PART I
Lydall, Inc. has been incorporated in Delaware since 1987 after originally being incorporated in Connecticut in 1969. The principal executive offices are located in Manchester, Connecticut. The Company designs and manufactures specialty engineered nonwoven filtration media, industrial thermal insulating solutions, and thermal and acoustical barriers for filtration/separation and heat abatement and sound dampening applications.
Lydall serves a number of markets. The Company’s products are primarily sold directly to customers through an internal sales force and distributed via common carrier. The majority of products are sold to original equipment manufacturers and tier-one suppliers. The Company differentiates itself through high-quality, specialty engineered innovative products, application engineering and exceptional customer service. Lydall has a number of domestic and foreign competitors for its products, most of whom are either privately owned or divisions of larger companies.
The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements are made available free of charge through the Investor Relations Section of the Company’s Internet website at www.lydall.com after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “Commission”) and are also available on the Commission’s website at www.sec.gov. Information found on these websites is not part of this Form 10-K.
SEGMENTS
The Company’s reportable segments are Performance Materials, Technical Nonwovens and Thermal Acoustical Solutions. The Performance Materials segment reports the results of the Filtration, and Sealing and Advanced Solutions businesses. The Technical Nonwovens segment reports the results of Industrial Filtration and Advanced Materials products. The Thermal Acoustical Solutions segment reports the results of parts and tooling products. For additional information regarding the Company’s reportable segments, refer to Note 15 in the Consolidated Financial Statements included in this Annual Report on Form 10-K.
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.
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. The Company believes the sale of this business is aligned with the Company's strategy to focus on its core technologies and capabilities that improve its effectiveness and positioning as a specialty materials provider.
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.
GENERAL BUSINESS INFORMATION
Lydall holds a number of patents, trademarks and licenses. While no single patent, trademark or license is critical to the success of Lydall, together these intangible assets are of considerable value to the Company.
Typically, the Company’s business can be slightly stronger in the first half of the calendar year given the timing of customer order patterns and planned customer shutdowns in North America and Europe that typically occur in the third and fourth quarters of each year. Lydall maintains levels of inventory and grants credit terms that are normal within the industries it serves. The Company uses a wide range of raw materials in the manufacturing of its products, including aluminum and other metals to manufacture most of its automotive heat shields and various glass and petroleum derived fibers in its Performance Materials, Technical Nonwovens, and Thermal Acoustical Solutions segments. The majority of raw materials used are generally available from a variety of suppliers.
Sales to Ford Motor Company accounted for 11.8%, 14.8% and 17.3% of Lydall’s net sales in the years ended December 31, 2019, 2018 and 2017, respectively. No other customers accounted for more than 10% of Lydall's net sales in such years.
Backlog at January 31, 2020 was $126.7 million. Lydall’s backlog was $119.1 million at December 31, 2019, $114.4 million at December 31, 2018, and $109.0 million at December 31, 2017. Thermal Acoustical Solutions segment backlog, which comprises the majority of total backlog, may be impacted by various assumptions, including future automotive production volume estimates, changes in program launch timing and changes in customer development plans. The Company believes that global automotive orders are typically fulfilled within a two month period and therefore represent a reasonable time frame to be included as Thermal Acoustical Solutions segment backlog.
No material portion of Lydall’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental body.
Lydall believes that its plants and equipment are overall, in substantial compliance with applicable federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment (See Item 3, Legal Proceedings).
As of December 31, 2019, Lydall employed approximately 3,250 people. The Company has approximately 250 employees in the United States under union contracts expiring between September 2020 through September 2022. All employees at the facilities in France and the Netherlands are covered under a National Collective Bargaining Agreement. Certain salaried and all hourly employees in Germany, the United Kingdom, China, and Canada are also covered under some form of a National Collective Bargaining Agreement. Lydall considers its employee relationships to be satisfactory.
There are no significant anticipated operating risks related to foreign investment law, expropriation, or availability of material, labor or energy. The foreign and domestic operations attempt to limit foreign currency exchange transaction risk by completing transactions in functional currencies whenever practical or through the use of foreign currency forward exchange contracts when deemed appropriate.
The reader should carefully review and consider the risk factors discussed below. Any and all of these risk factors could materially affect the Company’s business, financial condition, future results of operations or cash flows and possibly lead to a decline in Lydall’s stock price. The risks, uncertainties and other factors described below constitute all material risk factors known to management as of the date of this report.
Global political or economic changes may negatively impact Lydall’s business - Ongoing instability or changes in a country's or region's economic or political conditions could adversely affect demand for the Company’s products and impact profitability. Among other factors, political conflicts or changes, disruptions in the global credit and financial markets, including diminished liquidity and credit availability, swings in consumer confidence and spending, unstable economic growth and fluctuations in unemployment rates causing economic instability could have a negative impact on the Company’s results of operations, financial condition and liquidity. These factors also make it difficult to accurately forecast and plan future business activities.
Further, the implementation of more restrictive trade policies, including the imposition of tariffs, or the renegotiation of existing trade agreements by the U.S. or by countries where the Company sells products or procures materials incorporated into our products could negatively impact the Company's business, results of operations and financial condition. For example, a government's adoption of "buy national" policies or retaliation by another government against such policies, such as tariffs, could have a negative impact on the Company's results of operations by decreasing the demand for Company products in certain countries and/or increasing the prices on raw materials that are critical to the Company's businesses.
The United Kingdom's exit effective January 31, 2020 from the European Union (generally referred to as “BREXIT”) could cause disruptions to, and create uncertainty surrounding, Lydall's business, including affecting our relationships with existing and potential customers, suppliers, and employees. The effects of BREXIT will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. BREXIT also may create global economic uncertainty, which may cause the Company's customers and potential customers to monitor their costs and reduce their budgets for Lydall's products. Any of these effects of BREXIT, among others, could materially adversely affect Lydall's business, business opportunities, results of operations, financial condition, and cash flows.
The Company’s foreign and export sales were 53.1% of net sales in 2019, 53.5% in 2018, and 54.2% in 2017. If the global economy were to take a significant downturn, depending on the length, duration and severity of such downturn, the Company’s business and financial statements could be adversely affected.
The Company’s Thermal Acoustical Solutions segment is tied primarily to general economic and automotive industry conditions - Consolidated sales to the automotive market accounted for 42.9% of the Company’s net sales in 2019, 46.3% in 2018, and 48.3% in 2017. The segment net sales from products manufactured in North America were 69.9%, 69.6%, and 72.3% in 2019, 2018, and 2017, respectively, with the remainder manufactured in Europe and Asia. This segment is closely tied to general economic and automotive industry conditions as demand for vehicles depends largely on the strength of the economy, employment levels, consumer confidence levels, the availability and cost of credit, the cost of fuel, legislative and regulatory oversight and trade agreements. These factors have had, and could continue to have, a substantial impact on the segment. Adverse developments could reduce demand for new vehicles, causing Lydall’s customers to reduce their vehicle production in North America, Europe and Asia and, as a result, demand for Company products would be adversely affected.
The Company’s quarterly operating results may fluctuate; as a result, the Company may fail to meet or exceed the expectations of research analysts or investors, which could cause Lydall’s stock price to decline - The Company’s quarterly results are subject to significant fluctuations. Operating results have fluctuated as a result of many factors, including size and timing of orders and shipments, loss of significant customers, product mix, reductions in customer pricing, customer or company shut-downs, technological change, operational efficiencies and inefficiencies, competition, changes in tax laws and deferred tax asset valuation allowances, strategic initiatives, severance and recruiting charges, asset impairment, penalties or fines and general economic conditions. In addition, lower revenues may cause asset utilization to decrease, resulting in the under absorption of the Company’s fixed costs, which could negatively impact gross margins. Additionally, the Company’s gross margins vary among its product groups and have fluctuated from quarter to quarter as a result of shifts in product mix. Any and all of these factors could affect the
Company’s business, financial condition, future results of operations or cash flows and possibly lead to a decline in Lydall’s stock price.
Implementation of the Company’s strategic initiatives may not be successful - As part of Lydall’s business strategy, the Company continues to review various strategic and business opportunities to grow the business and to assess the profitability and growth potential for each of its existing businesses. The Company may incur significant professional services expenses associated with the review and potential implementation of strategic business opportunities. The Company cannot predict with certainty whether any recent or future strategic transactions will be beneficial to the Company. Among other things, future performance could be impacted by the Company’s ability to:
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Identify and effectively complete strategic transactions;
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Obtain adequate financing to fund strategic initiatives;
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Successfully integrate and manage acquired businesses that involve numerous operational and financial risks, including difficulties in the integration of acquired operations, diversion of management's attention from other business concerns, managing assets in multiple geographic regions and potential loss of key employees and key customers of acquired operations;
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Improve operating margins through its Lean Six Sigma initiatives which are intended to improve processes and work flow, improve customer service, reduce costs and leverage synergies across the Company; and
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Successfully invest and deploy capital investments to support our business and commitments to our customers.
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In order to meet its strategic objectives, the Company may also divest assets and/or businesses. Successfully executing such a strategy depends on various factors, including effectively transferring assets, liabilities, contracts, facilities and employees to any purchaser, identifying and separating the intellectual property to be divested from the intellectual property that the Company wishes to retain, reducing or eliminating fixed costs previously associated with the divested assets or business, and collecting the proceeds from any divestitures.
The Company may be unable to realize expected benefits from cost reduction, restructuring and consolidation efforts and profitability may be hurt or business otherwise might be adversely affected - In order to operate more efficiently and control costs, the Company announces from time to time restructuring or consolidation plans, which include workforce reductions as well as facility consolidations and other cost reduction initiatives. These plans are intended to generate operating expense savings through direct cost and indirect overhead expense reductions as well as other savings. The Company may undertake workforce reductions or restructuring actions in the future. These types of cost reduction and restructuring activities are complex. If the Company does not successfully manage current restructuring activities, or any other restructuring activities that it may undertake in the future, expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. Risks associated with these actions and other workforce management issues include unforeseen delays in implementation of anticipated workforce reductions, additional unexpected costs, adverse effects on employee morale and the failure to meet operational targets due to the loss of employees, any of which may impair our ability to achieve anticipated cost reductions or may otherwise harm the business, which could have a material adverse effect on competitive position, results of operations, cash flows or financial condition.
The Company may not have adequate cash to fund its operating requirements - The principal source of the Company’s liquidity is operating cash flows. Other significant factors that affect the overall management of liquidity include capital expenditures, investments in businesses, acquisitions, income tax payments, pension funding, outcomes of contingencies and availability of lines of credit and long-term financing. The Company’s liquidity can be impacted by the Company’s ability to:
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Manage working capital and the level of future profitability. The consolidated cash balance is impacted by capital equipment and inventory investments that may be made in response to changing market conditions;
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Satisfy covenants and other obligations under its existing credit facility, which expires in August 2023, and includes a consolidated net leverage ratio and consolidated fixed charge coverage ratio, which could limit or prohibit Lydall’s ability to borrow funds. Additionally, these debt covenants and other obligations could limit the Company’s ability to make acquisitions, incur additional debt, make investments, or consummate asset sales and obtain additional financing from other sources.
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Incurring a substantial amount of indebtedness could have an adverse effect on the Company’s financial health and make it more difficult for Lydall to obtain additional financing in the future - The Company incurred a substantial amount of debt to fund the purchase price of Interface Performance Materials in August 2018. Incurring this additional debt may have an adverse effect on the Company’s financial condition and may limit Lydall’s ability to obtain any necessary financing in the future for working capital, capital expenditures, future acquisitions, debt service requirements or other purposes. Additionally, the Company may not be able to generate sufficient cash flow or otherwise obtain funds necessary to meet the additional debt obligations. On August 31, 2018, the Company amended and restated its $175 million senior secured revolving credit agreement (the "Amended Credit Agreement"), which increased the available borrowing from $175 million to $450 million. See Note 8 in the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information. Any default under the Amended Credit Agreement would likely result in the acceleration of the repayment obligations to our lenders.
The Company is subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, which impose restrictions on the Company and violations of which may carry substantial fines and penalties and result in criminal sanctions - The U.S. Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions, including anti-bribery legislation in the United Kingdom, generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. The Company’s policies mandate compliance with these anti-bribery laws, violations of which often carry substantial fines and penalties and could result in criminal sanctions against the Company, Lydall’s officers or employees. The Company cannot assure that its internal control policies and procedures always will protect it from reckless or other inappropriate acts committed by the Company’s affiliates, employees or agents. Violations of these laws, or allegations of such violations, could have a material adverse effect on Lydall’s business, or financial statements and could possibly lead to a decline in Lydall's stock price.
Raw material pricing, supply issues, and disruptions in transportation networks could affect all of the Company’s businesses - The Thermal Acoustical Solutions segment uses aluminum and other metals to manufacture most of its automotive heat shields. The Thermal Acoustical Solutions and Technical Nonwovens segments use various petroleum-derivative fibers in manufacturing products, and the Performance Materials segment uses various glass-derivative fibers in manufacturing products. If the prices and duties of these raw materials, or any other raw materials used in the Company’s businesses increase, the Company may not have the ability to pass all of the incremental cost increases on to its customers. In addition, an interruption in the ability of the Company to source such materials, including government trade restrictions, could negatively impact operations and sales.
