LYDALL, INC.

INDEX



			Page Number

Cautionary Note Concerning Forward – Looking Statements			3

Part I.	Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Statements of Operations (Unaudited)	56

		Condensed Consolidated Statements of Comprehensive Income (Unaudited)	7

		~~Condensed Consolidated Balance Sheets (Unaudited)~~	8

		Condensed Consolidated ~~Statements of Cash Flows~~Balance Sheets (Unaudited)	9

		Condensed Consolidated Statements of ~~Changes in Stockholders' Equity~~Cash Flows (Unaudited)	10

		~~Notes to~~ Condensed Consolidated ~~Financial~~ Statements of Changes in Stockholders' Equity (Unaudited)	11

		Notes to Condensed Consolidated Financial Statements (Unaudited)	13

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3031

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4142

	Item 4.	Controls and Procedures	4142

Part II.	Other Information

	Item 1.	Legal Proceedings	4244

	Item 1A.	Risk Factors	4244

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4345

	Item 6.	Exhibits	4446

Signature			4547

Lydall, Inc. and its subsidiaries are hereafter collectively referred to as “Lydall,” the “Company” or the “Registrant.” Lydall and its subsidiaries’ names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or trade names of Lydall and its subsidiaries.

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. All such forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company based on current assumptions relating to the Company’s business, the economy and future conditions. Forward-looking statements generally can be identified through the use of words such as “believes,” “anticipates,” “may,” “should,” “will,” “plans,” “projects,” “expects,” “expectations,” “estimates,” “forecasts,” “predicts,” “targets,” “prospects,” “strategy,” “signs” and other words of similar meaning in connection with the discussion of future operating or financial performance. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash and other measures of financial performance. Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. Accordingly, the Company’s actual results may differ materially from those contemplated by the forward-looking statements. Investors, therefore, are cautioned against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Forward-looking statements in this Quarterly Report on Form 10-Q include, among others, statements relating to:

Overall economic and business conditions and the effects on the Company’s markets;

Outlook for the third quarter and ~~remainder of 2018, including expected impact of manufacturing inefficiencies and the Company's ability~~full year 2019;

Ability to improve operational effectiveness in the Thermal Acoustical Solutions segment;

Expected vehicle production in the North American, European or Asian markets;

Growth opportunities in markets served by the Company;

Ability to integrate the Interface Performance Materials business, which was acquired in the third quarter of 2018;

Expected future financial and operating performance of Interface Performance Materials;

Expected costs and future savings associated with restructuring programs;

Expected gross margin, operating margin and working capital improvements from ~~the application of Lean Six Sigma;~~cost control and other improvement programs;

Product development and new business opportunities;

Future strategic transactions, including but not limited to: acquisitions, joint ventures, alliances, licensing agreements and divestitures;

Pension plan funding;

Future cash flow and uses of cash;

Future amounts of stock-based compensation expense;

Future earnings and other measurements of financial performance;

Ability to meet cash operating requirements;

Future levels of indebtedness and capital spending;

Ability to meet financial covenants in the Company's amended revolving credit facility;

Future impact of the variability of interest rates and foreign currency exchange rates;

Expected future impact of recently issued accounting pronouncements upon adoption;

Future effective income tax rates ~~including the impact of the U.S. Tax Cuts and Jobs Act,~~ and realization of deferred tax assets;

Estimates of fair values of reporting units and long-lived assets used in assessing goodwill and long-lived assets for possible impairment; and

The expected outcomes of legal proceedings and other contingencies, including environmental matters.

All forward-looking statements are inherently subject to a number of risks and uncertainties that could cause the actual results of the Company to differ materially from those reflected in forward-looking statements made in this Quarterly Report on Form ~~10-Q,~~10-

Q, as well as in press releases and other statements made from time to time by the Company’s authorized officers. Such risks and uncertainties include, among others, worldwide economic cycles and political changes and uncertainties that affect the markets which the Company’s businesses serve, which could have an effect on demand for the Company’s products and impact the

Company’s profitability; challenges encountered by the Company in the execution of restructuring programs; challenges encountered in the ~~combination~~integration of the ~~former Thermal/Acoustical Fibers and Thermal/Acoustical Metals business segments;~~acquired Interface Performance Materials business; disruptions in the global credit and financial markets, including diminished liquidity and credit availability; changes in international trade agreements and policies, including tariff regulation and trade restrictions; swings in consumer confidence and spending; unstable economic growth; volatility in foreign currency exchange rates; raw material pricing and supply issues; fluctuations in unemployment rates; retention of key employees; increases in fuel prices; and outcomes of legal proceedings, claims and investigations, as well as other risks and uncertainties identified in Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q, and Part I, Item 1A - Risk Factors of Lydall’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. The Company does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)


	Quarter Ended June 30,					Quarter Ended June 30,
	2018			2017		2019			2018
	(Unaudited)					(Unaudited)
Net sales	$	186,413		$	174,879	$	220,811		$	186,413
Cost of sales	150,286			131,552		175,536			150,286
Gross profit	36,127			43,327		45,275			36,127
Selling, product development and administrative expenses	23,878			23,290		32,096			23,878
Operating income	12,249			20,037		13,179			12,249
Pension plan settlement expense						25,515			—
Interest expense	572			795		3,731			572
Other (income) expense, net	(368		)	792
Income before income taxes	12,045			18,450
Income tax expense	1,655			5,303
(Income) loss from equity method investment	(60		)	22
Net income	$	10,450		$	13,125
Earnings per share:
Other income, net						(873		)	(368		)
(Loss) income before income taxes						(15,194		)	12,045
Income tax (benefit) expense						(8,199		)	1,655
Income from equity method investment						(49		)	(60		)
Net (loss) income						$	(6,946	)	$	10,450
Earnings (loss) per share:
Basic	$	0.61		$	0.77	$	(0.40	)	$	0.61
Diluted	$	0.60		$	0.76	$	(0.40	)	$	0.60
Weighted average number of common shares outstanding:
Basic	17,196			17,044		17,267			17,196
Diluted	17,335			17,262		17,267			17,335

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)


	Six Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2019			2018
	(Unaudited)					(Unaudited)
Net sales	$	378,073		$	340,366	$	438,836		$	378,073
Cost of sales	302,439			256,541		351,505			302,439
Gross profit	75,634			83,825		87,331			75,634
Selling, product development and administrative expenses	49,349			48,640		65,102			49,349
Operating income	26,285			35,185		22,229			26,285
Pension plan settlement expense						25,515			—
Interest expense	1,112			1,401		7,359			1,112
Other (income) expense, net	(53		)	1,125
Income before income taxes	25,226			32,659
Income tax expense	3,778			7,797
(Income) loss from equity method investment	(56		)	68
Net income	$	21,504		$	24,794
Earnings per share:
Other income, net						(474		)	(53		)
(Loss) income before income taxes						(10,171		)	25,226
Income tax (benefit) expense						(7,093		)	3,778
Income from equity method investment						(22		)	(56		)
Net (loss) income						$	(3,056	)	$	21,504
Earnings (loss) per share:
Basic	$	1.25		$	1.46	$	(0.18	)	$	1.25
Diluted	$	1.24		$	1.44	$	(0.18	)	$	1.24
Weighted average number of common shares outstanding:
Basic	17,178			17,014		17,260			17,178
Diluted	17,334			17,272		17,260			17,334

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

Quarter Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(Unaudited) (Unaudited)
Net income $ 10,450
$ 13,125
$ 21,504
$ 24,794
Other comprehensive (loss) income:
Foreign currency translation adjustments (11,149 ) 11,784
(8,604 ) 14,513
Pension liability adjustment, net of tax 199
172
397
344
Unrealized (loss) gain on hedging activities, net of tax (27 ) (44 ) 75
(44 )
Comprehensive (loss) income $ (527 ) $ 25,037
$ 13,372
$ 39,607

~~See accompanying Notes to Condensed Consolidated Financial Statements.~~

~~LYDALL, INC.~~

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~(In Thousands)~~

June 30,
2018 December 31,
2017
(Unaudited)
ASSETS

Current assets:

Cash and cash equivalents $ 50,613
$ 59,875
Accounts receivable, less allowances (2018 - $1,462; 2017 - $1,507) 126,330
116,712
Contract assets 26,598
—
Inventories 78,901
80,339
Taxes receivable 4,815
5,525
Prepaid expenses 5,603
4,858
Other current assets 6,986
6,186
Total current assets 299,846
273,495
Property, plant and equipment, at cost 403,548
397,152
Accumulated depreciation (235,240 ) (226,820 )
Net, property, plant and equipment 168,308
170,332
Goodwill 67,022
68,969
Other intangible assets, net 36,329
40,543
Other assets, net 7,269
7,532
Total assets $ 578,774
$ 560,871
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 271
$ 277
Accounts payable 74,186
71,931
Accrued payroll and other compensation 13,286
15,978
Accrued taxes 3,312
2,230
Other accrued liabilities 15,255
11,690
Total current liabilities 106,310
102,106
Long-term debt 76,784
76,913
Deferred tax liabilities 16,257
14,714
Benefit plan liabilities 5,261
9,743
Other long-term liabilities 3,447
3,999

Commitments and Contingencies (Note 14)

Stockholders’ equity:
Preferred stock —
—
Common stock 251
250
Capital in excess of par value 91,177
88,006
Retained earnings 397,885
374,783
Accumulated other comprehensive loss (28,280 ) (20,148 )
Treasury stock, at cost (90,318 ) (89,495 )
Total stockholders’ equity 370,715
353,396
Total liabilities and stockholders’ equity $ 578,774
$ 560,871



	Quarter Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(Unaudited)						(Unaudited)
Net (loss) income	$	(6,946	)	$	10,450		$	(3,056	)	$	21,504
Other comprehensive income (loss):
Foreign currency translation adjustments	2,457			(11,149		)	2,330			(8,604		)
Pension liability adjustment, net of tax	143			199			358			397
Unrealized (loss) gain on hedging activities, net of tax	(1,351		)	(27		)	(2,026		)	75
Comprehensive (loss) income	$	(5,697	)	$	(527	)	$	(2,394	)	$	13,372

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)



	June 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	43,416		$	49,237
Accounts receivable, less allowances (2019 - $2,087; 2018 - $1,440)	147,392			144,938
Contract assets	21,566			23,040
Inventories	88,232			84,465
Taxes receivable	2,745			2,912
Prepaid expenses	5,190			4,707
Other current assets	8,474			7,779
Total current assets	317,015			317,078
Property, plant and equipment, at cost	473,943			458,075
Accumulated depreciation	(255,736		)	(244,706		)
Net, property, plant and equipment	218,207			213,369
Operating lease right-of-use assets	27,070			—
Goodwill	197,796			196,963
Other intangible assets, net	126,696			136,604
Other assets, net	9,650			8,672
Total assets	$	896,434		$	872,686
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	10,001		$	10,172
Accounts payable	81,053			73,265
Accrued payroll and other compensation	15,985			16,621
Deferred revenue	3,446			6,990
Other accrued liabilities	21,382			14,298
Total current liabilities	131,867			121,346
Long-term debt	289,673			314,641
Long-term operating lease liabilities	22,006			—
Deferred tax liabilities	37,640			39,265
Benefit plan liabilities	22,849			22,795
Other long-term liabilities	5,294			5,364

Commitments and Contingencies (Note 16)
Stockholders’ equity:
Preferred stock	—			—
Common stock	253			253
Capital in excess of par value	92,297			90,851
Retained earnings	408,086			411,325
Accumulated other comprehensive loss	(23,007		)	(42,685		)
Treasury stock, at cost	(90,524		)	(90,469		)
Total stockholders’ equity	387,105			369,275
Total liabilities and stockholders’ equity	$	896,434		$	872,686

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Six Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2019			2018
	(Unaudited)						(Unaudited)
Cash flows from operating activities:
Net income	$	21,504		$	24,794
Adjustments to reconcile net income to net cash provided by operating activities:
Net (loss) income							$	(3,056	)	$	21,504
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Gain on divestiture							(1,459		)	—
Depreciation and amortization	14,248			12,778			24,001			14,248
Long-lived asset impairment charge	—			772
Inventory step-up amortization	—			1,025
Deferred income taxes	1,165			157			(12,358		)	1,165
Pension plan settlement expense							25,515			—
Stock-based compensation	2,580			2,287			1,475			2,580
(Income) loss from equity method investment	(56		)	68
Loss on disposition of property, plant and equipment	18			—
Income from equity method investment							(22		)	(56		)
Changes in operating assets and liabilities:
Accounts receivable	(11,934		)	(8,197		)	(1,988		)	(11,934		)
Contract assets	(7,594		)	—			1,231			(7,594		)
Inventories	(15,643		)	(14,202		)	(4,660		)	(15,643		)
Accounts payable	7,406			15,479			10,227			7,406
Accrued payroll and other compensation	(2,408		)	(729		)	3,000			(2,408		)
Accrued taxes	1,184			(977		)	308			1,184
Other, net	(2,496		)	(5,460		)	(5,995		)	(2,478		)
Net cash provided by operating activities	7,974			27,795			36,219			7,974
Cash flows from investing activities:
Capital expenditures							(20,287		)	(16,355		)
Proceeds from divestiture							2,298			—
Proceeds from the sale of property, plant and equipment							295			217
Business acquisitions, net of cash acquired	—			(353		)	869			—
Proceeds from the sale of property, plant and equipment	217			—
Capital expenditures	(16,355		)	(15,068		)
Net cash used for investing activities	(16,138		)	(15,421		)	(16,825		)	(16,138		)
Cash flows from financing activities:
Debt repayments	(126		)	(21,566		)	(25,169		)	(126		)
Common stock issued	666			313			—			666
Common stock repurchased	(823		)	(2,497		)	(43		)	(823		)
Net cash used for financing activities	(283		)	(23,750		)	(25,212		)	(283		)
Effect of exchange rate changes on cash	(815		)	2,984			(3		)	(815		)
Decrease in cash and cash equivalents	(9,262		)	(8,392		)	(5,821		)	(9,262		)
Cash and cash equivalents at beginning of period	59,875			71,934			49,237			59,875
Cash and cash equivalents at end of period	$	50,613		$	63,542		$	43,416		$	50,613

Non-cash capital expenditures of ~~$2.0~~$2.3 million and ~~$4.3~~$2.0 million were included in accounts payable at June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


In thousands of dollars and shares	Common Stock Shares	Common Stock Amount		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders' Equity			Common Stock Shares		Common Stock Amount			Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders' Equity
Balance at December 31, 2017	25,018	$	250	$	88,006	$	374,783	$	(20,148	)	$	(89,495	)	$	353,396
Net Income						21,504								21,504
Balance at December 31, 2018																	25,254		$	253		$	90,851	$	411,325		$	(42,685	)	$	(90,469	)	$	369,275
Net income																								3,890									3,890
Other comprehensive loss, net of tax																											(587		)				(587		)
Stock repurchased																														(42		)	(42		)
Stock issued (canceled) under employee plans																	(26	)	(1		)												(1		)
Stock-based compensation expense																						862											862
Adoption of ASC 606 (1)																								(183		)							(183		)
Balance at March 31, 2019																	25,228		252			91,713		415,032			(43,272		)	(90,511		)	373,214
Net loss																								(6,946		)							(6,946		)
Other comprehensive income, net of tax								(8,132		)				(8,132		)											20,265						20,265
Stock repurchased											(823		)	(823		)														(13		)	(13		)
Stock issued under employee plans	52	1		666										667
Stock issued (canceled) under employee plans																	(3	)	1			12											13
Stock-based compensation expense				2,371										2,371								332											332
Stock issued to directors	—			134										134			10					240											240
Adoption of ASC 606						1,598								1,598
Balance at June 30, 2018	25,070	251		91,177		397,885		(28,280		)	(90,318		)	370,715
Balance at June 30, 2019																	25,235		253			92,297		408,086			(23,007		)	(90,524		)	387,105

(1) During the quarter ended March 31, 2019, the Company recorded an adjustment reducing retained earnings and contract assets by $0.2 million to correct an error in the adoption of ASC 606.



