 50,519,000 | ||||
Weighted average common shares outstanding Basic |
33,258,000 | 28,118,000 | ||||||
Earnings per share Basic |
$ | 1.03 | $ | 1.80 | ||||
Earnings per share Diluted |
||||||||
Net income |
$ | 34,550,000 | $ | 51,286,000 | ||||
Less: Net earnings allocated to participating securities Diluted |
(395,000 | ) | (742,000 | ) | ||||
Plus: Interest and debt issuance costs amortization related to
Contingent Convertible Notes, net of tax |
| 5,833,000 | ||||||
Income available to common shareholders Diluted |
$ | 34,155,000 | $ | 56,377,000 | ||||
Weighted average common shares outstanding Diluted |
||||||||
Weighted average common shares outstanding Basic |
33,258,000 | 28,118,000 | ||||||
Potential dilutive shares resulting from stock options |
15,000 | 46,000 | ||||||
Dilutive shares resulting from Contingent Convertible Notes |
| 5,979,000 | ||||||
Weighted average common shares outstanding Diluted |
33,273,000 | 34,143,000 | ||||||
Earnings per share Diluted |
$ | 1.03 | $ | 1.65 | ||||
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. In the third quarter of 2009, options to purchase
385,500 shares at an average price of $43.87 per share were excluded. In the first three quarters
of 2009, options to purchase 406,500 shares at an average price of $43.29 per share were excluded.
In both the third quarter of 2008 and the first three quarters of 2008, options to purchase 36,000
shares at an average price of $52.76 per share were excluded. During the third quarter of 2008,
all of the Companys outstanding 4% Contingent Convertible Senior Subordinated Notes (the Notes)
were converted into Company common stock and were not outstanding at any time during the first
three quarters of 2009.
As more fully described in Note 1, on January 1, 2009 the Company adopted new FASB guidance related
to the Companys former Notes and new FASB guidance related to certain of the Companys equity
incentive awards which participate in dividends prior to vesting. The retrospective application
of the guidance related to convertible debt had no effect on the third quarter of 2008, but
resulted in a decrease in basic earnings per share of $0.07 for the first three quarters of 2008,
due to a decrease in net income associated with the higher interest expense, net of tax, recorded
on adoption. The higher interest expense is added back to net income for diluted earnings per
share calculations and, therefore, the adoption did not have an effect on previously reported
diluted earnings per share. The retrospective application of the guidance related to certain of
the Companys equity incentive awards which participate in dividends prior to vesting required the
Company to use the two-class method to calculate earnings per share. This resulted in a $0.01
decrease in basic earnings per share and no effect in diluted earnings per share for the third
quarter of 2008, and in a $0.03 decrease in basic earnings per share and a $0.02 decrease in
diluted earnings per share for the first three quarters ended September 27, 2008.
6
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(6) Business Segment Information:
The Company has three reporting segments: Friction Control Products, Velocity Control Products,
and Sealing Products. The Companys remaining operating segments which do not meet the
quantitative thresholds for separate disclosure are combined and disclosed as Other businesses.
Sales between reporting segments are not material. Items not allocated to segment operating income
include certain amortization, corporate administrative expenses and curtailment gains related to
changes made to certain postretirement benefit plans of $5.4 million and $6.3 million for the third
quarter and first three quarters ended October 3, 2009, respectively.
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
October 3, 2009 | September 27, 2008 | October 3, 2009 | September 27, 2008 | |||||||||||||
Net sales |
||||||||||||||||
Friction Control Products |
$ | 87,076,000 | $ | 79,255,000 | $ | 223,491,000 | $ | 240,159,000 | ||||||||
Velocity Control Products |
12,202,000 | 17,114,000 | 34,602,000 | 55,832,000 | ||||||||||||
Sealing Products |
8,835,000 | 10,782,000 | 28,998,000 | 34,007,000 | ||||||||||||
Other businesses |
15,524,000 | 19,652,000 | 45,199,000 | 59,994,000 | ||||||||||||
Total consolidated net sales |
$ | 123,637,000 | $ | 126,803,000 | $ | 332,290,000 | $ | 389,992,000 | ||||||||
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
October 3, 2009 | September 27, 2008 | October 3, 2009 | September 27, 2008 | |||||||||||||
Operating income |
||||||||||||||||
Friction Control Products |
$ | 15,392,000 | $ | 16,431,000 | $ | 37,633,000 | $ | 56,130,000 | ||||||||
Velocity Control Products |
2,124,000 | 4,516,000 | 5,191,000 | 16,197,000 | ||||||||||||
Sealing Products |
845,000 | 990,000 | 2,209,000 | 4,031,000 | ||||||||||||
Other businesses |
1,383,000 | 1,849,000 | 3,258,000 | 7,309,000 | ||||||||||||
Total segment operating
income |
19,744,000 | 23,786,000 | 48,291,000 | 83,667,000 | ||||||||||||
Items not allocated to segment
operating income |
4,885,000 | 993,000 | 5,086,000 | (586,000 | ) | |||||||||||
Interest expense |
(62,000 | ) | (1,393,000 | ) | (185,000 | ) | (9,302,000 | ) | ||||||||
Interest income |
190,000 | 1,520,000 | 429,000 | 5,198,000 | ||||||||||||
Income before income taxes |
$ | 24,757,000 | $ | 24,906,000 | $ | 53,621,000 | $ | 78,977,000 | ||||||||
(7) Goodwill and Other Intangible Assets:
Annually during the third quarter, or between annual tests if certain circumstances exist, the
Company tests the carrying amounts of goodwill and certain intangible assets, deemed to have
indefinite useful lives, for impairment.
During the third quarter of 2009, the Company completed its annual goodwill impairment test. Fair
values of reporting units were estimated using the expected present value of future cash flows.
The fair value of all reporting units exceeded their carrying value, which indicated no goodwill
impairment. The 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)
ranged from approximately 22 percent to 475 percent. Based on this analysis, the Company does not
believe that any of the eight reporting units with goodwill balances are at risk of failing the
Step 1 goodwill impairment test. Also during the third quarter of 2009, intangible assets deemed
to have indefinite useful lives were tested for impairment with no impairment loss being realized.
