Performance Obligations
The following is a description of products and performance obligations, separated by reportable segments, from which the Company generates its revenue. For more detailed information about reportable segments, see Note 13 “Segment Information.”
|
|
|
Segment
|
Performance Materials
|
|
|
Products
|
Products for this segment include filtration media solutions primarily for air, fluid power, life science and industrial applications, gasket and sealing solutions, thermal insulation, energy storage, and other engineered products.
|
|
|
Performance Obligations
|
These contracts typically have distinct performance obligations, which is the promise to transfer the media solutions to the Company’s customers.
The Company recognizes revenue at a point in time or over time, based upon when control transfers to the customer. If revenue is recognized at a point in time, the performance obligation is typically satisfied upon shipment and in accordance with shipping terms. In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.
Customer payment terms are negotiated on a contract-by-contract basis and typically range from 30 to 90 days.
|
|
|
Segment
|
Technical Nonwovens
|
|
|
Products
|
This segment produces needle punch nonwoven solutions including industrial filtration
and advanced materials products. Industrial Filtration products include nonwoven rolled-good felt media and filter bags used primarily in industrial air and liquid filtration applications. Advanced materials products include nonwoven rolled good media used in commercial applications and predominantly serves the geosynthetic, automotive, industrial, medical, and safety apparel markets. The automotive media is provided to tier-one suppliers as well as the Company’s Thermal Acoustical Solutions segment.
|
|
|
|
|
|
Performance Obligations
|
These contracts typically have distinct performance obligations, which is the promise to transfer the industrial filtration or advanced materials products to the Company’s customers.
The Company recognizes revenue at a point in time or over time, based upon when control transfers to the customer. If revenue is recognized at a point in time, the performance obligation is typically satisfied upon shipment and in accordance with shipping terms.
In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.
Customer payment terms are negotiated on a contract-by-contract basis and typically range from 30 to 90 days.
For filter bag sales, the Company may enter into warranty agreements that are implied or sold with the product to provide assurance that a product will function as expected and in accordance with certain specifications. Therefore, this type of warranty is not a separate performance obligation.
|
|
|
Segment
|
Thermal Acoustical Solutions
|
|
|
Products
|
Parts
- The segment produces a full range of innovative engineered products tailored for the transportation sector to thermally shield sensitive components from high heat, improve exhaust gas treatment and lower harmful emissions as well as assist in the reduction of noise vibration and harshness. The majority of products are sold to original equipment manufacturers and tier-one suppliers.
Tooling
- The Company enters into contractual agreements with certain customers within the automotive industry, to design and develop molds, dies and tools (collectively, “tooling”).
|
|
|
Performance Obligations
|
Parts
- Customer contracts typically have distinct performance obligations, which is
the promise to transfer manufactured parts to these customers. The Company recognizes parts revenue at a point in time or over time, based upon when control transfers to the customer. If revenue is recognized at a point in time, the performance obligation is typically satisfied upon shipment and in accordance with shipping terms.
In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.
Customer payment terms are negotiated on a contract-by-contract basis and typically range from 30 to 90 days.
Tooling
- Customer contracts typically have distinct performance obligations and are generally completed within one year. The Company periodically enters into multiple contracts with a customer at or near the same time which may be combined for purposes of determining the appropriate transaction price. The Company allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price using costs incurred plus expected margin. The corresponding revenues are recognized over time as the related performance obligations are satisfied.
Tooling customer payment terms typically range from 30 to 90 days after title transfers to the customer. Occasionally customers make progress payments as the tool is constructed.
|
Practical Expedients and Exemptions
The Company has elected to adopt the contract cost practical expedient. This expedient allows the Company to recognize its incremental costs of obtaining contracts, such as sales commissions, as an expense when incurred if the related contract revenue is expected to be recognized in one year or less. These costs are included in selling, product development and administrative expenses.
The Company has made an accounting policy election to record shipping and handling activities occurring after control has passed to the customer to be treated as a fulfillment cost rather than as a distinct performance obligation. Shipping and handling expenses consist primarily of costs incurred to deliver products to customers and internal costs related to preparing products for shipment and are recorded as a cost of sales. Amounts billed to customers as shipping and handling are classified as revenue when services are performed.
ASC 606 requires the disclosure of unsatisfied performance obligations related to contracts from customers at the end of each reporting period. The Company has elected the practical expedient because the Company’s contracts generally have a duration of one year or less, therefore no disclosure is required.
The Company has elected to adopt the practical expedient to disregard the need to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects that the period of time between when the products are transferred to the customer and when the Company is paid for those products will be one year or less.
Contract Assets and Liabilities
The Company’s contract assets primarily include unbilled amounts typically resulting from sales under contracts when the over time method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer.
These unbilled accounts receivable in contract assets are transferred to accounts receivable upon invoicing, typically when the right to payment becomes unconditional in which case payment is due based only upon the passage of time.
The Company’s contract liabilities primarily relate to advance payments received from customers, and deferred revenue. These contract liabilities represent the Company’s obligation to transfer its products to its customers for which the Company has received, or is owed consideration from its customers.
Contract liabilities are included in deferred revenue on the Company’s Condensed Consolidated Balance Sheets.
Contract assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31, 2018
|
|
January 1, 2018
|
|
Dollar Change
|
Contract assets
|
|
$
|
23,040
|
|
|
$
|
19,125
|
|
|
$
|
3,915
|
|
Contract liabilities
|
|
$
|
4,537
|
|
|
$
|
2,820
|
|
|
$
|
1,717
|
|
The
$3.9 million
increase in contract assets from January 1, 2018 to
December 31, 2018
was primarily due to timing of billings to customers and contract assets increased
$0.3 million
relating to the acquisition of Interface. See Note 3 “Acquisitions."
The
$1.7 million
increase in contract liabilities from January 1, 2018 to
December 31, 2018
was primarily due to an increase in customer deposits partially offset by revenue recognized of
$2.6 million
in 2018 related to contract liabilities at January 1, 2018.
Impacts on Financial Statements
The cumulative effect of the changes made to the Company’s Condensed Consolidated January 1, 2018 Balance Sheet for the adoption of ASC 606 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31, 2017
|
|
Adjustments for Adoption of ASC606
|
|
January 1, 2018
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Contract assets
|
|
$
|
—
|
|
|
$
|
19,125
|
|
|
$
|
19,125
|
|
Inventories
|
|
$
|
80,339
|
|
|
$
|
(15,184
|
)
|
|
$
|
65,155
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
71,931
|
|
|
$
|
663
|
|
|
$
|
72,594
|
|
Deferred revenue
|
|
$
|
3,412
|
|
|
$
|
1,209
|
|
|
$
|
4,621
|
|
Deferred tax liabilities
|
|
$
|
14,714
|
|
|
$
|
471
|
|
|
$
|
15,185
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
374,783
|
|
|
$
|
1,598
|
|
|
$
|
376,381
|
|
The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet for the adoption of ASC 606 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
In thousands
|
|
Balances Without Adoption of ASC 606
|
|
ASC 606 Adjustments
|
|
As Reported
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Contract assets
|
|
$
|
—
|
|
|
$
|
23,040
|
|
|
$
|
23,040
|
|
Inventories
|
|
$
|
103,767
|
|
|
$
|
(19,302
|
)
|
|
$
|
84,465
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
71,937
|
|
|
$
|
1,328
|
|
|
$
|
73,265
|
|
Deferred revenue
|
|
$
|
7,952
|
|
|
$
|
(962
|
)
|
|
$
|
6,990
|
|
Deferred tax liabilities
|
|
$
|
38,422
|
|
|
$
|
843
|
|
|
$
|
39,265
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
408,846
|
|
|
$
|
2,479
|
|
|
$
|
411,325
|
|
Accumulated other comprehensive loss
|
|
$
|
(42,735
|
)
|
|
$
|
50
|
|
|
$
|
(42,685
|
)
|
The cumulative effect of the changes made to the Company’s Condensed Consolidated Statement of Operations for the adoption of ASC 606 for the year ended
December 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
In thousands
|
|
Results Without Adoption of ASC 606
|
|
Effect of Change
Higher (Lower)
|
|
As Reported
|
|
|
|
|
|
Net sales
|
|
$
|
781,612
|
|
|
$
|
4,285
|
|
|
$
|
785,897
|
|
Cost of sales
|
|
630,220
|
|
|
3,032
|
|
|
633,252
|
|
Gross profit
|
|
151,392
|
|
|
1,253
|
|
|
152,645
|
|
Selling, product development and administrative expenses
|
|
103,457
|
|
|
—
|
|
|
103,457
|
|
Operating income
|
|
47,935
|
|
|
1,253
|
|
|
49,188
|
|
Interest expense
|
|
6,212
|
|
|
—
|
|
|
6,212
|
|
Other income, net
|
|
(289
|
)
|
|
—
|
|
|
(289
|
)
|
Income before income taxes
|
|
42,012
|
|
|
1,253
|
|
|
43,265
|
|
Income tax expense
|
|
8,081
|
|
|
372
|
|
|
8,453
|
|
Income from equity method investment
|
|
(132
|
)
|
|
—
|
|
|
(132
|
)
|
Net income
|
|
$
|
34,063
|
|
|
$
|
881
|
|
|
$
|
34,944
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
1.98
|
|
|
$
|
0.05
|
|
|
$
|
2.03
|
|
Diluted
|
|
$
|
1.97
|
|
|
$
|
0.05
|
|
|
$
|
2.02
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
17,204
|
|
|
—
|
|
|
17,204
|
|
Diluted
|
|
17,330
|
|
|
—
|
|
|
17,330
|
|
Disaggregated Revenue
The Company disaggregates
revenue from customers by geographic region, as it believes this disclosure best depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic factors. Disaggregated revenue by geographical region for the year ended
December 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
117,313
|
|
|
$
|
167,519
|
|
|
$
|
250,133
|
|
|
$
|
(25,121
|
)
|
|
$
|
509,844
|
|
Europe
|
|
49,055
|
|
|
73,912
|
|
|
99,529
|
|
|
(697
|
)
|
|
221,799
|
|
Asia
|
|
2,849
|
|
|
35,640
|
|
|
15,765
|
|
|
—
|
|
|
54,254
|
|
Total Net Sales
|
|
$
|
169,217
|
|
|
$
|
277,071
|
|
|
$
|
365,427
|
|
|
$
|
(25,818
|
)
|
|
$
|
785,897
|
|
3. Acquisitions
On August 31, 2018, the Company completed the acquisition of Interface Performance Materials ("Interface"), based in Lancaster, Pennsylvania. A globally-recognized leader in the delivery of engineered sealing solutions, the Interface operations manufacture wet-laid gasket and specialty materials primarily serving OEM and Tier I manufacturers in the agriculture, construction, earthmoving, industrial, and automotive segments. The transaction strengthens the Company's position as an industry-leading global provider of filtration materials and expands the Company's end
markets into attractive adjacencies. The Company acquired
one hundred percent
of Interface for
$268.4 million
, net of cash acquired of
$5.2 million
, subject to a post-closing working capital adjustment within the one year window under ASC 805. The purchase price was financed with a combination of cash on hand and
$261.4 million
of borrowings from the Company's amended
$450 million
credit facility. The operating results of the Interface businesses have been included in the Consolidated Statements of Operations since August 31, 2018, the date of acquisition, and are reported within the Performance Materials reporting segment.
During the year ended
December 31, 2018
, the Company incurred
$3.4 million
of transaction costs, related to the acquisition of Interface. These transaction costs include legal fees and other professional services fees to complete the transaction. These expenses have been recognized in the Company's Condensed Consolidated Statements of Operations as selling, product development and administrative expenses.
From the date of the acquisition through
December 31, 2018
, Interface reported net sales and operating income of
$45.7 million
and
$0.8 million
, respectively. Operating income from the date of the acquisition to the year ended
December 31, 2018
included
$2.0 million
of purchase accounting inventory fair value step-up adjustments in cost of sales upon the sale of inventory and
$3.4 million
of intangible assets amortization expense in selling, product development and administrative expenses.
The following table presents the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Company's acquisition of Interface. The final determination of the fair value of certain assets and liabilities will be completed within the one year measurement period as required by the FASB ASC Topic 805, “Business Combinations.” As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period in the first eight months of 2019, including a post-close working capital adjustment. Fair value estimates are based on judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the purchase accounting assessment may result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.
