XNYS:KDN Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

Table of Contents

 

 

UNITED STATES

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 the quarterly period ended March 31, 2012

Commission File No. 1-11333

 

 

KAYDON CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3186040

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Suite 300, 315 E. Eisenhower Parkway,

Ann Arbor, Michigan

  48108
(Address of principal executive offices)   (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   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No   ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Common Stock Outstanding at April 30, 2012 – 32,040,772 shares, $.10 par value.

 

 

 


Table of Contents

KAYDON CORPORATION FORM 10-Q

INDEX

 

     Page No.  

Part I – Financial Information:

  

Item 1. Financial Statements.

     3   

Consolidated Balance Sheets (Unaudited) - March 31, 2012 and December 31, 2011

     3   

Consolidated Statements of Income (Unaudited) - Quarters Ended March 31, 2012 and April 2, 2011

     4   

Consolidated Statements of Other Comprehensive Income (Unaudited) – Quarters Ended March 31, 2012 and April 2, 2011

     5   

Consolidated Statements of Cash Flows (Unaudited) - Quarters Ended March 31, 2012 and April 2, 2011

     6   

Notes to Consolidated Financial Statements (Unaudited)

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     15   

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     21   

Item 4. Controls and Procedures.

     21   

Part II – Other Information:

  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

     21   

Item 6. Exhibits.

     22   

Signatures

     23   

 

 

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

KAYDON CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     March 31,
2012
     December 31,
2011
 

ASSETS

     

Current Assets:

     

Cash and cash equivalents

   $ 36,291       $ 225,214   

Accounts receivable, net

     88,154         78,441   

Inventories, net

     117,340         110,206   

Other current assets

     16,443         16,701   
  

 

 

    

 

 

 

Total current assets

     258,228         430,562   
  

 

 

    

 

 

 

Property, plant and equipment, net

     167,108         168,946   

Goodwill, net

     158,038         157,087   

Other intangible assets, net

     30,875         31,140   

Other assets

     4,873         3,962   
  

 

 

    

 

 

 

Total assets

   $ 619,122       $ 791,697   
  

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Current Liabilities:

     

Accounts payable

   $ 17,750       $ 19,699   

Accrued expenses

     33,434         29,766   

Current portion long-term debt

     7,500         —     
  

 

 

    

 

 

 

Total current liabilities

     58,684         49,465   
  

 

 

    

 

 

 

Long-term debt

     142,500         —     

Long-term postretirement and postemployment benefit obligations

     40,079         40,442   

Other long-term liabilities

     17,519         17,152   
  

 

 

    

 

 

 

Total long-term liabilities

     200,098         57,594   
  

 

 

    

 

 

 

Shareholders’ Equity:

     

Common stock

     3,693         3,693   

Other shareholders’ equity

     356,647         680,945   
  

 

 

    

 

 

 

Total shareholders’ equity

     360,340         684,638   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 619,122       $ 791,697   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

KAYDON CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended  
     March 31,
2012
    April 2,
2011
 

Net sales

   $ 116,466      $ 108,341   

Cost of sales

     74,867        69,519   
  

 

 

   

 

 

 

Gross profit

     41,599        38,822   

Selling, general and administrative expenses

     24,264        21,323   
  

 

 

   

 

 

 

Operating income

     17,335        17,499   

Interest expense

     (388     (97

Interest income

     125        179   
  

 

 

   

 

 

 

Income before taxes

     17,072        17,581   

Provision for income taxes

     4,951        5,591   
  

 

 

   

 

 

 

Net income

   $ 12,121      $ 11,990   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.38      $ 0.36   
  

 

 

   

 

 

 

Diluted

   $ 0.38      $ 0.36   
  

 

 

   

 

 

 

Dividends declared per share

   $ 10.70      $ 0.19   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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KAYDON CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Three Months Ended  
     March 31,
2012
    April 2,
2011
 

Net income

   $ 12,121      $ 11,990   

Other comprehensive income

    

Cumulative currency translation adjustments

     4,313        3,565   

Adjustment to pension benefit liability, net of tax

     775        516   

Adjustment to postretirement benefit liability, net of tax

     (180     (273
  

 

 

   

 

 

 

Total other comprehensive income

     4,908        3,808   
  

 

 

   

 

 

 

Total comprehensive income

   $ 17,029      $ 15,798   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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KAYDON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Three Months Ended  
     March 31, 2012     April 2, 2011  

Cash Flows from Operating Activities:

    

Net income

   $ 12,121      $ 11,990   

Adjustments to reconcile net income to net cash from operating activities:

    

Depreciation

     5,010        4,821   

Amortization of intangible assets

     739        665   

Amortization of stock awards

     891        906   

Stock option compensation expense

     1,116        321   

Excess tax benefits from stock-based compensation

     (702     (21

Deferred financing fees

     346        97   

Contributions to qualified pension plans

     (634     (478

Net change in receivables, inventories and trade payables

     (18,216     (10,459

Net change in other assets and liabilities

     5,286        (571
  

 

 

   

 

 

 

Net cash from operating activities

     5,957        7,271   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Capital expenditures

     (3,307     (4,328

Dispositions of property, plant and equipment

     1,793        69   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,514     (4,259
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash dividends paid

     (342,490     (6,279

Purchase of treasury stock

     (1,199     (13,976

Proceeds from long-term borrowings

     150,000        —     

Debt issuance costs

     (1,357     —     

Excess tax benefits from stock-based compensation

     702        21   

Proceeds from exercise of stock options

     15        39   
  

 

 

   

 

 

 

Net cash used in financing activities

     (194,329     (20,195
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     963        2,480   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (188,923     (14,703

Cash and cash equivalents – Beginning of period

     225,214        286,648   
  

 

 

   

 

 

 

Cash and cash equivalents – End of period

   $ 36,291      $ 271,945   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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KAYDON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) Basis of Presentation:

The accompanying consolidated financial statements of Kaydon Corporation and subsidiaries (“Kaydon” or the “Company”) have been prepared in accordance with generally accepted accounting principles and SEC rules and regulations, without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with prescribed SEC rules. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, and such adjustments are of a normal recurring nature. The December 31, 2011 consolidated 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 included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

When appropriate, certain items in the prior period financial statements may be reclassified to conform to the presentation used in the current period.

