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Previous: VARIFLEX, 497, 2000-08-11 |
Next: KAYDON CORP, 10-Q, EX-27, 2000-08-11 |
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
| For Quarter Ended July 1, 2000 | Commission File No. 0-12640 |
KAYDON CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
13-3186040 (I.R.S. Employer Identification No.) |
| 315 E. Eisenhower Parkway, Suite 300, Ann Arbor, Michigan (Address of principal executive offices) |
48108 (Zip Code) |
Registrant’s telephone number, including area code (734) 747-7025
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Common Stock Outstanding at August 4, 2000 – 29,947,770 shares, $.10 par value.
KAYDON CORPORATION FORM 10-Q
FOR THE QUARTER ENDED July 1, 2000
INDEX
| Page
No. |
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| Part I — Financial Information: | |||||||
| Item 1. Financial Statements | |||||||
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| |||||||
| Consolidated Condensed Balance Sheets - | |||||||
| July 1, 2000 and December 31, 1999 | 1 | ||||||
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| |||||||
| Consolidated Condensed Statements of Income - | |||||||
| Quarter and First Half Ended July 1, 2000 and July 3, 1999 | 2 | ||||||
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| Consolidated Condensed Statements of Cash Flows - | |||||||
| First Half Ended July 1, 2000 and July 3, 1999 | 3 | ||||||
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| Notes to Consolidated Condensed Financial Statements | 4 - 10 | ||||||
| |||||||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 - 13 | ||||||
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 13 | ||||||
| |||||||
| Part II — Other Information: | |||||||
| Item 1. – Legal Proceedings | 14 | ||||||
|
| |||||||
| Item 6. — Exhibits and Reports on Form 8-K | 14 | ||||||
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| |||||||
| Signatures | 15 | ||||||
ITEM 1. FINANCIAL STATEMENTS
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
| July 1, 2000 | December 31, 1999 | |||||||
| (Unaudited) | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 97,689,000 | $ | 89,749,000 | ||||
| Accounts receivable, net | 54,538,000 | 48,776,000 | ||||||
| Inventories, net | 61,385,000 | 61,008,000 | ||||||
| Other current assets | 12,027,000 | 12,020,000 | ||||||
| Total current assets | 225,639,000 | 211,553,000 | ||||||
| Plant and equipment, net | 97,668,000 | 98,844,000 | ||||||
| Cost in excess of net tangible assets of purchased businesses, net | 73,499,000 | 75,081,000 | ||||||
| Other assets | 24,387,000 | 21,271,000 | ||||||
| Total assets | $ | 421,193,000 | $ | 406,749,000 | ||||
| Liabilities and Shareholders’ Equity: | ||||||||
| Accounts payable | $ | 15,735,000 | $ | 11,360,000 | ||||
| Accrued expenses | 43,386,000 | 42,823,000 | ||||||
| Total current liabilities | 59,121,000 | 54,183,000 | ||||||
| Long-term liabilities | 48,765,000 | 35,616,000 | ||||||
| Shareholders’ equity: | ||||||||
| Common stock | 3,671,000 | 3,667,000 | ||||||
| Paid-in capital | 40,301,000 | 40,942,000 | ||||||
| Retained earnings | 413,204,000 | 401,024,000 | ||||||
| Less — treasury stock, at cost | (128,757,000 | ) | (114,794,000 | ) | ||||
| Less — restricted stock awards | (9,850,000 | ) | (10,833,000 | ) | ||||
| Accumulated other comprehensive loss | (5,262,000 | ) | (3,056,000 | ) | ||||
| 313,307,000 | 316,950,000 | |||||||
| Total liabilities and shareholders’ equity | $ | 421,193,000 | $ | 406,749,000 | ||||
See accompanying notes to consolidated condensed financial statements.