Impairment of the Company’s goodwill or other long-lived assets has required, and may in the future require recording significant charges to earnings - The Company reviews its long-lived assets for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is also tested by the Company for impairment at the reporting unit level during the fourth quarter of each year. Factors that may be considered a change in circumstances, indicating that the carrying value of goodwill or other long-lived assets may not be recoverable, include, but are not limited to, a decline in the Company’s stock price and market capitalization, reduced future cash flow estimates, and slower growth rates. Certain factors led to an impairment of the Performance Materials segment goodwill and other long-lived assets aggregating to $64.2 million in the fourth quarter of 2019. See Note 7, Impairment, in the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion of the impairments.
Volatility in the securities markets, interest rates, actuarial assumptions and other factors could substantially increase the Company’s costs and funding for its defined benefit pension plans - The Company’s defined benefit pension plans are funded with trust assets invested in a diversified portfolio of securities. Changes in interest rates, mortality rates, investment returns, and the market value of plan assets may affect the funded status and cause volatility in the net periodic benefit cost and future funding requirements of such plans. A significant increase in benefit plan liabilities or future funding requirements could have a negative impact on the Company’s financial statements.
The Company is involved in certain legal proceedings and may become involved in future legal proceedings all of which could give rise to liability - The Company is involved in legal proceedings that, from time to time, may be material. These proceedings may include, without limitation, commercial or contractual disputes, intellectual property matters, personal injury claims, stockholder claims, and employment matters. No assurances can be given that such proceedings and claims will not have a material adverse impact on the Company’s financial statements.
The Company is subject to legal and compliance risks and oversight on a global basis and developments in these risks and related matters could have a material adverse effect on Lydall's consolidated financial position, results of
operations or liquidity - The Company is subject to a variety of laws and regulations that govern our business both in the United States and internationally, including antitrust laws. Violations of these laws and regulations can result in significant fines, penalties or other damages being imposed by regulatory authorities. Expenses and fines arising out of or related to these investigations and related claims can also be significant. Despite meaningful measures that the Company undertakes to seek to ensure lawful conduct, which include training and internal control policies, these measures may not always prevent Lydall's employees or agents from violating the laws and regulations. As a result, the Company could be subject to criminal and civil penalties, disgorgement, further changes or enhancements to our procedures, policies and controls, personnel changes or other remedial actions. Violations of laws, or allegations of such violations, could disrupt operations, involve significant management distraction and result in a material adverse effect on the Company's competitive position, results of operations, cash flows or financial condition.
Changes in Accounting Standards could have a material adverse effect on Lydall's business - The Company’s accounting and financial reporting policies conform to U.S. generally accepted accounting principles (“U.S. GAAP”), which are periodically revised and/or expanded. The application of accounting principles is also subject to varying interpretations over time. Accordingly, the Company is required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as the FASB and the SEC. Such new financial accounting standards may change the financial accounting or reporting standards that govern the preparation of the Company’s Consolidated Financial Statements. During 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases, which provided for a wide-ranging change to lease accounting. During 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, which provided for comprehensive changes in revenue recognition and superseded nearly all existing U.S. GAAP. Implementing changes required by new standards, requirements or laws require interpretation of rules and development of new accounting policies and internal controls that if not appropriately applied could result in financial statement errors, deficiencies in internal control as well as significant costs to implement.
Changes in tax rates and exposure to additional income tax liabilities could have a material adverse effect on Lydall's consolidated financial position - The Company is subject to risks with respect to changes in tax law and rates, changes in rules related to accounting for income taxes, or adverse outcomes from tax audits that are in process or future tax audits in various jurisdictions in which the Company operates. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The changes included in the Tax Reform Act were broad and complex. In addition, certain jurisdictions in which the Company operates have statutory rates greater than or less than the United States statutory rate. Changes in the mix and source of earnings between jurisdictions could have a significant impact on the Company’s overall effective tax rate.
Ineffective internal controls could impact our business and operating results - The Company's internal controls over financial reporting may not prevent or detect misstatements because of their inherent limitations in detecting human errors, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the Company fails to maintain the adequacy of internal controls, including any failure to implement required new or improved controls; otherwise fails to prevent financial reporting misstatements; or if the Company experiences difficulties in implementing internal controls of acquired businesses, Lydall's operating results could be negatively impacted, and the Company could fail to meet its financial reporting obligations.
Realization of deferred tax assets is not 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 all deferred tax assets and reduces the carrying amount to the extent it believes a portion will not be realized. Changes in these assessments can result in an increase or reduction to valuation allowances on deferred tax assets and could have a significant impact on the Company’s overall effective tax rate.
The Company’s future success depends upon its ability to continue to innovate, improve its existing products, develop and market new products, and identify and enter new markets - Improved performance and growth are partially dependent on improvements to existing products and new product introductions planned for the future. Delays in improving or developing products and long customer qualification cycles may impact the success of new product programs. The degree of success of new product programs could impact the Company’s future results. Developments by other companies of new or improved products, processes or technologies may make Lydall's products or proposed products obsolete or less competitive and may negatively impact the Company's net sales. Accordingly, the ability to compete is in part dependent on the Company's ability to continually offer enhanced and improved products that meet the changing requirements of Lydall's customers. If the Company fails to develop new products or enhance existing products, it could have a material adverse effect on the Company's business, financial condition or results of operations.
The Company’s foreign operations expose it to business, economic, political, legal, regulatory and other risks - The Company believes that in order to be competitive and grow its businesses, it needs to maintain significant foreign operations. Foreign sales were $358.7 million, $363.7 million and $322.4 million for the years ended December 31, 2019, 2018, and 2017, respectively. Foreign operations are subject to inherent risks including political and economic conditions in various countries, unexpected changes in regulatory requirements (including tariff regulations and trade restrictions), longer accounts receivable collection cycles and potentially adverse tax consequences. In addition, a strain of coronavirus surfaced in China in early 2020, resulting in travel restrictions and extended shutdowns of certain businesses in the region. The impact of the coronavirus on the Company's businesses is uncertain at this time and will depend on future developments, but prolonged closures in China may disrupt the Company's operations and the operations of suppliers and customers. The Company has little control over most of these risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter its business practices in time to avoid the adverse effect of any of these possible changes.
Foreign currency exchange rate fluctuations and limitations on repatriation of earnings may affect the Company’s results of operations - The Company’s financial results are exposed to currency exchange rate fluctuations and an increased proportion of its assets, liabilities and expenses are denominated in non-U.S. dollar currencies. There can be significant volatility in foreign currencies that impact the Company, primarily the British Pound Sterling, Euro, Chinese Yuan, and Canadian Dollar. The Company’s foreign and domestic operations seek to limit foreign currency exchange transaction risk by completing transactions in functional currencies whenever practical or through the use of foreign currency forward exchange contracts when deemed appropriate. If the Company does not successfully hedge its currency exposure, changes in the rate of exchange between these currencies and the U.S. dollar may negatively impact the Company. Translation of the results of operations and financial condition of its foreign operations into U.S. dollars may be affected by exchange rate fluctuations. Additionally, limitations on the repatriation of earnings, including imposition or increase of withholding and other taxes on remittances, may limit or negatively impact the Company’s ability to redeploy or distribute cash. The Company receives a material portion of its revenue from foreign operations. Foreign operations generated approximately 42.8%, 46.3% and 46.1% of total net sales in 2019, 2018, and 2017, respectively.
The Company's hedging activities could negatively impact results of operations and cash flows - From time to time, the Company enters into derivatives to manage exposure to interest rate and currency movements. If the Company does not execute contracts that effectively mitigate the Company's economic exposure to interest rates and currency rates, elects to not apply hedge accounting, or fails to comply with the complex accounting requirements for hedging transactions, the Company's results of operations and cash flows could be volatile, as well as negatively impacted.
The Company’s manufacturing processes are subject to inherent risk - The Company operates a number of manufacturing facilities and relies upon an effective workforce and properly performing machinery and equipment. The workforce may experience a relatively high turnover rate, causing inefficiencies associated with retraining and rehiring. The equipment and systems necessary for such operations may break down, perform poorly or fail, and possibly cause higher manufacturing and delivery costs. Manufacturing processes affect the Company’s ability to deliver quality products on a timely basis, and delays in delivering products to customers could result in the Company incurring increased freight costs and penalties from customers.
Increases in energy pricing can affect all of the Company’s businesses - Higher energy costs at the Company’s manufacturing plants or higher energy costs passed on from the Company’s vendors could impact the Company’s profitability.
The Company’s resources are limited and may impair its ability to capitalize on changes in technology, competition and pricing - The industries in which the Company sells its products are highly competitive and many of the competitors are affiliated with entities that are substantially larger and that have greater financial, technical and marketing resources. The Company’s more limited resources and relatively diverse product mix may limit or impair its ability to capitalize on changes in technology, competition and pricing.
The Company’s products may fail to perform as expected, subjecting it to warranty or other claims from its customers -If such failure results in, or is alleged to result in, bodily injury and/or property damage or other losses, the Company may be subject to product liability lawsuits, product recalls and other claims, any of which could have a material adverse impact on results of operations and cash flows.
If the Company does not retain its key employees, the Company’s ability to execute its business strategy could be adversely affected - The Company’s success, in part, depends on key managerial, engineering, sales and marketing
and technical personnel and its ability to continue to attract and retain additional personnel. The loss of certain key personnel could have a material, adverse effect upon the Company’s business and results of operations. There is no assurance that the Company can retain its key employees or that it can attract competent and effective new or replacement personnel in the future.
The Company uses a combination of insurance and self-insurance to provide for potential liabilities - For property risk, workers’ compensation, automobile and general liability, director and officers’ liability and employee health care benefits, the Company uses a combination of insurance and self-insurance. The Company estimates the liabilities associated with the risks retained by Lydall, in part, by considering historical claims experience and other actuarial assumptions which, by their nature, are subject to a high degree of variability.
The Company’s current reserve levels may not be adequate to cover potential exposures - Estimates and assumptions may affect the reserves that the Company has established to cover uncollectible accounts receivable, excess or obsolete inventory, income tax valuation and fair market value write downs of certain assets and various liabilities. Actual results could differ from those estimates.
The Company is subject to environmental laws and regulations that could increase its expense and affect operating results - The Company is subject to federal, state, local, and foreign environmental, health and safety laws and regulations that affect operations. New and changing environmental laws and regulations may impact the products manufactured and sold to customers. In order to maintain compliance with such laws and regulations, the Company must devote significant resources and maintain and administer adequate policies, procedures and oversight. Should the Company fail to do these things, it could be negatively impacted by lower net sales, fines, legal costs, and clean-up requirements.
The Company may incur liabilities under various government statutes for the investigation and cleanup of contaminants previously released into the environment. Although there is no certainty, the Company does not anticipate that compliance with current provisions relating to the protection of the environment or that any payments the Company may be required to make for cleanup liabilities will have a material adverse effect upon the Company's cash flows, competitive position, financial condition or results of operations. Current and on-going environmental matters are further addressed in Item 3, Legal Proceedings, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 17 to the Consolidated Financial Statements in this 2019 Annual Report on Form 10-K.
The Company may be unable to adequately protect its intellectual property, which may limit its ability to compete effectively - The Company owns intellectual property, including patents, trademarks and trade secrets, which play an important role in helping the Company to maintain its competitive position in a number of markets. The Company is subject to risks with respect to (i) changes in the intellectual property landscape of markets in which it competes; (ii) the potential assertion of intellectual property-related claims against the Company; (iii) the misappropriation by third parties of our intellectual property (e.g., disclosure of trade secrets by former employees); (iv) the failure to maximize or successfully assert its intellectual property rights; and (iv) significant technological developments by others.
Disruptions may occur to the Company’s operations relating to information technology - The capacity, reliability and security of the Company’s information technology (“IT”) hardware and software infrastructure and the ability to expand and update this infrastructure in response to the Company’s changing needs are important to the operation of the businesses. Also, any inadequacy, interruption, loss of data, integration failure or security failure of the Company’s IT technology could harm its ability to effectively operate its business, which could adversely impact the Company’s results of operations and cash flows.
Increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted computer crime could pose a risk to the Company’s systems, networks, and data - Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cyber-related attacks pose a risk to the security of the Company’s systems and networks and the confidentiality, availability and integrity of the Company’s data. While the Company attempts to mitigate these risks by employing a number of measures, including employee training, monitoring and testing, and maintenance of protective systems and contingency plans, the Company remains vulnerable to additional known or unknown threats. The Company also may have access to sensitive, confidential or personal data or information in certain of Lydall’s businesses that is subject to privacy and security laws, regulations and customer-imposed controls. Despite efforts made by the Company to protect sensitive, confidential or personal data or information, the Company may be vulnerable to security breaches, ransomware, theft, misplaced or lost data, programming errors, employee errors and/or malfeasance that could potentially lead to the compromising or loss of sensitive, confidential or personal
data or information and could adversely impact the Company's results of operations and cash flows. Although the Company carries cybersecurity insurance, in the event of a cyber incident, that insurance may not be extensive enough or adequate in scope of coverage or amount to cover damages the Company may incur. In addition, a cyber-related attack could result in other negative consequences, including loss of information, damage to the Company’s reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action.
The General Data Protection Regulation ("GDPR"), which went into effect in the European Union ("EU") on May 25, 2018, among other things, mandates new requirements regarding the handling of personal data of employees and customers, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. If the Company fails to comply with these laws or regulations, we could be subject to significant litigation, monetary damages, regulatory enforcement actions or fines in one or more jurisdictions.
The Company could be subject to work stoppages or other business interruptions as a result of its unionized work force - A portion of the Company’s hourly employees are represented by various union locals and covered by collective bargaining agreements. These agreements contain various expiration dates and must be renegotiated upon expiration. If the Company is unable to negotiate any of its collective bargaining agreements on satisfactory terms prior to expiration, the Company could experience disruptions in its operations which could have a material adverse effect on operations.
