<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required)
For the fiscal year ended DECEMBER 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
Commission file number 0-12640
KAYDON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3186040
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
ARBOR SHORELINE OFFICE PARK, 19345 US 19 NORTH, CLEARWATER, FL 33764
(Address of principal executive offices)
Registrant's telephone number, including area code (727) 531-1101
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(Title of each class)
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 [X] No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Based on the closing sales price of March 22, 1999, the aggregate market value
of the voting stock held by nonaffiliates of the registrant was $869,073,214.
The number of shares outstanding of the registrant's common stock, $0.10 par
value was 31,892,595 as of March 22, 1999.
DOCUMENTS INCORPORATED BY REFERENCE AND THE PART(S) OF THIS FORM 10-K INTO
WHICH EACH DOCUMENT IS INCORPORATED:
KAYDON CORPORATION 1998 ANNUAL REPORT TO SHAREHOLDERS - PARTS I, II AND IV
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KAYDON CORPORATION PROXY STATEMENT - PART III
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KAYDON CORPORATION FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
Part I --------
- ------
<S> <C> <C>
Item 1. Business 1 - 11
Item 2. Properties 12 - 14
Item 3. Legal Proceedings 14 - 17
Item 4. Submission of Matters to Vote of Security Holders 17
Part II
- -------
Item 5. Market for the Registrant's Common Equity &
Related Shareholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 19
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant 20 - 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management 21
Item 13. Certain Relationships and Related Transactions 21
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) 1. Financial Statements 22
2. Financial Statement Schedules 22
3. Reference to Exhibits 23
(b) Reports on Form 8-K 23
Signatures 24
(c) 1. Exhibit Index 25 - 28
2. Exhibits 29 - 30
</TABLE>
<PAGE> 3
PART I
Item 1. BUSINESS
a. General Development of Business
Kaydon Corporation (the "Company" or "Kaydon") was formed in October
1983. The company has acquired the following operations from 1986 through 1993:
Kaydon Ring & Seal, Inc. 6/30/86
Spirolox 7/17/87
Electro-Tec Corp. 6/23/89
I.D.M. Electronics Ltd. 6/23/89
Cooper Bearing Companies 12/16/91
Kenyon Power Transmission Ltd. 12/04/93
Kaydon has made the following acquisitions and dispositions in the
past five years:
On January 28, 1994, Kaydon Corporation, through its wholly owned
subsidiary, Kaydon Acquisition VI, Inc., acquired for $7,268,000 certain assets
and liabilities of Industrial Tectonics Inc, the ball division of Axel Johnson,
Inc. Industrial Tectonics Inc, located in Dexter, Michigan, manufactures
specialty balls used in measuring devices, floats, valves, ball point pens and
antifriction bearings. This acquisition was consummated by Kaydon Acquisition
VI, Inc. with loaned funds from Kaydon Corporation.
On January 31, 1995, the Company, through its wholly owned subsidiary,
I.D.M. Electronics Ltd. ("I.D.M."), purchased the assets of D J Molding for
$759,000. I.D.M. moved the assets to its plant in Reading, England after the
purchase.
On May 1, 1995, Kaydon Corporation sold the majority of its automotive
operation assets. The net sale proceeds of $3,476,000 approximated the book
value of the assets sold. The Company and the buyer also entered into an
operating lease for the facility in which the business was located. The sales
of the automotive business were less than 4% of the consolidated net sales for
each of 1995, 1994 and 1993 with an operating income contribution percentage
lower than the rest of the Company. In addition, on May 17, 1995, Kaydon
Corporation sold the surplus building resulting from the 1993 plant
consolidation. The net sales proceeds of $1,789,000 approximated book value.
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On August 31, 1995, Kaydon Corporation, through its wholly owned
subsidiary, Kaydon Acquisition Corp. V, purchased the stock of Seabee
Corporation for approximately $22,753,000, net of cash received. Seabee,
located in Hampton, Iowa, is a manufacturer of large hydraulic cylinders and
alloy steel castings. This acquisition was accounted for using the purchase
method of accounting.
On February 1, 1996, Kaydon Corporation, through its wholly owned
subsidiary, Kaydon Acquisition VII, Inc., purchased the assets of Victor Fluid
Power Co. ("Victor") and Benton Harbor Engineering Co., Inc. ("Benton Harbor")
for $10,699,000. Both companies manufacture hydraulic cylinders and fluid power
components and are complementary to Seabee Corporation which was purchased in
August, 1995. The Benton Harbor facility was closed in the acquisition process
with the equipment and customer order base being absorbed into Seabee and
Victor. Victor is located in Granite Falls, Minnesota. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
results of operations have been included in the 1996 consolidated financial
statements since the date of acquisition.
On March 11, 1997, Kaydon Corporation, through its wholly owned
subsidiary, Kaydon Acquisition Corp. V (d/b/a Seabee Corporation), purchased
the assets of Gold Star Manufacturing, Inc. for $4,449,000. Gold Star is
located in Laurens, Iowa.
On May 29, 1997, Kaydon Corporation, through its wholly owned
subsidiary, Kaydon Acquisition VIII, Inc. purchased the assets of Great Bend
Industries, Inc. for $22,933,000. Great Bend Industries is located in Great
Bend, Kansas. Both companies manufacture custom-designed cylinders and
complement the prior years' acquisitions of Seabee and Victor. The acquisitions
have been accounted for using the purchase method of accounting and,
accordingly, the results of operations have been included in the 1997
consolidated financial statements since the dates of acquisition.
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b. and c. Financial Information About Industry Segments and
Narrative Description of Business
The Company designs, manufactures and sells custom-engineered products
for a broad and diverse customer base primarily in domestic markets. The
Company's principal products include antifriction bearings, bearing systems and
components, filters and filter housings, specialty retaining rings, specialty
balls, custom rings, shaft seals, hydraulic cylinders, metal castings and
various types of slip-rings. These products are used by customers in a wide
variety of medical, instrumentation, material handling, machine tool
positioning, aerospace, defense, construction and other industrial
applications. The Company is customer-focused and concentrates on providing
cost-effective solutions for its customers through close engineering
relationships with leading manufacturers throughout the world.
The Company operates through individual operating units which serve
four key market sectors. The market sectors the Company serves have similar
economic characteristics and attributes which include similar products,
distribution processes and classes of customers. Generally, products are sold
into more than one market sector. As a result, the Company aggregates its
operating units into a single segment of Custom-Engineered Products.
Products
Kaydon works closely with its customers to engineer the required
solutions to their design problems. As a custom manufacturer, many diverse
applications are served. Designed solutions are frequently unique to a single
customer or application. Depending upon the nature of the application, the
design may be used over a protracted time period and in large numbers, or it
may be for a single use.
The antifriction bearing products of Kaydon incorporate various types
of rolling elements. The ball, tapered roller and cylindrical roller bearings
manufactured by Kaydon are made in sizes ranging from approximately 1" outside
diameter thin section ball bearings to heavy-duty ball bearings with an outside
diameter of 180 inches. These antifriction products are fabricated from
aluminum, bearing-quality steel, stainless steel or special tool steels. They
often incorporate a broad range of features such as gearing, special sealing
systems and mounting arrangements in combination with other mechanical
components. Typical applications include large-diameter ball
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bearings for hydraulic cranes and excavators; thin-section ball bearings for
rotating joints of industrial robots; lightweight airborne radar bearings;
large-diameter aluminum roller bearings for military vehicle turret systems;
and ultra high-precision roller bearings for gear box applications.
Kaydon designs and manufactures hydraulic cylinders with bores ranging
from 1.25" to 24" and strokes up to 50' in length. The Company also provides
both chrome plating and foundry products of both grey and ductile steel. In
addition, the Company produces a line of high pressure pumps and valves,
railroad wheel presses and hydraulic accumulators. The cylinders are used in
manlifts, waste shredding machines, utility trucks, cranes, motion
compensators, drill equipment and various construction equipment.
Kaydon manufactures metallic medium and large bore-size rings for low
and medium-speed internal combustion engines, steam engines, pumps and
reciprocating compressors. Sealing rings are engineered with metallic and
nonmetallic products used to limit the leakage of fluids and gases within
engines and a wide variety of other mechanical products. Sealing rings are used
in industrial applications, such as: compressors, transmissions, hydraulic and
pneumatic cylinders, and commercial and military aircraft, jet engines and
control apparatus applications. Shaft seals are used to seal gases or liquids
usually under extreme conditions of speed, pressure or temperature. Shaft seals
are fabricated from a variety of materials depending on the application.
Kaydon's filtration products include industrial liquid filtration
systems that remove particulate and water from fuels, lubricants and hydraulic
oils in applications ranging from refrigeration units to large power generation
turbines; and special coalescing elements and filter housings for diesel fuel
filtration in both commercial and military applications.
Kaydon designs and manufactures precision, high-performance
slip-rings, slip-ring assemblies, capsules and related electromechanical
devices to meet customers' exact needs and specifications. Slip-rings are
manufactured from injection and transfer-molded plastics, aluminum and
stainless steel castings, bearings and electronic components and connectors,
and are sometimes subjected to an electro-deposition process. They are used to
transmit electrical signals or power between the rotating and stationary
members of an assembly and can be found in combat vehicles, aircraft inertial
guidance systems, telecommunications satellites, aircraft targeting systems and
medical diagnostic equipment.
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Kaydon designs and manufactures a range of split roller bearings,
which include both standard and custom-designed lines. Split bearings are
designed specifically to aid the customer in solving problems where the
application of full round bearings would be less desirable. The product is used
in a wide range of applications but particularly those where space and ease of
change are important selection criteria. The Company also manufactures pulleys
and drive components, which are complementary products.
Kaydon manufactures specialty balls from alloyed steel, plastic,
tungsten carbide, glass and an assortment of other materials. These balls are
used in a variety of applications including gauges, measuring devices, floats,
valves, ball point pens and antifriction bearings. The Company also designs,
manufactures and sells retaining rings and wave springs for various markets
including heavy equipment, aircraft, military, hydraulic/pneumatic and
machinery applications.
Approximately 70 percent of Kaydon's sales are to original equipment
manufacturers, which incorporate the Kaydon products in the products they sell.
Many of the applications for the Company's products also provide the
opportunity for participation in the replacement or spare parts markets.
New Product and Industry Segment Information
The Company has not made any public announcement of, or otherwise made
public information about, a new product or a new industry segment which would
require the investment of a material amount of the Company's assets or which
would otherwise result in a material cost.
Patents, Trademarks, Licenses, Etc.
The Company does not believe that any material part of its business is
dependent on the continued availability of any one or all of its patents or
trademarks.
Seasonal Nature of Business
The Company does not consider its business to be seasonal in nature.
Working Capital Practices
The Company does not believe that it or the industry in general has
any special practices or special conditions affecting working capital items
that are significant for an understanding of the Company's business.
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Customers
Kaydon sells its products to over 1,000 companies throughout the
world. The principal customers are generally large manufacturing corporations.
During 1998, 1997 and 1996, sales to no single customer exceeded 10% of total
sales.
Customers can generally be divided into four market sectors: Aerospace
and Military Equipment, Replacement Parts and Exports, Special Industrial
Machinery and Heavy Industrial Equipment. Sales to these customer groups for
1998, 1997 and 1996 are set forth in the following table:
Net Sales by Market Sectors
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- ----------------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Aerospace and $ 50,593 13.4 $ 45,412 13.8 $ 46,545 16.0
Military Equipment
Replacement Parts 113,427 30.2 112,426 34.2 101,808 35.0
and Exports
Special Industrial 99,710 26.5 86,564 26.3 75,271 25.9
Machinery
Heavy Industrial 112,442 29.9 84,634 25.7 67,046 23.1
Equipment
Total $376,172 100.0% $329,036 100.0% $290,670 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
A recap of each market sector follows:
Aerospace and Military Equipment:
The typical end use for products sold into the Aerospace and Military
Equipment market sector includes commercial and military satellite equipment,
military and commercial aircraft, and radar and ordinance equipment. The value
added products sold into these markets include but are not limited to aircraft
jet engine shaft seals and sealing rings, radar and fire control custom
bearings, helicopter and gear box assembly bearings, military vehicle fuel
filter systems, aircraft landing wheel brake bearings, tank turbine engine
shaft seals, military turret azimuth and elevation
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bearings, and slip-rings and assemblies. The economic factors which impact
sales into these markets are primarily domestic aircraft levels, including
maintenance, and aircraft and defense spending for selected equipment programs.
Replacement Parts and Exports:
The typical end use for products sold into the Replacement Parts and
Exports market sector includes replacement parts sold to major equipment users,
the U.S. Government and through distributors, plus all export sales. The value
added products sold into these markets include but are not limited to railroad
diesel replacement piston ring sets, spare bearings, filter elements and shaft
seals for military equipment, distributor replacement bearings and filter
elements for original equipment applications, and slip-rings and assemblies.
The economic factors which impact sales into these markets are primarily stable
with minor sensitivity to industrial production levels.
Replacement parts are sold mainly through specialized distributors.
Kaydon had export sales of $26,845,000 in 1998, $25,380,000 in 1997, and
$22,928,000 in 1996, with most of such sales concentrated in Canada, Europe and
Japan.
Special Industrial Machinery:
The typical end use for products sold into the Special Industrial
Machinery market sector includes machine tools, material handling equipment,
semi-conductor manufacturing equipment, medical diagnostic equipment, large air
and gas compressors, off-shore oil rig platforms, and robotic equipment. The
value added products sold into these markets include but are not limited to
robotic manipulator bearings, gas transmission line compressor piston and
sealing rings, air conditioning compressor filters, printing machine roll
bearings, medical scanner bearing systems, hydraulic cylinders, diesel engine
piston ring sets, slip-rings and assemblies, and hydraulic actuators for
drilling platforms and rescue devices. The economic factors which impact sales
into these markets are primarily domestic industrial production levels and
capital spending.
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Heavy Industrial Equipment:
The typical end use for products sold into the Heavy Industrial
Equipment market sector includes construction equipment, mining equipment,
forestry equipment, and oil field and power generation equipment. The value
added products sold into these markets include but are not limited to hydraulic
excavator swing bearings, off-road equipment, hydraulic filter elements, power
generation lubrication oil filter units, sealing rings, piston rings,
slip-rings and assemblies, and hydraulic cylinders for construction equipment.
The economic factors which impact sales into these markets are primarily the
domestic level of new industrial equipment and construction spending, domestic
electric power generation, and petroleum product exploration and production
levels.
Marketing
Kaydon's sales organization consists of salespersons and
representatives located throughout the United States, Canada, Europe and Asia.
Salespersons are trained to provide technical assistance to customers, as well
as to provide liaison with factory engineering staffs.
A nationwide network of specialized distributors and agents provides
local availability of Kaydon products to serve the requirements of the
replacement market and small original equipment manufacturers.
Manufacturing
Kaydon manufactures virtually all of the products it sells and
utilizes subcontractors only for occasional specialized services. Kaydon's
products require sophisticated processes and equipment, and many of its
products incorporate unique Kaydon-developed production techniques. Certain
satellite and aircraft-type bearing products must meet extraordinary mechanical
tolerances (for example, within 20 millionths of an inch) and some products
such as slip-rings are assembled in quality-controlled "white room" conditions.
Nearly all of Kaydon's products require high levels of
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incoming quality control and process quality control. The manufacturing
equipment required for Kaydon's operations entails a relatively high level of
capital investment for any given level of sales.
Suppliers
Kaydon and its subsidiaries purchase large quantities of raw
materials, mainly bearing-quality steel, special alloy steel, high-grade carbon
and filter media, aluminum alloy and stainless steel castings, plastics, wire
and electrical connectors, from multiple sources. Kaydon purchases large
amounts of certain types of bearing-quality steel from a number of foreign and
domestic suppliers. No significant supply problems have been encountered in
recent years as relationships with suppliers have generally been good.
Environmental Matters
Reference is made to "Management's Discussion and Analysis" on pages
23 through 27 of Kaydon's 1998 Annual Report to Shareholders which is
incorporated herein by reference.
Employees
On December 31, 1998, Kaydon employed 2,683 employees. Hourly
employees at the Muskegon facilities are represented by the International
Association of Machinists and Aerospace Workers. The current collective
bargaining agreement is effective until December 3, 2000. The Baltimore hourly
employees are also represented by the International Association of Machinists
and Aerospace Workers. The current collective bargaining agreement is effective
until December 9, 2001. Greeneville hourly employees are represented by the
United Steelworkers of America, with the current collective bargaining
agreement effective until January 26, 2000. Dexter hourly employees are
represented by the International Union United Automobile, Aerospace and
Agricultural Implement Workers of America, UAW, with the current collective
bargaining agreement effective until November 5, 1999. The hourly employees at
Granite Falls are represented by the
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International Association of Machinists and Aerospace Workers, with the current
collective bargaining agreement effective until October 15, 2000. The hourly
employees at Great Bend are represented by the International Association of
Machinists and Aerospace Workers, with the current collective bargaining
agreement effective until August 1, 2001. The remaining domestic factory
employees, as well as all office employees, are non-union.
Kaydon provides its employees with a full range of insurance, pension
and deferred compensation benefits. The Company believes its level of total
compensation is competitive when compared with similar jobs within the various
communities in which its operations are located.
Backlog
Kaydon sells certain products on a build-to-order basis that requires
substantial order lead time. This results in a backlog of unshipped, scheduled
orders. Other products are manufactured on the basis of sales projections or
annual blanket purchase orders. Orders for such products are not entered into
backlog until explicit shipping releases are received. Kaydon's backlog was
$145,311,000 at December 31, 1998 and $155,548,000 at December 31, 1997. Based
on experience, management would expect to ship over the following twelve months
about 90 percent of the year-end backlog. Backlog has become less indicative of
future results as the Company has made efforts to shorten manufacturing lead
times, creating a faster response to customer orders.
Competition
Kaydon competes with divisions of SKF Industries, Dover Corporation,
Parker Hannifin Corporation, Commercial Intertech Corporation,
Torrington/Fafnir, Rotek, FAG, EG&G Inc., Litton Poly-Scientific and numerous
other smaller companies.
The markets served by Kaydon are large and extremely competitive. The
major domestic competitors generally produce a wide line of standard products
and do not specialize in custom products. The major domestic bearing
manufacturers nonetheless do offer special-engineered
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bearings. The markets for Kaydon's special-machined components, hydraulic
cylinders, fabricated products, filters, rings and seals are very diverse.
Consequently, management feels that the size of the total market for such
products cannot be meaningfully estimated.
In all of the markets served by Kaydon, the principal methods of
competition involve price, product performance, engineering support and timely
delivery.
Many of Kaydon's domestic competitors are part of large, worldwide
manufacturing concerns and have significantly greater financial resources.
While foreign competition is intense and growing for all industrial components,
the detailed engineering content and service level required by many of its
customers have somewhat limited the impact of foreign competition on domestic
business.
Government Contracts and Renegotiation
Various provisions of federal law and regulations require, under
certain circumstances, the renegotiation of military procurement contracts or
the refund of profits determined to be excessive. Based on Kaydon's experience
under such provisions, management believes that no material renegotiation or
refunds (if any) will be required.
d. Information About International Operations
Information with respect to operations by geographic area appears in
Note 12, "Business Segment Information" of the Notes to Consolidated Financial
Statements set forth on page 42 of the Annual Report to Shareholders, which is
incorporated herein by reference. Fluctuating exchange rates and factors beyond
the control of the Company, such as tariffs and foreign economic policies, may
affect future results of foreign operations.