1
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
| Quarter Ended | First Half Ended | ||||||||||||||||
| July 1, 2000 | July 3, 1999 | July 1, 2000 | July 3, 1999 | ||||||||||||||
| Net sales | $ | 86,068,000 | $ | 85,524,000 | $ | 170,988,000 | $ | 173,644,000 | |||||||||
| Gross profit | $ | 32,173,000 | $ | 33,573,000 | $ | 64,285,000 | $ | 68,029,000 | |||||||||
| Operating income | $ | 7,522,000 | $ | 24,334,000 | $ | 27,081,000 | $ | 49,082,000 | |||||||||
| Interest income, net | 1,375,000 | 1,175,000 | 2,922,000 | 2,225,000 | |||||||||||||
| Income before income taxes | 8,897,000 | 25,509,000 | 30,003,000 | 51,307,000 | |||||||||||||
| Provision for income taxes | 3,292,000 | 9,566,000 | 11,102,000 | 19,240,000 | |||||||||||||
| Net income | $ | 5,605,000 | $ | 15,943,000 | $ | 18,901,000 | $ | 32,067,000 | |||||||||
| Weighted Average Common Shares: | |||||||||||||||||
| Basic | 30,111,000 | 31,855,000 | 30,286,000 | 31,954,000 | |||||||||||||
| Diluted | 30,157,000 | 32,047,000 | 30,339,000 | 32,157,000 | |||||||||||||
| Earnings Per Share: | |||||||||||||||||
| Basic | $ | .19 | $ | .50 | $ | .62 | $ | 1.00 | |||||||||
| Diluted | $ | .19 | $ | .50 | $ | .62 | $ | 1.00 | |||||||||
See accompanying notes to consolidated condensed financial statements.
2
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| First Half Ended | |||||||||
| July 1, 2000 | July 3, 1999 | ||||||||
| Cash flows from operating activities | $ | 36,510,000 | $ | 32,318,000 | |||||
| Cash flows from (used in) investing activities: | |||||||||
| Capital expenditures, net | (6,343,000 | ) | (5,585,000 | ) | |||||
| Acquisition of business | (1,248,000 | ) | |||||||
| Cash used in investing activities | (7,591,000 | ) | (5,585,000 | ) | |||||
| Cash flows from (used in) financing activities: | |||||||||
| Proceeds from issuance of common stock | 597,000 | 760,000 | |||||||
| Dividends paid | (6,788,000 | ) | (6,405,000 | ) | |||||
| Net payments on debt | (46,000 | ) | |||||||
| Purchase of treasury stock | (14,414,000 | ) | (10,517,000 | ) | |||||
| Cash used in financing activities | (20,651,000 | ) | (16,162,000 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | (328,000 | ) | (316,000 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 7,940,000 | 10,255,000 | |||||||
| Cash and cash equivalents — Beginning of period | 89,749,000 | 96,203,000 | |||||||
| Cash and cash equivalents — End of period | $ | 97,689,000 | $ | 106,458,000 | |||||
| Cash expended for income taxes | $ | 13,424,000 | $ | 18,850,000 | |||||
See accompanying notes to consolidated condensed financial statements.