The Company could be negatively affected as a result of the actions of activist stockholders - Over the last few years, proxy contests and other forms of stockholder activism have been directed against numerous public companies. The Company could become engaged in a solicitation, or proxy contest, or experience other stockholder activism, in the future. Activist stockholders may advocate for certain governance and strategic changes at the Company. In the event of stockholder activism, particularly with respect to matters which Lydall's Board of Directors, in exercising their fiduciary duties, disagree with or have determined not to pursue, the Company could be adversely affected because responding to actions by activist stockholders can be costly and time-consuming, disrupting operations and diverting the attention of management, and perceived uncertainties as to future direction may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel, business partners and customers.
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Item 1B.
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UNRESOLVED STAFF COMMENTS
|
None.
The principal properties of the Company as of December 31, 2019 are situated at the following locations and have the following characteristics:
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|
|
|
|
|
Location
|
|
Primary Business Segment/General Description
|
|
Type of
Interest
|
Hamptonville, North Carolina
|
|
Thermal Acoustical Solutions – Product Manufacturing
|
|
Owned
|
Yadkinville, North Carolina
|
|
Thermal Acoustical Solutions – Product Manufacturing
|
|
Leased
|
Meinerzhagen, Germany
|
|
Thermal Acoustical Solutions – Product Manufacturing
|
|
Owned
|
Saint-Nazaire, France
|
|
Thermal Acoustical Solutions – Product Manufacturing
|
|
Owned
|
Taicang, China
|
|
Thermal Acoustical Solutions – Product Manufacturing
|
|
Leased
|
Green Island, New York
|
|
Performance Materials – Specialty Media Manufacturing
|
|
Owned
|
Rochester, New Hampshire
|
|
Performance Materials – Specialty Media Manufacturing
|
|
Owned
|
Saint-Rivalain, France
|
|
Performance Materials – Specialty Media Manufacturing
|
|
Owned
|
Fulton, New York
|
|
Performance Materials – Specialty Media Manufacturing
|
|
Owned
|
Marshalltown, Iowa
|
|
Performance Materials – Specialty Media Manufacturing
|
|
Owned
|
Altenkirchen, Germany
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|
Performance Materials – Specialty Media Manufacturing
|
|
Owned
|
St. Elzear, Quebec, Canada
|
|
Technical Nonwovens - Filtration Media Manufacturing
|
|
Owned
|
St. Marie, Quebec, Canada
|
|
Technical Nonwovens - Filtration Media Manufacturing
|
|
Owned
|
Rossendale, United Kingdom
|
|
Technical Nonwovens - Filtration Media Manufacturing
|
|
Owned
|
North Augusta, South Carolina
|
|
Technical Nonwovens - Filtration Media Manufacturing
|
|
Owned
|
Wuxi, China
|
|
Technical Nonwovens - Filtration Media Manufacturing
|
|
Leased
|
Fulda, Germany
|
|
Technical Nonwovens - Filtration Media Manufacturing
|
|
Leased
|
Manchester, Connecticut
|
|
Corporate Office
|
|
Owned
|
For additional information regarding lease obligations, see Note 10 to the Consolidated Financial Statements included in this Annual Report on Form 10-K. The Company considers its properties to be in good operating condition and suitable and adequate for its present needs. In addition to the properties listed above, the Company has several leases for sales offices and warehouses in the United States, Europe and Asia, which the Company believes are immaterial individually and in the aggregate.
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|
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Item 3.
|
LEGAL PROCEEDINGS
|
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. The Company believes that it has meritorious defenses against the claims currently asserted against it and intends to defend them vigorously. While the outcome of litigation 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 have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
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, required the Company 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 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. In the third quarter of 2019, the Company reviewed interim remedial actions with the NHDES. The Company has not yet received further direction from the NHDES. 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 cash flows.
In December 2018, the New York State Department of Environmental Conservation (“NYDEC”) informed the Company that the acquired Interface site located at Hoosick Falls, NY will be the subject of an investigation into the possibility of it being an inactive hazardous disposable waste site. The letter specifically references perflourinated compounds or per- and polyfluoroalkyl substances (“PFAS”) that have been detected in a nearby water supply, soil and/or surface water. Notably, the PFAS contamination has been identified in the Hoosick Falls area for some time and other large manufacturers in the area have previously been identified as a source. The NYDEC approved a site characterization plan in December 2019. The Company recorded expense of $0.3 million in the fourth quarter of 2019 as a result of the site characterization plan preparation and site characterization activities, which will continue into the first quarter of 2020. The Company does not know the scope or extent of its future obligations, if any, that may arise from the site investigation and therefore is unable to estimate the cost of any future corrective action. Accordingly, the Company cannot assure that the costs of any future corrective at this location would not have a material effect on the Company's financial condition, results of operations or cash flows.
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.
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Item 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The executive officers of Lydall, Inc. or its subsidiaries, together with the offices presently held by them, their business experience since January 1, 2015, and their age as of March 2, 2020, the record date of the Company’s 2020 Annual Meeting, are as follows:
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|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position and Date of Appointment
|
|
Other Business Experience Since 2015
|
Sara A. Greenstein
|
|
45
|
|
President, Chief Executive Officer (November 18, 2019)
|
|
Senior Vice President of Consumer Solutions, United States Steel Corporation, an integrated steel producer (2014 - 2019)
|
Randall B. Gonzales
|
|
48
|
|
Executive Vice President and Chief Financial Officer (March 12, 2018)
|
|
Chief Financial Officer and Treasurer, Progress Rail Services Corporation, a wholly-owned subsidiary of Caterpillar Inc. (2014-2018), a diversified global supplier of railroad and transit system products and services.
|
Chad A. McDaniel
|
|
46
|
|
Executive Vice President, Chief Administrative Officer and General Counsel (October 15, 2019); formerly Senior Vice President, Chief Administrative Officer and General Counsel (May 13, 2015); formerly Vice President, General Counsel and Secretary (May 10, 2013)
|
|
Director, Chase Corporation (2016), NYSE: CCF, a manufacturer of protective materials for high reliability applications.
|
Joseph A. Abbruzzi
|
|
61
|
|
President, Lydall Thermal Acoustical Solutions (August 30, 2019); formerly President, Technical Nonwovens, (February 20, 2014); formerly Sr. Vice President, General Manager, Lydall Thermal/Acoustical Fibers (March 14, 2011)
|
|
Not applicable
|
Robert B. Junker
|
|
51
|
|
President, Lydall Thermal Acoustical Solutions (October 14, 2019)
|
|
Vice President, Operations, Parker Hannifin (2017 - 2019), a global leader in motion and control technologies; President, Purolator Advanced Filtration Group, CLARCOR (2016-2017), a manufacturer of filtration systems and packaging materials; President & CEO, Hengst North America, a division of Hengst Automotive (2010 - 2016), an international developer and manufacturer of filtration and fluid management solutions for the automotive and engine industry.
|
James V. Laughlan (1)
|
|
47
|
|
Vice President, Chief Accounting Officer and Treasurer (March 26, 2013); formerly Chief Accounting Officer, Controller and Treasurer (July 27, 2012); formerly Chief Accounting Officer and Controller (March 29, 2010)
|
|
Not applicable
|
Paul A. Marold
|
|
58
|
|
President, Performance Materials (February 15, 2016)
|
|
Chief Operating Officer, Sontara, a division of Jacob Holm & Sons (2014-2016), a global manufacturer of spunlace nonwoven fabrics and finished goods.
|
There is no family relationship among any of the Company’s directors or executive officers.
(1) On January 20, 2020, James V. Laughlan gave notice of his resignation of employment with the Company effective February 28, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
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. 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.
Principles of consolidation — The Consolidated Financial Statements include the accounts of Lydall, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Estimates and assumptions — The preparation of the Company’s Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Risks and uncertainties — Worldwide economic cycles and political changes affect the markets that the Company’s businesses serve and affect demand for Lydall’s products and impact profitability. Among other factors, disruptions in the global credit and financial markets, including diminished liquidity and credit availability, changes in international trade agreements, swings in consumer confidence and spending, unstable economic growth and fluctuations in unemployment rates has caused economic instability and can have a negative impact on the Company’s results of operations, financial condition and liquidity.
Cash and cash equivalents — Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less at the date of purchase.
Concentrations of credit risk — Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents in high-quality financial institutions. Concentrations of credit risk with respect to trade accounts receivable are limited by the large number of customers comprising the Company’s customer base and their dispersion across many different industries and geographies. At December 31, 2019 and December 31, 2018, no customer accounted for more than 10.0% of total accounts receivable. Foreign and export sales were 53.1% of the Company’s net sales in 2019, 53.5% in 2018, and 54.2% in 2017. Export sales primarily to Canada, Mexico, Asia and Europe were $86.3 million, $56.8 million, and $55.9 million in 2019, 2018, and 2017, respectively. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral. Sales to the automotive market, included in the Thermal Acoustical Solutions segment and to a lesser extent the Performance Materials segment, were 42.9% of the Company’s net sales in 2019, 46.3% in 2018, and 48.3% in 2017. Sales to Ford were 11.8%, 14.8%, and 17.3% of Lydall’s 2019, 2018, and 2017 net sales, respectively. No other customers accounted for more than 10% of total net sales in 2019, 2018, and 2017.
Transfers of Financial Assets — The Company accounts for transfers of financial assets as sold when it has surrendered control over the related assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company's continuing involvement with the assets transferred. Gains or losses and any expenditures stemming from the transfers are included in "Other (Income) Expense, net" in the accompanying Consolidated Statements of Operations. Assets obtained and liabilities incurred in connection with transfers reported as sold are initially recognized in the Consolidated Balance Sheets at fair value.
In December 2019, the Company entered into two arrangements with a banking institution to sell trade accounts receivable balances for select customers. Under the programs, the Company has no risk of loss due to credit default
and is charged a fee based on the nominal value of receivables sold and the time between the sale of the trade accounts receivables to banking institutions and collection from the customer. Under one of the programs, the Company services the trade receivables after sale and receives 90.0% of the trade receivables in cash at the time of sale and the remaining 10.0% in cash, net of fees, when the customer pays. As of December 31, 2019, under both programs, the Company sold $16.0 million in trade receivable balances, received $14.9 million in cash in December 2019 and incurred less than $0.1 million in fees. The Company expects to receive the remaining $1.0 million, net of fees, in 2020.
In December 2019, the Company's Amended Credit Agreement was amended to allow the Company to sell trade accounts receivable to approved third parties in connection with Receivable Purchases Agreements, or similar agreements ("Agreements"). At any given time, the maximum amount subject to such Agreements is not allowed to exceed $10.0 million for a certain approved customer and $50.0 million in aggregate for any other approved group of customers.
Inventories — Inventories are valued at lower of cost or net realizable value, cost being determined using the first-in, first-out (FIFO) cost method. Inventories in excess of requirements for current or anticipated orders have been written down to net realizable value.
Pre-production design and development costs — The Company enters into contractual agreements with certain customers to design and develop molds, dies and tools (collectively, “tooling”). All such tooling contracts relate to parts that the Company will supply to customers under long-term supply agreements. Tooling costs are accumulated in work-in process inventory and are charged to operations as the related revenue from the tooling is recognized. The Company’s revenue recognition policies require the Company to make significant judgments and estimates regarding timing of recognition based on timing of the transfer of control to the customer. 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. For tooling revenue recognized over time, the Company's significant judgments include, but are not limited to, estimated costs to completion, costs incurred to date, and assessments of risks related to changes in estimates of revenues and costs. The Company's management must make assumptions regarding the work required to fulfill the performance obligations, which is dependent upon the execution by the Company's subcontractors, among other variables and contract requirements.
Periodically, the Company enters into contractually guaranteed reimbursement arrangements as a mechanism to collect amounts due from customers from tooling sales. Under these arrangements, amounts due from tooling sales are collected as parts are delivered over the part supply arrangement, in accordance with the specific terms of the arrangement. The amounts due from the customer in such transactions are recorded in “Prepaid expenses and other current assets” or “Other assets, net” based upon the expected term of the reimbursement arrangement.
The following tooling related assets were included in the Consolidated Balance Sheets as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
December, 31
|
In thousands
|
2019
|
|
2018
|
Inventories, net of progress billings and reserves
|
$
|
1,777
|
|
|
$
|
4,262
|
|
Prepaid expenses and other current assets
|
530
|
|
|
469
|
|
Other assets, net
|
1,757
|
|
|
987
|
|
Total tooling related assets
|
$
|
4,064
|
|
|
$
|
5,718
|
|
Amounts included in “Prepaid expenses and other current assets” include the short-term portion of receivables due under contractually guaranteed reimbursement arrangements. Company owned tooling is recorded in “Property, plant and equipment, net” at December 31, 2019 and December 31, 2018.
Property, plant and equipment — Property, plant, and equipment are stated at cost. Assets held under finance leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Please refer to Note 10, Leases, to these Consolidated Financial Statements for additional policy details related to all leases including finance leases. Property, plant and equipment, including property, plant and equipment under finance leases, are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are depreciated on a straight-line basis over the term of the lease or the life of the asset, whichever is shorter. The cost and accumulated depreciation amounts applicable to assets sold or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any net gain or loss is included
in the Consolidated Statements of Operations. Expenses for maintenance and repairs are charged to expense as incurred.
