LYDALL INC /DE/ (Form: 10-Q, Received: 05/01/2018 17:02:08)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-7665

LYDALL, INC.

(Exact name of registrant as specified in its charter)



Delaware	06-0865505
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

One Colonial Road, Manchester, Connecticut	06042
(Address of principal executive offices)	(zip code)

(860) 646-1233

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

____________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer (Do not check if a smaller reporting company) ¨ Smaller reporting company ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock $ .01 par value per share.



Total Shares outstanding April 16 , 2018	17,374,320

LYDALL, INC.

INDEX



			Page Number

Cautionary Note Concerning Forward – Looking Statements			3

Part I.	Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Statements of Operations (Unaudited)	5

		Condensed Consolidated Statements of Comprehensive Income (Unaudited)	6

		Condensed Consolidated Balance Sheets (Unaudited)	7

		Condensed Consolidated Statements of Cash Flows (Unaudited)	8

		Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)	9

		Notes to Condensed Consolidated Financial Statements (Unaudited)	10

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

	Item 4.	Controls and Procedures	37

Part II.	Other Information

	Item 1.	Legal Proceedings	38

	Item 1A.	Risk Factors	38

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

	Item 5.	Other Information	40

	Item 6.	Exhibits	41

Signature			42

Lydall, Inc. and its subsidiaries are hereafter collectively referred to as “Lydall,” the “Company” or the “Registrant.” Lydall and its subsidiaries’ names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or trade names of Lydall and its subsidiaries.

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. All such forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company based on current assumptions relating to the Company’s business, the economy and future conditions. Forward-looking statements generally can be identified through the use of words such as “believes,” “anticipates,” “may,” “should,” “will,” “plans,” “projects,” “expects,” “expectations,” “estimates,” “forecasts,” “predicts,” “targets,” “prospects,” “strategy,” “signs” and other words of similar meaning in connection with the discussion of future operating or financial performance. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash and other measures of financial performance. Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. Accordingly, the Company’s actual results may differ materially from those contemplated by the forward-looking statements. Investors, therefore, are cautioned against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Forward-looking statements in this Quarterly Report on Form 10-Q include, among others, statements relating to:


•	Overall economic and business conditions and the effects on the Company’s markets;


•	Outlook for the second quarter and 2018, including expected impact of manufacturing inefficiencies and the Company's ability to improve operational effectiveness in the Thermal Acoustical Solutions segment;


•	Expected vehicle production in the North American, European or Asian markets;


•	Growth opportunities in markets served by the Company;


•	Expected costs and future savings associated with restructuring programs;


•	Expected gross margin, operating margin and working capital improvements from the application of Lean Six Sigma;


•	Product development and new business opportunities;


•	Future strategic transactions, including but not limited to: acquisitions, joint ventures, alliances, licensing agreements and divestitures;


•	Pension plan funding;


•	Future cash flow and uses of cash;


•	Future amounts of stock-based compensation expense;


•	Future earnings and other measurements of financial performance;


•	Ability to meet cash operating requirements;


•	Future levels of indebtedness and capital spending;


•	Ability to meet financial covenants in the Company's amended revolving credit facility;


•	Future impact of the variability of interest rates and foreign currency exchange rates;


•	Expected future impact of recently issued accounting pronouncements upon adoption;


•	Future effective income tax rates, including the impact of the U.S. Tax Cuts and Jobs Act, and realization of deferred tax assets;


•	Estimates of fair values of reporting units and long-lived assets used in assessing goodwill and long-lived assets for possible impairment; and


•	The expected outcomes of legal proceedings and other contingencies, including environmental matters.

All forward-looking statements are inherently subject to a number of risks and uncertainties that could cause the actual results of the Company to differ materially from those reflected in forward-looking statements made in this Quarterly Report on Form 10-Q, as well as in press releases and other statements made from time to time by the Company’s authorized officers. Such risks and uncertainties include, among others, worldwide economic cycles and political changes and uncertainties that affect the markets which the Company’s businesses serve, which could have an effect on demand for the Company’s products and impact the

Company’s profitability; challenges encountered by the Company in the execution of restructuring programs; challenges encountered in the combination of the former Thermal/Acoustical Fibers and Thermal/Acoustical Metals business segments; disruptions in the global credit and financial markets, including diminished liquidity and credit availability; changes in international trade agreements and policies including tariff regulation and trade restrictions; swings in consumer confidence and spending; unstable economic growth; volatility in foreign currency exchange rates; raw material pricing and supply issues; fluctuations in unemployment rates; retention of key employees; increases in fuel prices; and outcomes of legal proceedings, claims and investigations, as well as other risks and uncertainties identified in Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q, and Part I, Item 1A - Risk Factors of Lydall’s Annual Report on Form 10-K for the year ended December 31, 2017 . The Company does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)



	Quarter Ended March 31,
	2018		2017
	(Unaudited)
Net sales	$	191,660	$	165,487
Cost of sales	152,153		124,989
Gross profit	39,507		40,498
Selling, product development and administrative expenses	25,471		25,350
Operating income	14,036		15,148
Interest expense	540		606
Other expense, net	315		333
Income before income taxes	13,181		14,209
Income tax expense	2,123		2,494
Loss from equity method investment	4		46
Net income	$	11,054	$	11,669
Earnings per share:
Basic	$	0.64	$	0.69
Diluted	$	0.64	$	0.68
Weighted average number of common shares outstanding:
Basic	17,164		16,983
Diluted	17,339		17,284

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)



	Quarter Ended March 31,
	2018		2017
	(Unaudited)
Net income	$	11,054	$	11,669
Other comprehensive income:
Foreign currency translation adjustments	2,545		2,729
Pension liability adjustment, net of tax	198		172
Unrealized gain on hedging activities, net of tax	102		—
Comprehensive income	$	13,899	$	14,570

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)



	March 31, 2018			December 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	49,103		$	59,875
Accounts receivable, less allowances (2018 - $1,463; 2017 - $1,507)	136,078			116,712
Contract assets	25,005			—
Inventories	74,263			80,339
Taxes receivable	5,263			5,525
Prepaid expenses	4,016			4,858
Other current assets	6,765			6,186
Total current assets	300,493			273,495
Property, plant and equipment, at cost	405,428			397,152
Accumulated depreciation	(234,699		)	(226,820		)
Net, property, plant and equipment	170,729			170,332
Goodwill	68,958			68,969
Other intangible assets, net	39,031			40,543
Other assets, net	7,131			7,532
Total assets	$	586,342		$	560,871
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	283		$	277
Accounts payable	80,405			71,931
Accrued payroll and other compensation	13,678			15,978
Accrued taxes	3,162			2,230
Other accrued liabilities	14,470			11,690
Total current liabilities	111,998			102,106
Long-term debt	76,862			76,913
Deferred tax liabilities	15,542			14,714
Benefit plan liabilities	8,489			9,743
Other long-term liabilities	3,618			3,999

Commitments and Contingencies (Note 14)
Stockholders’ equity:
Preferred stock	—			—
Common stock	251			250
Capital in excess of par value	89,768			88,006
Retained earnings	387,435			374,783
Accumulated other comprehensive loss	(17,303		)	(20,148		)
Treasury stock, at cost	(90,318		)	(89,495		)
Total stockholders’ equity	369,833			353,396
Total liabilities and stockholders’ equity	$	586,342		$	560,871

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



	Three Months Ended March 31,
	2018			2017
	(Unaudited)
Cash flows from operating activities:
Net income	$	11,054		$	11,669
Adjustments to reconcile net income to net cash (used for) provided by operating activities:
Depreciation and amortization	7,220			6,517
Long-lived asset impairment charge	—			772
Inventory step-up amortization	—			481
Deferred income taxes	601			185
Stock-based compensation	1,201			1,231
Loss from equity method investment	4			46
Changes in operating assets and liabilities:
Accounts receivable	(18,626		)	(7,780		)
Contract assets	(5,745		)	—
Inventories	(8,796		)	(12,015		)
Accounts payable	9,471			13,686
Accrued payroll and other compensation	(2,432		)	(1,154		)
Accrued taxes	877			574
Other, net	1,209			(1,854		)
Net cash (used for) provided by operating activities	(3,962		)	12,358
Cash flows from investing activities:
Capital expenditures	(7,676		)	(9,560		)
Net cash used for investing activities	(7,676		)	(9,560		)
Cash flows from financing activities:
Debt repayments	(57		)	(10,467		)
Common stock issued	666			155
Common stock repurchased	(823		)	(2,497		)
Net cash used for financing activities	(214		)	(12,809		)
Effect of exchange rate changes on cash	1,080			616
Decrease in cash and cash equivalents	(10,772		)	(9,395		)
Cash and cash equivalents at beginning of period	59,875			71,934
Cash and cash equivalents at end of period	$	49,103		$	62,539

Non-cash capital expenditures of $4.2 million and $4.1 million were included in accounts payable at March 31, 2018 and 2017 , respectively.

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)



In thousands of dollars and shares	Common Stock Shares	Common Stock Amount		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders' Equity
Balance at December 31, 2017	25,018	$	250	$	88,006	$	374,783	$	(20,148	)	$	(89,495	)	$	353,396
Net Income						11,054								11,054
Other comprehensive income, net of tax								2,845						2,845
Stock repurchased											(823		)	(823		)
Stock issued under employee plans	50	1		666										667
Stock-based compensation expense				1,096										1,096
Adoption of ASC 606						1,598								1,598
Balance at March 31, 2018	25,068	251		89,768		387,435		(17,303		)	(90,318		)	369,833

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Financial Statement Presentation

Description of Business

Lydall, Inc. and its subsidiaries (the “Company” or “Lydall”) design and manufacture specialty engineered nonwoven filtration media, industrial thermal insulating solutions, and thermal and acoustical barriers for filtration/separation and heat abatement and sound dampening applications.

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements include the accounts of Lydall, Inc. and its subsidiaries. All financial information is unaudited for the interim periods reported. All significant intercompany transactions have been eliminated in the Condensed Consolidated Financial Statements. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The year-end Condensed Consolidated Balance Sheet was derived from the December 31, 2017 audited financial statements, but does not include all disclosures required by U.S. GAAP. Management believes that all adjustments, which include only normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position, results of operations and cash flows for the periods reported, have been included. For further information, refer to the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 .

Effective January 1, 2018, the Company combined the Thermal/Acoustical Metals and Thermal/Acoustical Fibers operating segments into a single operating segment named Thermal Acoustical Solutions. Combining these automotive segments into one segment is expected to allow the Company to better serve its customers, leverage operating disciplines and drive efficiencies across the global automotive operations. Refer to Note 13 "Segment Information" for further information. Prior period segment amounts throughout the Notes to the Condensed Consolidated Financial Statements have been recast to reflect the new segment structure. The recast of historical business segment information had no impact on the Company’s consolidated financial results.

Effective January 1, 2018 the Company adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09 (“ASC 606”) using the modified retrospective method. Therefore, the comparative information has not been adjusted and continues to be reported under the prior guidance of ASC 605. The details of the significant changes and quantitative impact of the changes are disclosed in Note 2 “Revenue from Contracts with Customers.”

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The amended guidance establishes a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance.

The amended guidance clarifies that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the amended guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 is effective for the Company’s interim and annual reporting periods beginning January 1, 2018, and is to be adopted using either a full retrospective or modified retrospective transition method.

The Company adopted the amended guidance and all related amendments using the modified retrospective approach on January 1, 2018, at which time it became effective for the Company. The Company recognized the cumulative effect of initially applying the new revenue standard to all contracts that were not completed on the date of adoption as an adjustment to the opening balance of retained earnings. (See Note 2. “Revenue from Contracts with Customers”).

At the adoption date, the cumulative impact of revenue that would have been recognized over time, was $19.6 million . The impact was primarily driven by tooling net sales of $16.3 million from customer contracts within the Thermal Acoustical Solutions ("TAS") segment. The related adoption impact to retained earnings was $1.6 million , net of tax. The impact to net sales and net income as a result of applying ASC 606 was an increase of $6.3 million and $0.2 million , respectively, for the quarter ended March 31, 2018.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall" (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities". This ASU revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017. In February 2018, the FASB issued ASU 2018-03, "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which clarifies various aspects of the guidance issued in ASU 2016-01. The adoption of these amendments is not required for public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018 until the interim period beginning after June 15, 2018, however early adoption is permitted. The Company adopted both ASUs effective January 1, 2018. The adoption of these ASUs did not have any impact on the Company’s consolidated financial statements and disclosures.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments", which provides guidance on eight specific cash flow classification issues. Prior to this ASU, GAAP did not include specific guidance on these eight cash flow classification issues. This ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” as part of the Board’s initiative to reduce complexity in accounting standards. This ASU eliminates an exception in ASC 740, which prohibits the immediate recognition of income tax consequences of intra-entity asset transfers other than inventory. This ASU requires entities to recognize the immediate current and deferred income tax effects of intra-entity asset transfers. This ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash", which clarifies guidance and presentation related to restricted cash in the statement of cash flows, including stating that restricted cash should be included within cash and cash equivalents on the statement of cash flows. The ASU was effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU effective January 1, 2018. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business", which adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU provide a screen to determine when an integrated set of assets and activities is not a business. This ASU was effective for fiscal years beginning after December 15, 2017. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". This ASU requires an entity to report the service cost component of net benefit costs in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. This ASU also requires the other components of net benefit cost, which includes interest costs and actual return on plan assets to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU was effective for fiscal year beginning after December 15, 2017. As required for retrospective adoption, the Company reclassified net benefit costs of $0.1 million from cost of sales and $0.1 million from the selling, product development and administrative expenses to other expense, net, in the Consolidated Statement of Operations for the quarter ended March 31, 2017. The adoption of this ASU had minimal impact on the Company's consolidated financial statements and disclosures for the quarter ended March 31, 2018.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting". This ASU requires an entity to apply modification accounting in Topic 718 when there are changes to the terms or conditions of a share-based payment award, unless the fair value, vesting conditions, and classification of the modified award are the same as the original award immediately before the original award is modified. This ASU was effective for fiscal years beginning after December 15, 2017. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". This ASU requires entities that lease assets with lease terms of more than 12 months to recognize right-of-use assets and lease liabilities created by those leases on their balance sheets. This ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. This ASU is effective for fiscal

years beginning after December 15, 2018, with early adoption permitted. The Company is currently developing a plan to evaluate the method and impact the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements and disclosures.

Significant Accounting Policies

The Company’s significant accounting policies are detailed in Note 1 “Significant Accounting Policies” within Part IV Item 15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Significant changes to these accounting policies as a result of adopting ASC 606 “Revenue from Contracts with Customers” are discussed within Note 2, “Revenue from Contracts with Customers.”

