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EXCEL - IDEA: XBRL DOCUMENT - KAYDON CORP | Financial_Report.xls |
EX-32 - EX-32 - KAYDON CORP | k50287exv32.htm |
EX-31.1 - EX-31.1 - KAYDON CORP | k50287exv31w1.htm |
EX-31.2 - EX-31.2 - KAYDON CORP | k50287exv31w2.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 April 2, 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 | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Common Stock Outstanding at May 2, 2011 32,599,583 shares, $.10 par value.
KAYDON CORPORATION FORM 10-Q
INDEX
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
April 2, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 271,945,000 | $ | 286,648,000 | ||||
Accounts receivable, net |
82,319,000 | 76,010,000 | ||||||
Inventories, net |
98,109,000 | 88,253,000 | ||||||
Other current assets |
14,213,000 | 16,384,000 | ||||||
Total current assets |
466,586,000 | 467,295,000 | ||||||
Property, plant and equipment, net |
168,991,000 | 169,597,000 | ||||||
Goodwill, net |
144,022,000 | 143,428,000 | ||||||
Other intangible assets, net |
17,425,000 | 18,047,000 | ||||||
Other assets |
3,151,000 | 2,965,000 | ||||||
Total assets |
$ | 800,175,000 | $ | 801,332,000 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 21,802,000 | $ | 16,944,000 | ||||
Salaries and wages |
7,016,000 | 11,439,000 | ||||||
Taxes payable |
5,298,000 | 3,452,000 | ||||||
Other accrued expenses |
20,891,000 | 21,194,000 | ||||||
Total current liabilities |
55,007,000 | 53,029,000 | ||||||
Long-term postretirement and postemployment benefit obligations |
23,492,000 | 23,567,000 | ||||||
Other long-term liabilities |
15,626,000 | 15,598,000 | ||||||
Total long-term liabilities |
39,118,000 | 39,165,000 | ||||||
Shareholders Equity: |
||||||||
Common stock |
3,693,000 | 3,693,000 | ||||||
Other shareholders equity |
702,357,000 | 705,445,000 | ||||||
Total shareholders equity |
706,050,000 | 709,138,000 | ||||||
Total liabilities and shareholders equity |
$ | 800,175,000 | $ | 801,332,000 | ||||
See accompanying notes to consolidated condensed financial statements.
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Table of Contents
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
First Quarter Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Net sales |
$ | 108,341,000 | $ | 119,245,000 | ||||
Cost of sales |
69,519,000 | 77,476,000 | ||||||
Gross profit |
38,822,000 | 41,769,000 | ||||||
Selling, general and administrative expenses |
21,323,000 | 22,087,000 | ||||||
Operating income |
17,499,000 | 19,682,000 | ||||||
Interest expense |
(97,000 | ) | (62,000 | ) | ||||
Interest income |
179,000 | 24,000 | ||||||
Income before income taxes |
17,581,000 | 19,644,000 | ||||||
Provision for income taxes |
5,591,000 | 5,817,000 | ||||||
Net income |
$ | 11,990,000 | $ | 13,827,000 | ||||
Earnings per share: |
||||||||
Basic |
$ | 0.36 | $ | 0.41 | ||||
Diluted |
$ | 0.36 | $ | 0.41 | ||||
Dividends declared per share |
$ | 0.19 | $ | 0.18 | ||||
See accompanying notes to consolidated condensed financial statements.