Goodwill and other intangible assets — Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired companies. Goodwill and other intangible assets with indefinite lives are not amortized but are subject to annual impairment tests. All other intangible assets are amortized over their estimated useful lives, which range from 2 to 17 years. In performing impairment tests, the Company considers discounted cash flows and other market factors as best evidence of fair value. There are inherent uncertainties and management judgment required in these analyses. Please refer to Note 6, Goodwill and Long-Lived Assets and Note 7, Impairment, to these Consolidated Financial Statements for additional details regarding impairment calculations.
Valuation of long-lived assets — The Company evaluates the recoverability of long-lived assets, or asset groups, whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. Should such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values would be reduced to fair value and this adjusted carrying value would become the assets’ new cost basis. For long-lived assets held for sale, assets are written down to fair value, less costs to sell. Please refer to Note 7, Impairment, to these Consolidated Financial Statements for additional details regarding impairment calculations.
Fair value is determined primarily using future anticipated cash flows that are directly associated with, and that are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, as well as market conditions and other factors. There are inherent uncertainties and management judgment required in these analyses.
Contingencies and environmental obligations — The Company makes judgments and estimates in accordance with applicable accounting rules when it establishes reserves for legal proceedings, claims, investigations, environmental obligations and other contingent matters. 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. The amount and timing of all future expenses related to legal proceedings, claims, investigations, environmental obligations and other contingent matters may vary significantly from estimates. Please refer to Footnote 17 "Commitments and Contingencies" for additional details regarding the Company's contingencies and environmental obligations.
Employer sponsored benefit plans — The Company recognizes the funded status of its defined benefit pension plans and post-retirement plans. Net benefit obligations are calculated based on actuarial valuations using key assumptions related to discount rates, mortality rates and expected return on plan assets.
Derivative instruments — Derivative instruments are measured at fair value and recognized as either assets or liabilities on the Consolidated 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 fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the Consolidated Statement of Operations. 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. 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 does not engage in derivative instruments for speculative or trading purposes. Please refer to Note 9, Derivatives, to these Consolidated Financial Statements for additional details regarding the Company's derivative instruments.
Revenue recognition — The Company's 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 judgments and estimates. 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. 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 depending on when control of the Company’s products transfers to its customers. 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. If sales are recognized at a point in time, the Company’s standard sales and shipping terms are FOB shipping point, therefore, most point in time revenue is recognized upon shipment. However, the Company conducts business with certain customers on FOB destination terms and in these instances point in time revenue is recognized upon receipt by the customer. In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. See Note 2, Revenue from Contracts with Customers, to these Consolidated Financial Statements.
Sales returns and allowances are recorded as identified or communicated by the customer and internally approved. The Company does not provide customers with general rights of return for products sold; however, in limited circumstances, the Company will allow sales returns and allowances from customers if the products sold do not conform to specifications.
The Company's accounting policy is to record shipping and handling activities occurring after control has passed to the customer 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.
Research and development — Research and development costs are charged to expense as incurred and amounted to $11.2 million in 2019, $10.6 million in 2018, and $10.8 million in 2017. Research and development costs were primarily comprised of development personnel salaries, prototype material costs and testing and trials of new products.
Earnings per share — Basic earnings per common share are equal to net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are equal to net income divided by the weighted average number of common shares outstanding during the period, including the effect of stock options and stock awards, if such effect is dilutive.
Income taxes — The provision for income taxes is based upon income reported in the accompanying Consolidated Financial Statements. Deferred income taxes reflect the impact of temporary differences between the amounts of income and expense recognized for financial reporting purposes and such amounts recognized for tax purposes. In the event the Company was to determine that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company would record a valuation allowance through a charge to income in the period that such determination was made. Conversely, if the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance and record an increase to income in the period that such determination was made.
Translation of foreign currencies — Assets and liabilities of foreign subsidiaries are translated at exchange rates prevailing on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the period. Any resulting translation gains or losses are reported in other comprehensive income (loss).
Stock options and share grants — The Company accounts for awards of equity instruments under the fair value method of accounting and recognizes such amounts in the Consolidated Statements of Operations. The Company recognizes expense on a straight-line basis over the vesting period of the entire award and records forfeitures as they occur. The Company estimates the fair value of option grants based on the Black Scholes option-pricing model. Expected volatility and expected term are based on historical information. The calculation assumes that future volatility and expected term are not likely to materially differ from the Company’s historical stock price volatility and historical exercise data, respectively. Compensation expense for all restricted stock awards is recorded based on the market value of the stock on the grant date and recognized as expense over the vesting period of the award. Compensation expense for performance-based restricted stock is also impacted by the probability of achieving the performance targets.
Recently Adopted Accounting Standards
Effective January 1, 2019, the Company adopted the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 financial statements and disclosures for all periods prior to 2019. 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 Consolidated Balance Sheets. Adoption of the New Lease Standard did not change the balances reported in the Company's 2019 Consolidated Statements of Operations, Consolidated Statements of Cash Flows, or Consolidated Statements of Comprehensive Income. See Footnote 10 "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.
Effective July 1, 2019, the FASB 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. The adoption of this ASU did not have any impact on the Company's consolidated financial statements and disclosures.
Effective October 1, 2019, the Company adopted the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment." This ASU simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test and allows for an impairment of goodwill to be recorded as the difference in the carrying value and quantitative calculation of fair value (previously known as step one). Please refer to Footnote 7 "Impairment", for additional details of the annual goodwill impairment testing for its reporting units, including an impairment of $63.0 million which was recorded in the fourth quarter of 2019 in the Performance Materials segment.
2. Revenue from Contracts with Customers
The Company accounts for revenue in accordance with Accounting Standards Codification ("ASC") 606 Revenue from Contracts from Customers. 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.
The Company accounts for revenue from contracts with customers when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is primarily derived from customer purchase orders, master sales agreements, and negotiated contracts, all of which represent contracts with customers.
The Company next identifies the performance obligations in the contract. A performance obligation is a promise to provide distinct goods or services. Performance obligations are the unit of account for purposes of applying the revenue standard and therefore determines when and how revenue is recognized. The Company determines the performance obligations at contract inception based on the goods that are promised in a contract with a customer. Typical performance obligations include automotive parts, automotive tooling, rolled good media and filter bags.
The transaction price in the contract is determined based on the consideration to which the Company will be entitled in exchange for transferring products to the customer, excluding amounts collected on behalf of third parties (for example, sales taxes). The transaction price is typically stated on the purchase order or in a negotiated agreement. Certain contracts may include variable consideration in the transaction price, such as rebates, pricing discounts, price concessions, sales incentives, index pricing or other provisions that can decrease the transaction price. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on reasonably available information (customer historical, current and forecasted data). In certain circumstances where a particular outcome is probable, the Company utilizes the most likely amount to which the Company expects to be entitled. The Company accounts for consideration payable to a customer as a reduction of the transaction price thereby reducing the amount of revenue recognized. Consideration payable to a customer includes cash amounts that the Company pays, or expects to pay, to a customer based on certain contract requirements.
The Company recognizes revenue as performance obligations are satisfied, which can be either over time or at a point in time, depending on when control of the Company’s products transfers to its customers.
In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires judgment.
The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products to be provided. The Company generally uses the cost-to-cost measure of progress for contracts because it best depicts the transfer of control to the customer which occurs as costs are incurred on contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
For tooling revenue recognized over time, the Company makes judgments which includes, but not limited to, estimated costs to completion, costs incurred to date, and assesses risks related to changes in estimates of revenues and costs. In doing so, management must make assumptions regarding the work required to fulfill the performance obligations, which is dependent upon the execution by the Company's subcontractors, among other variables and contract requirements.
Changes in estimates for revenue recognized over time are recorded by the Company in the period they become known. Changes are recognized on a cumulative catch-up basis in net sales, costs of sales, and operating income. The cumulative catch up adjustment recognizes in the current period the cumulative effect of changes in estimates on current and prior periods.
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 15, Segment Information, to these Consolidated Financial Statements.
|
|
|
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.
|
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, 2019
|
|
December 31, 2018
|
|
Dollar Change
|
Contract assets
|
|
$
|
28,245
|
|
|
$
|
23,040
|
|
|
$
|
5,205
|
|
Contract liabilities
|
|
$
|
1,441
|
|
|
$
|
4,537
|
|
|
$
|
(3,096
|
)
|
The $5.2 million increase in contract assets from December 31, 2018 to December 31, 2019 was primarily due to timing of tooling billings to customers.
The $3.1 million decrease in contract liabilities from December 31, 2018 to December 31, 2019 was primarily due to revenue recognized of $4.5 million in 2019 related to contract liabilities at December 31, 2018, partially offset by customer deposits in 2019.
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, based on the region in which the sales originated, for the years ended December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
176,094
|
|
|
$
|
157,579
|
|
|
$
|
245,870
|
|
|
$
|
(24,287
|
)
|
|
$
|
555,256
|
|
Europe
|
|
61,889
|
|
|
68,456
|
|
|
98,221
|
|
|
(718
|
)
|
|
227,848
|
|
Asia
|
|
7,497
|
|
|
29,311
|
|
|
17,486
|
|
|
—
|
|
|
54,294
|
|
Total Net Sales
|
|
$
|
245,480
|
|
|
$
|
255,346
|
|
|
$
|
361,577
|
|
|
$
|
(25,005
|
)
|
|
$
|
837,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 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 and Divestitures
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. In the second quarter of 2019, the Company finalized the post closing adjustment leading to a decrease in purchase price of $1.4 million and 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.
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.
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 6)
|
|
129,749
|
|
Other intangible assets (Note 6)
|
|
106,900
|
|
Other assets
|
|
308
|
|
Total assets acquired, net of cash acquired
|
|
$
|
322,436
|
|
|
|
|
Current liabilities
|
|
(11,319
|
)
|
Deferred tax liabilities (Note 16)
|
|
(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 following table reflects the unaudited pro forma operating results of the Company for the years ended December 31, 2019, 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,
|
|
|
(Actual)
|
|
(Unaudited
Pro Forma)
|
|
(Unaudited
Pro Forma)
|
In thousands
|
|
2019
|
|
2018
|
|
2017
|
Net Sales
|
|
$
|
837,398
|
|
|
$
|
888,355
|
|
|
$
|
840,040
|
|
Net Income
|
|
$
|
(70,513
|
)
|
|
$
|
37,537
|
|
|
$
|
36,773
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
(4.08
|
)
|
|
$
|
2.18
|
|
|
$
|
2.16
|
|
Diluted
|
|
$
|
(4.08
|
)
|
|
$
|
2.17
|
|
|
$
|
2.12
|
|
Included in net income during the year ended December 31, 2019 was $64.2 million of impairment charges in the Performance Materials segment, $12.3 million of intangible assets amortization expense related to acquired Interface intangible assets and $9.8 million of interest expense primarily to finance the Interface acquisition.
Pro forma adjustments during the year ended December 31, 2018 increased net income by $7.1 million. Included in net income for the year ended December 31, 2018 was $10.2 million of intangible assets amortization expense and $3.5 million of interest expense associated with borrowings under the Company's Amended Credit Agreement. Net income was adjusted to exclude items such as corporate strategic initiatives expenses, Interface management fee expenses and tax valuation allowance expenses.
Pro forma adjustments during the year ended December 31, 2017 reduced net income by $13.8 million. Included in net income for the year ended December 31, 2017 was $9.2 million of intangible assets amortization expense and $7.1 million of interest expense associated with borrowings under the Company's Amended Credit Agreement. Net income was 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 $1.6 million to be made based on the achievement of certain future financial targets through 2022. The estimate of contingent consideration to be earned was revalued to fair value at December 31, 2019. PCC had a minimal impact on the Company's sales and operating income from the date of the acquisition in 2018 and the year ended December 31, 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 was not 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 December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2019
|
|
2018
|
Raw materials
|
$
|
36,322
|
|
|
$
|
37,731
|
|
Work in process
|
14,873
|
|
|
18,296
|
|
Finished goods
|
29,349
|
|
|
28,438
|
|
Total inventories
|
$
|
80,544
|
|
|
$
|
84,465
|
|
Included in work in process is net tooling inventory of $1.8 million and $4.3 million at December 31, 2019 and 2018, respectively.
5. Property, Plant and Equipment, Net
Property, plant and equipment as of December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Lives
|
|
December 31,
|
In thousands
|
2019
|
|
2018
|
Land
|
–
|
|
$
|
6,268
|
|
|
$
|
6,280
|
|
Buildings and improvements
|
10-35 years
|
|
107,721
|
|
|
104,036
|
|
Machinery and equipment
|
5-25 years
|
|
308,457
|
|
|
289,059
|
|
Office equipment
|
2-8 years
|
|
36,905
|
|
|
36,110
|
|
Vehicles
|
3-6 years
|
|
1,516
|
|
|
1,640
|
|
Assets under finance leases:
|
|
|
|
|
|
Land
|
–
|
|
225
|
|
|
228
|
|
Buildings and improvements
|
2-10 years
|
|
—
|
|
|
229
|
|
Machinery and equipment
|
8-10 years
|
|
200
|
|
|
1,005
|
|
Office equipment
|
5 years
|
|
31
|
|
|
32
|
|
|
|
|
461,323
|
|
|
438,619
|
|
Accumulated depreciation
|
|
|
(265,586
|
)
|
|
(244,098
|
)
|
Accumulated depreciation of finance leases
|
|
|
(143
|
)
|
|
(608
|
)
|
|
|
|
195,594
|
|
|
193,913
|
|
Construction in progress
|
|
|
26,048
|
|
|
19,456
|
|
Total property, plant and equipment, net
|
|
|
$
|
221,642
|
|
|
$
|
213,369
|
|
Depreciation expense was $27.1 million in 2019, $23.4 million in 2018, and $21.4 million in 2017.
