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Second Quarter Results
Sales in the second fiscal quarter of 2009 were $98.3 million, compared to $139.9 million in the second quarter of 2008, or a decline of 29.7 percent, as global recessionary economic conditions affected each of our businesses. Wind energy sales were $19.8 million in the second quarter of 2009, an increase of $0.6 million compared to the second quarter of 2008. While there were no wind energy cancellations during the quarter, shipments were impacted by quarter-end deferrals as wind energy customers were challenged by difficulties in securing trade financing and reducing their own inventory levels.
Operating income was $13.2 million in the second quarter of 2009, compared to $32.1 million in the same period last year. EBITDA, a non-GAAP measure and as defined by the Company, equaled $20.6 million, or 20.9 percent of sales, during the second quarter of 2009, as compared to $38.9 million, or 27.8 percent of sales, during the second quarter of 2008. Readers should refer to the attached Reconciliation of Non-GAAP Measures exhibit for the calculation of EBITDA and the reconciliation of EBITDA to the most comparable GAAP measure.
Income, EBITDA, and resultant margins, excluding gains associated with recent changes to certain post-retirement benefit programs, were impacted by lower volume, increased pension costs, one-time costs associated with layoffs and other cost reduction efforts, and adverse product mix relative to that of the prior year. During the second quarter of 2009, the Company incurred approximately $1 million, or $.02 per share on a diluted basis, of one-time costs associated with downsizings, most notably for redundancies in the United Kingdom.
The Company has initiated several changes to its post-retirement employment benefits which, in addition to benefiting future cash flow and earnings, resulted in a pre-tax gain of approximately $1 million, or $0.02 per share on a diluted basis, in the second quarter of 2009. The Company expects additional, more significant gains in the Company's third quarter of 2009, which are currently being actuarially determined. The current estimate is for a pre-tax curtailment gain of not less than $4.5 million.
Net income for the second quarter of 2009 was $8.4 million, or $.25 per share on a diluted basis. During the second quarter of 2008, net income was $19.6 million, or $.63 per share on a diluted basis. Second quarter 2008 results have been adjusted to reflect the required retrospective application of two Financial Accounting Standards Board Finance Staff Positions effective January 1, 2009, and resulted in the recording of additional non-cash interest expense of $1.1 million, $0.7 million net of tax. Interest expense for the second quarter of 2009 was $0.1 million, compared to $3.5 million for the second quarter of 2008. These required adjustments reduced previously reported second quarter 2008 basic earnings per share by $.04 and diluted earnings per share by $.01.
Backlog at July 4, 2009 was $242.8 million compared to $324.0 million at June 28, 2008 and $273.3 million at April 4, 2009, the end of the first fiscal quarter of 2009. Wind energy backlog was $124.1 million at the end of the second quarter of 2009 compared to $150.9 million at the end of the second quarter of 2008.
Management Commentary
James O'Leary, Chairman and Chief Executive Officer commented, "The global economic recession continued to impact each of our businesses during the second quarter of 2009. While the wind energy market had greater sales stability relative to other end markets, growth was lower than anticipated due directly and indirectly to the global economic and financial crisis.
"During the second quarter, we continued our efforts begun in late 2008 to right-size in response to the global economic conditions, notably overseas where significant declines in business activity only occurred earlier in 2009. These actions, together with our debt-free, highly liquid balance sheet and leadership positions in fundamentally attractive end markets, should allow Kaydon to emerge from this challenging period well-positioned for the future."
Segment Review
During the second quarter of 2009, sales of friction control products totaled $64.2 million compared to $86.8 million in the prior second quarter. Sales to all major markets, except wind energy, in the first half of 2009 were below the comparable periods of the prior year. Sales to the defense market were below prior year for the quarter and year to date as the prior year's MRAP production and shipments have not thus far been replaced by this year's combined MRAP and M-ATV shipments. The recent awards for the M-ATV program have resulted in orders and will result in shipments in the second half of 2009 with additional potential orders as the program continues to ramp up.
