NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Financial Statement Presentation
Description of Business
Lydall, Inc. and its subsidiaries (the “Company” or “Lydall”) design and manufacture specialty engineered nonwoven filtration media, industrial thermal insulating solutions, and thermal and acoustical barriers for filtration/separation and heat abatement and sound dampening applications.
On August 31, 2018, the Company acquired an engineered sealing materials business operating under Interface Performance Materials ("Interface"), based in Lancaster, Pennsylvania for $267.0 million, net of cash acquired of $5.2 million. 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.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements include the accounts of Lydall, Inc. and its subsidiaries. All financial information is unaudited for the interim periods reported. All significant intercompany transactions have been eliminated in the Condensed Consolidated Financial Statements. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The operating results of Interface have been included in the Consolidated Statements of Operations beginning on the date of acquisition. The year-end Condensed Consolidated Balance Sheet was derived from the audited financial statements for the year ended December 31, 2018, but does not include all disclosures required by U.S. GAAP. Management believes that all adjustments, which include only normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position, results of operations and cash flows for the periods reported, have been included. For further information, refer to the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Recent Accounting Pronouncements
In July 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-07, “Codification Updates to SEC Sections — Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates (SEC Update)”. ASU 2019-07 aligns the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. ASU 2019-07 was effective immediately. The adoption of this ASU did not have any impact on the Company's consolidated financial statements and disclosures.
Effective January 1, 2019, the Company adopted the FASB issued ASU No. 2016-02, "Leases (Topic 842)", along with several additional clarification ASU's issued during 2018, collectively, "New Lease Standard". The New Lease Standard 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 New Lease Standard also requires 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. The Company's adoption of the New Lease Standard was on a modified retrospective basis and did not have any impact on the Company's 2018 financial statements and disclosures. As part of the adoption of the New Lease Standard, the Company elected the package of practical expedients which allowed the Company to not re-assess 1) if any existing arrangements contained a lease, 2) the lease classification of any existing leases and 3) initial direct costs for any existing lease. The Company also elected the practical expedient which allows use of hindsight in determining the lease term for leases in existence at the date of adoption. Effective January 1, 2019, the Company reported lease right-of-use assets and lease liabilities on the Company's Condensed Consolidated Balance Sheets. Adoption of the New Lease Standard did not change the balances reported in the Company's 2019 Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows, or Condensed Statements of Comprehensive Income. See Footnote 8 "Leases" for additional information required as part of the adoption of the New Lease Standard.
Effective January 1, 2019, the Company adopted the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Account for Hedging Activities". This ASU provides various improvements revolving around the financial reporting of hedging relationships that requires an entity to amend the presentation and disclosure of hedging activities
to better portray the economic results of an entity's risk management activities in its financial statements. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.
Effective January 1, 2019, the Company adopted the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". This ASU allows for reclassification of stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings, but does not require the reclassification. The Company elected not to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.
Effective January 1, 2019, the Company adopted the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting". This ASU expands the guidance for stock-based compensation to include share-based payment transactions for acquiring goods and services from nonemployees. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)". The new standard amends guidance on reporting credit losses for assets held at amortized cost basis. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The impact on the Company's consolidated financial statements and disclosures is not expected to be material.
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", 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. This ASU 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 this ASU will have on its 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.
Significant Accounting Policies
The Company’s significant accounting policies are detailed in Note 1, “Significant Accounting Policies” within Part IV Item 15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to these accounting policies as a result of adopting the New Lease Standard are discussed within Note 8, “Leases”.
2. Revenue from Contracts with Customers
The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts from Customers. These revenues are generated from the design and manufacture of specialty engineered filtration media, industrial thermal insulating solutions, automotive thermal and acoustical barriers for filtration/separation and thermal/acoustical applications. The Company’s revenue recognition policies require the Company to make significant judgments and estimates. In applying the Company’s revenue recognition policy, determinations must be made as to when control of products passes to the Company’s customers which can be either at a point in time or over time. Revenue is generally recognized at a point in time when control passes to customers upon shipment of the Company’s products and revenue is generally recognized over time when control of the Company’s products
transfers to customers during the manufacturing process. The Company analyzes several factors, including but not limited to, the nature of the products being sold and contractual terms and conditions in contracts with customers to help the Company make such judgments about revenue recognition.
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 billings and 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
|
September 30, 2019
|
|
December 31, 2018
|
|
Dollar Change
|
Contract assets
|
$
|
26,804
|
|
|
$
|
23,040
|
|
|
$
|
3,764
|
|
Contract liabilities
|
$
|
2,001
|
|
|
$
|
4,537
|
|
|
$
|
(2,536
|
)
|
The $3.8 million increase in contract assets from December 31, 2018 to September 30, 2019 was primarily due to timing of billings to customers.
The $2.5 million decrease in contract liabilities from December 31, 2018 to September 30, 2019 was primarily due to $4.5 million of revenue recognized in the first nine months of 2019 related to contract liabilities at December 31, 2018, offset by an increase in customer deposits.
