DELAWARE 06-0865505
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE COLONIAL ROAD, P.O. BOX 151, 06045
MANCHESTER, CONNECTICUT, (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(860) 646-1233
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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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 7, 1996 17,087,330 |
PAGE NO.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets............................. 2
Consolidated Condensed Statements of Income....................... 3-4
Consolidated Condensed Statements of Cash Flows................... 5
Notes to Consolidated Condensed Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 7-8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................ 8
Signature............................................................. 9
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SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 35,298 $ 27,820
Short-term investments............................. 2,518 913
Accounts receivable, net........................... 33,240 34,202
Inventories:
Finished goods................................... 6,270 6,033
Work in process.................................. 3,750 3,367
Raw materials and supplies....................... 6,183 7,217
LIFO reserve..................................... (1,846) (2,493)
-------- --------
Total inventories.................................. 14,357 14,124
Prepaid expenses................................... 965 820
Deferred tax assets................................ 4,583 4,590
-------- --------
Total current assets........................... 90,961 82,469
-------- --------
Property, plant and equipment, at cost............... 110,520 105,467
Less accumulated depreciation........................ (50,196) (45,393)
-------- --------
60,324 60,074
Other assets, at cost, less amortization............. 14,606 15,529
-------- --------
$165,891 $158,072
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................. $ 3,492 $ 2,871
Accounts payable................................... 15,580 14,770
Accrued taxes...................................... 866 263
Accrued payroll and other compensation............. 5,393 5,426
Other accrued liabilities.......................... 6,431 6,409
-------- --------
Total current liabilities...................... 31,762 29,739
Long-term debt....................................... 4,300 7,750
Deferred tax liabilities............................. 14,076 14,207
Other long-term liabilities.......................... 4,044 4,565
Stockholders' equity:
Preferred stock.................................... -- --
Common stock....................................... 2,108 2,089
Capital in excess of par value..................... 33,596 32,448
Foreign currency translation adjustment............ 1,518 2,091
Pension liability adjustment....................... (506) (459)
Retained earnings.................................. 97,077 78,461
-------- --------
133,793 114,630
-------- --------
Less: treasury stock, at cost...................... (22,084) (12,819)
-------- --------
Total stockholders' equity..................... 111,709 101,811
-------- --------
$165,891 $158,072
======== ========
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See accompanying Notes to Consolidated Condensed Financial Statements.
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
Net sales................................................ $ 59,707 $ 61,487
Cost of sales............................................ 40,308 42,572
--------- ---------
Gross margin............................................. 19,399 18,915
Selling, product development and administrative expenses. 10,270 9,643
--------- ---------
Operating income......................................... 9,129 9,272
Other (income) expense
Investment income...................................... (380) (288)
Interest expense....................................... 143 200
Other, net............................................. 62 123
--------- ---------
(175) 35
--------- ---------
Income before income taxes............................... 9,304 9,237
Income tax expense....................................... 3,524 3,790
--------- ---------
Net income............................................... $ 5,780 $ 5,447
========= =========
Net income per share..................................... $ .32 $ .30
========= =========
Weighted average common stock and equivalents outstand-
ing..................................................... 18,049 18,418
========= =========
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See accompanying Notes to Consolidated Condensed Financial Statements.