Sales to the wind energy market were $19.8 million in the second quarter of 2009, an increase of $0.6 million compared to the second quarter of 2008. Sales to the wind energy market for the first six months of 2009 increased to $40.7 million, 17 percent higher than the first six months of 2008. While long term policy discussions and legislative proposals centering on reducing carbon emissions and promoting growth in renewable energy alternatives remain positive for the long term, the absence of a well-defined renewable electricity standard on a national basis and ongoing customer issues associated with their accessing the financing markets have impacted both current orders and shipments. The lack of visibility and readily accessible financing has resulted in customers continuing to defer receipt of shipments and to refrain from placing new orders until conditions improve.
Second quarter 2009 friction control products operating income totaled $9.8 million, compared to $22.1 million in the prior second quarter. Results of this segment were affected by lower volumes, adverse changes in product mix, higher pension and depreciation costs, and costs incurred related to labor and other cost reductions.
Sales of velocity control products were $10.2 million in the second quarter of 2009 compared to $20.0 million in the second quarter of 2008, due to reduced demand in all regions and the adverse effects of exchange rate changes. Operating income in the second quarter of 2009 totaled $0.9 million compared to $6.1 million in the second quarter of 2008 due principally to the effects of the lower volume.
Sales of sealing products were $9.6 million in the second quarter of 2009 compared to $11.7 million in the second quarter of 2008, as lower volume was only partially offset by higher pricing. Operating income declined to $0.8 million in the 2009 period due to lower volume and lost absorption in addition to costs associated with the current period's downsizing.
Sales of the Company's remaining businesses equaled $14.3 million during the second quarter of 2009 compared to $21.4 million in the prior second quarter resulting from lower demand for liquid filtration, air filtration, and metal alloy products. Operating income decreased from $3.3 million in the 2008 period to $1.1 million in the 2009 period, due to the lower volumes.
Financial Position and Free Cash Flow
Free cash flow, a non-GAAP measure defined by the Company as net cash from operating activities less capital expenditures, was a negative $6.1 million in the second quarter of 2009 compared to a negative $1.9 million during the second quarter of 2008 as the Company made a voluntary additional contribution of $14.1 million to its qualified pension plans during the most recent period. Capital expenditures declined as planned as the Company completed its wind energy business capacity expansion program. The Company currently expects full year capital spending to drop from the $59.5 million in 2008 to less than $20 million for 2009, as the wind energy expansion is now complete and the Company has responded to current business conditions.
During the second quarter of 2009, the Company paid common stock dividends of $.17 per share or $5.7 million. For the third quarter of 2009, the Company declared a dividend of $.18 per share, payable on October 5, 2009. This 5.9 percent increase in quarterly dividends reflects the Company's confidence in the fundamental strength and cash generating ability of its businesses.
The Company had unrestricted cash totaling $210.7 million, $295.1 million in committed available credit and no debt outstanding as of July 4, 2009.
Readers should refer to the attached Reconciliation of Non-GAAP Measures exhibit for the calculation of free cash flow and the reconciliation of free cash flow to the most comparable GAAP measure.
About Kaydon
Kaydon Corporation is a leading designer and manufacturer of custom-engineered, performance-critical products, supplying a broad and diverse group of industrial, aerospace, medical and electronic equipment, alternative-energy, and aftermarket customers.
Conference call information: At 11:00 a.m. Eastern time today, Kaydon will host a second quarter 2009 earnings conference call. The conference call can be accessed telephonically in a listen-only mode by dialing 1-888-516-2377 and providing the following passcode number: 800500. Participants are asked to dial in 10 minutes prior to the scheduled start time of the call.
Alternatively, interested parties are invited to listen to the conference call on the Internet at:
http://webcast.premiereglobal.com/view/wl/r.htm?e=156835&s=1&k=6AC017B5F7292D76ECCF365256080AC5
or by logging on to the Kaydon Corporation website at: http://www.kaydon.com and accessing the conference call at the "Second Quarter 2009 Conference Call" icon.
To accommodate those that are unable to listen at the scheduled start time, a replay of the conference call will be available telephonically beginning at 1:30 p.m. Eastern time today through August 7, 2009 at 11:59 p.m. Eastern time. The replay is accessible by dialing 1-888-203-1112 and providing the following passcode number: 5759474.
Additionally, interested parties can access an archive of the conference call on the Kaydon Corporation website at http://www.kaydon.com.
