Item 1. BUSINESS
a. General Development of Business
Kaydon Corporation (the "Company" or "Kaydon") was formed in October 1983, as a wholly owned subsidiary of Bairnco Corporation ("Bairnco" or "former parent"), when it acquired all of the assets and assumed certain liabilities, other than amounts due from affiliates, from a subsidiary of Keene Corporation, another wholly owned subsidiary of Bairnco, which was then known as Kaydon Corporation and is now inactive. The Company was spun off from Bairnco in April 1984 and is no longer a member of its consolidated group. This spinoff was effected in the form of a 100 percent stock dividend to stockholders of the former parent's common stock. On June 30, 1986, Kaydon Ring and Seal, Inc., a wholly owned subsidiary of Kaydon, acquired for $29,600,000 certain assets and liabilities of the Piston Ring and Seal Division of Koppers Company, Inc., a manufacturer of piston rings and shaft seals. This acquisition was consummated by Kaydon Ring and Seal, Inc. with loaned funds from Kaydon. On July 17, 1987, Kaydon acquired for $5,100,000 certain assets and liabilities of the Spirolox operation of TRW, Inc., a manufacturer of specialty retaining rings. This acquisition was consummated with funds acquired through bank credit obtained in the normal course of business. On June 23, 1989, Kaydon Corporation, through its newly formed, wholly owned subsidiaries, Kaydon Acquisition Corp. III and Kaydon Acquisition Corp. IV, acquired for $22,710,000 all of the stock of I.D.M. Electronics Ltd., a United Kingdom corporation, and KDI Electro-Tec Corp., a Delaware corporation, from KDI Corporation. I.D.M. Electronics Ltd. and Electro-Tec Corp. manufacture high-performance, precision slip-rings, slip-ring capsules and slip-ring assemblies. Slip-rings are complex, electromechanical devices used to transmit electric signals or electrical power between the rotating and stationary members of an assembly, such as a gyro and its housing. The purchase price was financed by credit obtained in the normal course of business.
On December 16, 1991, Kaydon Corporation, through its wholly owned subsidiaries, Kaydon Acquisition Corp. III and Kaydon Acquisition Corp. U.K. Ltd., acquired for L.24,000,000 (approximately $43,440,000 when translated at the exchange rate in effect at the time of purchase) all of the capital stock of Prizerandom Limited, a United Kingdom corporation, from Clairmont PLC, a Scotland corporation. Prizerandom Limited is a wholly owned subsidiary of Clairmont PLC and is the holding company for Cooper Bearings Limited, a United Kingdom corporation, which was the primary subject of the acquisition. Cooper Bearings Ltd. is a holding company consisting of the following operating subsidiaries, all of which are manufacturers or distributors of complete bearings and related components parts:
Cooper U.K. is a manufacturing operation located in King's Lynn, Norfolk - U.K. that produces a range of split roller bearings including both a standard line and custom-designed product. Split bearings are designed specifically to aid the customer in solving problems where the application of full round bearings would be impractical. Cooper U.S. and Cooper Germany are distribution operations located in Virginia Beach, VA - U.S. and Krefeld, Germany, respectively. The purchase price was financed through Kaydon Corporation cash plus bank loans from the National Bank of Detroit and Continental Bank, U.K.
b. and c. Financial Information About Industry Segments and Narrative Description of Business
The Company designs, manufactures and sells custom-engineered products for a broad and diverse customer base. The Company's principal products include antifriction bearings, bearing systems, filters, filter housings, high-performance rings, sealing rings, specialty retaining rings, shaft seals and slip-rings. These products are used by customers in a variety of medical, instrumentation, material handling, machine tool positioning, aerospace, defense, construction and other industrial applications.