6. Goodwill and Long-Lived Assets
Gross and net carrying amounts of goodwill at December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Totals
|
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
|
|
Goodwill
|
143,658
|
|
|
53,254
|
|
|
12,160
|
|
|
209,072
|
|
Accumulated amortization/impairment
|
(63,000
|
)
|
|
—
|
|
|
(12,160
|
)
|
|
(75,160
|
)
|
Balance at December 31, 2019
|
$
|
80,658
|
|
|
$
|
53,254
|
|
|
$
|
—
|
|
|
$
|
133,912
|
|
The changes in the carrying amounts of goodwill in 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Performance Materials
|
|
Technical Nonwovens
|
|
Totals
|
Balance at January 1, 2018
|
$
|
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 reduction
|
(662
|
)
|
|
—
|
|
|
(662
|
)
|
Goodwill impairment
|
(63,000
|
)
|
|
—
|
|
|
(63,000
|
)
|
Currency translation adjustment
|
(306
|
)
|
|
917
|
|
|
611
|
|
Balance at December 31, 2019
|
$
|
80,658
|
|
|
$
|
53,254
|
|
|
$
|
133,912
|
|
Goodwill Associated with Acquisitions and Divestitures
The net goodwill reduction of $0.7 million in 2019 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.
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 was reflective of the benefits the Company expected 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.
Goodwill Impairment
During the fourth quarter of 2019, the Company performed its annual impairment analysis of the goodwill in the Performance Materials reporting unit (PM reporting unit) and in the Technical Nonwovens reporting unit (TNW reporting unit). The Company used the qualitative method to analyze the goodwill for the TNW 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 TNW reporting unit's fair value more likely than not exceeds its carrying value and as a result, the quantitative impairment assessment was not required to be completed.
For the PM reporting unit, the Company recorded a goodwill impairment charge of $63.0 million during the fourth quarter of 2019. See Note 7, Impairment, to these Consolidated Financial Statements for further discussion of the goodwill impairment.
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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
In thousands
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
142,400
|
|
|
$
|
(30,648
|
)
|
|
$
|
141,455
|
|
|
$
|
(11,453
|
)
|
Patents
|
|
759
|
|
|
(607
|
)
|
|
4,333
|
|
|
(3,816
|
)
|
Technology
|
|
2,500
|
|
|
(977
|
)
|
|
2,500
|
|
|
(810
|
)
|
Trade names
|
|
7,293
|
|
|
(5,143
|
)
|
|
7,235
|
|
|
(2,840
|
)
|
License agreements
|
|
610
|
|
|
(610
|
)
|
|
619
|
|
|
(619
|
)
|
Other
|
|
551
|
|
|
(551
|
)
|
|
561
|
|
|
(561
|
)
|
Total amortized intangible assets
|
|
$
|
154,113
|
|
|
$
|
(38,536
|
)
|
|
$
|
156,703
|
|
|
$
|
(20,099
|
)
|
In 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, 2019, the weighted average useful lives of Interface's intangible assets was 11 years.
Amortization of all intangible assets for the years ended December 31, 2019, 2018, and 2017 was $21.5 million, $9.3 million, and $4.5 million, respectively. Estimated amortization expense for intangible assets is expected to be $20.8 million, $16.3 million, $14.4 million, $12.7 million, $11.3 million, and $40.0 million for each of the years ending December 31, 2020 through 2024 and thereafter, respectively. As of December 31, 2019, the weighted average useful life of intangible assets was approximately 11 years.
7. Impairments of Goodwill and Other Long-Lived Assets
During the fourth quarter of 2019, in accordance with ASC 350 Intangibles - Goodwill and Other, the Company performed its annual impairment test of its goodwill held by the Performance Materials and Technical Nonwovens reporting units. In addition, in accordance with ASC 360 Property, Plant & Equipment, the Company performed an impairment test on certain of its long-lived assets (principally machinery and equipment, and buildings and improvements) due to events and changes in circumstances during the fourth quarter of 2019 that indicated an impairment might have occurred. As a result of these impairment tests, the Company recorded the following impairment charges during the fourth quarter of 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Totals
|
Impairment of goodwill
|
|
$
|
63,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63,000
|
|
Impairment of other long-lived assets
|
|
1,206
|
|
|
—
|
|
|
—
|
|
|
1,206
|
|
Total impairments
|
|
64,206
|
|
|
—
|
|
|
—
|
|
|
64,206
|
|
Goodwill
As a result of the Interface acquisition in August 2018 and recording the acquired assets and liabilities at fair value, there was a significant increase to the Performance Materials segment goodwill and intangible assets. Any declines in financial projections, including changes to key assumptions, could have a material, negative impact on the fair value of the segment, and therefore could result in an impairment.
During the fourth quarter of 2019 the Company recorded a goodwill impairment charge of $63.0 million in the Performance Materials segment. Lower than expected 2019 financial results from slowed demand in the sealing products' markets, combined with revised future financial projections, resulted in a reduction in the long-term forecasts of sales and cash generation as compared to prior projections for the Performance Materials reporting unit. As a result, the carrying value of the Performance Materials reporting unit exceeded its fair value by $63.0 million, resulting in the impairment charge.
Those factors, along with other factors, caused the Company to perform a quantitative goodwill impairment assessment. The Company weighted equally both an income approach (discounted cash flow model) and a market approach, both level 3 unobservable inputs, to determine the Performance Materials reporting unit's fair value. The Company’s significant assumptions in the discounted cash flow model included, but were not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and the tax rate. Calculation of future cash flows includes management estimates and assumptions that are based on the best available information as of the date of the assessment. Future cash flows can be affected by numerous factors including changes in economic, industry or market conditions, changes in the underlying business or products of the reporting unit, changes in competition and changes in technology. There are inherent uncertainties and management judgment required in an analysis of goodwill impairment. 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.
The Company also used a form of the market approach, which was derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting unit operates giving consideration to risk profiles, size, geography, and diversity of products and services. Other assumptions included adding an implied control premium to the valuation based on estimating the fair value on a controlling basis, which was derived from research on control premiums observed in recent mergers and acquisitions in the industries in which Lydall operates. 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 Performance Materials reporting unit.
The Company also performed an overall reconciliation to corroborate the fair value derived from the income and market approaches to Lydall's overall market capitalization.
Other Long-Lived Assets
The Company performed an impairment assessment on the long-lived assets for its two Thermal Acoustical Solutions European plants during the fourth quarter of 2019 due to negative 2019 financial performance compared to budget, changes in financial projections and general weakening in the European automotive sector. The Company considered each operating plant's asset group, primarily consisting of machinery and equipment, and buildings and improvements. Step one of the impairment tests required by ASC 350 failed as the undiscounted cash flows over the useful life of each operating plant's primary assets did not exceed the separate plant's asset groups carrying values of $28.5 million and $12.5 million. As part of step two of the impairment assessment, the Company used the market approach to determine fair value based on independent appraisals of the long-lived assets. The Company determined that impairment did not exist as the fair value of the long-lived asset groups for each operating plant exceeded their carrying amounts. Small changes in future operating results could result in a future non-cash impairment charge.
During the fourth quarter of 2019, as a result of negative cash flows in 2019 and an expected reduction in demand from certain customers further impacting net sales and cash flows in 2020, the Company tested for impairment a discrete long-lived asset group (primarily consisting of machinery and equipment and patents) in the Performance Materials segment with a carrying value of approximately $3.0 million. To determine the recoverability of this asset group, the Company completed an undiscounted cash flow analysis (income approach) and compared it to the asset group carrying value in accordance with ASC 350. 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. The Company then determined that fair value of the asset group exceeded its carrying value and recorded a long-lived asset impairment charge of $1.2 million.
8. 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 9, Derivatives, to these Consolidated Financial Statements.
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, 2019.
At December 31, 2019, the Company had borrowing availability of $121.6 million under the Facility, net of $273.0 million of borrowings outstanding and standby letters of credit outstanding of $1.9 million. The borrowings outstanding include a $146.1 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 $7.0 million. At December 31, 2019, the Company's foreign subsidiaries had $2.1 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
Effective Rate
|
|
Maturity
|
|
2019
|
|
2018
|
Revolver loan
|
3.80%
|
|
8/31/2023
|
|
$
|
126,500
|
|
|
$
|
138,000
|
|
Term loan, net of debt issuance costs
|
3.80%
|
|
8/31/2023
|
|
146,106
|
|
|
186,498
|
|
Finance leases
|
0.00% - 2.09%
|
|
2020
|
|
35
|
|
|
315
|
|
|
|
|
|
|
272,641
|
|
|
324,813
|
|
Less portion due within one year
|
|
|
|
|
(9,928
|
)
|
|
(10,172
|
)
|
Total long-term debt, net of debt issuance costs
|
|
|
|
|
$
|
262,713
|
|
|
$
|
314,641
|
|
As of December 31, 2019, total debt maturing in 2020, 2021, 2022, and 2023 is $10.0 million, $10.0 million, $10.0 million, and $243.0 million, respectively.
The weighted average interest rate on long-term debt was 4.3% for the year ended December 31, 2019, compared with 3.4% and 2.2% for the years ended December 31, 2018 and 2017, 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.
9. 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.
Interest Rate Hedging
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.
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.
Net Investment Hedges
The Company’s operations are subject to certain risks, including foreign currency exchange rate fluctuations. From time to time, the Company enters into cross-currency swaps designated as hedges, recorded at fair value using Level 2 observable market inputs, to protect the Company's net investments in subsidiaries denominated in currencies other than the US dollar.
In November 2019, the Company entered into three fixed-to-fixed cross-currency swaps with banking institutions with aggregate notional amounts totaling €67.8 million ($75 million U.S. dollar equivalent). These swaps hedge a portion of Lydall, Inc's net investment in a Euro functional currency denominated subsidiary against the variability of exchange rate translation impacts between the U.S. Dollar and Euro. These contracts require monthly cash interest exchanges over the life of the contracts with the Company recognizing a reduction to interest expense due to the favorable interest rate differential between the U.S. dollar and Euro. Also, settlement of the notional €22.6 million ($25 million U.S. Dollar equivalent) cross-currency swaps occur at maturity dates of August 2021, August 2022 and August 2023. The Company assesses hedge effectiveness of the cross-currency swaps quarterly by ensuring the critical terms of the swaps continue to match the critical terms of the designated net investment. The Company elected to assess effectiveness using the spot method, and as a result, records the interest rate differential monthly in the Company's Statement of Operations.
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.
The following table sets forth the fair value amounts of derivative instruments held by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
In thousands
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
2
|
|
|
$
|
4,538
|
|
|
$
|
179
|
|
|
$
|
2,738
|
|
Cross-currency swaps
|
—
|
|
|
1,817
|
|
|
—
|
|
|
—
|
|
Total derivatives
|
$
|
2
|
|
|
$
|
6,355
|
|
|
$
|
179
|
|
|
$
|
2,738
|
|
The following table sets forth the (loss) income, recorded in accumulated other comprehensive loss, net of tax, for the years ended December 31, 2019 and 2018 for derivatives held by the Company and designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
2019
|
|
2018
|
Cash flow hedges:
|
|
|
|
|
Interest rate contracts
|
|
$
|
(1,500
|
)
|
|
$
|
(2,096
|
)
|
Cross-currency swaps
|
|
$
|
(1,403
|
)
|
|
$
|
—
|
|
Total derivatives
|
|
$
|
(2,903
|
)
|
|
$
|
(2,096
|
)
|
10. 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 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 December 31, 2019, the weighted average discount rate used for operating and finance leases is 4.39% and 1.61%, 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
|
For the year ended December 31, 2019
|
Finance lease expense:
|
|
Amortization of right-of-use assets
|
$
|
81
|
|
Interest on lease liabilities
|
2
|
|
Operating lease expense
|
6,510
|
|
Short-term lease expense
|
918
|
|
Variable lease expense
|
199
|
|
Total lease expense
|
$
|
7,710
|
|
Supplemental balance sheet information related to leases are as follows:
|
|
|
|
|
In thousands, except lease term
|
December 31, 2019
|
Operating leases:
|
|
Operating lease right-of-use assets
|
$
|
23,116
|
|
|
|
Short-term lease liabilities, included in "Other accrued liabilities"
|
$
|
4,789
|
|
Long-term lease liabilities
|
18,424
|
|
Total operating lease liabilities
|
$
|
23,213
|
|
|
|
Finance leases:
|
|
Property, plant and equipment
|
$
|
456
|
|
Accumulated depreciation
|
(143
|
)
|
Property, plant and equipment, net
|
$
|
313
|
|
|
|
Short-term lease liabilities, included in debt
|
$
|
35
|
|
Long-term lease liabilities, included in debt
|
—
|
|
Total finance lease liabilities
|
$
|
35
|
|
|
|
Weighted average remaining lease term:
|
|
Operating leases
|
7.1 years
|
|
Finance leases
|
20.4 years
|
|
Supplemental cash flow information related to leases are as follows:
|
|
|
|
|
|
For the year ended December 31,
|
In thousands
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
6,301
|
|
Operating cash flows from finance leases
|
2
|
|
Financing cash flows from finance leases
|
240
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
1,743
|
|
Finance leases
|
—
|
|
As of December 31, 2019, future lease payments maturities were as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Years Ending December 31,
|
Operating Leases
|
|
Finance Leases
|
2020
|
$
|
5,680
|
|
|
$
|
36
|
|
2021
|
4,329
|
|
|
—
|
|
2022
|
3,555
|
|
|
—
|
|
2023
|
2,659
|
|
|
—
|
|
2024
|
1,848
|
|
|
—
|
|
Thereafter
|
9,465
|
|
|
—
|
|
Total lease payments
|
27,536
|
|
|
36
|
|
Less imputed interest
|
(4,323
|
)
|
|
(1
|
)
|
Total discounted future lease payments
|
$
|
23,213
|
|
|
$
|
35
|
|
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
|
|
11. 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, 2019, 5,422 Lydall stockholders of record held 17,622,191 shares of Common Stock.