The following is a preliminary estimate of the assets acquired and the liabilities assumed by the Company at the date of the acquisition:
|
|
|
|
|
|
In thousands
|
|
|
Accounts receivable
|
|
$
|
25,182
|
|
Inventories
|
|
17,313
|
|
Prepaid expenses and other current assets
|
|
2,382
|
|
Property, plant and equipment
|
|
40,902
|
|
Goodwill (Note 6)
|
|
130,991
|
|
Other intangible assets (Note 6)
|
|
106,900
|
|
Other assets
|
|
308
|
|
Total assets acquired, net of cash acquired
|
|
$
|
323,978
|
|
|
|
|
Current liabilities
|
|
(11,319
|
)
|
Deferred tax liabilities (Note 14)
|
|
(24,904
|
)
|
Benefit plan liabilities (Note 10)
|
|
(18,352
|
)
|
Other long-term liabilities
|
|
(1,031
|
)
|
Total liabilities assumed
|
|
(55,606
|
)
|
Total purchase price, net of cash acquired
|
|
$
|
268,372
|
|
The following table reflects the unaudited pro forma operating results of the Company for the year ended December 31,
2018
and
2017
, which gives effect to the acquisition of Interface as if it had occurred on January 1, 2017. The pro forma information includes the historical financial results of the Company and Interface. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective January 1, 2017, nor are they intended to be indicative of results that may occur in the future. The pro forma information does not include the effects of any synergies related to the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended
December 31,
|
|
|
(Unaudited Pro Forma)
|
|
(Unaudited
Pro Forma)
|
In thousands
|
|
2018
|
|
2017
|
Net Sales
|
|
$
|
888,355
|
|
|
$
|
840,040
|
|
Net Income
|
|
$
|
34,896
|
|
|
$
|
36,619
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic
|
|
$
|
2.03
|
|
|
$
|
2.15
|
|
Diluted
|
|
$
|
2.01
|
|
|
$
|
2.11
|
|
Pro forma adjustments to the historical financial statements during the year ended
December 31, 2018
resulted in an additional
$4.5 million
of net income. Earnings were adjusted to exclude items such as acquisition related expenses for both Lydall and Interface, purchase accounting adjustments for inventory step-up and tax valuation allowance expenses. Earnings for the year ended
December 31, 2018
were adjusted to include items such as additional intangibles amortization expense and additional interest expense associated with borrowings under the Company's Amended Credit Facility.
Pro forma adjustments during the year ended
December 31, 2017
reduced net income by
$14.0 million
. Earnings for the year ended
December 31, 2017
were adjusted to include items such as acquisition related expenses for both Lydall and Interface, additional intangibles amortization expense, purchase accounting adjustments for inventory step-up and additional interest expense associated with borrowings under the Company's Amended Credit Facility. Earnings were adjusted to exclude items such as Interface management fee expenses and tax valuation allowance expenses.
On July 12, 2018, the Company acquired certain assets and assumed certain liabilities of the Precision Filtration division of Precision Custom Coatings ("PCC") based in Totowa, NJ. Precision Filtration is a producer of high-quality, air filtration media principally serving the commercial and residential HVAC markets with a range of low efficiency through high-performing air filtration media. The Company acquired the assets and liabilities of PCC for
$1.6 million
in cash with additional cash payments of up to
$2.0 million
to be made based on the achievement of certain future financial targets through 2022. PCC had a minimal impact on the Company's sales and operating income from the date of the acquisition and the year ended
December 31, 2018
.
On December 31, 2016, the Company completed an acquisition of the nonwoven needle punch materials businesses, which include MGF Gutsche & Co GmbH KG, FRG and Gutsche Environmental Technology (Yixing) Co. Ltd., China, operating under Gutsche (“Gutsche”), a German based corporation. The Gutsche operations manufacture nonwoven needle punch materials and predominantly serve the industrial filtration and high performance nonwoven markets. The Company acquired
one hundred percent
of Gutsche for
$57.6 million
, net of a receivable of
$3.0 million
related to an estimated post-closing purchase price adjustment. In the second quarter of 2017, the Company finalized the post closing adjustment resulting in an increase in the purchase price of
$0.4 million
resulting in a final purchase price of
$58.0 million
.
On July 7, 2016, the Company completed an acquisition of the nonwoven and coating materials businesses primarily operating under Texel from ADS, a Canadian based corporation. The Texel operations manufacture nonwoven needle punch materials and predominantly serve the geosynthetic, liquid filtration, and other industrial markets. The Company acquired
one hundred percent
of Texel for
$102.7 million
in cash, including a post-closing working capital adjustment. As part of the acquisition, the Company acquired a
fifty percent
interest in a joint venture, Afitex Texel Geosynthetiques, Inc., with a fair value of
$0.6 million
. The joint venture is accounted for under the equity method of accounting.
4. Inventories
Inventories as of
December 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2018
|
|
2017
|
Raw materials
|
$
|
37,731
|
|
|
$
|
28,672
|
|
Work in process
|
18,296
|
|
|
29,427
|
|
Finished goods
|
28,438
|
|
|
23,901
|
|
|
84,465
|
|
|
82,000
|
|
Less: Progress billings
|
—
|
|
|
(1,661
|
)
|
Total inventories
|
$
|
84,465
|
|
|
$
|
80,339
|
|
Included in work in process is gross tooling inventory of
$4.3 million
and
$20.2 million
at
December 31, 2018
and
2017
, respectively. Tooling inventory, net of progress billings, was
$18.5 million
at
December 31, 2017
. Effective January 1, 2018 the Company adopted ASC 606, Revenue from Contracts from Customers, under the modified retrospective transition method. The adoption of ASC 606 resulted in the reclassification of progress billings to contract liabilities. See Note 2, Revenue from Contracts with Customers, for further discussion of contract liabilities.
5. Property, Plant and Equipment, Net
Property, plant and equipment as of
December 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Lives
|
|
December 31,
|
In thousands
|
2018
|
|
2017
|
Land
|
–
|
|
$
|
6,280
|
|
|
$
|
4,289
|
|
Buildings and improvements
|
10-35 years
|
|
104,036
|
|
|
84,337
|
|
Machinery and equipment
|
5-25 years
|
|
289,059
|
|
|
254,881
|
|
Office equipment
|
2-8 years
|
|
36,110
|
|
|
33,880
|
|
Vehicles
|
3-6 years
|
|
1,640
|
|
|
1,706
|
|
Assets under capital leases:
|
|
|
|
|
|
Land
|
–
|
|
228
|
|
|
241
|
|
Buildings and improvements
|
10-35 years
|
|
229
|
|
|
221
|
|
Machinery and equipment
|
5-25 years
|
|
1,005
|
|
|
1,051
|
|
Office equipment
|
2-8 years
|
|
32
|
|
|
34
|
|
|
|
|
438,619
|
|
|
380,640
|
|
Accumulated depreciation
|
|
|
(244,098
|
)
|
|
(226,581
|
)
|
Accumulated depreciation of capital leases
|
|
|
(608
|
)
|
|
(239
|
)
|
|
|
|
193,913
|
|
|
153,820
|
|
Construction in progress
|
|
|
19,456
|
|
|
16,512
|
|
Total property, plant and equipment, net
|
|
|
$
|
213,369
|
|
|
$
|
170,332
|
|
Depreciation expense was
$23.4 million
in
2018
,
$21.4 million
in
2017
, and
$17.8 million
in
2016
.
6. Goodwill and Long-Lived Assets
Gross and net carrying amounts of goodwill at
December 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Totals
|
Goodwill
|
$
|
13,307
|
|
|
$
|
55,662
|
|
|
$
|
12,160
|
|
|
$
|
81,129
|
|
Accumulated amortization/impairment
|
—
|
|
|
—
|
|
|
(12,160
|
)
|
|
(12,160
|
)
|
Balance at December 31, 2017
|
13,307
|
|
|
55,662
|
|
|
—
|
|
|
68,969
|
|
Goodwill
|
144,626
|
|
|
52,337
|
|
|
12,160
|
|
|
209,123
|
|
Accumulated amortization/impairment
|
—
|
|
|
—
|
|
|
(12,160
|
)
|
|
(12,160
|
)
|
Balance at December 31, 2018
|
$
|
144,626
|
|
|
$
|
52,337
|
|
|
$
|
—
|
|
|
$
|
196,963
|
|
The changes in the carrying amounts of goodwill in
2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Performance Materials
|
|
Technical Nonwovens
|
|
Totals
|
Balance at January 1, 2017
|
$
|
12,777
|
|
|
$
|
50,829
|
|
|
$
|
63,606
|
|
Goodwill addition
|
—
|
|
|
323
|
|
|
323
|
|
Currency translation adjustment
|
530
|
|
|
4,510
|
|
|
5,040
|
|
Balance at December 31, 2017
|
13,307
|
|
|
55,662
|
|
|
68,969
|
|
Goodwill addition
|
131,509
|
|
|
—
|
|
|
131,509
|
|
Currency translation adjustment
|
(190
|
)
|
|
(3,325
|
)
|
|
(3,515
|
)
|
Balance at December 31, 2018
|
$
|
144,626
|
|
|
$
|
52,337
|
|
|
$
|
196,963
|
|
Goodwill Associated with Acquisitions and Divestitures
The additional goodwill of
$131.5 million
in 2018 within the Performance Materials segment results from the two acquisitions completed in the third quarter of 2018. The Interface acquisition accounted for
$131.0 million
of the
$131.5 million
increase. The amount allocated to goodwill is reflective of the benefits the Company expects to realize from the expansion of the Company's engineered materials offering, new product development and Interface's assembled workforce.
None
of the goodwill associated with the Interface acquisition is expected to be deductible for income tax purposes.
The additional goodwill of
$0.3 million
in 2017 within the Technical Nonwovens segment is the result of the final post-closing adjustments related to the acquisition of Gutsche on December 31, 2016.
Goodwill Impairment Testing
During the fourth quarter of
2018
, the Company performed its annual impairment analysis of the
$144.6 million
of goodwill in the Performance Materials reporting unit (PM reporting unit) and
$52.3 million
in the Technical Nonwovens reporting unit (TNW reporting unit). The Company used the qualitative method to analyze the goodwill for the PM reporting unit by considering capital markets environment, economic conditions, industry trends, results of operations, and other factors. The Company also considered changes in assumptions used in the Company's most recent quantitative annual testing, including results of operations, the magnitude of excess of fair value over carrying value and other factors. As a result of this qualitative analysis, the Company concluded that the PM reporting unit's fair value more likely than not exceeds its carrying value and as a result, the two-step impairment assessment is not required to be completed.
To periodically supplement historical qualitative assessments, the Company also performed the two-step impairment test for the TNW reporting unit. In performing step one of the impairment analysis, a quantitative valuation of the fair value of the reporting unit was completed utilizing both an income approach and a market approach. The income approach involved determining the present value of future cash flows from the TNW reporting unit's projected financial results for 2019-2021 and the projected cash flows beyond that three year period computed as the terminal value.
The Company believes the income approach was appropriate because it provided a fair value estimate based upon the reporting unit's expected long-term operations and cash flow performance.
In applying the market approach, valuation multiples were derived from historic operating data of selected guideline companies, which were evaluated and adjusted, if necessary. The valuation multiples were then applied to the appropriate operating data of the TNW reporting unit to arrive at an indication of fair value. The Company believes the market approach was appropriate because it provided a fair value using multiples from companies with operations and economic characteristics similar to the TNW reporting unit.
As a result of the step-one quantitative assessment, the Company concluded that the TNW reporting unit had a fair value in excess of its carrying value and as a result, step two of the impairment test was not required.
Other Intangible Assets
The table below presents the gross carrying amount and, as applicable, the accumulated amortization of the Company’s acquired intangible assets other than goodwill included in “Other intangible assets, net” in the Consolidated Balance Sheets as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
In thousands
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
141,455
|
|
|
$
|
(11,453
|
)
|
|
$
|
39,474
|
|
|
$
|
(4,460
|
)
|
Patents
|
|
4,333
|
|
|
(3,816
|
)
|
|
4,504
|
|
|
(3,821
|
)
|
Technology
|
|
2,500
|
|
|
(810
|
)
|
|
2,500
|
|
|
(644
|
)
|
Trade names
|
|
7,235
|
|
|
(2,840
|
)
|
|
4,288
|
|
|
(1,461
|
)
|
License agreements
|
|
619
|
|
|
(619
|
)
|
|
640
|
|
|
(640
|
)
|
Other
|
|
561
|
|
|
(561
|
)
|
|
586
|
|
|
(423
|
)
|
Total amortized intangible assets
|
|
$
|
156,703
|
|
|
$
|
(20,099
|
)
|
|
$
|
51,992
|
|
|
$
|
(11,449
|
)
|
I
n connection with the acquisition of Interface on August 31, 2018, the Company recorded intangible assets of
$106.9 million
, which included
$103.7 million
of customer relationships and
$3.2 million
of trade names. As of December 31, 2018, the weighted average useful lives of Interface's intangible assets was
12
years.
