<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 July 4, 1998 Commission File No. 0-12640
KAYDON CORPORATION
A Delaware Corporation IRS Employer ID No. 13-3186040
19345 US 19 North, Clearwater, FL 33764 Phone: 727/531-1101
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 August 10, 1998 - 32,535,814 shares, $0.10 par
value.
<PAGE> 2
KAYDON CORPORATION FORM 10-Q
FOR THE QUARTER ENDED JULY 4, 1998
INDEX
Page No.
Part I - Financial Information:
Consolidated Condensed Balance Sheets -
July 4, 1998 and December 31, 1997 1
Consolidated Condensed Statements of Income -
Three Months and Six Months Ended July 4, 1998
and June 28, 1997 2
Consolidated Condensed Statements of Cash Flows -
Six Months Ended July 4, 1998 and June 28, 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
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KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
July 4, 1998 December 31, 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 52,118,000 $ 74,735,000
Marketable securities 44,572,000 22,067,000
Accounts receivable, net 56,804,000 42,690,000
Inventories, net 68,266,000 60,548,000
Other current assets 14,444,000 14,738,000
------------ ------------
Total current assets 236,204,000 214,778,000
Plant and equipment, net 95,934,000 85,510,000
Cost in excess of net tangible
assets of purchased businesses, net 65,838,000 66,687,000
Other assets 19,003,000 17,010,000
------------ ------------
Total assets $416,979,000 $383,985,000
============ ============
Liabilities and Stockholders' Investment:
Accounts payable $ 17,077,000 $ 11,574,000
Accrued expenses 62,665,000 52,782,000
Federal income tax payable 4,928,000 6,659,000
------------ ------------
Total current liabilities 84,670,000 71,015,000
Other long-term liabilities 30,180,000 29,374,000
Stockholders' investment 302,129,000 283,596,000
------------ ------------
Total liabilities and
stockholders' investment $416,979,000 $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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 99,548,000 $ 84,454,000 $198,657,000 $160,985,000
Gross profit 40,614,000 35,574,000 81,082,000 67,397,000
Operating income 29,190,000 24,769,000 57,450,000 46,315,000
Interest income, net 1,198,000 884,000 2,447,000 1,763,000
------------ ------------ ------------ ------------
Income before income taxes 30,388,000 25,653,000 59,897,000 48,078,000
Provision for income taxes 11,547,000 9,749,000 22,761,000 18,293,000
------------ ------------ ------------ ------------
Net income $ 18,841,000 $ 15,904,000 $ 37,136,000 $ 29,785,000
============ ============ ============ ============
Weighted Average Common Shares:
Basic 32,912,000 32,974,000 32,939,000 32,960,000
Diluted 33,169,000 33,124,000 33,195,000 33,106,000
Earnings Per Share:
Basic $ 0.57 $ 0.48 $ 1.13 $ 0.90
Diluted $ 0.57 $ 0.48 $ 1.12 $ 0.90
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
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KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
July 4, 1998 June 28, 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities $ 24,161,000 $ 22,335,000
------------ ------------
Cash flows from investing activities:
Purchases of marketable securities (44,956,000) (60,286,000)
Maturities of marketable securities 22,451,000 68,947,000
Capital expenditures, net (16,725,000) (5,514,000)
Acquisition of businesses, net of cash acquired 82,000 (27,165,000)
------------ ------------
Cash used in investing activities (39,148,000) (24,018,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,110,000 884,000
Dividends paid (5,941,000) (6,921,000)
Purchase of treasury stock (6,667,000) (645,000)
Payment of debt 0 (8,031,000)
------------ ------------
Cash used in financing activities (8,498,000) (14,713,000)
------------ ------------
Effect of exchange rate changes on cash
and cash equivalents 868,000 (13,000)
------------ ------------
Net decrease in cash and cash equivalents (22,617,000) (16,409,000)
Cash and cash equivalents - Beginning of period 74,735,000 54,443,000
------------ ------------
Cash and cash equivalents - End of period $ 52,118,000 $ 38,034,000
============ ============
Cash expended for income taxes $ 23,388,000 $ 19,450,000
============ ============
Cash expended for interest $ 24,000 $ 139,000
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 6
KAYDON CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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 July 4, 1998 and the results of its operations and its
cash flows for the six 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>
July 4, 1998 Dec 31, 1997
----------- -----------
<S> <C> <C>
Raw Material $25,182,000 $20,282,000
Work in Process 23,942,000 19,424,000
Finished Goods 19,142,000 20,842,000
----------- -----------
$68,266,000 $60,548,000
=========== ===========
</TABLE>
4
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(4) On March 5, 1998, the Company purchased a manufacturing facility and
adjacent property in Mocksville, North Carolina for $4,630,500. Year to
date, with equipment, a total of $8,077,000 has been invested. This
facility will produce custom bearings for various commercial applications
and represents additional capacity for the continuing growth of the
Bearings Division. Limited production started late in the second quarter.