(2) Cash and Cash Equivalents:

The Company considers all highly liquid debt and investment instruments purchased with a maturity of three months or less to be cash equivalents and consist of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Cash and cash equivalents:

     

Money market and other short-term funds

   $ 14,500       $ 194,501   

Time deposits, other interest bearing accounts, and other cash

     21,791         30,713   
  

 

 

    

 

 

 

Total cash and cash equivalents

   $ 36,291       $ 225,214   
  

 

 

    

 

 

 

(3) Inventories:

Inventories consist of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Raw material

   $ 44,570       $ 42,168   

Work in process

     32,593         29,408   

Finished goods

     40,177         38,630   
  

 

 

    

 

 

 

Total inventories

   $ 117,340       $ 110,206   
  

 

 

    

 

 

 

(4) Special Dividend:

On February 22, 2012, Kaydon’s Board of Directors declared a special cash dividend of $10.50 per common share payable to shareholders of record as of March 5, 2012 with a payment date of March 26, 2012. The Company paid the $336.1 million special cash dividend on March 26, 2012 using existing cash balances and the net proceeds from borrowings under the senior term loan facility as more fully described in Note 7 Long-term Debt.

 

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(5) Earnings per Share:

The following table sets forth the computation of basic and diluted earnings per share for the periods presented with amounts in thousands, except per share data:

 

     Three Months Ended  
     March 31,
2012
    April 2,
2011
 

Earnings per share—Basic

    

Net income

   $ 12,121      $ 11,990   

Less: Net earnings allocated to participating securities—Basic

     (111     (121
  

 

 

   

 

 

 

Income available to common shareholders—Basic

   $ 12,010      $ 11,869   

Weighted average common shares outstanding—Basic

     31,734        32,552   
  

 

 

   

 

 

 

Earnings per share—Basic

   $ 0.38      $ 0.36   
  

 

 

   

 

 

 

Earnings per share—Diluted

    

Net income

   $ 12,121      $ 11,990   

Less: Net earnings allocated to participating securities—Diluted

     (111     (121
  

 

 

   

 

 

 

Income available to common shareholders—Diluted

   $ 12,010      $ 11,869   
  

 

 

   

 

 

 

Weighted average common shares outstanding—Diluted

    

Weighted average common shares outstanding—Basic

     31,734        32,552   

Potential dilutive shares resulting from stock options

     23        27   
  

 

 

   

 

 

 

Weighted average common shares outstanding—Diluted

     31,757        32,579   
  

 

 

   

 

 

 

Earnings per share—Diluted

   $ 0.38      $ 0.36   
  

 

 

   

 

 

 

Certain options granted to purchase shares of common stock were excluded from the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of the common shares for the periods shown below (in thousands):

 

     Three Months Ended  
     March 31,
2012
     April 2,
2011
 

Shares excluded

     415         385   

 

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(6) Business Segment Information:

The Company has two reporting segments: Friction Control Products and Velocity Control Products. On April 8, 2011, the Company completed the acquisition of all of the outstanding shares of HAHN-Gasfedern GmbH and related real estate and intangible property (“Hahn”) from Ulrich Hahn e.K. Hahn, based in Aichwald, Germany, manufactures and sells high quality gas springs, tension springs and dampers for diverse industrial markets. Hahn’s results are included in the Velocity Control Products segment. The Company’s remaining operating segments are combined and disclosed as “Other Industrial Products.” Sales between reporting segments are not material. Items not allocated to segment operating income include certain amortization expenses, certain corporate administrative expenses, and other amounts. Amounts shown below are in thousands.

 

     Three Months Ended  
     March 31,
2012
    April 2,
2011
 

Net sales

    

Friction Control Products

   $ 65,803      $ 60,872   

Velocity Control Products

     24,299        19,626   

Other Industrial Products

     26,364        27,843   
  

 

 

   

 

 

 

Total consolidated net sales

   $ 116,466      $ 108,341   
  

 

 

   

 

 

 
     Three Months Ended  
     March 31,
2012
    April 2,
2011
 

Operating income

    

Friction Control Products

   $ 11,819      $ 9,874   

Velocity Control Products

     5,842        5,826   

Other Industrial Products

     1,909        2,537   
  

 

 

   

 

 

 

Total segment operating income

     19,570        18,237   

Items not allocated to segment operating income

     (2,235     (738

Interest expense

     (388     (97

Interest income

     125        179   
  

 

 

   

 

 

 

Income before taxes

   $ 17,072      $ 17,581   
  

 

 

   

 

 

 

(7) Long-term Debt:

In September 2010, the Company entered into a credit agreement (the “2010 credit agreement”) with a syndicate of lenders providing for a $250.0 million senior revolving credit facility. The 2010 credit agreement was terminated on March 26, 2012. On March 26, 2012, the Company entered into a new $400.0 million credit agreement (the “2012 credit agreement”) with a syndicate of lenders providing for a $150.0 million senior term loan facility, which the Company borrowed to fund a portion of its $10.50 per common share special dividend paid to shareholders on March 26, 2012. Loans under the credit agreement bear interest at a floating rate at the Company’s option as Eurocurrency rate loans or base rate loans. The term loan bears interest at a floating rate based on LIBOR plus an applicable margin, initially 1.375 percent, and is payable monthly, bimonthly or quarterly in accordance with the terms of the 2012 credit agreement. In addition, the 2012 credit agreement also provides for a $250.0 million senior revolving credit facility, the proceeds of which may be used by the Company for working capital and general corporate purposes, including acquisitions, payment of dividends and repurchases of the Company’s capital stock. The 2012 credit agreement matures on March 27, 2017 and is guaranteed by the Company and certain of its subsidiaries. It is also secured by a pledge of a portion of a wholly owned subsidiary and additional guarantees and/or pledges of current or future subsidiaries may be required in the future under the provisions of the 2012 credit agreement. In connection with the termination of the 2010 credit agreement, the Company accelerated the recognition of $0.2 million of deferred financing fees related to the unamortized portion of the debt issuance costs associated with lenders who are not parties to the 2012 credit agreement. The remaining unamortized portion of the 2010 debt issuance costs of $1.1 million and the $1.4 million of debt issuance costs related to the 2012 credit agreement will be amortized using the effective interest method over the life of the 2012 credit agreement which expires on March 27, 2017.