2. Revenue from Contracts with Customers

The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts from Customers. These revenues are generated from the design and manufacture of specialty engineered filtration media, industrial thermal insulating solutions, automotive thermal and acoustical barriers for filtration/separation and thermal/acoustical applications. The Company’s revenue recognition policies require the Company to make significant judgments and estimates. In applying the Company’s revenue recognition policy, determinations must be made as to when control of products passes to the Company’s customers which can be either at a point in time or over time. Revenue is generally recognized at a point in time when control passes to customers upon shipment of the Company’s products and revenue is generally recognized over time when control of the Company’s products transfers to customers during the manufacturing process (see description below). The Company analyzes several factors, including but not limited to, the nature of the products being sold and contractual terms and conditions in contracts with customers to help the Company make such judgments about revenue recognition.

The Company accounts for revenue from contracts with customers when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is primarily derived from customer purchase orders, master sales agreements, and negotiated contracts, all of which represent contracts with customers.

The Company next identifies the performance obligations in the contract. A performance obligation is a promise to provide distinct goods or services. Performance obligations are the unit of account for purposes of applying the revenue standard and therefore determines when and how revenue is recognized. The Company determines the performance obligations at contract inception based on the goods that are promised in a contract with a customer. Typical performance obligations include automotive parts, automotive tooling, rolled good media and filter bags.

The transaction price in the contract is determined based on the consideration to which the Company will be entitled in exchange for transferring products to the customer, excluding amounts collected on behalf of third parties (for example, sales taxes). The transaction price is typically stated on the purchase order or in a negotiated agreement. Certain contracts may include variable consideration in the transaction price, such as rebates, pricing discounts, price concessions, sales incentives, index pricing or other provisions that can decrease the transaction price. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on reasonably available information (customer historical, current and forecasted data). In certain circumstances where a particular outcome is probable, the Company utilizes the most likely amount to which the Company expects to be entitled. The Company accounts for consideration payable to a customer as a reduction of the transaction price thereby reducing the amount of revenue recognized. Consideration payable to a customer includes cash amounts that the Company pays, or expects to pay, to a customer based on certain contract requirements.

The Company recognizes revenue as performance obligations are satisfied, which can be either over time or at a point in time, depending on when control of the Company’s products transfers to its customers.

In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment.

The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products to be provided. The Company generally uses the cost-to-cost measure of progress for contracts because it best depicts the transfer of control to the customer which occurs as costs are incurred on contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.

For tooling revenue recognized over time, the Company makes significant judgments which includes, but not limited to, estimated costs to completion, costs incurred to date, and assesses risks related to changes in estimates of revenues and costs. In doing so,

management must make assumptions regarding the work required to fulfill the performance obligations, which is dependent upon the execution by the Company's subcontractors, among other variables and contract requirements.

Changes in estimates for revenue recognized over time are recorded by the Company in the period they become known. Changes are recognized on a cumulative catch-up basis in net sales, costs of sales, and operating income. The cumulative catch up adjustment recognizes in the current period the cumulative effect of changes in estimates on current and prior periods.

Performance Obligations

The following is a description of products and performance obligations, separated by reportable segments, from which the Company generates its revenue. For more detailed information about reportable segments, see Note 13 “Segment Information.”

Segment Performance Materials

Products Products for this segment include filtration media solutions, thermal insulation solutions

primarily for air, fluid power, and industrial applications, thermal insulation solutions for building products, appliances, and energy and industrial markets and air and liquid life science applications.

Performance Obligations These contracts typically have distinct performance obligations, which is the promise

to transfer the media solutions to the Company’s customers.

The Company recognizes revenue at a point in time or over time, based upon when control of the underlying product transfers to the customer. If revenue is recognized at a point in time, the performance obligation is typically satisfied upon shipment and in accordance with shipping terms. In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.

Customer payment terms are negotiated on a contract-by-contract basis and typically range from 30 to 90 days.

Segment Technical Nonwovens

Products This segment produces needle punch nonwoven solutions including industrial filtration

and advanced materials products. Industrial Filtration products include nonwoven rolled-good felt media and filter bags used primarily in industrial air and liquid filtration applications. Advanced materials products include nonwoven rolled good media used in commercial applications and predominantly serves the geosynthetic, automotive, industrial, medical, and safety apparel markets. The automotive media is provided to tier-one suppliers as well as the Company’s Thermal Acoustical Solutions segment.

Performance Obligations These contracts typically have distinct performance obligations, which is the promise to

transfer the industrial filtration or advanced materials products to the Company’s customers.

The Company recognizes revenue at a point in time or over time, based upon when control transfers to the customer. If revenue is recognized at a point in time, the performance obligation is typically satisfied upon shipment and in accordance with shipping terms. In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.

Customer payment terms are negotiated on a contract-by-contract basis and typically range from 30 to 90 days.

For filter bag sales, the Company may enter into warranty agreements that are implied or sold with the product to provide assurance that a product will function as expected and in accordance with certain specifications. Therefore, this type of warranty is not a separate performance obligation.

Segment Thermal Acoustical Solutions

Products Parts - The segment produces a full range of innovative engineered products tailored for the

transportation sector to thermally shield sensitive components from high heat, improve exhaust gas treatment and lower harmful emissions as well as assist in the reduction of noise vibration and harshness. The majority of products are sold to original equipment manufacturers and tier-one suppliers.

Tooling - The Company enters into contractual agreements with certain customers within the automotive industry, to design and develop molds, dies and tools (collectively, “tooling”).

Performance Obligations Parts - Customer contracts typically have distinct performance obligations, which is

the promise to transfer manufactured parts to these customers. The Company recognizes parts revenue at a point in time or over time, based upon when control transfers to the customer. If revenue is recognized at a point in time, the performance obligation is typically satisfied upon shipment and in accordance with shipping terms. In circumstances when control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.

Customer payment terms are negotiated on a contract-by-contract basis and typically range from 30 to 90 days.

Tooling - Customer contracts typically have distinct performance obligations and are generally completed within one year. The Company periodically enters into multiple contracts with a customer at or near the same time which may be combined for purposes of determining the appropriate transaction price. The Company allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price using costs incurred plus expected margin. The corresponding revenues are recognized over time as the related performance obligations are satisfied.

Tooling customer payment terms typically range from 30 to 90 days after title transfers to the customer. Occasionally customers make progress payments as the tool is constructed.

Practical Expedients and Exemptions

The Company has elected to adopt the contract cost practical expedient. This expedient allows the Company to recognize its incremental costs of obtaining contracts, such as sales commissions, as an expense when incurred if the related contract revenue is expected to be recognized in one year or less. These costs are included in selling, product development and administrative expenses.

The Company has made an accounting policy election to record shipping and handling activities occurring after control has passed to the customer to be treated as a fulfillment cost rather than as a distinct performance obligation. Shipping and handling expenses consist primarily of costs incurred to deliver products to customers and internal costs related to preparing products for shipment and are recorded as a cost of sales. Amounts billed to customers as shipping and handling are classified as revenue when services are performed.

ASC 606 requires the disclosure of unsatisfied performance obligations related to contracts from customers at the end of each reporting period. The Company has elected the practical expedient because the Company’s contracts generally have a duration of one year or less, therefore no disclosure is required.

The Company has elected to adopt the practical expedient to disregard the need to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects that the period of time between when the products are transferred to the customer and when the Company is paid for those products will be one year or less.

Contract Assets and Liabilities

The Company’s contract assets primarily include unbilled amounts typically resulting from sales under contracts when the over time method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. These unbilled

accounts receivable in contract assets are transferred to accounts receivable upon invoicing, typically when the right to payment becomes unconditional in which case payment is due based only upon the passage of time.

The Company’s contract liabilities primarily relate to billings and advance payments received from customers, and deferred revenue. These contract liabilities represent the Company’s obligation to transfer its products to its customers for which the Company has received, or is owed consideration from its customers. Contract liabilities are included in other accrued liabilities on the Company’s Condensed Consolidated Balance Sheets.

Contract assets and liabilities consisted of the following (in thousands):



	March 31, 2018		January 1, 2018		Dollar Change
Contract assets	$	25,005	$	19,125	$	5,880
Contract liabilities	$	3,198	$	2,820	$	378

The $5.9 million increase in contract assets from January 1, 2018 to March 31, 2018 was primarily due to timing of billings to customers.

The $0.4 million increase in contract liabilities from January 1, 2018 to March 31, 2018 was primarily due to an increase in customer deposits partially offset by revenue recognized of $1.3 million in the first quarter related to contract liabilities at January 1, 2018.

Impacts on Financial Statements

The cumulative effect of the changes made to the Company’s Condensed Consolidated January 1, 2018 Balance Sheet for the adoption of ASC 606 was as follows:



In thousands	December 31, 2017		Adjustments for Adoption of ASC606			January 1, 2018

Assets:
Contract assets	$	—	$	19,125		$	19,125
Inventories	$	80,339	$	(15,184	)	$	65,155

Liabilities:
Accounts payable	$	71,931	$	663		$	72,594
Other accrued liabilities	$	11,690	$	1,209		$	12,899
Deferred tax liabilities	$	14,714	$	471		$	15,185

Stockholders' equity:
Retained earnings	$	374,783	$	1,598		$	376,381

The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet for the adoption of ASC 606 was as follows:



	March 31, 2018
In thousands	Balances Without Adoption of ASC 606		ASC 606 Adjustments			As Reported

Assets:
Contract assets	$	—	$	25,005		$	25,005
Inventories	$	94,176	$	(19,913	)	$	74,263

Liabilities:
Accounts payable	$	76,742	$	3,663		$	80,405
Other accrued liabilities	$	15,402	$	(932	)	$	14,470
Deferred tax liabilities	$	15,015	$	527		$	15,542

Stockholders' equity:
Retained earnings	$	385,601	$	1,834		$	387,435

The cumulative effect of the changes made to the Company’s Condensed Consolidated Statement of Operations for the adoption of ASC 606 was as follows:



	Quarter Ended March 31, 2018
In thousands	Results Without Adoption of ASC606		Effect of Change Higher (Lower)		As Reported

Net sales	$	185,406	$	6,254	$	191,660
Cost of sales	146,191		5,962		152,153
Gross profit	39,215		292		39,507
Selling, product development and administrative expenses	25,471		—		25,471
Operating income	13,744		292		14,036
Interest expense	540		—		540
Other expense, net	315		—		315
Income before income taxes	12,889		292		13,181
Income tax expense	2,067		56		2,123
Loss from equity method investment	4		—		4
Net income	$	10,818	$	236	$	11,054
Earnings per share:
Basic	$	0.63	$	0.01	$	0.64
Diluted	$	0.62	$	0.02	$	0.64
Weighted average number of common shares outstanding:
Basic	17,164		—		17,164
Diluted	17,339		—		17,339

Disaggregated Revenue

The Company disaggregates revenue from customers by geographic region, as it believes this disclosure best depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic factors. Disaggregated revenue by geographical region for the three months ended March 31, 2018 was as follows:



	Quarter Ended March 31, 2018
In thousands	Performance Materials		Technical Nonwovens		Thermal Acoustical Solutions		Eliminations and Other			Consolidated Net Sales

North America	$	19,161	$	39,133	$	69,979	$	(7,826	)	$	120,447
Europe	11,532		19,386		28,055		(185		)	58,788
Asia	—		9,022		3,403		—			12,425
Total Net Sales	$	30,693	$	67,541	$	101,437	$	(8,011	)	$	191,660

3. Inventories

Inventories as of March 31, 2018 and December 31, 2017 were as follows:



In thousands	March 31, 2018		December 31, 2017
Raw materials	$	34,023	$	28,672
Work in process	16,013		29,427
Finished goods	24,227		23,901
	74,263		82,000
Less: Progress billings	—		(1,661		)
Total inventories	$	74,263	$	80,339

Included in work in process is gross tooling inventory of $6.5 million and $20.2 million at March 31, 2018 and December 31, 2017 , respectively. Tooling inventory, net of progress billings, was $18.5 million at December 31, 2017 . Effective January 1, 2018 the Company adopted ASC 606, Revenue from Contracts from Customers, under the modified retrospective transition method. The adoption of ASC 606 resulted in the reclassification of progress billings to contract liabilities. See Note 2, Revenue from Contracts with Customers, for further discussion of contract liabilities.

4. Goodwill and Other Intangible Assets

Goodwill:

The Company tests its goodwill for impairment annually in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value may exceed its fair value.

The changes in the carrying amount of goodwill by segment as of and for the quarter ended March 31, 2018 were as follows:



	December 31, 2017		Currency translation adjustments			Additions		March 31, 2018
In thousands	December 31, 2017		Currency translation adjustments			Additions		March 31, 2018
Performance Materials	$	13,307	$	115		$	—	$	13,422
Technical Nonwovens	55,662		(126		)	—		55,536
Total goodwill	$	68,969	$	(11	)	$	—	$	68,958

Other Intangible Assets:

The table below presents the gross carrying amount and, as applicable, the accumulated amortization of the Company’s acquired intangible assets other than goodwill included in “Other intangible assets, net” in the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 :



	March 31, 2018					December 31, 2017
In thousands	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets
Customer Relationships	$	39,399	$	(5,606	)	$	39,474	$	(4,460	)
Patents	4,607		(3,942		)	4,504		(3,821		)
Technology	2,500		(685		)	2,500		(644		)
Trade Names	4,285		(1,689		)	4,288		(1,461		)
License Agreements	652		(652		)	640		(640		)
Other	601		(439		)	586		(423		)
Total amortized intangible assets	$	52,044	$	(13,013	)	$	51,992	$	(11,449	)

5. Long-term Debt and Financing Arrangements

On July 7, 2016, the Company amended its $100 million senior secured revolving credit facility (“Amended Credit Facility”) which increased the available borrowing from $100 million to $175 million , added a fourth lender and extended the maturity date to July 7, 2021. The Amended Credit Facility is secured by substantially all of the assets of the Company. Under the terms of the Amended Credit Facility, the lenders are providing a $175 million revolving credit facility to the Company, under which the lenders may make revolving loans and issue letters of credit to or for the benefit of the Company and its subsidiaries. The Company may request the Amended Credit Facility be increased by an aggregate amount not to exceed $50 million through an accordion feature, subject to specified conditions set forth in the Amended Credit Facility.

The Amended Credit Facility contains a number of affirmative and negative covenants, including financial and operational covenants. The Company is required to meet a minimum interest coverage ratio. The interest coverage ratio requires that, at the end of each fiscal quarter, the ratio of consolidated EBIT to Consolidated Interest Charges, both as defined in the Amended Credit Facility, may not be less than 2.0 to 1.0 for the immediately preceding 12 month period. In addition, the Company must maintain a Consolidated Leverage Ratio, as defined in the Amended Credit Facility, as of the end of each fiscal quarter of no greater than 3.0 to 1.0 . The Company must also meet minimum consolidated EBITDA as of the end of each fiscal quarter for the preceding 12 month period of $30 million . The Company was in compliance with all covenants at March 31, 2018 and December 31, 2017.