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KAYDON CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
| (1) | The accompanying unaudited consolidated condensed financial statements of Kaydon Corporation and subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, and such adjustments are of a normal recurring nature. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 1999. | |
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| (2) | Inventories are summarized as follows: |
| July 1, 2000 | December 31, 1999 | |||||||
| Raw Material | $ | 22,948,000 | $ | 22,970,000 | ||||
| Work in Process | 15,549,000 | 15,372,000 | ||||||
| Finished Goods | 22,888,000 | 22,666,000 | ||||||
| $ | 61,385,000 | $ | 61,008,000 | |||||
| (3) | Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events, and from circumstances involving nonowner sources. For the Company, comprehensive income consists of net income, minimum pension liability adjustments and foreign currency translation adjustments. Other comprehensive income, net of tax, was approximately $(1,731,000) and $(2,049,000), resulting in comprehensive income of $3,874,000 and $13,894,000 for the quarters ended July 1, 2000 and July 3, 1999. On a first half basis, other comprehensive income, net of tax, was approximately ($2,206,000) and $(2,972,000), resulting in year to date comprehensive income of $16,695,000 and $29,095,000 for the first halves ended July 1, 2000 and July 3, 1999. |
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| (4) | The following table reconciles the numerators and denominators used in the calculation of basic and diluted earnings per share for the periods presented. |
| Quarter Ended | |||||||||
| July 1, 2000 | July 3, 1999 | ||||||||
| Numerators: | |||||||||
| Numerators for both basic and diluted earnings per share, net income | $ | 5,605,000 | $ | 15,943,000 | |||||
| Denominators: | |||||||||
| Denominators for basic earnings per share, weighted average common shares outstanding | 30,111,000 | 31,855,000 | |||||||
| Potential dilutive shares resulting from stock options and restricted stock awards | 46,000 | 192,000 | |||||||
| Denominators for dilutive earnings per share | 30,157,000 | 32,047,000 | |||||||
| Earnings per share: | |||||||||
| Basic | $ | .19 | $ | .50 | |||||
| Diluted | $ | .19 | $ | .50 | |||||
| First Half Ended | |||||||||||
| July 1, 2000 | July 3, 1999 | ||||||||||
| Numerators: | |||||||||||
| Numerators for both basic and diluted earnings per share, net income | $ | 18,901,000 | $ | 32,067,000 | |||||||
| Denominators: | |||||||||||
| Denominators for basic earnings per share, weighted average common shares outstanding | 30,286,000 | 31,954,000 | |||||||||
| Potential dilutive shares resulting from stock options and restricted stock awards | 53,000 | 203,000 | |||||||||
| Denominators for dilutive earnings per share | 30,339,000 | 32,157,000 | |||||||||
| Earnings per share: | |||||||||||
| Basic | $ | .62 | $ | 1.00 | |||||||
| Diluted | $ | .62 | $ | 1.00 | |||||||
5
| Options to purchase 414,225 shares of common stock at prices ranging from $24.8125 to $33.3125 per share were outstanding during the second quarter of 2000, 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 during that period. Options to purchase 12,000 shares of common stock at $33.3125 per share were outstanding during the second quarter of 1999, 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 during that period. | ||
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| ||
| In accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share”, potential dilutive shares resulting from stock option plans used in the calculation of dilutive earnings per share are based on an average of the potential dilutive shares resulting from stock option plans for the periods presented. | ||
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| ||
| (5) | 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. | |
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| ||
| The corporate component of income before taxes includes interest income, 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. |
6
Segment financial data (in thousands):
| Quarter Ended | ||||||||||||||||||||||||
| July 1, 2000 | July 3, 1999 | |||||||||||||||||||||||
| Custom- | Custom- | |||||||||||||||||||||||
| Engineered | Consolidated | Engineered | Consolidated | |||||||||||||||||||||
| Products | Corporate | Totals | Products | Corporate | Totals | |||||||||||||||||||
| Sales | $ | 86,424 | $ | 86,424 | $ | 86,843 | $ | 86,843 | ||||||||||||||||
| Elimination of intercompany sales | (356 | ) | (356 | ) | (1,319 | ) | (1,319 | ) | ||||||||||||||||
| Total net sales | $ | 86,068 | $ | 86,068 | $ | 85,524 | $ | 85,524 | ||||||||||||||||
| Segment earnings before interest and tax | $ | 20,192 | $ | 20,192 | $ | 24,768 | $ | 24,768 | ||||||||||||||||
| Unallocated amounts | 0 | $ | (11,295 | ) | (11,295 | ) | 0 | $ | 741 | 741 | ||||||||||||||
