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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

/X/     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBERNUMBER: 1-7665 ------------------------ LYDALL, INC. (Exact name of registrant as specified in its charter) DELAWARE 06-0865505 (State of incorporation) (IRS DELAWARE 06-0865505 (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) ONE COLONIAL ROAD, P.O.B. 151, 06045-0151 MANCHESTER, CONNECTICUT (zip code) (Address of principal executive offices)
(860) 646-1233 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)(Registrant's telephone number, including area code) NONE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)(Former name, former address and former fiscal year, if changed since last report) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common stock $.10 par value per share. Total Shares outstanding August 11, 1999 15,746,328
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. ______ Common stock $.10 par value per share. Total Shares outstanding November 11, 1999 15,681,328 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LYDALL, INC. INDEX
PAGE NO. ------------------- Part I. Financial Information Item 1. Financial Statements.........................................................Statements Consolidated Condensed Balance Sheets........................................Sheets................. 3 Consolidated Condensed Statements of Net Income and Comprehensive Income..... 4--5Income.................................. 4-5 Consolidated Condensed Statements of Cash Flows..............................Flows....... 6 Notes to Consolidated Condensed Financial Statements......................... 7--11Statements............................................ 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 12--15 Operations...................................................................Operations............... 11-13 Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 15Risk............................................... 13 Part II. Other Information Item 2. Changes in Securities and Use of Proceeds.................................... 15 Item 4. Submission of Matters to a Vote of Security Holders.......................... 15 Item 6. Exhibits and Reports on Form 8-K............................................. 16 Signature.............................................................................................. 178-K.................. 14 Signature................................................... 15
2 PART I. FINANCIAL INFORMATION ITEMItem 1. FINANCIAL STATEMENTSFinancial Statements LYDALL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS)
JUNESEPTEMBER 30, DECEMBER 31, 1999 1998 ----------- ------------- ------------ (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents...........................................................equivalents................................. $ 2,4983,268 $ 2,254 Accounts receivable, net............................................................ 45,294net.................................. 53,027 48,609 Inventories: Finished goods.................................................................... 10,775goods.......................................... 9,933 10,303 Work in progress.................................................................. 8,640process......................................... 10,865 8,859 Raw materials..................................................................... 10,687materials........................................... 12,141 11,003 LIFO reserve...................................................................... (1,291)reserve............................................ (1,361) (1,216) ----------- --------------------- -------- Total inventories................................................................... 28,811inventories......................................... 31,578 28,949 Taxes receivable....................................................................receivable.......................................... -- 2,256 Prepaid expenses.................................................................... 1,981expenses.......................................... 1,663 1,966 Deferred tax assets................................................................. 7,207assets....................................... 7,159 6,785 ----------- --------------------- -------- Total current assets.............................................................. 85,791assets................................ 96,695 90,819 Property, plant and equipment, at cost................................................ 174,983cost...................... 181,006 172,485 Less accumulated depreciation......................................................... (68,583)depreciation............................... (71,290) (64,649) ----------- ------------- 106,400-------- -------- 109,716 107,836 Other assets, at cost, less amortization.............................................. 28,762amortization.................... 28,607 28,193 -------- -------- Total assets........................................................................ $ 220,953 $ 226,848 ----------- ------------- ----------- -------------assets........................................ $235,018 $226,848 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Cash overdraft............................................ $ 2,689 $ -- Current portion of long-term debt................................................... $ 2,255 $debt......................... 7,140 2,340 Short-term borrowings............................................................... 2,511borrowings..................................... -- 52,324 Accounts payable.................................................................... 21,457payable.......................................... 23,848 22,530 Accrued taxes....................................................................... 953taxes............................................. 1,824 1,411 Accrued payroll and other compensation.............................................. 7,811compensation.................... 6,611 5,810 Other accrued liabilities........................................................... 14,544liabilities................................. 16,478 15,494 ----------- --------------------- -------- Total current liabilities......................................................... 49,531liabilities........................... 58,590 99,909 Deferred tax liabilities.............................................................. 10,072liabilities.................................... 9,964 10,726 Other long-term liabilities........................................................... 6,993liabilities................................. 6,998 6,988 Long-term debt........................................................................ 41,634debt.............................................. 43,729 -- Contingencies Stockholders' equity: Preferred stock.....................................................................stock........................................... -- -- Common stock........................................................................ 2,177stock.............................................. 2,178 2,171 Capital in excess of par value...................................................... 39,067value............................ 39,092 38,697 Retained earnings................................................................... 136,997earnings......................................... 140,245 129,310 Accumulated other comprehensive income.............................................. (4,553)income.................... (4,261) (71) ----------- ------------- 173,688-------- -------- 177,254 170,107 Less: treasury stock, at cost....................................................... (60,965)cost............................. (61,517) (60,882) ----------- --------------------- -------- Total stockholders' equity........................................................ 112,723equity.......................... 115,737 109,225 ----------- --------------------- -------- Total liabilities and stockholders' equity.......................................... $ 220,953 $ 226,848 ----------- ------------- ----------- -------------equity................ $235,018 $226,848 ======== ========
See accompanying Notes to Consolidated Condensed Financial Statements. 3 LYDALL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME (IN THOUSANDS EXCEPT PER-SHARE DATA)
