<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 June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-7665
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Lydall, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0865505
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Colonial Rd, P.O. B. 151, Manchester, Connecticut 06045-0151
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(Address principal executive offices) (Zip Code)
(860) 646-1233
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(Registrant's telephone number, including area code)
None
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(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 7, 1998 15,694,397
<PAGE>
LYDALL, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
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 6-7
Notes to Consolidated Condensed Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 12
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,911 $ 8,891
Short-term investments 3,838 3,873
Accounts receivable, net 35,053 32,203
Inventories:
Finished goods 8,638 6,243
Work in progress 3,903 2,867
Raw materials 8,726 7,600
LIFO reserve (1,154) (1,172)
------ ------
Total inventories 20,113 15,538
Taxes receivable -- 2,032
Prepaid expenses 1,876 1,314
Deferred tax assets 3,583 3,586
------ ------
Total current assets 68,374 67,437
Property, plant and equipment, at cost 135,613 125,622
Less accumulated depreciation (59,267) (56,762)
------- -------
76,346 68,860
Other assets, at cost, less amortization 31,953 23,827
------ ------
Total assets $ 176,673 $ 160,124
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,090 $ 2,950
Short-term borrowings 16,447 --
Accounts payable 18,101 13,342
Accrued taxes 1,185 1,030
Accrued payroll and other compensation 3,123 4,856
Other accrued liabilities 5,839 6,056
----- -----
Total current liabilities 47,785 28,234
Long-term debt 240 2,100
Deferred tax liabilities 12,575 12,979
Other long-term liabilities 3,468 3,781
Contingencies -- --
Stockholders' equity:
Preferred stock -- --
Common stock 2,159 2,143
Capital in excess of par value 37,147 36,510
Accumulated other comprehensive income (664) (164)
Retained earnings 132,508 125,108
------- -------
171,150 163,597
Less: treasury stock, at cost (58,545) (50,567)
------- -------
Total stockholders' equity 112,605 113,030
------- -------
Total liabilities and stockholders' equity $ 176,673 $ 160,124
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
(In Thousands Except Per-Share Data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
1998 1997
-------- -------
(Unaudited)
<S> <C> <C>
Net sales $ 59,244 $ 64,019
Cost of sales 41,696 43,983
-------- --------
Gross margin 17,548 20,036
Selling, product development and administrative expenses 11,913 11,182
-------- --------
Operating income 5,635 8,854
Other (income) expense:
Investment income (76) (554)
Interest expense 196 119
Other (321) 101
-------- --------
(201) (334)
-------- --------
Income before income taxes 5,836 9,188
Income tax expense 1,985 3,472
-------- --------
Net income $ 3,851 $ 5,716
-------- --------
-------- --------
Basic earnings per common share $ .24 $ .34
-------- --------
-------- --------
Weighted average common stock outstanding 15,997 16,713
-------- --------
-------- --------
Diluted earnings per common share $ .24 $ .33
-------- --------
-------- --------
Weighted average common stock and equivalents outstanding 16,363 17,305
-------- --------
-------- --------
Net income $ 3,851 $ 5,716
-------- --------
Other comprehensive income, before tax:
Foreign currency translation adjustments 272 (581)
Unrealized gain (loss) on securities (425) 180
-------- --------
Other comprehensive income, before tax (153) (401)
Income tax benefit related to items of other comprehensive income 54 140
-------- --------
Other comprehensive income, net of tax (99) (261)
-------- --------
Comprehensive income $ 3,752 $ 5,455
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
(In Thousands Except Per-Share Data)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Net sales $ 115,786 $ 125,990
Cost of sales 82,222 86,691
--------- ---------
Gross margin 33,564 39,299
Selling, product development and administrative expenses 22,650 21,678
--------- ---------
Operating income 10,914 17,621
Other (income) expense:
Investment income (400) (919)
Interest expense 285 277
Other (132) 58
--------- ---------
(247) (584)
--------- ---------
Income before income taxes 11,161 18,205
Income tax expense 3,761 6,864
--------- ---------
Net income $ 7,400 $ 11,341
--------- ---------