Amortization of all intangible assets for the years ended
December 31, 2018
,
2017
, and
2016
was
$9.3 million
,
$4.5 million
, and
$1.5 million
, respectively. Estimated amortization expense for intangible assets is expected to be
$21.4 million
,
$20.8 million
,
$16.4 million
,
$14.4 million
and
$12.7 million
for each of the years ending December 31,
2019
through
2023
and thereafter, respectively. As of
December 31, 2018
, the weighted average useful life of intangible assets was approximately
11
years.
Impairment of Long-Lived Assets
During the first quarter of 2017, the Company tested for impairment a discrete long-lived asset group in the Performance Materials segment with a carrying value of
$1.3 million
, as a result of indicators of possible impairment. To determine the recoverability of this asset group, the Company completed an undiscounted cash flow analysis and compared it to the asset group carrying value. This analysis was primarily dependent on the expectations for net sales over the estimated remaining useful life of the underlying asset group. The impairment test concluded that the asset group was not recoverable as the resulting undiscounted cash flows were less than their carrying amount. Accordingly, the Company determined the fair value of the asset group to assess if there was an impairment. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions considered to be Level 3 inputs. To determine the estimated fair value of the asset group the Company used the market approach. Under the market approach, the determination of fair value considered market conditions including an independent appraisal of the components of the asset group. The estimated fair value of the asset group was
$0.5 million
, below its carrying value of
$1.3 million
, which resulted in a long-lived asset impairment charge of
$0.8 million
included in selling, product development and administrative expenses during 2017.
7. Long-term Debt and Financing Arrangements
On August 31, 2018, the Company amended and restated its
$175 million
senior secured revolving credit agreement ("Amended Credit Agreement") that increased the available borrowing from
$175 million
to
$450 million
, added three additional lenders and extended the maturity date from July 7, 2021 to August 31, 2023.
Under the terms of the Amended Credit Agreement, the lenders are providing up to a
$450 million
credit facility (the “Facility”) to the Company, under which the lenders provided a term loan commitment of
$200
million and revolving loans and issue letters of credit to or for the benefit of the Company and its subsidiaries of up to
$250
million. The Facility may be increased by an aggregate amount not to exceed
$150 million
through an accordion feature, subject to specified conditions. The Facility is secured by substantially all of the assets of the Company.
Interest is charged on borrowings at the Company’s option of either: (i) Base Rate plus the Applicable Rate, or (ii) the Eurodollar Rate plus the Applicable Rate. The Base Rate is a fluctuating rate equal to the highest of (a) the federal funds rate plus
0.50%
, (b) the prime rate as set by Bank of America, and (c) the Eurocurrency Rate plus
1.00%
. The Eurocurrency Rate means (i) if denominated in LIBOR quoted currency, a fluctuating LIBOR per annum rate equal to the London Interbank Offered Rate; (ii) if denominated in Canadian Dollars, the rate per annum equal to the Canadian Dollar Offered Rate; or (iii) the rate per annum as designated with respect to such alternative currency at the time such alternative currency is approved by the Lenders. The Applicable Rate is determined based on the Company’s Consolidated Leverage Ratio (as defined in the Amended Credit Agreement). The Applicable Rate added to the Base Rate Committed Loans ranges from
0.00%
to
1.25%
, and the Applicable Rate added to Eurocurrency Rate Committed Loans and Letters of Credit ranges from
0.75%
to
2.00%
. The Company pays a quarterly fee ranging from
0.15%
to
0.275%
on the unused portion of the revolving commitment. The Company has entered into multiple interest rate swaps to convert a portion of the Company's one-month LIBOR-based borrowings from a variable rate to a fixed rate. See Note 8.
The Company is permitted to prepay term and revolving borrowings in whole or in part at any time without premium or penalty, subject to certain minimum payment requirements, and the Company is generally permitted to irrevocably cancel unutilized portions of the revolving commitments under the Amended Credit Agreement. The Company is required to repay the term commitment in an amount of
$2.5 million
per quarter beginning with the quarter ending December 31, 2018 through the quarter ending June 30, 2023.
The Amended Credit Agreement contains covenants required of the Company and its subsidiaries, including various affirmative and negative financial and operational covenants. The Company is required to meet certain quarterly financial covenants calculated from the four fiscal quarters most recently ended, including: (i) a minimum consolidated fixed charge coverage ratio, which requires that at the end of each fiscal quarter the ratio of (a) consolidated EBITDA to (b) the sum of consolidated interest charges, redemptions, non-financed maintenance capital expenditures, restricted payments and taxes paid, each as defined in the Amended Credit Agreement, may not be lower than
1.25
to 1.0; and (ii) a consolidated net leverage ratio, which requires that at the end of each fiscal quarter the ratio of consolidated funded indebtedness minus consolidated domestic cash to consolidated EBITDA, as defined in the Amended Credit Agreement, may not be greater than
3.5
to 1.0. The Company was in compliance with all covenants at
December 31, 2018
.
At
December 31, 2018
, the Company had borrowing availability of
$108.1 million
under the Amended Credit Facility net of
$138.0 million
of revolving loan borrowings outstanding and standby letters of credit outstanding of
$3.9 million
.
In addition to the amounts outstanding under the Amended Credit Facility, the Company has various acquired foreign credit facilities totaling approximately
$8.2 million
. At
December 31, 2018
, the Company's foreign subsidiaries had
$2.2 million
in standby letters of credit outstanding.
The Company also has capital lease agreements for machinery and equipment at multiple operations requiring monthly principal and interest payments through 2020.
Total outstanding debt consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
Effective Rate
|
|
Maturity
|
|
2018
|
|
2017
|
Revolver Loan
|
4.15%
|
|
8/31/2023
|
|
$
|
138,000
|
|
|
$
|
76,600
|
|
Term Loan, net of debt issuance costs
|
4.15%
|
|
8/31/2023
|
|
186,498
|
|
|
—
|
|
Capital Leases
|
1.65% - 2.09%
|
|
2019 - 2020
|
|
315
|
|
|
590
|
|
|
|
|
|
|
324,813
|
|
|
77,190
|
|
Less portion due within one year
|
|
|
|
|
(10,172
|
)
|
|
(277
|
)
|
Total long-term debt
|
|
|
|
|
$
|
314,641
|
|
|
$
|
76,913
|
|
As of
December 31, 2018
, total debt maturing in 2019, 2020, 2021, 2022, and 2023 is
$10.2 million
,
$9.9 million
,
$9.9 million
,
$9.9 million
, and
$284.9 million
, respectively.
The weighted average interest rate on long-term debt was
3.4%
for the year ended
December 31, 2018
, compared with
2.2%
and
1.4%
for the years ended
December 31, 2017
and
2016
, respectively.
The carrying value of the Company’s
$450 million
Facility approximates fair value given the variable rate nature of the debt. The fair values of the Company’s long-term debt are determined using discounted cash flows based upon the Company’s estimated current interest cost for similar type borrowings or current market value, which falls under Level 2 of the fair value hierarchy.
8. Derivatives
The Company selectively uses financial instruments to manage market risk associated with exposure to fluctuations in interest rates and foreign currency rates. These financial exposures are monitored and managed by the Company as an integral part of its risk management program. The Company’s interest rate exposure is most sensitive to fluctuations in interest rates in the United States and Europe, which impact interest paid on its debt. The Company has debt with variable rates of interest based generally on LIBOR. From time to time, the Company may enter into interest rate swap agreements to manage interest rate risk. These instruments are designated as cash flow hedges and are recorded at fair value using Level 2 observable market inputs.
Derivative instruments are recognized as either assets or liabilities on the balance sheet in either current or non-current other assets or other accrued liabilities or other long-term liabilities depending upon maturity and commitment. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the hedge transaction affects earnings. Any ineffective portion, or amounts related to contracts that are not designated as hedges, are recorded directly to earnings. The Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying hedged item. The Company does not use derivatives for speculative or trading purposes.
In November 2018, the Company entered into a
five
year interest rate swap agreement with a bank which converts the interest on a notional
$139.0 million
of the Company's one-month LIBOR-based borrowings under its Amended Credit Agreement from a variable rate, plus the borrowing spread, to a fixed rate of
3.09%
plus the borrowing spread. The notional amount reduces quarterly by fluctuating amounts through August 2023. In April 2017, the Company entered into a
three
-year interest rate swap agreement with a bank which converts the interest on a notional
$60.0 million
of the Company's one-month LIBOR-based borrowings under its Amended Credit Agreement from a variable rate, plus the borrowing spread, to a fixed rate of
1.58%
plus the borrowing spread. The notional amount reduces quarterly by
$5.0 million
through March 31, 2020. These interest rate swap agreements were accounted for as cash flow hedges. Effectiveness of these derivative agreements are assessed quarterly by ensuring that the critical terms of the swaps continue to match the critical terms of the hedged debt.
The following table sets forth the fair value amounts of derivative instruments held by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
In thousands
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
179
|
|
|
$
|
2,738
|
|
|
$
|
157
|
|
|
$
|
—
|
|
Total derivatives
|
$
|
179
|
|
|
$
|
2,738
|
|
|
$
|
157
|
|
|
$
|
—
|
|
The following table sets forth the income, recorded in accumulated other comprehensive income, net of tax, for the quarters and years ended
December 31,
2018
and
2017
for derivatives held by the Company and designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended December 31,
|
|
Years Ended
December 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
(2,185
|
)
|
|
$
|
129
|
|
|
$
|
(2,096
|
)
|
|
$
|
122
|
|
|
$
|
(2,185
|
)
|
|
$
|
129
|
|
|
$
|
(2,096
|
)
|
|
$
|
122
|
|
9. Capital Stock
Preferred Stock
— The Company has authorized Preferred Stock with a par value of
$0.01
.
None
of the
500,000
authorized shares have been issued.
Common Stock
— As of
December 31, 2018
,
8,384
Lydall stockholders of record held
17,555,672
shares of Common Stock.
Dividend policy
— The Company does not pay a cash dividend on its common stock. The Company’s Amended Credit Facility does not place any restrictions on cash dividend payments, so long as the payments do not place the Company in default.
10. Employer Sponsored Benefit Plans
The Company maintains a domestic defined benefit pension plan ("U.S. Lydall Pension Plan") and acquired two domestic pension plans in the Interface acquisition ("Interface Pension Plans"), (collectively, "domestic defined benefit pension plans").
The U.S. Lydall Pension Plan covers certain domestic Lydall employees, is noncontributory and benefits are based on either years of service or eligible compensation paid while a participant is in a plan. The plan has been closed to new employees for several years and benefits under the pension plan are no longer accruing. During the fourth quarter of 2018, the Company authorized the termination of the U.S. Lydall Pension Plan under which approximately
900
participants, including
200
active employees, have accrued benefits. The Company anticipates completing the termination of this plan in 2019. At December 31, 2018, the benefit obligations have been valued at the amount expected to be required to settle the obligations, using assumptions regarding the portion of obligations expected to be settled through participant acceptance of lump sum payments or annuities and the cost to purchase those annuities. Overall, the Company estimates it will incur pension expense of approximately
$29.0 million
to
$33.0 million
in 2019 when the plan settlement is completed. Of that settlement amount, the Company is expected to make a one-time cash contribution of approximately
$2.0 million
to
$4.0 million
to purchase annuities for participants and make lump s
um pa
yments.
The estimated expense is subject to change based on valuations at the actual date of settlement.
The Interface Pension Plans cover Interface's union and non-union employees, the plans are closed to new employees and benefits are no longer accruing for the majority of participants. Certain union employees of Interface business participate in a multi-employer pension plan. Contributions to this multi-employer plan are required to be made monthly based upon the total monthly hours worked by the covered employees multiplied by the employer contribution rate published by the fund. Total contributions related to the multi-employer plan from the date of acquisition through
December 31, 2018 were immaterial. As of the acquisition date, the Company remeasured the fair value of plan liabilities and funded status of the Interface Pension Plans. An underfunded liability of
$11.2 million
was included in benefit plan liabilities within the Company’s Condensed Consolidated Balance Sheets.
The Company also acquired Interface's domestic post-retirement benefit plan and recorded a liability of
$4.1 million
and German pension plans and recorded a liability of
$2.9 million
included in benefit plan liabilities within the Company’s Condensed Consolidated Balance Sheets. The Interface post-retirement benefits include life insurance and medical benefits for certain domestic employees and these plans are closed to new employees. The German noncontributory plan is closed to new employees.
The Company’s funding policy for all of its domestic defined benefit pension plans (US Lydall Pension plan and Interface Pension Plans) is to fund not less than the ERISA minimum funding standard and not more than the maximum amount that can be deducted for federal income tax purposes.
