<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended October 3, 1998 Commission File No. 0-12640
- - --------------------------------- ---------------------------
KAYDON CORPORATION
A Delaware Corporation IRS Employer ID No. 13-3186040
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19345 US 19 North, Clearwater, FL 33764 Phone: 727/531-1101
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Kaydon Corporation:
(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.
Yes X No
--- ---
(2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Common Stock Outstanding at November 12, 1998 - 32,162,025 shares, $0.10 par
value.
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KAYDON CORPORATION FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 3, 1998
INDEX
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<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
Part I - Financial Information:
Consolidated Condensed Balance Sheets -
October 3, 1998 and December 31, 1997 1
Consolidated Condensed Statements of Income -
Three Months and Nine Months Ended October 3, 1998
and September 27, 1997 2
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended October 3, 1998
and September 27, 1997 3
Notes to Consolidated Condensed Financial Statements 4 - 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 10
Part II - Other Information:
Item 5. - Other Information 11
Item 6. - Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
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KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
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<TABLE>
<CAPTION>
October 3, 1998 December 31, 1997
--------------- -----------------
(Unaudited)
<S> <C> <C>
Assets:
Cash and securities $ 75,314,000 $ 96,802,000
Accounts receivable, net 53,684,000 42,690,000
Inventories, net 71,569,000 60,548,000
Other current assets 12,972,000 14,738,000
------------ ------------
Total current assets 213,539,000 214,778,000
Plant and equipment, net 97,839,000 85,510,000
Cost in excess of net tangible
assets of purchased businesses, net 65,775,000 66,687,000
Other assets 19,377,000 17,010,000
------------ ------------
Total assets $396,530,000 $383,985,000
============ ============
Liabilities and Stockholders' Investment:
Accounts payable $ 14,751,000 $ 11,574,000
Accrued expenses 52,765,000 52,782,000
Federal income tax payable 1,454,000 6,659,000
------------ ------------
Total current liabilities 68,970,000 71,015,000
Other long-term liabilities 30,490,000 29,374,000
Stockholders' investment 297,070,000 283,596,000
------------ ------------
Total liabilities and
stockholders' investment $396,530,000 $383,985,000
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
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KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
Oct 3, 1998 Sep 27, 1997 Oct 3, 1998 Sep 27, 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $92,801,000 $83,380,000 $291,458,000 $244,365,000
Gross profit 37,165,000 34,356,000 118,247,000 101,753,000
Operating income 27,328,000 24,587,000 84,778,000 70,902,000
Interest income, net 996,000 847,000 3,443,000 2,610,000
----------- ----------- ------------ ------------
Income before income taxes 28,324,000 25,434,000 88,221,000 73,512,000
Provision for income taxes 10,764,000 9,664,000 33,525,000 27,957,000
----------- ----------- ------------ ------------
Net income $17,560,000 $15,770,000 $ 54,696,000 $ 45,555,000
=========== =========== ============ ============
Weighted Average Common Shares:
Basic 32,466,000 32,986,000 32,736,000 32,968,000
Diluted 32,694,000 33,194,000 32,979,000 33,140,000
Earnings Per Share:
Basic $ 0.54 $ 0.48 $ 1.67 $ 1.38
Diluted $ 0.54 $ 0.47 $ 1.66 $ 1.37
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 5
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
Oct 3, 1998 Sep 27, 1997
------------- --------------
<S> <C> <C>
Cash flows from operating activities $ 42,214,000 $ 44,251,000
------------ ------------
Cash flows from investing activities:
Purchases of marketable securities (44,956,000) (86,025,000)
Maturities of marketable securities 67,023,000 89,122,000
Capital expenditures, net (21,438,000) (9,154,000)
Acquisition of businesses, net of cash acquired 82,000 (27,027,000)
------------ ------------
Cash provided by (used in) investing activities 711,000 (33,084,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,148,000 1,094,000
Dividends paid (8,916,000) (6,921,000)
Purchase of treasury stock (38,601,000) (832,000)
Payment of debt 0 (8,031,000)
------------ ------------
Cash used in financing activities (43,369,000) (14,690,000)
------------ ------------
Effect of exchange rate changes on cash
and cash equivalents 1,023,000 (197,000)
------------ ------------
Net decrease in cash and cash equivalents 579,000 (3,720,000)
Cash and cash equivalents - Beginning of period 74,735,000 54,443,000
------------ ------------
Cash and cash equivalents - End of period $ 75,314,000 $ 50,723,000
============ ============
Cash expended for income taxes $ 35,016,000 $ 29,030,000
============ ============
Cash expended for interest $ 35,000 $ 210,000
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 6
KAYDON CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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(1) The consolidated condensed financial statements included herein have
been prepared by Kaydon Corporation and subsidiaries (the "Company"),
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company
believes that the disclosures made in this document are adequate to
make the information presented not misleading. It is suggested that
these consolidated condensed financial statements be read in
conjunction with the consolidated financial statements and notes
thereto in the Company's 1997 Annual Report on Form 10-K.
