5. Goodwill and Intangible Assets

Goodwill was $18.1 million as of December 31, 2011 compared to $18.2 million as of December 31, 2010. As of December 31, 2011, $13.4 million of goodwill was associated with the Performance Materials segment and $4.7 million was associated with the Life Sciences Vital Fluids business, included in Other Products and Services (“OPS”).

Gross and net carrying amounts of goodwill at December 31, 2010 and 2011 are as follows:

In thousands	Performance Materials		Thermal/ Acoustical			Other Products and Services			Totals
Goodwill	$	13,522	$	12,160		$	8,879		$	34,561
Accumulated amortization/impairment		-		(12,160	)		(4,219	)		(16,379	)
Balance at December 31, 2010		13,522		-			4,660			18,182
Goodwill		13,399		12,160			5,787			31,346
Accumulated amortization/impairment		-		(12,160	)		(1,127	)		(13,287	)
Balance at December 31, 2011	$	13,399	$	-		$	4,660		$	18,059

In June 2011 the Company sold its Affinity business, which was included in OPS. The Affinity business had $3.1 million of goodwill and accumulated amortization, which was disposed of in the sale.

The changes in the carrying amounts of goodwill in 2010 and 2011 are as follows:

In thousands	Performance Materials			Other Products and Services		Totals
Balance at January 1, 2010	$	14,598		$	4,660	$	19,258
Goodwill write-off		(826	)		-		(826	)
Goodwill adjustment		69			-		69
Currency translation adjustment		(319	)		-		(319	)
Balance at December 31, 2010		13,522			4,660		18,182
Goodwill adjustment		15			-		15
Currency translation adjustment		(138	)		-		(138	)
Balance at December 31, 2011	$	13,399		$	4,660	$	18,059

Goodwill Impairment Testing

During the fourth quarter of 2011, the Company performed its annual impairment analysis of the $13.4 million of goodwill in the Performance Materials reporting unit (PM reporting unit) and $4.7 million of goodwill in the Life Sciences Vital Fluids reporting unit (VF reporting unit), included in OPS. During the fourth quarter of 2011, the Company elected to early adopt ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment, which gives companies the option to qualitatively assess goodwill impairment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A two-step quantitative approach is utilized for goodwill that does not meet the qualitative assessment. In the first step, the Company compares the carrying value of the reporting unit to its fair value, which the Company estimates using a discounted cash flow analysis or by comparison with the market values of similar assets. If the carrying amount of the reporting unit exceeds its estimated fair value, the Company performs the second step, and determines the impairment loss, if any, as the excess of the carrying value of the goodwill over its fair value.

For the PM and VF reporting units, the Company first assessed qualitative factors to determine whether it was more likely than not that the fair value of the reporting units were less than their carrying amounts as a basis for determining whether it was necessary to perform the two-step impairment test described in Topic 350. As a result of these analyses, the Company concluded that it was not necessary to perform the two-step impairment test for the PM reporting unit as it was not more likely than not that the fair value of the PM reporting unit was less than its carrying value. However, the Company concluded that it was necessary to perform the two step test for the VF reporting unit in accordance with Topic 350.

In performing step one of the impairment analysis, to estimate the fair value of the VF reporting unit, the Company used both: (i) the income approach - discounted cash flows, and (ii) the market approach - comparable company analysis. The income approach involved determining the present value of future cash flows from the reporting unit’s projected financial results in 2012 – 2014 and the projected cash flows beyond that three year period computed as the terminal value. To determine the present value of the future cash flows, a discount rate of approximately 16% was used by the reporting unit, which was the value-weighted average of the Company’s estimated cost of equity and debt derived using both known and estimated customary market metrics. The reporting unit’s weighted average cost of capital was adjusted to reflect a risk and a size premium. The Company performed sensitivity tests with respect to growth rates and discount rates used in the income approach. The Company believes the income approach was appropriate because it provided a fair value estimate based upon the reporting unit’s expected long-term operations and cash flow performance.

