Back to GetFilings.com



Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
Form 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2002
 
OR
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                 
 
Commission File Number:  1-7665
 
LYDALL, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
  
06-0865505
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer Identification No.)
 
One Colonial Road, Manchester, Connecticut,  06040
                    (Address of principal executive offices)                (zip code)
 
(860) 646-1233
(Registrant’s telephone number, including area code)
 
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common stock $.10 par value per share.
     
Total Shares outstanding July 26, 2002
   
16,007,055
 

Table of Contents
 
LYDALL, INC.
 
INDEX
 
                  
Page No.
Part I.
       
Financial Information
     
        
Item 1.
        
                
3
                
4-5
                
6
                
7-10
        
Item 2.
      
10-13
        
Item 3.
      
13
Part II.
       
Other Information
     
        
Item 1.
      
14
        
Item 4.
      
14
        
Item 6.
      
15
Signature
   
16

Table of Contents
 
PART I.    FINANCIAL INFORMATION
Item 1.     Financial Statements
 
LYDALL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
    
June 30,
2002
     
December 31,
2001
  
    
(Unaudited)
         
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
1,041
 
   
$
955
 
Accounts receivable, net
   
 
46,241
 
   
 
35,458
 
Inventories:
                  
Finished goods
   
 
10,704
 
   
 
10,306
 
Work in progress
   
 
11,233
 
   
 
8,135
 
Raw materials and supplies
   
 
9,358
 
   
 
9,799
 
LIFO reserve
   
 
(483
)
   
 
(483
)
    
  
Total inventories
   
 
30,812
 
   
 
27,757
 
Income taxes receivable
   
 
—  
 
   
 
611
 
Prepaid expenses
   
 
2,268
 
   
 
2,363
 
Net investment in discontinued operations
   
 
1,118
 
   
 
1,165
 
Assets held for sale
   
 
410
 
   
 
1,515
 
Deferred tax assets
   
 
1,779
 
   
 
1,770
 
    
  
Total current assets
   
 
83,669
 
   
 
71,594
 
Property, plant and equipment, at cost
   
 
148,137
 
   
 
138,976
 
Accumulated depreciation
   
 
(67,459
)
   
 
(61,187
)
    
  
    
 
80,678
 
   
 
77,789
 
Other assets, net
   
 
39,179
 
   
 
37,788
 
    
  
Total assets
   
$
203,526
 
   
$
187,171
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Current liabilities:
                  
Current portion of long-term debt
   
$
10,640
 
   
$
9,473
 
Accounts payable
   
 
15,827
 
   
 
14,497
 
Accrued taxes
   
 
2,529
 
   
 
792
 
Accrued payroll and other compensation
   
 
5,983
 
   
 
3,144
 
Other accrued liabilities
   
 
5,437
 
   
 
6,929
 
    
  
Total current liabilities
   
 
40,416
 
   
 
34,835
 
Long-term debt
   
 
19,985
 
   
 
18,210
 
Deferred tax liabilities
   
 
6,978
 
   
 
6,818
 
Other long-term liabilities
   
 
8,283
 
   
 
8,273
 
Commitments and contingencies
                  
Stockholders’ equity:
                  
Preferred stock
   
 
—  
 
   
 
—  
 
Common stock
   
 
2,210
 
   
 
2,208
 
Capital in excess of par value
   
 
41,676
 
   
 
41,439
 
Retained earnings
   
 
152,103
 
   
 
145,083
 
Accumulated other comprehensive loss
   
 
(6,483
)
   
 
(8,053
)
    
  
    
 
189,506
 
   
 
180,677
 
Treasury stock, at cost
   
 
(61,642
)
   
 
(61,642
)
    
  
Total stockholders’ equity
   
 
127,864
 
   
 
119,035
 
    
  
Total liabilities and stockholders’ equity
   
$
203,526
 
   
$
187,171
 
    
  
See accompanying Notes to Consolidated Condensed Financial Statements.

3

Table of Contents
 
LYDALL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Thousands Except Per-Share Data)
 
    
Three Months Ended
June 30,
  
    
2002
     
2001
  
    
(Unaudited)
  
Net sales
   
$
66,259
 
   
$
58,940
 
Cost of sales
   
 
47,541
 
   
 
42,133
 
    
  
Gross margin
   
 
18,718
 
   
 
16,807
 
Selling, product development and administrative expenses
   
 
12,545
 
   
 
11,595
 
Impairment and restructuring charges
   
 
—  
 
   
 
2,629
 
    
  
Operating income
   
 
6,173
 
   
 
2,583
 
Other (income) expense:
                  
Investment income
   
 
(9
)
   
 
(54
)
Interest expense
   
 
202
 
   
 
243
 
Foreign currency transaction (gains) losses, net
   
 
(61
)
   
 
50
 
Other, net
   
 
—  
 
   
 
10
 
    
  
    
 
132
 
   
 
