Employer Sponsored Benefit Plan

The Company maintains a domestic defined benefit pension plan, which covers certain domestic Lydall employees, is noncontributory and benefits are based on either years of service or eligible compensation paid while a participant is in a plan. The plan has been closed to new employees for several years and benefits under the pension plan are no longer accruing.

The Company’s funding policy for its domestic defined benefit pension plan is to fund not less than the ERISA minimum funding standard and not more than the maximum amount that can be deducted for federal income tax purposes.

Plan assets and benefit obligations of the domestic defined benefit pension plan are as follows:



	December 31,
In thousands	2014			2013
Change in benefit obligation:
Net benefit obligation at beginning of year	$	53,427		$	60,020
Interest cost	2,348			2,453
Actuarial loss (gain)	7,654			(6,900		)
Gross benefits paid	(12,602		)	(2,146		)
Net benefit obligation at end of year	$	50,827		$	53,427
Change in plan assets:
Fair value of plan assets at beginning of year	$	40,680		$	36,355
Actual return on plan assets	945			5,226
Contributions	4,252			1,245
Gross benefits paid	(12,602		)	(2,146		)
Fair value of plan assets at end of year	$	33,275		$	40,680
Net benefit obligation in excess of plan assets	$	(17,552	)	$	(12,747	)
Balance sheet amounts:
Noncurrent liabilities	$	(17,552	)	$	(12,747	)
Total liabilities	$	(17,552	)	$	(12,747	)
Amounts recognized in accumulated other comprehensive income, net of tax consist of:
Net actuarial loss	$	17,228		$	14,830
Net amount recognized	$	17,228		$	14,830

At December 31, 2014, in addition to the accrued benefit liability of $17.6 million recognized for the Company’s domestic defined benefit pension plan, the Company also had foreign regulatory labor agreements with an accrued benefit liability of $1.4 million and accumulated other comprehensive loss, net of tax, of $0.4 million.

At December 31, 2013, in addition to the accrued benefit liability of $12.7 million recognized for the Company’s domestic defined benefit pension plan, the Company also had an accrued benefit liability of $1.2 million and accumulated other comprehensive loss, net of tax, related to foreign regulatory labor agreements of $0.2 million.

The domestic defined benefit pension plan liability, net of tax, included in other comprehensive income increased by $2.4 million for the year ended December 31, 2014 and decreased $6.5 million for the year ended December 31, 2013. These changes are mainly due to changes in pension assumptions, primarily the discount and mortality rates.

Aggregated information for the domestic defined benefit pension plan with an accumulated benefit obligation in excess of plan assets is provided in the tables below:



	December 31,
In thousands	2014		2013
Projected benefit obligation	$	50,827	$	53,427
Accumulated benefit obligation	$	50,827	$	53,427
Fair value of plan assets	$	33,275	$	40,680

Components of net periodic benefit cost for the domestic pension plan:



	December 31,
In thousands	2014			2013			2012
Interest cost	$	2,348		$	2,453		$	2,583
Expected return on plan assets	(2,798		)	(2,691		)	(2,559		)
Amortization of actuarial net loss	725			1,069			918
Pension settlement cost	4,914			—			—
Total net periodic benefit cost	$	5,189		$	831		$	942

On April 1, 2014, the Company offered a voluntary one-time lump sum payment option to certain former U.S. employees who were vested defined benefit plan participants and not currently receiving monthly payments from the Company's domestic pension plan. The election period for this voluntary offer ended in the second quarter of 2014. Approximately 62% of eligible participants elected to receive a one-time lump sum payout resulting in $10.3 million being paid out of domestic pension plan assets in July 2014. This payout required a re-measurement of the domestic pension plan and a partial plan settlement charge, which resulted in a non-cash pre-tax loss of $4.9 million in net periodic pension benefit expense, which was recorded in selling, product development and administrative expenses in the third quarter of 2014, with an offset to accumulated other comprehensive loss in shareholder’s equity, net of $1.9 million tax benefit. The non-cash charge was required to accelerate the recognition of a portion of the previously unrecognized actuarial losses in the domestic pension plan.

It is estimated that $0.9 million of actuarial net loss will be amortized from accumulated other comprehensive loss into net periodic benefit costs for the domestic pension plan in 2015.

The major assumptions used in determining the year-end benefit obligation and annual net cost for the domestic pension plan are presented in the following table:



	Benefit Obligation				Net Cost
For the years ended December 31,	2014		2013		2014		2013		2012
Discount rate	4.16	%	5.09	%	5.09	%	4.16	%	5.00	%
Expected return on plan assets	7.25	%	7.25	%	7.25	%	7.50	%	7.75	%

The year-end benefit obligation increased primarily due to a reduction in the assumed discount rate from 5.09% as of December 31, 2013 to 4.16% as of December 31, 2014. During 2014, the Company adopted the new RP-2014 mortality table and mortality improvement scale BB-2D in determining the liability for its domestic defined benefit plan. This new table, along with the change in the discount rate, caused the increase in the actuarial loss recognized during 2014 and the increased projected benefit obligation.

At December 31, 2013, the domestic defined benefit pension plan mortality assumption was based on the RP-2000 mortality table using mortality improvement scale AA. In October 2014, the Society of Actuaries issued an updated set of mortality tables and improvement scale collectively known as RP-2014 and MP-2014, respectively. The Company has reviewed the findings and recommendations of these reports with their actuary. Based on that review, the Company has elected to utilize the Society of Actuaries' base mortality scale RP-2014 with the BB-2D mortality improvement scale, as the Company believes the BB-2D mortality improvement table more accurately reflects recent rates of mortality improvement since 2006 for the general population compared to the MP-2014 table.

