UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the Fiscal Year Ended December 31, 2001
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 Organization) (I.R.S. Employer Identification No.)
One Colonial Road, Manchester, Connecticut 06040
(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
----------------
Common Stock, $.10 par
value New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate 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 11, 2002, the aggregate market value of the Registrant's voting stock
held by nonaffiliates was $207,863,310.
On March 11, 2002, there were 15,986,181 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 8, 2002.
The exhibit index is located on pages 16-19.
INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2001
Page
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PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 4
Item 3. Legal Proceedings.................................................................... 4
Item 4. Submission of Matters to a Vote of Security Holders.................................. 4
Item 4a. Executive Officers of the Registrant................................................. 5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 6
Item 6. Selected Financial Data.............................................................. 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 7a. Quantitative and Qualitative Disclosure about Market Risk............................ 13
Item 8. Financial Statements and Supplementary Data.......................................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 14
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 15
Item 11. Executive Compensation............................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 15
Item 13. Certain Relationships and Related Transactions....................................... 15
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 included under the captions "Election of Directors," "Common Stock
Ownership of Management," "Directors' Compensation," and "Executive
Compensation," in the Company's definitive Proxy Statement to be distributed in
connection with the 2002 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 16
Signatures...................................................... 20
PART I
Item 1. BUSINESS
Lydall, Inc. and its subsidiaries are hereafter collectively referred to as
"Lydall," the "Company," or the "Registrant." Lydall is a manufacturer of
engineered products for demanding specialty applications.
The Company develops and manufactures engineered specialty papers, automotive
heat shields, thermal and acoustical barriers, and certain medical filtration
and bioprocessing components, and designs and manufactures high-precision
specialty temperature-control units for industrial processes. The majority of
the Company's products are sold to original equipment manufacturers and
tier-one suppliers.
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
by common carrier or the Company's distribution operation. Within each market
niche there are typically several competitors. The Company competes through
high-quality, specialty engineered products and superior 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 share of the markets served.
The Company has defined its core businesses as Thermal/Acoustical and
Filtration/Separation and stated its long-term strategy to concentrate
primarily on these businesses. In accordance with this strategic focus, Lydall
completed its restructuring program in 2001 with the discontinuation of its
Paperboard Segment, including divestment of the materials-handling business and
the closing of its Connecticut boxboard plant. In addition, Lydall sold certain
assets of the fiberboard business and subsequently closed its Tennessee plant.
Segments
Lydall's two reportable segments are Thermal/Acoustical and
Filtration/Separation. All other businesses are aggregated in Other Products
and Services.
Thermal/Acoustical
Lydall's thermal and acoustical barriers, heat shields, temperature-control
units, and insulating products protect, control, and insulate within
temperature environments ranging from -459(degrees)F (-237(degrees)C) to
+3000(degrees)F (+1649(degrees)C).
LyTherm(R) and ManninGlas(R) products are employed as linings for ovens, kilns
and furnaces, in glass and metal manufacturing, and in consumer appliances, as
well as heating, ventilation, and air-conditioning systems.
Lydall's automotive heat shields and thermal and acoustical barriers, including
AMS(TM), dBLyte(R), ZeroClearance(R), and Lytherm(R) products, are comprised of
organic and inorganic fiber composites, fiber-and-metal combinations, and
all-metal components that are used in cars, trucks, sport-utility vehicles, and
vans. The Company holds patents on many of these products, which are employed
both inside and outside of vehicle passenger and engine compartments and around
such components as exhaust systems, fuel tanks, heat and air-conditioning
ducts, batteries, and electronic components.
At the very coldest temperatures (approaching absolute zero), CryoTherm(R)
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.
In October 2001, Lydall acquired substantially all the assets of Affinity
Industries Inc. ("Affinity"). Located in Ossipee, New Hampshire, the operation
designs and manufactures high-precision, specialty engineered
temperature-control equipment for demanding semiconductor, pharmaceutical,
medical, laser and industrial applications. The active thermal control systems
of Affinity complement Lydall's existing passive thermal solutions and
significantly broaden the Company's market presence.
Thermal/Acoustical Segment sales, before elimination of intersegment sales,
represented 56 percent of the Company's net sales in 2001, 61 percent in 2000
and 62 percent in 1999.
Filtration/Separation
The Filtration/Separation Segment includes industrial and consumer air- and
liquid-filtration products, vital fluids management systems for medical and
biopharmaceutical applications, separation media, and energy-related materials.
LydAir(R) high-efficiency air-filtration media range in filtering efficiencies
from 45 percent ASHRAE through all HEPA grades to the highest ULPA, and filter
particles as small as 0.1-micron. Uses for these products include industrial
and commercial heating, ventilating and air-conditioning systems, clean-room
applications, and consumer air-purifying units.
Lydall also produces liquid-filtration media, sold under the LyPore(R) and
ActiPure(R) trademarks, used for industrial and residential water purification,
in high-efficiency hydraulic oil and lubrication filters for off-road vehicles,
trucks, and heavy equipment, and in food and beverage processing.
Energy related products include LyFlex(R) flexible, microporous, carbon
nonwoven media used as a gas diffusion layer component in PEM (proton exchange
membrane) fuel cell stacks.
The Company's vital fluids management systems are sold by its wholly owned
subsidiary, Charter Medical, Ltd. ("Charter Medical"). Charter Medical designs
and manufactures specialty blood and cell therapy products and Bio-Pak(TM)
sterile containers for use in biopharmaceutical processing. In addition, its
medical filter components are employed in blood filtration devices such as
cardiotomy reservoirs and autotransfusion filters.
Sales from the Filtration/Separation Segment, before elimination of
intersegment sales, represented 30 percent of the Company's net sales in 2001
compared with 26 percent in 2000 and 21 percent in 1999.
Other Products and Services
The largest component of Other Products and Services is Lydall's transport and
distribution business. That business specializes in time-sensitive shipments
and has an in-depth understanding of the special nature and requirements of the
paper and printing industries. Other Products and Services also include
electrical insulation, assorted specialty products, and battery separator
materials sold in Europe.
Other Products and Services sales, before elimination of intersegment sales,
were 15 percent of the Company's net sales in 2001 compared with 15 percent in
2000 and 18 percent in 1999.
Paperboard
In February 2001, the Company discontinued this Segment, which consisted
primarily of the Southern Products and Lydall & Foulds Divisions. On February
1, 2001, Lydall announced that the Lydall & Foulds Division would cease
operations, and on February 5, 2001, the Southern Products Division was
sold.
The results of the Paperboard Segment have been excluded from continuing
operations for all years presented. See Note 4 in "Notes to Consolidated
Financial Statements."
General Business Information
Lydall holds a number of patents, trademarks, and licenses. While no single
patent, trademark or license is critical to the success of Lydall, together
these intangible assets are of considerable value to the Company.
2
The Company's business is generally not seasonal. Lydall maintains levels of
inventory and grants credit terms that are normal within the industries it
serves. The Company uses a wide range of raw materials in the manufacturing of
its products. 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 47 percent of Lydall's net sales in
2001 compared with 51 percent and 53 percent in 2000 and 1999, respectively.
Lydall primarily sells to original equipment manufacturers and tier-one
suppliers. Its products are used in a variety of models and applications. Sales
to Ford Motor Co. and DaimlerChrysler AG were $34.3 million and $22.7 million,
or 15 percent and 10 percent of Lydall's net sales in 2001, respectively. No
other single customer accounted for more than 10 percent of the Company's net
sales in 2001.
Lydall invested $6.9 million in 2001, $8.3 million in 2000, and $7.6 million in
1999, to develop new products 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 $21.1 million at December 31, 2001, $26.3 million at
December 31, 2000, and $48.5 million at December 31, 1999. Backlog at February
28, 2002 was $22.8 million. The decrease in backlog from December 31, 2000 to
December 31, 2001 is primarily the result of a change in the methodology used
to calculate backlog. The sale of two of Gerhardi's operations in the third
quarter of 2000 caused the majority of the fluctuation in backlog from 1999 to
2000. There are minimal seasonal aspects to Lydall's 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 substantially 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
12 in "Notes to Consolidated Financial Statements."
As of December 31, 2001, Lydall employed 1,193 people. Domestically, five
unions under contracts expiring at various points through March 2005
represented approximately 65 of the Company's employees. Lydall considers its
employee relationships to be satisfactory and did not have any actual or
threatened work stoppages due to union-related activities in 2001. All
employees at the Company's facility in France are covered under a National
Collective Bargaining Agreement. Certain salaried and all hourly employees at
the German operation are also covered under a National Collective Bargaining
Agreement.
Foreign and export sales were 30 percent of the Company's net sales in 2001, 37
percent in 2000 and 42 percent in 1999. Export sales are concentrated primarily
in Europe, Asia, Mexico, and Canada and were $25.6 million, $27.7 million, and
$25.4 million in 2001, 2000, and 1999, respectively. Foreign sales were $40.7
million, $67.8 million, and $89.1 million for the years ended December 31,
2001, 2000, and 1999, respectively. Foreign operations generated after-tax
income (losses) of $1.8 million, ($19.8 million) (including the loss from
disposition of two unprofitable German operations of $19.3 million), and ($1.2
million) for the years ended December 31, 2001, 2000 and 1999, respectively.
Total foreign assets were $32.3 million at December 31, 2001 compared with
$36.2 million at December 31, 2000 and $65.0 million at December 31, 1999.
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 foreign currency exchange
transaction risk by completing transactions in their functional currencies
whenever possible or through the use of foreign currency forward exchange
contracts when deemed appropriate.
3
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 Manufacturing 35.0 122,000
5 Columbus, Ohio Thermal/Acoustical Products Fabricating 9.0 80,000
6 St. Johnsbury, Vermont Thermal/Acoustical Products Fabricating 17.0 86,000
7 Meinerzhagen, Germany Thermal/Acoustical Products Fabricating 3.8 86,000
8 Lakewood, New Jersey Biomedical Products Fabricating 3.5 20,000
9 Winston-Salem, North Carolina Biomedical Products Fabricating and Manufacturing 2.6 71,000
10 Covington, Tennessee Idle Facility 26.0 155,000
11 Manchester, Connecticut Idle Facility 11.6 70,000
12 Manchester, Connecticut Idle Facility 9.1 120,000
13 Manchester, Connecticut Corporate Office 4.5 20,000
14 Ossipee, New Hampshire Thermal Control Unit Fabricating 15.0 68,000
15 Newport News, Virginia Warehouse and Office Facility 7.2 100,000
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Properties numbered 5, 6, 8, 9 and 15 are leased; all others are owned. For
information regarding lease obligations, see Note 12 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, except
for numbers 11 and 12, which were used by the Lydall & Foulds Division of the
discontinued Paperboard Segment and number 10, which was used by the now closed
Covington operation. In addition to the properties listed above, the Company
has several additional leases for sales offices and warehouses in the United
States, Europe, Japan and Singapore.
Item 3. LEGAL PROCEEDINGS
No significant legal proceedings were settled in the fourth quarter of 2001.
See Note 12 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 2001.
4
Item 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Lydall, Inc., together with the offices presently
held by them, their business experience since January 1, 1997, and their ages
as of March 11, 2002, the record date of the Company's 2002 Annual Meeting, are
as follows:
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Name Age Title Other Business Experience Since 1997
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Christopher R. Skomorowski 48 President and Chief Executive Officer Division President of Lydall Westex
(since 1998), Director (1998-Present)
Walter A. Ruschmeyer 51 Executive Vice President - Finance and Interim Vice President of Finance and
Administration, and Chief Financial Treasurer, Lydall, Inc., Partner in
Officer (since March 2000) Bushavior, Controller of Carrier
Corporation
Raymond S. Grupinski, Jr. 40 Group President - Lydall Thermal/ Division President of Lydall Westex,
Acoustical (since August 2000) Director of Operations of Lydall Westex,
General Manager of Lydall Westex
Columbus Operation
Kevin G. Lynch 49 Group President - Lydall Filtration/ Division President of Lydall Manning,
Separation Group (since August 2000) Vice President of Sales and Marketing
of Lydall Technical Papers
Thomas P. Smith 44 Vice President - Controller (since May Assistant Controller of Carrier
2000) Corporation
Carole F. Butenas 59 Vice President - Investor Relations N/A
(since 1991)
Mary A. Tremblay 41 General Counsel and Secretary (since N/A
1991)
5
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 6,131,300 and 7,514,500 were traded during 2001 and
2000, 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 11, 2002, the record date of the Company's
2002 Annual Meeting, 1,597 stockholders of record held 15,986,181 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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2001
First Quarter $11.49 $ 8.69 $10.40
Second Quarter 14.80 9.45 12.00
Third Quarter 13.50 6.06 6.60
Fourth Quarter 10.34 6.05 10.00
2000
First Quarter $ 8.94 $ 6.31 $ 8.75
Second Quarter 11.25 7.81 10.63
Third Quarter 13.00 10.31 11.44
Fourth Quarter 12.06 8.06 8.69
During 2001, the Company did not pay a cash dividend on its Common Stock and
does not anticipate doing so in the foreseeable future. Cash will be reinvested
in core businesses.
