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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JUNE 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 NUMBER 1-7665
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LYDALL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0865505
(State of incorporation) (IRS Employer Identification No.)
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)
NONE
(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
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LYDALL, INC.
INDEX
PAGE NO.
-----------
Part I. Financial Information
Item 1. Financial Statements.........................................................
Consolidated Condensed Balance Sheets........................................ 3
Consolidated Condensed Statements of Net Income and Comprehensive Income..... 4--5
Consolidated Condensed Statements of Cash Flows.............................. 6
Notes to Consolidated Condensed Financial Statements......................... 7--11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 12--15
Operations...................................................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 15
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.............................................................................................. 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 2,498 $ 2,254
Accounts receivable, net............................................................ 45,294 48,609
Inventories:
Finished goods.................................................................... 10,775 10,303
Work in progress.................................................................. 8,640 8,859
Raw materials..................................................................... 10,687 11,003
LIFO reserve...................................................................... (1,291) (1,216)
----------- -------------
Total inventories................................................................... 28,811 28,949
Taxes receivable.................................................................... -- 2,256
Prepaid expenses.................................................................... 1,981 1,966
Deferred tax assets................................................................. 7,207 6,785
----------- -------------
Total current assets.............................................................. 85,791 90,819
Property, plant and equipment, at cost................................................ 174,983 172,485
Less accumulated depreciation......................................................... (68,583) (64,649)
----------- -------------
106,400 107,836
Other assets, at cost, less amortization.............................................. 28,762 28,193
Total assets........................................................................ $ 220,953 $ 226,848
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 2,255 $ 2,340
Short-term borrowings............................................................... 2,511 52,324
Accounts payable.................................................................... 21,457 22,530
Accrued taxes....................................................................... 953 1,411
Accrued payroll and other compensation.............................................. 7,811 5,810
Other accrued liabilities........................................................... 14,544 15,494
----------- -------------
Total current liabilities......................................................... 49,531 99,909
Deferred tax liabilities.............................................................. 10,072 10,726
Other long-term liabilities........................................................... 6,993 6,988
Long-term debt........................................................................ 41,634 --
Contingencies
Stockholders' equity:
Preferred stock..................................................................... -- --
Common stock........................................................................ 2,177 2,171
Capital in excess of par value...................................................... 39,067 38,697
Retained earnings................................................................... 136,997 129,310
Accumulated other comprehensive income.............................................. (4,553) (71)
----------- -------------
173,688 170,107
Less: treasury stock, at cost....................................................... (60,965) (60,882)
----------- -------------
Total stockholders' equity........................................................ 112,723 109,225
----------- -------------
Total liabilities and stockholders' equity.......................................... $ 220,953 $ 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
JUNE 30,
--------------------
1999 1998
--------- ---------
(UNAUDITED)
Net sales................................................................................... $ 83,998 $ 59,244
Cost of sales............................................................................... 63,729 41,696
--------- ---------
Gross margin................................................................................ 20,269 17,548
Selling, product development and administrative expenses.................................... 14,330 11,913
--------- ---------
Operating income............................................................................ 5,939 5,635
Other (income) expense:
Investment income......................................................................... (9) (76)
Interest expense.......................................................................... 588 196
Foreign currency transaction loss......................................................... 317 22
Other..................................................................................... (327) (343)
--------- ---------
569 (201)
--------- ---------
Income before income taxes.................................................................. 5,370 5,836
Income tax expense.......................................................................... 1,765 1,985
--------- ---------
Net income.................................................................................. $ 3,605 $ 3,851
--------- ---------
--------- ---------
Basic earnings per common share............................................................. $ .23 $ .24
--------- ---------
Weighted average common stock outstanding................................................... 15,732 15,997
Diluted earnings per common share........................................................... $ .23 $ .24
--------- ---------
Weighted average common stock and equivalents outstanding................................... 15,822 16,363
--------- ---------
--------- ---------
Net income.................................................................................. $ 3,605 $ 3,851
Other comprehensive loss, before tax:
Foreign currency translation adjustments.................................................. (23) 227
Unrealized loss on securities............................................................. -- (354)
--------- ---------
Other comprehensive loss, before tax........................................................ (23) (127)
Income tax (provision) benefit related to items of other comprehensive loss................. (1,498) 28
--------- ---------
Other comprehensive loss, net of tax........................................................ (1,521) (99)
--------- ---------