In thousands of dollars and shares	Common Stock Shares	Common Stock Amount		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders' Equity
Balance at December 31, 2017	25,018	$	250	$	88,006	$	374,783	$	(20,148	)	$	(89,495	)	$	353,396
Net income						11,054								11,054
Other comprehensive income, net of tax								2,845						2,845
Stock repurchased											(823		)	(823		)
Stock issued under employee plans	50	1		666										667
Stock-based compensation expense				1,096										1,096
Adoption of ASC 606						1,598								1,598
Balance at March 31, 2018	25,068	251		89,768		387,435		(17,303		)	(90,318		)	369,833
Net income						10,450								10,450
Other comprehensive loss, net of tax								(10,977		)				(10,977		)
Stock issued under employee plans	2													—
Stock-based compensation expense				1,275										1,275
Stock issued to directors				134										134
Balance at June 30, 2018	25,070	251		91,177		397,885		(28,280		)	(90,318		)	370,715

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Financial Statement Presentation

Description of Business

Lydall, Inc. and its subsidiaries (the “Company” or “Lydall”) design and manufacture specialty engineered nonwoven filtration media, industrial thermal insulating solutions, and thermal and acoustical barriers for filtration/separation and heat abatement and sound dampening applications.

On August 31, 2018, the Company acquired an engineered sealing materials business operating under Interface Performance Materials ("Interface"), based in Lancaster, Pennsylvania for $267.0 million, net of cash acquired of $5.2 million. A globally-recognized leader in the delivery of engineered sealing solutions, the Interface operations manufacture wet-laid gasket and specialty materials primarily serving OEM and Tier I manufacturers in the agriculture, construction, earthmoving, industrial, and automotive segments. The acquired business is included in the Company's Performance Materials operating segment.

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements include the accounts of Lydall, Inc. and its subsidiaries. All financial information is unaudited for the interim periods reported. All significant intercompany transactions have been eliminated in the Condensed Consolidated Financial Statements. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The operating results of Interface have been included in the Consolidated Statements of Operations beginning on the date of acquisition. The year-end Condensed Consolidated Balance Sheet was derived from the ~~December 31, 2017~~ audited financial statements for the year ended December 31, 2018, but does not include all disclosures required by U.S. GAAP. Management believes that all adjustments, which include only normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position, results of operations and cash flows for the periods reported, have been included. For further information, refer to the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Effective January 1, 2018, the Company combined the Thermal/Acoustical Metals and Thermal/Acoustical Fibers operating segments into a single operating segment named Thermal Acoustical Solutions. Combining these automotive segments into one segment is expected to allow the Company to better serve its customers, leverage operating disciplines and drive efficiencies across the global automotive operations. Refer to Note 13 "Segment Information" for further information. Prior period segment amounts throughout the Notes to the Condensed Consolidated Financial Statements have been recast to reflect the new segment structure. The recast of historical business segment information had no impact on the Company’s consolidated financial results.

Effective January 1, 2018 the Company adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09 (“ASC 606”) using the modified retrospective method. Therefore, the comparative information has not been adjusted and continues to be reported under the prior guidance of ASC 605. The details of the significant changes and quantitative impact of the changes are disclosed in Note 2 “Revenue from Contracts with Customers.”

Recent Accounting Pronouncements

~~In May 2014,~~Effective January 1, 2019, the Company adopted the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The amended guidance establishes a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance.

The amended guidance clarifies that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the amended guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 is effective for the Company’s interim and annual reporting periods beginning January 1, 2018, and is to be adopted using either a full retrospective or modified retrospective transition method.

The Company adopted the amended guidance and all related amendments using the modified retrospective approach on January 1, 2018, at which time it became effective for the Company. The Company recognized the cumulative effect of initially applying the new revenue standard to all contracts that were not completed on the date of adoption as an adjustment to the opening balance of retained earnings. (See Note 2. “Revenue from Contracts with Customers”Accounting Standards Update ("ASU").

At the adoption date, the cumulative impact of revenue that would have been recognized over time, was $19.6 million. The impact was primarily driven by tooling net sales of $16.3 million from customer contracts within the Thermal Acoustical Solutions ("TAS") segment. The related adoption impact to retained earnings was $1.6 million, net of tax. Refer to Note 2.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall" (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities". This ASU revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017. In February 2018, the FASB issued ASU 2018-03, "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which clarifies various aspects of the guidance issued in ASU 2016-01. The adoption of these amendments is not required for public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018 until the interim period beginning after June 15, 2018, however early adoption is permitted. The Company adopted both ASUs effective January 1, 2018. The adoption of these ASUs did not have any impact on the Company’s consolidated financial statements and disclosures.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments", which provides guidance on eight specific cash flow classification issues. Prior to this ASU, GAAP did not include specific guidance on these eight cash flow classification issues. This ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” as part of the Board’s initiative to reduce complexity in accounting standards. This ASU eliminates an exception in ASC 740, which prohibits the immediate recognition of income tax consequences of intra-entity asset transfers other than inventory. This ASU requires entities to recognize the immediate current and deferred income tax effects of intra-entity asset transfers. This ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash", which clarifies guidance and presentation related to restricted cash in the statement of cash flows, including stating that restricted cash should be included within cash and cash equivalents on the statement of cash flows. The ASU was effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU effective January 1, 2018. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business", which adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU provide a screen to determine when an integrated set of assets and activities is not a business. This ASU was effective for fiscal years beginning after December 15, 2017. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". This ASU requires an entity to report the service cost component of net benefit costs in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. This ASU also requires the other components of net benefit cost, which includes interest costs and actual return on plan assets to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU was effective for fiscal year beginning after December 15, 2017. As required for retrospective adoption, the Company reclassified net benefit costs of $0.1 million from cost of sales and $0.1 million from the selling, product development and administrative expenses to other expense, net, in the Consolidated Statement of Operations for the quarter ended June 30, 2017. The Company reclassified net benefit costs of $0.2 million from cost of sales and $0.2 million from the selling, product development and administrative expenses to other expense, net, in the Consolidated Statement of Operations for the six months ended June 30, 2017. The adoption of this ASU had minimal impact on the Company's consolidated financial statements and disclosures for the quarter and six months ended June 30, 2018.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting". This ASU requires an entity to apply modification accounting in Topic 718 when there are changes to the terms or conditions of a share-based payment award, unless the fair value, vesting conditions, and classification of the modified award are the same as the original award immediately before the original award is modified. This ASU was effective for fiscal years beginning after December 15, 2017. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

~~In February 2016, the FASB issued ASU~~ No. 2016-02, "Leases (Topic 842)", along with several additional clarification ASU's issued during 2018, collectively, "New Lease Standard". ~~This ASU~~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 ~~ASU will~~New Lease Standard also ~~require~~requires new qualitative and quantitative disclosures to help investors and other financial statement

users better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company's adoption of the New Lease Standard was on a modified retrospective basis and did not have any impact on the Company's 2018 financial statements and disclosures. As part of the adoption of the New Lease Standard, the Company elected the package of practical expedients which allowed the Company to not re-assess 1) if any existing arrangements contained a lease, 2) the lease classification of any existing leases and 3) initial direct costs for any existing lease. The Company also elected the practical expedient which allows use of hindsight in determining the lease term for leases in existence at the date of adoption. Effective January 1, 2019, the Company reported lease right-of-use assets and lease liabilities on the Company's Condensed Consolidated Balance Sheets. Adoption of the New Lease Standard did not change the balances reported in the Company's 2019 Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows, or Condensed Statements of Comprehensive Income. Please refer to Footnote 8 "Leases" for additional information required as part of the adoption of the New Lease Standard.

Effective January 1, 2019, the Company adopted the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Account for Hedging Activities". This ASU provides various improvements revolving around the financial reporting of hedging relationships that requires an entity to amend the presentation and disclosure of hedging activities to better portray the economic results of an entity's risk management activities in its financial statements. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

Effective January 1, 2019, the Company adopted the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". This ASU allows for reclassification of stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings, but does not require the reclassification. The Company elected not to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.

Effective January 1, 2019, the Company adopted the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting". This ASU expands the guidance for stock-based compensation to include share-based payment transactions for acquiring goods and services from nonemployees. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)". The new standard amends guidance on reporting credit losses for assets held at amortized cost basis. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement", which adds, amends and removes certain disclosure requirements related to fair value measurements. Among other changes, this standard requires certain additional disclosure surrounding Level 3 assets, including changes in unrealized gains or losses in other comprehensive income and certain inputs in those measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain amended or eliminated disclosures in this standard may be adopted early, while certain additional disclosure requirements in this standard can be adopted on its effective date. In addition, certain changes in the standard require retrospective adoption, while other changes must be adopted prospectively. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." This ASU requires entities to disclose the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates. This ASU also requires entities to disclose an explanation for significant gains and losses related to changes in the benefit obligation for the period. This ASU is effective for fiscal years beginning after December 15, ~~2018,~~2020 with early adoption permitted. ~~In March 2018, the FASB approved amendments that made available a transition method that will provide an option to use the effective date of the amended guidance as the date of initial application.~~ The Company ~~plans to elect this option. Based on the effective date, this amended guidance will apply to the Company beginning on January 1, 2019.~~ Significant implementation matters being addressed by the Company include implementing an integrated third-party lease accounting application, assessing the impact to its internal control over financial reporting and documenting the new lease accounting process. ~~While the Company~~ is ~~still in the process of~~currently evaluating the ~~effect~~method and impact the adoption of ~~adoption~~this ASU will have on its consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.The amendments in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The Company is required to adopt this new guidance in the first quarter of 2020. Early adoption is permitted. The Company is currently ~~assessing leases,~~evaluating the ~~Company anticipates the ASU will have a material~~ impact of this update on its ~~assets~~consolidated financial statements and liabilities due to the addition of right-of-use assets and lease liabilities to the balance sheet; however, it does not expect the ASU to have a material impact on the Company's cash flows or results of operations.related disclosures.

Significant Accounting Policies

The Company’s significant accounting policies are detailed in Note 1, “Significant Accounting Policies” within Part IV Item 15 of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. Significant changes to these accounting policies as a result of adopting ~~ASC 606 “Revenue from Contracts with Customers”~~the New Lease Standard are discussed within Note ~~2, “Revenue from Contracts with Customers.”~~8, “Leases”.

2. Revenue from Contracts with Customers

The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts from Customers. These revenues are generated from the design and manufacture of specialty engineered filtration media, industrial thermal insulating solutions, automotive thermal and acoustical barriers for filtration/separation and thermal/acoustical applications. The Company’s revenue recognition policies require the Company to make significant judgments and estimates. In applying the Company’s revenue recognition policy, determinations must be made as to when control of products passes to the Company’s customers which can be either at a point in time or over time. Revenue is generally recognized at a point in time when control passes to customers upon shipment of the Company’s products and revenue is generally recognized over time when control of the Company’s products transfers to customers during the manufacturing ~~process (see description below).~~process. The Company analyzes several factors, including but not limited to, the nature of the products being sold and contractual terms and conditions in contracts with customers to help the Company make such judgments about revenue recognition.

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 significant 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 significant 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 13 “Segment Information.”



~~Segment~~	~~Performance Materials~~

~~Products~~	~~Products for this segment include filtration media solutions, thermal insulation solutions~~ primarily for air, fluid power, and industrial applications, thermal insulation solutions for building products, appliances, and energy and industrial markets and air and liquid life science applications.

~~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 of the underlying product transfers to the customer. If revenue is recognized at a point in time, the performance obligation is typically satisfied upon shipment and in accordance with shipping terms. In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. ~~Customer payment terms are negotiated on a contract-by-contract basis and typically range from 30 to 90 days.~~

~~Segment~~	~~Technical Nonwovens~~

~~Products~~	~~This segment produces needle punch nonwoven solutions including industrial filtration~~ and advanced materials products. Industrial Filtration products include nonwoven rolled-good felt media and filter bags used primarily in industrial air and liquid filtration applications. Advanced materials products include nonwoven rolled good media used in commercial applications and predominantly serves the geosynthetic, automotive, industrial, medical, and safety apparel markets. The automotive media is provided to tier-one suppliers as well as the Company’s Thermal Acoustical Solutions segment.



~~Performance Obligations~~	~~These contracts typically have distinct performance obligations, which is the promise to~~ ~~transfer the industrial filtration or advanced materials products to the Company’s customers.~~ The Company recognizes revenue at a point in time or over time, based upon when control transfers to the customer. If revenue is recognized at a point in time, the performance obligation is typically satisfied upon shipment and in accordance with shipping terms.~~In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.~~ ~~Customer payment terms are negotiated on a contract-by-contract basis and typically range from 30 to 90 days.~~ For filter bag sales, the Company may enter into warranty agreements that are implied or sold with the product to provide assurance that a product will function as expected and in accordance with certain specifications. Therefore, this type of warranty is not a separate performance obligation.