6
Item 6. SELECTED FINANCIAL DATA
Five-Year Statistical Review
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In thousands except per-share amounts 2001 2000 1999 1998 1997
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Financial results from continuing operations
Net sales $223,559 $261,118 $274,984 $183,236 $193,520
Income (loss) from continuing operations 7,521 (3,616) 11,089 7,233 18,841
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Common stock per-share data
Diluted income (loss) from continuing operations $.47 ($.23) $.70 $.45 $1.09
Diluted net income (loss) .46 (.15) .68 .26 1.27
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Financial position
Total assets $187,171 $194,964 $220,236 $226,848 $160,124
Working capital (deficit) 36,759 54,550 64,630 (9,090) 39,203
Long-term debt, net of current maturities 18,210 24,927 38,334 -- 2,100
Total stockholders' equity 119,035 111,753 115,236 109,225 113,030
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Property, plant, and equipment
Net property, plant, and equipment $ 77,789 $ 74,420 $ 80,556 $107,836 $ 68,860
Capital expenditures 11,948 19,767 16,773 17,657 17,104
Depreciation 9,874 9,925 11,946 8,844 7,993
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Performance and other ratios
Gross margin 28.32% 26.29% 24.87% 31.55% 34.87%
Operating margin 5.50% 7.27% 6.45% 6.15% 14.37%
Current ratio 2.06 2.32 2.28 .91 2.39
Debt to total capitalization 18.9% 22.3% 28.2% 33.4% 4.3%
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The results of operations of the discontinued Paperboard and Wovens Segments
have been excluded from the Selected Financial Data Table for all applicable
periods. The Paperboard and Wovens Segments' balance sheet items have been
excluded from calculations of the "Performance and other ratios" section for
all periods presented, except for the current ratio for years 1997-2001.
7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Net sales
For the year ended December 31, 2001, Lydall recorded net sales of $223.6
million compared to $261.1 million for the year ended December 31, 2000, a
decrease of $37.6 million, or 14.4 percent. The decrease in net sales was
primarily the result of the divestment of two German operations at the end of
the third quarter of 2000. Those operations contributed $34.3 million in sales
for 2000. After adjusting net sales for this divestment, as well as the
divestments of a gasket business during the first quarter of 2000 and a
fiberboard operation at the end of the first quarter of 2001, and the
acquisition of Affinity in the fourth quarter of 2001, net sales for 2001 and
2000 were $220.3 million and $220.2 million, respectively. As adjusted, net
sales for the Thermal/Acoustical Segment for 2001 improved over 2000 primarily
due to increased automotive sales. This increase was offset by a decline in net
sales from the Filtration/Separation Segment and Other Products and Services
due to lower demand for air-filtration products and the slowing economy, which
reduced sales of the Company's industrial substrate products.
In 2000, the Company generated $261.1 million in net sales compared with $275.0
million for the year ended December 31, 1999. The divestments of a gasket
business and two German operations during the year eliminated sales of $10.1
million and $18.1 million, respectively. In addition, the unfavorable impact of
foreign currency translation reduced sales by $12.3 million in 2000. Growth
within the Company's core businesses of $26.6 million partially offset the
decrease in net sales. Sales of high-efficiency air-filtration media
strengthened, sales to the automotive thermal/acoustical market were bolstered
by new-product launches, and Lydall Transport, Ltd. increased sales.
Gross margin
Lydall recorded gross margin for the year ended December 31, 2001 of 28.3
percent compared with 26.3 percent for the year ended December 31, 2000. The
Company improved its gross margin despite lower sales volumes primarily due to
the sale of the unprofitable German operations at the end of the third quarter
of 2000 and the achievement of operational efficiencies, particularly within
the Thermal/Acoustical Segment.
Gross margin for the year ended December 31, 2000 was 26.3 percent compared
with 24.9 percent for the year ended December 31, 1999. Gross margin in 2000
improved from 1999 due to the sale of two unprofitable German operations at the
end of the third quarter of 2000.
Selling, product development and administrative expenses
Selling, product development and administrative expenses were $47.6 million for
2001 compared with $49.7 million for 2000 due to the disposition of several
operations and the Company's continued focus on controlling these costs. For
the fourth quarter of 2001, selling, product development and administrative
expenses, exclusive of the incremental expenses from the acquisition of
Affinity, totaled $10.9 million, down from both $11.2 million in the third
quarter of 2001 and $11.5 million in the fourth quarter of 2000 .
Selling, product development and administrative expenses were lower by
approximately $1.0 million, or 1.9 percent, in 2000 compared to 1999. As a
percentage of sales, these costs increased slightly to 19.0 percent in 2000
from 18.4 percent in 1999.
Impairment and restructuring charges
During 2001, the Company recorded a pre-tax charge of $3.4 million, or $.13 per
share after-tax, for closing costs, severance benefits, and impairment of
assets held for sale related to the closing of its fiberboard operation. On
April 2, 2001, the Company sold certain assets of this business for
approximately $1.9 million and announced that the operation would be closed.
Assets of $1.5 million are classified as held for sale as of December 31, 2001
and consist principally of the land, building and remaining machinery and
equipment. The disposition of the remaining assets is expected to be completed
during 2002.
8
9
There were no impairment or restructuring charges in 2000 or 1999.
Other income and expense
For the year ended December 31, 2001, Lydall recorded other expense of $1.5
million, consisting primarily of interest expense of $1.0 million. Interest
expense for 2001 was $.2 million less than interest expense for 2000, primarily
due to lower debt levels and interest rates.
For the year ended December 31, 2000, other expense amounted to $25.0 million.
The two major components of this amount were a $29.7 million loss on the
disposition of two German operations and an offsetting gain of $6.1 million on
the sale of the gasket business.
Interest expense was $1.2 million for 2000 compared with $2.6 million in 1999.
The reduction in interest expense resulted from lower outstanding debt levels
and the capitalization of interest associated with plant expansions and capital
additions for new product platforms.
For 1999, other expense amounted to $1.5 million and consisted primarily of
interest expense of $2.6 million, offset by a foreign exchange transaction gain
of $1.4 million resulting from the appreciation of the dollar in relation to
the Euro on a Euro-denominated term loan.
Income taxes
The effective rate for the year ended December 31, 2001, excluding the tax
impact of discontinued operations, was 30.2 percent compared to a benefit of
39.5 percent for 2000. The effective tax rate for 2001 was impacted favorably
by the settlement of a tax audit during the year. For 2002, the Company expects
its effective tax rate to be approximately 35 percent.
The effective tax rate for the year ended December 31, 2000 was a benefit of
39.5 percent compared with a provision of 31.8 percent in 1999. The 2000 tax
rate reflected a tax benefit on the consolidated loss for the year and
additional benefits derived from exempt Foreign Sales Corporation income and
state income tax credits.
SEGMENT RESULTS
Thermal/Acoustical
Net sales for the Thermal/Acoustical Segment for 2001 were $125.7 million
compared with $158.5 million for 2000, a decrease of $32.7 million, or 20.7
percent. Operating income increased by $2.4 million, or 14.0 percent, from
2000. The decrease in net sales was primarily the result of the divestment of
two unprofitable German operations at the end of the third quarter of 2000.
Those operations contributed $34.3 million in sales for 2000. In addition, the
divestments of the fiberboard operation and the gasket business negatively
impacted net sales year over year. Offsetting these declines was the
acquisition of Affinity during the fourth quarter of 2001. Adjusted for
acquisitions and dispositions, net sales were $123.7 million for 2001 compared
with $122.6 million for 2000, an increase of 1 percent.
Sales to the automotive industry accounted for approximately 80 percent of
total Segment net sales in 2001. For the year ended December 31, 2001, Lydall
increased its continuing automotive business by 4 percent through the success
of new products, increased content in key vehicles, and increased sales to the
European market.
Industrial thermal/acoustical products account for approximately 20 percent of
total Segment net sales. Sales of these products are particularly sensitive to
economic conditions. Accordingly, sales and margins declined during 2001
compared with 2000 due to lower demand in the commercial building products
market. In addition, during October 2001, this business completed its
acquisition of Affinity, complementing its existing passive thermal business.
For the period ended December 31, 2001, the new business performed in line with
expectations.
Thermal/Acoustical net sales for the year ended December 31, 2000 were $158.5
million, a decrease of $10.8 million, or 6.4 percent, from 1999. Operating
income for the year ended December 31, 2000 was $16.8 million compared with
$13.1 million in 1999, an increase of $3.7 million, or 28.3 percent.
The disposition of two unprofitable German operations at the end of the third
quarter of 2000, and the unfavorable impact of foreign exchange translation
reduced net sales by $18.1 million and $8.4 million, respectively, for 2000
compared with 1999. Net sales, adjusted for the disposition of the German
operations and the impact of unfavorable fluctuations in foreign currency
exchange rates, increased by approximately $15.7 million, or 13.4 percent, for
the year ended 2000 compared with 1999. The introduction of new automotive
products supported sales growth, while industrial thermal/acoustical product
sales were relatively flat in 2000 due to the rise in interest rates and the
slowdown in the economy.
Filtration/Separation
For 2001, Filtration/Separation Segment net sales declined $1.3 million, or 1.9
percent, to $66.6 million compared with 2000. Operating income declined by
approximately $3.0 million, or 28.9 percent, for 2001 compared with 2000.
Sales of air-filtration products declined 6 percent year over year due
principally to softness in domestic commercial construction and declines in new
clean-room construction in Asia. This decrease was partially offset by stronger
sales of air-filtration products in Europe and increased revenues of higher
growth liquid-filtration products, which are expected to continue to show
growth in 2002. Operating income declined due to lower sales volume.
Sales of vital fluids management systems were flat for the year 2001 compared
with 2000 primarily due to bioprocessing order deferrals in the fourth quarter
of 2001. For the full year, sales of Bio-Pak/TM containers doubled year 2000
levels and are expected to enjoy significant additional growth in 2002.
Operating income suffered primarily due to write-offs of blood management
products during the second quarter of 2001. /
Filtration/Separation Segment net sales were $67.9 million for the year ended
December 31, 2000. This compares with net sales of $59.0 million for 1999, an
increase of $8.9 million, or 15.1 percent. Operating income for the year ended
December 31, 2000 totaled $10.2 million compared with $8.5 million in 1999, an
increase of $1.7 million, or 20.6 percent. This Segment benefited from
increased sales of high-efficiency air-filtration media in Asian and domestic
markets and increased sales volume in the consumer products market. Strong
sales of synthetic filtration media also contributed to the increase.
Biomedical and pharmaceutical processing products achieved record sales for the
year, as additional customers qualified the Company's Bio-Pak(TM) bioprocessing
containers and the Company's blood and cell therapy products continued to gain
market share.
Other Products and Services
Net sales were $33.3 million for 2001, a decrease of $5.5 million, or 14.3
percent, from 2000. Operating income decreased $4.3 million to a loss of $.4
million over the same period. Net sales declined primarily due to the
divestment of the fiberboard operation in the first half of 2001. The decline
in operating income primarily related to the impairment and restructuring
charge of $3.4 million recorded in connection with the divestment of the
fiberboard operation. See Note 5 in "Notes to Consolidated Financial
Statements." In addition, the Company incurred additional costs in the fourth
quarter of 2001 related to start-up activities at its Paper Distribution Center
located in Newport News, Virginia.
Net sales decreased by $11.7 million, or 23.2 percent, in 2000 from 1999.
