<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 SEPTEMBER 30, 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
----------------
LYDALL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-0865505
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE COLONIAL ROAD, P.O. BOX 151, 06045
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 November 7, 1996 17,087,330
</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....................... 3-4
Consolidated Condensed Statements of Cash Flows................... 5
Notes to Consolidated Condensed Financial Statements.............. 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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 35,298 $ 27,820
Short-term investments............................. 2,518 913
Accounts receivable, net........................... 33,240 34,202
Inventories:
Finished goods................................... 6,270 6,033
Work in process.................................. 3,750 3,367
Raw materials and supplies....................... 6,183 7,217
LIFO reserve..................................... (1,846) (2,493)
-------- --------
Total inventories.................................. 14,357 14,124
Prepaid expenses................................... 965 820
Deferred tax assets................................ 4,583 4,590
-------- --------
Total current assets........................... 90,961 82,469
-------- --------
Property, plant and equipment, at cost............... 110,520 105,467
Less accumulated depreciation........................ (50,196) (45,393)
-------- --------
60,324 60,074
Other assets, at cost, less amortization............. 14,606 15,529
-------- --------
$165,891 $158,072
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................. $ 3,492 $ 2,871
Accounts payable................................... 15,580 14,770
Accrued taxes...................................... 866 263
Accrued payroll and other compensation............. 5,393 5,426
Other accrued liabilities.......................... 6,431 6,409
-------- --------
Total current liabilities...................... 31,762 29,739
Long-term debt....................................... 4,300 7,750
Deferred tax liabilities............................. 14,076 14,207
Other long-term liabilities.......................... 4,044 4,565
Stockholders' equity:
Preferred stock.................................... -- --
Common stock....................................... 2,108 2,089
Capital in excess of par value..................... 33,596 32,448
Foreign currency translation adjustment............ 1,518 2,091
Pension liability adjustment....................... (506) (459)
Retained earnings.................................. 97,077 78,461
-------- --------
133,793 114,630
-------- --------
Less: treasury stock, at cost...................... (22,084) (12,819)
-------- --------
Total stockholders' equity..................... 111,709 101,811
-------- --------
$165,891 $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
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Net sales................................................ $ 59,707 $ 61,487
Cost of sales............................................ 40,308 42,572
--------- ---------
Gross margin............................................. 19,399 18,915
Selling, product development and administrative expenses. 10,270 9,643
--------- ---------
Operating income......................................... 9,129 9,272
Other (income) expense
Investment income...................................... (380) (288)
Interest expense....................................... 143 200
Other, net............................................. 62 123
--------- ---------
(175) 35
--------- ---------
Income before income taxes............................... 9,304 9,237
Income tax expense....................................... 3,524 3,790
--------- ---------
Net income............................................... $ 5,780 $ 5,447
========= =========
Net income per share..................................... $ .32 $ .30
========= =========
Weighted average common stock and equivalents outstand-
ing..................................................... 18,049 18,418
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $193,170 $189,775
Cost of sales............................................... 131,458 131,610
-------- --------
Gross margin................................................ 61,712 58,165
Selling, product development and administrative expenses.... 31,964 30,362
-------- --------
Operating income............................................ 29,748 27,803
Other (income) expense
Investment income......................................... (979) (718)
Interest expense.......................................... 457 655
Other, net................................................ 283 293
-------- --------
(239) 230
-------- --------
Income before income taxes.................................. 29,987 27,573
Income tax expense.......................................... 11,371 10,948
-------- --------
Net income.................................................. $ 18,616 $ 16,625
======== ========
Net income per share........................................ $ 1.03 $ .91
======== ========
Weighted average common stock and equivalents outstanding... 18,147 18,285
======== ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
--------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 18,616 $ 16,625
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 6,088 5,602
Amortization............................................ 1,050 1,134
Changes in operating assets and liabilities:
Accounts receivable.................................... 750 (3,585)
Inventories............................................ (337) (1,922)
Other assets........................................... (280) 378
Accounts payable....................................... 930 191
Accrued taxes.......................................... 632 (715)
Accrued payroll and other compensation................. (21) (102)
Deferred income taxes.................................. 30 906
Other long-term liabilities............................ (440) 9
Other accrued liabilities.............................. 40 1,136
--------- --------
Total adjustments........................................ 8,442 3,032
--------- --------
Net cash provided by operating activities................. 27,058 19,657
Cash flows from investing activities:
Additions of property, plant & equipment................. (7,684) (8,726)
Disposals of property, plant & equipment, net............ 693 406
Sale (Purchase) of investments, net...................... (1,647) 382
--------- --------
Net cash used for investing activities.................... (8,638) (7,938)
--------- --------
Cash flows from financing activities:
Long-term debt payments.................................. (2,821) (2,816)
Issuance of common stock................................. 1,167 1,808
Acquisition of common stock.............................. (9,265) --
--------- --------
Net cash used for financing activities.................... (10,919) (1,008)
--------- --------
Effect of exchange rate changes on cash................... (23) 22
--------- --------
Increase in cash and cash equivalents..................... 7,478 10,733
Cash and cash equivalents at beginning of period.......... 27,820 11,684
--------- --------
Cash and cash equivalents at end of period................ $ 35,298 $ 22,417
========= ========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest................................................ $ 661 $ 556
Income taxes............................................ 10,627 10,977
Non-cash transactions:
Reclassification between short-term and long-term in-
vestments, net......................................... -- 447
Effect on Additional Paid in Capital and Common Stock
for stock split effected in the form of a stock
dividend............................................... -- 1,041
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
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 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 this matter will not have a
material adverse effect upon the Company's consolidated financial position
or results of operations.
