Kaydon Corporation Reports Second Quarter 2005 Results
ANN ARBOR, Mich.--July 28, 2005--Kaydon Corporation today announced financial results for the second quarter ended July 2, 2005. Sales were up 23.7 percent, order entry increased 20.1 percent, and net income rose 24.9 percent from the second quarter 2004. Diluted earnings per share were $.40 versus $.33 in the comparable period last year.Highlights - Second Quarter 2005 compared with Second Quarter 2004
-- Sales, including recent acquisitions, increased 23.7 percent, to $104.4 million, on strengthened demand across most key product lines.
-- Net income increased 24.9 percent to $12.4 million.
-- Diluted earnings per share increased 21.2 percent to $.40.
-- Order entry increased 20.1 percent to $103.8 million, reflecting continued strength in the manufacturing economy.
-- Quarter-end backlog increased 33.2 percent to $143.3 million.
-- EBITDA, a non-GAAP measure, increased 17.8 percent to $24.5 million, equal to 23.5 percent of sales, and covered interest expense by 10.2 times.
-- Cash and cash equivalents equaled $240.2 million at the end of the second quarter.
Subsequent to the end of the quarter, as previously announced, on July 26, 2005 Kaydon Corporation sold its Power and Data Transmission Products Group to Moog, Inc. for $72.4 million cash. The sale will result in an after tax gain of approximately $0.70 per diluted share, which will be reported as a component of discontinued operations in Kaydon's third quarter ending October 1, 2005. On a net income basis, before the gain on the sale of the Group, the transaction is expected to be approximately earnings neutral for fiscal 2005.
Commenting on the quarter, Brian P. Campbell, Kaydon's President and Chief Executive Officer said, "We continue to experience strong demand in our key product markets as evidenced by our increased sales and orders during the second quarter. Our strong order intake during the quarter, and the resultant $143.3 million backlog we enjoyed at the end of the quarter are further evidence that we continue to benefit from a strong manufacturing economy, and we are positioned well to continue to improve our financial results throughout the year."
Commenting further, Mr. Campbell said, "Although gross margins during the quarter continued to be affected by material costs, the recent moderation in raw material pricing, strong backlogs, increased product pricing, and continuing efficiencies from Kaydon Six-Sigma initiatives, should have a beneficial impact on margins during the third and fourth quarters".
Additional Data on Second Quarter and Year-To-Date Results
Second quarter 2005 sales of $104.4 million increased 23.7 percent compared to sales of $84.4 million in 2004's second quarter. Increased sales across most of the Company's product lines, including specialty bearings, linear deceleration and sealing products, and metal forming equipment, along with incremental sales of $5.8 million from recent acquisitions were only partially offset by decreases totaling $1.5 million related to lower demand for certain filtration products utilized in military applications and lower prices on sales of specialty metal alloys reflecting lower raw material pricing.
Gross profit equaled $39.1 million or 37.4 percent of sales during the second quarter of 2005 as compared to $32.8 million or 38.9 percent of sales during the second quarter of 2004. Similar to this year's first quarter, the second quarter gross margin continued to be affected by increases in material costs and a shift in product mix, particularly in the specialty bearings business. Increased raw material costs relate to both higher prices for raw material and increased outsourcing of components during new program production ramp-up. Recent capital equipment additions to increase capacity, and product price increases, should positively affect the second half of 2005.
Selling, general, and administrative ("SG&A") expenses, equaled $19.3 million or 18.5 percent of sales during the second quarter of 2005 as compared to $15.7 million or 18.6 percent of sales during the second quarter of 2004. The increase in SG&A expenses resulted from higher sales volumes, additional amortization costs associated with recent acquisitions, and foreign currency translation losses on several foreign currency denominated accounts due to the strengthening of the U.S. dollar against certain currencies during the quarter.
Operating income equaled $19.8 million in the second quarter of 2005, as compared to $17.1 million in the second quarter of 2004.
As a result of higher investment interest rates, interest income earned on cash and cash equivalent balances increased to $1.7 million during this year's second quarter, compared with $0.8 million during last year's second quarter.