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 quarters and nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2019
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
42,693
|
|
|
$
|
42,128
|
|
|
$
|
61,315
|
|
|
$
|
(6,405
|
)
|
|
$
|
139,731
|
|
Europe
|
|
15,203
|
|
|
16,544
|
|
|
22,208
|
|
|
(159
|
)
|
|
53,796
|
|
Asia
|
|
2,104
|
|
|
5,240
|
|
|
4,403
|
|
|
—
|
|
|
11,747
|
|
Total Net Sales
|
|
$
|
60,000
|
|
|
$
|
63,912
|
|
|
$
|
87,926
|
|
|
$
|
(6,564
|
)
|
|
$
|
205,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2018
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
29,048
|
|
|
$
|
44,092
|
|
|
$
|
58,484
|
|
|
$
|
(4,891
|
)
|
|
$
|
126,733
|
|
Europe
|
|
12,120
|
|
|
18,757
|
|
|
24,183
|
|
|
(225
|
)
|
|
54,835
|
|
Asia
|
|
552
|
|
|
10,222
|
|
|
5,544
|
|
|
—
|
|
|
16,318
|
|
Total Net Sales
|
|
$
|
41,720
|
|
|
$
|
73,071
|
|
|
$
|
88,211
|
|
|
$
|
(5,116
|
)
|
|
$
|
197,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
136,892
|
|
|
$
|
121,984
|
|
|
$
|
189,152
|
|
|
$
|
(19,139
|
)
|
|
$
|
428,889
|
|
Europe
|
|
47,589
|
|
|
53,384
|
|
|
73,853
|
|
|
(540
|
)
|
|
174,286
|
|
Asia
|
|
5,201
|
|
|
23,228
|
|
|
12,506
|
|
|
—
|
|
|
40,935
|
|
Total Net Sales
|
|
$
|
189,682
|
|
|
$
|
198,596
|
|
|
$
|
275,511
|
|
|
$
|
(19,679
|
)
|
|
$
|
644,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
69,088
|
|
|
$
|
128,788
|
|
|
$
|
190,385
|
|
|
$
|
(19,249
|
)
|
|
$
|
369,012
|
|
Europe
|
|
34,007
|
|
|
56,197
|
|
|
76,753
|
|
|
(580
|
)
|
|
166,377
|
|
Asia
|
|
552
|
|
|
27,339
|
|
|
12,679
|
|
|
—
|
|
|
40,570
|
|
Total Net Sales
|
|
$
|
103,647
|
|
|
$
|
212,324
|
|
|
$
|
279,817
|
|
|
$
|
(19,829
|
)
|
|
$
|
575,959
|
|
|
|
3.
|
Acquisitions and Divestiture
|
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 and engineered materials and expands the Company's end markets into attractive adjacencies. The Company acquired one hundred percent of Interface for an initial price of $268.4 million, net of cash acquired of $5.2 million. In the second quarter of 2019, the Company finalized the post closing adjustment resulting in a decrease in purchase price of $1.4 million resulting in a final purchase price of $267.0 million. 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.
For the quarter ended September 30, 2019, Interface reported net sales and operating loss of $30.4 million and $1.3 million, respectively. Interface's operating loss for the quarter ended September 30, 2019 included $4.0 million of intangible assets amortization expense in selling, product development and administrative expenses. For the quarter ended September 30, 2018, the results of operations of Interface were included in the Company's results from the date of the acquisition and Interface reported net sales and operating loss of $11.8 million and $0.3 million, respectively. Interface's operating loss for the quarter ended September 30, 2018 included $1.4 million of purchase accounting inventory fair value step-up adjustments in cost of sales upon the sale of inventory and $0.9 million of intangible amortization expense in selling, product development and administrative expenses.
For the nine months ended September 30, 2019, Interface reported net sales and operating loss of $96.0 million and $2.1 million, respectively. Interface's operating loss for the nine months ended September 30, 2019 included $12.1 million of intangible assets amortization expense in selling, product development and administrative expenses. For the nine months ended September 30, 2018, the results of operations of Interface were included in the Company's results from the date of the acquisition and Interface reported net sales and operating loss of $11.8 million and $0.3 million, respectively. Interface's operating loss for the nine months ended September 30, 2018 included $1.4 million of purchase accounting inventory fair value step-up adjustments in cost of sales upon the sale of inventory and $0.9 million of intangible amortization expense in selling, product development and administrative expenses.
The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the date of the acquisition:
|
|
|
|
|
|
In thousands
|
|
|
Accounts receivable
|
|
$
|
25,182
|
|
Inventories
|
|
17,013
|
|
Prepaid expenses and other current assets
|
|
2,382
|
|
Property, plant and equipment
|
|
40,902
|
|
Goodwill (Note 5)
|
|
129,749
|
|
Other intangible assets (Note 5)
|
|
106,900
|
|
Other assets
|
|
308
|
|
Total assets acquired, net of cash acquired
|
|
$
|
322,436
|
|
|
|
|
Current liabilities
|
|
$
|
(11,319
|
)
|
Deferred tax liabilities
|
|
(24,081
|
)
|
Benefit plan liabilities (Note 12)
|
|
(19,002
|
)
|
Other long-term liabilities
|
|
(1,031
|
)
|
Total liabilities assumed
|
|
(55,433
|
)
|
Total purchase price, net of cash acquired
|
|
$
|
267,003
|
|
The final purchase price allocation reflects post-closing adjustments pursuant to the terms of the Stock Purchase Agreement.
