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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
ANNUAL REPORT
/X/ Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee
Required)
For the Fiscal Year Ended December 31, 1999
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from to Commission File Number: 1-7665
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LYDALL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0865505
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
ONE COLONIAL ROAD, MANCHESTER, CONNECTICUT 06045-0151
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (860) 646-1233
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.10 par value New York Stock Exchange
--------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
On March 24, 2000, the aggregate market value of the Registrant's voting stock
held by nonaffiliates was $119,909,456.
On March 24, 2000, there were 15,753,776 shares of Common Stock outstanding,
exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement to be distributed in connection with the Registrant's Annual Meeting
of Stockholders to be held on May 10, 2000.
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INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Executive Officers and Other Significant Employees of the
Registrant.................................................. 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 7a. Quantitative and Qualitative Disclosure about Market Risk... 20
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 21
Item 11. Executive Compensation...................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 21
Item 13. Certain Relationships and Related Transactions.............. 21
The information called for by items 10, 11, 12, and 13, to the extent not
included in this document, is incorporated herein by reference to such
information to be included under the captions "Election of Directors," "Common
Stock Ownership of Management," "Directors' Compensation," and "Executive
Compensation," in the Company's definitive Proxy Statement which is expected to
be filed by March 30, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 22
Signatures.................................................. 25
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PART I
ITEM 1. BUSINESS
Lydall, Inc. and its subsidiaries (hereafter referred to as "Lydall", the
"Company", or the "Registrant") are manufacturers of engineered products for
demanding specialty applications.
The Company develops and manufactures engineered specialty papers in both roll
and sheet form; fabricated automotive heat shields and acoustical barriers; and
certain medical filtration and bioprocessing components. Lydall's specialty
papers are supplied to other manufacturers for conversion or incorporation into
finished products. The Company's fabricated products are sold to original
equipment manufacturers and tier-one suppliers. Lydall uses wet-laid and
dry-laid nonwoven manufacturing processes incorporating a broad spectrum of
fibers, materials, binders, and resins and a variety of value-added systems to
produce a range of high-performance materials and products.
The Company serves a number of market niches. Lydall's products are primarily
sold directly to the customer through an internal sales force and distributed
through common carrier, ocean cargo, or the Company's distribution operation.
Within each market niche there are typically several competitors. The Company
competes through high-quality products, technology, and customer service. Lydall
has a number of domestic and foreign competitors for its products, most of whom
are either privately owned or divisions of large companies, making it difficult
to determine the Company's market share.
In 1999, the Company defined the thermal/acoustical and filtration/separation
segments as its core businesses and stated its long-term strategy to concentrate
primarily on these segments. In accordance with this strategic focus, Lydall
intends to divest businesses outside of these markets.
Lydall's products fall into four reportable segments: Thermal/Acoustical,
Filtration/Separation, Paperboard and Wovens. All other products are aggregated
in Other Products and Services. During the fourth quarter of 1999, Lydall
announced the discontinuation of the Wovens segment, the sale of which was
completed on February 29, 2000. Also, in the fourth quarter, the Company renamed
two of its segments to reflect the range of products included. Heat-Management
was renamed Thermal/Acoustical, and Filtration was renamed
Filtration/Separation. Financial reporting classifications and presentations
were not affected by these name changes.
SEGMENTS
THERMAL/ACOUSTICAL
Lydall's thermal and acoustical barriers, heat shields, and insulating products
include a range of fiber-based materials, fiber-and-metal combinations, and
all-metal products that protect and insulate within temperature environments
ranging from -459 DEG. F (-237 DEG. C) up to +3000 DEG. F (+1649 DEG. C).
At the highest temperature requirements, Lytherm-Registered Trademark- specialty
papers are used as linings for ovens, kilns, furnaces, and in glass and metal
manufacturing.
At mid-range temperatures, Manninglas-Registered Trademark- specialty papers are
employed in consumer appliances as well as heating, ventilation, and
air-conditioning ductwork. Lydall's automotive heat shields include organic and
inorganic fiber composites, fiber-and-metal combinations, and all-metal
components which are used as thermal barriers in medium- and light-duty trucks,
vans, sport-utility vehicles, and cars. The Company holds patents on many of
these
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products which are employed both inside and outside of vehicles to insulate
passenger compartments, exhaust systems, gas tanks, luggage compartments, heat
and air-conditioning ducts, batteries, electronic components, and engine
compartments. Acoustical barrier and trim products for automotive applications
are also included in this segment.
At the very coldest temperatures (approaching absolute zero),
Cryotherm-Registered Trademark- cryogenic materials, composed of 100-percent
inorganic fibers, are used for super-insulating applications. These applications
include tanker trucks that transport liquid gases, stationary and portable
cryogenic storage vessels, gas tanks for vehicles fueled by liquid natural gas,
and supercolliders.
Thermal/Acoustical segment sales represented 53 percent of the Company's total
sales in 1999, and 36 percent in both 1998 and 1997, respectively. Sales of
thermal/acoustical products increased 107 percent in 1999 from 1998 levels. The
acquisition of Gerhardi & Cie. GmbH & Co. Kg ("Gerhardi"), a German-based
automotive supplier, on December 30, 1998, accounted for the majority of this
growth.
FILTRATION/SEPARATION
The Company manufactures Lydair-Registered Trademark- high-efficiency, glass
microfiber air filtration media for rigid frame applications. Lydall
manufactures six filtration classes of Lydair-Registered Trademark- media in
over 100 grades with filtering efficiencies from 10 percent at 0.3-micron
particle size to 99.999999 percent at 0.1-micron particle size.
Lydair-Registered Trademark- filtration media are used in air filters, which are
capital goods rather than consumables and last approximately five years. Lydall
also supplies media for pre-filters and intermediary filters in air-handling
systems that are replaced more frequently. The Company's HEPA filtration media
are also used in home air purification systems.
Lydall also produces liquid filtration media which are used primarily in
high-efficiency hydraulic oil and lubrication oil elements for off-road
vehicles, trucks, and heavy equipment. These products are sold under the
Lypore-Registered Trademark- trademark.
Charter Medical, Ltd. fabricates medical filter components employed in blood
filtration devices, such as cardiotomy reservoirs which filter the blood supply
of open-heart surgery patients during operations, and autotransfusion filters
used to filter blood collected from patients before surgery or from injured
patients. Charter Medical also manufactures proprietary medical devices for
biotech and pharmaceutical packaging, blood bank and transfusion services, and
neonatal intensive care.
Sales from the Filtration/Separation segment represented 19 percent of total
sales in 1999 compared with 25 percent in 1998, and 24 percent in 1997. Overall
sales of filtration/separation products increased 5 percent in 1999 from 1998.
PAPERBOARD
The Paperboard segment includes commodity paper products which are employed
primarily in materials-handling and packaging applications.
Lydall produces slipsheets, separator sheets, and protective sheets.
Ly-Pak-Registered Trademark- slipsheets are used to ship a growing number of
products such as food, pharmaceuticals, and chemicals.
Ly-Pak-Registered Trademark- slipsheet systems are a substitute for wooden
pallets, providing significant cost and space reductions for the customer.
Ly-Pak-Registered Trademark- separator sheets are supplied to the glass and
plastic bottle industry and are manufactured to meet industry specifications for
bulk
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palletizing. Ly-Pak-Registered Trademark- protective sheets are used as pallet
pads, protective top caps, and stabilizing sheets. These products are
custom-made from plies of virgin kraft linerboard and laminated with a special
moisture-resistant adhesive.
Paperboard sales represented 14 percent of total sales in 1999 compared with
18 percent in 1998 and 17 percent in 1997. Sales of these products increased by
6 percent in 1999.
WOVENS
During the fourth quarter of 1999, the Company announced the discontinuation of
this segment, the sale of which was completed on February 29, 2000. The Wovens
segment included specialty woven composites used in advanced structural
materials sold to the aerospace, marine, and sporting goods industries.
The results of the Wovens segment have been excluded from continuing operations
for the years ended December 31, 1999, 1998, and 1997. See Note 5 in "Notes to
Consolidated Financial Statements."
OTHER PRODUCTS AND SERVICES
Other Products and Services includes pencil slats made from recycled newsprint
and cardboard, electrical insulation, several specialty products, battery
separators made in Europe, and the Company's distribution and warehouse
services. It also includes fiberboard composites manufactured at Lydall's
Composite Materials, Hoosick Falls Operation and sold in sheet form to
fabricators of high-performance gaskets. The Hoosick Falls Operation was sold on
January 28, 2000.
Other Products and Services sales were 16 percent of the Company's total sales
in 1999, compared with 21 percent in 1998, and 23 percent in 1997.
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GENERAL BUSINESS INFORMATION
Lydall holds a number of patents, trademarks, and licenses. While no single
patent, trademark or license by itself is critical to the success of Lydall,
together these intangible assets are of considerable value to the Company.