(2) In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, of a normal and
recurring nature, necessary to present fairly the financial position of
the Company as of October 3, 1998 and the results of its operations and
its cash flows for the nine months then ended. However, interim results
are not necessarily indicative of results of a full year.
(3) Inventories are valued at the lower of cost or market and include
material, labor and overhead. Cost is determined under the first-in,
first-out ("FIFO") method.
Inventories are summarized as follows:
<TABLE>
<CAPTION>
Oct 3, 1998 Dec 31, 1997
------------ ------------
<S> <C> <C>
Raw Material $26,194,000 $20,282,000
Work in Process 25,160,000 19,424,000
Finished Goods 20,215,000 20,842,000
----------- -----------
$71,569,000 $60,548,000
=========== ===========
</TABLE>
(4) Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income reflects
the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
For the Company, the comprehensive income represents net income
adjusted for unrealized gains and losses on foreign currency
translation adjustments. Other comprehensive income, net of tax, was
approximately $1,026,000 and $(935,000), resulting in comprehensive
income of $18,586,000 and $14,835,000 for the quarters
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ended October 3, 1998 and September 27, 1997, respectively. On a nine
month basis, other comprehensive income, net of tax, was approximately
$2,118,000 for 1998 versus a net loss of $1,746,000 for 1997, resulting
in year to date comprehensive income of $56,814,000 and $43,809,000 for
the quarters ended October 3, 1998 and September 27, 1997,
respectively.
(5) Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". This statement establishes standards for computing and
presenting earnings per share ("EPS"). Under these standards, basic
earnings per share excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for
the period. Diluted earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding plus
all potential common shares. Dilutive potential common shares include
all shares which may become contractually issuable. For the Company,
dilutive potential common shares are primarily comprised of shares
issuable under stock option plans. All prior period earnings per share
data presented has been restated to conform to this statement.
The following table reconciles the numerators and denominators used in
the calculation of basic and diluted earnings per share for the
quarters presented.
<TABLE>
<CAPTION>
Quarter Ending Quarter Ending
Oct 3, 1998 Sep 27, 1997
----------- ------------
<S> <C> <C>
Numerators:
Numerators for both basic
and diluted earnings per share,
net income $17,560,000 $15,770,000
=========== ===========
Denominators:
Denominators for basic earnings
per share, weighted average
common shares outstanding 32,466,000 32,986,000
Potential dilutive shares resulting
from stock option plans 228,000 208,000
----------- -----------
Denominator for dilutive
earnings per share 32,694,000 33,194,000
=========== ===========
Earnings Per Share:
Basic $ .54 $ .48
Diluted $ .54 $ .47
=========== ===========
</TABLE>
5
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(6) The Company, together with other companies, certain former officers and
directors, has been named as a co-defendant in lawsuits filed in
federal court in New York in 1993. The suits purport to be class
actions on behalf of all persons who have unsatisfied personal injury
and property damage claims against Keene Corporation which filed for
bankruptcy under Chapter 11. The premise of the suits is that assets of
Keene were transferred to Bairnco subsidiaries, of which Kaydon was one
in 1983, at less than fair value. The suits also allege that the
Company, among other named defendants, was a successor to Keene. The
Keene Creditors' Trust is seeking from the defendants, collectively,
damages approximating $700 million. The complaint fails to specify the
amount of damages sought against Kaydon individually. In 1994, an
examiner was appointed by a bankruptcy court to examine the issues at
stake. On September 23, 1994, the "Preliminary Report of the Examiner"
was made public. In the report, the examiner stated that the alleged
fraudulent conveyance claims against the Company appear to be
time-barred by the statute of limitations, subject to certain possible
exceptions which the Company does not believe are significant or
factual. In June 1995, the creditors' committee filed a complaint in
the same bankruptcy court asserting claims against the Company similar
to those previously filed. On June 12, 1996, the District and
Bankruptcy Courts for the Southern District of New York entered an
order confirming the plan of reorganization for Keene Corporation. As a
result, the so-called transactions lawsuit was transferred in April
1997 from the Bankruptcy Court for the Southern District of New York to
the District Court for that district and the stay of the transactions
lawsuit was lifted. On September 15, 1997, the Company submitted a
motion to dismiss the complaint based on the statute of limitations.
All motions, supporting documents and rebuttal were filed on December
15, 1997. On October 13, 1998, the U.S. District Court, Southern
District of New York, issued an Opinion which dismissed many of the
charges against Kaydon and the other defendants. At the same time, the
Opinion denied Kaydon's motion for summary judgement and dismissal on
the statute of limitation. The Opinion stated that the suit may go
forward and the stay of discovery is lifted. Management believes it has
meritorious defenses against any claims. Accordingly, no provision has
been reflected in the consolidated financial statements for any alleged
damages. Management further believes that the outcome of this
litigation will not have a material adverse effect on the Company's
financial position.
