Kaydon Corporation Reports Fourth Quarter and Full Year 2011 Results

ANN ARBOR, Mich.--(BUSINESS WIRE)--Kaydon Corporation (NYSE:KDN) today announced its results for the fourth fiscal quarter and full year ended December 31, 2011.

“Fourth Quarter and Full Year 2011 Conference Call”

Consolidated Results

Fourth quarter sales increased 3.0 percent to $108.1 million, compared to sales of $105.0 million in the fourth quarter of 2010. Fourth quarter sales were impacted by approximately $7 million of international wind energy deferred shipments which are expected to be released in the first half of 2012.

Operating income was $11.9 million in the fourth quarter of 2011, compared to $17.1 million in the fourth quarter of 2010. Adjusting for the items detailed below, operating income was $17.5 million in the fourth quarter of 2011. The fourth quarter of 2011 included $5.2 million of costs and charges associated with a previously disclosed customer arbitration which is expected to be concluded in 2012. These charges include an impairment charge for which the Company is pursuing recovery. The Company also incurred $0.5 million of costs for due diligence and restructuring activities.

Net income for the fourth quarter of 2011 was $8.7 million, compared to net income of $11.3 million in the fourth quarter of 2010. Diluted earnings per share in the fourth quarter of 2011 equaled $.27 compared to $.34 in the fourth quarter of 2010. Adjusting for the items noted above, net income was $12.7 million, or $.40 per share on a diluted basis, in the fourth quarter of 2011.

EBITDA equaled $19.3 million, or 17.8 percent of sales, during the fourth quarter of 2011, compared to $24.6 million, or 23.5 percent of sales, during the fourth quarter of 2010. Adjusting for the items noted above, EBITDA was $24.8 million, or 22.9 percent of sales, in the fourth quarter of 2011.

Full year 2011 sales totaled $460.1 million compared to $464.0 million for full year 2010. Full year 2011 diluted earnings per share totaled $1.52 per share compared to $1.67 per share in full year 2010. Adjusting for the items noted above and for plant consolidation costs and legal expenses incurred earlier in the year for the arbitration, full year 2011 diluted earnings per share totaled $1.75 per share and full year 2011 EBITDA totaled $109.5 million, or 23.8 percent of sales.

This press release includes certain non-GAAP measures, including EBITDA, free cash flow, and as adjusted operating income, EBITDA, net income, and earnings per share – diluted. Readers should refer to the attached Reconciliation of Non-GAAP Measures exhibit for the reconciliations of the applicable GAAP measures to the non-GAAP measures presented for both the fourth quarter and full year.

Management Commentary

James O’Leary, Chairman and Chief Executive Officer commented, “Fiscal 2011 saw early strength and continued progress in our efforts to broaden our sales both internationally and in North America. In particular, our industrial businesses performed well through most of the year as investments in sales and marketing resources, both globally and in North America, have proved successful. For the year, our industrial businesses grew over 16 percent, substantially offsetting the decline in our wind and military businesses.

“As has been well publicized in the media, the fourth quarter was characterized by the general economic uncertainty and volatility that began in the third quarter as both international orders and shipments were affected by softening business conditions. However, we remain confident that the investments made to better support our international and North American distribution channels will serve us well over the long term. The successes we experienced in 2011 were necessary to offset the expected decline in both military and wind energy sales. The decline in these two markets, most of which was offset by growth elsewhere in the portfolio, accounted for the entire shortfall relative to 2010.

“Wind energy performance was negatively impacted as compared to 2010, as sales in 2011 dropped by $42 million from 2010's shipments of $96 million. The fourth quarter was also impacted by approximately $7 million of delayed shipments as an international customer deferred releases into 2012. We currently expect 2012 sales to exceed $70 million as wind installations pick up in advance of the potential expiration of the United States' Production Tax Credit (PTC). In the fourth quarter, we took preliminary action to both rationalize headcount and better align customer inventories in advance of potential further action later in 2012 should the PTC not be extended and global renewable energy conditions remained challenged.

