Acquisition and Divestiture

Acquisition

On July 7, 2016, the Company completed an acquisition of the nonwoven and coating materials businesses primarily operating under Texel from ADS, a Canadian based corporation. The Texel operations manufacture nonwoven needle punch materials and predominantly serve the geosynthetic, liquid filtration, and other industrial markets. The Company acquired one hundred percent of Texel for $102.7 million in cash, including a post-closing working capital adjustment. The purchase price was financed with a combination of cash on hand and $85.0 million of borrowings through the Company’s amended $175 million credit facility. As part of the acquisition, the Company acquired a fifty percent interest in a joint venture, Afitex Texel Geosynthetiques, Inc., with a fair value of $0.6 million. The joint venture is accounted for under the equity method of accounting. The operating results of the Texel business have been included in the Condensed Consolidated Statements of Operations since July 7, 2016, the date of the acquisition and are reported within the Technical Nonwovens segment.

During the three and nine months ended September 30, 2016, the Company incurred $0.5 million and $2.6 million of transaction related costs, respectively, primarily related to the acquisition of Texel. These transaction costs include legal fees and other professional services fees to complete the transaction. These corporate office expenses have been recognized in the Company’s Condensed Consolidated Statements of Operations as selling, product development and administrative expenses.

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the date of the acquisition:



In thousands
Cash and cash equivalents	$	1,610
Accounts receivable	13,355
Inventories	17,525
Prepaid expenses and other current assets	2,469
Non-current environmental indemnification receivable (Note 12)	925
Property, plant and equipment, net	31,603
Investment in joint venture	616
Goodwill (Note 4)	28,281
Other intangible assets, net (Note 4)	22,887
Total assets acquired	$	119,271

Current liabilities	$	(8,520	)
Long-term environmental remediation liability (Note 12)	(925		)
Deferred tax liabilities	(7,117		)
Total liabilities assumed	(16,562		)
Net assets acquired	$	102,709

The following table reflects the unaudited pro forma operating results of the Company for the three and nine months ended September 30, 2016 and the three and nine months ended September 30, 2015, which give effect to the acquisition of Texel as if it had occurred on January 1, 2015. The pro forma information includes the historical financial results of the Company and Texel. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective January 1, 2015, 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.



	(Unaudited Pro Forma)				(Unaudited Pro Forma)
	Quarter Ended September 30,				Nine Months Ended September 30,
In thousands	2016		2015		2016		2015
Net sales	$	157,528	$	153,180	$	462,068	$	447,102
Net income	$	14,679	$	12,630	$	36,497	$	41,319

Earnings per share:
Basic	$	0.87	$	0.76	$	2.16	$	2.47
Diluted	$	0.86	$	0.74	$	2.14	$	2.42

Pro forma earnings during the three months ended September 30, 2016 were adjusted to exclude non-recurring items such as acquisition related costs of $0.7 million and expense related to the fair value adjustment to inventory of $1.6 million. No amount is included in the pro forma earnings for the three months ended September 30, 2016 related to inventory fair value adjustments which would have been recognized in cost of sales as the corresponding inventory would have been completely sold during 2015. Pro forma earnings during the three months ended September 30, 2016 were adjusted to include additional expense of $0.3 million related to the amortization of acquired Technical Nonwoven intangible assets recognized at fair value in purchase accounting.

Pro forma earnings during the three months ended September 30, 2015 were adjusted to include expense of $0.6 million related to the amortization of acquired Technical Nonwoven intangible assets recognized at fair value in purchase accounting, interest expense of $0.2 million associated with borrowings under the Company’s Amended Credit Facility, additional depreciation expense of $0.3 million resulting from increased basis of property, plant and equipment, and expense of $0.2 million related to the fair value adjustment to inventory. Customer freight billings of $0.5 million were reclassed from costs of sales to net sales for the three months ended September 30, 2015 to conform to GAAP.

Pro forma earnings during the nine months ended September 30, 2016 were adjusted to exclude non-recurring items such as acquisition related costs of $2.3 million and expense related to the fair value adjustment to inventory of $1.6 million, and to include $1.6 million for additional amortization of the acquired Technical Nonwoven intangible assets recognized at fair value in purchase accounting, additional interest expense of $0.2 million associated with borrowings under the Company’s Amended Credit Facility, and additional depreciation expense of $0.6 million resulting from increased basis of property, plant and equipment. No amount is included in the pro forma earnings during the nine months ended September 30, 2016 related to inventory fair value adjustments which would have been recognized in cost of sales as the corresponding inventory would have been completely sold during 2015. Customer freight billings of $0.9 million were reclassed from costs of sales to net sales for the nine ended September 30, 2016.

Pro forma earnings during the nine months ended September 30, 2015 were adjusted to include acquisition-related costs of $0.4 million, expense of $2.5 million related to the amortization of the fair value adjustments to inventory and $1.6 million of additional amortization of the acquired Technical Nonwoven intangible assets recognized at fair value in purchase accounting, additional depreciation expense of $1.0 million resulting from increased basis of property, plant and equipment, as well as $0.4 million of interest expense associated with borrowings under the Company’s Amended Credit Facility. Customer freight billings of $1.3 million were reclassed from costs of sales to net sales for the nine months ended September 30, 2015 to conform to GAAP.

Divestiture

On January 30, 2015, the Company sold all of the outstanding shares of common stock of its Life Sciences Vital Fluids business, reported as Other Products and Services, for a cash purchase price of $30.1 million. The disposition was completed pursuant to a Stock Purchase and Sale Agreement, dated January 30, 2015, by and among the Company, and the buyer. The Company recognized a pre-tax gain on the sale of $18.6 million, reported as non-operating income in the first quarter of 2015. Net of income taxes, the Company reported a gain on sale of $11.8 million.

In accordance with the revised accounting guidance for reporting discontinued operations, the Company did not report Life Sciences Vital Fluids as a discontinued operation as it would not be considered a strategic shift in Lydall's business. Accordingly, the operating results of Life Sciences Vital Fluids are included in the operating results of the Company through the sale date.