NINE MONTHS ENDED
SEPTEMBER 30
------------------
1996 1995
-------- --------
(UNAUDITED)
Net sales................................................... $193,170 $189,775
Cost of sales............................................... 131,458 131,610
-------- --------
Gross margin................................................ 61,712 58,165
Selling, product development and administrative expenses.... 31,964 30,362
-------- --------
Operating income............................................ 29,748 27,803
Other (income) expense
Investment income......................................... (979) (718)
Interest expense.......................................... 457 655
Other, net................................................ 283 293
-------- --------
(239) 230
-------- --------
Income before income taxes.................................. 29,987 27,573
Income tax expense.......................................... 11,371 10,948
-------- --------
Net income.................................................. $ 18,616 $ 16,625
======== ========
Net income per share........................................ $ 1.03 $ .91
======== ========
Weighted average common stock and equivalents outstanding... 18,147 18,285
======== ========
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See accompanying Notes to Consolidated Condensed Financial Statements.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
--------- --------
(UNAUDITED)
Cash flows from operating activities:
Net income............................................... $ 18,616 $ 16,625
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 6,088 5,602
Amortization............................................ 1,050 1,134
Changes in operating assets and liabilities:
Accounts receivable.................................... 750 (3,585)
Inventories............................................ (337) (1,922)
Other assets........................................... (280) 378
Accounts payable....................................... 930 191
Accrued taxes.......................................... 632 (715)
Accrued payroll and other compensation................. (21) (102)
Deferred income taxes.................................. 30 906
Other long-term liabilities............................ (440) 9
Other accrued liabilities.............................. 40 1,136
--------- --------
Total adjustments........................................ 8,442 3,032
--------- --------
Net cash provided by operating activities................. 27,058 19,657
Cash flows from investing activities:
Additions of property, plant & equipment................. (7,684) (8,726)
Disposals of property, plant & equipment, net............ 693 406
Sale (Purchase) of investments, net...................... (1,647) 382
--------- --------
Net cash used for investing activities.................... (8,638) (7,938)
--------- --------
Cash flows from financing activities:
Long-term debt payments.................................. (2,821) (2,816)
Issuance of common stock................................. 1,167 1,808
Acquisition of common stock.............................. (9,265) --
--------- --------
Net cash used for financing activities.................... (10,919) (1,008)
--------- --------
Effect of exchange rate changes on cash................... (23) 22
--------- --------
Increase in cash and cash equivalents..................... 7,478 10,733
Cash and cash equivalents at beginning of period.......... 27,820 11,684
--------- --------
Cash and cash equivalents at end of period................ $ 35,298 $ 22,417
========= ========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest................................................ $ 661 $ 556
Income taxes............................................ 10,627 10,977
Non-cash transactions:
Reclassification between short-term and long-term in-
vestments, net......................................... -- 447
Effect on Additional Paid in Capital and Common Stock
for stock split effected in the form of a stock
dividend............................................... -- 1,041
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See accompanying Notes to Consolidated Condensed Financial Statements.
1. The accompanying consolidated condensed financial statements include the accounts of Lydall, Inc. and its wholly owned subsidiaries. All financial information is unaudited for interim periods reported. All significant intercompany transactions have been eliminated in the consolidated condensed financial statements. Management believes that all adjustments, which include only normal recurring accruals, necessary to present a fair statement of the financial position and results of the periods have been included. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.
2. Earnings per common share are based on the weighted average number of common shares outstanding during the period, including the effect of stock options, stock awards and warrants where such effect would be dilutive. Fully diluted earnings per share are not presented since the dilution is not material.
3. In the mid-1980's, the United States Environmental Protection Agency
("EPA") notified a former subsidiary of the Company that it and other
entities may be potentially responsible in connection with the release of
hazardous substances at a landfill and property located adjacent to a
landfill located in Michigan City, Indiana. The two sites have been
combined and are viewed by the EPA as one site. The preliminary indication,
based on the Site Steering Committee's volumetric analysis, is that the
alleged contribution to the waste volume at the site of the plant once
owned by a former subsidiary is approximately 0.434 percent of the total
volume. The portion of the 0.434 percent specifically attributable to the
former subsidiary by the current operator of the plant is approximately
0.286 percent.
There are over 800 potentially responsible parties ("prp") which have been identified by the Site Steering Committee. Of these, 38, not including the Company's former subsidiary, are estimated to have contributed over 80 percent of the total waste volume at the site. These prp's include Fortune 500 companies, public utilities, and the State of Indiana. The Company believes that, in general, these parties are financially solvent and should be able to meet their obligations at the site. The Company has reviewed Dun & Bradstreet reports on several of these prp's, and based on these financial reports, does not believe Lydall will have any material additional volume attributed to it for reparation of this site due to insolvency of other prp's.
During the quarter ended September 30, 1994, the Company learned that the EPA had completed its Record of Decision ("ROD") for the Michigan site and has estimated the total cost of remediation to be between $17 million and $22 million. Based on the alleged volumetric contribution of its former subsidiary to the site, and on the EPA's estimated remediation costs, Lydall's alleged total exposure would be less than $100 thousand, which has been accrued. In June 1995, the Company and its former subsidiary were sued in the Northern District of Indiana by the insurer of the current operator of the former subsidiary's plant seeking contribution. No demand has been formally made in this matter, however, the Company believes it has several defenses to the action.
Management believes the ultimate disposition of this matter will not have a material adverse effect upon the Company's consolidated financial position or results of operations.