Dividend policy — The Company does not pay a cash dividend on its common stock. The Company’s Amended Credit Agreement does not place any restrictions on cash dividend payments, so long as the payments do not place the Company in default.
12. Employer Sponsored Benefit Plans
During 2019, the Company maintained a domestic defined benefit pension plan ("U.S. Lydall Pension Plan") and two domestic defined benefit pension plans acquired in the Interface acquisition: the Retirement Income Plan for Employees of Interface Performance Materials, Inc. ("IPM Pension Plan"), and the Interface Sealing Solutions, Inc. Pension Plan ("ISS Pension Plan"), collectively, the "Interface Pension Plans."
During 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 $25.7 million in 2019 related to the recognition of accumulated deferred actuarial losses U.S. Lydall Pension Plan as well as settlement-related fees and expenses. The settlement loss was included as non-operating expense in the consolidated statements of operations. No contributions were made to the U.S. Lydall Pension Plan during the year ended December 31, 2019.
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. Contributions of $1.4 million were made to the plans during the year ended December 31, 2019. During the fourth quarter of 2019, the Company terminated the ISS Pension Plan. The Company anticipates completing the settlement of this plan in the first half of 2020. At December 31, 2019, the benefit obligations of the ISS Pension Plan have been valued at the amount expected to be required to settle the obligations through a combination of participant-elected lump sums or annuities, and the cost to purchase those annuities. Overall, the Company estimates it will incur expense of approximately $0.4 million to $0.6 million in 2020 when the plan settlement is completed. The Company is expected to make a one-time cash contribution of approximately $0.7 million to $0.9 million to purchase annuities for participants and make lump sum payments. The estimated expense and cash contribution are subject to change based on valuations at the actual date of settlement.
During 2019 and 2018, certain union employees of Interface participated in a separate multi-employer pension plan. There were no significant contributions to the multi-employer plan during 2019 and 2018. In the fourth quarter of 2019, the Company negotiated with its union employees and the multi-employer pension plan the withdrawal from the plan and satisfied all outstanding obligations with a payment of $2.2 million, which was previously accrued on the Company's consolidated balance sheet at $2.7 million, resulting in a pension settlement gain of $0.5 million in 2019.
The Company’s funding policy for the 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 former U.S. Lydall Pension Plan and the Interface Pension Plans were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
Net benefit obligation at beginning of year
|
$
|
102,679
|
|
|
$
|
51,882
|
|
Benefit obligation assumed through acquisition
|
—
|
|
|
52,392
|
|
Service Cost
|
136
|
|
|
46
|
|
Interest cost
|
2,132
|
|
|
2,595
|
|
Actuarial loss/(gain)
|
5,149
|
|
|
(876
|
)
|
Gross benefits paid
|
(2,932
|
)
|
|
(3,360
|
)
|
Net effect of remeasurement
|
(3,290
|
)
|
|
—
|
|
Settlement
|
(48,773
|
)
|
|
—
|
|
Net benefit obligation at end of year
|
$
|
55,101
|
|
|
$
|
102,679
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
87,452
|
|
|
$
|
44,174
|
|
Fair value of plan assets through acquisition
|
—
|
|
|
43,230
|
|
Actual return/(loss) on plan assets
|
6,987
|
|
|
(4,092
|
)
|
Contributions
|
1,415
|
|
|
7,500
|
|
Gross benefits paid
|
(2,932
|
)
|
|
(3,360
|
)
|
Net effect of remeasurement
|
(211
|
)
|
|
—
|
|
Settlement
|
(48,773
|
)
|
|
—
|
|
Fair value of plan assets at end of year
|
$
|
43,938
|
|
|
$
|
87,452
|
|
Net benefit obligation in excess of plan assets
|
$
|
(11,163
|
)
|
|
$
|
(15,227
|
)
|
Balance sheet amounts:
|
|
|
|
Current liabilities
|
$
|
(787
|
)
|
|
$
|
(3,078
|
)
|
Noncurrent liabilities
|
$
|
(10,376
|
)
|
|
$
|
(12,149
|
)
|
Total liabilities
|
$
|
(11,163
|
)
|
|
$
|
(15,227
|
)
|
Amounts recognized in accumulated other comprehensive income, net of tax consist of:
|
|
|
|
Net actuarial loss
|
$
|
2,579
|
|
|
$
|
21,850
|
|
Net amount recognized
|
$
|
2,579
|
|
|
$
|
21,850
|
|
At December 31, 2019, in addition to the accrued benefit liability of $11.2 million recognized for the Company’s domestic defined benefit pension plans, the Company had foreign pension plans, including those acquired in the Interface acquisition, with an accrued benefit liability of $5.2 million and accumulated other comprehensive loss, net of tax, of $0.9 million. At December 31, 2018, in addition to the accrued benefit liability of $15.2 million recognized for the Company’s domestic defined benefit pension plan, the Company had foreign pension plans, including those acquired in the Interface acquisition, with an accrued benefit liability of $4.7 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 domestic post-retirement benefits include life insurance and medical benefits for certain domestic employees with an accrued benefit liability of $3.6 million at December 31, 2019 and $4.1 million at December 31, 2018. For the year ended December 31, 2019, benefit expense of approximately $0.1 million was recognized and benefit payments of $0.2 million were made. 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.
The U.S. Lydall Pension Plan liability, net of tax, included in other comprehensive income decreased by $19.4 million as a result of the settlement. The Interface Pension Plans' liability, net of tax, included in other comprehensive income increased by $0.3 million at December 31, 2019. 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.
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
|
2019
|
|
2018
|
Projected benefit obligation
|
$
|
55,101
|
|
|
$
|
102,679
|
|
Accumulated benefit obligation
|
$
|
55,101
|
|
|
$
|
104,188
|
|
Fair value of plan assets
|
$
|
43,938
|
|
|
$
|
87,452
|
|
Components of net periodic benefit cost for the domestic defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
136
|
|
|
$
|
46
|
|
|
$
|
—
|
|
Interest cost
|
2,886
|
|
|
2,595
|
|
|
2,058
|
|
Expected return on plan assets
|
(2,601
|
)
|
|
(3,339
|
)
|
|
(2,376
|
)
|
Amortization of actuarial net loss
|
464
|
|
|
1,024
|
|
|
1,092
|
|
Total net periodic benefit cost
|
$
|
885
|
|
|
$
|
326
|
|
|
$
|
774
|
|
Settlement loss
|
25,247
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total employer pension plan cost
|
$
|
26,132
|
|
|
$
|
326
|
|
|
$
|
774
|
|
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 and expense.
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,
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2017
|
Discount rate
|
3.37
|
%
|
|
3.99
|
%
|
|
3.88
|
%
|
|
3.75
|
%
|
|
4.21
|
%
|
Expected return on plan assets
|
5.06
|
%
|
|
4.08
|
%
|
|
4.65
|
%
|
|
5.79
|
%
|
|
6.30
|
%
|
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 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 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 Plans 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 5.20%. 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, and CMO derivatives and commodities.
The following table presents the target allocation of the IPM Pension Plan assets for 2020 and the actual allocation of all domestic defined benefit pension plan assets as of December 31, 2019 and 2018 by major asset category:
|
|
|
|
|
|
|
|
|
|
|
Target Allocation
|
|
Actual Allocation of Plan Assets
December 31,
|
|
Asset Category
|
2020 (1)
|
|
2019
|
|
2018 (2)
|
|
Domestic equities
|
20% - 40%
|
|
38
|
%
|
|
16
|
%
|
|
International equities
|
15% - 35%
|
|
25
|
%
|
|
11
|
%
|
|
Fixed income
|
20%-45%
|
|
18
|
%
|
|
49
|
%
|
|
Real assets
|
0% - 10%
|
|
7
|
%
|
|
3
|
%
|
|
Hedge fund of funds
|
5% - 15%
|
|
9
|
%
|
|
5
|
%
|
|
Cash and cash equivalents
|
0% - 10%
|
|
3
|
%
|
|
16
|
%
|
|
|
|
|
|
|
|
|
(1) Target allocation percentages reflect the IPM Pension Plan only, as the terminated ISS Pension Plan assets, which comprise 5% of the total domestic defined benefit pension balances at December 31, 2019, has an investment target of primarily fixed income investments in anticipation of 2020 settlement.
|
(2) Plan Assets as of December 31, 2018 included values associated with the U.S. Lydall Plan, which was settled during 2019.
|
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 that were measured at fair value using the NAV practical expedient 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, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
In thousands
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Domestic equity
|
$
|
16,729
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,729
|
|
International equity
|
10,903
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,903
|
|
Fixed income
|
3,724
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,724
|
|
U.S. government securities
|
—
|
|
|
2,686
|
|
|
—
|
|
|
—
|
|
|
2,686
|
|
Corporate and foreign bonds
|
—
|
|
|
1,701
|
|
|
—
|
|
|
—
|
|
|
1,701
|
|
Real assets
|
3,010
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,010
|
|
Hedge fund of funds
|
4,009
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,009
|
|
Cash and cash equivalents
|
145
|
|
|
1,031
|
|
|
—
|
|
|
—
|
|
|
1,176
|
|
Total Assets at Fair Value
|
$
|
38,520
|
|
|
$
|
5,418
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Real assets
|
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
|
|
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 consisted of mutual funds valued using quoted market prices and a long duration fixed income held in proprietary funds pooled with other investor accounts which sometimes uses the net asset value (NAV) per share practical expedient to measure fair value.
Real assets includes inflation hedge mutual funds that invest primarily in a portfolio of inflation-protected debt securities, real-estate related securities and commodity/natural resource-related securities. The mutual fund, which is valued using quoted market prices, 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, and are valued using pricing models maximizing the use of observable inputs for similar securities.
Corporate and foreign bonds primarily include a diversified portfolio of U.S. corporate debt obligations, and are valued using pricing models maximizing the use of observable inputs for similar securities. This includes basing value on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the bond is valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks or a broker quote if available.
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 hierarchy.
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.
Estimated Future Contributions and Benefit Payments
The Company expects to contribute approximately $2.4 million in cash to its domestic defined employee benefit plans in 2020.
Estimated future benefit payments for the next 10 years for the Interface Pension Plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025-2028
|
Benefit payments
|
$
|
5,903
|
|
|
$
|
3,026
|
|
|
$
|
3,065
|
|
|
$
|
3,082
|
|
|
$
|
3,138
|
|
|
$
|
15,957
|
|
Employee Savings Plan
The Company also sponsors a 401(k) Plan. Employer contributions to this plan amounted to $3.7 million in 2019, $2.9 million in 2018, and $2.6 million in 2017. 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%.
13. Equity Compensation Plans
As of December 31, 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 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. During the fourth quarter of 2019, additional shares of common stock were issued pursuant to separate inducement share agreements with two individuals as material inducement to their employment with the Company (the "Inducement Grants"). The Inducement Grants awarded stock options and restricted stock to the two individuals. Amounts shown below are inclusive of the Plans and the Inducement Grants.
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 earning-per-share target to better align compensation to the long-term interest 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.
The Company incurred compensation expense of $2.9 million, $2.1 million, and $4.3 million for the years ended December 31, 2019, 2018, and 2017, 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 $0.2 million, $1.3 million, and $4.0 million for the years ended December 31, 2019, 2018, and 2017, respectively.
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:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
1.7
|
%
|
|
2.7
|
%
|
|
2.2
|
%
|
Expected life
|
5.3 years
|
|
|
5.5 years
|
|
|
5.5 years
|
|
Expected volatility
|
37
|
%
|
|
34
|
%
|
|
33
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The following is a summary of the option activity as of December 31, 2019 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, 2018
|
623
|
|
$
|
30.14
|
|
|
|
|
|
Granted
|
242
|
|
$
|
19.35
|
|
|
|
|
|
Exercised
|
(40)
|
|
$
|
11.47
|
|
|
|
|
|
Forfeited/Cancelled
|
(142)
|
|
$
|
31.36
|
|
|
|
|
|
Outstanding at December 31, 2019
|
683
|
|
$
|
27.15
|
|
|
7.9
|
|
$
|
688
|
|
Options exercisable at December 31, 2019
|
318
|
|
$
|
33.01
|
|
|
6.1
|
|
$
|
372
|
|
Unvested at December 31, 2019
|
365
|
|
$
|
22.04
|
|
|
3.0
|
|
$
|
316
|
|
The Company granted 242,592, 245,830, and 99,840 stock options during 2019, 2018, and 2017, respectively. The weighted-average grant-date fair value of options granted during the years 2019, 2018, and 2017 was $19.35, $21.49, and $17.91, respectively. There were 40,147 options exercised in 2019, 54,316 options exercised in 2018, and 90,897 options exercised in 2017. The intrinsic value for options exercised during 2019 was $0.4 million and the associated tax benefit realized from stock options exercised was $0.1 million. The total 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 amount of cash received from the exercise of stock options was $0.4 million in 2019, $0.9 million in 2018, and $1.3 million in 2017. At December 31, 2019, the total unrecognized compensation cost related to non-vested stock option awards was approximately $2.7 million, with a weighted average expected amortization period of 3.0 years.