No significant portion of Lydall's business is seasonal. Lydall maintains levels
of inventory and grants credit terms which are normal within the industries it
serves. The Company uses a wide range of raw materials in the manufacturing of
its products and was able to obtain the raw materials needed during 1999. The
majority of raw materials used by Lydall are available from a variety of
suppliers who can be substituted if necessary.
Sales to the automotive market represented 46 percent of Lydall's total sales in
1999 compared with 26 percent and 27 percent in 1998 and 1997, respectively.
Lydall sells to both original equipment manufacturers and tier-one suppliers for
use in a variety of models and applications. Sales to Ford Motor Co. were
$36.8 million, or 12 percent of Lydall's total sales in 1999. No other single
customer accounted for more than 10 percent of total sales in 1999.
Lydall invested $7.6 million in 1999, and $8.7 million in both 1998 and 1997 to
develop new products and manufacturing processes and to improve existing
products. Most of Lydall's investment in research and development is application
specific; very little is pure research. There were no significant
customer-sponsored research and development activities during the past three
years.
Lydall's backlog was $48.5 million at December 31, 1999, $29.5 million at
December 31, 1998, and $18.8 million at December 31, 1997. Backlog at
February 29, 2000 was $50.8 million. The large increase in backlog at
December 31, 1999 is related to Gerhardi orders that mainly will be filled in
the first nine months of 2000. There are no seasonal aspects to this backlog.
No material portion of Lydall's business is subject to renegotiation of profits
or termination of contracts or subcontracts at the election of any governmental
body.
Lydall believes that its plants and equipment are in substantial compliance with
applicable federal, state and local provisions that have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment. Additional measures to maintain
compliance with presently enacted laws and regulations are not expected to have
a substantial adverse effect on the capital expenditures, earnings, or
competitive position of the Company. For information relating to certain
environmental proceedings involving the Company, please refer to Note 14 in
"Notes to Consolidated Financial Statements."
As of February 29, 2000, Lydall had 1,914 employees. Four unions under contracts
expiring at various points through March 2005 represented approximately 122 of
the domestic employees. Lydall considers its employee relationships to be
satisfactory, and there have not been any actual or threatened work stoppages
due to union-related activities. All employees at the Company's facility in
France are covered under a National Collective Bargaining Agreement. Hourly and
certain salaried employees at the German operations are also covered under a
National Collective Bargaining Agreement.
Foreign and export sales were 39 percent of total sales in 1999, 18 percent in
1998 and 20 percent in 1997. Export sales are concentrated primarily in Europe,
the Far East, Mexico, and Canada and aggregated $35.5 million, $30.4 million,
and $34.6 million in 1999, 1998, and 1997, respectively. Foreign sales were
$89.1 million, $10.8 million, and $11.2 million for the years ended
December 31, 1999, 1998, and 1997, respectively. Foreign operations
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incurred losses of $1.2 million, $1.0 million (including the recognition of an
impairment loss of $941 thousand), and $348 thousand, for the years ended
December 31, 1999, 1998 and 1997, respectively. Total foreign assets were
$65.0 million at December 31, 1999 compared with $73.4 million at December 31,
1998 and $16.4 million at December 31, 1997.
There are no anticipated operating risks related to foreign investment law,
expropriation, inflation effects or availability of material, labor and energy.
The Company's foreign and domestic operations limit currency and foreign
exchange transaction risks by completing transactions primarily in their
functional currencies.
ITEM 2. PROPERTIES
The principal properties of the Company are situated at the following locations
and have the following characteristics:
Approximate Area
Land Buildings
Location General Description (Acres) (Sq.Feet)
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1 Rochester, New Hampshire Specialty Papers Manufacturing 18.0 158,000
2 Green Island, New York Specialty Papers Manufacturing 5.4 275,000
3 Saint-Rivalain, France Specialty Papers Manufacturing 14.3 156,000
4 Hamptonville, North Carolina Thermal/Acoustical Products Fabricating and 35.0 85,000
Manufacturing
5 Columbus, Ohio Thermal/Acoustical Products Fabricating 9.0 80,000
6 St. Johnsbury, Vermont Thermal/Acoustical Products Fabricating 10.0 43,000
7 Ludenscheid, Germany Thermal/Acoustical Products Fabricating and 2.9 118,000
Manufacturing
8 Ibbenburen, Germany Thermal/Acoustical Products Fabricating and 9.9 180,000
Manufacturing
9 Meinerzhagen, Germany Thermal/Acoustical Products Fabricating and 3.8 86,000
Manufacturing
10 Lakewood, New Jersey Biomedical Products Fabricating -- 20,000
11 Winston-Salem, North Biomedical Products Fabricating and Manufacturing -- 29,000
Carolina
12 Covington, Tennessee Composite Materials Manufacturing 26.0 155,000
13 Richmond, Virginia Laminated Paperboard Manufacturing 5.0 104,000
14 Jacksonville, Florida Laminated Paperboard Manufacturing -- 52,000
15 Manchester, Connecticut Paperboard Manufacturing 11.6 70,000
16 Manchester, Connecticut Warehouse and Office Facility 9.1 120,000
17 Manchester, Connecticut Corporate Office 4.5 20,000
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Properties numbered 5, 6, 10, 11, 13 and 14 are being leased; all others are
owned. For information regarding obligations for lease rentals and owned
property, see Note 4 in "Notes to Consolidated Financial Statements." Lydall
considers its properties to be suitable and adequate for its present needs. The
properties are being fully utilized. In addition to the properties listed above,
the Company has several additional leases for sales offices and warehouses in
the United States, Europe, and Japan.
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ITEM 3. LEGAL PROCEEDINGS
No legal proceedings were settled in the fourth quarter of 1999. See Note 14 in
"Notes to Consolidated Financial Statements" for additional information on legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1999.
EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT:
The executive officers of Lydall, Inc., together with the offices presently held
by them, their business experience since January 1, 1995, and their ages, are as
follows:
Other Business
Name Age Title Experience Since 1995
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Christopher R. Skomorowski 46 President and Chief Executive Division President
Officer (since 1998), Director Lydall Westex
(1994-1995, 1998-1999)
Walter A. Ruschmeyer 49 Executive Vice President- Interim Vice President of
Finance and Administration, Finance and Treasurer, Lydall,
and Chief Financial Officer Inc. Partner in Bushavior,
(since March 2000) Controller of Carrier
Corporation
James P. Carolan 57 Executive Vice President N/A
(since 1998), Division
President (since 1983),
Director (1994-1995,
1996-1998)
Carole F. Butenas 57 Vice President-Investor N/A
Relations (since 1991),
Director (1995-1996)
Mary A. Tremblay 39 General Counsel and Secretary N/A
(since 1991)
Raymond J. Lanzi 61 Division President (since N/A
1979), Director (1993-1994)
Bill W. Franks, Jr. 41 Division President (since Vice President and General
1997) Manager, Lydall Logistics
Management
Raymond S. Grupinski, Jr. 38 Division President (since Director of Operations, Lydall
1998) Westex and General Manager of
Lydall Westex-Columbus
Operation
Kevin G. Lynch 47 Division President (since Vice President of Sales and
1998) Marketing at Lydall Technical
Papers
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol LDL. Shares totaling 9,316,600 and 7,507,000 were traded during 1999 and
1998, respectively. The table below shows the range of reported sale prices on
the New York Stock Exchange Composite Tape for the Company's Common Stock for
the periods indicated. As of March 13, 2000, the record date of the Company's
2000 Annual Meeting, 1,516 stockholders of record held 15,699,776 shares of
Lydall's Common Stock, $.10 par value. As of the record date, there were no
shares outstanding of the Company's Preferred Stock, $1.00 par value.