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Table of Contents
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
First Quarter Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 11,990,000 | $ | 13,827,000 | ||||
Adjustments to reconcile net income to net cash from
operating activities: |
||||||||
Depreciation |
4,821,000 | 5,031,000 | ||||||
Amortization of intangible assets |
665,000 | 971,000 | ||||||
Amortization of stock awards |
906,000 | 1,072,000 | ||||||
Stock option compensation expense |
321,000 | 297,000 | ||||||
Excess tax benefits from stock-based compensation |
(21,000 | ) | (62,000 | ) | ||||
Deferred financing fees |
97,000 | 62,000 | ||||||
Contributions to qualified pension plans |
(478,000 | ) | 0 | |||||
Net change in receivables, inventories and trade payables |
(10,459,000 | ) | (3,805,000 | ) | ||||
Net change in other assets and liabilities |
(571,000 | ) | 12,234,000 | |||||
Net cash from operating activities |
7,271,000 | 29,627,000 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(4,328,000 | ) | (1,700,000 | ) | ||||
Dispositions of property, plant and equipment |
69,000 | 21,000 | ||||||
Net cash used in investing activities |
(4,259,000 | ) | (1,679,000 | ) | ||||
Cash flows from financing activities: |
||||||||
Cash dividends paid |
(6,279,000 | ) | (6,043,000 | ) | ||||
Purchase of treasury stock |
(13,976,000 | ) | (7,515,000 | ) | ||||
Excess tax benefits from stock-based compensation |
21,000 | 62,000 | ||||||
Proceeds from exercise of stock options |
39,000 | 7,000 | ||||||
Net cash used in financing activities |
(20,195,000 | ) | (13,489,000 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
2,480,000 | (1,849,000 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(14,703,000 | ) | 12,610,000 | |||||
Cash and cash equivalents Beginning of period |
286,648,000 | 262,403,000 | ||||||
Cash and cash equivalents End of period |
$ | 271,945,000 | $ | 275,013,000 | ||||
Cash paid for income taxes |
$ | 1,743,000 | $ | 745,000 | ||||
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)
(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.
April 2, 2011 | December 31, 2010 | |||||||
Cash and cash equivalents: |
||||||||
Money market and other short-term funds |
$ | 257,344,000 | $ | 275,547,000 | ||||
Time deposits, other interest bearing accounts, and other cash |
14,601,000 | 11,101,000 | ||||||
$ | 271,945,000 | $ | 286,648,000 | |||||
(3) Inventories:
April 2, 2011 | December 31, 2010 | |||||||
Raw material |
$ | 36,508,000 | $ | 33,429,000 | ||||
Work in process |
25,948,000 | 23,797,000 | ||||||
Finished goods |
35,653,000 | 31,027,000 | ||||||
$ | 98,109,000 | $ | 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.
First Quarter Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Net income |
$ | 11,990,000 | $ | 13,827,000 | ||||
Other comprehensive income (loss) |
3,808,000 | (2,829,000 | ) | |||||
Comprehensive income |
$ | 15,798,000 | $ | 10,998,000 | ||||
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(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.
First Quarter Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Earnings per share Basic |
||||||||
Net income |
$ | 11,990,000 | $ | 13,827,000 | ||||
Less: Net earnings allocated to participating securities Basic |
(121,000 | ) | (147,000 | ) | ||||
Income available to common shareholders Basic |
$ | 11,869,000 | $ | 13,680,000 | ||||
Weighted average common shares outstanding Basic |
32,552,000 | 33,273,000 | ||||||
Earnings per share Basic |
$ | 0.36 | $ | 0.41 | ||||
Earnings per share Diluted |
||||||||
Net income |
$ | 11,990,000 | $ | 13,827,000 | ||||
Less: Net earnings allocated to participating securities Diluted |
(121,000 | ) | (147,000 | ) | ||||
Income available to common shareholders Diluted |
$ | 11,869,000 | $ | 13,680,000 | ||||
Weighted average common shares outstanding Diluted |
||||||||
Weighted average common shares outstanding Basic |
32,552,000 | 33,273,000 | ||||||
Potential dilutive shares resulting from stock options |
27,000 | 24,000 | ||||||
Weighted average common shares outstanding Diluted |
32,579,000 | 33,297,000 | ||||||
Earnings per share Diluted |
$ | 0.36 | $ | 0.41 | ||||
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:
First Quarter Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Shares excluded |
385,500 | 385,500 | ||||||
Average exercise price |
$ | 43.87 | $ | 43.87 |
(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.
Hahns results will be reported 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.
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First Quarter Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Net sales |
||||||||
Friction Control Products |
$ | 60,895,000 | $ | 79,782,000 | ||||
Velocity Control Products |
19,626,000 | 14,233,000 | ||||||
Other Industrial Products |
27,820,000 | 25,230,000 | ||||||
Total consolidated net sales |
$ | 108,341,000 | $ | 119,245,000 | ||||
First Quarter Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Operating income |
||||||||
Friction Control Products |
$ | 9,874,000 | $ | 16,544,000 | ||||
Velocity Control Products |
5,826,000 | 3,375,000 | ||||||
Other Industrial Products |
2,537,000 | 1,306,000 | ||||||
Total segment operating income |
18,237,000 | 21,225,000 | ||||||
Items not allocated to segment operating income |
(738,000 | ) | (1,543,000 | ) | ||||
Interest expense |
(97,000 | ) | (62,000 | ) | ||||
Interest income |
179,000 | 24,000 | ||||||
Income before income taxes |
$ | 17,581,000 | $ | 19,644,000 | ||||
(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 April 2, 2011. After consideration of the covenants and $4.7 million of letters
of credit issued under the credit agreement, the Company had available credit of $245.3 million at
April 2, 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 2010, 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) at the July 31, 2010 annual testing date ranged from approximately 38 percent to
approximately 282 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
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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 31, 2010, trademarks were tested for impairment and no impairment loss was realized.