Plan assets and benefit obligations of the domestic defined benefit pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2018
|
|
2017
|
Change in benefit obligation:
|
|
|
|
Net benefit obligation at beginning of year
|
$
|
51,882
|
|
|
$
|
50,086
|
|
Benefit obligation assumed through acquisition
|
52,392
|
|
|
—
|
|
Service Cost
|
46
|
|
|
—
|
|
Interest cost
|
2,595
|
|
|
2,058
|
|
Actuarial (gain)/loss
|
(876
|
)
|
|
2,126
|
|
Gross benefits paid
|
(3,360
|
)
|
|
(2,388
|
)
|
Net benefit obligation at end of year
|
$
|
102,679
|
|
|
$
|
51,882
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
44,174
|
|
|
$
|
37,038
|
|
Fair value of plan assets through acquisition
|
43,230
|
|
|
—
|
|
Actual (loss)/return on plan assets
|
(4,092
|
)
|
|
5,924
|
|
Contributions
|
7,500
|
|
|
3,600
|
|
Gross benefits paid
|
(3,360
|
)
|
|
(2,388
|
)
|
Fair value of plan assets at end of year
|
$
|
87,452
|
|
|
$
|
44,174
|
|
Net benefit obligation in excess of plan assets
|
$
|
(15,227
|
)
|
|
$
|
(7,708
|
)
|
Balance sheet amounts:
|
|
|
|
Current liabilities
|
$
|
(3,078
|
)
|
|
$
|
—
|
|
Noncurrent liabilities
|
$
|
(12,149
|
)
|
|
$
|
(7,708
|
)
|
Total liabilities
|
$
|
(15,227
|
)
|
|
$
|
(7,708
|
)
|
Amounts recognized in accumulated other comprehensive income, net of tax consist of:
|
|
|
|
Net actuarial loss
|
$
|
21,850
|
|
|
$
|
17,632
|
|
Net amount recognized
|
$
|
21,850
|
|
|
$
|
17,632
|
|
At
December 31, 2018
, in addition to the accrued benefit liability of
$15.2 million
recognized for the Company’s domestic defined benefit pension plans, the Company also had foreign pension plans with an accrued benefit liability of
$4.7 million
and accumulated other comprehensive loss, net of tax, of
$0.4 million
. At
December 31, 2017
, in addition to the accrued benefit liability of
$7.7 million
recognized for the Company’s domestic defined benefit pension plan, the Company also had foreign regulatory labor agreements with an accrued benefit liability of
$1.9 million
and accumulated other comprehensive loss, net of tax, of
$0.4 million
.
In addition to the domestic pension plans included in the table above, the Interface post-retirement benefits include life insurance and medical benefits for certain domestic employees with an accrued benefit liability of
$4.1 million
at
December 31, 2018. From the August 31, 2018 acquisition to December 31, 2018, benefit expense of
$0.1 million
was recognized and benefit payments of
$0.1 million
were made from Company assets.
The U.S. Lydall Pension Plan liability, net of tax, included in other comprehensive income increased by
$1.8 million
for the year ended
December 31, 2018
. The Interface Pension Plans liability, net of tax, included in other comprehensive income increased by
$1.8 million
at December 31, 2018. The U.S. Lydall Pension Plan liability, net of tax, included in other comprehensive income increased by
$2.1 million
for the year ended
December 31, 2017
. These changes are mainly due to changes in pension assumptions, primarily the discount rates.
Aggregated information for the domestic defined benefit pension plans with an accumulated benefit obligation in excess of plan assets is provided in the tables below:
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2018
|
|
2017
|
Projected benefit obligation
|
$
|
102,679
|
|
|
$
|
51,882
|
|
Accumulated benefit obligation
|
$
|
104,188
|
|
|
$
|
51,882
|
|
Fair value of plan assets
|
$
|
87,452
|
|
|
$
|
44,174
|
|
Components of net periodic benefit cost for the domestic defined benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2018
|
|
2017
|
|
2016
|
Service cost
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
2,595
|
|
|
2,058
|
|
|
2,139
|
|
Expected return on plan assets
|
(3,339
|
)
|
|
(2,376
|
)
|
|
(2,419
|
)
|
Amortization of actuarial net loss
|
1,024
|
|
|
1,092
|
|
|
933
|
|
Total net periodic benefit cost
|
$
|
326
|
|
|
$
|
774
|
|
|
$
|
653
|
|
It is estimated that
$0.5 million
of actuarial net loss will be amortized from accumulated other comprehensive loss into net periodic benefit costs for the domestic defined benefit pension plans in
2019
. For the U.S. Lydall Pension Plan settlement loss of approximately
$29.0 million
to
$33.0 million
will also be expensed when the U.S. plan terminates in 2019.
The major assumptions used in determining the year-end benefit obligation and annual net cost for the domestic defined benefit pension plans are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation
|
|
Net Cost
|
For the years ended December 31,
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2016
|
Discount rate
|
3.99
|
%
|
|
3.71
|
%
|
|
3.75
|
%
|
|
4.21
|
%
|
|
4.56
|
%
|
Expected return on plan assets
|
4.08
|
%
|
|
5.80
|
%
|
|
5.79
|
%
|
|
6.30
|
%
|
|
7.00
|
%
|
Plan Assets
The domestic defined benefit pension plans are administered by the Lydall Retirement Committee (the "Committee"), which is appointed by the Board of Directors. The Committee’s responsibilities are to establish a funding policy for the domestic pension plans and to appoint and oversee the investment advisor responsible for the plan investments. The Committee is a named fiduciary under the plan, and the Committee has granted discretion to the investment advisor with respect to management of the investments. The assets of the U.S. Lydall Pension Plan are invested with the purpose to fund the plan termination which the Company anticipates completing in 2019. The Interface Pension Plans are invested for the purpose of investment diversification. In determining the expected return on plan assets, the Committee considers the relative weighting of plan assets, the historical performance of marketable debt and equity securities and economic and other indicators of future performance.
Investment management objective for the U.S. Lydall Pension Plan is a liability driven strategy to lessen the risk prior to plan termination with liquidity of assets to match the expected plan termination lump sum and annuity payments in 2019.
Investment management objectives for the Interface Pension Plans include maintaining an adequate level of diversification to balance market risk and to provide sufficient liquidity for near-term payments of benefits accrued under the Plan and to pay the expenses of administration. Investment decisions are based on the returns and risk relative to the Plan's liabilities, an approach commonly referred to as liability-driven investing. The long-term investment objective of the Interface Pension Plan is to achieve a total return equal to or greater than the assumed weighted rate of return, currently
4.08%
. Though it is the intent of the Committee to achieve income and growth, that intent does not include taking extraordinary risks or engaging in investment activities not commonly considered prudent under the standards imposed by ERISA. The allowable investments include: securities, mutual funds, sub-advisers, independent investment managers and/or programs, and cash or cash equivalents.
Prohibited investments include: single strategy hedge funds, investment in individual securities, direct investment in venture capital, CMO derivatives and commodities.
The following table presents the target allocation of the domestic defined benefit pension plan assets for
2019
and the actual allocation of plan assets as of
December 31, 2018
and
2017
by major asset category:
|
|
|
|
|
|
|
|
|
|
Target Allocation
|
|
Actual Allocation of Plan Assets
December 31,
|
Asset Category
|
2019
|
|
2018
|
|
2017
|
Domestic equities
|
11% - 32%
|
|
16
|
%
|
|
26
|
%
|
International equities
|
5% - 24%
|
|
11
|
%
|
|
26
|
%
|
Fixed income
|
30% - 69%
|
|
44
|
%
|
|
40
|
%
|
U.S. government securities
|
2% - 13%
|
|
3
|
%
|
|
—
|
%
|
Corporate and foreign bonds
|
2% - 13%
|
|
2
|
%
|
|
—
|
%
|
Inflation hedge mutual funds
|
2% - 13%
|
|
3
|
%
|
|
—
|
%
|
Hedge fund of funds
|
2% - 9%
|
|
5
|
%
|
|
7
|
%
|
Cash and cash equivalents
|
0% - 32%
|
|
16
|
%
|
|
1
|
%
|
Domestic and international equities consist primarily of mutual funds valued at the closing price reported in the active market in which individual securities are traded.
Fixed income consists of mutual funds and a long duration f
ixed income held in proprietary funds pooled with other investor accounts which use the net asset value (NAV) per share practical expedient to measure fair value.
The fixed income mutual funds are valued using quoted market prices.
Inflation hedge mutual funds invest primarily in a portfolio of inflation-protected debt securities, real-estate related securities and commodity/natural resource-related securities. The mutual fund is designed to protect against the long-term effects of inflation on an investment portfolio with the long-term objective of preservation of capital with current income.
U.S. government securities include U.S. Treasury Notes and Bonds which represent middle range and long term fixed income investments.
Corporate and foreign bonds primarily include a diversified portfolio of U.S. corporate debt obligations.
Hedge funds
are mutual funds and pooled funds that employ a range of investment strategies for diversification including equity and fixed income, credit driven, macro and multi oriented strategies. Certain hedge funds were measured at fair value using the NAV practical expedient and are not classified in the fair value hierar
chy.
Cash and cash equivalents include investments readily converted to cash valued in the active market in which the funds were traded and are classified within Level 1 of the fair value hierarchy. Non-government money market funds are classified as Level 2.
The investments of the domestic defined benefit plans are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fixed income long duration fund and certain hedge funds were measured at fair value using the NAV practical expedient and are included as a reconciling item to the fair value table.
The following tables set forth the fair value of the assets by major asset category as of
December 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
In thousands
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Domestic equity
|
$
|
13,941
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,941
|
|
International equity
|
9,547
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,547
|
|
Fixed income
|
10,977
|
|
|
—
|
|
|
—
|
|
|
27,727
|
|
|
38,704
|
|
U.S. government securities
|
—
|
|
|
2,466
|
|
|
—
|
|
|
—
|
|
|
2,466
|
|
Corporate and foreign bonds
|
—
|
|
|
1,448
|
|
|
—
|
|
|
—
|
|
|
1,448
|
|
Inflation hedge mutual funds
|
2,808
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,808
|
|
Hedge fund of funds
|
4,129
|
|
|
—
|
|
|
—
|
|
|
312
|
|
|
4,441
|
|
Cash and cash equivalents
|
12,027
|
|
|
2,070
|
|
|
—
|
|
|
—
|
|
|
14,097
|
|
Total Assets at Fair Value
|
$
|
53,429
|
|
|
$
|
5,984
|
|
|
$
|
—
|
|
|
$
|
28,039
|
|
|
$
|
87,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
In thousands
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Domestic equity
|
$
|
11,577
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,577
|
|
International equity
|
11,626
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,626
|
|
Fixed income
|
—
|
|
|
—
|
|
|
—
|
|
|
17,360
|
|
|
17,360
|
|
Hedge fund of funds
|
—
|
|
|
—
|
|
|
—
|
|
|
3,054
|
|
|
3,054
|
|
Cash and cash equivalents
|
557
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
557
|
|
Total Assets at Fair Value
|
$
|
23,760
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,414
|
|
|
$
|
44,174
|
|
Estimated Future Contributions and Benefit Payments
The Company expects to contribute approximately
$3.5 million
to
$5.5 million
in cash to its domestic defined benefit pension plans in
2019
.
The U.S. Lydall pension plan is estimated to pay a partial year of benefits in 2019 as the U.S. plan is expected to terminate in 2019. The benefit payments for 2020 and thereafter only include benefit payments for the Interface Pension Plans. Estimated future benefit payments for the next 10 years for the domestic defined benefit pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024-2028
|
Benefit payments
|
$
|
4,023
|
|
|
$
|
3,099
|
|
|
$
|
3,186
|
|
|
$
|
3,241
|
|
|
$
|
3,264
|
|
|
$
|
16,995
|
|
Employee Savings Plan
The Company also sponsors a 401(k) Plan. Employer contributions to this plan amounted to
$2.9 million
in
2018
,
$2.6 million
in
2017
, and
$2.5 million
in
2016
. Matching contributions by the Company are made on employee pretax contributions up to
five
percent of compensation, with the first
three
percent matched at
100%
and the next
two
percent matched at
50%
.
11. Equity Compensation Plans
As of
December 31, 2018
, the Company’s equity compensation plans consisted of the 2003 Stock Incentive Compensation Plan (the “2003 Plan”) and the 2012 Stock Incentive Plan (the “2012 Plan” and together with the 2003 Plan, the “Plans”) under which incentive and non-qualified stock options and time and performance based restricted shares have been granted to employees and directors from authorized but unissued shares of common stock or treasury shares. The 2003 Plan is not active, but continues to govern all outstanding awards granted under the plan until the awards themselves are exercised or terminate in accordance with their terms. The 2012 Plan, approved by stockholders on April 27, 2012, authorized
1,750,000
shares of common stock for awards. The 2012 Plan also authorizes an additional
1,200,000
shares of common stock to the extent awards granted under prior stock plans that were outstanding as of April 27, 2012 are forfeited. The 2012 Plan provides for the following type of awards: options, restricted stock, restricted stock units and other stock-based awards.
