Q4 2016 Earnings Conference Call Quarter ended December 31, 2016 - - PowerPoint PPT Presentation

Q4 2016 Earnings Conference Call

Quarter ended December 31, 2016

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Forward-looking Statements

This presentation contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as

• amended. Any statements contained in this presentation that are not statements of historical fact 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 integration of the Texel and Gutsche acquisitions, 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, increases in fuel prices, and

• utcomes 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, 2016. These forward-looking statements speak only as of the date of this presentation, and Lydall does not assume any obligation to update

• r revise any forward-looking statement made in this presentation or that may, from time to time, be made by or on behalf of the Company.

This presentation contains non-GAAP financial measures, including organic sales growth, adjusted earnings per share, adjusted gross margin, and adjusted operating margin. The Appendix at the end of this presentation includes a reconciliation to the most comparable GAAP measures. We believe that the presentation of these non-GAAP financial measures, among other things, provides enhanced visibility into our performance. It is important to view each of these non-GAAP financial measures in addition to, rather than as a substitute for, the comparable GAAP measures.

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Growth Profitability Other

• Sales up 8.1% to $566.9m
• Organic growth of 1.5%
• Gross margin up 100 bps to

24.4%

• Adj. operating margin up 100 bps

to 11.3%

• Adj. EBITDA up 130 bps to 15.0%
• Adj. EPS up 24% to $2.61

1

1 Reference Appendix for reconciliation between adjusted and GAAP financials.

2016 vs. 2015 Q4 2016 vs. Q4 2015

• Sales up 9.7% to $144.2m
• Organic growth of 0.8%
• Adj. gross margin up 20 bps to

22.4%

• Adj. operating margin down 60

bps to 8.4%

• Adj. EBITDA up 20 bps to 12.5%
• Adj. EPS up 13% to $0.52
• Concluded German Federal

Cartel matter for €3.3m; expense recorded in Q4 2016 and one-time payment anticipated in Q1 2017

• Completed acquisition of

Gutsche on December 31, 2016; integration on track

• Completed acquisition of Texel
• n July 7, 2016; integration on

track

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Key Takeaways

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Clear, Consistent Strategy for Profitable Growth Profitable Growth

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Develop and quickly deploy next generation product offerings Drive revenue and margin expansion through operational excellence Evaluate opportunities to further strengthen global footprint Disciplined M&A for Filtration & Engineered Materials opportunities

New Product Development Lean Six Sigma Geographic Expansion Select Acquisitions

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Business Conditions

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Filtration & Engineered Materials Automotive

Thermal / Acoustical Fibers

• Continued

moderate growth in North America Thermal / Acoustical Metals

• Growth in excess
• f market in North

America

• Growth in line with

market in Europe

• China facility

continuing to ramp up Performance Materials

• Growth in filtration

across all regions; improving demand for insulation products from historical lows Technical Nonwovens

• Normal seasonality

within Industrial Filtration and Advanced Materials

• Encouraging order

activity for power generation filtration

• Integrations on track

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Financial Highlights of Q4 2016 vs. Q4 2015

• Cash balance of $71.9m as of Dec. 31, 2016
• ~$129m of total borrowings from credit

facility

• Capital expenditures of $25.5 in 2016
• 2017 estimated at ~$35m
• Cash generated from operating activities of

$69.7m in 2016 vs $36.1m in 2015

1

1Reference Appendix for reconciliation between adjusted and GAAP financials

• Sales up 9.7% to $144.2m
• Organic growth of 0.8%
• Adj. gross margin up 20 bps to 22.4%
• Adj. operating margin down 60 bps to 8.4%
• Driven by operational inefficiencies in Metals

segment

• Adj. EBITDA up 20 bps to 12.5%
• Adj. EPS up 13% to $0.52

Income Statement Balance Sheet Cash Flows

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Thermal / Acoustical Metals

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1 Reference Appendix for reconciliation between adjusted and GAAP financials