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High Low Close
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1999
FIRST QUARTER $12.88 $7.75 $8.31
SECOND QUARTER 12.50 8.31 11.50
THIRD QUARTER 12.88 9.81 10.31
FOURTH QUARTER 10.38 5.25 6.63
1998
First Quarter $20.81 $17.06 $18.06
Second Quarter 18.94 14.44 14.56
Third Quarter 14.75 10.25 10.25
Fourth Quarter 13.31 9.25 11.88
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The Company did not pay a cash dividend on its Common Stock and does not
anticipate doing so for the foreseeable future. Cash will be reinvested in core
businesses.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR STATISTICAL REVIEW
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$ thousands except per-share amounts 1999 1998 1997 1996 1995
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FINANCIAL RESULTS FROM CONTINUING
OPERATIONS
Net sales $318,505 $224,286 $234,447 $252,652 $252,128
Income from continuing operations 12,952 9,825 22,380 24,736 22,438
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COMMON STOCK PER-SHARE DATA
Continuing operations (diluted) $ .82 $ .61 $ 1.29 $ 1.38 $ 1.23
Common stockholders' equity 7.34 6.96 7.04 6.89 5.88
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FINANCIAL POSITION
Total assets $220,236 $226,848 $160,124 $182,119 $158,072
Working capital (deficit) 64,630 (9,090) 39,203 53,358 52,730
Current ratio 2.28 .91 2.39 2.24 2.77
Long-term debt, net of current
maturities 38,334 -- 2,100 5,050 7,750
Total stockholders' equity 115,236 109,225 113,030 117,844 101,811
Debt to total capitalization 28.2% 33.4% 4.3% 12.9% 9.4%
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PROPERTY, PLANT, AND EQUIPMENT
Net property, plant, and equipment $80,556 $107,836 $68,860 $62,038 $60,074
Capital additions from acquisitions -- 32,065 -- 500 --
Other capital additions 16,773 17,657 17,104 10,893 12,006
Capital divestment, net 303 679 685 894 632
Depreciation 11,946 8,844 7,993 7,824 7,122
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PERFORMANCE RATIOS AND OTHER ITEMS
Return on average assets 5.9% 5.4% 14.3% 15.2% 15.2%
Return on average common
stockholders' equity 11.5% 8.8% 19.4% 22.5% 25.2%
Return on sales 4.1% 4.4% 9.6% 9.8% 8.9%
Days of inventory on hand 34 34 30 29 33
Days of receivables outstanding 43 50 48 46 49
Number of employees at year-end 2,047 1,330 1,225 1,268 1,227
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SHARES AND STOCKHOLDERS
Weighted average common stock and
equivalents 15,784,000 16,163,000 17,319,000 17,988,000 18,197,000
Common stock outstanding at year-end 15,699,776 15,693,860 16,065,473 17,092,011 17,320,252
Stockholders at year-end 1,516 1,603 1,653 1,855 1,918
Market price per share of common
stock--
Highest close $ 12.81 $ 20.13 $ 25.75 $ 25.87 $ 28.50
Lowest close $ 5.81 $ 9.25 $ 18.50 $ 19.75 $ 14.75
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Share figures adjusted to reflect a two-for-one stock split in 1995.
1998 financial position items incorporate the assets and liabilities of Gerhardi
which was acquired on December 30, 1998. The 1998 balances of Gerhardi are not
included in calculations in the Performance Ratios and Other Items section
above.
The results of operations of the discontinued Wovens segment have been excluded
from the selected financial data schedule for all applicable periods. Wovens
segment balance sheet items have been excluded from calculations in the
Performance Ratios and Other Items section for 1996 through 1999.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion reflects the discontinuation of the Wovens segment.
Thus, the results of operations of the Wovens segment have been excluded for all
periods discussed.
SALES
OVERVIEW
In 1999, sales from continuing operations increased 42 percent to
$318.5 million.
- Acquisitions contributed sales of $84.3 million.
- Internal marketing actions resulted in a net increase in sales of
$14.0 million.
- External forces accounted for a net decrease of $4.1 million.
In 1998, the acquisition of a manufacturer of medical and pharmaceutical
products and an automotive heat-shield operation contributed sales of
$11.4 million. Internal marketing actions plus external market forces produced a
combined negative impact of $21.5 million.
During 1997, internal and external forces combined reduced sales by a net
$18.3 million.
ACQUISITIONS
Lydall isolates the impact of acquisitions for three years, after which time it
considers such operations to be fully integrated. The Company made no
acquisitions in 1999. However, three acquisitions made in 1998 were the primary
drivers of sales growth in 1999.
The acquisition of Gerhardi, included in the Thermal/Acoustical segment, had no
impact on sales or results of operations in 1998. In 1999, Gerhardi contributed
sales totaling $75.3 million. Acquiring Gerhardi increased international sales
and fulfilled the Company's goal of having a thermal manufacturing presence in
Europe. Gerhardi's heat-shield business directly complements Lydall's domestic
automotive business and opens growth opportunities both in the U. S. and Europe.
The injection-molding and chrome-plating operations of Gerhardi, however, are
not central to Lydall's long-term strategic focus. Accordingly, in the fourth
quarter of 1999, the Company announced its intention to divest the two non-core
operations. These two operations generated sales of approximately $50 million in
1999. The Company expects to sell these businesses in 2000.
Two other 1998 acquisitions--a medical device business, part of the
Filtration/Separation segment, and a domestic automotive heat-shield operation,
included in the Thermal/Acoustical segment--added incremental sales of
$9.0 million in 1999 and $11.4 million in 1998.
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INTERNAL MARKETING ACTIONS
During 1999, sales increased by a net $14.0 million due to internal marketing
actions. Lydall defines product introductions, net of product discontinuances,
market-share changes, and selling price changes as internal marketing actions.
Internal marketing actions caused a net increase in sales of $700 thousand in
1998 and a net decrease of $13.1 million in 1997.
Sales from 1999 product introductions of $13.7 million represented a 54-percent
increase over 1998 new-product sales of $8.9 million. This compares with
incremental new-product sales of $2.4 million in 1997. 1999 growth was primarily
attributable to automotive applications; specifically, the development of Zero
Clearance-TM- high-performance, self-adhesive underbody shields, innovative
Polyshield-TM- components, the acoustical barrier, dBLyte-TM-, and a large
thermal/acoustical shield introduced on the latest Lincoln LS and Jaguar S-type
models. New-product introductions also occurred in the Filtration/Separation
segment, including both air filtration and biomedical fluid processing products.
Product discontinuances amounted to $6.6 million in 1999 compared with
$3.1 million in 1998 and $6.1 million in 1997. As with product introductions,
most product discontinuances related to automotive products under the
Thermal/Acoustical segment. The 1999 and 1998 reductions were primarily
attributable to the replacement of existing products by new products. In 1997,
Lydall exited certain low-margin non-core products, while discontinuing a
flame-barrier material sold to the office-panel market.
Market-share changes in 1999 caused a net sales increase of $8.9 million. A
healthy market expansion overseas by the materials-handling business of the
Paperboard segment was offset by losses of boxboard market share within that
same segment. The Filtration/Separation segment achieved market-share increases,
particularly in Europe and Asia, and the Company's distribution services
operation captured market share.
In 1998, changes in market share caused sales to decrease by $4.2 million. This
decrease was primarily due to lower Asian demand for filtration media employed
in high-efficiency air-filtration applications and from losses to lower cost
competitors in the mature electrical insulation market.
In 1997, net market-share losses of $1.4 million occurred primarily in the
Thermal/Acoustical segment related to the automotive market.
Prices declined by a net $2.0 million during 1999 and $900 thousand over the
course of 1998. In both years, pricing weakness was felt in the
Thermal/Acoustical and Filtration/Separation segments, specifically related to
non-automotive thermal barriers and air filter media. Pricing adjustments
associated with long-term contractual commitments also affected certain
automotive products. In 1998, the Paperboard segment recorded price increases of
approximately $1.7 million.
In 1997, pricing caused a drop in sales of $8.0 million. Price changes in 1997
were concentrated in the Paperboard segment. Selling prices of Lydall's
materials-handling products in this segment are somewhat dependent on the
pricing of linerboard, its primary raw material.
EXTERNAL MARKET FORCES
Lydall defines external forces as the effects of economic and market changes
beyond the influence of management, including the effects of market decay,
pricing pressures, and foreign exchange. During 1999, external forces
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reduced sales by a net $4.1 million. Economic growth and market-share gains made
in the Filtration/Separation segment were offset by market changes, such as the
design-out of certain products in the Thermal/Acoustical segment. Competitive
pricing environments, particularly in the Paperboard segment, also countered
economic and market-share growth during the year.
In 1998, external market forces caused a deterioration in sales of
$22.2 million. A weak air-filtration market, declining use of pyrotechnic airbag
inflator systems that employ Lydall's materials, and a number of automotive
thermal barrier design changes were the major contributors to this decline.
In 1997, external forces reduced sales by $5.2 million. Positive economic forces
and market growth substantially offset the effects of market decay and other
negative market changes during the year. Currency exchange rates, which have a
nominal effect in most years, resulted in a $2.2 million reduction in sales in
1997.
- - --------------------------------------------------------------------------------
CHANGES IN SALES
- - ---------------------------------------------------------------------
$ millions 1999 1998 1997
- - ---------------------------------------------------------------------
Prior year's net sales $224.3 $234.4 $252.7
.....................................................................
Acquisitions 84.3 11.4 --
Internal marketing actions 14.0 .7 (13.1)
External market forces (4.1) (22.2) (5.2)
.....................................................................
Total change 94.2 (10.1) (18.3)
.....................................................................
Current year's net sales $318.5 $224.3 $234.4
- - ---------------------------------------------------------------------
GROSS MARGIN
OVERVIEW
Gross margin increased to $75.5 million during 1999, but declined as a percent
of sales to 23.7 percent.