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Item 2. PROPERTIES
The following chart lists the principal locations, activity (use) and
square footage of Kaydon's most significant facilities as of December 31, 1998
and indicates whether the property is owned or leased:
<TABLE>
<CAPTION>
Owned or
Location Activity Sq. Ft. Leased
- --------------------- ---------------------- --------- --------
<S> <C> <C> <C>
Ann Arbor, MI Corporate Headquarters 10,654 Leased
Clearwater, FL Corporate Headquarters 11,743 Leased
Muskegon, MI Manufacturing Facility 232,250 Owned
(Norton Shores)
Muskegon, MI Rental Property 162,476 Owned
(Norton Shores)
Mocksville, NC Manufacturing Facility 130,000 Owned
Dexter, MI Manufacturing Facility 56,627 Owned
Sumter, SC Manufacturing Facility 168,400 Owned
Sumter, SC Manufacturing Facility 115,200 Owned
Greeneville, TN Manufacturing Facility 80,700 Owned
LaGrange, GA Manufacturing Facility 87,000 Owned
Baltimore, MD Manufacturing Facility 725,000 Owned
St. Louis, MO Manufacturing Facility 18,500 Leased
Blacksburg, VA Manufacturing Facility 111,400 Owned
Virginia Beach, VA Warehouse & Offices 38,568 Owned
Hampton, IA Manufacturing Facility 298,380 Owned
Hampton, IA Manufacturing Facility 67,968 Owned
Hampton, IA Warehouse 14,400 Owned
Hampton, IA Warehouse 15,600 Owned
Laurens, IA Manufacturing Facility 42,000 Leased
Granite Falls, MN Manufacturing Facility 114,000 Leased
Great Bend, KS Manufacturing Facility 107,000 Leased
Great Bend, KS Manufacturing Facility 43,000 Leased
Krefeld, Germany Warehouse 10,032 Leased
King's Lynn, England Manufacturing Facility 153,000 Owned
Reading, England Manufacturing Facility 26,000 Leased
Monterrey, NL, Mexico Manufacturing Facility 32,000 Owned
</TABLE>
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Kaydon owns the manufacturing facility and the leased building located
in Muskegon (Norton Shores), the manufacturing facilities located in Dexter,
Sumter, Greeneville, LaGrange, Baltimore, Blacksburg, Hampton, Mocksville,
Monterrey, Mexico, and King's Lynn, England and the warehouses located in
Hampton and Virginia Beach. The St. Louis property is leased for a term
expiring July 31, 1999. The property in Reading, England, is leased for a term
expiring May 1, 2009. The Krefeld, Germany property is leased on a monthly
basis. The Laurens, Iowa property is leased for a term expiring December 31,
2003. Kaydon leases two properties in Great Bend, Kansas, one under a
capitalized lease with the option to purchase the property for nominal
consideration upon its expiration of August 1, 2004. The other Great Bend
property is leased for a term expiring May 30, 1999, with three one-year
renewable options which would expire May 30, 2002. The manufacturing facility
in Granite Falls, Minnesota is leased for a term expiring January 30, 1999. The
Corporate office located in Clearwater, Florida is leased for a term expiring
May 31, 2001.
Effective May 15, 1999, the Corporate office for Kaydon Corporation
will relocate to the leased property in Ann Arbor, Michigan. The Corporate
office located in Ann Arbor, Michigan is leased for a term expiring October 31,
2002.
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Kaydon Corporation is the sole shareholder of the following operating
subsidiaries:
<TABLE>
<CAPTION>
Date
Subsidiary Formed/Acquired
---------- ---------------
<S> <C>
Kaydon Ring and Seal, Inc. June 17, 1986
(a Delaware corporation)
Kaydon S.A. de C.V. April 10, 1987
(a Mexico corporation)
Electro-Tec Corp. June 23, 1989
(a Delaware corporation)
I.D.M. Electronics Ltd. June 23, 1989
(a United Kingdom corporation)
Cooper Roller Bearing Company Limited December 16, 1991
(a United Kingdom corporation)
Cooper Split Roller Bearing Corporation December 16, 1991
(a Virginia corporation)
Cooper Geteilte Rollenlager GmbH December 16, 1991
(a Germany corporation)
Industrial Tectonics Inc January 28, 1994
(a Delaware corporation)
Kaydon Acquisition Corp. V
(a Delaware corporation)
d/b/a Seabee Corporation August 31, 1995
d/b/a Gold Star Manufacturing, Inc. March 11, 1997
Kaydon Acquisition VII, Inc.
(a Delaware corporation)
d/b/a Victor Fluid Power, Inc. February 1, 1996
Great Bend Industries, Inc. May 29, 1997
(a Delaware corporation)
</TABLE>
Item 3. LEGAL PROCEEDINGS
In June of 1995, the Company, along with certain former officers and
directors of the Company and certain other companies and organizations, was
named as a defendant in a lawsuit commenced in Bankruptcy Court in the Southern
District of New York. The plaintiff was the Creditors Committee formed in
connection with the Chapter 11 Bankruptcy Proceeding of Keene
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Corporation ("Keene"). That action, identified as the "Transactions Lawsuit",
asserted claims against the Company arising from the Company's 1983 acquisition
of certain assets of Keene, and Bairnco Corporation's 1984 spin-off of the
Company's common stock. As originally filed, the Transactions Lawsuit alleged
claims against the Company under state fraudulent conveyance laws, tort claims
under successor liability law, and civil RICO claims. The Transactions Lawsuit
seeks damages alleged by plaintiffs to be an amount of $700 million, plus
interest and punitive damages against the defendants collectively. The RICO
claims sought trebling of those damages. The claims asserted in the
Transactions Lawsuit are similar to, and supplant, claims previously asserted
in certain class actions brought against the Company in 1993, purportedly on
behalf of certain persons with asbestos-related claims against Keene. In 1997,
in connection with the Bankruptcy Court's confirmation of Keene's Plan of
Reorganization, the Keene Creditors Trust was created to, among other things,
prosecute this lawsuit, and the Trustees of that Trust were substituted as the
plaintiffs in place of the Keene Creditors Committee. In addition, the case was
transferred from the Bankruptcy Court to the United States District Court for
the Southern District of New York. Subsequently, the Company and certain other
defendants filed motions to dismiss the complaint for failure to state a claim,
and for summary judgment on the grounds that the fraudulent conveyance claims
and certain related causes of action were barred by the statute of limitations.
On October 13, 1998, the Court granted in part and denied in part the Company's
motion to dismiss the complaint, and denied the Company's motion for summary
judgment. With respect to the motion for summary judgment, the Court found that
certain groups of asbestos claimants had claims that were not time-barred, and
therefore the plaintiffs could assert claims against the Company for both
actual fraudulent conveyance and constructive fraudulent conveyance. With
respect to the motion to dismiss, the Court granted the Company's motion to
dismiss the fraudulent conveyance claim against it in connection with Bairnco's
1984 spin-off of the Company's common stock, and dismissed all the RICO claims
asserted against the Company. The Court denied the Company's motion to dismiss
the successor liability claim, but noted the plaintiffs' ability to pursue
such a
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claim was subject to their ability to pursue a fraudulent conveyance claim. On
October 29, 1998, the Company filed a motion for reargument of the Court's
ruling that the plaintiffs' claims for actual and constructive fraudulent
conveyance against the Company are not barred by the applicable statute of
limitations. On January 5, 1999, the Court issued a decision on the Company's
motion for reargument, which granted the Company's motion for reargument with
regard to the plaintiffs' claims for constructive fraudulent conveyance, and,
with one minor exception, held those claims were barred by the applicable
statute of limitations and dismissed them. However, the Court denied the
Company's motion to dismiss the actual fraudulent conveyance claims.
Accordingly, as a result of the Company's motions, the only claims remaining
against the Company are plaintiffs' claims for actual fraudulent conveyance and
for successor liability. In addition, there is on behalf of certain individual
judgment creditors, a limited claim for constructive fraudulent conveyance. The
Company does not believe any recovery on this limited claim will be material.
The discovery stay previously in place has been lifted, and discovery is in its
preliminary stages. In other decisions, the Court also dismissed the claims
against all the individual defendants except one, and against the professional
organizations that had been named as defendants in the case. However, Bairnco
and its other subsidiaries and former subsidiaries remain as defendants in the
case. Management believes it has meritorious defenses to the claims pending
against it in this litigation. 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 product quality problems or deficiencies existed with respect to
the Kaydon bearing used in the Sikorsky
16
<PAGE> 19
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 Report (the "JAG Report")
and the Naval Air Systems Command "First Endorsement" to the JAG Report dated
July 28, 1998 wherein the U.S. Navy reviewed the crash of the Sikorsky CH-53E
on May 9, 1996. The findings contained in the JAG Report, management believes,
reaffirm 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. Management further believes the outcome of this matter will not have a
material adverse effect on the Company's financial position or results of
operations.
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 will not have a material adverse
effect on the Company's financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1998.
17
<PAGE> 20
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY & RELATED SHAREHOLDER MATTERS
a. and c. Market Information and Dividends
Information regarding the market price of Kaydon's common stock
appears in the "Financial History" section on page 46 of Kaydon's 1998 Annual
Report to Shareholders, which is incorporated herein by reference. During 1997,
the Company effected a two-for-one stock split; accordingly, all applicable
financial data has been restated to reflect the split. This is the second,
two-for-one split that the Company has initiated with the prior one occurring
in 1992. Kaydon's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol KDN. Kaydon declared cash dividends during 1998, 1997
and 1996 as follows (on a per-share basis):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
March $0.09 $0.07 $0.06
June 0.09 0.07 0.06
September 0.09 0.07 0.06
November 0.10 0.09 0.07
</TABLE>
Effective with the cash dividend declared in November 1998 and paid in January
1999, Kaydon adopted a plan which calls for quarterly cash dividends of $0.10
per share. This recent increase in the dividend amount reflects Kaydon Board of
Directors' continuing confidence in the growing financial strength of the
Company and their expectation of continued earnings growth.
b. Holders
The number of common equity security holders is as follows:
<TABLE>
<CAPTION>
Number of Holders
of Record
Title of Class As of December 31, 1998
- --------------------------------------- -----------------------
<S> <C>
Common Stock, par value $0.10 per share 1,286
</TABLE>
18
<PAGE> 21
Item 6. SELECTED FINANCIAL DATA
Reference is made to "Financial History" on pages 46 and 47 and
"Management's Discussion and Analysis" on pages 23 through 27 of Kaydon's 1998
Annual Report to Shareholders, which is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to "To Our Shareholders" on pages 4 through 7 and
"Management's Discussion and Analysis" on pages 23 through 27 of Kaydon's 1998
Annual Report to Shareholders, which is incorporated herein by reference.
a. Quantitative and Qualitative Disclosures About Market Risk
The Registrant's market risk sensitive instruments do not subject the
Registrant to material market risk exposures.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and related notes
included on pages 28 through 44 of Kaydon's 1998 Annual Report to Shareholders,
which is incorporated herein by reference. Financial statement schedules are
included in Part IV of this filing.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE> 22
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required with respect to directors of Kaydon is
included in the Proxy Statement for the 1999 Annual Meeting of Shareholders of
Kaydon, which has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The information required with respect to
executive officers of the Company is as follows:
<TABLE>
<CAPTION>
Name and Age of Data Pertaining to
Executive Officer Executive Officers
----------------- ---------------------------------------------------------------------------
<S> <C>
Lawrence J. Cawley (64) Chairman of the Board. Mr. Cawley was President of the Bearings Division of
Kaydon Corporation from 1985 to 1987. He was elected President and Chief
Executive Officer of Kaydon Corporation in 1987. In September 1989, Mr. Cawley
was elected Chairman of the Board and appointed Chief Financial Officer. In
June 1996, Mr. Cawley relinquished the position of Chief Executive Officer
while retaining his position as Chairman of the Board and Chief Financial
Officer. In June 1998, Mr. Cawley was appointed Chief Executive Officer. In
September 1998, Mr. Cawley relinquished the positions of Chief Executive
Officer and Chief Financial Officer while retaining his position as Chairman of
the Board.
Brian P. Campbell (58) President, Chief Executive Officer and Chief Financial Officer. Mr. Campbell
joined Kaydon in September 1998 as President, Chief Executive Officer and Chief
Financial Officer. Prior to that, Mr. Campbell was founder and President of
TriMas Corporation from May 1986 to January 1998, and from January 1998 to
September 1998, President and Co-Chief Operating Officer of Masco Tech, Inc.
From 1974 to 1986, Mr. Campbell held several executive positions at Masco
Corporation, including Vice President of Business Development and Group
President. He has been a Director of Kaydon Since September 1995.
</TABLE>
20
<PAGE> 23
<TABLE>
<S> <C>
John F. Brocci (56) Vice President of Administration and Secretary. Mr. Brocci has been Vice
President of Administration since joining Kaydon in March 1989. He was elected
Secretary in April 1992. Prior to joining Kaydon, he was the Operations Manager
for the Sealed Power Division of SPX Corporation.
Stephen K. Clough (45) Mr. Clough joined Kaydon as Vice President of its Automotive operation in April
1986 and became Vice President and General Manager of Kaydon's Bearings
Division in 1987. Mr. Clough was appointed President and Chief Operating
Officer of Kaydon Corporation and was elected to the Board of Directors in
September 1989. In June 1996, Mr. Clough relinquished the title of Chief
Operating Officer and was, in turn, elected Chief Executive Officer. In June
1998, Mr. Clough resigned from the Corporation.
</TABLE>
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the Proxy Statement
for the 1999 Annual Meeting of Shareholders of Kaydon, which has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is included in the Proxy Statement
for the 1999 Annual Meeting of Shareholders of Kaydon, which has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the Proxy Statement
for the 1999 Annual Meeting of Shareholders of Kaydon, which has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference.
21
<PAGE> 24
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. 1. Financial Statements
The following consolidated financial statements of the
Company are included in the Annual Report of the registrant
to its shareholders for the year ended December 31, 1998
which is incorporated herein by reference in Part II, Item 8
of this report.
<TABLE>
<CAPTION>
Page Number in
Annual Report
to Shareholders
---------------
<S> <C>
Consolidated Balance Sheets
as of December 31, 1998 and 1997 28
Consolidated Statements of Income
for the years ended December 31, 1998, 1997 and 1996 29
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996 30
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 31
Notes to Consolidated Financial Statements 32 - 44
Report of Independent Public Accountants 45
</TABLE>
2. Financial Statement Schedules
All schedules required by Form 10-K Annual Report have been
omitted because they were inapplicable, the required
information is included in the notes to the consolidated
financial statements or otherwise is not required under
instructions contained in Regulation S-X.
Financial statements of the Company have been omitted since
the Company is primarily an operating company and all
subsidiaries included in the consolidated financial
statements filed are wholly owned subsidiaries.
22
<PAGE> 25
3. Reference to Exhibits
Reference is made to the Exhibit Index which is found on
pages 25 through 28 of this Form 10-K.
b. Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth
quarter of 1998.
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Kaydon has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KAYDON CORPORATION
Registrant
Date: March 26, 1999 By: /s/Brian P. Campbell
--------------------------------------
President, Chief Executive Officer
and Chief Financial Officer
Date: March 26, 1999 By: /s/Lawrence J. Cawley
---------------------------------------
Chairman
Date: March 26, 1999 By: /s/Joseph P. Port
--------------------------------------
Vice President Finance and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of Kaydon and in
the capacities and on the dates indicated.
/s/ Gerald J. Breen
------------------------------
Gerald J. Breen - Director March 26, 1999
/s/ Brian P. Campbell
------------------------------
Brian P. Campbell - Director March 26, 1999
/s/ Lawrence J. Cawley
------------------------------
Lawrence J. Cawley - Chairman March 26, 1999
/s/ Thomas C. Sullivan
------------------------------
Thomas C. Sullivan - Director March 26, 1999
24
<PAGE> 27
c. 1. Exhibits Index
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
<S> <C> <C>
2.1 Stock and Asset Purchase Exhibit 2 to Kaydon's
Agreement between Kaydon Registration Statement on
Acquisition, Inc. (now Form 8-K filed on July 15,
Kaydon Ring and Seal, Inc.) 1986, as amended by the
and Koppers Company, Inc., Registration Statement filed
dated June 26, 1986. on Form 8-K on September 30,
1986 (SEC File No. 0-12640).
2.2 Agreement of Purchase and Sale Exhibit 2 to Kaydon's Annual
between Kaydon Corporation and Report on Form 10-K for the
TRW Automotive Products, Inc., year ended December 31, 1987
dated as of June 29, 1987. (SEC File No. 0-12640).
2.3 Stock Purchase Agreement among Exhibit 2 to Kaydon's
Kaydon Corporation, Kaydon Registration Statement on
Acquisition Corp. III, Kaydon Form 8-K filed on July 7,
Acquisition Corp. IV, KDI Holdings, 1989, as amended by the
Inc. and KDI Corporation. Registration Statement filed
on Form 8-K on November 3,
1989 and Registration
Statement filed on Form 8-K
on March 27, 1990 (SEC File
No. 0-12640).
2.4 Stock Purchase Agreement among Exhibit 2 to Kaydon's
Kaydon Corporation, Kaydon Registration Statement on
Acquisition Corp. U.K. Limited, Form 8-K filed on December
Murray Ventures PLC and others 31, 1991, as amended by the
and William Terence Blaney and Registration Statement filed
others. on Form 8-K on February 28,
1992 (SEC File No. 0-12640).
2.5 Asset Purchase Agreement among Exhibit 2 to Kaydon's Annual
Kaydon Corporation, Industrial Report on Form 10-K for the
Tectonics Inc and Axel Johnson, year ended December 31, 1994
Inc. dated January 28, 1994. (SEC File No. 0-12640).
2.6 Stock Purchase Agreement among Exhibit 2.6 to Kaydon's
Kaydon Acquisition Corp. V and Annual Report on Form 10-K
the shareholders of Seabee for the year ended December
Corporation. 31, 1995 (SEC File No.
0-12640).
2.7 Asset Purchase Agreement among Exhibit 2.7 to Kaydon's
Kaydon Acquisition VII, Inc., Annual Report on Form 10-K
Keynote Holding Co., Inc, Victor for the year ended December
Fluid Power Co. and Benton 31, 1996 (SEC File No.
Harbor Engineering Co., Inc. 0-12640).
dated February 1, 1996.
3.1 Certificate of Incorporation Exhibit 3 to Kaydon's
of the Registrant, dated Registration Statement on
October 21, 1983. Form S-1 (No. 2-89399).
3.2 Certificate of Amendment to Exhibit 3 to Kaydon's
the Certificate of Incorporation Registration Statement on
of the Registrant, dated Form S-1 (No. 2-89399).
November 23, 1983.
3.3 Certificate of Amendment to the Exhibit 3 to Kaydon's
Certificate of Incorporation of Registration Statement on
the Registrant, dated Form S-1 (No. 2-89399).
February 6, 1984.
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
<S> <C> <C>
3.4 Certificate of Correction to Exhibit 3 to Kaydon's
the Certificate of Amendment to Registration Statement on
the Certificate of Incorporation Form S-1 (No. 2-89399).
of the Registrant, dated
February 17, 1984.
3.5 Form of Restated Certificate of Exhibit 3 to Kaydon's
Incorporation of the Registrant, Registration Statement on
dated March 1984. Form S-1 (No. 2-89399).
3.6 Amendment to Certificate of Exhibit 3 to Kaydon's Annual
Incorporation of the Registrant, Report on Form 10-K for the
dated February 24, 1987. year ended December 31, 1987
(SEC File No. 0-12640).
3.7 By-Laws of the Registrant, as Exhibit 3 to Kaydon's
adopted on October 27, 1983. Registration Statement on
Form S-1 (No. 2-89399).
3.8 Amended By-Laws of the Exhibit 3 to Kaydon's Annual
Registrant, as adopted on Report on Form 10-K for the
February 19, 1986. year ended December 31, 1985
(SEC File No. 0-12640).
3.9 Amendment to the By-Laws of Exhibit 3 to Kaydon's Annual
the Registrant, dated as of Report on Form 10-K for the
September 19, 1989. year ended December 31, 1989
(SEC File No. 0-12640).
3.10 Certificate of Amendment to Exhibit 3 to Kaydon's
the Certificate of Incorporation Quarterly Report on Form 10-Q
of the Registrant, dated for the quarter ended March
April 27, 1992. 28, 1992 (SEC File No.
0-12640).
4.1 Form of Stock Certificate for Exhibit 3 to Kaydon's
Kaydon Common Stock. Registration Statement on
Form S-1 (No. 2-89399).
4.2 Shareholders Rights Plan Exhibit 1 to Kaydon's
dated June 21, 1995. Registration of Certain
Classes of Securities on Form
8-A filed June 28, 1995 (SEC
File No. 0-12640).
10.1 Amended and Restated Exhibit 4 to Kaydon's Annual
Revolving Credit and Term Report on Form 10-K for the
Loan Agreement, dated year ended December 31, 1990
March 14, 1990. (SEC File No. 0-12640).
10.2 First Amendment to the Amended Exhibit 4 to Kaydon's Annual
and Restated Revolving Credit Report on Form 10-K for the
and Term Loan Agreement, dated year ended December 31, 1991
February 22, 1991. (SEC File No. 0-12640).
10.3 Second Amendment to the Amended Exhibit 4.1 to Kaydon's
and Restated Revolving Credit Annual Report on Form 10-K
and Term Loan Agreement, dated for the year ended December
February 28, 1994. 31, 1994 (SEC File No.
0-12640).
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
<S> <C> <C>
10.4 Third Amendment to the Amended Exhibit 4.2 to Kaydon's
and Restated Revolving Credit Annual Report on Form 10-K
and Term Loan Agreement, dated for the year ended December
March 29, 1994. 31, 1994 (SEC File No.
0-12640).
10.5 Letter, dated March 22, 1984, Exhibit 4 to Kaydon's
whereby the Registrant undertakes Registration Statement on
to furnish to the Securities and Form S-1 (No. 2-89399).
Exchange Commission, upon request,
a copy of certain instruments as
provided in Item 601(b)(4)(iii)(A)
of Regulation S-K.