Primarily due to reduced taxes on foreign earnings and remittances, and additional deductions available for the first time under the American Jobs Creation Act of 2004, the effective tax rate during the second quarter of 2005 was 35.2 percent, compared with 36.0 percent for the second quarter of 2004.
Net income for the second quarter 2005 was $12.4 million or $.40 per common share on a diluted basis, based on 34.7 million common shares outstanding. During the second quarter 2004 Kaydon generated net income of $9.9 million or $.33 per common share on a diluted basis, based on 34.8 million common shares outstanding. As previously disclosed, second quarter 2004 diluted earnings per share, previously reported as $.36, have been restated in accordance with the final consensus of the Emerging Issues Task Force on EITF 04-8.
Reflecting increased orders for specialty bearings, including new program introductions, continued strength in the manufacturing economy, and aided by recent acquisitions, order entry during the second quarter of 2005 equaled $103.8 million, an increase of 20.1 percent compared to the second quarter of 2004. Backlog equaled $143.3 million at the end of the second quarter 2005, a 33.2 percent increase compared to a backlog of $107.6 million at the end of the second quarter 2004.
Net cash flow from operating activities during the second quarter 2005 equaled $14.5 million, compared to second quarter 2004 cash flow from operations of $7.1 million, as a result of increased net income and reduced working capital levels. During the second quarter 2005, the Company paid common stock dividends of $3.4 million, repurchased a total of 90,500 shares of Company common stock for $2.5 million, and invested $2.9 million in net capital expenditures. The Company's cash and cash equivalents equaled $240.2 million at July 2, 2005.
Depreciation and amortization equaled $4.7 million during the second quarter of 2005, compared to $3.7 million during the comparable period last year, due principally to the increased amortization of intangible assets associated with recent acquisitions.
EBITDA, or earnings before interest, taxes, depreciation and amortization, a non-GAAP measure, equaled $24.5 million during the second quarter 2005 as compared to $20.8 million during the second quarter 2004, and covered second quarter interest expense by 10.2 times. For the twelve months ended July 2, 2005, EBITDA totaled $85.2 million, and covered interest expense by 8.9 times. 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.
Sales during the first half of 2005 increased $31.2 million, or 18.6 percent, to $198.9 million, compared with the first half of 2004. Recent acquisitions accounted for $11.4 million of the increase. First half operating income increased $3.3 million, or 10.1 percent, to $36.0 million. As a result of higher interest income and a lower effective tax rate, first half net income and earnings per common share on a diluted basis were up 18.3 percent and 15.9 percent, respectively, compared with the first half of 2004.
Segment Discussion
During the second quarter of 2005, sales of the Friction and Motion Control Products segment increased $8.2 million or 19.3 percent, to $50.9 million, when compared with second quarter 2004. This segment benefited from increased demand for specialty bearings utilized in defense, heavy equipment, and wind power markets, and for split roller bearing products used globally in various industrial markets. Operating income increased 14.3 percent, to $12.7 million. The growth of second quarter operating income was affected by higher material costs, including both higher raw material pricing and the cost of outsourcing certain production processes associated with the ramp-up phase of several new product programs in the military and wind power markets.
Second quarter 2005 sales of the Velocity Control Products segment increased $1.9 million or 15.5 percent, to $14.4 million, when compared with second quarter 2004. Segment operating income, also affected by higher material costs, increased $0.3 million in the second quarter of 2005 to $3.7 million.
Second quarter 2005 sales of the Sealing Products segment increased 7.7 percent, to $10.4 million, and operating income increased 11.8 percent, to $1.7 million, when compared with 2004, primarily as a result of some business shifting from the first quarter to the second quarter as a result of the previously disclosed work stoppage at the Baltimore, Maryland facility, which ended in late January.
During the second quarter of 2005, sales of the Power and Data Transmission Products segment increased $2.4 million, to $9.9 million, when compared with second quarter 2004. This segment was positively affected by increased demand for traditional rotary and electronic products, along with slip-ring products utilized in aerospace applications. Aided by the increase in sales, operating income equaled $1.2 million during the second quarter of 2005 as compared to an operating loss of $(0.1) million during the second quarter of 2004.