Operating income was $3.8 million in 2000 compared with $7.3 million in 1999, a
decrease of 47.9 percent. The decreases in net sales and operating income
resulted primarily from the sale of the gasket business in the first quarter of
2000. Excluding the gasket business, net sales and operating income were lower
by $1.6 million and $2.2 million, respectively, in 2000 than in 1999, mainly
due to declining pencil-board sales.
Paperboard
In February 2001, the Company discontinued this Segment, which consisted
primarily of the Southern Products and Lydall & Foulds Divisions. On February
1, 2001, Lydall announced that the Lydall & Foulds Division would cease
operations. On February 5, 2001, the Southern Products Division was sold.
10
The results of the Paperboard Segment have been excluded from continuing
operations for all years presented. See Note 4 in "Notes to Consolidated
Financial Statements."
Liquidity and Capital Resources
The Company ended the year with $1.0 million in cash and cash equivalents
compared with $2.2 million as of December 31, 2000. In addition, as of December
31, 2001, Lydall had $27.7 million outstanding under its various credit
facilities representing a decrease of $4.3 million, or 13.6 percent, from the
prior year.
Operating cash flow (earnings before interest, taxes, depreciation and
amortization, and non-recurring transactions) of $26.6 million and proceeds
from the sale of discontinued operations of $14.3 million funded the Company's
capital investments of $12.0 million, the acquisition of the assets of Affinity
for approximately $20.0 million, and assisted in reducing the overall
outstanding debt.
The Company did not repurchase any of its Common Stock in 2001 or 2000.
Repurchases of Common Stock totaled $.8 million in 1999.
Cash Flow Overview
Cash flow from operating activities in 2001 was $16.1 million compared with
$17.2 million in 2000 and $23.3 million in 1999. The decrease in cash flow was
primarily attributable to changes in working capital items.
Cash used for investing activities was $15.2 million in 2001 compared to $5.4
million in 2000. For 2001, capital expenditures totaled $12.0 million and
acquisition activities used $18.7 million in cash. These expenditures were
partially offset by proceeds from the sale of the Southern Products Division, a
favorable settlement of the net equity adjustment related to the acquisition of
Gerhardi, and proceeds from the sale of certain assets of the fiberboard
operation. For 2000, investing activities consisted primarily of capital
expenditures of $19.8 million, partially offset by proceeds from the divestment
of businesses totaling $13.9 million. Investing activities in 1999 used $17.1
million in cash primarily for capital expenditures.
In 2001, financing activities used $2.1 million compared with $10.5 million in
2000. Lydall used its cash flow from operations and proceeds from divested
operations during 2001 and 2000 to reduce its long-term debt outstanding. For
the years ended December 31, 2001 and 2000, debt was reduced by $3.2 million
and $11.3 million, respectively. In 1999, Lydall used $7.2 million in cash to
reduce debt outstanding by $6.8 million and repurchase $.8 million of its
Common Stock. Proceeds from stock option exercises were approximately $1.0
million in 2001 and 2000 and $.4 million in 1999.
Future Cash Requirements
Cash requirements for 2002 will include the funding of ongoing operations,
capital expenditures, and acquisitions, if completed. The 2002 capital budget
is approximately $14.0 million.
Management expects to finance capital expenditures and working capital needs
from cash provided by operating activities in 2002. Acquisitions, if completed,
would be financed under the credit facility described under "Credit
Arrangements" below, or other forms of financing, as deemed appropriate.
Currently, the Company has no plans to repurchase its Common Stock except to
offset shares granted under Lydall's stock option award program, as deemed
appropriate.
Credit Arrangements
Lydall, Inc. and certain subsidiaries entered into a credit facility on July
14, 1999 with a group of five banking institutions. At December 31, 2001, the
facility was comprised of a $50 million domestic revolving credit facility, of
which $12.0 million was outstanding, and a Euro-denominated term loan with an
outstanding balance of $9.9 million, which is an obligation of Lydall's German
subsidiary. The interest rate on the revolving credit facility is based on
various money-market rates selected by the
11
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 facility. The facility 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 reduces financial ratios below agreed upon levels.
The credit facility is maturing on July 14, 2002. As a result, the Company has
initiated discussions with the bank group regarding the $50 million domestic
revolving credit facility as it is the Company's intention to renew this
facility for another three-year period under terms and conditions similar to
those currently in place. Based on the discussions to date and current market
conditions, Lydall expects to complete the renewal prior to July 14, 2002.
Accordingly, the Company has classified the $12.0 million outstanding under the
$50 million revolving credit facility as a long-term obligation in the
Consolidated Balance Sheet at December 31, 2001.
Certain foreign subsidiaries of the Company maintain additional lines of credit
totaling $9.1 million, of which $5.8 million was outstanding at December 31,
2001. These credit facilities bear interest at rates ranging from 3.6 percent
to 6.8 percent.
Management believes that current credit arrangements provide sufficient
capacity to meet working capital requirements and fund future capital
expenditures, as required.
Capital Structure
At the end of 2001, total indebtedness was $27.7 million, or 18.9 percent, of
Lydall's total capital structure. Cash flows from operating activities, in
conjunction with substantial debt financing sources, are available to complete
strategic acquisitions in Lydall's core business markets. The Company
continually explores its core markets for suitable acquisitions. Given
appropriate acquisition opportunities, the Company would consider increasing
its debt to total capitalization percentage above current levels.
Other Key Financial Items
Cash and cash equivalents. Cash and cash equivalents decreased to $1.0 million
as of December 31, 2001 compared with $2.2 million as of December 31, 2000.
Receivables. Receivables, net of the allowance for doubtful receivables, were
$35.5 million at the end of 2001 compared with $40.0 million at the end of 2000.
Inventories. Inventories were $27.8 million at December 31, 2001, net of a LIFO
reserve of $.5 million, compared with $21.5 million, net of a $.6 million LIFO
reserve at December 31, 2000.
Working capital. Working capital decreased to $36.8 million at December 31,
2001 compared with $54.6 million at December 31, 2000. The ratio of current
assets to current liabilities in 2001 decreased to 2.06 from 2.32 in 2000. The
decrease is primarily related to the sale, during 2001, of the Southern
Products Division of the discontinued Paperboard Segment, the net assets of
which were classified as current assets at December 31, 2000.
Capital asset expenditures. Capital asset expenditures were $12.0 million in
2001, $19.8 million in 2000 and $16.8 million in 1999. The Company's capital
budget for 2002 is approximately $14.0 million, which is expected to be
financed from cash flows from operations.
Debt to total capitalization. Debt to total capitalization decreased to 18.9
percent in 2001 compared with 22.3 percent in 2000 as Lydall reduced its
outstanding debt.
Stockholders' equity. Stockholders' equity increased to $119.0 million at
December 31, 2001 from $111.8 million at December 31, 2000. On a per-share
basis, Stockholders' equity increased to $7.45 at December 31, 2001 from $7.04
at December 31, 2000.
12
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.
Recently issued accounting standards. See Note 1 in "Notes to Consolidated
Financial Statements."
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 where the Company distributes its products. The Company's primary
currency exposure is to the Euro and, to a lesser degree, the Japanese Yen.
Lydall's foreign and domestic operations limit foreign currency exchange
transaction risk by completing transactions primarily in their functional
currencies whenever possible. In addition, Lydall periodically enters into
foreign currency forward exchange contracts to mitigate exposure to foreign
currency volatility. The Company had no material foreign currency forward
exchange contracts during 2001 and 2000. Lydall utilizes bank loans and other
debt instruments throughout its operations. To mitigate foreign currency risk,
such debt is denominated primarily in the functional currency of the operation
maintaining the debt.
Interest Rate Risk
The Company's interest rate exposure is most sensitive to fluctuations in
United States and European interest rates, which primarily impact interest paid
on its debt. At December 31, 2001, the Company had $13.7 million outstanding on
various lines of credit with variable interest rates. The weighted average
interest rate paid on this debt was 4.2 percent in 2001 and 6.5 percent in
2000. A 10 percent change in the weighted average interest rate on the
Company's variable rate debt would be immaterial to the Company's financial
position, results of operations or cash flows.
As of December 31, 2001, the Company also had $9.9 million outstanding on a
five-year term loan with a variable interest rate. In July 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, thereby taking
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 4.0 percent for the year ended December 31, 2001 compared with 4.3 percent
for 2000.
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 intended to provide management's current
expectations for the future operating and financial performance of the Company
based on assumptions believed to be valid at the time. Thus, such expectations
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
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 United States and European Automotive Markets. Although
Lydall's automotive sales are not solely contingent on the strength of the
automotive market, a significant downturn of the United States or European
automotive industries could have a substantial impact on Lydall's results. The
Company can also be affected when automotive manufacturers discontinue
13
production of specific models that contain Lydall's products. On the other
hand, Lydall benefits from the introduction of new models that contain the
Company's products. Approximately 47 percent of Lydall's total sales in 2001
were to the automotive market. Lydall's automotive products are thermal and
acoustical barriers and heat shields employed both inside and under the body of
vehicles. Most of Lydall's products are supplied to meet unique, niche
applications. Lydall may have a number of components on a particular vehicle.
Also, applications range across all types of vehicles from sport-utility models
to trucks and vans to cars. Thus, there is no direct correlation between the
number of Lydall products sold and the number of vehicles being built by
automotive manufacturers. 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. The
Thermal/Acoustical Segment uses aluminum to manufacture most automotive heat
shields. Volatility in aluminum prices could impact Thermal/Acoustical Segment
profitability where the Company is selling its products under long-term
agreements with fixed sales prices.
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.
Lydall 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.
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
None.
14
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of Lydall 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 in connection with its Annual Meeting of
Stockholders to be held on May 8, 2002. Information regarding the executive
officers of the Company is contained on page 5 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 in connection with its Annual Meeting of
Stockholders to be held on May 8, 2002. The Proxy includes the Compensation and
Stock Option Committee Report to Stockholders, found on pages 19 through 21,
and the comparative performance graph located on page 22, therein.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of Common Stock by certain
beneficial owners and by certain senior management of the Company is
incorporated by reference to the definitive Proxy Statement of Lydall to be
filed with the Commission in connection with its Annual Meeting of Stockholders
to be held on May 8, 2002.
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 in connection with its Annual Meeting of
Stockholders to be held on May 8, 2002.
15
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 (Loss) for the years ended December 31, 2001, 2000 and 1999 F-3
Consolidated Balance Sheets at December 31, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the
period ended December 31, 2001 F-7
Notes to Consolidated Financial Statements F-8
a)2, Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts for the years ended December 31, 2001, 2000 and 1999 S-1
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.
16
a)3, Exhibits Included Herein or Incorporated by Reference:
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 and
incorporated herein by this 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, 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* Employment Agreement with Carole F. Butenas dated March 1, 2000 (filed as
Exhibit 10.8 to the Registrant's Annual Report on Form 10-K dated March
30, 2000, and incorporated herein by this reference).
10.3* Employment Agreement with Mary A. Tremblay dated March 1, 2000 (filed as
Exhibit 10.10 to the Registrant's Annual Report on Form 10-K dated March
30, 2000, and incorporated herein by this reference).
10.4* 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).
10.5* 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).
10.6* Amended and restated, 1992 Stock Incentive Compensation Plan, dated May
14, 1992, amended through March 10, 1999 (filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K dated March 21, 2001, and
incorporated herein by this reference).
10.7* Employment Agreement with James P. Carolan dated March 1, 2000 (filed as
Exhibit 10.10 to the Registrant's Annual Report on Form 10-K dated March
21, 2001, and incorporated herein by this reference).
10.8* Employment Agreement with Christopher R. Skomorowski dated March 1, 2000
(filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K
dated March 30, 2000, and incorporated herein by this reference).
10.9* Employment Agreement with Walter A. Ruschmeyer dated March 16, 2000
(filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K
dated March 30, 2000, and incorporated herein by this reference).
10.10* Employment Agreement with Kevin G. Lynch dated March 1, 2000 (filed as
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K dated March
30, 2000, and incorporated herein by this reference).
10.11* Employment Agreement with Raymond S. Grupinski, Jr. dated March 1, 2000
(filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K
dated March 30, 2000, and incorporated herein by this reference).
