Lydall Announces Financial Results for the Third Quarter Ended September 30, 2019

Company Release - 10/29/2019 4:15 PM ET

MANCHESTER, Conn., Oct. 29, 2019 (GLOBE NEWSWIRE) -- LYDALL, INC. (NYSE: LDL) today announced financial results for the third quarter ended September 30, 2019.

HIGHLIGHTS - Q3 2019 vs. Q3 2018

GAAP Financials

  • Net sales of $205.3 million, up 3.7%
       – Acquisitions and divestitures netted growth of 8.9%
       – Unfavorable foreign currency translation of 1.6%
  • Gross margin of 17.7%, down 10 basis points
  • Operating margin of 3.6%, down 130 basis points
       – Incremental intangibles amortization of $3.0 million, or 150 basis points
  • Earnings per share ("EPS") of $0.17, compared to $0.36
  • Cash generated from operations of $26.7 million, compared to $6.5 million

Non-GAAP Financial Measures*

  • Organic sales decline of 2.2%
  • Adjusted gross margin of 17.8%, down 90 basis points
  • Adjusted operating margin of 3.7%, down 290 basis points
  • Adjusted EPS of $0.19, compared to adjusted $0.54 per share
      – Includes incremental intangibles amortization of $0.14 per share
  • Adjusted EBITDA of $20.9 million, compared to $21.4 million

    *Reconciliations of the Non-GAAP financial measures to Lydall’s GAAP financial results are included at the end of this release.  See also “Use of Non-GAAP Financial Measures” below.

Dale G. Barnhart, President and Chief Executive Officer, stated, “Third quarter sales declined 2% organically as on-going global trade tensions drove uncertainty in key markets.  Third quarter sales were negatively impacted by a significant drop in demand in China, global weakness in sealing product markets and lower volume due to the strike at General Motors.

"From a profitability standpoint, adjusted EBITDA was negatively impacted by higher labor and overhead costs in the Thermal Acoustical Solutions segment and lower gross margin in the Performance Materials segment.  Despite lower sales volumes, the Technical Nonwovens segment delivered healthy adjusted EBITDA margin of 16.5%.

"The business continues to drive strong cash generation, producing $27 million and $63 million from operations for the quarter and nine months ended, respectively, enabling us to pay down $13 million of outstanding credit facility borrowings in the quarter and $38 million year-to-date."

Q3 2019 Results

Net sales increased by $7.4 million, or 3.7%, to $205.3 million, compared to $197.9 million in the third quarter of 2018 primarily from the acquisition of Interface Performance Materials ("Interface"), which increased Performance Materials ("PM") segment net sales by $18.6 million.  Organically, PM segment sales declined by 3.9% from lower sealing product sales. The Technical Nonwovens ("TNW") segment reported organic sales compression of 6.8% primarily from weak demand for industrial filtration products in China which is being impacted by on-going trade uncertainties.  Organic sales growth was 4.2% in the Thermal Acoustical Solutions ("TAS") segment primarily from increased parts sales in Europe and North America.

Gross margin was 17.7%, a decline of 10 basis points from the third quarter of 2018, but on an adjusted basis, declined 90 basis points.  Improved TNW segment adjusted gross margin, was offset by the TAS and PM segments.  The TAS segment gross margin was lower due to increased labor, outsourcing and logistics costs at the Company's North American and European automotive facilities.  Lower gross margin from the PM segment was primarily driven by product mix and unfavorable cost absorption on lower volumes.

Operating margin was 3.6%, down 130 basis points, compared to the third quarter of 2018, or down 290 basis points on an adjusted basis, primarily due to lower adjusted gross margin of 90 basis points, incremental intangible assets amortization of 150 basis points and increased selling, product development and administrative expenses from the Interface business acquired on August 31, 2018.  Adjusted EBITDA margin of 10.2% dropped by 60 basis points compared to the third quarter of 2018.