This press release contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 regarding the Company's 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 the Company's financial performance, anticipated growth, characterization of and the Company's ability to control contingent liabilities, and anticipated trends in the Company's businesses. These statements are only predictions, based on the Company's current expectation about future events. Although the Company believes the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, performance or achievements or that predictions or current expectations will be accurate. These forward-looking statements involve risks and uncertainties that could cause the Company's actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements.
In addition, the Company or persons acting on its 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 the Company's 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. Kaydon does not undertake any responsibility to update its forward-looking statements or risk factors to reflect future events or circumstances except to the extent required by applicable law.
Certain non-GAAP measures are presented in this press release. These measures should be viewed as supplemental data, rather than as substitutes or alternatives to the most comparable GAAP measures.
READ IT ON THE WEB
http://www.kaydon.com
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Second Quarter Ended First Half Ended
As adjusted (1) As adjusted (1)
July 4, June 28, July 4, June 28,
2009 2008 2009 2008
Net sales $ 98,318,000 $ 139,905,000 $ 208,653,000 $ 263,189,000
Cost of sales 65,966,000 85,734,000 140,523,000 161,699,000
Gross profit 32,352,000 54,171,000 68,130,000 101,490,000
Selling, general, and administrative expenses 19,124,000 22,033,000 39,382,000 43,188,000
Operating income 13,228,000 32,138,000 28,748,000 58,302,000
Interest expense (61,000 ) (3,502,000 ) (123,000 ) (7,909,000 )
Interest income 109,000 1,742,000 239,000 3,678,000
Income before income taxes 13,276,000 30,378,000 28,864,000 54,071,000
Provision for income taxes 4,917,000 10,746,000 10,381,000 19,120,000
Net income $ 8,359,000 $ 19,632,000 $ 18,483,000 $ 34,951,000
Earnings per share:
Basic $ 0.25 $ 0.71 $ 0.55 $ 1.26
Diluted $ 0.25 $ 0.63 $ 0.55 $ 1.15
Dividends declared per share $ 0.17 $ 0.15 $ 0.34 $ 0.30
(1) Results for the Second Quarter and First Half Ended June 28,
2008 have been adjusted, as required, for the retrospective
application of FSP APB 14-1 and FSP EITF 03-6-1.
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
July 4, December 31,
2009 2008
Assets:
Cash and cash equivalents $ 210,667,000 $ 232,998,000
Accounts receivable, net 65,442,000 78,918,000
Inventories, net 114,739,000 97,748,000
Other current assets 16,507,000 18,395,000
Total current assets 407,355,000 428,059,000
Property, plant and equipment, net 182,421,000 185,642,000
Goodwill, net 144,324,000 142,424,000
Other intangible assets, net 23,645,000 25,746,000
Other assets 5,703,000 7,911,000
Total assets $ 763,448,000 $ 789,782,000
Liabilities and Shareholders' Equity:
Accounts payable $ 19,796,000 $ 35,080,000
Accrued expenses 26,118,000 27,682,000
Total current liabilities 45,914,000 62,762,000
Long-term liabilities 40,543,000 54,390,000
Shareholders' equity 676,991,000 672,630,000
Total liabilities and shareholders' equity $ 763,448,000 $ 789,782,000
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Second Quarter Ended First Half Ended
As adjusted (1) As adjusted (1)
July 4, June 28, July 4, June 28,
2009 2008 2009 2008
Cash flows from operating activities:
Net income $ 8,359,000 $ 19,632,000 $ 18,483,000 $ 34,951,000
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation 4,881,000 3,912,000 9,575,000 7,604,000