10.12* Agreement with Thomas P. Smith dated May 1, 2000 (filed as Exhibit 10.17
to the Registrant's Annual Report on Form 10-K dated March 21, 2001, and
incorporated herein by this reference).
10.13 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).
17
10.14 Amendment dated August 10, 2000 to Credit Agreement dated July 14, 1999
between Lydall, Inc. and certain subsidiaries and Chase Manhattan Bank,
as Administrative Agent, and Fleet National Bank, as Documentation Agent
(filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
dated August 14, 2000, and incorporated herein by this reference).
10.15 Spin-off and Transfer Agreement (English translation) between Lydall
Gerhardi GmbH and Co. KG and Gerhardi Kunststofftechnik GmbH dated
September 29, 2000, effective September 30, 2000 (filed as Exhibit 2.1 to
the Registrant's Current Report on Form 8-K filed October 16, 2000, and
incorporated herein by this reference).
10.16 Purchase and Transfer Agreement (English translation) between Lydall
Gerhardi GmbH and Co. KG and the management buyout group as set forth in
the agreement dated September 29, 2000, effective September 30, 2000
(filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K
filed October 16, 2000, and incorporated herein by this reference).
10.17 Asset Purchase and Sale Agreement between Lydall Eastern, Inc. and Ludlow
Building Products. Inc., dated February 5, 2001 (filed as Exhibit 10.27
to the Registrant's Annual Report on Form 10-K dated March 21, 2001, and
incorporated herein by this reference).
10.18* Amendment dated August 1, 2000 to the Employment Agreement with Mary A.
Tremblay dated March 1, 2000 (filed as Exhibit 10.29 to the Registrant's
Annual Report on Form 10-K dated March 21, 2001, and incorporated herein
by this reference).
10.19* Amendment dated August 1, 2000 to the Employment Agreement with
Christopher R. Skomorowski dated March 1, 2000 (filed as Exhibit 10.30
to the Registrant's Annual Report on Form 10-K dated March 21, 2001, and
incorporated herein by this reference).
10.20* Amendment dated August 1, 2000 to the Employment Agreement with Walter
A. Ruschmeyer dated March 16, 2000 (filed as Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K dated March 21, 2001, and
incorporated herein by this reference).
10.21* Amendment dated August 1, 2000 to the Employment Agreement with James P.
Carolan dated March 1, 2000 (filed as Exhibit 10.32 to the Registrant's
Annual Report on Form 10-K dated March 21, 2001, and incorporated herein
by this reference).
10.22* Amendment dated August 1, 2000 to the Employment Agreement with Kevin G.
Lynch dated March 1, 2000 (filed as Exhibit 10.33 to the Registrant's
Annual Report on Form 10-K dated March 21, 2001, and incorporated herein
by this reference).
10.23* Amendment dated August 1, 2000 to the Employment Agreement with Raymond
S. Grupinski, Jr. dated March 1, 2000 (filed as Exhibit 10.34 to the
Registrant's Annual Report on Form 10-K dated March 21, 2001, and
incorporated herein by this reference).
10.24 Asset Purchase and Sale Agreement between Lydall Filtration/Separation,
Inc. and Bennett Fleet (Chambly), Inc., dated April 2, 2001 (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q dated May
11, 2001, and incorporated herein by this reference).
10.25* Agreement and General Release with Raymond J. Lanzi dated March 28,
2001(filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q dated May 11, 2001, and incorporated herein by this reference).
10.26 Asset Purchase Agreement between Lydall Industrial Thermal Solutions,
Inc., Lydall Filtration/Separation Inc. and Affinity Industries, Inc.
dated October 19, 2001 (filed as Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed November 2, 2001, and incorporated herein by
this reference).
10.27 Purchase and Sale Agreement between Lydall Industrial Thermal Solutions,
Inc., and Clear Lake Realty Corporation dated October 19, 2001(filed as
Exhibit 2.2 to the Registrant's Current Report on Form 8-K filed November
2, 2001, and incorporated herein by this reference).
18
21.1 List of subsidiaries of the Registrant, filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP, filed herewith.
24.1 Power of Attorney, dated February 25, 2002, 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.
99.1 Press release dated October 22, 2001 titled "Lydall Announces Acquisition
of Affinity Industries, Inc. a Specialty Manufacturer of Thermal Control
Equipment" (filed as Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed November 2, 2001, and incorporated herein by this
reference).
* Management contract or compensatory plan.
b) Reports on Form 8-K:
On November 2, 2001, a report on Form 8-K (File No. 1-7665) was filed to
disclose the acquisition of certain assets and the assumption of certain
liabilities of Affinity Industries Inc. under Item 5 Other Events and
Regulation FD Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
19
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.
March 15, 2002
BY /S/ THOMAS P. SMITH
-----------------------------
Thomas P. Smith
Vice President-Controller
(On behalf of the
Registrant and as Principal
Accounting 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 March 15, 2002
------------------------------ Executive Officer
Christopher R. Skomorowski (Principal Executive
Officer)
/s/ Walter A. Ruschmeyer Executive Vice President-- March 15, 2002
------------------------------ Finance and Administration
Walter A. Ruschmeyer and Chief Financial Officer
(Principal Financial Officer)
/s/ Walter A. Ruschmeyer March 15, 2002
------------------------------
Walter A. Ruschmeyer
Attorney-in-fact for:
Christopher R. Skomorowski Director
Lee A. Asseo Director
Samuel P. Cooley Director
W. Leslie Duffy Director (constituting in excess of
a majority of the full Board
David Freeman Director of Directors)
Suzanne Hammett Director
Robert E. McGill, III Director
Elliott F. Whitely Director
Roger M. Widmann Director
Albert E. Wolf Director
20
STATEMENT OF MANAGEMENT RESPONSIBILITY
The consolidated financial statements of Lydall, Inc. and its subsidiaries have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The integrity and objectivity of these
statements, including the effect of certain estimates and judgments, is the
responsibility of management.
Lydall's management has established and maintains an internal control structure
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 audit function. Management has concluded that the internal control
structure was effective throughout the year ended December 31, 2001.
Each year, Lydall's Board of Directors appoints independent accountants who
audit the Company's financial statements in accordance with auditing standards
generally accepted in the United States of America. Their audit includes a
review of the internal control structure and tests of selected transactions
with respect to financial reporting.
The Audit Review 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
auditors to review financial reporting, internal accounting controls and
auditing matters. The Committee has direct and private access to both internal
and external auditors.
/s/ Christopher R.
Skomorowski
/s/ Walter A. Ruschmeyer
Christopher R. Skomorowski Walter A. Ruschmeyer
President and Chief Executive Vice
Executive Officer 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 16 present fairly, in all material
respects, the financial position of Lydall, Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 16 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
February 13, 2002
F-2
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
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In thousands except per-share data For the years ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Net sales $223,559 $261,118 $274,984
Cost of sales 160,242 192,472 206,600
-----------------------------------------------------------------------------------------------------------------------
Gross margin 63,317 68,646 68,384
Selling, product development and administrative expenses 47,628 49,663 50,643
Impairment and restructuring charges 3,389 -- --
Operating income 12,300 18,983 17,741
-----------------------------------------------------------------------------------------------------------------------
Other (income) expense:
Investment income (185) (185) (46)
Interest expense 985 1,223 2,612
Loss on sale of operations -- 23,579 --
Foreign currency transaction losses (gains), net 196 331 (961)
Other expense (income), net 528 16 (128)
-----------------------------------------------------------------------------------------------------------------------
1,524 24,964 1,477
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 10,776 (5,981) 16,264
Income tax expense (benefit) 3,255 (2,365) 5,175
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 7,521 (3,616) 11,089
-----------------------------------------------------------------------------------------------------------------------
Discontinued operations:
(Loss) income from operations of the Paperboard and Wovens Segments, net of tax (benefit)
expense of ($181), $660 and $880, respectively (308) 1,124 1,516
Gain (loss) on disposal of the Paperboard and Wovens Segments, including provision for
operating losses during the phase-out period, net of tax expense (benefit) of $121, $44
and ($1,133), respectively 206 71 (1,830)
-----------------------------------------------------------------------------------------------------------------------
(Loss) income from discontinued operations (102) 1,195 (314)
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $7,419 ($2,421) $10,775
-----------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share
Continuing operations $.47 ($.23) $.70
Discontinued operations (.01) .08 (.02)
Net income (loss) $.46 ($.15) $.68
Weighted average common stock outstanding 15,899 15,778 15,715
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share
Continuing operations $.47 ($.23) $.70
Discontinued operations (.01) .08 (.02)
Net income (loss) $.46 ($.15) $.68
Weighted average common stock and equivalents outstanding 16,011 15,778 15,784
-----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------
In thousands except share data December 31, 2001 2000
--------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 955 $ 2,220
Accounts receivable (less allowance for doubtful receivables of $859 and $644) 35,458 39,993
Inventories:
Finished goods 10,306 9,933
Work in process 8,135 5,820
Raw materials and supplies 9,799 6,272
LIFO reserve (483) (555)
--------------------------------------------------------------------------------------------------
Total inventories 27,757 21,470
Income taxes receivable 611 2,705
Prepaid expenses 2,363 1,632
Net investment in discontinued operations (Note 4) 1,165 14,285
Assets held for sale (Note 5) 1,515 6,200
Deferred tax assets 1,770 7,290
--------------------------------------------------------------------------------------------------
Total current assets 71,594 95,795
--------------------------------------------------------------------------------------------------
Property, plant, and equipment, at cost:
Land 1,393 1,295
Buildings and improvements 27,486 23,247
Machinery and equipment 80,762 74,041
Office equipment 22,168 20,370
Vehicles 606 537
Assets in progress 6,561 7,221
--------------------------------------------------------------------------------------------------
138,976 126,711
Less accumulated depreciation (61,187) (52,291)
--------------------------------------------------------------------------------------------------
77,789 74,420
Other noncurrent assets:
Goodwill (net of accumulated amortization of $7,080 and $5,830) 29,832 18,069
Other assets (net of accumulated amortization of $6,562 and $6,237) 7,956 6,680
--------------------------------------------------------------------------------------------------
37,788 24,749
--------------------------------------------------------------------------------------------------
Total assets $187,171 $194,964
--------------------------------------------------------------------------------------------------
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, 2001 2000
---------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 9,473 $ 7,101
Accounts payable 14,497 19,154
Accrued taxes 792 844
Accrued payroll and other compensation 3,144 7,244
Liabilities related to assets held for sale -- 421
Other accrued liabilities 6,929 6,481
---------------------------------------------------------------------------------------------------------------
Total current liabilities 34,835 41,245
---------------------------------------------------------------------------------------------------------------
Long-term debt 18,210 24,927
Deferred tax liabilities 6,818 11,183
Other long-term liabilities 8,273 5,856
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock -- --
Common stock, par value $.10 per share; Authorized 30,000,000 shares; Issued 22,078,694 and
21,962,275 shares 2,208 2,196
Capital in excess of par value 41,439 40,335
Retained earnings 145,083 137,664
Accumulated other comprehensive loss (8,053) (6,800)
---------------------------------------------------------------------------------------------------------------
180,677 173,395
Treasury stock, 6,097,388 shares of common stock, at cost (61,642) (61,642)
---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 119,035 111,753
---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $187,171 $194,964
---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------
In thousands For the years ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 7,419 ($ 2,421) $ 10,775
-----------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 9,874 9,925 11,946
Amortization 1,545 1,554 1,775
(Gain) loss on disposal of Segments (849) (71) 1,830
Loss on sale of operations, net -- 23,579 --
Impairment loss 1,745 -- --
Gain on sale of investments -- (136) --
Gain on receipt of common stock from demutualization of
insurance companies -- (393) --
Loss on disposition of property, plant, and equipment,
net 88 294 303
Foreign currency transaction loss (gain) 196 331 (961)
Stock-based compensation 145 156 121
Changes in operating assets and liabilities, excluding
effects from acquisitions:
Accounts receivable 7,229 (6,306) 100
Income taxes receivable 1,679 2,820 (1,764)
Inventories (3,520) (3,740) (1,527)
Prepaid expenses and other assets (385) (1,654) (1,292)
Accounts payable (4,363) 1,757 (234)
Accrued taxes (316) (321) (348)
Accrued payroll and other accrued liabilities (6,684) (5,193) (469)
Deferred income taxes 1,494 (3,232) 3,954
Other long-term liabilities 802 246 (904)
-----------------------------------------------------------------------------------------------------------------------------
Total adjustments 8,680 19,616 12,530
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,099 17,195 23,305
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions, net (18,661) -- (281)
Additions of property, plant and equipment (11,948) (19,767) (16,773)
Proceeds from sale of Segments 14,322 1,819 --
Proceeds from sale of operations 1,058 12,037 --
Sale of investments, net -- 529 --
-----------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (15,229) (5,382) (17,054)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt payments (43,928) (164,410) (75,444)
Long-term debt proceeds 40,743 153,077 108,840
Proceeds from short-term borrowings -- -- 92,902
Payments of short-term borrowings -- -- (133,087)
Proceeds from stock option exercises 1,116 830 384
Acquisition of common stock -- -- (760)
-----------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (2,069) (10,503) (7,165)
-----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (66) (244) (186)
-----------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (1,265) 1,066 (1,100)
Cash and cash equivalents at beginning of year 2,220 1,154 2,254
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 955 $ 2,220 $ 1,154
-----------------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Cash Flow Information
------------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 888 $ 1,606 $ 2,689
Income taxes 1,184 1,042 5,016
Noncash transactions:
Additional minimum pension liability 2,224 452 1,206
Liabilities assumed with acquisitions 1,340 -- --
Net cash provided by operating activities includes changes in certain assets and liabilities, which have been
reclassified as "Net Investment in Discontinued Operations" and "Assets Held for Sale," in the Consolidated Balance
Sheets.