- Acquisitions added gross margin of $9.9 million.
- The increased volume had a positive impact of $2.2 million.
- Net pricing actions eroded gross margin by $1.2 million.
- Cost reductions improved gross margin by $1.0 million.
In 1999, margins were lowered by cost overruns associated with process redesigns
and new process implementations necessitated by the introduction of a record
number of new automotive products. The Company improved manufacturing
efficiencies during the year and put procedures in place to facilitate smoother,
more cost efficient new-product launches in the future.
Gross margin in 1998 was $65.9 million, or 29.4 percent of sales. Acquisitions
produced incremental margin improvements in 1998, but lower sales volume, and
the combined effect of price decreases in relation to net cost increases acted
to reduce margins. The shutdown and consolidation of automotive thermal
operations in North
11
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Carolina and additional overhead to support the operations of Charter
Medical, Ltd. as a stand-alone facility lowered margins. Cost-reduction programs
during the year contributed positively to overall gross-margin performance.
In 1997, gross margin was $76.9 million, or 32.8 percent of sales. Gross margin
was negatively impacted by lower sales volume and the net effects of price
decreases that were only partially offset by cost decreases from vendors.
ACQUISITIONS
Gerhardi increased Lydall's total 1999 sales by approximately 34 percent, but
diluted total gross margin as a percent of total sales. During the year,
Gerhardi improved its margins while making management changes, relocating and
consolidating metal heat-shield production, and successfully completing an
extensive expansion of the Meinerzhagen plant.
CharterMed, Inc., now Charter Medical in New Jersey, and Engineered Thermal
Systems, Incorporated, now the St. Johnsbury Operation of Lydall Westex, were
successfully integrated into the Company over the course of 1999. Margins at the
New Jersey Operation showed marked improvement despite the distraction of
construction during the year of a manufacturing clean room devoted to
pharmaceutical processing products. The St. Johnsbury Operation improved its
margin performance, added new business, and began construction of a larger
manufacturing plant to accommodate sales growth and to support its focus on
large, complex shields. Lydall looks forward to both these acquisitions
continuing to grow and contributing positively to company-wide margin
improvements in 2000.
In 1998, Charter Medical in New Jersey and the St. Johnsbury Operation combined
to produce $3.2 million of incremental gross margin. Since Gerhardi was acquired
on December 30, 1998, it had no effect on Lydall's 1998 consolidated operating
results.
Gross margin was not affected by acquisitions in 1997.
EFFECTS OF CHANGES IN SALES VOLUME
In 1999, gross margin was depressed by increased sales volume resulting from the
acquisition of Gerhardi, whose margins were significantly below the Company's
average. Also, gains in gross margin from increased sales of Lydall's core
businesses and benefits of cost-reduction efforts during the year were
diminished by pricing pressures.
Lower sales volume produced a $9.7 million decline in gross margin in 1998,
accounting for approximately 90 percent of the total margin decline for the
year. Positive contributions from new products and market growth in several
product lines were recorded in 1998. However, the combined negative effects from
design-outs of automotive heat-management products, market decay, market-share
losses, effects of the Asian economy, and a poor market for filtration products
worldwide overwhelmed these positives.
The same dynamics that affected gross margin in 1998 reduced gross margin in
1997 by $5.2 million. The loss of operating leverage due to design-outs and
product discontinuation offset the benefits of economic and market growth.
12
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PRICE CHANGES IN RELATION TO COST INCREASES
Net pricing actions eroded gross margin by $1.2 million in 1999. In both 1999
and 1998, the Thermal/Acoustical and Filtration/Separation segments faced
pricing pressures as described under "Sales" in this Item 7. The pricing
environments for the Paperboard segment, although somewhat more stable than in
the two previous years, remained extremely competitive in 1999.
A primary focus of the Company's cost-reduction campaign in 1999 was in the area
of raw material costs. Savings achieved through these initiatives partly
alleviated pricing pressures experienced during the year.
In 1998, prices declined overall by $900 thousand. Vendor costs rose by an
estimated $2.0 million which created a combined negative impact on gross margin
of $2.9 million. The largest impact occurred in the Thermal/Acoustical segment
for products sold to non-automotive thermal applications. The materials-handling
and automotive thermal-barrier businesses also experienced some margin erosion
due to pricing pressures.
During 1997, pricing actions reduced gross margin by $3.5 million. The largest
part of this reduction emanated from the Paperboard segment related to
materials-handling products. Price concessions were evident in Lydall's
Thermal/Acoustical and Filtration/Separation segments as well.
COST REDUCTIONS
Over the last three years, Lydall has focused a great deal of effort on a
company-wide cost-reduction program. A large portion of the savings realized in
1999 was reinvested in the development of the core businesses of thermal/
acoustical and filtration/separation and in other initiatives such as Lydall's
Economic Value-Added (EVA) Program. The net impact of these actions on gross
margin was a positive $1.0 million.
The Company has consistently driven down manufacturing costs over the years
through a combination of management actions and capital improvements. The
positive impact on gross margin of these actions in 1998 was $2.5 million
compared with savings of $2.4 million in 1997.
OTHER EFFECTS
Other effects normally include fluctuations in inventory, depreciation expense,
and other adjustments. These factors reduced gross margin by $2.3 million in
1999.
In 1998, the above factors reduced margins by approximately $2.0 million. Lydall
also closed a facility in North Carolina and wrote off an outdated production
line and related support equipment in France. In addition, the Company set up a
new legal entity and relocated the medical business from within an automotive
thermal/ acoustical operation to a separate facility. The total impact of other
effects on 1998 gross margin was $4.1 million.
In 1997, other effects had a positive impact on gross margin of $1.1 million.
13
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- - --------------------------------------------------------------------------------
CHANGES IN GROSS MARGIN
- - --------------------------------------------------------------------------------
$ millions 1999 1998 1997
- - --------------------------------------------------------------------------------
Prior year's gross margin $65.9 $76.9 $82.1
................................................................................
Acquisitions 9.9 3.2 --
Effects of changes in sales volume 2.2 (9.7) (5.2)
Price increases in relation to cost changes (1.2) (2.9) (3.5)
Cost reductions 1.0 2.5 2.4
Other effects (2.3) (4.1) 1.1
................................................................................
Total change 9.6 (11.0) (5.2)
Current year's gross margin $75.5 $65.9 $76.9
................................................................................
As a percent of net sales 23.7 29.4 32.8
- - --------------------------------------------------------------------------------
PRETAX INCOME FROM CONTINUING OPERATIONS
OVERVIEW
The Company earned $19.2 million of pretax income from continuing operations in
1999. The net impact of acquisitions was slightly positive in 1999, however,
pricing pressures, especially in paperboard markets, lowered pretax income.
Pretax income from continuing operations declined to $14.5 million in 1998 from
$35.2 million in 1997.
ACQUISITIONS
In 1999, Gerhardi incurred an operating loss of $600 thousand. As disclosed
under "Sales" in this Item 7, Lydall intends to sell the unprofitable
injection-molding and chrome-plating operations of Gerhardi in 2000. Charter
Medical in New Jersey and the St. Johnsbury Operation contributed an incremental
$1.1 million of operating profit. There was no acquisition effect on pretax
income in 1998 and 1997.
OPERATIONS
Pretax income from continuing operations in 1999, other than acquisitions,
equaled $18.6 million compared with $14.5 million in 1998. As discussed in the
"Gross Margin" section of Item 7, there were many factors that impacted
operating results in 1999. Gains from increased sales volume and operating
efficiencies were countered by delays associated with new-product launches at
domestic automotive operations, pricing pressures in the filtration markets, and
competitive conditions in the Paperboard segment.
14
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Selling, product development, and administrative expenses were reduced during
the year by $5.1 million. This compares with an increase in 1998 of
$3.7 million, including the pretax cost of the severance agreement for the
Company's former chairman and chief executive officer and selected impairment
charges.
INVESTMENTS AND FINANCING
Nonoperating investments and financing costs combined to reduce pretax income by
$600 thousand in 1999. Investment and foreign exchange transaction income rose
by a net $1.2 million. The majority of this increase resulted from a foreign
exchange transaction gain due to the appreciation of the dollar in relation to
the Euro. The gain related to a portion of the Gerhardi purchase price funded
from domestic credit lines denominated in Euro. Also, during 1999, interest
expense increased by $1.8 million as a result of higher debt levels associated
with the three acquisitions made in 1998.
Nonoperating investments and financing costs combined to decrease pretax income
by $2.7 million in 1998. Investment balances were much lower as Lydall funded a
major capital program, repurchased common stock, and made three acquisitions.
In 1997, investments and financing costs produced $700 thousand of additional
pretax income. Cash flow during 1997 was in excess of operating and financing
requirements resulting in higher investment income.