4. 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 third quarter ended September 30, 1996, net income was $5.8 million
compared with $5.4 million for the comparable prior-year quarter--up 6
percent. On an earnings per-share basis, the Company posted a third-quarter
record of $.32 compared with $.30 for the same period last year--a 7 percent
increase. Sales declined slightly in the quarter--$59.7 million compared with
$61.5 million for the 1995 third quarter. Gross margin for the quarter was
$19.4 million, 32.5 percent of sales, compared with $18.9 million, or 30.8
percent of sales, in the third quarter 1995. After-tax return on sales was 9.7
percent compared with 8.9 percent for the same period last year.
Net income for the nine months ended September 30, 1996 was $18.6 million,
or $1.03 per share, compared with $16.6 million, or $.91 per share--a 13
percent increase in earnings per share. Sales for the nine months ended
September 30, 1996 were $193.2 million compared with $189.8 million for the
first three quarters of 1995--up 2 percent. Gross margin was $61.7 million, or
31.9 percent of sales, for the nine months ended September 30, 1996, and the
after-tax return on sales was 9.6 percent. For the same nine-month period in
1995, gross margin was $58.2 million, or 30.6 percent of sales, and the after-
tax return on sales was 8.8 percent.
The increase in the Company's gross margin percentage is largely
attributable to the continuing emphasis placed on cost of quality. Substantial
progress was made at acquisitions with gross margin for the quarter increasing
to 21.1% from 12.2% for the same period in 1995.
Selling, new product development and administrative expenses increased 5.3
percent in the first nine months of the year versus the same period in 1995.
As a percentage of sales, these expenses amounted to 16.5 percent in 1996 in
comparison to 16.0 percent in 1995. Year to date 1996 figures include higher
legal fees due to the successful defense of a lawsuit alleging patent
infringement which was concluded in March of this year. The Company
anticipates that these expenses will approximate 17.0 percent through the end
of the year. A factor in this increased level of expenditures is the Company's
plan to implement a new information technology system throughout the entire
organization.
The Company anticipates achieving its twelfth year of growth in 1996.
However, the second half of 1996 is proving to be less robust than earlier
anticipated. Results are tracking somewhat below previously announced
projections for 1996 of earnings per share of about $1.41 and sales in the
range of $265 million. Earnings are now projected to be more in the range of
$1.35 to $1.36 per share with sales slightly ahead of last year's sales of
$252 million.
Domestic sales are up slightly from 1995. International sales, including
sales attributable to the Company's French operation and exports, have fallen
15.8 percent for the third quarter 1996 in comparison to the same period for
1995 and are relatively flat on a year-to-date comparison. International sales
account for 19.6 percent and 21.1 percent of total sales on a quarterly and
year to date basis, respectively, for 1996.
Lydall has many growth opportunities on the horizon and this period of
slower growth is viewed as a temporary plateau. In the thermal area, sales of
automotive heat shields continue to be healthy. Compared with the same quarter
last year, sales of these products for the third quarter of 1996 exhibited low
double-digit growth, while automotive builds were reported to be up only
around 4 percent. Growth of the battery insulator product line also continues
to be good.
Although high-efficiency air filtration products continue to present
opportunities for growth through new product introduction, market penetration,
and geographic expansion, sales of these products in the quarter were about
equal to the record levels achieved last year. Air filtration sales have grown
at a phenomenal rate over the past two years; however, they slowed modestly in
the third quarter. In general, the long-term trend for this business is very
positive with demand for clean rooms expanding across a wide variety of
industries. In addition, there are opportunities for increasing demand in
developing countries. The home air filtration market also has growth
potential, domestically and overseas.
