-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RePRu6tj0yEPZN5en26U5HEEg0v/aiW4HaJu2OKYi9PUCpYJZiXDx9DVcwGCpbEh YxwRIxZGeqVhVxXn7FFs6g== 0001047469-98-030761.txt : 19980813 0001047469-98-030761.hdr.sgml : 19980813 ACCESSION NUMBER: 0001047469-98-030761 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYDALL INC /DE/ CENTRAL INDEX KEY: 0000060977 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 060865505 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07665 FILM NUMBER: 98683920 BUSINESS ADDRESS: STREET 1: ONE COLONIAL RD STREET 2: P O BOX 151 CITY: MANCHESTER STATE: CT ZIP: 06045-0151 BUSINESS PHONE: 2036461233 FORMER COMPANY: FORMER CONFORMED NAME: COLONIAL BOARD CO DATE OF NAME CHANGE: 19700115 10-Q 1 10-Q 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 ------------------------------------------------- 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 August 7, 1998 15,694,397 LYDALL, INC. INDEX
Page No. -------- 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
2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements LYDALL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands)
June 30, December 31, 1998 1997 ----------- ------------- ASSETS (Unaudited) 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 --------- --------- --------- ---------
See accompanying Notes to Consolidated Condensed Financial Statements. 3 LYDALL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME (In Thousands Except Per-Share Data)
Three Months Ended June 30, ------------------ 1998 1997 -------- ------- (Unaudited) 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 -------- -------- -------- --------
See accompanying Notes to Consolidated Condensed Financial Statements. 4 LYDALL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME (In Thousands Except Per-Share Data)
Six Months Ended June 30, ---------------------- 1998 1997 --------- --------- (Unaudited) 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 --------- --------- --------- ---------
See accompanying Notes to Consolidated Condensed Financial Statements. 5 LYDALL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands)
Six Months Ended June 30, ----------------- 1998 1997 ----------------- (Unaudited) 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
6 LYDALL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands)
Six Months Ended June 30, ----------------- 1998 1997 ----------------- (Unaudited) 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 -
See accompanying Notes to Consolidated Condensed Financial Statements. 7 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.
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 - ---------------------------------------------------------------------------------------------------------------------------------- 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 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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 - ---------------------------------------------------------------------------------------------------------------------------------- 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 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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 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 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 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 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 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
For Withheld --- -------- 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
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 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 EX-27 2 EX-27
5 1,000 6-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 3,911 3,838 34,439 (1,421) 20,113 68,374 135,613 59,267 176,673 47,785 3,330 0 0 2,159 110,446 176,673 115,786 115,786 82,222 82,222 (247) (85) 285 11,161 3,761 7,400 0 0 0 7,400 0.46 0.45
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