CHANGES IN PRETAX INCOME FROM CONTINUING OPERATIONS
- - --------------------------------------------------------------------------------------------
$ millions 1999 1998 1997
- - --------------------------------------------------------------------------------------------
Prior year's pretax income from continuing operations $14.5 $35.2 $39.9
............................................................................................
Acquisitions--change in:
Gross margin 9.9 3.2 --
Selling, product development, and administrative
expenses (9.4) (3.2) --
............................................................................................
Total change from acquisitions .5 -- --
............................................................................................
Operations--change in:
Gross margin (.3) (14.2) (5.2)
Selling, product development, and administrative
expenses 5.1 (3.7) (0.6)
Other income/expense -- (0.1) 0.4
............................................................................................
Total change from operations 4.8 (18.0) (5.4)
Nonoperating investments and financing--change in:
Investment and foreign exchange transaction gain (loss) 1.2 (2.3) 0.6
Interest expense (1.8) (0.4) 0.1
............................................................................................
Total change from nonoperating investments and financing (.6) (2.7) 0.7
............................................................................................
Total change 4.7 (20.7) (4.7)
............................................................................................
Current year's pretax income from continuing operations $19.2 $14.5 $35.2
- - --------------------------------------------------------------------------------------------
15
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. In general, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements within the meaning of
Section 21E. Without limiting the generality of the foregoing, the words
"believes," "anticipates," "plans," "expects," and other similar expressions are
intended to identify forward-looking statements. Investors should be aware that
such forward-looking statements are based on the current expectations of
management and are inherently subject to a number of risks and uncertainties
that could cause the actual results of the Company to differ materially from
those reflected in the forward-looking statements. In addition to general
economic conditions and market trends, some of the important factors which could
cause actual results to differ materially from those projected include, but are
not limited to, the following:
A MAJOR DOWNTURN OF THE U.S. AND EUROPEAN 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. and European 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. On the other hand, Lydall benefits from the
introduction of new models. Approximately 46 percent of Lydall's total sales in
1999 were to the automotive market. Lydall's primary automotive products are
thermal barriers and heat shields employed both inside and outside of vehicles.
The Company also produces acoustical barrier products. Most of Lydall's products
are supplied to meet unique, niche applications. There is no 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 automotive
production have relatively little effect on Lydall's business; however, a major
downward shift could prevent Lydall from achieving its projected 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. The materials-handling business is unique for Lydall
because the selling price of Lydall's products move in relation to pricing of
linerboard, its primary raw material. Thus, significant changes in the pricing
of linerboard directly affect this portion of Lydall's business.
The Thermal/Acoustical segment uses aluminum in the manufacturing of most
automotive heat-shields. The heat shields are sold under long-term agreements
with established fixed sales prices. The volatility in aluminum prices over the
agreement periods could impact Thermal/Acoustical segment profitability.
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 could impact Lydall's projected results.
The Company does not undertake to update any forward-looking statement made in
this report or that may from time to time be made by or on behalf of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
Lydall completed 1999 with $45.2 million outstanding under its various credit
facilities. The indebtedness is related to the three strategic acquisitions
completed in 1998. The 1999 year-end balance represents a decrease of
16
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$9.5 million, or 17 percent. Operating cash flow in 1999 increased by
19 percent from 1998 to $35.6 million. Debt was reduced, and capital investments
of $16.8 million were made in 1999. The Company funded a similar level of
capital expenditures in 1998 and 1997. Purchases of Common Stock in 1999 totaled
$800 thousand compared with purchases in 1998 and 1997 totaling $10.3 million
and $27.4 million, respectively.
CASH FLOW OVERVIEW
Cash from operating activities in 1999 was $20.6 million compared with
$20.3 million in 1998. In 1997, cash from operating activities equaled
$24.5 million. The positive cash flows in 1999 were derived from operating
earnings before deducting non-cash charges from depreciation, amortization, and
loss on disposal of the Wovens segment.
Cash used for investing activities in 1999 was $17.1 million, mostly related to
capital expenditures. Investment activity in 1999 was down from $60.0 million in
1998, as no acquisitions were completed in 1999. Investing activities in 1997
totaled $16.2 million, primarily capital expenditure related.
Financing activities used $4.5 million in 1999. Payments and proceeds related to
short- and long-term borrowings were $208.5 million and $201.7 million,
respectively in 1999. In 1998 Lydall generated $33.0 million in cash from
financing activities. Net proceeds from bank credit lines were $44.6 million,
while the largest use of cash was the purchase of common stock for
$10.3 million. In 1997, financing activities resulted in net cash outflows of
$37.5 million, including debt repayments totaling $12.5 million and common stock
purchases of $27.4 million.
WORKING CAPITAL PRODUCTIVITY
Lydall measures working capital productivity, or working capital turnover, to
assess short-term utilization of operating resources. Working capital turnover
is defined as net sales divided by the quarterly average of receivables and
inventory, less accounts payable. Turnover declined by 9 percent in 1999 to 5.6
times from 6.2 times in 1998, and 7.3 times in 1997. Overall performance was
negatively impacted by the Gerhardi acquisition and Charter Medical in New
Jersey, both acquired in 1998. Excluding the aforementioned operations,
significant progress with inventory management was achieved throughout the
Company, offset by increased levels of accounts receivable and lower accounts
payable. Management's goal is to improve turnover to historical rates in 2000.
- - -------------------------------------------------------------------------------------------------
$ millions 1999 1998 1997
- - -------------------------------------------------------------------------------------------------
Net sales $318.5 $224.3 $234.4
Average working capital 56.7 36.2 32.3
Working capital productivity 5.6 6.2 7.3
Percent change from previous year (9) (15) (12)
- - -------------------------------------------------------------------------------------------------
FUTURE CASH REQUIREMENTS
Cash requirements for 2000 include the funding of ongoing operations, capital
expenditures, and acquisitions. In 1998, Lydall suspended purchases of Common
Stock except to offset shares granted under the Company's stock option award
program, choosing to focus on cash requirements for existing operations and
acquisitions.
The 2000 capital budget is $14.7 million, down from actual expenditures in 1999
and 1998 of $16.8 million and $17.7 million, respectively.
Management expects to finance capital expenditures and working capital needs
from cash provided by operating activities in 2000. Acquisitions, if completed,
would be financed under the credit facility described under "Credit
Arrangements" below.
17
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CREDIT ARRANGEMENTS
Lydall, Inc. and certain subsidiaries entered into a $69 million credit facility
on July 14,1999 with a group of five banking institutions. The entire facility
is comprised of a $50 million domestic revolving credit facility, renewed every
three years, and a Euro-denominated five-year term loan, which is an obligation
of Lydall's German subsidiary. The current credit facility replaces annually
renewed domestic unsecured credit lines totaling $70 million. The interest rate
on the revolving credit facility is based on various money-market rates selected
by the Company at the time of borrowing. The credit facility carries an annual
facility fee, as well as a commitment fee on the unused portion of the facility.
The Company is required to maintain certain financial ratios and other financial
conditions as part of the credit agreement. The agreement also prohibits the
Company from incurring certain indebtedness, restricts asset sales and capital
expenditures, and limits certain investments and dividends to the extent such
activity affects the financial ratios.
Certain domestic and foreign subsidiaries of the Company maintain additional
lines of credit totaling $11.5 million as of December 31, 1999. These credit
facilities incur interest at rates ranging from 2.3 percent to LIBOR plus
2 percent.
Management believes that current credit arrangements provide ample capacity to
meet working capital requirements and to fund future capital expenditures.
CAPITAL STRUCTURE
Lydall's long-term financial strategy calls for the prudent use of debt
financing. Substantial debt financing in combination with cash from operating
activities are available to complete strategic acquisitions in Lydall's core
thermal/acoustical and filtration/separation markets. At the end of 1999, total
indebtedness was $45.2 million, representing 28 percent of Lydall's total
capital structure.
The Company continually explores its core markets for suitable acquisitions.
Based on a 40-percent debt-to-total-capitalization ratio and maintaining
investment grade credit quality, the Company could borrow up to $50 million to
fund acquisitions. Management has indicated a willingness to exceed the
40 percent debt-to-total-capitalization ratio to complete a compelling strategic
acquisition.
YEAR 2000
Lydall began a comprehensive information technology upgrade program (Lydall
2000) in 1995. Lydall 2000 addressed information technology and non-information
technology systems, and also included an assessment of the status of third
parties. The project went beyond accommodating century-dating issues and
included the implementation of systems to improve product quality, process
efficiencies, and productivity.
As of December 31, 1999, the Company had satisfactorily completed the Lydall
2000 initiative, which included testing major systems in a simulated environment
on and around sensitive Year 2000 dates. Date-sensitive components of machinery
and equipment had been reviewed and remediation of any non-compliant parts was
completed. The Company also examined information from all major customers and
suppliers and did not identify any significant Year 2000 concerns.