10.6 Kaydon Corporation Employee Stock Exhibit 10.1 to Kaydon's
Ownership and Thrift Plan as Annual Report on Form 10-K
amended and restated for the year ended December
December 14, 1994 effective 31, 1994 (SEC File No.
January 1, 1989. 0-12640).
10.7 Management Incentive Exhibit 10 to Kaydon's
Compensation Plan. Registration Statement on
Form S-1 (No. 2-89399).
10.8 Electro-Tec Corporation Employee Exhibit 10.2 to Kaydon's
Retirement Benefit Plan as amended Annual Report on Form 10-K
and restated December 14, 1994 for the year ended December
effective July 1, 1989. 31, 1994 (SEC File No.
0-12640).
10.9 Kaydon Corporation 1993 Exhibit A to Kaydon's Proxy
Stock Option Plan. Statement dated March 10,
1993.
10.10 Kaydon Corporation 1993 Exhibit B to Kaydon's Proxy
Non-Employee Directors Statement dated March 10,
Stock Option Plan. 1993.
</TABLE>
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (10.11 AND 10.12 ONLY)
<TABLE>
<S> <C> <C>
10.11 Kaydon Corporation Supplemental Exhibit 10.11 to Kaydon's
Executive Retirement Plan. Annual Report on Form 10-K
for the year ended December
31, 1995 (SEC File No.
0-12640).
10.12 Change in Control Compensation Exhibit 10.12 to Kaydon's
Agreements Versions A & B. Annual Report on Form 10-K
for the year ended December
31, 1995 (SEC File No.
0-12640).
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
<S> <C> <C>
10.13 Fluid Power Companies Pension Exhibit 4.3 to Kaydon's
and Retirement Savings Plan. Registration Statement on
Form S-8 (No. 333-15903), as
amended by filing with the
SEC pursuant to Rule 424(c)
of the Securities Act of 1933
on November 12, 1996.
10.14 Asset Purchase Agreement among Exhibit 10.14 to Kaydon's
Kaydon Acquisition Corp. V and Annual Report on Form 10-K
the Shareholders of Gold Star for the year ended December
Manufacturing, Inc. dated March 31, 1997 (SEC File No.
11, 1997. 0-12640).
10.15 Restated Revolving Credit Exhibit 10.15 to Kaydon's
Agreement dated February 28, Annual Report on Form 10-K
1997. for the year ended December
31, 1997 (SEC File No.
0-12640).
10.16 Asset Purchase Agreement among Exhibit 10.16 to Kaydon's
Kaydon Acquisition VIII, Inc. Annual Report on Form 10-K
and Hein-Werner Corporation for the year ended December
dated May 29, 1997. 31, 1997 (SEC File No.
0-12640).
10.17 Amended By-Laws of the Registrant, Exhibit 10.17 to Kaydon's
as adopted May 14, 1997. Annual Report on Form 10-K
for the year ended December
31, 1997 (SEC File No.
0-12640).
13 Financial Section of Annual
Report to Shareholders.
21 Subsidiaries of Registrant.
23 Consent of Independent Public
Accountants.
27 Financial Data Schedule
(for SEC use only)
</TABLE>
28
<PAGE> 1
EXHIBIT 13
[GRAPHIC]
1998 ANNUAL REPORT
<PAGE> 2
PROFILE OF KAYDON CORPORATION
Kaydon Corporation is a leading diversified manufacturer of highly engineered,
performance-critical custom products having a broad and diverse customer base.
The successful implementation of Kaydon's growth strategies has produced seven
consecutive record years of increased sales and operating results.
Kaydon's leadership market and proprietary product positions have again produced
record sales in 1998 to each of the market sectors we serve. Record operating
performance in 1998 enabled Kaydon Corporation to continue strategic investments
in aggressive long-term growth initiatives while continuing to strengthen its
financial position.
HIGHLIGHTS OF ANOTHER RECORD YEAR
- Record sales of $376.2 million achieved through proprietary, value-added
product positions and product line extensions, expansion into new markets
and contributions from acquisitions.
- Record operating income of $110.4 million as increased sales and
continuing efficiency initiatives contributed to improved earnings
performance.
- Record net income of $71.2 million and diluted earnings per share of
$2.17, an increase of 15.4 percent and 16.7 percent, respectively,
compared to 1997 results.
- Record cash flow from operations of $72.6 million results in five-year
total of over $306.0 million; year-end cash and cash equivalents total
$96.2 million after $39.1 million of common stock repurchases and $25.4
million of capital expenditures.
- Continued adherence to our growth philosophy which has been so critical in
achieving our most important long-term objective--maximization of
shareholder value.
TABLE OF CONTENTS
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS................................................... 1
KAYDON AT A GLANCE..................................................... 2
SHAREHOLDER LETTER..................................................... 4
GROWTH STRATEGIES...................................................... 8
SPECIAL INDUSTRIAL MACHINERY SECTOR DESCRIPTION........................ 16
REPLACEMENT PARTS & EXPORTS SECTOR DESCRIPTION......................... 17
AEROSPACE & MILITARY EQUIPMENT SECTOR DESCRIPTION...................... 18
HEAVY INDUSTRIAL EQUIPMENT SECTOR DESCRIPTION ......................... 19
FINANCIAL CONTENTS..................................................... 20
</TABLE>
<PAGE> 3
SHAREHOLDER & CORPORATE INFORMATION
EXECUTIVE OFFICES
Kaydon Corporation
19345 U.S. 19 North, Suite 500, Clearwater, Florida 33764-3148
Telephone 727.531.1101 Fax 727.524.3629
Our new address effective May 15, 1999 is
Kaydon Corporation
315 East Eisenhower Parkway, Suite 300, Ann Arbor, Michigan 48108-3330
Telephone 734.747.7025 Fax 734.747.6565
ANNUAL MEETING OF SHAREHOLDERS
The Annual Shareholders Meeting will be held at the Tampa Airport
Marriott Hotel, Tampa, Florida on April 30, 1999 at 10:00 a.m., Eastern
daylight time.
10-K REPORT
A copy of the Form 10-K annual report filed with the Securities and
Exchange Commission for the year ended December 31, 1998 is available
at no charge to shareholders who direct a request in writing to the
Company:
Attention: Shareholder Relations, Kaydon Corporation, 315 East
Eisenhower Parkway, Suite 300, Ann Arbor, Michigan 48108-3330
QUARTERLY COMMON STOCK PRICE INFORMATION
<TABLE>
<CAPTION>
1998 1997
Market Price Market Price
High Low High Low
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4th Quarter $40 1/16 $23 5/8 $34 1/8 $29 1/4
- ----------------------------------------------------------------------------
3rd Quarter 39 3/8 24 13/16 32 1/32 24 1/4
- ----------------------------------------------------------------------------
2nd Quarter 45 3/16 35 5/16 25 11/16 20 15/16
- ----------------------------------------------------------------------------
1st Quarter 42 13/16 30 1/16 23 3/8 21
- ----------------------------------------------------------------------------
</TABLE>
COMMON STOCK DATA
Kaydon Corporation's common stock is listed and traded on the New York
Stock Exchange with the symbol KDN.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, 171 Monroe Avenue, N.W. Grand Rapids, MI
49503-2683
TRANSFER AGENT AND REGISTRAR
Shareholders may address inquiries to: Continental Stock Transfer and
Trust Company, 2 Broadway, New York, NY 10004-2801 Telephone
212.509.4000
<PAGE> 4
Kaydon Corporation
Arbor Shoreline Office Park
19345 U.S. 19 North, Suite 500
Clearwater, FL 33764-3148
727.531.1101
New Address Effective May 15, 1999
Kaydon Corporation
315 E. Eisenhower Parkway, Suite 300
Ann Arbor, MI 48108-3330
734.747.7025
<PAGE> 5
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In thousands, except per share data)
December 31, 1998 December 31, 1997 Change
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $376,172 $329,036 14%
Operating Income $110,380 $ 95,681 15%
Net Income $ 71,184 $ 61,666 15%
As % of Net Sales 18.9% 18.7%
Earnings Per Share-Diluted $ 2.17 $ 1.86 17%
Dividends Per Share $ 0.37 $ 0.30 23%
Cash Flow From Operations $ 72,560 $ 71,619 1%
Total Assets $413,808 $383,985 8%
Working Capital $158,600 $143,763 10%
Shareholders' Equity $311,656 $283,596 10%
Book Value Per Share $ 9.69 $ 8.60 13%
Weighted Average Shares Outstanding-Diluted 32,871 33,163 -1%
- --------------------------------------------------------------------------------------------
</TABLE>
Graphic
Graphic
Graphic
KAYDON CORPORATION 1998 1
<PAGE> 6
[GRAPHIC]
KAYDON AT A GLANCE -- MARKET SECTORS
Market
Sector SPECIAL INDUSTRIAL MACHINERY
1998
Sales $99,710,000
TYPICAL END USE
- Machine Tools
- Material Handling Equipment
- Semiconductor Manufacturing Equipment
- Medical Diagnostic Equipment
- Large Air & Gas Compressors
- Robotic Equipment
ECONOMIC FACTOR
Domestic industrial production levels and capital spending.
VALUE-ADDED PRODUCTS
Robotic Manipulator Bearings, Gas Transmission Line Compressor Piston and
Sealing Rings, Air Conditioning Compressor Filters, Printing Machine Roll
Bearings, Medical Scanner Bearing Systems, Diesel Engine Piston Ring Sets,
Slip-Rings and Assemblies, Hydraulic Cylinders, Hydraulic Actuators for Drilling
Platforms and Rescue Devices.
Market
Sector Replacement Parts and Exports
1998
Sales $113,427,000
TYPICAL END USE
- Replacement parts sold to major equipment users, the United States
Government and through distributors, plus all export sales
ECONOMIC FACTOR
Stable business with minor sensitivity to industrial production levels.
VALUE-ADDED PRODUCTS
Railroad Diesel Replacement Piston Ring Sets, Spare Bearings, Filter Elements
and Shaft Seals for Military Equipment, Distributor Replacement Bearings and
Filter Elements for Original Equipment Applications, Slip-Rings and Assemblies.
2 KAYDON CORPORATION 1998
<PAGE> 7
[GRAPHIC]
Market
Sector AEROSPACE & MILITARY EQUIPMENT
1998
Sales $50,593,000
TYPICAL END USE
- Commercial & Military Satellite Equipment
- Military & Commercial Aircraft
- Radar & Ordinance Equipment
ECONOMIC FACTOR
Level of domestic aircraft, including maintenance, aircraft and defense spending
for selected equipment programs.
VALUE-ADDED PRODUCTS
Aircraft Jet Engine Shaft Seals and Sealing Rings, Radar and Fire Control Custom
Bearings, Helicopter and Gear Box Assembly Bearings, Military Vehicle Fuel
Filter Systems, Aircraft Landing Wheel Brake Bearings, Tank Turbine Engine Shaft
Seals, Military Turret Azimuth and Elevation Bearings, Slip-Rings and
Assemblies.
Market
Sector Heavy Industrial Equipment
1998
Sales $112,442,000
TYPICAL END USE
- Construction Equipment
- Mining Equipment
- Forestry Equipment
- Oil Field & Power Generation Equipment
ECONOMIC FACTOR
Domestic level of new industrial and construction spending; domestic electric
power generation and petroleum product exploration and production levels.
VALUE-ADDED PRODUCTS
Hydraulic Excavator Swing Bearings, Off-Road Equipment, Hydraulic Filter
Elements, Power Generation Lubrication Oil Filter Units, Sealing Rings, Piston
Rings, Slip-Rings and Assemblies, Hydraulic Cylinders for Construction
Equipment.
KAYDON CORPORATION 1998 3
<PAGE> 8
TO OUR SHAREHOLDERS
ANOTHER YEAR OF RECORD OPERATING PERFORMANCE
For the seventh consecutive year, Kaydon Corporation achieved record
sales, operating income and earnings per share in 1998. In addition to
our record levels in sales and operating income, we also continued our
progress from implementing our proven strategies for long-term growth:
new product development, market share initiatives, cost reduction and
manufacturing efficiencies, and the continued strengthening of our
financial position.
In addition to our record levels in sales and operating income, we also
continued our progress from implementing our proven strategies for
long-term growth.
Adhering to our well-disciplined and well-defined operational
objectives and growth strategies, we have significantly strengthened
our financial and competitive positions, thereby enhancing future
growth and profit opportunities. Important 1998 accomplishments,
discussed on the following pages of this report, have increased our
ability to reach our most important long-term objectives --continued
above-average profit growth and maximization of shareholder value.
Net sales in 1998 increased 14.3 percent to a record $376.2 million, as
compared to 1997 sales of $329.0 million, while net income increased
15.4 percent to a record $71.2 million, compared to $61.7 million in
1997. Basic earnings per share in 1998 increased 16.6 percent to a
record $2.18 compared to $1.87 in 1997. On a diluted basis, record
earnings per share were $2.17 in 1998, compared to $1.86 in the prior
year.
FINANCIAL POSITION STRENGTHENED DURING 1998
The ability to generate funds internally is one of our most significant
financial strengths. As in prior years, Kaydon Corporation's increased
operating earnings and superior cash flow during 1998 allowed us to
further strengthen our financial position and liquidity while
supporting both internal and external investment initiatives to further
enhance future profit opportunities.
Cash flow from operations during 1998 was a record $72.6 million,
compared to 1997's $71.6 million, resulting in over $306.0 million in
cash generated from operations during the last five years. Net capital
expenditures in 1998 were $25.4 million, compared to $12.8 million the
previous year. Investments for cost reductions, manufacturing
efficiencies and capacity increases accounted for substantially all of
these expenditures. In the five-year period through 1998, Kaydon has
expended over $61.6 million for capital investments to enhance our
future growth and profitability. The substantial cumulative cash flow
generated during this period enabled Kaydon to pursue external growth
initiatives, increase common stock dividends, finance capital
expenditure programs, and continually strengthen our financial
position, including the achievement of a debt-free capital structure.
The ability to generate funds internally is one of our most significant
financial strengths.
To put our cash generation and increased financial flexibility in a
broader context, Kaydon began 1998 with cash and marketable securities
of $96.8 million. During the year, we purchased $39.1 million of common
stock under our existing stock repurchase program and expended $25.4
million for capital expenditures, including $13.3 million for what we
4 KAYDON CORPORATION 1998
<PAGE> 9
[PHOTO]
MARCH 18, 1999
Lawrence J. Cawley (Left)
Chairman
Brian P. Campbell (Right)
President and
Chief Executive Officer
consider to be non-recurring capital investments. After payment of $11.8
million in common stock dividends, our year-end 1998 cash and marketable
securities balance was $96.2 million.
Our ability to generate above-average cash flow enables Kaydon to
continue to pursue our ambitious capital expenditure, diversification
and profitability objectives, and permits us to further increase our
competitive and financial strengths in future years.
The enhanced financial strength of Kaydon is a vital element of our
long-term growth and diversification strategies and will continue to
provide important support to our objective of maximizing long-term
shareholder value.
Our ability to generate above-average cash flow enables Kaydon to continue to
pursue our ambitious capital expenditure, diversification and profitability
objectives, and permits us to further increase our competitive and financial
strengths in future years.
MANAGEMENT TRANSITION
At its September 23, 1998 meeting, the Board of Directors elected Brian
P. Campbell as President and Chief Executive Officer of the Company. Mr.
Campbell, who has been a director of Kaydon since 1995, was the Founder
and President of TriMas Corporation beginning in 1986. Through 1997,
when it achieved sales of $667.0 million, TriMas recorded ten
consecutive record years of increased sales, operating profits and cash
flow. Previously listed on the NYSE, TriMas was acquired by MascoTech,
Inc. in a January 1998 cash tender offer. Prior to his election, Mr.
Campbell was President and Co-Chief Operating Officer of MascoTech.
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 to fill a vacancy. Mr. Sullivan is Chairman and Chief
Executive Officer of RPM, Inc., a $1.6 billion company which
manufactures and sells specialty consumer and industrial coatings
including such well-known brand names as Rust-Oleum(R), Zinsser(R),
Plastic Wood(R), and Bondex(R). As a result of its ongoing internal and
external growth strategies, RPM recently completed its 51st
KAYDON CORPORATION 1998 5
<PAGE> 10
consecutive year of record growth in sales and earnings. Earlier this
year, Forbes magazine listed RPM in its Forbes Platinum List as one of
the 400 best-performing big companies in the U.S. We look forward to Mr.
Sullivan's continuing counsel and contributions to Kaydon's long-term
growth and success.
During the year we were pleased to announce that John R. Emling joined
Kaydon as President of our Bearing Group. Based upon his extensive
industry experience, we look forward to his leadership contributions to
this important Kaydon operating unit.
DIVIDEND INCREASED
In view of our strong cash generation, attractive return on capital, and
optimistic long-term outlook, the Board of Directors increased the
quarterly dividend 11 percent during 1998 to an annualized rate of $.40
per share.
OUTLOOK FOR THE FUTURE
Although 1998 was a year affected by many economic and political
uncertainties, our gains in operating performance, cash flow and
financial strength gave further support to our growth and market sector
diversification strategies. While many of these uncertainties will
continue to affect the economy in 1999 and the years beyond, we remain
optimistic about Kaydon's long-term future growth prospects.
As discussed elsewhere in this report, sales in some key markets have
slowed in recent months, particularly sales of fluid power products to
offshore petroleum equipment customers as well as sales of specialty
bearing products to the semiconductor equipment market. Although this
softening in demand will present challenges to us in the first and
second quarters of 1999, we believe that 1999's second half should see
higher order-entry rates as compared to the first half of the year.
Although 1999 will be a challenging year for Kaydon, we believe our
Growth Strategies, discussed on the following pages, should continue to
create superior long-term operating and shareholder returns.
Our backlog of unshipped orders stands at $145.3 million at year-end
compared to $155.5 million at year-end 1997. Backlog numbers, primarily
as a result of the variability of order-entry and shipping release
dates, are not nearly as significant to Kaydon's business outlook or
future success as they were five or more years ago.
Our optimism for future growth prospects is founded upon expected
continued long-term positive momentum from all of the market sectors we
serve, based upon our belief in continued modest economic growth and a low
interest rate environment.
In past years we have mentioned the continuing changes in manufacturing
technology and processes, including the reduction in manufacturing
lead-times, just-in-time inventory control systems, and the ongoing
compression of the entire ordering/manufacturing cycle. We have also
made note of the percentage of our revenues represented by the repair,
maintenance and replacement market (approximately 22.4 percent) that
requires shipment from inventory in the same month, week or day that an
order is received.
Our optimism for future growth prospects is founded upon expected
continued long-term positive momentum from all of the market sectors we
serve, based upon our belief in
6 KAYDON CORPORATION 1998
<PAGE> 11
continued modest economic growth and a low interest rate environment
during the next five years. We believe Kaydon is well positioned
strategically to take advantage of profitable growth opportunities,
supported by our enhanced financial strength, high levels of liquidity
and cash flow, and focused strategies. Our significant capital
investments during the last five years for cost reductions and
manufacturing efficiencies, market share initiatives and well-defined
and strategically targeted capacity expansion programs should have an
important, positive impact on Kaydon's future earnings performance.
Specifically, we intend to build on our past success to achieve
above-average, long-term cash flow and profit growth.
As we look forward to the next five years, we see opportunities for
both internal and external growth in all of our market sectors.
Specifically, we intend to build on our past success to achieve
above-average, long-term cash flow and profit growth through:
- Ongoing new product introductions and product line extensions.
- Continued penetration into both new and related markets.
- Strategic allocation of resources to sustain our balanced
diversification.
- The continued leveraging of our competitive strengths to obtain
further "share of customer" and "share of market" positions, based
upon our proven engineering and manufacturing competencies.
- Further investment to maintain manufacturing technology leadership
in our markets.
- Enhancement of our strong financial position and flexibility.
- Continued search for complementary acquisitions which will enhance
future profit opportunities and contribute to our five-year
strategic goal to double the size of Kaydon.
The maximization of long-term shareholder value, achieved by providing
an attractive total return to investors, remains the overall objective
of Kaydon. We have the essential elements in place to produce
attractive long-term returns for our shareholders: well-defined,
focused operating and financial strategies, proven operating
management, and leadership product and market positions.
The maximization of long-term shareholder value, achieved by providing an
attractive total return to investors, remains the overall objective of
Kaydon.
As we verge on a new century, the next decade will continue to present
unprecedented challenges and opportunities. We believe that Kaydon is
uniquely positioned to convert challenges into opportunities through
entrepreneurially based management that is structured for adaptive
strategies, quick responses and individual initiatives; characteristics
that reflect the distinctive competence of Kaydon and its people.
