<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________
COMMISSION FILE NUMBER: 1-7665
------------------------
LYDALL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 06-0865505
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE COLONIAL ROAD, P.O.B. 151, 06045-0151
MANCHESTER, CONNECTICUT, (zip code)
(Address of principal executive
offices)
</TABLE>
(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 August 7, 2000 15,806,098
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
LYDALL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C> <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
Notes to Consolidated Condensed Financial Statements........ 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11-14
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 6. Exhibits and Reports on Form 8-K............................ 15
Signature........................................................................ 16
</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,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,686 $ 1,154
Accounts receivable, net.................................. 48,549 45,517
Inventories:
Finished goods.......................................... 9,918 8,529
Work in progress........................................ 6,258 5,044
Raw materials........................................... 7,779 8,576
LIFO reserve............................................ (1,628) (1,619)
--------- ---------
Total inventories......................................... 22,327 20,530
Taxes receivable.......................................... -- 4,022
Prepaid expenses.......................................... 2,463 1,895
Net investment in discontinued operations................. -- 2,125
Assets held for sale...................................... 31,558 35,183
Deferred tax assets....................................... 2,558 4,807
--------- ---------
Total current assets.................................... 109,141 115,233
Property, plant and equipment, at cost...................... 146,067 146,828
Less: accumulated depreciation.............................. (65,330) (66,272)
--------- ---------
80,737 80,556
Other assets, at cost, less amortization.................... 24,027 24,447
--------- ---------
Total assets.............................................. $ 213,905 $ 220,236
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft............................................ $ 2,799 $ 2,564
Current portion of long-term debt......................... 7,194 6,849
Accounts payable.......................................... 21,015 18,438
Accrued taxes............................................. 1,097 920
Accrued payroll and other compensation.................... 6,236 4,021
Liabilities related to assets held for sale............... 7,585 6,945
Other accrued liabilities................................. 8,244 10,866
--------- ---------
Total current liabilities............................... 54,170 50,603
Long-term debt.............................................. 18,302 38,334
Deferred tax liabilities.................................... 11,762 11,306
Other long-term liabilities................................. 4,769 4,757
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock........................................... -- --
Common stock.............................................. 2,191 2,180
Capital in excess of par value............................ 39,766 39,195
Retained earnings......................................... 150,077 140,085
Accumulated other comprehensive loss...................... (5,490) (4,582)
--------- ---------
186,544 176,878
Less: treasury stock, at cost............................. (61,642) (61,642)
--------- ---------
Total stockholders' equity.............................. 124,902 115,236
--------- ---------
Total liabilities and stockholders' equity.................. $ 213,905 $ 220,236
========= =========
</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,
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
NET SALES................................................... $79,370 $83,054
Cost of sales............................................... 60,323 62,759
------- -------
Gross margin................................................ 19,047 20,295
Selling, product development and administrative expenses.... 13,998 14,175
------- -------
Operating income............................................ 5,049 6,120
Other (income) expense:
Investment income......................................... (142) (9)
Interest expense.......................................... 349 588
Foreign currency transaction (gain) loss.................. (71) 317
Other..................................................... 94 (327)
------- -------
230 569
------- -------
Income from continuing operations before income taxes....... 4,819 5,551
Income tax expense.......................................... 1,633 1,834
------- -------
Income from continuing operations........................... 3,186 3,717
Discontinued operations:
Loss from operations of the Wovens segment, net of tax
benefit of $69.......................................... -- (112)
------- -------
Loss from discontinued operations........................... -- (112)
------- -------
NET INCOME.................................................. $ 3,186 $ 3,605
======= =======
Basic earnings (loss) per common share:
Continuing operations..................................... $ .20 $ .24
Discontinued operations................................... -- (.01)
------- -------
Net income................................................ $ .20 $ .23
Diluted earnings (loss) per common share:
Continuing operations..................................... $ .20 $ .24
Discontinued operations................................... -- (.01)
------- -------
Net income................................................ $ .20 $ .23
Weighted average common stock outstanding................... 15,784 15,732
Weighted average common stock and equivalents outstanding... 15,866 15,822
Net income.................................................. $ 3,186 $ 3,605
Other comprehensive income, before tax:
Foreign currency translation adjustments.................. (61) (23)
Reclassification for gains included in net income......... (19) --
------- -------
Other comprehensive loss, before tax........................ (80) (23)
Income tax benefit related to items of other comprehensive
loss...................................................... 27 (1,498)
------- -------
Other comprehensive loss, net of tax........................ (53) (1,521)
------- -------