4. The Company will adopt the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation," for the year ending December 31, 1996. As permitted under SFAS 123, the Company has elected not to adopt the fair- value-based method of accounting for its stock-based compensation plans, but will continue to account for such compensation under the provisions of APB Opinion No. 25. The adoption will have no effect on the Company's consolidated financial position or results of operations.
RESULTS OF OPERATIONS:
For the third quarter ended September 30, 1996, net income was $5.8 million compared with $5.4 million for the comparable prior-year quarter--up 6 percent. On an earnings per-share basis, the Company posted a third-quarter record of $.32 compared with $.30 for the same period last year--a 7 percent increase. Sales declined slightly in the quarter--$59.7 million compared with $61.5 million for the 1995 third quarter. Gross margin for the quarter was $19.4 million, 32.5 percent of sales, compared with $18.9 million, or 30.8 percent of sales, in the third quarter 1995. After-tax return on sales was 9.7 percent compared with 8.9 percent for the same period last year.
Net income for the nine months ended September 30, 1996 was $18.6 million, or $1.03 per share, compared with $16.6 million, or $.91 per share--a 13 percent increase in earnings per share. Sales for the nine months ended September 30, 1996 were $193.2 million compared with $189.8 million for the first three quarters of 1995--up 2 percent. Gross margin was $61.7 million, or 31.9 percent of sales, for the nine months ended September 30, 1996, and the after-tax return on sales was 9.6 percent. For the same nine-month period in 1995, gross margin was $58.2 million, or 30.6 percent of sales, and the after- tax return on sales was 8.8 percent.
The increase in the Company's gross margin percentage is largely attributable to the continuing emphasis placed on cost of quality. Substantial progress was made at acquisitions with gross margin for the quarter increasing to 21.1% from 12.2% for the same period in 1995.
Selling, new product development and administrative expenses increased 5.3 percent in the first nine months of the year versus the same period in 1995. As a percentage of sales, these expenses amounted to 16.5 percent in 1996 in comparison to 16.0 percent in 1995. Year to date 1996 figures include higher legal fees due to the successful defense of a lawsuit alleging patent infringement which was concluded in March of this year. The Company anticipates that these expenses will approximate 17.0 percent through the end of the year. A factor in this increased level of expenditures is the Company's plan to implement a new information technology system throughout the entire organization.
The Company anticipates achieving its twelfth year of growth in 1996. However, the second half of 1996 is proving to be less robust than earlier anticipated. Results are tracking somewhat below previously announced projections for 1996 of earnings per share of about $1.41 and sales in the range of $265 million. Earnings are now projected to be more in the range of $1.35 to $1.36 per share with sales slightly ahead of last year's sales of $252 million.
Domestic sales are up slightly from 1995. International sales, including sales attributable to the Company's French operation and exports, have fallen 15.8 percent for the third quarter 1996 in comparison to the same period for 1995 and are relatively flat on a year-to-date comparison. International sales account for 19.6 percent and 21.1 percent of total sales on a quarterly and year to date basis, respectively, for 1996.
Lydall has many growth opportunities on the horizon and this period of slower growth is viewed as a temporary plateau. In the thermal area, sales of automotive heat shields continue to be healthy. Compared with the same quarter last year, sales of these products for the third quarter of 1996 exhibited low double-digit growth, while automotive builds were reported to be up only around 4 percent. Growth of the battery insulator product line also continues to be good.
Although high-efficiency air filtration products continue to present opportunities for growth through new product introduction, market penetration, and geographic expansion, sales of these products in the quarter were about equal to the record levels achieved last year. Air filtration sales have grown at a phenomenal rate over the past two years; however, they slowed modestly in the third quarter. In general, the long-term trend for this business is very positive with demand for clean rooms expanding across a wide variety of industries. In addition, there are opportunities for increasing demand in developing countries. The home air filtration market also has growth potential, domestically and overseas.
In addition, sales of material handling products continued to be off from record highs last year. This has always been a good growth business for Lydall, and it continues to be solid. This year's lower sales resulted primarily in a deflationary issue. In contrast, raw material prices increased dramatically last year, and the Company passed through corresponding price increases. This is one area of business where the market pushes for price reductions that directly track decreases in raw material costs.