249
 
    
  
Income from continuing operations before income taxes
   
 
6,041
 
   
 
2,334
 
Income tax expense
   
 
2,121
 
   
 
757
 
    
  
Income from continuing operations
   
 
3,920
 
   
 
1,577
 
Discontinued operations:
                  
Loss from disposal of discontinued segments, net of tax benefit of $49
   
 
—  
 
   
 
(79
)
    
  
Loss from discontinued operations
   
 
—  
 
   
 
(79
)
    
  
Net income
   
$
3,920
 
   
$
1,498
 
    
  
Basic earnings (loss) per common share:
                  
Continuing operations
   
$
.25
 
   
$
.10
 
Discontinued operations
   
 
—  
 
   
 
(.01
)
    
  
Net income
   
$
.25
 
   
$
.09
 
Diluted earnings (loss) per common share:
                  
Continuing operations
   
$
.24
 
   
$
.10
 
Discontinued operations
   
 
—  
 
   
 
(.01
)
    
  
Net income
   
$
.24
 
   
$
.09
 
Weighted average common stock outstanding
   
 
15,995
 
   
 
15,889
 
Weighted average common stock and equivalents outstanding
   
 
16,430
 
   
 
16,117
 
Net income
   
$
3,920
 
   
$
1,498
 
Other comprehensive income (loss), before tax:
                  
Foreign currency translation adjustments
   
 
2,731
 
   
 
(325
)
Change in fair value of derivative instrument
   
 
(42
)
   
 
(15
)
    
  
Other comprehensive income (loss), before tax
   
 
2,689
 
   
 
(340
)
Income tax (expense) benefit related to other comprehensive income (loss)
   
 
(941
)
   
 
118
 
    
  
Other comprehensive income (loss), net of tax
   
 
1,748
 
   
 
(222
)
    
  
Comprehensive income
   
$
5,668
 
   
$
1,276
 
    
  
 
See accompanying Notes to Consolidated Condensed Financial Statements.

4

Table of Contents
 
LYDALL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Thousands Except Per-Share Data)
 
    
Six Months Ended
June 30,
  
    
2002
     
2001
  
    
(Unaudited)
  
Net sales
   
$
125,944
 
   
$
117,205
 
Cost of sales
   
 
90,852
 
   
 
83,805
 
    
  
Gross margin
   
 
35,092
 
   
 
33,400
 
Selling, product development and administrative expenses
   
 
23,993
 
   
 
25,104
 
Impairment and restructuring charges
   
 
—  
 
   
 
3,389
 
    
  
Operating income
   
 
11,099
 
   
 
4,907
 
Other (income) expense:
                  
Investment income
   
 
(24
)
   
 
(91
)
Interest expense
   
 
385
 
   
 
576
 
Foreign currency transaction (gains) losses, net
   
 
(54
)
   
 
198
 
Other, net
   
 
(24
)
   
 
43
 
    
  
    
 
283
 
   
 
726
 
    
  
Income from continuing operations before income taxes
   
 
10,816
 
   
 
4,181
 
Income tax expense
   
 
3,797
 
   
 
1,368
 
    
  
Income from continuing operations
   
 
7,019
 
   
 
2,813
 
Discontinued operations:
                  
Loss from operations of discontinued segments, net of tax benefit of $181
   
 
—  
 
   
 
(308
)
Gain on disposal of discontinued segments, net of tax expense of $400
   
 
—  
 
   
 
684
 
    
  
Income from discontinued operations
   
 
—  
 
   
 
376
 
    
  
Net income
   
$
7,019
 
   
$
3,189
 
    
  
Basic earnings per common share:
                  
Continuing operations
   
$
.44
 
   
$
.18
 
Discontinued operations
   
 
—  
 
   
 
.02
 
    
  
Net income
   
$
.44
 
   
$
.20
 
Diluted earnings per common share:
                  
Continuing operations
   
$
.43
 
   
$
.18
 
Discontinued operations
   
 
—  
 
   
 
.02
 
    
  
Net income
   
$
.43
 
   
$
.20
 
Weighted average common stock outstanding
   
 
15,990
 
   
 
15,876
 
Weighted average common stock and equivalents outstanding
   
 
16,327
 
   
 
16,050
 
Net income
   
$
7,019
 
   
$
3,189
 
Other comprehensive income (loss), before tax:
                  
Foreign currency translation adjustments
   
 
2,406
 
   
 
(708
)
Change in fair value of derivative instrument
   
 
8
 
   
 
(140
)
    
  
Other comprehensive income (loss), before tax
   
 
2,414
 
   
 
(848
)
Income tax (expense) benefit related to other comprehensive income (loss)
   
 
(845
)
   
 
295
 
    
  
Other comprehensive income (loss), net of tax
   
 
1,569
 
   
 
(553
)
Cumulative effect of change in accounting principle, net of tax
   
 
—  
 
   
 
201
 
    
  
Comprehensive income
   
$
8,588
 
   
$
2,837
 
    
  
 
See accompanying Notes to Consolidated Condensed Financial Statements.