Products
Kaydon works closely with its customers to engineer the required solutions to their design problems. Design solutions are frequently unique to a single customer or application. Depending upon the nature of the application, the design may be used over a protracted time period and in large numbers, or it may be for a single use. The antifriction bearing products of Kaydon incorporate various types of rolling elements. The ball, tapered roller, cylindrical roller and needle roller bearings manufactured by Kaydon are made in sizes ranging from needle bearings with a 1/2-inch outside diameter to heavy-duty ball bearings with an outside diameter of 180 inches. These antifriction products are fabricated from aluminum, bearing-quality steel, stainless steel or special tool steels. They often incorporate a broad range of features such as gearing, special sealing systems and mounting arrangements in combination with other mechanical components. As a custom manufacturer, many diverse applications are served. Typical applications include large-diameter ball bearings for hydraulic cranes and excavators; thin-section ball bearings for rotating joints of industrial robots; lightweight airborne radar bearings; large-diameter aluminum roller bearings for military vehicle turret systems; needle roller bearings for passenger car transmissions; loose needle rollers for universal joints utilized in light trucks, agricultural tractors
and passenger cars; special coalescing elements and filter housings for diesel fuel filtration on both commercial and military vehicles; hydraulic filter elements for tractor-mounted farm implement units; and ultra high-precision roller bearings for gear box applications. Kaydon's subsidiary, Kaydon Ring and Seal, Inc., manufactures metallic medium and large bore-size rings for low and medium-speed internal combustion engines, steam engines, pumps and reciprocating compressors. Sealing rings are engineered with metallic and nonmetallic products used to limit the leakage of fluids and gases within engines and a wide variety of other mechanical products. Sealing rings are used in industrial applications, such as: compressors, transmissions, hydraulic and pneumatic cylinders, and commercial and military aircraft, jet engines and control apparatus applications. Shaft seals are used to seal gases or liquids usually under extreme conditions of speed, pressure or temperature. Shaft seals are fabricated from a variety of materials depending on the application. Electro-Tec Corp. and I.D.M. Electronics Ltd., wholly owned subsidiaries of Kaydon Corporation, design and manufacture precision, high-performance slip-rings, slip-ring assemblies, capsules and related electromechanical devices to meet customers' exact needs and specifications. Slip-rings are manufactured from injection and transfer-molded plastics, aluminum and stainless steel castings, bearings and electronic components and connectors, and are sometimes subjected to an electro-deposition process. They are used to transmit electrical signals or power between the rotating and stationary members of an assembly and can be found in combat vehicles, aircraft inertial guidance systems, telecommunications satellites, aircraft targeting systems and medical diagnostic equipment. Cooper Bearings Ltd., a wholly owned subsidiary of Kaydon Corporation, designs and manufactures a range of split roller bearings, which include both standard and custom-designed lines. Split bearings are designed specifically to aid the customer in solving problems where the application of full round bearings would be less desirable. The product is used in a wide range of applications but particularly those where space and ease of change are important selection criteria.
Approximately 69 percent of Kaydon's sales are to original equipment manufacturers, which incorporate the Kaydon products in the products they sell. Many of the applications for the Company's products also provide the opportunity for participation in the replacement or spare parts markets.
New Product and Industry Segment Information
On December 4, 1993 the Company acquired, for approximately $716,000, the assets of Kenyon Power Transmission Ltd. of Manchester, England. Kenyon manufactures pulleys and drive components which are complementary to the product offering of the Company's subsidiary, Cooper U.K., into which it will be absorbed. Subsequent to year end, on January 28, 1994 the Company acquired, for approximately $7,500,000, the assets of Industrial Tectonics Inc located in Dexter, Michigan. This company has been in existence since 1946 and is noted for the production of balls made of alloyed steel, plastic, tungsten carbide, glass and an assortment of other materials which are used in gauges, floats, measuring instruments, ball point pens and antifriction bearings. The Company has not made any other public announcement of, or otherwise made public information about, a new product or a new industry segment which would require the investment of a material amount of the Company's assets or which would otherwise result in a material cost.
Patents, Trademarks, Licenses, Etc.
The Company does not believe that any material part of its business is dependent on the continued availability of any one or all of its patents or trademarks.
Seasonal Nature of Business
The Company does not consider its business to be seasonal in nature.
