Acquisitions and Divestitures

Acquisitions

On December 31, 2016, the Company completed an acquisition of the nonwoven needle punch materials businesses, which include MGF Gutsche & Co GmbH KG, FRG and Gutsche Environmental Technology (Yixing) Co. Ltd., China, operating under Gutsche (“Gutsche”), a German based corporation. The Gutsche operations manufacture nonwoven needle punch materials and predominantly serve the industrial filtration and high performance nonwoven markets. The Company acquired one hundred percent of Gutsche for $57.6 million, net of a receivable of $3.0 million related to an estimated post-closing purchase price adjustment. In the second quarter of 2017, the Company finalized the post closing adjustment resulting in an increase in the purchase price of $0.4 million resulting in a final purchase price of $58.0 million. The purchase price was financed with a combination of cash on hand and $31.6 million of borrowings through the Company's amended $175 million credit facility. The operating results of the Gutsche business have been included in the Consolidated Statements of Operations since December 31, 2016, the date of the acquisition, and are reported within the Technical Nonwovens segment.

For the year ended December 31, 2017, Gutsche reported net sales and operating income of $51.5 million and $2.9 million, respectively. Operating income for the year ended December 31, 2017 included $0.6 million of purchase accounting inventory fair value step-up adjustments in cost of sales upon the sale of inventory and $0.2 million of restructuring expenses. There were no sales or operating income for Gutsche during the year ended December 31, 2016 as the acquisition occurred on December 31, 2016.

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 Consolidated Statements of Operations since July 7, 2016, the date of the acquisition, and are reported within the Technical Nonwovens segment.

For the year ended December 31, 2017, Texel reported net sales and operating income of $84.8 million and $6.9 million, respectively. Operating income for the year ended December 31, 2017 included $0.5 million of purchase accounting inventory fair value step-up adjustments in cost of sales upon the sale of inventory.

From the date of the acquisition through December 31, 2016, Texel reported net sales and operating income of $40.9 million and $2.5 million, respectively. Operating income from the date of the acquisition through the year ended December 31, 2016 included $2.0 million of purchase accounting inventory fair value step-up adjustments in cost of sales upon the sale of inventory.

During the year ended December 31, 2017 and 2016 the Company incurred $0.1 million and $3.7 million, respectively, of acquisition related costs related to the acquisitions of Texel and Gutsche. 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 Texel and Gutsche acquisitions:



In thousands	Texel			Gutsche
Cash and cash equivalents	$	1,610		$	9,400
Accounts Receivable	13,355			7,736
Inventories	17,525			6,417
Prepaid expenses and other current assets	2,469			1,125
Non-current environmental indemnification receivable (Note 14)	925			—
Property, plant and equipment, net	31,525			7,969
Investment in joint venture	616			—
Goodwill (Note 5)	28,655			19,729
Other intangible assets, net (Note 5)	22,887			15,622
Other long-term assets	—			1,545
Total assets acquired	119,567			69,543

Current liabilities	(8,520		)	(8,376		)
Long-term environmental remediation liability (Note 14)	(925		)	—
Other long-term liabilities	—			(2,742		)
Deferred tax liabilities	(7,413		)	(470		)
Total liabilities assumed	(16,858		)	(11,588		)
Net assets acquired	$	102,709		$	57,955

The final purchase price allocation related to Texel reflects post-closing adjustments pursuant to the terms of the Stock Purchase Agreement. The final purchase price allocation related to Gutsche reflects post-closing adjustments pursuant to the terms of the Gutsche Share Purchase Agreement.

The following table reflects the results of the Company for the year ended December 31, 2017 and the unaudited pro forma operating results of the Company for years ended December 31, 2016 and 2015, which give effect to the acquisitions of Texel and Gutsche as if they had occurred on January 1, 2015. The pro forma information includes the historical financial results of the Company and the acquired businesses. 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 acquisitions.



	For The Years Ended December 31,
	(Actual)		(Unaudited Pro Forma)		(Unaudited Pro Forma)
In thousands	2017		2016		2015
Net Sales	$	698,437	$	654,877	$	651,252
Net Income	$	49,317	$	43,559	$	47,956

Earnings per share:
Basic	$	2.89	$	2.58	$	2.86
Diluted	$	2.85	$	2.53	$	2.81

Included in earnings during the year ended December 31, 2017 was $3.9 million of amortization expense, $1.1 million of fair value step-up adjustments to inventory and acquisition related expenses of $0.1 million related to Texel and Gutsche.

Pro forma earnings during the year ended December 31, 2016 were adjusted to exclude non-recurring items such as acquisition-related costs of $4.3 million and expense related to the fair value adjustment to inventory of $2.0 million. No amount was included in the pro forma earnings during the year ended December 31, 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 year ended December 31, 2016 were adjusted to include additional expense of $3.9 million related to the amortization of the acquired intangible assets recognized at fair value in purchase accounting, additional depreciation expense of $1.2 million resulting from increased basis of property, plant and equipment, and additional interest expense of $0.8 million associated with borrowings under the Company’s Amended Credit Facility. Customer freight billings of $0.9 million were reclassed from costs of sales to net sales for the year ended December 31, 2016.

Pro forma earnings during the year ended December 31, 2015 were adjusted to include acquisition-related costs of $0.8 million, expense of $3.2 million related to the amortization of the fair value adjustments to inventory, $3.5 million of additional amortization of the acquired intangible assets recognized at fair value in purchase accounting, additional depreciation expense of $2.1 million resulting from increased basis of property, plant and equipment, as well as $1.2 million of interest expense associated with borrowings under the Company’s Amended Credit Facility. Customer freight billings of $1.6 million were reclassed from costs of sales to net sales for the year ended December 31, 2015.

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 in 2015.