The third quarter 2019 effective tax rate was 35.1% compared to 25.1% in the third quarter 2018.  The Company's third quarter 2019 effective tax rate was negatively impacted by losses in jurisdictions where a tax benefit is not recognized.

Net income was $3.0 million, or $0.17 per diluted share, compared to net income of $6.3 million, or $0.36 per diluted share in the third quarter of 2018.  Adjusted earnings per share were $0.19, including incremental intangibles amortization of $0.14 per share, compared to $0.54 per share in the third quarter of 2018.

Liquidity

Cash was $48.9 million at September 30, 2019, compared to $49.2 million at December 31, 2018.  Net cash provided by operations was $26.7 million in the third quarter of 2019 compared to $6.5 million in the third quarter of 2018, and $63.0 million through September 30, 2019 compared to $14.5 million through September 30, 2018.  There was approximately $110 million of availability under the Company's credit facility at September 30, 2019.

Outlook

Mr. Barnhart concluded, "The market weakness we have seen in both the Technical Nonwovens and Performance Materials segments is not expected to improve in the fourth quarter and may further deteriorate.  As a result, the Company is aggressively adjusting its cost structure, and will record one-time severance-related expenses of $2.0 million to $2.5 million in the fourth quarter, with savings of $4.0 million to $5.0 million anticipated in 2020.  Further, while the General Motors strike just ended, we will be negatively impacted by the strike in the fourth quarter and are sharpening our focus on reducing manufacturing costs in our Thermal Acoustical Solutions segment.  As we close out 2019, we expect strong cash generation in the fourth quarter that will allow the Company to continue to reduce its outstanding debt."

Conference Call

Lydall will host a conference call on October 30, 2019, at 10:00 a.m. Eastern Time to discuss results for its third quarter and nine months ended September 30, 2019 as well as general matters related to its businesses and markets.  The call may be accessed at (888) 338-7142, from within the U.S., or (412) 902-4181, internationally.  In addition, the audio of the call will be webcast live and will be available for replay on the Company's website at www.lydall.com in the Investor Relations' Section.  A recording of the call will be available from 12:00 p.m. Eastern Time on October 30, 2019 through 11:59 p.m. Eastern Time on November 6, 2019 at (877) 344-7529, from within the U.S., or (412) 317-0088, internationally, pass code 10135999.  Additional information, including a presentation outlining key financial data supporting the conference call, can be found on the Company’s website www.lydall.com under the Investors Relations’ section.

Use of Non-GAAP Financial Measures

In addition to the financial measures prepared in accordance with generally accepted accounting principles (“GAAP”), the Company uses certain non-GAAP financial measures, including organic sales, adjusted gross profit, adjusted gross margin, adjusted operating income, adjusted operating margin, adjusted earnings per share, consolidated and segment EBITDA and adjusted EBITDA.  The attached financial tables address the non-GAAP measures used in this press release and reconcile non-GAAP measures to the most directly comparable GAAP measures.  The Company believes that the use of non-GAAP measures helps investors gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the Company's performance, especially when comparing such results to previous periods or forecasts.  Adjusted segment EBITDA is used as a basis to internally evaluate the financial performance of the Company's segments because the Company believes it reflects current core operating performance and provides an indicator of the segment's ability to generate cash.  Non-GAAP measures should be considered in addition to, and not as a replacement for or superior to, the corresponding GAAP measures, and may not be comparable to similarly titled measures reported by other companies.