As of the date of this report, the Company has not experienced any material
interruptions resulting from Year 2000 date processing. While the possibility of
issues arising from Year 2000 date processing still exists, the impact is likely
to be immaterial. The Company will continue to monitor for Year 2000 problems
during the first half of 2000 to ensure that any potential problems are
minimized.
18
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OTHER KEY FINANCIAL ITEMS
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased to $1.2 million
at the end of 1999 from $2.3 million in 1998.
RECEIVABLES. Receivables were $47.1 million in 1999 and $48.6 million in 1998,
of which trade receivables were $44.7 million and $46.8 million for 1999 and
1998, respectively. Days of sales outstanding in trade receivables were 43 in
1999 and 50 in 1998. Foreign and export sales were approximately 39 percent of
total sales in 1999, 18 percent in 1998, and 20 percent in 1997. These sales are
concentrated primarily in Europe, the Far East, Mexico and Canada.
INVENTORIES. Inventories were $29.1 million at December 31, 1999, net of LIFO
reserves of $1.6 million and $28.9 million at December 31, 1998 net of LIFO
reserves of $1.2 million.
WORKING CAPITAL. Working capital increased to $64.6 million on December 31,
1999 from a deficit of $9.1 million on December 31, 1998. The ratio of current
assets to current liabilities increased to 2.28 from 0.91. The majority of the
working capital improvement resulted from reclassification of certain long-term
assets and liabilities to current assets and related liabilities held for sale.
In addition, a portion of debt classified as current at December 31, 1998 is
classified as long-term at December 31, 1999 based on the Company's new credit
arrangement entered into in July 1999.
CAPITAL ASSET EXPENDITURES. Capital asset expenditures were $16.8 million in
1999, $17.7 million in 1998, and $17.1 million in 1997. Depreciation was
$11.9 million in 1999, $8.8 million in 1998, and $8.0 million in 1997. The
Company's 2000 Capital Plan calls for commitments of $14.7 million. Expenditures
in 2000 are expected to be financed from existing cash balances or cash
generated from operations.
DEBT TO TOTAL CAPITALIZATION. Debt to total capitalization decreased to
28 percent in 1999 from 33 percent in 1998.
COMMON STOCKHOLDERS' EQUITY. Common stockholders' equity increased to
$115.2 million at December 31, 1999, from $109.2 million at December 31, 1998.
On a per-share basis, common stockholders' equity increased to $7.34 at
December 31, 1999 from $6.96 at December 31, 1998.
DIVIDEND POLICY. The Company does not pay a cash dividend on its Common Stock
and does not anticipate doing so in the foreseeable future. Cash will be
reinvested into core businesses.
RESEARCH AND DEVELOPMENT. Research and development investments were
$7.6 million in 1999, and $8.7 million in both 1998 and 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1 in "Notes to Consolidated Financial Statements."
19
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Lydall is exposed to market risk related to changes in foreign currency exchange
rates and interest rates.
FOREIGN CURRENCY RISK
Lydall has sales and manufacturing activities in foreign countries. As a result,
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in the foreign markets in
which the Company distributes its products. The Company's primary currency
exposure is with the Euro.
Lydall's foreign and domestic operations limit foreign currency exchange
transaction risk by completing transactions primarily in their local currencies.
Lydall utilizes bank loans and other debt instruments throughout its operations.
To mitigate foreign currency risk, such debt is taken out primarily in
underlying local currencies of its subsidiaries.
Lydall uses foreign currency forward contracts to mitigate exposure to foreign
currency volatility. At December 31, 1999, the Company had no foreign currency
forward contracts outstanding. Lydall had a forward contract outstanding at
December 31, 1998 to mitigate the exposure to foreign currency volatility in the
December 30, 1998 acquisition of a German subsidiary. The contract, for a
contractual amount equivalent to $17 million at a contract rate of 1.6733,
limited Lydall's exposure to both favorable and unfavorable currency
fluctuations and settled in January 1999 at a minimal gain.
INTEREST RATE RISK
The Company's interest rate exposure is most sensitive to fluctuations in United
States and European interest rates, which primarily impacts interest paid on
debt. At December 31, 1999 the Company had $26.6 million outstanding on various
lines of credit with variable interest rates. The weighted average interest rate
paid on this debt was 5.4 percent in 1999. The Company also had $17.7 million
outstanding on a 5-year term loan with a variable interest rate. In July of
1999, Lydall entered into an interest rate swap agreement to convert the base
rate component of the interest rate on the term loan to a fixed rate of
3.45 percent to take advantage of favorable long-term borrowing rates in Europe.
Including the effect of the swap the weighted average interest rate on the
long-term debt was 4.7 percent.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is contained under Item 14 Exhibits, Financial
Statement Schedules, and Reports on Form 8-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent accountants on
accounting and financial disclosure matters.
20
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of Lydall and disclosure of late filings
required by Section 16 of the Exchange Act are incorporated by reference to the
definitive Proxy Statement of Lydall to be filed with the Commission relating to
its Annual Meeting of Stockholders to be held on May 10, 2000. Information
regarding the executive officers and other significant employees of the Company
is contained on page 6 of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of Lydall's directors and executive
officers is incorporated by reference to the definitive Proxy Statement of
Lydall to be filed with the Commission relating to its Annual Meeting of
Stockholders to be held on May 10, 2000, including the Compensation and Stock
Option Committee Report to Stockholders, found on pages 13 through 17, and the
comparative performance graph located on page 18, therein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of the Common Stock by certain
beneficial owners and by management of the Company is incorporated by reference
to the definitive Proxy Statement of Lydall to be filed with the Commission
relating to its Annual Meeting of Stockholders to be held on May 10, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
management is incorporated by reference to the definitive Proxy Statement of
Lydall to be filed with the Commission relating to its Annual Meeting of
Stockholders to be held on May 10, 2000.
21
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- - ----------------------------------------------------------------------
PAGE
- - ----------------------------------------------------------------------
A)1, FINANCIAL STATEMENTS:
Statement of Management Responsibility F-1
Report of Independent Accountants F-2
Consolidated Statements of Income and Comprehensive Income
for the three years ended December 31, 1999 F-3
Consolidated Balance Sheets at December 31, 1999 and 1998 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended
December 31, 1999 F-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999 F-7
Notes to Consolidated Financial Statements F-8
A)2, FINANCIAL STATEMENT SCHEDULES:
Schedule II-Valuation and Qualifying Accounts for the
three years ended December 31, 1999 S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable, or are presented in "Notes to
Consolidated Financial Statements," and therefore have been omitted.
22
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A)3, EXHIBITS INCLUDED HEREIN OR INCORPORATED BY REFERENCE:
3.1 Certificate of Incorporation of the Registrant, filed
herewith.
3.2 Bylaws 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).
4.1 Certain long-term debt instruments, each representing
indebtedness in an amount equal to less than 10 percent of
the Registrant's total consolidated assets, have not been
filed as exhibits to this Annual Report on Form 10-K. The
Registrant will file these instruments with the Commission
upon request.
10.1* Amended and restated, Lydall, Inc. 1982 Stock Incentive
Compensation Plan, amended through May 14, 1991 (filed as
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
dated March 26, 1992, and incorporated herein by this
reference).
10.2* Lydall, Inc. Senior Management Annual Incentive Compensation
Plan (filed as Exhibit 3.5 to the Registrant's Registration
Statement on Form 8-B dated October 16, 1987, and
incorporated herein by this reference).
10.3* Lydall, Inc. Management Annual Incentive Compensation Plan
(filed as Exhibit 3.6 to the Registrant's Registration
Statement on Form 8-B dated October 16, 1987, and
incorporated herein by this reference).
10.4* Agreement and General Release with Leonard R. Jaskol dated
December 2, 1998, (filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q dated May 17, 1999, and
incorporated herein by this reference.)
10.5* Employment Agreement with John E. Hanley dated March 10,
1995 (filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q dated May 9, 1995, and incorporated
herein by this reference).
10.6* Employment Agreement with Elliott F. Whitely dated
March 10, 1995 (filed as Exhibit 10.3 to the Registrant's
Quarterly report on Form 10-Q dated May 9, 1995, and
incorporated herein by this reference).
10.7* Employment Agreement with Raymond J. Lanzi dated March 10,
1995 (filed as Exhibit 10.5 to the Registrant's Quarterly
report on Form 10-Q dated May 9, 1995, and incorporated
herein by this reference).
10.8* Employment Agreement with Carole F. Butenas dated March 1,
2000, filed herewith.
10.9* Employment Agreement with Mona G. Estey dated March 1, 2000,
filed herewith.
10.10* Employment Agreement with Mary A. Tremblay dated March 1,
2000, filed herewith.