5

Table of Contents
 
LYDALL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
 
    
Six Months Ended
June 30,
  
    
2002
     
2001
  
    
(Unaudited)
  
Cash flows from operating activities:
                  
Net income
   
$
7,019
 
   
$
3,189
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation
   
 
5,111
 
   
 
4,918
 
Amortization
   
 
191
 
   
 
776
 
Gain on disposal of discontinued segments
   
 
—  
 
   
 
(1,289
)
Impairment and restructuring charges
   
 
—  
 
   
 
3,389
 
Foreign currency transaction (gains) losses
   
 
(54
)
   
 
198
 
Changes in operating assets and liabilities, excluding effects from acquisitions:
                  
Accounts receivable
   
 
(11,624
)
   
 
657
 
Income taxes receivable
   
 
611
 
   
 
2,583
 
Inventories
   
 
(2,156
)
   
 
(3,763
)
Prepaid expenses and other assets
   
 
(119
)
   
 
(812
)
Accounts payable
   
 
2,796
 
   
 
(641
)
Accrued taxes
   
 
1,595
 
   
 
64
 
Accrued payroll and other compensation
   
 
2,756
 
   
 
(4,422
)
Deferred income taxes
   
 
7
 
   
 
(734
)
Other long-term liabilities
   
 
(124
)
   
 
217
 
Other accrued liabilities
   
 
(1,389
)
   
 
(1,998
)
    
  
Total adjustments
   
 
(2,399
)
   
 
(857
)
    
  
Net cash provided by operating activities
   
 
4,620
 
   
 
2,332
 
    
  
Cash flows from investing activities:
                  
Acquisitions, net
   
 
(1,035
)
   
 
—  
 
Proceeds from post-closing net equity adjustment
   
 
—  
 
   
 
1,357
 
Proceeds from disposal of discontinued segments
   
 
47
 
   
 
14,163
 
Proceeds from assets held for sale
   
 
920
 
   
 
872
 
Additions of property, plant and equipment
   
 
(6,157
)
   
 
(4,194
)
    
  
Net cash (used for) provided by investing activities
   
 
(6,225
)
   
 
12,198
 
    
  
Cash flows from financing activities:
                  
Long-term debt proceeds
   
 
64,830
 
   
 
15,756
 
Long-term debt payments
   
 
(63,438
)
   
 
(30,070
)
Issuance of common stock
   
 
239
 
   
 
475
 
    
  
Net cash provided by (used for) financing activities
   
 
1,631
 
   
 
(13,839
)
    
  
Effect of exchange rate changes on cash
   
 
60
 
   
 
(100
)
    
  
Increase in cash and cash equivalents
   
 
86
 
   
 
591
 
Cash and cash equivalents at beginning of period
   
 
955
 
   
 
2,220
 
    
  
Cash and cash equivalents at end of period
   
$
1,041
 
   
$
2,811
 
    
  
Supplemental Schedule of Cash Flow Information:
                  
Cash paid during the period for:
                  
Interest
   
$
432
 
   
$
581
 
Income taxes
   
 
1,691
 
   
 
959
 
 
See accompanying Notes to Consolidated Condensed Financial Statements.

6

Table of Contents

LYDALL, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 
1.
 
The accompanying consolidated condensed financial statements include the accounts of Lydall, Inc. and its wholly owned subsidiaries (collectively, the “Company”). All financial information is unaudited for the interim periods reported. All significant intercompany transactions have been eliminated in the consolidated condensed financial statements. Management believes that all adjustments, which include only normal recurring accruals necessary to fairly present the consolidated statement of financial position, results of operations and cash flows for the periods reported, have been included. The year-end consolidated condensed balance sheet was derived from the December 31, 2001 audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
 
2.
 
Basic earnings per common share are based on income from continuing operations and net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are based on income from continuing operations and net income divided by the weighted average number of common shares outstanding during the period, including the effect of stock options, where such effect is dilutive.
 
    
Quarter Ended
June 30, 2002
     
Quarter Ended
June 30, 2001
    
(Unaudited)
     
(Unaudited)
    
Income from
Continuing
Operations
($000’s)
   
Average
Shares
(000’s)
   
Per-Share
Amount
     
Income from
Continuing
Operations
($000’s)
   
Average
Shares
(000’s)
   
Per-Share
Amount
Basic earnings per share
   
$
3,920
   
15,995
   
$
.25
 
   
$
1,577
   
15,889
   
$
.10
Effect of dilutive stock options
   
 
—  
   
435
   
 
(.01
)
   
 
—  
   
228
   
 
—  
    
  
  
  
  
  
Diluted earnings per share
   
$
3,920
   
16,430
   
$
.24
 
   
$
1,577
   
16,117
   
$
.10
    
  
  