Cautionary Note Concerning Forward-Looking Statements

This press release contains “forward-looking statements” within the Private Securities Litigation Reform Act of 1995.  Any statements contained in this press release that are not statements of historical fact, including statements about the outlook for the fourth quarter of 2019, planned reductions to the Company's cost structure and improvements to margins, and cash flow generation may be deemed to be forward-looking statements.  All such forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company based on current expectations and assumptions relating to the Company’s business, the economy and other future conditions.  Forward-looking statements generally can be identified through the use of words such as “believes,” “anticipates,” “may,” “should,” “will,” “plans,” “projects,” “expects,” “expectations,” “estimates,” “forecasts,” “predicts,” “targets,” “prospects,” “strategy,” “signs,” and other words of similar meaning in connection with the discussion of future operating or financial performance.  Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict.  Such risks and uncertainties which include, among others, worldwide economic or political changes that affect the markets that the Company’s businesses serve which could have an effect on demand for the Company’s products and impact the Company’s profitability, challenges encountered by the Company in the execution of restructuring programs, challenges in integrating acquired companies, disruptions in the global credit and financial markets, including diminished liquidity and credit availability, changes in international trade agreements, including tariffs and trade restrictions, foreign currency volatility, swings in consumer confidence and spending, unstable economic growth, raw material pricing and supply issues, fluctuations in unemployment rates, retention of key employees and the successful execution of the recently announced CEO transition, increases in fuel prices, and outcomes of legal proceedings, claims and investigations.  Accordingly, the Company’s actual results may differ materially from those contemplated by these forward-looking statements.  Investors, therefore, are cautioned against relying on any of these forward-looking statements.  They are neither statements of historical fact nor guarantees or assurances of future performance.  Additional information regarding the factors that may cause actual results to differ materially from these forward-looking statements is available in Lydall’s filings with the Securities and Exchange Commission, including the risks and uncertainties identified in Part I, Item 1A - Risk Factors of Lydall’s Annual Report on Form 10-K for the year ended December 31, 2018.

These forward-looking statements speak only as of the date of this press release, and Lydall does not assume any obligation to update or revise any forward-looking statement made in this press release or that may from time to time be made by or on behalf of the Company.

Lydall, Inc. is a New York Stock Exchange listed company, headquartered in Manchester, Connecticut with global manufacturing operations producing specialty engineered products for the thermal/acoustical and filtration/separation markets. For more information, visit http://www.lydall.com. Lydall® is a registered trademark of Lydall, Inc. in the U.S. and other countries.


Summary of Operations       
In thousands except per share data       
(Unaudited)       
 Quarters Ended Nine Months Ended
 September 30, September 30,
 2019 2018 2019 2018
        
Net sales$205,274  $197,886  $644,110  $575,959 
Cost of sales168,918  162,747  520,423  465,186 
Gross profit36,356  35,139  123,687  110,773 
        
Selling, product development and administrative expenses28,909  25,406  94,011  74,755 
Operating income7,447  9,733  29,676  36,018 
        
Pension plan settlement expense186    25,701   
Interest expense3,666  1,505  11,025  2,617 
Other income, net(885) (40) (1,359) (93)
Income (loss) before income taxes4,480  8,268  (5,691) 33,494 
        
Income tax expense (benefit)1,574  2,076  (5,519) 5,854 
Income from equity method investment(98) (64) (120) (120)
Net income (loss)$3,004  $6,256  $(52) $27,760 
        
Earnings per share       
  Basic$0.17  $0.36  $0.00  $1.61 
  Diluted$0.17  $0.36  $0.00  $1.60 
        
Weighted average number of common shares outstanding17,270  17,216  17,264  17,189 
Weighted average number of common shares and equivalents outstanding17,330  17,349  17,264  17,339 


Summary of Segment Information        
and Corporate Office Expenses        
In thousands        
(Unaudited)        
  Quarters Ended Nine Months Ended
  September 30, September 30,
  2019 2018 2019 2018
Net Sales        
         
Performance Materials Segment (1) $60,000  $41,720  $189,682  $103,647 
Technical Nonwovens Segment (2),(3) 63,912  73,071  198,596  212,324 
Thermal Acoustical Solutions 87,926  88,211  275,511  279,817 
Eliminations and Other (3) (6,564) (5,116) (19,679) (19,829)
Consolidated Net Sales $205,274  $197,886  $644,110  $575,959 
         
Operating Income        
         
Performance Materials Segment (1) $712  $1,753  $5,474  $8,043 
Technical Nonwovens Segment (2),(3) 7,165  6,271  19,743  17,395 
Thermal Acoustical Solutions 5,022  7,923  21,870  29,357 
Corporate Office Expenses (5,452) (6,214) (17,411) (18,777)
Consolidated Operating Income $7,447  $9,733  $29,676  $36,018 

(1) The Performance Materials segment reports the results of Interface and PCC for the period following the date of acquisitions of August 31, 2018 and July 12, 2018, respectively, and included $3.1 million and $11.2 million of incremental intangible assets amortization for the quarter and nine months ended September 30, 2019, respectively.