10.11* Lydall, Inc. Board of Directors Deferred Compensation Plan
effective January 1, 1991, (filed as Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K dated March 26,
1991, and incorporated herein by this reference).
10.12* Lydall, Inc. Supplemental Executive Retirement Plan
effective January 1, 1994, (filed as Exhibit 10.20 to the
Registrant's Annual Report on Form 10-K dated March 27,
1996, and incorporated herein by this reference).
10.13* Amended and restated, 1992 Stock Incentive Compensation
Plan, dated May 14, 1992, amended through May 11, 1994,
(filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 dated April 17, 1998, Reg. No.
[33-93768], and incorporated herein by this reference).
10.14* Employment Agreement with James P. Carolan dated
February 1, 1999 (filed as 10.16 to the Registrant's Annual
Report on Form 10-K dated March 18, 1999, and incorporated
herein by this reference).
10.15* Employment Agreement with Christopher R. Skomorowski dated
March 1, 2000, filed herewith.
23
- - --------------------------------------------------------------------------------
10.16* Employment Agreement with Walter A. Ruschmeyer dated
March 16, 2000, filed herewith.
10.17* Employment Agreement with Kevin G. Lynch dated March 1,
2000, filed herewith.
10.18* Employment Agreement with Lisa Krallis-Nixon dated March 1,
2000, filed herewith.
10.19* Employment Agreement with Raymond S. Grupinski dated
March 1, 2000, filed herewith.
10.20* Employment Agreement with Bill W. Franks, Jr. dated
March 1, 2000, filed herewith.
10.21 Asset Purchase Agreement between CharterMed, Inc. and
Charter Medical Ltd. (filed as Exhibit 10.20 to the
Registrant's Annual Report on Form 10-K dated March 16,
1998, and incorporated herein by this reference).
10.22 Asset Purchase Agreement between Lydall Central, Inc. and
Engineered Thermal Systems, Inc. (filed as Exhibit 10.1 to
the Registrant's Quarterly report on Form 10-Q dated May 7,
1998, and incorporated herein by this reference).
10.23 Purchase and Sale Agreement (English Translation) signed as
of December 30, 1998 by and between HOHENSTAUFEN
EINHUNDERTSTE. Vermogensverwaltungs GmbH, a wholly owned
subsidiary of Lydall, Inc. and Gerhardi & Cie. Gmbh & Co. KG
related to the purchase of all the outstanding shares of
Gerhardi & Cie. GmbH & Co. KG (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed January 14,
1999).
10.24 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 as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q dated August 11,
1999, and incorporated herein by this reference).
21.1 List of subsidiaries of the Registrant (filed as Exhibit
21.1 to the Registrant's Annual Report on Form 10-K dated
March 27, 1996, and incorporated here by reference).
23.1 Consent of PricewaterhouseCoopers LLP, filed herewith.
24.1 Power of Attorney, dated February 18, 2000, authorizing
Christopher R. Skomorowski and/or Walter A. Ruschmeyer to
sign this report on behalf of each member of the Board of
Directors indicated therein, filed herewith.
27.1 Financial Data Schedule, filed herewith.
* Management contract or compensatory plan.
B) REPORTS ON FORM 8-K:
The Company did not file any reports on Form 8-K during the
three months ended December 31, 1999.
24
- - --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Lydall, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LYDALL, INC.
Date March 30, 2000 By /s/ CHRISTOPHER R. SKOMOROWSKI
-------------------------------------------
Christopher R. Skomorowski
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Lydall, Inc. in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CHRISTOPHER R. SKOMOROWSKI President and Chief Executive
- - ------------------------------------------------ Officer March 30, 2000
Christopher R. Skomorowski
/s/ WALTER A. RUSCHMEYER Vice President-Finance and Chief
- - ------------------------------------------------ Financial Officer and March 30, 2000
Walter A. Ruschmeyer Principal Accounting Officer
/s/ WALTER A. RUSCHMEYER
- - ------------------------------------------------
Walter A. Ruschmeyer March 30, 2000
Attorney-in-fact for:
Christopher R. Skomorowski Director
Lee A. Asseo Director
Samuel P. Cooley Director
W. Leslie Duffy Director
David Freeman Director
Suzanne Hammett Director
Robert E. McGill, III Director
Elliott F. Whitely Director
Roger M. Widmann Director
Albert E. Wolf Director
(constituting in excess of a majority
of the full Board of Directors)
25
- - --------------------------------------------------------------------------------
STATEMENT OF MANAGEMENT RESPONSIBILITY
The consolidated financial statements of Lydall, Inc. and its subsidiaries have
been prepared in accordance with generally accepted accounting principles. The
integrity and objectivity of these statements, including the effect of certain
estimates and judgements, is the responsibility of management.
Lydall's management has established and maintains a system of internal
accounting controls that is designed to provide reasonable assurance that
Company assets are safeguarded, transactions are executed in accordance with
management's authorization, and that the Company's financial records may be
relied upon for the purpose of preparing financial statements. That system is
continuously monitored and assessed by direct management review and by the
Company's internal auditor. Management has concluded that the system of internal
accounting controls was effective throughout the year ended December 31, 1999.
Each year, Lydall's Board of Directors appoints independent accountants who
audit the Company's financial statements in accordance with generally accepted
auditing standards. Their audit includes a review of internal accounting
controls and tests of selected transactions.
The Audit Committee of the Board of Directors, which consists of directors who
are neither officers nor employees of the Company, meets regularly with
management, the independent accountants and the internal auditor to review
financial reporting, internal accounting control and auditing matters. The
Committee has direct and private access to both internal and external auditors.
Christopher A. Skomorowski Walter A. Ruschmeyer
President and Chief Executive Officer Executive Vice President-Finance and
Administration and Chief Financial Officer
F-1
- - --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Lydall, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 22 present fairly, in all material
respects, the financial position of Lydall, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 22 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 29, 2000
F-2
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- - -----------------------------------------------------------------------------------------------
In thousands except per-share data For the years ended
December 31, 1999 1998 1997
- - -----------------------------------------------------------------------------------------------
NET SALES $318,505 $224,286 $234,447
Cost of sales 242,985 158,370 157,517
...............................................................................................
Gross margin 75,520 65,916 76,930
Selling, product development, and administrative expenses 54,827 48,588 43,525
Impairment loss -- 1,948 --
...............................................................................................
Operating income 20,693 15,380 33,405
Other (income) expense:
Investment (income) loss (46) 284 (1,986)
Interest expense 2,612 820 262
Foreign currency transaction (gain) loss (961) (87) 60
Other (134) (127) (143)
...............................................................................................
1,471 890 (1,807)
...............................................................................................
Income from continuing operations before income taxes 19,222 14,490 35,212
Income tax expense 6,270 4,665 12,832
- - -----------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 12,952 9,825 22,380
...............................................................................................
Discontinued operations:
Loss from operations of the Wovens segment, net of tax
benefit of $215, $3,483 and $290, respectively (347) (5,623) (469)
Loss on disposal of the Wovens segment, including
provision for operating losses during the phase-out
period, net of tax benefit of $1,133 (1,830) -- --
...............................................................................................
LOSS FROM DISCONTINUED OPERATIONS (2,177) (5,623) (469)
...............................................................................................
NET INCOME $ 10,775 $ 4,202 $ 21,911
...............................................................................................
BASIC EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ .82 $ .62 $ 1.34
Discontinued operations (.14) (.35) (.03)
Net income $ .68 $ .27 $ 1.31
Weighted average common stock outstanding 15,715 15,847 16,692
...............................................................................................
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ .82 $ .61 $ 1.29
Discontinued operations (.14) (.35) (.02)
Net income $ .68 $ .26 $ 1.27
Weighted average common stock and equivalents outstanding 15,784 16,163 17,319
...............................................................................................
NET INCOME $ 10,775 $ 4,202 $ 21,911
...............................................................................................
Other comprehensive income (loss):
Foreign currency translation adjustments, net of $2,563,
$(180), and $772, in tax effect, respectively (5,295) 637 (1,349)
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) arising during
period, net of $0, $103, and $(317) in tax effect,
respectively -- (366) 553
Less: reclassification adjustment for gains (losses)
included in net income -- (344) 608
...............................................................................................
Net unrealized loss on securities, net of $0, $6, and
$31 in tax effect, respectively -- (22) (55)
Minimum pension liability adjustment, net of $(422),
$281, and $121 in tax effect, respectively 784 (522) (224)
...............................................................................................
Other comprehensive income (loss), net of tax (4,511) 93 (1,628)
...............................................................................................
COMPREHENSIVE INCOME $ 6,264 $ 4,295 $ 20,283
- - -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
- - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- - -----------------------------------------------------------------------------------
In thousands except share data December 31, 1999 1998
- - -----------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,154 $ 2,254
Accounts receivable (less allowance for doubtful receivables
of $1,511 in 1999 and $1,504 in 1998) 45,517 48,609
Inventories:
Finished goods 8,529 10,303
Work in process 5,044 8,859
Raw materials and supplies 8,576 11,003
LIFO reserve (1,619) (1,216)
...................................................................................