(5) 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 $118,000 and $661,000,
resulting in comprehensive income of $18,565,000 and $16,565,000 for the
quarters ended July 4, 1998 and June 28, 1997, respectively. On a six
month basis, other comprehensive income, net of tax, was approximately
$1,092,000 for 1998 versus a net loss of $811,000 for 1997, resulting in
year to date comprehensive income of $38,228,000 and $28,974,000 for the
quarters ended July 4, 1998 and June 28, 1997, respectively.
(6) 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.
5
<PAGE> 8
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
July 4, 1998 June 28, 1997
----------- -----------
<S> <C> <C>
Numerators:
Numerators for both basic
and diluted earnings per share,
net income $18,841,000 $15,904,000
=========== ===========
Denominators:
Denominators for basic earnings
per share, weighted average
common shares outstanding 32,912,000 32,974,000
Potential dilutive shares resulting
from stock option plans 257,000 150,000
----------- -----------
Denominator for dilutive
earnings per share 33,169,000 33,124,000
=========== ===========
Earnings Per Share:
Basic $ .57 $ .48
Diluted $ .57 $ .48
=========== ===========
</TABLE>
All options were included in second quarter 1998 and 1997 because the
options' exercise price was less than the average market price of common
shares.
(7) The Company, together with other companies, certain former officers, and
certain former 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 and alter ego of Keene.
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.
Although the examiner has made certain recommendations regarding a
mechanism to resolve the claims against the Company, the Court has not
taken any action related to the report. Nevertheless, in the Company's
opinion,
6
<PAGE> 9
the report reinforces management's original view that the claims will
ultimately not be sustained. Accordingly, no provision has been reflected
in the consolidated financial statements for any alleged damages. 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, in accordance with the schedule established by the judge, 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. The court has not yet ruled upon the motions.
Management 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 in which four persons
died. The grand jury has requested and received documents and records
relating to a bearing manufactured by Kaydon and used in the Sikorsky
helicopter. In addition, the Defense Logistics Agency of the Defense
Contract Management Command and a "Mishap Board" led by Sikorsky Aircraft
Corporation with participation from certain Federal agencies alleged that
product quality problems or deficiencies exist with respect to the bearing
product used in the Sikorsky helicopter described above. The Company was
excluded from participation on this "Mishap Board", however, it
independently evaluated the available evidence and refuted the "Mishap
Board" findings in its report 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 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. 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
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Kaydon Corporation and subsidiaries (the "Company") reported record sales of
$99,548,000 in the second quarter 1998, up 17.9% from $84,454,000 in the second
quarter last year. Base business growth excluding the impact of certain
acquisitions remained strong, up 13.8%, the fifth consecutive quarter the rate
of internal growth increased. The internal business growth was broad based and
was led by the Fluid Power Products Group.
Gross profit for the quarter was consistent with the first quarter of 1998 at
40.8% compared to 42.1% in the second quarter of last year. The lower gross
margin rate reflects the growth of the Fluid Power Products Group as a percent
of the total Company's sales. In general, gross margins within the Fluid Power
Products Group have been at a lower rate.
Selling and administrative expenses were $11,424,000, up $619,000 from
$10,805,000 last year. Although the absolute dollars increased, expenses as a
percent of sales were down to 11.5% from 12.8%. This percentage decrease is
primarily attributed to slower expense growth to support the larger sales base.
Net interest income was $1,198,000, up $314,000 from $884,000 last year. This
was due to higher cash balances and slightly higher rates over second quarter
1997.
Net income for the quarter totaled $18,841,000, with return on sales at 18.9%
and earnings per share on a diluted basis at $.57. Relative to the second
quarter 1997, net income and EPS increased 18.5% and 18.8%, respectively.
The effective tax rate of 38.0% was flat with second quarter of 1997.
Six Months 1998 to 1997:
Sales for the six months of 1998 were $198,657,000, an increase of 23.4% over
last year's $160,985,000. Year to date net earnings were $37,136,000, a gain of
24.7% over the 1997 earnings of $29,785,000. Earnings per share were up 24.4% on
a diluted basis at $1.12 versus $0.90 last year.