(2) The Technical Nonwovens segment reports the results of Geosol through the date of disposition of May 9, 2019.

(3) Included in the Technical Nonwovens segment and Eliminations and Other is $4.3 million in intercompany sales to the Thermal Acoustical Solutions segment for the quarters ended September 30, 2019 and 2018, and $13.6 million and $17.2 million for the nine months ended September 30, 2019 and 2018, respectively.

Financial Position    
In thousands except ratio data    
(Unaudited)    
  September 30, 2019 December 31, 2018
     
Cash and cash equivalents $48,919  $49,237 
Working capital $172,023  $195,732 
Total debt $286,670  $324,813 
Stockholders' equity $381,671  $369,275 
Total capitalization $668,341  $694,088 
Total debt to total capitalization 42.9% 46.8%


Cash Flows        
In thousands Quarters Ended Nine Months Ended
(Unaudited) September 30, September 30,
  2019 2018 2019 2018
         
Net cash provided by operating activities $26,745  $6,524  $62,964  $14,498 
Net cash used for investing activities $(6,947) $(273,643) $(23,772) $(289,781)
Net cash (used for) provided by financing activities $(13,018) $260,841  $(38,230) $260,558 
Depreciation and amortization $12,681  $8,194  $36,682  $22,442 
Capital expenditures $(6,949) $(3,736) $(27,236) $(20,091)


Common Stock Data    
  Quarters Ended September 30,
  2019 2018
     
High $26.99  $48.45 
Low $18.02  $39.15 
Close $24.91  $43.10 

During the third quarter of 2019, 6,119,647 shares of Lydall common stock (LDL) were traded on the New York Stock Exchange.

Non-GAAP Measures
In thousands except ratio and per share data
(Unaudited)

The following tables address the non-GAAP measures used in this press release and reconcile the non-GAAP measures to the most directly comparable GAAP measures:

  Quarters Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
         
Net sales $205,274  $197,886  $644,110  $575,959 
Net sales, adjusted $205,274  $197,886  $644,110  $575,959 
         
Gross profit, as reported $36,356  $35,139  $123,687  $110,773 
TNW restructuring expenses 88  400  480  1,724 
Inventory step-up purchase accounting adjustments   1,390    1,390 
Gross profit, adjusted $36,444  $36,929  $124,167  $113,887 
         
Gross margin, as reported 17.7% 17.8% 19.2% 19.2%
Gross margin, adjusted 17.8% 18.7% 19.3% 19.8%
         
Operating income, as reported $7,447  $9,733  $29,676  $36,018 
Strategic initiatives expenses   1,514  1,246  2,803 
TNW restructuring expenses 117  519  591  1,938 
Inventory step-up purchase accounting adjustments   1,390    1,390 
Operating income, adjusted $7,564  $13,156  $31,513  $42,149 
         
Operating margin, as reported 3.6% 4.9% 4.6% 6.3%
Operating margin, adjusted 3.7% 6.6% 4.9% 7.3%
         
Earnings per share $0.17  $0.36  $0.00  $1.60 
Strategic initiatives expenses $  $0.09  $0.07  $0.16 
TNW restructuring expenses $0.01  $0.03  $0.03  $0.11 
Inventory step-up purchase accounting adjustments $  $0.08  $  $0.08 
Pension plan settlement expense $0.01  $  $1.48  $ 
Gain on sale from a divestiture $  $  $(0.08) $ 
Tax effect of above adjustments $  $(0.02) $(0.61) $(0.05)
Diluted earnings per share, adjusted $0.19  $0.54  $0.89  $1.90 

This press release reports adjusted results for the quarters and nine months ended September 30, 2019 and 2018, which excludes strategic initiatives expenses, restructuring expenses in the Technical Nonwovens segment, purchase accounting adjustments related to inventory step-up in the Performance Materials segment, pension plan settlement expenses and gain on sale from a divestiture.