▪ Strong organic growth of 11.1% in Q4 and 9.7% for 2016 ▪

• Adj. operating margin down 320 bps in Q4 due to
• perating inefficiencies; full year impact was 100 bps

▪ China facility profitable for the year

Highlights

($ in 000) Adj. Q4 2016 Q4 2015 Var $ Var % Adj. FY 2016 FY 2015 Var $ Var % Net sales Parts 38,609 34,382 4,227 12.3 % 156,187 141,117 15,070 10.7 % Tooling 4,486 7,062 (2,576) (36.5)% 18,787 19,815 (1,028) (5.2)% Metals Segment 43,095 41,444 1,651 4.0 % 174,974 160,932 14,042 8.7 % Operating income 1,951 3,194 (1,243) 15,041 15,517 (476) % of net sales 4.5% 7.7% 8.6% 9.6%

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Dual Wall Heat Shield

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Thermal / Acoustical Fibers

▪

Strong organic growth of 5.1% in Q4, 6.3% for full year

▪

Increase in operating income primarily due to lower raw material costs and positive mix

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Highlights

($ in 000) Q4 2016 Q4 2015 Var $ Var % FY 2016 FY 2015 Var $ Var % Net sales Parts 36,716 34,855 1,861 5.3 % 144,345 135,595 8,750 6.5% Tooling 238 1,624 (1,386) (85.3)% 5,067 3,152 1,915 60.8% Fibers Segment 36,954 36,479 475 1.3 % 149,412 138,747 10,665 7.7% Operating income 10,472 9,367 1,105 41,452 37,086 4,366 % of net sales 28.3% 25.7% 27.7% 26.7%

Molded Flooring Solution

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Performance Materials

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Advanced HD ASHRAE Air Filtration Media

▪ Strong organic growth of 8.9% in Q4, 9.5% for full year ▪ Improved demand in Air and Fluid Power & Transport Filtration across all geographies ▪ Operating margin flat during Q4 at 8.6% and up 310 bps for 2016 to 11.1% due to leverage and favorable mix

Highlights

($ in 000) Q4 2016 Adj. Q4 2015 Var $ Var % FY 2016 Adj. FY 2015 Var $ Var % Net sales Filtration 16,569 14,576 1,993 13.7 % 70,430 62,716 7,714 12.3 % Thermal Insulation 7,213 6,866 347 5.1 % 27,783 28,311 (528) (1.9)% Life Sciences Filtration 2,166 2,504 (338) (13.5)% 12,915 10,451 2,464 23.6 % Performance Materials Segment 25,948 23,946 2,002 8.4 % 111,128 101,478 9,650 9.5 % Operating income 2,237 2,073 164 12,339 8,144 4,195 % of net sales 8.6% 8.7% 11.1% 8.0%

1 1 Reference Appendix for reconciliation between adjusted and GAAP financials 1

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Technical Nonwovens

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▪ Organic decline of 19.9% in Q4, 14.6% for full year

• Driven by domestic power generation and softness in China

▪ Unfavorable currency translation of 4.2% and 3.1% from Q4 and full year, respectively ▪

• Adj. operating margin increased 30 bps to 7.1% in Q4 and 160

bps in 2016 to 11.3%, due to favorable mix and lower raw material costs ▪ Integrations on track

1 1 Reference Appendix for reconciliation between adjusted and GAAP financials

Highlights

($ in 000) Adj. Q4 2016 Q4 2015 Var $ Var % Adj. YTD 2016 YTD 2015 Var $ Var % Net sales Industrial Filtration 22,610 27,525 (4,915) (17.9)% 90,415 113,044 (22,629) (20.0)% Advanced Materials 21,564 7,351 14,213 193.3 % 65,090 26,089 39,001 149.5 % 44,174 34,876 9,298 26.7 % 155,505 139,133 16,372 11.8 % Operating income 3,124 2,373 751 17,538 13,431 4,107 % of net sales 7.1% 6.8% 11.3% 9.7%