| Income before income taxes | $ | 20,192 | $ | (11,295 | ) | $ | 8,897 | $ | 24,768 | $ | 741 | $ | 25,509 | |||||||||||
| First Half Ended | ||||||||||||||||||||||||
| July 1, 2000 | July 3, 1999 | |||||||||||||||||||||||
| Custom- | Custom- | |||||||||||||||||||||||
| Engineered | Consolidated | Engineered | Consolidated | |||||||||||||||||||||
| Products | Corporate | Totals | Products | Corporate | Totals | |||||||||||||||||||
| Sales | $ | 171,849 | $ | 171,849 | $ | 176,592 | $ | 176,592 | ||||||||||||||||
| Elimination of intercompany sales | (861 | ) | (861 | ) | (2,948 | ) | (2,948 | ) | ||||||||||||||||
| Total net sales | $ | 170,988 | $ | 170,988 | $ | 173,644 | $ | 173,644 | ||||||||||||||||
| Segment earnings before interest and tax | $ | 40,441 | $ | 40,441 | $ | 49,875 | $ | 49,875 | ||||||||||||||||
| Unallocated amounts | 0 | $ | (10,438 | ) | (10,438 | ) | 0 | $ | 1,432 | 1,432 | ||||||||||||||
| Income before income taxes | $ | 40,441 | $ | (10,438 | ) | $ | 30,003 | $ | 49,875 | $ | 1,432 | $ | 51,307 | |||||||||||
| There has been no change in the basis or measurement of segmentation since the last annual report. | ||
|
| ||
| (6) | 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 |
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| 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 Corporation’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. |
| 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 |
8
| 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 the discovery phase is well underway. |
| 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. A provision is recorded in the consolidated financial statements equal to the Company’s most current and best estimates to litigate these legal actions. |
| Since June 1996, the Company and certain employees have received subpoenas 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, and Kaydon employee testimony relating to bearings manufactured by Kaydon and used in the Sikorsky helicopter. In addition, a “Mishap Board” led by Sikorsky Aircraft Corporation personnel alleged that product quality problems or deficiencies existed with respect to the Kaydon bearing used in the Sikorsky helicopter described above. Kaydon personnel were excluded from participation on this “Mishap Board”. However, Kaydon 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’s insurance company 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 |
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| (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. A supplemental review dated November 30, 1999 with a First Endorsement dated December 10, 1999 further reviewed the JAG investigation and the Sikorsky “Mishap Board” investigation. The Supplemental Review and related First Endorsement contradict certain findings contained in the earlier JAG Report and related First Endorsement. Management believes that none of the findings contained in these reviews are conclusive, and management further believes it has meritorious defenses against any claims relating to alleged quality problems or deficiencies in its products. Accordingly, no provision has been reflected in the consolidated financial statements for any alleged damages. A provision is recorded in the consolidated financial statements equal to the Company’s most current and best estimates to litigate these legal actions. |
| During the second quarter of 2000, a $12,637,000 provision was recorded in order to support the Company’s most current and best estimates to litigate the Transactions Lawsuit and the Sikorsky matter discussed above. The change in the estimates during the second quarter resulted from current spending levels and substantial new information regarding forecasted spending levels to complete the discovery stages of these cases, and to try the cases by the end of 2002. The Company now estimates that annual spending of as much as $5,250,000 to $6,250,000 related to these two legal matters will continue through 2002. |
| Various other claims, lawsuits and environmental matters arising in the normal course of business are pending against the Company. A provision is recorded in the consolidated financial statements equal to the Company’s most current and best estimates to litigate these legal actions. |
10
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
During the second quarter of 2000, Kaydon Corporation and subsidiaries (the “Company”) achieved sales of $86,068,000, up 0.6 percent from $85,524,000 in the second quarter of 1999. Results for the quarter reflect recent acquisitions and modest recoveries in certain markets served by Kaydon including sales of specialty bearings to the semiconductor equipment market, industrial sealing products and repairs, as well as the specialty ball market. However, these improvements were offset by the absence of recoveries in certain other key markets including the heavy construction equipment and offshore oil markets.
