Lydall Inc. Reports Operating Results (10-Q)

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Nov 05, 2010
Lydall Inc. (LDL, Financial) filed Quarterly Report for the period ended 2010-09-30.

Lydall Inc. has a market cap of $135.3 million; its shares were traded at around $8.08 with and P/S ratio of 0.5. LDL is in the portfolios of Arnold Van Den Berg of Century Management, Chuck Royce of Royce& Associates, Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

Thermal/Acoustical segment net sales were $42.3 million, or approximately 50% of the Companys net sales in the third quarter of 2010, compared to approximately 52% of net sales in the quarter ended September 30, 2009. Excluding the impact of foreign currency translation, net sales increased by $9.7 million, or 28.0%, compared to the third quarter of 2009. According to a published automotive market forecasting service, production of cars and light trucks in North America and Europe in the third quarter of 2010 increased by approximately 8%, or 0.5 million vehicles, compared to the same period a year ago. The same service predicts that production of cars and light trucks in North America and Europe in the fourth quarter of 2010 will be slightly higher than the levels of production in the fourth quarter of 2009. While automobile production has improved in the first nine months of 2010, volatile market conditions, including fluctuations in consumer demand for automobiles, persist in the automotive market.

The segment reported an operating loss in the third quarter of 2010 of $3.2 million compared with operating income of $0.1 million in the third quarter of 2009. Thermal/Acoustical segment was adversely impacted by manufacturing inefficiencies for fiber based products at its North American automotive (NA Auto) facility, which resulted in higher manufacturing costs. The Company responded to a rapid acceleration of orders with a plant expansion, implementation of new equipment, hiring and training of a significant number of new employees and fabrication of tooling while simultaneously increasing output to meet customers demand. As a result, the Company incurred abnormally high labor costs, material usage inefficiencies and excessive scrap on production lines, and freight expediting and inspection costs. Also, due to capacity constraints, the facility was forced to outsource a portion of the processing of certain fibers at a premium. While the Company has undertaken a comprehensive improvement plan, the full impact of actions underway is not expected to be realized until the first quarter of 2011.

At September 30, 2010, the Company had cash balances of $17.6 million and no borrowings under any existing credit facility. The Company anticipates that it will be subject to a $5.0 million borrowing limit under its Domestic Credit Facility in the fourth quarter of 2010 because it does not expect to meet the fixed charge coverage ratio. The Company expects to fund its operating cash requirements from existing cash balances, cash generated by operations and from available borrowings, as needed, under its existing Domestic Credit Facility and foreign credit facilities.

The $4.3 million increase in selling, product development and administrative expenses in the first nine months of 2010 was primarily due to increases in accrued incentive compensation expense of $1.3 million, sales commission expense of $0.8 million, severance-related expenses of $0.7 million, salaries and benefits expense of $0.9 million and an accrued payroll tax item of $0.4 million. Because the Company expects to meet certain 2010 bonus plan targets, it accrued incentive compensation.

With respect to the divestiture described above, the Company recorded a gain on sale of $1.7 million in the second quarter of 2010, net of a write-off of $0.8 million of goodwill that was allocated to the electrical papers product line. The Company deferred a gain of $3.2 million on June 30, 2010, which will be recognized into income on a straight-line basis as the services are provided by the Company to the buyer in accordance with the terms of the License Agreement. In accordance with this accounting treatment, the Company recognized income of $0.4 million in the third quarter of 2010.

of currency translations from branch inception through January 1, 2010 using exchange rates prevailing during the time that income was earned or remittances were made. The tax impact of the resulting currency translation adjustment is reflected in the Companys effective tax rate and generated a tax benefit of $4.1 million in the third quarter of 2010. This benefit resulted from the German branch having incurred losses during periods of time when the U.S Dollar exchange rates were less favorable compared to the Deutsch Mark and Euro and profits were earned during periods when the U.S. Dollar was strong against the Euro. The impact of the Companys election to change its assertion is partially offset by recording additional valuation reserves against certain foreign tax credits, state net operating losses, and net deferred tax assets, which generated tax expense of $2.2 million in the third quarter of 2010. The reserve reflects the Companys assessment that the future realization of such tax benefits is not reasonably assured. The net impact of the above two items contributed to the Company recording a tax benefit of $1.8 million, or $0.11 per diluted share, in the third quarter of 2010.

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