 

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The Company is obligated to make quarterly principal payments throughout the term of the term loan and has the option to prepay term loan amounts under the provisions of the 2012 credit agreement. The remaining balance of the term loan will be due on March 27, 2017. At March 31, 2012, $7.5 million of the term loan was included in the current portion of long-term debt line in the current liabilities section of the balance sheet and $142.5 million of the term loan was included in the long-term debt line in the long-term liabilities section of the balance sheet.

The 2012 credit agreement requires the Company to comply with maximum leverage and minimum interest coverage ratios. In addition, the 2012 credit agreement contains other standard covenants such as those which (subject to certain thresholds) limit the ability of the Company and its subsidiaries to, among other things, incur debt, sell assets, incur additional liens, make certain investments, enter into certain transactions with shareholders or affiliates, or enter into speculative hedging obligations. The 2012 credit agreement also includes customary events of default which would permit the lenders to accelerate borrowings under the 2012 credit agreement if not cured within applicable grace periods. The Company was in compliance with all restrictive covenants contained in the 2012 credit agreement at March 31, 2012. Taking into account $3.8 million of letters of credit issued under the credit agreement, the Company had available credit under the 2012 credit agreement of $246.2 million at March 31, 2012.

(8) Goodwill and Other Intangible Assets:

The Company annually, or more frequently if events or changes in circumstances indicate a need, tests the carrying values of goodwill and indefinite-lived intangible assets for impairment.

During the third quarter of 2011, the Company completed its annual goodwill impairment test. The fair value of each reporting unit was estimated using the expected present value of future cash flows using a weighted average cost of capital discount rate of 11.5-12.5 percent depending on the assessed risk of the reporting unit and a growth rate in perpetuity of 1.0-2.5 percent depending on the assessed long-term growth of the reporting unit. In accordance with current accounting guidance, the Company has included deferred taxes in determining the carrying value of each reporting unit. During 2011, the Company’s goodwill impairment testing revealed that the estimated fair values of each of its reporting units exceeded their carrying values, which indicated no goodwill impairment. The Company’s goodwill impairment testing revealed that the excess of the estimated fair value of each of the reporting units tested over their carrying value (expressed as a percentage of the carrying value) as of the July 30, 2011 annual testing date ranged from approximately 43 percent to approximately 309 percent. Changes in estimates of future cash flows and the weighted average cost of capital may have a material effect on the valuation of reporting units and the results of the related impairment testing.

Certain trademarks are the Company’s only indefinite-lived intangible assets. The Company identifies impairment of these trademarks by comparing their fair values to their carrying values. The fair values of the trademarks are calculated based on estimates of discounted future cash flows related to the net amount of royalty expenses avoided due to the existence of the trademarks. At July 30, 2011, trademarks were tested for impairment and no impairment loss was realized.

The changes in the carrying value of goodwill for the three months ended March 31, 2012, were as follows (in thousands):

 

     Friction
Control
Products
     Velocity
Control
Products
     Other
Industrial
Products
    Total  

Balance at January 1, 2012

          

Goodwill

   $ 56,381       $ 56,874       $ 62,532      $ 175,787   

Accumulated impairment losses

     —           —           (18,700     (18,700
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Balance

   $ 56,381       $ 56,874       $ 43,832      $ 157,087   

Effect of foreign currency exchange rate changes

     541         410         —          951   

Balance at March 31, 2012

          

Goodwill

   $ 56,922       $ 57,284       $ 62,532      $ 176,738   

Accumulated impairment losses

     —           —           (18,700     (18,700
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Balance

   $ 56,922       $ 57,284       $ 43,832      $ 158,038   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The accumulated impairment losses include impairment losses of $1.9 million recorded in 2004 and $16.8 million recorded in 2002.

Other intangible assets are summarized as follows (in thousands):

 

     March 31, 2012      December 31, 2011  

Amortized Intangible Assets

   Gross
Carrying
Value
     Accumulated
Amortization
     Gross
Carrying
Value
     Accumulated
Amortization
 

Customer relationships and lists

   $ 42,200       $ 20,721       $ 41,791       $ 20,096   

Patents and developed technology

     7,775         4,588         7,724         4,462   

Distributor agreements

     374         286         374         277   

Product names

     320         225         320         219   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 50,669       $ 25,820       $ 50,209       $ 25,054   
  

 

 

    

 

 

    

 

 

    

 

 

 

The intangible assets are being amortized at pro rata rates or on a straight-line basis, whichever is appropriate, over their respective useful lives.

Amounts shown below are in thousands.

 

Unamortized Intangible Assets

   March 31, 2012
Carrying Value
     December 31, 2011
Carrying Value
 

Trademarks

   $ 6,026       $ 5,985   
Aggregate Intangible Assets Amortization Expense              

For the three months ended March 31, 2012

      $ 739   

For the three months ended April 2, 2011

      $ 665   

Estimated Intangible Assets Amortization Expense

         

 

 

For the year ending December 31, 2012

      $ 3,053   

For the year ending December 31, 2013

      $ 2,759   

For the year ending December 31, 2014

      $ 2,463   

For the year ending December 31, 2015

      $ 2,127   

For the year ending December 31, 2016

      $ 2,029   

(9) Employee Benefit Plans:

The components of net periodic benefit cost (income) are as follows (in thousands):

 

Pension Benefits

   Three Months Ended  
   March 31, 2012     April 2, 2011  

Service cost

   $ 825      $ 777   

Interest cost

     1,749        1,714   

Expected return on plan assets

     (2,129     (2,120

Amortization of:

    

Unrecognized net prior service cost

     2        16   

Unrecognized net actuarial loss

     1,239        810   
  

 

 

   

 

 

 

Total

   $ 1,686      $ 1,197   
  

 

 

   

 

 

 

 

Postretirement Benefits

   Three Months Ended  
   March 31, 2012     April 2, 2011  

Service cost

   $ 20      $ 23   

Interest cost

     69        74   

Amortization of:

    

Unrecognized net prior service credit

     (176     (325

Unrecognized net actuarial gain

     (113     (113
  

 

 

   

 

 

 

Total

   $ (200   $ (341
  

 

 

   

 

 

 

The Company contributed $0.6 million to its qualified pension plans in the three months ended March 31, 2012 and expects to contribute an aggregate of $10.0 million to its qualified and non-qualified pension plans for full year 2012.