Gross profit during the second quarter of 2000 of $32,173,000 was 37.4 percent of sales, compared with $33,573,000 or 39.3 percent of sales in the second quarter of 1999. While below the 1999 second quarter levels, the gross profit percentage achieved in the second quarter of 2000 was relatively consistent with gross profit percentages achieved during the last two quarters of 1999 and the first quarter of 2000. Operating income during the second quarter of 2000 was $7,522,000 or 8.7 percent of sales as compared to $24,334,000 or 28.5 percent of sales in the 1999 second quarter.
The operating income results were negatively impacted by a pre-tax $12,637,000 provision recorded during the second quarter of 2000 to support the Company’s most current and best estimates of expenses to litigate various legal actions. The after tax effect of this litigation charge was $7,961,000 or $.26 per share. These legal actions relate to the so-called Transactions Lawsuit, as well as the so-called Sikorsky Matter further discussed in detail in the Notes to Consolidated Condensed Financial Statements. The change in the estimates during the second quarter resulted from current spending levels and substantial new information regarding forecasted spending levels to complete the discovery stages of these cases, and to try the cases by the end of 2002. The Company now estimates that annual spending of as much as $5,250,000 to $6,250,000 related to these two legal matters will continue through 2002. Kaydon is prepared to continue vigorous defenses based on the merits of these matters.
Second quarter sales and operating income results continue to reflect the effects of softness in many of the heavy industrial equipment markets that Kaydon products serve, including construction, mining, forestry and power generation equipment. Particularly effected by the lack of demand from these markets are Kaydon's Cooper Roller Bearings subsidiary in the United Kingdom and its Fluid Power Products division.
Certain charges for headcount reductions and fixed asset write-offs were recorded during the first quarter of 2000 at Cooper Roller Bearings related to the discontinuance of their power transmission parts business and during the second quarter the Company began a restructuring of its Fluid Power Products division. The restructuring involves the closing of one of the division’s four facilities with its operations integrated into the other three divisional locations. The restructuring of the Fluid Power Products division, involving total estimated expenditures of approximately $2.0 million during 2000, is expected to result in future annualized cost savings in excess of $2.0 million.
Amortization expense related to goodwill generated as a result of the two strategic
11
acquisitions completed by the Company in late 1999 also negatively affected the second quarter compared to the same period last year. The 1999 acquisitions on a whole, while currently adding sales volume have yet to have a comparable operating income impact as the Company is in the process of fully integrating the new businesses.
Net interest income of $1,375,000 during the second quarter of 2000 was up $200,000 from $1,175,000 over last year’s comparable period as higher prevailing investment rates offset slightly lower cash balances.
Second quarter 2000 net income, including the after tax effect of the litigation charge of $7,961,000, was $5,605,000, or 6.5 percent of sales. Earnings per share on a diluted basis, including the after tax effect of the litigation charge of $.26, equaled $.19. Second quarter 1999 net income and diluted earnings per share were $15,943,000 and $.50.
The effective tax rate during the 2000 second quarter was 37.0 percent compared to 37.5 percent in the second quarter 1999. The lower rate is due to more state tax planning efforts.
Sales for the first half of 2000 were $170,988,000, a decrease of 1.5 percent over last year’s $173,644,000 reflecting the softness in certain major markets served by Kaydon. As a result of the lower sales volume and mix of products sold, gross profit for the first half of 2000 decreased to $64,285,000 or 37.6 percent of sales as compared to $68,029,000 or 39.2 percent of sales during the first half of 1999. Operating income during the first half of 2000, including the previously mentioned litigation charge in the second quarter, was $27,081,000 or 15.8 percent of sales as compared to $49,082,000 or 28.3 percent of sales in the 1999 first half.
Net income for the first half of 2000, including the previously mentioned litigation charge, was $18,901,000 or 11.1 percent of sales, while earnings per share on a diluted basis equaled $.62. First half 1999 net income was $32,067,000 or 18.5 percent of sales, while earnings per share on a diluted basis equaled $1.00.