~~Segment~~	~~Thermal Acoustical Solutions~~

~~Products~~	~~Parts~~ ~~- The segment produces a full range of innovative engineered products tailored for the~~ transportation sector to thermally shield sensitive components from high heat, improve exhaust gas treatment and lower harmful emissions as well as assist in the reduction of noise vibration and harshness. The majority of products are sold to original equipment manufacturers and tier-one suppliers. ~~Tooling~~ ~~- The Company enters into contractual agreements with certain customers within the automotive industry, to design and develop molds, dies and tools (collectively, “tooling”).~~

~~Performance Obligations~~	~~Parts~~ ~~- Customer contracts typically have distinct performance obligations, which is~~ the promise to transfer manufactured parts to these customers. The Company recognizes parts revenue at a point in time or over time, based upon when control transfers to the customer. If revenue is recognized at a point in time, the performance obligation is typically satisfied upon shipment and in accordance with shipping terms.~~In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.~~ ~~Customer payment terms are negotiated on a contract-by-contract basis and typically range from 30 to 90 days.~~ ~~Tooling~~ - Customer contracts typically have distinct performance obligations and are generally completed within one year. The Company periodically enters into multiple contracts with a customer at or near the same time which may be combined for purposes of determining the appropriate transaction price. The Company allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price using costs incurred plus expected margin. The corresponding revenues are recognized over time as the related performance obligations are satisfied. ~~Tooling customer payment terms typically range from 30 to 90 days after title transfers to the customer. Occasionally customers make progress payments as the tool is constructed.~~

~~Practical Expedients and Exemptions~~

The Company has elected to adopt the contract cost practical expedient. This expedient allows the Company to recognize its incremental costs of obtaining contracts, such as sales commissions, as an expense when incurred if the related contract revenue is expected to be recognized in one year or less. These costs are included in selling, product development and administrative expenses.

The Company has made an accounting policy election to record shipping and handling activities occurring after control has passed to the customer to be treated as a fulfillment cost rather than as a distinct performance obligation. Shipping and handling expenses consist primarily of costs incurred to deliver products to customers and internal costs related to preparing products for shipment

~~and are recorded as a cost of sales. Amounts billed to customers as shipping and handling are classified as revenue when services are performed.~~

ASC 606 requires the disclosure of unsatisfied performance obligations related to contracts from customers at the end of each reporting period. The Company has elected the practical expedient because the Company’s contracts generally have a duration of one year or less, therefore no disclosure is required.

The Company has elected to adopt the practical expedient to disregard the need to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects that the period of time between when the products are transferred to the customer and when the Company is paid for those products will be one year or less.

Contract Assets and Liabilities

The Company’s contract assets primarily include unbilled amounts typically resulting from sales under contracts when the over time method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. These unbilled accounts receivable in contract assets are transferred to accounts receivable upon invoicing, typically when the right to payment becomes unconditional in which case payment is due based only upon the passage of time.

The Company’s contract liabilities primarily relate to billings and advance payments received from customers, and deferred revenue. These contract liabilities represent the Company’s obligation to transfer its products to its customers for which the Company has received, or is owed consideration from its customers. Contract liabilities are included in ~~other accrued liabilities~~deferred revenue on the Company’s Condensed Consolidated Balance Sheets.

Contract assets and liabilities consisted of the ~~following (in thousands):~~following:



In thousands	June 30, 2019		December 31, 2018		Dollar Change
Contract assets	$	21,566	$	23,040	$	(1,474	)
Contract liabilities	$	2,707	$	4,537	$	(1,830	)

June 30, 2018 January 1, 2018 Dollar Change
Contract assets $ 26,598
$ 19,125
$ 7,473
Contract liabilities $ 4,546
$ 2,820
$ 1,726

The ~~$7.5~~$1.5 million ~~increase~~decrease in contract assets from ~~January 1,~~December 31, 2018 to June 30, ~~2018~~2019 was primarily due to timing of billings to customers.

The ~~$1.7~~$1.8 million ~~increase~~decrease in contract liabilities from ~~January 1,~~December 31, 2018 to June 30, ~~2018~~2019 was primarily due to ~~an increase in customer deposits partially offset by~~$3.4 million of revenue recognized ~~of $1.5 million~~ in the first six months of ~~2018~~2019 related to contract liabilities at ~~January 1, 2018.~~December 31, 2018, offset by an increase in customer deposits.

~~Impacts on Financial Statements~~

~~The cumulative effect of the changes made to the Company’s Condensed Consolidated January 1, 2018 Balance Sheet for the adoption of ASC 606 was as follows:~~

In thousands December 31, 2017 Adjustments for Adoption of ASC606 January 1, 2018

Assets:
Contract assets $ —
$ 19,125
$ 19,125
Inventories $ 80,339
$ (15,184 ) $ 65,155

Liabilities:
Accounts payable $ 71,931
$ 663
$ 72,594
Other accrued liabilities $ 11,690
$ 1,209
$ 12,899
Deferred tax liabilities $ 14,714
$ 471
$ 15,185

Stockholders' equity:
Retained earnings $ 374,783
$ 1,598
$ 376,381

~~The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet for the adoption of ASC 606 was as follows:~~

June 30, 2018
In thousands Balances Without Adoption of ASC 606 ASC 606 Adjustments As Reported

Assets:
Contract assets $ —
$ 26,598
$ 26,598
Inventories $ 100,892
$ (21,991 ) $ 78,901

Liabilities:
Accounts payable $ 71,295
$ 2,891
$ 74,186
Other accrued liabilities $ 15,966
$ (711 ) $ 15,255
Deferred tax liabilities $ 15,729
$ 528
$ 16,257

Stockholders' equity:
Retained earnings $ 395,986
$ 1,899
$ 397,885

The cumulative effect of the changes made to the Company’s Condensed Consolidated Statement of Operations for the adoption of ASC 606 for the quarter and six months ended June 30, 2018 were as follows:

Quarter Ended June 30, 2018
In thousands Results Without Adoption of ASC606 Effect of Change
Higher (Lower) As Reported

Net sales $ 184,806
$ 1,607
$ 186,413
Cost of sales 148,745
1,541
150,286
Gross profit 36,061
66
36,127
Selling, product development and administrative expenses 23,878
—
23,878
Operating income 12,183
66
12,249
Interest expense 572
—
572
Other income, net (368 ) —
(368 )
Income before income taxes 11,979
66
12,045
Income tax expense 1,654
1
1,655
Income from equity method investment (60 ) —
(60 )
Net income $ 10,385
$ 65
$ 10,450
Earnings per share:
Basic $ 0.60
$ 0.01
$ 0.61
Diluted $ 0.60
$ 0.00
$ 0.60
Weighted average number of common shares outstanding:
Basic 17,196
—
17,196
Diluted 17,335
—
17,335

Six Months Ended June 30, 2018
In thousands Results Without Adoption of ASC606 Effect of Change
Higher (Lower) As Reported

Net sales $ 370,211
$ 7,862
$ 378,073
Cost of sales 294,935
7,504
302,439
Gross profit 75,276
358
75,634
Selling, product development and administrative expenses 49,349
—
49,349
Operating income 25,927
358
26,285
Interest expense 1,112
—
1,112
Other income, net (53 ) —
(53 )
Income before income taxes 24,868
358
25,226
Income tax expense 3,721
57
3,778
Income from equity method investment (56 ) —
(56 )
Net income $ 21,203
$ 301
$ 21,504
Earnings per share:
Basic $ 1.23
$ 0.02
$ 1.25
Diluted $ 1.22
$ 0.02
$ 1.24
Weighted average number of common shares outstanding:
Basic 17,178
—
17,178
Diluted 17,334
—
17,334

Disaggregated Revenue

The Company disaggregates revenue from customers by geographic region, as it believes this disclosure best depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic factors. Disaggregated revenue by geographical region for the quarters and six months ended June 30, 2019 and2018 were as follows:



	Quarter Ended June 30, 2019
In thousands	Performance Materials		Technical Nonwovens		Thermal Acoustical Solutions		Eliminations and Other			Consolidated Net Sales

North America	$	47,822	$	42,667	$	64,235	$	(6,466	)	$	148,258
Europe	15,729		17,791		25,203		(175		)	58,548
Asia	1,551		8,620		3,834		—			14,005
Total Net Sales	$	65,102	$	69,078	$	93,272	$	(6,641	)	$	220,811



	Quarter Ended June 30, 2018
In thousands	Performance Materials		Technical Nonwovens		Thermal Acoustical Solutions		Eliminations and Other			Consolidated Net Sales

North America	$	20,879	$	45,564	$	61,922	$	(6,533	)	$	121,832
Europe	10,355		18,053		24,515		(169		)	52,754
Asia	—		8,095		3,732		—			11,827
Total Net Sales	$	31,234	$	71,712	$	90,169	$	(6,702	)	$	186,413



	Six Months Ended June 30, 2019
In thousands	Performance Materials		Technical Nonwovens		Thermal Acoustical Solutions		Eliminations and Other			Consolidated Net Sales

North America	$	94,199	$	79,856	$	127,837	$	(12,734	)	$	289,158
Europe	32,386		36,840		51,645		(381		)	120,490
Asia	3,097		17,988		8,103		—			29,188
Total Net Sales	$	129,682	$	134,684	$	187,585	$	(13,115	)	$	438,836



	Six Months Ended June 30, 2018
In thousands	Performance Materials		Technical Nonwovens		Thermal Acoustical Solutions		Eliminations and Other			Consolidated Net Sales

North America	$	40,040	$	84,697	$	131,901	$	(14,359	)	$	242,279
Europe	21,887		37,439		52,570		(354		)	111,542
Asia	—		17,117		7,135		—			24,252
Total Net Sales	$	61,927	$	139,253	$	191,606	$	(14,713	)	$	378,073


3.	Acquisitions and Divestiture

Acquisitions

On August 31, 2018, the Company completed the acquisition of Interface Performance Materials ("Interface"), based in Lancaster, Pennsylvania. A globally-recognized leader in the delivery of engineered sealing solutions, the Interface operations manufacture wet-laid gasket and specialty materials primarily serving OEM and Tier I manufacturers in the Agriculture, Construction, Earthmoving, Industrial, and Automotive segments. The transaction strengthens the Company's position as an industry-leading global provider of filtration and engineered materials and expands the Company's end markets into attractive adjacencies. The Company acquired one hundred percent of Interface for an initial price of $268.4 million, net of cash acquired of $5.2 million. In the second quarter of 2019, the Company recorded a post closing adjustment resulting in a decrease in purchase price of $1.4 million resulting in a purchase price of $267.0 million. The purchase price was financed with a combination of cash on hand and $261.4 million of borrowings from the Company's amended $450 million credit facility. The operating results of the Interface businesses have been included in the Consolidated Statements of Operations since August 31, 2018, the date of acquisition, and are reported within the Performance Materials reporting segment.

For the quarter ended June 30, 2019, Interface reported net sales and operating income of $32.7 million and $0.1 million, respectively. Interface's operating income for the quarter ended June 30, 2019 included $4.0 million of intangible assets amortization expense in selling, product development and administrative expenses. There were no sales or operating income for Interface during the quarter ended June 30, 2018 as the acquisition was completed on August 31, 2018.

For the six months ended June 30, 2019, Interface reported net sales and operating loss of $65.6 million and $0.7 million, respectively. Interface's operating income loss for the six months ended June 30, 2019 included $8.0 million of intangible assets amortization expense in selling, product development and administrative expenses. There were no sales or operating income for Interface during the six months ended June 30, 2018 as the acquisition was completed on August 31, 2018.

The following table presents the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Company's acquisition of Interface. The final determination of the fair value of certain assets and liabilities will be completed within the one year measurement period as required by the FASB ASC Topic 805, “Business Combinations.” As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period within one year of the acquisition date. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the purchase accounting assessment may result in a change in the

valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.



In thousands
Accounts receivable	$	25,182
Inventories	17,013
Prepaid expenses and other current assets	2,382
Property, plant and equipment	40,902
Goodwill (Note 5)	130,346
Other intangible assets (Note 5)	106,900
Other assets	308
Total assets acquired, net of cash acquired	$	323,033

Current liabilities	$	(11,319	)
Deferred tax liabilities	(24,678		)
Benefit plan liabilities (Note 12)	(19,002		)
Other long-term liabilities	(1,031		)
Total liabilities assumed	(56,030		)
Total purchase price, net of cash acquired	$	267,003

The following table reflects the unaudited actual results of the Company for the quarter and six months ended June 30, 2019 and the pro forma operating results of the Company for the quarter and six months ended June 30, 2018, ~~were~~which gives effect to the acquisition of Interface as ~~follows:~~if it had occurred on January 1, 2017. The pro forma information includes the historical financial results of the Company and Interface. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective January 1, 2017, nor are they intended to be indicative of results that may occur in the future. The pro forma information does not include the effects of any synergies related to the acquisition.



	Quarter Ended June 30,					Six Months Ended June 30,
	(Actual)			(Pro Forma)		(Actual)			(Pro Forma)
In thousands	2019			2018		2019			2018
Net sales	$	220,811		$	226,404	$	438,836		$	457,481
Net (loss) income	$	(6,946	)	$	11,589	$	(3,056	)	$	22,518

Earnings per share:
Basic	$	(0.40	)	$	0.67	$	(0.18	)	$	1.31
Diluted	$	(0.40	)	$	0.67	$	(0.18	)	$	1.30

Basic	17,267			17,196		17,260			17,178
Diluted	17,267			17,335		17,260			17,334

Included in net income during the quarter ended June 30, 2019 was $3.1 million of intangible assets amortization expense related to acquired Interface intangible assets and $2.6 million of interest expense primarily to finance the Interface acquisition.

Pro forma adjustments during the quarter ended June 30, 2018 reduced net income by $0.6 million. Included in net income for the quarter ended June 30, 2018 was $3.0 million of intangible assets amortization expense and $2.1 million of interest expense associated with borrowings under the Company's Amended Credit Facility. Net income was adjusted to exclude items such as corporate strategic initiatives expenses, Interface management fee expenses and tax valuation allowance expenses.