 

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Table of Contents

(10) Stock-Based Compensation:

A summary of restricted stock award information pursuant to the Company’s equity incentive plans for the three months ended March 31, 2012 is as follows:

 

     Restricted
Stock
    Wtd. Avg.
Grant Date
Fair Value
 

Outstanding at January 1, 2012

     311,237      $ 36.21   

Granted

     63,750      $ 35.48   

Vested

     (112,549   $ 38.01   

Canceled

     (11,578   $ 35.38   
  

 

 

   

 

 

 

Outstanding at March 31, 2012

     250,860      $ 35.26   
  

 

 

   

 

 

 

In addition to restricted stock shown in the above table, in the first quarter of 2012, the Company also granted performance based restricted stock awards under the Kaydon Corporation 1999 Long Term Stock Incentive Plan (the “Plan”). On the grant date, recipients were granted 34,800 restricted shares pursuant to the award agreement equal to the target award that will vest upon 100 percent achievement of a designated growth rate of earnings performance goal, over a three year performance period. Partial vesting of a minimum of 50 percent of the target shares will vest in the case of achievement of 50 percent of the performance goal, at 150 percent achievement of the performance goal a maximum award equal to 200 percent of the target award will vest, and at achievement of less than 50 percent of the performance goal all award shares will be forfeited. Vesting will accelerate as to a portion of the restricted shares under certain circumstances upon the death, disability or retirement at or after age 65 of the holder. Awards will otherwise be forfeited if vesting does not occur or the employee leaves the Company. Awards will be fully vested upon a change of control as required by the Plan. The target awards were valued at the weighted average grant date stock price of $35.39. Compensation expense for these awards will be recorded over the three year performance period and will be adjusted as necessary whenever the estimate of the level of achievement of the performance goal is revised. Dividends on performance based restricted stock awards are calculated when dividends are paid on common stock and the equivalent value will be paid in common stock on the vesting date. Compensation expense related to all restricted stock awards was $0.9 million in both the three months ended March 31, 2012 and the three months ended April 2, 2011.

A summary of stock option information pursuant to the Company’s equity incentive plans for the three months ended March 31, 2012 is as follows:

 

     Options     Wtd. Avg.
Ex. Price
 

Outstanding at January 1, 2012

     619,000      $ 28.33   

Granted

     98,000      $ 24.85   

Canceled

     (30,900   $ 25.95   

Exercised

     (600   $ 14.93   
  

 

 

   

 

 

 

Outstanding at March 31, 2012

     685,500      $ 27.96   
  

 

 

   

 

 

 

Exercisable at March 31, 2012

     487,700      $ 29.41   
  

 

 

   

 

 

 

Stock options are granted with an exercise price equal to the closing market price of Company common stock on the date of grant. Options granted become exercisable at the rate of 20 percent or 100 percent per year, commencing one year after the date of grant, and options expire ten years after the date of grant. The fair value of each new option grant is estimated on the date of grant using the Black-Scholes option-pricing model. For options granted in the first quarter of 2012, the option value was determined using the following weighted average assumptions, which represent the current expectations of the risk-free interest rate, expected dividend yield, expected life and using historical volatility to project expected volatility:

 

Risk-free interest rate

     1.28

Expected dividend yield

     2.77

Expected life in years

     6.5   

Expected volatility

     36.4
  

 

 

 

 

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Compensation expense related to stock options was $1.1 million in the three months ended March 31, 2012 and $0.3 million in the three months ended April 2, 2011. The amount recorded in the first quarter of 2012 included $0.8 million in costs associated with the modification of certain options to reduce the exercise price by the amount of the $10.50 per common share special dividend paid on March 26, 2012. This modification was required due to the February 22, 2012, amendment of the adjustment provision of the Plan which provides for mandatory adjustment of awards, including outstanding awards, subject to compliance with Section 409A under the Internal Revenue Code, upon the occurrence of any dividend or other distribution (whether in the form of cash (other than regular, quarterly cash dividends), shares, other securities or other property), changes in the capital or shares of capital stock, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up spin-off, combination, or exchange of shares or other securities of the Company or other extraordinary transaction or event which effects the shares. Such adjustment is made as appropriate to the number and type of shares subject to the award, or the grant, purchase or exercise price of outstanding awards. Previously such adjustments were permitted but were not required under the Plan. All options subsequently granted under existing stock option programs will require such modification. The weighted average prices in the above table reflect the modification of the prices of each option. An additional $0.2 million of costs associated with the modification of certain options will be recorded over the remaining vesting periods of those options. The fair value of the modification was estimated using a binomial option-pricing model with the following weighted average assumptions, which reflect current expectations of the risk-free interest rate, expected dividend yield, expected life and using historical volatility to project expected volatility:

 

Risk-free interest rate

     1.35

Expected dividend yield

     2.90

Expected remaining contractual life in years

     5.9   

Expected volatility

     35.1
  

 

 

 

(11) Other Matters:

At March 31, 2012, the Company had approximately $8.3 million of working capital, or $3.8 million after reserves, invested on behalf of an international wind energy customer. This included past due accounts receivable and inventory manufactured on the customer’s behalf and designed to its agreed upon specifications. The customer has not paid the Company and has made a claim for material damages alleging that certain field performance issues of its product are attributable to the quality of the supplied bearings. The Company is confident that its bearings were manufactured to the agreed upon design specifications and that the customer’s field performance issues relate to factors outside of the Company’s control. Under the documents which comprise the sales contract, the customer is obligated to pay its liability and to reimburse Kaydon for inventory costs incurred along with lost profits. In order to expedite the resolution of this matter, Kaydon agreed with the customer to enter into a mediation process, and if necessary, binding arbitration to resolve the parties’ claims. The mediation process was completed in March 2010, but was unsuccessful in resolving the matter. During the second quarter of 2010, a notice of binding arbitration was filed. An arbitration panel was selected in the third quarter of 2010 and the hearing phase of the arbitration process was conducted in November 2011. Following certain post-hearing arbitration procedures, a final non-appealable ruling from the arbitrators is expected in 2012. With the completion of the arbitration hearings and the absence of a settlement, the sale of the inventory cannot be expected in the ordinary course of business. Accordingly, in the fourth quarter of 2011 the Company reserved $4.1 million for the write down of the value of the inventory to scrap value. The Company continues to remain confident in the merits of its claim against the customer and the potential for recovery through the arbitration process of all or a portion of the inventory value. Based on the Company’s monitoring of the customer’s liquidity and cash flows, the Company believes that the receivable is collectible. With regard to the customer’s claim for material damages, given the inherent uncertainty of the arbitration process, the substantial volume of evidence and testimony provided since commencement of the arbitration, and the complexity of the legal analysis involved, the Company believes that it is reasonably possible, but not probable, that the arbitrators would give credence to a portion of the customer’s claims and that a loss has been incurred. However, due to these uncertainties and complexities, no estimate of a reasonably possible loss or range of loss can be made at this time. This matter is within the Friction Control Products segment.