Plan Assets

The domestic defined benefit pension plan is administered by an Administrative Committee and an Investment Committee, which are appointed by the Board of Directors. The Investment Committee’s responsibilities are to establish a funding policy for the Lydall Pooled Pension Investment Trust (“the Trust”) and to appoint and oversee the investment advisors responsible for the Trust’s investments. The Investment Committee is a named fiduciary under the plan with respect to management of the Trust’s investments. The assets of the domestic defined benefit pension plan are invested in the Trust for the purpose of investment diversification. In determining the expected return on plan assets, the Investment Committee considers the relative weighting of plan assets, the historical performance of marketable debt and equity securities and economic and other indicators of future performance.

Investment management objectives include maintaining an adequate level of diversification to balance market risk and to provide sufficient liquidity for near-term payments of benefits accrued under the domestic pension plan and to pay the expenses of administration. The long-term investment objective of the Trust is to achieve a total return equal to or greater than the Trust’s actuarially assumed rate of return, currently 7.25%. Though it is the intent of the Investment Committee to achieve income and growth, that intent does not include taking extraordinary risks or engaging in investment activities not commonly considered prudent under the standards imposed by ERISA. The Investment Committee defines risk as the probability of not meeting the Trust’s objectives and the probability of not meeting the Trust’s liability requirements. The allowable investments include: exchange-traded stocks, over-the-counter common and preferred stocks, warrants, rights, convertible securities, depository receipts and shares, trust certificates, limited partnership interests, shares of other investment companies, real estate investment trusts and equity participation, obligations of foreign governments, obligations of international agencies, obligations issued by the U.S. government, mortgage related and other asset-backed securities, corporate debt securities, inflation-index bonds issued by corporations, structured notes, delayed funding loans and revolving credit facilities, bank certificates of deposit, debt securities issued by state of local governments, and money market funds. Prohibited investments include: venture capital investments, direct investment in real estate properties, CMO derivatives, hedge funds, Lydall, Inc. securities, and commodities.

The Investment Committee’s target asset allocation seeks to control risk through portfolio diversification and takes into account, among other factors, objectives discussed above, current funding levels, cash flow conditions and economic and industry trends. Equity securities include investments in large-cap and mid/small-cap companies primarily located in the United States, non-U.S. equities, and emerging market equities. Fixed income securities include fixed income mutual bond funds and common and collective funds.

The following table presents the target allocation of pension plan assets for 2015 and the actual allocation of plan assets as of December 31, 2014 and 2013 by major asset category:



	Target Allocation	Actual Allocation of Plan Assets December 31,
Asset Category	2015	2014		2013
Equity securities:
U.S. Equity	22% - 60%	43	%	37	%
Non-U.S.	15% - 25%	19	%	23	%
Emerging Markets	3% - 9%	6	%	7	%
Fixed income securities:
U.S. Bond funds	12% - 38%	26	%	26	%
Non-U.S. Bond funds	2% - 8%	3	%	5	%
Real estate investment trusts	0% - 8%	—	%	—	%
Cash and cash equivalents	0% - 5%	3	%	2	%

The investments of the Trust are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).

Equity securities, which consist primarily of common stocks, are valued at the closing price reported in the active market in which individual securities are traded. Short-term cash funds, mutual funds, bond funds and real estate investment trusts are valued at the net asset value of shares held by the plan at year end as reported in the active market in which the funds are traded.

The Trust’s purchases and sales of securities are recorded on a trade date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.

The following table sets forth by level, within the fair value hierarchy, the Trust’s assets at fair value as of December 31, 2014 and December 31, 2013:



December 31, 2014
In thousands	Level 1		Level 2		Level 3		Total
Equity securities:
U.S. Equity	$	14,272	$	—	$	—	$	14,272
Non-U.S.	6,432		—		—		6,432
Emerging Markets	1,896		—		—		1,896
Fixed income securities:
U.S. Bond funds	8,528		—		—		8,528
Non-U.S. Bond funds	917		—		—		917
Real estate investment trusts	170		—		—		170
Cash and cash equivalents	1,060		—		—		1,060
Total Assets at Fair Value	$	33,275	$	—	$	—	$	33,275



December 31, 2013
In thousands	Level 1		Level 2		Level 3		Total
Equity securities:
U.S. Equity	$	15,141	$	—	$	—	$	15,141
Non-U.S.	9,465		—		—		9,465
Emerging Markets	2,713		—		—		2,713
Fixed income securities:
U.S. Bond funds	10,461		—		—		10,461
Non-U.S. Bond funds	1,847		—		—		1,847
Real estate investment trusts	155		—		—		155
Cash and cash equivalents	898		—		—		898
Total Assets at Fair Value	$	40,680	$	—	$	—	$	40,680

Estimated Future Contributions and Benefit Payments

The Company expects to contribute approximately $0.9 million in cash to its domestic defined benefit pension plan in 2015. Estimated future benefit payments for the next 10 years are as follows:



In thousands	2015		2016		2017		2018		2019		2020-2024
Benefit payments	$	2,337	$	2,365	$	2,430	$	2,510	$	2,647	$	14,490

Employee Savings Plan

The Company also sponsors a 401(k) Plan. Employer contributions to this plan amounted to $2.1 million in 2014, $1.7 million in 2013, and $1.6 million in 2012. Matching contributions by the Company are made on employee pretax contributions up to five percent of compensation, with the first three percent matched at 100% and the next two percent matched at 50%.