In applying the market approach, valuation multiples were derived from historical and projected operating data of selected guideline companies, which were evaluated and adjusted, if necessary, based on the strengths and weaknesses of the reporting unit relative to the selected guideline companies. The valuation multiples were then applied to the appropriate projected operating data of the reporting unit to arrive at an indication of fair value. The Company believes the market approach was appropriate because it provided a fair value using multiples from companies with operations and economic characteristics similar to its reporting unit.

The Company weighted the results of the income and market approaches at 75% and 25%, respectively. The income approach was given a higher weight because it has a more direct correlation to the specific economics of the reporting unit than the market approach, which is based on multiples of companies that, although comparable, may not have the exact same mix of products and may not have the exact same systemic or non-systemic risk factors as the Company’s reporting unit.

The Company also considered EITF 02-13, Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in ASC 350, to determine whether the fair value of the VF reporting unit should be estimated by assuming the reporting unit would be sold in a stock or asset transaction. The Company determined that an asset transaction was feasible and would result in a higher economic value relative to a stock transaction. As an asset transaction, the Company believes that a buyer would pay Lydall for the buyer’s expected tax amortization benefits to be realized in the future for the step up in asset basis.

The Company determined that the VF reporting unit, with $4.7 million of goodwill, had excess fair value over its carrying value of approximately 4%, and as a result, step two of the impairment test was not required. Small changes in future earnings, discount rates, market trends and cash flows could result in a goodwill impairment charge in the future.

The estimates of fair value of reporting units are based on the best information available as of the date of the assessment, which incorporate management assumptions about expected future cash flows, as well as other factors such as market capitalization and other market information. Future cash flows can be affected by numerous factors including changes in economic, industry or market conditions, changes in the underlying business or products of the reporting unit, changes in competition and changes in technology. Any changes in key assumptions about the business and its prospects, changes in any of the factors discussed above or other factors could affect the fair value of one or more of the reporting units resulting in an impairment charge. If future operating performance in the VF reporting unit’s business does not reasonably meet expectations or other key assumptions change or are not met, then a non-cash impairment charge to income from operations could occur.

Goodwill Associated with Acquisitions and Divestitures

On June 30, 2010, Lydall sold an electrical papers product line for a total consideration of $5.8 million (see Note 8). Lydall concluded that the sale of this product line constituted a sale of a business in accordance with ASC 805. The electrical papers business was included in the Company’s Performance Materials segment. In 2010, the Company wrote off $0.8 million of goodwill that was allocated to this business based on the relative fair value of the business sold to the total fair value of the related reporting unit.

The goodwill adjustment of $0.1 million in 2010 was related to the acquisition of DSM Solutech B.V. (“Solutech”) in December 2008. Lydall is obligated to pay to the Seller payments based on the net revenues of Solutech for a period of five years beginning on December 1, 2008 (“Contingent Consideration”). This Contingent Consideration will equal 4% of Solutech’s net revenues, as defined, during each of the periods. The value of the Contingent Consideration when paid will be added to the original cost of the acquisition and will increase the amount of goodwill previously recorded, as the acquisition occurred prior to the revised guidance issued by the Financial Accounting Standards Board (ASC 805) for business combinations. The goodwill adjustment in 2011 was less than $0.1 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” in the Consolidated Balance Sheets as of December 31, 2011 and 2010:

	December 31, 2011					December 31, 2010
In thousands	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets
License agreements	$	851	$	(721	)	$	866	$	(590	)
Patents		6,482		(2,182	)		6,628		(1,592	)
Other		269		(162	)		289		(139	)
Total amortized intangible assets	$	7,602	$	(3,065	)	$	7,783	$	(2,321	)
Unamortized intangible assets:
Trademarks	$	-				$	450

Amortization of intangible assets for the years ended December 31, 2011, 2010 and 2009 was $0.9 million , $0.8 million and $0.9 million, respectively. Estimated amortization expense for intangible assets is expected to be $0.8 million for the year ending December 31, 2012, and $0.6 million for each of the years ending December 31, 2013 through 2016. As of December 31, 2011, the weighted average useful life of intangible assets was approximately 7 years.