  
  
  
    
Net
Income
   
Average
Shares
   
Per-Share
     
Net
Income
   
Average
Shares
   
Per-Share
    
($000’s)
   
(000’s)
   
Amount
     
($000’s)
   
(000’s)
   
Amount
Basic earnings per share
   
$
3,920
   
15,995
   
$
.25
 
   
$
1,498
   
15,889
   
$
.09
Effect of dilutive stock options
   
 
—  
   
435
   
 
(.01
)
   
 
—  
   
228
   
 
—  
    
  
  
  
  
  
Diluted earnings per share
   
$
3,920
   
16,430
   
$
.24
 
   
$
1,498
   
16,117
   
$
.09
    
  
  
  
  
  
 
    
Six Months Ended
June 30, 2002
     
Six Months Ended
June 30, 2001
    
(Unaudited)
     
(Unaudited)
    
Income from
Continuing
Operations
($000’s)
   
Average
Shares
(000’s)
   
Per-Share
Amount
     
Income from
Continuing
Operations
($000’s)
   
Average
Shares
(000’s)
   
Per-Share
Amount
Basic earnings per share
   
$
7,019
   
15,990
   
$
.44
 
   
$
2,813
   
15,876
   
$
.18
Effect of dilutive stock options
   
 
—  
   
337
   
 
(.01
)
   
 
—  
   
174
   
 
—  
    
  
  
  
  
  
Diluted earnings per share
   
$
7,019
   
16,327
   
$
.43
 
   
$
2,813
   
16,050
   
$
.18
    
  
  
  
  
  
    
Net
Income
   
Average
Shares
   
Per-Share
     
Net
Income
   
Average
Shares
   
Per-Share
    
($000’s)
   
(000’s)
   
Amount
     
($000’s)
   
(000’s)
   
Amount
Basic earnings per share
   
$
7,019
   
15,990
   
$
.44
 
   
$
3,189
   
15,876
   
$
.20
Effect of dilutive stock options
   
 
—  
   
337
   
 
(.01
)
   
 
—  
   
174
   
 
—  
    
  
  
  
  
  
Diluted earnings per share
   
$
7,019
   
16,327
   
$
.43
 
   
$
3,189
   
16,050
   
$
.20
    
  
  
  
  
  

7

Table of Contents

LYDALL, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

 
3.
 
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FAS 142), effective for fiscal years beginning after December 15, 2001. FAS 142 requires that goodwill recorded from business combinations completed on or before June 30, 2001, and certain other intangible assets deemed to have indefinite lives, no longer be amortized after the effective date. In addition, FAS 142 requires that goodwill and other intangible assets with indefinite lives recorded as a result of business combinations completed after June 30, 2001 not be amortized. Goodwill and other intangible assets with indefinite lives are subject to annual impairment tests. The Company completed its initial impairment tests for such assets recorded as of January 1, 2002 and determined that no impairment exists. The Company will perform its annual impairment tests for such assets as required by FAS 142 in the fourth quarter of each fiscal year.
 
    
 
The following table reconciles the reported results for the second quarter and six months ended June 30, 2001 to the adjusted results for the same period had FAS 142 been adopted on January 1, 2001:
 
In thousands except per-share data
     
Quarter Ended
June 30, 2001
       
Six Months Ended
June 30, 2001
  
      
(Unaudited)
  
Reported net income
     
$
1,498
 
     
$
3,189
 
Goodwill amortization
     
 
313
 
     
 
626
 
Tax effect of deductible goodwill
     
 
(96
)
     
 
(203
)
      
    
Adjusted net income
     
$
1,715
 
     
$
3,612
 
      
    
Basic earnings per share:
                      
Reported net income
     
$
.09
 
     
$
.20
 
Goodwill amortization, net of tax
     
 
.02
 
     
 
.03
 
      
    
Adjusted net income
     
$
.11
 
     
$
.23
 
      
    
Diluted earnings per share:
                      
Reported net income
     
$
.09
 
     
$
.20
 
Goodwill amortization, net of tax
     
 
.02
 
     
 
.03
 
      
    
Adjusted net income
     
$
.11
 
     
$
.23
 
      
    
 
4.
 
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (FAS 144). FAS 144 establishes the accounting and reporting for the impairment or disposal of long-lived assets. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
    
 
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (FAS 146). This statement provides guidance on significant issues associated with the recognition, measurement and reporting of costs associated with exit and disposal activities and is effective for the Company on January 1, 2003. The Company is currently reviewing and assessing the provisions of FAS 146 to determine the statement’s impact upon adoption, if any.
 
5.
 
During the second quarter of 2002, the Company signed a settlement agreement regarding the environmental claims against it relating to the Rogers Fibre Mill site, a matter previously disclosed in Note 12 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The Company and subsequent owners/operators of the site paid a total of $300 thousand, which is currently held in escrow pending final approval of the settlement. The Company’s share of the settlement was $150 thousand, an amount previously accrued. The settlement did not have any impact on the results of operations for the quarter or six months ended June 30, 2002.