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Industrial Filtration: Filtration needle felts & Bags Advanced Materials: Geosynthetic Media

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Appendix

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Summary Statements of Operations

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As Reported

Fourth Quarter Full Year ($ in 000) 2016 2015 Var $ 2016 2015 Var $ Net sales 144,192 131,398 12,794 566,852 524,505 42,347 Gross profit 31,982 29,217 2,765 138,542 122,497 16,045 % 22.2% 22.2% — % 24.4% 23.4% 1.0 % Selling, product development and administrative expenses 24,688 18,688 6,000 83,750 70,020 13,730 % 17.1% 14.2% 2.9 % 14.8% 13.3% 1.5 % Operating income 7,294 10,529 (3,235) 54,792 52,477 2,315 % 5.1% 8% (2.9)% 9.7% 10.0% (0.3)% Gain on sale of business — —

—

— (18,647) 18,647 Interest expense 425 160 265 1,068 755 313 Other income, net (331) (35) (296) (1,215) (654) (561) Income before income taxes 7,200 10,404 (3,204) 54,939 71,023 (16,084) Income tax expense 2,798 5,085 (2,287) 17,821 24,764 (6,943) As % of income 38.9% 48.9% (10.0)% 32.4% 34.9% (2.5)% Income from equity method investment (18) — (18) (69) — (69) Net income 4,420 5,319 (899) 37,187 46,259 (9,072) Diluted earnings per share $ 0.26 $ 0.31 $ (0.05) $ 2.16 $ 2.71 $ (0.55)

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Summary Balance Sheets

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($ in 000)

• Dec. 31, 2016
• Dec. 31, 2015

Var $ Cash $ 71,934 $ 75,909 (3,975) Accounts receivable, net 103,316 82,149 21,167 Inventories 66,146 46,530 19,616 Prepaids and other current assets 14,210 14,715 (505) Total current assets 255,606 219,303 36,303 Property, plant and equipment, net 160,795 114,433 46,362 Goodwill and other intangible assets 105,053 22,240 82,813 Other assets, net 5,575 2,284 3,291 Total assets 527,029 358,260 168,769 Accounts payable 56,346 42,470 13,876 Accrued payroll and other compensation 14,016 10,210 3,806 Other current liabilities 20,082 8,320 11,762 Total current liabilities 90,444 61,000 29,444 Long-term debt 128,141 20,156 107,985 Benefit plan and other long-term liabilities 34,988 31,879 3,109 Total liabilities 253,573 113,035 140,538 Total stockholders' equity 273,456 245,225 28,231 Total liabilities and stockholders' equity 527,029 358,260 168,769

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Summary Statements of Cash Flows

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For the years ended December 31, In thousands 2016 2015 Cash flows from operating activities: Net income $ 37,187 $ 46,259 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of business — (18,647) Depreciation and amortization 19,559 17,275 Inventory step-up amortization 1,954 — — Long-lived asset impairment charge — 1,354 Deferred income taxes (1,172) 3,585 Stock-based compensation 4,359 2,827 Other (9) 288 Accounts receivable 379 (2,749) Inventories 500 479 Accounts payable 3,505 (4,886) Accrued payroll and other compensation 1,770 (3,416) Other, net 1,695 (6,259) Net cash provided by operating activities 69,727 36,110 Cash flows from investing activities: Business acquisitions, net of cash acquired (152,242) — Capital expenditures (25,466) (20,645) Proceeds from sale of business, net — 28,550 Net cash (used for) provided by investing activities (177,708) 7,905 Cash flows from financing activities: Proceeds from borrowings 116,600 — Debt repayments, net (10,328) (20,571) Common stock activity, net 103 (6,136) Net cash provided by (used for) financing activities 106,375 (26,707) Effect of exchange rate changes on cash (2,369) (3,450) (Decrease) Increase in cash and cash equivalents (3,975) 13,858 Cash and cash equivalents at beginning of period 75,909 62,051 Cash and cash equivalents at end of period $ 71,934 $ 75,909 Free Cash Flow (Cash provided by ops - Cap exp) 44,261 15,465