Gross margins followed the same trend year to date at 40.8% versus 41.9% last
year. This change is due to the dilutive effect of the Fluid Power Products
Group as it grew as a percent of the Company's total sales.
8
<PAGE> 11
Selling and administrative expenses were $23,632,000, up $2,550,000 from
$21,082,000 in 1997. The absolute dollars are larger but in percentage terms
1998 is 11.9% of sales versus 13.1% for the six month period in 1997. This
decrease is attributed to slower expense growth to support a larger sales base.
Liquidity and Capital Resources:
Working capital was $151,534,000 at the end of the second quarter reflecting a
current ratio of 2.8 compared to $143,763,000 at year end with a current ratio
of 3.0. The increase in working capital was primarily due to increased
inventories and receivables in support of higher sales levels.
Cash and securities of $96,690,000 remained virtually flat with year end at
$96,802,000. During the quarter the Company repurchased 317,700 shares of stock
in the open market for $11,398,000, of which $3,147,000 was settled in the
quarter. There remains 2,565,385 shares of stock to be purchased of the original
6,000,000 authorized by the Board of Directors. A total of 335,109 shares were
purchased in the second quarter. In addition, net capital spending for plant and
equipment in the quarter was $5,858,000, while year to date spending was
$16,725,000. The capital expenditures support internal expansions within
existing product lines, including the purchase of a new manufacturing facility
in Mocksville, North Carolina and expansion of the Monterey, Mexico plant.
During the second quarter, additional capital expenditures were authorized
totaling approximately $2,000,000 to expand the existing manufacturing capacity
for industrial bearings in Monterey, Mexico. The additional capacity should be
operational late in the fourth quarter 1998.
Management expects that the Company's planned capital requirements for the
remainder of 1998, which consist of capital expenditures, dividend payments and
its stock repurchase program will be financed by operations. The Company has
$100,000,000 available under its multi-bank revolving credit agreements that
could be utilized to meet liquidity needs. The Company is currently debt free.
Year 2000
The Company has a plan in place to ensure its systems are compliant with the
requirements to process transactions in the year 2000. The Company is also
working with its vendors and processing banks to ensure their systems are year
2000 compliant.
Incremental costs associated with the year 2000 modifications, if any, will be
expensed as incurred and are not expected to be material. Any year 2000
compliance costs associated with outside vendors and processors will be borne by
the parties.
9
<PAGE> 12
Outlook
The backlog of unshipped orders entering the Company's seasonally lowest quarter
was essentially unchanged at $159,747,000 compared to $160,404,000 at the end of
the first quarter of 1998. The additional capacity from expansions and continued
strength in base business should provide operating flexibility and a sound basis
for long-term growth. The Company continues to be confident with operating
levels in the forthcoming quarter, and while seeing some increasing softness in
orders for the semiconductor equipment market, the Company continues to expect
growth for the remainder of the year.
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 actual results to differ
materially from those projected.
10
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Part II OTHER INFORMATION
Item 5. Other Information
Effective June 24, 1998, Mr. Stephen K. Clough resigned as President
and Chief Executive Officer of the Company. Mr. Lawrence J. Cawley
was elected Chief Executive Officer by the Company's Board of
Directors.
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
On June 29, 1998, the Company filed a Form 8-K reporting the
resignation of the Company's President and Chief Executive Officer.
The Company's current Chairman was elected Chief Executive Officer,
President and Chief Financial Officer by the Board of Directors at
the Board meeting on June 24, 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
August 14, 1998 /s/ Lawrence J. Cawley
--------------------------------
Lawrence J. Cawley
(Chairman, CEO, President, & Chief Financial Officer)
August 14, 1998 /s/ Joseph P. Port
--------------------------------
Joseph P. Port
(Vice President Finance & Corporate Controller)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-04-1998
<CASH> 52,118
<SECURITIES> 44,572
<RECEIVABLES> 58,518
<ALLOWANCES> 1,714
<INVENTORY> 68,266
<CURRENT-ASSETS> 236,204
<PP&E> 214,534
<DEPRECIATION> 118,600
<TOTAL-ASSETS> 416,979
<CURRENT-LIABILITIES> 84,670
<BONDS> 0
0
0
<COMMON> 3,640
<OTHER-SE> 298,489
<TOTAL-LIABILITY-AND-EQUITY> 416,979
<SALES> 198,657
<TOTAL-REVENUES> 198,657
<CGS> 117,575
<TOTAL-COSTS> 117,575
<OTHER-EXPENSES> 23,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,447)
<INCOME-PRETAX> 59,897
<INCOME-TAX> 22,761
<INCOME-CONTINUING> 37,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,136
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.12
</TABLE>