Interest is charged on borrowings at the Company’s option of either: (i) Base Rate plus the Applicable Rate, or (ii) the Eurodollar Rate plus the Applicable Rate. The Base Rate is a fluctuating rate equal to the highest of (a) the federal funds rate plus 0.50% , (b) the prime rate as set by Bank of America, and (c) the Eurocurrency Rate plus 1.00% . The Eurocurrency Rate means (i) if denominated in LIBOR quoted currency, a fluctuating LIBOR per annum rate equal to the London Interbank Offered Rate; (ii) if denominated in Canadian Dollars, the rate per annum equal to the Canadian Dealer Offered Rate; or (iii) the rate per annum as designated with respect to such alternative currency at the time such alternative currency is approved by the Lenders. The Applicable Rate is determined based on the Company’s Consolidated Leverage Ratio (as defined in the Amended Credit Agreement). The Applicable Rate added to the Base Rate Committed Loans ranges from 15 basis points to 100 basis points, and the Applicable Rate added to Eurocurrency Rate Committed Loans and Letters of Credit ranges from 75 basis points to 175 basis points. The Company pays a quarterly fee ranging from 17.5 basis points to 30 basis points on the unused portion of the $175 million available under the Amended Credit Facility.

In April 2017, the Company entered into a three -year interest rate swap agreement transacted with a bank which converts the interest on the first notional $60.0 million of the Company's one-month LIBOR-based borrowings under its Amended Credit Facility from a variable rate, plus the borrowing spread, to a fixed rate of 1.58% plus the borrowing spread. The notional amount reduces quarterly by $5.0 million through March 31, 2020. The Company is accounting for the interest rate swap agreement as a cash flow hedge. Effectiveness of this derivative agreement is assessed quarterly by ensuring that the critical terms of the swap continue to match the critical terms of the hedged debt.

At March 31, 2018 , the Company had borrowing availability of $94.5 million under the Amended Credit Facility, net of $76.6 million of borrowings outstanding and standby letters of credit outstanding of $3.9 million .

In addition to the amounts outstanding under the Amended Credit Facility, the Company has various acquired foreign credit facilities totaling approximately $10.0 million . At March 31, 2018 , the Company's foreign subsidiaries had $0.1 million in borrowings outstanding as well as $3.0 million in standby letters of credit outstanding.

Total outstanding debt consists of:



				March 31,			December 31,
In thousands	Effective Rate		Maturity	2018			2017
Revolver Loan, due July 7, 2021	2.88	%	2021	$	76,600		$	76,600
Capital Leases	1.65% - 2.09%		2019 - 2020	545			590
				77,145			77,190
Less portion due within one year				(283		)	(277		)
Total long-term debt				$	76,862		$	76,913

The carrying value of the Company’s $175 million Amended Credit Facility approximates fair value given the variable rate nature of the debt. The fair values of the Company’s long-term debt are determined using discounted cash flows based upon the Company’s estimated current interest cost for similar type borrowings or current market value, which falls under Level 2 of the fair value hierarchy. The carrying values of the long-term debt approximate fair market value.

The weighted average interest rate on long-term debt was 2.6% for the three months ended March 31, 2018 and 2.2% for the year ended December 31, 2017 .

6. Derivatives

The Company selectively uses financial instruments to manage market risk associated with exposure to fluctuations in interest rates. These financial exposures are monitored and managed by the Company as an integral part of its risk management program. The Company’s interest rate exposure is most sensitive to fluctuations in interest rates in the United States and Europe, which impact interest paid on its debt. The Company has debt with variable rates of interest based generally on LIBOR. From time to time, the Company enters into interest rate swap agreements to manage interest rate risk. These instruments are designated as cash flow hedges and are recorded at fair value using Level 2 observable market inputs.

Derivative instruments are recognized as either assets or liabilities on the balance sheet in either current or non-current other assets or other accrued liabilities or other long-term liabilities depending upon maturity and commitment. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the hedge transaction affects earnings. Any ineffective portion, or amounts related to contracts that are not designated as hedges, are recorded directly to earnings. The Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying hedged item. The Company does not use derivatives for speculative or trading purposes.

In April 2017, the Company entered into a three -year interest rate swap agreement transacted with a bank which converts the interest on the first notional $60.0 million of the Company's one-month LIBOR-based borrowings under its Amended Credit Facility from a variable rate, plus the borrowing spread, to a fixed rate of 1.58% plus the borrowing spread. The notional amount reduces quarterly by $5.0 million through March 31, 2020. The interest rate swap agreement was accounted for as cash flow hedge. Effectiveness of this derivative agreement is assessed quarterly by ensuring that the critical terms of the swap continue to match the critical terms of the hedged debt.

The following table sets forth the fair value amounts of derivative instruments held by the Company:



	March 31, 2018				December 31, 2017
In thousands	Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments:
Interest rate contract	$	289	$	—	$	157	$	—
Total derivatives	$	289	$	—	$	157	$	—

The following table sets forth the income recorded in accumulated other comprehensive income (loss), net of tax, for the quarters ended March 31, 2018 and 2017 for derivatives held by the Company and designated as hedging instruments:



	Quarter Ended March 31,
	2018		2017
Cash flow hedges:
Interest rate contract	$	102	$	—
	$	102	—

7. Equity Compensation Plans

As of March 31, 2018 , the Company’s equity compensation plans consisted of the 2003 Stock Incentive Compensation Plan (the “2003 Plan”) and the 2012 Stock Incentive Plan (the “2012 Plan” and together with the 2003 Plan, the “Plans”) under which incentive and non-qualified stock options and time and performance based restricted shares have been granted to employees and directors from authorized but unissued shares of common stock or treasury shares. The 2003 Plan is not active, but continues to govern all outstanding awards granted under the plan until the awards themselves are exercised or terminate in accordance with their terms. The 2012 Plan, approved by shareholders on April 27, 2012, authorizes 1.75 million shares of common stock for awards. The 2012 Plan also authorizes an additional 1.2 million shares of common stock to the extent awards granted under prior stock plans that were outstanding as of April 27, 2012 are forfeited. The 2012 Plan provides for the following types of awards: options, restricted stock, restricted stock units and other stock-based awards.

The Company accounts for the expense of all share-based compensation by measuring the awards at fair value on the date of grant. The Company recognizes expense on a straight-line basis over the vesting period of the entire award. Options issued by the Company under its stock option plans have a term of ten years and generally vest ratably over a period of three to four years. Time-based restricted stock grants are expensed over the vesting period of the award, which is typically two to four years. The number of performance based restricted shares that vest or forfeit depend upon achievement of certain targets during the performance period. The Company accounts for forfeitures as they occur. Compensation expense for performance based awards is recorded based upon the service period and management’s assessment of the probability of achieving the performance goals and will be adjusted based upon actual achievement.

The Company incurred equity compensation expense of $1.2 million for each of the quarters ended March 31, 2018 and March 31, 2017 , for the Plans, including restricted stock awards. No equity compensation costs were capitalized as part of inventory.

Stock Options

The following table is a summary of outstanding and exercisable options as of March 31, 2018 :



In thousands except per share amounts	Shares	Weighted- Average Exercise Price		Aggregate Intrinsic Value
Outstanding at March 31, 2018	417	$	34.36	$	6,732
Exercisable at March 31, 2018	207	$	21.90	$	5,611
Unvested at March 31, 2018	210	$	46.64	$	1,121

There were 11,180 stock options granted and 27,041 stock options exercised during the quarter ended March 31, 2018 . The amount of cash received from the exercise of stock options was $0.7 million during the quarter ended March 31, 2018 . The intrinsic value of stock options exercised was $0.6 million with a tax benefit of $0.1 million during the quarter ended March 31, 2018 .

There were no stock options granted and 12,164 stock options exercised during the quarter ended March 31, 2017. The amount of cash received from the exercise of stock options was $0.2 million during the quarter ended March 31,2017. The intrinsic value of stock options exercised was $0.5 million with a tax benefit of $0.2 million during the quarter ended March 31, 2017.

At March 31, 2018 , the total unrecognized compensation cost related to non-vested stock option awards was approximately $3.3 million , with a weighted average expected amortization period of 3.0 years .

Restricted Stock

Restricted stock includes both performance-based and time-based awards. There were 8,106 time-based restricted stock shares granted during the quarter ended March 31, 2018 . There were 15,190 performance-based restricted shares granted during the quarter ended March 31, 2018 . There were 48,035 performance-based restricted shares that vested during the quarter ended March 31, 2018 in accordance with plan provisions. There were 5,164 time-based restricted shares that vested during the quarter ended March 31, 2018.

There were no time-based restricted shares granted during the quarter ended March 31, 2017. There were 18,100 performance-based restricted shares granted during the quarter ended March 31, 2017. There were 108,600 performance-based restricted shares that vested during the quarter ended March 31, 2017 in accordance with Plan provisions. There were 9,288 time-based restricted shares that vested during the quarter ended March 31, 2017.

At March 31, 2018 , there were 187,902 unvested restricted stock awards with total unrecognized compensation cost related to these awards of $5.6 million with a weighted average expected amortization period of 2.1 years . Compensation expense for performance based awards is recorded based on the service period and management’s assessment of the probability of achieving the performance goals.

8. Stock Repurchases

During the three months ended March 31, 2018 , the Company purchased 18,561 shares of common stock valued at $0.8 million , through withholding, pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s equity compensation plans, in which the Company withholds that number of shares having fair value equal to each recipient’s minimum tax withholding due.

9. Restructuring

In April 2017, the Company commenced a restructuring plan in the Technical Nonwovens segment which includes plant consolidations and transfer of equipment to other facilities within the segment's Europe and China operations. The consolidation of certain plants, which is expected to conclude in the second quarter of 2019, is expected to reduce operating costs, increase efficiency and enhance the Company’s flexibility by better aligning its manufacturing footprint with the segment's customer base. Accordingly, the Company expects to record total pre-tax expenses of approximately $5.0 million , in connection with this restructuring plan, of which approximately $4.8 million is expected to result in cash expenditures over the period of consolidation. The Company also expects to incur cash expenditures of approximately $3.5 million for capital expenditures associated with this plan.

During the quarter ended March 31, 2018 , the Company recorded pre-tax restructuring expenses of $0.5 million . Restructuring expenses of $0.4 million , primarily related to severance and equipment move costs, were recorded in selling, product development and administrative expenses and $0.1 million of severance and engineering costs were recorded in cost of sales during the quarter ended March 31, 2018. The Company expects to record approximately $1.5 million of restructuring expenses in the second quarter of 2018 and $3.5 million for the year ended December 31, 2018.

Actual pre-tax expenses incurred and total estimated pre-tax expenses for the restructuring program by type are as follows:



In thousands	Severance and Related Expenses		Contract Termination Expenses		Facility Exit, Move and Set-up Expenses		Total
Total estimated expenses	1,200		300		3,500		5,000
Expenses incurred through December 31, 2017	181		154		327		662
Estimated remaining expense at December 31, 2017	1,019		146		3,173		4,338
Expense incurred during quarter ended:
March 31, 2018	$	315	$	—	$	219	$	534
Total pre-tax expense incurred	$	496	$	154	$	546	$	1,196
Estimated remaining expense at March 31, 2018	704		146		2,954		3,804

There were cash outflows of $0.3 million for the restructuring program for the quarter ended March 31, 2018.

Accrued restructuring costs were as follows at March 31, 2018 :



In thousands	Total
Balance as of December 31, 2017	$	333
Pre-tax restructuring expenses, excluding depreciation	469
Cash paid	(320		)
Balance as of March 31, 2018	$	482

10. Employer Sponsored Benefit Plans

As of March 31, 2018 , the Company maintains a defined benefit pension plan that covers certain domestic Lydall employees (“domestic pension plan”) that is closed to new employees and benefits are no longer accruing. The domestic pension plan is noncontributory and benefits are based on either years of service or eligible compensation paid while a participant is in the plan. The Company’s funding policy 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.

As of January 1, 2018 the Company adopted ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". This ASU required the other components of net benefit cost, which includes interest costs, expected return on plan assets, and amortization of actuarial loss be presented in the income statement outside a subtotal of income from operations for the quarter ended March 31, 2018. The retrospective adoption of this ASU resulted in the reclassification of net benefit costs of $0.1 million from cost of sales and $0.1 million from the selling, product development and administrative expenses to the other expense, net line in the Consolidated Statement of Operations for the quarter ended March 31, 2017.

The Company expects to contribute approximately $3.0 million to $4.0 million in cash for the domestic pension plan in 2018, and is evaluating this strategy as a result of the recent changes to U.S. tax law enacted on December 22, 2017. Contributions of $1.2 million were made during the quarter ended March 31, 2018 and during the quarter ended March 31, 2017.

The following is a summary of the components of net periodic benefit cost, which is recorded in other expense, net, for the domestic pension plan for the quarters ended March 31, 2018 and 2017 :



	Quarter Ended March 31,
In thousands	2018			2017
Components of net periodic benefit cost
Interest cost	$	470		$	514
Expected return on assets	(650		)	(594		)
Amortization of actuarial loss	256			273
Net periodic benefit cost	$	76		$	193

11. Income Taxes

On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of the Tax Cuts and Jobs Act (the "Tax Reform Act"). The Company has followed guidance in Staff Accounting Bulletin No.118 ("SAB 118"), which provides a measurement period, not to exceed one year from the enactment of the Tax Reform Act, and recorded provisional items related to the one-time mandatory repatriation of foreign earnings and the revaluation of deferred tax assets and liabilities for the year ended December 31, 2017. For the quarter ended March 31, 2018, the Company continued to perform analysis and evaluate interpretations and additional regulatory guidance, but did not record any adjustments to these provisional items, nor deemed any of them as complete.

The effective rate in the first quarter of 2017 of 17.6% was favorably impacted by a tax benefit of $1.6 million related to stock vesting as well as the geographical mix of earnings.

The Company and its subsidiaries file a consolidated federal income tax return, as well as returns required by various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities, including such major jurisdictions as the United States, France, Germany, China, the United Kingdom, Canada and the Netherlands. With few exceptions, the Company is no longer subject to U.S. federal examinations for years before 2015, state and local examinations for years before 2013, and non-U.S. income tax examinations for years before 2003.

The Company’s effective tax rates in future periods could be affected by earnings being higher or lower in countries where tax rates differ from the United States federal tax rate, the relative impact of permanent tax adjustments on higher or lower earnings from domestic operations, changes in net deferred tax asset valuation allowances, stock vesting, the completion of acquisitions or divestitures, changes in tax rates or tax laws and the completion of tax projects and audits.