Working Capital Practices
The Company does not believe that it or the industry in general has any special practices or special conditions affecting working capital items that are significant for an understanding of the Company's business.
Customers
Kaydon sells its products to over 1,000 companies throughout the world. The principal customers are generally large manufacturing corporations. During 1993, 1992 and 1991, sales to no single customer exceeded 10% of total sales.
Customers can generally be divided into four major market groups: Aerospace and Military, Replacement Parts and Exports, Special Industrial Machinery and Heavy Industrial Equipment. Sales to these customer groups for 1993, 1992 and 1991 are set forth in the following table:
Replacement parts are sold mainly through specialized distributors. Kaydon had export sales of $10,979,000 in 1993, $9,102,000 in 1992, and $10,762,000 in 1991, with most of such sales concentrated in Canada, Europe and Japan.
Marketing
Kaydon's sales organization consists of salespersons and representatives located throughout the United States, Canada, Europe and Asia. Salespersons are trained to provide technical assistance to customers, as well as to provide liaison with factory engineering staffs. A nationwide network of specialized distributors and agents provides local availability of Kaydon products to serve the requirements of the replacement market and small original equipment manufacturers.
Manufacturing
Kaydon manufactures virtually all of the products it sells and utilizes subcontractors only for occasional specialized services. Kaydon's products require sophisticated processes and equipment, and many of its products incorporate unique Kaydon-developed production techniques. Certain satellite and aircraft-type bearing products must meet extraordinary mechanical tolerances (for example, within 20 millionths of an inch) and many bearings and slip-rings are assembled in quality-controlled "white room" conditions. Nearly all of Kaydon's products require high levels of incoming quality control and process quality control. The manufacturing equipment required for Kaydon's operations entails a very high level of capital investment for any given level of sales.
Suppliers
Kaydon and its subsidiaries purchase large quantities of raw materials, mainly bearing-quality steel, special alloy steel, high-grade carbon and filter media, aluminum alloy and stainless steel castings, plastics, wire and electrical connectors, from multiple sources. Kaydon purchases large amounts of certain types of bearing-quality steel from a number of foreign suppliers. No significant supply problems have been encountered in recent years as relationships with suppliers have generally been good.
Environmental Matters
Reference is made to "Management's Discussion and Analysis" on pages 15 and 16 of Kaydon's 1993 Annual Report to Stockholders which is incorporated herein by reference.
Employees
On December 31, 1993, Kaydon employed 1,671 employees. Hourly employees at the Muskegon facilities (including Norton Shores) are represented by the International Association of Machinists and Aerospace Workers. The current collective bargaining agreement is effective until December 3, 1994. The Baltimore hourly employees are also represented by the International Association of Machinists and Aerospace Workers. The current collective bargaining agreement is effective until November 5, 1995. Greeneville hourly employees are represented by the United Steelworkers of America, with the current collective bargaining agreement effective until February 2, 1996. The remaining domestic factory employees, as well as all office employees, are non-union. Kaydon provides its employees with a full range of insurance, pension and deferred compensation benefits. The Company believes its levels of total compensation are equal to or better than comparable companies in communities adjacent to each facility.
Backlog
Kaydon sells certain products on a build-to-order basis that requires substantial order lead time. This results in a backlog of unshipped, scheduled orders. Other products are manufactured on the basis of sales projections or annual blanket purchase orders. Orders for such products are not entered into backlog until explicit shipping releases are received. Kaydon's backlog was $84,385,000 at December 31, 1993 and $83,296,000 at December 31, 1992. Based on experience, management would expect to ship over the following twelve months about 90 percent of the year-end backlog. The backlog increase reversed a downward trend over the last several years. Backlog has become less indicative of future results as the Company has made efforts to shorten manufacturing lead times, creating a faster response to customer orders.