Liquidity and Capital Resources
Working capital was $166,518,000 at July 1, 2000 reflecting a current ratio of 3.8 to 1 compared to $157,370,000 and a current ratio of 3.9 to 1 at year-end 1999. Cash flow from operations was a record $36,510,000 during the first half, up from $32,318,000 for the same period in 1999.
Depreciation and amortization for the first half of 2000 totaled $8,978,000 compared to $8,266,000 in the first half of 1999. Increases are primarily due to the previously mentioned acquisitions completed in late 1999.
12
Cash and cash equivalents equaled $97,689,000 at July 1, 2000, up $7,940,000 over the balance at year-end 1999 of $89,749,000. This increase reflects strong operating cash flow offset by capital expenditures of $6,343,000, dividend payments of $6,788,000, the repurchase of 609,472 shares of common stock for $14,414,000, and acquisition costs of $1,248,000 primarily associated with the purchase of the assets of a small manufacturer of fuel cleansing systems.
Management expects that the Company’s planned capital requirements for the remainder of 2000, which consists of capital expenditures, dividend payments and its stock repurchase program will be financed by operations and existing cash balances.
Outlook
The Company’s backlog at July 1, 2000 was $118,348,000 compared to $117,621,000 at the end of 1999. Based upon current business indications, including quoting activity and future business forecasts for Kaydon customers’ end-markets, we believe orders will increase only slightly for the third quarter of 2000 with a more significant increase not expected until the fourth quarter of 2000 and in to 2001. Specifically, it is expected that we will benefit from a rebound of capital spending in the offshore oil market and growth in the construction equipment market. Expected operating cash flows coupled with the Company’s current cash reserves and the Company’s $300,000,000 credit facility will provide substantial resources to fund the Company’s ongoing business development efforts which include internal and external growth initiatives as well as selected stock repurchases.
Certain information in this Form 10-Q is forward-looking, such as the Company’s expectations regarding future financial performance, litigation expenses and business development activity. The Company may not update these expectations to reflect subsequent events. Such forward-looking information involves risks and uncertainties that could significantly affect expected results. These risks and uncertainties include, but are not limited to, uncertainties as to economic conditions, market acceptance of new or enhanced versions of the Company’s products, the pricing of raw materials, changes in the competitive environments in which the Company’s businesses operate and the outcome of pending and future litigation and governmental proceedings. Readers are cautioned to consider these factors when relying on such forward-looking information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks which exist as part of its ongoing business operations including interest rates and foreign currency exchange rates. The Company believes that the potential effect of these risks in the near term should not materially affect the Company’s financial position.
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| PART II. | OTHER INFORMATION | |
| Item 1. | Legal Proceedings. See the discussion in the Notes to Consolidated Condensed Financial Statements. | |
| Item 6. | Exhibits and Reports on Form 8-K | |
| A. | Exhibit No. Description | |
| (27) Financial Data Schedule (for SEC use only) | ||
| B. | Reports on Form 8-K | |
| On May 24, 2000, the Company filed a Form 8-K under Item 5 reporting the adoption of a new preferred share purchase rights plan. This new plan replaces the former shareholders rights plan which was to expire as of July 7, 2000. The rights will be exercisable only if a person or group acquires 15 percent or more of Kaydon's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15 percent or more of the common stock. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KAYDON CORPORATION | ||
| August 11, 2000 | /s/ Brian P. Campbell | |
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| Brian P. Campbell | ||
| Chairman, President, Chief Executive | ||
| Officer and Chief Financial Officer | ||
| (Principal Executive Officer and | ||
| Principal Financial Officer) | ||
| August 11, 2000 | /s/ Kenneth W. Crawford | |
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| Kenneth W. Crawford | ||
| Vice President and Corporate Controller | ||
| (Principal Accounting Officer) |
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Exhibit Index
| Exhibit No. | Description | |
| 27 | Financial Data Schedule |
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