12. Earnings Per Share

For the quarters ended March 31, 2018 and 2017 , basic earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Unexercised stock options and unvested restricted shares are excluded from this calculation but are included in the diluted earnings per share calculation using the treasury stock method as long as their effect is not antidilutive.

The following table provides a reconciliation of weighted-average shares used to determine basic and diluted earnings per share:



	Quarter Ended March 31,
In thousands	2018	2017
Basic average common shares outstanding	17,164	16,983
Effect of dilutive options and restricted stock awards	175	301
Diluted average common shares outstanding	17,339	17,284

For each of the quarters ended March 31, 2018 and 2017 , stock options for 137,709 shares and 38,280 shares of Common Stock were not considered in computing diluted earnings per common share because they were antidilutive.

13. Segment Information

As of March 31, 2018 , the Company’s reportable segments are Performance Materials, Technical Nonwovens, and Thermal Acoustical Solutions.

Effective January 1, 2018, the Thermal/Acoustical Metals and Thermal/Acoustical Fibers operating segments were combined into a single operating segment named Thermal Acoustical Solutions. These automotive segments were combined into one segment to allow the Company to better serve its customers, leverage operating disciplines and drive efficiencies across the global automotive operations.

Prior period segment amounts throughout the Notes to the Condensed Consolidated Financial Statements have been recast to reflect the results of the new segment structure. The recast of historical business segment information had no impact on the consolidated financial results.

Performance Materials Segment

The Performance Materials segment includes filtration media solutions primarily for air, fluid power, and industrial applications (“Filtration”), thermal insulation solutions for building products, appliances, and energy and industrial markets (“Thermal Insulation”) and air and liquid life science applications (“Life Sciences Filtration”). Filtration products include LydAir® MG (Micro-Glass) Air Filtration Media, LydAir® MB (Melt Blown) Air Filtration Media, LydAir® SC (Synthetic Composite) Air Filtration Media, and Arioso™ Membrane Composite Media. These products constitute the critical media component of clean-air systems for applications in clean-space, commercial, industrial and residential HVAC, power generation, and industrial processes. Lydall has leveraged its extensive technical expertise and applications knowledge into a suite of media products covering the vast liquid filtration landscape across the engine and industrial fields. The LyPore® Liquid Filtration Media series address a variety of application needs in fluid power including hydraulic filters, air-water and air-oil coalescing, industrial fluid processes and diesel fuel filtration.

Thermal Insulation products are high performance nonwoven veils, papers, mats and specialty composites for the building products, appliance, and energy and industrial markets. The Manniglas® Thermal Insulation brand is diverse in its product application ranging from high temperature seals and gaskets in ovens and ranges to specialty veils for HVAC and cavity wall insulation. The Lytherm® Insulation Media product brand services Lydall’s high temperature technology portfolio, traditionally utilized in the industrial market for kilns and furnaces used in metal processing. Lydall’s Cryotherm® Super-Insulating Media, CRS-Wrap® Super-Insulating Media and Cryo-Lite™ Cryogenic Insulation products are industry standards for state-of-the-art cryogenic insulation designs used by manufacturers of cryogenic equipment for liquid gas storage, piping, and transportation.

Life Sciences Filtration is comprised of products which have been designed to meet the stringent requirements of critical applications including biopharmaceutical pre-filtration and clarification, lateral flow diagnostic and analytical testing, respiratory protection, potable water filtration and high purity process filtration such as that found in food and beverage and medical applications. Lydall also offers ultra-high molecular weight polyethylene membranes under the Solupor® trade name. These specialty microporous membranes are utilized in various markets and applications including air and liquid filtration and transdermal drug delivery. Solupor® membranes incorporate a unique combination of high mechanical strength, chemical inertness, gamma stability and very high porosity making them ideal for many applications.

Technical Nonwovens Segment

The Technical Nonwovens segment primarily produces needle punch nonwoven solutions for myriad industries and applications. Products are manufactured and sold globally under the leading brands of Lydall Industrial Filtration, Southern Felt, Gutsche, and Texel. Industrial Filtration products include nonwoven rolled-good felt media and filter bags used primarily in industrial air and liquid filtration applications. Nonwoven filter media is the most effective solution to satisfy increasing emission control regulations in a wide range of industries, including power, cement, steel, asphalt, incineration, mining, food, and pharmaceutical. Advanced Materials products include nonwoven rolled-good media used in commercial applications and predominantly serves the geosynthetics, automotive, industrial, medical, and safety apparel markets. Automotive media is provided to Tier I/II suppliers and as well as the Company's Thermal Acoustical Solutions segment.

Technical Nonwovens segment products include air and liquid filtration media sold under the brand names Fiberlox® high performance filtration felts, Checkstatic™ conductive filtration felts, Microfelt® high efficiency filtration felts, Pleatlox® pleatable filtration felts, Ultratech™ PTFE filtration felts, Powertech® and Powerlox® power generation filtration felts, Microcap® high efficiency liquid filtration felts, Duotech membrane composite filtration felts, along with our porotex® family of high temperature filtration felts including microvel® and optivel® products. Technical Nonwovens Advanced Materials products are sold under the brand names Thermofit® thermo-formable products, Ecoduo® recycled content materials, Duotex® floor protection products, and Versaflex® composite molding materials. Technical Nonwovens also offers extensive finishing and coating capabilities which provide custom engineered properties tailored to meet the most demanding applications. The business leverages a wide range of fiber types and extensive technical capabilities to provide products that meet our customers’ needs across a variety of applications providing both high performance and durability.

Thermal Acoustical Solutions Segment

The Thermal Acoustical Solutions segment offers a full range of innovative engineered products tailored for the transportation sector to thermally shield sensitive components from high heat, improve exhaust gas treatment and lower harmful emissions as well as assist in the reduction of noise vibration and harshness (NVH). Lydall products are found in the interior (dash insulators, cabin flooring), underbody (wheel well, aerodynamic belly pan, fuel tank, exhaust, tunnel, spare tire) and under hood (engine compartment, outer dash, powertrain, catalytic converter, turbo charger, manifolds) of cars, trucks, SUVs, heavy duty trucks and recreational vehicles.

Thermal Acoustical Solutions segment products offer thermal and acoustical insulating solutions comprised of organic and inorganic fiber composites that provide weight reduction, superior noise suppression and increased durability over conventional designs, as well as products that efficiently combine multiple layers of metal and thermal - acoustical insulation media to provide an engineered shielding solution for an array of application areas for the automotive and truck markets. Lydall’s dBCore® is a lightweight acoustical composite that emphasizes absorption principles over heavy-mass type systems. Lydall’s dBLyte® is a high-performance acoustical barrier with sound absorption and blocking properties and can be used throughout a vehicle’s interior to minimize intrusive noise from an engine compartment and road. Lydall’s ZeroClearance® is an innovative thermal solution that utilizes an adhesive backing for attachment and is used to protect vehicle components from excessive heat. Lydall’s flux® product family includes several patented or IP-rich products that address applications which include: Direct Exhaust Mount heat shields, which are assembled to high temperature components like catalytic converters, turbochargers or exhaust manifolds using aluminized and stainless steel and high performance and high temperature heat insulating materials; Powertrain heat shields that absorb noise at the source and do not contribute to the engine's noise budget; and durable, thermally robust solutions for temperature sensitive plastic components such as fuel tanks that are in proximity to high temperature heat sources.

The tables below present net sales and operating income by segment for the quarters ended March 31, 2018 and 2017 , and also a reconciliation of total segment net sales and operating income to total consolidated net sales and operating income.

Consolidated net sales by segment:



	Quarter Ended March 31,
In thousands	2018			2017
Performance Materials Segment:
Filtration	$	20,690		$	18,846
Thermal Insulation	7,507			7,425
Life Sciences Filtration	2,496			2,480
Performance Materials Segment net sales	30,693			28,751

Technical Nonwovens Segment:
Industrial Filtration	40,231			34,214
Advanced Materials (1)	27,310			24,704
Technical Nonwovens net sales	67,541			58,918

Thermal Acoustical Solutions Segment:
Parts	88,122			81,814
Tooling	13,315			2,971
Thermal Acoustical Solutions Segment net sales	101,437			84,785
Eliminations and Other (1)	(8,011		)	(6,967		)
Consolidated Net Sales	$	191,660		$	165,487

Operating income by segment:



	Quarter Ended March 31,
In thousands	2018			2017 (2)
Performance Materials	$	2,641		$	1,658
Technical Nonwovens	5,006			4,668
Thermal Acoustical Solutions	12,614			14,796
Corporate Office Expenses	(6,225		)	(5,974		)
Consolidated Operating Income	$	14,036		$	15,148


(1)	Included in the Technical Nonwovens segment and Eliminations and Other is $7.1 million and $6.3 million in intercompany sales to the Thermal Acoustical Solutions segment for the quarters ended March 31, 2018 and 2017 , respectively.


(2)	First quarter 2017 segment operating income amounts of $0.2 million have been reclassified to other expense, net, to give effect to the adoption of ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost".

14. Commitments and Contingencies

Environmental Remediation

The Company elected to remediate environmental contamination discovered prior to the closing of the Texel acquisition in 2016 at a certain property in the province of Quebec, Canada (“the Property”) that was acquired by Lydall. The Company records accruals for environmental costs when such losses are probable and reasonably estimable. In 2016, the Company, through the engagement of a third-party environmental service firm, determined the final scope and timing of the remediation project and estimated the cost of the remediation project to range between $0.9 million and $1.5 million , which was further refined in July of 2017 to the top end of this range at $1.5 million and remains as the Company's best estimate as of March 31, 2018. During 2017, the environmental liability was reduced by $0.7 million , reflecting payments made to vendors, resulting in a balance of $0.8 million at December 31, 2017. During the three months ended March 31, 2018, the environmental liability was further reduced by $0.4 million , reflecting payments to vendors. The remaining balance for the environmental liability of $0.4 million (which remains fully offset as described below) is included within other long-term liabilities on the Company's balance sheet at March 31, 2018.

Pursuant to the Share Purchase Agreement, ADS, Inc. ("ADS") has agreed to indemnify the Company from all costs and liabilities associated with the contamination and remediation work, including the costs of preparation and approval of the remediation plan and other reports in relation therewith. This indemnity was secured by an environmental escrow account, which was established in the amount of $3.0 million Canadian Dollars (approximately $2.3 million U.S. Dollars as of March 31, 2018). Should the costs and liabilities exceed the environmental escrow amount, the Company also has access to the general indemnity escrow account, which was originally established in the amount of $14.0 million Canadian Dollars (approximately $10.9 million U.S. Dollars as of March 31, 2018), and based on the Share Purchase Agreement was reduced to approximately $7.0 million Canadian Dollars (approximately $5.4 million U.S. Dollars as of March 31, 2018). Based on the foregoing, an indemnification asset of $0.9 million was also recorded in other assets at December 31, 2016, and subsequently increased to $1.5 million in July of 2017, as the Company believed, and still believes collection from ADS is probable. The indemnification asset was decreased by $0.7 million , reflecting indemnification from ADS for payments made by the Company to its vendors during 2017. During the three months ended March 31, 2018, the indemnification asset was further reduced by $0.4 million , reflecting indemnification from ADS for payments made by the Company to its vendors The resulting indemnification asset balance was $0.4 million at March 31, 2018. The accrual for remediation costs will be adjusted as further information develops, estimates change and payments to vendors are made for remediation, with an off-setting adjustment to the indemnification asset from ADS if collection is deemed probable.

In the fourth quarter of 2016, as part of a groundwater discharging permitting process, water samples collected from wells and process water basins at the Company’s Rochester New Hampshire manufacturing facility, within the Performance Materials segment, showed concentrations of Perfluorinated Compounds (“PFCs”) in excess of state ambient groundwater quality standards.

In January 2017, the Company received a notification from the State of New Hampshire Department of Environmental Services (“NHDES”) naming Lydall Performance Materials, Inc. a responsible party with respect to the discharge of regulated contaminants and, as such, is required to take action to investigate and remediate the impacts in accordance with standards established by the NHDES. The Company conducted a site investigation, the scope of which was reviewed by the NHDES, in order to assess the extent of potential soil and groundwater contamination and develop a remedial action. Based on input received from NHDES in March 2017 with regard to the scope of the site investigation, the Company recorded $0.2 million of expense in the first quarter of 2017 associated with the expected costs of conducting this site investigation.

In the fourth quarter of 2017, the Company completed its state-approved site investigation report and submitted it to the NHDES. During the year ended December 31, 2017, the environmental liability of $0.2 million was reduced by $0.2 million reflecting payments made to vendors, resulting in no balance at December 31, 2017.

In the first quarter of 2018, the Company received a response from the NHDES to the site investigation report outlining proposed remedial actions. The Company recorded $0.1 million of expense in the first quarter of 2018 associated with the expected costs to remediate the impacts of the discharge of regulated contaminants in accordance with standards established by the NHDES. Additionally, the Company expects to incur approximately $0.2 million of capital expenditures in 2018, which will be recorded as incurred, in relation to the lining of the Company's fresh water waste lagoons.

While the site investigation is complete, the Company cannot be sure that costs will not exceed the current estimates until this matter is closed with the NHDES, nor that any future corrective action at this location would not have a material effect on the Company’s financial condition, results of operations or liquidity. Provisions for such matters are charged to expense when it is probable that a liability has been incurred and reasonable estimates of the liability can be made. Estimates of environmental liabilities are based on a variety of matters, including, but not limited to, the stage of investigation, the stage of the remedial design, evaluation of existing remediation technologies, and presently enacted laws and regulations. In future periods, a number of factors could significantly impact any estimates of environmental remediation costs.

15. Changes in Accumulated Other Comprehensive Income (Loss)

The following table discloses the changes by classification within accumulated other comprehensive income (loss) for the periods ended March 31, 2018 and 2017 :



In thousands	Foreign Currency Translation Adjustment			Defined Benefit Pension Adjustment				Gains and Losses on Cash Flow Hedges			Total Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2016	$	(27,885	)	$	(20,065	)		$	—		$	(47,950	)
Other Comprehensive Income	2,729			—				—			2,729
Amounts reclassified from accumulated other comprehensive loss	—			172			(a)	—			172
Balance at March 31, 2017	(25,156		)	(19,893		)		—			(45,049		)
Balance at December 31, 2017	(2,221		)	(18,049		)		122			(20,148		)
Other Comprehensive Income	2,545			—				102		(b)	2,647
Amounts reclassified from accumulated other comprehensive loss	—			198			(a)	—			198
Balance at March 31, 2018	$	324		$	(17,851	)		$	224		$	(17,303	)


(a)	Amount represents amortization of actuarial losses, a component of net periodic benefit cost. This amount was $0.2 million , net of $0.1 million tax benefit for the quarters ended March 31, 2018 and 2017 .