 

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(12) Taxes:

The effective tax rate for the three months ended March 31, 2012 equaled 29.0 percent compared to 31.8 percent in the three months ended April 2, 2011. The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate is due primarily to permanently reinvested foreign earnings which are taxed at lower rates than the U.S. rate.

(13) Acquisition:

On April 8, 2011, the Company completed the purchase of all of the outstanding shares of HAHN-Gasfedern GmbH and related real estate and intangible property (“Hahn”) from Ulrich Hahn e.K. Hahn, based in Aichwald, Germany, manufactures and sells high quality gas springs, tension springs and dampers for diverse industrial markets. Hahn’s results are included in the Velocity Control Products reporting segment.

(14) Fair Value Measurement:

The Company had no material non-financial assets or liabilities recorded at fair value at March 31, 2012.

(15) Impact of Recently Issued Accounting Pronouncements:

New accounting guidance was issued in 2011 to require more prominent disclosure of Comprehensive Income. The Company adopted this guidance and now includes the Consolidated Statements of Comprehensive Income to present net income, items of other comprehensive income and total comprehensive income as allowed under this guidance.

In addition, new accounting guidance was issued in 2011, which is intended to reduce the complexity and costs of performing annual goodwill testing by allowing companies the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. This guidance will be effective for the Company beginning in 2012. The Company does not expect that this guidance will have a material effect on the financial position, results of operations, or cash flows of the Company.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Kaydon Corporation is a leading designer and manufacturer of custom engineered, performance-critical products, supplying a broad and diverse group of alternative energy, military, industrial, aerospace, medical and electronic equipment, and aftermarket customers. Demand for our products depends, in part, upon a wide range of general economic conditions, which affect our markets in varying ways from quarter to quarter.

Our performance in the three months ended March 31, 2012 compared to the three months ended April 2, 2011 reflected increased wind energy sales and the inclusion of the results of Hahn, a business that we acquired early in the second quarter of 2011, which more than offset a decrease in sales of products serving industrial markets.

During the first quarter of 2012 we completed the recapitalization of the Company. On March 26, 2012, the Company entered into a new $400.0 million credit agreement (the “2012 credit agreement”) with a syndicate of lenders providing for a $150.0 million senior term loan facility which was used to fund a portion of our $10.50 per common share special dividend to shareholders paid on March 26, 2012. The remaining portion of the dividend was funded from our available cash balances. Costs associated with the recapitalization totaled $1.3 million which included non-cash stock option modification costs, the immediate recognition of certain unamortized debt issuance costs associated with our prior credit agreement, and the effect of the special dividend on certain benefit costs. Other significant items affecting the comparison of the first quarter 2012 results to the 2011 first quarter results included $1.1 million in costs related to our manufacturing consolidation program which were incurred during the 2011 first quarter, a $0.5 million reduction in due diligence costs in the first quarter of 2012 compared to the prior first quarter, and a reduction of $0.3 million in costs related to a customer arbitration matter in the first quarter of 2012 compared to the prior first quarter.

At March 31, 2012 our current ratio was 4.4 to 1 and working capital totaled $199.5 million, reflecting the reduction in cash associated with our first quarter 2012 recapitalization. We believe that our current cash position at March 31, 2012 of $36.3 million along with our future cash flows from operations and our borrowing capacity are adequate to fund our operational needs as well as our strategies for future growth, including selected stock repurchases, market share initiatives and corporate development efforts.

In summary, our future performance will be impacted by general economic conditions, national policy steps regarding renewable energy, national budgets for military expenditures, the overall strength of the manufacturing environment, the success of our efforts to continue to expand operations and improve operating efficiencies, as well as the use of available cash and borrowing capacity for future acquisitions.

The discussion that follows should be read in conjunction with the unaudited Consolidated Financial Statements (and the Notes thereto), included elsewhere in this report, and our 2011 Annual Report on Form 10-K, particularly “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to assist in understanding our results of operations, financial position, cash flows, capital structure and other relevant financial information.

Results of Operations

Three Months Ended March 31, 2012 Compared to the Three Months Ended April 2, 2011

 

     Three Months Ended  

Dollars in millions, except per share amounts

   March 31,
2012
    % of
Sales
    April 2,
2011
     % of
Sales
 

Net sales

   $ 116.5        100.0   $ 108.3         100.0
    

 

 

      

 

 

 

Cost of sales

     74.9        64.3     69.5         64.2
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     41.6        35.7     38.8         35.8

Selling, general and administrative expenses

     24.3        20.8     21.3         19.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     17.3        14.9     17.5         16.2

Interest, net

     (0.3     (0.2 )%      0.1         0.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before taxes

     17.1        14.7     17.6         16.2

Provision for income taxes

     5.0        4.3     5.6         5.2
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 12.1        10.4   $ 12.0         11.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Earnings per share:

         

Basic

   $ 0.38        $ 0.36      
  

 

 

     

 

 

    

Diluted

   $ 0.38        $ 0.36      
  

 

 

     

 

 

    

 

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Net sales for the three months ended March 31, 2012 were $116.5 million, up $8.1 million, or 7.5 percent from $108.3 million for the three months ended April 2, 2011. The increase from the prior year first quarter was primarily the result of Hahn which was acquired in the second quarter of 2011 which provided an additional $5.7 million of net sales in the first quarter of 2012. The remaining increase in net sales was a result of a 2.3 percent increase in volume and a 0.7 percent increase in prices which was partially offset by a $0.8 million unfavorable effect of changes in foreign exchange rates. The sales volume increase from the prior year was a result of increased wind energy sales which more than offset a decrease in sales of products serving industrial markets.