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The changes in the carrying amount of goodwill for the first three quarters ended October 3, 2009,
were as follows:
Friction Control |
Velocity Control |
Sealing | Other | |||||||||||||||||
Products | Products | Products | businesses | Total | ||||||||||||||||
Balance as of
January 1, 2009 |
$ | 55,392,000 | $ | 43,200,000 | $ | 186,000 | $ | 43,646,000 | $ | 142,424,000 | ||||||||||
Effect of foreign currency
exchange rate changes |
280,000 | | | | 280,000 | |||||||||||||||
Balance as of
April 4, 2009 |
$ | 55,672,000 | $ | 43,200,000 | $ | 186,000 | $ | 43,646,000 | $ | 142,704,000 | ||||||||||
Effect of foreign currency
exchange rate changes |
1,620,000 | | | | 1,620,000 | |||||||||||||||
Balance as of
July 4, 2009 |
$ | 57,292,000 | $ | 43,200,000 | $ | 186,000 | $ | 43,646,000 | $ | 144,324,000 | ||||||||||
Effect of foreign currency
exchange rate changes |
(456,000 | ) | | | | (456,000 | ) | |||||||||||||
Balance as of
October 3, 2009 |
$ | 56,836,000 | $ | 43,200,000 | $ | 186,000 | $ | 43,646,000 | $ | 143,868,000 | ||||||||||
Other intangible assets are summarized as follows:
October 3, 2009 | December 31, 2008 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amortized Intangible Assets | Amount | Amortization | Amount | Amortization | ||||||||||||
Customer relationships and lists |
$ | 28,194,000 | $ | 13,942,000 | $ | 28,194,000 | $ | 11,761,000 | ||||||||
Patents and developed technology |
6,476,000 | 3,380,000 | 6,427,000 | 3,004,000 | ||||||||||||
Backlog |
3,300,000 | 3,046,000 | 3,300,000 | 2,519,000 | ||||||||||||
Distributor agreements |
374,000 | 189,000 | 374,000 | 162,000 | ||||||||||||
Product names |
320,000 | 154,000 | 320,000 | 130,000 | ||||||||||||
Trademarks |
200,000 | 173,000 | 200,000 | 97,000 | ||||||||||||
$ | 38,864,000 | $ | 20,884,000 | $ | 38,815,000 | $ | 17,673,000 | |||||||||
The intangible assets are being amortized at accelerated rates or on a straight-line basis,
whichever is appropriate, over their respective useful lives. The weighted-average original useful
life for customer relationships and lists is 13.6 years, and for patents and developed technology
is 13.4 years. Backlog is being amortized over three years.
October 3, 2009 | December 31, 2008 | |||||||
Unamortized Intangible Assets | Carrying Amount | Carrying Amount | ||||||
Unamortized Intangible Assets | ||||||||
Trademarks |
$ | 4,604,000 | $ | 4,604,000 | ||||
Aggregate Intangible Assets Amortization Expense |
||||||||
For the first three quarters ended October 3, 2009 |
$ | 3,211,000 | ||||||
For the first three quarters ended September 27, 2008 |
$ | 4,097,000 | ||||||
Estimated Intangible Assets Amortization Expense |
||||||||
For the year ending December 31, 2009 |
$ | 4,317,000 | ||||||
For the year ending December 31, 2010 |
$ | 3,574,000 | ||||||
For the year ending December 31, 2011 |
$ | 2,263,000 | ||||||
For the year ending December 31, 2012 |
$ | 1,981,000 | ||||||
For the year ending December 31, 2013 |
$ | 1,713,000 |
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(8) Employee Benefit Plans:
The components of net periodic benefit cost (income) are as follows:
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
Pension Benefits | October 3, 2009 | September 27, 2008 | October 3, 2009 | September 27, 2008 | ||||||||||||
Service cost |
$ | 826,000 | $ | 647,000 | $ | 2,409,000 | $ | 2,154,000 | ||||||||
Interest cost |
1,743,000 | 1,355,000 | 5,167,000 | 4,781,000 | ||||||||||||
Expected return on plan assets |
(1,293,000 | ) | (1,637,000 | ) | (4,201,000 | ) | (5,849,000 | ) | ||||||||
Amortization of: |
||||||||||||||||
Unrecognized net prior
service cost |
38,000 | 6,000 | 44,000 | 20,000 | ||||||||||||
Unrecognized net loss |
1,257,000 | | 3,787,000 | 2,000 | ||||||||||||
Total |
$ | 2,571,000 | $ | 371,000 | $ | 7,206,000 | $ | 1,108,000 | ||||||||
Third Quarter Ended | First Three Quarters Ended | |||||||||||||||
Postretirement Benefits | October 3, 2009 | September 27, 2008 | October 3, 2009 | September 27, 2008 | ||||||||||||
Service cost |
$ | 23,000 | $ | 72,000 | $ | 224,000 | $ | 218,000 | ||||||||
Interest cost |
110,000 | 165,000 | 486,000 | 493,000 | ||||||||||||
Amortization of: |
||||||||||||||||
Unrecognized net prior
service cost |
(203,000 | ) | (429,000 | ) | (770,000 | ) | (1,288,000 | ) | ||||||||
Unrecognized net gain |
(157,000 | ) | (228,000 | ) | (414,000 | ) | (682,000 | ) | ||||||||
Curtailment gain |
(5,395,000 | ) | | (6,305,000 | ) | | ||||||||||
Total |
$ | (5,622,000 | ) | $ | (420,000 | ) | $ | (6,779,000 | ) | $ | (1,259,000 | ) | ||||
During the first three quarters of 2009, the Company contributed $14.8 million to its qualified
pension plans, which was $14.1 million in excess of the required contribution. The Company does not
expect to make additional contributions during the current fiscal year, and reviews its pension
plan funding strategy on an ongoing basis. The Company did not contribute to its qualified pension
plans in the first three quarters of 2008, but the Company contributed $11.9 million to its
qualified pension plans in the fourth quarter of 2008.