The changes in the carrying value of goodwill for the first quarter ended April 2, 2011, were as
follows:
Friction | Velocity | Other | ||||||||||||||
Control | Control | 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 |
594,000 | 0 | 0 | 594,000 | ||||||||||||
Balance at April 2, 2011 |
||||||||||||||||
Goodwill |
$ | 56,990,000 | $ | 43,200,000 | $ | 62,532,000 | $ | 162,722,000 | ||||||||
Accumulated impairment losses |
0 | 0 | (18,700,000 | ) | (18,700,000 | ) | ||||||||||
$ | 56,990,000 | $ | 43,200,000 | $ | 43,832,000 | $ | 144,022,000 | |||||||||
The accumulated impairment losses include impairment losses of $1.9 million recorded in 2004
and $16.8 million recorded in 2002.
Other intangible assets are summarized as follows:
April 2, 2011 | December 31, 2010 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amortized Intangible Assets | Value | Amortization | Value | Amortization | ||||||||||||
Customer relationships and lists |
$ | 28,194,000 | $ | 18,174,000 | $ | 28,194,000 | $ | 17,638,000 | ||||||||
Patents and developed technology |
6,639,000 | 4,086,000 | 6,596,000 | 3,974,000 | ||||||||||||
Backlog |
3,300,000 | 3,300,000 | 3,300,000 | 3,300,000 | ||||||||||||
Distributor agreements |
374,000 | 247,000 | 374,000 | 237,000 | ||||||||||||
Product names |
320,000 | 199,000 | 320,000 | 192,000 | ||||||||||||
$ | 38,827,000 | $ | 26,006,000 | $ | 38,784,000 | $ | 25,341,000 | |||||||||
The intangible assets are being amortized at pro rata rates or on a straight-line basis, whichever is appropriate, over their
respective useful lives.
April 2, 2011 | December 31, 2010 | |||||||
Unamortized Intangible Assets | Carrying Value | Carrying Value | ||||||
Trademarks |
$ | 4,604,000 | $ | 4,604,000 |
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Aggregate Intangible Assets Amortization Expense | ||||
For the first quarter ended April 2, 2011
|
$ | 665,000 | ||
For the first quarter ended April 3, 2010
|
$ | 971,000 |
Estimated Intangible Assets Amortization Expense | ||||
For the year ending December 31, 2011 |
$ | 2,275,000 | ||
For the year ending December 31, 2012 |
$ | 1,992,000 | ||
For the year ending December 31, 2013 |
$ | 1,725,000 | ||
For the year ending December 31, 2014 |
$ | 1,426,000 | ||
For the year ending December 31, 2015 |
$ | 1,102,000 |
(9) Employee Benefit Plans:
The components of net periodic benefit cost (income) are as follows:
First Quarter Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Pension Benefits |
||||||||
Service cost |
$ | 777,000 | $ | 831,000 | ||||
Interest cost |
1,714,000 | 1,738,000 | ||||||
Expected return on plan assets |
(2,120,000 | ) | (1,921,000 | ) | ||||
Amortization of: |
||||||||
Unrecognized net prior service cost |
16,000 | 16,000 | ||||||
Unrecognized net actuarial loss |
810,000 | 870,000 | ||||||
Total |
$ | 1,197,000 | $ | 1,534,000 | ||||
First Quarter Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Postretirement Benefits |
||||||||
Service cost |
$ | 23,000 | $ | 62,000 | ||||
Interest cost |
74,000 | 136,000 | ||||||
Amortization of: |
||||||||
Unrecognized net prior service credit |
(325,000 | ) | (289,000 | ) | ||||
Unrecognized net actuarial gain |
(113,000 | ) | (75,000 | ) | ||||
Total |
$ | (341,000 | ) | $ | (166,000 | ) | ||
The Company contributed $0.5 million to its qualified pension plans in the first quarter of 2011.