<TABLE>
<S> <C>
/s/ Lawrence J. Crawley /s/ Brian P. Campbell
- ----------------------- -----------------------------------
Lawrence J. Cawley Brian P. Campbell
Chairman President & Chief Executive Officer
</TABLE>
KAYDON CORPORATION 1998 7
<PAGE> 12
GROWTH STRATEGIES
[GRAPHIC]
HIGHLIGHTS
Kaydon Corporation achieved its seventh consecutive year of growth in 1998. The
foundation for our growth is the Company's well-defined and disciplined
operating, diversification and financial strategies. Through strict adherence to
these Growth Strategies, more fully discussed below, we believe Kaydon
Corporation is well positioned to continue creating superior operating and
shareholder returns. Specifically, our Growth Strategies are designed to:
- Grow operating cash flow to fund internal and external expansion.
- Strengthen our balance sheet, consistent with our superior cash flow,
allowing us to aggressively pursue growth opportunities.
- Increase operating income while earning a minimum 20-25 percent operating
margin on net sales, including future acquisitions.
- Increase earnings per share, on average over any five-year period, by
15-20 percent annually.
For the five-year period from 1994 to 1998, Kaydon Corporation has realized
compound annual rates of growth of 16.4 percent in sales, 19.2 percent in
operating income and 23.6 percent in earnings per share. This strong financial
performance has enabled Kaydon shareholders to realize total returns on their
investment in Kaydon common stock during this same five year period of 32.6
percent per year. Continued superior long-term returns to shareholders will be
created only through superior long-term financial performance. Because our
financial success is firmly based in our aggressive and well-defined financial
objectives, which have been consistently achieved through adherence to
disciplined operating and profit growth strategies, it is important to
articulate this strategic framework for growth.
The Company operates through individual operating units which serve four key
market sectors. The market sectors served by the Company have several related
economic characteristics and attributes, including similar products,
distribution patterns and classes of customers. As a result, the Company
aggregates its operating units into a single segment of Custom-Engineered
Products.
Each of our operating units has aggressive goals for growth in earnings based on
our overall corporate goals outlined below. The management of each Kaydon
operating unit is responsible for executing aggressive market-specific and
product-specific growth strategies through continuous product and market
development that most effectively leverages the distinctive core manufacturing,
new product development and marketing capabilities of that Kaydon business.
Kaydon's operating units possess:
- Key management and operational characteristics that make important
contributions to our continued success.
- Clearly defined operating and financial objectives.
- Lean, profit-oriented management.
8 KAYDON CORPORATION 1998
<PAGE> 13
- Operational autonomy which encourages and supports initiative and timely
decisions.
- Operating and financial flexibility which permits immediate response to
changing market environments.
- A distinct management culture based upon shared values, which accepts,
supports and validates Kaydon's objectives.
OPERATING PHILOSOPHY
Kaydon's individual operating units are empowered and managed as autonomous
profit centers. Our operating units are characterized by entrepreneurial
success across a broad range of markets and products, supported by individual
initiative and decision making as well as access to the people, centralized
support services and capital resources available in a larger organization.
In the competitive markets in which Kaydon participates, the availability of
capital resources, in conjunction with the decentralized nature of our
individual operating units, has provided us with key competitive advantages:
- Highly productive and cost efficient manufacturing capabilities.
- Premier customer service levels in every key market in which we
participate.
- Aggressive engineering and new product development programs, allowing us
to offer the most extensive range of innovative, value-added products and
services in our relevant markets.
- Leadership positions in selected niche markets, which support strategic
initiatives to further enhance market shares.
- The ability to further enhance cash flows to support future growth
opportunities and maintain our positions of leadership and innovation.
OPERATING AND PROFIT GROWTH STRATEGIES
Our operating and profit strategies, so vital in providing Kaydon with
competitive market advantages, are based upon eight key principles:
- Provide customers with highly engineered, value-added,
performance-critical products.
- Primary focus on profit growth, return on capital and cash flow as
priorities over sales growth.
- Enhancement of our leadership product positions in selected and
diversified niche markets.
- Continuous and rapid improvement of our businesses by strategic investment
in capacity, manufacturing efficiencies, process improvement, aggressive
marketing initiatives and people resources.
- Enhancement of our strong competitive positions based on product quality,
innovation and customer service.
- Avoidance of price-sensitive markets where we cannot receive acceptable
returns for the unique value-added qualities of our proprietary products
and services.
- Well-defined responsibility for attaining performance goals based on
well-disciplined, strong operating controls.
- Utilization of a disciplined acquisition strategy to complement future
profit growth.
EMPHASIS ON PROPRIETARY PRODUCTS
The success of Kaydon is based to a great extent upon our proprietary product
positions and their cost effective, value-added features, which have proven
so compelling to our customers. A high priority of Kaydon is the ongoing
development of new proprietary products, marketing channels and manufacturing
processes, which not only maintains, but also enhances, our competitive and
market leadership positions.
KAYDON CORPORATION 1998 9
<PAGE> 14
GROWTH STRATEGIES
We define a proprietary product as one with characteristics broader than a
position protected by patent. Within Kaydon, proprietary products are those
that have demonstrably superior design and utility, have a unique
distribution and service capability, or incorporate the effective integration
of many capabilities which, when combined, offer compelling advantages to our
customers.
Cost effectiveness, convenience, durability, safety and reliability are
product features that offer premium value to the customer. Such a premium
should exist whether that customer is a purchasing agent for an OEM customer
or an ultimate end-user purchasing one of our replacement market products.
Proprietary products with premium value to our customers provide unique
opportunities for continued growth when those products are designed,
manufactured and aggressively marketed. It is our value-added, highly
engineered proprietary products and, in many cases, our "brand equity" which
allow us the competitive leverage to increase existing market shares to
obtain enhanced future sales and earnings growth.
MARKET LEADERSHIP
Our proprietary product positions have allowed Kaydon to assume a key
leadership role in substantially all of the key markets relevant to our
success and future growth. We believe market leadership is more than just
share of market. It means enhancing our manufacturing and product
technologies so that Kaydon is able to offer the widest range of products to
the widest customer base. It means the avoidance of complacency, no matter
how strong our competitive advantages are. It means a strategy to make our
products obsolete before competitors do, by continued innovative new product
development. And most important, market leadership means continual
improvement in every aspect of our businesses.
Market leadership in a competitive world begins with advanced manufacturing
and application engineering technologies which allow us to maintain and
enhance our competitive advantage as a cost efficient, high-productivity
leader in every key market in which we compete. We will continue to invest in
capital programs that will further strengthen manufacturing capabilities and
provide increased flexibility to produce a wide range of existing and new
value-added products to satisfy ever-changing market demands and
opportunities.
Our market leadership positions and superior operating performance during
periods of economic adversity are clear evidence of our manufacturing
efficiency. Kaydon's emphasis on the continual improvement of manufacturing
technologies and proficiencies will enhance our operating performance
throughout the coming decade.
Aggressive marketing initiatives are a key element in maintaining market
leadership. In a market driven economy, customer needs are changing at an
ever-increasing pace and our ability to respond quickly is an important
competitive advantage.
Staying close to customers and listening to their needs and concerns about
the marketplace have been hallmarks of our success for many years. A
proactive strategy of assessing shifting markets and product needs has
allowed us to recognize new growth opportunities quickly, thereby pre-empting
competitive threats by other companies who often struggle to react to
emerging marketplace trends. Our marketing initiatives rely heavily on our
proven manufacturing and technical advantages and expertise to respond
quickly to customer needs throughout the world.
10 KAYDON CORPORATION 1998
<PAGE> 15
Awareness of market needs, superior customer service and the pursuit of
aggressive new product development initiatives provide us with the
competitive advantages to maintain our leadership positions.
In this decade's challenging, market driven environment, competitive dynamics
are changing more rapidly than ever before. Increasing concerns about
quality, performance, customer service and cost effectiveness are assuming
increasing importance in all of our key markets, presenting additional new
product opportunities. Competitive leadership has allowed us to aggressively
pursue new product initiatives, which have made important contributions to
our growth.
WELL-DEFINED FINANCIAL OBJECTIVES
We have established well-defined, disciplined financial objectives to measure
our operating performance. Although external factors may prevent us from
reaching all of these objectives in a particular year, we believe that they
are attainable, on average, over any five-year period. Specifically, our
financial objectives are to:
- Maintain strong operating cash flow to fund internal expansion and
continually strengthen our balance sheet.
- Manage our balance sheet prudently, consistent with our superior cash
flow.
- Earn a minimum 20 percent annual return on shareholders' equity.
- Increase operating income while earning a minimum 20-25 percent operating
margin on net sales, including contributions from acquired companies.
- Increase earnings per share, on average over any five-year period, by
15-20 percent per year.
Attainment of our financial objectives is a crucial element in the successful
implementation of overall corporate goals. Our strong financial position and
flexibility have allowed us to make continual improvements in all key aspects
of our business, including enhanced manufacturing and distribution
efficiencies and quality and customer service programs, and will allow us to
continue aggressively pursuing new proprietary product developments which
provide further expansion of our available markets.
Cash generation is an important element in our ability to meet aggressive
targets for growth, representing one of our most important strategic
financial objectives. In evaluating both overall corporate performance and
the individual performance of our Kaydon operating units, we utilize several
cash flow standards to measure our return on assets employed and our capacity
to finance future growth.
Our cash flow from operations has strengthened significantly since 1994 as
Chart #1 illustrates. Significant increases in cash flow from operations are
primarily the result of increasing operating earnings and continued
improvements in working capital management. Because of strategic capital
investment initiatives implemented during the last decade, Kaydon has enjoyed
competitive advantages based on cost effective, advanced manufacturing
technologies and productive capacity, which provide considerable flexibility
in servicing increased customer demands.
[GRAPHIC]
After-tax cash flow, defined as net income plus noncash charges for
depreciation, amortization and deferred taxes, is an important measure of
cash generated from operations of our
KAYDON CORPORATION 1998 11
<PAGE> 16
GROWTH STRATEGIES
[GRAPHIC]
[GRAPHIC]
[GRAPHIC]
operating units and available to fund future growth initiatives. This
important cash flow measure, illustrated in Chart #2, has grown significantly
during the last five years, increasing at an annual rate of 21.0 percent in
the 1994-1998 period. This above-average performance reflects the underlying
growth of earnings recorded by Kaydon operating units as we continue to
benefit increasingly from the growth initiatives of the last five years.
Kaydon maintains a corporate development program to complement internal
growth. The acquisition of leadership companies has played an important
strategic role in our success. Due to the exceptional operating and financial
characteristics of leadership companies, the purchase price paid generally
exceeds the acquired company's historical book value. When accounted for as a
purchase, this premium increases the book value of acquired assets, including
goodwill, and its related amortization which is charged against consolidated
operating results.
To more adequately gauge the ongoing operational and financial progress of
Kaydon, we utilize cash return on net operating assets (operating cash flow
compared to net operating assets, as defined below) as a more comparable
measure of operating performance. As discussed previously, maintenance of
strong operating cash flow is an important element of our financial strategy,
and an important performance measure against which all Kaydon operating units
are evaluated. This important corporate performance measurement defines
operating cash flow as operating income before noncash charges for
depreciation and amortization. Net operating assets exclude cash over $10.0
million, deemed excess, acquisition premium-based goodwill amounts, current
accounts payable and accrued liabilities.
As shown in Chart #3, our cash return on net operating assets for the period
1994-1998 reflects, in particular, the benefits of the aggressive capital
investment and acquisition initiatives in those years which will support our
future growth objectives.
An important measure of the strong cash generating capabilities of Kaydon is
our earnings before interest, taxes, depreciation and amortization (EBITDA).
EBITDA is a gauge of the cash generated from operations before financing
costs and noncash charges and is a critical determinant of Kaydon's capacity
to incur additional senior capital to enhance future profit and cash flow
growth. As shown in Chart #4, EBITDA increased from $60.4 million in 1994 to
$124.4 million in 1998.
During the last five years, as Chart #5 illustrates, our strong cash flow
from operations has also resulted in strong free cash flow (cash flow from
operations less capital expenditures). Free cash flow is an important
indicator of our ability to generate excess cash above levels required for
capital investment to support future growth. Strong operating cash flow has
enabled Kaydon to fund internally $61.6 million in capital expenditures
during this period while producing free cash flow which allowed us to
repurchase $51.8 million of our common stock in the open market, pay
shareholders $43.0 million of dividends and provide increasing resources to
support ongoing new product development, employee training programs,
manufacturing efficiencies and enhanced market share initiatives. During the
last five years our free cash flow has
[GRAPHIC]
12 KAYDON CORPORATION 1998
<PAGE> 17
[GRAPHIC]
[GRAPHIC]
equaled $244.5 million, after including approximately $13.3 million for
capital expenditures that we consider non-recurring.
The prudent management of our balance sheet and capital structure, consistent
with our superior cash flow, is an important financial objective.
Kaydon's historical low levels of net debt to total capital provide Kaydon
with the financial capacity to fund future growth and increase shareholder
returns. Kaydon's strong balance sheet and high cash flow provide the
financial flexibility to aggressively pursue internal growth initiatives and
selected acquisitions.
Maintaining a strong and liquid balance sheet is an important element of
Kaydon's financial flexibility. We measure liquidity as the level of cash and
cash equivalents and marketable securities, plus the amount of available
committed credit. Maintaining significant liquidity assures us of our ability
to invest and commit capital for important growth initiatives. We
intentionally maintain significant cash resources to ensure funding of
opportunistic and strategic investment objectives regardless of the current
regulatory environment or conditions in capital markets. As shown in Chart
#6, funds availability at year-end 1998 aggregated approximately $196.0
million, which will support our important internal investment opportunities
as well as strategic diversification initiatives.
Our objective of earning a minimum 20-25 percent operating profit margin on
net sales, including future acquisitions, is based on our proprietary
product, value-added and niche-market leadership positions, supported by
advanced manufacturing technologies and aggressive new product development
initiatives. As illustrated in Chart #7, operating income margins have
increased steadily in recent years, reaching 29.3 percent during 1998. We
believe continuing long-term moderate economic expansion, in conjunction with
ongoing cost reduction, manufacturing efficiency initiatives and new product
introductions, should contribute to strengthened profitability levels in
future years.
As shown in Chart #8, during the period 1994-1998, returns on beginning
shareholders' equity averaged 22.7 percent. We believe that our objective of
earning a minimum 20 percent return on shareholders' equity will continue to
be attained, on average over time, based on our well-disciplined operating
and growth strategies.
It is important to note that, although during the 1994-1998 period returns on
average shareholders' equity were enhanced by acquisitions completed during
this period, the initial earnings contribution of an acquired company is
moderated by fixed acquisition related charges, primarily additional
depreciation and amortization expenses, as well as financing costs. As a
result, subsequent growth of acquired companies provides larger incremental
profit contributions in succeeding years with corresponding improvements
anticipated in equity returns.
[GRAPHIC]
KAYDON CORPORATION 1998 13
<PAGE> 18
[GRAPHIC]
GROWTH STRATEGIES
As shown in Chart #9, Kaydon's 1998 diluted earnings per share increased 16.7
percent as compared to 1997. Since 1994 diluted earnings per share have grown
at an average annual rate of 22.3 percent, thus achieving our objective of a
minimum 15-20 percent average annual growth, over time. This well-defined
financial objective establishes the disciplinary framework for balance sheet
management, operating performance goals and strategic diversification
initiatives, and should enable us to continue providing superior shareholder
returns.
STRATEGIC DIVERSIFICATION
The strategic diversification of products (which are cross-sector marketed)
enjoyed by Kaydon has balanced our operating risk over a broad spectrum of
industries, thereby enhancing overall corporate performance. Our strategy of
being a premier supplier of proprietary, value-added products to diverse
niche markets, in conjunction with increasing sales of new products, market
share initiatives and selected acquisitions, has allowed us to substantially
anticipate and, for the most part, avoid the cyclical vagaries of individual
markets.
Our approach to product and market sector diversification recognizes that one
of the most important risks to any company is that which results from random
influences on its core businesses. We believe that participation in
diversified proprietary product lines and market sectors provides optimum
protection against such effects on any single operating unit. We are
convinced that our current diversified markets have numerous long-term growth
opportunities based upon those factors discussed earlier in Operating and
Profit Growth Strategies and Emphasis on Proprietary Products. While internal
growth and product line and market sector diversification will always remain
the primary focus of our growth strategy, there are valid operational and
strategic reasons to justify our ongoing program of identifying and selecting
attractive business partners.
Our ongoing corporate development program has several objectives:
- Increase shareholder returns by enhancing long-term growth of earnings.
- Complement our existing engineering, manufacturing and marketing
capabilities.
- Continue diversification into new markets and industries with familiar
products, manufacturing technologies and marketing programs.
- Acquire additional proprietary products or market positions that can serve
as additional focal points for further internal growth.
- Provide attractive investment opportunities for a portion of the excess
cash flow generated by our core operating units.
Given our financial objectives and the performance record of individual
operating units, our external diversification activities are limited to
seeking only those select companies whose characteristics closely mirror
those of existing Kaydon markets and provide an immediate earnings
contribution. Specifically, we are attracted to companies that have:
- A clearly defined and distinct leadership position in their market or
industry.
14 KAYDON CORPORATION 1998
<PAGE> 19
- Advanced, cost efficient manufacturing technologies, well-established
distribution channels, superior engineering and customer service, leading
market share positions and superior management expertise.
- Well-established, proprietary product positions in each of their markets.
- Strategic diversity, thereby avoiding dependence upon any one product
line, market or customer for continued growth.
- Low to medium technology levels, thereby avoiding the risk of rapid
manufacturing or product obsolescence.
- A historical operating earnings growth rate of at least 12-15 percent, on
average.
- Strong operating profit margins, typically a minimum of at least 15-20
percent, consistent with market leadership and proprietary product
positions.
- Relatively low capital expenditure requirements in relation to sales and
operating earnings, resulting in superior cash flow.
- In-depth, entrepreneurially oriented management with an ongoing commitment
to the business that can continue to perform effectively in our
decentralized environment.
- A management culture closely attuned to that of other Kaydon operating
units which emphasizes growth, continuous improvement, and disciplined
operating and financial objectives, indicative of superior management.
While disciplined adherence to these criteria has been an important element in
the success of our acquisition program, we will consider an acquisition
candidate that does not meet certain of these criteria if that acquisition
provides a strategic opportunity to further enhance the profit growth or margin
of an existing Kaydon proprietary product line or market sector.
Selected acquisitions of leadership companies have been a positive source of
opportunity and growth for Kaydon and our external strategic diversification
initiatives should continue to positively impact our future performance,
profitability and shareholder value.
Disciplined adherence to our selective external strategic diversification
criteria may, naturally, result in years during which no acquisition
transactions are completed. However, we continue to feel that only through
maintenance of these proven standards for strategic diversification will future
diversification initiatives produce significant increases in shareholder value.
KAYDON CORPORATION 1998 15
<PAGE> 20
SPECIAL INDUSTRIAL MACHINERY
[GRAPHIC] [PHOTO]
The Special Industrial Machinery market sector, the broadest in which Kaydon
operates, and our third largest market sector in 1998, recorded sales of $99.7
million, or 26.5 percent of total sales, as compared to $86.6 million in 1997.
Sales to the medical equipment market continued gains shown in recent years,
based upon our position as a premier worldwide supplier of performance-critical
specialty bearings and slip rings to the medical imaging and diagnostic
equipment industry. We believe the medical equipment market is illustrative of
Kaydon's design and engineering capabilities and manufacturing technologies,
which supports our optimistic expectations for this market.
Sales of specialty filtration products for commercial and industrial air
conditioning and refrigeration applications also recorded strong gains.
Reflecting excess inventory levels at both the OEM and JIT distributor levels,
sales to the semiconductor equipment market declined modestly. However, as
inventory overstock quantities are further reduced during 1999, combined with
expected continued growth in semiconductor production, we expect this important
market to record attractive year-over-year gains during the second half of 1999.
Other important markets served by Kaydon are the mobile municipal equipment,
material handling equipment industries, and offshore oil production equipment,
all of which recorded increased sales in 1998. Gains in 1998 in many of these
markets reflect improvements and strong contributions from fluid power products.
During the third quarter, we did experience a softening in demand from customers
manufacturing off-shore oil production equipment and we expect lower demand in
this market until oil markets experience higher price levels.
As our most diverse market sector, we expect continued growth and profit
opportunities in the years ahead in the Special Industrial Machinery area.
Continued growth of the medical equipment, machine tool, robotic equipment,
material handling and automation equipment markets should have a positive
long-term impact on Kaydon's future operating performance through this market
sector. New product applications and increased manufacturing efficiencies, as
well as future acquisitions, further support our expectations for enhanced
future growth opportunities.
[PHOTO]
SECTOR PROFILE
Through the Special Industrial Machinery market sector, Kaydon supplies
customers with specialty bearings for robotic equipment, medical imaging and
diagnostic equipment, air conditioning system filtration products, and hydraulic
products for material handling and mobile municipal equipment.