In the third quarter and first three quarters of 2009, the Company made changes to its
postretirement benefit plans which resulted in curtailment gains totaling $5.4 million and $6.3
million for the third quarter and first three quarters ended October 3, 2009, respectively. These
gains were recorded as reductions to selling, general and administrative expenses.
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(9) Stock-Based Compensation:
A summary of restricted stock award activity pursuant to the Companys equity incentive plans for
the first three quarters of 2009 is as follows:
First Three Quarters Ended | ||||||||
October 3, 2009 | ||||||||
Wtd.-Avg. | ||||||||
Restricted | Grant Date | |||||||
Stock | Fair Value | |||||||
Outstanding at January 1, 2009 |
391,580 | $ | 38.33 | |||||
Granted |
86,750 | $ | 25.43 | |||||
Vested |
(139,008 | ) | $ | 35.91 | ||||
Canceled |
(1,108 | ) | $ | 35.64 | ||||
Outstanding at April 4, 2009 |
338,214 | $ | 36.02 | |||||
Granted |
6,000 | $ | 32.69 | |||||
Canceled |
(511 | ) | $ | 33.17 | ||||
Outstanding at July 4, 2009 |
343,703 | $ | 35.97 | |||||
Granted |
5,000 | $ | 35.04 | |||||
Canceled |
(3,268 | ) | $ | 35.52 | ||||
Outstanding at October 3, 2009 |
345,435 | $ | 35.96 | |||||
Compensation expense related to restricted stock awards was $1.0 million and $3.1 million in the
third quarter and first three quarters of 2009, respectively. Compensation expense related to
restricted stock awards was $1.1 million and $3.4 million in third quarter and first three quarters
of 2008, respectively.
A summary of stock option activity for the first three quarters of 2009 is as follows:
First Three Quarters Ended | ||||||||
October 3, 2009 | ||||||||
Wtd.-Avg. | ||||||||
Options | Ex. Price | |||||||
Outstanding at January 1, 2009 |
443,750 | $ | 41.87 | |||||
Granted |
99,500 | $ | 25.43 | |||||
Outstanding at April 4, 2009 |
543,250 | $ | 38.86 | |||||
Granted |
21,000 | $ | 32.69 | |||||
Canceled |
(13,500 | ) | $ | 38.24 | ||||
Outstanding at July 4, 2009 |
550,750 | $ | 38.64 | |||||
Exercised |
(1,000 | ) | $ | 24.25 | ||||
Outstanding at October 3, 2009 |
549,750 | $ | 38.67 | |||||
Exercisable at October 3, 2009 |
186,000 | $ | 41.31 | |||||
Weighted-Avg. Remaining Contractual Life (years) |
||||||||
Outstanding at October 3, 2009 |
7.8 | |||||||
Exercisable at October 3, 2009 |
7.1 |
The exercise price of each fixed stock option equals the closing market price of Company common
stock on the date of grant. Options granted become exercisable at the rate of 10.0 percent, 20.0
percent, or 100.0 percent per year, commencing one year after the date of grant, and options expire
ten years after the date of grant. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. Compensation expense related to fixed stock
options was $0.3 million and $1.0 million in the third quarter and first three quarters of 2009,
respectively. Compensation expense related to fixed stock options was $0.3 million and $0.9
million in the third quarter and first three quarters of 2008, respectively. The aggregate
intrinsic value of options outstanding at October 3, 2009 was $0.8 million. There were no fixed
stock options awarded in the third quarter of 2009.
(10) Fair Value Measurement:
The FASB guidance on fair value measurements includes a fair value hierarchy that is intended to
increase consistency and comparability in fair value measurements and related disclosures. The fair
value hierarchy is based
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on inputs to valuation techniques that are used to measure fair value that are either
observable or unobservable. Observable inputs reflect assumptions market participants would use in
pricing an asset or liability based on market data obtained from independent sources while
unobservable inputs reflect a reporting entitys pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
Level 1 | Inputs are quoted prices in active markets for identical assets or liabilities. | ||
Level 2 | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. | ||
Level 3 | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
The following table represents our financial assets and liabilities measured at fair value on a
recurring basis as of October 3, 2009 and the basis for that measurement:
Fair Value Measurement at October 3, 2009 Using: | ||||||||||||||||
Total | Quoted Prices in | Significant | ||||||||||||||
Fair Value | Active Markets | Other | Significant | |||||||||||||
Measurement at | for Identical | Observable | Unobservable | |||||||||||||
October 3, 2009 | Assets (Level 1) | Inputs (Level 2) | Inputs (Level 3) | |||||||||||||
Long-term investment |
$ | 1,101,000 | | | $ | 1,101,000 |
The following table provides a reconciliation of our long-term investment measured at fair value on
a recurring basis, which uses level 3 or significant unobservable inputs for the first three
quarters of 2009:
Fair Value Measurements | ||||
Using Significant | ||||
Unobservable Inputs | ||||
(Level 3) | ||||
Balance at January 1, 2009 |
$ | 4,940,000 | ||
Redemptions cash received |
(1,416,000 | ) | ||
Gain on investment redemptions above book value included in interest income |
2,000 | |||
Unrealized gain on investment recorded to accumulated other comprehensive
income |
28,000 | |||
Balance at April 4, 2009 |
$ | 3,554,000 | ||
Redemptions cash received |
(477,000 | ) | ||
Gain on investment redemptions above book value included in interest income |
19,000 | |||
Unrealized gain on investment recorded to accumulated other comprehensive
income |
148,000 | |||
Balance at July 4, 2009 |
$ | 3,244,000 | ||
Redemptions cash received |
(2,170,000 | ) | ||
Gain on investment redemptions above book value included in interest income |
133,000 | |||
Change in unrealized gain on investment recorded to accumulated other
comprehensive income |
(106,000 | ) | ||
Balance at October 3, 2009 |
$ | 1,101,000 | ||
The long-term investment included in the level 3 hierarchy is the Companys position in an
investment fund which is being liquidated by the fund issuer as the underlying fund assets mature
or are sold. The Company owns a share of this fund which has no quoted market price. There are no
similar funds with quoted market prices. The fund issuer provides a daily net asset value (NAV)
for the fund. The Company primarily determined the fair value of its investment in this fund using
the NAV provided by the fund issuer as of October 3, 2009. The NAV and the underlying fund assets
had one or more significant inputs or value drivers that were unobservable to the Company, both in
the calculation methodology and because certain of the underlying fund assets did not have quoted
market prices. The ultimate timing of the liquidation of the investment and liquidation value of
the investment will depend on market factors outside the control of the Company.