In June 1996, the Company received a subpoena issued by the U.S.
District Court in Bridgeport, Connecticut on behalf of a grand jury
investigating a May 9, 1996 accident involving a Sikorsky helicopter
(CH-53E) in which four persons died. The grand jury requested and
received documents and records relating to bearings manufactured by
Kaydon and used in the Sikorsky helicopter. In addition, a "Mishap
Board" led by Sikorsky Aircraft Corporation alleged that
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product quality problems or deficiencies existed with respect to the
Kaydon bearing used in the Sikorsky helicopter described above. Kaydon
was excluded from participation on this "Mishap Board". However, it has
independently evaluated the available evidence and refuted the "Mishap
Board" findings in reports submitted to the Navy. Subsequent incidents
have occurred in the helicopter fleet even though the bearings used
were newly manufactured, inspected and approved by Sikorsky and Navy
personnel, reinforcing the Company's position that the bearing quality
was not the causative action in the May 9, 1996 accident. During the
first half of 1997, the estates of the four deceased individuals filed
civil suits against the Company. On July 6, 1998, Sikorsky filed a
claim against the Company in those same civil cases claiming damages
which they are alleged to have incurred following the May 9, 1996
accident. In October 1998, Kaydon reached settlement agreements with
the estates of each plaintiff in the four civil suits. All settlement
amounts were fully covered under Company insurance. In September 1998,
Kaydon received the Judge Advocate General's (the "JAG Report") and the
Naval Air Systems Command "First Endorsement" to the JAG Report dated
28 July 1998 wherein the U.S. Navy reviewed the crash of the Sikorsky
CH-53E on 9 May 1996. The findings contained in the JAG Report,
management believes, reaffirms the position that the bearing was not
the causative action in the May 9, 1996 accident. Management believes
it has meritorious defenses against any claims.
Various other claims, lawsuits and environmental matters arising in the
normal course of business are pending against the Company. Management
believes that the outcome of these matters, including the Sikorsky
matter referred to above, will not have a material adverse effect on
the Company's financial position or results of operations.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Results of Operations
Kaydon Corporation and subsidiaries (the "Company") reported record third
quarter 1998 sales of $92,801,000, up 11.3% from $83,380,000 in the third
quarter of last year. The growth was driven primarily by continued strength in
heavy industrial equipment markets for fluid power products and specialty
bearings. Growth in slip rings continued, while filtration products posted
strong improvement reflecting increased market demand and a slower comparable
period in 1997.
Gross profit for the quarter was 40.0% compared to 40.8% last quarter and 41.2%
in the third quarter last year. The rate of gross margin as compared to 1997
reflects the proportional increase of sales into heavy industrial equipment
markets relative to total corporation sales. In general, gross margins from such
sales have been at a lower rate. As compared to the second quarter of 1998,
gross margins were down slightly as expected, reflecting traditional third
quarter shutdowns.
Selling and administrative expenses were $ 9,837,000 as compared to $9,769,000
last year. Expenses as a percent of sales were 10.6% versus 11.7% last year and
11.5% last quarter. The percentage decrease is attributed to emphasis on
spending controls and slower expense growth to support the larger sales base.
Net interest income was $996,000 up $149,000 from last year. This was due to
higher average cash balances for the quarter over the third quarter last year.
Net income was $17,560,000, with return on sales at 18.9% and earnings per share
on a diluted basis at $.54. Relative to the third quarter 1997, net income and
EPS increased 11.4% and 14.9%, respectively.
The effective tax rate of 38.0% was flat with the third quarter of 1997.
Nine Months 1998 to 1997:
Sales for the nine months of 1998 were $291,458,000, an increase of 19.3% over
$244,365,000 for the comparable period in 1997. Year to date net income was
$54,696,000, a gain of 20.1% over the 1997 earnings of $45,555,000. Earnings per
share were up 21.2% on a diluted basis at $1.66 versus $1.37 last year.
8
<PAGE> 11
Gross margins for the nine month period were 40.6% versus 41.6% in 1997. The
lower rate as compared to the same period in 1997 primarily reflects the
proportional increase in sales to heavy industrial equipment markets versus
total company sales.
Selling and administrative expenses were $33,469,000, up $2,618,000 from
$30,851,000 in 1997. Although up in absolute dollar terms, expenses declined
relative to sales at 11.5% versus 12.6% for the nine month period in 1997. The
decrease reflects emphasis on spending controls and slower expense growth in
support of increased sales.