8

Table of Contents

LYDALL, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

 
    
 
During the second quarter of 2002, the Company entered into a consent order with the Connecticut Department of Environmental Protection relating to a matter previously disclosed in Item 1 of “Other Information” in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2001. The Company paid $120 thousand in connection with this consent order. This amount had previously been accrued and therefore the settlement did not have any impact on the results of operations for the quarter or six months ended June 30, 2002.
 
6.
 
Lydall, Inc. and certain subsidiaries amended and restated its $50 million domestic revolving credit facility with a group of five banking institutions on May 13, 2002. This facility, which has a maturity date of September 30, 2005, was renewed under similar terms and conditions to those in place under the prior agreement. Under the new arrangement, the Company may borrow up to $50 million, or the equivalent in certain other foreign currencies. Amounts borrowed under this agreement are required to be paid in full by September 30, 2005, unless the agreement is extended through amendment or renegotiation. The rate of interest charged on outstanding loans may, at the Company’s option and subject to certain restrictions, be based on the prime rate or at rates from 100 to 175 basis points over a Eurocurrency loan rate. The basis point spread over the Eurocurrency rate is based on the Company’s leverage ratio. Under the arrangement, the ongoing commitment fee varies from 25.0 to 37.5 basis points of the maximum amount that can be borrowed, net of any outstanding borrowings and net of amounts beneficiaries may draw under outstanding letters of credit. The loan agreement contains restrictions that limit the amount of dividends (whether in cash, securities or other property, unless payable solely in additional shares of the Company’s capital stock) that can be paid to external shareholders of its capital stock each fiscal year. The loan agreement also contains restrictive financial covenants primarily related to indebtedness, leverage ratio, fixed charge coverage ratio, capital expenditures, EBITDA (adjusted for certain non-recurring transactions) and net worth. At June 30, 2002, the Company was in compliance with these financial covenants, as well as, all non-financial covenants contained in the loan agreement.
 
7.
 
Lydall’s reportable segments are: Thermal/Acoustical and Filtration/Separation. All other products are aggregated in Other Products and Services. Reconciling Items include Corporate Office operating expenses and intercompany eliminations. For a full description of each segment, refer to the “Notes to Consolidated Financial Statements” reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The table below presents net sales and operating income (loss) by segment for the quarter and six months ended June 30, 2002 and 2001:
 
In thousands
Quarter Ended
   
Thermal/ Acoustical
   
Filtration/ Separation
     
Other Products and Services
     
Reconciling Items
     
Consolidated Totals
June 30, 2002
                                   
Net sales
   
$39,023
   
$19,584
     
 
$8,112
 
   
(
$   460
)
   
$66,259
Operating income
   
$  6,816
   
$  2,847
     
 
$   738
 
   
(
$4,228
)
   
$  6,173
    
  
    
  
  
June 30, 2001
                                   
Net sales
   
$33,349
   
$17,640
     
 
$8,483
 
   
(
$   532
)
   
$58,940
Operating income (loss)
   
$  5,968
   
$  1,444
     
(
$1,575
)
   
(
$3,254
)
   
$  2,583
    
  
    
  
  
 
In thousands
Six Months Ended
   
Thermal/ Acoustical
   
Filtration/ Separation
   
Other Products and Services
     
Reconciling Items
     
Consolidated Totals
June 30, 2002
                                 
Net sales
   
$73,716
   
$36,591
   
 
$16,535
 
   
(
$   898
)
   
$125,944
Operating income
   
$12,002
   
$  5,638
   
 
$  1,424
 
   
(
$7,965
)
   
$  11,099
    
  
  
  
  
June 30, 2001
                                 
Net sales
   
$65,450
   
$35,206
   
 
$17,799
 
   
(
$1,250
)
   
$117,205
Operating income (loss)
   
$10,586
   
$  3,228
   
(
$  1,658
)
   
(
$7,249
)
   
$    4,907
    
  
  
  
  

9

Table of Contents
 
The operating losses for Other Products and Services for the quarter and six months ended June 30, 2001 include pre-tax impairment and restructuring charges of $2.6 million and $3.4 million, respectively, related to the closing of the fiberboard operation.
 
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Results of Operations
 
Net Sales
 
Lydall, Inc. recorded net sales of $66.3 million in the second quarter of 2002 compared with $58.9 million for the same quarter of 2001, an increase of $7.3 million or 12.4 percent. This increase was the result of increased sales in the automotive business driven by the start-up of new platforms, primarily at the Company’s operation in Germany, improvement in thermal/acoustical building materials sales, increased air filtration sales in Europe and the addition of the Ossipee operation. These increases were partially offset by a decrease in specialty products sales.
 