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Reconciliation Between Adjusted and Reported GAAP Financials

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(a) Exclude the inventory step-up purchase accounting adjustment of $0.3 million related to the Texel acquisition. (b) Exclude corporate acquisition expenses of $1.1 million related to the Texel and Gutsche acquisitions and the $3.5 million German Cartel settlement. (c) Exclude the tax expense realized on the adjustments in (a) and (b) of $0.4 million. (d) Exclude the non-cash intangible asset impairment charge of $1.4 million related to the Company's Solutech operation in the Performance Materials Segment. (e) Exclude non-cash discrete income tax charges of $1.2 million related to state tax law changes.

For the quarter ended December 31, 2016 For the quarter ended December 31, 2015 In thousands except per share data As Reported, Lydall, Inc Adjustments Adjusted Results As Reported, Lydall, Inc Adjustments Adjusted Results Net sales $ 144,192 $ — $ 144,192 $ 131,398 $ — $ 131,398 Cost of sales 112,210 (347) (a) 111,863 102,181 — 102,181 Gross profit 31,982 347 32,329 29,217 — 29,217 Gross margin 22.2% 22.4% 22.2% 22.2% Selling, product development and administrative expenses 24,688 (4,536) (b) 20,152 18,688 (1,354) (d) 17,334 Operating income 7,294 4,883 12,177 10,529 1,354 11,883 Operating margin 5.1% 8.4% 8.0% 9.0% Interest expense 425 — 425 160 — 160 Other income, net (331) — (331) (35) — (35) Income before income taxes 7,200 4,883 12,083 10,404 1,354 11,758 Income tax expense 2,798 364 (c) 3,162 5,085 (1,174) (e) 3,911 Income from equity method investments (18) — (18) — — — Net income $ 4,420 $ 4,519 $ 8,939 $ 5,319 $ 2,528 $ 7,847 Earning per share Basic $ 0.26 $ 0.53 $ 0.32 $ 0.47 Diluted $ 0.26 $ 0.52 $ 0.31 $ 0.46 Weighted average number of common shares outstanding Basic 16,911 16,911 16,751 16,751 Diluted 17,306 17,306 17,095 17,095

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Reconciliation Between Adjusted and Reported GAAP Financials

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(a) Exclude the inventory step-up purchase accounting adjustment of $2.0 million related to the Texel acquisition. (b) Exclude corporate acquisition expenses of $3.7 million related to the Texel and Gutsche acquisitions and the $3.5 million German Cartel settlement. (c) Exclude the tax expense realized on the adjustments in (a) and (b) of $1.3 million. (d) Exclude the net sales of the divested business of $1.7 million related to the sale of the Life Sciences Vital Fluids business. (e) Exclude the cost of sales of the divested business of $1.1 million related to the sale of the Life Sciences Vital Fluids business. (f) Exclude the non-cash intangible asset impairment charge of $1.4 million related to the Company's Solutech operation and administrative expenses

• f $0.4 million related to the sale of the Life Sciences Vital Fluids business.