Gross profit during the first quarter of 2012 increased $2.8 million or 7.2 percent compared to the first quarter of 2011. Gross profit comparisons were positively affected by $1.4 million from sales volume increases, net pricing increases of $0.9 million and the contribution of the results of Hahn. These were partially offset by unfavorable sales mix of $1.3 million and net cost increases of $0.3 million. Gross margin decreased slightly to 35.7 percent in the first quarter of 2012 compared to 35.8 percent in the first quarter of 2011.

Selling, general and administrative expenses were $24.3 million or 20.8 percent of sales during the first quarter of 2012, compared to $21.3 million or 19.7 percent of sales in the first quarter of 2011. Selling expenses, excluding the effect of the Hahn acquisition, increased $0.5 million primarily due to costs relating to our increased focus on global sales and marketing initiatives to increase revenue. General and administrative expenses, excluding the expenses contributed by Hahn, increased $1.0 million compared to the first quarter of 2011. One-time costs associated with the Company’s recapitalization accounted for the change in general and administrative expenses.

The Company’s operating income was $17.3 million in the first quarter of 2012, compared to $17.5 million in the first quarter of 2011.

During the first quarter of 2012, interest income was $0.1 million on average investment balances of $189.0 million, principally related to our investments prior to our March 26, 2012 special dividend. Interest income in the first quarter of 2011 was $0.2 million.

Interest expense equaled $0.4 million in the first quarter of 2012 including $0.2 million associated with the immediate recognition of certain fees for the 2010 credit agreement and $0.2 million associated with the amortization of our 2010 credit facility upon its termination in connection with the recapitalization and new 2012 credit facility costs. On March 26, 2012, the Company entered into a new senior credit agreement providing for a $150 million term loan and a $250 million revolving credit facility. Interest expense in the three months ended April 2, 2011 was $0.1 million, and represents the amortization of the 2010 credit facility costs.

The effective tax rate for the three months ended March 31, 2012 equaled 29.0 percent compared to 31.8 percent in the three months ended April 2, 2011. The tax rate in 2012 decreased primarily as a result of an increase in foreign earnings taxed at a lower rate than the U.S. rate.

Net income for the first quarter of 2012 was $12.1 million, or $0.38 per share on a diluted basis, compared to net income for the first quarter of 2011 of $12.0 million, or $0.36 per share on a diluted basis.

 

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Results of Business Segments

The Company has two reporting segments: Friction Control Products and Velocity Control Products. The Company’s remaining operating businesses are combined and disclosed as “Other Industrial Products.” Sales between reporting segments are not material. Items not allocated to segment operating income include certain amortization and corporate administrative expenses.

Friction Control Products

 

     Three Months Ended  

Dollars in millions

   March 31,
2012
    April 2,
2011
    %
Change
 

Sales

   $ 65.8      $ 60.9        8.1

Operating Income

   $ 11.8      $ 9.9        19.7

Operating Margin

     18.0     16.2  

Three Months Ended March 31, 2012 Compared to the Three Months Ended April 2, 2011

During the three months ended March 31, 2012 sales from our Friction Control Products reporting segment totaled $65.8 million, an increase of $4.9 million compared to the three months ended April 2, 2011. The increase was a result of a $4.4 million increase in sales volume and increased pricing of $0.7 million, partially offset by a $0.2 million unfavorable effect of changes in foreign currency exchange rates. Sales increased in the wind energy, heavy equipment, and military markets, and were partially offset by decreased sales to the medical and semiconductor markets.

During the first quarter of 2012, operating income for the segment increased $1.9 million compared to the three months ended April 2, 2011, to $11.8 million. This increase was a result of a $2.7 million increase in sales volume, $1.1 million in decreased manufacturing consolidation costs, and a $0.3 million decrease in arbitration costs, which were partially offset by a $0.5 million unfavorable change in product mix, and a $1.7 million increase principally in manufacturing costs.

Velocity Control Products

 

     Three Months Ended  

Dollars in millions

   March 31,
2012
    April 2,
2011
    %
Change
 

Sales

   $ 24.3      $ 19.6        23.8

Operating income

   $ 5.8      $ 5.8        0.3

Operating Margin

     24.0     29.7  

Three Months Ended March 31, 2012 Compared to the Three Months Ended April 2, 2011

During the three months ended March 31, 2012 sales from our Velocity Control Products reporting segment increased $4.7 million compared to the three months ended April 2, 2011, to $24.3 million. The sales growth was a result of the inclusion of Hahn which was acquired in the second quarter of 2011. This resulted in an additional $5.7 million in revenue. There were also favorable pricing impacts of $0.6 million which were partially offset by decreased other volume of $1.0 million principally in our international markets, and a $0.6 million unfavorable effect of changes in foreign currency exchange rates.

During the three months ended March 31, 2012, operating income for the segment compared to the three months ended April 2, 2011, was flat at $5.8 million in each period. The favorable pricing impact of $0.6 million and the contribution of the Hahn results were offset by decreased volume and unfavorable mix of $1.0 million, increased selling expenses of $0.5 million in support of global sales initiatives, and a $0.2 million increase in manufacturing costs.

 

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Other Industrial Products

 

     Three Months Ended  

Dollars in millions

   March 31,
2012
    April 2,
2011
    %
Change
 

Sales

   $ 26.4      $ 27.8        -5.3

Operating income

   $ 1.9      $ 2.5        -24.8

Operating Margin

     7.2     9.1  

Three Months Ended March 31, 2012 Compared to the Three Months Ended April 2, 2011

First quarter 2012 sales of our remaining businesses, which are combined and shown above as Other Industrial Products, totaled $26.4 million, compared to $27.8 million in the first quarter of 2011. The reduction in sales was a result of decreased volume of $0.8 million and lower selling prices of $0.6 million.

Operating income of Other Industrial Products totaled $1.9 million during the three months ended March 31, 2012, compared to $2.5 million in the three months ended April 2, 2011. The decrease was due to an unfavorable sales volume impact of $0.3 million and an unfavorable price/mix impact of $0.4 million.