For the six months ended June 30, 2002, net sales were $125.9 million, an increase of $8.7 million, or 7.5 percent, from $117.2 million for the comparable period of the prior year. This increase was primarily attributable to the overall strong performance of the automotive business, increased air filtration sales in Europe and the incremental net sales added by the Ossipee operation. These increases were partially offset by the reduction in net sales related to the fiberboard operation that was sold at the beginning of the second quarter of 2001.
 
Gross Margin
 
Gross margin for the second quarter of 2002 was 28.2 percent compared to 28.5 percent for the same quarter of 2001 and 27.9 percent and 28.5 percent for the six months ended June 30, 2002 and 2001, respectively. Increased sales volume for the Company’s automotive thermal/acoustical products and building materials products, as well as improved margins in the vital fluids business, positively impacted gross margin for the quarter and six months ended June 30, 2002. However, start-up activities at the Lydall Newport News Distribution Center and sales mix changes in the Thermal/Acoustical Segment for the quarter and year-to-date periods offset these improvements.
 
Selling, Product Development and Administrative Expenses
 
For the quarter and six months ended June 30, 2002, selling, product development and administrative expenses were $12.5 million and $24.0 million compared with $11.6 million and $25.1 million for the same periods of 2001, respectively. Selling, product development and administrative expenses were 18.9 percent of net sales for the quarter ended June 30, 2002, compared to 19.7 percent in the second quarter of 2001; and 19.1 percent of net sales for the first six months of 2002, compared to 21.4 percent for the first six months of 2001. The increased expense in the second quarter of 2002, as compared to the second quarter of 2001, was primarily related to increased bonuses accrued for in accordance with the Company’s Economic Value Added (EVA) program, which resulted from the Company’s improved performance. The decrease in costs for the six months ended June 30, 2002, as compared to the first six months of 2001, was primarily attributable to management’s continued focus on controlling and reducing discretionary administrative expenses, targeted reductions in headcount and minimized usage of external consulting, which more than offset the increased EVA bonus expense. In addition, the quarter and six months ended June 30, 2001 amounts include approximately $.3 million and $.6 million, respectively, of goodwill amortization expense. In accordance with FAS 142, goodwill is no longer amortized.
 
Impairment and Restructuring Charges
 
There were no impairment or restructuring charges recorded during the quarter or six months ended June 30, 2002.

10

Table of Contents
 
In the quarter ended June 30, 2001, the Company recorded a pre-tax charge of $2.6 million, or $.10 per share after-tax, for closing costs, severance benefits and additional impairment on assets held for sale related to its fiberboard operation. In April 2001, the Company sold certain assets of this operation for approximately $1.9 million and announced that the operation would be closed. Additionally, during the quarter ended March 31, 2001, the Company recorded a pre-tax impairment charge of $.8 million, or $.03 per share after-tax, related to assets held for sale of the fiberboard operation.
 
Other Income/Expense
 
For the quarter ended June 30, 2002, other expense of $.1 million was primarily comprised of interest expense of $.2 million, offset by foreign exchange transaction gains of $.1 million. For the quarter ended June 30, 2001, other expense of $.3 million was primarily interest expense.
 
For the six months ended June 30, 2002, other expense of $.3 million consisted of interest expense of $.4 million, offset by $.1 million of foreign currency transaction gains. For the six months ended June 30, 2001 other expense of $.7 million consisted of interest expense of $.6 million and foreign currency transaction losses of $.2 million, offset by $.1 million of investment income.
 
Segment Results
 
Thermal/Acoustical
 
Thermal/Acoustical net sales increased $5.7 million, or 17.0 percent and $8.3 million, or 12.6 percent for the quarter and six months ended June 30, 2002, respectively, compared to the same periods of 2001. The increases were primarily attributable to strong automotive performance associated with new platforms and products, notably the BMW 7-Series, underbody shields for DaimlerChrysler and the continued adoption of ZeroClearance® products, improvement in building materials sales and the addition of net sales from the Ossipee operation.
 
Thermal/Acoustical operating income for the second quarter and first six months of 2002 increased $.8 million, or 14.2 percent and $1.4 million, or 13.4 percent, respectively, over the same periods of 2001. Operating margin for the quarter and six months ended June 30, 2002 was 17.5 percent and 16.3 percent, respectively, compared to 17.9 percent and 16.2 percent for the quarter and six months ended June 30, 2001. The overall increase in operating income primarily relates to increased gross margin from the automotive and building materials businesses and the Ossipee operation.
 
Filtration/Separation
 
Filtration/Separation net sales for the second quarter of 2002 increased $1.9 million, or 11.0 percent over the same period of 2001. Net sales for the first six months of 2002, increased $1.4 million, or 3.9 percent compared to the first six months of 2001. The majority of the increase in second quarter and six month net sales was the result of solid sales performance in the air filtration business in Europe and liquid filtration market share gains. These gains were partially offset by domestic air filtration sales, which recovered during the second quarter, but are still lower year-to-date when compared to the first six months of 2001.
 
