Kdn Report

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Kdn Report

  1. 1. BABSON COLLEGE FUND Rating: BUY Kaydon Corp. (KDN) Price Target: $30.85 Industry: Specialty Bearings FY06(A) FY07(A) 1Q08(A) 2Q08(A) 3Q08(A) 4Q08(E) FY08(E) FY09(E) Close 19-Nov-2008 Sales (mm) 403,992 451,382 123,284 139,905 126,803 136,102 526,094 575,005 Price $24.89 Rev. Growth 13.9% 11.7% 15.3% 23.4% 18.1% 10.0% 16.6% 9.3% Shares Outstanding (mm) 34 EBITDA Margin 28.7% 29.2% 25.7% 26.9% 23.9% 24.0% 25.1% 23.9% Market Cap (mm) $900 ROA 8.2% 8.5% 8.9% 8.7% Source: Capital IQ ROE 14.0% 13.8% 10.0% 9.9% Consensus EPS $ 2.17 $ 2.41 $ 0.52 $ 0.63 $ 0.50 $ 0.53 $ 2.20 $ 2.11 BCF Est. EPS $ 2.17 $ 2.41 $ 0.52 $ 0.63 $ 0.50 $ 0.52 $ 2.18 $ 2.17 Price/Earnings 11.5X 10.3X 10.5X 10.4X 10.6X 11.4X 11.4X 11.5X Basic Information Price/Sales 2.1X 1.9X 1.8X 1.7X 1.7X 1.6X 1.6X 1.5X Beta 1.4 Price/Book 2.0X 1.8X 1.2X 1.1X FY End: Dec 31 Dividend Yield 2.8% Diluted EPS (ttm) $2.36 Investment Thesis Long Term EPS Growth 15% Kaydon is a major player in the rapidly growing wind power generation Cash per share $7.69 market; however, the stock is currently not illustrating any of that business’s LT Debt to Total Capital 0% % of S&P 500 0% potential upside. We believe the company’s end markets are more stable % of Benchmark (IYJ) 0.07% than what is currently being discounted by the market. Moreover, Kaydon’s Book Value per share $21.25 lack of debt and almost $8 per share in cash on the balance sheet represent ttm as of Sept. 2008 the possibility of substantial short-term catalysts. Source: Capital IQ, Northfield Investment Outlook and Valuation Company Overview We rate KDN a BUY. Shares currently trade at about 4.7X trailing EV/EBITDA Kaydon is a designer and which marks a new valuation trough for KDN; it had bottomed out in the manufacturer of custom- last two recessions at slightly lower than 6.0X trailing EV/EBITDA. Our price engineered, performance-critical target of $30.85 represents about 6.0X 2008 EV/EBITDA. Even though products serving many different customers. Its three main Kaydon is caught in a cyclical downturn, it should trade no lower than past segments produce friction control lows given its presence in the wind market which was not as large of a products, such as specialty percentage of its business in the past. bearings; velocity control products, such as industrial shock absorbers; Risks to Outlook and sealing products, such as engine rings. Disappearance of Federal Funds – a strong driver of wind capacity production is the Production Tax Credit (PTC) which is authorized by Source: Capital IQ Congress. Should this credit disappear, future wind capacity, and KDN, will be harmed. Analysts Acquisition Risk – Kaydon recently made its largest acquisition in the last Eric S. Crawley seven years and is poised to make another large one. If the company is unable to assimilate acquisitions efficiently, or spends its money unwisely, Kaydon’s returns could be smaller in the future. BCF - KDN 1/20 11/18/08
  2. 2. BABSON Kaydon Corp. (KDN) COLLEGE FUND RECENT FINANCIAL PERFORMANCE Kaydon does not give formal guidance so the few analysts that cover the stock, about seven, have a hard time predicting how the company will perform on a quarter-to-quarter basis. For example, on the past earnings release, KDN missed the street by about $0.10 and shares soared more than 30% over the next week. The habit of the Street and its treatment of KDN is characterized by ratcheting up estimates as the company beats, and then cutting them sharply should the company disappoint. This is happening currently, as 2008 earnings estimates had gone from about $3 to about $2 as the year has progressed, creating a lower hurdle. Outside of that, Kaydon has been posting relatively solid numbers amid an increasingly weakening environment. The company recorded about a 13% organic increase in sales for the quarter, though the 2007 comp was an easy one. Still, anything positive in today’s economic backdrop is encouraging. The reason why net income has been relatively stable is the company’s exposure to the wind power generation market. Sales to this industry are expected to be about $90 million in 2008, up from about $32.8 million in 2007. They are expected to reach $140 million in 2009. These revenues, about 20% of total, are so far offsetting the company’s weaker end markets. One drastic change throughout the past few quarters is the company’s decrease in interest income from over $4 million last year, to about $1.5 million this year in each quarter. This is mainly due to the effective interest rate on their cash at 2.2%, down