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.
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;
Future strategic transactions, including but not limited to: acquisitions, joint ventures, alliances, licensing agreements and divestitures;
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;
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-
Company’s profitability; challenges encountered by the Company in the execution of restructuring programs; challenges encountered in the combinationintegration 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.
See accompanying Notes to Condensed Consolidated Financial Statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
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 ASUThe 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 willNew Lease Standard also requirerequires 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 ofcurrently evaluating the effectmethod and impact the adoption of adoptionthis 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 assetsconsolidated 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.”
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Segment | Performance Materials |
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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.
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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.
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Segment | Technical Nonwovens |
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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.
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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.
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Segment | Thermal Acoustical Solutions |
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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”).
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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.
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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 liabilitiesdeferred revenue on the Company’s Condensed Consolidated Balance Sheets.
Contract assets and liabilities consisted of the following (in thousands):following:
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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 | ) |
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| June 30, 2018 | | January 1, 2018 | | Dollar Change |
Contract assets | $ | 26,598 |
| | $ | 19,125 |
| | $ | 7,473 |
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Contract liabilities | $ | 4,546 |
| | $ | 2,820 |
| | $ | 1,726 |
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The $7.5$1.5 million increasedecrease in contract assets from January 1,December 31, 2018 to June 30, 20182019 was primarily due to timing of billings to customers.
The $1.7$1.8 million increasedecrease in contract liabilities from January 1,December 31, 2018 to June 30, 20182019 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 20182019 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:
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In thousands | | December 31, 2017 | | Adjustments for Adoption of ASC606 | | January 1, 2018 |
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Assets: | | | | | | |
Contract assets | | $ | — |
| | $ | 19,125 |
| | $ | 19,125 |
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Inventories | | $ | 80,339 |
| | $ | (15,184 | ) | | $ | 65,155 |
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Liabilities: | | | | | | |
Accounts payable | | $ | 71,931 |
| | $ | 663 |
| | $ | 72,594 |
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Other accrued liabilities | | $ | 11,690 |
| | $ | 1,209 |
| | $ | 12,899 |
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Deferred tax liabilities | | $ | 14,714 |
| | $ | 471 |
| | $ | 15,185 |
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Stockholders' equity: | | | | | | |
Retained earnings | | $ | 374,783 |
| | $ | 1,598 |
| | $ | 376,381 |
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The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet for the adoption of ASC 606 was as follows:
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In thousands | | Balances Without Adoption of ASC 606 | | ASC 606 Adjustments | | As Reported |
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Assets: | | | | | | |
Contract assets | | $ | — |
| | $ | 26,598 |
| | $ | 26,598 |
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Inventories | | $ | 100,892 |
| | $ | (21,991 | ) | | $ | 78,901 |
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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, werewhich 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, 20182019 and December 31, 20172018 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, 20182019 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, 20182019 were as follows:
|
| | | | | | | | | | | | | | | | | |
| 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, 20182019 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") whichthat increased the available borrowing from $100$175 million to $175$450 million, added a fourth lenderthree 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 CreditFacility 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 DealerDollar 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 points0.00% to 100 basis points,1.25%, and the Applicable Rate added to Eurocurrency Rate Committed Loans and Letters of Credit ranges from 75 basis points0.75% to 175 basis points.2.00%. The Company pays a quarterly fee ranging from 17.5 basis points0.15% to 30 basis points0.275% on the unused portion of the $175 million available under the Amended Credit Facility.
In April 2017, therevolving commitment. The Company has entered into a three-yearmultiple interest rate swap agreement transacted withswaps to convert a bank which converts the interest on the first notional $60.0 millionportion 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 forpermitted 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 agreementCompany is assessed quarterly by ensuring that the critical termsgenerally permitted to irrevocably cancel unutilized portions of the swap continuerevolving commitments under the Amended Credit Agreement. The Company is required to matchrepay the critical termsterm 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 Creditdebt 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, 20182019 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 firsta notional $60.0 million of the Company's one-month LIBOR-based borrowings under its Amended Credit FacilityAgreement 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. TheThese interest rate swap agreement wasagreements were accounted for as cash flow hedge.hedges. Effectiveness of thisthese derivative agreement isagreements are assessed quarterly by ensuring that the critical terms of the swapswaps 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, 20182019 and 20172018 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, 20182019 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, 20182019 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 2.82.7 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 187,902265,816 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 2.01.9 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 18,5612,124 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.
9.
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 ofPrior to the quarter ended June 30, 2018,2019, the Company maintainsmaintained 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 thanInterface 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, 2018quarter ended June 30, 2019, the Company adopted ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improvingsettled the Presentationpension obligation of Net Periodicthe U.S. Lydall Pension Cost and Net Periodic Postretirement Benefit Cost". This ASU requiredPlan through lump sum distributions to participants or by irrevocably transferring pension liabilities to two insurance companies through the other componentspurchase of net benefit cost, which includes interest costs, expected return on plangroup annuity contracts. These purchases, funded with pension assets, and amortizationresulted in a pre-tax settlement loss of actuarial loss be presented$25.5 million in the income statement outside a subtotalquarter ended June 30, 2019, related to the recognition of income from operations foraccumulated 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 sales2019 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. Contributionscontributions 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 planplans for the quarters and six months ended June 30, 20182019 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 continuedrecorded a tax benefit of $8.2 million compared to perform analysistax 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’sresulted in an effective tax rate was 13.7% and 28.7% for the quartersquarter 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 monthsquarter ended June 30, 2018 and 2017, respectively.2018. The difference inpension 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, 20172019 was due to22.7%. 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 theCompany's geographical mix of earnings. The differencesecond 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, 20172019 was primarily related to22.5%. 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 theCompany'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 higheran increase or lowerdecrease 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 projectsplanning strategies and audits.
12.14. Earnings (Loss) Per Share
For the quarters and six months ended June 30, 20182019 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, 20182019 and 2017,2018, stock options for 162,830520,189 shares and 38,280162,830 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, 20182019 and 2017,2018, stock options for 149,940521,293 shares and 38,280149,940 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 arewere Performance Materials, Technical Nonwovens, and Thermal Acoustical Solutions.
Effective January 1,September 30, 2018, as a result of the Thermal/Acoustical MetalsInterface 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 segmentproduct level amounts throughout the Notes to the Condensed Consolidated Financial Statements have been recast to reflect the results of the new segmentproduct level structure. The recast of historical business segmentproduct 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 buildingenergy 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 enginetransportation 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 InsulationSealing 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 performanceready 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. Themarkets include Manniglas® Thermal Insulation brand is diverse in its product application ranging from high temperature sealsPapers, and gaskets in ovens and ranges to specialty veils for HVAC and cavity wall insulation. The Lytherm® Insulation Media product brand services Lydall’sfor 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 myriada 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 mostan 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, 20182019 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 CompoundsPer 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 NHDESenvironmental 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 millionno balance at June 30,December 31, 2018. Additionally, the Company expects to incur approximatelyincurred $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, theongoing. 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 periodssix months ended June 30, 20182019 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 monthmonths ended June 30, 20182019 and 2017.2018. |
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.
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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 buildingenergy 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.
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.
Second Quarter 20182019 Highlights
Below are financial highlights comparing Lydall’s quarter ended June 30, 20182019 (“Q2 2018”2019”) results to its quarter ended June 30, 20172018 (“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 | % |