The following table reflects the unaudited actual results of the Company for the quarter and nine months ended September 30, 2019 and the pro forma operating results of the Company for the quarter and nine months ended September 30, 2018, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
(Actual)
|
|
(Pro Forma)
|
|
(Actual)
|
|
(Pro Forma)
|
In thousands
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net sales
|
|
$
|
205,274
|
|
|
$
|
220,937
|
|
|
$
|
644,110
|
|
|
$
|
678,418
|
|
Net income (loss)
|
|
$
|
3,004
|
|
|
$
|
6,452
|
|
|
$
|
(52
|
)
|
|
$
|
29,303
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.37
|
|
|
$
|
—
|
|
|
$
|
1.70
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.37
|
|
|
$
|
—
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
17,270
|
|
|
17,216
|
|
|
17,264
|
|
|
17,189
|
|
Diluted
|
|
17,330
|
|
|
17,349
|
|
|
17,264
|
|
|
17,339
|
|
Included in net income during the quarter ended September 30, 2019 was $3.1 million of intangible assets amortization expense related to acquired Interface intangible assets and $2.5 million of interest expense primarily to finance the Interface acquisition.
Pro forma adjustments during the quarter ended September 30, 2018 increased net income by $7.8 million. Included in net income for the quarter ended September 30, 2018 was $3.0 million of intangible assets amortization expense and $1.1 million of interest expense associated with borrowings under the Company's Amended Credit Facility. Net income was adjusted to exclude items such as corporate strategic initiatives expenses, Interface management fee expenses and tax valuation allowance expenses.
Included in net income during the nine months ended September 30, 2019 was $9.2 million of intangible assets amortization expense related to acquired Interface intangible assets and $7.7 million of interest expense to finance the Interface acquisition.
Pro forma adjustments during the nine months ended September 30, 2018 increased net income by $6.1 million. Included in net income for the nine months ended September 30, 2018 was $9.1 million of intangible assets amortization expense and $4.8 million of interest expense associated with borrowings under the Company's Amended Credit Facility. Net income was adjusted to exclude items such as corporate strategic initiatives expenses, 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 for the quarter ended September 30, 2019.
Divestiture
On May 9, 2019, the Company sold its Texel Geosol, Inc. ("Geosol") business, a subsidiary of the Company's Texel Technical Materials, Inc. ("Texel") business, for a cash purchase price of $3.0 million. Under the terms of the arrangement, $0.4 million of the total purchase price will be withheld and paid to the Company in three annual payments of approximately $0.1 million. The disposition was completed pursuant to a Sale Agreement, dated May 9, 2019, by and between the Company, and the third-party buyer. The Company recognized a pre-tax gain on the sale of $1.5 million, reported as non-operating income in the second quarter of 2019. Net of income taxes, the Company reported a gain on sale of $1.3 million in the second quarter of 2019.
The Company did not report Geosol as a discontinued operation as it would not be considered a strategic shift in Lydall's business. Accordingly, the operating results of Geosol are included in the operating results of the Company through the sale date and in comparable periods.
4. Inventories
Inventories as of September 30, 2019 and December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
September 30,
2019
|
|
December 31,
2018
|
Raw materials
|
|
$
|
43,279
|
|
|
$
|
37,731
|
|
Work in process
|
|
17,308
|
|
|
18,296
|
|
Finished goods
|
|
27,602
|
|
|
28,438
|
|
Total inventories
|
|
$
|
88,189
|
|
|
$
|
84,465
|
|
Included in work in process is gross tooling inventory of $3.3 million and $4.3 million at September 30, 2019 and December 31, 2018, respectively.
5. Goodwill and Other Intangible Assets
Goodwill:
The Company tests its goodwill for impairment annually in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value may exceed its fair value.
The changes in the carrying amount of goodwill by segment as of and for the nine months ended September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31,
2018
|
|
Currency translation adjustments
|
|
Reductions
|
|
September 30,
2019
|
|
|
Performance Materials
|
|
$
|
144,626
|
|
|
$
|
(485
|
)
|
|
$
|
(662
|
)
|
|
$
|
143,479
|
|
|
Technical Nonwovens
|
|
52,337
|
|
|
(203
|
)
|
|
—
|
|
|
52,134
|
|
|
Total goodwill
|
|
$
|
196,963
|
|
|
$
|
(688
|
)
|
|
$
|
(662
|
)
|
|
$
|
195,613
|
|
Goodwill Associated with Acquisitions
The net goodwill reduction of $0.7 million within the Performance Materials segment was due to a goodwill reduction of $1.3 million as a result of post-closing purchase price adjustments in the second and third quarters of 2019 related to the acquisition of
Interface Performance Materials on August 31, 2018, partially offset by acquisition activity in the second quarter of 2019 resulting in a goodwill addition of $0.6 million.
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 Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
In thousands
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
$
|
141,537
|
|
|
$
|
(25,625
|
)
|
|
$
|
141,455
|
|
|
$
|
(11,453
|
)
|
Patents
|
|
4,215
|
|
|
(3,731
|
)
|
|
4,333
|
|
|
(3,816
|
)
|
Technology
|
|
2,500
|
|
|
(935
|
)
|
|
2,500
|
|
|
(810
|
)
|
Trade Names
|
|
7,203
|
|
|
(4,520
|
)
|
|
7,235
|
|
|
(2,840
|
)
|
License Agreements
|
|
598
|
|
|
(598
|
)
|
|
619
|
|
|
(619
|
)
|
Other
|
|
539
|
|
|
(539
|
)
|
|
561
|
|
|
(561
|
)
|
Total amortized intangible assets
|
|
$
|
156,592
|
|
|
$
|
(35,948
|
)
|
|
$
|
156,703
|
|
|
$
|
(20,099
|
)
|
6. 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 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 7.