The effective tax rate for the Company's domestic operations was 37.8 percent for the third quarter of 1996 and 37.9 percent on a year to date basis. This compares to 37.7 percent for the third quarter and 38.7 percent year to date in 1995. Had the Company not invested cash balances in a variety of tax exempt or tax advantaged investments, the year to date rates would have been 38.8 percent in 1996 and 39.2 percent in 1995. The tax rate at our Axohm Division in France remained unchanged at 36.6 percent in 1996 and 1995 on a year to date basis but the effect on Lydall's consolidated results was minimal.
Stockholders are referred to Lydall's Form 8-K, filed on June 4, 1996, which outlines certain risks regarding the Company's forward-looking statements. Such risks include: a major downturn of the U.S. automotive market which accounts for about 30 percent of Lydall's total sales; a meaningful decrease in the number of clean rooms being built worldwide; and significant, unforeseen changes in raw material pricing, specifically, virgin fiber used in producing the Company's materials handling slipsheets.
LIQUIDITY AND CAPITAL RESOURCES:
Lydall generated operating cash flow (earnings before taxes, interest expense and investment income or expense plus depreciation and amortization) of $11.4 million in the third quarter of 1996, bringing operating cash flow year-to-date to a record $36.6 million. At September 30, 1996, cash, cash equivalents and short-term investments were $37.8 million compared with $28.7 million at the end of 1995. Working capital was $59.2 million compared with $52.7 million at the end of last year. The current ratio improved to 2.86 at the end of the third quarter from 2.77 at the end of 1995, and total debt to total capitalization was 7 percent reduced from 9 percent at December 31, 1995.
The Company expects to continue to finance its day-to-day operating needs from accumulated cash plus cash generated from operations.
Lydall continues to actively seek strategic acquisitions and to reinvest in the Company with the primary focus on the ongoing comprehensive quality program.
ACCOUNTING STANDARDS:
The Company will adopt the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation," for the year ending December 31, 1996. As permitted under SFAS 123. The Company has elected to account for such compensation under the provisions of APB Opinion No. 25. The adoption will have no effect on the Company's consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1--Schedule of Computation of Weighted Average Shares Outstanding
27.1--Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended September 30, 1996.
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.
By /s/ John E. Hanley
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JOHN E. HANLEY
Vice President--Finance and Treasurer
(Principal Accounting and Financial Officer)
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November 7, 1996
Index to Exhibits
Exhibit No. Page No.
- ----------- --------
11.1 Schedule of Computation of Weighted Average 15
Shares Outstanding
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27.1 Financial Data Schedule
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Primary
- -------
Weighted average number
of common shares 17,097 17,259 17,155 17,251
Additional shares assuming
conversion of stock
options and warrants 952 1,159 992 1,034
------ ------ ------ ------
Weighted average common
shares and equivalents
outstanding 18,049 18,418 18,147 18,285
====== ====== ====== ======
Fully Diluted
- -------------
Weighted average number
of common shares 17,097 17,259 17,155 17,251
Additional shares assuming
conversion of stock
options and warrants 973 1,170 1,011 1,061
------ ------ ------ ------
Weighted average common
shares and equivalents
outstanding 18,070 18,429 18,166 18,312
====== ====== ====== ======
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ARTICLE 5
MULTIPLIER: 1,000
PERIOD TYPE
9 MOS
FISCAL YEAR END
DEC 31 1996
PERIOD START
JUL 01 1996
PERIOD END
SEP 30 1996
CASH
35,298
SECURITIES
2,518
RECEIVABLES
34,533
ALLOWANCES
2,009
INVENTORY
14,357
CURRENT ASSETS
90,961
PP&E
110,520
DEPRECIATION
50,196
TOTAL ASSETS
165,891
CURRENT LIABILITIES
31,762
BONDS
7,792
PREFERRED MANDATORY
0
PREFERRED
0
COMMON
2,108
OTHER SE
109,601
TOTAL LIABILITY AND EQUITY
165,891
SALES
193,170
TOTAL REVENUES
193,170
CGS
131,458
TOTAL COSTS
131,458
OTHER EXPENSES
(239)
LOSS PROVISION
159
INTEREST EXPENSE
457
INCOME PRETAX
29,987
INCOME TAX
11,371
INCOME CONTINUING
18,616
DISCONTINUED
0
EXTRAORDINARY
0
CHANGES
0
NET INCOME
18,616
EPS PRIMARY
1.03
EPS DILUTED
1.03