7
<PAGE>
One of Lydall's more mature businesses, electrical materials sold to the
European battery aftermarket, declined by approximately $1.1 million in the
third quarter 1996 compared with the same quarter last year.
In addition, sales of material handling products continued to be off from
record highs last year. This has always been a good growth business for
Lydall, and it continues to be solid. This year's lower sales resulted
primarily in a deflationary issue. In contrast, raw material prices increased
dramatically last year, and the Company passed through corresponding price
increases. This is one area of business where the market pushes for price
reductions that directly track decreases in raw material costs.
The effective tax rate for the Company's domestic operations was 37.8
percent for the third quarter of 1996 and 37.9 percent on a year to date
basis. This compares to 37.7 percent for the third quarter and 38.7 percent
year to date in 1995. Had the Company not invested cash balances in a variety
of tax exempt or tax advantaged investments, the year to date rates would have
been 38.8 percent in 1996 and 39.2 percent in 1995. The tax rate at our Axohm
Division in France remained unchanged at 36.6 percent in 1996 and 1995 on a
year to date basis but the effect on Lydall's consolidated results was
minimal.
Stockholders are referred to Lydall's Form 8-K, filed on June 4, 1996, which
outlines certain risks regarding the Company's forward-looking statements.
Such risks include: a major downturn of the U.S. automotive market which
accounts for about 30 percent of Lydall's total sales; a meaningful decrease
in the number of clean rooms being built worldwide; and significant,
unforeseen changes in raw material pricing, specifically, virgin fiber used in
producing the Company's materials handling slipsheets.
LIQUIDITY AND CAPITAL RESOURCES:
Lydall generated operating cash flow (earnings before taxes, interest
expense and investment income or expense plus depreciation and amortization)
of $11.4 million in the third quarter of 1996, bringing operating cash flow
year-to-date to a record $36.6 million. At September 30, 1996, cash, cash
equivalents and short-term investments were $37.8 million compared with $28.7
million at the end of 1995. Working capital was $59.2 million compared with
$52.7 million at the end of last year. The current ratio improved to 2.86 at
the end of the third quarter from 2.77 at the end of 1995, and total debt to
total capitalization was 7 percent reduced from 9 percent at December 31,
1995.
The Company expects to continue to finance its day-to-day operating needs
from accumulated cash plus cash generated from operations.
Lydall continues to actively seek strategic acquisitions and to reinvest in
the Company with the primary focus on the ongoing comprehensive quality
program.
ACCOUNTING STANDARDS:
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 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
11.1--Schedule of Computation of Weighted Average Shares
Outstanding
27.1--Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended September 30, 1996.
8
<PAGE>
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)
November 7, 1996
9
<PAGE>
LYDALL, INC.
Index to Exhibits
Exhibit No. Page No.
- ----------- --------
11.1 Schedule of Computation of Weighted Average 15
Shares Outstanding
27.1 Financial Data Schedule
14
<PAGE>
LYDALL, INC.
Exhibit 11.1
Schedule of Computation of Weighted Average Shares Outstanding
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Primary
- -------
<S> <C> <C> <C> <C>
Weighted average number
of common shares 17,097 17,259 17,155 17,251
Additional shares assuming
conversion of stock
options and warrants 952 1,159 992 1,034
------ ------ ------ ------
Weighted average common
shares and equivalents
outstanding 18,049 18,418 18,147 18,285
====== ====== ====== ======
Fully Diluted
- -------------
Weighted average number
of common shares 17,097 17,259 17,155 17,251
Additional shares assuming
conversion of stock
options and warrants 973 1,170 1,011 1,061
------ ------ ------ ------
Weighted average common
shares and equivalents
outstanding 18,070 18,429 18,166 18,312
====== ====== ====== ======
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 35,298
<SECURITIES> 2,518
<RECEIVABLES> 34,533
<ALLOWANCES> 2,009
<INVENTORY> 14,357
<CURRENT-ASSETS> 90,961
<PP&E> 110,520
<DEPRECIATION> 50,196
<TOTAL-ASSETS> 165,891
<CURRENT-LIABILITIES> 31,762
<BONDS> 7,792
0
0
<COMMON> 2,108
<OTHER-SE> 109,601
<TOTAL-LIABILITY-AND-EQUITY> 165,891
<SALES> 193,170
<TOTAL-REVENUES> 193,170
<CGS> 131,458
<TOTAL-COSTS> 131,458
<OTHER-EXPENSES> (239)
<LOSS-PROVISION> 159
<INTEREST-EXPENSE> 457
<INCOME-PRETAX> 29,987
<INCOME-TAX> 11,371
<INCOME-CONTINUING> 18,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,616
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