Amortization of intangible assets 1,070,000 1,366,000 2,140,000 2,731,000
Amortization of stock awards 1,035,000 1,126,000 2,070,000 2,227,000
Stock option compensation expense 362,000 363,000 692,000 590,000
Excess tax benefits from stock-based compensation 21,000 106,000 43,000 83,000
Deferred financing fees 62,000 279,000 124,000 666,000
Net change in receivables, inventories and trade payables (3,650,000 ) (12,415,000 ) (17,769,000 ) (31,130,000 )
Contributions to qualified pension plans (14,846,000 ) - (14,846,000 ) -
Net change in other assets and liabilities (1,148,000 ) (1,149,000 ) 2,268,000 8,210,000
Net cash from (used in) operating activities (3,854,000 ) 13,220,000 2,780,000 25,932,000
Cash flows from investing activities:
Additions to property, plant and equipment, net (2,213,000 ) (15,146,000 ) (7,589,000 ) (29,908,000 )
Proceeds from sales of investments 477,000 3,097,000 1,893,000 60,016,000
Acquisition of business, net of cash received - - - 489,000
Net cash from (used in) investing activities (1,736,000 ) (12,049,000 ) (5,696,000 ) 30,597,000
Cash flows from financing activities:
Cash dividends paid (5,707,000 ) (4,166,000 ) (11,457,000 ) (8,337,000 )
Purchase of treasury stock - (4,483,000 ) (8,871,000 ) (12,082,000 )
Excess tax benefits from stock-based compensation (21,000 ) (106,000 ) (43,000 ) (83,000 )
Proceeds from exercise of stock options - 139,000 - 163,000
Net cash used in financing activities (5,728,000 ) (8,616,000 ) (20,371,000 ) (20,339,000 )
Effect of exchange rate changes on cash and cash equivalents 1,638,000 (211,000 ) 956,000 2,320,000
Net increase (decrease) in cash and cash equivalents (9,680,000 ) (7,656,000 ) (22,331,000 ) 38,510,000
Cash and cash equivalents - Beginning of period 220,347,000 276,159,000 232,998,000 229,993,000
Cash and cash equivalents - End of period $ 210,667,000 $ 268,503,000 $ 210,667,000 $ 268,503,000
(1) Results for the Second Quarter and First Half Ended June 28,
2008 have been adjusted, as required, for the retrospective
application of FSP APB 14-1.
KAYDON CORPORATION
EARNINGS PER SHARE
Second Quarter Ended First Half Ended
As adjusted (1) As adjusted (1)
July 4, June 28, July 4, June 28,
2009 2008 2009 2008
Earnings per share - Basic
Net income $ 8,359,000 $ 19,632,000 $ 18,483,000 $ 34,951,000
Less: Net earnings allocated to participating securities - Basic (89,000 ) (280,000 ) (211,000 ) (535,000 )
Income available to common shareholders - Basic $ 8,270,000 $ 19,352,000 $ 18,272,000 $ 34,416,000
Weighted average common shares outstanding - Basic 33,225,000 27,291,000 33,274,000 27,338,000
Earnings per share - Basic $ 0.25 $ 0.71 $ 0.55 $ 1.26
Earnings per share - Diluted
Net income $ 8,359,000 $ 19,632,000 $ 18,483,000 $ 34,951,000
Less: Net earnings allocated to participating securities - Diluted (89,000 ) (261,000 ) (211,000 ) (515,000 )
Plus: Interest and debt issuance costs amortization related to - 2,201,000 - 4,981,000
Contingent Convertible Notes, net of tax
Income available to common shareholders - Diluted $ 8,270,000 $ 21,572,000 $ 18,272,000 $ 39,417,000
Weighted average common shares outstanding - Diluted
Weighted average common shares outstanding - Basic 33,225,000 27,291,000 33,274,000 27,338,000
Potential dilutive shares resulting from stock options 13,000 40,000 13,000 41,000
Dilutive shares resulting from Contingent Convertible Notes - 6,841,000 - 6,850,000
Weighted average common shares outstanding - Diluted 33,238,000 34,172,000 33,287,000 34,229,000
Earnings per share - Diluted $ 0.25 $ 0.63 $ 0.55 $ 1.15
(1) Results for the Second Quarter and First Half Ended June 28,
2008 have been adjusted, as required, for the retrospective
application of FSP APB 14-1 and FSP EITF 03-6-1.