------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------
Accumulated
Capital in Other Cost of Total
Common Excess of Retained Comprehensive Stock in Stockholders'
In thousands Stock Par Value Earnings Loss Treasury Equity
--------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 $2,171 $38,697 $129,310 ($ 71) ($ 60,882) $109,225
--------------------------------------------------------------------------------------------------------------------
Net income 10,775 10,775
Other comprehensive income:
Foreign currency translation adjustments, net of
income taxes of $2,563 (5,295) (5,295)
Minimum pension liability adjustment, net of
income taxes of $422 784 784
--------
Comprehensive income 6,264
Stock options exercised 7 377 384
Stock issued to Directors 2 119 121
Tax benefit from stock-based compensation 2 2
Purchase of treasury stock (760) (760)
--------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 2,180 39,195 140,085 (4,582) (61,642) 115,236
--------------------------------------------------------------------------------------------------------------------
Net loss (2,421) (2,421)
Other comprehensive loss:
Foreign currency translation adjustments, net of
income taxes of $1,029 (1,933) (1,933)
Minimum pension liability adjustment, net of
income taxes of $167 (285) (285)
--------
Comprehensive loss (4,639)
Stock options exercised 15 815 830
Stock issued to Directors 1 155 156
Tax benefit from stock-based compensation 170 170
--------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 2,196 40,335 137,664 (6,800) (61,642) 111,753
--------------------------------------------------------------------------------------------------------------------
Net income 7,419 7,419
Other comprehensive income:
Foreign currency translation adjustments, net of
income taxes of $83 (155) (155)
Minimum pension liability adjustment, net of
income taxes of $656 (1,116) (1,116)
Change in fair value of derivative instrument,
net of income taxes of $99 (183) (183)
Cumulative effect change in accounting
principle, net of income taxes of $108 201 201
--------
Comprehensive income 6,166
Stock options exercised 10 904 914
Stock issued to Directors 2 143 145
Tax benefit from stock-based compensation 57 57
--------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $2,208 $41,439 $145,083 ($ 8,053) ($ 61,642) $119,035
--------------------------------------------------------------------------------------------------------------------
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 subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of estimates. The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America 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. Some of the more significant estimates
included in the financial statements include the allowance for doubtful
receivables, inventory valuation reserves, net realizable value of assets held
for sale, insurance related reserves and pension rate assumptions.
Cash and cash equivalents. Cash and cash equivalents include cash on hand and
highly liquid investments with original maturities of three months or less at
the date of purchase.
Concentration of risk. Financial instruments that 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 47 percent of the Company's 2001 total sales
compared with 51 percent in 2000 and 53 percent in 1999. Sales to Ford Motor
Co. represented 15 percent, 13 percent, and 13 percent of Lydall's total sales
in 2001, 2000, and 1999, respectively. For 2001, sales to DaimlerChrysler AG
were 10 percent of Lydall's total sales. No other customer accounted for more
than 10 percent of total sales in 2001, 2000, or 1999. As of December 31, 2001,
the Company had no other significant concentrations of risk.
Inventories. Inventories are valued at the lower of cost or market.
Approximately 32 percent in 2001 and 44 percent in 2000 of the inventories were
valued by a last-in, first-out (LIFO) cost method, and the balance, were valued
by a first-in, first-out (FIFO) cost method.
Property, plant, and equipment and depreciation. 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. The cost and accumulated depreciation applicable to
assets sold or otherwise disposed of are removed from the asset and accumulated
depreciation accounts and any net gain or loss is included in the Consolidated
Statements of Income.
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
--------------------------------------
For the year ended December 31, 2001, the Company capitalized $.2 million in
interest expense. The Company capitalized $.4 million and $.1 million of
interest expense in 2000 and 1999, respectively.
Pre-production design and development costs. The Company has contractual
agreements with certain customers to design and develop molds, dies and tools
("tooling") related to long-term supply arrangements. Such costs are deferred
and subsequently recognized, along with the related revenue, upon acceptance of
the tooling by the customer.
F-8
Periodically, the Company may incur costs in excess of the related tooling
revenue. These costs are deferred when the Company has the non-cancelable right
to use the tooling during the supply arrangement; otherwise, these costs are
expensed as incurred. At December 31, 2001 and 2000, $3.8 million and $3.2
million, respectively, of costs have been deferred as assets on the balance
sheet.
Intangibles. Goodwill represents costs in excess of fair values assigned to the
underlying net assets of acquired companies. Goodwill and other intangibles
have been amortized on a straight-line basis over periods not exceeding 25
years. Beginning in fiscal year 2002, in accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," the
Company will no longer amortize goodwill and certain other intangible assets.
Valuation of long-lived assets. The Company periodically evaluates the
recoverability of long-lived assets. Should such evaluations indicate that the
future undiscounted cash flows are not sufficient to recover the carrying value
of the asset, the asset is adjusted to fair value. Fair value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved.
Revenue recognition. Lydall recognizes revenue when the earnings process is
complete and the risks and rewards of ownership have transferred to the
customer, which is generally upon shipment.
Research and development. Costs are charged to expense as incurred. Research
and development investments were $6.9 million in 2001, $8.3 million in 2000,
and $7.6 million in 1999.
Earnings per share. Basic earnings per common share are equal to net income
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share are equal to net income divided by
the weighted average number of common shares outstanding during the period,
including the effect of stock options and stock awards, if such effect is
dilutive.
Income taxes. The provision for income taxes is based upon income reported in
the accompanying financial statements. Deferred income taxes reflect the impact
of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax
purposes.
Translation of foreign currencies. Assets and liabilities of foreign
subsidiaries are translated at exchange rates prevailing on the balance sheet
date. Revenues and expenses are translated at average exchange rates prevailing
during the period except for individually significant transactions, which are
translated at the prevailing rate on the date of the transaction. Any resulting
translation gains or losses are reported in Other Comprehensive Income.
Derivative instruments. On January 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, ("FAS 133"). In accordance with the
transition provisions of FAS 133, the Company recorded a $.2 million,
net-of-tax, cumulative-effect adjustment to Other Comprehensive Income as of
January 1, 2001 representing the fair value of an interest rate swap designated
as a cash flow hedge.
The interest rate swap has been designated as a cash flow hedge that is
utilized to convert the base rate component of the variable interest rate on
the Company's term loan to a fixed rate. In accordance with FAS 133, the swap
is recorded at its fair value as of the balance sheet date. Subsequent changes
in the fair value of the swap are recorded in Other Comprehensive Income. The
Company reassesses the effectiveness of the hedge on an ongoing basis. If it is
determined that the interest rate swap has ceased to be highly effective as a
hedge, the Company will discontinue hedge accounting prospectively, and changes
in the fair value of the interest rate swap will then be reported in
current-period earnings.
Recently issued accounting standards. Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("FAS 141"), effective for business
combinations initiated after June 30, 2001, provides guidance on accounting for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"), effective for fiscal years beginning after
December 15, 2001, requires that goodwill recorded from business combinations
completed on or before
F-9
June 30, 2001 no longer be amortized after the effective date. In addition, FAS
142 requires that goodwill recorded as a result of a business combination
completed after June 30, 2001 and intangible assets with indefinite lives not
be amortized, but must be reviewed for impairment in connection with the
implementation of this standard and at least annually thereafter. The impact of
this review is still being assessed. Beginning in 2002, annual amortization of
approximately $1.25 million related to goodwill from acquisitions completed
prior to June 30, 2001 will no longer be recorded.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (FAS 144), effective for fiscal
years beginning after December 15, 2001, establishes the reporting and
accounting for the impairment or disposal of long-lived assets. Management
believes that the adoption of this standard will not have a material impact on
the Company's consolidated financial position, results of operations, or cash
flows.
Reclassification of financial information. Certain prior-year components of the
financial statements have been reclassified to be consistent with current year
presentation.
2. Financial Instruments
The Company held no investment instruments at December 31, 2001 and 2000. Gains
of $136 thousand from the sale of securities were realized in 2000. No gains or
losses were realized in 2001 or in 1999. For the purpose of computing realized
gains and losses, cost is determined on a specific identification basis.
The Company utilizes letters of credit in the ordinary course of business and
to satisfy self-insurance security deposit requirements. Outstanding letters of
credit were $2.1 million and $2.7 million as of December 31, 2001 and 2000,
respectively. The Company does not expect any material losses to result from
these off-balance-sheet instruments as performance is not expected to be
required.
The carrying amount of debt outstanding at December 31, 2001 and 2000
approximates fair value.
3. Long-term Debt and Credit Arrangements
On July 14, 1999, Lydall, Inc. and certain subsidiaries entered into a credit
facility with a group of five banking institutions. At December 31, 2001, the
facility was comprised of a $50 million domestic revolving credit facility, of
which $12.0 million was outstanding, and a Euro-denominated term loan, with an
outstanding balance of $9.9 million, which is an obligation of Lydall's German
subsidiary. 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 Euro-denominated term loan bears interest equal to Euro LIBOR plus a
percentage based on negotiated ratios. The Company pays a commitment fee,
calculated quarterly, based on the available balance of the revolving credit
facility and the Company's leverage ratio as defined in the facility. For 2001,
the commitment fee was $112 thousand. The facility, as amended, requires the
Company to maintain certain financial ratios and other financial conditions.
The facility also prohibits the Company from incurring certain additional
indebtedness, restricts asset sales and capital expenditures, and limits
certain investments and dividends to the extent such activities would reduce
financial ratios below agreed-upon levels. At June 30, 2000, a financial
covenant of the Company's main credit facility was not met as a result of the
capital expenditures required to support the significant amount of new
automotive business that began during the latter half of 2000. A waiver of such
non-compliance was obtained. In addition, effective August 10, 2000, the
Company and its lenders amended certain covenants and conditions of the credit
facility. The amendment provides increased flexibility to the Company with
regard to strategic and operational financing needs. As of December 31, 2001,
the Company was in compliance with all loan covenants and conditions.
Certain foreign subsidiaries of the Company maintain additional lines of credit
totaling $9.1 million, of which $5.8 million was outstanding as of December 31,
2001. These credit facilities incur interest at rates ranging from 3.6 percent
to 6.8 percent.
The Company has initiated discussions with the bank group regarding the $50
million domestic revolving credit facility maturing on July 14, 2002. It is the
Company's intention to renew the facility for another three-year period under
terms and conditions similar to those currently in place. Based on the
discussions to-date and current market conditions, Lydall expects to complete
the renewal prior to July 14, 2002. Based on the foregoing, the Company
classified the $12.0 million outstanding under the $50 million credit facility
as long-term debt in the Consolidated Balance Sheet at December 31, 2001.