The Company accounts for the expense of all share-based compensation by measuring the awards at fair value on the date of grant. The Company recognizes expense on a straight-line basis over the vesting period of the entire award. Options issued by the Company under its stock option plans have a term of
ten
years and generally vest ratably over a period of
three
to
four
years. Time-based restricted stock grants are expensed over the vesting period of the award, which is typically
two
to
four
years. The number of performance based restricted shares that vest or forfeit depend upon achievement of certain targets during the performance period. Prior to January 1, 2016, stock-based compensation expense included estimated effects of forfeitures. Upon adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, in 2016, an accounting policy election was made to account for forfeitures as they occur. Compensation expense for performance based awards is recorded based upon the service period and management’s assessment of the pr
obability of achieving the performance goals and will be adjusted based upon actual achievement. Stock options iss
ued under the current plan must have an exercise price that may not be less than the fair market value of the Company’s Common Stock on the date of grant. The Plans provide for automatic acceleration of vesting in the event of a change in control of the Company. Upon the exercise of a stock option under the Plans, shares are issued from authorized shares or treasury shares held by the Company.
The Company incurred compensation expense of
$2.1 million
,
$4.3 million
, and
$4.4 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively, for all stock-based compensation plans, including restricted stock awards.
No
compensation costs were capitalized as part of inventory. The associated tax benefit realized
was
$1.3 million
,
$4.0 million
, and
$1.9 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectivel
y.
Stock Options
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Risk-free interest rate
|
2.7
|
%
|
|
2.2
|
%
|
|
1.8
|
%
|
Expected life
|
5.5 years
|
|
|
5.5 years
|
|
|
5.5 years
|
|
Expected volatility
|
34
|
%
|
|
33
|
%
|
|
42
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The following is a summary of the option activity as of
December 31, 2018
and changes during the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands except per share amounts and years
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted- Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2017
|
433
|
|
$
|
33.37
|
|
|
|
|
|
Granted
|
246
|
|
$
|
21.49
|
|
|
|
|
|
Exercised
|
(54)
|
|
$
|
16.48
|
|
|
|
|
|
Forfeited/Cancelled
|
(2)
|
|
$
|
36.08
|
|
|
|
|
|
Outstanding at December 31, 2018
|
623
|
|
$
|
30.14
|
|
|
7.7
|
|
$
|
734
|
|
Options exercisable at December 31, 2018
|
254
|
|
$
|
29.36
|
|
|
5.8
|
|
$
|
699
|
|
Unvested at December 31, 2018
|
369
|
|
$
|
30.68
|
|
|
3.1
|
|
$
|
35
|
|
The Company granted
245,830
,
99,840
, and
56,580
stock options during
2018
,
2017
, and
2016
, respectively. The weighted-average grant-date fair value of options granted during the years
2018
,
2017
, and
2016
was
$21.49
,
$17.91
, and
$21.11
, respectively. There were
54,316
options exercised in
2018
,
90,897
options exercised in
2017
, and
76,333
options exercised in
2016
. The intrinsic value for options exercised during
2018
was
$1.4 million
and the associated tax benefit realized from stock options exercised was
$0.3 million
. The total intrinsic value for options exercised during
2017
was
$3.6 million
and the associated tax benefit realized from stock options exercised was
$1.1 million
. The total intrinsic value for options exercised during
2016
was
$2.4 million
and the associated tax benefit realized from stock options exercised was
$0.7 million
. The amount of cash received from the exercise of stock options was
$0.9 million
in
2018
,
$1.3 million
in
2017
, and
$1.2 million
in
2016
. At
December 31, 2018
, the total unrecognized compensation cost related to non-vested stock option awards was approximately
$4.0 million
, with a weighted average expected amortization period of
3.1 years
.
Restricted Stock
The following is a summary of the Company’s unvested restricted shares for the year ended and as of
December 31, 2018
:
|
|
|
|
|
|
|
In thousands except per share amounts
|
|
|
|
Outstanding Restricted Shares
|
Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Nonvested at December 31, 2017
|
219
|
|
$
|
44.77
|
|
Granted
|
172
|
|
$
|
25.19
|
|
Vested
|
(79)
|
|
$
|
31.26
|
|
Forfeited/Cancelled
|
(8)
|
|
$
|
50.56
|
|
Nonvested December 31, 2018
|
304
|
|
$
|
37.02
|
|
Restricted stock includes both performance-based and time-based awards. Compensation for restricted stock is recorded based on the fair market value of the stock on the grant date and amortized to expense over the vesting period of the award. The Company granted
99,560
,
52,595
, and
44,423
shares of performance-based restricted stock during
2018
,
2017
, and
2016
, respectively. The Company granted
71,516
shares of time-based restricted stock in
2018
,
22,700
shares in
2017
, and
31,455
in
2016
. The Company granted
1,245
,
485
, and
8,570
of time-based restricted stock units in
2018
,
2017
, and
2016
, respectively. The weighted average fair value per share of restricted stock granted was
$25.19
,
$45.18
, and
$49.70
during
2018
,
2017
, and
2016
, respectively. During
2018
,
2017
, and
2016
, respectively, there were
8,440
,
14,045
and
33,800
shares of restricted stock forfeited. The fair value of awards for which restrictions lapsed during the years ended
December 31, 2018
,
2017
, and
2016
was
$3.2 million
,
$8.0 million
, and
$3.4 million
, respectively. At
December 31, 2018
, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately
$6.5 million
, with a weighted average expected amortization period of
2.4 years
.
Stock Repurchases
During the year ended
December 31, 2018
, the Company acquired
23,581
shares of common stock valued at
$1.0 million
, through withholding, pursuant to provisions in agreements with recipients of restricted stock granted under the Company's equity compensation plans, which allow the Company to withhold the number of shares having fair value equal to each recipient's tax withholding due.
12. Restructuring
In April 2017, the Company commenced a restructuring plan in the Technical Nonwovens segment which includes plant consolidations and transfer of equipment to other facilities within the segment's Europe and China operations. The consolidation of certain plants, which is expected to conclude in 2019, is expected to reduce operating costs, increase efficiency and enhance the Company’s flexibility by better aligning its manufacturing footprint with the segment's customer base. Accordingly, the Company expects to record pre-tax expenses of approximately
$4.2 million
, in connection with this restructuring plan, of which approximately
$3.7 million
is expected to result in cash expenditures over the period of consolidation. The Company also expects to incur cash expenditures of approximately
$3.8 million
for capital expenditures associated with this plan.
During the year ended
December 31, 2018
, the Company recorded pre-tax restructuring expenses of
$2.3 million
as part of this restructuring plan. Restructuring expenses of
$1.9 million
were recorded in cost of sales and
$0.4 million
were recorded in selling, product development and administrative expenses. During the year ended
December 31, 2017
, the Company recorded pre-tax restructuring expenses of
$0.7 million
as part of this restructuring plan. Restructuring expenses of
$0.4 million
were recorded in cost of sales and
$0.3 million
were recorded in selling, product development and administrative expenses. The Company expects to record approximately
$1.2 million
of restructuring expenses as part of the restructuring plan in 2019.
Actual pre-tax expenses incurred and total estimated pre-tax expenses for the restructuring program by type are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Severance and Related Expenses
|
Contract Termination Expenses
|
Facility Exit, Move and Set-up Expenses
|
Total
|
Total estimated expenses
|
$
|
1,250
|
|
$
|
450
|
|
$
|
2,500
|
|
$
|
4,200
|
|
Expenses incurred during year ended:
|
|
|
|
|
December 31, 2017
|
181
|
|
154
|
|
327
|
|
662
|
|
December 31, 2018
|
606
|
|
136
|
|
1,555
|
|
2,297
|
|
Estimated remaining expense at December 31, 2018
|
$
|
463
|
|
$
|
160
|
|
$
|
618
|
|
$
|
1,241
|
|
There were cash outflows of
$2.2 million
and
$0.2 million
for the restructuring program for the years ended
December 31, 2018
and 2017, respectively.
Accrued restructuring costs were as follows at
December 31, 2018
:
|
|
|
|
|
In thousands
|
Total
|
Pre-tax restructuring expenses, excluding depreciation
|
$
|
510
|
|
Cash paid
|
(177
|
)
|
Balance as of December 31, 2017
|
$
|
333
|
|
Pre-tax restructuring expenses, excluding depreciation
|
$
|
2,012
|
|
Cash paid
|
(2,198
|
)
|
Balance as of December 31, 2018
|
$
|
147
|
|
13. Segment Information
The Company’s reportable segments as of
December 31, 2018
were Performance Materials, Technical Nonwovens, Thermal Acoustical Solutions.
On August 31, 2018, the Company acquired an engineered sealing materials business operating under Interface Performance Materials ("Interface"), based in Lancaster, Pennsylvania. A globally-recognized leader in the delivery of engineered sealing solutions, the Interface operations manufacture wet-laid gasket and specialty materials primarily serving OEM and Tier I manufacturers in the agriculture, construction, earthmoving, industrial, and automotive segments. The acquired business is included in the Company's Performance Materials operating segment.
Effective September 30, 2018, as a result of the Interface acquisition, the Performance Materials segment changed the disaggregation of revenue at the product level to be categorized as "Filtration" and "Sealing and Advanced Solutions".
Effective January 1, 2018, the Thermal/Acoustical Metals and Thermal/Acoustical Fibers operating segments were combined into a single operating segment named Thermal Acoustical Solutions. These automotive segments were combined into one segment to allow the Company to better serve its customers, leverage operating disciplines and drive efficiencies across the global automotive operations.
Prior period segment amounts throughout the Notes to the Condensed Consolidated Financial Statements have been recast to reflect the new segment structures. The recast of historical business segment information had no impact on the consolidated financial results.
Performance Materials Segment
The Performance Materials segment includes filtration media solutions primarily for air, fluid power, life science and industrial applications (“Filtration”), and sealing and gasket solutions, thermal insulation, energy storage, and other engineered products (“Sealing and Advanced Solutions”).
Filtration products include LydAir® MG (Micro-Glass) Air Filtration Media, LydAir® MB (Melt Blown) Air Filtration Media, LydAir® SC (Synthetic Composite) Air Filtration Media, and Arioso® Membrane Composite Media. These products constitute the critical media component of clean-air systems for applications in clean-space, commercial, industrial and residential HVAC, power generation, respiratory protection, and industrial processes. Lydall has leveraged its extensive technical expertise and applications knowledge into a suite of media products covering the vast liquid filtration landscape across the transportation and industrial fields. The LyPore® Liquid Filtration Media series address a variety of application needs in fluid power including hydraulic filters, air-water and air-oil coalescing, industrial fluid processes and diesel fuel filtration. LyPore® media and Solupor® ultra-high molecular weight polyethylene membranes also serve critical liquid filtration/separation applications such as biopharmaceutical pre-filtration and clarification, lateral flow diagnostic and analytical testing, potable water filtration and high purity process filtration such as those found in food and beverage and medical applications.
Sealing and Advanced Solutions products include nonwoven specialty engineered materials for a multitude of applications. Interface fiber-reinforced gasket materials serve the heavy-duty diesel, automobile, small engine, transmission and compressor markets. These products handle demanding sealing challenges with a diverse range of metallic, non-metallic, rubber-coated and laminate materials that comprise the extensive Sealing materials portfolio. Interface Engineered Components are ready to use soft and hard gasket parts sold directly to OEMs and aftermarket applications. An example is Select-a-Seal® rubber-edged composite (REC) technology that provides robust sealing, compression, adhesion, and shear strength for driveline applications. Advanced Solutions’ nonwoven veils, papers and specialty composites for the building products, appliance, energy and industrial markets include Manniglas® Thermal Insulation Papers, and Lytherm® Insulation Media for high temperature technology applications. Lydall’s Cryotherm® Super-Insulating Media, CRS-Wrap® Super-Insulating Media and Cryo-Lite® Cryogenic Insulation products are industry standards for state-of-the-art cryogenic insulation designs used by manufacturers of cryogenic equipment for liquid gas storage, piping, and transportation. Additional specialty composite materials include specialty fiber calendar bowl products to service the printing and textile industries and press pad materials for industrial lamination processes.
Technical Nonwovens Segment
The Technical Nonwovens segment primarily produces needle punch nonwoven solutions for a multitude of industries and applications. Products are manufactured and sold globally under the leading brands of Lydall Industrial Filtration, Southern Felt, Gutsche, and Texel. Industrial Filtration products include nonwoven rolled-good felt media and filter bags used primarily in industrial air and liquid filtration applications. Nonwoven filter media is an effective solution to satisfy increasing emission control regulations in a wide range of industries, including power, cement, steel, asphalt, incineration, mining, food, and pharmaceutical. Advanced Materials products include nonwoven rolled-good media used in commercial applications and predominantly serves the geosynthetics, automotive, industrial, medical, and safety apparel markets. Automotive media is provided to Tier I/II suppliers as well as the Company's Thermal Acoustical Solutions segment.