Included in net income during the six months ended June 30, 2019 was $6.1 million of intangible assets amortization expense related to acquired Interface intangible assets and $5.2 million of interest expense to finance the Interface acquisition.

Quarter Ended June 30, 2018
In thousands Performance Materials Technical Nonwovens Thermal Acoustical Solutions Eliminations and Other Consolidated Net Sales

North America $ 20,879
$ 45,564
$ 61,922
$ (6,533 ) $ 121,832
Europe 10,355
18,053
24,515
(169 ) 52,754
Asia —
8,095
3,732
—
11,827
Total Net Sales $ 31,234
$ 71,712
$ 90,169
$ (6,702 ) $ 186,413

Pro forma adjustments during the six months ended June 30, 2018 reduced net income by $2.1 million. Included in net income for the six months ended June 30, 2018 was $6.1 million of intangible assets amortization expense and $4.2 million of interest expense associated with borrowings under the Company's Amended Credit Facility. Net income was adjusted to exclude items such as corporate strategic initiatives expenses, Interface management fee expenses and tax valuation allowance expenses.

Six Months Ended June 30, 2018
In thousands Performance Materials Technical Nonwovens Thermal Acoustical Solutions Eliminations and Other Consolidated Net Sales

North America $ 40,040
$ 84,697
$ 131,901
$ (14,359 ) $ 242,279
Europe 21,887
37,439
52,570
(354 ) 111,542
Asia —
17,117
7,135
—
24,252
Total Net Sales $ 61,927
$ 139,253
$ 191,606
$ (14,713 ) $ 378,073
On July 12, 2018, the Company acquired certain assets and assumed certain liabilities of the Precision Filtration division of Precision Custom Coatings ("PCC") based in Totowa, NJ. Precision Filtration is a producer of high-quality, air filtration media principally serving the commercial and residential HVAC markets with a range of low efficiency through high-performing air filtration media. The Company acquired the assets and liabilities of PCC for $1.6 million in cash with additional cash payments of up to $2.0 million to be made based on the achievement of certain future financial targets through 2022. PCC had a minimal impact on the Company's sales and operating income for the quarter ended June 30, 2019.

Divestiture

On May 9, 2019, the Company sold its Texel Geosol, Inc. ("Geosol") business, a subsidiary of the Company's Texel Technical Materials, Inc. ("Texel") business, for a cash purchase price of $3.0 million, subject to a post-closing adjustment(s) within ninety days of the purchase date. 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.

The Company did not report Geosol as a discontinued operation as it would not be considered a strategic shift in Lydall's business. Accordingly, the operating results of Geosol are included in the operating results of the Company through the sale date and in comparable periods.

3.4. Inventories

Inventories as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:



In thousands	June 30, 2019		December 31, 2018
Raw materials	$	41,108	$	37,731
Work in process	16,527		18,296
Finished goods	30,597		28,438
Total inventories	$	88,232	$	84,465

In thousands June 30,
2018 December 31,
2017
Raw materials $ 36,862
$ 28,672
Work in process 18,199
29,427
Finished goods 23,840
23,901
78,901
82,000
Less: Progress billings —
(1,661 )
Total inventories $ 78,901
$ 80,339

Included in work in process is gross tooling inventory of ~~$7.7~~$2.5 million and ~~$20.2~~$4.3 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Tooling inventory, net of progress billings, was $18.5 million at December 31, 2017. Effective January 1, 2018 the Company adopted ASC 606, Revenue from Contracts from Customers, under the modified retrospective transition method. The adoption of ASC 606 resulted in the reclassification of progress billings to contract liabilities. See Note 2, Revenue from Contracts with Customers, for further discussion of contract liabilities.

4.5. Goodwill and Other Intangible Assets

Goodwill:

The Company tests its goodwill for impairment annually in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value may exceed its fair value.

The changes in the carrying amount of goodwill by segment as of and for the six months ended June 30, ~~2018~~2019 were as follows:



In thousands	December 31, 2018		Currency translation adjustments			Reductions			June 30, 2019
In thousands	December 31, 2018		Currency translation adjustments			Reductions			June 30, 2019
Performance Materials	$	144,626	$	(84	)	$	(65	)	$	144,477
Technical Nonwovens	52,337		982			—			53,319
Total goodwill	$	196,963	$	898		$	(65	)	$	197,796

Goodwill Associated with Acquisitions

The net goodwill reduction of $0.1 million within the Performance Materials segment was due to a goodwill reduction of $0.7 million as a result of a post-closing purchase price adjustment in the second quarter of 2019 related to the acquisition of Interface

December 31,
2017
Currency
translation adjustments
Additions June 30, 2018
In thousands
Performance Materials $ 13,307
$ (114 ) $ —
$ 13,193
Technical Nonwovens 55,662
(1,833 ) —
53,829
Total goodwill $ 68,969
$ (1,947 ) $ —
$ 67,022

Performance Materials on August 31, 2018, partially offset by acquisition activity in the second quarter of 2019 resulting in a goodwill addition of $0.6 million.

Other Intangible Assets:

The table below presents the gross carrying amount and, as applicable, the accumulated amortization of the Company’s acquired intangible assets other than goodwill included in “Other intangible assets, net” in the Condensed Consolidated Balance Sheets as of June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:



	June 30, 2019					December 31, 2018
In thousands	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets
Customer Relationships	$	142,418	$	(21,134	)	$	141,455	$	(11,453	)
Patents	4,366		(3,841		)	4,333		(3,816		)
Technology	2,500		(898		)	2,500		(810		)
Trade Names	7,302		(4,017		)	7,235		(2,840		)
License Agreements	616		(616		)	619		(619		)
Other	559		(559		)	561		(561		)
Total amortized intangible assets	$	157,761	$	(31,065	)	$	156,703	$	(20,099	)

June 30, 2018 December 31, 2017
In thousands Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
Amortized intangible assets

Customer Relationships $ 38,119
$ (6,595 ) $ 39,474
$ (4,460 )
Patents 4,401
(3,790 ) 4,504
(3,821 )
Technology 2,500
(727 ) 2,500
(644 )
Trade Names 4,145
(1,872 ) 4,288
(1,461 )
License Agreements 627
(627 ) 640
(640 )
Other 573
(425 ) 586
(423 )
Total amortized intangible assets $ 50,365
$ (14,036 ) $ 51,992
$ (11,449 )

5.6. Long-term Debt and Financing Arrangements

On ~~July 7, 2016,~~August 31, 2018, the Company amended and restated its ~~$100~~$175 million senior secured revolving credit ~~facility (“~~agreement ("Amended Credit ~~Facility”~~Agreement") ~~which~~that increased the available borrowing from ~~$100~~$175 million to ~~$175~~$450 million, added ~~a fourth lender~~three additional lenders and extended the maturity date tofrom July 7, ~~2021.~~2021 to August 31, 2023.

Under the terms of the Amended Credit Agreement, the lenders are providing up to a $450 million credit facility (the “Facility”) to the Company, under which the lenders provided a term loan commitment of $200 million and revolving loans to or for the benefit of the Company and its subsidiaries of up to $250 million. The ~~Amended Credit~~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. Under the terms of the Amended Credit Facility, the lenders are providing a $175 million revolving credit facility to the Company, under which the lenders may make revolving loans and issue letters of credit to or for the benefit of the Company and its subsidiaries. The Company may request the Amended Credit Facility be increased by an aggregate amount not to exceed $50 million through an accordion feature, subject to specified conditions set forth in the Amended Credit Facility.

The Amended Credit Facility contains a number of affirmative and negative covenants, including financial and operational covenants. The Company is required to meet a minimum interest coverage ratio. The interest coverage ratio requires that, at the end of each fiscal quarter, the ratio of consolidated EBIT to Consolidated Interest Charges, both as defined in the Amended Credit Facility, may not be less than 2.0 to 1.0 for the immediately preceding 12 month period. In addition, the Company must maintain a Consolidated Leverage Ratio, as defined in the Amended Credit Facility, as of the end of each fiscal quarter of no greater than 3.0 to 1.0. The Company must also meet minimum consolidated EBITDA as of the end of each fiscal quarter for the preceding 12 month period of $30 million. The Company was in compliance with all covenants at ~~June 30, 2018~~ ~~and December 31, 2017.~~

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 ~~Dealer~~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 ~~15 basis points~~0.00% to ~~100 basis points,~~1.25%, and the Applicable Rate added to Eurocurrency Rate Committed Loans and Letters of Credit ranges from ~~75 basis points~~0.75% to ~~175 basis points.~~2.00%. The Company pays a quarterly fee ranging from ~~17.5 basis points~~0.15% to ~~30 basis points~~0.275% on the unused portion of the ~~$175 million available under the Amended Credit Facility.~~

~~In April 2017, the~~revolving commitment. The Company has entered into ~~a three-year~~multiple interest rate ~~swap agreement transacted with~~swaps to convert a ~~bank which converts the interest on the first notional $60.0 million~~portion of the Company's one-month LIBOR-based borrowings ~~under its Amended Credit Facility~~ 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.~~ rate. See Note 7.

The Company is ~~accounting for~~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 ~~interest rate swap agreement as a cash flow hedge. Effectiveness of this derivative agreement~~Company is ~~assessed quarterly by ensuring that the critical terms~~generally permitted to irrevocably cancel unutilized portions of the ~~swap continue~~revolving commitments under the Amended Credit Agreement. The Company is required to ~~match~~repay the ~~critical terms~~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 ~~hedged debt.~~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 June 30, 2019.

At June 30, ~~2018,~~2019, the Company had borrowing availability of ~~$94.5~~$108.2 million under the ~~Amended Credit~~ Facility, net of ~~$76.6~~$300.0 million of borrowings outstanding and standby letters of credit outstanding of ~~$3.9~~$3.8 million. The borrowings outstanding included a $162.0 million term loan, net of $0.5 million in debt issuance costs being amortized to interest expense over the debt maturity period.

In addition to the amounts outstanding under the ~~Amended Credit~~ Facility, the Company has various acquired foreign credit facilities totaling approximately ~~$8.4~~$8.2 million. At June 30, ~~2018,~~2019, the Company's foreign subsidiaries had $0.1 million in borrowings outstanding as well as ~~$2.0~~$1.8 million in standby letters of credit outstanding.

The Company also has finance lease agreements for machinery and equipment at multiple operations requiring monthly principal and interest payments through 2020.

Total outstanding debt consists of:



In thousands	Effective Rate		Maturity	June 30, 2019			December 31, 2018
Revolver loan	4.40	%	8/31/2023	$	138,000		$	138,000
Term loan, net of debt issuance costs	4.40	%	8/31/2023	161,552			186,498
Finance leases	0.00% - 2.09%		2019 - 2020	122			315
				299,674			324,813
Less portion due within one year				(10,001		)	(10,172		)
Total long-term debt, net of debt issuance costs				$	289,673		$	314,641

June 30, December 31,
In thousands Effective Rate Maturity 2018 2017
Revolver Loan, due July 7, 2021 3.09 % 2021 $ 76,600
$ 76,600
Capital Leases 1.65% - 2.09%
2019 - 2020 455
590

77,055
77,190
Less portion due within one year
(271 ) (277 )
Total long-term debt
$ 76,784
$ 76,913

The carrying value of the Company’s ~~$175 million Amended Credit~~debt outstanding on its Facility approximates fair value given the variable rate nature of the debt. The fair values of the Company’s long-term debt are determined using discounted cash flows based upon the Company’s estimated current interest cost for similar type borrowings or current market value, which falls under Level 2 of the fair value hierarchy. ~~The carrying values of the long-term debt approximate fair market value.~~

The weighted average interest rate on long-term debt was ~~2.8%~~4.3% for the six months ended June 30, ~~2018~~2019 and ~~2.2%~~3.4% for the year ended December 31, ~~2017.~~2018.

6.7. Derivatives

The Company selectively uses financial instruments to manage market risk associated with exposure to fluctuations in interest rates. These financial exposures are monitored and managed by the Company as an integral part of its risk management program. The Company’s interest rate exposure is most sensitive to fluctuations in interest rates in the United States and Europe, which impact interest paid on its debt. The Company has debt with variable rates of interest based generally on LIBOR. From time to time, the Company enters into interest rate swap agreements to manage interest rate risk. These instruments are designated as cash flow hedges and are recorded at fair value using Level 2 observable market inputs.

Derivative instruments are recognized as either assets or liabilities on the balance sheet in either current or non-current other assets or other accrued liabilities or other long-term liabilities depending upon maturity and commitment. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the hedge transaction affects earnings. Any ineffective portion, or amounts related to contracts that are not designated as hedges, are recorded directly to earnings. The Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying hedged item. The Company does not use derivatives for speculative or trading purposes.

In November 2018, the Company entered into a five-year interest rate swap agreement with a bank which converts the interest on a notional $139.0 million of the Company's one-month LIBOR-based borrowings under its Amended Credit Agreement from a variable rate, plus the borrowing spread, to a fixed rate of 3.09% plus the borrowing spread. The notional amount reduces quarterly by fluctuating amounts through August 2023. In April 2017, the Company entered into a three-year interest rate swap agreement ~~transacted~~ with a bank which converts the interest on ~~the first~~a notional $60.0 million of the Company's one-month LIBOR-based borrowings under its Amended Credit ~~Facility~~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. ~~The~~These interest rate swap ~~agreement was~~agreements were accounted for as cash flow ~~hedge.~~hedges. Effectiveness of ~~this~~these derivative ~~agreement is~~agreements are assessed quarterly by ensuring that the critical terms of the ~~swap~~swaps continue to match the critical terms of the hedged debt.