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 September 30, 2019.
At September 30, 2019, the Company had borrowing availability of $110.1 million under the Facility, net of $287.0 million of borrowings outstanding and standby letters of credit outstanding of $1.9 million. The borrowings outstanding included a $149.0 million term loan, net of $0.4 million in debt issuance costs being amortized to interest expense over the debt maturity period.
In addition to the amounts outstanding under the Facility, the Company has various foreign credit facilities totaling approximately $6.8 million. At September 30, 2019, the Company's foreign subsidiaries had $0.1 million in borrowings outstanding as well as $2.3 million in standby letters of credit outstanding.
The Company also has finance lease agreements for machinery and equipment at multiple operations requiring monthly principal and interest payments through 2020.
Total outstanding debt consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Effective Rate
|
|
Maturity
|
|
September 30, 2019
|
|
December 31, 2018
|
Revolver loan
|
|
4.04
|
%
|
|
8/31/2023
|
|
$
|
138,000
|
|
|
$
|
138,000
|
|
Term loan, net of debt issuance costs
|
|
4.04
|
%
|
|
8/31/2023
|
|
148,578
|
|
|
186,498
|
|
Finance leases
|
|
0.00% - 2.09%
|
|
|
2019 - 2020
|
|
92
|
|
|
315
|
|
|
|
|
|
|
|
|
286,670
|
|
|
324,813
|
|
Less portion due within one year
|
|
|
|
|
|
|
(9,981
|
)
|
|
(10,172
|
)
|
Total long-term debt, net of debt issuance costs
|
|
|
|
|
|
|
$
|
276,689
|
|
|
$
|
314,641
|
|
The carrying value of the Company’s debt outstanding on its 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.
The weighted average interest rate on long-term debt was 4.3% for the nine months ended September 30, 2019 and 3.4% for the year ended December 31, 2018.
7. Derivatives
The Company selectively uses financial instruments to manage market risk associated with exposure to fluctuations in interest 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 enters 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
In thousands
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
10
|
|
|
$
|
5,433
|
|
|
$
|
179
|
|
|
$
|
2,738
|
|
Total derivatives
|
$
|
10
|
|
|
$
|
5,433
|
|
|
$
|
179
|
|
|
$
|
2,738
|
|
The following table sets forth the income recorded in accumulated other comprehensive (loss) income, net of tax, for the quarters and nine months ended September 30, 2019 and 2018 for derivatives held by the Company and designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended September 30,
|
|
Nine Months Ended September 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
(148
|
)
|
|
$
|
14
|
|
|
$
|
(2,174
|
)
|
|
$
|
89
|
|
|
$
|
(148
|
)
|
|
$
|
14
|
|
|
$
|
(2,174
|
)
|
|
$
|
89
|
|
8. Leases
From time to time, the Company enters into arrangements with vendors to provide certain tangible assets used in the Company's operations which qualify as a lease pursuant to ASC Topic 842, Leases. The tangible assets leased include Buildings, Office Equipment, Machinery and Vehicles. The Company's leases have remaining terms of a few months to 14 years, some of which have options to extend for a period of up to 7 years and some of which have options to terminate within 1 year.
At inception of the arrangement, the Company determines if an arrangement is a lease based on assessment of the terms and conditions of the contract. Operating leases are included in Operating lease right-of-use (“ROU”) assets, other accrued liabilities, and Long-term operating lease liabilities in the Company's condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, Current portion of long-term debt, and long-term debt in the Company's condensed consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
While the overwhelming majority of leases have fixed payments schedules, some leases have variable lease schedules based on market indices such as LIBOR or include additional payments based on excess consumption of services. For leases on a variable schedule based on a market index, the current lease payment amount is used in the calculation of the lease liability and corresponding asset included on the balance sheet. For leases with additional payments based on excess consumption of services, no amount is included in the calculation of the lease liability or corresponding asset as it is not probable excess consumption will continue in the future.
As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. At September 30, 2019, the weighted average discount rate used for operating and finance leases is 4.39% and 1.79%, respectively. The implicit rate is used when readily determinable from a lease.
The operating lease ROU asset also includes any lease payments made in advance of the assets use and excludes lease incentives received. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for as one component as permitted by ASC 842.
After consideration of any options to terminate early which are reasonably certain to be executed or any options to extend which are not reasonably certain to be executed, any lease with a term of 12 months or less is considered short-term. As permitted by ASC 842, short-term leases are excluded from the ROU Asset and Lease Liability accounts on the condensed consolidated balance sheets. Consistent with all other operating leases, short-term lease expense is recorded on a straight-line basis over the lease term.