--------- ---------
Basic earnings per common share $ .46 $ .67
--------- ---------
--------- ---------
Weighted average common stock outstanding 16,020 16,882
--------- ---------
Diluted earnings per common share $ .45 $ .65
--------- ---------
--------- ---------
Weighted average common stock and equivalents outstanding 16,434 17,561
--------- ---------
--------- ---------
Net income $ 7,400 $ 11,341
--------- ---------
Other comprehensive income, before tax:
Foreign currency translation adjustments (108) (1,778)
Unrealized loss on securities (662) (63)
--------- ---------
Other comprehensive income, before tax (770) (1,841)
Income tax benefit related to items of other comprehensive income 270 644
--------- ---------
Other comprehensive income, net of tax (500) (1,197)
--------- ---------
Comprehensive income $ 6,900 $ 10,144
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1998 1997
-----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,400 $ 11,341
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 4,471 4,098
Amortization 967 876
Changes in operating assets and liabilities excluding effects from acquisitions:
Accounts receivable 229 (564)
Taxes receivable 2,032 --
Inventories (2,632) (1,234)
Other assets 402 (734)
Accounts payable 3,221 2,182
Accrued taxes 152 (861)
Accrued payroll and other compensation (1,772) (2,125)
Deferred income taxes (381) 185
Other long-term liabilities (306) 212
Other accrued liabilities (551) (1,244)
-------- --------
Total adjustments 5,832 791
-------- --------
Net cash provided by operating activities 13,232 12,132
-------- --------
Cash flows from investing activities:
Acquisitions (16,269) (75)
Additions of property, plant, and equipment (8,482) (10,312)
Purchase of investments, net (395) (3,320)
Disposals of property, plant, and equipment, net 310 64
-------- --------
Net cash used for investing activities (24,836) (13,643)
Cash flows from financing activities:
Long-term debt payments (2,494) (3,950)
Proceeds from short-term borrowings 28,208 --
Payments of short-term borrowings (11,761) --
Payment of current note payable -- (8,000)
Issuance of common stock 653 1,665
Acquisition of common stock (7,978) (14,475)
-------- --------
Net cash provided by (used for) financing activities 6,628 (24,760)
-------- --------
Effect of exchange rate changes on cash (4) (103)
-------- --------
Decrease in cash and cash equivalents (4,980) (26,374)
Cash and cash equivalents at beginning of period 8,891 38,226
-------- --------
Cash and cash equivalents at end of period $ 3,911 $ 11,852
-------- --------
-------- --------
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 311 $ 484
Income taxes 2,243 8,042
</TABLE>
6
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1998 1997
-----------------
(Unaudited)
<S> <C> <C>
Non-cash transactions:
Unrealized gains/losses on available-for-sale securities 430 41
Reduction of payable for acquired operations - 24
Reclassification between short and long term assets 904 -
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
7
<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. 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, stock awards and warrants where such
effect is dilutive.
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
June 30, 1998 June 30, 1997
(unaudited) (unaudited)
Net Net
Income Shares Per-Share Income Shares Per-Share
($000's) (000's) Amount ($000's) (000's) Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $3,851 15,997 $0.24 $5,716 16,713 $0.34
Effect of dilutive securities
stock options 366 592
-------- -------
Diluted earnings per share $3,851 16,363 $0.24 $5,716 17,305 $0.33
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
June 30, 1998 June 30, 1997
(undaudited) (unaudited)
Net Net
Income Shares Per-Share Income Shares Per-Share
($000's) (000's) Amount ($000's) (000's) Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $7,400 16,020 $0.46 $11,341 16,882 $0.67
Effect of dilutive securities
stock options 414 679
--------- --------
Diluted earnings per share $7,400 16,434 $0.45 $11,341 17,561 $0.65
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
Options to purchase 468,879 shares and 302,321 shares of Lydall Common
Stock for the year-to-date June 30, 1998 and 1997 respectively, as well as
661,953 shares and 302,321 shares for the quarter ended June 30, 1998 and
1997, respectively, were not included in the computation of diluted
earnings per share. These options were excluded because the average
exercise price was greater than the average market price of the Common
Stock for each respective period.