“Military performance was likewise negatively impacted as compared to 2010, as recent years benefited from our leading position on several major military vehicle programs, and the highly publicized fiscal issues affecting future defense spending in the United States. Most of the decline, year over year, was due to the absence of significant sales in a key ground vehicle program in 2010 as the breadth of our program coverage insulated us to some extent. Going forward, we expect performance more comparable to 2011 with a less severe, but still modestly downward bias, due to uncertainty over defense spending through much of this election year.”

Segment Results and Review

Friction Control Products sales in the fourth quarter of 2011 were $58.5 million, compared to $61.5 million in the 2010 fourth quarter. The decline was largely attributable to lower wind energy sales. Wind energy sales were $9.6 million in the fourth quarter of 2011 compared to $12.5 million in the fourth quarter of 2010. Approximately $7 million of wind energy orders originally scheduled for delivery in the fourth quarter 2011 were rescheduled for delivery in the first half of 2012. Wind energy sales were approximately $54 million in 2011 and are expected to exceed $70 million in 2012. Fourth quarter 2011 sales to non-wind markets totaled $48.9 million compared to $49.1 million in the fourth quarter of 2010.

Fourth quarter 2011 Friction Control Products operating income totaled $4.9 million, compared to $11.8 million in the prior fourth quarter due to $5.2 million of arbitration related costs and charges previously discussed and the decline in wind energy sales.

Velocity Control Products sales in the fourth quarter of 2011 were $20.4 million, compared to $14.9 million in the fourth quarter of 2010. Operating income for this segment totaled $3.4 million in the fourth quarter of 2011, compared to $2.8 million earned in the fourth quarter of 2010.

Other Industrial Products sales equaled $29.2 million in the fourth quarter of 2011, compared to $28.5 million in the prior year fourth quarter. Operating income equaled $3.8 million in the fourth quarter of 2011, compared to operating income of $3.5 million in the fourth quarter of 2010, due to improved sales.

Order Activity

Orders were $84.6 million in the fourth quarter of 2011, compared to $100.8 million in the fourth quarter of 2010. Collectively, wind energy and military orders declined $12.8 million in the fourth quarter of 2011 as compared to the fourth quarter of 2010. The remainder of the decline was due to weaker international and export orders, principally in Europe, and the timing of a major aerospace blanket order received in the fourth quarter of 2010. Backlog at December 31, 2011 was $181.6 million of which $60.0 million was in support of wind energy shipments.

Financial Position and Free Cash Flow

Free cash flow, a non-GAAP measure defined by the Company, was $16.6 million in the fourth quarter of 2011, compared to $23.4 million in the fourth quarter of 2010. For the full year of 2011, net cash generated from operating activities was $54.9 million, compared to a record $93.9 million in the full year of 2010, while full year 2011 free cash flow was $40.2 million compared to a record $78.6 million in the full year of 2010.

On October 3, 2011, the Company paid common stock dividends of $.20 per share or an aggregate of $6.4 million. For the full year of 2011, the Company paid common stock dividends of $25.1 million. During the fourth quarter of 2011 the Company repurchased 135,000 shares of common stock for $4.0 million. For the full year of 2011, the Company repurchased 1,082,091 shares for $38.7 million. In aggregate, the Company returned $63.8 million to its shareholders in 2011 while investing over $50 million in the previously announced Hahn acquisition, capital expenditures and growth programs to further enhance the long term value of our businesses.

As of December 31, 2011, the Company had unrestricted cash totaling $225.2 million. The Company has a $250 million senior revolving credit facility with a syndicate of banks which provides for borrowings by the Company for working capital and other general corporate purposes, including acquisitions. The Company had no outstanding borrowings under this facility and no other debt outstanding as of December 31, 2011.

About Kaydon

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.

Conference call information: At 11:00 a.m. Eastern time today, Kaydon will host a fourth quarter and full year 2011 earnings conference call. The conference call can be accessed telephonically in a listen-only mode by dialing 1-888-438-5524 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://w.on24.com/r.htm?e=396612&s=1&k=6ED35A900B0771FD9ECF2992F0175FAA

or by logging on to the Kaydon Corporation website at: http://www.kaydon.com and accessing the conference call at the “Fourth Quarter and Full Year 2011 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 2:00 p.m. Eastern time today through Thursday, March 1, 2012 at 2:00 p.m. Eastern time. The replay is accessible by dialing 1-888-203-1112 and providing the following passcode number: 9524488.