THREE MONTHS ENDED JUNESEPTEMBER 30, ------------------------------------------- 1999 1998 --------- ----------------- -------- (UNAUDITED) Net sales................................................................................... $ 83,998 $ 59,244sales................................................... $76,834 $56,495 Cost of sales............................................................................... 63,729 41,696 --------- ---------sales............................................... 57,694 40,166 ------- ------- Gross margin................................................................................ 20,269 17,548margin................................................ 19,140 16,329 Selling, product development and administrative expenses.................................... 14,330 11,913 --------- ---------expenses.... 13,511 11,353 ------- ------- Operating income............................................................................ 5,939 5,635income............................................ 5,629 4,976 Other (income) expense: Investment income......................................................................... (9) (76)income......................................... (18) (130) Interest expense.......................................................................... 588 196expense.......................................... 701 262 Foreign currency transaction loss......................................................... 317 22 Other..................................................................................... (327) (343) --------- --------- 569 (201) --------- ---------gain......................... (72) (127) Other..................................................... 26 175 ------- ------- 637 180 ======= ======= Income before income taxes.................................................................. 5,370 5,836taxes.................................. 4,992 4,796 Income tax expense.......................................................................... 1,765 1,985 --------- ---------expense.......................................... 1,743 1,642 ------- ------- Net income..................................................................................income.................................................. $ 3,6053,249 $ 3,851 --------- --------- --------- ---------3,154 ======= ======= Basic earnings per common share.............................................................share............................. $ .23.21 $ .24 --------- ---------.20 ------- ------- Weighted average common stock outstanding................................................... 15,732 15,997outstanding................... 15,733 15,688 Diluted earnings per common share...........................................................share........................... $ .23.21 $ .24 --------- ---------.20 ------- ------- Weighted average common stock and equivalents outstanding................................... 15,822 16,363 --------- --------- --------- ---------outstanding... 15,848 15,941 Net income..................................................................................income.................................................. $ 3,6053,249 $ 3,8513,154 ------- ------- Other comprehensive loss,income, before tax: Foreign currency translation adjustments.................................................. (23) 227adjustments.................. 292 1,085 Unrealized loss on securities.............................................................securities............................. -- (354) --------- ---------(735) ------- ------- Other comprehensive loss,income, before tax........................................................ (23) (127)tax...................... 292 350 Income tax (provision) benefitexpense related to items of other comprehensive loss................. (1,498) 28 --------- ---------income.................................................... -- (122) ------- ------- Other comprehensive loss,income, net of tax........................................................ (1,521) (99) --------- ---------tax...................... 292 228 ------- ------- Comprehensive income........................................................................income........................................ $ 2,0843,541 $ 3,752 --------- --------- --------- ---------3,382 ======= =======
See accompanying Notes to Consolidated Condensed Financial Statements. 4 LYDALL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME (IN THOUSANDS EXCEPT PER-SHARE DATA)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, ----------------------------------------- 1999 1998 ---------- ------------------ -------- (UNAUDITED) Net sales................................................................................. $ 167,600 $ 115,786sales................................................... $244,434 $172,281 Cost of sales............................................................................. 128,256 82,222 ---------- ----------sales............................................... 185,950 122,388 -------- -------- Gross margin.............................................................................. 39,344 33,564margin................................................ 58,484 49,893 Selling, product development and administrative expenses.................................. 27,667 22,650 ---------- ----------expenses.... 41,178 34,003 -------- -------- Operating income.......................................................................... 11,677 10,914income............................................ 17,306 15,890 Other (income) expense: Investment income....................................................................... (15) (400)income......................................... (33) (530) Interest expense........................................................................ 1,309 285expense.......................................... 2,010 547 Foreign currency transaction (gain) loss................................................ (1,010) 36 Other................................................................................... (112) (168) ---------- ---------- 172 (247) ---------- ----------gain......................... (1,082) (91) Other..................................................... (86) 7 -------- -------- 809 (67) -------- -------- Income before income taxes................................................................ 11,505 11,161taxes.................................. 16,497 15,957 Income tax expense........................................................................ 3,818 3,761 ---------- ----------expense.......................................... 5,561 5,403 -------- -------- Net income................................................................................income.................................................. $ 7,68710,936 $ 7,400 ---------- ---------- ---------- ----------10,554 ======== ======== Basic earnings per common share...........................................................share............................. $ .49.70 $ .46 ---------- ----------.66 -------- -------- Weighted average common stock outstanding................................................. 15,724 16,020outstanding................... 15,726 15,908 Diluted earnings per common share.........................................................share........................... $ .49.69 $ .45 ---------- ----------.65 -------- -------- Weighted average common stock and equivalents outstanding................................. 15,808 16,434 ---------- ---------- ---------- ----------outstanding... 15,819 16,266 Net income................................................................................income.................................................. $ 7,68710,936 $ 7,40010,554 -------- -------- Other comprehensive loss, before tax: Foreign currency translation adjustments................................................ (4,482) (90)adjustments.................. (4,190) 977 Unrealized loss on securities...........................................................securities............................. -- (551) ---------- ----------(1,397) -------- -------- Other comprehensive loss, before tax...................................................... (4,482) (641)tax........................ (4,190) (420) Income tax benefit related to items of other comprehensive loss...........................loss...................................................... -- 141 ---------- ----------147 Other comprehensive loss, net of tax...................................................... (4,482) (500) ---------- ----------tax........................ (4,190) (273) -------- -------- Comprehensive income......................................................................income........................................ $ 3,2056,746 $ 6,900 ---------- ---------- ---------- ----------10,281 ======== ========
See accompanying Notes to Consolidated Condensed Financial Statements. 5 LYDALL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, -------------------- 1999 1998 --------- ----------------- (UNAUDITED) Cash flows from operating activities: Net income....................................................................................income.................................................. $ 7,68710,936 $ 7,40010,554 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................................................. 5,760 4,471 Amortization.............................................................................. 873 967Depreciation............................................ 9,006 6,846 Amortization............................................ 1,336 1,491 Loss on disposition of property, plant and equipment...................................... 32 310equipment.... 192 383 Foreign currency transaction (gain) loss.................................................. (1,010) 36gain....................... (1,082) (91) Changes in operating assets and liabilities excluding effects from acquisitions: Accounts receivable..................................................................... 1,210 193receivable................................... (5,678) 634 Taxes receivable........................................................................receivable...................................... 2,256 2,032 Inventories............................................................................. (1,454) (2,632)Inventories........................................... (877) (2,627) Other assets............................................................................ (1,526) 402assets.......................................... (1,487) (120) Accounts payable........................................................................ 46 3,221payable...................................... 1,503 1,894 Accrued taxes........................................................................... (399) 152taxes......................................... 