Comprehensive income........................................ $ 3,133 $ 2,084
======= =======
</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,
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
NET SALES................................................... $159,525 $165,988
Cost of sales............................................... 121,403 126,566
-------- --------
Gross margin................................................ 38,122 39,422
Selling, product development and administrative expenses.... 28,208 27,403
-------- --------
Operating income............................................ 9,914 12,019
Other (income) expense:
Investment income......................................... (158) (15)
Interest expense.......................................... 839 1,309
Foreign currency transaction loss (gain).................. 5 (1,010)
Gain from sale of operations.............................. (6,065) --
Other..................................................... (218) (112)
-------- --------
(5,597) 172
-------- --------
Income from continuing operations before income taxes....... 15,511 11,847
Income tax expense.......................................... 5,591 3,949
-------- --------
Income from continuing operations........................... 9,920 7,898
Discontinued operations:
Loss from operations of the Wovens segment, net of tax
benefit of $131......................................... -- (211)
Gain on disposal of the Wovens segment, net of tax expense
of $44.................................................. 71 --
-------- --------
Gain (loss) from discontinued operations.................... 71 (211)
NET INCOME.................................................. $ 9,991 $ 7,687
======== ========
Basic earnings per common share
Continuing operations..................................... $ .63 $ .50
Discontinued operations................................... -- (.01)
-------- --------
Net income................................................ $ .63 $ .49
Diluted earnings (loss) per common share:
Continuing operations..................................... $ .63 $ .50
Discontinued operations................................... -- (.01)
-------- --------
Net income................................................ $ .63 $ .49
Weighted average common stock outstanding................... 15,745 15,724
Weighted average common stock and equivalents outstanding... 15,800 15,808
Net income.................................................. $ 9,991 $ 7,687
Other comprehensive income, before tax:
Foreign currency translation adjustments.................. (1,392) (4,482)
-------- --------
Other comprehensive loss, before tax........................ (1,392) (4,482)
Income tax benefit related to items of other comprehensive
loss...................................................... 484 --
-------- --------
Other comprehensive loss, net of tax........................ (908) (4,482)
-------- --------
Comprehensive income........................................ $ 9,083 $ 3,205
======== ========
</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,
---------------------
2000 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 9,991 $ 7,687
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 5,187 5,760
Amortization............................................ 775 873
Gain on disposal of Wovens Segment...................... (71) --
Gain on sale of the Hoosick Falls Operation............. (6,065) --
Gain on sale of investments............................. (136) --
Loss on disposition of property, plant and equipment.... 296 32
Foreign currency transaction loss (gain)................ 5 (1,010)
Gain on receipt of common stock from demutualization of
insurance companies.................................... (393) --
Changes in operating assets and liabilities excluding
effects from acquisitions:
Accounts receivable................................... (856) 1,210
Taxes receivable...................................... 4,022 2,256
Inventories........................................... (1,269) (1,454)
Other assets.......................................... (1,050) (1,526)
Accounts payable...................................... (663) 46
Accrued taxes......................................... 1,317 (399)
Accrued payroll and other compensation................ 4,254 2,394
Deferred income taxes................................. 1,661 (853)
Other long-term liabilities........................... 35 130
Other accrued liabilities............................. (3,093) 48
--------- --------
Total adjustments....................................... 3,956 7,507
--------- --------
Net cash provided by operating activities................... 13,947 15,194
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of Wovens Segment.................. 1,819 --
Proceeds from sales of the Hoosick Falls Operation........ 12,037 --
Proceeds from sales of investments........................ 529 --
Acquisitions.............................................. -- (178)
Additions of property, plant, and equipment............... (10,271) (8,817)
--------- --------
Net cash provided by (used for) investing activities........ 4,114 (8,995)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft............................................ 235 --
Long-term debt payments................................... (100,424) (2,100)
Long-term debt proceeds................................... 82,141 --
Proceeds from short-term borrowings....................... -- 54,881
Payment of short-term borrowings.......................... -- (58,744)
Issuance of common stock.................................. 582 376
Acquisition of common stock............................... -- (83)
--------- --------
Net cash used for financing activities...................... (17,466) (5,670)
--------- --------
Effect of exchange rate changes on cash..................... (63) (285)
--------- --------
Increase in cash and cash equivalents....................... 532 244
Cash and cash equivalents at beginning of period............ 1,154 2,254
--------- --------
Cash and cash equivalents at end of period.................. $ 1,686 $ 2,498
========= ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 739 $ 1,323
Income taxes.............................................. $ 682 $ 2,726
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
6
<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 (collectively,
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 operations
for the periods presented 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. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1999.