(b)	Amount represents unrealized gains on the fair value of hedging activities, net of taxes, for the quarter ended March 31, 2018 .



Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW AND OUTLOOK

Business

Lydall, Inc. and its subsidiaries (collectively, the “Company” or “Lydall”) design and manufacture specialty engineered nonwoven filtration media, industrial thermal insulating solutions, and thermal and acoustical barriers for filtration/separation and heat abatement and sound dampening applications. Lydall principally conducts its business through three reportable segments: Performance Materials, Technical Nonwovens and Thermal Acoustical Solutions, with sales globally. The Performance Materials segment includes filtration media solutions for air, fluid power, and industrial applications (“Filtration”), air and liquid life science applications (“Life Sciences Filtration”), and thermal insulation solutions for building products, appliances, and energy and industrial markets (“Thermal Insulation”). The Technical Nonwovens ("TNW") segment consists of Industrial Filtration products that include nonwoven rolled-goods felt media and filter bags used primarily in industrial air and liquid filtration applications as well as Advanced Materials products that include nonwoven rolled-good media that is used in other commercial applications and predominantly serves the geosynthetics, automotive, industrial and medical markets. Advanced Materials products also include automotive rolled-good material for use in the Thermal Acoustical Solutions segment manufacturing process. Nonwoven filter media is used to satisfy increasing emission control regulations in a wide range of industries, including power, cement, steel, asphalt, incineration, food, and pharmaceutical. The Thermal Acoustical Solutions ("TAS") segment offers innovative engineered products to assist in noise and heat abatement within the transportation sector.

First Quarter 2018 Highlights

Below are financial highlights comparing Lydall’s quarter ended March 31, 2018 (“ Q1 2018 ”) results to its quarter ended March 31, 2017 (“ Q1 2017 ”) results:


•	Net sales were $191.7 million in Q1 2018 , compared to $165.5 million in Q1 2017 , an increase of $26.2 million , or 15.8% . The change in consolidated net sales is summarized in the following table:



Components (in thousands)	Change in Net Sales		Percent Change
Parts volume and pricing change	6,924		4.2	%
Change in tooling sales	9,542		5.8	%
Foreign currency translation	9,707		5.8	%
Total	$	26,173	15.8	%


•	On January 1, 2018 the Company adopted Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASC 606”). The impact of adopting ASC 606 resulted in an increase to net sales of $6.3 million, of which $6.2 million related to tooling sales, and an increase to net income of $0.2 million for the quarter ended March 31, 2018.

•

Gross margin decreased 390 basis points to 20.6% in the first quarter of 2018, primarily driven by the Thermal Acoustical Solutions segment, and to a lesser extent the Technical Nonwovens and Performance Materials segments. The Thermal Acoustical Solutions segment negatively impacted consolidated gross margin by approximately 290 basis points due to a sharp increase in demand on key platforms in North America, and coupled with equipment downtime and other inefficiencies, resulted in excessive manufacturing and freight costs to meet customer delivery schedules. Also, increased aluminum costs and reduced customer pricing for certain parts contributed to lower gross margin.

•

Operating income was $ 14.0 million , or 7.3% , of net sales in Q1 2018 , compared to $ 15.1 million , or 9.2% of net sales, in Q1 2017 . Operating margin declined due to the negative impact of lower gross margin of 390 basis points. Decreased gross margin was partially offset by a 200 basis point reduction in selling, product development and administrative expenses as a percentage of net sales compared to the first quarter of 2017 primarily due to managed spending coupled

with sales growth. The following components are included in operating income for Q1 2018 and Q1 2017 and impact the comparability of each quarter:



	Q1 2018					Q1 2017
Components (in thousands except per share amounts)	Operating income effect		EPS impact			Operating income effect		EPS impact
TNW restructuring expenses	(534	)	$	(0.03	)	—		$	—
Strategic initiatives expenses	(122	)	$	(0.01	)	(160	)	$	(0.01	)
Severance expenses	—		$	—		(988	)	$	(0.03	)
Inventory step-up purchase accounting adjustments	—		$	—		(481	)	$	(0.02	)
Impairment charge	—		$	—		(772	)	$	(0.03	)


•	The Company's effective tax rate for Q1 2018 was 16.1% compared to 17.6% in Q1 2017. The effective tax rate in the first quarter of 2018 was impacted by the reduction of the U.S. corporate tax rate from 35% to 21% under the U.S. Tax Cuts and Jobs Act, while the first quarter of 2017 was impacted by 11.4% due to tax benefits from stock vesting.


•	Net income was $11.1 million , or $0.64 per diluted share, in Q1 2018 and $11.7 million , or $0.68 per diluted share, in Q1 2017.

Liquidity

Cash flows used in operations in the first quarter of 2018 were $4.0 million compared with cash provided by operations of $12.4 million in the first quarter of 2017. The reduction in cash from operations was primarily caused by increased accounts receivable since December 31, 2017 driven by increased sales and lower accounts payable based on timing of inventory and capital expenditures. Cash was $49.1 million at March 31, 2018, compared to $59.9 million at December 31, 2017, with availability of $94.5 million on the Company's domestic credit facility at March 31, 2018.

Outlook

Looking forward in the second quarter of 2018, the Company expects robust backlog and order activity to continue across all segments and overall organic growth to be in a range consistent with the first quarter of 2018. The TAS segment expects commodity inflation and reduced customer pricing on certain applications to continue. Meaningful improvements are being made to address TAS manufacturing processes and equipment efficiency to reduce excessive manufacturing costs and improve gross margin. Overall, the Company expects quarterly sequential improvement in consolidated gross margin in the second quarter, but the Company does expect consolidated gross margin to be lower than the same period last year. The Company remains focused on executing the Technical Nonwovens' restructuring plan that is expected to reduce operating costs and increase efficiency. The Company will also continue to pursue organic and inorganic opportunities to drive profitable growth.

Results of Operations

All of the following tabular comparisons, unless otherwise indicated, are for the quarters ended March 31, 2018 ( Q1-18 ) and March 31, 2017 ( Q1-17 ).

Net Sales



	Quarter Ended
In thousands	Q1-18		Q1-17		Percent Change
Net sales	$	191,660	$	165,487	15.8	%

Net sales for the first quarter of 2018 increased by $26.2 million, or 15.8%, compared to the first quarter of 2017. Foreign currency translation had a favorable impact on net sales of $9.7 million, or 5.8% of consolidated net sales, in the first quarter of 2018 compared to the first quarter of 2017. Net sales increased in the Thermal Acoustical Solutions segment by $16.7 million, or 10.1% of consolidated net sales, including increased tooling sales of $10.3 million. The increase in tooling sales was primarily due to the Company's adoption of ASC 606 which resulted in the recognition of $6.2 million of Thermal Acoustical Solutions tooling sales as the Company's performance obligations were satisfied over time in the first quarter of 2018 compared to the first quarter

of 2017 when tooling sales were recognized when delivered and accepted by the customer. The Technical Nonwovens segment reported sales growth of $8.6 million, or 5.2% of consolidated net sales, primarily due to increased industrial filtration sales of $6.0 million in the first quarter of 2018 compared to the first quarter of 2017. The Performance Materials segment reported growth in net sales of $1.9 million, or 1.2% of consolidated net sales.

Cost of Sales



	Quarter Ended
In thousands of dollars	Q1-18		Q1-17		Percent Change
Cost of sales	$	152,153	$	124,989	21.7	%

Cost of sales for the first quarter of 2018 increased by $27.2 million, or 21.7%, compared to the first quarter of 2017. The increase in cost of sales was primarily due to increased net sales across all segments and included $6.1 million of tooling costs in the Thermal Acoustical Solutions segment related to the adoption of ASC 606 that under prior accounting rules would be recognized upon delivery and acceptance by the customer. Other items contributing to the increase in cost of sales for the first quarter of 2018 compared to the first quarter of 2017 were incremental manufacturing costs, primarily in the Thermal Acoustical Solutions segment related to incremental scrap, excessive overtime and expedited freight expenses from equipment downtime and other inefficiencies, including interruptions in production associated with pre-launch activities and prototypes. Cost of sales also increased in the first quarter of 2018 compared to the first quarter of 2017 due to raw material commodity increases, primarily in the Thermal Acoustical Solutions and Technical Nonwovens segments. These increases to cost of sales were partially offset by improved mix of products in the Thermal Acoustical Solutions segment and the absence of $0.5 million in purchase accounting adjustments to cost of sales related to inventory step-up in the Technical Nonwovens segment. Foreign currency translation increased cost of sales in the first quarter of 2018 compared to the first quarter of 2017 by $8.2 million, or 6.6%.

Gross Profit



	Quarter Ended
In thousands	Q1-18			Q1-17			Percent Change
Gross profit	$	39,507		$	40,498		(2.4	)%
Gross margin	20.6		%	24.5		%

Gross margin for the first quarter of 2018 was 20.6% compared to 24.5% in the first quarter of 2017. The Thermal Acoustical Solutions segment negatively impacted consolidated gross margin by approximately 290 basis points, primarily related to incremental scrap, excessive overtime and expedited freight expenses from equipment downtime and other inefficiencies, including interruptions in production associated with pre-launch activities and prototypes. Also, increased aluminum costs and reduced customer pricing for certain parts contributed to lower gross margin in the segment. The Technical Nonwovens segment negatively impacted consolidated gross margin by approximately 50 basis points, primarily related to restructuring related expenses of $0.4 million, or 20 basis points, as well as unfavorable mix and increased variable overhead expenses, partially offset by the absence of the negative impact of $0.5 million, or 30 basis points, of purchase accounting adjustments relating to inventory step up in the first quarter of 2017. Additionally, the Performance Materials segment negatively impacted consolidated gross margin by approximately 50 basis points, primarily as a result of unfavorable absorption of fixed costs.

Selling, Product Development and Administrative Expenses



	Quarter Ended
In thousands	Q1-18			Q1-17			Percent Change
Selling, product development and administrative expenses	$	25,471		$	25,350		0.5	%
Percentage of sales	13.3		%	15.3		%

Selling, product development and administrative expenses for the first quarter of 2018 increased by $0.1 million compared to the first quarter of 2017. This increase was primarily related to greater professional fees of $0.7 million, salaries of $0.5 million and intangible amortization expense of $0.3 million. These increases were primarily offset by the absence of a non-cash long-lived asset impairment charge of $0.8 million incurred in the first quarter of 2017 in the Performance Materials segment, lower severance expense of $0.3 million and a decrease in other administrative expenses of $0.3 million. Selling, product development and

administrative expenses decreased 200 basis points as a percentage of net sales compared to the first quarter of 2017 primarily due to managed spending coupled with sales growth.

Interest Expense



	Quarter Ended
In thousands	Q1-18			Q1-17			Percent Change
Interest expense	$	540		$	606		(10.9	)%
Weighted average interest rate	2.6		%	1.8		%

The decrease in interest expense for the quarter ended March 31, 2018 compared to the quarter ended March 31, 2017 was due to lower average borrowings outstanding, partially offset by increased interest rates under the Company’s Amended Credit Facility used to finance both the Texel and Gutsche acquisitions in 2016.

Other Income/Expense, net



	Quarter Ended
In thousands	Q1-18		Q1-17		Dollar Change
Other expense, net	$	315	$	333	$	(18	)

Other expense, net, for the quarter ended March 31, 2018 compared to the quarter ended March 31, 2017 was relatively flat, as net foreign currency losses recognized on the revaluation of cash, trade payables and receivables and intercompany loans denominated in currencies other than the functional currencies of the Company's subsidiaries was consistent with prior year.

Income Taxes

On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of the Tax Cuts and Jobs Act (the "Tax Reform Act"). The Company has followed guidance in Staff Accounting Bulletin No.118 ("SAB 118"), which provides a measurement period, not to exceed one year from the enactment of the Tax Reform Act, and recorded provisional items related to the one-time mandatory repatriation of foreign earnings and the revaluation of deferred tax assets and liabilities for the year ended December 31, 2017. For the quarter ended March 31, 2018, the Company continued to perform analysis and evaluate interpretations and additional regulatory guidance but did not record any adjustments to these provisional items and has not deemed any of them as complete.

The Company’s effective tax rate for the first quarter of 2018 was 16.1% compared to an effective tax rate of 17.6% for the first quarter of 2017. The effective tax rate in the first quarter of 2018 was impacted by the reduction of the U.S. corporate tax rate from 35% to 21% under the Tax Reform Act, tax benefits of $0.3 million related to stock vesting and the geographical mix of earnings. The effective rate in the first quarter of 2017 of 17.6% was favorably impacted by a tax benefit of $1.6 million related to stock vesting as well as the geographical mix of earnings. The Company now expects its ordinary effective tax rate in 2018 to be in the range of 18% to 20%.

Segment Results

The following tables present net sales information for the key product and service groups included within each operating segment as well as other products and services and operating income by segment, for the quarter ended March 31, 2018 compared with the quarter ended March 31, 2017 :

Net sales by segment:



	Quarter Ended
In thousands	Q1-18			Q1-17			Dollar Change
Performance Materials Segment:
Filtration	$	20,690		$	18,846		$	1,844
Thermal Insulation	7,507			7,425			82
Life Sciences Filtration	2,496			2,480			16
Performance Materials Segment net sales	30,693			28,751			1,942

Technical Nonwovens Segment:
Industrial Filtration	40,231			34,214			6,017
Advanced Materials (1)	27,310			24,704			2,606
Technical Nonwovens net sales	67,541			58,918			8,623

Thermal Acoustical Solutions Segment:
Parts	88,122			81,814			6,308
Tooling	13,315			2,971			10,344
Thermal Acoustical Solutions Segment net sales	101,437			84,785			16,652
Eliminations and Other (1)	(8,011		)	(6,967		)	(1,044		)
Consolidated Net Sales	$	191,660		$	165,487		$	26,173

Operating income by segment:



	Quarter Ended
	Q1-18				Q1-17
In thousands	Operating Income			Operating Margin %	Operating Income			Operating Margin %	Dollar Change
Performance Materials	$	2,641		8.6%	$	1,658		5.8%	$	983
Technical Nonwovens	5,006			7.4%	4,668			7.9%	338
Thermal Acoustical Solutions	12,614			12.4%	14,796			17.5%	(2,182		)
Corporate Office Expenses	(6,225		)		(5,974		)		(251		)
Consolidated Operating Income	$	14,036		7.3%	$	15,148		9.2%	$	(1,112	)


(1)	Included in the Technical Nonwovens segment and Eliminations and Other is $7.1 million and $6.3 million in intercompany sales to the Thermal Acoustical Solutions segment for the quarters ended March 31, 2018 and 2017 , respectively.

