Acquisitions and Divestiture

6 Months Ended

Jun. 30, 2019

Acquisitions

On August 31, 2018, the Company completed the 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 and engineered materials and expands the Company's end markets into attractive adjacencies. The Company acquired one hundred percent of Interface for an initial price of $268.4 million, net of cash acquired of $5.2 million. In the second quarter of 2019, the Company recorded a post closing adjustment resulting in a decrease in purchase price of $1.4 million resulting in a purchase price of $267.0 million. 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 operating results of the Interface businesses have been included in the Consolidated Statements of Operations since August 31, 2018, the date of acquisition, and are reported within the Performance Materials reporting segment.

For the quarter ended June 30, 2019, Interface reported net sales and operating income of $32.7 million and $0.1 million, respectively. Interface's operating income for the quarter ended June 30, 2019 included $4.0 million of intangible assets amortization expense in selling, product development and administrative expenses. There were no sales or operating income for Interface during the quarter ended June 30, 2018 as the acquisition was completed on August 31, 2018.

For the six months ended June 30, 2019, Interface reported net sales and operating loss of $65.6 million and $0.7 million, respectively. Interface's operating income loss for the six months ended June 30, 2019 included $8.0 million of intangible assets amortization expense in selling, product development and administrative expenses. There were no sales or operating income for Interface during the six months ended June 30, 2018 as the acquisition was completed on August 31, 2018.

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 within one year of the acquisition date. 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.



In thousands
Accounts receivable	$	25,182
Inventories	17,013
Prepaid expenses and other current assets	2,382
Property, plant and equipment	40,902
Goodwill (Note 5)	130,346
Other intangible assets (Note 5)	106,900
Other assets	308
Total assets acquired, net of cash acquired	$	323,033

Current liabilities	$	(11,319	)
Deferred tax liabilities	(24,678		)
Benefit plan liabilities (Note 12)	(19,002		)
Other long-term liabilities	(1,031		)
Total liabilities assumed	(56,030		)
Total purchase price, net of cash acquired	$	267,003

The following table reflects the unaudited actual results of the Company for the quarter and six months ended June 30, 2019 and the pro forma operating results of the Company for the quarter and six months ended June 30, 2018, 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.



	Quarter Ended June 30,					Six Months Ended June 30,
	(Actual)			(Pro Forma)		(Actual)			(Pro Forma)
In thousands	2019			2018		2019			2018
Net sales	$	220,811		$	226,404	$	438,836		$	457,481
Net (loss) income	$	(6,946	)	$	11,589	$	(3,056	)	$	22,518

Earnings per share:
Basic	$	(0.40	)	$	0.67	$	(0.18	)	$	1.31
Diluted	$	(0.40	)	$	0.67	$	(0.18	)	$	1.30

Basic	17,267			17,196		17,260			17,178
Diluted	17,267			17,335		17,260			17,334

Included in net income during the quarter ended June 30, 2019 was $3.1 million of intangible assets amortization expense related to acquired Interface intangible assets and $2.6 million of interest expense primarily to finance the Interface acquisition.

Pro forma adjustments during the quarter ended June 30, 2018 reduced net income by $0.6 million. Included in net income for the quarter ended June 30, 2018 was $3.0 million of intangible assets amortization expense and $2.1 million of interest expense associated with borrowings under the Company's Amended Credit Facility. Net income was adjusted to exclude items such as corporate strategic initiatives expenses, Interface management fee expenses and tax valuation allowance expenses.

Included in net income during the six months ended June 30, 2019 was $6.1 million of intangible assets amortization expense related to acquired Interface intangible assets and $5.2 million of interest expense to finance the Interface acquisition.

Pro forma adjustments during the six months ended June 30, 2018 reduced net income by $2.1 million. Included in net income for the six months ended June 30, 2018 was $6.1 million of intangible assets amortization expense and $4.2 million of interest expense associated with borrowings under the Company's Amended Credit Facility. Net income was adjusted to exclude items such as corporate strategic initiatives expenses, 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. PCC had a minimal impact on the Company's sales and operating income for the quarter ended June 30, 2019.

Divestiture

On May 9, 2019, the Company sold its Texel Geosol, Inc. ("Geosol") business, a subsidiary of the Company's Texel Technical Materials, Inc. ("Texel") business, for a cash purchase price of $3.0 million, subject to a post-closing adjustment(s) within ninety days of the purchase date. Under the terms of the arrangement, $0.4 million of the total purchase price will be withheld and paid to the Company in three annual payments of approximately $0.1 million. The disposition was completed pursuant to a Sale Agreement, dated May 9, 2019, by and between the Company, and the third-party buyer. The Company recognized a pre-tax gain on the sale of $1.5 million, reported as non-operating income in the second quarter of 2019. Net of income taxes, the Company reported a gain on sale of $1.3 million.

The Company did not report Geosol as a discontinued operation as it would not be considered a strategic shift in Lydall's business. Accordingly, the operating results of Geosol are included in the operating results of the Company through the sale date and in comparable periods.