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(11) Other Matters:
The Company has $8.6 million of working capital invested on behalf of an international wind energy
customer, including past due accounts receivable, inventory and purchase commitments made or
incurred on this customers behalf and designed to its specifications. The Company is pursuing
payment of these amounts and the potential for further supply. Under the documents which comprise
the sales contract, the customer is obligated to pay the outstanding amounts and to reimburse
Kaydon for inventory costs incurred and lost profits. While the Company is working towards
resolving this issue and hopes to supply to the customer prospectively, Kaydon has retained outside
legal counsel to advise the Company in resolving this matter. Based on the documents which
comprise the sales contract and the customers financial ability to pay, the Company has concluded
that the receivables are probable of full collection and the inventory and purchase commitments are
fully recoverable. Therefore, while there is uncertainty that the customer will comply with its
contractual commitments, no accrual or reserve for these exposures is justifiable at this time and
none has been established as of October 3, 2009.
(12)
Impact of Recently Issued Accounting Pronouncements:
On January 1, 2009 the Company adopted new accounting guidance on business combinations and
noncontrolling interests. The adoptions had no effect on the Company as no business combinations
were consummated in the first three quarters of 2009 and the Company has no noncontrolling
interests.
As more fully described in Notes 1 and 5, on January 1, 2009 the Company adopted guidance related
to the calculation of earnings per share under the two-class method related to certain of the
Companys equity incentive awards.
In the second quarter 2009, the Company adopted new accounting guidance related to the reporting of
subsequent events. This guidance establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this guidance sets forth the period after the balance sheet
date during which management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; the circumstances under
which an entity should recognize events or transactions occurring after the balance sheet date in
its financial statements; and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The Company evaluated events occurring
subsequent to the balance sheet date through November 3, 2009.
On July 1, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC). The ASC, is the single official source of nongovernmental
generally accepted accounting principles. The adoption of the ASC did not have any impact on the
financial statements of the Company.
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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, 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. The global recessionary conditions that impacted the economy
during the second half of 2008 continued during the first three quarters of 2009, reducing demand
for our products and resulting in year-to-date sales volume declines in each of our businesses.
The adverse macroeconomic conditions have resulted in customers continuing to act with caution,
resulting in a decline in orders and requests for deferred delivery.
While worldwide business conditions remain very challenging, there has been anecdotal evidence that
economic conditions are stabilizing, albeit at cyclically low levels. We believe these challenging
economic conditions will likely continue through the remainder of 2009, which will continue to
negatively impact end-user spending and our customers demand for our products. Because of our
diverse product offerings and served markets, as well as the general uncertainty as to the timing
and nature of any economic recovery, the specific impact of these economic conditions on our
operating results is difficult to predict.
With respect to the wind energy market, while the third quarter 2009 reflected sequential and
year-over-year quarterly growth, it is important to note that the longer term outlook will be
heavily influenced by government policy. Recent actions and policy statements regarding a
sustained, committed policy towards increasing renewable energy usage in the United States supports
the confidence we have in our investment in this market.
At October 3, 2009, our current ratio was 8.4 to 1 and working capital totaled $382.2 million. We
believe that our current cash and cash equivalent balance of $247.8 million at October 3, 2009, and
future cash flows from operations, along with our borrowing capacity are adequate to fund our
strategies for future growth, including working capital, expenditures for capital expansion and
efficiencies, selected stock repurchases, market share initiatives and corporate development
efforts.
In summary, our future performance will be impacted by general economic conditions, 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 2008
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, our
financial position, cash flows, capital structure and other relevant financial information.
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Results of Operations
The discussion that follows describes the significant factors contributing to the changes in our
results of operations for the periods presented.
Third Quarter Results
For the third quarter ended | ||||||||||||||||
October 3, | % of | September 27, | % of | |||||||||||||
Dollars in millions, except per share amounts | 2009 | Sales | 2008 | Sales | ||||||||||||
Net sales |
$ | 123.6 | $ | 126.8 | ||||||||||||
Cost of sales |
85.6 | 82.3 | ||||||||||||||
Gross profit |
38.0 | 30.8 | % | 44.5 | 35.1 | % | ||||||||||
Selling, general and administrative expenses |
13.4 | 10.9 | % | 19.7 | 15.6 | % | ||||||||||
Operating income |
24.6 | 19.9 | % | 24.8 | 19.5 | % | ||||||||||
Interest, net |
0.2 | 0.1 | ||||||||||||||
Income before income taxes |
24.8 | 24.9 | ||||||||||||||
Provision for income taxes |
8.7 | 8.6 | ||||||||||||||
Net income |
$ | 16.1 | $ | 16.3 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.48 | $ | 0.54 | ||||||||||||
Diluted |
$ | 0.48 | $ | 0.50 | ||||||||||||
Net sales for the third quarter of 2009 decreased $3.2 million, or 2.5 percent, compared to the
third quarter of 2008. During the third quarter of 2009, price declines aggregating $2.8 million
and the effects of adverse currency exchange rate changes of $1.5 million more than offset
increased sales attributable to increased volumes of $1.2 million. Price declines were primarily
attributable to contractual adjustments associated with the pass-through of lower material costs.
