<PAGE>
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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 MARCH 31, 1996
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 OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE COLONIAL RD., 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.
<TABLE>
<S> <C>
Common stock $.10 par value per share.
Total shares outstanding May 8, 1996 17,097,626
</TABLE>
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<PAGE>
LYDALL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets......................... 2
Consolidated Condensed Statements of Income................... 3
Consolidated Condensed Statements of Cash Flows............... 4
Notes to Consolidated Condensed Financial Statements.......... 5-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 7-8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................... 8
Signature............................................................ 9
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 26,423 $ 27,820
Short-term investments................................ 1,977 913
Accounts receivable, net.............................. 35,670 34,202
Inventories:
Finished goods...................................... 7,180 6,033
Work in process..................................... 3,716 3,367
Raw materials and supplies.......................... 7,104 7,217
LIFO reserve........................................ (2,518) (2,493)
-------- --------
Total inventories..................................... 15,482 14,124
Prepaid expenses...................................... 749 820
Deferred tax assets................................... 4,590 4,590
-------- --------
Total current assets................................ 84,891 82,469
-------- --------
Property, plant and equipment, at cost.................. 106,690 105,467
Less accumulated depreciation........................... (47,268) (45,393)
-------- --------
59,422 60,074
Other assets, at cost, less amortization................ 15,177 15,529
-------- --------
$159,490 $158,072
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................... $ 2,826 $ 2,871
Accounts payable...................................... 18,566 14,770
Accrued taxes......................................... 1,021 263
Accrued payroll and other compensation................ 3,326 5,426
Other accrued liabilities............................. 7,613 6,409
-------- --------
Total current liabilities........................... 33,352 29,739
Long-term debt.......................................... 7,250 7,750
Deferred tax liabilities................................ 13,799 14,207
Other long-term liabilities............................. 3,917 4,565
Stockholders' equity:
Preferred stock....................................... -- --
Common stock.......................................... 2,097 2,089
Capital in excess of par value........................ 33,145 32,448
Foreign currency translation adjustment............... 1,792 2,091
Pension liability adjustment.......................... (532) (459)
Retained earnings..................................... 84,426 78,461
-------- --------
120,928 114,630
Less: treasury stock, at cost......................... (19,756) (12,819)
-------- --------
Total stockholders' equity.......................... 101,172 101,811
-------- --------
$159,490 $158,072
======== ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Net sales................................................ $ 65,794 $ 62,736
Cost of sales............................................ 45,003 43,510
--------- ---------
Gross margin............................................. 20,791 19,226
Selling, product development and administrative expenses. 11,216 10,263
--------- ---------
Operating income......................................... 9,575 8,963
Other (income) expense
Investment income...................................... (324) (232)
Interest expense....................................... 182 264
Other, net............................................. 125 224
--------- ---------
(17) 256
--------- ---------
Income before income taxes............................... 9,592 8,707
Income tax expense....................................... 3,627 3,401
--------- ---------
Net Income............................................... $ 5,965 $ 5,306
========= =========
Per-share amounts:
Net income per share*.................................... $ .33 $ .29
========= =========
Weighted average common stock and equivalents
outstanding*............................................ 18,310 18,144
========= =========
</TABLE>
- --------
* Share information for 1995 was restated to reflect a two-for-one stock split
distributed June 21, 1995.
See accompanying Notes to Consolidated Condensed Financial Statements.
3
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LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 5,965 $ 5,306
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 2,026 1,826
Amortization........................................... 370 382
Changes in operating assets and liabilities:
Accounts receivable................................... (1,571) (2,254)
Inventories........................................... (1,412) (2,078)
Other assets.......................................... 51 526
Accounts payable...................................... 3,855 (884)
Accrued taxes......................................... 773 1,690
Accrued payroll and other compensation................ (2,094) (1,492)
Deferred income taxes................................. (327) 190
Other long-term liabilities........................... (605) 13
Other accrued liabilities............................. 1,213 1,485
--------- ---------
Total adjustments....................................... 2,279 (596)
--------- ---------
Net cash provided by operating activities................ 8,244 4,710
Cash flows from investing activities:
Additions of property, plant & equipment................ (2,078) (2,179)
Purchase of investments, net............................ (1,138) (599)
Disposals of property, plant & equipment, net........... 363 4
--------- ---------
Net cash used for investing activities................... (2,853) (2,774)
--------- ---------
Cash flows from financing activities:
Long-term debt payments................................. (540) (538)
Issuance of common stock................................ 705 1,751
Acquisition of common stock............................. (6,937) --
--------- ---------
Net cash provided (used for) financing activities........ (6,772) 1,213
--------- ---------
Effect of exchange rate changes on cash.................. (16) 29
--------- ---------
Increase (decrease) in cash and cash equivalents......... (1,397) 3,178
Cash and cash equivalents at beginning of period......... 27,820 11,684
--------- ---------
Cash and cash equivalents at end of period............... $ 26,423 $ 14,862
========= =========
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest............................................... $ 341 $ 149
Income taxes........................................... 3,268 1,716
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
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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.