Filtration/Separation operating income increased $1.4 million, or 97.2 percent for the second quarter of 2002 and $2.4 million, or 74.7 percent for the six months ended June 30, 2002, compared to the same periods of 2001. Operating margin also showed solid improvement during the quarter and six months ended  June 30, 2002, increasing to 14.5 percent and 15.4 percent, respectively; from 8.2 percent and 9.2 percent for the comparable periods of 2001. These increases were primarily related to improved margins in the vital fluids business where inventory write-offs and manufacturing cost overruns in 2001 negatively impacted operating performance. Additionally, increased manufacturing efficiencies and administrative cost reductions across all operations within the segment continued to create solid benefits in selling, product development and administrative costs.

11

Table of Contents
 
Other Products and Services
 
Other Products and Services net sales decreased $.4 million, or 4.4 percent and $1.3 million, or 7.1 percent for the quarter and six months ended June 30, 2002, respectively, compared to the same periods of 2001. The decrease in second quarter net sales primarily relates to lower specialty products and battery separator sales when compared to the second quarter of 2001. The now closed fiberboard operation contributed $1.2 million of net sales during the six months ended June 30, 2001, accounting for the majority of the decrease year-to-date.
 
Other Products and Services operating income decreased $.3 million, or 30.0 percent for the quarter ended June 30, 2002 and $.3 million, or 17.7 percent for the six months ended June 30, 2002 compared to the same periods of 2001, after adjusting for the pre-tax impairment and restructuring charges of $2.6 million and $3.4 million, respectively, related to the closing of the fiberboard operation. The decrease for the quarter ended June 30, 2002 was primarily due to start-up activities at the Lydall Newport News Distribution Center and declines in specialty product sales. For the six months ended June 30, 2002, the decrease in operating income primarily related to Lydall Newport News Distribution Center start-up costs.
 
Outlook
 
We believe Lydall’s thermal/acoustical and filtration/separation businesses are healthy and are expected to grow, primarily through the introduction of new products and the penetration of new markets. Lydall has continued to garner new automotive thermal/acoustical business in 2002 and continues to work to identify new opportunities in this market. Demand for the Company’s bioprocessing products is expected to increase. Lydall continues to leverage its market position in the air and liquid filtration markets by expanding the Company’s technology base and range of products.
 
Liquidity and Capital Resources
 
Cash and cash equivalents were approximately $1.0 million at June 30, 2002 and December 31, 2001. Working capital at June 30, 2002 was $43.3 million compared with $36.8 million at December 31, 2001. The increase in working capital was primarily due to higher receivables and inventory related to the strong financial and operational performance of the Thermal/Acoustical Segment.
 
Capital expenditures were $6.2 million for the first six months of 2002 compared with $4.2 million for the same period of 2001 as the Company continues to invest in its core operations in line with expected demand for the Company’s products.
 
Lydall, Inc. and certain subsidiaries amended and restated its $50 million domestic revolving credit facility with a group of five banking institutions on May 13, 2002. This facility, which has a maturity date of September 30, 2005, was renewed under similar terms and conditions to those in place under the prior agreement. Under the new arrangement, the Company may borrow up to $50 million, or the equivalent in certain other foreign currencies. Amounts borrowed under this agreement are required to be paid in full by September 30, 2005, unless the agreement is extended through amendment or renegotiation. The rate of interest charged on outstanding loans may, at the Company’s option and subject to certain restrictions, be based on the prime rate or at rates from 100 to 175 basis points over a Eurocurrency loan rate. The basis point spread over the Eurocurrency rate is based on the Company’s leverage ratio. Under the arrangement, the ongoing commitment fee varies from 25.0 to 37.5 basis points of the maximum amount that can be borrowed, net of any outstanding borrowings and net of amounts beneficiaries may draw under outstanding letters of credit. The loan agreement contains restrictions that limit the amount of dividends (whether in cash, securities or other property, unless payable solely in additional shares of the Company’s capital stock) that can be paid to external shareholders of its capital stock each fiscal year. The loan agreement also contains restrictive financial covenants primarily related to indebtedness, leverage ratio, fixed charge coverage ratio, capital expenditures, EBITDA (adjusted for certain non-recurring transactions) and net worth. At June 30, 2002, the Company was in compliance with these financial covenants, as well as, all non-financial covenants contained in the loan agreement.

12

Table of Contents
 
The funded status of the Company’s defined benefit pension plans is dependent upon many factors, including returns on invested assets. Recent declines in the value of equity securities have negatively impacted the value of the plans’ assets, as a result, the Company may be required to make contributions to the plans in excess of current funding levels.
 
As of June 30, 2002, the Company had unused borrowing capacity of approximately $37.8 million under various credit facilities. Management believes that the Company’s cash and cash equivalents, operating cash flow and unused borrowing capacity at June 30, 2002 are sufficient to meet current and anticipated requirements for the foreseeable future.
 