2. Basic earnings per common share are based on income from continuing
operations and net income divided by the weighted average number of common
shares outstanding during the period. Diluted earnings per common share are
based on income from continuing operations and net income divided by the
weighted average number of common shares outstanding during the period,
including the effect of stock options, where such effect is dilutive.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
(UNAUDITED) (UNAUDITED)
---------------------------------- ----------------------------------
INCOME FROM INCOME FROM
CONTINUING CONTINUING
OPERATIONS SHARES PER-SHARE OPERATIONS SHARES PER-SHARE
($000'S) (000'S) AMOUNT ($000'S) (000'S) AMOUNT
----------- -------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share.................. $3,186 15,784 $.20 $3,717 15,732 $.24
Effect of dilutive stock options.......... -- 82 -- -- 90 --
------ ------ ---- ------ ------ ----
Diluted earnings per share................ $3,186 15,866 $.20 $3,717 15,822 $.24
====== ====== ==== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
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.................. $3,186 15,784 $.20 $3,605 15,732 $.23
Effect of dilutive securities: stock
options................................. -- 82 -- -- 90 --
------ ------ ---- ------ ------ ----
Diluted earnings per share................ $3,186 15,866 $.20 $3,605 15,822 $.23
====== ====== ==== ====== ====== ====
</TABLE>
7
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
(UNAUDITED) (UNAUDITED)
---------------------------------- ----------------------------------
INCOME FROM INCOME FROM
CONTINUING CONTINUING
OPERATIONS SHARES PER-SHARE OPERATIONS SHARES PER-SHARE
($000'S) (000'S) AMOUNT ($000'S) (000'S) AMOUNT
----------- -------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share.................. $9,920 15,745 $.63 $7,898 15,724 $.50
Effect of dilutive securities stock
options................................. -- 55 -- -- 84 --
------ ------ ---- ------ ------ ----
Diluted earnings per share................ $9,920 15,800 $.63 $7,898 15,808 $.50
====== ====== ==== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
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.................. $9,991 15,745 $.63 $7,687 15,724 $.49
Effect of dilutive securities stock
options................................. -- 55 -- -- 84 --
------ ------ ---- ------ ------ ----
Diluted earnings per share................ $9,991 15,800 $.63 $7,687 15,808 $.49
====== ====== ==== ====== ====== ====
</TABLE>
3. On January 28, 2000, the Company sold substantially all of the assets, net
of certain liabilities, of the Composite Materials, Hoosick Falls Operation
for approximately $12.0 million in cash, plus $660 thousand of liabilities
assumed resulting in a pretax gain of $6.1 million, or $.24 per diluted
share after-tax. For the quarter ended June 30, 1999, sales and income from
operations of the Hoosick Falls Operation included in income from continuing
operations were $2.9 million and $508 thousand, respectively. For the six
months ended June 30, 2000 and June 30, 1999, sales and income (loss) from
operations of the Hoosick Falls Operation included in income from continuing
operations were $591 thousand and $5.4 million and ($10 thousand) and
$618 thousand, respectively. Assets of $6.4 million and related liabilities
of $800 thousand were classified as "Assets held for sale" and "Liabilities
related to assets held for sale" in the Consolidated Condensed Balance Sheet
at December 31, 1999.