The effects of unfavorable currency exchange rate changes were principally attributable to a
stronger U.S. dollar relative to the Euro and British pound. Sales growth attributable to
increased volumes was $1.2 million as a $22.6 million volume increase to wind energy customers
offset $21.4 million in volume decreases across the rest of our end markets, especially industrial
markets, as a result of the global economic slowdown. Wind energy sales in the third quarter of
2009 were $41.0 million, an increase of $19.4 million or 90 percent, compared to the third quarter
of 2008, as the improved volume significantly exceeded the impact of the aforementioned contractual
pricing adjustments.
Gross margin in the third quarter of 2009 was 30.8 percent, a decrease of 4.3 points from the 35.1
percent gross margin in the third quarter of 2008. Unfavorable changes in product mix accounted
for 1.7 points of the decline as the volume increase to wind energy customers was largely offset by
volume decreases to industrial markets, which command higher margins. Pricing had an insignificant
impact on gross margin as price reductions were largely offset by material cost reductions. The
remaining 2.6 points of the gross margin difference is attributable to higher unabsorbed fixed
costs associated with lower production volumes, as inventory increased in the third quarter of 2008
and decreased in the third quarter of 2009, partially offset by net cost reductions.
Selling, general and administrative expenses were $13.4 million, or 10.9 percent of sales, in the
third quarter of 2009, compared to $19.7 million, or 15.6 percent of sales, in the third quarter of
2008. During the third quarter of 2009, we recorded curtailment gains totaling $5.4 million that
were associated with changes to certain postretirement benefit plans. The remaining decrease is
primarily attributable to the preemptive and continuing steps we have taken to reduce discretionary
costs.
Our operating income was $24.6 million in the third quarter of 2009 compared to $24.8 million in
the third quarter of 2008, as the decrease in gross profit more than offset the decline in selling,
general and administrative expenses.
During the third quarter of 2009, interest income totaled $0.2 million on average investment
balances of $223.0 million. This compares to $1.5 million of interest income in last years third
quarter when we earned approximately 2.2 percent on average investment balances of $269.2 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
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significantly lower interest earned in the third quarter of 2009 reflects prevailing
historically low interest rates on short term treasury securities.
The effective tax rate for the third quarter of 2009 was 35.1 percent, slightly higher than the
34.4 percent effective tax rate for the third quarter of 2008. The third quarter 2009 effective
tax rate was unfavorably impacted by a decrease in foreign earnings which are subject to lower tax
rates than the U.S. statutory rate of 35.0 percent. The full year 2009 effective tax rate is
expected to be approximately 35.4 percent.
Net income for the third quarter of 2009 was $16.1 million or $0.48 per share on a diluted basis
compared to net income for the third quarter of 2008 of $16.3 million, or $0.50 per share on a
diluted basis. Third quarter 2008 results have been adjusted to reflect the required retrospective
application of new accounting guidance related to earnings per share which was effective January 1,
2009. This required adjustment reduced previously reported third quarter 2008 basic earnings per
share by $0.01 and had no effect on diluted earnings per share.
First Three Quarters Results
For the first three quarters ended | ||||||||||||||||
October 3, | % of | September 27, | % of | |||||||||||||
Dollars in millions, except per share amounts | 2009 | Sales | 2008 | Sales | ||||||||||||
Net sales |
$ | 332.3 | $ | 390.0 | ||||||||||||
Cost of sales |
226.1 | 244.0 | ||||||||||||||
Gross profit |
106.2 | 32.0 | % | 146.0 | 37.4 | % | ||||||||||
Selling, general and administrative expenses |
52.8 | 15.9 | % | 62.9 | 16.1 | % | ||||||||||
Operating income |
53.4 | 16.1 | % | 83.1 | 21.3 | % | ||||||||||
Interest, net |
0.2 | (4.1 | ) | |||||||||||||
Income before income taxes |
53.6 | 79.0 | ||||||||||||||
Provision for income taxes |
19.0 | 27.7 | ||||||||||||||
Net income |
$ | 34.6 | $ | 51.3 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 1.03 | $ | 1.80 | ||||||||||||
Diluted |
$ | 1.03 | $ | 1.65 | ||||||||||||
Net sales for the first three quarters of 2009 equaled $332.3 million, a decrease of 14.8 percent,
compared with the same period of 2008. Sales declines for the first three quarters of 2009
attributable to reduced volumes totaled $51.1 million, or 13.1 percent, compared to the first three
quarters of 2008 as $75.7 million in volume decreases across our non-wind end markets, principally
industrial markets, more than offset higher sales associated with a $24.6 million increase in
volume to wind energy customers. Improved pricing yielded an increase of $3.1 million and was
primarily attributable to price increases on our core products, and to a lesser extent, contractual
adjustments associated with the pass-through of material cost changes on a year-to-date basis.
Finally, the adverse effects of currency exchange rate changes had a $9.7 million, or 2.5 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.
Wind energy sales in the first three quarters of 2009, were $81.7 million, an increase of $25.2
million, or 45 percent compared to the first three quarters of 2008. The increase was principally
attributable to improved volumes.
From a regional perspective, our businesses serving international markets, principally Europe,
continued to experience declines during the first three quarters of 2009 similar to those
previously experienced in our domestic end markets.
Gross margin in the first three quarters of 2009 was 32.0 percent compared with 37.4 percent in the
first three quarters of 2008. The year-over-year decrease of 5.4 points is attributable to
decreased sales volume and higher unit costs associated with lower production volumes of 4.8
points, and adverse changes in product mix, largely due to sales declines in higher margin
industrial segments of 1.2 points, partially offset by favorable pricing.
Selling, general and administrative expenses were $52.8 million, or 15.9 percent of sales, in the
first three quarters of 2009, compared to $62.9 million, or 16.1 percent of sales in the first
three quarters of 2008. During the first three
quarters of 2009, we recorded curtailment gains totaling $6.3 million that were associated with
changes to certain postretirement benefit plans. The remainder of the year-over-year decrease is
primarily attributable to the
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preemptive and continuing steps we have taken to reduce discretionary
costs, partially offset by approximately $1 million of one-time expenses associated with layoffs
and severance in 2009.