Competition
Kaydon competes with divisions of SKF Industries, Timken Corporation, Torrington/Fafnir, Rotek, FAG, EG&G Inc., Litton Poly-Scientific and numerous other smaller companies. The markets served by Kaydon are large and extremely competitive. The major domestic competitors generally produce a wide line of standard products and do not specialize in custom products. The major domestic bearing manufacturers nonetheless do offer special-engineered bearings. The markets for Kaydon's special-machined components, fabricated products, filters, rings and seals are very diverse. Consequently, management feels that the size of the total market for such products cannot be meaningfully estimated. In all of the markets served by Kaydon, the principal methods of competition involve price, product performance, engineering support and timely delivery. Many of Kaydon's domestic competitors are part of large, worldwide manufacturing concerns and have significantly greater financial resources. While foreign competition is intense and growing for all industrial components, the special nature of Kaydon's products and the close working relationship with its customers have somewhat limited the impact of foreign competition on domestic business.
Government Contracts and Renegotiation
Various provisions of federal law and regulations require, under certain circumstances, the renegotiation of military procurement contracts or the refund of profits determined to be excessive. Based on Kaydon's experience under such provisions, management believes that no material renegotiation or refunds (if any) will be required.
d. Information About International Operations
Information with respect to operations by geographic area appears in Note 15, "Business Segment Information" of the Notes to Consolidated Financial Statements set forth on page 28 of the Annual Report to Stockholders, which is incorporated herein by reference. Fluctuating exchange rates and factors beyond the control of the Company, such as tariffs and foreign economic policies, may affect future results of foreign operations.
Item 2.
Item 2. PROPERTIES
The following chart lists the principal locations, activity (use) and square footage of Kaydon's most significant facilities as of December 31, 1993 and indicates whether the property is owned or leased:
Kaydon owns the two manufacturing facilities located in Muskegon (Norton Shores), the assembly facility located in Newaygo, the manufacturing facilities located in Sumter, Greeneville, LaGrange (lease option to purchase exercised June 1, 1993), Baltimore, Blacksburg, Monterrey, Mexico, and King's Lynn, England and the warehouse facility in Virginia Beach. The other property
in Muskegon was leased (under a capitalized lease) in connection with a $10,000,000 Industrial Revenue Bond (IRB) financing for a term expiring January 15, 2009, with an option to purchase the property during the pendency of the lease and an obligation to purchase the property for nominal consideration upon its expiration. The IRB's were paid off on January 4, 1993, the lease was terminated, and the Company took title to the land. Due to the continuing shrinkage of the military and aerospace markets, Kaydon consolidated its three Muskegon, Michigan plants into two buildings and closed this plant which is located within a modern industrial park during the year. Management does not anticipate a material impact, if any, on earnings relating to the sale of this facility and anticipates that the desirable location will allow the plant facility to be sold for at least book value. Kaydon operates at two sites in Sumter, one site is owned and the other is leased (under a capitalized lease) in connection with a $4,000,000 Industrial Revenue Bond financing for a term expiring April 1, 1997, with an option to purchase the property during the pendency of the lease and an obligation to purchase the property for nominal consideration upon its expiration. The St. Louis property is leased for a term expiring July 31, 1997. The property in Reading, England, is leased for a term expiring May 1, 2009. The Krefeld, Germany property is leased for a term expiring September 30, 1994. The Corporate office located in Clearwater, Florida is leased for a term expiring January 31, 1999.
Kaydon Corporation is the sole shareholder of the following operating subsidiaries:
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company, together with other companies, certain former officers, and certain current and former directors, has been named as a co-defendant in lawsuits filed in the federal court in New York. The suits purport to be class actions on behalf of all persons who have unsatisfied personal injury and property damage claims against Keene Corporation. The premise of the suits is that assets of Keene were transferred to Bairnco subsidiaries, of which Kaydon was one in 1983, at less than fair value. The suits also allege that the Company, among other named defendants, was a successor to and alter ego of Keene. While the ultimate outcome of this litigation is unknown at the present time, management believes that it has meritorious defenses to the asserted claims. Accordingly, no provision has been reflected in the financial statements for any alleged
damages. Management believes that the outcome of this litigation will not have a materially adverse effect on the Company's financial position. Various other claims, lawsuits and environmental matters arising in the normal course of business are pending against the Company. Management believes that the outcome of these matters will not have a materially adverse effect on the Company's financial position or results of operations.