Technical Nonwovens segment products include air and liquid filtration media sold under the brand names Fiberlox® high performance filtration felts, Checkstatic™ conductive filtration felts, Microfelt® high efficiency filtration felts, Pleatlox® pleatable filtration felts, Ultratech™ PTFE filtration felts, Powertech® and Powerlox® power generation filtration felts, Microcap® high efficiency liquid filtration felts, Duotech membrane composite filtration felts, along with our porotex® family of high temperature filtration felts including microvel® and optivel® products. Technical Nonwovens Advanced Materials products are sold under the brand names Thermofit® thermo-formable products, Ecoduo® recycled content materials, Duotex® floor protection products, and Versaflex® composite molding materials. Technical Nonwovens also offers extensive finishing and coating capabilities which provide custom engineered properties tailored to meet the most demanding applications. The business leverages a wide range of fiber types and extensive technical capabilities to provide products that meet our customers’ needs across a variety of applications providing both high performance and durability.
Thermal Acoustical Solutions Segment
The Thermal Acoustical Solutions segment offers a full range of innovative engineered products tailored for the transportation and industrial sectors to thermally shield sensitive components from high heat, improve exhaust gas treatment and lower harmful emissions as well as assist in the reduction of noise, vibration and harshness (NVH). Within the transportation sector, Lydall’s products are found in the interior (dash insulators, cabin flooring), underbody (wheel well, aerodynamic belly pan, fuel tank, exhaust, tunnel, spare tire) and under hood (engine compartment, outer dash, powertrain, catalytic converter, turbo charger, manifolds) of cars, trucks, SUVs, heavy duty trucks and recreational vehicles.
Thermal Acoustical Solutions segment products offer thermal and acoustical insulating solutions comprised of organic and inorganic fiber composites that provide weight reduction, superior noise suppression and increased durability over conventional designs, as well as products that efficiently combine multiple layers of metal and thermal - acoustical insulation media to provide an engineered shielding solution for an array of application areas. Lydall’s dBCore® is a lightweight acoustical composite that emphasizes absorption principles over heavy-mass type systems. Lydall’s dBLyte® is a high-performance acoustical barrier with sound absorption and blocking properties and can be used throughout a vehicle’s interior to minimize intrusive noise from an engine compartment and road. Lydall’s ZeroClearance® is an innovative thermal solution that utilizes an adhesive backing for attachment and is used to protect vehicle components from excessive heat. Lydall’s flux® product family includes several patented or IP-rich products that address applications which include: Direct Exhaust Mount heat shields, which are assembled to high temperature components like catalytic converters, turbochargers or exhaust manifolds using aluminized and stainless steel and high performance and high temperature heat insulating materials; Powertrain heat shields that absorb noise at the source and do not contribute to the engine's noise budget; and durable, thermally robust solutions for temperature sensitive plastic components such as fuel tanks that are in proximity to high temperature heat sources.
Net sales by segment, as well as reconciling items, to equal consolidated net sales for the years ended
December 31, 2018
,
2017
, and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Sales
|
For the Years Ended December 31,
|
|
|
|
|
|
|
In thousands
|
2018
|
|
2017
|
|
2016
|
Performance Materials Segment
(1)
:
|
|
|
|
|
|
Filtration
|
$
|
93,089
|
|
|
$
|
87,173
|
|
|
$
|
83,345
|
|
Sealing and Advanced Solutions
|
76,128
|
|
|
29,496
|
|
|
27,783
|
|
Performance Materials Segment net sales
|
169,217
|
|
|
116,669
|
|
|
111,128
|
|
Technical Nonwovens Segment
(2),(3)
:
|
|
|
|
|
|
Industrial Filtration
|
157,606
|
|
|
147,087
|
|
|
90,415
|
|
Advanced Materials
(4)
|
119,465
|
|
|
121,990
|
|
|
65,090
|
|
Technical Nonwovens net sales
|
277,071
|
|
|
269,077
|
|
|
155,505
|
|
Thermal Acoustical Solutions Segment:
|
|
|
|
|
|
Parts
|
328,057
|
|
|
318,217
|
|
|
298,016
|
|
Tooling
|
37,370
|
|
|
23,888
|
|
|
23,176
|
|
Thermal Acoustical Solutions Segment net sales
|
365,427
|
|
|
342,105
|
|
|
321,192
|
|
Eliminations and Other
(4)
|
(25,818
|
)
|
|
(29,414
|
)
|
|
(20,973
|
)
|
Consolidated Net Sales
|
$
|
785,897
|
|
|
$
|
698,437
|
|
|
$
|
566,852
|
|
Operating income by segment and Corporate Office Expenses for the years ended
December 31, 2018
,
2017
, and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
For the Years Ended December 31,
|
|
|
|
|
|
|
In thousands
|
2018
|
|
2017
(5)
|
|
2016
(5)
|
Performance Materials Segment
(1)
|
$
|
13,139
|
|
|
$
|
12,321
|
|
|
$
|
12,574
|
|
Technical Nonwovens Segment
(2),(3)
|
21,323
|
|
|
26,047
|
|
|
15,584
|
|
Thermal Acoustical Solutions Segment
|
38,085
|
|
|
53,132
|
|
|
53,072
|
|
Corporate Office Expenses
|
(23,359
|
)
|
|
(25,300
|
)
|
|
(25,785
|
)
|
Consolidated Operating Income
|
$
|
49,188
|
|
|
$
|
66,200
|
|
|
$
|
55,445
|
|
Operating results in 2018 were negatively impacted by
$3.6 million
of corporate strategic initiatives expenses predominantly within Corporate Office Expenses,
$2.3 million
of restructuring expenses in the Technical Nonwovens segment, and a
$2.0 million
purchase accounting adjustment related to inventory step-up in the Performance Materials segment. Operating results in 2017 were negatively impacted by
$1.7 million
of expenses associated with the combination of the Company's former T/A Metals and T/A Fibers segments, a
$1.1 million
purchase accounting adjustment related to inventory step-up in the Technical Nonwovens segment,
$0.7 million
and
$0.3 million
related to severance expenses for a reduction in force in the Thermal Acoustical Solutions and Technical Nonwovens segments, respectively,
$0.8 million
of corporate strategic initiatives expenses predominantly within Corporate Office Expenses, a
$0.8 million
non-cash long-lived asset impairment in the Performance Materials segments and
$0.7 million
of restructuring expenses in the Technical Nonwovens segment. Operating results in 2016 were negatively impacted by
$3.7 million
of acquisition related expenses within Corporate Office Expenses,
$3.5 million
related to a settlement with the German Cartel Office in the Thermal Acoustical Solutions segment and a
$2.0 million
purchase accounting adjustment related to inventory step-up in the Technical Nonwovens segment.
Total assets by segment and the Corporate Office were as follows at
December 31, 2018
,
2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
December 31,
|
|
|
|
|
|
|
In thousands
|
2018
|
|
2017
|
|
2016
|
Performance Materials Segment
(1)
|
$
|
414,211
|
|
|
$
|
72,837
|
|
|
$
|
66,965
|
|
Technical Nonwovens Segment
(2),(3)
|
242,007
|
|
|
271,713
|
|
|
268,104
|
|
Thermal Acoustical Solutions Segment
|
201,509
|
|
|
189,301
|
|
|
166,591
|
|
Corporate Office
|
14,959
|
|
|
27,020
|
|
|
25,369
|
|
Total Assets
|
$
|
872,686
|
|
|
$
|
560,871
|
|
|
$
|
527,029
|
|
Total capital expenditures and depreciation and amortization by segment and the Corporate Office for the years ended
December 31, 2018
,
2017
, and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Performance Materials Segment
(1)
|
$
|
11,288
|
|
|
$
|
3,610
|
|
|
$
|
4,098
|
|
|
$
|
9,006
|
|
|
$
|
3,996
|
|
|
$
|
4,028
|
|
Technical Nonwovens Segment
(2),(3)
|
5,864
|
|
|
2,903
|
|
|
1,248
|
|
|
13,877
|
|
|
12,625
|
|
|
6,791
|
|
Thermal Acoustical Solutions Segment
|
11,934
|
|
|
17,462
|
|
|
22,324
|
|
|
9,190
|
|
|
8,619
|
|
|
7,605
|
|
Corporate Office
|
544
|
|
|
940
|
|
|
489
|
|
|
658
|
|
|
699
|
|
|
977
|
|
Total
|
$
|
29,630
|
|
|
$
|
24,915
|
|
|
$
|
28,159
|
|
|
$
|
32,731
|
|
|
$
|
25,939
|
|
|
$
|
19,401
|
|
Net sales by geographic area for the years ended
December 31, 2018
,
2017
and
2016
and long-lived asset information by geographic area as of
December 31, 2018
,
2017
, and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
United States
(1)
|
$
|
422,222
|
|
|
$
|
376,086
|
|
|
$
|
354,371
|
|
|
$
|
136,448
|
|
|
$
|
93,583
|
|
|
$
|
88,918
|
|
France
(1)
|
66,579
|
|
|
56,214
|
|
|
52,042
|
|
|
13,219
|
|
|
14,268
|
|
|
12,692
|
|
Germany
(1),(3)
|
125,796
|
|
|
105,828
|
|
|
63,301
|
|
|
25,873
|
|
|
20,872
|
|
|
15,649
|
|
United Kingdom
|
27,156
|
|
|
24,921
|
|
|
23,871
|
|
|
4,844
|
|
|
4,916
|
|
|
4,903
|
|
Canada
(2)
|
87,622
|
|
|
84,701
|
|
|
40,871
|
|
|
25,614
|
|
|
30,739
|
|
|
30,911
|
|
China
(1),(3)
|
54,198
|
|
|
47,856
|
|
|
30,361
|
|
|
11,958
|
|
|
11,896
|
|
|
11,996
|
|
Other
(1)
|
2,324
|
|
|
2,831
|
|
|
2,035
|
|
|
4,085
|
|
|
1,590
|
|
|
1,301
|
|
Total
|
$
|
785,897
|
|
|
$
|
698,437
|
|
|
$
|
566,852
|
|
|
$
|
222,041
|
|
|
$
|
177,864
|
|
|
$
|
166,370
|
|
|
|
(1)
|
The Performance Materials segment includes the results of Interface and PCC for the periods following the dates of acquisitions of August 31, 2018 and July 12, 2018, respectively.
|
|
|
(2)
|
Technical Nonwovens segment includes results of Texel for the period following the date of acquisition of July 7, 2016.
|
|
|
(3)
|
Technical Nonwovens segment includes results of Gutsche as of the acquisition date of December 31, 2016.
|
|
|
(4)
|
Included in the Technical Nonwovens segment and Eliminations and Other is
$22.2 million
,
$26.5 million
and
$18.2 million
of intercompany sales to the Thermal Acoustical Solutions segment for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
|
|
|
(5)
|
For the years ended
December 31, 2017
and
2016
$0.8 million
and
$0.7 million
, respectively, have been reclassified from operating income to other expense (income), net, to give effect to the adoption of ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost".
|
Foreign sales are based on the country in which the sales originated (i.e., where the Company’s legal entity is domiciled). Sales to Ford Motor Company in
2018
,
2017
, and
2016
were
$116.1 million
,
$120.7 million
, and
$110.9 million
, respectively, and accounted for
14.8%
,
17.3%
, and
19.6%
of Lydall’s net sales in the years ended
December 31, 2018
,
2017
, and
2016
, respectively. These sales were reported in the Thermal Acoustical Solutions segment. No other customers accounted for more than
10.0%
of total net sales in
2018
,
2017
, and
2016
.