Restricted Stock
The following is a summary of the Company’s unvested restricted shares for the year ended and as of December 31, 2019:
|
|
|
|
|
|
|
In thousands except per share amounts
|
|
|
|
Outstanding Restricted Shares
|
Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Nonvested at December 31, 2018
|
304
|
|
$
|
37.02
|
|
Granted
|
157
|
|
$
|
20.96
|
|
Vested
|
(23)
|
|
$
|
56.45
|
|
Forfeited/Cancelled
|
(150)
|
|
$
|
38.07
|
|
Nonvested at December 31, 2019
|
288
|
|
$
|
26.13
|
|
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 59,566, 99,560, and 52,595 shares of performance-based restricted stock during 2019, 2018, and 2017, respectively. The Company granted 97,803 shares of time-based restricted stock in 2019, 71,516 shares in 2018, and 22,700 in 2017. The Company granted 1,245, and 485 of time-based restricted stock units in 2018 and 2017, respectively. The weighted average fair value per share of restricted stock granted was $20.96, $25.19, and $45.18 during 2019, 2018, and 2017, respectively. During 2019, 2018, and 2017, respectively, there were 150,365, 8,440 and 14,045 shares of restricted stock forfeited. The fair value of awards for which restrictions lapsed during the years ended December 31, 2019, 2018, and 2017 was $0.5 million, $3.2 million, and $8.0 million, respectively. At December 31, 2019, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately $4.5 million, with a weighted average expected amortization period of 2.4 years.
Stock Repurchases
During the year ended December 31, 2019, the Company acquired 7,122 shares of common stock valued at $0.2 million, through withholding, pursuant to provisions in agreements with recipients of restricted stock granted under the Company's equity compensation plans, which provide for the Company to withhold the number of shares having fair value equal to each recipient's tax withholding due.
14. 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 concluded in the fourth quarter of 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. The Company recorded expenses of $3.7 million in connection with this restructuring plan, of which approximately $3.3 million resulted in cash expenditures over the period of consolidation. The Company also incurred cash expenditures of approximately $3.8 million for capital expenditures associated with this plan.
During the year ended December 31, 2019, the Company recorded pre-tax restructuring expenses of $0.8 million as part of this restructuring plan. Restructuring expenses of $0.6 million were recorded in cost of sales and $0.2 million were recorded in selling, product development and administrative expenses. 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.
Actual pre-tax expenses incurred 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
|
Expenses incurred during year ended:
|
|
|
|
|
December 31, 2017
|
$
|
181
|
|
$
|
154
|
|
$
|
327
|
|
$
|
662
|
|
December 31, 2018
|
606
|
|
136
|
|
1,555
|
|
2,297
|
|
December 31, 2019
|
145
|
|
—
|
|
622
|
|
767
|
|
Total expenses
|
$
|
932
|
|
$
|
290
|
|
$
|
2,504
|
|
$
|
3,726
|
|
There were cash outflows of $0.8 million and $2.2 million for the restructuring program for the years ended December 31, 2019 and 2018, respectively.
Accrued restructuring costs were as follows at December 31, 2019:
|
|
|
|
|
In thousands
|
Total
|
December 31, 2017
|
$
|
333
|
|
Pre-tax restructuring expenses, excluding depreciation
|
$
|
2,012
|
|
Cash paid
|
(2,198
|
)
|
December 31, 2018
|
$
|
147
|
|
Pre-tax restructuring expenses, excluding depreciation
|
$
|
767
|
|
Cash paid
|
(806
|
)
|
December 31, 2019
|
$
|
108
|
|
15. Segment Information
The Company’s reportable segments as of December 31, 2019 were Performance Materials, Technical Nonwovens, 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.
Net sales by segment, as well as reconciling items, to equal consolidated net sales for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Sales
|
For the Years Ended December 31,
|
|
|
|
|
|
|
In thousands
|
2019
|
|
2018
|
|
2017
|
Performance Materials Segment (1):
|
|
|
|
|
|
Filtration
|
$
|
93,314
|
|
|
$
|
93,089
|
|
|
$
|
87,173
|
|
Sealing and Advanced Solutions
|
152,166
|
|
|
76,128
|
|
|
29,496
|
|
Performance Materials Segment net sales
|
245,480
|
|
|
169,217
|
|
|
116,669
|
|
Technical Nonwovens Segment (2):
|
|
|
|
|
|
Industrial Filtration
|
144,320
|
|
|
157,606
|
|
|
147,087
|
|
Advanced Materials (3)
|
111,026
|
|
|
119,465
|
|
|
121,990
|
|
Technical Nonwovens net sales
|
255,346
|
|
|
277,071
|
|
|
269,077
|
|
Thermal Acoustical Solutions Segment:
|
|
|
|
|
|
Parts
|
326,436
|
|
|
328,057
|
|
|
318,217
|
|
Tooling
|
35,141
|
|
|
37,370
|
|
|
23,888
|
|
Thermal Acoustical Solutions Segment net sales
|
361,577
|
|
|
365,427
|
|
|
342,105
|
|
Eliminations and Other (3)
|
(25,005
|
)
|
|
(25,818
|
)
|
|
(29,414
|
)
|
Consolidated Net Sales
|
$
|
837,398
|
|
|
$
|
785,897
|
|
|
$
|
698,437
|
|
Operating income by segment and Corporate Office Expenses for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
For the Years Ended December 31,
|
|
|
|
|
|
|
In thousands
|
2019
|
|
2018
|
|
2017
|
Performance Materials Segment (1)
|
$
|
(59,804
|
)
|
|
$
|
13,139
|
|
|
$
|
12,321
|
|
Technical Nonwovens Segment (2)
|
22,895
|
|
|
21,323
|
|
|
26,047
|
|
Thermal Acoustical Solutions Segment
|
23,590
|
|
|
38,085
|
|
|
53,132
|
|
Corporate Office Expenses
|
(25,506
|
)
|
|
(23,359
|
)
|
|
(25,300
|
)
|
Consolidated Operating Income
|
$
|
(38,825
|
)
|
|
$
|
49,188
|
|
|
$
|
66,200
|
|
Operating results in 2019 were negatively impacted by $64.2 million related to the impairment of goodwill and other long-lived assets in the Performance Materials segment, $12.2 million of incremental intangible assets amortization, $2.3 million of CEO transition expenses within Corporate Office Expenses, $1.9 million of reduction-in-force severance expenses across all segments, $1.5 million of corporate strategic initiatives expenses within Corporate Office Expenses, and $0.8 million of restructuring expenses in the Technical Nonwovens segment. 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.
Total assets by segment and the Corporate Office were as follows at December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
December 31,
|
|
|
|
|
|
|
In thousands
|
2019
|
|
2018
|
|
2017
|
Performance Materials Segment (1)
|
$
|
325,164
|
|
|
$
|
414,211
|
|
|
$
|
72,837
|
|
Technical Nonwovens Segment (2)
|
242,787
|
|
|
242,007
|
|
|
271,713
|
|
Thermal Acoustical Solutions Segment
|
199,218
|
|
|
201,509
|
|
|
189,301
|
|
Corporate Office
|
18,768
|
|
|
14,959
|
|
|
27,020
|
|
Total Assets
|
$
|
785,937
|
|
|
$
|
872,686
|
|
|
$
|
560,871
|
|
The significant reduction in total assets in the Performance Materials segment was driven by $64.2 million of goodwill and other long lived asset impairment charges in the fourth quarter of 2019.
Total capital expenditures and depreciation and amortization by segment and the Corporate Office for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Performance Materials Segment (1)
|
$
|
8,914
|
|
|
$
|
11,288
|
|
|
$
|
3,610
|
|
|
$
|
25,118
|
|
|
$
|
9,006
|
|
|
$
|
3,996
|
|
Technical Nonwovens Segment (2)
|
9,345
|
|
|
5,864
|
|
|
2,903
|
|
|
12,702
|
|
|
13,877
|
|
|
12,625
|
|
Thermal Acoustical Solutions Segment
|
17,858
|
|
|
11,934
|
|
|
17,462
|
|
|
10,168
|
|
|
9,190
|
|
|
8,619
|
|
Corporate Office
|
316
|
|
|
544
|
|
|
940
|
|
|
635
|
|
|
658
|
|
|
699
|
|
Total
|
$
|
36,433
|
|
|
$
|
29,630
|
|
|
$
|
24,915
|
|
|
$
|
48,623
|
|
|
$
|
32,731
|
|
|
$
|
25,939
|
|
Net sales by geographic area for the years ended December 31, 2019, 2018 and 2017 and long-lived asset information by geographic area as of December 31, 2019, 2018, and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2019
|
|
2018
|
|
2017
|
|
2019 (4)
|
|
2018
|
|
2017
|
United States (1)
|
$
|
478,720
|
|
|
$
|
422,222
|
|
|
$
|
376,086
|
|
|
$
|
138,265
|
|
|
$
|
136,448
|
|
|
$
|
93,583
|
|
France (1)
|
75,313
|
|
|
66,579
|
|
|
56,214
|
|
|
13,723
|
|
|
13,219
|
|
|
14,268
|
|
Germany (1)
|
124,402
|
|
|
125,796
|
|
|
105,828
|
|
|
44,116
|
|
|
25,873
|
|
|
20,872
|
|
United Kingdom
|
26,556
|
|
|
27,156
|
|
|
24,921
|
|
|
5,981
|
|
|
4,844
|
|
|
4,916
|
|
Canada (2)
|
76,535
|
|
|
87,622
|
|
|
84,701
|
|
|
29,667
|
|
|
25,614
|
|
|
30,739
|
|
China (1)
|
54,036
|
|
|
54,198
|
|
|
47,856
|
|
|
17,888
|
|
|
11,958
|
|
|
11,896
|
|
Other (1)
|
1,836
|
|
|
2,324
|
|
|
2,831
|
|
|
3,211
|
|
|
4,085
|
|
|
1,590
|
|
Total
|
$
|
837,398
|
|
|
$
|
785,897
|
|
|
$
|
698,437
|
|
|
$
|
252,851
|
|
|
$
|
222,041
|
|
|
$
|
177,864
|
|
|
|
(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)
|
The Technical Nonwovens segment includes results of Geosol through the date of disposition of May 9, 2019.
|
|
|
(3)
|
Included in the Technical Nonwovens segment and Eliminations and Other is $21.0 million, $22.2 million and $26.5 million of intercompany sales to the Thermal Acoustical Solutions segment for the years ended December 31, 2019, 2018 and 2017, respectively.
|
|
|
(4)
|
Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)", requiring the Company to recognize right-of-use assets totaling $23.1 million at December 31, 2019.
|
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 2019, 2018, and 2017 were $99.1 million, $116.1 million, and $120.7 million, respectively, and accounted for 11.8%, 14.8%, and 17.3% of Lydall’s consolidated net sales in the years ended
December 31, 2019, 2018, and 2017, 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 2019, 2018, and 2017.
16. Income Taxes
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
In thousands
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
3,505
|
|
|
$
|
3,739
|
|
|
$
|
11,526
|
|
State
|
381
|
|
|
498
|
|
|
956
|
|
Foreign
|
4,479
|
|
|
3,788
|
|
|
2,425
|
|
Total Current
|
$
|
8,365
|
|
|
$
|
8,025
|
|
|
$
|
14,907
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
(12,481
|
)
|
|
$
|
2,646
|
|
|
$
|
(2,472
|
)
|
State
|
(1,442
|
)
|
|
380
|
|
|
256
|
|
Foreign
|
(858
|
)
|
|
(2,598
|
)
|
|
(717
|
)
|
Total Deferred
|
(14,781
|
)
|
|
428
|
|
|
(2,933
|
)
|
Provision (Benefit) for income taxes
|
$
|
(6,416
|
)
|
|
$
|
8,453
|
|
|
$
|
11,974
|
|
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,
|
|
2019
|
|
2018
|
|
2017
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
2.7
|
|
|
1.6
|
|
|
1.6
|
|
Valuation allowances for deferred tax assets, including state
|
(4.4
|
)
|
|
(1.3
|
)
|
|
0.1
|
|
Research and development credits
|
0.7
|
|
|
(1.3
|
)
|
|
(1.0
|
)
|
Capitalized transaction costs
|
—
|
|
|
0.6
|
|
|
—
|
|
Domestic production activities deduction
|
—
|
|
|
—
|
|
|
(1.8
|
)
|
Stock based compensation
|
(0.1
|
)
|
|
(0.7
|
)
|
|
(4.4
|
)
|
Goodwill Impairment
|
(19.6
|
)
|
|
—
|
|
|
—
|
|
Foreign income taxed at lower rates
|
2.4
|
|
|
(1.6
|
)
|
|
(2.8
|
)
|
Reserves for uncertain tax positions
|
0.3
|
|
|
—
|
|
|
(1.7
|
)
|
Repatriation of foreign undistributed earnings
|
—
|
|
|
1.6
|
|
|
1.3
|
|
Revaluation of deferred tax liabilities due to federal rate change
|
—
|
|
|
—
|
|
|
(7.3
|
)
|
Pension plan settlement
|
5.9
|
|
|
—
|
|
|
—
|
|
Other
|
(0.6
|
)
|
|
(0.4
|
)
|
|
0.5
|
|
Effective income tax rate
|
8.3
|
%
|
|
19.5
|
%
|
|
19.5
|
%
|
In 2019, the Company had a pre-tax loss primarily resulting from a goodwill impairment charge of $63.0 million, recorded in the fourth quarter of 2019. The impairment significantly impacted the Company's effective tax rate because goodwill impairment expense is not deductible for income taxes purposes, resulting in a low effective tax rate in 2019 when in a pre-tax loss position. Partially offsetting the impairment was a tax benefit of $4.5 million recorded in the second quarter of 2019 related to the reclassification of stranded tax effects from accumulated other comprehensive income. Also, the Company's effective tax rate in 2019 was negatively impacted by losses in jurisdictions in which no tax benefit can be recognized.