In November 1999, the Company's Board of Directors adopted a plan to
discontinue the operations of the Wovens Segment. Losses from operations of
the Wovens Segment for 1999 included results through November 30, 1999. The
Company recorded an estimated loss on disposition of the Wovens Segment of
$1.8 million at December 31, 1999. On February 29, 2000 the Company sold
certain assets of the segment for approximately $1.8 million in cash. A
$71 thousand gain on disposal was recorded in the quarter ended March 31,
2000 and reflects the final adjustments to the Company's 1999 estimated loss
on disposal.
The Company's Board of Directors has formalized plans to sell certain assets
and liabilities of the Company. As a result, assets of $31.6 million and
related liabilities of $7.6 million have been reclassified as "Assets held
for sale" and "Liabilities related to assets held for sale" in the Condensed
Consolidated Balance Sheet at June 30, 2000.
4. 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
8
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
operator of the plant is approximately 0.286 percent. The EPA has completed
its Record of Decision for the site and has estimated the total cost of
remediation to be between $17 million and $22 million. Based on the alleged
volumetric contribution of its former subsidiary to the site, and on the
EPA's estimated remediation costs, Lydall's alleged total exposure would be
less than $100 thousand, which has been accrued.
There are over 800 potentially responsible parties ("prp") that have been
identified by the Site Steering Committee. Of these, 38, not including the
Company's former subsidiary, are estimated to have contributed over 80% of
the total waste volume at the site. These prp's include Fortune 500
companies, public utilities, and the State of Indiana. The Company believes
that, in general, these parties are financially solvent and should be able
to meet their obligations at the site. The Company has reviewed Dun &
Bradstreet reports on several of these prp's and, based on these financial
reports, does not believe Lydall will have any material additional volume
attributed to it for reparation of this site due to insolvency of other
prp's.
In June 1995, the Company and its former subsidiary were sued in the
Northern District of Indiana by the insurer of the current operator of the
former subsidiary's plant seeking contribution. In October 1997, the insurer
made a settlement demand of $150,591 to the Company in exchange for a
release of the Company's liability at the site and indemnification from the
current operator against site-related claims. The Company executed a
settlement agreement with the insurer and current operator for a full site
release; however, the current operator subsequently backed out of the
agreement. In June 1998, a stipulation for dismissal signed by all parties
was filed to end current litigation until the total liability at the site is
defined.
Management believes the ultimate disposition of this matter will not have a
material adverse effect upon the Company's consolidated financial position,
results of operations, or cash flows.
By letter dated July 13, 1998, Lydall Eastern, Inc., a subsidiary of
Lydall, Inc. ("Lydall Eastern"), was identified as a "potentially
responsible party" by the EPA in connection with the claimed release or
threat of release of hazardous substances at a site known as the Rogers
Fibre Mill in Buxton, Maine (the "site"). Lydall Eastern merged with the
owner and operator of a fiberboard mill at the site whose ownership dated
back to approximately 1912. Lydall Eastern ceased operation at the site in
1980. In 1982, Lydall Eastern conveyed its interest in the site.
The EPA has spent public funds to investigate and take action with respect
to the site. The EPA likely will seek to recover the funds it has spent, and
will spend, at the site from potentially responsible parties, including
Lydall Eastern. At this time, it is not possible to predict what future
liability or costs might be incurred by Lydall Eastern in connection with
the site.