[PHOTO]
16 KAYDON CORPORATION 1998
<PAGE> 21
REPLACEMENT PARTS & EXPORTS
[PHOTO]
SECTOR PROFILE
Through the Replacement Parts & Exports markets sector, Kaydon supplies
specialty bearings, filter elements, shaft seals, diesel engine piston ring
sets, slip rings and assemblies to major equipment users, governmental agencies
and distributors, both domestically and internationally.
[PHOTO]
Sales to replacement parts and export markets, our largest market sector in
1998, increased modestly to $113.4 million, or 30.2 percent of Kaydon total
sales, as compared to $112.4 million in 1997. Export sales in 1998 increased
modestly over 1997 levels despite the strength of the U.S. dollar. Direct sales
of replacement parts to the U.S. Government, which is included in this market
sector, increased modestly over 1997 levels, when we recorded an unusual 26.2
percent increase over 1996. With the recently announced proposed increase in
defense spending, we expect sales to governmental agencies to show further
growth during the next twelve months.
During the year, sales to commercial distribution channels showed further growth
over 1997. Because of our excellent customer service levels and the performance
critical nature of our products, we believe Kaydon's strength in distribution
channels will continue to provide attractive profit opportunities on an ongoing
basis. As the population of equipment in use containing Kaydon component parts
increases, further growth can be expected from replacement part sales.
Replacement parts are sold across substantially all Kaydon product lines and
customer profiles serving diverse industrial markets, thereby moderating our
risk to the vagaries of any one market.
Kaydon maintains large stocking inventories of replacement parts, allowing us to
fill orders within 24 to 48 hours in most cases. Our forecasting of anticipated
usage results in extremely high order fill rates and excellent customer service,
providing a strong competitive advantage.
We believe the historical growth and performance of the Replacement Parts &
Exports market sector validates the underlying strength of our basic business
strategies for the markets served by this sector. Supported by ongoing strategic
capital investments and marketing programs, these strengths are expected to
produce above-average operating and profit opportunities going forward.
[GRAPHIC]
KAYDON CORPORATION 1998 17
<PAGE> 22
AEROSPACE & MILITARY EQUIPMENT
[PHOTO] [PHOTO]
SECTOR PROFILE
Typical Kaydon products supplied to this market sector include commercial and
military aircraft engine shaft seals and sealing rings, specialty bearings
utilized on radar and fire control systems, filtration products for mobile
equipment fuel systems, and specialty bearing products for aircraft landing
systems.
[GRAPHIC]
Kaydon's sales to aerospace and military equipment markets, our smallest market
sector in 1998, increased 11.4 percent to $50.6 million, or 13.4 percent of
total sales, as compared to $45.4 million in 1997. Based upon our technical
manufacturing and engineering competencies, we believe this market sector will
continue to provide important long-term operating benefits to Kaydon. However,
we expect it to remain the smallest sector for the foreseeable future, primarily
because of higher expected growth in other Kaydon market sectors.
In 1998, sales to aerospace and military equipment markets continued to grow
over levels recorded in the prior year, despite a continuation of modest overall
defense spending trends. In last year's Annual Report we expressed our belief
that defense demand for relevant Kaydon products would stabilize with slight
positive or negative fluctuations. However, with the increasing realization that
our defense establishment has under-invested in critical infrastructure programs
due to budgetary constraints, we now anticipate that Kaydon should benefit going
forward from higher sales levels to this market sector.
Sales to the commercial aerospace market during 1998 declined modestly as a
percent of total market sector sales, primarily as a result of a year-to-year
shift in the production mix of commercial aircraft engines. During the year,
average commercial aircraft build rates remained strong, reflecting firm
underlying demand. Despite several aircraft order cancellations during the year,
especially from Asian markets, projected intermediate and long-term commercial
air travel trends indicate further growth in the commercial aerospace market.
Combined with new product development programs, we believe these trends should
provide Kaydon with further growth opportunities into the future.
Since our inception in 1941, Kaydon has earned an outstanding reputation as an
important supplier to customers comprising this market sector. We believe our
distinct and widely recognized market reputation for performance-critical
quality and customer service has positioned us for continued long-term growth
and operating performance in the Aerospace and Military Equipment market sector.
[PHOTO]
18 KAYDON CORPORATION 1998
<PAGE> 23
HEAVY INDUSTRIAL EQUIPMENT
Sales to heavy industrial equipment markets, our second largest market sector in
1998, increased 32.9 percent to $112.4 million, or 29.9 percent of total sales,
as compared to $84.6 million in 1997. The full year inclusion of 1997 fluid
power acquisitions made an important contribution to 1998 performance, with the
biggest gains occurring in basic construction equipment, primarily mobile
cranes, man-lifts, excavators and forestry harvesting equipment. Another
important contribution to 1998's performance was increased sales of turntable
bearing products, primarily as a result of increased production levels at our
Mexican manufacturing facility.
As reflected in this sector's 1998 performance, our strategy of "buy and build"
in the acquisition of fluid power products lines was validated. Strategic
capital expenditure initiatives, including new operating and financial systems,
as well as coordinated marketing and engineering programs, resulted in a record
sales year for our fluid power products. As part of our long range growth
strategy, we continue to look for acquisition candidates which may complement
our activities in this product and market area.
Sales in this market sector remained strong during the year, especially to
manufacturers of mobile equipment. Sales to the power generation market, both
domestic and export, continued at moderate levels, primarily as a result of
deregulation initiatives by governmental regulatory authorities. As a result of
a more competitive electric power market, utilities have reduced their level of
capital expenditures, thereby slowing our previously expected growth rate in
sales to this market.
Longer term, we see profit opportunities from increasing sales to this market
sector. Kaydon operating units will continue to focus on increased customer
service, new product introductions and increased manufacturing efficiencies,
which historically have been important elements of our success not only in this
market sector, but in others as well.
[GRAPHIC]
[PHOTO]
SECTOR PROFILE
Kaydon is a supplier of specialty bearings, filtration products, sealing rings
and fluid power products for the construction, mining, forestry, oil field and
power generation equipment markets.
[PHOTO]
KAYDON CORPORATION 1998 19
<PAGE> 24
FINANCIAL CONTENTS
<TABLE>
<S> <C>
SELECTED FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . .21
STRATEGIC OBJECTIVES AND RESULTS . . . . . . . . . . . . . . . . . . . . . . . .22
MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . .23
CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . . 28
CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . . . . . . . . . . . .29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . 30
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . .32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . 45
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS . . . . . . . . . . . . . .45
FINANCIAL HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
20 KAYDON CORPORATION 1998
<PAGE> 25
SELECTED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
==============================================================================================================
Operating Data, Amounts in thousands except per share data(1) Percent
Change
1998 1997 1996 1995 1994 98/97
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Sales $376,172 $329,036 $290,670 $229,924 $204,695 14.3%
- --------------------------------------------------------------------------------------------------------------
Operating Income $110,380 $ 95,681 $ 78,954 $ 59,286 $ 49,759 15.4%
- --------------------------------------------------------------------------------------------------------------
Income Before Cumulative Prior Year
Effect of Change in Accounting Principle $ 71,184 $ 61,666 $ 50,521 $ 38,203 $ 31,226 15.4%
- --------------------------------------------------------------------------------------------------------------
Cumulative Prior Year Effect
of Change in Accounting Principle -- -- -- -- 2,000 --
- --------------------------------------------------------------------------------------------------------------
Net Income $ 71,184 $ 61,666 $ 50,521 $ 38,203 $ 29,226 15.4%
- --------------------------------------------------------------------------------------------------------------
Return on Net Sales(2) 18.9% 18.7% 17.4% 16.6% 15.3% --
- --------------------------------------------------------------------------------------------------------------
Earnings per Share (Diluted)(1)(2) $ 2.17 $ 1.86 $ 1.53 $ 1.14 $ 0.93 16.7%
- --------------------------------------------------------------------------------------------------------------
Dividends per Share(1) $ 0.37 $ 0.30 $ 0.25 $ 0.23 $ 0.21 23.3%
- --------------------------------------------------------------------------------------------------------------
Book Value per Share(1) $ 9.69 $ 8.60 $ 7.05 $ 5.74 $ 5.01 12.7%
- --------------------------------------------------------------------------------------------------------------
Total Assets $413,808 $383,985 $331,538 $267,675 $243,584 7.8%
- --------------------------------------------------------------------------------------------------------------
Shareholders' Equity $311,656 $283,596 $232,056 $187,905 $166,570 9.9%
- --------------------------------------------------------------------------------------------------------------
Return on Average
Shareholders' Equity(2) 23.9% 23.9% 24.1% 21.6% 20.1% --
- --------------------------------------------------------------------------------------------------------------
Weighted Average Shares
Outstanding (Diluted)(1) 32,871 33,163 33,098 33,481 33,452 --
==============================================================================================================
</TABLE>
(1) All share and per share data presented has been restated to reflect
the two-for-one stock split effected in 1997. See note (2) to
consolidated financial statements.
(2) Based on income before cumulative prior year effect of change in
accounting principle for SFAS 112 in 1994.
KAYDON CORPORATION 1998 21
<PAGE> 26
KAYDON CORPORATION STRATEGIC OBJECTIVES AND RESULTS
The Company's primary goal of creating long-term shareholder value through
superior returns to shareholders will only be accomplished through the
consistent attainment of its well-defined and ambitious strategic financial
objectives. As such, it is important to assess how Kaydon has performed as
compared to the financial benchmarks which the Company has established.
Among Kaydon's Growth Strategies are goals to increase earnings per share at a
15-20 percent average rate over any five-year period, earn a minimum 20 percent
annual return on shareholders' equity, earn a return on capital of 15-20 percent
over any five-year period, and earn a minimum 20-25 percent operating margin on
net sales, including contributions from future acquisitions. Over the last five
years, the Company's financial performance has met or exceeded each of these
goals. Diluted earnings per share have grown at a 22.3 percent average annual
rate, average operating margin on net sales has exceeded 27.1 percent and
average returns on shareholders' equity have exceeded 22.7 percent. These
results were accomplished during the 1994-1998 period which included sectoral
downturns and slowness in certain of the Company's key markets.
Underlying this consistently strong financial performance is a balanced approach
to business risk achieved through the strategic diversification among products
and markets of the Company's activities. Kaydon participates in numerous niche
markets and subsets of larger markets, shielding the Company's performance from
any one individual sector or cycle. This strategic diversity enables Kaydon to
consistently invest in growth opportunities and remain relatively unaffected by
individual market cycles.
Kaydon's strategic financial objectives also include maintaining strong cash
flows and continually strengthening its balance sheet. Cash flow from operations
in 1998 of $72.6 million has resulted in a five-year total of approximately
$306.0 million. Capital expenditures over the last 5 years have continued at a
rate averaging less than five percent of sales and totaled $61.6 million for the
five-year period. As a result, Kaydon was able to fund its strategic
diversification initiatives, redeem all long-term debt and continually increase
annual common stock dividends with the remaining cash flow of approximately
$245.0 million during the five-year period.
The Company's strong historical cash flow is a key element in achieving the
important objective of maintaining a strong and liquid balance sheet. Net debt
(long-term debt minus cash and cash equivalents) as a percent of capital (net
debt plus equity) has consistently been zero during the seven years ending in
1998. The measure of net debt is a strong example of the Company's historic
strategy of maintaining strong liquidity to fund growth initiatives. Kaydon's
cash and cash equivalents balance at the end of 1998 totaled $96.2 million as
compared to $24.5 million in 1993. The combination of a strong balance sheet,
strong cash flow and high liquidity levels enables Kaydon to pursue aggressive
growth objectives through both internal and external initiatives.
Internal growth initiatives consisting of strategic investments in new products,
capacity expansions and market expansion opportunities are expected to provide,
over any five-year period, a minimum of at least one-half of the Company's
expected 15-20 percent average annual growth in earnings. Strategic
diversification achieved through selective acquisitions is expected to provide
growth above that generated internally. The Company's disciplined adherence to
well-defined acquisition criteria may result in periods of time when no
acquisitions will be completed. However, timing considerations of owners of
potential acquisition candidates could result in several strategic acquisitions
in any given year.
22 KAYDON CORPORATION 1998
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL FINANCIAL ANALYSIS
During 1998 Kaydon achieved record net sales and operating income for the
seventh consecutive year as it continued its focus on operating and financial
strategies to improve operating performance and shareholder returns. These
strategies include internal and external programs to strengthen the Company's
competitive positions in key markets, including increased levels of
manufacturing efficiency and customer service, new product development and
market share initiatives, and the acquisition of selected companies which can
enhance future growth and profitability.
[GRAPHIC]
The discussion which follows should be reviewed in conjunction with the
financial statements and related footnotes to assist in understanding the
Company's results of operations, its financial position, cash flows, capital
structure and other relevant financial information. Additional information
pertaining to the Company's products, markets, 1998 operations and future
prospects is contained in the Letter to the Shareholders, the section entitled
Kaydon at a Glance and other discussions throughout this report.
ANALYSIS OF 1998 OPERATIONS COMPARED TO 1997 OPERATIONS
Record net sales of $376.2 million in 1998 increased 14.3 percent over 1997 net
sales of $329.0 million. Kaydon's strategic diversification of products and
markets has balanced its operating risk over a broad range of industries and
markets, moderating the cyclical impact of individual markets. As in 1997, the
results of the Company's strategic diversification, including emphasis on niche
markets, manufacturing efficiencies and market share initiatives, played an
important role in 1998's performance.
[GRAPHIC]
HIGHLIGHTS FOR THE YEAR 1998 COMPARED WITH THE YEAR 1997
<TABLE>
<CAPTION>
=======================================================================
For the years
ended December 31,
(In thousands except ------------------------ Percent
per share amounts) 1998 1997 Increase
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated
- -----------------------------------------------------------------------
Net sales $376,172 $329,036 14.3%
- -----------------------------------------------------------------------
Gross profit $152,224 $137,260 10.9%
- -----------------------------------------------------------------------
Gross profit margin 40.5% 41.7%
- -----------------------------------------------------------------------
Operating income $110,380 $ 95,681 15.4%
- -----------------------------------------------------------------------
Operating income margin 29.3% 29.1%
- -----------------------------------------------------------------------
Net income $ 71,184 $ 61,666 15.4%
- -----------------------------------------------------------------------
Earnings per share-Diluted $ 2.17 $ 1.86 16.7%
- -----------------------------------------------------------------------
</TABLE>
The Company's gross margin percentage equaled 40.5 percent in 1998, as compared
to 41.7 percent achieved in 1997. The gross margin in 1998 reflects an increased
proportion of sales into the Heavy Industrial Equipment market which, in
general, has lower gross margins than other Kaydon markets.
[GRAPHIC]
Selling, general and administrative expenses as a percentage of sales decreased
to 11.1 percent in 1998, compared to 12.6 percent for 1997. The lower relative
expense level is attributable to enhanced cost containment initiatives and
slower spending growth to support the larger sales base.
Consolidated operating income equaled $110.4 million during 1998, compared to
$95.7 million in 1997, an increase of 15.4 percent, with operating profit
margins of 29.3 percent and 29.1 percent in 1998 and 1997, respectively. Net
interest income in 1998 was $4.4 million, up 17.3 percent from $3.8 million in
1997. The increase in interest income is a result of higher average cash
balances throughout the year and a moderate increase in interest rates.
Net income was $71.2 million, up 15.4 percent from the prior year, with return
on net sales at 18.9 percent. Diluted earnings per share increased 16.7 percent
to $2.17 in 1998 based
KAYDON CORPORATION 1998 23
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
on 32.9 million weighted average shares outstanding, compared to $1.86 in 1997,
based on 33.2 million weighted average shares outstanding.
The effective tax rate of 38.0 percent remained unchanged from 38.0 percent in
1997.
1997 COMPARED TO 1996
Record net sales of $329.0 million in 1997 increased 13.2 percent over 1996 net
sales of $290.7 million. Kaydon's strategic diversification of products and
markets has balanced its operating risk over a broad range of industries and
markets, moderating the cyclical impact of individual markets. As in 1996, the
results of the Company's strategic diversification, including emphasis on niche
markets, manufacturing efficiencies and market share initiatives, played an
important role in 1997's performance.
HIGHLIGHTS FOR THE YEAR 1997 COMPARED WITH THE YEAR 1996
<TABLE>
<CAPTION>
=======================================================================
For the years
(In thousands except ended December 31,
per share amounts) ------------------------ Percent
1997 1996 Increase
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated
- -----------------------------------------------------------------------
Net sales $329,036 $290,670 13.2%
- -----------------------------------------------------------------------
Gross profit $137,260 $117,496 16.8%
- -----------------------------------------------------------------------
Gross profit margin 41.7% 40.4%
- -----------------------------------------------------------------------
Operating income $ 95,681 $ 78,954 21.2%
- -----------------------------------------------------------------------
Operating income margin 29.1% 27.2%
- -----------------------------------------------------------------------
Net income $ 61,666 $ 50,521 22.1%
- -----------------------------------------------------------------------
Earnings per share-Diluted $ 1.86 $ 1.53 21.6%
- -----------------------------------------------------------------------
</TABLE>
The Company's gross margin percentage equaled 41.7 percent in 1997, as compared
to 40.4 percent achieved in 1996. The increase is primarily attributable to
operating efficiencies, increased volume and continued cost control.
[GRAPHIC]
Selling, general and administrative expenses as a percentage of sales decreased
to 12.6 percent in 1997, compared to 13.3 percent in 1996. Although expenses
increased approximately 7.9 percent in absolute terms, primarily from the
effects of acquisitions, spending was controlled to minimize increases relative
to sales growth.
Consolidated operating income equaled $95.7 million during 1997, compared to
$79.0 million in 1996, an increase of 21.2 percent, with operating profit
margins of 29.1 percent and 27.2 percent in 1997 and 1996, respectively. Net
interest income in 1997 was $3.8 million up 42.0 percent from $2.7 million in
1996. The net increase was due to the increase in cash and securities of $13.5
million and higher interest rates. The reduction of interest expense resulting
from the redemption of Industrial Revenue Bonds also contributed to the
improvement in net interest income.
Net income was $61.7 million, up 22.1 percent from the prior year, with return
on sales at 18.7 percent. Diluted earnings per share increased 21.6 percent to
$1.86 in 1997 based on 33.2 million weighted average shares outstanding,
compared to $1.53 in 1996 based on 33.1 million weighted average shares
outstanding.
The effective tax rate of 38.0 percent remained essentially unchanged from 38.1
percent in 1996.
[GRAPHIC]
LIQUIDITY, WORKING CAPITAL AND CASH FLOWS
One of the Company's financial strategies is to maintain a relatively high level
of liquidity and cash flow, which continued in 1998. Historically, Kaydon has
generated significant cash flows from operating activities to fund capital
expenditures, dividends and other operating requirements. Cash flow generation
has been enhanced by the Company's continuing efforts to improve operating
efficiencies, cost reductions and the management of working capital requirements
to support increased sales volume.
One of the Company's strengths is its ability to generate cash from operations
in excess of requirements for capital investments and dividends.
"Free Cash Flow": Free Cash Flow is cash from operations remaining after the
Company has satisfied its capital investment initiatives to enhance
manufacturing efficiencies, expand productive capacity and avail itself of other
competitive opportunities. As one of its financial strategies, the Company
focuses on maximizing Free Cash Flow to achieve management's primary
objective--maximizing long-term shareholder value.
24 KAYDON CORPORATION 1998
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The consolidated statements of cash flows are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from (used for):
Operations $ 72,560 $ 71,619 $ 68,225
Capital expenditures, net (25,363) (12,750) (9,320)
- -----------------------------------------------------------------------------
"Free Cash Flow" 47,197 58,869 58,905
Cash flows from (used for):
Acquisitions 82 (27,382) (10,699)
Financing -- (8,031) (349)
- -----------------------------------------------------------------------------
Free cash flow after capital
acquisitions and financing $ 47,279 $ 23,456 $ 47,857
- -----------------------------------------------------------------------------
</TABLE>
In 1998 the Company again experienced strong operating cash flows as operating
activities provided $72.6 million. Increased cash flow from income and non-cash
charges for depreciation and amortization resulted in record cash flows from
operations. Shares of Kaydon common stock issued in 1998 of $4.8 million, net of
tax benefits were made in conjunction with the exercise of Kaydon stock options.