Comprehensive income........................................................................ $ 2,084 $ 3,752
--------- ---------
--------- ---------
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)
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
---------- ----------
(UNAUDITED)
Net sales................................................................................. $ 167,600 $ 115,786
Cost of sales............................................................................. 128,256 82,222
---------- ----------
Gross margin.............................................................................. 39,344 33,564
Selling, product development and administrative expenses.................................. 27,667 22,650
---------- ----------
Operating income.......................................................................... 11,677 10,914
Other (income) expense:
Investment income....................................................................... (15) (400)
Interest expense........................................................................ 1,309 285
Foreign currency transaction (gain) loss................................................ (1,010) 36
Other................................................................................... (112) (168)
---------- ----------
172 (247)
---------- ----------
Income before income taxes................................................................ 11,505 11,161
Income tax expense........................................................................ 3,818 3,761
---------- ----------
Net income................................................................................ $ 7,687 $ 7,400
---------- ----------
---------- ----------
Basic earnings per common share........................................................... $ .49 $ .46
---------- ----------
Weighted average common stock outstanding................................................. 15,724 16,020
Diluted earnings per common share......................................................... $ .49 $ .45
---------- ----------
Weighted average common stock and equivalents outstanding................................. 15,808 16,434
---------- ----------
---------- ----------
Net income................................................................................ $ 7,687 $ 7,400
Other comprehensive loss, before tax:
Foreign currency translation adjustments................................................ (4,482) (90)
Unrealized loss on securities........................................................... -- (551)
---------- ----------
Other comprehensive loss, before tax...................................................... (4,482) (641)
Income tax benefit related to items of other comprehensive loss........................... -- 141
---------- ----------
Other comprehensive loss, net of tax...................................................... (4,482) (500)
---------- ----------
Comprehensive income...................................................................... $ 3,205 $ 6,900
---------- ----------
---------- ----------
See accompanying Notes to Consolidated Condensed Financial Statements.
5
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
--------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income.................................................................................... $ 7,687 $ 7,400
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.............................................................................. 5,760 4,471
Amortization.............................................................................. 873 967
Loss on disposition of property, plant and equipment...................................... 32 310
Foreign currency transaction (gain) loss.................................................. (1,010) 36
Changes in operating assets and liabilities, excluding effects from acquisitions:
Accounts receivable..................................................................... 1,210 193
Taxes receivable........................................................................ 2,256 2,032
Inventories............................................................................. (1,454) (2,632)
Other assets............................................................................ (1,526) 402
Accounts payable........................................................................ 46 3,221
Accrued taxes........................................................................... (399) 152
Accrued payroll and other compensation.................................................. 2,394 (1,772)
Deferred income taxes................................................................... (853) (381)
Other long-term liabilities............................................................. 130 (306)
Other accrued liabilities............................................................... 48 (551)
--------- ---------
Total adjustments......................................................................... 7,507 6,142
--------- ---------
Net cash provided by operating activities..................................................... 15,194 13,542
--------- ---------
Cash flows from investing activities:
Acquisitions................................................................................ (178) (16,269)
Additions of property, plant, and equipment................................................. (8,817) (8,482)
Purchase of investments, net................................................................ -- (395)
--------- ---------
Net cash used for investing activities........................................................ (8,995) (25,146)
--------- ---------
Cash flows from financing activities:
Long-term debt payments..................................................................... (2,100) (2,494)
Proceeds from short-term borrowings......................................................... 54,881 28,208
Payments of short-term borrowings........................................................... (58,744) (11,761)
Issuance of common stock.................................................................... 376 653
Acquisition of common stock................................................................. (83) (7,978)
--------- ---------
Net cash provided by (used for) financing activities.......................................... (5,670) 6,628
--------- ---------
Effect of exchange rate changes on cash....................................................... (285) (4)
--------- ---------
Increase (decrease) in cash and cash equivalents.............................................. 244 (4,980)
Cash and cash equivalents at beginning of period.............................................. 2,254 8,891
--------- ---------
Cash and cash equivalents at end of period.................................................... $ 2,498 $ 3,911
--------- ---------
--------- ---------
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest.................................................................................... $ 1,323 $ 311
Income taxes................................................................................ 2,726 2,243
Non-cash transactions:
Unrealized gains/losses on available-for-sale securities.................................... -- 430
Reclassification between short and long term assets......................................... -- 904
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. The 10-Q should be read in
conjunction with Lydall's Annual Report on Form 10-K.