471 (85) Accrued payroll and other compensation.................................................. 2,394 (1,772)compensation................ 1,063 (2,377) Deferred income taxes................................................................... (853) (381)taxes................................. (968) (663) Other long-term liabilities............................................................. 130 (306)liabilities........................... 40 (296) Other accrued liabilities............................................................... 48 (551)liabilities............................. (1,178) (1,042) --------- -------- Total adjustments....................................... 4,597 5,979 --------- Total adjustments......................................................................... 7,507 6,142 --------- ----------------- Net cash provided by operating activities..................................................... 15,194 13,542activities................... 15,533 16,533 --------- ----------------- Cash flows from investing activities: Acquisitions................................................................................ (178) (16,269)Acquisitions.............................................. (291) (16,889) Additions of property, plant, and equipment................................................. (8,817) (8,482)equipment............... (14,086) (13,336) Purchase of investments, net................................................................net.............................. -- (395)(394) --------- ----------------- Net cash used for investing activities........................................................ (8,995) (25,146) --------- ---------activities...................... (14,377) (30,619) Cash flows from financing activities: Cash overdraft............................................ 2,689 -- Long-term debt payments..................................................................... (2,100) (2,494)payments................................... (45,102) (3,244) Long-term debt proceeds................................... 82,380 -- Proceeds from short-term borrowings......................................................... 54,881 28,208borrowings....................... 62,992 56,113 Payments of short-term borrowings........................................................... (58,744) (11,761)borrowings......................... (102,712) (37,300) Issuance of common stock.................................................................... 376 653stock.................................. 402 929 Acquisition of common stock................................................................. (83) (7,978)stock............................... (635) (9,899) --------- ----------------- Net cash provided by (used for) financing activities.......................................... (5,670) 6,628activities................... 14 6,599 --------- ----------------- Effect of exchange rate changes on cash....................................................... (285) (4)cash..................... (156) 86 --------- ----------------- Increase (decrease) in cash and cash equivalents.............................................. 244 (4,980)equivalents............ 1,014 (7,401) Cash and cash equivalents at beginning of period..............................................period............ 2,254 8,891 --------- ----------------- Cash and cash equivalents at end of period....................................................period.................. $ 2,4983,268 $ 3,911 --------- --------- --------- ---------1,490 ========= ======== Supplemental Schedule of Cash Flow Information: Cash paid during the period for: Interest....................................................................................Interest.................................................. $ 1,3231,759 $ 311476 Income taxes................................................................................ 2,726 2,243taxes.............................................. 3,902 4,371 Non-cash transactions: Unrealized gains/losses on available-for-sale securities....................................securities.............................................. -- 430908 Reclassification between short and long term assets.........................................assets....... -- 904 Reclassification of deferred tooling revenue from inventory to other accrued liabilities.................. 2,949 --
See accompanying Notes to Consolidated Condensed Financial Statements. 6 LYDALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. The accompanying consolidated condensed financial statements include the accounts of Lydall, Inc. and its wholly owned subsidiaries. All financial information is unaudited for interim periods reported. All significant intercompany transactions have been eliminated in the consolidated condensed financial statements. Management believes that all adjustments, which include only normal recurring accruals, necessary to present a fair statement of the financial position and results of the periods have been included. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. TheThis Form 10-Q should be read in conjunction with Lydall's Annual Report on Form 10-K.10-K for the year ended December 31, 1998. 2. Basic earnings per common share are based on net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are based on net income divided by the weighted average number of common shares outstanding during the period, including the effect of stock options and stock awards where such effect is dilutive.
FOR THE QUARTER ENDED FOR THE QUARTER ENDED JUNESEPTEMBER 30, 1999 JUNESEPTEMBER 30, 1998 (UNAUDITED) (UNAUDITED) ----------------------------------- ----------------------------------------------------- ------------------------------- NET NET INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE ($000'S) (000'S) AMOUNT ($000'S) (000'S) -----------AMOUNT -------- -------- --------- ----------- ------------------- -------- --------- Basic earnings per share.....................................share....................... $ 3,605 15,7323,249 15,733 $0.21 $ 0.23 $ 3,851 15,9973,154 15,688 $0.20 Effect of dilutive securities:securities stock optionsoptions.... -- 90 .00115 0.00 -- 366 ----------- ---------253 0.00 ------- ------ ----- ----------- --------- Diluted earnings per share................................... $ 3,605 15,822 $ 0.23 $ 3,851 16,363 ----------- --------- ----- ----------- --------- ----------- --------- ----- ----------- --------- PER-SHARE AMOUNT ----------- Basic earnings per share..................................... $ 0.24 Effect of dilutive securities: stock options .00------- ------ ----- Diluted earnings per share...................................share..................... $ 0.24 ----- -----3,249 15,848 $0.21 $ 3,154 15,941 $0.20 ======= ====== ===== ======= ====== =====
FOR THE SIXNINE MONTHS ENDED FOR THE SIXNINE MONTHS ENDED ENDED JUNESEPTEMBER 30, 1999 JUNESEPTEMBER 30, 1998 (UNAUDITED) (UNAUDITED) ----------------------------------- ----------------------------------------------------- ------------------------------- NET NET INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE ($000'S) (000'S) AMOUNT ($000'S) (000'S) -----------AMOUNT -------- -------- --------- ----------- ------------------- -------- --------- Basic earnings per share..................................... $ 7,687 15,724 $ 0.49 $ 7,400 16,020share....................... $10,936 15,726 $0.70 $10,554 15,908 $0.66 Effect of dilutive securities:securities stock optionsoptions.... -- 84 .0093 (.01) -- 414 ----------- ---------358 (.01) ------- ------ ----- ----------- --------- Diluted earnings per share................................... $ 7,687 15,808 $ 0.49 $ 7,400 16,434 ----------- --------- ----- ----------- --------- ----------- --------- ----- ----------- --------- PER-SHARE AMOUNT ----------- Basic earnings per share..................................... $ 0.46 Effect of dilutive securities: stock options (0.01)------- ------ ----- Diluted earnings per share................................... $ 0.45 ----- -----share..................... $10,936 15,819 $0.69 $10,554 16,266 $0.65 ======= ====== ===== ======= ====== =====