[GRAPHIC]
In 1998 the Company utilized $39.1 million to repurchase Kaydon common stock
compared with $2.0 million in the prior year. Net capital expenditures to reduce
costs, improve quality and expand productive capacity equaled $25.4 million in
1998, $12.8 million in 1997 and $9.3 million in 1996. Capital expenditures to
enhance manufacturing capabilities in 1998 equaled $12.1 million. To expand
productive capacity in 1998, $13.3 million of capital spending was provided for
capacity expansions through the purchase of a new bearings manufacturing plant
and equipment in Mocksville, North Carolina, and the addition of capacity at
existing plants in Blacksburg, Virginia and Monterrey, Mexico. The Company
continues its active corporate development efforts to complement internal growth
through significant investments for the plant expansions and the acquisition of
additional companies to meet Kaydon's well-disciplined criteria. In 1997 the
Company used a portion of its significant cash resources to acquire two
companies for a total of $27.4 million. In March 1997, Kaydon purchased the
assets of Gold Star Manufacturing, Inc., followed by the asset acquisition of
Great Bend Industries in May 1997. Common stock dividends paid in 1998, 1997 and
1996 equaled $11.8 million, $9.2 million and $7.9 million, respectively. The
Company redeemed $8.0 million of Industrial Revenue Bonds in April 1997,
resulting in a debt-free capital structure at year end.
[GRAPHIC]
The Company believes its cash flows from operations, along with its borrowing
capacity and access to financial markets are adequate to fund its strategies for
future growth, including working capital expenditures for manufacturing
expansions and efficiencies, market share initiatives and corporate development
activities.
At December 31, 1998 the Company's current ratio was 3.2 to 1 and working
capital totaled $158.6 million, including $96.2 million of cash and cash
equivalents. At December 31, 1997, the current ratio was 3.0 to 1 and working
capital totaled $143.8 million, including cash and marketable securities of
$96.8 million.
The Company's working capital turnover was 2.4 times in 1998, compared to 2.3
times in 1997. Excluding cash, the working capital turnover was 6.0 times in
1998 compared to 7.0 times in 1997. The Company's inventory turnover ratio was
3.5 times in 1998 compared to 3.4 times in 1997, while the days-sales year end
balance equaled 53 days in 1998 compared to 45 days in 1997.
The Company has a $100 million domestic revolving credit facility, maturing in
2002, with a group of domestic and international banks. The facility permits the
company to borrow under several different rate options. At December 31, 1998 the
Company has available credit of $100 million under the agreement.
[GRAPHIC]
KAYDON CORPORATION 1998 25
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
[GRAPHIC]
The Company repurchased 1,127,153 shares of its common stock in 1998 for $39.1
million compared to 73,591 shares for $2.0 million in 1997. Open market
repurchases of common stock in 1998 totaled 1,010,800 shares for $34.7 million.
Of the original 6,000,000 shares authorized by the Board of Directors for
repurchase under the existing plan, 4,150,836 shares have been repurchased.
CORPORATE DEVELOPMENT
The Company maintains an active acquisition program, which has made important
contributions to the Company's growth. During the last five years the Company
acquired four businesses for $68.8 million (including the assumption of certain
liabilities).
The Company utilizes well-disciplined criteria in selecting acquisitions,
including the long-term enhancement of its financial strength and shareholder
value.
The initial earnings benefit of acquisitions to the Company is less than the
corresponding increase in sales since earnings are reduced by acquisition
related costs such as interest and added depreciation and amortization.
Generally, the anticipated earnings improvement for the Company comes from
subsequent growth of acquired companies, since future incremental sales are not
burdened with these fixed acquisition costs. Future earnings are also
anticipated to benefit from improved operating efficiencies and cost containment
programs.
[GRAPHIC]
OTHER
YEAR 2000 READINESS DISCLOSURE
This year 2000 readiness disclosure is the most current information available
and replaces all previous disclosures made by the Company in its filings on form
10-Q and form 10-K, and in its Annual Report to shareholders.
The Company has a plan in place to manage the readiness of its systems with
respect to the requirements for transaction processing in the year 2000. The
proprietary Company internal system was modified to be year 2000 compliant in
1997. Review and testing of the modifications was completed during 1998. The
costs for these modifications were expensed as routine internal programming
costs during the year and were not material. Any additional expenses will also
be expensed as incurred and are not expected to be material.
As part of the Company's long-term objectives for continued operational
improvements and cost management, investments are planned in information
technology. The cost of these investments are estimated at $2.5 to $3.0 million
over the next 18 months. As part of any investment in information systems, year
2000 compliance will be assured. The incremental costs associated with year 2000
modifications related to these investments, if any, will be expensed as incurred
and are not expected to be material.
Embedded technology in facilities systems, machinery and equipment is currently
being inventoried and assessed. No significant year 2000 compliance issues are
anticipated and completion of all remediation is expected to be completed by
December 31, 1999.
A component of the Company's year 2000 readiness plan is to address any
remaining open issues anticipated in 1999 and early 2000. As a precautionary
measure, the Company will be developing contingency plans for systems not
expected to be year 2000 compliant. A variety of automated as well as manual
fallback plans are under consideration.
The Company is also working with its customers, vendors and suppliers to assess
the year 2000 readiness of their systems. It is anticipated this activity will
be completed by December 31, 1999. Any costs for
26 KAYDON CORPORATION
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
remediation of third party system issues are expected to be borne by those third
parties.
At this time, the Company would characterize as "worst case" any scenario that
involves potential disruptions in which the Company's operations may rely on
such third parties whose systems may not work properly after December 31, 1999.
Possible consequences of year 2000 interruptions include, but are not limited
to, a temporary inability to manufacture or ship product; process transactions;
communicate with customers, suppliers, subsidiary locations and employees; or
conduct other similar corporate activities in a normal business environment.
While such failures could affect the Company either directly or indirectly, the
Company cannot at the present time estimate either the likelihood or the
potential cost of such failures.
LITIGATION
The Company is a party to various lawsuits and other matters arising in the
normal course of business that are pending. Refer to Item 3 of the Securities
and Exchange Commission 1998 Form 10-K filed by Kaydon Corporation for further
information.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Annual Report contain forward-looking
statements that are based on current expectations, estimates, forecasts and
projections about the market sectors in which Kaydon Corporation operates,
management's beliefs, and assumptions made by management. In addition, other
written or oral statements which constitute forward-looking statements may be
made by or on behalf of the Company. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," "should," "going forward,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Business
Risks") which are difficult to predict. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such forward-
looking statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Business Risks include increasing price and product competition by foreign and
domestic competitors, including new entrants; the Company's ability to continue
to introduce competitive new products on a timely, cost-effective basis; the mix
of products; the achievement of lower costs and expenses; the outcome and impact
of year 2000; reliance on large customers; the cyclical nature of the markets
served by the Company; the outcome of pending and future litigation and
governmental proceedings and continued availability of financing and financial
resources in the amounts, at the times and on the terms required to support the
Company's future business and growth strategies. These are representative of the
Business Risks that could affect the outcome of the forward-looking
statements. In addition, such statements could be affected by general industry
and market conditions, including interest rate fluctuations and other Business
Risks.
KAYDON CORPORATION 1998 27
<PAGE> 32
CONSOLIDATED BALANCE SHEETS
Kaydon Corporation and Subsidiaries
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ......................................... $ 96,203,000 $ 74,735,000
Marketable securities ............................................. -- 22,067,000
Accounts receivable, less allowances of
$1,957,000 in 1998 and $1,620,000 in 1997 ..................... 48,957,000 42,690,000
Inventories ....................................................... 68,176,000 60,548,000
Other current assets .............................................. 16,464,000 14,738,000
------------- -------------
Total current assets .......................................... 229,800,000 214,778,000
------------- -------------
Plant and Equipment, at cost:
Land and improvements ............................................. 4,259,000 3,924,000
Buildings and leasehold improvements .............................. 47,767,000 42,162,000
Machinery and equipment ........................................... 170,822,000 152,090,000
------------- -------------
222,848,000 198,176,000
Less - accumulated depreciation and amortization .................. (123,589,000) (112,666,000)
------------- -------------
99,259,000 85,510,000
------------- -------------
Cost in excess of net tangible assets of purchased businesses, net ... 64,717,000 66,687,000
Other assets ......................................................... 20,032,000 17,010,000
------------- -------------
$ 413,808,000 $ 383,985,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................................. $ 14,853,000 $ 11,574,000
Accrued expenses:
Salaries and wages ............................................ 11,145,000 13,502,000
Employee benefits ............................................. 13,519,000 11,184,000
Income taxes .................................................. 4,716,000 8,560,000
Other accrued expenses ........................................ 26,967,000 26,195,000
------------- -------------
Total current liabilities .................................. 71,200,000 71,015,000
------------- -------------
Long-term postretirement and postemployment benefit obligations ...... 30,952,000 29,374,000
------------- -------------
Shareholders' Equity:
Preferred stock -
($.10 par value, 2,000,000 shares authorized; none issued) .... -- --
Common stock -
($.10 par value, 98,000,000 shares authorized; 36,466,016 and
36,180,150 shares issued in 1998 and 1997) .................... 3,646,000 3,618,000
Paid-in capital ................................................... 35,969,000 28,854,000
Retained earnings ................................................. 355,233,000 296,097,000
Less - treasury stock, at cost; (4,315,198 and 3,188,045 shares
in 1998 and 1997) ............................................. (80,711,000) 41,646,000)
Accumulated other comprehensive loss .............................. (2,481,000) (3,327,000)
------------- -------------
311,656,000 283,596,000
------------- -------------
$ 413,808,000 $ 383,985,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
28 KAYDON CORPORATION 1998
<PAGE> 33
CONSOLIDATED STATEMENTS OF INCOME
Kaydon Corporation and Subsidiaries
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales ................................ $ 376,172,000 $ 329,036,000 $ 290,670,000
Cost of sales ........................ 223,948,000 191,776,000 173,174,000
------------- ------------- --------------
Gross Profit ............................. 152,224,000 137,260,000 117,496,000
Selling and administrative expenses... 41,844,000 41,579,000 38,542,000
------------- ------------- --------------
Operating Income ......................... 110,380,000 95,681,000 78,954,000
Interest expense ..................... (45,000) (200,000) (348,000)
Interest income ...................... 4,479,000 3,980,000 3,010,000
------------- ------------- --------------
Income Before Income Taxes ............... 114,814,000 99,461,000 81,616,000
Provision for income taxes ........... 43,630,000 37,795,000 31,095,000
------------- ------------- --------------
Net Income ............................... $ 71,184,000 $ 61,666,000 $ 50,521,000
============= ============= =============
Earnings Per Share - Basic ............... $ 2.18 $ 1.87 $ 1.54
- Diluted ............. $ 2.17 $ 1.86 $ 1.53
============= ============= =============
Dividends Per Share ...................... $ 0.37 $ 0.30 $ 0.25
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
KAYDON CORPORATION 1998 29
<PAGE> 34
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Kaydon Corporation and Subsidiaries
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Comprehensive Common Paid-in Retained
Income Stock Capital Earnings
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 ...................... $ 1,763,000 $ 17,699,000 $ 202,058,000
Net income, 1996 ............................. $ 50,521,000 - - 50,521,000
Other comprehensive income, net of tax-
Minimum pension liability, net of
$240,000 tax ............................... 389,000 - - -
Unrealized translation adjustments .......... 2,788,000 - - -
-------------
Comprehensive income ......................... $53,698,000 - - -
=============
Cash dividends declared ...................... - - (8,247,000)
Issuance of 390,575 shares of common
stock under stock option plans .............. 39,000 10,681,000 -
Purchase of 293,546 shares of treasury stock - - -
----------- ------------- -------------
Balance, December 31, 1996 ...................... 1,802,000 28,380,000 244,332,000
Net income, 1997 ............................ $ 61,666,000 - - 61,666,000
Other comprehensive income, net of tax-
Minimum pension liability, net of
$426,000 tax ............................... 688,000 - - -
Unrealized translation adjustments .......... (1,190,000) - - -
-------------
Comprehensive income ......................... $ 61,164,000 - - -
=============
Cash dividends declared ...................... - - (9,901,000)
Issuance of 132,670 shares of common
stock under stock option plans .............. 9,000 2,281,000 -
Purchase of 73,591 shares of treasury stock - - -
Two-for-one stock split ...................... 1,807,000 (1,807,000) -
----------- ------------- -------------
Balance, December 31, 1997 ...................... 3,618,000 28,854,000 296,097,000
Net income, 1998 ............................. $ 71,184,000 - - 71,184,000
Other comprehensive income, net of tax-
Minimum pension liability, net of
($8,000) tax ............................... (15,000) - - -
Unrealized translation adjustments .......... 861,000 - - -
-------------
Comprehensive income ......................... $ 72,030,000 - - -
=============
Cash dividends declared ...................... - - (12,048,000)
Issuance of 285,866 shares of common
stock under stock option plans .............. 28,000 7,115,000 -
Purchase of 1,127,153 shares of treasury stock - - -
----------- ------------- -------------
Balance, December 31, 1998 ....................... $ 3,646,000 $ 35,969,000 $ 355,233,000
=========== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Treasury Comprehensive
Stock Loss Total
------------ ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 ....................... $(27,613,000) $ (6,002,000) $ 187,905,000
Net income, 1996 .............................. - - 50,521,000
Other comprehensive income, net of tax-
Minimum pension liability, net of
$240,000 tax ................................ - 389,000 389,000
Unrealized translation adjustments ........... - 2,788,000 2,788,000
Comprehensive income .......................... - - -
Cash dividends declared ....................... - - (8,247,000)
Issuance of 390,575 shares of common
stock under stock option plans ............... - - 10,720,000
Purchase of 293,546 shares of treasury stock... (12,020,000) - (12,020,000)
------------ ------------- -------------
Balance, December 31, 1996 ....................... (39,633,000) (2,825,000)(*) 232,056,000
Net income, 1997 ............................. - - 61,666,000
Other comprehensive income, net of tax-
Minimum pension liability, net of
$426,000 tax ................................ - 688,000 688,000
Unrealized translation adjustments ........... - (1,190,000) (1,190,000)
Comprehensive income .......................... - - -
Cash dividends declared ....................... - - (9,901,000)
Issuance of 132,670 shares of common
stock under stock option plans ............... - - 2,290,000
Purchase of 73,591 shares of treasury stock (2,013,000) - (2,013,000)
Two-for-one stock split ....................... - - -
------------ ------------- -------------
Balance, December 31, 1997 ....................... (41,646,000) (3,327,000)(*) 283,596,000
Net income, 1998 .............................. - - 71,184,000
Other comprehensive income, net of tax-
Minimum pension liability, net of
($8,000) tax ................................ - (15,000) (15,000)
Unrealized translation adjustments ........... - 861,000 861,000
Comprehensive income .......................... - - -
Cash dividends declared ....................... - - (12,048,000)
Issuance of 285,866 shares of common
stock under stock option plans .............. - - 7,143,000
Purchase of 1,127,153 shares of treasury stock (39,065,000) - (39,065,000)
------------ ------------- -------------
Balance, December 31, 1998........................ $(80,711,000) $ (2,481,000)(*) $ 311,656,000
============ ============= =============
</TABLE>
(*)Comprised of unrealized translation adjustments of (2,438,000), (3,299,000),
and (2,109,000) and minimum pension liability of (43,000), (28,000), and
(716,000), as of December 31, 1998, 1997 and 1996, respectively.
The accompanying notes are an integral part of these statements.
30 KAYDON CORPORATION 1998
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
Kaydon Corporation and Subsidiaries
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ..................................................... $ 71,184,000 $ 61,666,000 $ 50,521,000
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization .............................. 14,044,000 12,756,000 11,749,000
Deferred taxes ............................................. (1,847,000) (2,689,000) (6,811,000)
Postretirement and postemployment benefit obligations ...... 1,578,000 716,000 935,000
Changes in current assets and liabilities, net of effects of
acquisitions of businesses:
Accounts receivable .................................... (6,310,000) (3,266,000) (2,524,000)
Inventories ............................................ (7,620,000) (2,897,000) 243,000
Other current assets ................................... (736,000) 744,000 (2,386,000)
Accounts payable ....................................... 3,272,000 172,000 (1,815,000)
Accrued expenses ....................................... (1,005,000) 4,417,000 18,313,000
------------ ------------- -------------
Net cash provided by operating activities .............. $ 72,560,000 $ 71,619,000 $ 68,225,000
------------ ------------- -------------
Cash Flows from Investing Activities:
Purchases of marketable securities ............................. (45,384,000) (130,869,000) (104,468,000)
Maturities of marketable securities ............................ 67,451,000 137,626,000 117,995,000
Additions to plant and equipment, net .......................... (25,363,000) (12,750,000) (9,320,000)
Other .......................................................... (2,500,000) - -
Acquisitions of businesses, net of cash acquired ............... 82,000 (27,382,000) (10,699,000)
------------ ------------- -------------
Net cash used in investing activities .................. $ (5,714,000) $ (33,375,000) $ (6,492,000)
------------ ------------- -------------
Cash Flows from Financing Activities:
Cash dividends paid ............................................ (11,807,000) (9,231,000) (7,906,000)
Repayment of IRB debt .......................................... - (8,000,000) --
Net payments under lines of credit ............................. - (31,000) (349,000)
Proceeds from issuance of common stock ......................... 4,777,000 1,560,000 7,765,000
Purchase of treasury stock ..................................... (39,065,000) (2,013,000) (12,020,000)
------------ ------------- -------------
Net cash used in financing activities .................. $(46,095,000) $ (17,715,000) $ (12,510,000)
Effect of Exchange Rate Changes on Cash and Cash Equivalents ....... 717,000 (237,000) 412,000
------------ ------------- -------------
Net Increase in Cash and Cash Equivalents .......................... $ 21,468,000 $ 20,292,000 $ 49,635,000
Cash and Cash Equivalents - Beginning of Year ...................... 74,735,000 54,443,000 4,808,000
------------ ------------- -------------
Cash and Cash Equivalents - End of Year ............................ $ 96,203,000 $ 74,735,000 $ 54,443,000
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
KAYDON CORPORATION 1998 31
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Kaydon
Corporation and its wholly-owned domestic and foreign subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates 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 reporting period.
Actual results could differ from those estimates.
DESCRIPTION OF BUSINESS:
The Company designs, manufactures and sells custom-engineered products for a
broad and diverse customer base primarily in domestic markets. The Company's
principal products include antifriction bearings, bearing systems and
components, filters and filter housings, specialty retaining rings, specialty
balls, custom rings, shaft seals, hydraulic cylinders, metal castings and
various types of slip-rings. These products are used by customers in a wide
variety of medical, instrumentation, material handling, machine tool
positioning, aerospace, defense, construction and other industrial
applications. The Company is customer-focused and concentrates on providing
cost-effective solutions for its customers through close engineering
relationships with leading manufacturers throughout the world.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES:
The Company's cash equivalents and marketable securities are considered
"held-to-maturity" and are stated at amortized cost which approximates fair
market value at December 31, 1998 and 1997. Cash equivalents have maturity
dates of three months or less from the date of purchase. Marketable securities
include United States Treasury Bills with maturity dates of less than one year.
Both cash equivalents and marketable securities are high-credit quality
financial instruments. The Company's portfolio of cash and cash equivalents and
marketable securities consists of the following at December 31,:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents:
Cash held in banks ................ $ 7,557,000 $11,969,000
U.S. Treasury Bills ............... 80,068,000 58,276,000
Other cash equivalents ............ 8,578,000 4,490,000
----------- -----------
96,203,000 74,735,000
Marketable securities:
U.S. Treasury Bills ............... -- 22,067,000
----------- -----------
Total ......................... $96,203,000 $96,802,000
=========== ===========
</TABLE>
INVENTORIES:
Inventories are valued at the lower of cost or market and include material,
labor and overhead. Cost is determined using the first-in, first-out ("FIFO")
method for all inventories. Inventories are summarized as follows at December
31,:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Raw material .......................... $26,570,000 $20,282,000
Work in process ....................... 20,352,000 19,424,000
Finished goods ........................ 21,254,000 20,842,000
----------- -----------
$68,176,000 $60,548,000
=========== ===========
</TABLE>
32 KAYDON CORPORATION 1998
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PLANT AND EQUIPMENT:
Plant and equipment are stated at cost. The cost is depreciated over the
estimated useful lives of the assets using the straight-line method. Useful
lives vary among the classifications, but generally fall within the following
ranges:
<TABLE>
<S> <C>
Buildings, land improvements and
leasehold improvement ........................ 10 - 40 years
Machinery and equipment ......................... 3 - 15 years
</TABLE>
Leasehold improvements are amortized over the terms of the respective leases or
over their useful lives, whichever is shorter. Renewals and betterments are
capitalized while maintenance and repairs are charged to operations in the year
incurred.
RESEARCH AND DEVELOPMENT COSTS:
Research and development costs, which are not material to the consolidated
statements of income, are expensed as incurred.
COST IN EXCESS OF NET TANGIBLE ASSETS OF PURCHASED BUSINESSES AND OTHER
LONG-LIVED ASSETS:
Cost in excess of net tangible assets of purchased businesses ("goodwill")
totaling $16,239,000 arose prior to 1971 and is not being amortized since, in
the opinion of management, there has been no diminution in value. Goodwill
acquired after 1970 is being amortized on a straight-line basis over a period
of 20 to 40 years and is stated net of accumulated amortization of $9,292,000
and $7,091,000 at December 31, 1998 and 1997, respectively.