The following table sets forth the fair value amounts of derivative instruments held by the Company:



	June 30, 2019				December 31, 2018
In thousands	Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments:
Interest rate contracts	$	34	$	5,263	$	179	$	2,738
Total derivatives	$	34	$	5,263	$	179	$	2,738

June 30, 2018 December 31, 2017
In thousands Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives
Derivatives designated as hedging instruments:
Interest rate contract $ 300
$ —
$ 157
$ —
Total derivatives $ 300
$ —
$ 157
$ —

The following table sets forth the income recorded in accumulated other comprehensive (loss) income, ~~(loss),~~ net of tax, for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 for derivatives held by the Company and designated as hedging instruments:



	Quarters Ended June 30,						Six Months Ended June 30,
In thousands	2019			2018			2019			2018
Cash flow hedges:
Interest rate contracts	$	(1,351	)	$	(27	)	$	(2,026	)	$	75
	$	(1,351	)	(27		)	$	(2,026	)	$	75

Quarter Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Cash flow hedges:
Interest rate contract $ (27 ) $ (44 ) $ 75
$ (44 )
$ (27 ) (44 ) $ 75
$ (44 )

7.8. Leases

From time to time, the Company enters into arrangements with vendors to provide certain tangible assets used in the Company's operations which qualify as a lease pursuant to ASC Topic 842, Leases. The tangible assets leased include Buildings, Office Equipment, Machinery and Vehicles. The Company's leases have remaining terms of a few months to 14 years, some of which have options to extend for a period of up to 7 years and some of which have options to terminate within 1 year.

At inception of the arrangement, the Company determines if an arrangement is a lease based on assessment of the terms and conditions of the contract. Operating leases are included in Operating lease right-of-use (“ROU”) assets, other accrued liabilities, and Long-term operating lease liabilities in the Company's condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, Current portion of long-term debt, and long-term debt in the Company's condensed consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

While the overwhelming majority of leases have fixed payments schedules, some leases have variable lease schedules based on market indices such as LIBOR or include additional payments based on excess consumption of services. For leases on a variable schedule based on a market index, the current lease payment amount is used in the calculation of the lease liability and corresponding asset included on the balance sheet. For leases with additional payments based on excess consumption of services, no amount is included in the calculation of the lease liability or corresponding asset as it is not probable excess consumption will continue in the future.

As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. At June 30, 2019, the weighted average discount rate used for operating and finance leases is 4.39% and 1.78%, respectively. The implicit rate is used when readily determinable from a lease.

The operating lease ROU asset also includes any lease payments made in advance of the assets use and excludes lease incentives received. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for as one component as permitted by ASC 842.

After consideration of any options to terminate early which are reasonably certain to be executed or any options to extend which are not reasonably certain to be executed, any lease with a term of 12 months or less is considered short-term. As permitted by ASC 842, short-term leases are excluded from the ROU Asset and Lease Liability accounts on the condensed consolidated balance sheets. Consistent with all other operating leases, short-term lease expense is recorded on a straight-line basis over the lease term.

The components of lease expense are as follows:



In thousands	Quarter Ended June 30, 2019		Six Months Ended June 30, 2019
Finance lease expense:
Amortization of right-of-use assets	$	16	$	49
Interest on lease liabilities	—		1
Operating lease expense	1,605		3,249
Short-term lease expense	244		468
Variable lease expense	18		54
Total lease expense	$	1,883	$	3,821

Supplemental balance sheet information related to leases are as follows:



In thousands, except lease term	June 30, 2019
Operating leases:
Operating lease right-of-use assets	$	27,070

Short-term lease liabilities, included in "Other accrued liabilities"	$	5,176
Long-term lease liabilities	22,006
Total operating lease liabilities	$	27,182

Finance leases:
Property, plant and equipment	$	740
Accumulated depreciation	(195		)
Property, plant and equipment, net	$	545

Short-term lease liabilities, included in debt	$	109
Long-term lease liabilities, included in debt	13
Total finance lease liabilities	$	122

Weighted average remaining lease term:
Operating leases	7.5 years
Finance leases	12.0 years

Supplemental cash flow information related to leases are as follows:



	Six Months Ended June 30,
In thousands	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	3,162
Operating cash flows from finance leases	1
Financing cash flows from finance leases	188

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	1,676
Finance leases	—

As of June 30, 2019, future lease payments maturities were as follows:



In thousands
Years Ending December 31,	Operating Leases			Finance Leases
2019 (excluding the six months ended June 30, 2019)	$	3,223		$	89
2020	5,723			34
2021	4,408			—
2022	3,643			—
2023	2,753			—
Thereafter	12,822			—
Total lease payments	32,572			123
Less imputed interest	(5,390		)	(1		)
Total discounted future lease payments	$	27,182		$	122

As of December 31, 2018, future lease payment maturities were as follows:



In thousands
Years Ending December 31,	Operating Leases		Finance Leases
2019	$	6,004	$	279
2020	4,871		35
2021	3,877		—
2022	3,226		—
2023	2,617		—
Thereafter	11,111		—
Total lease payments	$	31,706	$	314

9. Equity Compensation Plans

As of June 30, ~~2018,~~2019, the Company’s equity compensation plans consisted of the 2003 Stock Incentive Compensation Plan (the “2003 Plan”) and the 2012 Stock Incentive Plan (the “2012 Plan” and together with the 2003 Plan, the “Plans”) under which incentive and non-qualified stock options and time and performance based restricted shares have been granted to employees and directors from authorized but unissued shares of common stock or treasury shares. The 2003 Plan is not active, but continues to govern all outstanding awards granted under the plan until the awards themselves are exercised or terminate in accordance with their terms. The 2012 Plan, approved by shareholders on April 27, 2012, authorizes 1.75 million shares of common stock for awards. The 2012 Plan also authorizes an additional 1.2 million shares of common stock to the extent awards granted under prior stock plans that were outstanding as of April 27, 2012 are forfeited. The 2012 Plan provides for the following types of awards: options, restricted stock, restricted stock units and other stock-based awards.

The Company accounts for the expense of all share-based compensation by measuring the awards at fair value on the date of grant. The Company recognizes expense on a straight-line basis over the vesting period of the entire award. Options issued by the Company under its stock option plans have a term of ten years and generally vest ratably over a period of three to four years. Time-based restricted stock grants are expensed over the vesting period of the award, which is typically two to four years. The number of performance based restricted shares that vest or forfeit depend upon achievement of certain targets during the performance period. The Company accounts for forfeitures as they occur. Compensation expense for performance based awards granted prior to December 2018, is recorded based upon the service period and management’s assessment of the probability of achieving the performance goals and will be adjusted based upon actual achievement. In December 2018, the performance metric changed to a 3-year relative Total Shareholder Return (TSR) compared to S&P 600 industrial index instead of a pre-established earnings-per-share target to better align compensation to the long-term interests of shareholders. Stock options issued under the current plan must have an exercise price that may not be less than the fair market value of the Company’s Common Stock on the date of grant. The Plans provide for automatic acceleration of vesting in the event of a change in control of the Company. Upon the exercise of a stock option under the Plans, shares are issued from authorized shares or treasury shares held by the Company.

The Company incurred equity compensation expense of ~~$1.4~~$0.5 million and ~~$1.1~~$1.4 million for the quarters ended June 30, ~~2018~~2019 and June 30, ~~2017,~~2018, respectively, and ~~$2.6~~$1.5 million and ~~$2.3~~$2.6 million for the six months ended June 30, ~~2018~~2019 and June 30, ~~2017,~~2018, respectively, for the Plans, including restricted stock awards. No equity compensation costs were capitalized as part of inventory.

Stock Options

The following table is a summary of outstanding and exercisable options as of June 30, ~~2018:~~2019:



In thousands except per share amounts	Shares	Weighted- Average Exercise Price		Aggregate Intrinsic Value
Outstanding at June 30, 2019	599	$	30.32	$	644
Exercisable at June 30, 2019	256	$	29.89	$	635
Unvested at June 30, 2019	343	$	30.64	$	9

In thousands except per share
amounts
Shares
Weighted-
Average
Exercise Price

Aggregate
Intrinsic Value
Outstanding at June 30, 2018 417
$ 34.36
$ 5,486
Exercisable at June 30, 2018 207
$ 21.90
$ 4,702
Unvested at June 30, 2018 210
$ 46.64
$ 784

There were no stock options granted orand 3,325 stock options exercised during the quarter and six months ended June 30, 2019. There was no cash received from the exercise of stock options during the quarter and six months ended June 30, 2019. The intrinsic value of stock options exercised was $0.1 million with a tax benefit of less than $0.1 million during the quarter and six months ended June 30, 2019.

There were no stock options granted and no stock options exercised during the quarter ended June 30, 2018. There were 11,180 stock options granted and 27,041 stock options exercised during the six months ended June 30, 2018. The amount of cash received from the exercise of stock options was $0.7 million during the six months ended June 30, 2018. The intrinsic value of stock options exercised was $0.7 million with a tax benefit of $0.1 million during the six months ended June 30, 2018.

There were no stock options granted and 16,300 stock options exercised during the quarter ended June 30, 2017 and no stock options granted and 28,464 stock options exercised during the six months ended June 30, 2017. The amount of cash received from the exercise of stock options was $0.2 million during the quarter ended June 30, 2017 and $0.3 million during the six months ended June 30, 2017. The intrinsic value of stock options exercised was $0.7 million with a tax benefit of $0.1 million during the quarter ended June 30, 2017 and the intrinsic value of stock options exercised was $1.2 million with a tax benefit of $0.3 million during the six months ended June 30, 2017.

At June 30, ~~2018,~~2019, the total unrecognized compensation cost related to non-vested stock option awards was approximately ~~$2.9~~$3.0 million, with a weighted average expected amortization period of ~~2.8~~2.7 years.

Restricted Stock

Restricted stock includes both performance-based and time-based awards. There were no time-based restricted stock shares granted during the quarter ended June 30, 2019 and 33,932 time-based restricted stock shares granted during the six months ended June 30, 2019. There were no performance-based restricted shares granted during the quarter and six months ended June 30, 2019. There were no performance-based restricted shares that vested during the quarter and six months ended June 30, 2019. There were no time-based restricted shares that vested during the quarter ended June 30, 2019 and 5,468 time-based restricted shares that vested during the six months ended June 30, 2019.

There were no time-based restricted stock shares granted during the quarter ended June 30, 2018 and 8,106 time-based restricted stock shares granted during the six months ended June 30, 2018. There were no performance-based restricted stock shares granted during the quarter ended June 30, 2018 and 15,190 performance-based restricted shares granted during the six months ended June 30, 2018. There were no performance-based restricted stock shares that vested during the quarter ended June 30, 2018 and 48,035 performance-based restricted shares that vested during the six months ended June 30, ~~2018, in accordance with plan provisions.~~2018. There were no time-based restricted stock shares that vested during the quarter ended June 30, 2018 and 5,164 time-based restricted shares that vested during the six months ended June 30, 2018.

There were no time-based restricted stock shares granted during the quarter and six month period ended June 30, 2017. There were no performance-based restricted shares granted during the quarter ended June 30, 2017 and 18,100 performance-based restricted shares granted for the six months ended June 30, 2017, which have a 2019 earnings per share target. There were no performance-based restricted shares that vested during the quarter ended June 30, 2017 and 108,600 performance-based restricted shares that vested during the six months ended June 30, 2017. There were no time-based restricted shares that vested during the quarter ended June 30, 2017 and 9,288 time-based restricted shares that vested during the six months ended June 30, 2017.

At June 30, ~~2018,~~2019, there were ~~187,902~~265,816 unvested restricted stock awards with total unrecognized compensation cost related to these awards of ~~$4.8~~$3.9 million with a weighted average expected amortization period of ~~2.0~~1.9 years. Compensation expense for performance based awards is recorded based on the service period and management’s assessment of the probability of achieving the performance goals.

8.10. Stock Repurchases

During the six months ended June 30, ~~2018,~~2019, the Company purchased ~~18,561~~2,124 shares of common stock valued at ~~$0.8~~$0.1 million, through withholding, pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s equity compensation plans, in which the Company withholds that number of shares having fair value equal to each recipient’s minimum tax withholding due.

11. Restructuring

In ~~April~~ 2017, the Company commenced a restructuring plan in the Technical Nonwovens segment which includes plant consolidations and transfer of equipment to other facilities within the segment's Europe and China operations. The consolidation of certain plants, which is expected to conclude in ~~the second 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. Accordingly, the Company expects to record ~~total~~ pre-tax expenses of approximately ~~$5.0~~$4.2 million, in connection with this restructuring plan, of which approximately ~~$4.8~~$3.7 million is expected to result in cash expenditures over the period of consolidation. The Company also expects to incur cash expenditures of approximately ~~$3.5~~$3.8 million for capital expenditures associated with this plan.

During the quarter ended June 30, ~~2018,~~2019, the Company recorded pre-tax restructuring expenses of ~~$0.9~~$0.1 million, primarily related to severance costs in selling, product development and administrative expenses. During the six months ended June 30, 2019, the Company recorded pre-tax restructuring expenses of $0.5 million, primarily related to equipment move costs in cost of sales. During the six months ended June 30, 2018, the Company recorded pre-tax restructuring expenses of $1.4 million as part of this restructuring plan. Restructuring expenses of $1.3 million, primarily related to severance and equipment move costs, were recorded in cost of sales and $0.1 million of severance and engineering costs were recorded in selling, product development and administrative expenses during the six months ended June 30, 2018. The Company expects to record approximately ~~$1.3~~$0.8 million of restructuring expenses ~~in the second half of 2018 and $2.8 million~~ for the ~~year ending December 31, 2018.~~remainder of 2019.

Actual pre-tax expenses incurred and total estimated pre-tax expenses for the restructuring program by type are as follows:



In thousands	Severance and Related Expenses	Contract Termination Expenses	Facility Exit, Move and Set-up Expenses	Total
Total estimated expenses	1,250	450	2,500	4,200
Expenses incurred through December 31, 2018	787	290	1,882	2,959
Estimated remaining expense at December 31, 2018	463	160	618	1,241
Expense incurred during quarter ended:
March 31, 2019	16	—	360	376
June 30, 2019	53	—	44	97
Total pre-tax expense incurred	856	290	2,286	3,432
Estimated remaining expense at June 30, 2019	394	160	214	768

In thousands Severance and Related Expenses Contract Termination Expenses Facility Exit, Move and Set-up Expenses Total
Total estimated expenses $ 1,200
$ 300
$ 3,500
$ 5,000
Expenses incurred through December 31, 2017 181
154
327
662
Estimated remaining expense at December 31, 2017 $ 1,019
$ 146
$ 3,173
$ 4,338
Expense incurred during quarter ended:
March 31, 2018 $ 315
$ —
$ 219
$ 534
June 30, 2018 185
—
700
885
Total pre-tax expense incurred $ 681
$ 154
$ 1,246
$ 2,081
Estimated remaining expense at June 30, 2018 $ 519
$ 146
$ 2,254
$ 2,919

There were cash outflows of ~~$0.5~~$0.2 million and ~~$0.8~~$0.5 million for the restructuring program for the quarter and six months ended June 30, ~~2018,~~2019, respectively.