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 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 expectations 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.

KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
	Fourth Quarter Ended						Full Year Ended
	December 31,			December 31,			December 31,			December 31,
	2011			2010			2011			2010
Net sales	$	108,113,000		$	104,963,000		$	460,120,000		$	463,988,000
Cost of sales		72,684,000			66,430,000			299,043,000			299,363,000
Gross profit		35,429,000			38,533,000			161,077,000			164,625,000
Selling, general and administrative expenses		23,483,000			21,428,000			90,841,000			83,006,000
Operating income		11,946,000			17,105,000			70,236,000			81,619,000
Interest expense		(95,000	)		(98,000	)		(388,000	)		(231,000	)
Interest income		114,000			171,000			491,000			486,000
Income before income taxes		11,965,000			17,178,000			70,339,000			81,874,000
Provision for income taxes		3,285,000			5,864,000			21,007,000			25,829,000
Net income	$	8,680,000		$	11,314,000		$	49,332,000		$	56,045,000
Earnings per share:
Basic	$	0.27		$	0.34		$	1.52		$	1.67
Diluted	$	0.27		$	0.34		$	1.52		$	1.67
Dividends declared per share	$	0.20		$	0.19		$	0.78		$	0.74

KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
	December 31,		December 31,
	2011		2010
Assets:
Cash and cash equivalents	$	225,214,000	$	286,648,000
Accounts receivable, net		78,441,000		76,010,000
Inventories, net		110,206,000		88,253,000
Other current assets		16,701,000		16,384,000
Total current assets		430,562,000		467,295,000
Property, plant and equipment, net		168,946,000		169,597,000
Goodwill, net		157,087,000		143,428,000
Other intangible assets, net		31,140,000		18,047,000
Other assets		3,962,000		2,965,000
Total assets	$	791,697,000	$	801,332,000
Liabilities and Shareholders' Equity:
Accounts payable	$	19,699,000	$	16,944,000
Accrued expenses		29,766,000		36,085,000
Total current liabilities		49,465,000		53,029,000
Long-term liabilities		57,594,000		39,165,000
Shareholders' equity		684,638,000		709,138,000
Total liabilities and shareholders' equity	$	791,697,000	$	801,332,000

KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
		Fourth Quarter Ended						Full Year Ended
		December 31,			December 31,			December 31,			December 31,
		2011			2010			2011			2010
Cash flows from operating activities:
	Net income	$	8,680,000		$	11,314,000		$	49,332,000		$	56,045,000
	Adjustments to reconcile net income to net cash from operating activities:
	Depreciation		5,124,000			5,280,000			20,219,000			20,925,000
	Amortization of intangible assets		802,000			872,000			3,076,000			3,585,000
	Amortization of stock awards		1,079,000			1,037,000			4,204,000			4,035,000
	Stock option compensation expense		317,000			323,000			1,312,000			1,314,000
	Excess tax benefits from stock-based compensation		(309,000	)		-			(404,000	)		(186,000	)
	Deferred financing fees		97,000			97,000			388,000			231,000
	Non-cash postretirement benefits curtailment gain		(133,000	)		(385,000	)		(275,000	)		(3,451,000	)
	Net change in receivables, inventories and trade payables		8,054,000			7,116,000			(17,412,000	)		(2,417,000	)
	Contributions to qualified pension plans		(634,000	)		(657,000	)		(2,586,000	)		(2,271,000	)
	Net change in other assets and liabilities		(3,465,000	)		2,478,000			(2,968,000	)		16,054,000
	Net cash from operating activities		19,612,000			27,475,000			54,886,000			93,864,000
Cash flows from investing activities:
	Capital expenditures		(3,053,000	)		(4,117,000	)		(14,918,000	)		(15,397,000	)
	Dispositions of property, plant and equipment		-			34,000			210,000			141,000
	Acquisition of business, net of cash received		-			-			(39,610,000	)		-
	Net cash used in investing activities		(3,053,000	)		(4,083,000	)		(54,318,000	)		(15,256,000	)
Cash flows from financing activities:
	Cash dividends paid		(6,430,000	)		(6,356,000	)		(25,082,000	)		(24,477,000	)
	Purchase of treasury stock		(3,965,000	)		(18,254,000	)		(38,684,000	)		(27,043,000	)
	Excess tax benefits from stock-based compensation		309,000			-			404,000			186,000
	Proceeds from exercise of stock options		-			49,000			39,000			153,000
	Credit facility issuance costs		-			(13,000	)		-			(1,948,000	)
	Net cash used in financing activities		(10,086,000	)		(24,574,000	)		(63,323,000	)		(53,129,000	)
Effect of exchange rate changes on cash and cash equivalents			(347,000	)		(972,000	)		1,321,000			(1,234,000	)
Net increase (decrease) in cash and cash equivalents			6,126,000			(2,154,000	)		(61,434,000	)		24,245,000
Cash and cash equivalents - Beginning of period			219,088,000			288,802,000			286,648,000			262,403,000
Cash and cash equivalents - End of period		$	225,214,000		$	286,648,000		$	225,214,000		$	286,648,000