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful lives of goodwill and
other long-lived assets may warrant revision or that the remaining balances may
not be recoverable. When factors indicate that such costs should be evaluated
for possible impairment, the Company uses an estimate of the undiscounted cash
flows over the remaining lives of the goodwill and other long-lived assets to
evaluate whether the costs are recoverable.
OTHER ASSETS:
Other assets include, among other items, deferred tax assets and various
intangibles which primarily include noncompete and supply agreements. Deferred
tax assets are further discussed in Note 3. The noncompete and supply
agreements and other intangibles are being amortized on a straight-line basis
ranging from 4 to 15 years. They are stated net of accumulated amortization of
$4,114,000 and $3,697,000 at December 31, 1998 and 1997, respectively.
FOREIGN CURRENCY TRANSLATION:
The financial position and results of operations of the Company's United
Kingdom and German subsidiaries are measured using the local currency as the
functional currency. Assets and liabilities are translated at the exchange rate
in effect at year-end. Income statement accounts are translated at the average
rate of exchange in effect during the year. The resulting translation
adjustment is recorded as a separate component of accumulated other
comprehensive loss in the consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of financial instruments included in current assets and
current liabilities approximate fair value due to the short-term nature of
these instruments.
NEW ACCOUNTING STANDARD:
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income". This statement establishes standards for
the reporting of comprehensive income and its components. Comprehensive income
consists of net income, minimum pension liability adjustments and foreign
currency translation adjustments and is presented in the consolidated
statements of shareholders' equity. The adoption of SFAS 130 had no impact on
total shareholders' equity. Prior year financial statements have been
reclassified to conform to this statement.
KAYDON CORPORATION 1998 33
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. COMMON STOCK AND EARNINGS PER SHARE
On September 23, 1997, the Board of Directors approved a two-for-one stock
split for shareholders of record on October 7, 1997 and distributed on October
21, 1997. Common stock was increased by $1,807,000 with an offsetting reduction
to additional paid-in capital, to reflect the $.10 par value per share for each
additional share issued.
Where applicable, references in the financial statements with regard to number
of shares of common stock or related per share amounts, including the stock
option plan information, have been restated to reflect the two-for-one stock
split.
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. 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
dilutive common shares. Potential dilutive common shares include all shares
which may become contractually issuable. For the Company, potential dilutive
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
calculations of basic and diluted earnings per share for each of the last three
years:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NUMERATORS:
Numerator for both basic and diluted
earnings per share, net income .......... $71,184,000 $61,666,000 $50,521,000
=========== =========== ===========
DENOMINATORS:
Denominator for basic earnings per
share, weighted average common
shares outstanding ...................... 32,631,000 32,976,000 32,908,000
Potential dilutive common shares
resulting from stock option plans ....... 240,000 187,000 190,000
----------- ----------- -----------
Denominator for diluted earnings
per share ............................... 32,871,000 33,163,000 33,098,000
=========== =========== ===========
EARNINGS PER SHARE:
Basic ....................................... $ 2.18 $ 1.87 $ 1.54
=========== =========== ===========
Diluted ..................................... $ 2.17 $ 1.86 $ 1.53
=========== =========== ===========
</TABLE>
All options were included in 1998 because the options' exercise price was less
than the average market price of the common shares.
Options to purchase 194,150 shares of common stock at $33.00 per share were
outstanding during 1997, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares.
Options to purchase 416,400 shares of common stock at $21.75 per share were
outstanding during 1996, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares.
34 KAYDON CORPORATION 1998
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
U.S. Federal ....................... $ 38,098,000 $ 34,360,000 $ 33,381,000
State .............................. 5,039,000 4,494,000 3,717,000
Foreign ............................ 2,403,000 2,767,000 2,061,000
Rate change ........................ -- (125,000) --
------------ ------------ ------------
45,540,000 41,496,000 39,159,000
------------ ------------ ------------
Deferred:
U.S. Federal ....................... (1,738,000) (2,906,000) (7,134,000)
State .............................. (172,000) (209,000) (382,000)
Foreign ............................ -- (919,000) (548,000)
Rate change ........................ -- 333,000 --
------------ ------------ ------------
(1,910,000) (3,701,000) (8,064,000)
------------ ------------ ------------
$ 43,630,000 $ 37,795,000 $ 31,095,000
============ ============ ============
</TABLE>
In April 1997, the income tax rate in the United Kingdom decreased from 33% to
31%. The income tax balances were adjusted to reflect the revised rate.
In 1998, 1997 and 1996, the Company's effective tax rates were 38.0%, 38.0% and
38.1%, respectively, of income before income taxes and differed from the U.S.
federal statutory income tax rate primarily due to the effect of state income
taxes, net of the federal tax benefit.
Cash expended for income taxes totaled $44,408,000 in 1998, $41,546,000 in 1997
and $30,974,000 in 1996.
The tax effect and type of significant temporary differences by component which
gave rise to the net deferred tax asset as of December 31, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Financial accruals and reserves not
currently deductible............................................. $15,547,000 $13,696,000
Postretirement and postemployment
benefit obligations.............................................. 12,677,000 12,077,000
Inventory accounting method and
basis differences................................................ 7,027,000 6,561,000
Other.............................................................. 1,046,000 1,630,000
Valuation allowance -- --
----------- -----------
36,297,000 33,964,000
----------- -----------
Deferred tax liabilities:
Plant and equipment basis differences,
including depreciation and amortization.......................... (9,153,000) (8,744,000)
----------- -----------
$27,144,000 $25,220,000
=========== ===========
</TABLE>
The Company has not provided for U.S. income taxes on undistributed earnings of
foreign subsidiaries. Recording of deferred income taxes on these undistributed
earnings is not required as these earnings have been permanently reinvested.
The amounts subject to U.S. taxation upon remittance of these earnings as
dividends would be substantially offset by available foreign tax credits.
KAYDON CORPORATION 1998 35
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. SHORT-TERM DEBT
The Company has short-term lines of credit with banks totaling $27,000,000 with
no outstanding borrowings at December 31, 1998 and 1997. The rates of interest
on the outstanding balances of each of these lines are at or slightly below the
applicable prime commercial rate (as defined in the respective agreements),
which was 7.75% at December 31, 1998. There were no borrowings of short-term
debt during 1998.
NOTE 5. LONG-TERM DEBT
The Company has $100,000,000 of borrowings available under its revolving credit
and term loan agreement, none of which are outstanding at December 31, 1998 or
1997. The borrowing rate is defined in the agreement and is the prime
commercial rate or lower. The available interest rate at December 31, 1998 was
5.31%. Commitment fees ranging from .1% to .2% of the unused portion of credit
are charged quarterly.
There were no borrowings of long-term debt during 1998. Cash expended for
interest on long-term debt totaled $94,000 in 1997 and $352,000 in 1996.
NOTE 6. STOCK-BASED COMPENSATION
The Company has two stock option plans which include the 1993 Stock Option Plan
("Employee Plan") and the 1993 Non-Employee Directors Plan ("Directors Plan").
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net Income:
As reported..................................... $71,184,000 $61,666,000
Pro forma....................................... $70,098,000 $60,908,000
Earnings Per Share (Diluted):
As reported..................................... $ 2.17 $ 1.86
Pro forma....................................... $ 2.13 $ 1.84
</TABLE>
The fair value of each option grant in the stock option plans is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for the grant in 1998: risk-free
interest rate of 4.6%; expected dividend yield of 1.1%; expected life of 4
years; expected volatility of 31.4%. The following assumptions were used for
grants in 1997: risk-free interest rates ranging from 5.8% to 6.8%; expected
dividend yield of 1.1%; expected lives of 4 years; expected volatility of
27.4%. The following assumptions were used for grants in 1996: risk-free
interest rates ranging from 5.3% to 6.2%; expected dividend yield of 1.2%;
expected lives of 4 years; expected volatility of 29.0%.
36 KAYDON CORPORATION 1998
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company may grant options for up to 2,000,000 shares under the Employee
Plan. The Company has granted options on 1,427,824 shares through December 31,
1998. The Directors Plan has a maximum 200,000 shares available for grant of
which 140,000 remained available for grant at December 31, 1998. Under the
Plans, the purchase price of each option granted will not be less than fair
market value at the date of grant. Options granted become exercisable at the
rate of 25% per year, commencing one year after the date of grant and expiring
five years from the date of grant.
A summary of stock option information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------ ------------------------
Wtd. Avg.* Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
---------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of Year...... 1,116,030 $20.21 1,052,350 $16.70 1,170,100 $10.49
Granted............................... 351,550 $24.81 214,150 $32.00 684,400 $19.51
Exercised............................. (285,866) $14.87 (132,670) $11.75 (781,150) $ 9.94
Canceled.............................. (80,476) $24.86 (17,800) $17.40 (21,000) $13.38
---------- ---------- ---------
Outstanding at End of Year............ 1,101,238 $22.73 1,116,030 $20.21 1,052,350 $16.70
========== ========== ==========
Exercisable at End of Year............ 258,876 $18.30 373,679 $14.95 257,830 $11.48
Weighted Average Fair Value
of Options Granted................ $ 7.17 $ 9.05 $ 5.69
</TABLE>
Options outstanding at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Wtd. Avg.
Wtd. Avg. Remaining
Number of Lowest Highest Exercise Contractual
Options Price Price Price Life (years)
--------- ------ ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Exercise price per share:
Under $22.00:
Exercisable....................... 242,838 $11.94 $21.75 $17.55 2.21
Non-exercisable................... 332,200 $15.38 $21.75 $19.50 2.64
---------
575,038 $11.94 $21.75 $18.68 2.46
---------
Over $22.00:
Exercisable....................... 16,038 $22.31 $33.00 $29.67 3.48
Non-exercisable................... 510,162 $22.31 $33.00 $27.08 4.67
---------
526,200 $22.31 $33.00 $27.15 4.63
---------
Total options......................... 1,101,238 $11.94 $33.00 $22.73 3.50
=========
</TABLE>
KAYDON CORPORATION 1998 37
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7. SHAREHOLDERS RIGHTS PLAN
On June 21, 1995, the Board of Directors of the Company adopted a Shareholders
Rights Plan which attaches one right to each share of Kaydon common stock to
shareholders of record at the close of business on July 7, 1995. When the right
becomes exercisable, each registered holder will be entitled to purchase from
the Company additional common stock having a value of twice the exercise price
upon payment of the exercise price. The exercise price, subject to adjustment,
is fifteen dollars ($15.00) per right. The rights will become exercisable eight
days following a public announcement that a person or group of affiliated or
associated persons has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding shares of common stock (the "Stock
Acquisition Date"). The rights are not exercisable until the Stock Acquisition
Date and will expire at the close of business on July 7, 2000, unless earlier
redeemed by Kaydon.
NOTE 8. EMPLOYEE BENEFIT PLANS
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". All information in the Employee Benefit Plans note
has been presented accordingly.
Pension Plans. The Company maintains several defined benefit pension plans
which cover the majority of all U.S. employees. Benefits paid under these plans
are based generally on employees' years of service and compensation during the
final years of employment. The Company's policy is to fund the minimum amounts
required by the Employee Retirement Income Security Act of 1974. Plan assets
consist principally of publicly traded equity and debt securities which
included 160,000 shares of Kaydon common stock at December 31, 1998 and 1997.
Other Postretirement Benefits. The Company provides certain retiree health care
and life insurance benefits covering the majority of U.S. salaried and hourly
employees. Employees are generally eligible for benefits upon retirement or
long-term disability and completion of a specified number of years of credited
service. These benefits are subject to cost-sharing provisions and other
limitations. The Company does not pre-fund these benefits and has the right to
modify or terminate certain of these benefits in the future.
The Company accrues for the cost of providing postretirement benefits for
medical, dental and life insurance coverage over the active service period of
the employee.
38 KAYDON CORPORATION 1998
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation, beginning of year ............. $(50,157,000) $(46,169,000) $(26,741,000) $(23,499,000)
Service cost ...................................... (1,914,000) (1,649,000) (732,000) (599,000)
Interest cost ..................................... (3,772,000) (3,308,000) (1,989,000) (1,742,000)
Plan amendments ................................... (2,781,000) (206,000) -- --
Actuarial loss .................................... (4,125,000) (858,000) (186,000) (2,178,000)
Benefits paid ..................................... 2,218,000 2,033,000 995,000 1,277,000
------------ ------------ ------------ ------------
Benefit obligation, September 30 ................. (60,531,000) (50,157,000) (28,653,000) (26,741,000)
------------ ------------ ------------ ------------
Change in Plan Assets
Fair value of plan assets, beginning of year ...... 55,936,000 42,313,000 -- --
Actual return on plan assets ...................... 535,000 15,560,000 -- --
Company contributions ............................. 2,869,000 96,000 995,000 1,277,000
Plan participants' contributions .................. -- -- 54,000 54,000
Benefits paid ..................................... (2,218,000) (2,033,000) (1,049,000) (1,331,000)
------------ ------------ ------------ ------------
Fair value of plan assets, September 30 .......... 57,122,000 55,936,000 -- --
------------ ------------ ------------ ------------
Funded Status ..................................... (3,409,000) 5,779,000 (28,653,000) (26,741,000)
Unrecognized net transition obligation ............ 37,000 31,000 -- --
Unrecognized prior service cost ................... 4,279,000 2,528,000 (2,126,000) (2,322,000)
Unrecognized net loss (gain) ...................... (3,922,000) (12,620,000) 252,000 114,000
------------ ------------ ------------ ------------
Accrued benefit cost, September 30 ............... (3,015,000) (4,282,000) (30,527,000) (28,949,000)
Provision for fourth quarter ...................... (363,000) (513,000) -- --
Contributions for fourth quarter .................. 36,000 17,000 -- --
------------ ------------ ------------ ------------
Accrued benefit cost, December 31 ................ $ (3,342,000) $ (4,778,000) $(30,527,000) $(28,949,000)
============ ============ ============ ============
Amounts Recognized in the Consolidated
Balance Sheets Consist of:
Accrued benefit liability ......................... $ (7,156,000) $ (7,270,000) $(30,527,000) $(28,949,000)
Intangible asset .................................. 3,744,000 2,445,000 -- --
Accumulated other comprehensive income ............ 70,000 47,000 -- --
------------ ------------ ------------ ------------
Net amount recognized ............................. $ (3,342,000) $ (4,778,000) $(30,527,000) $(28,949,000)
============ ============ ============ ============
Weighted Average Assumptions as of September 30
Discount rate ..................................... 6.25-7.00% 7.00-7.75% 6.25-7.00% 7.00-7.75%
Expected return on plan assets .................... 9.00% 9.00% N/A N/A
Rate of compensation increase ..................... 4.50% 4.50% 5.00% 4.50%
</TABLE>
KAYDON CORPORATION 1998 39
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $33,417,000, $32,812,000 and $27,145,000,
respectively, as of December 31, 1998 and $4,845,000, $3,788,000 and $143,000,
respectively, as of December 31, 1997.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------------------------- ---------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
Components of Net Periodic Benefit Cost:
<S> <C> <C> <C> <C> <C> <C>
Service cost ................................. $ 1,968,000 $ 1,750,000 $ 1,347,000 $ 732,000 $ 599,000 $ 670,000
Interest cost ................................ 3,878,000 3,455,000 2,865,000 1,989,000 1,742,000 1,667,000
Expected return on plan assets ............... (5,034,000) (3,808,000) (2,848,000) -- -- --
Amortization of:
Unrecognized net transition obligation ... (6,000) (6,000) (6,000) -- -- --
Unrecognized prior service cost .......... 1,138,000 444,000 408,000 (195,000) (196,000) (173,000)
Unrecognized net loss (gain) ............ (494,000) 247,000 (5,000) 41,000 (37,000) (45,000)
----------- ----------- ----------- ----------- ----------- -----------
Net periodic benefit cost ............ $ 1,450,000 $ 2,082,000 $ 1,761,000 $ 2,567,000 $ 2,108,000 $ 2,119,000
=========== =========== =========== =========== =========== ===========
</TABLE>
For measurement purposes, a 10% annual rate of increase for participants under
65 years of age and an 8% annual rate of increase for participants over 65
years of age in the per capita cost of covered health care benefits was assumed
for 1998. The rates were assumed to decrease gradually to 6% for 2002 and
remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A 1% change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1% 1%
Increase Decrease
----------- ------------
<S> <C> <C>
Effect on total of service and interest cost components ............. $ 492,000 $ (412,000)
Effect on postretirement benefit obligation ......................... $ 4,110,000 $(3,577,000)
</TABLE>
401(k) Plans. The Company and its domestic subsidiaries also offer 401(k)
savings plans in which substantially all of their employees may participate.
The majority of the contributions to the plans are made by the employees.
NOTE 9. LEASE COMMITMENTS
Total minimum rentals payable under operating leases that have initial or
remaining noncancellable lease terms in excess of one year as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1999 ......................... $ 1,002,000
2000 ......................... 838,000
2001 ......................... 728,000
2002 ......................... 593,000
2003 ......................... 392,000
Thereafter ................... 1,431,000
</TABLE>
Aggregate rental expense charged to operations was $1,659,000, $1,607,000 and
$1,272,000 in 1998, 1997 and 1996, respectively.
40 KAYDON CORPORATION 1998
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10. ACQUISITIONS
On March 11, 1997, the Company purchased the assets of Gold Star Manufacturing,
Inc. for $4,449,000 and on May 29, 1997, the Company purchased the assets of
Great Bend Industries, Inc. for $22,933,000. Both companies manufacture custom-
designed cylinders and will strengthen and complement the prior years'
acquisitions of Seabee Corporation ("Seabee") and Victor Fluid Power Co.
("Victor"). The acquisitions have been accounted for using the purchase method
of accounting and, accordingly, the results of operations have been included in
the 1997 consolidated financial statements since the date of acquisition.
On February 1, 1996, the Company purchased the assets of Victor and Benton
Harbor Engineering Co., Inc. ("Benton Harbor") for $10,699,000. Both companies
manufacture hydraulic cylinders and fluid power components and are
complementary to Seabee, which was purchased in August 1995. The Benton Harbor
facility was closed in the acquisition process with the equipment and customer
order base being absorbed into Seabee and Victor. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
results of operations have been included in the 1996 consolidated financial
statements since the date of acquisition.
NOTE 11. CONTINGENCIES
In June of 1995, the Company, along with certain former officers and directors
of the Company and certain other companies and organizations, was named as a
defendant in a lawsuit commenced in Bankruptcy Court in the Southern District
of New York. The plaintiff was the Creditors Committee formed in connection
with the Chapter 11 Bankruptcy Proceeding of Keene Corporation ("Keene"). That
action, identified as the "Transactions Lawsuit", asserted claims against the
Company arising from the Company's 1983 acquisition of certain assets of Keene,
and Bairnco Corporation's 1984 spin-off of the Company's common stock. As
originally filed, the Transactions Lawsuit alleged claims against the Company
under state fraudulent conveyance laws, tort claims under successor liability
law, and civil RICO claims. The Transactions Lawsuit seeks damages alleged by
plaintiffs to be an amount of $700 million, plus interest and punitive damages
against the defendants collectively. The RICO claims sought trebling of those
damages. The claims asserted in the Transactions Lawsuit are similar to, and
supplant, claims previously asserted in certain class actions brought against
the Company in 1993, purportedly on behalf of certain persons with
asbestos-related claims against Keene.
In 1997, in connection with the Bankruptcy Court's confirmation of Keene's Plan
of Reorganization, the Keene Creditors Trust was created to, among other
things, prosecute this lawsuit, and the Trustees of that Trust were substituted
as the plaintiffs in place of the Keene Creditors Committee. In addition, the
case was transferred from the Bankruptcy Court to the United States District
Court for the Southern District of New York. Subsequently, the Company and
certain other defendants filed motions to dismiss the complaint for failure to
state a claim, and for summary judgment on the grounds that the fraudulent
conveyance claims and certain related causes of action were barred by the
statute of limitations.
On October 13, 1998, the Court granted in part and denied in part the Company's
motion to dismiss the complaint, and denied the Company's motion for summary
judgment. With respect to the motion for summary judgment, the Court found that
certain groups of asbestos claimants had claims that were not time-barred, and
therefore the plaintiffs could assert claims against the Company for both
actual fraudulent conveyance and constructive fraudulent conveyance. With
respect to the motion to dismiss, the Court granted the Company's motion to
dismiss the fraudulent conveyance claim against it in connection with Bairnco's
1984 spin-off of the Company's common stock, and dismissed all the RICO claims
asserted against the Company. The Court denied the Company's motion to dismiss
the successor liability claim, but noted the plaintiffs' ability to pursue such
a claim was subject to their ability to pursue a fraudulent conveyance claim.