Accrued restructuring costs were as follows at June 30, ~~2018:~~2019:



In thousands	Total
Balance as of December 31, 2018	$	147
Pre-tax restructuring expenses, excluding depreciation	473
Cash paid	(534		)
Balance as of June 30, 2019	$	86

In thousands Total
Balance as of December 31, 2017 $ 333
Pre-tax restructuring expenses, excluding depreciation 1,307
Cash paid (770 )
Balance as of June 30, 2018 $ 870

~~10.~~12. Employer Sponsored Benefit Plans

~~As of~~Prior to the quarter ended June 30, ~~2018,~~2019, the Company ~~maintains~~maintained a defined benefit pension plan ~~that covers certain domestic~~("U.S. Lydall ~~employees (“~~Pension Plan") and two domestic pension plan”) that is closed to new employees and benefits are no longer accruing. The domestic pension plan is noncontributory and benefits are based on either years of service or eligible compensation paid while a participant isplans acquired in the ~~plan. The Company’s funding policy is to fund not less than~~Interface acquisition ("Interface Pension Plans"), (collectively the ~~ERISA minimum funding standard and not more than~~"domestic defined benefit pension plans"). During the ~~maximum amount that can be deducted for federal income tax purposes.~~

~~As of January 1, 2018~~quarter ended June 30, 2019, the Company ~~adopted ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving~~settled the ~~Presentation~~pension obligation of ~~Net Periodic~~the U.S. Lydall Pension ~~Cost and Net Periodic Postretirement Benefit Cost". This ASU required~~Plan through lump sum distributions to participants or by irrevocably transferring pension liabilities to two insurance companies through the ~~other components~~purchase of ~~net benefit cost, which includes interest costs, expected return on plan~~group annuity contracts. These purchases, funded with pension assets, ~~and amortization~~resulted in a pre-tax settlement loss of ~~actuarial loss be presented~~$25.5 million in the ~~income statement outside a subtotal~~quarter ended June 30, 2019, related to the recognition of ~~income from operations for~~accumulated deferred actuarial losses. The settlement loss was included as non-operating expense in the condensed consolidated statements of operations. No contributions were made to the U.S. Lydall Pension Plan during the quarter and six months ended June 30, ~~2018. The retrospective adoption of this ASU resulted in the reclassification of net benefit costs of $0.1 million from cost of sales~~2019 and $0.1 million from the selling, product development and administrative expenses to the other expense, net line in the Consolidated Statement of Operations for the quarter ended June 30, 2017. Net benefit costs of $0.2 million from cost of sales and $0.2 million from the selling, product development and administrative expenses were reclassified to the other expense, net line in the Consolidated Statement of Operations for the six months ended June 30, 2017.

~~The Company expects to contribute approximately $7.0 million in cash to the domestic pension plan in 2018 to further fund the plan. Contributions~~contributions of $3.0 million and $4.2 million were made during the quarter and six months ended June 30, 2018, respectively.

The Interface Pension Plans cover Interface's union and non-union employees. The plans are closed to new employees and benefits are no longer accruing for the majority of participants. The Company expects to make a required contribution of approximately $1.0 million to $2.0 million to the Interface Pension Plans during 2019. Contributions of ~~$1.2~~$0.3 million and ~~$2.4~~$0.9 million were made during the quarter and six months ended June 30, ~~2017,~~2019, respectively.

The following is a summary of the components of net periodic benefit cost ~~which is recorded in other expense, net,~~ for the domestic defined benefit pension ~~plan~~plans for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:



	Quarters Ended June 30,						Six Months Ended June 30,
In thousands	2019			2018			2019			2018
Components of employer benefit cost
Service cost	$	30		$	—		$	60		$	—
Interest cost	833			470			1,827			940
Expected return on assets	(744		)	(650		)	(1,616		)	(1,300		)
Amortization of actuarial loss	186			256			464			512
Net periodic benefit cost	$	305		$	76		$	735		$	152
Settlement loss	25,515			—			25,515			—
Total employer benefit plan cost	$	25,820		$	76		$	26,250		$	152

Quarter Ended
June 30, Six Months Ended
June 30,
In thousands 2018 2017 2018 2017
Components of net periodic benefit cost

Interest cost $ 470
$ 514
$ 940
$ 1,029
Expected return on assets (650 ) (594 ) (1,300 ) (1,188 )
Amortization of actuarial loss 256
273
512
546
Net periodic benefit cost $ 76
$ 193
$ 152
$ 387

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.

~~11.~~13. Income Taxes

On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of the Tax Cuts and Jobs Act (the "Tax Reform Act"). The Company has followed guidance in Staff Accounting Bulletin No.118 ("SAB 118"), which provides a measurement period, not to exceed one year from the enactment of the Tax Reform Act, and recorded provisional items related to the one-time mandatory repatriation of foreign earnings and the revaluation of deferred tax assets and liabilities for the year ended December 31, 2017. For the quarter ended June 30, ~~2018,~~2019 the Company ~~continued~~recorded a tax benefit of $8.2 million compared to ~~perform analysis~~tax expense of $1.7 million for the quarter ended June 30, 2018. The tax benefit was driven by $10.5 million of tax benefit related to the pension plan settlement and ~~evaluate interpretations and additional regulatory guidance, but did not record any adjustments to these provisional items, nor deemed any of them as complete.~~

~~The Company’s~~resulted in an effective tax rate ~~was 13.7% and 28.7%~~ for the ~~quarters~~quarter ended June 30, ~~2018 and 2017, respectively, and 15% and 23.9%~~2019 of 54.0%. This is compared to an effective tax rate of 13.7% for the ~~six months~~quarter ended June 30, ~~2018 and 2017, respectively.~~2018. The ~~difference in~~pension plan settlement tax benefit included a $4.5 million benefit related to the reclassification of stranded tax effects from accumulated other comprehensive income. Excluding the tax benefit of the pension plan settlement, the Company's effective tax rate for the quarter ended June 30, ~~2018 compared to June 30, 2017~~2019 was ~~due to~~22.7%. This was negatively impacted by valuation allowance activity of $0.9 million partially offset by the ~~reduction of the U.S. corporate tax rate from 35% to 21% under the Tax Reform Act, tax benefits of $0.4 million related to additional tax deductible pension contributions and the~~Company's geographical mix of earnings. The ~~difference~~second quarter of 2018 effective tax rate was positively impacted by discretionary pension plan contributions and geographical mix of earnings.

For the six months ended June 30, 2019 the Company recorded a tax benefit of $7.1 million compared to tax expense of $3.8 million for the six months ended June 30, 2018. The tax benefit was driven by $10.5 million of tax benefit related to the pension plan settlement and resulted in an effective tax rate for the six months ended June 30, 2019 of 69.7%. This is compared to an effective tax rate of 15.0% for the six months ended June 30, 2018. Excluding the tax benefit of the pension plan settlement, the Company's effective tax rate for the six months ended June 30, ~~2018 compared to June 30, 2017~~2019 was ~~primarily related to~~22.5%. This was negatively impacted by valuation allowance activity of $1.2 million partially offset by the ~~reduction of the U.S. corporate tax rate from 35% to 21% under the Tax Reform act and the~~Company's geographical mix of earnings.

The Company and its subsidiaries file a consolidated federal income tax return, as well as returns required by various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities, including such major jurisdictions as the United States, France, Germany, China, the United Kingdom, Canada and the Netherlands. With few exceptions, the Company is no longer subject to U.S. federal examinations for years before 2015, state and local examinations for years before 2013, and non-U.S. income tax examinations for years before 2003.

The Company’s effective tax rates in future periods could be affected by ~~earnings being higher~~an increase or ~~lower~~decrease in earnings in countries where tax rates differ from the United States federal tax rate, the relative impact of permanent tax adjustments on ~~higher or lower~~ earnings from domestic operations, changes in net deferred tax asset valuation allowances, stock vesting, pension plan terminations, the completion of acquisitions or divestitures, changes in tax rates or tax laws and the completion of ongoing tax ~~projects~~planning strategies and audits.

~~12.~~14. Earnings (Loss) Per Share

For the quarters and six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, basic earnings per share were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Unexercised stock options and unvested restricted shares are excluded from this calculation but are included in the diluted earnings per share calculation using the treasury stock method as long as their effect is not antidilutive.

The following table provides a reconciliation of weighted-average shares used to determine basic and diluted earnings per share:



	Quarter Ended June 30,		Six Months Ended June 30,
In thousands	2019	2018	2019	2018
Basic average common shares outstanding	17,267	17,196	17,260	17,178
Effect of dilutive options and restricted stock awards	—	139	—	156
Diluted average common shares outstanding	17,267	17,335	17,260	17,334

Quarter Ended
June 30, Six Months Ended
June 30,
In thousands 2018 2017 2018 2017
Basic average common shares outstanding 17,196
17,044
17,178
17,014
Effect of dilutive options and restricted stock awards 139
218
156
258
Diluted average common shares outstanding 17,335
17,262
17,334
17,272

Dilutive stock options totaling 54,713 and 69,730 shares of Common Stock were excluded from the diluted per share computation for the quarter and six months ended June 30, 2019, respectively, as the Company reported a net loss during those periods and, therefore, the effect of including these options would be antidilutive.

For each of the quarters ended June 30, ~~2018~~2019 and ~~2017,~~2018, stock options for ~~162,830~~520,189 shares and ~~38,280~~162,830 shares of Common Stock were not considered in computing diluted earnings per common share because they were antidilutive.

For each of the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, stock options for ~~149,940~~521,293 shares and ~~38,280~~149,940 shares of Common Stock were not considered in computing diluted earnings per common share because they were antidilutive.

~~13.~~15. Segment Information

As of June 30, ~~2018,~~2019, the Company’s reportable segments ~~are~~were Performance Materials, Technical Nonwovens, and Thermal Acoustical Solutions.

Effective ~~January 1,~~September 30, 2018, as a result of the ~~Thermal/Acoustical Metals~~Interface acquisition, the Performance Materials segment changed the disaggregation of revenue at the product level to be categorized as "Filtration" and Thermal/Acoustical Fibers operating segments were combined into a single operating segment named Thermal Acoustical Solutions. These automotive segments were combined into one segment to allow the Company to better serve its customers, leverage operating disciplines"Sealing and ~~drive efficiencies across the global automotive operations.~~

Advanced Solutions". Prior period ~~segment~~product level amounts throughout the Notes to the Condensed Consolidated Financial Statements have been recast to reflect the results of the new ~~segment~~product level structure. The recast of historical ~~business segment~~product level information had no impact on the consolidated financial results.

Performance Materials Segment

The Performance Materials segment includes filtration media solutions primarily for air, fluid power, life science and industrial applications (“Filtration”), and sealing and gasket solutions, thermal insulation, ~~solutions for building~~energy storage, and other engineered products ~~appliances,~~(“Sealing and ~~energy and industrial markets (“Thermal Insulation”) and air and liquid life science applications (“Life Sciences Filtration”~~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™~~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 ~~engine~~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.

~~Thermal Insulation~~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 ~~high performance~~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 ~~mats~~ and specialty composites for the building products, appliance, ~~and~~ energy and industrial ~~markets. The~~markets include Manniglas® Thermal Insulation ~~brand is diverse in its product application ranging from high temperature seals~~Papers, and ~~gaskets in ovens and ranges to specialty veils for HVAC and cavity wall insulation. The~~ Lytherm® Insulation Media ~~product brand services Lydall’s~~for high temperature technology ~~portfolio, traditionally utilized in the industrial market for kilns and furnaces used in metal processing.~~applications. Lydall’s Cryotherm® Super-Insulating Media, CRS-Wrap®

Super-Insulating Media and ~~Cryo-Lite™~~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.

Life Sciences Filtration is comprised of products which have been designed to meet the stringent requirements of critical applications including biopharmaceutical pre-filtration and clarification, lateral flow diagnostic and analytical testing, respiratory protection, potable water filtration and high purity process filtration such as that found in food and beverage and medical applications. Lydall also offers ultra-high molecular weight polyethylene membranes under the Solupor® trade name. These specialty microporous membranes are utilized in various markets and applications including air and liquid filtration and transdermal drug delivery. Solupor® membranes incorporate a unique combination of high mechanical strength, chemical inertness, gamma stability and very high porosity making them ideal for many applications.

Technical Nonwovens Segment

The Technical Nonwovens segment primarily produces needle punch nonwoven solutions for ~~myriad~~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 ~~the most~~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 ~~and~~ as well as the Company's Thermal Acoustical Solutions segment.

Technical Nonwovens segment products include air and liquid filtration media sold under the brand names Fiberlox® high performance filtration felts, Checkstatic™ conductive filtration felts, Microfelt® high efficiency filtration felts, Pleatlox® pleatable filtration felts, Ultratech™ PTFE filtration felts, Powertech® and Powerlox® power generation filtration felts, Microcap® high efficiency liquid filtration felts, Duotech membrane composite filtration felts, along with our porotex® family of high temperature filtration felts including microvel® and optivel® products. Technical Nonwovens Advanced Materials products are sold under the brand names Thermofit® thermo-formable products, Ecoduo® recycled content materials, Duotex® floor protection products, and Versaflex® composite molding materials. Technical Nonwovens also offers extensive finishing and coating capabilities which provide custom engineered properties tailored to meet the most demanding applications. The business leverages a wide range of fiber types and extensive technical capabilities to provide products that meet our customers’ needs across a variety of applications providing both high performance and durability.

Thermal Acoustical Solutions Segment

The Thermal Acoustical Solutions segment offers a full range of innovative engineered products tailored for the transportation and industrial sectors to thermally shield sensitive components from high heat, improve exhaust gas treatment and lower harmful emissions as well as assist in the reduction of noise, vibration and harshness (NVH). Within the transportation sector, Lydall’s products are found in the interior (dash insulators, cabin flooring), underbody (wheel well, aerodynamic belly pan, fuel tank, exhaust, tunnel, spare tire) and under hood (engine compartment, outer dash, powertrain, catalytic converter, turbo charger, manifolds) of cars, trucks, SUVs, heavy duty trucks and recreational vehicles.