KAYDON CORPORATION
EARNINGS PER SHARE
		Fourth Quarter Ended						Full Year Ended
		December 31,			December 31,			December 31,			December 31,
		2011			2010			2011			2010
Earnings per share - Basic
	Net income	$	8,680,000		$	11,314,000		$	49,332,000		$	56,045,000
	Less: Net earnings allocated to participating securities - Basic
			(87,000	)		(119,000	)		(513,000	)		(602,000	)
Income available to common shareholders - Basic		$	8,593,000		$	11,195,000		$	48,819,000		$	55,443,000
Weighted average common shares outstanding - Basic			31,763,000			32,935,000			32,113,000			33,112,000
Earnings per share - Basic		$	0.27		$	0.34		$	1.52		$	1.67
Earnings per share - Diluted
	Net income	$	8,680,000		$	11,314,000		$	49,332,000		$	56,045,000
	Less: Net earnings allocated to participating securities - Diluted
			(87,000	)		(119,000	)		(513,000	)		(602,000	)
Income available to common shareholders - Diluted		$	8,593,000		$	11,195,000		$	48,819,000		$	55,443,000
Weighted average common shares outstanding - Diluted
	Weighted average common shares outstanding - Basic		31,763,000			32,935,000			32,113,000			33,112,000
	Potential dilutive shares resulting from stock options		13,000			22,000			22,000			25,000
	Weighted average common shares outstanding - Diluted		31,776,000			32,957,000			32,135,000			33,137,000
Earnings per share - Diluted		$	0.27		$	0.34		$	1.52		$	1.67

KAYDON CORPORATION
Reportable Segment Information
(Amounts in thousands)
	Fourth Quarter Ended						Full Year Ended
	December 31,			December 31,			December 31,			December 31,
Net sales	2011			2010			2011			2010
Friction Control Products	$	58,495		$	61,533		$	255,025		$	299,009
Velocity Control Products		20,436			14,929			89,766			60,208
Other Industrial Products		29,182			28,501			115,329			104,771
Total consolidated net sales	$	108,113		$	104,963		$	460,120		$	463,988
	Fourth Quarter Ended						Full Year Ended
	December 31,			December 31,			December 31,			December 31,
Operating income	2011			2010			2011			2010
Friction Control Products	$	4,902		$	11,761		$	37,382		$	61,317
Velocity Control Products		3,439			2,843			21,199			14,265
Other Industrial Products		3,839			3,515			13,708			9,031
Total segment operating income		12,180			18,119			72,289			84,613
Items not allocated to segment operating income		(234	)		(1,014	)		(2,053	)		(2,994	)
Interest expense		(95	)		(98	)		(388	)		(231	)
Interest income		114			171			491			486
Income before income taxes	$	11,965		$	17,178		$	70,339		$	81,874
The Company has two reporting segments: Friction Control Products and Velocity Control Products. The Company’s remaining operating segments are combined and disclosed as "Other Industrial Products."