3. Options to purchase 909,008704,331 shares and 468,879630,716 shares of Lydall Common Stock for the year-to-date Junethrough September 30, 1999 and the comparable period in 1998, respectively, as well as 708,872560,081 shares and 661,953648,716 shares for the quarterquarters ended JuneSeptember 30, 1999 and 1998, respectively, were not included in the computation of diluted earnings per share. These options were excluded because the exercise price was greater than the average market price of the Common Stock for each respective period, and therefore were antidilutive. 4. On July 14, 1999, Lydall, Inc. and certain subsidiaries entered into a $69 million credit facility with a group of five banking institutions. A Euro-denominated term loan of approximately $19 million, which is held in the name of Lydall's German subsidiary, bears an interest rate based on Euro LIBOR plus a percentage based on the negotiated ratios maintained by the parties to the agreement. The remaining $50 million is a revolving credit facility which is renewed every three years, on which $20$21 million is currently outstanding. Interest on the revolving credit facility is primarily based on US Dollar LIBOR plus a percentage based on negotiated ratios maintained by the parties to the agreement. $41.6 million in outstanding borrowings have been reclassified on 7 LYDALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) JuneAs a result of entering into the new credit facility, the Company is bound by certain financial and non-financial covenants. As of September 30, 1999 to long-term debt from short-term borrowings to reflect maturity datesthe Company was in compliance with all covenants of the new credit facility. 5. On December 30, 1998, a subsidiary of the Company acquired for cash all of the outstanding shares of Gerhardi and Cie GmbH and Co. KG ("Gerhardi"), a privately held German manufacturer of automotive components. Under the terms of the agreement and in consideration for Gerhardi's outstanding shares, the Company's subsidiary paid to Gerhardi a negotiated purchase price of $30.7 million and assumed Gerhardi's existing liabilities, net of cash, of approximately $26.5 million. The purchase price is subject to a post-closing net equity adjustment as defined in the agreement and has been allocated to the acquired net assets on a preliminary basis. Negotiation of the post-closing adjustment is expected to be completed in the third quarter of 1999. Lydall, Inc. funded the subsidiary's acquisition through interim borrowing on existing lines of credit. On July 14, 1999, Lydall converted the majority of the borrowings used to purchase Gerhardi to a Euro denominatedEuro-denominated 5 year term loan in the name of Lydall DeutchelandDeutschland Holding GmbH. This acquisition was accounted for under the purchase method of accounting. The fair value of assets acquired exceeded the cost of the acquisition, and as a result, the Company reduced the appraised value of long-term assets by $9.1 million. The operating results of Gerhardi have been included in the Company's consolidated financial statements from the date of acquisition. On April 18, 1998, a subsidiary of Lydall acquired Engineered Thermal Systems, Inc. ("ETSI"), a producer of automotive thermal and acoustical components for $9.2 million, accounted for under the purchase method. ETSI, which operates as the St. Johnsbury Operation of Lydall Westex, complements the Company's extensive automotive thermal-barrier business. The results of the St. Johnsbury Operation have been included in the Company's consolidated results since the date of acquisition. The Company recorded $6.7 million in goodwill and other intangible assets related to this acquisition which are being amortized on a straight-line basis over 17 years. Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical, Ltd. On February 6, 1998, this separate corporate entity acquired CharterMed, Inc., a privately held company located in Lakewood, New Jersey, for $6.6 million in cash and a note for $720 thousand, payable through 1999, accounted for under the purchase method. CharterMed, Inc. was a growing and profitable manufacturer of proprietary medical devices, which served applications such as biotech and pharmaceutical packaging, blood bank and transfusion services and neonatal intensive care. The results of CharterMed, Inc., now the Charter Medical, New Jersey Operation, since the date of acquisition have been included in the Company's consolidated results. The Company recorded $5.8 million in goodwill and other intangible assets related to this acquisition which are being amortized on a straight-line basis over 20 years. 8 LYDALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes the unaudited consolidated pro forma information of Lydall, Inc., assuming that the acquisitions of Charter Medical, Ltd., Engineered Thermal Systems, Inc. ("ETSI"), and Gerhardi and Cie. GmbH and Co. KG ("Gerhardi") completed during 1998 had occurred on January 1, 1998.
FOR THE THREE MONTHS ENDED: IN THOUSANDS EXCEPT PER-SHARE DATA FOR THE THREE MONTHS JUNESEPTEMBER 30, ENDED: 1998 - ----------------------------------------------------------------------------------- ------------------------------------------- ------------------ Sales..............................................................................Sales....................................................... $76,607 Net income.................................................. $ 76,833 Net income......................................................................... $ 3,7533,088 Basic earnings per common share....................................................share............................. $ .23.20 Diluted earnings per common share..................................................share........................... $ .23.19 -------
FOR THE NINE MONTHS ENDED: IN THOUSANDS EXCEPT PER-SHARE DATA FOR THE SIX MONTHS JUNESEPTEMBER 30, ENDED: 1998 - ---------------------------------------------------------------------------------- -------------------------------------------- ------------------ Sales.............................................................................Sales....................................................... $231,006 Net income.................................................. $ 154,399 Net income........................................................................ $ 7,18110,269 Basic earnings per common share...................................................share............................. $ .45.65 Diluted earnings per common share.................................................share........................... $ .44.63 --------
5.6. In the mid-1980's, the United States Environmental Protection Agency ("EPA") notified a former subsidiary of the Company that it and other entities may be potentially responsible in connection with the release of hazardous substances at a landfill and property located adjacent to a landfill located in Michigan City, Indiana. The preliminary indication, based on the Site Steering Committee's volumetric analysis, is that the alleged contribution to the waste volume at the site of the plant once owned by a former subsidiary is approximately 0.434 percent of the total volume. The portion of the 0.434 percent specifically attributable to the former subsidiary by the current operator of the plant is approximately 0.286 percent. The EPA has completed its Record of Decision for the site and has estimated 8 LYDALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) the total cost of remediation to be between $17 million and $22 million. Based on the alleged volumetric contribution of its former subsidiary to the site, and on the EPA's estimated remediation costs, Lydall's alleged total exposure would be less than $100 thousand, which has been accrued. There are over 800 potentially responsible parties ("prp") that have been identified by the Site Steering Committee. Of these, 38, not including the Company's former subsidiary, are estimated to have contributed over 80 percent of the total waste volume at the site. These prp's include Fortune 500 companies, public utilities, and the State of Indiana. The Company believes that, in general, these parties are financially solvent and should be able to meet their obligations at the site. The Company has reviewed Dun & Bradstreet reports on several of these prp's and, based on these financial reports, does not believe Lydall will have any material additional volume attributed to it for reparation of this site due to insolvency of other prp's. In June 1995, the Company and its former subsidiary were sued in the Northern District of Indiana by the insurer of the current operator of the former subsidiary's plant seeking contribution. In October 1997, the insurer made a settlement demand of $150,591 to the Company in exchange for a release of the Company's liability at the site and indemnification from the current operator against site-related claims. The Company executed a settlement agreement with the insurer and current operator for a full site release; however, the current operator subsequently backed out of the agreement. In June 1998, a stipulation for dismissal signed by all parties was filed to end current litigation until the total liability at the site is defined. Management believes the ultimate disposition of this matter will not have a material adverse effect upon the Company's consolidated financial position, or results of operations, or cash flows. 9 LYDALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) By letter dated July 13, 1998, Lydall Eastern, Inc., a subsidiary of Lydall, Inc. ("Lydall Eastern"), was identified as a "potentially responsible party" by the EPA in connection with the claimed release or threat of release of hazardous substances at a site known as the Rogers Fibre Mill in Buxton, Maine (the "site"). Lydall Eastern merged with the owner and operator of a fiberboard mill at the site whose ownership dated back to approximately 1912. Lydall Eastern ceased operation at the site in 1980. In 1982, Lydall Eastern conveyed its interest in the site. The EPA is spending public funds to investigate and take action with respect to the site. The EPA likely will seek to recover the funds it has spent, and will spend, at the site from potentially responsible parties, including Lydall Eastern. At this time, it is not possible to predict what future liability or costs might be incurred by Lydall Eastern in connection with the site. 6.7. Lydall's subsidiaries manufacture and fabricate products with various distinct applications and provide logistics services. Lydall is organized and reports results of operations in four segments: Heat-Management, Filtration, Paperboard, Wovens and Other. For a full description of each segment, refer to the "Notes to Consolidated Financial Statements" reported in the Company's 1998 Annual 9 LYDALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) Report on Form 10-K. The tables below present revenues and operating income by segment for the three months and sixnine months ended JuneSeptember 30, 1999 and 1998.