14. Income Taxes
On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of the Tax Cuts and Jobs Act (the "Tax Reform Act"). During the year ended December 31, 2017, the Company followed guidance in Staff Accounting Bulletin No.118 ("SAB 118"), which provided a measurement period, not to exceed one year from the enactment of the Tax Reform Act, and recorded a provisional benefit of
$3.7 million
related to the revaluation of deferred tax assets and liabilities, the one-time mandatory repatriation of foreign earnings, and legislative changes to 162(m). During the year ended December 31, 2018, the Company evaluated interpretations and additional regulatory guidance and adjusted the provisional tax reform benefit by recording tax expense of
$0.7 million
. As of December 31, 2018, the Company has completed its accounting for the Tax Reform Act as described in SAB 118. In 2019, the Company will continue to review and incorporate updates related to forthcoming U.S. Treasury Regulations and other interpretive guidance and determine any impacts to the Company.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
In thousands
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
Federal
|
$
|
3,739
|
|
|
$
|
11,526
|
|
|
$
|
15,376
|
|
State
|
498
|
|
|
956
|
|
|
1,513
|
|
Foreign
|
3,788
|
|
|
2,425
|
|
|
2,104
|
|
Total Current
|
$
|
8,025
|
|
|
$
|
14,907
|
|
|
$
|
18,993
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
2,646
|
|
|
$
|
(2,472
|
)
|
|
$
|
(594
|
)
|
State
|
380
|
|
|
256
|
|
|
601
|
|
Foreign
|
(2,598
|
)
|
|
(717
|
)
|
|
(1,179
|
)
|
Total Deferred
|
428
|
|
|
(2,933
|
)
|
|
(1,172
|
)
|
Provision for income taxes
|
$
|
8,453
|
|
|
$
|
11,974
|
|
|
$
|
17,821
|
|
The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory tax rate on earnings:
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Statutory federal income tax rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes
|
1.6
|
|
|
1.6
|
|
|
2.1
|
|
Valuation allowances for deferred tax assets, including state
|
(1.3
|
)
|
|
0.1
|
|
|
1.3
|
|
Research and development credits
|
(1.3
|
)
|
|
(1.0
|
)
|
|
(1.2
|
)
|
Capitalized transaction costs
|
0.6
|
|
|
—
|
|
|
0.7
|
|
Domestic production activities deduction
|
—
|
|
|
(1.8
|
)
|
|
(2.7
|
)
|
Stock based compensation
|
(0.7
|
)
|
|
(4.4
|
)
|
|
(2.1
|
)
|
German Cartel settlement
|
—
|
|
|
—
|
|
|
2.2
|
|
Foreign income taxed at lower rates
|
(1.6
|
)
|
|
(2.8
|
)
|
|
(3.5
|
)
|
Reserves for uncertain tax positions
|
—
|
|
|
(1.7
|
)
|
|
(0.1
|
)
|
Repatriation of foreign undistributed earnings
|
1.6
|
|
|
1.3
|
|
|
—
|
|
Revaluation of deferred tax liabilities due to federal rate change
|
—
|
|
|
(7.3
|
)
|
|
—
|
|
Other
|
(0.4
|
)
|
|
0.5
|
|
|
0.7
|
|
Effective income tax rate
|
19.5
|
%
|
|
19.5
|
%
|
|
32.4
|
%
|
In 2018, the effective tax rate of
19.5%
was below the federal statutory rate and included valuation allowance activity of
$0.6 million
. This was primarily a result of the fourth quarter partial release of valuation allowance on the Netherlands net operating losses offset by a valuation allowance addition in Germany. Compared to 2017, the tax benefit from stock compensation expense had a lesser impact on the 2018 rate because of less windfall benefits recognized. Also, foreign income taxed at lower rates had a lesser impact on the 2018 rate because of new U.S. regulations that were released in the fourth quarter 2018 that limit the amount of the tax benefit recorded compared to 2017.
In 2017, in addition to the Tax Reform Act, which favorably impacted the effective tax rate by a net
$3.7 million
, the effective tax rate of
19.5%
was impacted by a favorable mix of taxable income generated from foreign income taxed at lower rates, resulting in a tax benefit of
$1.7 million
, net of
$0.7 million
of expense to correct a foreign tax error in prior years. The Company also recorded a tax benefit of
$1.1 million
attributable to the Domestic Production Activities Deduction, a tax benefit of
$2.7 million
related to stock based compensation and a tax benefit of
$1.5 million
attributable to the release of certain reserves for uncertain tax positions from the settlement of the IRS tax audit that closed in the third quarter of 2017. These favorable adjustments were partially offset by tax expense of
$0.3 million
against certain deferred tax assets in China, as future realization of the assets is not reasonably assured.
In 2016, the effective tax rate of
32.4%
was positively impacted by a favorable mix of taxable income generated from countries with lower tax rates compared to that of the United States at that time, resulting in a tax benefit of
$1.3 million
. The Company also recorded a tax benefit of
$1.5 million
attributable to the Domestic Production Activities Deduction and a tax benefit of
$1.1 million
related to stock based compensation. These favorable adjustments were partially offset by tax expense of
$1.2 million
related to a nondeductible German Cartel settlement and a net increase in valuation allowance against certain deferred tax assets of
$0.7 million
, primarily related to tax valuation allowances of
$0.5 million
recorded against certain net deferred tax assets in the Netherlands and China, as future realization of the assets is not reasonably assured.
The Company maintains valuation allowances against certain deferred tax assets where realization is not reasonably assured. The Company evaluates the likelihood of the realization of deferred tax assets and reduces the carrying amount to the extent it believes a portion will not be realized. The Company’s effective tax rates in future periods could be affected by increases or decreases in anticipated earnings in countries where tax rates differ from the United States federal rate, the relative impact of permanent tax adjustments on higher or lower earnings from domestic operations, changes in net deferred tax asset valuation allowances, completion of acquisitions or divestitures, changes in tax rates or tax laws, and the outcome of tax audits.
The following schedule presents net current and net long-term deferred tax assets and liabilities by tax jurisdiction as of December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Deferred Tax Assets
|
|
Deferred Tax Assets
|
In thousands
|
Current
|
|
Long-term
|
|
Current
|
|
Long-term
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign
|
—
|
|
|
2,055
|
|
|
—
|
|
|
1,146
|
|
Totals
|
$
|
—
|
|
|
$
|
2,055
|
|
|
$
|
—
|
|
|
$
|
1,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Deferred Tax Liabilities
|
|
Deferred Tax Liabilities
|
In thousands
|
Current
|
|
Long-term
|
|
Current
|
|
Long-term
|
Federal
|
$
|
—
|
|
|
$
|
30,193
|
|
|
$
|
—
|
|
|
$
|
7,288
|
|
State
|
—
|
|
|
3,728
|
|
|
—
|
|
|
424
|
|
Foreign
|
—
|
|
|
5,344
|
|
|
—
|
|
|
7,002
|
|
Totals
|
$
|
—
|
|
|
$
|
39,265
|
|
|
$
|
—
|
|
|
$
|
14,714
|
|
Net deferred tax assets (liabilities) consisted of the following as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Accounts receivable
|
$
|
172
|
|
|
$
|
132
|
|
Inventories
|
520
|
|
|
164
|
|
Net operating loss carryforwards
|
6,095
|
|
|
5,339
|
|
Other accrued liabilities
|
3,426
|
|
|
1,053
|
|
Pension
|
5,181
|
|
|
1,482
|
|
Tax Credits
|
1,846
|
|
|
1,735
|
|
Total deferred tax assets
|
17,240
|
|
|
9,905
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
25,133
|
|
|
2,073
|
|
Property, plant and equipment
|
23,353
|
|
|
15,691
|
|
Total deferred tax liabilities
|
48,486
|
|
|
17,764
|
|
Valuation allowance
|
5,964
|
|
|
5,709
|
|
Net deferred tax liabilities
|
$
|
(37,210
|
)
|
|
$
|
(13,568
|
)
|
For the years ended
December 31, 2018
,
2017
and
2016
, income before income taxes was derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
In thousands
|
2018
|
|
2017
|
|
2016
|
United States
|
$
|
33,928
|
|
|
$
|
54,212
|
|
|
$
|
53,356
|
|
Foreign
|
9,337
|
|
|
7,107
|
|
|
1,583
|
|
Total income before income taxes
|
$
|
43,265
|
|
|
$
|
61,319
|
|
|
$
|
54,939
|
|
At December 31, 2018, the Company had approximately
$4.1 million
of state net operating loss carryforward which will expire between 2027 and 2036. The Company has not recorded a deferred tax asset for
$4.0 million
of this carryforward as the Company anticipates paying a non-income based franchise tax for the foreseeable future in the applicable jurisdiction. In addition, at December 31, 2018, the Company had
$1.8 million
of state tax credit carryforwards that expire between 2019 and 2033. As of December 31, 2018, the Company has recorded a valuation allowance against the full amount of its state tax credit carryforwards. The Company also has
$6.8 million
of foreign net operating loss carryforwards in China,
$10.5 million
of net operating loss carryforwards in Germany, and
$5.1 million
of net operating loss carryforwards in the Netherlands. The Netherlands’ net operating losses expire between the years 2019 and 2025 and the China net operating losses expire between the years 2019 and 2023. A partial valuation allowance is recorded against the net operating losses in all three jurisdictions for the portion of its net operating losses that future realization is not reasonably assured. The Company evaluates and weighs the positive and negative evidence present at each period. The Company will continue to monitor the realization criteria based on future operating results.
During 2018 the Company changed its assertion and no longer intends to reinvest certain undistributed earnings of its foreign subsidiaries that have been previously taxed in the U.S. and has recorded taxes associated with this position. For the remainder of the undistributed foreign earnings, unless tax effective to repatriate, the Company will continue to permanently reinvest these earnings. As of December 31, 2018, such undistributed earnings were approximately
$1.8 million
.
The Company estimates that the amount of tax that would be payable on the undistributed earnings if repatriated to the United States could be up to
$0.5 million
. This amount may vary in the future due to a variety of factors including future tax law changes, future earnings and statutory taxes paid by foreign subsidiaries, and ongoing tax planning strategies by the Company.
The Company and its subsidiaries file a consolidated federal income tax return, as well as returns required by various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities, including such major jurisdictions as the United States, China, France, Germany, Hong Kong, the
Netherlands, Canada and the United Kingdom. Within the next fiscal year, the Company expects to conclude certain income tax matters through the year ended December 31, 2015 and it is reasonably expected that net unrecognized
benefits of
$0.3 million
may be recognized. The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was
$3.6 million
as of December 31, 2018. However,
$1.4 million
of the unrecognized tax benefits, if recognized, would be offset in pre-tax income by the reversal of indemnification assets due to the Company. The Company is no longer subject to U.S. federal examinations for years before 2015, state and local examinations for years before 2013, and non-U.S. income tax examinations for years before 2003.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
2018
|
|
2017
|
Unrecognized tax benefits at beginning of year
|
$
|
2,526
|
|
|
$
|
3,219
|
|
Decreases relating to positions taken in prior periods
|
(298
|
)
|
|
—
|
|
Increases relating to positions taken in prior periods
|
—
|
|
|
221
|
|
Increases relating to current period
|
1,584
|
|
|
475
|
|
Decreases due to settlements with tax authorities
|
(233
|
)
|
|
(1,372
|
)
|
Decreases due to lapse of statute of limitations
|
(16
|
)
|
|
(17
|
)
|
Unrecognized tax benefits at end of year
|
$
|
3,563
|
|
|
$
|
2,526
|
|
The Company recognizes the interest accrued and the penalties related to unrecognized tax benefits as a component of tax expense.
15. Commitments and Contingencies
Leases
The Company has operating leases that resulted in expense of
$6.8 million
in
2018
,
$5.8 million
in
2017
, and
$5.4 million
in
2016
. These contracts include building, office equipment, vehicle and machinery leases that require payment of property taxes, insurance, repairs and other operating costs.
Approximate future minimum lease payments under noncancelable leases are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
In thousands
|
Operating Lease Payments
|
|
Capital Lease Payments
|
|
Total
|
2019
|
$
|
6,004
|
|
|
$
|
279
|
|
|
$
|
6,283
|
|
2020
|
4,871
|
|
|
35
|
|
|
4,906
|
|
2021
|
3,877
|
|
|
—
|
|
|
3,877
|
|
2022
|
3,226
|
|
|
—
|
|
|
3,226
|
|
2023
|
2,617
|
|
|
—
|
|
|
2,617
|
|
Thereafter
|
11,111
|
|
|
—
|
|
|
11,111
|
|
Total
|
31,706
|
|
|
314
|
|
|
32,020
|
|
Interest on capital leases
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Total
|
$
|
31,706
|
|
|
$
|
312
|
|
|
$
|
32,018
|
|
Commitments and Contingencies
The Company is subject to legal proceedings, claims, investigations and inquiries that arise in the ordinary course of business such as, but not limited to, actions with respect to commercial, intellectual property, employment, personal injury and environmental matters. While the outcome of any matter is inherently uncertain and the Company cannot be sure that it will prevail in any of the cases, subject to the matter referenced below, the Company is not aware of any matters pending that are expected to be material with respect to the Company’s business, financial position, results of operations or cash flows.
Environmental Obligations
The Company elected to remediate environmental contamination discovered prior to the closing of the Texel acquisition in 2016 at a certain property in the province of Quebec, Canada (“the Property”) that was acquired by Lydall. The Company records accruals for environmental costs when such losses are probable and reasonably estimable. In 2016, the Company, through the engagement of a third-party environmental service firm, determined the final scope and timing of the remediation project and estimated the cost of the remediation project to range between
$0.9 million
and
$1.5 million
, which was further refined in July of 2017 to the top end of this range at
$1.5 million
. During 2017, the environmental liability was reduced by
$0.7 million
, reflecting payments made to vendors, resulting in a balance of
$0.8 million
at December 31, 2017. During 2018, the environmental liability was reduced by
$0.8 million
resulting in
no
balance at December 31, 2018.