from over 5% last year. Though this decrease in interest income depressed earnings by about $0.06 from last quarter, it is positive to see the company is not chasing unsafe yields. Cash currently represents about $7.69 per share on the balance sheet and it is doubtful the company will remain content with earning 2.2% on it for long. Kaydon’s acquisition strategy has been to minimize debt, accumulate cash, and then buy something struggling. Kaydon now has no debt, plenty of cash, and there are struggling companies aplenty. Capital expenditures appear to be a tailwind for cash generation going forward. The winning servants of the wind power generation market will not be technology leaders. Especially in windmills, the technology has been around for quite some time. The winners will therefore have the capacity to serve the growth. Kaydon has ramped up capital expenditures over the past three years from $12 to $70 million in order to create capacity. The company has signaled that this is coming to an end, and capex could trail down to maintenance levels of about $20 to $30 million over the next couple years. Certainly, an extra $50 million annually would be beneficial. Finally, the company completed the redemption of the remainder of its long-term debt on September 21, 2008. Kaydon had issued $200 million of contingent-convertible bonds due 2023. All notes were converted to about 6.8 million shares. However, these shares were already included in the company’s diluted share count, so no assumptions need to be changed going forward about the diluted share count. BCF - KDN 2/20 11/18/08
  3. 3. BABSON Kaydon Corp. (KDN) COLLEGE FUND YTD KDN price performance Source: BigCharts.com One year return of KDN vs. iShares Dow Jones US INDUSTRIAL ETF (IYJ), and S&P 500 Source: BigCharts.com BCF - KDN 3/20 11/18/08
  4. 4. BABSON Kaydon Corp. (KDN) COLLEGE FUND INVESTMENT OUTLOOK AND VALUATION Cyclical Business The company’s main products are specialized bearings. This is a highly cyclical business. Earnings compressed in both the early 90’s and 00’s, and are expected to contract again in 2008 and 2009. This time around, however, they are estimated to be buffeted by demand for the company’s wind related products, mainly large diameter bearings. The wind power generation industry will be explained below in greater detail, but it is driven by government subsidies. Another end market, defense and aerospace, is also deemed relatively stable through the cycles as it is mainly paid for by the government as well. These markets represent about 40% of Kaydon’s revenue footprint. The US government is certainly not infinitely rich, but it has deeper pockets than many of Kaydon’s competitors’ other end markets, such as automotive and commercial aerospace. Short-term Catalysts Kaydon’s recommendation does not hinge on an acquisition it will make, but it is useful to note that the company’s powder keg is full and primed. Kaydon’s largest acquisition to date was Ace Controls in 2001 for $70.6 million when Kaydon had no debt and the industry was in recession. We currently find ourselves in the same situation and KDN now has double the cash on its balance sheet as well. Valuation Kaydon is valued mainly on an EV/EBITDA basis. This is logical as the company’s production is highly capital intensive, and there is a fair amount of non-cash charges like depreciation each year that skew the true measure of Kaydon’s operations. 2008 depreciation is expected to be about $22 million, almost 25% of CFO. BCF - KDN 4/20 11/18/08
  5. 5. BABSON Kaydon Corp. (KDN) COLLEGE FUND RISKS TO INVESTMENT The future is not automatically bright for Kaydon, however. There are a few risks that could seriously compromise the investment thesis. They include: Disappearance of Federal Funds – A strong motivation to invest in wind power is a current power generation subsidy that the government offers under the Production Tax Credit (PTC). The PTC was enacted in 1992 and has since gone through many short-term extensions. It was most recently extended in October 2008 by Congress and allows for a 2.1c income tax credit per kilowatt hour generated by a wind turbine. The total earmark in 2007 was $2.5 - $3 billion. Although the PTC has only been allowed to lapse for three individual years since inception in 1992, the year after each lapse proved detrimental for the wind power generation industry and its suppliers. The PTC is up for expiration again December 31, 2009 and there is no guarantee is will be extended. Acquisition Risk – Although Kaydon can generate organic growth, it also relies on acquisitions to drive the top line. The