CONSOLIDATED AND SEGMENT EBITDA/ADJUSTED EBITDA
In thousands except ratio data
(Unaudited)

The following tables report consolidated and segment earnings before interest, taxes, depreciation and amortization ("EBITDA") and adjusted EBITDA for the quarters and nine months ended September 30, 2019 and 2018.  The Company uses segment operating income (loss) for the purpose of calculating segment EBITDA and adjusted EBITDA.  Adjusted EBITDA excludes strategic initiatives expenses, restructuring expenses, purchase accounting adjustments related to inventory step-up, pension plan settlement expenses and gain on sale from a divestiture.

  For the Quarter Ended September 30, 2019
  Segments    
  Performance
Materials
 Technical
Nonwovens
 Thermal
Acoustical
Solutions
 Total Corporate Office Consolidated Lydall
             
Net income           $3,004 
Pension plan settlement expense           186 
Interest expense           3,666 
Income tax expense           1,574 
Other income, net           (885)
Income from equity method investment           (98)
Operating income $712  $7,165  $5,022  $12,899  $(5,452) $7,447 
Depreciation and amortization 6,290  3,162  2,726  12,178  148  12,326 
Pension plan settlement expense         186  186 
Other income, net         (885) (885)
Income from equity method investment   (98)   (98)   (98)
EBITDA $7,002  $10,425  $7,748  $25,175  $(4,605) $20,570 
% of net sales 11.7% 16.3% 8.8% 11.9%   10.0%
             
TNW restructuring expenses $  $117  $  $117  $  $117 
Pension plan settlement expense         186  186 
EBITDA, adjusted $7,002  $10,542  $7,748  $25,292  $(4,419) $20,873 
% of net sales 11.7% 16.5% 8.8% 11.9%   10.2%


  For the Quarter Ended September 30, 2018
  Segments    
  Performance
Materials
 Technical
Nonwovens
 Thermal
Acoustical
Solutions
 Total Corporate Office Consolidated Lydall
             
Net income           $6,256 
Interest expense           1,505 
Income tax expense           2,076 
Other income, net           (40)
Income from equity method investment           (64)
Operating income $1,753  $6,271  $7,923  $15,947  $(6,214) $9,733 
Depreciation and amortization 2,323  3,410  2,216  7,949  167  8,116 
Other income, net         (40) (40)
Income from equity method investment   (64)   (64)   (64)
EBITDA $4,076  $9,745  $10,139  $23,960  $(6,007) $17,953 
% of net sales 9.8% 13.3% 11.5% 11.8%   9.1%
             
Strategic initiatives expenses $  $  $  $  $1,514  $1,514 
TNW restructuring expenses   519    519    519 
Inventory step-up purchase accounting adjustments 1,390      1,390    1,390 
EBITDA, adjusted $5,466  $10,264  $10,139  $25,869  $(4,493) $21,376 
% of net sales 13.1% 14.0% 11.5% 12.7%   10.8%


  For the Nine Months Ended September 30, 2019
  Segments    
  Performance
Materials
 Technical
Nonwovens
 Thermal
Acoustical
Solutions
 Total Corporate Office Consolidated Lydall
             