KAYDON CORPORATION
Reportable Segment Information
(Amounts in thousands)
Second Quarter Ended First Half Ended
July 4, June 28, July 4, June 28,
Net sales 2009 2008 2009 2008
Friction Control Products $ 64,220 $ 86,795 $ 136,415 $ 160,904
Velocity Control Products 10,241 19,966 22,400 38,718
Sealing Products 9,591 11,724 20,163 23,225
Other 14,266 21,420 29,675 40,342
Total consolidated net sales $ 98,318 $ 139,905 $ 208,653 $ 263,189
Second Quarter Ended First Half Ended
As adjusted (1) As adjusted (1)
July 4, June 28, July 4, June 28,
Operating income 2009 2008 2009 2008
Friction Control Products $ 9,759 $ 22,105 $ 22,241 $ 39,699
Velocity Control Products 891 6,089 3,067 11,681
Sealing Products 767 1,527 1,364 3,041
Other 1,119 3,327 1,875 5,460
Total segment operating income 12,536 33,048 28,547 59,881
Items not allocated to segment operating income 692 (910 ) 201 (1,579 )
Interest expense (61 ) (3,502 ) (123 ) (7,909 )
Interest income 109 1,742 239 3,678
Income before income taxes $ 13,276 $ 30,378 $ 28,864 $ 54,071
(1) Results for the Second Quarter and First Half Ended June 28,
2008 have been adjusted, as required, for the retrospective
application of FSP APB 14-1. The state income tax provision is no
longer included in segment operating income and amounts in the
second quarter and first half of 2008 have been reclassified to
conform to this presentation.
Kaydon Corporation
Reconciliation of Non-GAAP Measures
(Amounts in thousands)
Free cash flow, as defined (non-GAAP)
Second Quarter Ended First Half Ended LTM
July 4, June 28, July 4, June 28, July 4, June 28,
2009 2008 2009 2008 2009 2008
Net cash from (used in) operating activities (GAAP) $ (3,854 ) $ 13,220 $ 2,780 $ 25,932 $ 34,748 $ 62,979
Capital expenditures (2,213 ) (15,146 ) (7,589 ) (29,908 ) (37,191 ) (63,801 )
Free cash flow, as defined (non-GAAP) $ (6,067 ) $ (1,926 ) $ (4,809 ) $ (3,976 ) $ (2,443 ) $ (822 )
Kaydon's management believes free cash flow, as defined above and
a non-GAAP measure, is an important indicator of the Company's
ability to generate excess cash above levels required for capital
investment to support future growth. However, it should be viewed
as supplemental data, rather than as a substitute or alternative
to the comparable GAAP measure.
EBITDA, as defined (non-GAAP)
Second Quarter Ended First Half Ended LTM
As adjusted (1) As adjusted (1) As adjusted (1) As adjusted (1)
July 4, June 28, July 4, June 28, July 4, June 28,
2009 2008 2009 2008 2009 2008
Net income (GAAP) $ 8,359 $ 19,632 $ 18,483 $ 34,951 $ 48,595 $ 72,270
Net interest (income)/expense (48 ) 1,760 (116 ) 4,231 156 4,293
Provision for income taxes 4,917 10,746 10,381 19,120 27,206 38,362
Depreciation and amortization of intangible assets 5,951 5,278 11,715 10,335 23,025 18,077
Stock-based compensation expense (2) 1,397 1,489 2,762 2,817 5,672 5,644
EBITDA, as defined (non-GAAP) $ 20,576 $ 38,905 $ 43,225 $ 71,454 $ 104,654 $ 138,646
(1) Results have been adjusted, as required, for the retrospective
application of FSP APB 14-1.
(2) Includes non-cash stock amortization expense and non-cash stock
option expense.
Kaydon's management believes EBITDA, as defined above and a
non-GAAP measure, is a determinant of the Company's capacity to
incur additional senior capital to enhance future profit growth
and cash flow growth. In addition, EBITDA is widely used by
financial analysts and investors, and is utilized in measuring
compliance with financial covenants in the Company's credit
agreement. Also, EBITDA is the metric used to determine payments
under the Company's annual incentive compensation program for
senior managers. However, EBITDA, as defined, should be viewed as
supplemental data, rather than as a substitute or alternative to
the comparable GAAP measure.
SOURCE: Kaydon Corporation
Kaydon Corporation James O'Leary Chairman and Chief Executive Officer (734) 747-7025 ext. 2025 or Peter C. DeChants Senior Vice President and Chief Financial Officer (734) 680-2009
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