company has made a series of bolt-on acquisitions over time and once in a while it levers up to purchase something large. Below is a history of the company’s acquisitions with price paid in millions. Kaydon Corp Acquisitions 2007 Avon Bearings 55.0 10/28/07 Wide-dimameter bearings 2005 Purafil 42.7 1/7/05 Filtration company 2002 Printed Circuit 4.4 5/17/02 Printed circuit boards and fexible printed tapes 2001 ACE Controls 70.6 3/1/01 Linear decleration products 2000 Tridan Group 46.6 8/28/00 Specialty production AC equipment; Alloy manufacturer 1999 Focal Technologies 8.8 Q4'99 Fiber-optic and fluid transmission devices Filterdyne 5.0 Q4'99 Filtration and vacuum distillation systems 1997 Gold Star 4.5 3/11/97 Custom designed cylinders Great Bend 22.9 5/29/97 Custom designed cylinders 1996 Benton Harbor 10.7 2/1/96 Hydraulic cylinders and fluid power components 1995 Seabee 22.7 8/31/95 Large hydraulic cylinders and alloy steel castings 1994 Industrial Tectonics 7.3 1/28/94 Specialty balls Most acquisitions do not meet the buyer’s expectations, and as Kaydon grows, it must make more small acquisitions or considerably larger ones, in order to move the dial. Another risk is the double-edged nature of Kaydon’s success. It has the highest gross margin of its peers. It prides itself with entering only businesses where others find it too difficult to operate. As time goes by and the company grows, these opportunities appear less frequently, and the risk rises that Kaydon will acquire something unwise. BCF - KDN 5/20 11/18/08
  6. 6. BABSON Kaydon Corp. (KDN) COLLEGE FUND BUSINESS DESCRIPTION Kaydon is a designer and manufacturer of custom- engineered, performance-critical products serving many different customers. About 70% of sales are domestic. Its three main segments produce friction control products, velocity control products, and sealing products. Friction Control Products – These are the most identifiable products with Kaydon. They include specialty bearings for many end markets, and include products like anti-friction bearings, split roller bearings, and specialty balls. Velocity Control Products – Products include industrial shock absorbers (like what lies at the end of a metro line), safety shock absorbers, gas springs, and rotary dampers. Sealing Products – These are mostly for the aerospace and defense markets and include products like standard ring and seal products. Other businesses include gas filtration systems, machine tool components, dies, presses, and benders. Kaydon benefits from a diverse customer base in many different industries. The smaller end markets, along with the catch-all, General Industrial, have been the most negatively affected by the current economic downturn while the Defense and Power Generation markets have been the most stable. The defense market is actually where Kaydon initially made a name for itself as a mission-critical, custom manufacturer. In 1941 it began making the bearing housings for different rotating deck guns for the US Navy. Since then it has expanded into providing bearings for tank turrets and helicopters, but the largest piece of its current defense business is for the HMMWV and its successor, the MRAP. This is notable because the Mine Resistant Ambush Protected (MRAP) vehicle has been instrumental in saving US soldiers’ lives in Iraq and in Afghanistan. In June 2008, USA Today noted that roadside bomb attacks and fatalities were down almost 90%, partially due to the added protection of the MRAP on patrol instead of the traditional or up-armored Humvee. Given this vehicle’s success in saving lives, it is unlikely the current orders will be trimmed due to potential military spending cutbacks. BCF - KDN 6/20 11/18/08
  7. 7. BABSON Kaydon Corp. (KDN) COLLEGE FUND INDUSTRY DYNAMICS AND COMPETITION The ball bearing was invented by Leonardo da Vinci and throughout time has become something of a commodity. Kaydon has found success, however, not in what it makes, but rather where the company applies it. In short, Kaydon does not like competition. It would rather fill all the orders of a smaller run than just a few of a larger run. There are two ways to compete with a commodity product: be the low-price, high-volume player, or the high- price, custom player. Kaydon has found itself in the latter niche. For example, two larger companies, SKR ($3 billion market cap) and Timkin ($1 billion market cap) have much lower EBITDA margins. SKR returns 15.5% and Timkin returns 14%. This compares to Kaydon’s 24% EBITDA margin in Q3’08. A major driver of this is that the two larger companies compete heavily in the automotive and commercial