F-10
Total long-term debt maturing in 2002, 2003, 2004, and 2005 will be $9.5
million, $4.1 million, $2.1 million, and $12.0 million, respectively.
In July 1999, the Company entered into an interest rate swap agreement to
convert the base rate component of the interest rate on the Euro-denominated
term loan to a fixed rate of 3.45 percent.
--------------------------------------------------------------------------------------
In thousands December 31, 2001 2000
--------------------------------------------------------------------------------------
Credit Agreement revolving credit facility,
effective rate 3.26%, due 2002 $12,025 $10,130
Credit Agreement term loan,
effective rate 4.45%, due quarterly,
collateralized by German subsidiary stock 9,896 13,947
Deutsche Bank, line of credit, effective rate 3.6% - 6.8%, due 2002,
collateralized by certain fixed assets in Meinerzhagen, Germany 5,762 7,951
--------------------------------------------------------------------------------------
27,683 32,028
Less portion due within one year (9,473) (7,101)
--------------------------------------------------------------------------------------
$18,210 $24,927
--------------------------------------------------------------------------------------
4. Acquisitions and Dispositions
Acquisitions
On October 19, 2001, the Company acquired for cash certain assets and assumed
certain liabilities of Affinity Industries Inc. ("Affinity"), a privately held
designer and manufacturer of high-precision, specialty temperature-control
equipment for demanding semiconductor, pharmaceutical, medical, laser, and
industrial applications. The active thermal systems of Affinity complement
Lydall's existing passive thermal solutions and significantly broaden the
Company's market presence. Under the terms of the asset purchase agreement, the
Company paid $17.4 million to Affinity and assumed approximately $1.3 million
of certain liabilities, consisting primarily of current liabilities. In
addition, the agreement provides for an additional $2.0 million of
consideration to be paid, a portion of which is contingent upon the occurrence
of certain events. The purchase price was also subject to a post-closing net
asset adjustment as defined in the agreement. That adjustment was settled in
January 2002 and resulted in an immaterial increase to the purchase price. In
addition, the Company purchased for $2.3 million in cash the land and building
where Affinity is located from Clear Lake Realty Corporation. The purchases
will be accounted for in accordance with Statements of Financial Accounting
Standards No. 141 and No. 142, which are described in Footnote 1. The Company
funded the acquisitions through borrowings on its existing credit facility and
operating cash flows. The operating results of Affinity were included in the
Company's consolidated financial statements from the date of acquisition.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition:
--------------------------------------------------
In thousands......... At October 19, 2001
--------------------------------------------------
Current assets $ 4,216
Property, plant, and equipment 3,366
Intangible assets 775
Goodwill 13,011
--------------------------------------------------
Total assets acquired 21,368
Current liabilities 1,340
--------------------------------------------------
Net assets acquired $20,028
--------------------------------------------------
F-11
The Company obtained independent appraisals to determine the fair value of the
property, plant, and equipment and intangible assets acquired as listed above.
Of the $775 thousand of intangible assets acquired, $450 thousand was assigned
to a trademark that is not subject to amortization, $180 thousand was assigned
to a customer list with an estimated useful life of three years and $145
thousand was assigned to non-compete agreements with estimated useful lives of
five years. The $13.0 million of goodwill, all of which is deductible for tax
purposes, has been assigned to the Thermal/Acoustical Segment. The opening
balance sheet had not been finalized as of December 31, 2001 as certain
contingencies and events that would require the payment of additional
consideration had not been met. When paid, the additional consideration will
increase goodwill.
On December 30, 1998, a subsidiary of the Company acquired for cash all of the
outstanding shares of Gerhardi & Cie GmbH & Co. KG ("Gerhardi"), a privately
held German manufacturer of automotive components. The purchase price was
subject to a post-closing net equity adjustment as defined in the agreement. In
June 2001 that adjustment was finalized, and the Company received $1.4 million
in cash.
Dispositions
In February 2001, the Company's Board of Directors adopted a plan to
discontinue the operations of the Paperboard Segment, consisting principally of
the Southern Products and Lydall & Foulds Divisions. Accordingly, the operating
results of this Segment have been segregated from continuing operations and
reported as discontinued operations for all years presented. Net sales from the
Paperboard Segment were $4.2 million, $42.6 million, and $43.5 million for the
years ended December 31, 2001, 2000, and 1999, respectively.
On February 1, 2001, the Company announced that the Lydall & Foulds Division
would close on April 1, 2001. Additionally, on February 5, 2001, the Company
sold the Southern Products Division for approximately $14.2 million in cash. In
total, the disposition of the Paperboard Segment resulted in a gain, net of
tax, of $.3 million, or $.02 per diluted share. The sale of the Southern
Products Division resulted in a gain, net of tax, of $3.6 million, or $.23 per
diluted share. The closing of the Lydall & Foulds Division resulted in a loss,
net of tax, of $3.3 million, or $.21 per diluted share, representing costs
incurred from the measurement date, an estimate of other exit costs to be
incurred during the phase-out period, and an adjustment to the net realizable
value for certain current and long-lived assets.
Paperboard Segment net assets to be disposed of consist primarily of inventory
and property, plant, and equipment of the Lydall & Foulds Division, with a
total net realizable value of $1.2 million, have been classified on the
Consolidated Balance Sheet as "Net Investment in Discontinued Operations."
Effective September 30, 2000, the Company sold substantially all of the assets
and certain liabilities of its chrome-plating and injection-molding operations
of Lydall Gerhardi GmbH and Co. KG to Gerhardi Kunststofftechnik GmbH. The
pretax loss on the sale amounted to $29.7 million, or $1.22 per share after-tax.
On January 28, 2000, the Company sold substantially all of the assets, net of
certain liabilities, of the Composite Materials, Hoosick Falls Operation for
approximately $12.0 million in cash, plus $660 thousand of liabilities assumed,
resulting in a pretax gain of $6.1 million, or $.24 per diluted share. For the
years ended December 31, 2000 and 1999, sales and (loss) income from operations
of the Hoosick Falls Operation included in income (loss) from continuing
operations were $.6 million and $10.7 million, and ($10 thousand) and $1.1
million, respectively.
In November 1999, the Company's Board of Directors adopted a plan to
discontinue the operations of the Wovens Segment. Accordingly, the operating
results have been segregated from continuing operations and reported as
discontinued operations. Sales from the Wovens Segment were $3.9 million for
the year ended December 31, 1999. In 1999, the Company recorded an estimated
net loss on disposal of $1.8 million, or $.12 per share, net of tax, associated
with the disposition of this Segment.
On February 29, 2000, the Company sold fixed assets, leasehold improvements,
inventory, and certain intangibles of the Wovens Segment for $1.8 million.
During 2001, the Company recorded an additional loss of $100 thousand, net of
tax.
F-12
5. Assets Held for Sale
In November 2000, Lydall's Board of Directors formalized a plan to dispose of
certain assets and related liabilities of the Company's fiberboard operation.
During 2001, the Company sold certain assets related to this operation for
approximately $1.9 million and announced that the operation would close on June
1, 2001. As a result, the Company recorded a pre-tax charge of $3.4 million, or
$.13 per share after-tax, for closing costs, severance benefits and impairment
of remaining assets. Of the $1.6 million of closing costs and severance
benefits accrued, approximately $1.3 million has been paid through December 31,
2001. At December 31, 2001, $1.5 million has been classified as "Assets Held
for Sale" representing primarily the estimated net realizable value of the
remaining property, plant, and equipment of the operation.
For the years ended December 31, 2001, 2000 and 1999, sales and (loss) income
from operations related to these assets were $1.6 million, $6.5 million, and
$11.0 million and ($.1 million), ($.2 million) and $.8 million, respectively.
6. Capital Stock
Preferred stock. The Company has authorized Serial Preferred Stock with a par
value of $1. None of the 500,000 authorized shares have been issued.
Common stock. At the end of 2001, 1,606 Lydall stockholders of record held
15,981,306 shares of Common Stock.
Stockholder rights plan. In the second quarter of 1999, the Company's Board of
Directors adopted a Stockholder Rights Plan by granting a dividend of one
preferred share purchase right for each common share to stockholders of record
at the close of business on June 30, 1999. Under certain conditions, each right
entitles the holder to purchase one one-thousandth of a Series A Junior
Participating Preferred Share. The rights cannot be exercised or transferred
apart from the related common shares unless a person or group acquires 10
percent or more of the Company's outstanding common shares. The rights will
expire May 15, 2009 if they are not redeemed.
The following table provides a reconciliation of the income (loss) amounts and
shares used to determine basic and diluted earnings (loss) per share.
----------------------------------------------------------------------------------------------------------
For the Year Ended 2001 For the Year Ended 2000 For the Year Ended 1999
---------------------------------------------------------------------------------------------------------
Income Loss Income
from from from
Continuing Average Per-Share Continuing Average Per-Share Continuing Average Per-Share
Operations Shares Amount Operations Shares Amount Operations Shares Amount
---------------------------------------------------------------------------------------------------------
Basic earnings
(loss) per share $7,521 15,899 $ .47 ($3,616) 15,778 ($ .23) $11,089 15,715 $ .70
Effect of dilutive
stock options -- 112 (.00) -- -- (.00) -- 69 (.00)
---------------------------------------------------------------------------------------------------------
Diluted earnings
(loss) per share $7,521 16,011 $ .47 ($3,616) 15,778 ($ .23) $11,089 15,784 $ .70
---------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
For the Year Ended 2001 For the Year Ended 2000 For the Year Ended 1999
------------------------------------------------------------------------------------------------
Net Average Per-Share Net Average Per-Share Net Average Per-Share
Income Shares Amount Loss Shares Amount Income Shares Amount
------------------------------------------------------------------------------------------------
Basic earnings
(loss) per share $7,419 15,899 $ .46 ($2,421) 15,778 ($ .15) $10,775 15,715 $ .68
Effect of dilutive
stock options -- 112 (.00) -- -- (.00) -- 69 (.00)
------------------------------------------------------------------------------------------------
Diluted earnings
(loss) per share $7,419 16,011 $ .46 ($2,421) 15,778 ($ .15) $10,775 15,784 $ .68
------------------------------------------------------------------------------------------------
F-13
Options to purchase 608,887 shares of Common Stock were excluded from the 2001
computation of diluted earnings per share because the exercise price was
greater than the average market price of the Common Stock at the end of the
year. Options to purchase 1,640,917 and 974,467 shares of Common Stock were
excluded from the 2000 and 1999 computation of diluted earnings per share
because for 2000 the effect would have been antidilutive, and for 1999, the
exercise price was greater than the average market price of the Common Stock at
the end of the year.
7. Stock Option Plans
At December 31, 2001, the Company had two stock option plans under which
employees and directors had options to purchase Common Stock. Under each plan
-- the 1982 Stock Incentive Compensation Plan ("1982 Plan") and the 1992 Stock
Incentive Compensation Plan ("1992 Plan") -- options are granted at fair market
value on the grant date and expire ten years after the grant date. In most
cases, options vest at a rate of 25 percent per year starting with the first
anniversary of the award. Certain incentive stock option (ISO) awards have an
extended vesting period because IRS regulations, with regard to ISO awards,
limit the total dollar amount that can vest in one year for an individual at
$100,000. The 1982 Plan has expired; therefore, no further options can be
granted under this Plan. In February 2002, all outstanding options previously
awarded under the 1982 Plan expired. Under the 1992 Plan, which expires on May
13, 2002, options for 2.4 million shares of Common Stock were available for
grant and only 200,000 remained available for grant at December 31, 2001. In
addition, the 1992 Plan provides for automatic acceleration of vesting in the
event of a change in control of the Company. The 1992 Plan also provides for
the use of shares of Common Stock in lieu of cash to exercise options if the
shares are held for more than six months and if the Compensation and Stock
Option Committee of the Board of Directors approves this form of exercise.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized. Had compensation cost
for the Company's two stock option plans been determined based on the fair
value of the options at the grant dates for awards under those plans,
consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss) and
earnings (loss) per share would have been reduced (increased) to the pro forma
amounts indicated below:
-----------------------------------------------------------------------------------------------------------
In thousands except per-share data For the years ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------------------
Net income (loss) As reported $7,419 ($ 2,421) $10,775
Pro forma 6,058 (3,657) 9,556
Basic earnings (loss) per share As reported $ .46 $ (.15) $ .68
Pro forma .37 (.23) .61
Diluted earnings (loss) per share As reported $ .46 $ (.15) $ .68
Pro forma .37 (.23) .61
-----------------------------------------------------------------------------------------------------------
The fair value of each option granted is estimated for the above disclosure on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2001, 2000 and 1999,
respectively: zero dividend yield for all years; expected volatility of 52
percent, 47 percent and 50 percent; risk-free interest rates of 5.1 percent,
5.3 percent, and 6.7 percent; and an expected eight-year life for all years.