(g) Exclude the gain of $18.6 million related to sale of the Life Sciences Vital Fluids business. (h) Exclude the tax expense realized on the adjustments in (d), (e), (f), and (g) of $6.9 million. For the year ended December 31, 2016 For the year ended December 31, 2015 In thousands except per share data As Reported, Lydall, Inc Adjustments Adjusted Results As Reported, Lydall, Inc Adjustments Adjusted Results Net sales $ 566,852 $ — $ 566,852 $ 524,505 $ (1,671) (d) $ 522,834 Cost of sales 428,310 (1,954) (a) 426,356 402,008 (1,137) (e) 400,871 Gross profit 138,542 1,954 140,496 122,497 (534) 121,963 Gross margin 24.4% 24.8% 23.4% 23.3% Selling, product development and administrative expenses 83,750 (7,181) (b) 76,569 70,020 (1,770) (f) 68,250 Operating income 54,792 9,135 63,927 52,477 1,236 53,713 Operating margin 9.7% 11.3% 10.0% 10.3% Gain on sale of business — — — (18,647) 18,647 (g) — Interest expense 1,068 — 1,068 755 — 755 Other income, net (1,215) — (1,215) (654) — (654) Income before income taxes 54,939 9,135 64,074 71,023 (17,411) 53,612 Income tax expense 17,821 1,283 (c) 19,104 24,764 (6,852) (h) 17,912 Income from equity method investments (69) — (69) — — — Net income $ 37,187 $ 7,852 $ 45,039 $ 46,259 $ (10,559) $ 35,700 Earning per share Basic $ 2.20 $ 2.67 $ 2.76 $ 2.13 Diluted $ 2.16 $ 2.61 $ 2.71 $ 2.10 Weighted average number of common shares outstanding Basic 16,871 16,871 16,746 16,746 Diluted 17,241 17,241 17,084 17,084

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Reconciliation Between Adjusted and Reported GAAP Financials

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The above tables provide information regarding organic sales growth, defined as net sales growth excluding (1) sales from the acquired and sold businesses (2) the impact of foreign currency translation and (3) change in tooling sales. For the quarter ended December 31, 2016 Performance Materials Technical Nonwovens Thermal/Acoustical Metals Thermal/Acoustical Fibers Consolidated Sales growth, as reported 8.4% 26.7% 4.0% 1.3% 9.7% Acquisition/disposition —

• 50.9%

— —

• 13.5%

Foreign currency translation 0.5% 4.3% 1.0% — 1.6% Change in tooling sales — — 6.1% 3.8% 3.0% Organic sales growth (decline) 8.9%

• 19.9%

11.1% 5.1% 0.8% For the year ended December 31, 2016 Performance Materials Technical Nonwovens Thermal/Acoustical Metals Thermal/Acoustical Fibers Other Products and Services Consolidated Sales growth, as reported 9.5% 11.8% 8.7% 7.7%

• 100.0%

8.1% Acquisition/disposition —

• 29.4%

— — 100.0%

• 7.5%

Foreign currency translation — 3.0% 0.4% — — 1.0% Change in tooling sales — —% 0.6%

• 1.4%

—

• 0.1%

Organic sales growth (decline) 9.5%

• 14.6%

9.7% 6.3% —% 1.5%

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($ in 000) Quarter Ended December 31, Year Ended December 31, 2016 2015 2016 2015 Technical Nonwovens Operating Income, as reported

$ 2,777 $ 2,373 $ 15,584 $ 13,431

Inventory step-up purchase accounting adjustment

347 — 1,954 —

Operating Income, adjusted

$ 3,124 $ 2,373 $ 17,538 $ 13,431

Operating margin, as reported 6.3 % 6.8% 10.0% 9.7% Operating margin, adjusted 7.1 % 6.8% 11.3% 9.7% Performance Materials Operating Income, as reported

$ 2,237 $ 719 $ 12,339 $ 6,790

Long-lived asset impairment charge

— 1,354 — 1,354

Operating Income, adjusted

$ 2,237 $ 2,073 $ 12,339 $ 8,144

Operating margin, as reported 8.6 % 3.0% 11.1% 6.7% Operating margin, adjusted 8.6 % 8.7% 11.1% 8.0% Thermal / Acoustical Metals Operating Income, as reported

$ (1,528) $ 3,194 $ 11,562 $ 15,517

German Cartel settlement

3,479 — 3,479 —

Operating Income, adjusted

$ 1,951 $ 3,194 $ 15,041 $ 15,517

Operating margin, as reported (3.5)% 7.7% 6.6% 9.6% Operating margin, adjusted 4.5 % 7.7% 8.6% 9.6%

Reconciliation Between Adjusted and Reported GAAP Financials