2. Earnings per common share are based on the weighted average number of
common shares outstanding during the period, including the effect of stock
options, stock awards and warrants where such effect would be dilutive.
Fully diluted earnings per share are not presented since the dilution is
not material.
3. 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 two sites have been
combined and are viewed by the EPA as one site. 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.
There are over 800 potentially responsible parties ("prp") which 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 the
financial statements and 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.
During the quarter ended September 30, 1994, the Company learned that the EPA
had completed its Record of Decision ("ROD") for the Michigan 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. 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. No demand has been
formally made in this matter, however, the Company believes it has several
defenses to the action.
Management believes the ultimate disposition of the claim will not have a
material adverse effect upon the Company's consolidated financial position or
results of operations.
4. On March 19, 1996, patent litigation brought by ATD Corporation ("ATD")
against Lydall in the United States District Court for the Eastern District
of Michigan Southern Division was concluded with all of ATD's claims for
damages being denied. An eight-member jury decided in favor of Lydall in
the lawsuit filed by ATD alleging patent infringement of two ATD patents
for all-metal insulators by Lydall's all-metal automotive heat shields.
ATD had previously filed an amended complaint against Lydall, Inc. alleging
that the Company willfully infringed ATD's patents, both literally and under
the Doctrine of Equivalents. ATD sought as relief for Lydall's alleged
infringement both an injunction and damages. Lydall vigorously contested this
action and filed a counterclaim to invalidate ATD's patents.
5
<PAGE>
On January 9, 1996, a decision on the parties' cross motions for summary
judgment was entered. The Court ruled that Lydall's all-metal shield products
did not literally infringe ATD's patents and gave the issue of equivalency,
i.e., the degree to which Lydall's products are different from ATD's
products, to a jury to decide. The court also gave the issue of validity of
ATD's patents to the jury. Shortly before the trial began, the Court ruled
that Lydall did not willfully infringe.
The trial began on February 21, 1996 and concluded on March 19, 1996. The
jury decided in favor of Lydall on the issue of infringement of the patents
involved in the suit on all but one claim of one of the two patents. With
respect to that claim, the jury had voted seven to one for noninfringement,
but because a unanimous vote was required, the judge declared the jury
deadlocked. The jury found that key claims which formed the basis of both of
ATD's patents to be invalid. In view of the jury's decisions in Lydall's
favor, ATD's claim for damages was denied.
On April 5, 1996, ATD filed a Motion for Judgment as a Matter of Law or in
the alternative for a New Trial. The Company has filed a response, however
the court has not yet ruled on that motion. While the outcome of the motion
cannot be predicted, counsel for the Company has advised that the motion is
without merit.
5. The Company will adopt SFAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," for the year
ending December 31, 1996. The Company estimates that the adoption will not
have a material effect on the Company's consolidated financial position or
results of operations.
The Company will adopt the disclosure requirements of SFAS 123, "Accounting
for Stock-Based Compensation," for the year ending December 31, 1996. As
permitted under SFAS 123, the Company has elected not to adopt the fair-
value-based method of accounting for its stock-based compensation plans, but
will continue to account for such compensation under the provisions of
APB Opinion No. 25. The adoption will have no effect on the Company's
consolidated financial position or results of operations.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
For the first quarter ended March 31, 1996, sales rose 5 percent to a record
$65.8 million compared with $62.7 million for the same quarter last year. Net
income in the 1996 first quarter was $6.0 million compared with $5.3 million
for the prior year to date quarter--up 12 percent. On a per-share basis, the
Company earned a record $.33 in the first quarter of 1996 compared with $.29
in the same period last year--a 14 percent increase.
Gross margin in the first quarter 1996 was $20.8 million, or 31.6 percent of
sales, and after-tax return on sales was 9.1 percent. For the 1995 first
quarter, gross margin was $19.2 million, or 30.6 percent of sales, and after-
tax return on sales was 8.5 percent. Margins continued to improve at the
Company's two most recent acquisitions and are now at a combined 18.9 percent
of sales for the first quarter.
Despite a slight slowing of economic growth, demand remained strong in most
of Lydall's markets. Revenue growth came from both established and new
products, while the effect of price increases was negligible. Demand for
Lydair air filtration media employed in the air purification systems of clean
rooms around the world continued to be strong. Sales of products sold to the
automotive market, particularly battery insulators and all-metal heat shields,
also remained robust. Sales of thermal barrier and insulation materials for
industrial end-users such as commercial building and architectural components
increased as well.
Additional production of air filtration media was successfully introduced
during the quarter into the Company's facility in France. Lydall also
increased penetration and new applications for automotive thermal barriers.
The Company was, however, adversely affected by lower sales of more
economically sensitive products, a less vibrant market for materials handling
products, the strike at certain General Motors plants, and the continuing
decline of cellulose battery separator sales to the European automotive
aftermarket, an expected technological change. Business conditions have been
more difficult this year than last, but an improvement is anticipated as the
year progresses.
Selling, product development and administrative expenses, including $1.0
million to successfully defend a lawsuit alleging patent infringement,
amounted to $11.2 million or 17.0 percent of sales. This compares to first
quarter 1995 expenses of $10.3 million which amounted to 16.4 percent of
sales. The 1995 figure had slightly larger incentive compensation expenses due
to the outstanding results obtained in the first quarter of 1995 in comparison
to 1994.