The Company expects to contribute $3.5 million to its qualified and non-qualified pension plans in
2011, and reviews its funding strategy on an ongoing basis.
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(10) Stock-Based Compensation:
A summary of restricted stock award information pursuant to the Companys equity incentive plans
for the first quarter of 2011 is as follows:
Wtd. Avg. | ||||||||
Restricted | Grant Date | |||||||
Stock | Fair Value | |||||||
Outstanding at January 1, 2011 |
330,630 | $ | 35.85 | |||||
Granted |
88,250 | 38.63 | ||||||
Vested |
(113,652 | ) | 37.29 | |||||
Canceled |
(1,250 | ) | 32.75 | |||||
Outstanding at April 2, 2011 |
303,978 | $ | 36.13 | |||||
Compensation expense related to restricted stock awards was $0.9 million and $1.1 million in the
first quarter of
2011 and in the first quarter of 2010, respectively.
A summary of stock option information pursuant to the Companys equity incentive plans for the
first quarter of 2011 is as follows:
Wtd. Avg. | ||||||||
Options | Ex. Price | |||||||
Outstanding at January 1, 2011 |
603,000 | $ | 38.83 | |||||
Granted |
0 | 0 | ||||||
Canceled |
0 | 0 | ||||||
Exercised |
(1,500 | ) | $ | 26.01 | ||||
Outstanding at April 2, 2011 |
601,500 | $ | 38.87 | |||||
Exercisable at April 2, 2011 |
391,300 | $ | 40.02 | |||||
Weighted Average Remaining Contractual Life (years) |
||||||||
Outstanding at April 2, 2011 |
6.45 | |||||||
Exercisable at April 2, 2011 |
6.28 |
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
in the first quarter of 2011 and the first quarter of 2010.
(11) Other Matters:
At April 2, 2011, the Company had approximately $8.5 million of working capital invested on behalf
of an international wind energy customer, including past due accounts receivable and inventory made
on the customers behalf and designed to its agreed upon specifications. The customer has not paid
the Company and has made a claim for material damages alleging that certain field performance
issues of its product are attributable to the quality of the Companys supplied bearings. The
Company is confident that its bearings were made to the agreed upon design specifications and that
the customers field performance issues relate to factors outside of the Companys control. Under
the documents which comprise the sales contract, the customer is obligated to pay its liability and
to reimburse the Company for inventory costs incurred and lost profits. In order to expedite the
resolution of this matter, the Company agreed with the customer to enter into a mediation process,
and if necessary, binding arbitration to resolve the parties claims. The mediation process was
completed in March 2010, but was unsuccessful in resolving the matter. During the second quarter
of 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 us of the
damages claimed is remote.
(12) Taxes:
The effective tax rate for the first quarter of 2011 equaled 31.8 percent compared to 29.6 percent
in the first quarter of 2010. The tax rate in the first quarter of 2010 included the $1.4 million
effect of a qualifying advanced energy
investment tax credit partially offset by adjustments to
deferred tax assets.
11
Table of Contents
(13) Subsequent Event:
On February 24, 2011 the Company entered into a definitive agreement to purchase all of the
outstanding shares of HAHN-Gasfedern GmbH and related real estate and intangible property (Hahn)
from Ulrich Hahn e.K. The acquisition closed on April 8, 2011 following completion of customary
closing conditions. Hahn, based in Aichwald, Germany, manufactures and sells high quality gas
springs, tension springs and dampers for diverse industrial markets. Hahns results will be
reported in the Velocity Control Products 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 new facility, with Kaydons
existing Sumter facilities, is designed to create a custom bearings center of excellence and is
expected to allow the Company to grow its market share, realize overhead cost reductions and
leverage its engineering capabilities. In connection with this plan, the Company closed its
Mocksville, North Carolina manufacturing facility. This manufacturing consolidation program is
within the Friction Control Products reporting segment.
During the first quarter of 2011 the Company incurred $1.0 million in cost of sales for
engineering, relocation, recruiting, travel, training and other start-up costs in Sumter associated
with the manufacturing consolidation program. The Company expects to incur approximately $0.6
million in additional start-up costs associated with this program through its completion later in
2011.
The Company expects to incur approximately $0.2 million in annual costs for insurance, property
taxes, utilities and security at the Mocksville facility until its disposal.
(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
April 2, 2011.