Liquidity and Capital Resources

Kaydon’s primary capital requirements are to fund our operations, including working capital and capital expansion/improvements as well as to fund our strategies for future growth and shareholder value, including market share initiatives and business development activities. We will continue to invest in growth opportunities while continuously focusing on working capital and operational efficiencies. In addition, we expect to service our debt with cash generated from operations.

At March 31, 2012 the Company’s current ratio was 4.4 to 1 and working capital totaled $199.5 million, including $36.3 million of cash and cash equivalents. At December 31, 2011, the current ratio was 8.7 to 1 and working capital totaled $381.1 million, including cash and cash equivalents of $225.2 million. The reduction in working capital was a result of a $336.1 million payment on March 26, 2012 for a special dividend of $10.50 per common share which was in part funded by $186.1 million in cash.

Net cash from operating activities during the first quarter of 2012 was $6.0 million, compared to first quarter 2011 net cash from operating activities of $7.3 million. The decrease was primarily due to a larger increase in working capital items in the first quarter of 2012 compared to the first quarter of 2011. This was partially offset by an increase in cash generated from other assets and liabilities in the first quarter of 2012 compared to the first quarter of 2011. The increase in working capital items in the first quarter of 2012 exceeded the increase in the first quarter of 2011 by $7.8 million, principally due to a reduction in accounts payable balances in the first quarter of 2012 compared to an increase in the first quarter of 2011. Cash from the change in other assets and liabilities increased by $5.9 million in the first quarter of 2012 compared to the first quarter of 2011, due principally to the reduction in incentive compensation payments in the first quarter of 2012 compared to the first quarter of 2011, and increased tax accruals in the first quarter of 2012 compared to the prior first quarter.

Net inventories at March 31, 2012 were $117.3 million, an increase of $7.1 million compared to the $110.2 million of inventory at December 31, 2011. Inventory turns for the three months ended March 31, 2012 equaled 2.6 turns compared to 2.8 turns for the three months ended April 2, 2011.

We closely monitor our accounts receivable from wind energy customers and are reasonably assured that our accounts receivable are fully collectible. Additionally, we believe that our inventory at March 31, 2012 is fully realizable.

However, at March 31, 2012, we had approximately $8.3 million of working capital, or $3.8 million after reserves invested on behalf of an international wind energy customer. This includes past due accounts receivable and inventory manufactured on the customer’s behalf and designed to its agreed upon specifications. The customer has not paid us and has made a claim for material damages alleging that certain field performance issues of its product are attributable to the quality of the supplied bearings. We are confident that our bearings were manufactured to the agreed upon design specifications and that the customer’s field performance issues relate to factors outside of our control. Under the documents which comprise the sales contract, the customer is obligated to pay its liability and to

 

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Table of Contents

reimburse us for inventory costs incurred along with lost profits. In order to expedite the resolution of this matter, we agreed with the customer to enter into a mediation process, and if necessary, binding arbitration to resolve the parties’ claims. The mediation process was completed in March 2010, but was unsuccessful in resolving the matter. During the second quarter of 2010, a notice of binding arbitration was filed. An arbitration panel was selected in the third quarter of 2010 and the hearing phase of the arbitration process was conducted in November 2011. Following certain post-hearing arbitration procedures, a final non-appealable ruling from the arbitrators is expected in 2012. With the completion of arbitration hearings and the absence of a settlement, the sale of the inventory cannot be expected in the ordinary course of business. Accordingly, in the fourth quarter of 2011 we reserved $4.1 million for the write down of the value of the inventory to scrap value. Based on our monitoring of the customer’s liquidity and cash flows, we believe that the receivable and any potential arbitration awards are collectible. We continue to remain confident in the merits of our claim against the customer and the potential for recovery through the arbitration process of all or a portion of the inventory value. With regard to the customer’s claim for material damages, given the inherent uncertainty of the arbitration process, the substantial volume of evidence and testimony provided since commencement of the arbitration, and the complexity of the legal analysis involved, we believe that it is reasonably possible, but not probable that the arbitrators would give credence to a portion of the customer’s claims and that a loss has been incurred. However, due to these uncertainties and complexities, no estimate of a reasonably possible loss or range of loss can be made at this time. This matter is within the Friction Control Products segment.

During the first quarter of 2012, we paid regular cash dividends of $6.4 million compared to $6.3 million in the three months ended April 2, 2011, reflecting an increased dividend rate of $0.20 per common share paid in the first quarter of 2012 compared to $0.19 per common share paid in the first quarter of 2011. In addition, a special dividend of $10.50 per common share was paid in the first quarter of 2012 which totaled $336.1 million. Share repurchases in the three months ended March 31, 2012 totaled 36,742 shares for $1.2 million compared to 357,091 shares for $14.0 million in the three months ended April 2, 2011. We believe that our current cash position at March 31, 2012 of $36.3 million along with our future cash flows from operations and our borrowing capacity are adequate to fund our operational needs as well as our strategies for future growth, including selected stock repurchases, market share initiatives and corporate development efforts.

On March 26, 2012, we terminated our former 2010 credit agreement and entered into a new $400 million credit agreement (the “2012 credit agreement”) with a syndicate of lenders providing for a $150.0 million senior term loan facility, which the Company borrowed to fund a portion of its $10.50 per common share special dividend paid to shareholders on March 26, 2012. Under the provisions of the 2012 credit agreement, the Company is required to repay the term loan in quarterly installments of $1,875,000 each quarter from June 2012 to March 2013, of $2,812,500 per quarter from June 2013 to March 2014, and $3,750,000 each quarter from June 2014 to March 2016, with the balance due on March 27, 2017. The Company expects to service this obligation through cash generated from operations over the period of the 2012 credit agreement. The 2012 credit agreement also provides for a $250.0 million senior revolving credit facility. The revolving credit facility provides for borrowings by the Company and our subsidiaries for working capital and other general corporate purposes, including acquisitions. The 2012 credit agreement requires us to comply with maximum leverage and minimum interest coverage ratios. We were in compliance with all restrictive covenants contained in the 2012 credit agreement at March 31, 2012. Taking into account $3.8 million of letters of credit issued under the 2012 credit agreement, we had available credit under the 2012 credit agreement of $246.2 million at March 31, 2012.

 

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Outlook

Our performance during the first quarter of 2012 reflects the expected increase in wind energy sales and the inclusion of the results of Hahn which was acquired in the second quarter of 2011. Looking ahead to the second quarter, we anticipate continued strong wind energy sales and expect to see improvement in both non-wind orders and shipments resulting in sequential improvement in second quarter sales and profitability.