Critical Accounting Policies
 
The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 of the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 describes the significant accounting policies used, as well as the more significant estimates included, in the preparation of the consolidated financial statements. Actual results could differ from those estimates, assumptions and judgments.
 
Accounting Standards
 
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144). FAS 144 establishes the reporting and accounting for the impairment or disposal of long-lived assets. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
    
 
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (FAS 146). This statement provides guidance on significant issues associated with the recognition, measurement and reporting of costs associated with exit and disposal activities and is effective for the Company on January 1, 2003. The Company is currently reviewing and assessing the provisions of FAS 146 to determine the statement’s impact upon adoption, if any.
 
Forward-Looking Information
 
In the interest of more meaningful disclosure, Lydall and its management make statements regarding the future outlook of the Company, which constitute “forward-looking statements” under the securities laws. These forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the company, based on assumptions and estimates currently believed to be valid. Forward-looking statements are included under the “Outlook” section of this Item and elsewhere within this report and are generally identified through the use of language such as “believe,” “expect,” “estimate,” “anticipate” and other words of similar meaning in connection with discussion of future operating or financial performance.
 
All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Some of the factors that might cause such a difference include risks and uncertainties which are detailed in Note 14 and in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
 
Item 3.     Quantitative and Qualitative Disclosures about Market Risk
 
There have been no significant changes in market risks from those disclosed in Item 7A of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
 

13

Table of Contents
 
PART II.    OTHER INFORMATION
 
Item 1.     Legal Proceedings
 
During the second quarter of 2002, the Company signed a settlement agreement regarding the environmental claims against it relating to the Rogers Fibre Mill site, a matter previously disclosed in Note 12 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The Company and subsequent owners/operators of the site paid a total of $300 thousand, which is currently held in escrow pending final approval of the settlement. The Company’s share of the settlement was $150 thousand, an amount previously accrued. The settlement did not have any impact on the results of operations for the quarter or six months ended June 30, 2002.
 
During the second quarter of 2002, the Company entered into a consent order with the Connecticut Department of Environmental Protection relating to a matter previously disclosed in Item 1 of “Other Information” in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2001. The Company paid $120 thousand in connection with this consent order. This amount had previously been accrued and therefore the settlement did not have any impact on the results of operations for the quarter or six months ended June 30, 2002
 
Item 4.     Submission of Matters to a Vote of Security Holders
 
The Company’s Annual Meeting of Stockholders was held on May 8, 2002. Stockholders voted on two proposals presented to them for consideration. The proposed matters and results of the voting are as follows:
 
1.)  Election of Nominees to the Board of Directors
 
Stockholders elected ten Directors to serve for one-year terms, until the next Annual Meeting to be held  in 2003. The results of the voting were as follows:
 
    
For
   
Withheld
Lee A. Asseo
   
12,694,145
   
1,399,452
Samuel P. Cooley
   
12,701,301
   
1,392,287
W. Leslie Duffy
   
12,661,692
   
1,431,905
David Freeman
   
12,703,066
   
1,390,531
Suzanne Hammett
   
12,674,782
   
1,418,815
Robert E. McGill, III
   
12,701,572
   
1,392,025
Christopher R. Skomorowski
   
11,302,530
   
2,791,067
Elliott F. Whitely
   
12,681,799
   
1,411,798
Roger M. Widmann
   
12,693,228
   
1,400,369
Albert E. Wolf
   
10,353,423
   
3,740,174
 
2.)  Lydall 2002 Stock Incentive Compensation Plan
 
Stockholders did not approve the Lydall 2002 Stock Incentive Compensation Plan as proposed. The results of the voting were as follows:
 
For
   
5,477,516
Against
   
6,728,743
Abstained
   
58,551

14

Table of Contents
 
Item 6.     Exhibits and Reports on Form 8-K
 
a.    Exhibits
 
 
3.1
 
Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001, incorporated herein by reference).
 
 
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, incorporated herein by reference).
 
 
10.28
 
Credit Agreement dated as of July 14, 1999 and amended and restated as of May 13, 2002, filed herewith.
 
 
99.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
99.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
b.    Reports on Form 8-K
 
The Company did not file any reports on Form 8-K during the quarter or six months ended June 30, 2002.

15

Table of Contents
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
August 13, 2002
LYDALL, INC.
    (Registrant)
By:
  
/s/    THOMAS P. SMITH        
   
Thomas P. Smith
Vice President - Controller
(On behalf of the Registrant and
as Principal Accounting Officer)

16

Table of Contents
 
LYDALL, INC.
 
Index to Exhibits
 
Exhibit Number
     
3.1
   
Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001, incorporated herein by reference).
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, incorporated herein by reference).
10.28
   
Credit Agreement dated as of July 14, 1999 and amended and restated as of May 13, 2002, filed herewith.
99.1
   
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
99.2
   
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.