aerospace markets which are more highly competitive. Kaydon has been able to string together enough niche applications that it can generate strong cash flow and returns on a larger basis. In this sense, the wind power generation market is a logical fit for Kaydon. There is no standard size for wind turbines, and it becomes more difficult to build stable bearings in larger applications. KDN’s last acquisition, Avon, specializes in this application, and can build bearings 240 inches in diameter. This fits the custom-engineered part of Kaydon’s strategy. Wind turbines are also mission critical. The larger towers are 80 meters tall and the last thing an owner of a wind farm needs is to be clambering up them in order to un-jam a rotor. Less friction equals more revolutions which equals more energy production. These parts cannot fail. 20% by 2030 There is a goal floating around Congress that the country should be producing 20% of its energy needs via renewable power by 2030. The PTC was enacted to encourage this goal. An interesting feature of this mandate is that it is state controlled, not federal. So some states like Oregon have a target of 25%, and Massachusetts has set a target of 4%. According to Dr. James Walker, the current president of the American Wind Energy Association, only about 1.5% of our nation’s energy needs are generated by wind power, but capacity is growing quickly. There is a current wind installed base of 18k megawatts. Four years ago there was 6k. At the moment, a kilowatt of wind power is the cheapest type of alternative energy to create. Hydro is hampered by location, and solar is coming down in price quickly, but there still needs to be technological advances before it is more competitive than wind power. BCF - KDN 7/20 11/18/08
  8. 8. BABSON Kaydon Corp. (KDN) COLLEGE FUND VALUATION Discounted Cash Flow Analysis Kaydon Discounted Cash Flow Year 2008 2009 2010 2011 2012 2013 Operating Income 110,301 113,699 131,310 152,727 189,611 233,828 Income Tax Expense 38,350 39,795 45,959 53,454 66,364 81,840 EBIAT 71,951 73,904 85,352 99,273 123,247 151,988 Depreciation 22,000 24,000 26,000 27,300 28,665 30,098 Capex 70,000 40,000 30,000 30,600 31,212 31,836 Change in WC 3,078 14,582 10,649 9,584 9,105 9,105 FCF to Enterprise 20,873 43,322 70,703 86,389 111,595 141,145 Terminal Value 1,425,290 FCF to Enterprise 20,873 43,322 70,703 86,389 111,595 1,566,436 NPV 958,082 Less Debt 0 Shareholders' Equity 958,082 Shares Out 34,165 $28.04 Value per Share Assumptions Year 2008 2009 2010 2011 2012 2013 Op. Inc. Growth 3.08% 15.49% 16.31% 24.15% 23.32% Tax Rate 35.00% 35.00% 35.00% 35.00% 35.00% Net Income 4.11% 15.49% 16.31% 24.15% 23.32% Depreciation 9.09% 8.33% 5.00% 5.00% 5.00% Capex -42.86% -25.00% 2.00% 2.00% 2.00% Change in WC 373.76% -26.97% -10.00% -5.00% 0.00% g 3.00% Beta 1.4 Risk Free Rate 3.40% Market Risk Premium 7.00% Cost of Capital 13.20% The discounted cash flow yields a price of $28.04. The driving assumptions behind this model are that wind revenues will continue to be strong and offset the drop off of Kaydon’s other businesses until they pick up again a couple years out. Also, capital expenditures are set to drop off to near maintenance levels over the next five years as management has prescribed. Note that KDN’s cost of capital, 13.2% is relatively high due to the fact that it has no debt. None of the aforementioned catalysts are modeled in, so this could be considered a base case scenario. If the company decided to make an acquisition, buy back stock, or lever up for an intelligent reason, the implied share price could be considerably higher. BCF - KDN 8/20 11/18/08
  9. 9. BABSON Kaydon Corp. (KDN) COLLEGE FUND Peer Group Analysis DuPont Drivers 11/19/2008 Kaydon Comparison of Peers Return Asset Leverage LTM LTM Market LTM Company Cap GM Debt/Cap on Sales Turnover A/E ROA ROE EV/EBITDA P/E Emerson Electric (EMR) 25,404 36.8% 33.1% 16.5% 1.2X 2.31 19.8% 45.7% 5.9X 10.5X Franklin Electric (FELE) 737 30.1% 33.3% 10.9% 1.1X 1.85 12.0% 22.2% 8.3X 16.1X Kennametal (KMT) 1,220 33.8% 24.5% 11.1% 1.0X 1.83 11.1% 20.3% 4.1X 7.7X RBC Bearings (ROLL) 412 33.6% 17.4% 18.6% 1.1X 1.45 20.5% 29.7% 5.8X 9.8X Mean 6,943 33.6% 27.1% 14.3% 1.1X 1.86 15.8% 29.5% 6.0X 11.0X Kaydon (KDN) 900 37.8% 0.0% 22.4% 0.7X 1.13 15.7% 17.7% 4.7X 11.9X Implied Valuation Current Price $25.00 Forward EBITDA 137,699 Current EV / EBITDA 4.7X Mean Multiple 6.0X Forward EBITDA 137,699 Implied Price $31.75 The above peer group was chosen for the following reasons. Emerson Electric is much larger than Kaydon, but it is known as a premiere engineered products company and at a level where Kaydon could reach some day. Franklin Electric manufactures mission critical, submersible pumps. Kennametal manufactures customized tools and dies. RBC is in the bearings market, but in the more mainstream markets. The implied value of Kaydon from its peers is $31.75. We feel KDN should be valued at least at 6.0X EV/EBITDA because KDN has higher gross and operating margins than its peers, generates a comparable return on assets, and does this with no debt. Yet, the company trades at a discount. BCF - KDN 9/20 11/18/08