IN THOUSANDS HEAT RECONCILING CONSOLIDATED FOR THE THREE MONTHS ENDED MANAGEMENT FILTRATION PAPERBOARD WOVENS OTHER ITEMS TOTALS - ---------------------------------------------------------------- ---------- ---------- ---------- -------- -------- ----------- ------------ ----------- ----------- --------- --------- ----------- ------------(UNAUDITED) JuneSeptember 30, 1999 Sales...............................Sales................ $ 45,42739,531 $14,566 $10,943 $ 14,7401,048 $11,755 $(1,009) $ 10,27276,834 Operating income (loss)............. $ 9433,478 $ 13,6301,301 $ (1,014)150 $ 83,998 Operating income(loss)..............(264) $ 2,4391,620 $ 1,798(656) $ 680 $ (277) $ 1,844 $ (545) $ 5,939 ------------ ----------- ----------- --------- --------- ----------- ------------ June5,629 -------- ------- ------- ------- ------- ------- -------- September 30, 1998 Sales...............................Sales................ $ 21,21719,111 $14,681 $10,094 $ 14,5221,326 $11,618 $ 10,126(335) $ 1,40356,495 Operating income (loss)............. $ 12,5971,539 $ (621)1,839 $ 59,244 Operating income(loss)..............851 $ 3,230(668) $ 1,4591,328 $ 57087 $ (708) $ 1,113 $ (29) $ 5,635 ------------ ----------- ----------- --------- --------- ----------- ------------4,976 -------- ------- ------- ------- ------- ------- --------
IN THOUSANDS HEAT RECONCILING CONSOLIDATED FOR THE SIXNINE MONTHS ENDED MANAGEMENT FILTRATION PAPERBOARD WOVENS OTHER ITEMS TOTALS - -------------------------------------------------------------- ---------- ---------- ---------- -------- -------- ----------- ------------ ----------- ----------- --------- --------- ----------- ------------(UNAUDITED) JuneSeptember 30, 1999 Sales..............................Sales................ $129,769 $43,984 $32,630 $ 90,238 $ 29,418 $ 21,687 $ 1,612 $ 26,514 $ (1,869) $ 167,6002,660 $38,269 $(2,878) $244,434 Operating income(loss)income (loss)............. $ 4,6798,157 $ 3,4154,716 $ 1,5591,709 $ (534)(798) $ 2,9734,593 $(1,071) $ (415) $ 11,677 ------------ ----------- ----------- --------- --------- ----------- ------------ June17,306 -------- ------- ------- ------- ------- ------- -------- September 30, 1998 Sales..............................Sales................ $ 40,19259,303 $43,060 $30,285 $ 28,379 $ 20,191 $ 3,492 $ 24,738 $ (1,206) $ 115,7864,818 $36,356 $(1,541) $172,281 Operating income(loss)income (loss)............. $ 5,9477,486 $ 2,8294,668 $ 1,0821,933 $(1,926) $ (1,258)3,016 $ 1,688713 $ 626 $ 10,914 ------------ ----------- ----------- --------- --------- ----------- ------------15,890 -------- ------- ------- ------- ------- ------- --------
7.8. In June of 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 2000. As of JuneSeptember 30, 1999, the Company did not have any derivative instruments.had one interest rate swap and one forward currency contract outstanding. Lydall is currently evaluating the effect on the Company's consolidated financial position, results of operations, comprehensive income, orand cash flows as a result of implementing this pronouncement. 10 LYDALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 8. On May 20,9. Net income for the quarter ended September 30, 1999 includes an adjustment related to conforming certain accounting policies of Gerhardi to those of Lydall. The adjustment, amounting to approximately $200 thousand, relates to the Company's Boardcapitalization of Directors adopted a Rights Agreement designed to enhancecertain items expensed by Gerhardi during the ability of all of the Company's stockholders to realize the long-term value of their investment. In connection with the adoption of the Agreement, the Board of Directors declared a dividend to stockholders of record as of the close of business onsix-month period ended June 30, 1999, which, according to Lydall's accounting policy, should have been capitalized. This adjustment, which is reflected in the third quarter results of one rightoperations, does not have a significant impact on Lydall's results of operations for each outstanding sharethe nine-month period ended September 30, 1999, does not change the trend in reported earnings for 1999 and is not expected to have a significant effect on Lydall's earnings for 1999. Additionally, sales and cost of Common Stock. Each right entitlessales for the holder to purchase a one one-thousandthquarter ended September 30, 1999 have been reduced by $1.9 million for intercompany transactions which occurred in the first half of a share1999 and were not eliminated in the results of Series A Junior Participating Preferred Stock at an exercise price of $60, subject to adjustment. For all Lydall Common Stock held as ofoperations for the period ended June 30, 1999 the Rights automatically become part of, and trade with, each share. Unless redeemed earlier, the Rights become exercisable if any person or group of people becomes the beneficial owner of 10 percent or more of the voting stock of the Company. The Rights Agreement will expire in ten years, or the Board of Directors may redeem the Rights in whole, but not in part, at a price of $.001 per Right at any time prior to 5 p.m. New York City time1999. This adjustment had no impact on the tenth calendar day following the date a person or person acquires 10 percent or more of Lydall's Common Stock. The rights have no dilutive effect on earnings. The Rights are not being distributed in response to any specific effort to acquire control of Lydall. The Company's management and Board of Directors consider the institution of the Rights Agreement to be a strong expression of their continued confidence in the future of Lydall. 9. Certain components of the financial statements have been reclassified to be consistent with current presentation. In particular, $1,979,000 and $2,502,000 of segment sales previously classified within Otherreported earnings for the three months ended March 31, 1999 and 1998, respectively, have been reclassified to the Paperboard segment. 11third quarter of 1999. 10 10. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS
FOR THE QUARTERSQUARTER ENDED JUNESEPTEMBER 30, (IN THOUSANDS) 1999 1998 - --------------------------------------------------------------------------- -------------------- ---------------------------------------------------------------------- ---------------------- ---------------------- NET SALES..................................................................Net sales........................................... $ 83,99876,834 100.0% $ 59,24456,495 100.0% Cost of sales............................................................ 63,729 75.9 41,696 70.4 --------- --------- --------- --------- GROSS MARGIN............................................................... 20,269 24.1 17,548 29.6 SELLING, PRODUCT DEVELOPMENT AND ADMINISTRATIVE EXPENSES................. 14,330 17.1 11,913sales..................................... 57,694 75.1 40,166 71.1 -------- ----- -------- ----- Gross margin........................................ 19,140 24.9 16,329 28.9 Selling, product development and administrative expenses........................................ 13,511 17.6 11,353 20.1 --------- --------- --------- ----------------- ----- -------- ----- Operating income........................................................... 5,939 7.1 5,635 9.5income.................................... 5,629 7.3 4,976 8.8 Other (income) expense................................................... 569 0.7 (201) (0.3) --------- --------- --------- ---------expense..................................... 637 0.8 180 0.3 -------- ----- -------- ----- Income before income taxes................................................. 5,370 6.4 5,836 9.9taxes.......................... 4,992 6.5 4,796 8.5 Income tax expense....................................................... 1,765 2.1 1,985 3.4 --------- --------- --------- --------- NET INCOME.................................................................expense................................ 1,743 2.3 1,642 2.9 -------- ----- -------- ----- Net income.......................................... $ 3,605 4.3%3,249 4.2% $ 3,851 6.5%3,154 5.6%
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, (IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------ --------------------- --------------------------------------------------------------------------- ---------------------- ---------------------- NET SALES............................................................... $ 167,600Net sales............................................ $244,434 100.0% $ 115,786$172,281 100.0% Cost of sales......................................................... 128,256 76.5 82,222sales...................................... 185,950 76.1 122,388 71.0 ---------- --------- ---------- --------- GROSS MARGIN............................................................ 39,344 23.5 33,564-------- ----- -------- ----- Gross margin......................................... 58,484 23.9 49,893 29.0 SELLING, PRODUCT DEVELOPMENT AND ADMINISTRATIVE EXPENSES.............. 27,667 16.5 22,650 19.6 ---------- --------- ---------- ---------Selling, product development and administrative expenses......................................... 41,178 16.8 34,003 19.7 -------- ----- -------- ----- Operating income........................................................ 11,677 7.0 10,914 9.4income..................................... 17,306 7.1 15,890 9.3 Other (income) expense................................................ 172 0.1 (247) (0.2) ---------- --------- ---------- ---------expense............................. 809 0.3 (67) 0.0 -------- ----- -------- ----- Income before income taxes.............................................. 11,505 6.9 11,161 9.6taxes........................... 16,497 6.8 15,957 9.3 Income tax expense.................................................... 3,818expense................................. 5,561 2.3 3,7615,403 3.2 ---------- --------- ---------- --------- NET INCOME..............................................................-------- ----- -------- ----- Net income........................................... $ 7,687 4.6%10,936 4.5% $ 7,400 6.4%10,554 6.1%
NET SALES ForNet sales for the secondthird quarter ended JuneSeptember 30, 1999 sales were $84.0$76.8 million compared with $59.2$56.5 million forin the secondsame quarter of 1998, representing a $24.8$20.3 million, or a 4236 percent, increase. The acquisitionsacquisition of ETSIGerhardi accounted for $16.0 million of the sales increase in April 1998the third quarter of 1999 compared with the same quarter of 1998. Sales from operations other than Gerhardi increased in the third quarter of 1999 by $4.4 million or 8 percent from third quarter 1998. This increase was realized primarily in the Heat-Management and Gerhardi on December 30, 1998 increased second quarterPaperboard segments offset by small declines in the Filtration and Wovens segments. Excluding $64.9 million in incremental 1999 sales from operations acquired during 1998, sales for the nine months ended September 30, 1999 have increased by $23.0$7.2 million, compared with 1998. Excludingor 4 percent. The majority of these sales came from the effectaddition of acquisitions, organic growthGerhardi that is included in the quarter of $1.8 million emanated primarily fromHeat-Management segment. Consistent with the Heat-Management segment and Other, offset by a decline in the Wovens segment. Sales for thefirst six months ended June 30,of 1999, increased by $51.8 million over the same period in the previous year. Acquisitions completed during and subsequent to the six-month period in 1998 contributed $48.9 million to this increase, resulting in a $2.9 million increase inorganic sales growth is predominantly derived from existing operations. Heat-managementHeat-Management sales to the automotive market were the major contributor to organic growth in the first six months of 1999. Newwith new products that contributed included an interior duct insulator for Audi, a trunk insulator and two different wiring harness shields for the new DaimlerChrysler Neon, and asuch as Zero Clearance-TM- exhaust shield on Ford's F-Series trucks. The latter combines acoustical and thermal performance and supports Lydall's strategy of becoming a total system supplier. During the second quarter, Lydall launched a new product, dBLyte-TM-. It is an under-carpet acoustical insulation for the automotive market. A patent has been applied for on this recyclable, lightweight, high quality sound-blocking barrier that is very cost effective in use. Initial approvals for 1211 this product include Nissan's Altima and Sentra models. Also, during the second quarter, Solvay, a major fuel tank manufacturer, designated Lydall as one of two exclusive suppliers of multi-layer shields for its plastic gas tanks. In addition, the Company was awarded the underbody and engine-mount shields for Chrysler's new RS minivan starting for the 2001 model year. GROSS MARGIN Gross margin in the secondthird quarter of 1999 was 24.124.9 percent compared with second28.9 percent in the third quarter of 1998 gross margin of 29.6 percent.1998. Excluding the effects of Gerhardi, gross margin for the secondthird quarter 1999 declined by 2 percent to 2927.6 percent. AlthoughDuring the third quarter there was a deterioration in the price-to-cost ratio mainly in our Paperboard segment. In addition, changes in sales mix in the Heat-Management segment also had a negative impact. Cost reduction actions have been taken in the fourth quarter within that segment to reduce fixed overhead costs which will benefit the Company recorded a positive price-to-cost ratio in the first quarter and recognized substantial cost savings in cost of goods sold, expenses associated with the consolidation of two automotive heat-shield manufacturing facilities in North Carolina largely offset gains. The Company expects the integration of these two plants to generate significant savings beginning later in 1999.2000. For the sixnine months ended JuneSeptember 30, 1999, gross margin was 23.523.9 percent compared with the first six months of 1998 of 29and, excluding Gerhardi, it was 28.3 percent. Excluding Gerhardi, the 1999 gross margin was 28.6 percent compared with 29This compares to 29.0 percent for the same period innine months ended September 30, 1998. SELLING, PRODUCT DEVELOPMENT AND ADMINISTRATIVE EXPENSES Selling, product development and administrative expenses were $14.3 million in the secondthird quarter of 1999 comparedincreased by $2.2 million, or 19.0 percent, over the third quarter of 1998 primarily due to the costs added with secondthe acquisition of Gerhardi. However, selling, product development and administrative expenses were 17.6 percent of sales in the third quarter 1998 expenses of $11.9 million. Gerhardi accounted for most of1999, down from 20.1 percent in the increase with severance costs and compensation accruals making upsame period a year ago. For the balance. During the first sixnine months ofended September 30, 1999, selling, product development and administrative expenses were $27.7$41.2 million compared with $22.7to $34.0 million fromfor the comparablesame period in 1998. Excluding Gerhardi,the prior year, representing an increase of $7.2 million, or 21 percent. This increase was also primarily due to costs at acquired businesses. As a percent of sales, selling, product development, and administrative expenses duringdelined from 19.7 percent in the quarter and the sixnine months ended JuneSeptember 30, 1999 as a percentage1998 to 16.8 percent in the comparable period of sales have decreased by approximately 3 percent over the same periods in 1998.1999. INTEREST EXPENSE Interest expense forin the secondthird quarter of 1999 was $588$701 thousand compared with $196$262 thousand duringin the comparablesame quarter of 1998, representing a $392 thousand, or 200 percent, increase.1998. For the sixnine months ended JuneSeptember 30, 1999 and 1998, interest expense was $1.3$2.0 million and $285compared to $547 thousand respectively.in the same period in the prior year. The increase in interest expense is mainly attributable to additional borrowings in 1999 relateddebt incurred to finance acquisitions completed in 1998.1998 and to fund capital expenditures. FOREIGN CURRENCY TRANSACTION GAIN In the first six monthsquarter of 1999 the Company recorded a foreign currency transaction gain of $1.4 million due to the appreciation in the dollar against the Euro since January. The gain related to the portion of the Gerhardi purchase price funded from domestic credit lines denominated in Euros. The loan, which was paid in full in June of 1999, was hedged with a forward contract early in the second quarter. Foreign currency transaction gains and losses were not significant in the second and third quarters. It is not Lydall's policy to enter into foreign currency denominated transactions for speculative purposes. As a result, transaction gains such as this are not expected to recur. LIQUIDITY AND CAPITAL RESOURCES Operating cash flow (earnings before interest, taxes, depreciation and amortization) was $9.3increased 20 percent to $9.4 million in the secondthird quarter of 1999, up 6 percent over1999. For the $8.8 million generated in the second quarter of 1998. Year-to-datenine months ended September 30, 1999 operating cash flow increased by 13totaled $28 million, an increase of 15 percent to $18.6 million compared with $16.5 million infrom the same period in 1998. 13During the third quarter of 1999 the Company borrowed an additional $7.0 million on foreign lines of credit and its new credit facility. Operating cash flow and borrowings in the third quarter were used primarily to fund capital expenditures and working capital requirements. 12 In July 1999, Lydall, completedInc. and certain subsidiaries entered into a $69 million credit facility with a group of five banking institutions in the refinancingthird quarter. The facility is comprised of its short-term debt into a Euro-denominated term loan equivalent toof approximately $19 million to finance a large portion of the Gerhardi acquisition, plusand a $50 million domestic revolving credit facility. Of the $50 million, $20 millionfacility which is currently outstanding. Classifications of debt at June 30, 1999 have been adjusted to reflect the maturity of the components of the new facility. Working capital at June 30, 1999 was $36.3 million compared with a deficit of $9.1 million at December 31, 1998, mostly due to the reclassification described above. Lydall expects to fund future working capital and capital expenditure requirements from operations and, as needed, short- and long-term borrowings. NEW MEMBER OF THE BOARD OF DIRECTORS Robert E. McGill, III was elected to fill an existing vacancy on Lydall, Inc.'s Board of Directors at its regular meeting held August 4, 1999. Mr. McGill retired from The Dexter Corporation as Executive Vice President--Finance & Administration at the end of 1994 and as a Director in mid-1995. Mr. McGill (age 68) joined The Dexter Corporation in 1975 as Vice President--Finance & Secretary. In 1983, Mr. McGill became Senior Vice President--Finance & Administration, and was elected to Dexter's Board of Directors. He became Executive Vice President--Finance & Administration in 1989. Mr. McGill also serves on the boards of Chemfab Corporation, Connecticut Surety Corporation and Ravenswood Winery, Inc. He is active in community leadership, serving as a managing partner of The Berkshires Capital Investors LLP. He is also a trustee of Travelers Mutual & Variable Annuity Funds, Colt Bequest, Inc., the Association Des Amis De L'Abbye Notre Dame De Valmont, and the Willliamstown Art Conservation Center.renewed every three years. ACCOUNTING STANDARDS In June of 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. It requires that all derivatives be recognized as either assets or liabilities on the balance sheet and that those instruments be measured at their fair value. The statement is effective for fiscal years beginning after June 15, 2000. At JuneSeptember 30, 1999, the Company did not have any derivative instruments.had one interest rate swap and one forward currency contract outstanding. Lydall is currently evaluating the effect on the Company's consolidated financial position, results of operations, comprehensive income, orand cash flows as a result of implementing this pronouncement. YEAR 2000 Most of the Company's operating locations are Year 2000 compliant. During the third quarter, theThe Company will be completing systemhas satisfactorily completed testing of all significant hardware and softwaremajor systems in a simulated environment that will test proper functionality on and around sensitive Year 2000 dates. Date sensitive components of machinery and equipment have been reviewed and remediation of any non-compliant parts is essentially complete. The Company is also completing its examinationhas examined information from all major customers