The components of lease expense are as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
Quarter Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
Finance lease expense:
|
|
|
|
Amortization of right-of-use assets
|
$
|
16
|
|
|
$
|
65
|
|
Interest on lease liabilities
|
—
|
|
|
1
|
|
Operating lease expense
|
1,657
|
|
|
4,906
|
|
Short-term lease expense
|
183
|
|
|
651
|
|
Variable lease expense
|
72
|
|
|
126
|
|
Total lease expense
|
$
|
1,928
|
|
|
$
|
5,749
|
|
Supplemental balance sheet information related to leases are as follows:
|
|
|
|
|
In thousands, except lease term
|
September 30, 2019
|
Operating leases:
|
|
Operating lease right-of-use assets
|
$
|
24,148
|
|
|
|
Short-term lease liabilities, included in "Other accrued liabilities"
|
$
|
4,973
|
|
Long-term lease liabilities
|
19,241
|
|
Total operating lease liabilities
|
$
|
24,214
|
|
|
|
Finance leases:
|
|
Property, plant and equipment
|
$
|
719
|
|
Accumulated depreciation
|
(207
|
)
|
Property, plant and equipment, net
|
$
|
512
|
|
|
|
Short-term lease liabilities, included in debt
|
$
|
89
|
|
Long-term lease liabilities, included in debt
|
3
|
|
Total finance lease liabilities
|
$
|
92
|
|
|
|
Weighted average remaining lease term:
|
|
Operating leases
|
7.4 years
|
|
Finance leases
|
12.6 years
|
|
Supplemental cash flow information related to leases are as follows:
|
|
|
|
|
|
Nine Months Ended September 30,
|
In thousands
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
4,785
|
|
Operating cash flows from finance leases
|
1
|
|
Financing cash flows from finance leases
|
186
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
1,721
|
|
Finance leases
|
—
|
|
As of September 30, 2019, future lease payments maturities were as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Years Ending December 31,
|
Operating Leases
|
|
Finance Leases
|
2019 (excluding the nine months ended September 30, 2019)
|
$
|
1,516
|
|
|
$
|
58
|
|
2020
|
5,557
|
|
|
35
|
|
2021
|
4,267
|
|
|
—
|
|
2022
|
3,510
|
|
|
—
|
|
2023
|
2,619
|
|
|
—
|
|
2024
|
1,996
|
|
|
—
|
|
Thereafter
|
9,167
|
|
|
—
|
|
Total lease payments
|
28,632
|
|
|
93
|
|
Less imputed interest
|
(4,418
|
)
|
|
(1
|
)
|
Total discounted future lease payments
|
$
|
24,214
|
|
|
$
|
92
|
|
As of December 31, 2018, future lease payment maturities were as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Years Ending December 31,
|
Operating Leases
|
|
Finance Leases
|
2019
|
$
|
6,004
|
|
|
$
|
279
|
|
2020
|
4,871
|
|
|
35
|
|
2021
|
3,877
|
|
|
—
|
|
2022
|
3,226
|
|
|
—
|
|
2023
|
2,617
|
|
|
—
|
|
Thereafter
|
11,111
|
|
|
—
|
|
Total lease payments
|
$
|
31,706
|
|
|
$
|
314
|
|
9. Equity Compensation Plans
As of September 30, 2019, 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 shareholders on April 27, 2012, authorizes 1.75 million shares of common stock for
awards. The 2012 Plan also authorizes an additional 1.2 million 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 types 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. The Company accounts for forfeitures as they occur. Compensation expense for performance based awards granted prior to December 2018, is recorded based upon the service period and management’s assessment of the probability of achieving the performance goals and will be adjusted based upon actual achievement. In December 2018, the performance metric changed to a 3-year relative Total Shareholder Return (TSR) compared to S&P 600 industrial index instead of a pre-established earnings-per-share target to better align compensation to the long-term interests of shareholders. Stock options issued 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 equity compensation expense of $0.6 million and $0.6 million for the quarters ended September 30, 2019 and September 30, 2018, respectively, and $2.1 million and $3.2 million for the nine months ended September 30, 2019 and September 30, 2018, respectively, for the Plans, including restricted stock awards. No equity compensation costs were capitalized as part of inventory.
Stock Options
The following table is a summary of outstanding and exercisable options as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands except per share
amounts
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
Outstanding at September 30, 2019
|
|
680
|
|
|
$
|
28.58
|
|
|
$
|
2,507
|
|
Exercisable at September 30, 2019
|
|
256
|
|
|
$
|
29.98
|
|
|
$
|
989
|
|
Unvested at September 30, 2019
|
|
424
|
|
|
$
|
27.73
|
|
|
$
|
1,518
|
|
There were 108,380 stock options granted and 1,000 stock options exercised during the quarter ended September 30, 2019. There were 108,380 stock options granted and 4,325 stock options exercised during the nine months ended September 30, 2019. The amount of cash received from the exercise of stock options was less than $0.1 million during the quarter and nine months ended September 30, 2019. The intrinsic value of stock options exercised was $0.1 million with a tax benefit of less than $0.1 million during the quarter and nine months ended September 30, 2019.
There were no stock options granted and 19,250 stock options exercised during the quarter ended September 30, 2018. There were 11,180 stock options granted and 46,291 stock options exercised during the nine months ended September 30, 2018. The amount of cash received from the exercise of stock options was $0.2 million during the quarter ended September 30, 2018. The amount of cash received from the exercise of stock options was $0.8 million during the nine months ended September 30, 2018. The intrinsic value of stock options exercised was $0.6 million with a tax benefit of $0.1 million during the quarter ended September 30, 2018. The intrinsic value of stock options exercised was $1.3 million with a tax benefit of $0.3 million during the nine months ended September 30, 2018.