Thermal Acoustical Solutions segment products offer thermal and acoustical insulating solutions comprised of organic and inorganic fiber composites that provide weight reduction, superior noise suppression and increased durability over conventional designs, as well as products that efficiently combine multiple layers of metal and thermal - acoustical insulation media to provide an engineered shielding solution for an array of application areas. Lydall’s dBCore® is a lightweight acoustical composite that emphasizes absorption principles over heavy-mass type systems. Lydall’s dBLyte® is a high-performance acoustical barrier with sound absorption and blocking properties and can be used throughout a vehicle’s interior to minimize intrusive noise from an engine compartment and road. Lydall’s ZeroClearance® is an innovative thermal solution that utilizes an adhesive backing for attachment and is used to protect vehicle components from excessive heat. Lydall’s flux® product family includes several patented or IP-rich products that address applications which include: Direct Exhaust Mount heat shields, which are assembled to high temperature components like catalytic converters, turbochargers or exhaust manifolds using aluminized and stainless steel and high performance and high temperature heat insulating materials; Powertrain heat shields that absorb noise at the source and do not contribute to the engine's noise budget; and durable, thermally robust solutions for temperature sensitive plastic components such as fuel tanks that are in proximity to high temperature heat sources.

The tables below present net sales and operating income by segment for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, and also a reconciliation of total segment net sales and operating income to total consolidated net sales and operating income.

Consolidated net sales by segment:



	Quarters Ended June 30,						Six Months Ended June 30,
In thousands	2019			2018			2019			2018
Performance Materials Segment (1):
Filtration	$	24,732		$	23,061		$	48,666		$	46,203
Sealing and Advanced Solutions	40,370			8,173			81,016			15,724
Performance Materials Segment net sales	65,102			31,234			129,682			61,927

Technical Nonwovens Segment:
Industrial Filtration	38,706			39,170			81,070			79,401
Advanced Materials (2)	30,372			32,542			53,614			59,852
Technical Nonwovens Segment net sales	69,078			71,712			134,684			139,253

Thermal Acoustical Solutions Segment:
Parts	85,705			82,920			170,281			171,041
Tooling	7,567			7,249			17,304			20,565
Thermal Acoustical Solutions Segment net sales	93,272			90,169			187,585			191,606

Eliminations and Other (2)	(6,641		)	(6,702		)	(13,115		)	(14,713		)
Consolidated Net Sales	$	220,811		$	186,413		$	438,836		$	378,073

Quarter Ended
June 30, Six Months Ended
June 30,
In thousands 2018 2017 2018 2017
Performance Materials Segment:

Filtration $ 20,574
$ 19,255
$ 41,264
$ 38,100
Thermal Insulation 7,796
7,407
15,303
14,833
Life Sciences Filtration 2,864
2,639
5,360
5,119
Performance Materials Segment net sales 31,234
29,301
61,927
58,052

Technical Nonwovens Segment:
Industrial Filtration 39,170
36,325
79,401
70,538
Advanced Materials (1)
32,542
30,773
59,852
55,478
Technical Nonwovens net sales 71,712
67,098
139,253
126,016

Thermal Acoustical Solutions Segment:
Parts 82,920
80,648
171,041
162,462
Tooling 7,249
5,354
20,565
8,325
Thermal Acoustical Solutions Segment net sales 90,169
86,002
191,606
170,787
Eliminations and Other (1)
(6,702 ) (7,522 ) (14,713 ) (14,489 )
Consolidated Net Sales $ 186,413
$ 174,879
$ 378,073
$ 340,366

Operating income by segment:



	Quarters Ended June 30,						Six Months Ended June 30,
In thousands	2019			2018			2019			2018
Performance Materials (1)	$	3,303		$	3,649		$	4,762		$	6,290
Technical Nonwovens	7,844			6,118			12,578			11,124
Thermal Acoustical Solutions	7,357			8,820			16,848			21,434
Corporate Office Expenses	(5,325		)	(6,338		)	(11,959		)	(12,563		)
Consolidated Operating Income	$	13,179		$	12,249		$	22,229		$	26,285

Quarter Ended
June 30, Six Months Ended
June 30,
In thousands 2018
2017 (2)
2018
2017 (2)
Performance Materials $ 3,649
$ 3,933
$ 6,290
$ 5,591
Technical Nonwovens 6,118
6,535
11,124
11,203
Thermal Acoustical Solutions 8,820
15,395
21,434
30,191
Corporate Office Expenses (6,338 ) (5,826 ) (12,563 ) (11,800 )
Consolidated Operating Income $ 12,249
$ 20,037
$ 26,285
$ 35,185

(1) The Performance Materials segment reports the results of Interface and PCC for the period following the date of acquisitions of August 31, 2018 and July 12, 2018, respectively, and included $4.0 million and $8.0 million of incremental intangible assets amortization for the quarter and six months ended June 30, 2019, respectively.


~~(1)~~	Included in the Technical Nonwovens segment and Eliminations and Other is $5.8 million and $6.8 million in intercompany sales to the Thermal Acoustical Solutions segment for the quarters ended June 30, 2018 and 2017, respectively, and $12.9 million and $13.1 million for the six months ended June 30, 2018 and 2017, respectively.


~~(2)~~	The quarter and six months ended June 30, 2017 segment operating income amounts of $0.2 million and $0.4 million, respectively, have been reclassified to other expense (income), net, to give effect to the adoption of ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost".

(2) Included in the Technical Nonwovens segment and Eliminations and Other is $4.6 million and $5.8 million in intercompany sales to the Thermal Acoustical Solutions segment for the quarters ended June 30, 2019 and 2018, respectively, and $9.3 million and $12.9 million for the six months ended June 30, 2019 and 2018, respectively.

~~14.~~16. Commitments and Contingencies

Environmental Remediation

The Company elected to remediate environmental contamination discovered prior to the closing of the Texel acquisition in 2016 at a certain property in the province of Quebec, Canada (“the Property”) that was acquired by Lydall. The Company records accruals for environmental costs when such losses are probable and reasonably estimable. In 2016, the Company, through the engagement of a third-party environmental service firm, determined the final scope and timing of the remediation project and estimated the cost of the remediation project to range between $0.9 million and $1.5 million, which was further refined in July of 2017 to the top end of this range at $1.5 million and remains as the Company's best estimate as of June 30, 2018. During 2017, the environmental liability was reduced by $0.7 million, reflecting payments made to vendors, resulting in a balance of $0.8 million at December 31, 2017. During the six months ended June 30, 2018, the environmental liability was further reduced by $0.5 million, reflecting payments to vendors. The remaining balance for the environmental liability of $0.4 million (which remains fully offset as described below) is included within other long-term liabilities on the Company's balance sheet at June 30, 2018.

Pursuant to the Share Purchase Agreement, ADS, Inc. ("ADS") has agreed to indemnify the Company from all costs and liabilities associated with the contamination and remediation work, including the costs of preparation and approval of the remediation plan and other reports in relation therewith. This indemnity was secured by an environmental escrow account, which was established in the amount of $3.0 million Canadian Dollars (approximately $2.3 million U.S. Dollars as of June 30, 2018). Prior to July 2018, for any costs and liabilities that exceeded the environmental escrow amount, the Company had access to the general indemnity escrow account, which was originally established in the amount of $14.0 million Canadian Dollars (approximately $10.7 million U.S. Dollars as of June 30, 2018). Based on the Share Purchase Agreement, the general indemnity escrow account was initially reduced to approximately $7.0 million Canadian Dollars (approximately $5.3 million U.S. Dollars as of June 30, 2018) on the first anniversary date of the closing date and then liquidated, in full on or about the second anniversary date of the closing date (i.e., July 9, 2018). Based on the foregoing, an indemnification asset of $0.9 million was also recorded in other assets at December 31, 2016, and subsequently increased to $1.5 million in July of 2017, as the Company believed, and still believes collection from ADS is probable. The indemnification asset was decreased by $0.7 million, reflecting indemnification from ADS for payments made by the Company to its vendors during 2017. During the six months ended June 30, 2018, the indemnification asset was further reduced by $0.5 million, reflecting indemnification from ADS for payments made by the Company to its vendors The resulting indemnification asset balance was $0.4 million at June 30, 2018. The accrual for remediation costs will be adjusted as further information develops, estimates change and payments to vendors are made for remediation, with an off-setting adjustment to the indemnification asset from ADS if collection is deemed probable.

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~~Per and Polyfluorinated Substances (“~~PFCs”~~PFAS”) in excess of state ambient groundwater quality standards.

In January 2017, the Company received a notification from the State of New Hampshire Department of Environmental Services (“NHDES”) naming Lydall Performance Materials, Inc. a responsible party with respect to the discharge of regulated contaminants and, as such, is required to take action to investigate and remediate the impacts in accordance with standards established by the NHDES. The Company conducted a site investigation, the scope of which was reviewed by the NHDES, in order to assess the extent of potential soil and groundwater contamination and develop a remedial action. Based on input received from NHDES in March 2017 with regard to the scope of the site investigation, the Company recorded $0.2 million of ~~expense in the first quarter of 2017 associated with the expected costs of conducting this site investigation.~~

expense. In the fourth quarter of 2017, the Company completed its state-approved site investigation report and submitted it to the NHDES. During the year ended December 31, 2017, the environmental liability of $0.2 million was reduced by $0.2 million reflecting payments made to vendors, resulting in no balance at December 31, 2017.

~~In the first quarter of~~ 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 ~~the first quarter of~~ 2018 associated with the expected costs to remediate the impacts of the discharge of regulated contaminants in accordance with standards established by the NHDES.

~~In May of~~ During 2018 the ~~Company met with the NHDES~~environmental liability was fully reduced reflecting payments made to finalize the proposed remedial actions from the site investigation report. The Company recorded a minimal incremental amount in the second quarter of 2018 associated with the cost of the proposed remedial actionsvendors, resulting in ~~an environmental liability of $0.1 million~~no balance at ~~June 30,~~December 31, 2018. Additionally, the Company ~~expects to incur approximately~~incurred $0.2 million of capital expenditures in 2018, ~~which will be recorded as incurred,~~ in relation to the lining of the Company's fresh water ~~waste~~ lagoons.

~~While the~~ The site investigation is ~~complete, the~~ongoing. The Company cannot be sure that costs will not exceed the current estimates until this matter is closed with the NHDES, nor that any future corrective action at this location would not have a material effect on the Company’s financial condition, results of operations or liquidity.

Provisions for such matters are charged to expense when it is probable that a liability has been incurred and reasonable estimates of the liability can be made. Estimates of environmental liabilities are based on a variety of matters, including, but not limited to, the stage of investigation, the stage of the remedial design, evaluation of existing remediation technologies, and presently enacted laws and regulations. In future periods, a number of factors could significantly impact any estimates of environmental remediation costs.

~~15.~~17. Changes in Accumulated Other Comprehensive Income (Loss)

The following table discloses the changes by classification within accumulated other comprehensive income (loss) for the ~~periods~~six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:


In thousands	Foreign Currency Translation Adjustment			Defined Benefit Pension Adjustment				Gains and Losses on Cash Flow Hedges				Total Accumulated Other Comprehensive (Loss) Income			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 (loss)	14,513			—				(44		)	(b)	14,469
Amounts reclassified from accumulated other comprehensive loss	—			344			(a)	—				344
Balance at June 30, 2017	(13,372		)	(19,721		)		(44		)		(33,137		)
Balance at December 31, 2017	(2,221		)	(18,049		)		122				(20,148		)	$	(2,221	)	$	(18,049	)		$	122			$	(20,148	)
Other Comprehensive (loss) income	(8,604		)	—				75			(b)	(8,529		)
Other comprehensive income															(8,604		)	—				75			(c)	(8,529		)
Amounts reclassified from accumulated other comprehensive loss	—			397			(a)	—				397			—			397			(a)	—				397
Balance at June 30, 2018	$	(10,825	)	$	(17,652	)		$	197			$	(28,280	)	(10,825		)	(17,652		)		197				(28,280		)
Balance at December 31, 2018															(18,458		)	(22,253		)		(1,974		)		(42,685		)
Other comprehensive loss															2,330			—				(2,026		)	(c)	304
Amounts reclassified from accumulated other comprehensive loss															—			19,374			(b)	—				19,374
Balance at June 30, 2019															$	(16,128	)	$	(2,879	)		$	(4,000	)		$	(23,007	)


(a)	Amount represents amortization of actuarial losses, a component of net periodic benefit cost. This amount was $0.4 million, net of ~~$.01 million tax benefit, and $0.3 million, net of $0.2~~$0.1 million tax benefit, for the six months ended June 30, ~~2018 and 2017, respectively.~~2018.

(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, for the six months ended June 30, 2019. Amount also represents amortization of actuarial losses, a component of net periodic benefit cost during the first five months of fiscal year 2019 prior to the plan termination. This amount was $0.4 million, net of $0.1 million tax benefit.


~~(b)~~(c)	Amount represents unrealized gains (losses) on the fair value of hedging activities, net of taxes, for the six ~~month~~months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

~~16. Subsequent Event~~

On July 12, 2018, the Company acquired the Precision Filtration division of Precision Custom Coatings based in Totowa, NJ for $1.0 million in cash with an additional cash payment to be made of up to $2.0 million based on the achievement of certain future financial targets through 2022. Precision Filtration is a long-time producer of high-quality, air filtration media serving principally the commercial and residential HVAC markets with a range of low efficiency through high-performing air filtration media. The acquisition will be included in Lydall’s Performance Materials operating segment.



Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW AND OUTLOOK

Business

Lydall, Inc. and its subsidiaries (collectively, 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. Lydall principally conducts its business through three reportable segments: Performance Materials, Technical Nonwovens and Thermal Acoustical Solutions, with sales globally. The Performance Materials ("PM") segment includes filtration media solutions primarily for air, fluid power, life science and industrial applications (“Filtration”), ~~air~~ and ~~liquid life science applications (“Life Sciences Filtration”),~~gasket and sealing solutions, thermal insulation, ~~solutions for building~~energy storage, and other engineered products ~~appliances,~~(“Sealing and ~~energy and industrial markets (“Thermal Insulation”~~Advanced Solutions”). The Technical Nonwovens ("TNW") segment consists of Industrial Filtration products that include nonwoven rolled-goods felt media and filter bags used primarily in industrial air and liquid filtration applications as well as Advanced Materials products that include nonwoven rolled-good media that is used in other commercial applications and predominantly serves the geosynthetics, automotive, industrial and medical markets. Advanced Materials products also include automotive rolled-good material for use in the Thermal Acoustical Solutions segment manufacturing process. Nonwoven filter media is used to satisfy increasing emission control regulations in a wide range of industries, including power, cement, steel, asphalt, incineration, food, and pharmaceutical. The Thermal Acoustical Solutions ("TAS") segment offers innovative engineered products to assist in noise and heat abatement within the transportation and industrial sectors.