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 awards where such effect is
dilutive.
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
JUNE 30, 1999 JUNE 30, 1998
(UNAUDITED) (UNAUDITED)
----------------------------------- ----------------------
NET NET
INCOME SHARES PER-SHARE INCOME SHARES
($000'S) (000'S) AMOUNT ($000'S) (000'S)
----------- --------- ----------- ----------- ---------
Basic earnings per share..................................... $ 3,605 15,732 $ 0.23 $ 3,851 15,997
Effect of dilutive securities: stock options -- 90 .00 -- 366
----------- --------- ----- ----------- ---------
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................................... $ 0.24
-----
-----
FOR THE SIX MONTHS
FOR THE SIX MONTHS ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
(UNAUDITED) (UNAUDITED)
----------------------------------- ----------------------
NET NET
INCOME SHARES PER-SHARE INCOME SHARES
($000'S) (000'S) AMOUNT ($000'S) (000'S)
----------- --------- ----------- ----------- ---------
Basic earnings per share..................................... $ 7,687 15,724 $ 0.49 $ 7,400 16,020
Effect of dilutive securities: stock options -- 84 .00 -- 414
----------- --------- ----- ----------- ---------
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
-----
-----
3. Options to purchase 909,008 shares and 468,879 shares of Lydall Common Stock
for the year-to-date June 30, 1999 and 1998 respectively, as well as 708,872
shares and 661,953 shares for the quarter ended June 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 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)
June 30, 1999 to long-term debt from short-term borrowings to reflect
maturity dates in 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
denominated 5 year term loan in the name of Lydall Deutcheland 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 the acquisitions had occurred on
January 1, 1998.
IN THOUSANDS EXCEPT PER-SHARE DATA FOR THE THREE MONTHS JUNE 30,
ENDED: 1998
- ----------------------------------------------------------------------------------- ---------
Sales.............................................................................. $ 76,833
Net income......................................................................... $ 3,753
Basic earnings per common share.................................................... $ .23
Diluted earnings per common share.................................................. $ .23
IN THOUSANDS EXCEPT PER-SHARE DATA FOR THE SIX MONTHS JUNE 30,
ENDED: 1998
- ---------------------------------------------------------------------------------- ----------
Sales............................................................................. $ 154,399
Net income........................................................................ $ 7,181
Basic earnings per common share................................................... $ .45
Diluted earnings per common share................................................. $ .44
5. 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 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. 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 Report on Form 10-K. The tables below present
revenues and operating income by segment for the three months and six months
ended June 30, 1999 and 1998.