At September 30, 2019, the total unrecognized compensation cost related to non-vested stock option awards was approximately $3.2 million, with a weighted average expected amortization period of 2.8 years.
Restricted Stock
Restricted stock includes both performance-based and time-based awards. There were 7,480 time-based restricted stock shares granted during the quarter ended September 30, 2019 and 41,412 time-based restricted stock shares granted during the nine months ended September 30, 2019. There were no performance-based restricted shares granted during the quarter and nine months ended September 30, 2019. There were no performance-based restricted shares that vested during the quarter and nine months ended September 30, 2019. There were 1,230 time-based restricted shares that vested during the quarter ended September 30, 2019 and 6,698 time-based restricted shares that vested during the nine months ended September 30, 2019.
There were 10,790 time-based restricted stock shares granted during the quarter ended September 30, 2018 and 18,896 time-based restricted stock shares granted during the nine months ended September 30, 2018. There were no performance-based restricted stock shares granted during the quarter ended September 30, 2018 and 15,190 performance-based restricted shares granted during the nine months ended September 30, 2018. There were no performance-based restricted stock shares that vested during the quarter ended September 30, 2018 and 48,035 performance-based restricted shares that vested during the nine months ended September 30, 2018. There were 14,570 time-based restricted stock shares that vested during the quarter ended September 30, 2018 and 19,734 time-based restricted shares that vested during the nine months ended September 30, 2018.
At September 30, 2019, there were 244,196 unvested restricted stock awards with total unrecognized compensation cost related to these awards of $3.3 million with a weighted average expected amortization period of 1.8 years. Compensation expense for performance based awards is recorded based on the service period and management’s assessment of the probability of achieving the performance goals.
10. Stock Repurchases
During the nine months ended September 30, 2019, the Company purchased 2,478 shares of common stock valued at $0.1 million, through withholding, pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s equity compensation plans, in which the Company withholds that number of shares having fair value equal to each recipient’s minimum tax withholding due.
11. Restructuring
In 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 will 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 $3.7 million, in connection with this restructuring plan, of which approximately $3.3 million is expected to result in cash expenditures over the period of consolidation. The Company also expects to incur cash expenditures of approximately $4.2 million for capital expenditures associated with this plan.
During the quarter and nine months ended September 30, 2019, the Company recorded pre-tax restructuring expenses of $0.1 million and $0.6 million, respectively, primarily related to equipment move costs in cost of sales. The Company expects to record approximately $0.2 million of restructuring expenses for the remainder of 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
|
1,000
|
|
290
|
|
2,450
|
|
3,740
|
|
Expenses incurred through December 31, 2018
|
787
|
|
290
|
|
1,882
|
|
2,959
|
|
Estimated remaining expense at December 31, 2018
|
213
|
|
—
|
|
568
|
|
781
|
|
Expense incurred during quarter ended:
|
|
|
|
|
March 31, 2019
|
16
|
|
—
|
|
360
|
|
376
|
|
June 30, 2019
|
53
|
|
—
|
|
44
|
|
97
|
|
September 30, 2019
|
50
|
|
—
|
|
67
|
|
117
|
|
Total pre-tax expense incurred
|
906
|
|
290
|
|
2,353
|
|
3,549
|
|
Estimated remaining expense at September 30, 2019
|
94
|
|
—
|
|
97
|
|
191
|
|
There were cash outflows of $0.1 million and $0.7 million for the restructuring program for the quarter and nine months ended September 30, 2019, respectively.
Accrued restructuring costs were as follows at September 30, 2019:
|
|
|
|
|
In thousands
|
Total
|
Balance as of December 31, 2018
|
$
|
147
|
|
Pre-tax restructuring expenses, excluding depreciation
|
591
|
|
Cash paid
|
(661
|
)
|
Balance as of September 30, 2019
|
$
|
77
|
|
12. Employer Sponsored Benefit Plans
Prior to the quarter ended June 30, 2019, the Company maintained a defined benefit pension plan ("U.S. Lydall Pension Plan") and two domestic pension plans acquired in the Interface acquisition ("Interface Pension Plans"), (collectively the "domestic defined benefit pension plans"). During the quarter ended June 30, 2019, the Company settled the pension obligation of the U.S. Lydall Pension Plan through lump sum distributions to participants or by irrevocably transferring pension liabilities to two insurance companies through the purchase of group annuity contracts. These purchases, funded with pension assets, resulted in a pre-tax settlement loss of $25.5 million in the quarter ended June 30, 2019, related to the recognition of accumulated deferred actuarial losses. During the quarter ended September 30, 2019, additional expenses of $0.2 million were incurred related to the settlement of the U.S. Lydall Pension Plan. The settlement loss and expenses were included as non-operating expense in the condensed consolidated statements of operations. No contributions were made to the U.S. Lydall Pension Plan during the quarter and nine months ended September 30, 2019 and contributions of $3.0 million and $7.2 million were made during the quarter and nine months ended September 30, 2018, respectively.