Our operating income was $53.4 million in the first three quarters of 2009 compared to $83.1
million in the first three quarters of 2008, as the decrease in gross profit of $39.8 million more
than offset the reduction in selling, general and administrative expenses of $10.1 million.
During the first three quarters of 2009, interest income totaled $0.4 million on average investment
balances of $218.6 million. This compares to $5.2 million of interest income in last years first
three quarters when we earned approximately 2.5 percent on average investment balances of $279.9
million. The decline in average investment balances resulted from our capital expenditure program,
increased working capital, our stock repurchase program, contributions to our qualified pension
plans and an increase in our dividend rate. In addition to lower average balances, the
significantly lower interest earned in the first three quarters of 2009 reflects prevailing
historically low interest rates on short term treasury securities.
During the first three quarters of 2009, interest expense totaled $0.2 million and represented
amortization of costs associated with the credit facility. During the first three quarters of
2008, interest expense totaled $9.3 million. The year-over-year difference of $9.1 million is
attributable to interest and amortization of issuance costs associated with the Notes that were
outstanding in the prior year.
The effective tax rate for the first three quarters of 2009 was 35.6 percent. The effective tax
rate for the first three quarters of 2008 was 35.1 percent.
Net income for the first three quarters of 2009 was $34.6 million, or $1.03 per share on a diluted
basis, compared to the adjusted net income for the first three quarters of 2008 of $51.3 million,
or $1.65 per share on a diluted basis. The first three quarters 2008 results have been adjusted to
reflect the required retrospective application of new accounting guidance related to convertible
debt and earnings per share, which were effective January 1, 2009, resulting in the recording of
additional non-cash interest expense of $3.1 million, $2.0 million net of tax. These required
adjustments reduced previously reported first three quarters 2008 basic earnings per share by $0.10
and diluted earnings per share by $0.02.
Results of Business Segments
We classify our businesses into three reporting segments: Friction Control Products, Velocity
Control Products, and Sealing Products. Our remaining operating segments are combined and
disclosed as Other businesses. The segment discussions that follow describe the significant
factors contributing to the changes in results for each segment.
The aforementioned 2009 curtailment gains resulting from changes to our postretirement benefit
plans, which total $5.4 million in the third quarter 2009 and $6.3 million for the first three
quarters 2009, were not allocated to our operating segments.
Friction Control Products
For the third quarter ended | For the first three quarters ended | |||||||||||||||||||||||
October 3, | September 27, | % | October 3, | September 27, | % | |||||||||||||||||||
Dollars in millions | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
Sales |
$ | 87.1 | $ | 79.3 | 9.9 | % | $ | 223.5 | $ | 240.2 | (6.9 | )% | ||||||||||||
Operating Income |
$ | 15.4 | $ | 16.4 | (6.3 | )% | $ | 37.6 | $ | 56.1 | (33.0 | )% | ||||||||||||
Operating Margin |
17.7 | % | 20.7 | % | 16.8 | % | 23.4 | % |
Sales in our Friction Control Products reporting segment increased $7.8 million or a 9.9 percent
compared to the prior third quarter. The sales increase was driven by a $19.4 million increase in
sales to wind energy customers. During the 2009 period, there was an improvement in trade credit
conditions, which benefited shipments, as our customers ability to obtain letters of credit
improved. The sales gains to wind energy customers offset an $11.6
million decline in sales principally to our industrial and government markets. Overall, sales were
reduced by a $0.9 million unfavorable year-over-year effect of currency exchange rate changes.
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Operating income from our Friction Control Products reporting segment during the third quarter of
2009 was $15.4 million compared to $16.4 million in the third quarter of 2008. The $1.0 million
decrease was principally attributable to the adverse effect of changes in product mix of $2.1
million resulting from increased sales to wind energy customers being largely offset by volume
decreases to industrial markets, which command higher margins. This decrease was partially offset
by cost decreases net of higher costs associated with lower production volumes, as the combined
effect of inventory increases in the third quarter of 2008 and decreases in the third quarter of
2009 more than offset the increase in sales volume.
The third quarter of 2009 reflected sequential sales growth in our wind energy and medical markets
and a solid position in our military market. While we are pleased with our current position in
these markets, considering the current economic environment, their longer-term outlooks will be
heavily influenced by government policy issues including clear, long-term support for renewable
energy initiatives and funding for military spending. Industrial markets appear to have stabilized
at the relatively low levels noted in the second quarter of 2009.
Sales in our Friction Control Products reporting segment were $223.5 million during the first three
quarters of 2009 compared to $240.2 million in the first three quarters of 2008, reflecting a
decrease of $16.7 million or 6.9 percent. Excluding sales gains to wind energy customers of $25.2
million, sales to all other markets in the first three quarters of 2009 decreased by $41.9 million
from the comparable period last year. This decline was due to the effects of volume declines of
$38.7 million and the adverse effects of currency exchange rate changes of $5.4 million, which were
only partially offset by a $2.2 million effect of increased pricing.
Operating income from the Friction Control Products reporting segment during the first three
quarters of 2009 totaled $37.6 million compared to $56.1 million in the first three quarters of
2008. The $18.5 million decrease in operating income was due to a $14.9 million adverse effect of
lower sales volumes and lower production volumes, a $2.8 million adverse effect of product mix
resulting from lower sales to higher margin industrial markets, with the remaining $0.8 million of
the decrease resulting from higher costs net of 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 costs incurred during the first
three quarters of 2009.