5. Lydall's reportable segments are: Thermal/Acoustical, Filtration/Separation
and Paperboard. All other products and services are aggregated in Other
Products and Services. During the fourth quarter of 1999, the Company
announced the discontinuance of the Wovens segment. For a full description
of each segment, refer to the "Notes to Consolidated Financial Statements"
reported in the Company's 1999 Annual Report on Form 10-K. The table below
presents net sales and operating income by segment for the three and six
months ended June 30, 2000 and 1999. In 2000,
9
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
the Company removed its corporate charge from the calculation of operating
income and, as a result, reclassified the 1999 operating income amounts to
conform to the current year presentation.
<TABLE>
<CAPTION>
IN THOUSANDS THERMAL/ FILTRATION/ OTHER PRODUCTS RECONCILING CONSOLIDATED
FOR THE THREE MONTHS ENDED ACOUSTICAL SEPARATION PAPERBOARD & SERVICES ITEMS TOTALS
---------------------------------- ---------- ----------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 2000
Net Sales....................... $40,908 $17,433 $11,105 $10,958 $(1,034) $ 79,370
Operating income................ $ 3,368 $ 2,757 $ 492 $ 1,460 $(3,028) $ 5,049
------- ------- ------- ------- ------- --------
June 30, 1999
Net Sales....................... $45,427 $14,740 $10,272 $13,630 $(1,015) $ 83,054
Operating income................ $ 3,488 $ 2,264 $ 1,036 $ 2,035 $(2,703) $ 6,120
------- ------- ------- ------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
IN THOUSANDS THERMAL/ FILTRATION/ OTHER PRODUCTS RECONCILING CONSOLIDATED
FOR THE SIX MONTHS ENDED ACOUSTICAL SEPARATION PAPERBOARD & SERVICES ITEMS TOTALS
---------------------------------- ---------- ----------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 2000
Net Sales....................... $85,139 $33,654 $21,527 $21,229 $(2,024) $159,525
Operating income................ $ 7,651 $ 5,179 $ 833 $ 2,338 $(6,087) $ 9,914
------- ------- ------- ------- ------- --------
June 30, 1999
Net Sales....................... $90,238 $29,418 $21,687 $26,514 $(1,869) $165,988
Operating income................ $ 6,821 $ 4,455 $ 2,341 $ 3,398 $(4,996) $ 12,019
------- ------- ------- ------- ------- --------
</TABLE>
6. The effective tax rate for the six months ended June 30, 2000 was
approximately 36% as the tax effect of the gain on the sale of the Hoosick
Falls Operation has resulted in an income tax provision greater than the
Company's effective tax rate in 1999.
7. Effective August 10, 2000 the Company amended certain covenants and
conditions of its main credit facility dated July 14, 1999. The amendments
provide increased flexibility to the Company with regard to strategic and
operational financing needs. The Company is in compliance with all of the
loans covenants and conditions, as amended.
8. Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") and Statement
of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Hedging Activities an amendment of SFAS 133"
("SFAS 138"), effective for fiscal years beginning after June 15, 2000, will
be adopted by the Company when effective. SFAS 133, as amended, and
SFAS 138 establish accounting and reporting standards for derivative
instruments, including certain derivatives embedded in other contracts, and
for hedging activities. They require that entities recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. The effect of adopting SFAS 133 and SFAS 138 is
presently being assessed.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
NET SALES
Lydall, Inc. recorded net sales of $79.4 million for the second quarter of
2000 compared with $83.1 million for the same quarter in 1999, a decline of
$3.7 million (4.5%). The decline stemmed from lower volume at the chrome plating
and injection molding operations in Germany, the decline in the relative value
of the Euro, and the sale of the Hoosick Falls Operation in January 2000. These
factors were partially offset by strengthening sales in the
Filtration/Separation and Paperboard segments.
For the six months ended June 30, 2000 net sales were $159.5 million, a
decrease of $6.5 million (3.9%) from $166.0 million for the comparable period of
the prior year. The decrease is primarily attributable to the sale of the
Hoosick Falls Operation in January 2000, the decline in the relative value of
the Euro, and lower volume at the chrome plating and injection molding
operations in Germany. Sales of the Filtration/Separation segment partially
offset the decrease as sales of high efficiency air-filtration media continued
to strengthen.