Performance Materials

Segment net sales increased $1.9 million, or 6.8%, in the first quarter of 2018 compared to the first quarter of 2017. The increase was primarily due to foreign currency translation which had a positive impact on net sales of $1.6 million, or 5.4%. Net sales of filtration products increased approximately $1.8 million, or 9.8%, due to increased demand in the fluid power market, partially offset by decreased volume in the air filtration market, particularly in Europe. Thermal insulation and life sciences product net sales were essentially flat compared to the first quarter of 2017. The Company's adoption of ASC 606, which impacts the timing of revenue recognition, contributed $0.4 million of the sales increase.

The Performance Materials segment reported operating income of $2.6 million, or 8.6% of net sales, in the first quarter of 2018, compared to operating income of $1.7 million, or 5.8% of net sales, in the first quarter of 2017. The increase in operating margin of 280 basis points was attributable to decreased selling, product development and administrative expenses of $0.7 million, or 350 basis points as a percentage of net sales, due to the absence of $0.8 million of expense from a non-cash long-lived asset impairment charge in the first quarter of 2017. This increase to operating margin was partially offset by lower gross margin of approximately 70 basis points due to unfavorable absorption of fixed costs. Foreign currency translation had a positive impact on operating income of $0.1 million, or 8.2%, in the first quarter of 2018 compared to the first quarter of 2017.

Technical Nonwovens

Segment net sales increased $8.6 million, or 14.6%, in the first quarter of 2018 compared to the first quarter of 2017 primarily due to increased industrial filtration sales of $6.0 million, or 17.6%, particularly from increased demand in Europe and to a lesser extent, China and North America. Additionally, advanced materials sales increased $2.6 million, or 10.5%, due to increased demand in North America, coupled with increased sales of automotive rolled-good material for use in the Thermal Acoustical Solutions segment manufacturing process. Foreign currency translation had a positive impact on segment net sales of $4.0 million, or 6.9%, in the first quarter of 2018 compared to the first quarter of 2017. The Company's adoption of ASC 606, which impacts the timing of revenue recognition, had a minimal impact on net sales in the first quarter of 2018.

The Technical Nonwovens segment reported operating income of $5.0 million, or 7.4% of net sales, in the first quarter of 2018, compared to $4.7 million, or 7.9% of net sales, in the first quarter of 2017. The increase in segment operating income of $0.3 million was due to increased sales from improved global demand, primarily related to increased industrial filtration sales. The decrease in operating margin of 50 basis points was attributable to lower gross margin of approximately 140 basis points. Gross margin was negatively impacted by segment restructuring expenses of $0.4 million, or 70 basis points, as well as unfavorable mix and increased variable overhead expenses, partially offset by inventory step-up of $0.5 million, or 80 basis points, in the first quarter of 2017. Selling, product development and administrative expenses increased $0.5 million in the first quarter of 2018 compared to the first quarter of 2017, however, decreased by approximately 90 basis points as a percentage of net sales. The increase in selling, product development and administrative expenses was primarily related to increased salaries and sales commissions of $0.5 million and higher amortization of intangible assets of $0.3 million, partially offset by lower accrued incentive compensation of $0.3 million in the first quarter of 2018 compared to the first quarter of 2017. Foreign currency translation had a favorable impact on operating income of $0.2 million, or 4.0%, in the first quarter of 2018 compared to the first quarter of 2017.

Thermal Acoustical Solutions

Segment net sales increased $16.7 million, or 19.6%, in the first quarter of 2018 compared to the first quarter of 2017. Tooling net sales increased $10.3 million compared to the first quarter of 2017 due to new platform launches and the impact of the Company's adoption of ASC 606 effective January 1, 2018 which impacts the timing of revenue recognition. The new standard resulted in the recognition of an additional $6.2 million of segment tooling sales that under prior accounting rules would have been recognized upon delivery and acceptance by the customer in a later period. Additionally, parts net sales increased $6.3 million, or 7.7%, compared to the first quarter of 2017, primarily due to increased global demand, partially offset by reduced customer pricing on certain parts. The Company's adoption of ASC 606, which impacts the timing of revenue recognition, had a minimal impact on parts net sales in the first quarter of 2018. Foreign currency translation had a positive impact on segment net sales of $4.1 million, or 4.8%, in the first quarter of 2018 compared to the first quarter of 2017.

The Thermal Acoustical Solutions segment reported operating income of $12.6 million, or 12.4% of net sales, in the first quarter of 2018, compared to operating income of $14.8 million, or 17.5% of net sales, in the first quarter of 2017. The decrease in operating income of $2.2 million and operating margin of 510 basis points was due to lower gross margin of 620 basis points primarily due to incremental scrap, excessive overtime and expedited freight expenses from equipment downtime and other inefficiencies, including interruptions in production associated with pre-launch activities and prototypes. Additionally, increased aluminum costs and reduced customer pricing for certain parts contributed to lower gross margin. This decrease to gross margin was partially offset by a 110 basis point decrease in selling, product development and administrative expenses as a percentage of net sales. Lower severance and information technology expenses of $0.4 million and $0.3 million, respectively, were offset by increased accrued compensation expense of $0.3 million, consulting expenses of $0.2 million and other administrative expenses of $0.2 million in the first quarter of 2018 compared to the first quarter of 2017. Foreign currency translation had a favorable impact on operating income of $0.2 million, or 1.2%, in the third quarter of 2018 compared to the third quarter of 2017.

Corporate Office Expenses

Corporate office expenses for the first quarter of 2018 were $6.3 million, compared to $6.0 million in the first quarter of 2017. The increase of $0.3 million was primarily due to increased professional fees of $0.5 million, partially offset by decreased stock compensation expense of $0.2 million in the first quarter of 2018 compared to the first quarter of 2017.

Liquidity and Capital Resources

The Company assesses its liquidity in terms of its ability to generate cash to fund operating, investing and financing activities. The principal source of liquidity is operating cash flows. In addition to operating cash flows, other significant factors that affect the overall management of liquidity include capital expenditures, investments in businesses, strategic transactions, income tax payments, debt service payments, outcomes of contingencies, foreign currency exchange rates and pension funding. The Company manages worldwide cash requirements by considering available funds among domestic and foreign subsidiaries. The Company expects to finance its 2018 operating cash and capital spending requirements from existing cash balances, cash provided by operating activities and through borrowings under the Amended Credit Facility, as needed.

At March 31, 2018 , the Company held $49.1 million in cash and cash equivalents, including $8.6 million in the U.S. with the remaining held by foreign subsidiaries.

Financing Arrangements

On July 7, 2016, the Company amended its $100 million senior secured revolving credit facility (“Amended Credit Facility”) which increased the available borrowing from $100 million to $175 million , added a fourth lender and changed the maturity date from January 31, 2019 to July 7, 2021. The Amended Credit Facility is secured by substantially all of the assets of the Company. The Company entered into this Amended Credit Facility in part to fund a majority of the 2016 acquisitions and provide additional capacity to support organic growth programs, fund capital investments and continue pursuits of attractive acquisitions.

Under the terms of the Amended Credit Facility, the lenders are providing a $175 million revolving credit facility to the Company, under which the lenders may make revolving loans and issue letters of credit to or for the benefit of the Company and its subsidiaries. The Company may request the Amended Credit Facility be increased by an aggregate amount not to exceed $50 million through an accordion feature, subject to specified conditions.

In addition to the amounts outstanding under the Amended Credit Facility, the Company has various acquired foreign credit facilities totaling approximately $10.0 million . At March 31, 2018, the Company's foreign subsidiaries had $0.1 million in borrowings outstanding as well as $3.0 million in standby letters of credit outstanding.

In April 2017, the Company entered into a three -year interest rate swap agreement transacted with a bank which converts the interest on the first notional $60.0 million of the Company's one-month LIBOR-based borrowings under its revolver loan from a variable rate, plus the borrowing spread, to a fixed rate of 1.58% plus the borrowing spread. The notional amount reduces quarterly by $5.0 million through March 31, 2020. The Company is accounting for the interest rate swap agreement as a cash flow hedge. Effectiveness of this derivative agreement is assessed quarterly by ensuring that the critical terms of the swap continue to match the critical terms of the hedged debt.

Operating Cash Flows

Net cash used for operating activities in the first three months of 2018 was $4.0 million compared with net cash provided by operating activities of $12.4 million in the first three months of 2017. In the first three months of 2018, net income and non-cash adjustments were $20.1 million compared to $20.9 million in the first three months of 2017. Since December 31, 2017 , net operating assets and liabilities increased by $24.0 million, primarily due to increases of $18.6 million in accounts receivable, $8.8 million in inventories and $5.7 million in contract assets, partially offset by an increase of $9.5 million in accounts payable. The increase in accounts receivable and contract assets was primarily due to higher net sales in the first quarter of 2018 compared to the fourth quarter of 2017 of $13.6 million, primarily from the Thermal Acoustical Solutions segment. The increase in inventory was principally due to higher raw material inventories, primarily associated with strategic purchases within the Technical Nonwovens segment to meet seasonal demands. The increase in accounts payable was primarily driven by the timing of vendor payments and payments for capital expenditures within the Thermal Acoustical Solutions segment during the first three months of 2018.

Investing Cash Flows

In the first three months of 2018 and 2017, net cash used for investing activities consisted of capital expenditures of $7.7 million and $9.6 million , respectively. Capital spending for 2018 is expected to be approximately $30 million to $35 million .

Financing Cash Flows

In the first three months of 2018, net cash used for financing activities was $0.2 million compared to net cash used by financing activities of $12.8 million in the first three months of 2017. Debt repayments were $0.1 million and $10.5 million in the first three months of 2018 and 2017, respectively. The Company acquired $0.8 million and $2.5 million in company stock through its equity compensation plans during the first three months of 2018 and 2017, respectively. The Company received $0.7 million from the exercise of stock options in the first three months of 2018, compared to $0.2 million in the first three months of 2017.

Critical Accounting Estimates

The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Note 1 of the “Notes to Consolidated Financial Statements” and Critical Accounting Estimates in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and the “Notes to Condensed Consolidated Financial Statements” of this report describe the significant accounting policies and critical accounting estimates used in the preparation of the consolidated financial statements. The Company’s management is required to make judgments and estimates about the effect of matters that are inherently uncertain. Actual results could differ from management’s estimates. There have been no significant changes in the Company’s critical accounting estimates during the quarter ended March 31, 2018, except for those described in Note 2 of this report in relation to the Company's adoption of ASC 606.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on the Company’s judgment and estimates of undiscounted future cash flows resulting from the use of the assets and their eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the assets. If the carrying values of the assets are determined to be impaired, then the carrying values are reduced to their estimated fair values. The fair values of the impaired assets are determined based on applying a combination of market approaches, including independent appraisals when appropriate, the income approach, which utilizes cash flow projections, and the cost approach.

During the first quarter of 2017, the Company tested for impairment a discrete long-lived asset group in the Performance Materials segment with a carrying value of $1.3 million, as a result of indicators of possible impairment. To determine the recoverability of this asset group, the Company completed an undiscounted cash flow analysis and compared it to the asset group carrying value. This analysis was primarily dependent on the expectations for net sales over the estimated remaining useful life of the underlying asset group. The impairment test concluded that the asset group was not recoverable as the resulting undiscounted cash flows were less than their carrying amount. Accordingly, the Company determined the fair value of the asset group to assess if there was an impairment. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions considered to be Level 3 inputs. To determine the estimated fair value of the asset group the Company used the market approach. Under the market approach, the determination of fair value considered market conditions including an independent appraisal of the components of the asset group. The estimated fair value of the asset group was $0.5 million, below its carrying value of $1.3

million, which resulted in a long-lived asset impairment charge of $0.8 million included in selling, product development and administrative expenses during the quarter ended March 31, 2017. This long-lived asset group, with a net book value of $0.5 million, is classified as held for sale as of March 31, 2018.



Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Lydall’s limited market risk exposures relate to changes in foreign currency exchange rates and interest rates.

Foreign Currency Risk

The Company has operations in France, Germany, China, the United Kingdom, Canada and the Netherlands, in addition to the United States. As a result of this, the Company’s financial results are affected by factors such as changes in foreign currency exchange rates or economic conditions in the foreign markets where the Company manufactures and distributes its products. The Company’s currency exposure is to the US Dollar, the Euro, the Chinese Yuan, the British Pound Sterling, the Canadian Dollar, the Japanese Yen and the Hong Kong Dollar. The Company’s foreign and domestic operations attempt to limit foreign currency exchange transaction risk by completing transactions in local functional currencies, whenever practicable. The Company may periodically enter into foreign currency forward exchange contracts to mitigate exposure to foreign currency volatility. In addition, the Company utilizes bank loans and other debt instruments throughout its operations. To mitigate foreign currency risk, such debt is denominated primarily in the functional currency of the operation maintaining the debt.

The Company also has exposure to fluctuations in currency risk on intercompany loans that the Company makes to certain of its subsidiaries. The Company may periodically enter into foreign currency forward contracts which are intended to offset the impact of foreign currency movements on the underlying intercompany loan obligations.

Interest Rate Risk

The Company’s interest rate exposure is most sensitive to fluctuations in interest rates in the United States and Europe, which impact interest paid on its debt. The Company has debt with variable rates of interest based generally on LIBOR. Increases in interest rates could therefore significantly increase the associated interest payments that the Company is required to make on this debt. From time to time, the Company may enter into interest rate swap agreements to manage interest rate risk. The Company has assessed its exposure to changes in interest rates by analyzing the sensitivity to Lydall’s earnings assuming various changes in market interest rates. Assuming a hypothetical increase of one percentage point in interest rates on the variable interest rate debt as of March 31, 2018 , the Company’s net income would decrease by an estimated $0.3 million over a twelve-month period.



Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Company’s President and Chief Executive Officer (the “CEO”) and the Executive Vice President and Chief Financial Officer (the "CFO"), conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "SEC"), and that such information is accumulated and communicated to management of the Company, with the participation of its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2018 at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2018 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION



Item 1.	Legal Proceedings

The Company is subject to legal proceedings, claims, investigations and inquiries that arise in the ordinary course of business such as, but not limited to, actions with respect to commercial, intellectual property, employment, personal injury, and environmental matters. The Company believes that it has meritorious defenses against the claims currently asserted against it and intends to defend them vigorously. While the outcome of litigation is inherently uncertain and the Company cannot be sure that it will prevail in any of the cases, subject to the matter referenced below, the Company is not aware of any matters pending that are expected to have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.



Item 1A.	Risk Factors

See Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 , as updated by Part I, Item 1. Legal Proceedings of this report. The risks described in the Annual Report on Form 10-K, and the “Cautionary Note Concerning Forward-Looking Statements” in this report, are not the only risks faced by the Company. Additional risks and uncertainties not currently known or that are currently judged to be immaterial may also materially affect the Company’s business, financial position, results of operations or cash flows.



Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended March 31, 2018 , the Company acquired 18,561 shares of common stock through withholding, pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s equity compensation plans, in which the Company withholds that number of shares having fair value equal to each recipient’s minimum tax withholding due.



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares That May Yet Be Purchased Under the Program
January 1, 2018 - January 31, 2018	—	$	—	—	—
February 1, 2018 - February 28, 2018	18,561	$	44.35	—	—
March 1, 2018 - March 31, 2018	—	$	—	—	—
	18,561	$	44.35	—	—



Item 5.	Other Information

Submission of Matters to a Vote of Security Holders

At the annual meeting of stockholders of the Company held on April 27, 2018, stockholders voted on three proposals presented to them for consideration:

1. Election of Nominees to the Board of Directors

The following nominees were elected to the Company’s Board of Directors to serve until the next annual meeting to be held in 2019 and until their successors are duly elected and qualified. The results of the voting were as follows:



Director	For	Withheld	Broker Non-Votes
Dale G. Barnhart	14,852,898	120,527	737,095
David G. Bills	14,928,627	44,798	737,095
Kathleen Burdett	14,739,011	234,414	737,095
James J. Cannon	14,881,131	92,294	737,095
Matthew T. Farrell	14,515,244	458,181	737,095
Marc T. Giles	14,662,100	311,325	737,095
William D. Gurley	14,573,647	399,778	737,095
Suzanne Hammett	14,674,042	299,383	737,095
S. Carl Soderstorm, Jr.	14,461,593	511,832	737,095

2. Advisory Vote on Executive Compensation

Stockholders approved, on an advisory basis, the executive compensation of the Company’s named executive officers. The results of the voting were as follows:



For	14,721,050
Against	241,576
Abstain	10,799
Broker Non-Votes	737,095

3. Ratification of Appointment of Independent Auditors

Stockholders ratified the appointment of PricewaterhouseCoopers LLP as the Company’s independent auditors for fiscal year 2018. The results of the voting were as follows:



For	15,225,354
Against	484,930
Abstain	236



Item 6.	Exhibits



Exhibit Number			Description

10.1			Employment Agreement with Randall B. Gonzales dated March 12, 2018, filed herewith.

10.2			Offer Letter for Randall B. Gonzales dated January 5, 2018, filed herewith.

31.1			Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, of principal executive officer, filed herewith.

31.2			Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, of principal financial officer, filed herewith.

32.1			Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

101.INS			XBRL Instance Document

101.SCH			XBRL Taxonomy Extension Schema Document

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			XBRL Taxonomy Extension Label Linkbase Document

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	LYDALL, INC.

May 1, 2018	By:	/s/ Randall B. Gonzales
		Randall B. Gonzales Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer)

AGREEMENT

THIS AGREEMENT is made and entered by and between LYDALL, INC., a Delaware corporation (the "Company"), and Randall B. Gonzales (“the "Employee"), effective March 12, 2018.

W I T N E S S E T H

WHEREAS, the Company and the Employee (the "Parties") have agreed to enter into this agreement (the "Agreement) relating to the termination of the employment of the Employee;

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows:

1. Termination of Employment by the Company .

1.1 Termination by the Company Other Than For Cause . The Company may terminate the Employee's employment at any time other than for Cause (as defined in Section 1.2), by giving the Employee a written notice of termination at least 30 days before the date of termination (or such lesser notice period as the Employee may agree to). In the event of such a termination of employment pursuant to this Section 1.1, the Employee shall be entitled to receive (i) the benefits described in Section 3 if such termination of employment does not occur within 18 months following a "Change of Control" (as defined in Section 5), or (ii) the benefits described in Section 4 if such termination of employment occurs within 18 months following a Change of Control.

1.2 Termination for Cause . The Company may terminate the Employee's employment immediately for Cause for any of the following reasons: (i) an act or acts of dishonesty or fraud by the Employee relating to the performance of his services to the Company; (ii) a breach by the Employee of his duties or responsibilities under this Agreement resulting in significant demonstrable injury to the Company or any of its subsidiaries; (iii) the Employee's conviction of a felony or any crime involving moral turpitude; (iv) the Employee's material failure (for reasons other than death or Disability) to perform his duties under this Agreement or insubordination (defined as refusal to execute or carry out directions from the Board or its duly appointed designees) where the Employee has been given written notice of the acts or omissions constituting such failure or insubordination and the Employee has failed to cure such conduct, where susceptible to cure, within ten days following such notice; or (v) a breach by the Employee of any provision of any material policy of the Company or of his obligations under the confidentiality, non-competition and invention ownership agreement executed by the Employee and attached hereto as Exhibit A (the "Confidentiality Agreement"). The Company shall exercise its right to terminate the Employee's employment for Cause by giving the Employee written notice of termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive only (i) his base salary earned through the date of such termination of employment plus his base salary for the period of any vacation time earned but not taken for the year of termination of employment, such base salary to be paid in a lump sum no later than the next payroll date following the Employee's date of termination to the extent not previously paid, (ii) any other compensation and benefits to the extent actually earned by the Employee under any other benefit plan or program of the Company as of the date of such termination of employment, such compensation and

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benefits to be paid at the normal time for payment of such compensation and benefits to the extent not previously paid and (iii) any reimbursement amounts owing.


2.	Termination of Employment by the Employee .

(a) The Employee may terminate his employment at any time and for any reason by giving the Company a written notice of termination to that effect at least 30 days before the date of termination (or such lesser notice period as the Company may agree to); provided, however, that the Company following receipt of such notice from the Employee may elect to have the Employee's employment terminate immediately following its receipt of such notice. In the event of the Employee's termination of his employment, the Employee shall be entitled to receive only (i) his base salary earned through the date of such termination of employment plus his base salary for the period of vacation time earned but not taken for the year of termination of employment, such base salary to be paid in a lump sum no later than the next payroll date following the Employee's date of termination to the extent not previously paid, (ii) any other compensation and benefits to the extent actually earned by the Employee under any other benefit plan or program of the Company as of the date of such termination of employment, such compensation and benefits to be paid at the normal time for payment of such compensation and benefits to the extent not previously paid, and (iii) any reimbursement amounts owing.

(b) Good Reason. Only following a Change of Control, the Executive may terminate his employment for Good Reason (as defined below) by giving the Company a written notice of termination at least 30 days before the date of such termination (or such lesser notice period as the Company may agree to) specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Executive's termination of his employment for Good Reason within 18 months following a Change of Control, the Executive shall be entitled to receive the benefits described in Section 4 if such termination of employment occurs. For purposes of this Agreement, Good Reason shall mean, without the Executive's written consent, (i) a significant reduction in the scope of the Executive's authority, functions, duties or responsibilities from that which is contemplated by this Agreement; provided that a change in scope solely as a result of the Company no longer being public or becoming a subsidiary of another corporation shall not constitute Good Reason, (ii) any reduction in the Executive's base salary, other than an across-the-board reduction affecting substantially all members of senior management of the Company on substantially the same proportional basis, (iii) any material breach by the Company of any provision of this Agreement without the Executive having committed any material breach of the Executive's obligations hereunder or under the Confidentiality Agreement, in each case, which breach is not cured within thirty days following written notice thereof to the Company of such breach or (iv) the relocation of the Executive's office location to a location more than 50 miles away from the Executive's then current principal place of employment. If an event constituting a ground for termination of employment for Good Reason occurs, and the Executive fails to give notice of termination within 30 days after the occurrence of such event, the Executive shall be deemed to have waived his right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 30-day period has not expired).

3. Benefits Upon Termination Without Cause (No Change of Control ). If (a) the Employee's employment hereunder shall terminate because of termination by the Company pursuant to

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Section 1.1 and (b) such termination of employment does not occur within 18 months following a Change of Control of the Company, the Employee shall be entitled to the following:

(a) The Company shall pay to the Employee his base salary earned through the date of such termination of employment in a lump sum no later than the next payroll date following the Employee's date of termination to the extent not previously paid, and any other compensation and benefits to the extent actually earned by the Employee under any benefit plan or program of the Company as of the date of such termination of employment, any such compensation and benefits to be paid at the normal time for payment of such compensation and benefits to the extent not previously paid.

(b) The Company shall pay the Employee any reimbursement amounts owing.

(c) The Company shall pay to the Employee one (1) times the sum of (i) the Employee's annual rate of base salary in effect immediately preceding his termination of employment, and (ii) the average of his annual bonuses earned under the Company's annual bonus plan for the three calendar years preceding his termination of employment (or, if the Employee was not eligible for a bonus in each of those three calendar years, then the average of such bonuses for all of the calendar years in such three-year period for which he was eligible), with any deferred bonuses counting for the year earned rather than the year paid (the "Severance Benefit"). The Severance Benefit shall be paid in equal installments over a twelve (12) month period at the same intervals that salary payments are normally made by the Company; provided that, if at the time of the Employee's termination of employment, (i) the Employee is a "specified employee" (a "Specified Employee") as defined in subsection (a)(2)(B)(i) of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the Severance Benefit is subject to the provisions of Code Section 409A, then the portion of the Severance Benefit that is subject to Code Section 409A shall be paid as provided in Section 8.15, below.

(d) If the Employee elects to continue coverage under the Company's health plan pursuant to COBRA, then for the period beginning on the date of the Employee's termination of employment and ending on the earlier of (i) the date which is 12 months after the date of such termination of employment or (ii) the date the Employee becomes eligible for health insurance benefits under the group health plan of another employer, the Company will pay the same percentage of the Employee's premium for COBRA coverage for the Employee and, if applicable, his spouse and dependent children, as the Company paid at the applicable time for coverage under such plan for actively employed members of management generally. In addition, for the period beginning on the date of the Employee's termination of employment and ending on the earlier of (i) the date which is 12 months after the date of such termination of employment or (ii) the date on which the Employee becomes eligible for life insurance benefits from another employer, the Company will continue to provide the executive life insurance benefits that the Company would have provided to the Employee if the Employee had continued in employment with the Company for such period, but only if the Employee timely pays the portion of the premium for such coverage that members of management of the Company generally are required to pay for such coverage, if any. The Employee shall notify the Company promptly if he, while eligible for benefits under this subsection (d), becomes eligible to receive health and/or life insurance benefits from another employer.

(e) The Company will pay to the outplacement services provider reasonably selected by the Employee an amount not to exceed $10,000 for outplacement services costs

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incurred by Employee within the twelve months following the Employee's termination of employment.

(f) The Company's obligation to provide the severance benefits set forth in Sections 3(c), (d) and (e) upon the Employee's termination of employment without Cause, which does not occur within 18 months following a Change of Control, is subject to the Employee's execution without revocation of a valid release in substantially the form attached to this Agreement as Exhibit B (the "Release").

4. Benefits Upon Termination Without Cause (Change of Control ). If (a) the Employee's employment hereunder shall terminate because of termination by the Company pursuant to Section 1.1 or because of termination by the Employee for Good Reason pursuant to Section 2 (b) and (b) such termination of employment occurs within 18 months following a Change of Control of the Company, the Employee shall be entitled to the following:

(b) The Company shall pay the Employee any reimbursement amounts owing.

(c) The Company shall pay to the Employee as a severance benefit an amount equal to two (2) times the sum of (i) his annual rate of base salary in effect immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses earned under the Company's annual bonus plan for any of the five calendar years preceding his termination of employment (or, if the Employee was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which the Employee was eligible), with any deferred bonuses counting for the year earned rather than the year paid (the "COC Severance Benefit"). The COC Severance Benefit shall be paid in a lump sum within thirty (30) days after the date of such termination of employment; provided that, if at the time of the Employee's termination of employment, (i) the Employee is a Specified Employee, and (ii) the COC Severance Benefit is subject to the provisions of Code Section 409A, then the portion of the COC Severance Benefit that is subject to Code Section 409A shall be paid as provided in Section 8.15, below.

(d) The Company shall pay to the Employee as a bonus for the year of termination of his employment an amount equal to a portion (determined as provided in the next sentence) of the Employee's target bonus opportunity under the Company's annual bonus plan for the calendar year of termination of the Employee's employment or, if none, such portion of the bonus awarded to the Employee under the Company's annual bonus plan for the calendar year immediately preceding the calendar year of the termination of the Employee's employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made in a lump sum within 30 days after the date of such termination of employment, and the Employee

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shall have no right to any further bonuses under said plan; provided that, if at the time of the Employee's termination of employment, the Employee is a Specified Employee, then such payment shall be made in a lump sum on the date that is six (6) months after the date of such termination of employment, and the Employee shall have no right to any further bonuses under said plan.

(e) If the Employee elects to continue coverage under the Company's health plan pursuant to COBRA, then for the period beginning on the date of the Employee's termination of employment and ending on the earlier of (i) the date which COBRA coverage ends but not to exceed 24 months after the date of such termination of employment or (ii) the date the Employee becomes eligible for comparable benefits from another employer, the Employee (and, if applicable, the Employee's spouse and dependent children) shall remain covered by the medical, dental, and if reasonably commercially available through nationally reputable insurance carriers, executive life and executive long-term disability plans of the Company that covered the Employee immediately prior to his termination of employment as if the Employee had remained in employment for such period; provided, however, that the coverage under any such plan is conditioned on the timely payment by the Employee (or his spouse or dependent children) of the portion of the premium for such coverage that actively employed members of senior management of the Company generally are required to pay for such coverage. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee (and, if applicable, his spouse and dependent children) with comparable benefits to the extent available at a cost not to exceed 125% of the cost of providing benefits to the Employee under the Company's plan or plans. The Employee shall notify the Company promptly if he, while eligible for benefits under this subsection (e) becomes eligible to receive benefits from another employer.

(f) Each stock option granted by the Company to the Employee and outstanding immediately prior to termination of his employment shall be fully vested and immediately exercisable and may be exercised by the Employee (or, following his death, by the person or entity to which such option passes) at any time prior to the expiration date of the applicable option (determined without regard to any earlier termination of the option that would otherwise occur by reason of termination of his employment). Each restricted stock award granted by the Company to the Employee and outstanding immediately prior to termination of the Employee's employment shall be fully vested upon such termination of employment.

(g) The Company will pay to the outplacement services provider reasonably selected by the Employee an amount not to exceed $10,000 for outplacement services costs incurred by Employee within the twelve months following the Employee's termination of employment.

(h) The Company shall promptly pay all reasonable attorneys' fees and related expenses incurred by the Employee in seeking to obtain or enforce any right or benefit under this Section 4 or to defend against any claim or assertion in connection with this Section 4, but only if and to the extent that the Employee substantially prevails.