Velocity Control Products
For the third quarter ended | For the first three quarters ended | |||||||||||||||||||||||
October 3, | September 27, | % | October 3, | September 27, | % | |||||||||||||||||||
Dollars in millions | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
Sales |
$ | 12.2 | $ | 17.1 | (28.7 | )% | $ | 34.6 | $ | 55.8 | (38.0 | )% | ||||||||||||
Operating Income |
$ | 2.1 | $ | 4.5 | (53.0 | )% | $ | 5.2 | $ | 16.2 | (68.0 | )% | ||||||||||||
Operating Margin |
17.4 | % | 26.4 | % | 15.0 | % | 29.0 | % |
In the third quarter of 2009, sales in our Velocity Control Products reporting segment were $12.2
million compared to $17.1 million in the third quarter of 2008. The decrease of $4.9 million was
attributable to volume declines of $4.2 million caused by reduced domestic and international
economic demand, especially in industrial markets, and the adverse effects of currency exchange
rate changes of $0.7 million.
The Velocity Control Products reporting segment contributed $2.1 million to our operating income
during the third quarter of 2009 compared to $4.5 million during the comparable period last year.
This decrease in operating income was principally due to the effects of the decline in sales
volumes mentioned above.
During the first three quarters of 2009, sales in our Velocity Control Products reporting segment
were $34.6 million compared to $55.8 million in the first three quarters of 2008. The decrease of
$21.2 million was due to reduced volumes of $17.0 million caused by decreased demand in domestic
and international markets, especially industrial markets, and the adverse effects of currency
exchange rate changes of approximately $4.2 million.
The Velocity Control Products reporting segment contributed $5.2 million to our operating income
during the first three quarters of 2009 compared to $16.2 million during the comparable period last
year. This decrease in operating
income is principally due to the effect of the decline in sales volume mentioned above.
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Sealing Products
For the third quarter ended | For the first three quarters ended | |||||||||||||||||||||||
October 3, | September 27, | % | October 3, | September 27, | % | |||||||||||||||||||
Dollars in millions | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
Sales |
$ | 8.8 | $ | 10.8 | (18.1 | )% | $ | 29.0 | $ | 34.0 | (14.7 | )% | ||||||||||||
Operating Income |
$ | 0.8 | $ | 1.0 | (14.6 | )% | $ | 2.2 | $ | 4.0 | (45.2 | )% | ||||||||||||
Operating Margin |
9.6 | % | 9.2 | % | 7.6 | % | 11.9 | % |
Sales in our Sealing Products reporting segment in the third quarter of 2009 were $8.8 million
compared to $10.8 million in the third quarter of 2008. The $2.0 million sales decline was
principally attributable to decreased sales volumes resulting from the delay of capital projects
which is continuing to cause our customers to defer the delivery of our product, and soft
industrial markets, particularly the railroad and hydrocarbon processing markets.
The Sealing Products reporting segment contributed $0.8 million to our operating income during the
third quarter of 2009 compared to $1.0 million during the comparable period last year. The $0.2
million decrease is attributable to the effect of lower sales volume of $1.0 million partially
offset by $0.8 million of net cost reductions.
Sales in our Sealing Products reporting segment in the first three quarters of 2009 were $29.0
million compared to $34.0 million in the first three quarters of 2008, as decreased volume
associated with the global economic recession of $5.6 million was only partially offset by a $0.6
million increase resulting from favorable pricing.
The Sealing Products reporting segment contributed $2.2 million to our operating income during the
first three quarters of 2009 compared to $4.0 million during the comparable period last year. The
combined effect of the decreased sales volume mentioned above and adverse changes in product mix
associated with proportionately lower sales of higher margin industrial seals totaled $3.7 million,
and were partially offset by the impact of higher pricing of $0.6 million, and net cost reductions
of approximately $1.3 million.
Other businesses
For the third quarter ended | For the first three quarters ended | |||||||||||||||||||||||
October 3, | September 27, | % | October 3, | September 27, | % | |||||||||||||||||||
Dollars in millions | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
Sales |
$ | 15.5 | $ | 19.7 | (21.0 | )% | $ | 45.2 | $ | 60.0 | (24.7 | )% | ||||||||||||
Operating Income |
$ | 1.4 | $ | 1.8 | (25.2 | )% | $ | 3.3 | $ | 7.3 | (55.4 | )% | ||||||||||||
Operating Margin |
8.9 | % | 9.4 | % | 7.2 | % | 12.2 | % |
Sales in our other businesses were $15.5 million in the third quarter of 2009 compared to $19.7
million in the third quarter of 2008. The $4.2 million sales decline was principally due to the
global economic slowdown which resulted in decreased sales of our liquid filtration, air
filtration, metal alloy, and metal-forming products. We expect these markets to continue at these
decreased demand levels for the remainder of 2009.
Our other businesses contributed $1.4 million to our operating income during the third quarter of
2009 compared to $1.8 million during the comparable period last year. The $0.4 million decrease is
attributable to the effect of lower sales volume of $1.9 million, partially offset by $1.4 million
in net favorable material costs and reduced spending.
Sales in our other businesses were $45.2 million during the first three quarters of 2009 compared
to $60.0 million in the first three quarters of 2008. The $14.8 million sales decline was
principally due to the global economic recession which resulted in decreased sales of our liquid
filtration, air filtration, metal alloy, and metal-forming products.
Our other businesses contributed $3.3 million to our operating income during the first three
quarters of 2009 compared to $7.3 million during the comparable period last year. This decrease in
operating income is due to the effect of lower sales volumes of $6.4 million, partially offset by a
net cost decrease of $2.4 million.
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Liquidity and Capital Resources
At October 3, 2009, our current ratio was 8.4 to 1 and working capital totaled $382.2 million,
including $247.8 million of cash and cash equivalents. At December 31, 2008, our current ratio was
6.8 to 1 and working capital totaled $365.3 million, including cash and cash equivalents of $233.0
million.
Net cash from operating activities during the first three quarters of 2009 equaled $44.1 million,
compared to net cash from operating activities of $49.7 million during the first three quarters of
2008. The year-over-year decline in net cash from operating activities was principally due to the
decline of $16.7 million in net income and $14.8 million in increased contributions to our
qualified pension plans, offset by a $23.5 million net reduction in the use of receivables,
inventory, and trade payables, and $2.8 million in increased depreciation primarily associated with
our investments in wind energy manufacturing capacity.