IN THOUSANDS HEAT RECONCILING CONSOLIDATED
FOR THE THREE MONTHS ENDED MANAGEMENT FILTRATION PAPERBOARD WOVENS OTHER ITEMS TOTALS
- -------------------------------------- ------------ ----------- ----------- --------- --------- ----------- ------------
June 30, 1999
Sales............................... $ 45,427 $ 14,740 $ 10,272 $ 943 $ 13,630 $ (1,014) $ 83,998
Operating income(loss).............. $ 2,439 $ 1,798 $ 680 $ (277) $ 1,844 $ (545) $ 5,939
------------ ----------- ----------- --------- --------- ----------- ------------
June 30, 1998
Sales............................... $ 21,217 $ 14,522 $ 10,126 $ 1,403 $ 12,597 $ (621) $ 59,244
Operating income(loss).............. $ 3,230 $ 1,459 $ 570 $ (708) $ 1,113 $ (29) $ 5,635
------------ ----------- ----------- --------- --------- ----------- ------------
IN THOUSANDS HEAT RECONCILING CONSOLIDATED
FOR THE SIX MONTHS ENDED MANAGEMENT FILTRATION PAPERBOARD WOVENS OTHER ITEMS TOTALS
- ------------------------------------- ------------ ----------- ----------- --------- --------- ----------- ------------
June 30, 1999
Sales.............................. $ 90,238 $ 29,418 $ 21,687 $ 1,612 $ 26,514 $ (1,869) $ 167,600
Operating income(loss)............. $ 4,679 $ 3,415 $ 1,559 $ (534) $ 2,973 $ (415) $ 11,677
------------ ----------- ----------- --------- --------- ----------- ------------
June 30, 1998
Sales.............................. $ 40,192 $ 28,379 $ 20,191 $ 3,492 $ 24,738 $ (1,206) $ 115,786
Operating income(loss)............. $ 5,947 $ 2,829 $ 1,082 $ (1,258) $ 1,688 $ 626 $ 10,914
------------ ----------- ----------- --------- --------- ----------- ------------
7. 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 June 30, 1999, the Company did not have any derivative
instruments. Lydall is currently evaluating the effect on the Company's
consolidated financial position, results of operations, comprehensive
income, or 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, 1999 the Company's Board of Directors adopted a Rights Agreement
designed to enhance 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 on
June 30, 1999 of one right for each outstanding share of Common Stock. Each
right entitles the holder to purchase a one one-thousandth of a share of
Series A Junior Participating Preferred Stock at an exercise price of $60,
subject to adjustment. For all Lydall Common Stock held as of 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 time
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 Other for the three
months ended March 31, 1999 and 1998, respectively, have been reclassified
to the Paperboard segment.
11
10. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED JUNE 30, 1999 1998
- --------------------------------------------------------------------------- -------------------- --------------------
NET SALES.................................................................. $ 83,998 100.0% $ 59,244 100.0%
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 11,913 20.1
--------- --------- --------- ---------
Operating income........................................................... 5,939 7.1 5,635 9.5
Other (income) expense................................................... 569 0.7 (201) (0.3)
--------- --------- --------- ---------
Income before income taxes................................................. 5,370 6.4 5,836 9.9
Income tax expense....................................................... 1,765 2.1 1,985 3.4
--------- --------- --------- ---------
NET INCOME................................................................. $ 3,605 4.3% $ 3,851 6.5%
FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
- ------------------------------------------------------------------------ --------------------- ---------------------
NET SALES............................................................... $ 167,600 100.0% $ 115,786 100.0%
Cost of sales......................................................... 128,256 76.5 82,222 71.0
---------- --------- ---------- ---------
GROSS MARGIN............................................................ 39,344 23.5 33,564 29.0
SELLING, PRODUCT DEVELOPMENT AND ADMINISTRATIVE EXPENSES.............. 27,667 16.5 22,650 19.6
---------- --------- ---------- ---------
Operating income........................................................ 11,677 7.0 10,914 9.4
Other (income) expense................................................ 172 0.1 (247) (0.2)
---------- --------- ---------- ---------
Income before income taxes.............................................. 11,505 6.9 11,161 9.6
Income tax expense.................................................... 3,818 2.3 3,761 3.2
---------- --------- ---------- ---------
NET INCOME.............................................................. $ 7,687 4.6% $ 7,400 6.4%
NET SALES
For the second quarter ended June 30, 1999, sales were $84.0 million
compared with $59.2 million for the second quarter 1998, representing a $24.8
million, or a 42 percent, increase. The acquisitions of ETSI in April 1998 and
Gerhardi on December 30, 1998 increased second quarter 1999 sales by $23.0
million compared with 1998. Excluding the effect of acquisitions, organic growth
in the quarter of $1.8 million emanated primarily from the Heat-Management
segment and Other, offset by a decline in the Wovens segment.