KAYDON CORPORATION 1998 41
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On October 29, 1998, the Company filed a motion for reargument of the Court's
ruling that the plaintiffs' claims for actual and constructive fraudulent
conveyance against the Company are not barred by the applicable statute of
limitations. On January 5, 1999, the Court issued a decision on the Company's
motion for reargument, which granted the Company's motion for reargument with
regard to the plaintiffs' claims for constructive fraudulent conveyance, and,
with one minor exception, held those claims were barred by the applicable
statute of limitations and dismissed them. However, the Court denied the
Company's motion to dismiss the actual fraudulent conveyance claims.
Accordingly, as a result of the Company's motions, the only claims remaining
against the Company are plaintiffs' claims for actual fraudulent conveyance and
for successor liability. In addition, there is on behalf of certain individual
judgment creditors, a limited claim for constructive fraudulent conveyance. The
Company does not believe any recovery on this limited claim will be material.
The discovery stay previously in place has been lifted, and discovery is in its
preliminary stages.
In other decisions, the Court also dismissed the claims against all the
individual defendants except one, and against the professional organizations
that had been named as defendants in the case. However, Bairnco and its other
subsidiaries and former subsidiaries remain as defendants in the case.
Management believes it has meritorious defenses to the claims pending against
it in this litigation. 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
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 Report (the "JAG Report") and the Naval Air Systems
Command "First Endorsement" to the JAG Report dated July 28, 1998 wherein the
U.S. Navy reviewed the crash of the Sikorsky CH-53E on May 9, 1996. The
findings contained in the JAG Report, management believes, reaffirm 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.
Management believes the outcome of this matter will not have a material adverse
effect on the Company's financial position or results of operations.
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 will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE 12. BUSINESS SEGMENT INFORMATION
In 1998 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement establishes new standards for reporting
information about operating segments and related disclosures. All prior period
information has been restated to conform to this statement.
The Company operates through individual operating units which serve four key
market sectors. The market sectors served by the Company have several related
economic characteristics and attributes, including similar products,
distribution patterns and classes of customers. As a result, the Company
aggregates its operating units into a single segment of Custom-Engineered
Products.
42 KAYDON CORPORATION 1998
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Kaydon's accounting policies for segments are the same as those described in
the summary of significant accounting policies. Management evaluates segment
performance based on segment earnings before interest and income taxes
("EBIT").
The corporate component of income before income taxes includes interest income,
of goodwill amortization, depreciation and unallocated corporate administrative
expenses. The Company maintains an asymmetrical allocation between its
corporate office and its plants with regards to goodwill. The goodwill
associated with an operating unit is on the balance sheet of the respective
operating unit while the amortization expense associated with the goodwill is
charged to the corporate office. Corporate assets consist of cash and cash
equivalents, marketable securities, fixed assets and certain prepaid expenses.
The selling price for transfers between geographic segments is generally based
on cost plus a markup.
Segment Financial Data (000)
<TABLE>
<CAPTION>
For the year 1998 For the year 1997 For the year 1996
--------------------------------- ---------------------------------- ----------------------------------
Custom- Custom- Custom-
Engineered Consolidated Engineered Consolidated Engineered Consolidated
Products Corporate Totals Products Corporate Totals Products Corporate Totals
---------- --------- ------------ ---------- --------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 380,077 $ -- $ 380,077 $ 331,545 $ -- $ 331,545 $ 291,403 $ -- $ 291,403
Elimination of
intercompany sales (3,905) -- (3,905) (2,509) -- (2,509) (733) -- (733)
--------- -------- --------- --------- -------- --------- --------- -------- ---------
Total net sales 376,172 -- 376,172 329,036 -- 329,036 290,670 -- 290,670
Depreciation and
amortization 11,390 2,654 14,044 10,405 2,351 12,756 10,367 1,382 11,749
Segment EBIT 112,930 -- 112,930 99,421 -- 99,421 82,804 -- 82,804
Unallocated amounts -- 1,884 1,884 -- 40 40 -- (1,188) (1,188)
--------- -------- --------- --------- -------- --------- --------- -------- ---------
Income before
income taxes $ 112,930 $ 1,884 $ 114,814 $ 99,421 $ 40 $ 99,461 $ 82,804 $ (1,188) $ 81,616
========= ======== ========= ========= ======== ========= ========= ======== =========
Total assets $ 317,053 $ 96,755 $ 413,808 $ 286,180 $ 97,805 $ 385,985 $ 247,267 $ 84,271 $ 331,538
========= ======== ========= ========= ======== ========= ========= ======== =========
Expenditures for
segment assets $ 25,064 $ 299 $ 25,363 $ 12,663 $ 87 $ 12,750 $ 9,292 $ 28 $ 9,320
========= ======== ========= ========= ======== ========= ========= ======== =========
</TABLE>
GEOGRAPHIC INFORMATION:
The Company attributes sales to different geographic areas on the basis of the
location of the customer. Sales and long-lived assets by geographic area are as
follows:
<TABLE>
<CAPTION>
Geographic Financial Data (000)
Sales 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
United States ............................ $ 304,116 $ 273,450 $ 234,804
Foreign .................................. 72,056 55,586 55,866
--------- --------- ---------
Total .................................... $ 376,172 $ 329,036 $ 290,670
========= ========= =========
Long-lived Assets
United States ............................ $ 142,139 $ 128,335 $ 104,508
Foreign .................................. 26,069 26,011 27,468
--------- --------- ---------
Total .................................... $ 168,208 $ 154,346 $ 131,976
========= ========= =========
</TABLE>
KAYDON CORPORATION 1998 43
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
MAJOR CUSTOMER AND MARKET SECTOR INFORMATION:
During 1998 sales to no single customer exceeded 10% of total sales.
<TABLE>
<CAPTION>
Sales by Market Sector (000) 1998 % 1997 % 1996 %
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Special Industrial Machinery .................... $ 99,710 26.5% $ 86,564 26.3% $ 75,271 25.9%
Replacement Parts & Exports ..................... 113,427 30.2% 112,426 34.2% 101,808 35.0%
Aerospace & Military Equipment .................. 50,593 13.4% 45,412 13.8% 46,545 16.0%
Heavy Industrial Equipment ...................... 112,442 29.9% 84,634 25.7% 67,046 23.1%
--------- ----- --------- ----- --------- -----
$ 376,172 $ 329,036 $ 290,670
========= ========= =========
</TABLE>
44 KAYDON CORPORATION 1998
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Kaydon Corporation:
We have audited the accompanying consolidated balance sheets of Kaydon
Corporation (a Delaware corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kaydon
Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Arthur Anderson LLP
Grand Rapids, Michigan,
January 21, 1999
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL
STATEMENTS
The management of Kaydon Corporation is responsible for the
preparation and integrity of the Company's consolidated financial
statements and all related information appearing in the Annual Report.
The Company maintains accounting and internal control systems which
are intended to provide reasonable assurances that assets are
safeguarded against loss from unauthorized use or disposition, that
transactions are executed in accordance with management's
authorization and that accounting records are reliable for preparing
financial statements in accordance with generally accepted accounting
principles.
The financial statements for each of the years covered in the Annual
Report have been audited by independent public accountants, who have
provided an independent assessment as to the fairness of the financial
statements.
The Board of Directors has an Audit Committee whose members are not
employees of the Company. The Committee meets with management and the
independent public accountants to review the results of their work and
to satisfy itself that their responsibilities are being properly
discharged. The independent public accountants have full and free
access to the Audit Committee and have discussions with the Committee
regarding appropriate matters, with and without management present.
/s/ Brian P. Campbell /s/ Joseph P. Port
Brian P. Campbell Joseph P. Port
President and Vice President Finance and
Chief Executive Officer Corporate Controller
KAYDON CORPORATION 1998 45
<PAGE> 50
FINANCIAL HISTORY
<TABLE>
<CAPTION>
Two-Year Quarterly Summary "Unaudited"
First Quarter Second Quarter Third Quarter Fourth Quarter
FINANCIAL STATEMENT DATA (000) 1998 1997 1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net Sales $ 99,109 $ 76,531 $ 99,548 $ 84,454 $ 92,801 $ 83,380 $ 84,714 $ 84,671
Gross Profit 40,468 31,823 40,614 35,574 37,165 34,356 33,977 35,507
Operating Income 28,260 21,546 29,190 24,769 27,328 24,587 25,602 24,779
Interest Income, net 1,249 879 1,198 884 996 847 991 1,170
Provision for Income Taxes 11,214 8,544 11,547 9,749 10,764 9,664 10,105 9,838
Net Income $ 18,295 $ 13,881 $ 18,841 $ 15,904 $ 17,560 $ 15,770 $ 16,488 $ 16,111
BALANCE SHEET
Total Assets $412,040 $346,656 $416,979 $349,464 $396,530 $367,991 $413,808 $383,985
Cash & Securities 101,212 85,167 96,690 58,197 75,314 76,450 96,203 96,802
Working Capital 149,505 126,672 151,534 116,834 144,569 128,725 158,600 143,763
Plant & Equipment, net 93,147 78,584 95,934 83,218 97,839 84,449 99,259 85,510
Capital Employed:
Total Debt -- 8,000 -- -- -- -- -- --
Shareholders' Equity 298,395 242,260 302,129 254,311 297,070 266,228 311,656 283,596
-------- -------- -------- -------- -------- -------- -------- --------
Capital Employed $298,395 $250,260 $302,129 $254,311 $297,070 $266,228 $311,656 $283,596
CASH FLOW DATA
Net Cash Provided by
Operating Activities $ 18,944 $ 11,261 $ 5,217 $ 11,074 $ 18,053 $ 21,916 $ 30,346 $ 27,368
Capital Expenditures, net 10,867 2,396 5,858 3,118 4,713 3,640 3,925 3,596
Free Cash 8,077 8,865 (641) 7,956 13,340 18,276 26,421 23,772
Acquisition of Businesses (11) 4,412 (71) 22,753 -- (138) -- 355
Depreciation & Amortization 3,698 3,231 3,729 3,307 3,603 2,877 3,014 3,341
EBITDA $ 31,958 $ 24,777 $ 32,919 $ 28,076 $ 30,931 $ 27,464 $ 28,616 $ 28,120
FINANCIAL RATIOS
PROFITABILITY
Operating Margin 28.5% 28.2% 29.3% 29.3% 29.4% 29.5% 30.2% 29.3%
Return on Net Sales 18.5% 18.1% 18.9% 18.8% 18.9% 18.9% 19.5% 19.0%
Return on Average Assets 18.4% 16.4% 18.2% 18.3% 17.3% 17.6% 16.3% 17.1%
Return on Average Capital
Employed 25.1% 22.6% 25.1% 25.2% 23.4% 24.2% 21.7% 23.4%
Return on Average
Shareholders' Equity 25.1% 23.4% 25.1% 25.6% 23.4% 24.2% 21.7% 23.4%
LIQUIDITY
Current Ratio 2.8 2.8 2.8 2.8 3.1 2.8 3.2 3.0
Debt to Debt-Equity Ratio -- 3.2% -- -- -- -- -- --
PER SHARE DATA (2)
Earnings per Share (Diluted) $ 0.55 $ 0.42 $ 0.57 $ 0.48 $ 0.54 $ 0.47 $ 0.51 $ 0.49
Dividends Declared per Share 0.09 0.07 0.09 0.07 0.09 0.07 0.10 0.09
Book Value per Share, net of
treasury stock $ 9.04 $ 7.35 $ 9.21 $ 7.71 $ 9.25 $ 8.07 $ 9.69 $ 8.60
Number of Common
Shareholders of Record 1,337 1,406 1,318 1,376 1,304 1,354 1,286 1,349
Market Price per Share,
Quarter High 42 13/16 23 3/8 45 3/16 25 11/16 39 3/8 32 1/32 40 1/16 34 1/8
Market Price per Share,
Quarter Low 30 1/16 21 35 5/16 20 15/16 24 13/16 24 1/4 23 5/8 29 1/4
Quarter-End Closing
Stock Price 42 1/4 21 5/16 37 11/16 25 1/8 25 15/16 29 11/16 40 1/16 32 5/8
</TABLE>
(1) All share and per share data presented has been restated to reflect
the two-for-one stock split effected in 1997.
46 KAYDON CORPORATION 1998
<PAGE> 51
FINANCIAL HISTORY
<TABLE>
<CAPTION>
Five-Year Summary
FINANCIAL STATEMENT DATA(000) 1998 1997 1996 1995 1994(1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net Sales $ 376,172 $ 329,036 $ 290,670 $ 229,924 $ 204,695
Gross Profit 152,224 137,260 117,496 88,599 76,150
Operating Income 110,380 95,681 78,954 59,286 49,759
Interest Income, net 4,434 3,780 2,662 2,505 609
Provision for Income Taxes 43,630 37,795 31,095 23,588 19,142
Net Income $ 71,184 $ 61,666 $ 50,521 $ 38,203 $ 29,226
BALANCE SHEET
Total Assets $ 413,808 $ 383,985 $ 331,538 $ 267,675 $ 243,584
Cash & Securities 96,203 96,802 83,267 47,159 39,667
Working Capital 158,600 143,763 119,232 91,407 85,886
Plant & Equipment, net 99,259 85,510 76,176 72,345 61,247
Capital Employed:
Total Debt -- -- 8,000 8,000 8,000
Shareholders' Equity 311,656 283,596 232,056 187,905 166,570
--------- --------- --------- --------- ---------
Capital Employed $ 311,656 $ 283,596 $ 240,056 $ 195,905 $ 174,570
CASH FLOW DATA
Net Cash Provided by Operating Activities $ 72,560 $ 71,619 $ 68,225 $ 49,487 $ 44,176
Capital Expenditures, net 25,363 12,750 9,320 7,371 6,746
Free Cash 47,197 58,869 58,905 42,116 37,430
Acquisition of Businesses (82) 27,382 10,699 23,512 7,268
Depreciation & Amortization 14,044 12,756 11,749 11,176 10,641
EBITDA $ 124,424 $ 108,437 $ 90,703 $ 70,462 $ 60,400
FINANCIAL RATIOS
PROFITABILITY
Operating Margin 29.3% 29.1% 27.2% 25.8% 24.3%
Return on Net Sales 18.9% 18.7% 17.4% 16.6% 14.3%
Return on Average Assets 17.8% 17.2% 16.9% 14.9% 12.7%
Return on Average Capital Employed 23.9% 23.6% 23.2% 20.6% 17.5%
Return on Average Shareholders' Equity 23.9% 23.9% 24.1% 21.6% 18.8%
LIQUIDITY
Current Ratio 3.2 3.0 2.8 3.1 3.1
Debt to Debt-Equity Ratio -- -- 3.3% 4.1% 4.6%
PER SHARE DATA(2)
Earnings per Share (Diluted) $ 2.17 $ 1.86 $ 1.53 $ 1.14 $ 0.87
Dividends Declared per Share 0.37 0.30 0.25 0.23 0.21
Book Value per Share, net of treasury stock $ 9.69 $ 8.60 $ 7.05 $ 5.74 $ 5.01
Number of Common Shareholders of Record 1,286 1,349 1,415 1,487 1,615
Market Price per Share, Annual High 45 3/16 34 1/8 24 5/8 15 3/4 12 5/8
Market Price per Share, Annual Low 23 5/8 20 15/16 14 5/8 11 3/8 9 7/8
Year-End Closing Stock Price 40 1/16 32 5/8 23 9/16 15 3/16 12
</TABLE>
(1) Financial results include the impact (net of tax) of $2,000,000
related to the adoption of Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postretirement Benefits".
(2) All share and per share data presented has been restated to reflect
the two-for-one stock split effected in 1997.
KAYDON CORPORATION 1998 47
<PAGE> 52
KAYDON CORPORATION CORPORATE DIRECTORY
BOARD OF DIRECTORS
<TABLE>
<S> <C> <C> <C>
[PHOTO-LAWRENCE J. CAWLEY [PHOTO-BRIAN P. CAMPBELL [PHOTO-GERALD J. BREEN [PHOTO-THOMAS C. SULLIVAN
Chairman, President and Chairman and Chairman and
Kaydon Corporation] Chief Executive Officer Chief Executive Officer Chief Executive Officer
Kaydon Corporation] IER Industries, Inc.] RPM, Inc.]
</TABLE>
CORPORATE OFFICERS AND OPERATING EXECUTIVES
<TABLE>
<S> <C> <C> <C>
LAWRENCE J. CAWLEY JOHN F. BROCCI JOHN R. EMLING PATRICK T. KIRK
Chairman Vice President-Administration President President
and Secretary Bearing Products Group Specialty Products Group
BRIAN P. CAMPBELL JOSEPH P. PORT EDWIN GAIR THOMAS C. SORRELLS, III
President and Vice President-Finance and Vice President and President
Chief Executive Officer Corporate Controller Managing Director Fluid Power Products Group
Cooper Bearings
U.K & U.S.A.
OPERATING MANAGEMENT
JOHN R. EMLING THOMAS C. SORRELLS, III JOANNA SUTTON PETER E. COTTER
President President Vice President and General Manager
Bearing Products Group Fluid Power Products Group General Manager. Industrial Tectonics Inc.
Electro-Tec Corp.
EDWIN GAIR PATRICK T. KIRK CHRISTOPHER M. HENRY N. GUENTHER
Vice President and President HAGGETT General Manager
Managing Director Specialty Products Group Managing Director Spirolox
Cooper Bearings I.D.M. Electronics, Ltd.
U.K & U.S.A.
KENNETH J. LANGE ARTHUR H. RIDLER THOMAS A. BUSHAR
General Manger Vice President and Vice President and
Cooper Bearings (U.S.A.) General Manager General Manager
Ring and Seal, Inc. Filtration Division
</TABLE>
48 KAYDON CORPORATION 1998
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<S> <C> <C>
1. Name: Kaydon International, Inc.
Place of Incorporation: United States Virgin Islands
Date of Incorporation: July 16, 1991
2. Name: Kaydon Ring and Seal, Inc.
Place of Incorporation: Delaware
Date of Incorporation: June 30, 1986
3. Name: Kaydon S.A. de C.V.
Place of Incorporation: Nuevo Leon, United Mexican States
Date of Incorporation: April 10, 1987
4. Name: I.D.M. Electronics Ltd.
Place of Incorporation: United Kingdom
Date of Incorporation: July 1, 1957
5. Name: Electro-Tec Corp.
Place of Incorporation: Delaware
Date of Incorporation: October 27, 1967
6. Name: Cooper Roller Bearing Company Limited
Place of Incorporation: United Kingdom
Date of Incorporation: June 16, 1982
7. Name: Cooper Split Roller Bearing Corporation
Place of Incorporation: Virginia
Date of Incorporation: January 1, 1974
8. Name: Cooper Geteilte Rollenlager GmbH
Place of Incorporation: Germany
Date of Incorporation: March 22, 1974
9. Name: Industrial Tectonics Inc
Place of Incorporation: Delaware
Date of Incorporation: November 22, 1991
10. Name: Kaydon Acquisition Corp. V
(d/b/a Seabee Corporation)
(d/b/a Gold Star Manufacturing, Inc.)
Place of Incorporation: Delaware
Date of Incorporation: October 4, 1993
11. Name: Kaydon Acquisition VII, Inc.
(d/b/a Victor Fluid Power, Inc.)
Place of Incorporation: Delaware
Date of Incorporation: September 28, 1995
12. Name: Great Bend Industries, Inc.
Place of Incorporation: Delaware
Date of Incorporation: September 28, 1995
</TABLE>
29
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kaydon Corporation:
As independent public accountants, we hereby consent to the
incorporation of our report dated January 21, 1999, incorporated by reference
in this Form 10-K, into the Company's previously filed Form S-8 Registration
Statement Numbers 2-89399, 2-92389, 33-48762, 33-61646, 33-61648 and 333-15903.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Grand Rapids, Michigan
March 26, 1999
30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 96,203
<SECURITIES> 0
<RECEIVABLES> 50,914
<ALLOWANCES> 1,957
<INVENTORY> 68,176
<CURRENT-ASSETS> 229,800
<PP&E> 222,848
<DEPRECIATION> 123,589
<TOTAL-ASSETS> 413,808
<CURRENT-LIABILITIES> 71,200
<BONDS> 0
0
0
<COMMON> 3,646
<OTHER-SE> 308,010
<TOTAL-LIABILITY-AND-EQUITY> 413,808
<SALES> 376,172
<TOTAL-REVENUES> 376,172
<CGS> 223,948
<TOTAL-COSTS> 223,948
<OTHER-EXPENSES> 41,844
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,434)
<INCOME-PRETAX> 114,814
<INCOME-TAX> 43,630
<INCOME-CONTINUING> 71,184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,184
<EPS-PRIMARY> 2.18
<EPS-DILUTED> 2.17
</TABLE>