Item 4.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1993.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER MATTERS
a. and c. Market Information and Dividends
Information regarding the market price of Kaydon's common stock appears in Note 14, "Quarterly Results of Operations" of the Notes to Consolidated Financial Statements on page 27 of Kaydon's 1993 Annual Report to Stockholders, which is incorporated herein by reference. During 1992, the Company effected a two-for-one stock split; accordingly, all applicable financial data has been restated to reflect the split. Kaydon's common stock is listed on NASDAQ (over the counter) under the symbol KDON. Kaydon declared cash dividends during 1991, 1992 and 1993 as follows (on a per-share basis):
Effective with the cash dividend declared in December 1993 and paid in January 1994, Kaydon adopted a plan which calls for quarterly cash dividends of $0.10 per share. This recent increase in the dividend amount reflects Kaydon management's continuing confidence in the growing financial strength of the Company and their expectation of continued earnings growth.
b. Holders
The number of common equity security holders is as follows:
Item 6.
Item 6. SELECTED FINANCIAL DATA
Reference is made to "Financial History" on page 14 and "Management's Discussion and Analysis" on pages 15 and 16 of Kaydon's 1993 Annual Report to Stockholders, which is incorporated herein by reference.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to "To Our Stockholders" on pages 2 through 4 and "Management's Discussion and Analysis" on pages 15 and 16 of Kaydon's 1993 Annual Report to Stockholders, which is incorporated herein by reference.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and related notes included on pages 18 through 28 and "Quarterly Results of Operations" on page 27 of Kaydon's 1993 Annual Report to Stockholders, which is incorporated herein by reference. Financial statement schedules are included in Part IV of this filing.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required with respect to directors of Kaydon is included in the Proxy Statement for the 1994 Annual Meeting of Stockholders of Kaydon, which has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The information required with respect to executive officers of the company is as follows:
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the Proxy Statement for the 1994 Annual Meeting of Stockholders of Kaydon, which has been filed with the Securities and Exchange Commission and is incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is included in the Proxy Statement for the 1994 Annual Meeting of Stockholders of Kaydon, which has been filed with the Securities and Exchange Commission and is incorporated herein by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the Proxy Statement for the 1994 Annual Meeting of Stockholders of Kaydon, which has been filed with the Securities and Exchange Commission and is incorporated herein by reference.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. 1. Financial Statements
The following consolidated financial statements of the Company are included in the Annual Report of the registrant to its stockholders for the year ended December 31, 1993 which is incorporated herein by reference in Part II, Item 8 of this report.
2. Financial Statement Schedules
The following financial statement schedules and related Report of Independent Public Accountants on Financial Statement Schedules are included in this Form 10-K on the pages noted:
All other schedules required by Form 10-K Annual Report have been omitted because they were inapplicable, the required information is included in the notes to the consolidated financial statements or otherwise is not required under instructions contained in Regulation S-X.
Financial statements of the Company have been omitted since the Company is primarily an operating company and all subsidiaries included in the consolidated financial statements filed are wholly owned subsidiaries.
3. Reference to Exhibits
Reference is made to the Exhibit Index which is found on pages 27 through 34 of this Form 10-K.
b. Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth quarter of 1993.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of Kaydon Corporation:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Kaydon Corporation and Subsidiaries' annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 20, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed at Item 14.a.2. above are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen & Co. - - ------------------------- ARTHUR ANDERSEN & CO. Grand Rapids, Michigan January 20, 1994
(a) Plant and equipment of businesses acquired at date of acquisition. (b) Reclassification of plant and equipment. (c) Adjustment for change in foreign currency exchange rate.
(a) Adjustment for change in foreign currency exchange rate.
(1) Calculated based on daily balances. (2) Calculated based on daily rates.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Kaydon has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of Kaydon and in the capacities and on the dates indicated.
c. 1. Exhibits Index