F-14
The following is a summary of the status of the Company's stock option plans as
of December 31, 2001, 2000, and 1999, and changes during the years then ended:
------------------------------------------------------------------------------------------------
In thousands except per-share data 2001 2000 1999
------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares
------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,641 $12.95 1,329 $13.96 1,263
Granted 562 9.84 556 8.77 243
Exercised (103) 8.86 (150) 5.62 (68)
Forfeited (84) 13.20 (94) 14.17 (109)
------------------------------------------------------------------------------------------------
Outstanding at end of year 2,016 $12.28 1,641 $12.95 1,329
------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,004 921 1,002
Shares reserved for grants 200 678 1,140
Weighted-average fair value per option
granted during the year $ 6.19 $ 5.24 $ 6.16
------------------------------------------------------------------------------------------------
For 1999, the weighted-average exercise price for options outstanding at the
beginning and end of the year was $14.38 and $13.96, respectively. Options with
weighted-average exercise prices of $10.88, $5.64, and $17.16 were granted,
exercised, and forfeited in 1999, respectively.
The following table summarizes information about stock options outstanding at
December 31, 2001:
------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------------
Number Weighted-Average
Range of Outstanding at Remaining Weighted-Average Number Exercisable Weighted-Average
Exercise Prices 12/31/01 Contractual Life Exercise Price at 12/31/01 Exercise Price
---------------- -------------- ---------------- ---------------- ------------------ ----------------
$ 6.50 -- $10.08 1,236,012 8.2 $ 9.41 318,949 $ 9.25
10.38 -- 11.75 294,252 5.0 10.76 202,681 10.68
13.13 -- 19.81 285,197 3.2 17.68 281,954 17.71
22.63 -- 26.00 200,574 3.2 24.52 200,574 24.52
-----------------------------------------------------------------------------------------------------
$ 6.50 -- $26.00 2,016,035 6.5 $12.28 1,004,158 $14.96
-----------------------------------------------------------------------------------------------------
8. Employer-Sponsored Benefit Plans
As of December 31, 2001, the Company maintains three defined benefit pension
plans, which cover substantially all domestic Lydall employees. In connection
with the sale of the Hoosick Falls Operation, the Company transferred one
defined benefit plan to the purchaser. The pension plans are noncontributory,
and benefits are based on either years of service or eligible compensation paid
while a participant is in a plan. The Company's funding policy is to fund not
less than the ERISA minimum funding standard nor more than the maximum amount
which can be deducted for federal income tax purposes.
The following items are the components of net periodic benefit cost for pension
benefits:
---------------------------------------------------------------------------
In thousands For the years ended December 31, 2001 2000 1999
---------------------------------------------------------------------------
Service cost $ 1,093 $ 993 $ 1,412
Interest cost 1,780 1,710 1,717
Expected return on plan assets (1,837) (1,997) (1,814)
Amortization of:
Transition asset (100) (100) (103)
Prior service cost 3 11 19
Actuarial loss (gain) 10 (5) 186
Curtailment charges 139 -- --
---------------------------------------------------------------------------
Total net periodic benefit cost $ 1,088 $ 612 $ 1,417
---------------------------------------------------------------------------
F-15
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $24.9 million, $22.7 million, and $17.3 million,
respectively, as of December 31, 2001 and $24.0 million, $20.9 million, and
$20.2 million, respectively, as of December 31, 2000. At December 31, 1999,
there were no plans with an accumulated benefit obligation in excess of plan
assets.
Plan assets include investments in bonds and equity securities. The Company
determines the assumed discount rate, expected long-term rate of return on plan
assets, and annual compensation increase rate for each year. The following
presents the assumptions and a summary of funded status for all plans:
-------------------------------------------------------------------------
December 31, 2001 2000 1999
-------------------------------------------------------------------------
Weighted average assumptions:
Discount rate 7.25% 7.50% 7.75%
Expected return on plan assets 9.25% 9.25% 9.25%
Rate of compensation increase 3.5-4.5% 5.00% 5.00%
-------------------------------------------------------------------------
--------------------------------------------------------------------
In thousands December 31, 2001 2000
--------------------------------------------------------------------
Change in benefit obligation:
Net benefit obligation at beginning of year $ 23,984 $22,093
Service cost 1,093 993
Interest cost 1,780 1,710
Plan amendments -- (62)
Actuarial loss 854 668
Curtailments (905) --
Divestitures -- (373)
Gross benefits paid (1,897) (1,045)
--------------------------------------------------------------------
Net benefit obligation at end of year $ 24,909 $23,984
--------------------------------------------------------------------
--------------------------------------------------------------------
In thousands December 31, 2001 2000
--------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 20,191 $22,300
Actual return on plan assets (970) (691)
Divestitures -- (373)
Gross benefits paid (1,897) (1,045)
--------------------------------------------------------------------
Fair value of plan assets at end of year 17,324 20,191
--------------------------------------------------------------------
Funded status at end of year ($ 7,585) ($ 3,793)
Unrecognized net actuarial loss 4,708 1,959
Unrecognized prior service cost 113 258
Unrecognized net transition asset (116) (216)
--------------------------------------------------------------------
Net amount recognized ($ 2,880) ($ 1,792)
--------------------------------------------------------------------
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost $ 201 $ 512
Accrued benefit liability (3,081) (2,304)
Additional minimum liability (2,456) (873)
Intangible assets 232 421
Accumulated other comprehensive income 2,224 452
--------------------------------------------------------------------
Net amount recognized ($ 2,880) ($ 1,792)
--------------------------------------------------------------------
F-16
The Company also sponsors a Stock Purchase Plan and 401(k) Plan. Contributions
are determined under various formulas. Employer contributions to these plans
amounted to $1.0 million in 2001, $1.1 million in 2000, and $1.7 million in
1999.
9. Postemployment, Postretirement, and Deferred Compensation
The Company maintains a defined benefit postretirement plan covering a limited
number of retired and hourly employees. The plan provides health care benefits
to certain groups of retired employees and postretirement life insurance
benefits to certain hourly employees. The amount of expense reflected in the
Company's results of operations for these benefits was less than $100 thousand
for each of the last three years.
The Company provides deferred compensation to a small number of former
employees and has a deferred compensation plan, which was frozen as of December
31, 1996, that provides the Company's outside directors and the former Chairman
with compensation upon their retirement from service with the Board. In
addition, the Company provides a Supplemental Executive Retirement Plan
("SERP") that provides supplemental income payments after retirement to senior
executives. The total net deferred compensation expense related to these three
plans was $232 thousand in 2001, $257 thousand in 2000, and $327 thousand in
1999.
10. Segment Information
Lydall's reportable segments are: Thermal/Acoustical and Filtration/Separation.
All other products are aggregated in Other Products and Services. In February
2001, the Company discontinued the Paperboard Segment. This Segment consisted
primarily of the Company's Southern Products and Lydall & Foulds Divisions. On
February 1, 2001, the Company announced the closure of its Lydall & Foulds
Division. In addition, on February 5, 2001, the Company sold the Southern
Products Division. The results of the Paperboard Segment have been excluded
from continuing operations for all years presented.
During the fourth quarter of 1999, the Company discontinued the Wovens Segment,
the sale of which was completed on February 29, 2000. The results of the Wovens
Segment have been excluded from continuing operations for all years presented.
Lydall evaluates performance and allocates resources based on sales and
operating income. Net sales by segment reported below include intercompany
transactions. Operating income (loss) is calculated using specific cost
identification for most items, with certain allocation of overhead, based on
sales volume.
Thermal/Acoustical
The Thermal/Acoustical Segment includes thermal and acoustical barriers, heat
shields, temperature-control units, and insulating products that control and
insulate within temperature environments ranging from -459(degrees)F
(-237(degrees)C) to +3000(degrees)F (+1649(degrees)C).
Filtration/Separation
The Filtration/Separation Segment includes industrial and consumer air and
liquid filtration products, vital fluids management systems for medical and
biopharmaceutical applications, separation media, and energy-related products.
Other Products and Services
The largest component of Other Products and Services is Lydall's transport and
distribution business. That business specializes in time-sensitive shipments
and has an in-depth understanding of the special nature and requirements of the
paper and printing industries. Other Products and Services also include
electrical insulation, assorted specialty products, and battery separator
materials sold in Europe.
F-17
The table below presents net sales and operating income (loss) by segment as
used by the chief operating decision-maker of Lydall for the years ended
December 31, 2001, 2000, and 1999:
-------------------------------------------------------------------------------------------
Other
Thermal/ Filtration/ Products Reconciling Consolidated
In thousands for the years ended Acoustical Separation & Services Items Totals
-------------------------------------------------------------------------------------------
December 31, 2001
Net sales $125,741 $66,638 $33,260 ($ 2,080) $223,559
Operating income (loss) 19,123 7,256 (431) (13,648) 12,300
-------------------------------------------------------------------------------------------
December 31, 2000
Net sales $158,472 $67,913 $38,799 ($ 4,066) $261,118
Operating income 16,768 10,210 3,826 (11,821) 18,983
-------------------------------------------------------------------------------------------
December 31, 1999
Net sales $169,283 $58,994 $50,489 ($ 3,782) $274,984
Operating income 13,065 8,466 7,347 (11,137) 17,741
-------------------------------------------------------------------------------------------
A reconciliation of total segment net sales to total consolidated net sales and
of total segment operating income to total consolidated operating income for
the years ended December 31, 2001, 2000, and 1999 is as follows:
--------------------------------------------------------------------------------
In thousands For the years ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------
Net sales
Total segment net sales $225,639 $265,184 $278,766
Elimination of intersegment sales (2,080) (4,066) (3,782)
--------------------------------------------------------------------------------
Consolidated net sales $223,559 $261,118 $274,984
--------------------------------------------------------------------------------
Operating Income
Total segment operating income $ 25,948 $ 30,804 $ 28,878
Elimination of intersegment and corporate expenses (13,648) (11,821) (11,137)
--------------------------------------------------------------------------------
Consolidated operating income $ 12,300 $ 18,983 $ 17,741
--------------------------------------------------------------------------------
Asset information by reportable segment is not reported since the chief
operating decision-maker does not use such information internally.
Net sales and long-lived asset information by geographic area and for the years
ended December 31, 2001, 2000, and 1999 are as follows:
---------------------------------------------------------------------
Net Sales Long-Lived Assets
----------------------------------------- --------------------------
In thousands 2001 2000 1999 2001 2000 1999
--------------------------------------------------------------------
United States $182,850 $193,339 $185,879 $ 98,612 $79,670 $ 87,901
France 15,342 11,498 13,809 6,770 7,518 8,244
Germany 25,367 56,281 75,296 10,195 11,981 8,858
--------------------------------------------------------------------
Total $223,559 $261,118 $274,984 $115,577 $99,169 $105,003
--------------------------------------------------------------------
Foreign sales are based on the country in which the sales originate (i.e.,
where the legal entity is domiciled).
For 2001, Lydall had two major customers, Ford Motor Co. and DaimlerChrysler
AG, which accounted for sales of $34.3 million and $22.7 million, respectively.
For 2000 and 1999, Lydall's major customer was Ford Motor Co., which accounted
for sales of $34.1 million and $36.8 million, respectively. These sales are
reported in the Thermal/Acoustical Segment.