  10. 10. BABSON Kaydon Corp. (KDN) COLLEGE FUND Historical Multiple Analysis Kaydon is valued primarily on an EV/EBITDA basis. To the right is a graph of the stock’s historical multiple performance. The graph demonstrates the effect of three recessions on the company’s multiple: around 1993, 2000, and 2008. EV/EBITDA appears to bottom out at just below 6.0X trailing EV/EBITDA. At $24.89, shares trade at about 4.7X trailing EV/EBITDA which represents a new multiple trough. This is reasonable as today’s economic environment seems more uncertain than in the early 90’s or even after September 11th. The past does not always predict the future, but this graph states that shares of KDN are trading at about where they should be when the economy is in a recession. We believe, however, it does not take into account the potential upside from wind revenues going forward. Implied Valuation Each of the three valuations contains certain strengths and weaknesses. To derive a final price target, we feel it prudent to take a weighted average of each output. Given this method, we propose a 12-month price target of $30.85. This represents about 6.0X trailing EV/EBITDA. Since Price Target Valuation Method Price Weight Kaydon generates stable cash flow, even in recessionary DCF 28.04 40% environments, we thought it appropriate to weight the DCF the Comp Co 31.75 30% heaviest. However, it does not take into account potential Historical Multiple 33.68 30% Price Target 30.85 catalysts of making an acquisition or buying back stocks. The comparison of peers is valuable, but the definition of a niche business is one that is not mainstream, and since Kaydon is a collection of them, finding the correct companies for comparison is challenging. We feel as though Kaydon’s current valuation relative to its history represents a bargain, but today’s economic environment appears more uncertain, so present and future recessions may not necessarily mirror past economic contractions. Therefore, we feel the above blend is a reasonable combination of valuation methodologies. BCF - KDN 10/20 11/18/08
  11. 11. BABSON Kaydon Corp. (KDN) COLLEGE FUND WALL STREET ANALYST RECOMMENDATION TRENDS Management does not give formal guidance, so Kaydon’s analyst core (about seven) tends to raise expectations until the company misses, then sharply reel them in. This situation is playing out now. The bar graph above illustrates Kaydon beating expectations throughout the year until it sorely missed this past quarter. Analysts have moved swiftly to take in expectations for about $3 EPS in 2009 to about $2. Analysts remain generally bullish, however. BCF - KDN 11/20 11/18/08
  12. 12. BABSON Kaydon Corp. (KDN) COLLEGE FUND MANAGEMENT AND MAJOR SHAREHOLDERS Management Bios The current President and CEO of Kaydon is James O’Leary (45). He was appointed by the Board in March of 2007 and has been a director of the company since 2005. Before Kaydon, he was the CFO of Beazer, a top-10 public homebuilder in the southeastern US from 2002 – 2005. His prior work experience is in the industrial space. He has been the champion of ramping up capacity for the wind market over the past two years. O’Leary took over for Brian Campbell who retired from Kaydon after 10 years at the helm at 66. He was the company’s Chairman, CEO, and CFO. Some have speculated that he was forced out because he did not want to give up his role as CFO. 66 does not seem that old for someone so involved in the company, but it is not necessarily a young ago to retire either. In any case, his departure was unexpected and speculation because of this is natural. We believe Kaydon’s current management team to be solid but nothing groundbreaking. O’Leary does not have a magnificent track record, but that does not mean he cannot create one at Kaydon. Major Shareholders BCF - KDN 12/20 11/18/08