GROSS MARGIN
Gross margin for the second quarter of 2000 was 24.0% compared to 24.4% for
the same quarter of 1999. This decline was driven by increased raw material
prices in the Paperboard segment, and the sale of the Hoosick Falls Operation,
offset by increased volume of air-filtration media in the Filtration/ Separation
segment.
Gross margin increased 150 basis points to 23.9% for the six months ended
June 30, 2000 compared to the comparable period of the prior year. This change
resulted from increased sales of thermal/acoustical industrial products and
better than expected tooling margins in Germany, offset by raw material pricing
in the Paperboard segment.
SELLING, PRODUCT DEVELOPMENT AND ADMINISTRATIVE EXPENSES
For the quarter ended June 30, 2000 selling, product development and
administrative expenses were $14.0 million compared with $14.2 million from the
same period in 1999. As a percentage of net sales these costs increased to 17.6%
of sales for the second quarter of 2000 compared with 17.1% for the second
quarter of 1999 mainly due to the decrease in net sales.
Selling, product development and administrative expenses have increased by
$800 thousand (2.9%) to $28.2 million for the first six months of 2000 compared
to $27.4 million for the comparable period of the prior year. The increase is
primarily due to increased spending on new product and market development
efforts.
OTHER (INCOME)/EXPENSE
Other (income)/expense for the second quarter of 2000 decreased by
$300 thousand to $200 thousand compared to the same period of the prior year.
The decrease resulted from lower interest expense due to reduced debt levels,
income realized upon receipt and subsequent sale of common stock of two
demutualized life insurance companies, and the impact of foreign currency
transactions. The decrease was partially offset by losses on assets written-off
during the quarter.
For the six months ended June 30, 2000 other (income)/expense was
($5.6 million) compared to ($200 thousand) for the same period in 1999. The
majority of the change is due to the gain of $6.1 million on the January 2000
sale of the Hoosick Falls Operation. The majority of the proceeds from that
transaction were used to pay down debt resulting in lower interest expense since
the sale.
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<PAGE>
Other (income)/expense in 1999 included a $1.0 million foreign currency
transaction gain on a Euro denominated loan.
INCOME TAX
The effective tax rate for the six months ended June 30, 2000 was 36.0%
compared to 33.3% for the comparable period in 1999. The increase is due to the
gain on the sale of the Hoosick Falls Operation that has resulted in a higher
effective state income tax rate than in 1999.
SEGMENT RESULTS
THERMAL/ACOUSTICAL
Thermal/Acoustical net sales declined $4.5 million (9.9%) and $5.1 million
(5.7%) for the second quarter and the six months ended June 30, 2000 compared to
1999, primarily due to the decline in the relative value of the Euro and lower
sales volume at the chrome plating and injection molding operations in Germany.
These factors were partially offset by improved domestic sales of automotive and
industrial thermal products.
Thermal/Acoustical operating income decreased $100 thousand (3.4%) and
increased $800 thousand (12.2%) for the second quarter and six months ended
June 30, 2000 compared to 1999. The decrease in operating income for the quarter
was primarily due to reduced volume at the chrome plating and injection molding
operations in Germany partially offset by improved results in domestic
automotive and non-automotive products. For the first six months of 2000,
operating income improvements are due to improved manufacturing efficiencies at
certain plants and greater sales volume of industrial thermal products.
FILTRATION/SEPARATION
Filtration/Separation net sales increased $2.7 million (18.3%) and
$4.2 million (14.4%) for the second quarter and six months ended June 30, 2000
compared to 1999. Strong sales of high-efficiency air filtration products drove
the majority of the improvement in both periods. The Company also benefited from
a general resurgence in world filtration markets and some market-share gains as
well as the growth of synthetic air and liquid filtration products and
biomedical and pharmaceutical processing products. These improvements were
partially offset by the unfavorable impact of foreign currency translation.