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 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
8
<PAGE>
alleged total exposure would be less than $100 thousand, which has been
accrued.
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.
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. The Company is now evaluating its options. Management believes
the ultimate disposition of this matter will not have a material adverse
effect upon the Company's consolidated financial position, results of
operations, comprehensive income, or cash flows.
4. On March 19, 1996, patent litigation brought by ATD Corporation ("ATD")
against Lydall in the U.S. District Court for the Eastern District of
Michigan was concluded with the jury finding in favor of Lydall and with
all of ATD's claims for damages being denied. A notice of appeal to the
U.S. Court of Appeals for the Federal Circuit regarding this litigation was
filed by ATD on March 28, 1997. The appeal issues were fully briefed and
argued in January of 1998. No decision has been rendered. Management
believes the ultimate disposition of this matter will not have a material
adverse effect upon the Company's consolidated financial position, results
of operations, comprehensive income, or cash flows.
5. Effective July 29, 1998 Lydall increased amounts available under line of
credit arrangements to over $35 million. Lydall primarily pays interest at
the lower of prime or money market rates and compensates its banks for
services on a fee basis.
6. 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. CharterMed is a growing and profitable manufacturer of proprietary
medical devices serving applications such as biotech and pharmaceutical
packaging, blood bank and transfusion services, neonatal intensive care,
operating room/perfusion, and stem cell processing and freezing. The
results of the CharterMed Operation since the date of acquisition have been
included in the Company's consolidated results. The proforma effect on the
Company's results of operations for the quarter and year-to-date ended June
30, 1997 and 1998, had the acquisition occurred at the beginning of the
respective periods, is not material.
7. 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. This acquisition, which will operate 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 proforma effect on the Company's
results of operations for the quarter and year-to-date ended June 30, 1997
and 1998, had the acquisition occurred at the beginning of the respective
periods, is not material.
8. The Company will adopt Statement of Financial Accounting Standards No. 131,
and No. 132, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131"), and "Employers' Disclosures about Pensions and
Other Postretirement Benefits," ("SFAS 132"), both of which are effective
for fiscal years beginning after December 15, 1997.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. SFAS 131
is based on the management approach to segment reporting and includes
requirements to report selected segment information quarterly and to
include entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets and
reports revenues. The Company currently reports under one segment and is
evaluating the impact of the disclosure requirements. SFAS 131 may require
Lydall to disclose more than one segment. The Company will adopt SFAS 131
effective for the year ending December 31, 1998. There will be no effect on
the Company's consolidated financial position, results of operations,
comprehensive income, or cash flows.
SFAS 132 revises employers' disclosures about pension and other
postretirement benefit plans. The Company will adopt SFAS 132 effective for
the year ending December 31, 1998. There will be no effect on the Company's
consolidated financial position, results of operations, comprehensive
income, or cash flows.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
For the second quarter of 1998, sales were $59.2 million compared with $64.0
million for the second quarter of 1997. Net income was $3.9 million compared
with $5.7 million, and diluted earnings per share were $.24 compared with $.33
in the second quarter of 1997. Gross margin for the second quarter of 1998 was
$17.5 million, or 29.6 percent of sales, compared with $20.0 million, or 31.3
percent of sales, for the second quarter of 1997. After-tax return on sales was
6.5 percent for the second quarter of 1998 compared with 8.9 percent for the
same quarter of 1997.