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. The Company expects to make a required contribution of approximately $1.5 million to the Interface Pension Plans during 2019. Contributions of $0.3 million and $1.1 million were made during the quarter and nine months ended September 30, 2019, respectively.
The following is a summary of the components of net periodic benefit cost for the domestic defined benefit pension plans for the quarters and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended September 30,
|
|
Nine Months Ended September 30,
|
In thousands
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Components of employer benefit cost
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
30
|
|
|
$
|
12
|
|
|
$
|
90
|
|
|
$
|
12
|
|
Interest cost
|
|
530
|
|
|
640
|
|
|
2,356
|
|
|
1,579
|
|
Expected return on assets
|
|
(488
|
)
|
|
(893
|
)
|
|
(2,105
|
)
|
|
(2,193
|
)
|
Amortization of actuarial loss
|
|
—
|
|
|
256
|
|
|
464
|
|
|
768
|
|
Net periodic benefit cost
|
|
$
|
72
|
|
|
$
|
15
|
|
|
$
|
805
|
|
|
$
|
166
|
|
Settlement loss
|
|
186
|
|
|
—
|
|
|
25,701
|
|
|
—
|
|
Total employer benefit plan cost
|
|
$
|
258
|
|
|
$
|
15
|
|
|
$
|
26,506
|
|
|
$
|
166
|
|
The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit cost in other income.
13. Income Taxes
The Company's effective tax rate was 35.1% and 25.1% for the quarters ended September 30, 2019 and 2018, respectively. The Company's effective tax rate for the three months ended September 30, 2019 was negatively impacted by losses in jurisdictions in which no tax benefit can be recognized. The Company's effective tax rate for the quarter ended September 30, 2018 was primarily impacted by the provisional one-time mandatory repatriation of foreign earnings tax and non-deductible transaction costs as a result of the Interface Performance Materials acquisition, partially offset by a tax benefit from a valuation allowance release.
For the nine months ended September 30, 2019 the Company recorded a tax benefit of $5.5 million compared to tax expense of $5.9 million for the nine months ended September 30, 2018. The tax benefit was driven by $10.5 million of tax benefit related to the pension plan settlement and resulted in an effective tax rate for the nine months ended September 30, 2019 of 97.0%. This is
compared to an effective tax rate of 17.5% for the nine months ended September 30, 2018. Excluding the tax benefit of the pension plan settlement, the Company's effective tax rate for the nine months ended September 30, 2019 was 25.2%. This rate was negatively impacted by $1.8 million from losses in jurisdictions in which no tax benefit can be recognized, partially offset by the Company's geographical mix of earnings.
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, France, Germany, China, the United Kingdom, Canada and the Netherlands. With few exceptions, 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.
The Company’s effective tax rates in future periods could be affected by an increase or decrease in earnings in countries where tax rates differ from the United States federal tax rate, the relative impact of permanent tax adjustments on earnings from domestic operations, changes in net deferred tax asset valuation allowances, including valuation allowances on loss carryforwards in which no tax benefit can be recognized, stock vesting, pension plan terminations, the completion of acquisitions or divestitures, changes in tax rates or tax laws and the completion of ongoing tax planning strategies and audits.
14. Earnings (Loss) Per Share
For the quarters and nine months ended September 30, 2019 and 2018, basic earnings per share were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Unexercised stock options and unvested restricted shares are excluded from this calculation but are included in the diluted earnings per share calculation using the treasury stock method as long as their effect is not antidilutive.
The following table provides a reconciliation of weighted-average shares used to determine basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
In thousands
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Basic average common shares outstanding
|
|
17,270
|
|
|
17,216
|
|
|
17,264
|
|
|
17,189
|
|
Effect of dilutive options and restricted stock awards
|
|
60
|
|
|
133
|
|
|
—
|
|
|
150
|
|
Diluted average common shares outstanding
|
|
17,330
|
|
|
17,349
|
|
|
17,264
|
|
|
17,339
|
|
Dilutive stock options totaling 53,892 shares of Common Stock were excluded from the diluted per share computation for the nine months ended September 30, 2019, as the Company reported a net loss during that period and, therefore, the effect of including these options would be antidilutive.
For each of the quarters ended September 30, 2019 and 2018, stock options for 584,725 shares and 162,830 shares of Common Stock were not considered in computing diluted earnings per common share because they were antidilutive.
For each of the nine months ended September 30, 2019 and 2018, stock options for 542,669 shares and 150,005 shares of Common Stock were not considered in computing diluted earnings per common share because they were antidilutive.
15. Segment Information
As of September 30, 2019, the Company’s reportable segments were Performance Materials, Technical Nonwovens, and Thermal Acoustical Solutions.
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.
The tables below present net sales and operating income by segment for the quarters and nine months ended September 30, 2019 and 2018, and also a reconciliation of total segment net sales and operating income to total consolidated net sales and operating income.