Looking ahead to the second half of 2012, we anticipate a slowdown in the wind energy market as we get closer to the expected year-end expiration of the Production Tax Credit (PTC), a federal per kilowatt hour tax incentive available to producers of electricity generated by wind facilities placed in service prior to December 31,2012. In the event an extension of the PTC is not enacted, we will need to consider additional operating cost reductions. In our base industrial businesses we expect margin improvements due to increased volume and improved efficiencies due to our completed manufacturing consolidation.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.

We continually evaluate the estimates, judgments, and assumptions used to prepare the consolidated financial statements. In general, these estimates are based on historical experience, on information from first party professionals and on various other judgments and assumptions that are believed to be reasonable under the current facts and circumstances. Actual results could differ from our current estimates. Our critical accounting policies and estimates are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to the critical accounting policies disclosed in that report.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 regarding our plans, expectations, estimates and beliefs. Forward-looking statements are typically identified by words such as “believes,” “anticipates,” “estimates,” “expects,” “intends,” “will,” “may,” “should,” “could,” “potential,” “projects,” “approximately,” and other similar expressions, including statements regarding pending litigation, general economic conditions, competitive dynamics and the adequacy of capital resources. These forward-looking statements may include, among other things, projections of our financial performance, anticipated growth, characterization of and our ability to control contingent liabilities and anticipated trends in our businesses. These statements are only predictions, based on our current expectation about future events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements or that our predictions or current expectations will be accurate. These forward-looking statements involve risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements.

In addition, we or persons acting on our behalf may from time to time publish or communicate other items that could also be construed to be forward-looking statements. Statements of this sort are or will be based on our estimates, assumptions, and projections and are subject to risks and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. We do not undertake any responsibility to update our forward-looking statements or risk factors to reflect future events or circumstances.

 

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Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is exposed to certain market risks which exist as part of the Company’s ongoing business operations including interest rates and foreign currency exchange rates. The exposure to market risk for changes in interest rates relates primarily to our outstanding term debt which is at a floating interest rate, currently LIBOR plus an applicable margin, initially 1.375 percent. A 10 percent increase in the weighted average interest rates paid by the Company would not have a material impact on the Company’s pre-tax earnings. The Company conducts business in various foreign currencies, primarily in Europe, Mexico, and Asia. Therefore, changes in the value of currencies of countries in these regions affect the Company’s financial position and cash flows when translated into U.S. dollars. The Company has mitigated and will continue to mitigate a portion of the Company’s currency exposure through operation of decentralized foreign operating companies in which many costs are local currency based. In addition, the Company periodically enters into derivative financial instruments in the form of forward foreign exchange contracts to reduce the effect of fluctuations in foreign exchange rates. A 10 percent change in the value of all foreign currencies would not have a material effect on the Company’s financial position and cash flows.

ITEM 4. CONTROLS AND PROCEDURES.

Kaydon’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this report, the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including its principal executive and principal financial officers, of the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. No changes were made to the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table provides the information with respect to purchases made by the Company of shares of its common stock during each of the three fiscal months ended March 31, 2012:

 

Period

   Total Number
Of Shares
Purchased
     Average Price
Paid
Per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
     Maximum Number
of Shares that May
Yet be Purchased
Under the Plan (1)
 

January 1 to January 28

     28,728       $ 31.81         28,728         1,176,610   

January 29 to February 25

     0         0         0         1,176,610   

February 26 to March 31

     8,014       $ 35.59         8,014         1,168,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     36,742       $ 32.63         36,742         1,168,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) On May 6, 2005, the Company’s Board of Directors authorized management to purchase up to 5,000,000 shares of its common stock in the open market.

 

21


Table of Contents

ITEM 6. EXHIBITS.

 

Exhibit No.

  

Description

10.1    Amendment No. 1 to Kaydon Corporation 1999 Long Term Stock Incentive Plan (previously filed as an exhibit to the Company’s Current Report on Form 8-K dated February 22, 2012 and incorporated herein by reference)
10.2    Form of Kaydon Corporation 1999 Long Term Stock Incentive Plan Non-Qualified Stock Option Agreement (previously filed as an exhibit to the Company’s Current Report on Form 8-K dated February 22, 2012 and incorporated herein by reference)
10.3    Form of Kaydon Corporation 1999 Long Term Stock Incentive Plan Performance Award Agreement (previously filed as an exhibit to the Company’s Current Report on Form 8-K dated February 22, 2012 and incorporated herein by reference)
10.4    Employee Severance Agreement dated March 5, 2012 by and between Kaydon Corporation and Timothy J. Heasley (previously filed as an exhibit to the Company’s Current Report on Form 8-K dated March 5, 2012 and incorporated herein by reference)
10.5    CICC Agreement dated March 5, 2012 by and between Kaydon Corporation and Timothy J. Heasley (previously filed as an exhibit to the Company’s Current Report on Form 8-K dated March 5, 2012 and incorporated herein by reference)
10.6    Credit Agreement, dated as of March 26, 2012, among Kaydon Corporation, the subsidiary borrowers from time to time party thereto, the alternate currency borrowers from time to time party thereto, the institutions from time to time parties thereto as lenders, JP Morgan Chase Bank, N.A., as Administrative Agent, SunTrust Bank and Wells Fargo Bank, National Association, as Syndication Agents, PNC Bank, National Association, as Documentation Agent and J.P. Morgan Securities LLC as Sole Lead Arranger and Sole Book Runner (previously filed as an exhibit to the Company’s Current Report on Form 8-K dated March 26, 2012 and incorporated herein by reference)
31.1    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Interactive Data File

 

22


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      KAYDON CORPORATION
May 9, 2012       /s/ Timothy J. Heasley
      Timothy J. Heasley
      Senior Vice President, Chief Financial Officer
May 9, 2012       /s/ Laura M. Kowalchik
      Laura M. Kowalchik
      Vice President, Chief Accounting Officer

 

23

XNYS:KDN Quarterly Report 10-Q Filling

XNYS:KDN Stock - Get Quarterly Report SEC Filing of XNYS:KDN stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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XNYS:KDN Quarterly Report 10-Q Filing - 3/31/2012
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