(16) Impact of Recently Issued Accounting Pronouncements:
No recently issued accounting pronouncements had a material 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, 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 first quarter of 2011 compared to 2010s first quarter reflected moderation
in our wind energy and military businesses as expected, partially offset by sales growth of
products serving industrial markets. Other items affecting the comparison of the first quarter
2011 results to the 2010 first quarter included $1.5 million of net costs in 2011 associated with a
previously announced manufacturing consolidation program and due diligence efforts for
acquisitions, as well as the $0.5 million net benefit realized in the first quarter of 2010 related
to certain tax items.
At April 2, 2011, our current ratio was 8.5 to 1 and working capital totaled $411.6 million. We
believe that our current cash and cash equivalents balance of $271.9 million at April 2, 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
First Quarter Results
First Quarter Ended | ||||||||||||||||
April 2, | % of | April 3, | % of | |||||||||||||
Dollars in millions, except per share amounts | 2011 | Sales | 2010 | Sales | ||||||||||||
Net sales |
$ | 108.3 | $ | 119.2 | ||||||||||||
Cost of sales |
69.5 | 77.5 | ||||||||||||||
Gross profit |
38.8 | 35.8 | % | 41.8 | 35.0 | % | ||||||||||
Selling, general and administrative expenses |
21.3 | 19.7 | % | 22.1 | 18.5 | % | ||||||||||
Operating income |
17.5 | 16.2 | % | 19.7 | 16.5 | % | ||||||||||
Interest, net |
0.1 | 0.0 | ||||||||||||||
Income before income taxes |
17.6 | 19.6 | ||||||||||||||
Provision for income taxes |
5.6 | 5.8 | ||||||||||||||
Net income |
$ | 12.0 | $ | 13.8 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.36 | $ | 0.41 | ||||||||||||
Diluted |
$ | 0.36 | $ | 0.41 | ||||||||||||
Amounts and percentages in the above table may not total due to rounding.
Sales equaled $108.3 million in the first quarter of 2011, a decrease of $10.9 million or 9.1
percent compared to the
first quarter of 2010. The decrease was principally attributable to a $17.1 million reduction in
sales to wind energy customers along with smaller reductions in sales to our military and liquid
filtration markets. These decreases were partially offset by increased sales across the majority
of our remaining principal industrial end markets, particularly a $5.4 million or 37.9 percent
increase in sales of velocity control products and a $2.2 million or 24.5 percent increase in sales
of sealing products.
A decline in wind energy sales in the first quarter of 2011 compared to the first quarter of 2010
was expected, and was comprised of a $15.4 million decline in sales volume and $1.7 million in
pricing reductions.
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Gross profit during the first quarter of 2011 decreased $2.9 million or 7.1 percent compared to the
first quarter of 2010 due in part to the decline in sales. Gross profit was also negatively
affected by net pricing reductions of $1.4 million, $1.0 million in costs related to our
manufacturing consolidation program (see Note 14 to the Consolidated Condensed Financial
Statements), and $0.1 million due to unfavorable changes in foreign exchange rates. Gross margin
increased to 35.8 percent in the first quarter of 2011 from 35.0 percent in the prior first quarter
due to improved manufacturing efficiencies and improved product mix based on the growth in sales of
higher margin industrial products.
Selling, general and administrative expenses were $21.3 million or 19.7 percent of sales during the
first quarter of 2011, compared to $22.1 million or 18.5 percent of sales in the first quarter of
2010. The $0.8 million decrease was attributable to a $0.7 million decline in professional fees
and $0.9 million in lower accrued incentive compensation expense, partly offset by $1.1 million in
increased selling expenses compared to the prior first quarter.
The Companys operating income was $17.5 million in the first quarter of 2011 compared to $19.7
million in the first quarter of 2010, as the decrease in gross profit was only partially offset by
lower selling, general and administrative expenses.
During the first quarter of 2011, interest income was $0.2 million on average investment balances
of $265.8 million. Interest income in the first quarter of 2010 was less than $0.1 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 both the first quarter of 2011 and 2010, and
represents the amortization of our credit facility costs.
The effective tax rate for the first quarter of 2011 equaled 31.8 percent compared to 29.6 percent
in the first quarter of 2010. The tax rate in the first quarter of 2010 included the $1.4 million
effect of a qualifying advance energy investment tax credit partially offset by adjustments to
deferred tax assets. The projected full year 2011 tax rate is expected to be approximately 31
percent.