Pursuant to the Share Purchase Agreement, ADS has agreed to indemnify the Company from all costs and liabilities associated with the contamination and remediation work, including the costs of preparation and approval of the remediation plan and other reports in relation therewith. This indemnity was secured by an environmental escrow account, which was established in the amount of
$3.0 million
Canadian Dollars (approximately
$2.2 million
U.S. Dollars as of December 31, 2018). Should the costs and liabilities exceed the environmental escrow amount, the Company also has access to the general indemnity escrow account, which was originally established in the amount of
$14.0 million
Canadian Dollars (approximately
$10.3 million
U.S. Dollars as of December 31, 2018), and based on the Share Purchase Agreement was reduced to approximately
$7.0 million
Canadian Dollars (approximately
$5.1 million
U.S. Dollars as of December 31, 2018). Based on the foregoing, an indemnification asset of
$0.9 million
was also recorded in other assets at December 31, 2016, and subsequently increased to
$1.5 million
in July of 2017, as the Company believed, and still believes collection from ADS is probable. The indemnification asset was decreased by
$0.7 million
, reflecting indemnification from ADS for payments made by the Company to its vendors during 2017. During 2018, the indemnification asset was further reduced by
$0.8 million
, reflecting indemnification from ADS for payments made by the Company to its vendors, resulting in
no
balance at December 31, 2018. In the fourth quarter of 2018 the Company and ADS reached an agreement to release the remaining
$1.2 million
Canadian Dollars (approximately
$0.9 million
U.S. Dollars as of December 31, 2018) from the environmental escrow account as the remediation was substantially complete. A portion of the escrow was released directly to the Company to pre-fund three years of monitoring for which the Company will assume the incremental monitoring costs.
In the fourth quarter of 2016, as part of a groundwater discharging permitting process, water samples collected from wells and process water basins at the Company’s Rochester New Hampshire manufacturing facility, within the Performance Materials segment, showed concentrations of Perfluorinated Compounds (“PFCs”) in excess of state ambient groundwater quality standards. In January 2017, the Company received a notification from the State of New Hampshire Department of Environmental Services (“NHDES”) naming Lydall Performance Materials, Inc. a responsible party with respect to the discharge of regulated contaminants and, as such, is required to take action to investigate and remediate the impacts in accordance with standards established by the NHDES. The Company conducted a site investigation, the scope of which was reviewed by the NHDES, in order to assess the extent of potential soil and groundwater contamination and develop a remedial action. Based on input received from NHDES in March 2017 with regard to the scope of the site investigation, the Company recorded
$0.2 million
of expense. In 2018, the Company received a response from the NHDES to the site investigation report outlining proposed remedial actions. The Company recorded an additional
$0.1 million
of expense in 2018 associated with the expected costs to remediate the impacts of the discharge of regulated contaminants in accordance with standards established by the NHDES. During 2018 the environmental liability was fully reduced reflecting payments made to vendors, resulting in
no
balance at December 31, 2018. Additionally, the Company incurred
$0.2 million
of capital expenditures in 2018, in relation to the lining of the Company's fresh water waste lagoons. The site investigation is ongoing. The Company cannot be sure that costs will not exceed the current estimates until this matter is closed with the NHDES, nor that any future corrective action at this location would not have a material effect on the Company’s financial condition, results of operations or liquidity.
Provisions for such matters are charged to expense when it is probable that a liability has been incurred and reasonable estimates of the liability can be made. Estimates of environmental liabilities are based on a variety of matters, including, but not limited to, the stage of investigation, the stage of the remedial design, evaluation of existing remediation technologies, and presently enacted laws and regulations. In future periods, a number of factors could significantly impact any estimates of environmental remediation costs.
16. Earnings Per Share
The following table provides a reconciliation of weighted-average shares used to determine basic and diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31,
|
In thousands
|
2018
|
|
2017
|
|
2016
|
Basic average common shares outstanding
|
17,204
|
|
|
17,045
|
|
|
16,871
|
|
Effect of dilutive options and restricted stock awards
|
126
|
|
|
272
|
|
|
370
|
|
Diluted average common shares outstanding
|
17,330
|
|
|
17,317
|
|
|
17,241
|
|
For the years ended
December 31, 2018
,
2017
and
2016
, stock options for
455,515
,
44,837
, and
94,796
shares of Common Stock, respectively, were not considered in computing diluted earnings per common share as the stock options were considered anti-dilutive.
17. Quarterly Financial Information (Unaudited)
The following table summarizes quarterly financial results for
2018
and
2017
. In management’s opinion, all material adjustments necessary for a fair statement of the information for such quarters have been reflected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
In thousands except per share data
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales
|
$
|
191,660
|
|
|
$
|
165,487
|
|
|
$
|
186,413
|
|
|
$
|
174,879
|
|
|
$
|
197,886
|
|
|
$
|
180,041
|
|
|
$
|
209,938
|
|
|
$
|
178,030
|
|
Gross profit
|
$
|
39,507
|
|
|
$
|
40,498
|
|
|
$
|
36,127
|
|
|
$
|
43,327
|
|
|
$
|
35,139
|
|
|
$
|
40,054
|
|
|
$
|
41,872
|
|
|
$
|
39,480
|
|
Net income
|
$
|
11,054
|
|
|
$
|
11,669
|
|
|
$
|
10,450
|
|
|
$
|
13,125
|
|
|
$
|
6,256
|
|
|
$
|
10,675
|
|
|
$
|
7,184
|
|
|
$
|
13,848
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.64
|
|
|
$
|
0.69
|
|
|
$
|
0.61
|
|
|
$
|
0.77
|
|
|
$
|
0.36
|
|
|
$
|
0.63
|
|
|
$
|
0.42
|
|
|
$
|
0.81
|
|
Diluted
|
$
|
0.64
|
|
|
$
|
0.68
|
|
|
$
|
0.60
|
|
|
$
|
0.76
|
|
|
$
|
0.36
|
|
|
$
|
0.62
|
|
|
$
|
0.42
|
|
|
$
|
0.80
|
|
The table above includes the quarterly results of Interface since the acquisition date of August 31, 2018.
The following components are included gross profit and net income for
2018
and
2017
and impact the comparability of each year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
In thousands except per share data
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Gross profit impact:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory step-up purchase accounting adjustments
|
$
|
—
|
|
|
$
|
481
|
|
|
$
|
—
|
|
|
$
|
543
|
|
|
$
|
1,390
|
|
|
$
|
83
|
|
|
$
|
585
|
|
|
$
|
—
|
|
Restructuring, severance and segment consolidation expenses
|
449
|
|
|
441
|
|
|
876
|
|
|
92
|
|
|
400
|
|
|
287
|
|
|
169
|
|
|
155
|
|
Net income impact:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory step-up purchase accounting adjustments
|
$
|
—
|
|
|
$
|
350
|
|
|
$
|
—
|
|
|
$
|
394
|
|
|
$
|
1,077
|
|
|
$
|
59
|
|
|
$
|
438
|
|
|
$
|
—
|
|
Restructuring, severance and segment consolidation expenses
|
494
|
|
|
702
|
|
|
711
|
|
|
216
|
|
|
409
|
|
|
910
|
|
|
527
|
|
|
488
|
|
Long-lived asset impairment charge
|
—
|
|
|
490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Strategic initiatives expenses
|
87
|
|
|
125
|
|
|
923
|
|
|
—
|
|
|
1,730
|
|
|
219
|
|
|
493
|
|
|
205
|
|
Discrete tax items
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,380
|
)
|
|
320
|
|
|
(2,867
|
)
|
During the quarter ended December 31, 2017, the Company recorded an out of period adjustment reducing net income by
$0.8 million
to correct a foreign tax error in prior periods. This error resulted in the overstatement of net income by less than
$0.1 million
in each of the first, second, and third quarters of 2017. This error also impacted each quarter in 2016, 2015 and 2014 by less than
$0.1 million
. The Company evaluated the impact of these errors and determined them to be immaterial to all quarters and years.
18. Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". This ASU requires entities that lease assets with lease terms of more than 12 months to recognize right-of-use assets and lease liabilities created by those leases on their balance sheets. This ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB amended the leasing guidance to add a transition option. The Company plans to elect the transition option to continue to apply the legacy guidance ASC 840, Leases, including disclosure requirements, in the comparative periods presented in the year of adoption. Based on the effective date, the Company will adopt the new standard effective January 1, 2019 on a modified retrospective basis and will not restate comparative periods.
The Company anticipates the ASU will have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to the balance sheet; however, it does not expect the ASU to have a material impact on the Company's consolidated cash flows or results of operations. Based on the portfolio of leases as of December 31, 2018, the Company expects to recognize approximately
$28.0 million
to
$34.0 million
of operating lease right-of-use assets and lease liabilities on its consolidated balance sheets upon adoption.
While substantially complete, the Company is still in the process of finalizing its evaluation of the effect of ASU 842 on the Company's financial statements, disclosures and impact to its internal control over financial reporting. The Company will finalize its accounting assessment and quantitative impact of the adoption during the first quarter of 2019 and the actual impact may differ from the estimate. As the Company completes its evaluation of this new standard, new information may arise that could change the Company's current understanding of the impact to leases. Additionally, the Company continues to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession, and adjust the Company's assessment and implementation plans accordingly.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718) (“ASU 2018-07”). ASU 2018-07 was issued in order to expand the guidance for stock-based compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of the new accounting standard to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which adds, amends and removes certain disclosure requirements related to fair value measurements. Among other changes, this standard requires certain additional disclosure surrounding Level 3 assets, including changes in unrealized gains or losses in other comprehensive income and certain inputs in those measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain amended or eliminated disclosures in this standard may be adopted early, while certain additional disclosure requirements in this standard can be adopted on its effective date. In addition, certain changes in the standard require retrospective adoption, while other changes must be adopted prospectively. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." This ASU requires entities to disclose the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates. This ASU also requires entities to disclose an explanation for significant gains and losses related to changes in the benefit obligation for the period. This ASU is effective for fiscal years beginning after December 15, 2020 with early adoption permitted. The Company is currently evaluating the method and impact the adoption of ASU 2018-14 will have on the Company’s consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The Company is required to adopt this new guidance in the first quarter of 2020. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
19. Changes in Accumulated Other Comprehensive Income (Loss)
The following table discloses the changes by classification within accumulated other comprehensive income (loss) for the period ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Foreign Currency
Translation
Adjustment
|
|
Defined Benefit
Pension
Adjustment
|
|
Gains and Losses on Cash Flow Hedges
|
|
Total
Accumulated Other
Comprehensive
(Loss) Income
|
Balance at December 31, 2015
|
$
|
(16,920
|
)
|
|
$
|
(17,665
|
)
|
|
$
|
—
|
|
|
$
|
(34,585
|
)
|
Other Comprehensive loss
|
(10,965
|
)
|
|
(2,969
|
)
|
(a)
|
—
|
|
|
(13,934
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
569
|
|
(b)
|
—
|
|
|
569
|
|
Balance at December 31, 2016
|
$
|
(27,885
|
)
|
|
$
|
(20,065
|
)
|
|
$
|
—
|
|
|
$
|
(47,950
|
)
|
Other Comprehensive income
|
25,664
|
|
|
1,299
|
|
(a)
|
122
|
|
(c)
|
27,085
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
717
|
|
(b)
|
—
|
|
|
717
|
|
Balance at December 31, 2017
|
$
|
(2,221
|
)
|
|
$
|
(18,049
|
)
|
|
$
|
122
|
|
|
$
|
(20,148
|
)
|
Other Comprehensive loss
|
(16,237
|
)
|
|
(4,998
|
)
|
(a)
|
(2,096
|
)
|
(c)
|
(23,331
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
794
|
|
(b)
|
—
|
|
|
794
|
|
Balance at December 31, 2018
|
$
|
(18,458
|
)
|
|
$
|
(22,253
|
)
|
|
$
|
(1,974
|
)
|
|
$
|
(42,685
|
)
|
(a) Amount represents actuarial (losses) gains arising from the Company’s postretirement benefit obligation. This amount was
$(5.0) million
, net of
$1.5 million
tax benefit, for
2018
,
$1.3 million
, net of a
$0.1 million
tax expense, for
2017
and
$(3.0) million
, net of
$1.6 million
tax benefit in
2016
. (See Note 10)
(b) Amount represents the amortization of actuarial losses to pension expense arising from the Company’s postretirement benefit obligation. This amount was
$0.8 million
, net of
$0.2 million
tax benefit in
2018
,
$0.7 million
, net of
$0.4 million
tax benefit in
2017
, and
$0.6 million
, net of
$0.4 million
tax benefit in
2016
. (See Note 10)
(c) Amount represents unrealized gains (losses) on the fair value of hedging activities, net of taxes, for the years ended
December 31, 2018
and
2017
.