Sales for the six months ended June 30, 1998 were $115.8 million compared with
$126.0 million for the same period in 1997. Net income was $7.4 million compared
with $11.3 million, and diluted earnings per share were $.45 compared with $.65
for the first half of 1997. Gross margin was $33.6 million, or 29.0 percent of
sales, for the six months ended June 30, 1998, and the after-tax return on sales
was 6.4 percent. For the six-month period ended June 30, 1997, gross margin was
$39.3 million, or 31.2 percent of sales, and the after-tax return on sales was
9.0 percent.
Selling, product development and administrative expenses (SG&A) amounted to
$11.9 million and $11.2 million for the second quarter of 1998 and 1997,
respectively. On a year-to-date basis, SG&A amounted to $22.7 million and $ 21.7
million for 1998 and 1997, respectively. A large portion of the increase in the
quarter and year-to-date related to two recent acquisitions, including
amortization of acquisition costs, and continued higher levels of product
development spending.
In the second quarter of 1998, as well as year to date, investment income
decreased as compared to the respective periods of the previous year due to a
decrease in investment holdings which correspondingly produced lower returns.
Interest expense in the second quarter of 1998 increased significantly
compared to the second quarter of 1997 due to borrowings on a short-term line
of credit during the quarter. Year to date interest was relatively flat
compared to 1997 year to date as decreases in the debt levels which reduced
interest expense were offset by the increase in interest expense related to
the line of credit. Other income for the second quarter of 1998 as well as
year to date 1998 increased from 1997 levels due to the elimination of an
environmental reserve which, based upon the result of a recent environmental
study at the site, was determined to no longer be necessary. Dispositions and
write-offs of fixed assets were the other major contributor to the changes in
other income.
As anticipated, second quarter 1998 results were slightly better than the first
quarter of 1998 but below the same period last year. The Company believes the
second half of the year will be better than the first half. It is expected that
performance in the fourth quarter will be improved by the addition of
new-product sales in filtration and thermal, particularly to the automotive
market. Lydall also expects to begin to see the benefits from intensive efforts
directed at operating margin improvements initiated during the year.
The continuing evaluation of the Company's long-term strategy has reinforced an
emphasis on two core businesses -- thermal and filtration. The goal is to return
to double-digit long-term growth rates primarily through acquisition and new
product development in core markets. The expectation is that these two
businesses, which today represent 61 percent of total sales, will account for
closer to 75 percent within a two to four year horizon.
High-efficiency air filtration media used in clean room filtration systems did
not show any significant improvement in the second quarter. Slower sales growth
continues to relate to a depressed semiconductor market and resulting
postponements of clean-room fabrications. Filtration sales in the second quarter
just ended were about even with the second quarter of 1997 and slightly better
than the first quarter of 1998. Second quarter sales, bolstered by sales to home
air purification and biomedical applications, accounted for about 25 percent of
total sales. The long-term outlook for these businesses is positive.
Future air filtration growth is expected from product extensions like the home
air purification application; process technology expansion such as the addition
of the melt-blown line installed recently; product innovations addressing the
industry's evolving needs like a higher alpha media; and acquisitions.
The integration of CharterMed, Inc., which was acquired in February of this
year, is going well. This acquisition was combined with Lydall's previously
existing blood filtration business into a separate entity, Charter Medical,
Ltd., which operates as a second tier Lydall subsidiary. In addition to
supplementing Lydall's blood filtration products, this acquisition extends the
product line to include flexible, disposable containers for bio-pharmaceutical
fluid processing and specialty disposable containers used in medical procedures
and drug delivery.
10
<PAGE>
Sales of thermal barrier products accounted for about 36 percent of total 1998
second quarter sales. Thermal business was down by about 7 percent from the same
quarter last year but up 12 percent from the first quarter of 1998, reflecting
the acquisition of ETSI in April. The strike at GM did have a negative effect on
sales of thermal barrier products during the second quarter of 1998.
In addition, there are a number of programs in the development pipeline for
automotive applications, a number of new-product launches are forecast toward
the end of the year. Initial reception of the Zero-Clearance concept, the
polyshield line, and stand-alone shields has been very positive. Also, expansion
by acquisition of automotive thermal companies is a major focus of corporate
development efforts.
Sales of materials handling products were down compared with the same quarter
last year and about even with the first quarter of 1998. Materials handling
sales accounted for 13 percent of total 1998 second-quarter sales.
The Company's effective tax rate for the second quarter of 1998 was 34.0 percent
and 33.7 percent year-to-date. This compares to 37.8 percent for the second
quarter and year-to-date in 1997. The effective tax rate was adjusted in 1998 to
reflect current conditions affecting Lydall's tax position.
Lydall, Inc. desires to take advantage of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995. In addition to economic
conditions and market trends, the Company considered the following market
circumstances in determining any forward-looking statements made in this report.
A Major Downturn of the U.S. Automotive Market. Although Lydall's automotive
sales are not solely contingent on the strength of the automotive market, a
significant downturn of the U.S. automotive industry could have a substantial
impact on Lydall's results. The Company can also be affected when automotive
manufacturers discontinue production of specific models that contain Lydall's
products, as happened at Ford in mid-1997. On the other hand, Lydall benefits
from the introduction of new models. Twenty-six percent of Lydall's total sales
in 1997 were to the U.S. automotive market, excluding aftermarket sales.
Lydall's primary automotive products are thermal barriers and heat shields
employed both inside and outside of vehicles. Most of Lydall's products are
supplied to meet unique, niche applications. There is not a direct correlation
between the number of Lydall parts on a vehicle and the number of units built,
as with tires or steering wheels for example. Slight fluctuations in U.S.
automotive production have relatively little effect on Lydall's business;
however, a major downward shift could prevent Lydall from achieving its
projected results.
A Significant change in the Number of Clean Rooms Being Built. Lydall's
high-efficiency air filtration business is linked to the fabrication of clean
rooms around the world. In 1995 and early 1996, the demand for these air
filtration materials was the strongest the Company had ever experienced. Since
then the demand curve has leveled. This slowdown was related primarily to the
semiconductor industry. The Company estimates that about one-third of its total
high-efficiency air filtration sales are to semiconductor related clean rooms.
Various independent industry published forecasts project excellent long-term
growth for clean-room fabrications in general. Lydall relies on these forecasts,
feedback from its filtration customers, and other market intelligence sources
for forward-looking information. Lydall's outlook is based in part on the
renewed strength of this market; however, if a significant market decline were
to continue, it would have a negative impact on Lydall's results.
Raw-Material Pricing and Supply. Raw-material pricing and supply issues affect
all of Lydall's businesses and can influence results in the short term. Pricing
fluctuations, however, particularly impact the Company's materials-handling
business. These products are made from laminated virgin kraft paperboard, also
known as linerboard. In 1995, costs of linerboard were extremely high, and
Lydall, in turn, raised prices, partially accounting for the higher than average
sales growth in that year. In 1996, as raw-material costs declined, Lydall
reduced prices. Linerboard prices began to rise slightly in mid-1997, and Lydall
instituted a price increase on its products in the third quarter of the year.
The materials-handling business is unique for Lydall because it is the one area
where the market pushes for price reductions that directly track decreases in
raw materials and accepts price increases in the face of high raw-material
costs. Thus, significant changes in the pricing of linerboard directly affect
this portion of Lydall's business.
New product Introductions. Improved performance and growth is partially linked
to new-product introductions planned for the future. The timing and degree of
success of new product programs impact Lydall's projected results.
Liquidity and Capital Resources
At June 30, 1998, cash, cash equivalents and short-term investments were $7.7
million compared with $12.8 million at December 31, 1997. Uses of cash
year-to-date included $16.3 million for two acquisitions and $8.0 million to
acquire 466,400 shares of Lydall stock. Working capital was $20.6 million at
June 30, 1998, compared with $39.2 million at the end of last year. Short-term
borrowings at June 30, 1998 were $16.4 million
11
<PAGE>
At the end of July, 1998 the Company increased the amounts available under line
of credit arrangements to over $35 million. The Company expects to continue to
finance both its day to day operating needs and the purchase of Lydall Common
Stock from accumulated cash, sales of short-term investments, cash from
operations and short-term lines of credit.