Kaydon Corporation
Reconciliation of Non-GAAP Measures
(Amounts in thousands)
		Fourth Quarter Ended						Full Year Ended
		December 31,			December 31,			December 31,			December 31,
	Free cash flow, as defined (non-GAAP)	2011			2010			2011			2010
Net cash from operating activities (GAAP)		$	19,612		$	27,475		$	54,886		$	93,864
Capital expenditures, net of dispositions			(3,053	)		(4,083	)		(14,708	)		(15,256	)
Free cash flow, as defined (non-GAAP)		$	16,559		$	23,392		$	40,178		$	78,608
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.
		Fourth Quarter Ended						Full Year Ended
		December 31,			December 31,			December 31,			December 31,
		2011			2010			2011			2010
	EBITDA, as defined (non-GAAP)
Net income (GAAP)		$	8,680		$	11,314		$	49,332		$	56,045
Net interest (income)/expense			(19	)		(73	)		(103	)		(255	)
Provision for income taxes			3,285			5,864			21,007			25,829
Depreciation and amortization of intangible assets			5,926			6,152			23,295			24,510
Stock-based compensation expense (1)			1,396			1,360			5,516			5,349
EBITDA, as defined (non-GAAP)		$	19,268		$	24,617		$	99,047		$	111,478
	(1) 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.

Kaydon Corporation
Reconciliation of Non-GAAP Measures (continued)
(Amounts in thousands)
		Fourth Quarter Ended						Full Year Ended
		December 31,			December 31,			December 31,			December 31,
		2011			2010			2011			2010
	Operating income, as adjusted
Operating income (GAAP)		$	11,946		$	17,105		$	70,236		$	81,619
Arbitration costs			5,177			596			6,217			2,326
Consolidation costs			-			740			2,359			3,665
Due diligence costs			198			1,027			1,244			3,989
Purchase accounting costs			-			-			527			-
Severance costs			280			177			414			383
Curtailment gain			(133	)		(385	)		(275	)		(3,451	)
Operating income, as adjusted (non-GAAP)		$	17,468		$	19,260		$	80,722		$	88,531
	EBITDA, as adjusted
EBITDA, as defined above (non-GAAP)		$	19,268		$	24,617		$	99,047		$	111,478
Arbitration costs			5,177			596			6,217			2,326
Consolidation costs, net of depreciation			-			435			2,359			2,531
Due diligence costs			198			1,027			1,244			3,989
Purchase accounting costs			-			-			527			-
Severance costs			280			177			414			383
Curtailment gain			(133	)		(385	)		(275	)		(3,451	)
EBITDA, as adjusted (non-GAAP)		$	24,790		$	26,467		$	109,533		$	117,256
	Net income, as adjusted
Net income (GAAP)		$	8,680		$	11,314		$	49,332		$	56,045
Arbitration costs *			3,756			393			4,482			1,605
Consolidation costs *			-			487			1,638			2,514
Due diligence costs *			144			676			866			2,690
Purchase accounting costs *			-			-			365			-
Severance costs *			203			117			296			259
Curtailment gain *			(97	)		(253	)		(195	)		(2,330	)
Net income, as adjusted (non-GAAP) *		$	12,686		$	12,734		$	56,784		$	60,783
	* Taxed at effective tax rate for each quarter
	Earnings per share - diluted, as adjusted
Earnings per share - Diluted (GAAP)		$	0.27		$	0.34		$	1.52		$	1.67
Arbitration costs *			0.12			0.01			0.14			0.05
Consolidation costs			-			0.01			0.05			0.08
Due diligence costs			-			0.02			0.03			0.08
Purchase accounting costs			-			-			0.01			-
Severance costs			0.01			-			0.01			0.01
Curtailment gain			-			(0.01	)		(0.01	)		(0.07	)
Earnings per share - Diluted, as adjusted (non-GAAP)		$	0.40		$	0.38		$	1.75		$	1.81
Kaydon's management believes that certain non-GAAP measures of operating income, as adjusted, EBITDA, as adjusted, net income, as adjusted, and earnings per share - diluted, as adjusted, provide investors with additional information to assess the Company's financial performance. However, these measures should be viewed as supplemental data, rather than substitutes or alternatives to the comparable GAAP measures.