Net income for the first quarter of 2011 was $12.0 million, or $0.36 per share on a diluted basis,
as compared to net income for the first quarter of 2010 of $13.8 million, or $0.41 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
First Quarter Ended | ||||||||||||
April 2, | April 3, | % | ||||||||||
Dollars in millions | 2011 | 2010 | Change | |||||||||
Sales |
$ | 60.9 | $ | 79.8 | (23.7 | )% | ||||||
Operating Income |
$ | 9.9 | $ | 16.5 | (40.3 | )% | ||||||
Operating Margin |
16.2 | % | 20.7 | % |
First Quarter
During the first quarter of 2011 sales from our Friction Control Products reporting segment equaled
$60.9 million, a decrease of $18.9 million compared to the first quarter of 2010. The decrease was
due to a $17.6 million decline in sales volume and $1.5 million in pricing reductions, partially
offset by a favorable $0.2 million effect from changes in foreign exchange rates. Lower sales
volumes were experienced in the wind energy and military markets, partially offset by increased
sales volume to the machinery, heavy equipment, and medical markets.
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First quarter 2011 sales to the wind energy market decreased $17.1 million to $12.2 million
compared to the first quarter of 2010. The decrease was comprised of $15.4 million decline in sales
volume and $1.7 million in pricing reductions.
During the first quarter of 2011 operating income for the segment decreased $6.7 million to $9.9
million compared to the first quarter of 2010. Of this decrease, $6.6 million was attributable to
declines in sales volume, $1.5 million in pricing reductions, and $1.1 million to manufacturing
consolidation program costs (see Note 14 to the Consolidated Condensed Financial Statements).
These operating income decreases were partly offset by the $1.2 million operating income effect of
improved sales of higher margin industrial products, other net cost reductions of $1.2 million and
a $0.1 million favorable effect from changes in foreign exchange rates.
Velocity Control Products
First Quarter Ended | ||||||||||||
April 2, | April 3, | % | ||||||||||
Dollars in millions | 2011 | 2010 | Change | |||||||||
Sales |
$ | 19.6 | $ | 14.2 | 37.9 | % | ||||||
Operating Income |
$ | 5.8 | $ | 3.4 | 72.6 | % | ||||||
Operating Margin |
29.7 | % | 23.7 | % |
First Quarter
During the first quarter of 2011 sales from our Velocity Control Products reporting segment
increased $5.4 million to $19.6 million compared to the first quarter of 2010. The increase was
due to increased volumes in all of our markets and most significantly in our international markets.
During the first quarter of 2011 operating income for the segment increased $2.5 million to $5.8
million compared to the first quarter of 2010. The increase was attributable to $3.0 million from
increased sales and a $0.3 million favorable effect from sales mix, and was partially offset by net
cost increases of $0.6 million and a $0.1 million unfavorable effect of changes in foreign exchange
rates.
Other Industrial Products
First Quarter Ended | ||||||||||||
April 2, | April 3, | % | ||||||||||
Dollars in millions | 2011 | 2010 | Change | |||||||||
Sales |
$ | 27.8 | $ | 25.2 | 10.3 | % | ||||||
Operating Income |
$ | 2.5 | $ | 1.3 | 94.3 | % | ||||||
Operating Margin |
9.1 | % | 5.2 | % |
First Quarter
First quarter 2011 sales of our remaining operating segments, which are combined and shown above as
Other Industrial Products, equaled $27.8 million compared to $25.2 million in the first quarter of
2010. The improvement was due principally to higher demand of $2.2 million for sealing products
and a $1.9 million increase in sales of metal alloy products, primarily related to commodity
pricing, partially offset by decreased sales of $2.2 million of liquid filtration products.
Operating income of Other Industrial Products equaled $2.5 million during the first quarter of
2011, compared to $1.3 million in the first quarter of 2010. The increase was due to an aggregate
favorable impact of volume, mix and pricing increases of $1.5 million, partially offset by net cost
increases of $0.3 million.
Liquidity and Capital Resources
At April 2, 2011, the Companys current ratio was 8.5 to 1 and working capital totaled $411.6
million, including $271.9 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.