Consolidated net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended September 30,
|
In thousands
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Performance Materials Segment (1):
|
|
|
|
|
|
|
|
|
Filtration
|
|
$
|
22,427
|
|
|
$
|
22,643
|
|
|
$
|
71,093
|
|
|
$
|
68,846
|
|
Sealing and Advanced Solutions
|
|
37,573
|
|
|
19,077
|
|
|
118,589
|
|
|
34,801
|
|
Performance Materials Segment net sales
|
|
60,000
|
|
|
41,720
|
|
|
189,682
|
|
|
103,647
|
|
|
|
|
|
|
|
|
|
|
Technical Nonwovens Segment (2):
|
|
|
|
|
|
|
|
|
Industrial Filtration
|
|
32,935
|
|
|
40,945
|
|
|
114,005
|
|
|
120,346
|
|
Advanced Materials (3)
|
|
30,977
|
|
|
32,126
|
|
|
84,591
|
|
|
91,978
|
|
Technical Nonwovens Segment net sales
|
|
63,912
|
|
|
73,071
|
|
|
198,596
|
|
|
212,324
|
|
|
|
|
|
|
|
|
|
|
Thermal Acoustical Solutions Segment:
|
|
|
|
|
|
|
|
|
Parts
|
|
80,309
|
|
|
77,723
|
|
|
250,591
|
|
|
248,764
|
|
Tooling
|
|
7,617
|
|
|
10,488
|
|
|
24,920
|
|
|
31,053
|
|
Thermal Acoustical Solutions Segment net sales
|
|
87,926
|
|
|
88,211
|
|
|
275,511
|
|
|
279,817
|
|
|
|
|
|
|
|
|
|
|
Eliminations and Other (3)
|
|
(6,564
|
)
|
|
(5,116
|
)
|
|
(19,679
|
)
|
|
(19,829
|
)
|
Consolidated Net Sales
|
|
$
|
205,274
|
|
|
$
|
197,886
|
|
|
$
|
644,110
|
|
|
$
|
575,959
|
|
Operating income by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended September 30,
|
In thousands
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Performance Materials (1)
|
|
$
|
712
|
|
|
$
|
1,753
|
|
|
$
|
5,474
|
|
|
$
|
8,043
|
|
Technical Nonwovens (2)
|
|
7,165
|
|
|
6,271
|
|
|
19,743
|
|
|
17,395
|
|
Thermal Acoustical Solutions
|
|
5,022
|
|
|
7,923
|
|
|
21,870
|
|
|
29,357
|
|
Corporate Office Expenses
|
|
(5,452
|
)
|
|
(6,214
|
)
|
|
(17,411
|
)
|
|
(18,777
|
)
|
Consolidated Operating Income
|
|
$
|
7,447
|
|
|
$
|
9,733
|
|
|
$
|
29,676
|
|
|
$
|
36,018
|
|
(1) The Performance Materials segment reports the results of Interface and PCC for the period following the date of acquisitions of August 31, 2018 and July 12, 2018, respectively, and included $3.1 million and $11.2 million of incremental intangible assets amortization for the quarter and nine months ended September 30, 2019, respectively.
(2) The Technical Nonwovens segment reports the results of Geosol through the date of disposition of May 9, 2019.
(3) Included in the Technical Nonwovens segment and Eliminations and Other is $4.3 million in intercompany sales to the Thermal Acoustical Solutions segment for the quarters ended September 30, 2019 and 2018, and $13.6 million and $17.2 million for the nine months ended September 30, 2019 and 2018, respectively.
16. Commitments and Contingencies
Environmental Remediation
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 Per and Polyfluorinated Substances (“PFAS”) 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 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.
17. Changes in Accumulated Other Comprehensive Income (Loss)
The following table discloses the changes by classification within accumulated other comprehensive income (loss) for the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017
|
|
$
|
(2,221
|
)
|
|
$
|
(18,049
|
)
|
|
|
$
|
122
|
|
|
|
$
|
(20,148
|
)
|
Other comprehensive (loss) income
|
|
(9,262
|
)
|
|
—
|
|
|
|
89
|
|
(c)
|
|
(9,173
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
595
|
|
(a)
|
|
—
|
|
|
|
595
|
|
Balance at September 30, 2018
|
|
(11,483
|
)
|
|
(17,454
|
)
|
|
|
211
|
|
|
|
(28,726
|
)
|
Balance at December 31, 2018
|
|
(18,458
|
)
|
|
(22,253
|
)
|
|
|
(1,974
|
)
|
|
|
(42,685
|
)
|
Other comprehensive loss
|
|
(6,396
|
)
|
|
—
|
|
|
|
(2,174
|
)
|
(c)
|
|
(8,570
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
19,395
|
|
(b)
|
|
—
|
|
|
|
19,395
|
|
Balance at September 30, 2019
|
|
$
|
(24,854
|
)
|
|
$
|
(2,858
|
)
|
|
|
$
|
(4,148
|
)
|
|
|
$
|
(31,860
|
)
|
|
|
(a)
|
Amount represents amortization of actuarial losses, a component of net periodic benefit cost. This amount was $0.6 million, net of $0.2 million tax benefit, for the nine months ended September 30, 2018.
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(b) Amount represents the settlement of the Lydall Pension Plan in the second quarter of 2019. This amount was $19.0 million, net of $11.5 million tax benefit. Amount also represents amortization of actuarial losses, a component of net periodic benefit cost during the first five months of fiscal year 2019 prior to the plan termination. This amount was $0.4 million, net of $0.1 million tax benefit.
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(c)
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Amount represents unrealized gains (losses) on the fair value of hedging activities, net of taxes, for the nine months ended September 30, 2019 and 2018.
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