Sales of the Company's remaining businesses equaled $18.7 million during the second quarter of 2005, an increase from second quarter 2004 of $6.7 million. $5.1 million of the increase related to a recent acquisition. Additionally, a $2.9 million increase in sales of metal forming equipment, in part due to customer-initiated shipping delays from the first quarter, was partially offset by decreased sales of certain filtration products, primarily due to a decrease in military spending for these items, and by lower prices on sales of specialty metal alloys reflecting lower raw material pricing. Operating income for these businesses, benefiting from higher sales of metal forming equipment and from the contribution of a recent acquisition, totaled $1.9 million in the second quarter of 2005 compared to a $(0.8) million operating loss during the second quarter 2004, which included a $1.9 million goodwill impairment loss.
Information regarding the Company's reportable segments for the second quarters of 2005 and 2004 can be found on the Kaydon Corporation website at: http://www.kaydon.com at the "Reportable Segment Information" icon.
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, and aftermarket customers.
KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
--------------------------------------- --------------------------
Second Quarter Ended First Half Ended
------------------------- --------------------------
(unaudited) (unaudited)
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
------------ ----------- ------------ ------------
Net sales $104,409,000 $84,386,000 $198,891,000 $167,709,000
Cost of sales 65,317,000 51,548,000 124,198,000 103,097,000
------------ ----------- ------------ ------------
Gross profit 39,092,000 32,838,000 74,693,000 64,612,000
Selling,
general, and
administrative
expenses 19,266,000 15,729,000 38,730,000 31,940,000
------------ ----------- ------------ ------------
Operating
income 19,826,000 17,109,000 35,963,000 32,672,000
Interest income 1,733,000 802,000 3,260,000 1,568,000
Interest
expense (2,396,000) (2,374,000) (4,814,000) (4,793,000)
------------ ----------- ------------ ------------
Income before
income taxes 19,163,000 15,537,000 34,409,000 29,447,000
Provision for
income taxes 6,745,000 5,593,000 12,112,000 10,601,000
------------ ----------- ------------ ------------
Net income $12,418,000 $9,944,000 $22,297,000 $18,846,000
============ =========== ============ ============
Weighted average
common shares
outstanding
Basic 27,778,000 27,881,000 27,832,000 27,891,000
Diluted 34,696,000 34,796,000 34,757,000 34,800,000
Earnings per
share
Basic $0.45 $0.36 $0.80 $0.68
Diluted $0.40(1) $0.33(1) $0.73(1) $0.63(1)
Dividends
declared per
share $0.12 $0.12 $0.24 $0.24
(1) Diluted earnings per common share calculations reflect the
provisions of the final consensus of the Emerging Issues Task
Force (EITF) on EITF 04-8, "The Effects of Contingently
Convertible Instruments on Diluted Earnings per Share," which
states that the impact of contingently convertible instruments
that are convertible into common stock upon the achievement of a
specified market price of the issuer's shares, such as the
Company's 4% Contingent Convertible Senior Subordinated Notes due
2023, should be included in diluted earnings per share
computations regardless of whether or not the market price trigger
has been met.