Total inventories 20,530 28,949
Taxes receivable 4,022 2,256
Prepaid expenses 1,895 1,966
Net investment in discontinued operations (Note 5) 2,125 --
Assets held for sale (Note 6) 35,183 --
Deferred tax assets 4,807 6,785
...................................................................................
Total current assets 115,233 90,819
...................................................................................
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land 1,410 2,729
Buildings and improvements 24,779 30,764
Machinery and equipment 91,761 111,157
Office equipment 22,471 16,865
Vehicles 943 1,310
Assets in progress 5,464 9,660
...................................................................................
146,828 172,485
Less accumulated depreciation (66,272) (64,649)
...................................................................................
80,556 107,836
OTHER NONCURRENT ASSETS:
Goodwill, at cost (net of accumulated amortization of $4,652
and $4,463 in 1999 and 1998, respectively, and an
impairment loss of $6,519 recognized in 1998) 19,444 23,380
Other assets, at cost (net of accumulated amortization of
$6,038 in 1999 and $7,922 in 1998) 5,003 4,813
...................................................................................
24,447 28,193
...................................................................................
TOTAL ASSETS $220,236 $226,848
- - -----------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
- - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
- - -----------------------------------------------------------------------------------
In thousands except share data December 31, 1999 1998
- - -----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 2,564 $ --
Current portion of long-term debt 6,849 2,340
Short-term borrowings -- 52,324
Accounts payable 18,438 22,530
Accrued taxes 920 1,411
Accrued payroll and other compensation 4,021 5,810
Liabilities related to assets held for sale (Note 6) 6,945 --
Other accrued liabilities 10,866 15,494
...................................................................................
Total current liabilities 50,603 99,909
...................................................................................
Long-term debt 38,334 --
Deferred tax liabilities 11,306 10,726
Other long-term liabilities 4,757 6,988
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock, par value $.10 per share, authorized
30,000,000 shares, issued 21,797,164 shares in 1999 and
21,714,301 shares in 1998 2,180 2,171
Capital in excess of par value 39,195 38,697
Retained earnings 140,085 129,310
Accumulated other comprehensive loss (4,582) (71)
...................................................................................
176,878 170,107
Less cost of 6,097,388 shares of common stock in treasury in
1999 and 6,020,441 shares in 1998 (61,642) (60,882)
...................................................................................
Total stockholders' equity 115,236 109,225
...................................................................................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $220,236 $226,848
- - -----------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- - ------------------------------------------------------------------------------------------------------------------------
Capital Accumulated
in Other Cost of Total
Preferred Common Excess of Retained Comprehensive Stock in Stockholders'
In thousands Stock Stock Par Value Earnings Income (Loss) Treasury Equity
- - ------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1997 $-- $2,112 $34,235 $103,197 $ 1,464 $(23,164) $117,844
Stock options exercised 31 2,275 2,306
Purchase of treasury shares (27,403) (27,403)
Net income 21,911 21,911
Other comprehensive loss (1,628) (1,628)
........................................................................................................................
BALANCE AT DECEMBER 31, 1997 -- 2,143 36,510 125,108 (164) (50,567) 113,030
Stock options exercised 28 2,187 2,215
Purchase of treasury shares (10,315) (10,315)
Net income 4,202 4,202
Other comprehensive income 93 93
........................................................................................................................
BALANCE AT DECEMBER 31, 1998 -- 2,171 38,697 129,310 (71) (60,882) 109,225
Stock options exercised 9 498 507
Purchase of treasury shares (760) (760)
Net income 10,775 10,775
Other comprehensive loss (4,511) (4,511)
........................................................................................................................
BALANCE AT DECEMBER 31, 1999 $-- $2,180 $39,195 $140,085 $(4,582) $(61,642) $115,236
- - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------------------
In thousands For the years ended December 31, 1999 1998 1997
- - --------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,775 $ 4,202 $ 21,911
............................................................................................
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 11,946 8,844 7,993
Amortization 1,775 2,052 1,569
Loss on disposal of Wovens segment 1,830 -- --
Impairment loss -- 8,467 --
Loss on disposition of property, plant and equipment 303 403 685
Foreign currency transaction (gain) loss (961) (87) 60
Changes in operating assets and liabilities, excluding
effects from acquisitions:
Accounts receivable 100 2,132 1,221
Taxes receivable (1,766) (224) (2,032)
Inventories (1,527) 333 (1,140)
Prepaid expenses and other assets (1,292) 5 (1,708)
Accounts payable (2,798) (895) (2,049)
Accrued taxes (348) 343 (249)
Accrued payroll and other accrued liabilities (469) (2,294) (2,452)
Deferred income taxes 3,954 (5,600) 818
Other long-term liabilities (904) 2,651 (158)
............................................................................................
Total adjustments 9,843 16,130 2,558
............................................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,618 20,332 24,469
............................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (281) (46,447) (78)
Additions of property, plant and equipment (16,773) (17,657) (17,104)
Proceeds from the sale of property, plant and equipment -- 276 --
Sale of investments, net -- 3,851 1,013
............................................................................................
NET CASH USED FOR INVESTING ACTIVITIES (17,054) (59,977) (16,169)
............................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 2,564 -- --
Long-term debt payments (75,444) (3,484) (4,450)
Long-term debt proceeds 108,840 -- --
Proceeds from short-term borrowings 92,902 110,820 --
Payments of short-term borrowings (133,087) (66,245) --
Notes payable -- -- (8,000)
Issuance of common stock 507 2,215 2,306
Acquisition of common stock (760) (10,315) (27,403)
............................................................................................
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (4,478) 32,991 (37,547)
............................................................................................
EFFECT OF EXCHANGE RATE CHANGES ON CASH (186) 17 (88)
............................................................................................
Decrease in cash and cash equivalents (1,100) (6,637) (29,335)
Cash and cash equivalents at beginning of year 2,254 8,891 38,226
............................................................................................
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,154 $ 2,254 $ 8,891
- - --------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
- - --------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 2,689 $ 734 $ 687
Income taxes 5,016 6,231 14,678
Noncash transactions:
Amounts payable for acquired operations -- 240 16
Additional minimum pension liability 1,206 999 591
Unrealized losses on available-for-sale securities -- (22) (55)
Liabilities assumed with acquisitions -- 26,496 --
Net cash provided by operating activities includes changes in certain assets and
liabilities which have been reclassified as "Net Investment in Discontinued Operations,"
"Assets Held for Sale," and "Liabilities Related to Assets Held for Sale" in the
Consolidated Balance Sheet.
- - --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
- - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Lydall, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
financial statement dates, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on hand and
highly liquid investments with a maturity of three months or less at the date of
purchase.
CONCENTRATION OF RISK. Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments, and trade receivables. The Company places
its cash, cash equivalents and short-term investments in high-quality financial
institutions and instruments. Concentrations of credit risk with respect to
trade receivables are limited by the large number of customers comprising the
Company's customer base and their dispersion across many different industries
and geographies. The Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral. Sales
to the automotive market were 46 percent of the Company's 1999 total sales
compared with 26 percent in 1998 and 27 percent in 1997. Sales to Ford Motor Co.
represented 12 percent, 15 percent, and 19 percent of Lydall's total sales in
1999, 1998, and 1997, respectively. No other single customer accounted for more
than 10 percent of total sales in 1999, 1998, or 1997. As of December 31, 1999,
the Company had no other significant concentrations of risk.
INVENTORIES. Approximately 37 percent in 1999 and 33 percent in 1998 of the
inventories have been valued on a last-in, first-out (LIFO) method and the
balance on a first-in, first-out (FIFO) method at the lower of cost or market.
DEPRECIATION AND AMORTIZATION. Property, plant, and equipment are depreciated
over their estimated useful lives using the straight-line method for financial
statement purposes. Leasehold improvements are depreciated on a straight-line
basis over the term of the lease or the life of the asset, whichever is shorter.
Useful lives by category are as follows:
- - -------------------------------------------------------------------------
Category Useful Life
- - -------------------------------------------------------------------------
Buildings and improvements 10-35 years
Machinery and equipment 5-25 years
Office equipment 2-8 years
Vehicles 3-6 years
- - -------------------------------------------------------------------------
INTANGIBLES. Goodwill and other intangibles are being amortized on a
straight-line basis primarily over periods not exceeding 25 years.
F-8
- - --------------------------------------------------------------------------------
VALUATION OF LONG-LIVED ASSETS. The Company periodically evaluates the
recoverability of long-lived assets, including goodwill and other intangible
assets. At the time such evaluations indicate that the future undiscounted cash
flows are not sufficient to recover the carrying va