Liquidity and Capital Resources:
Working capital at the end of the third quarter 1998 totaled $144,569,000
compared to $143,763,000 at the end of 1997. Corresponding current ratios were
3.1 for the third quarter 1998 and 3.0 at the end of 1997. The modest increase
in working capital reflects higher levels of inventory and receivables to
support increased sales, primarily offset by lower levels of cash and marketable
securities.
Cash and securities totaled $75,314,000 at the end of the third quarter 1998
versus $96,802,000 at the end of 1997. Cash flow from operations for the nine
months of 1998 totaled $42,214,000 offset by net capital expenditures of
$21,438,000 and repurchases of common stock of $38,601,000. Capital expenditures
for the year include $12,285,000 of non-routine spending for the purchase of a
new manufacturing facility and equipment in Mocksville, North Carolina and plant
expansions of existing facilities in Monterey, Mexico and Blacksburg, Virginia.
Purchases of common stock for the nine months 1998 totaled 1,113,131 shares,
with 1,010,800 shares purchased on the open market. Of the total Board
authorized share repurchase of 6,000,000, there remains 1,863,186 shares
available.
Depreciation and amortization totaled $3,603,000 for the third quarter 1998
versus $2,877,000 in 1997. For the nine month period, depreciation and
amortization was $11,030,000 as compared to $9,415,000 for the same period in
1997.
Management expects that the Company's planned capital requirements for the
remainder of 1998, which consist primarily of capital expenditures and dividend
payments will be financed by operations. The Company has $100,000,000 available
under it multi-bank revolving credit agreements that could be utilized to meet
liquidity needs. The Company is currently debt free.
Year 2000
The Company's plan to address its computer systems' compliance with the year
2000 continues. The Company expects that all internal remediation activities and
all internal acceptance testing will be completed by mid-1999. The Company is in
the process of ascertaining the status of its suppliers' year 2000 compliance
efforts, and plans to
9
<PAGE> 12
develop contingency plans by mid-1999 for any key suppliers that will not be
compliant on a timely basis. The Company currently believes that the cost of
addressing the year 2000 issue will not be material to the Company's business,
operations or financial condition.
While the Company believes all necessary work will be completed, there can be no
guarantee that all systems will be in compliance by the year 2000 or that the
systems of other companies on which the Company relies will be converted in a
timely manner. Such failure to complete the necessary work by the year 2000
could cause delays in the Company's ability to produce or ship its products,
process transactions or otherwise conduct business in its markets, resulting in
material financial risk.
Outlook
The backlog of unshipped orders at the end of the third quarter 1998 was
$153,314,000 compared to $143,037,000 at the end of the same period in 1997.
However, management views backlog as only one of many indicators of future
operating performance due to continuing shortening of lead times and variability
of order release dates. Based on the Company's expectation of continued modest
economic improvement, ongoing operating efficiencies and market share
initiatives, as well as contributions from companies acquired in 1997,
management believes that the Company should achieve record sales and earnings in
1998.
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company, including those made in this document, are
subject to risks and uncertainties that may cause results to differ materially
from those projected.
10
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Part II OTHER INFORMATION
Item 5. Other Information
At its September 23, 1998 meeting, the Board of Directors
elected Brian P. Campbell as President and Chief Executive
Officer of the Company. Lawrence J. Cawley will continue as
Chairman of the Board until the Annual Meeting in April 1999.
At the same meeting, the Board appointed Thomas C. Sullivan to
the Board of Directors of the Company to fill a vacancy. Mr.
Sullivan is Chairman and Chief Executive Officer of RPM, Inc.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit No. Description
(27) Financial Data Schedule (for SEC use only)
B. Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended October 3, 1998.
11
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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 17, 1998 /s/ Brian P. Campbell
---------------------------------------------
Brian P. Campbell
(President and Chief Executive Officer)
November 17, 1998 /s/ Joseph P. Port
---------------------------------------------
Joseph P. Port
(Vice President Finance and
Corporate Controller)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF KAYDON CORPORATION FOR THE NINE MONTHS ENDED OCTOBER 3,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-03-1998
<CASH> 75,314
<SECURITIES> 0
<RECEIVABLES> 55,485
<ALLOWANCES> 1,801
<INVENTORY> 71,569
<CURRENT-ASSETS> 213,539
<PP&E> 219,329
<DEPRECIATION> 121,490
<TOTAL-ASSETS> 396,530
<CURRENT-LIABILITIES> 68,970
<BONDS> 0
0
0
<COMMON> 3,642
<OTHER-SE> 293,428
<TOTAL-LIABILITY-AND-EQUITY> 396,530
<SALES> 291,458
<TOTAL-REVENUES> 291,458
<CGS> 173,211
<TOTAL-COSTS> 173,211
<OTHER-EXPENSES> 33,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,443)
<INCOME-PRETAX> 88,221
<INCOME-TAX> 33,525
<INCOME-CONTINUING> 54,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,696
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.66
</TABLE>