F-18
11. Income Taxes
The provision (benefit) for income taxes from continuing operations consists of
the following:
--------------------------------------------------------------------------
In thousands For the years ended December 31, 2001 2000 1999
--------------------------------------------------------------------------
Current
Federal $ 548 $ 2,631 $2,163
State 519 1,117 428
Foreign 388 95 289
--------------------------------------------------------------------------
Total current $1,455 $ 3,843 $2,880
--------------------------------------------------------------------------
Deferred
Federal $2,240 ($ 5,347) $2,859
State (320) (778) (163)
Foreign (120) (83) (401)
--------------------------------------------------------------------------
Total deferred $1,800 (6,208) $2,295
--------------------------------------------------------------------------
Provision for income taxes $3,255 ($ 2,365) $5,175
--------------------------------------------------------------------------
The following is a reconciliation of the difference between the actual
provision (benefit) for income taxes from continuing operations and the
provision (benefit) computed by applying the federal statutory tax rate on
earnings.
--------------------------------------------------------------------
For the years ended December 31, 2001 2000 1999
--------------------------------------------------------------------
Statutory federal income tax rates 34.0% (35.0%) 35.0%
State income taxes, net of federal tax deduction 1.2 8.5 2.6
Exempt FSC and foreign income (6.0) (14.0) (5.7)
Other and tax exempt income 1.0 1.0 (.1)
--------------------------------------------------------------------
Effective income tax rates 30.2% (39.5%) 31.8%
--------------------------------------------------------------------
The following is a schedule of the net current deferred tax assets and
long-term deferred tax liabilities by tax jurisdiction as of December 31:
-------------------------------------------------------------------
2001 2000
------------------------- -------------------------
Current Long-term Current Long-term
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
In thousands Assets (Liabilities) Assets (Liabilities)
------------------------------------------------------------------
Federal $1,650 ($ 5,133) $7,044 ($ 8,897)
State 35 (281) 140 (741)
Foreign 85 (1,404) 106 (1,545)
------------------------------------------------------------------
Total $1,770 ($ 6,818) $7,290 ($11,183)
------------------------------------------------------------------
F-19
-------------------------------------------------
In thousands December 31, 2001 2000
-------------------------------------------------
Deferred Tax Assets
Accounts receivable $ 231 $ 294
Inventories 606 745
Other accrued expenses 655 1,407
Retirement accounts 3,107 2,546
Tax credits 606 406
Net operating losses 11,054 22,576
Discontinued operations 493 --
Other, net -- 278
-------------------------------------------------
Total deferred tax assets 16,752 28,252
Deferred tax liabilities
Property, plant and equipment 12,550 15,365
Assets held for sale 236 1,017
Discontinued operations -- 1,111
Intangible assets 840 770
Other, net 946 --
-------------------------------------------------
Total deferred tax liabilities 14,572 18,263
Valuation reserve 7,228 13,882
-------------------------------------------------
Net deferred tax liabilities $ 5,048 $ 3,893
-------------------------------------------------
The Internal Revenue Service ("IRS") is currently examining the Company's
federal income tax returns for 1998 and 1999. Lydall's management believes any
potential issues resulting from this examination will not be significant to the
consolidated financial position, results of operations, or cash flows of the
Company. The IRS completed its examination of the Company's 1997 federal income
tax return during 2001. The 2001 effective tax rate includes a benefit from the
settlement of this examination. Excluding this settlement, the effective tax
rate for 2001 was 35.5 percent.
For the years ended December 31, 2001, 2000 and 1999 income (loss) from
continuing operations before income taxes was derived from the following
sources:
-----------------------------------------------------------------------------
In thousands For the years ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------
United States $ 8,100 $ 23,851 $18,170
Foreign 2,676 (29,832) (1,906)
-----------------------------------------------------------------------------
Total $10,776 ($ 5,981) $16,264
-----------------------------------------------------------------------------
The Company has foreign net operating loss carryforwards of approximately $31.5
million at December 31, 2001 that never expire. The Company has fully reserved
for these net operating loss carryforwards at December 31, 2001 as the ability
to utilize them is uncertain.
At December 31, 2001, the Company also has approximately $8.0 million and $4.3
million of federal regular net operating loss carryforwards and federal
alternative minimum tax net operating loss carryforwards, respectively, and
approximately $9.3 million of state net operating loss carryforwards. The
federal net operating loss carryforwards expire in 2020, and the state net
operating loss carryforwards expire between 2014 and 2019.
In addition, the Company has $.6 million of tax credit carryforwards, the
majority of which never expire.
12. Commitments and Contingencies
Leases
Lydall has operating leases that resulted in an expense of $2.9 million in
2001, $2.5 million in 2000, and $3.0 million in 1999. These contracts include
building, office equipment, vehicle, and machinery leases, which require
payment of property taxes, insurance, repairs and other operating costs.
F-20
Future lease commitments under noncancelable operating leases are:
--------------------------------------------------------------------
In thousands 2002 2003 2004 2005 2006 Thereafter Total
--------------------------------------------------------------------
Lease payments $2,914 $2,690 $2,480 $2,283 $2,031 $3,136 $15,534
--------------------------------------------------------------------
Environmental and Other
The Company is, from time to time, subject to various legal actions,
governmental audits, and proceedings relating to various matters incidental to
its business including product liability and environmental claims. While the
outcome of such matters cannot be predicted with certainty, in the opinion of
management, after reviewing such matters and consulting with the Company's
counsel and considering any applicable insurance or indemnification, any
liability which may ultimately be incurred is not expected to materially affect
the consolidated financial position, results of operations, or cash flows of
the Company.
In March 1986, the United States Environmental Protection Agency ("EPA")
notified a former subsidiary of the Company that it and other entities may be
potentially responsible in connection with the release of hazardous substances
at a landfill and property located adjacent to a landfill located in Michigan
City, Indiana.
In June 1995, the Company and its former subsidiary were sued in the Northern
District of Indiana by the insurer of the current operator of the former
subsidiary's plant seeking contribution. In June 1998, a Stipulation for
Dismissal signed by all parties was filed to end current litigation until total
liability at the site could be defined.
In 2001, settlement discussions started between the Company and the current
operator and its insurers. The Company will make a payment of approximately
$150 thousand in exchange for a full site release if the settlement occurs. In
addition, the Company is in negotiations with certain insurance carriers and a
third party, to receive reimbursement for the settlement.
By letter dated July 13, 1998, a subsidiary of the Company was identified as a
"potentially responsible party" by the EPA in connection with the claimed
release or threat of release of hazardous substances at a site known as the
Rogers Fibre Mill in Buxton, Maine (the "Site"). The subsidiary merged with the
owner and operator of a fiberboard mill at the site whose ownership dated back
to approximately 1912. The subsidiary ceased operations at the site in 1980,
and in 1982, conveyed its interest in the site.
The EPA has spent over $3 million in public funds to investigate and take
action with respect to the Site and has indicated that it considers the Company
to be responsible for some or all of those funds. The EPA has offered to settle
with all parties, including Lydall for a total of $300,000. Lydall's proposed
share of this total would be $150,000 for which it would obtain a full release
from all parties and contribution protection from the EPA. The Company has
accrued this amount as of December 31, 2001.
Management believes the ultimate disposition of these matters will not have a
material adverse effect upon the Company's consolidated financial position,
results of operations or cash flows.
In the normal course of business Lydall enters into long-term supply agreements
with customers. Losses, if any, on these agreements are provided for when
anticipated.
F-21
13. Comprehensive Income
The following table discloses the balance by classification within accumulated
other comprehensive loss.
------------------------------------------------------------------------------
Unrealized Minimum Accumulated
Foreign Gain Pension Other
Currency on Derivative Liability Comprehensive
In thousands Adjustment Instruments Adjustment Loss
------------------------------------------------------------------------------
Balance at December 31, 1998 $ 713 $-- ($ 784) ($ 71)
Change year-to-date ( 5,295) -- 784 ( 4,511)
------------------------------------------------------------------------------
Balance at December 31,1999 ( 4,582) -- -- ( 4,582)
Change year-to-date ( 1,933) -- ( 285) ( 2,218)
------------------------------------------------------------------------------
Balance at December 31, 2000 ( 6,515) -- ( 285) ( 6,800)
Change year-to-date ( 155) 18 ( 1,116) ( 1,253)
------------------------------------------------------------------------------
Balance at December 31, 2001 ($6,670) $18 ($1,401) ($8,053)
------------------------------------------------------------------------------
14. Quarterly Financial Information (Unaudited)
The following table summarizes quarterly financial information for 2001 and
2000, restated to reflect the discontinuation of the Paperboard Segment. In
management's opinion, all adjustments necessary to present fairly the
information for such quarters have been reflected below:
------------------------------------------------------------------------------------------------------
In thousands 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Except per-share data 2001 2000 2001 2000 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------
Net sales $58,266 $69,733 $58,940 $68,265 $53,478 $ 65,966 $52,875 $57,154
Gross margin 16,594 17,598 16,807 17,588 14,470 17,312 15,447 16,149
Income (loss) from continuing
operations 1,237 6,519 1,577 2,814 2,353 ( 15,967) 2,355 3,018
Gain (loss) from discontinued
operations 455 286 ( 79) 372 -- 241 ( 478) 296
Net income (loss) 1,692 6,805 1,498 3,186 2,353 ( 15,726) 1,877 3,314
-----------------------------------------------------------------------------------------------------
Basic EPS
Continuing operations $ 0.08 $ 0.42 $ 0.10 $ 0.18 $ .15 ($ 1.01) $ 0.15 $ 0.19
Discontinued operations 0.03 0.01 ( 0.01) 0.02 0.00 0.02 ( 0.03) 0.02
Net income (loss) $ 0.11 $ 0.43 $ 0.09 $ 0.20 $ 0.15 ($ 0.99) $ 0.12 $ 0.21
-----------------------------------------------------------------------------------------------------
Diluted EPS
Continuing operations $ 0.08 $ 0.42 $ 0.10 $ 0.18 $ .15 ($ 1.01) $ 0.15 $ 0.19
Discontinued operations 0.03 0.01 ( 0.01) 0.02 0.00 0.02 ( 0.03) 0.02
Net income (loss) $ 0.11 $ 0.43 $ 0.09 $ 0.20 $ 0.15 ($ 0.99) $ 0.12 $ 0.21
-----------------------------------------------------------------------------------------------------
The sum of the quarterly amounts may not agree to the amounts in the
Consolidated Statements of Income (Loss) for the entire year due to rounding.
F-22
Schedule II
LYDALL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
-----------------------------------------------------------------------------------------------------
Additions
--------------------------------------------- -------------------- -----------------------------
Charged To
Charged To Other
Balance At Costs and Accounts Deductions Balance At
In thousands January 1, Expenses Describe Describe December 31,
----------------------------------------------------------------------------------------------------
2001
Allowance for doubtful receivables $ 644 $ 345 $ -- ( $ 115)/1,2/ $ 874
LIFO reserve 555 132 -- ( 204)/3/ 483
Inventory obsolescence reserve 293 878 -- ( 589)/4/ 582
Reserve for future tax benefits 13,882 -- -- ( 6,654) /8,9/ 7,228
----------------------------------------------------------------------------------------------------
2000
Allowance for doubtful receivables $ 1,511 $ 358 ( $ 36)/2/ ($1,189)/1,6,7/ $ 644
LIFO reserve 1,619 209 -- ( 1,273)/3,7/ 555
Inventory obsolescence reserve 641 309 -- ( 657)/4,6/ 293
Reserve for future tax benefits 2,104 11,778 -- -- 13,882
----------------------------------------------------------------------------------------------------
1999
Allowance for doubtful receivables $ 1,504 $ 364 $553 /5/ ($ 910)/1/ $ 1,511
LIFO reserve 1,216 428 -- ( 25)/3/ 1,619
Inventory obsolescence reserve 649 375 ( 22)/2/ ( 361)/4/ 641
Reserve for future tax benefits -- 2,104 -- -- 2,104
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/1 /Uncollected receivables written off and adjustments to allowance.
/2 /Record foreign currency translation adjustments.
/3 /Adjustment of LIFO reserve for inventory levels and cost.
/4 /Write-off of obsolete inventory and current year activity.
/5 /Allowance for uncollected receivables recorded on Gerhardi's completed
opening balance sheet.
/6 /Elimination of allowance for uncollectible receivables and inventory
reserve due to disposition of operations.
/7 /Reduction due to the reclassification of the reserve to "Net Investment
in Discontinued Operations" and
"Assets Held for Sale."
/8 /Reduction credited to income tax expense of $726 thousand.
/9 /Reduction credited to deferred tax assets due to rate reduction and
other adjustments.
S-1