Net loss           $(52)
Pension plan settlement expense           25,701 
Interest expense           11,025 
Income tax benefit           (5,519)
Other income, net           (1,359)
Income from equity method investment           (120)
Operating income $5,474  $19,743  $21,870  $47,087  $(17,411) $29,676 
Depreciation and amortization 18,789  9,526  7,616  35,931  487  36,418 
Pension plan settlement expense         25,701  25,701 
Other income, net         (1,359) (1,359)
Income from equity method investment   (120)   (120)   (120)
EBITDA $24,263  $29,389  $29,486  $83,138  $(41,266) $41,872 
% of net sales 12.8% 14.8% 10.7% 12.5%   6.5%
             
Strategic initiatives expenses $  $  $  $  $1,246  $1,246 
TNW restructuring expenses   591    591    591 
Pension plan settlement expense         25,701  25,701 
Gain on sale from a divestiture         (1,459) (1,459)
EBITDA, adjusted $24,263  $29,980  $29,486  $83,729  $(15,778) $67,951 
% of net sales 12.8% 15.1% 10.7% 12.6%   10.5%


  For the Nine Months Ended September 30, 2018
  Segments    
  Performance
Materials
 Technical
Nonwovens
 Thermal
Acoustical
Solutions
 Total Corporate Office Consolidated Lydall
             
Net income           $27,760 
Interest expense           2,617 
Income tax expense           5,854 
Other income, net           (93)
Income from equity method investment           (120)
Operating income $8,043  $17,395  $29,357  $54,795  $(18,777) $36,018 
Depreciation and amortization 4,371  10,568  6,821  21,760  484  22,244 
Other income, net         (93) (93)
Income from equity method investment   (120)   (120)   (120)
EBITDA $12,414  $28,083  $36,178  $76,675  $(18,200) $58,475 
% of net sales 12.0% 13.2% 12.9% 12.9%   10.2%
             
Strategic initiatives expenses $  $  $  $  $2,803  $2,803 
TNW restructuring expenses   1,938    1,938    1,938 
Inventory step-up purchase accounting adjustments 1,390      1,390    1,390 
EBITDA, adjusted $13,804  $30,021  $36,178  $80,003  $(15,397) $64,606 
% of net sales 13.3% 14.1% 12.9% 13.4%   11.2%

Organic Sales
(Unaudited)

  Quarter Ended September 30, 2019
  Performance
Materials
 Technical
Nonwovens
 Thermal
Acoustical
Solutions
 Consolidated
Sales growth, as reported 43.8% (12.5)% (0.3)% 3.7%
  Acquisitions and divestitures 48.9% (4.0)% % 8.9%
  Change in tooling sales 0.1% % (3.1)% (1.4)%
  Foreign currency translation (1.3)% (1.7)% (1.4)% (1.6)%
Organic sales growth (3.9)% (6.8)% 4.2% (2.2)%
         
  Nine Months Ended September 30, 2019
  Performance
Materials
 Technical
Nonwovens
 Thermal
Acoustical
Solutions
 Consolidated
Sales growth, as reported 83.0% (6.5)% (1.5)% 11.8%
  Acquisitions and divestitures 84.9% (2.3)% % 14.4%
  Change in tooling sales 0.1% % (1.9)% (0.9)%
  Foreign currency translation (2.1)% (3.2)% (1.9)% (2.5)%
Organic sales growth 0.1% (1.0)% 2.3% 0.8%

This press release provides information regarding organic sales change, defined as net sales change excluding (1) sales from acquired and divested businesses (2) the impact of foreign currency translation and (3) tooling sales.  Management believes that the presentation of organic sales change is useful to investors because it enables them to assess, on a consistent basis, sales trends related to the Company selling products to customers, without the impact of foreign currency rate changes that are not under management's control and do not reflect the performance of the Company and management.  Tooling sales are excluded because tooling revenue is not generated from selling the Company's products to customers, but rather is reimbursement from our customers for the design and production of tools used by the Company in our manufacturing processes.  Tooling sales can be sporadic and may mask underlying business conditions and obscure business trends.

For further information:
Brendan Moynihan
Vice President, Financial Planning and Investor Relations
Telephone 860-646-1233
Facsimile 860-646-4917
info@lydall.com
www.lydall.com

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Source: Lydall, Inc.