This excerpt taken from the KDN 10-K filed Feb 27, 2007.
Analysis of 2006 Operations Compared to 2005 Operations
Selected Data For The Year 2006 Compared With The Year 2005
Record net sales of continuing operations of $404.0 million in 2006 increased $49.4 million or 13.9 percent compared to 2005s net sales of $354.6 million.
Specifically, the Friction and Motion Control Products reporting segment achieved sales of $234.0 million during 2006, up $39.0 million or 20.0 percent compared to 2005 sales of $195.0 million. The increase is principally the result of increased sales of custom-engineered bearings to various defense-related markets of $15.1 million, the wind energy market of $6.8 million, the heavy equipment market of $3.9 million, the medical equipment market of $3.2 million, the specialty electronics market of $2.5 million, and the machinery market of $1.9 million. Sales of split roller bearings, used globally in various industrial markets, increased $4.8 million compared to last year. Our Velocity Control Products reporting segment achieved sales of $56.7 million during 2006, up $2.9 million, or 5.4 percent from 2005 sales of $53.8 million, reflecting increased sales of gas springs, hydraulic dampers, and other products in Germany and other Euro-bloc countries. Our Sealing Products reporting segment achieved sales of $42.0 million during 2006, an increase of $3.5 million, or 9.0 percent from 2005 sales of $38.5 million, as demand increased from both the aerospace and petroleum processing markets. Our other businesses achieved sales of $71.2 million during 2006, up $4.0 million, or 6.0 percent from 2005 sales of $67.2 million. Sales growth in our other businesses was due primarily to growth in our air and liquid filtration businesses.
Gross profit from continuing operations for 2006 equaled $167.4 million or 41.4 percent of sales as compared to $139.0 million or 39.2 percent of sales for 2005. Compared to 2005, gross margin for 2006 was favorably impacted by the full-year effect of selling price and capacity increases implemented during the second half of 2005, increased demand, and the Companys ongoing focus on improving operating efficiencies.
Selling, general and administrative expenses of continuing operations totaled $68.7 million or 17.0 percent of sales in 2006, compared to $68.9 million or 19.4 percent of sales for 2005. Primarily as a result of the Companys effort to reduce its exposure to changes in exchange rates applicable to non-functional currency assets and liabilities, we recorded an exchange gain of $0.3 million in 2006, compared to an exchange loss of $2.9 million in 2005, resulting in a $3.2 million decrease in selling, general and administrative expenses when comparing 2006 to 2005. In addition, in 2006 the Companys selling, general, and administrative expenses were favorably impacted by $0.8 million resulting from an insurance refund, and a reduction in the Companys environmental reserves.
Operating income from continuing operations equaled $98.7 million during 2006, compared to $70.2 million in 2005, with operating margins of 24.4 percent and 19.8 percent in 2006 and 2005.
On a reporting segment basis, operating income from the Friction and Motion Control Products reporting segment was $67.9 million during 2006 as compared to $49.5 million during 2005. The increase is the result of increased sales of custom-engineered bearings to the wind energy, defense, heavy equipment and medical equipment markets, and of split roller bearing products used globally in various industrial markets. The growth of operating income was also positively affected by the full-year benefit of actions taken in the second half of 2005 to increase certain selling prices and achieve improved operating efficiencies.
The Velocity Control Products reporting segment contributed $12.9 million to our consolidated operating income during 2006 as compared to $12.2 million during 2005. Operating income growth was due primarily to higher sales in 2006.
The Sealing Products reporting segment contributed $6.4 million to our consolidated operating income during 2006 as compared to $5.9 million during 2005. The increased operating income was due primarily to higher sales in 2006.
Our other businesses contributed $6.5 million to our consolidated operating income during 2006 as compared to $4.6 million during 2005. Each of our other businesses generated increased operating income in 2006 compared with 2005, as a result of either higher sales or improved operating efficiencies.
During both 2006 and 2005, $9.3 million of interest and amortization of issuance costs related to our $200.0 million of 4% Contingent Convertible Senior Subordinated Notes was charged to interest expense. We expect a similar amount to be charged to interest expense during 2007.
As a result of higher investment interest rates and higher cash and cash equivalent balances, interest income increased to $16.3 million during 2006, compared with $8.7 million during 2005.
The effective tax rate for continuing operations for 2006 was 34.0 percent compared to 32.9 percent in 2005. The effective tax rates for both 2006 and 2005 reflect reductions to the tax provisions related to deductions recognized for financial reporting purposes, after examinations by certain taxing authorities, or after the expiration of applicable review periods, totaling $1.7 million in 2006 and $1.1 million in 2005. We expect the effective tax rate for 2007 to be approximately 36.0 36.5 percent.
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, states that the impact of contingently convertible instruments that are convertible into common stock upon the achievement of a specified market price of the issuers shares, such as the Companys 4% Contingent Convertible Senior Subordinated Notes, should be included in diluted earnings per share computations regardless of whether or not the market price trigger has been met. The Notes are
convertible into Kaydon common stock during any calendar quarter, if during the preceding calendar quarter the common stock has traded above $34.99 for a specified period of time (market price trigger).
Our income from continuing operations for 2006 was $69.5 million or $2.17 per share on a diluted basis, based on 34.8 million common shares outstanding, compared with income from continuing operations for 2005 of $46.5 million or $1.52 per share on a diluted basis, based on 34.7 million common shares outstanding.
Income from discontinued operations for 2005 equaled $27.4 million, including the after tax gain of $25.4 million on the sale of the Power and Data Transmission Products Group. Diluted earnings per share from discontinued operations for 2005 were $0.79, with $0.73 resulting from the gain on the sale.
Our net income for 2006 was $69.5 million or $2.17 per share on a diluted basis, compared with net income for 2005 of $73.9 million or $2.30 per share on a diluted basis.