Sales for the six months ended June 30, 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 in sales from existing
operations.
Heat-management sales to the automotive market were the major contributor to
organic growth in the first six months of 1999. 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 a 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
12
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 second quarter of 1999 was 24.1 percent compared with
second quarter of 1998 gross margin of 29.6 percent. Excluding the effects of
Gerhardi, gross margin for the second quarter 1999 declined by 2 percent to 29
percent. Although the Company recorded a positive price-to-cost ratio in the
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.
For the six months ended June 30, 1999, gross margin was 23.5 percent
compared with the first six months of 1998 of 29 percent. Excluding Gerhardi,
the 1999 gross margin was 28.6 percent compared with 29 percent for the same
period in 1998.
SELLING, PRODUCT DEVELOPMENT AND ADMINISTRATIVE EXPENSES
Selling, product development and administrative expenses were $14.3 million
in the second quarter 1999 compared with second quarter 1998 expenses of $11.9
million. Gerhardi accounted for most of the increase with severance costs and
compensation accruals making up the balance. During the first six months of
1999, selling, product development and administrative expenses were $27.7
million compared with $22.7 million from the comparable period in 1998.
Excluding Gerhardi, selling, product development and administrative expenses
during the quarter and the six months ended June 30, 1999 as a percentage of
sales have decreased by approximately 3 percent over the same periods in 1998.
INTEREST EXPENSE
Interest expense for the second quarter of 1999 was $588 thousand compared
with $196 thousand during the comparable quarter of 1998, representing a $392
thousand, or 200 percent, increase. For the six months ended June 30, 1999 and
1998, interest expense was $1.3 million and $285 thousand, respectively. The
increase in interest expense is attributable to additional borrowings in 1999
related to acquisitions completed in 1998.
FOREIGN CURRENCY TRANSACTION GAIN
In the first six months 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. 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 $9.3 million in the second quarter of 1999, up 6 percent over
the $8.8 million generated in the second quarter of 1998. Year-to-date operating
cash flow increased by 13 percent to $18.6 million compared with $16.5 million
in the same period in 1998.
13
In July 1999, Lydall completed the refinancing of its short-term debt into a
Euro-denominated term loan equivalent to approximately $19 million to finance a
large portion of the Gerhardi acquisition, plus a $50 million domestic revolving
credit facility. Of the $50 million, $20 million 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.
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 June 30, 1999, the Company did not have any derivative instruments.
Lydall is currently evaluating the effect on the Company's consolidated
financial position, results of operations, comprehensive income, or 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, the Company will be completing system testing of all
significant hardware and software in a simulated environment that will test
proper functionality on sensitive dates. The Company is also completing its
examination of all embedded microchips in manufacturing 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 transactions through the end of
the year. Contingency plans will be developed if suppliers are found not to be
compliant, or if otherwise considered necessary.
14
The failure of the Company to correct a material Year 2000 issue or identify
vendors or customers with such a problem could result in an interruption in, or
failure of, certain normal business activities or operations for an indefinite
period of time.
Lydall, Inc. has capitalized approximately $10.6 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 in the third
quarter of 1999.
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 3 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 variable rate interest cost to a
fixed rate of 3.45% to take advantage of favorable longer-term borrowing rates
in Europe.
The Company also purchased a forward contract in July 1999 to hedge domestic
intercompany receivables due from Lydall's French operation. The forward
contract and the intercompany balance will settle before the end of the third
quarter.
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 operations 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, 1999
27.1--Financial Data Schedule, filed herewith
b. Reports on Form 8-K
On May 28, 1999, the registrant filed a current report on Form 8-K
announcing that 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 June 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.
16
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, 1999 By: /s/ JOHN E. HANLEY
-----------------------------------------
John E. Hanley
Vice President, Finance and Treasurer
(Principal Accounting and Financial
Officer)
17
LYDALL, INC.
INDEX TO EXHIBITS
EXHIBIT NO.
- -------------
10.1 Credit Agreement dated July 14, 1999.
27.1 Financial Data Schedule.
18