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.
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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Deferred Tax Assets
|
|
Deferred Tax Assets
|
In thousands
|
Current
|
|
Long-term
|
|
Current
|
|
Long-term
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign
|
—
|
|
|
1,933
|
|
|
—
|
|
|
2,055
|
|
Totals
|
$
|
—
|
|
|
$
|
1,933
|
|
|
$
|
—
|
|
|
$
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Deferred Tax Liabilities
|
|
Deferred Tax Liabilities
|
In thousands
|
Current
|
|
Long-term
|
|
Current
|
|
Long-term
|
Federal
|
$
|
—
|
|
|
$
|
26,992
|
|
|
$
|
—
|
|
|
$
|
30,193
|
|
State
|
—
|
|
|
2,902
|
|
|
—
|
|
|
3,728
|
|
Foreign
|
—
|
|
|
4,667
|
|
|
—
|
|
|
5,344
|
|
Totals
|
$
|
—
|
|
|
$
|
34,561
|
|
|
$
|
—
|
|
|
$
|
39,265
|
|
Net deferred tax assets (liabilities) consisted of the following as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Accounts receivable
|
$
|
377
|
|
|
$
|
172
|
|
Financial Hedging Instruments
|
1,491
|
|
|
585
|
|
Interest Expense Carryovers
|
2,371
|
|
|
463
|
|
Inventories
|
1,845
|
|
|
520
|
|
Net operating loss carryforwards
|
8,478
|
|
|
6,095
|
|
Operating lease
|
6,001
|
|
|
—
|
|
Other accrued liabilities
|
5,905
|
|
|
2,378
|
|
Pension
|
4,274
|
|
|
5,181
|
|
Tax Credits
|
2,015
|
|
|
1,846
|
|
Total deferred tax assets
|
32,757
|
|
|
17,240
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
21,990
|
|
|
25,133
|
|
Right of use assets
|
6,001
|
|
|
—
|
|
Property, plant and equipment
|
28,177
|
|
|
23,353
|
|
Total deferred tax liabilities
|
56,168
|
|
|
48,486
|
|
Valuation allowance
|
9,217
|
|
|
5,964
|
|
Net deferred tax liabilities
|
$
|
(32,628
|
)
|
|
$
|
(37,210
|
)
|
For the years ended December 31, 2019, 2018 and 2017, (loss) income before income taxes was derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
In thousands
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
(73,539
|
)
|
|
$
|
33,928
|
|
|
$
|
54,212
|
|
Foreign
|
(3,538
|
)
|
|
9,337
|
|
|
7,107
|
|
Total income before income taxes
|
$
|
(77,077
|
)
|
|
$
|
43,265
|
|
|
$
|
61,319
|
|
At December 31, 2019, the Company had approximately $4.0 million of state net operating loss carryforwards 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, 2019, the Company had $2.1 million of state tax credit carryforwards that expire between 2020 and 2028. As of December 31, 2019, the Company has recorded a valuation allowance against the full amount of its state tax credit carryforwards. The Company also has $7.6 million of foreign net operating loss carryforwards in China, $13.7 million of net operating loss carryforwards in Germany, $3.4 million of net operating loss carryforwards in the Netherlands, and $0.7 million of net operating loss carryforwards in India. The Netherlands’ net operating losses expire between the years 2021 and 2025 and the China net operating losses expire between the years 2020 and 2024. A valuation allowance is recorded against the net operating losses in all four 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.
As of December 31, 2019, the Company maintains its intention to distribute certain 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, 2019, such undistributed earnings were approximately $3.4 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 $0.9 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, 2016 and it is reasonably expected that net unrecognized
benefits of $1.6 million may be recognized. The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized is $3.2 million as of December 31, 2019. However, $1.3 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 2016, 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
|
2019
|
|
2018
|
Unrecognized tax benefits at beginning of year
|
$
|
3,563
|
|
|
$
|
2,526
|
|
Decreases relating to positions taken in prior periods
|
(36
|
)
|
|
(298
|
)
|
Increases relating to positions taken in prior periods
|
—
|
|
|
—
|
|
Increases relating to current period
|
—
|
|
|
1,584
|
|
Decreases due to settlements with tax authorities
|
—
|
|
|
(233
|
)
|
Decreases due to lapse of statute of limitations
|
(315
|
)
|
|
(16
|
)
|
Unrecognized tax benefits at end of year
|
$
|
3,212
|
|
|
$
|
3,563
|
|
The Company recognizes the interest accrued and the penalties related to unrecognized tax benefits as a component of tax expense. The Company accrued interest and penalties of $0.2 million and $0.1 million as of December 31, 2019 and 2018, respecitvely.
17. 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
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, required the Company 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 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. In the third quarter of 2019, the Company reviewed interim remedial actions with the NHDES. The Company has not yet received further direction from the NHDES. 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 cash flows.
In December 2018, the New York State Department of Environmental Conservation (“NYDEC”) informed the Company that the newly acquired Interface site located at Hoosick Falls, NY will be the subject of an investigation in to the possibility of it being an inactive hazardous disposable waste site. The letter specifically references perflourinated compounds or per- and polyfluoroalkyl substances (“PFAS”) that have been detected in a nearby water supply, soil and/or surface water. Notably, the PFAS contamination has been identified in the Hoosick Falls area for some time and other large manufacturers in the area have previously been identified as a source. The NYDEC approved a site characterization plan in December 2019. The Company recorded expense of $0.3 million in the fourth quarter of 2019 as a result of the site characterization plan preparation and site characterization activities, which will continue into the first quarter of 2020. The Company does not know the scope or extent of its future obligations, if any, that may arise from the site investigation and therefore is unable to estimate the cost of any corrective action. Accordingly, the Company cannot assure that the costs of any future corrective at this location would not have a material effect on the Company's financial condition, results of operations or cash flows.
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.
18. Earnings Per Share
For the years ended December 31,2019, 2018, and 2017, basic earnings per share were computed by dividing net (loss) income 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.
|
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31,
|
In thousands
|
2019
|
|
2018
|
|
2017
|
Basic average common shares outstanding
|
17,271
|
|
|
17,204
|
|
|
17,045
|
|
Effect of dilutive options and restricted stock awards
|
—
|
|
|
126
|
|
|
272
|
|
Diluted average common shares outstanding
|
17,271
|
|
|
17,330
|
|
|
17,317
|
|
Dilutive stock options totaling 54,828 shares of Common Stock were excluded from the diluted per share computation for the year ended December 31, 2019, as the Company reported a net loss during that period and, therefore, the effective of including these options would be antidilutive.
For the years ended December 31, 2019, 2018 and 2017, stock options for 573,920, 455,515 and 44,837 shares of Common Stock, respectively, were not considered in computing diluted earnings per common share as the stock options were considered anti-dilutive.
19. Quarterly Financial Information (Unaudited)
The following table summarizes quarterly financial results for 2019 and 2018. 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
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net sales
|
$
|
218,025
|
|
|
$
|
191,660
|
|
|
$
|
220,811
|
|
|
$
|
186,413
|
|
|
$
|
205,274
|
|
|
$
|
197,886
|
|
|
$
|
193,288
|
|
|
$
|
209,938
|
|
Gross profit
|
$
|
42,056
|
|
|
$
|
39,507
|
|
|
$
|
45,275
|
|
|
$
|
36,127
|
|
|
$
|
36,356
|
|
|
$
|
35,139
|
|
|
$
|
28,103
|
|
|
$
|
41,872
|
|
Net income (loss)
|
$
|
3,890
|
|
|
$
|
11,054
|
|
|
$
|
(6,946
|
)
|
|
$
|
10,450
|
|
|
$
|
3,004
|
|
|
$
|
6,256
|
|
|
$
|
(70,461
|
)
|
|
$
|
7,184
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.23
|
|
|
$
|
0.64
|
|
|
$
|
(0.40
|
)
|
|
$
|
0.61
|
|
|
$
|
0.17
|
|
|
$
|
0.36
|
|
|
$
|
(4.07
|
)
|
|
$
|
0.42
|
|
Diluted
|
$
|
0.22
|
|
|
$
|
0.64
|
|
|
$
|
(0.40
|
)
|
|
$
|
0.60
|
|
|
$
|
0.17
|
|
|
$
|
0.36
|
|
|
$
|
(4.07
|
)
|
|
$
|
0.42
|
|
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 2019 and 2018 and impact the comparability of each year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
In thousands except per share data
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Gross profit impact:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory step-up purchase accounting adjustments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,390
|
|
|
$
|
—
|
|
|
$
|
585
|
|
Restructuring, severance and segment consolidation expenses
|
351
|
|
|
449
|
|
|
42
|
|
|
876
|
|
|
88
|
|
|
400
|
|
|
1,137
|
|
|
169
|
|
Net income impact:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory step-up purchase accounting adjustments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,077
|
|
|
$
|
—
|
|
|
$
|
438
|
|
Restructuring, severance and segment consolidation expenses
|
364
|
|
|
494
|
|
|
93
|
|
|
711
|
|
|
114
|
|
|
409
|
|
|
1,836
|
|
|
527
|
|
Goodwill and other long-lived asset impairment charges
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64,206
|
|
|
—
|
|
CEO transition expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,728
|
|
|
—
|
|
Strategic initiatives expenses
|
652
|
|
|
87
|
|
|
311
|
|
|
923
|
|
|
—
|
|
|
1,730
|
|
|
161
|
|
|
493
|
|
Employee benefit plan settlements
|
—
|
|
|
—
|
|
|
14,977
|
|
|
—
|
|
|
142
|
|
|
—
|
|
|
(347
|
)
|
|
—
|
|
Gain on sale from a divestiture
|
—
|
|
|
—
|
|
|
(1,265
|
)
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Discrete tax items
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
320
|
|
In connection with the preparation of its 2019 audited financial statements, the Company identified that in its previously filed unaudited interim financial statements for the three and six months ended June 30, 2019 and the nine months ended September 30, 2019, the Company had incorrectly excluded from its Consolidated Statements of Comprehensive Income the impact to comprehensive income resulting from the settlement of its U.S. Lydall Pension Plan (see Note 12). As a result, unaudited comprehensive income for such periods was understated by $19.0 million. This error did not have any impact on the Company’s corresponding previously filed Consolidated Balance Sheets, Statements of Operations or Statements of Cash Flows. Management has concluded that such errors did not result in the previously issued unaudited financial statements being materially misstated. The Company will, however, revise these Consolidated Statements of Comprehensive Income in connection with the future filings of its 2020 Form 10-Qs to correct for such errors.
20. Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)". Subsequent additional clarifying ASUs were issued during 2019. Collectively, the new standards amend guidance on reporting credit losses for assets held at amortized cost basis. The Company has determined the only financial asset subject to the new standards are its trade receivables. As our allowance for doubtful accounts assessment process takes into consideration forward-looking information related to our customers in addition to historical experience the Company does not expect the new standard to have a material impact on the Company's consolidated financial statements and disclosures upon adoption of the new standards effective January 1, 2020.
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. 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. Upon adoption of this ASU effective January 1, 2020, the Company does not anticipate any material changes to 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 currently does not have any cloud computing arrangements related to internal use software and therefore does not expect the new standard to have a material impact on its consolidated financial statements and disclosures upon adoption of the new standard effective January 1, 2020.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The new standard is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740, and by clarifying and amending existing guidance in other areas of the same topic. This ASU is effective for fiscal years and interim periods beginning after December 15, 2020. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
21. 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, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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
|
)
|
Other Comprehensive income (loss)
|
436
|
|
|
(222
|
)
|
(a)
|
(2,903
|
)
|
(c)
|
(2,689
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
19,395
|
|
(b)
|
—
|
|
|
19,395
|
|
Balance at December 31, 2019
|
$
|
(18,022
|
)
|
|
$
|
(3,080
|
)
|
|
$
|
(4,877
|
)
|
|
$
|
(25,979
|
)
|
(a) Amount represents actuarial gains (losses) arising from the Company's pension and postretirement benefit obligations, excluding the effect of the settlement in 2019. This amount was $(0.2) million, net of less than $0.1 million tax benefit, for 2019, $(5.0) million, net of a $1.5 million tax benefit, for 2018 and $1.3 million, net of $0.1 million tax expense, for 2017. (See Note 12)
(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 the amortization of actuarial losses to pension expense arising from the Company’s pension and postretirement benefit obligations. This amount was $0.4 million, net of $0.1 million tax benefit during the first five months of fiscal year 2019 prior to the plan settlement, $0.8 million, net of $0.2 million tax benefit in 2018, and $0.7 million, net of $0.4 million tax benefit in 2017. (See Note 12)
(c) Amount represents unrealized gains (losses) on the fair value of hedging activities, net of taxes, for the years ended December 31, 2019, 2018 and 2017.