The effective tax rate for the Company's domestic operations was 37.8% for
the first quarter of 1996, versus 39.3% for the first quarter of 1995. These
rates would have been 38.8% and 39.8% in the first quarter of 1996 and 1995,
respectively, had the Company not invested cash balances in tax advantaged
investments. The tax rate at our Axohm Division in France is 36.6 percent in
1996 compared to 33.3 percent in the first quarter of 1995, but the effect on
Lydall's consolidated results was minimal.
LIQUIDITY AND CAPITAL RESOURCES:
Lydall generated record operating cash flow of $11.8 million in the first
quarter of 1996 and had cash, cash equivalents and short-term investments of
$28.4 million and working capital of $51.5 million at March 31, 1996. The
Company's current ratio decreased slightly to 2.55 at March 31, 1996 compared
with 2.77 at the end of 1995, and total debt to total capitalization was 9
percent, the same percentage as at the end of 1995. Capital expenditures of
$2.1 million were funded during the quarter by cash from operations out of a
capital plan of $13.0 million for the full year.
Also, during the quarter, the Company used $6.9 million in cash to purchase
300,000 shares of its common stock from a group of executives at a cost which
was $.25 per share off the closing market price on the day of
7
<PAGE>
the transaction. The proceeds of the transaction largely covered individual
tax and debt obligations which the executives incurred as a result of
exercising incentive stock options early in 1995. The purchase of these shares
was in accordance with a previously announced stock buyback program which
authorizes Lydall to acquire its stock from time to time on the open market
and in private transactions as market conditions permit and opportunities
arise.
During the month of April 1996, the Company repaid $2.2 million in long-term
debt, made the semi-annual interest payment, paid quarterly federal and state
income taxes and funded pension obligations. These payments were made from
accumulated cash and cash from operations. The Company expects to continue to
finance its day-to-day operating needs from these same sources.
ACCOUNTING STANDARDS:
The Company will adopt SFAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," for the year ending
December 31, 1996. The Company estimates that the adoption will not have a
material effect on the Company's consolidated financial position or results of
operations.
The Company will adopt the disclosure requirements of SFAS 123, "Accounting
for Stock-Based Compensation," for the year ending December 31, 1996. As
permitted under SFAS 123, the Company has elected not to adopt the fair-value-
based method of accounting for its stock-based compensation plans, but will
continue to account for such compensation under the provisions of APB Opinion
No. 25. The adoption will have no effect on the Company's consolidated
financial position or results of operations.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
11.1 --Schedule of Computation of Weighted Average Shares Outstanding,
filed herewith.
27.1 --Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
On February 15, 1996, the registrant filed a current report on Form 8-K
announcing its earnings for the fourth quarter and year ended December 31,
1995, and that a competitor, ATD Corporation, had filed a patent infringement
complaint against the Company. The favorable jury verdict of this case was
subsequently filed as part of the Company's Annual Report on Form 10-K filed
March 27, 1996.
8
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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)
By /s/ John E. Hanley
------------------------------------------
JOHN E. HANLEY
Vice President-- Finance and Treasurer
(Principal Accounting and Financial Officer)
May 9, 1996
9
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LYDALL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
11.1 Schedule of Computation of Weighted Average Shares Outstanding.
27.1 Financial Data Schedule.
</TABLE>
10
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LYDALL, INC.
Exhibit 11.1
Schedule of Computation of Weighted Average Shares Outstanding
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
-------------
1996 1995
---- ----
(In Thousands)
(Unaudited)
<C> <C>
Primary
- -------
Weighted average number
of common shares 17,270 17,240
Additional shares assuming
conversion of stock
options and warrants 1,040 904
------ -----
Weighted average common shares
and equivalents outstanding 18,310 18,144
====== ======
Fully Diluted
- -------------
Weighted average number of
common shares 17,270 17,240
Additional shares assuming
conversion of stock options
and warrants 1,076 909
------ -----
Weighted average common shares
and equivalents outstanding 18,346 18,149
====== ======
</TABLE>
Share information for 1995 was restated to reflect a two-for-one stock split
distributed June 21, 1995.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 26,423
<SECURITIES> 1,977
<RECEIVABLES> 36,910
<ALLOWANCES> 1,966
<INVENTORY> 15,482
<CURRENT-ASSETS> 84,891
<PP&E> 106,690
<DEPRECIATION> 47,268
<TOTAL-ASSETS> 159,490
<CURRENT-LIABILITIES> 33,352
<BONDS> 10,076
0
0
<COMMON> 2,097
<OTHER-SE> 99,074
<TOTAL-LIABILITY-AND-EQUITY> 159,490
<SALES> 65,794
<TOTAL-REVENUES> 65,794
<CGS> 45,003
<TOTAL-COSTS> 45,003
<OTHER-EXPENSES> (17)
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 182
<INCOME-PRETAX> 9,592
<INCOME-TAX> 3,627
<INCOME-CONTINUING> 5,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,965
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