Second Quarter ~~2018~~2019 Highlights

Below are financial highlights comparing Lydall’s quarter ended June 30, ~~2018~~2019 (“Q2 ~~2018”~~2019”) results to its quarter ended June 30, ~~2017~~2018 (“Q2 ~~2017”~~2018”) results:

Net sales were $220.8 million in Q2 2019, compared to $186.4 million in Q2 2018, ~~compared to $174.9 million in Q2 2017,~~ an increase of ~~$11.5~~$34.4 million, or ~~6.6%~~18.5%. The change in consolidated net sales is summarized in the following table:


Components (in thousands)	Change in Net Sales		Percent Change		Change in Net Sales			Percent Change
Acquisitions and divestitures					$	31,843		17.1	%
Parts volume and pricing change	4,004		2.3	%	6,943			3.7	%
Change in tooling sales	1,768		1.0	%	646			0.3	%
Foreign currency translation	5,762		3.3	%	(5,034		)	(2.6	)%
Total	$	11,534	6.6	%	$	34,398		18.5	%

On January 1, 2018 the Company adopted Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASC 606”). The impact of adopting ASC 606 for the quarter ended June 30, 2018 resulted in an increase to net sales of $1.6 million, of which $1.4 million related to tooling sales, and an increase to net income of $0.1 million.

Gross margin ~~decreased 540 basis points~~was 20.5% in the second quarter of 2019, compared to 19.4% in the second quarter of ~~2018, primarily driven by the Thermal Acoustical Solutions~~2018. The PM segment ~~and to a lesser extent the Technical Nonwovens and Performance Materials segments. The Thermal Acoustical Solutions segment negatively~~favorably impacted consolidated gross margin by approximately ~~450~~330 basis points, due to higher gross margin sealing product sales. Gross margin from the TAS segment lowered consolidated gross margin by approximately 150 basis points primarily due to increased labor ~~and variable overhead expenses of 190 basis points, including outsourcing costs and overtime associated with new product launch activity. Increased commodity~~ costs, primarily ~~aluminum, were approximately 140 basis points. Also, lower sales from~~related to increased headcount and temporary labor, particularly in North America and Europe, coupled with increased outsourcing and expedited freight expenses caused by equipment downtime and other inefficiencies in Europe to meet customer ~~shutdowns due to a fire at a U.S. supplier to the Company's customers and the resulting fixed costs under-absorption resulted in lower~~delivery requirements. The TNW segment reported improved gross margin offrom increased pricing and lower restructuring related expenses, but based on segment mix, was negative to consolidated gross margin in the quarter by approximately 70 basis points.

Operating income was ~~$12.2~~$13.2 million, or ~~6.6%,~~6.0% of net sales, in Q2 ~~2018,~~2019, compared to ~~$20.0~~$12.2 million, or ~~11.5%~~6.6% of net sales, in Q2 ~~2017.~~2018. Operating margin declined 60 basis points primarily due to ~~the negative impact~~incremental intangible assets amortization of ~~lower gross margin of 540~~170 basis ~~points. Decreased gross margin was~~points, partially offset by ~~a 50~~improved consolidated gross margins of 110 basis ~~point reduction in selling, product development and administrative expenses as a percentage of net sales compared to the second quarter of 2017 primarily~~points due to ~~managed spending coupled with~~higher gross margin Interface sales.

~~sales growth.~~

The following components are included in operating income for Q2 ~~2018~~2019 and Q2 ~~2017~~2018 and impact the comparability of each quarter:


	Q2 2018					Q2 2017					Q2 2019					Q2 2018
Components (in thousands except per share amounts)	Operating income effect		EPS impact			Operating income effect		EPS impact			Operating income effect		EPS impact			Operating income effect		EPS impact
TNW restructuring expenses	(885	)	$	(0.04	)	(293	)	$	(0.02	)	(97	)	$	(0.01	)	(885	)	$	(0.04	)
Strategic initiatives expenses	(1,167	)	$	(0.06	)	—		$	—		(405	)	$	(0.01	)	(1,167	)	$	(0.06	)
Inventory step-up purchase accounting adjustments	—		$	—		(543	)	$	(0.02	)
Intangible assets amortization expenses											(5,369	)	$	(0.24	)	(1,476	)	$	(0.06	)

During the quarter ended June 30, 2019, the Company settled the pension obligation of the U.S. Lydall Pension Plan ("pension settlement") through lump sum distributions to participants or by irrevocably transferring pension liabilities to insurance companies through the purchase of group annuity contracts. The ~~Company's effective tax rate for~~settlement was funded by the Pension Plan assets and resulted in a non-cash settlement expense of $25.5 million in the second quarter of 2019, related to the recognition of accumulated deferred actuarial losses.

Net loss was $6.9 million, or $0.40 per diluted share, in Q2 ~~2018 was 13.7%~~2019 compared to ~~28.7%. U.S. tax law changes that lowered the statutory U.S. tax rate to 21%, tax benefits from discretionary pension plan contributions and the geographical mix~~net income of ~~earnings contributed to the effective tax rate being below the statutory rate. The Company now projects its ordinary effective tax rate in 2018 to be in the range of 18% - 19%.~~

~~Net income was~~ $10.5 million, or $0.60 per diluted share, in Q2 ~~2018~~2018. The pension settlement and ~~$13.1 million, or $0.76~~incremental intangible assets amortization expense negatively impacted earnings by $0.86 per diluted share and $0.18 per diluted share, respectively, in ~~Q2 2017.~~the second quarter of 2019, partially offset by a gain on sale from a divestiture of $0.07 per diluted share.

Liquidity

Cash was ~~$50.6~~$43.4 million at June 30, ~~2018,~~2019, compared to ~~$59.9~~$49.2 million at December 31, ~~2017.~~2018. Net cash provided by operations was $21.8 million in the second quarter of 2019 compared to $11.9 million in the second quarter of 2018, ~~compared to $15.4 million in~~primarily driven by improved working capital management. During the second quarter of ~~2017, with~~2019, the ~~reduction primarily driven by strategic raw material inventory purchases and discretionary pension plan contributions.~~Company re-paid $18.0 million of outstanding borrowings on its credit facility. As of June 30, 2019, there was approximately $108 million of availability under the Company's credit facility.

Outlook

~~Looking forward in~~Entering the third quarter, the Performance Materials segment is experiencing favorable conditions in filtration markets and demand consistent with the first half of ~~2018,~~ the Company is seeing solid order activity across all segments and expects low-to-mid single digit consolidated organic sales growth. The Company remains focused on improving operational efficiency and profitability throughoutyear for sealing products. In the ~~Company. The~~ Thermal Acoustical Solutions segment, ~~will~~demand remains generally steady in the North American market, but the segment is expected to be impacted by typical seasonal customer shut-downs, as well as softness in the European automotive market. The Company expects demand to continue to be ~~challenged by increased commodity costs and labor and overhead costs. However,~~steady in the Technical Nonwovens segment. Overall, the Company ~~does expect sequential~~continues to focus on margin improvement ~~in consolidated margins from second quarter 2018 results. The Technical Nonwovens' restructuring plan remains on-schedule which is expected to reduce operating costs~~ and ~~increase efficiency.~~cash flow generation.

Results of Operations

All of the following tabular comparisons, unless otherwise indicated, are for the quarters ended June 30, ~~2018 (Q2-18)~~2019 (Q2-19) and June 30, ~~2017 (Q2-17)~~2018 (Q2-18) and the six months ended June 30, ~~2018 (YTD-18)~~2019 (YTD-19) and June 30, ~~2017 (YTD-17)~~2018 (YTD-18).

Net Sales


	Quarter Ended						Six Months Ended						Quarter Ended						Six Months Ended
In thousands	Q2-18		Q2-17		Percent Change		YTD-18		YTD-17		Percent Change		Q2-19		Q2-18		Percent Change		YTD-19		YTD-18		Percent Change
Net sales	$	186,413	$	174,879	6.6	%	$	378,073	$	340,366	11.1	%	$	220,811	$	186,413	18.5	%	$	438,836	$	378,073	16.1	%



Delaware					06-0865505
(State or Other Jurisdiction of Incorporation or Organization)					(I.R.S. Employer Identification No.)

One Colonial Road	,	Manchester	,	Connecticut	06042
(Address of principal executive offices)					(zip code)



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	LDL	New York Stock Exchange



Total Shares outstanding July ~~17, 2018~~15, 2019	~~17,379,746~~17,534,626



	June 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	50,613		$	59,875
Accounts receivable, less allowances (2018 - $1,462; 2017 - $1,507)	126,330			116,712
Contract assets	26,598			—
Inventories	78,901			80,339
Taxes receivable	4,815			5,525
Prepaid expenses	5,603			4,858
Other current assets	6,986			6,186
Total current assets	299,846			273,495
Property, plant and equipment, at cost	403,548			397,152
Accumulated depreciation	(235,240		)	(226,820		)
Net, property, plant and equipment	168,308			170,332
Goodwill	67,022			68,969
Other intangible assets, net	36,329			40,543
Other assets, net	7,269			7,532
Total assets	$	578,774		$	560,871
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	271		$	277
Accounts payable	74,186			71,931
Accrued payroll and other compensation	13,286			15,978
Accrued taxes	3,312			2,230
Other accrued liabilities	15,255			11,690
Total current liabilities	106,310			102,106
Long-term debt	76,784			76,913
Deferred tax liabilities	16,257			14,714
Benefit plan liabilities	5,261			9,743
Other long-term liabilities	3,447			3,999

Commitments and Contingencies (Note 14)
Stockholders’ equity:
Preferred stock	—			—
Common stock	251			250
Capital in excess of par value	91,177			88,006
Retained earnings	397,885			374,783
Accumulated other comprehensive loss	(28,280		)	(20,148		)
Treasury stock, at cost	(90,318		)	(89,495		)
Total stockholders’ equity	370,715			353,396
Total liabilities and stockholders’ equity	$	578,774		$	560,871



	June 30, 2018		January 1, 2018		Dollar Change
Contract assets	$	26,598	$	19,125	$	7,473
Contract liabilities	$	4,546	$	2,820	$	1,726



In thousands	December 31, 2017		Adjustments for Adoption of ASC606			January 1, 2018

Assets:
Contract assets	$	—	$	19,125		$	19,125
Inventories	$	80,339	$	(15,184	)	$	65,155

Liabilities:
Accounts payable	$	71,931	$	663		$	72,594
Other accrued liabilities	$	11,690	$	1,209		$	12,899
Deferred tax liabilities	$	14,714	$	471		$	15,185

Stockholders' equity:
Retained earnings	$	374,783	$	1,598		$	376,381



	June 30, 2018
In thousands	Balances Without Adoption of ASC 606		ASC 606 Adjustments			As Reported

Assets:
Contract assets	$	—	$	26,598		$	26,598
Inventories	$	100,892	$	(21,991	)	$	78,901

Liabilities:
Accounts payable	$	71,295	$	2,891		$	74,186
Other accrued liabilities	$	15,966	$	(711	)	$	15,255
Deferred tax liabilities	$	15,729	$	528		$	16,257

Stockholders' equity:
Retained earnings	$	395,986	$	1,899		$	397,885



	Quarter Ended June 30, 2018
In thousands	Results Without Adoption of ASC606			Effect of Change Higher (Lower)		As Reported

Net sales	$	184,806		$	1,607	$	186,413
Cost of sales	148,745			1,541		150,286
Gross profit	36,061			66		36,127
Selling, product development and administrative expenses	23,878			—		23,878
Operating income	12,183			66		12,249
Interest expense	572			—		572
Other income, net	(368		)	—		(368		)
Income before income taxes	11,979			66		12,045
Income tax expense	1,654			1		1,655
Income from equity method investment	(60		)	—		(60		)
Net income	$	10,385		$	65	$	10,450
Earnings per share:
Basic	$	0.60		$	0.01	$	0.61
Diluted	$	0.60		$	0.00	$	0.60
Weighted average number of common shares outstanding:
Basic	17,196			—		17,196
Diluted	17,335			—		17,335



	December 31, 2017		Currency translation adjustments			Additions		June 30, 2018
In thousands	December 31, 2017		Currency translation adjustments			Additions		June 30, 2018
Performance Materials	$	13,307	$	(114	)	$	—	$	13,193
Technical Nonwovens	55,662		(1,833		)	—		53,829
Total goodwill	$	68,969	$	(1,947	)	$	—	$	67,022



				June 30,			December 31,
In thousands	Effective Rate		Maturity	2018			2017
Revolver Loan, due July 7, 2021	3.09	%	2021	$	76,600		$	76,600
Capital Leases	1.65% - 2.09%		2019 - 2020	455			590
				77,055			77,190
Less portion due within one year				(271		)	(277		)
Total long-term debt				$	76,784		$	76,913



In thousands	Total
Balance as of December 31, 2017	$	333
Pre-tax restructuring expenses, excluding depreciation	1,307
Cash paid	(770		)
Balance as of June 30, 2018	$	870


(1)	The Performance Materials segment reports results of Interface and PCC for the period following the date of acquisitions of August 31, 2018 and July 12, 2018, respectively, and included $4.0 million and $8.0 million of incremental intangible assets amortization for the quarter and six months ended June 30, 2019, respectively.



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares That May Yet Be Purchased Under the Program
April 1, 2019 - April 30, 2019	488	$	25.01	—	—
May 1, 2019 - May 31, 2019	—	$	—	—	—
June 1, 2019 - June 30, 2019	—	$	—	—	—
	488	$	25.01	—	—



Exhibit Number			Description

31.1			Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, of principal executive officer, filed herewith.

31.2			Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, of principal financial officer, filed herewith.

32.1			Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

101.INS			XBRL Instance Document

101.SCH			XBRL Taxonomy Extension Schema Document

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			XBRL Taxonomy Extension Label Linkbase Document



	LYDALL, INC.

July ~~31, 2018~~30, 2019	By:	/s/ Randall B. Gonzales
		Randall B. Gonzales Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer)