<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 , 1998
-------------------------------------------------
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
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address principal executive offices) (Zip Code)
(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 November 6, 1998 15,647,093
<PAGE>
LYDALL, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
--------
<S> <C>
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 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
Part II. Other Information
Item 1. Legal Proceedings 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>
September 30, December 31,
1998 1997
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,490 $ 8,891
Short-term investments 3,359 3,873
Accounts receivable, net 34,851 32,203
Inventories:
Finished goods 7,903 6,243
Work in progress 4,761 2,867
Raw materials 8,708 7,600
LIFO reserve (1,166) (1,172)
-------- --------
Total inventories 20,206 15,538
Taxes receivable -- 2,032
Prepaid expenses 1,366 1,314
Deferred tax assets 3,612 3,586
-------- --------
Total current assets 64,884 67,437
Property, plant and equipment, at cost 140,678 125,622
Less accumulated depreciation (61,386) (56,762)
-------- --------
79,292 68,860
Other assets, at cost, less amortization 33,486 23,827
-------- --------
Total assets $177,662 $160,124
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,340 $ 2,950
Short-term borrowings 18,813 --
Accounts payable 16,975 13,342
Accrued taxes 991 1,030
Accrued payroll and other compensation 2,541 4,856
Other accrued liabilities 5,379 6,056
-------- --------
Total current liabilities 47,039 28,234
Long-term debt 240 2,100
Deferred tax liabilities 12,531 12,979
Other long-term liabilities 3,511 3,781
Contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 2,162 2,143
Capital in excess of par value 37,420 36,510
Accumulated other comprehensive income (437) (164)
Retained earnings 135,662 125,108
-------- --------
174,807 163,597
Less: treasury stock, at cost (60,466) (50,567)
-------- --------
Total stockholders' equity 114,341 113,030
-------- --------
Total liabilities and stockholders' equity $177,662 $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
September 30,
-----------------------------
1998 1997
(Unaudited)
<S> <C> <C>
Net sales $ 56,495 $ 59,377
Cost of sales 40,166 40,504
-------- --------
Gross margin 16,329 18,873
Selling, product development and administrative expenses 11,353 10,888
-------- --------
Operating income 4,976 7,985
Other (income) expense:
Investment income (130) (442)
Interest expense 262 83
Other 48 (219)
-------- --------
180 (578)
-------- --------
Income before income taxes 4,796 8,563
Income tax expense 1,642 3,048
-------- --------
Net income $ 3,154 $ 5,515
======== ========
Basic earnings per common share
$ .20 $ .33
======== ========
Weighted average common stock outstanding 15,688 16,661
======== ========
Diluted earnings per common share
$ .20 $ .32
======== ========
Weighted average common stock and equivalents outstanding 15,941 17,273
======== ========
Net income $ 3,154 $ 5,515
-------- --------
Other comprehensive income, before tax:
Foreign currency translation adjustments 1,085 (88)
Unrealized (loss) gain on securities (735) 131
-------- --------
Other comprehensive income, before tax 350 43
Income tax expense related to items of other comprehensive
income (122) (15)
-------- --------
Other comprehensive income, net of tax 228 28
-------- --------
Comprehensive income $ 3,382 $ 5,543
======== ========
</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>
Nine Months Ended
September 30,
-----------------------------
1998 1997
(Unaudited)
<S> <C> <C>
Net sales $ 172,281 $ 185,367
Cost of sales 122,388 127,195
--------- ---------
Gross margin 49,893 58,172
Selling, product development and administrative expenses 34,003 32,566
--------- ---------
Operating income 15,890 25,606
Other (income) expense:
Investment income (530) (1,361)
Interest expense 547 360
Other (84) (161)
--------- ---------
(67) (1,162)
--------- ---------
Income before income taxes 15,957 26,768
Income tax expense 5,403 9,912
--------- ---------
Net income $ 10,554 $ 16,856
========= =========
Basic earnings per common share
$ .66 $ 1.00
========= =========
Weighted average common stock outstanding 15,908 16,799
--------- ---------
Diluted earnings per common share
$ .65 $ .97
========= =========
Weighted average common stock and equivalents outstanding 16,266 17,455
========= =========
Net income $ 10,554 $ 16,856
--------- ---------
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments 977 (1,866)
Unrealized (loss) gain on securities (1,397) 68
--------- ---------
Other comprehensive income (loss), before tax (420) (1,798)
Income tax benefit related to items of other comprehensive
income 147 629
--------- ---------
Other comprehensive income, net of tax (273) (1,169)
--------- ---------
Comprehensive income $ 10,281 $ 15,687
========= =========
</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>
Nine Months Ended
September 30,
-----------------------------
1998 1997
-------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,554 $ 16,856
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 6,846 6,039
Amortization 1,491 1,317
Changes in operating assets and liabilities
excluding effects from acquisitions:
Accounts receivable 543 (1,082)
Taxes receivable 2,032 --
Inventories (2,627) (1,240)
Other assets (120) (574)
Accounts payable 1,894 3,016
Accrued taxes (85) (46)
Accrued payroll and other compensation (2,377) (2,538)
Deferred income taxes (663) (128)
Other long-term liabilities (296) (144)
Other accrued liabilities (1,042) (2,081)
-------- --------
Total adjustments 5,596 2,539
-------- --------
Net cash provided by operating activities 16,150 19,395
-------- --------
Cash flows from investing activities:
Acquisitions (16,889) (76)
Additions of property, plant, and equipment (13,336) (14,429)
Purchase of investments, net (394) (4,198)
Disposals of property, plant, and equipment, net 383 394
-------- --------
Net cash used for investing activities (30,236) (18,309)
Cash flows from financing activities:
Long-term debt payments (3,244) (3,950)
Proceeds from short-term borrowings 56,113 --
Payments of short-term borrowings (37,300) --
Payment of current note payable -- (8,000)
Issuance of common stock 929 1,783
Acquisition of common stock (9,899) (15,399)
-------- --------
Net cash provided by (used for) financing activities 6,599 (25,566)
-------- --------
Effect of exchange rate changes on cash 86 (108)
-------- --------
Decrease in cash and cash equivalents (7,401) (24,588)
Cash and cash equivalents at beginning of period 8,891 38,226
-------- --------
Cash and cash equivalents at end of period $ 1,490 $ 13,638
======== ========
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 476 $ 640
Income taxes 4,371 10,767
</TABLE>
6
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<S> <C> <C>
Non-cash transactions:
Unrealized gains/losses on available-for-sale securities 908 88
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 (the
"Company"). 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
September 30, 1998 September 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 $ 3,154 15,688 $ 0.20 $ 5,515 16,661 $ 0.33
Effect of dilutive securities
stock options 253 -- 612 .01
------ --------- ------ --------
Diluted earnings per share $ 3,154 15,941 $ 0.20 $ 5,515 17,273 $ 0.32
======= ====== ========= ======= ====== ========
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
September 30, 1998 September 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 $ 10,554 15,908 $ 0.66 $ 16,856 16,799 $ 1.00
Effect of dilutive securities
stock options 358 .01 656 .03
------ --------- ------ --------
Diluted earnings per share $ 10,554 16,266 $ 0.65 $ 16,856 17,455 $ 0.97
======== ====== ========= ======== ====== ========
</TABLE>
Options to purchase 630,716 shares and 300,196 shares of Lydall Common
Stock for the year-to-date September 30, 1998 and 1997, respectively, as
well as 648,716 shares and 300,196 shares for the quarter ended September
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. 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. On October 6, 1998, the U.S. Court of
Appeals for the Federal Circuit upheld the jury finding of
non-infringement in favor of Lydall, with all of ATD's claims for damages
being denied. Therefore, there will be no material adverse effect upon the
Company's consolidated financial position, results of operations,
comprehensive income, or cash flows, relating to this litigation.
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 September 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 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 proforma effect on the Company's results of
operations for the quarter and year-to-date ended September 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 as a result of implementing this
pronouncement.
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,
9
<PAGE>
results of operations, comprehensive income, or cash flows as a result of
implementing this pronouncement.
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 face value. This statement is effective for fiscal years beginning
after June 15, 1999. As of September 30, 1998, the Company does not have
any derivative instruments. If Lydall continues not to use derivative
instruments, there will not be a material effect on the Company's
consolidated financial position, results of operations, comprehensive
income, or cash flows as a result of implementing this pronouncement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
For the third quarter of 1998, sales declined to $56.5 million compared with the
same period a year ago of $59.4 million. Net income was $3.2 million compared
with $5.5 million and diluted earnings per share were $.20 compared with $.32 in
the comparable quarter of 1997. Gross margin declined to $16.3 million, or 28.9
percent of sales, from $18.9 million, or 31.8 percent of sales. After-tax return
on sales was 5.6 percent for the third quarter of 1998 compared with 9.3 percent
for the same quarter of 1997.
For the nine months ended September 30, 1998 sales declined to $172.3 million
compared with the same period a year ago of $185.4 million. Net income was $10.6
million compared with $16.9 million, and diluted earnings per share were $.65
compared with $.97 for the first nine months of 1997. Gross margin was $49.9
million, or 29.0 percent of sales, for the nine months ended September 30, 1998,
and after-tax return on sales was 6.1 percent. Last year for the same period,
gross margin was $58.2 million, or 31.4 percent of sales, and after-tax return
on sales was 9.1 percent.
Selling, product development and administrative expenses (SG&A) amounted to
$11.4 million and $10.9 million for the third quarter of 1998 and 1997,
respectively. On a year-to-date basis, SG&A amounted to $34.0 million and $32.6
million for 1998 and 1997, respectively. The two acquisitions made during 1998
have contributed significantly to an increase in the SG&A costs for the quarter
and year-to-date periods. Costs associated with the Lydall 2000 program,
Lydall's enterprisewide systems implementation project, have also contributed to
the increase in SG&A costs. These additional costs were offset somewhat by
reductions of incentive compensation expense.
Investment income in 1998 has decreased year-to-date as well as in the quarter
due to a decrease in investment holdings which correspondingly produced lower
returns. Interest expense continues to increase over 1997 levels due to the
continued borrowing on the short-term line of credit during 1998. The line of
credit was not utilized in 1997. For the three months ended September 30, 1998
other expense related to disposals of fixed assets. Other income in the
corresponding quarter of 1997 resulted from a reduction of an environmental
reserve, which was deemed to be no longer necessary. This reserve was
subsequently eliminated during 1998 based upon an updated assessment of the
exposure at the site. The reserve elimination along with fixed asset
dispositions resulted in income year-to-date for nine months ended September 30,
1998. Other income for the nine months ended September 30, 1997 resulted from
the third quarter 1997 reserve reduction, offset by asset dispositions at a
loss.
Lower sales and earnings in the third quarter can be attributed to several
factors, both external and internal. The strike at General Motors as well as an
extended shutdown at Chrysler had an effect. In addition, costs of new product
launches to the automotive market were higher than anticipated coupled with
customer driven program delays related to these introductions. Lydall also
continues to be affected by the depressed semiconductor market and the resulting
softness in markets for high-efficiency air filtration media. The Company is
operating in a very competitive climate, which is putting pressure on pricing.
In addition, the Asian economic crisis is effecting Company performance.
In light of year-to-date financial results and expected fourth-quarter business
activity, the Company revised its 1998 forecast of sales to approximately $230
million and diluted earnings per share to about $.80. This assumes the effect of
costs associated with realignment of operations in the fourth quarter and
certain other nonrecurring charges and events. The total effect on earnings
could amount to as much as $.04 or $.05 per share. These actions would be costly
in the short-term but have positive long-term effects. These projections are
down from the Company's earlier forecast of sales of approximately $245 million
and earnings per share of between $1.00 and $1.05.
The Company is introducing several new products in both the thermal and
filtration areas. Approvals have been received on many programs in the
automotive applications under each of the three new product concepts of
Zero-Clearance heat shields, polyshield components, and stand-alone shields. It
is anticipated there will be a positive impact from these products as 1999
unfolds.
10
<PAGE>
Development of new medical fluid filtration devices and a Cryo-Pak line used in
the preservation of stem cells and cord blood is underway. Also, the
introduction of the Bio-Pak, a flexible, disposable container used for
bio-pharmaceutical fluid processing and compound preparation, is going well.
Expectations for Bio-Pak are to see further progress in 1999 with more of a
step-up in 2000. In air filtration, product extensions like the home air
purification application, process technology expansion such as the addition of
the melt-blown line installed in mid-1998, and product innovations addressing
the industry's evolving needs like a next-generation ASHRAE media and low-boron
media are expected to be areas of growth.
There does not appear to be any appreciable strengthening of the filtration
markets in the short term, however, Lydall remains confident in the long-term
opportunities in these markets. There is no apparent immediate relief to price
pressures, but tangible benefits are expected in the fourth quarter from
intensive cost-reduction efforts implemented earlier in the year. Our price/cost
ratio, which is the relationship of the increases or decreases of prices of our
products to increases or decreases in costs negotiated with our suppliers, is
improving.
The Company's effective tax rate for the third quarter of 1998 was 34.2 percent
and 33.9 percent year-to-date. This compares to 35.6 percent and 37.0 percent
for the third quarter and year-to-date 1997. The effective 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.
Year 2000. The estimates and conclusions relating to Lydall 2000 are based on
management's best estimates of future events. Risks to completing the plan
include the availability of resources, the ability to discover and correct the
potential Year 2000 sensitive problems and the ability of third parties to
bring their systems into Year 2000 compliance.
11
<PAGE>
Liquidity and Capital Resources
The Company generated operating cash flow of $7.8 million in the third quarter
of 1998 bringing year-to-date operating cash flow to $24.3 million. On September
30, 1998, cash, cash equivalents and short-term investments were $4.8 million
compared with $12.8 million at year-end 1997. Uses of cash year-to-date included
approximately $17 million to acquire CharterMed and Engineered Thermal Systems,
$13 million of capital expenditures, and $9.9 million to repurchase 607,700
shares of Lydall stock. Working capital was $17.8 million at September 30, 1998,
compared with $39.2 million at the end of last year.
During the quarter ended September 30, 1998, $4.9 million of capital
expenditures were made, $750 thousand of debt was paid down and repurchases of
stock totaled $1.9 million. Tax payments of $2.1 million were also made during
the quarter. As of September 30, 1998, the Company has in excess of $16 million
available under line of credit arrangements.
The Company expects to finance its day-to-day operations needs and the purchase
of Lydall Common Stock from accumulated cash, sales of short-term investments,
cash from operations, and borrowings on short-term lines of credit.
Additionally, Lydall continues to actively seek strategic acquisitions.
Year 2000
As many computer systems and other equipment with embedded chips or processors
use only two digits to represent the year, they may be unable to process
accurately certain data before, during or after the year 2000. As a result,
business and governmental entities are at risk of possible miscalculations or
systems failures causing disruptions in their business operations. The century
dating issue can arise at any point in the Company's supply, manufacturing,
processing, distribution, and financial chains.
Lydall has recognized the urgency of updating its information technology systems
to improve product quality, process efficiencies, productivity, and to
accommodate century dating issues. The Company and each of its operating
subsidiaries are in the process of implementing a Year 2000 readiness program
with the objective of having all significant systems processing date sensitive
transactions properly with respect to the century dating issue. The project,
entitled Lydall 2000, has been underway since 1995. Lydall 2000 addresses
internal information technology and non-information technology systems as well
as an assessment of third parties' Year 2000 readiness.
Information technology systems were analyzed to determine those which must be
replaced to meet the criteria of Lydall 2000. The identified systems have been
segregated into two logical parts, the financial/manufacturing system and the
human resource management system. The scope of these implementations has been
determined, the infrastructure has been put in place and the Company has been
progressing with the implementation using both internal resources and external
consultants. World class systems, which will meet the objectives of the Company,
have been chosen to replace current legacy systems. The Company estimates that
the domestic financial/manufacturing systems implementations are approximately
75 percent complete with an estimated completion date in the beginning of the
third quarter of 1999. The foreign implementation of the financial/manufacturing
systems is estimated at 10 percent complete with completion date in the end of
the third quarter of 1999. The completion timeframes includes time for testing
and verification of newly implemented systems. The human resource management
system is currently Year 2000 compliant.
Non-information technology systems are also being assessed as part of Lydall
2000. Resources have been assigned to complete this assessment by the end of
1998. Systems requiring remediation are expected to be substantially compliant
by mid-year 1999.
Additionally, customers and suppliers which could have a material impact on the
Company's operations are being contacted to verify their Year 2000 readiness.
The Company intends to assess their compliance and consider alternatives where
necessary.
Since the inception of Lydall 2000, the Company has capitalized costs of
approximately $8.5 million. The Company expects, based upon actual experience
to date, to additionally capitalize approximately $2 million to complete
Lydall 2000. The Lydall 2000 budgeted expenditures for 1998 are approximately
80 percent of the entire information technology budget for 1998. There are no
deferrals of information technology projects that will have a material impact
on financial condition and results of operations of the Company.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity or financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on results of operations, liquidity or
financial condition. Lydall 2000 is expected to significantly reduce the level
of uncertainty about the Year 2000 problem. The Company believes that with the
12
<PAGE>
implementation of new systems and completion of Lydall 2000, the possibility of
significant interruptions of normal operations should be reduced.
The Company is anticipating being century-dating compliant prior to the year
2000 but will continue to reassess the need for formal contingency plans, based
upon progress of Year 2000 efforts by the Company and third parties. If deemed
necessary, contingency planning will begin in the first quarter of 1999.
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 as a result
of implementing this pronouncement.
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
as a result of implementing this pronouncement.
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 face
value. This statement is effective for fiscal years beginning after June 15,
1999. As of September 30, 1998, the Company does not have any derivative
instruments. If Lydall continues not to use derivative instruments, there will
not be a material effect on the Company's consolidated financial position,
results of operations, comprehensive income, or cash flows as a result of
implementing this pronouncement.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
Part II. OTHER INFORMATION
Item 1. Item 1. Legal Proceedings
On July 16, 1998, a subsidiary of the Company received a notice of potential
liability from the United States Environmental Protection Agency regarding an
abandoned site in Maine formerly owned by an affiliate of the Company. The
Company is currently investigating the matter and has notified its insurers.
The Company is unable to determine the ultimate outcome of this matter or its
materiality at this time.
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 September 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)
November 9, 1998 By /s/ John E. Hanley
------------------
John E. Hanley
Vice President, Finance and Treasurer
(Principal Accounting and Financial
Officer)
14
<PAGE>
LYDALL, INC.
Index to Exhibits
Exhibit No.
- -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,490
<SECURITIES> 3,359
<RECEIVABLES> 34,202
<ALLOWANCES> (1,542)
<INVENTORY> 20,206
<CURRENT-ASSETS> 64,884
<PP&E> 140,678
<DEPRECIATION> 61,386
<TOTAL-ASSETS> 177,662
<CURRENT-LIABILITIES> 47,039
<BONDS> 2,580
0
0
<COMMON> 2,162
<OTHER-SE> 112,179
<TOTAL-LIABILITY-AND-EQUITY> 177,662
<SALES> 172,281
<TOTAL-REVENUES> 172,281
<CGS> 122,388
<TOTAL-COSTS> 122,388
<OTHER-EXPENSES> (67)
<LOSS-PROVISION> (201)
<INTEREST-EXPENSE> 547
<INCOME-PRETAX> 15,957
<INCOME-TAX> 5,403
<INCOME-CONTINUING> 10,554
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,554
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.65
</TABLE>