and suppliers and has not identified any significant Year 2000 concerns. Interaction with customers and suppliers will continue through year-end to monitor for any potential interruptions that could result from Year 2000 issues. Despite these efforts, the Company can provide no assurance that all customer and vendor Year 2000 compliance plans will be successfully completed to avoid possible interruptions. All operations of all embedded microchips in manufacturingthe Company have been charged with establishing contingency plans for possible utility, logistic, supply chain and other critical equipment. Some major automotive customers have conducted audits of Lydall's systems and ability to produce and deliver product and consider the Company capable of producing and shipping product in the year 2000 and thereafter. The Company is continuing efforts to ensure that critical vendors and customers are capable of handling date-sensitive transactionsinterruptions. This process will continue through the end of the year. Contingency plansyear and will be developed if suppliers are found not to be compliant, or if otherwise considered necessary. 14 The failure ofadapted for changes in perceived risks as they arise. While the Company could fail to correct or identify a material Year 2000 issue or identify vendors or customers with such a problemwhich could result in an interruption in, or failure of, certain normal business activities or operations for an indefinite period of time. Lydall, Inc.time, management feels that its efforts and the diversity of its businesses help to reduce the potential impact of non-compliance. The Company has capitalized approximately $10.6$11.1 million under its comprehensive program to upgrade information systems, called Lydall 2000, which has been underway since 1995. It is expected that there will be an additional $450 thousand capitalized under this program before its completion innow complete. The Company does not track internal costs incurred for the thirdYear 2000 project. These costs are principally internal payroll costs. Costs incurred during the fourth quarter of 1999.1999 relating to the Year 2000 issue are estimated to be immaterial to results of operations and cash flows. FORWARD LOOKING INFORMATION In the interest of more meaningful disclosure, Lydall and its management make statements regarding the future outlook of the Company. The Company's actual results could differ materially from those set forth in forward-looking statements. Certain factors that might cause such a difference include risks and uncertainties detailed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in the Company's 1998 Annual Report on Form 10-K. ITEM 33. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In July of 1999 Lydall borrowed approximately $19 million in a 5 year term loan denominated in Euro. The loan was taken out to refinance the debt incurred upon the acquisition of Lydall's German operations. The term loan has a variable interest rate based on Euro LIBOR. Also in July 1999, Lydall entered into an interest rate swap agreement to convert the base rate component of its variable interest rate interest coston a Euro denominated term-loan to a fixed rate of 3.45%3.45 percent to take advantage of favorable longer-termlong-term borrowing rates in Europe. The addition of a credit spread, which varies as a function of Lydall's consolidated debt to EBITDA ratio, brought the all-in rate to 4.7 percent at 13 September 30, 1999. The weighted average variable interest rate for the third quarter of 1999 was 3.94 percent. The Company also purchasedhad a forward contract in July 1999outstanding for the purchase of Euro to hedge domestic intercompany receivables due from Lydall's French operation.make the first installment payment on the Euro denominated term loan on behalf of its subsidiary, Lydall Deutschland Holding GmbH. The forward contract andsettled in the intercompany balance will settle before the end of the third quarter.fourth quarter resulting in no income statement effect. As of the date of this report, there are no other significant changes in market risks from those disclosed in Item 7a of Management's Discussion and Analysis of Financial Condition and Results of operationsOperations in the Company's 1998 Annual Report on Form 10-K. PART II. OTHER INFORMATION ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS On May 20, 1999, the Board of Directors of the Company adopted a Rights Agreement (the "Agreement"). Information concerning the Agreement may be found under Item 5 of the Company's Current Report on the Form 8-K dated May 20, 1999 (date of earliest event reported), filed with the Securities and Exchange Commission on May 28, 1999. Such information is hereby incorporated herein by reference. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on May 12, 1999. Stockholders elected ten Directors to serve for one-year terms, until the next Annual Meeting to be held in 2000. 15 1.) Election of Nominees to the Board of Directors
FOR WITHHELD ------------ --------- Lee Asseo........................................................ 11,661,235 900,273 Samuel P. Cooley................................................. 11,659,759 901,749 W. Leslie Duffy.................................................. 11,654,008 907,500 David Freeman.................................................... 11,661,832 899,676 Christopher R. Skomorowski....................................... 11,665,424 896,084 Elliott F. Whitely............................................... 11,657,948 903,560 Roger M. Widmann................................................. 11,659,921 901,587 Albert E. Wolf................................................... 11,659,759 901,749
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 10.1--Credit Agreement dated July 14,3 (ii)--Lydall, Inc. By-laws, adopted October 27, 1999 27.1--Financial Data Schedule, filed herewith b. Reports on Form 8-K On May 28, 1999, the registrant filed a current reportThe Company did not file any reports on Form 8-K announcing thatduring the Board of Directors of the Company declared a dividend distribution of one Right for each outstanding share of common stock payable to shareholders of record on Junethree months ended September 30, 1999. The description and terms of the Rights are set forth in a Rights Agreement between the Company and American Stock Transfer and Trust Company that was included in the filing. 1614 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LYDALL, INC. (Registrant) August XX,LYDALL, INC. (Registrant) November 12, 1999 By: /s/ JOHN E. HANLEY ----------------------------------------- John E. Hanley Vice President, Finance and Treasurer (Principal Accounting and Financial Officer)VICE PRESIDENT, FINANCE AND TREASURER (PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
1715 LYDALL, INC. INDEX TO EXHIBITS
EXHIBIT NO. - ---------------------------------- 10.1 Credit Agreement dated July 14, 1999. 27.1 Financial Data Schedule.
1816