During the first three quarters of 2009, we paid common stock dividends of $17.2 million,
repurchased a total of 314,047 shares of Company common stock for $8.9 million and invested $9.6
million in capital expenditures, or 2.9 percent of net sales.
Net inventories at October 3, 2009 were $95.1 million, a decrease of $2.7 million compared to
December 31, 2008. The decrease is principally attributable to increased shipments to wind energy
customers and reduced inventory associated with an overall decrease in year-over-year production
levels. Inventory turns for the third quarter of 2009 improved from both 2009s second quarter and
the fourth quarter of 2008.
In considering both our long-term confidence in the wind energy market and our ongoing strategic
relationships with wind energy customers, we have made significant investments in support of this
initiative. While certain of our customers have deferred their receipt of ordered goods and have
delayed certain payments, we closely monitor our accounts receivable from wind energy customers and
are reasonably assured that our accounts receivable are fully collectible. Additionally, we
believe that our inventory as of October 3, 2009 is fully realizable. As such we have not
established any reserve for inventory or an allowance for doubtful accounts related to wind energy
customers as of October 3, 2009.
We have $8.6 million of working capital invested on behalf of an international wind energy customer
including past due accounts receivable, inventory and purchase commitments made or incurred on this
customers behalf and designed to its agreed upon specifications. We are pursuing payment of these
amounts and the potential for further supply. Under the documents which comprise the sales
contract, the customer is obligated to pay the outstanding amounts and to reimburse us for
inventory costs incurred and lost profits. While we are working towards resolving this issue and
hope to supply to the customer prospectively, we have retained outside legal counsel to advise us
in resolving this matter. Based on the documents which comprise the sales contract and the
customers financial ability to pay, we have concluded that the receivables are probable of full
collection and the inventory and purchase commitments are fully recoverable. Therefore, while
there is uncertainty that the customer will comply with their contractual commitments, no accrual
or reserve for these exposures is justifiable at this time and none has been established as of
October 3, 2009.
We have recorded in other assets a $1.1 million net investment representing our position in an
investment fund. This fund has been closed by the fund issuer. The fund issuer, owned by a major
bank, has restricted the redemption of the fund to permit its orderly liquidation as the underlying
fund assets mature or are sold. During the first three quarters of 2009 we received distributions
of $4.1 million from the fund, of which $2.2 million was received in the third quarter of 2009.
Management expects that our planned capital requirements, which consist of capital expenditures,
dividend payments and our stock repurchase program, will be financed by operations and existing
cash balances. In addition, our revolving credit facility provides additional financial strength
to support our objectives, including future acquisitions.
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Outlook
While our overall industrial end markets appear to have stabilized, albeit at cyclically low
levels, the near term outlook for the domestic and international economies remains at the present
uncertain. The deterioration in general business conditions has reduced demand for our higher
margin immediately shippable orders, or book and ship orders, to our general industrial distribution channels in domestic and international markets. In
addition, certain customers which previously placed large orders to be delivered over many quarters
have reduced the size of those orders and increased the frequency of smaller orders as they react
to economic conditions.
While the third quarter of 2009 reflected sequential order growth in our wind energy, medical, and
military markets, their medium and longer-term outlooks will be heavily influenced by governmental
policy issues including clear, long-term support for renewable energy initiatives and funding for
military spending.
Backlog equaled $250.1 million at October 3, 2009 compared to backlog of $354.5 million at
September 27, 2008. The decrease is principally attributable to shipments in excess of gross
orders, and, to a lesser extent, pricing adjustments reflecting contractual pass-through of
decreased material costs.
Interest income will continue to be significantly lower than in prior years as market interest
rates remain well below market interest rates of prior years.
The full year 2009 effective tax rate is expected to be approximately 35.4 percent.
During the third quarter of 2009, we completed our annual goodwill impairment test. Fair values of
reporting units were estimated using the expected present value of future cash flows. The fair
value of all reporting units exceeded their carrying value, which indicated no goodwill impairment.
Our testing revealed that the excess of the estimated fair value of each of our reporting units
tested over their carrying value (expressed as a percentage of the carrying value) ranged from
approximately 22 percent to 475 percent. Based on our analysis, we do not believe that any of our
eight reporting units with goodwill balances are at risk of failing the Step 1 goodwill impairment
test. Also during the third quarter of 2009, intangible assets deemed to have indefinite useful
lives were tested for impairment, with no impairment loss being realized.
Expected operating cash flows, coupled with our current cash reserves and available credit under
our $300.0 million revolving credit facility, will provide substantial resources to fund our
ongoing business development efforts, which include internal and external growth initiatives, and
selected stock repurchases.
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, 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. Our 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
the Companys Annual Report on Form 10-K for the year ended December 31, 2008. There have been no
material changes to the critical accounting policies previously 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, including trends related to the anticipated improvement in industrial
markets and the global economy. 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
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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 those 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.
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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
Securities and Exchange 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.
Exhibit No. | Description | |
10.1*
|
Twelfth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan dated September 14, 2009 | |
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 |
Those exhibits with an asterisk (*) designate the Companys management contracts or compensatory
plans or arrangements required to be filed herewith.
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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 |
||||
November 3, 2009 | /s/ Peter C. DeChants | |||
Peter C. DeChants | ||||
Senior Vice President, Chief Financial Officer | ||||
November 3, 2009 | /s/ Donald I. Buzinkai | |||
Donald I. Buzinkai | ||||
Vice President, Controller and Chief Accounting Officer |
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EXHIBIT INDEX
Exhibit No. | Description | |
10.1*
|
Twelfth Amendment to the Kaydon Corporation Employee Stock Ownership and Thrift Plan dated September 14, 2009 | |
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 |
Those exhibits with an asterisk (*) designate the Companys management contracts or compensatory
plans or arrangements required to be filed herewith.
25