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
----------------------------------------------------------------------
July 2, December 31,
2005 2004
------------- -------------
Assets: (unaudited)
Cash and cash equivalents $240,195,000 $278,586,000
Accounts receivable, net 58,792,000 48,786,000
Inventories, net 59,829,000 55,730,000
Other current assets 11,440,000 9,925,000
------------- -------------
Total current assets 370,256,000 393,027,000
Plant and equipment, net 87,183,000 86,028,000
Goodwill, net 129,905,000 113,375,000
Other intangible assets, net 25,929,000 9,200,000
Other assets 14,170,000 17,494,000
------------- -------------
Total assets $627,443,000 $619,124,000
============= =============
Liabilities and Shareholders' Equity:
Accounts payable $18,022,000 $17,735,000
Accrued expenses 27,228,000 25,961,000
------------- -------------
Total current liabilities 45,250,000 43,696,000
Long-term debt 200,034,000 200,066,000
Long-term liabilities 65,589,000 66,681,000
------------- -------------
Total long-term liabilities 265,623,000 266,747,000
Shareholders' equity 316,570,000 308,681,000
------------- -------------
Total liabilities and shareholders'
equity $627,443,000 $619,124,000
============= =============
Reportable Segment Information
(Amounts in thousands)
Quarter Ended First Half Ended
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
--------- -------- --------- ---------
Net sales
Friction and Motion Control
Products
External customers $50,687 $42,575 $95,357 $81,379
Intersegment 230 95 360 165
--------- -------- --------- ---------
50,917 42,670 95,717 81,544
Velocity Control Products
External customers 14,434 12,497 29,172 26,091
Intersegment (1) - (1) -
--------- -------- --------- ---------
14,433 12,497 29,171 26,091
Sealing Products
External customers 10,471 9,728 19,161 19,331
Intersegment (28) (35) (47) (45)
--------- -------- --------- ---------
10,443 9,693 19,114 19,286
Power and Data Transmission
Products
External customers 10,130 7,608 20,154 16,326
Intersegment (194) (53) (298) (113)
--------- -------- --------- ---------
9,936 7,555 19,856 16,213
Other
External customers 18,687 11,978 35,047 24,582
Intersegment (7) (7) (14) (7)
--------- -------- --------- ---------
18,680 11,971 35,033 24,575
Total consolidated net
sales $104,409 $84,386 $198,891 $167,709
========= ======== ========= =========
Quarter Ended First Half Ended
Operating income (loss) July 2, July 3, July 2, July 3,
2005 2004 2005 2004
--------- -------- --------- ---------
Friction and Motion Control
Products $12,675 $11,086 $23,284 $20,080
Velocity Control Products 3,734 3,439 7,175 7,397
Sealing Products 1,724 1,543 2,915 2,960
Power and Data Transmission
Products 1,203 (110) 1,699 (469)
Other 1,897 (787) 2,935 783
--------- -------- --------- ---------
Total segment
operating income 21,233 15,171 38,008 30,751
State income tax provision
included in segment operating
income 289 279 784 553
Items not allocated to segment
operating income (1,696) 1,659 (2,829) 1,368
Interest expense (2,396) (2,374) (4,814) (4,793)
Interest income 1,733 802 3,260 1,568
--------- -------- --------- ---------
Income from operations
before income taxes $19,163 $15,537 $34,409 $29,447
========= ======== ========= =========
Kaydon Corporation
Reconciliation of Non-GAAP Measures
Free cash flow (non-GAAP)
Second Quarter Ended LTM
------------------------- ------------
July 2, July 3, July 2,
2005 2004 2005
------------ ------------ ------------
Net cash from operating
activities (GAAP) $14,465,000 $7,146,000 $50,040,000
Capital expenditures (2,869,000) (2,826,000) (12,652,000)
------------ ------------ ------------
Free cash flow (non-GAAP) $11,596,000 $4,320,000 $37,388,000
============ ============ ============
Kaydon's management believes free cash flow, 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 GAAP performance measure.
Earnings before interest,
taxes, depreciation and
amortization- EBITDA
(non-GAAP)
Second Quarter Ended LTM
------------------------- ------------
July 2, July 3, July 2,
2005 2004 2005
------------ ------------ ------------
Net income (GAAP) $12,418,000 $9,944,000 $41,809,000
Net interest expense 663,000 1,572,000 3,931,000
Income tax expense 6,745,000 5,593,000 23,088,000
Depreciation and amortization 4,698,000 3,704,000 16,380,000
------------ ------------ ------------
Earnings before interest, taxes,
depreciation and amortization-
EBITDA (non-GAAP) $24,524,000 $20,813,000 $85,208,000
============ ============ ============
Kaydon's management believes EBITDA, or earnings before interest,
taxes, depreciation and amortization, is a gauge of financial strength
from continuing operations before financing costs, investment income,
taxes on income and non-cash charges. 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.
Accordingly, EBITDA is a determinant of the Company's capacity to
incur additional senior capital to enhance future profit growth and
cash flow growth. However, it should be viewed as supplemental data,
rather than as a substitute or alternative to the GAAP performance
measure.