Filtration/Separation operating income increased $500 thousand (21.8%) and
$700 thousand (16.3%) for the second quarter and six months ended June 30, 2000
compared to 1999, primarily as a result of greater volume and manufacturing
efficiencies. These improvements were partially offset by increased selling,
administrative and product development costs related to market-development and
new-product efforts.
PAPERBOARD
Paperboard net sales increased $800 thousand (8.1%) and decreased
$200 thousand (0.7%) for the second quarter and six months ended June 30, 2000
compared to 1999. In March of 2000 a new customer was added that mitigated the
decline in net sales in the first quarter and provided most of the increase in
the second quarter. Also, during the second quarter of 2000, net foreign sales
of materials handling products increased, however this increase was partially
offset by a decline in domestic materials handling product net sales.
Paperboard operating income decreased $500 thousand (52.5%) and
$1.5 million (64.4%) for the second quarter and six months ended June 30, 2000
compared to 1999. The primary reason for the decreases is the increase in
materials handling products raw materials costs. Due to an increasingly
12
<PAGE>
competitive environment the Company has not yet been able to pass on these cost
increases to its customers.
OTHER PRODUCTS AND SERVICES
Other Products and Services net sales decreased $2.7 million (19.6%) and
$5.3 million (19.9%) for the second quarter and six months ended June 30, 2000
compared with 1999, mainly as a result of the sale of the Hoosick Falls
Operation. Removing the Hoosick Falls Operation's 1999 net sales for comparative
purposes, Other Products and Services net sales increased by $200 thousand and
decreased $500 thousand during the second quarter and six months ended June 30,
2000 compared to 1999.
Other Products and Services operating income decreased $600 thousand (28.3%)
and $1.1 million (31.2%) for the second quarter and six months ended June 30,
2000 compared to 1999. The decline in the second quarter is mainly due to the
sale of the Hoosick Falls Operation. For the six month period, the decrease is
mainly due to the sale of the Hoosick Falls Operation and lower volume of pencil
board product sales.
OUTLOOK
The Company anticipates continued double-digit growth of net sales and
operating income of the Filtration/Separation segment and improved performance
of the Thermal/Acoustical segment in the second half of 2000. The remainder of
2000 should benefit from the expected continued strengthening of the air
filtration market, increased sales of the new biopharmaceutical processing
products as commercialization of the product line continues, and significant new
thermal/acoustical automotive business. The Company has previously announced
that on an annual basis, more than $30 million of new automotive business is
currently booked. This new business begins to phase in during the latter half of
2000. The Company expects approximately $10 million of this new business to be
added to 2000 sales with the full impact realized in future annual sales.
The Company has previously announced its intention to divest its German
chrome plating and injection molding operations. Efforts to this end continued
in the second quarter of 2000. The sale of these two operations is expected to
generate a loss on disposition. However, the sale of these two unprofitable
operations is expected to have a positive impact on the operating income of the
Company subsequent to their disposition.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flow (earnings before interest, taxes, depreciation and
amortization) for the second quarter 2000 decreased $1.3 million, or 14% to
$8.0 million. For the six months ended June 30, 2000 operating cash flow, net of
the gain on the sale of the Hoosick Falls Operation, was $16.3 million compared
to $19.4 million for the same period in 1999. At June 30, 2000, cash and cash
equivalents were $1.7 million compared to $1.2 million at December 31, 1999.
Working capital at June 30, 2000 was $55.0 million compared with
$64.6 million at December 31, 1999. The reduction in working capital is mainly
due to the sale of the Wovens segment and the Hoosick Falls Operation.
Capital expenditures were $6.1 million and $10.3 million for the second
quarter and six months ended June 30, 2000 compared with $4.8 million and
$8.8 million for the same periods in 1999.
As of June 30, 2000, the Company had unused borrowing capacity of
approximately $46.8 million under various credit facilities. Management believes
that the Company's cash and cash equivalents, operating cash flow, and unused
borrowing capacity at June 30, 2000 are sufficient to meet current and
anticipated requirements for the foreseeable future.
13
<PAGE>
As previously announced, the Company has booked significant new automotive
business which is expected to phase in during the latter half of 2000. To
accommodate this new business, the Company made significant capital expenditures
on plant expansions and machinery and equipment in the first six months of 2000.
