Acquisitions

On August 31, 2018, the Company completed the previously announced 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 materials and expands the Company's end markets into attractive adjacencies. The Company acquired one hundred percent of Interface for $268.4 million, net of cash acquired of $5.2 million, subject to a post-closing purchase price adjustment that is expected to be finalized in the fourth quarter of 2018. 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 assets and liabilities of Interface have been included in the Company's Consolidated Balance Sheet at September 30, 2018. The acquired business is included in the Company's Performance Materials reporting segment.

During the quarter and nine months ended September 30, 2018, the Company incurred $1.5 million and $2.6 million, respectively, of transaction costs, related to the acquisition of Interface. 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 results of operations of Interface have been included in the Company's results from the date of the acquisition, and for the quarter and nine months ended September 30, 2018, Interface reported net sales and operating loss of $11.8 million and $0.3 million, respectively. Interface's operating loss for the quarter and nine months ended September 30, 2018 included $1.4 million of purchase accounting inventory fair value step-up adjustments in cost of sales upon the sale of inventory and $0.9 million of intangible amortization expense in selling, product development and administrative expenses.

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 in the last quarter of 2018 and the first eight months of 2019. 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.

The following is a preliminary estimate of the assets acquired and the liabilities assumed by the Company at the date of the acquisition:



In thousands
Accounts receivable	$	25,182
Inventories	17,313
Prepaid expenses and other current assets	2,382
Property, plant and equipment	40,902
Goodwill (Note 5)	130,462
Other intangible assets (Note 5)	107,800
Other assets	308
Total assets acquired, net of cash acquired	$	324,349

Current liabilities	$	(11,319	)
Deferred tax liabilities	(25,275		)
Benefit plan liabilities	(18,352		)
Other long-term liabilities	(1,031		)
Total liabilities assumed	(55,977		)
Total purchase price, net of cash acquired	$	268,372

The following table reflects the unaudited pro forma operating results of the Company for the quarter and nine months ended September 30, 2018 and 2017, which gives effect to the acquisition of Interface as 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.



	(Unaudited Pro Forma)				(Unaudited Pro Forma)
	Quarter Ended September 30,				Nine Months Ended September 30,
In thousands	2018		2017		2018		2017
Net sales	$	220,937	$	214,503	$	678,418	$	627,197
Net income	$	6,147	$	8,474	$	28,461	$	26,061

Earnings per share:
Basic	$	0.36	$	0.50	$	1.66	$	1.53
Diluted	$	0.35	$	0.49	$	1.64	$	1.51

Basic	17,216		17,055		17,189		17,028
Diluted	17,349		17,267		17,339		17,270

Pro forma adjustments to historical financial statements during the quarter ended September 30, 2018 resulted in an additional $7.9 million of net income. Earnings were adjusted to exclude non-recurring items such as acquisition related expenses for both Lydall and Interface, purchase accounting adjustments for inventory step-up and tax valuation allowance expenses. Earnings were also adjusted to include items such as additional intangibles amortization expense and additional interest expense associated with borrowings under the Company's Amended Credit Facility.

Pro forma adjustments during the quarter ended September 30, 2017 reduced net income by $1.7 million. Earnings for the quarter ended September 30, 2017 were adjusted to include items such as additional intangibles amortization expense and additional interest expense associated with borrowings under the Company's Amended Credit Facility. Earnings were adjusted to exclude items such as Interface management fee expenses and tax valuation allowance expenses.

Pro forma adjustments during the nine months ended September 30, 2018 resulted in an additional $5.6 million of net income. Earnings were adjusted to exclude items such as acquisition related expenses for both Lydall and Interface, purchase accounting adjustments for inventory step-up and tax valuation allowance expenses. Earnings for the nine months ended September 30, 2018 were adjusted to include items such as additional intangibles amortization expense and additional interest expense associated with borrowings under the Company's Amended Credit Facility.

Pro forma adjustments during the nine months ended September 30, 2017 reduced net income by $11.6 million. Earnings for the nine months ended September 30, 2017 were adjusted to include items such as acquisition related expenses for both Lydall and Interface, additional intangibles amortization expense, purchase accounting adjustments for inventory step-up and additional interest expense associated with borrowings under the Company's Amended Credit Facility. Earnings were adjusted to exclude items such as Interface management fee expenses and tax valuation allowance expenses.

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. The assets and liabilities related to the acquisition of PCC have been included in the Company's Performance Materials reporting segment and in the Consolidated Balance Sheets at September 30, 2018. PCC had a minimal impact on the Company's sales and operating income for the quarter and nine months ended September 30, 2018.