  13. 13. BABSON Kaydon Corp. (KDN) COLLEGE FUND Analyst Certification The analysts on the cover of this report certify that all of the views expressed in this report accurately reflect their personal views about all the subject matter inside and that all assumptions were made with the highest level of due diligence possible. Explanation of Equity Research Ratings The Babson College Fund uses the following rating system: Buy – The stock is expected to outperform its sector over the next 12 months by more than 10%. Hold – The stock is expected to perform no more or less than 10% of it sector over the next 12 months. Sell – The stock is expected to underperform its sector over the next 12 months by more than 10%. The sector benchmark is IYJ for the Industrial sector. The Babson College Fund Portfolio Managers equity research rating distribution as of 11/18/08: Buy Hold Sell 100% 0% 0% References 1. BCF Estimates 2. Company website – www.kaydon.com 3. Company SEC filings 4. Earnings calls 5. Thomson ONE Banker 6. Capital IQ 7. BigCharts.com 8. Northfield BCF - KDN 13/20 11/18/08
  14. 14. BABSON Kaydon Corp. (KDN) COLLEGE FUND APPENDIX - SUPPORTING ANALYSIS Consolidated Statements of Income Kaydon Corp Income Statement 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E Sales 285,603 279,410 294,092 333,811 354,558 403,992 451,382 526,094 575,005 632,505 COGS 185,758 184,061 188,508 204,668 215,528 236,566 267,082 332,435 367,986 395,316 Gross Profit 99,845 95,349 105,584 129,143 139,030 167,426 184,300 193,659 207,019 237,189 SG&A 54,348 49,493 49,862 63,606 68,854 68,746 73,037 83,357 93,320 105,879 Operating Income 45,497 45,856 55,722 65,537 70,176 98,680 111,263 110,301 113,699 131,310 EBITDA 60,927 59,581 69,588 80,201 86,689 116,106 131,892 132,301 137,699 157,310 Interest expense 4,968 1,885 6,289 9,589 9,579 9,554 9,552 7,662 6,000 6,000 Interest income 4,676 2,695 2,493 3,987 8,747 16,253 18,051 6,698 6,000 6,000 Pretax Income 45,205 46,666 51,926 59,935 69,344 105,379 119,762 109,337 113,699 131,310 Taxes 16,725 16,380 18,174 21,577 22,814 35,871 42,055 38,350 39,795 45,959 Tax rate 37.0% 35.1% 35.0% 36.0% 32.9% 34.0% 35.1% 35.1% 35.0% 35.0% Net Income 28,480 30,286 33,752 38,358 46,530 69,508 77,707 70,987 73,904 85,352 Basic EPS $ 0.95 $ 1.01 $ 1.18 $ 1.38 $ 1.67 $ 2.50 $ 2.81 $ 2.49 $ 2.46 $ 2.58 Diluted EPS $ 0.95 $ 1.01 $ 1.18 $ 1.27 $ 1.52 $ 2.17 $ 2.41 $ 2.18 $ 2.17 $ 2.28 Basic Sharecount 29,949 29,989 28,579 27,872 27,800 27,829 27,694 28,589 30,000 30,000 Diluted Sharecount 29,982 30,004 28,601 34,789 34,706 34,768 34,670 34,165 34,000 34,000 Gross margin 35.0% 34.1% 35.9% 38.7% 39.2% 41.4% 40.8% 36.8% 36.0% 37.5% SG&A % sales 19.0% 17.7% 17.0% 19.1% 19.4% 17.0% 16.2% 15.8% 16.2% 16.7% EBITDA margin 21.3% 21.3% 23.7% 24.0% 24.4% 28.7% 29.2% 25.1% 23.9% 24.9% Operating margin 15.9% 16.4% 18.9% 19.6% 19.8% 24.4% 24.6% 21.0% 19.8% 20.8% Net margin 10.0% 10.8% 11.5% 11.5% 13.1% 17.2% 17.2% 13.5% 12.9% 13.5% Sales -15.8% -2.2% 5.3% 13.5% 6.2% 13.9% 11.7% 16.6% 9.3% 10.0% SG&A 15.6% -8.9% 0.7% 27.6% 8.3% -0.2% 6.2% 14.1% 12.0% 13.5% EBITDA -36.6% -2.2% 16.8% 15.3% 8.1% 33.9% 13.6% 0.3% 4.1% 14.2% Operating income -42.3% 0.8% 21.5% 17.6% 7.1% 40.6% 12.8% -0.9% 3.1% 15.5% Net income -46.3% 6.3% 11.4% 13.6% 21.3% 49.4% 11.8% -8.6% 4.1% 15.5% EPS -46.0% 6.3% 16.9% 7.9% 19.0% 43.2% 11.1% -9.7% -0.2% 4.7% BCF - KDN 14/20 11/18/08
  15. 15. BABSON Kaydon Corp. (KDN) COLLEGE FUND Quarterly Income Statement Kaydon Corp Qtrly Income Statement Q1'08 Q2'08 Q3'08 Q4'08E Q1'09E Q2'09E Q3'09E Q4'09E Q1'10E Q2'10E Q3'10E Q4'10E Sales 123,284 139,905 126,803 136,102 131,914 153,896 139,483 149,712 145,105 169,285 153,432 164,683 COGS 75,965 85,734 82,270 88,466 85,084 99,263 88,572 95,067 90,691 105,803 95,895 102,927 Gross Profit 47,319 54,171 44,533 47,636 46,829 54,633 50,911 54,645 54,414 63,482 57,537 61,756 SG&A 21,155 22,033 19,754 20,415 22,425 24,623 22,317 23,954 24,668 28,778 26,083 26,349 Operating Income 26,164 32,138 24,779 27,220 24,404 30,010 28,594 30,691 29,747 34,703 31,453 35,407 EBITDA 31,664 37,638 30,279 32,720 30,404 36,010 34,594 36,691 36,247 41,203 37,953 41,907 Interest expense 2,387 2,382 1,393 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Interest income 1,936 1,742 1,520 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Pretax Income 25,713 31,498 24,906 27,220 24,404 30,010 28,594 30,691 29,747 34,703 31,453 35,407 Taxes 9,102 11,150 8,571 9,527 8,541 10,503 10,008 10,742 10,411 12,146 11,009 12,392 Tax rate 35.4% 35.4% 34.4% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% Net Income 16,611 20,348 16,335 17,693 15,863 19,506 18,586 19,949 19,335 22,557 20,445 23,014 Basic EPS $ 0.61 $ 0.75 $ 0.55 $ 0.59 $ 0.53 $ 0.65 $ 0.62 $ 0.66 $ 0.64 $ 0.75 $ 0.68 $ 0.77 Diluted EPS $ 0.52 $ 0.63 $ 0.50 $ 0.52 $ 0.47 $ 0.57 $ 0.55 $ 0.59 $ 0.57 $ 0.66 $ 0.60 $ 0.68 Basic Sharecount 27,384 27,291 29,679 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 Diluted Sharecount 34,350 34,237 34,072 34,000 34,000 34,000 34,000 34,000 34,000 34,000 34,000 34,000 Gross margin 38.4% 38.7% 35.1% 35.0% 35.5% 35.5% 36.5% 36.5% 37.5% 37.5% 37.5% 37.5% SG&A % sales 17.2% 15.7% 15.6% 15.0% 17.0% 16.0% 16.0% 16.0% 17.0% 17.0% 17.0% 16.0% EBITDA margin 25.7% 26.9% 23.9% 24.0% 23.0% 23.4% 24.8% 24.5% 25.0% 24.3% 24.7% 25.4% Operating margin 21.2% 23.0% 19.5% 20.0% 18.5% 19.5% 20.5% 20.5% 20.5% 20.5% 20.5% 21.5% Net margin 13.5% 14.5% 12.9% 13.0% 12.0% 12.7% 13.3% 13.3% 13.3% 13.3% 13.3% 14.0% Sales 15.3% 23.4% 18.1% 10.0% 7.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% SG&A 14.1% 12.3% 4.9% 27.3% 6.0% 11.8% 13.0% 17.3% 10.0% 16.9% 16.9% 10.0% EBITDA 0.7% 12.3% 2.2% -12.3% -4.0% -4.3% 14.3% 12.1% 19.2% 14.4% 9.7% 14.2% Operating income -0.5% 13.4% 1.3% -15.4% -6.7% -6.6% 15.4% 12.8% 21.9% 15.6% 10.0% 15.4% Net income -8.9% 3.6% -4.7% -22.0% -4.5% -4.1% 13.8% 12.8% 21.9% 15.6% 10.0% 15.4% EPS -8.7% 4.9% -6.6% -25.6% -10.9% -9.6% 9.5% 12.8% 21.9% 15.6% 10.0% 15.4% BCF - KDN 15/20 11/18/08
  16. 16. BABSON Kaydon Corp. (KDN) COLLEGE FUND Consolidated Balance Sheet Kaydon Corp Balance Sheet Q3'08 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E Assets Cash 152,570 146,301 255,756 278,586 320,804 370,789 286,993 262,731 250,000 250,000 Accounts receivable 38,432 38,334 45,423 48,786 50,869 54,066 67,574 75,591 78,768 83,179 Inventories 55,066 47,019 44,840 55,730 51,783 56,043 68,896 94,863 90,736 95,309 Other current assets 15,706 12,396 14,231 9,925 14,671 17,012 15,411 15,305 23,000 25,300 Total current assets: 261,774 244,050 360,250 393,027 438,127 497,910 438,874 448,490 442,504 453,788 PP&E 84,273 84,380 84,707 86,028 79,603 95,280 145,826 178,359 218,359 248,359 Goodwill 121,708 108,770 112,183 113,375 117,168 119,484 146,922 146,396 146,396 146,396 Intangibles 9,744 8,903 9,200 24,288 21,271 31,162 27,113 27,113 27,113 Other assets 30,043 30,203 24,331 17,494 11,401 3,611 23,781 15,748 15,748 15,748 Total assets: 497,798 477,147 590,374 619,124 670,587 737,556 786,565 816,106 850,120 891,404 Liabilities Current LT debt 0 0 0 0 0 0 0 0 Short-term debt 0 0 0 0 0 0 0 0 Accounts payable 10,117 10,724 13,488 17,735 18,192 23,044 28,498 34,107 37,303 34,658 Accrued expenses 21,528 29,709 28,834 25,961 26,552 28,588 30,000 30,980 44,158 47,438 Total current liabilities: 31,645 40,433 42,322 43,696 44,744 51,632 58,498 65,087 81,461 82,096 Post-retirement obligation 44,652 61,139 63,890 64,524 64,765 46,083 17,401 28,453 20,000 20,000 Long-term debt 112,194 72,367 200,128 200,066 200,000 200,000 200,000 0 Other long-term liabilities 5,503 4,459 3,515 2,157 1,402 6,661 27,276 0 Total liabilities: 193,994 178,398 309,855 310,443 310,911 304,376 303,175 93,540 101,461 102,096 Equity Total shareholders equity: 303,804 298,749 280,519 308,681 359,676 433,180 483,390 722,566 748,659 789,308 Total liabilities and equity: 497,798 477,147 590,374 619,124 670,587 737,556 786,565 816,106 850,120 891,404 BCF - KDN 16/20 11/18/08
  17. 17. BABSON Kaydon Corp. (KDN) COLLEGE FUND Statement of Cash Flows Kaydon Corp Cash Flows 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E Operating cash flow Net income 28,480 12,204 33,752 38,358 46,530 69,508 77,707 70,987 73,904 85,352 D&A 15,430 13,725 13,866 14,664 16,513 17,426 20,629 22,000 24,000 26,000 Accounting changes 13,222 5,033 Deferred taxes 9 787 8,401 7,009 5,551 9,889 18,223 Accounts receivable 13,191 1,087 6,084 2,144 7,030 2,469 10,469 3,052 8,141 4,411 Inventories 3,544 8,987 3,338 8,993 2,146 3,417 8,389 7,610 14,231 4,573 Other current assets 2,025 10,945 2,391 2,253 1,029 1,650 5,249 6,685 904 2,300 Accounts payable 844 109 2,485 3,817 2,130 4,627 4,464 3,379 5,425 2,645 Accrued expenses 7,497 487 3,055 46 17,565 1,053 4,102 10,890 3,269 3,280 Post-retirement oblig. 948 2,265 4,206 1,027 1,730 3,001 24,020 Total operating CF: 51,236 62,244 60,628 53,983 41,224 89,860 74,259 89,909 83,322 100,703 Investing cash flow ST investments 57,000 Capex 9,562 8,821 11,918 12,365 12,560 26,294 54,073 70,000 40,000 30,000 Acquisitions, net 54,274 5,104 3,864 32,574 54,869 Other 8,500 Total Investing CF: 63,836 13,925 11,918 16,229 20,014 26,294 174,442 70,000 40,000 30,000 Financing cash flow LT-debt payments 6,053 40,160 72,282 90 62 66 Dividends 14,596 14,616 14,017 13,541 13,528 13,530 14,354 15,000 15,750 16,538 Line of credit borrowing Common stock issuance 2,239 475 5,104 115 1,000 1,626 390 Stock repurchases 1,655 20 52,193 2,117 6,102 3,404 30,091 10,000 10,000 10,000 LT-debt issuance 70,750 192,674 940 Other Total financing CF: 50,685 54,321 59,286 15,633 19,632 15,374 44,055 25,000 25,750 26,538 FX effect 480 267 1,459 709 612 1,793 3,442 1,200 1,200 1,200 Net change in cash 37,605 6,269 109,455 22,830 42,218 49,985 140,796 3,891 18,772 45,365 Beginning cash 114,965 152,570 146,301 255,756 278,586 320,804 370,789 229,993 226,102 244,874 Ending cash 152,570 146,301 255,756 278,586 320,804 370,789 229,993 226,102 244,874 290,239 BCF - KDN 17/20 11/18/08