Lydall continues to progress on the Lydall 2000 program, an enterprisewide
software and hardware information technology platform. Lydall expects to
complete implementation of the new systems and avoid any disruption of
operations. The Company is assessing the impact of Year 2000 compliance by its
suppliers and customers and the potential effect, if any, on the Company's
operations. Total capital outlays for Lydall 2000 will exceed $9 million. These
additional expenditures in 1998 and 1999 will have minimal effect on Lydall's
liquidity and capital resources.
Lydall continues to actively seek strategic acquisitions and to reinvest in
capital projects, which focus on the ongoing comprehensive quality program.
Accounting Standards
The Company will adopt Statement of Financial Accounting Standards No. 131, and
No. 132, "Disclosures about Segments of an Enterprise and Related Information,"
(SFAS 131"), and "Employers' Disclosures about Pensions and Other Postretirement
Benefits," ("SFAS 132"), both of which are effective for fiscal years beginning
after December 15, 1997.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. SFAS 131 is
based on the management approach to segment reporting and includes requirements
to report selected segment information quarterly and to include entity-wide
disclosures about products and services, major customers, and the countries in
which the entity holds material assets and reports revenues. The Company
currently reports under one segment and is evaluating the impact of the
disclosure requirements. SFAS 131 may require Lydall to disclose more than one
segment. The Company will adopt SFAS 131 effective for the year ending December
31, 1998. There will be no effect on the Company's consolidated financial
position, results of operations, comprehensive income, or cash flows.
SFAS 132 revises employers' disclosures about pension and other postretirement
benefit plans. The Company will adopt SFAS 132 effective for the year ending
December 31, 1998. There will be no effect on the Company's consolidated
financial position, results of operations, comprehensive income, or cash flows.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
12
<PAGE>
Part II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 13, 1998.
Stockholders elected ten Directors to serve for one-year terms, until the next
Annual Meeting to be held in 1999.
1.) Election of Nominees to the Board of Directors
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Lee Asseo 14,521,485 255,967
Samuel P. Cooley 14,532,126 245,326
W. Leslie Duffy 14,393,632 383,820
Leonard Jaskol 14,535,541 241,911
Joel Schiavone 14,540,436 237,016
Christopher R. Skomorowski 14,544,778 232,674
Elliott F. Whitely 14,544,804 232,648
Roger M. Widmann 14,544,804 232,648
Albert E. Wolf 14,543,886 233,566
John J. Worthington 14,544,804 232,648
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27.1 - Financial Data Schedule, filed herewith
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
June 30, 1998.
13
<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)
August 7, 1998 By /s/ John E. Hanley
-------------------------------------
John E. Hanley
Vice President, Finance and Treasurer
(Principal Accounting and Financial Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,911
<SECURITIES> 3,838
<RECEIVABLES> 34,439
<ALLOWANCES> (1,421)
<INVENTORY> 20,113
<CURRENT-ASSETS> 68,374
<PP&E> 135,613
<DEPRECIATION> 59,267
<TOTAL-ASSETS> 176,673
<CURRENT-LIABILITIES> 47,785
<BONDS> 3,330
0
0
<COMMON> 2,159
<OTHER-SE> 110,446
<TOTAL-LIABILITY-AND-EQUITY> 176,673
<SALES> 115,786
<TOTAL-REVENUES> 115,786
<CGS> 82,222
<TOTAL-COSTS> 82,222
<OTHER-EXPENSES> (247)
<LOSS-PROVISION> (85)
<INTEREST-EXPENSE> 285
<INCOME-PRETAX> 11,161
<INCOME-TAX> 3,761
<INCOME-CONTINUING> 7,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,400
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.45
</TABLE>