As a consequence of this level of capital spending, at June 30, 2000, a covenant
of the Company's main credit facility dated July 14, 1999 was not met. A waiver
of such non-compliance was obtained. In addition, effective August 10, 2000, the
Company amended certain covenants and conditions of such credit facility. The
amendment provides increased flexibility to the Company with regard to strategic
and operational financing needs. The Company is in compliance with all of the
loan covenants and conditions as amended.
ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), and Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Hedging Activities an amendment of SFAS 133" ("SFAS 138"),
effective for fiscal years beginning after June 15, 2000, will be adopted by the
Company when effective. SFAS 133, as amended, and SFAS 138 establish accounting
and reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities. They
require that entities recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. The effect of
adopting SFAS 133 and SFAS 138 is presently being assessed.
FORWARD-LOOKING INFORMATION
In the interest of more meaningful disclosure, Lydall and its management
make statements regarding the future outlook of the Company which constitute
"forward-looking statements" under the securities laws. These forward-looking
statements are intended to provide management's current expectations for the
future operating and financial performance of the company, based on assumptions
currently believed to be valid. Forward-looking statements include language such
as "believe", "expect", "estimate", "anticipate" and other words of similar
meaning in connection with discussion of future operating or financial
performance.
All forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially from those expressed or implied in the
forward-looking statements. This Report on Form 10-Q includes information as to
risk factors in the "Notes to Consolidated Condensed Financial Statements" under
Note 4. Additional factors that might cause such a difference include risks and
uncertainties which are detailed in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of the Company's 1999
Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in market risks from those disclosed
in Item 7a. of Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company's 1999 Annual Report on Form 10-K.
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<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 10, 2000.
Stockholders elected ten Directors to serve for one-year terms, until the next
Annual Meeting to be held in 2001.
Election of Nominees to the Board of Directors
<TABLE>
<CAPTION>
FOR WITHHELD
---------- ---------
<S> <C> <C>
Lee A. Asseo................................................ 12,476,926 1,423,638
Samuel P. Cooley............................................ 12,476,416 1,424,148
W. Leslie Duffy............................................. 12,473,885 1,426,679
David Freeman............................................... 12,476,676 1,423,888
Suzanne Hammett............................................. 12,477,601 1,422,963
Robert E. McGill, III....................................... 12,477,676 1,422,888
Christopher R. Skomorowski.................................. 12,475,667 1,424,897
Elliott F. Whitely.......................................... 12,477,676 1,422,888
Roger M. Widmann............................................ 12,476,676 1,423,888
Albert E. Wolf.............................................. 12,476,381 1,424,183
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1-- Certificate of Incorporation of the Registrant (filed as Exhibit
3.1 to the Registrant's Annual Report on Form 10-K dated
March 30, 2000, and incorporated herein by this reference).
3.2-- By-laws of the Registrant (filed as Exhibit 3(ii) to the
Registrant's Quarterly Report on Form 10-Q dated November 12,
1999, and incorporated herein by this reference).
10.1-- Amendment dated August 10, 2000 to Credit Agreement dated
July 14, 1999 between Lydall, Inc. and certain subsidiaries and
Chase Manhattan Bank, as Administrative Agent, and Fleet National
Bank, as Documentation Agent, filed herewith.
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, 2000.
15
<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 14, 2000
By /s/ THOMAS P. SMITH
------------------------------------
Thomas P. Smith
VICE PRESIDENT--CONTROLLER
(ON BEHALF OF THE REGISTRANT AND AS
PRINCIPAL ACCOUNTING OFFICER)
16
<PAGE>
LYDALL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
10.1 Amendment dated August 10, 2000 to Credit Agreement dated
July 14, 1999 between Lydall, Inc. and certain subsidiaries
and Chase Manhattan Bank, as Administrative Agent, and Fleet
National Bank, as Documentation Agent
27.1 Financial Data Schedule.
</TABLE>
17