  18. 18. BABSON Kaydon Corp. (KDN) COLLEGE FUND Working Capital Worksheet Kaydon Corp Working Capital Worksheet 2004 2005 2006 2007 2008E 2009E 2010E Sales 333,811 354,558 403,992 451,382 526,094 575,005 632,505 Cost of Sales 204,668 215,528 236,566 267,082 332,435 367,986 395,316 Working Capital Balances Accounts Receivable, net 48,786 50,869 54,066 67,574 70,626 78,768 83,179 Inventories 55,730 51,783 56,043 68,896 76,506 90,736 95,309 Other Current Assets 9,925 14,671 17,012 15,411 22,096 23,000 25,300 Total Non-Cash Current Assets: 114,441 117,323 127,121 151,881 169,228 192,504 203,788 Accounts Payable 17,735 18,192 23,044 28,498 31,877 37,303 34,658 Accrued Expenses 25,961 26,552 28,588 30,000 40,890 44,158 47,438 Total Non-Debt Current Liabilities: 43,696 44,744 51,632 58,498 72,767 81,461 82,096 NET WORKING CAPITAL / (DEFICIT) 70,745 72,579 75,489 93,383 96,461 111,043 121,692 (Increase)/Decrease in Working Capital 1,834 2,910 17,894 3,078 14,582 10,649 Ratios and Assumptions, actual, not average Accounts Receivable, net (Collection period in days) 53.3 52.4 48.8 54.6 49.0 50.0 48.0 Inventories (Days) 99.4 87.7 86.5 94.2 84.0 90.0 88.0 Other Current Assets as % of Sales 3.0% 4.1% 4.2% 3.4% 4.2% 4.0% 4.0% Accounts Payable (Days outstanding) 31.6 30.8 35.6 38.9 35.0 37.0 32.0 Accrued Liabilities as % of Cost of Sales 12.7% 12.3% 12.1% 11.2% 12.3% 12.0% 12.0% Cash Flows by Individual Accounts Accounts Receivable, net 2,083 3,197 13,508 3,052 8,141 4,411 Inventories 3,947 4,260 12,853 7,610 14,231 4,573 Other Current Assets 4,746 2,341 1,601 6,685 904 2,300 Accounts Payable 457 4,852 5,454 3,379 5,425 2,645 Accrued Liabilities 591 2,036 1,412 10,890 3,269 3,280 (Increase)/Decrease in Working Capital 1,834 2,910 17,894 3,078 14,582 10,649 BCF - KDN 18/20 11/18/08
  19. 19. BABSON Kaydon Corp. (KDN) COLLEGE FUND Ratios Q3'08 Ratio 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E Current Ratio 827.2% 603.6% 851.2% 899.5% 979.2% 964.3% 750.2% 689.1% 543.2% 552.8% Cash Ratio 482.1% 361.8% 604.3% 637.6% 717.0% 718.1% 490.6% 403.7% 306.9% 304.5% Cash per Share 5.09 4.88 8.94 8.01 9.24 10.66 8.28 7.69 7.35 7.35 Debt to Equity 36.9% 24.2% 71.3% 64.8% 55.6% 46.2% 41.4% 0.0% 0.0% 0.0% Net Debt to Equity -13.3% -24.7% -19.8% -25.4% -33.6% -39.4% -18.0% -36.4% -33.4% -31.7% Debt to Capital 27.0% 19.5% 41.6% 39.3% 35.7% 31.6% 29.3% 0.0% 0.0% 0.0% Net Debt to Capital -9.7% -19.9% -11.6% -15.4% -21.6% -27.0% -12.7% -36.4% -33.4% -31.7% ROE - Extended DuPont 15.9% 16.4% 18.9% 19.6% 19.8% 24.4% 24.6% 21.0% 19.8% 20.8% 57.4% 58.6% 49.8% 53.9% 52.9% 54.8% 57.4% 64.5% 67.6% 71.0% -0.1% 0.2% -0.6% -0.9% -0.1% 0.9% 1.1% -0.1% 0.0% 0.0% 163.9% 159.7% 210.5% 200.6% 186.4% 170.3% 162.7% 112.9% 113.6% 112.9% 63.0% 64.9% 65.0% 64.0% 67.1% 66.0% 64.9% 64.9% 65.0% 65.0% 9.5% 9.8% 13.8% 14.7% 13.2% 14.0% 13.8% 10.0% 9.9% 10.8% ROA 5.8% 6.1% 6.6% 7.4% 7.1% 8.2% 8.5% 8.9% 8.7% 9.6% ROCE 9.8% 10.5% 10.2% 11.4% 11.2% 14.4% 15.3% 14.7% 14.8% 16.2% Receivables Turn 7.4x 7.3x 6.5x 6.8x 7.0x 7.5x 6.7x 7.0x 7.3x 7.6x Collection Period 49.1 50.1 56.4 53.3 52.4 48.8 54.6 52.4 50.0 48.0 Inventory Turn 3.4x 3.9x 4.2x 3.7x 4.2x 4.2x 3.9x 3.5x 4.1x 4.1x Inventory Proc. Period 108.2 93.2 86.8 99.4 87.7 86.5 94.2 104.2 90.0 88.0 Payables Turn 18.4x 17.2x 14.0x 11.5x 11.8x 10.3x 9.4x 9.7x 9.9x 11.4x Payment Period 19.9 21.3 26.1 31.6 30.8 35.6 38.9 37.4 37.0 32.0 Cash Conversion Cycle 177.2 164.6 169.3 184.4 170.9 170.9 187.7 194.0 177.0 168.0 BCF - KDN 19/20 11/18/08
  20. 20. BABSON Kaydon Corp. (KDN) COLLEGE FUND Valuation Price to Earnings Price 2007 2008 2009 $ 22.00 EPS 2.41 2.18 2.17 9.12X 10.10X 10.12X Price to Sales 2007 2008 2009 Sales/share 13.02 15.40 16.91 1.69X 1.43X 1.30X Enterprise Value to EBITDA 2007 2008 2009 Shares out 34,670 34,165 34,000 + Debt 200,000 0 0 - Cash 286,993 262,731 250,000 EV 675,753 488,894 498,000 EBITDA 131,892 132,301 137,699 5.12X 3.70X 3.62X Enterprise Value to Sales 2007 2008 2009 Shares out 34,670 34,165 34,000 + Debt 200,000 0 0 - Cash 286,993 262,731 250,000 EV 675,753 488,894 498,000 Sales 451,382 526,094 575,005 1.50X 0.93X 0.87X BCF - KDN 20/20 11/18/08

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