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Net cash from operating activities during the first quarter of 2011 equaled $7.3 million, compared
to first quarter 2010 net cash from operating activities of $29.6 million due largely to changes in
working capital items and other assets and liabilities. The increase in working capital items in
the first quarter of 2011 was $6.7 million greater than the first quarter of 2010 comparable
increase. Cash used for other assets and liabilities increased by $12.8 million compared to the
first quarter of 2010 resulting from cash used for increases in prepaid assets, decreases in
salaries and wages accruals principally related to incentive compensation earned in 2010 and paid
in 2011, and decreases in accruals for professional fees.
Net inventories at April 2, 2011 were $98.1 million, an increase of $9.9 million compared to the
$88.3 million of inventory at December 31, 2010. First quarter 2011 inventory turns equaled 2.8
turns compared to the first quarter 2010 inventory turns of 3.6 turns. The Company selectively
increased inventory during the first quarter 2011 to satisfy anticipated higher demand.
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 April 2, 2011 is fully realizable.
At April 2, 2011, we had approximately $8.5 million of working capital invested on behalf of an
international wind energy customer, including past due accounts receivable and inventory made on
the customers behalf and designed to its agreed upon specifications. The customer has not paid us
and has made a claim for material damages alleging that certain field performance issues of its
product are attributable to the quality of our supplied bearings. We are confident that our
bearings were made to the agreed upon design specifications and that the customers field
performance issues relate to factors outside of our control. Under the documents which comprise
the sales contract, the customer is obligated to pay its liability and to reimburse us for
inventory costs incurred and lost profits. In order to expedite the resolution of this matter, we
agreed with the customer to enter into a mediation process, and if necessary, binding arbitration
to resolve the parties claims. The mediation process was completed in March 2010, but was
unsuccessful in resolving the matter. During the second quarter of 2010, a notice of 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 first quarter of 2011 we paid cash dividends of $6.3 million compared to $6.0 million in
the first quarter of 2010, reflecting an increased dividend rate of $0.19 per common share paid in
the first quarter of 2011 compared to the dividend rate of $0.18 per common share paid in the first
quarter of 2010. Share repurchases in the first quarter of 2011 totaled 357,091 shares for $14.0
million. Share repurchases in the first quarter of 2010 totaled 207,437 shares for $7.5 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 April 2,
2011. After consideration of the covenants and $4.7 million of letters of credit issued under the
Credit Agreement, we had available credit under the Credit Agreement of $245.3 million at April 2,
2011.
Outlook
Our performance during the first quarter 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.
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Improvement for the remainder of 2011 will continue to be dependent on the further strengthening of
general economic and industrial conditions. Further ongoing improvement in our industrial
businesses will be required to achieve favorable comparisons against prior periods as we expect the
moderation relative to prior years in our wind energy and military businesses to continue.
First quarter 2011 wind energy sales were $12.2 million compared to $29.3 million in the first
quarter of 2010. We expect wind energy shipments for the full year of 2011 to be below the $95.9
million of wind energy shipments in the full year of 2010. Longer term, the enactment of a clear,
actionable national renewable electricity standard and a continued economic recovery are
prerequisites for sustained performance in future wind energy shipments. As a result of the
anticipated changes in our wind market, going forward, we are opportunistically reallocating
capacity designated to service the wind energy market to take advantage of opportunities in the
still improving heavy equipment market.
The acquisition of HAHN-Gasfedern GmbH is expected to enhance the product offerings and market
position of our Velocity Control Products segment, and is further expected to contribute to the
growth of this segment in 2011.
Our market leadership positions, robust cash from operating activities, and strong balance sheet
position us well for the future despite broader macroeconomic uncertainty.
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. 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 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. 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.
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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
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 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 month in the first 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) | ||||||||||||
January 1 to January 29 |
118,931 | $ | 39.26 | 118,931 | 2,168,498 | |||||||||||
January 30 to February 26 |
95,000 | $ | 39.86 | 95,000 | 2,073,498 | |||||||||||
February 27 to April 2 |
143,160 | $ | 38.56 | 143,160 | 1,930,338 | |||||||||||
Total |
357,091 | $ | 39.14 | 357,091 | 1,930,338 | |||||||||||
(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 |
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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 |
||||
May 6, 2011 | /s/ Peter C. DeChants | |||
Peter C. DeChants | ||||
Senior Vice President, Chief Financial Officer | ||||
May 6, 2011 | /s/ Laura M. Kowalchik | |||
Laura M. Kowalchik | ||||
Vice President, Chief Accounting Officer | ||||
20