(i) The Company will pay to the Employee an automobile allowance, in an amount equal to the Employee's monthly allowance at the time of termination, each month for 24 months following termination of the Employee's employment provided that, if at the time of the Employee's termination of employment, the Employee is a Specified Employee, then fifty percent (50%) of the automobile allowance shall be paid in a lump sum on the date that is six (6) months

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after the date of termination, and the remaining fifty percent (50%) of the automobile allowance shall be paid in six (6) equal monthly installments, beginning in the seventh month following the date of termination.

(j) The Company's obligation to provide the severance benefits set forth in Sections 4(c), (d), (e), (f), (g), (h) and (i) upon the Employee's termination of employment without Cause within 18 months following a Change of Control is subject to the Employee's execution of the Release.

5. Change of Control . For the purposes of this Agreement, a "Change of Control" shall be deemed to occur upon the consummation of any of the following events: (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company or any subsidiary of the Company) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 25% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board; (b) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a "Current Director" shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least a majority of the Current Directors then on the Board); (c) (i) the complete liquidation of the Company or (ii) the merger or consolidation of the Company, other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation, which liquidation, merger or consolidation has been approved by the shareholders of the Company; or (d) the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company pursuant to an agreement (or agreements) which has (have) been approved by the shareholders of the Company.

6. Golden Parachute Excise Tax .

(a) In the event that any payment or benefit received or to be received by the Employee pursuant to this Agreement or any other plan, program or arrangement of the Company or any of its affiliates would constitute an "excess parachute payment" within the meaning of Section 280G of the Code ("Excess Parachute Payment"), then the payments under this Agreement shall be reduced (by the minimum possible amounts) until no amount payable to the Employee under this Agreement constitutes an Excess Parachute Payment; provided, however, that no such reduction shall be made if the net after-tax payment (after taking into account Federal, state, local or other income and excise taxes) to which the Employee would otherwise be entitled without such reduction would be greater than the net after-tax payment (after taking into account Federal, state, local or other income and excise taxes) to the Employee resulting from the receipt of such payments with such reduction. If, as a result of subsequent events or conditions (including a subsequent payment or absence of a subsequent payment under this Agreement or other plan, program or arrangement of the Company or any of its affiliates), it is determined that payments under this Agreement have been reduced by more than the minimum amount required to prevent any payments from constituting an Excess Parachute Payment, then an additional payment shall be

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promptly made to the Employee in an amount equal to the additional amount that can be paid without causing any payment to constitute an Excess Parachute Payment.

(b) All determinations required to be made under this Section 6 shall be made by a nationally recognized independent accounting firm mutually agreeable to the Company and the Employee (the "Accounting Firm") which shall provide detailed supporting calculations to the Company and the Employee as requested by the Company or the Employee. All fees and expenses of the Accounting Firm shall be borne solely by the Company and shall be paid by the Company upon demand of the Employee as incurred or billed by the Accounting Firm. All determinations made by the Accounting Firm pursuant to this Section 6 shall be final and binding upon the Company and the Employee.

(c) To the extent any payment or benefit is to be reduced pursuant to this Section 6, the severance payment described in Section 3(c) or 4(c) will first be reduced and then the bonus described in Section 4(d), in each case only to the extent necessary.

7. Entitlement to Other Benefits . Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company; provided that the Employee shall not be eligible to receive any benefits under any circumstances under any severance plan or policy of the Company, including, without limitation, the Lydall, Inc. Severance Plan.

8. General Provisions .

8.1 No Duty to Seek Employment . The Employee shall not be under any duty or obligation to seek or accept other employment following termination of employment, and no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment, except as expressly set forth herein.

8.2 Deductions and Withholding . All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Employee and any deductions and withholdings required by law.

8.3 Notices . All notices, demands, requests, consents, approvals or other communications (collectively "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be delivered personally, sent by facsimile transmission with a copy deposited in the United States mail, registered or certified, return receipt requested, postage prepaid, or sent by overnight mail addressed as follows:


To the Company:	Lydall, Inc. P.O. Box 151 One Colonial Road Manchester, CT 06045-0151 Attn: Chief Executive Officer

To the Employee: Randall B. Gonzales

[REDACTED]

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or such other address as such party shall have specified most recently by written notice. Notice mailed as provided herein shall be deemed given when so delivered personally or sent by facsimile transmission, or, if sent by overnight mail, on the day after the date of mailing.

8.4 No Disparagement . The Employee shall not during the period of his employment with the Company, nor following the date of termination of his employment for any reason, publish or communicate to any person or entity any Disparaging (as defined below) remarks, comments or statements concerning the Company, or any of its subsidiaries or affiliates or any of their shareholders, directors, officers, employees or agents. "Disparaging" remarks, comments or statements are those that impugn the character, honesty, integrity or morality or business acumen or abilities in connection with any aspect of the operation of business of the individual or entity being disparaged. The Employee agrees that the terms of this Section 8.4 shall survive the term of this Agreement and the termination of the Employee's employment.

8.5 Proprietary Information and Inventions . The Confidentiality Agreement is incorporated by reference in this Agreement, and the Employee agrees to continue to be bound thereby.

8.6 Covenant to Notify Management . The Employee agrees to abide by the ethics policies of the Company as well as the Company's other rules, regulations, policies and procedures. The Employee agrees to comply in full with all governmental laws and regulations as well as ethics codes applicable. In the event that the Employee is aware or suspects the Company, or any of its officers or agents, of violating any such laws, ethics, codes, rules, regulations, policies or procedures, the Employee agrees to bring all such actual and suspected violations to the attention of the Company immediately so that the matter may be properly investigated and appropriate action taken. The Employee understands that the Employee is precluded from filing a complaint with any governmental agency or court having jurisdiction over wrongful conduct unless the Employee has first notified the Company of the facts and permits it to investigate and correct the concerns.

8.7 Amendments and Waivers . No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Employee and the Company. No waiver by either Party hereto at any time of any breach by the other Party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

8.8 Beneficial Interests . This Agreement shall inure to the benefit of and be enforceable by (a) the Company's successors and assigns and (b) the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee shall die while any amounts are still payable to his hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee, or other designee or, if there be no such designee, to the Employee's estate.

8.9 Successors . The Company will require any successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform.

8.10 Assignment . This Agreement and the rights, duties, and obligations hereunder may not be assigned or delegated by any Party without the prior written consent of the other Party and any

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attempted assignment or delegation without such prior written consent shall be void and be of no effect. Notwithstanding the foregoing provisions of this Section 8.10, the Company may assign or delegate its rights, duties and obligations hereunder to any affiliate or to any person or entity which succeeds to all or substantially all of the business of the Company or one of its subsidiaries through merger, consolation, reorganization, or other business combination or by acquisition of all or substantially all of the assets of the Company or one of its subsidiaries without the Employee's consent.

8.1 Choice of Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to the conflicts of law provisions thereof.

8.2 Statute of Limitations . The Employee and the Company hereby agree that there shall be a one year statute of limitations for the filing of any requests for arbitration or any lawsuit relating to this Agreement or the terms or conditions of Employee's employment by the Company. If such a claim is filed more than one year subsequent to the Employee's last day of employment it shall be precluded by this provision, regardless of whether or not the claim has accrued at that time.

8.3 Right to Injunctive and Equitable Relief . The Employee's obligations under Section 8.4 are of a special and unique character, which gives them a peculiar value. The Company cannot be reasonably or adequately compensated for damages in an action at law in the event the Employee breaches such obligations. Therefore, the Employee expressly agrees that the Company shall be entitled to injunctive and other equitable relief without bond or other security in the event of such breach in addition to any other rights or remedies which the Company may possess or be entitled to pursue. Furthermore, the obligations of the Employee and the rights and remedies of the Company under Section 8.4 and this Section 8.13 are cumulative and in addition to, and not in lieu of, any obligations, rights, or remedies as created by applicable law. The Employee agrees that the terms of this Section 8.13 shall survive the term of this Agreement and the termination of the Employee's employment.

8.4 Severability or Partial Invalidity . The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

8.5 Section 409A of the Code.

(a) If (i) the Employee is determined to be a “specified employee” within the meaning of Code Section 409A(a)(2)(B)(i), (ii) any amounts payable under this Agreement are subject to Code Section 409A, and (iii) such amounts are payable on the Employee’s “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h), then such amounts will be payable on a monthly basis after Employee’s termination of employment (or, if earlier, the date of death of Employee). Payments under this Section to which an Employee would otherwise be entitled during the first six (6) months following Employee’s termination date will be accumulated and paid on the day that is six (6) months after the termination date.

(b) Any taxable reimbursements under this Agreement will be made no later than the end of the calendar year following the calendar year the expense was incurred. For purposes of complying with Section 409A: (i) payment of such reimbursements or in-kind benefits during one calendar year will not affect the amount of such reimbursement or in-kind benefits provided during a subsequent calendar year; and (ii) such reimbursement benefit or rights or in-kind benefits may not be exchanged or substituted for another form of compensation to the Employee.

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(c) Any severance payments due as a result of Employee’s termination of employment with the Company will be made only upon a “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h).

(d) In no event shall the Company be liable to the Employee for or with respect to any taxes, penalties or interest which may be imposed upon the Employee pursuant to Section 409A. The Employee hereby acknowledges that she or he has been advised to seek and has sought the advice of a tax advisor with respect to the tax consequences to the Employee of all payments pursuant to this Agreement, including any adverse tax consequences or penalty taxes under Code Section 409A and applicable state tax law. The Employee hereby agrees to bear the entire risk of any such adverse federal and state tax consequences and penalty taxes in the event any payment pursuant to this Agreement is deemed to be subject to Code Section 409A, and that no representations have been made to the Employee relating to the tax treatment of any payment pursuant to this Agreement under Code Section 409A and the corresponding provisions of any applicable state income tax laws.

8.6 Entire Agreement . This Agreement, along with the Confidentiality Agreement, constitutes the entire agreement of the Parties and supersedes all prior written or oral and all contemporaneous oral agreements, understandings, and negotiations between the Parties with respect to the subject matter hereof. This Agreement may not be changed orally and may only be modified in writing signed by both Parties. This Agreement, along with the Confidentiality Agreement, is intended by the Parties as the final expression of their agreement with respect to such terms as are included herein and therein and may not be contradicted by evidence of any prior or contemporaneous agreement. The Parties further intend that this Agreement, along with the Confidentiality Agreement, constitutes the complete and exclusive statement of their terms and that no extrinsic evidence may be introduced in any judicial proceeding involving such agreements. For the avoidance of doubt, the terms of the Confidentiality Agreement do not prevent the Employee from communicating directly with a government agency regarding any potential or pending investigation, either during or after my employment with the Company.

8.7 Counterparts . This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the day and year first above written.

LYDALL, INC.


By:	/S/ Dale G. Barnhart March 12, 2018 Dale G. Barnhart Date President and Chief Executive Officer

/S/ Randall B. Gonzales March 8, 2018
Randall B. Gonzales Date

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EXHIBIT A

Confidentiality, Invention and Non-Compete Agreement

In consideration of my employment by the Company, or future employment with an affiliate to whom I am transferred (Lydall Inc. or affiliate together the “Company”), the compensation and other benefits to be received by me from the Company, I agree that:


1.	DEFINITIONS

The term “Confidential Information” as used in this Agreement includes all business information and records which relate to the Company or to parties working with the Company under a confidentiality agreement, and which are not known to the public generally, including, but not limited to, technical notebook records, technical reports, patent applications, machine equipment, computer software, models, process and product designs including any drawings and descriptions, unwritten knowledge and “know-how”, operating instructions, training manuals, production and development processes, production or other schedules, customer lists, customer buying records, product sales records, sales requests, territory listings, market surveys, plans including marketing plans and long-range plans, salary information, contracts, supplier lists, product costs, policy statements, policy procedures, policy manuals, flowcharts, computer printouts, program listings, reproductions and correspondence.

The term “Invention” as used in this Agreement includes any discovery, improvement, design or idea, patentable, copywriteable or otherwise, which relates to any activity or business in which the Company is engaged or any process, equipment, material, product or method (including computer software) in which the Company has any direct or indirect interest.


2.	INVENTIONS

I will disclose promptly to the Company any Invention conceived, developed or perfected by me, either alone or jointly with another or others, while I am an employee, whether or not such conception, development or perfection occurs during the hours of my employment.

I grant to the Company without further compensation, all my right, title and interest in and to any such Invention for the sole use and benefit of the Company, together with all U.S. and foreign patents, trademarks or copyrights that may at any time be granted, and all reissues, renewals and extensions of such patents, trademarks or copyrights. At the request and expense of the Company, I will at any time do what the Company reasonably believes to be necessary to assist the Company to vest full right and title to each such Invention in the Company, enable the Company to obtain and maintain full right and title in any country, prosecute applications for and secure patents (including their reissue, renewal and extension), trademarks, copyrights and any other form of protection for each such Invention, and prosecute or defend any interference or opposition which may be declared involving any such application or patent and any litigation in which the Company may be involved concerning any such Invention. This will include preparing, executing and delivering any written document, drawings, flowcharts, or computer printouts. The provisions of this section will continue after I stop working for the Company and shall be binding on my executors, administrators and assigns, unless waived in writing by the Company.


3.	CONFIDENTIAL INFORMATION

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I have not disclosed and will not disclose to the Company, and I will not use, in the discharge of my duties as an employee of the Company, any trade secret or confidential information belonging to a former employer or other person and which has been classified by the former employer or other person as a trade secret or confidential information. The limitation set forth in this section shall not apply to matters which (a) are or become public knowledge, (b) were previously known to the Company, (c) are subsequently received by the Company from a third party, or (d) are independently derived by the Company.

I will not, directly or indirectly, during or at any time after the period of my employment by the Company, use for myself or others, or disclose to others, any Confidential Information, no matter how such information becomes known to me, unless I first obtain the Company’s written consent.

When I leave the Company’s employ, or at any other time upon request by the Company, I will promptly deliver to the Company all documents and records, including but not limited to those listed under the definition of Confidential Information, which are in my possession or under my control and which pertain to the Company, any of its activities or any of my activities while in the course of my employment and all copies thereof. I will not retain or deliver to any others copies of these documents or records.


4.	NON-COMPETITION

I acknowledge and agree that the Company’s business competes upon a worldwide basis, and that the degree of competition in that business is high. I recognize that the Company may assign me to duties in a geographic area or specific market. I agree that, unless I first obtain the Company’s written consent, I will not during my employment with the Company and for a period of two (2) years following the termination of my employment (provided, however, that if I am employed by the Company for less than two (2) years, the post-employment period to which this section applies shall be the greater of six (6) months or the length of my employment in any capacity) , directly or indirectly or through others, individually, or as a member, officer, director, employee, agent, or investor of any partnership or entity (except ownership of not more than one percent (1%) of the outstanding publicly traded stock of any company):

(i)

participate in the ownership, management, operation or control of, or work for (as an employee, consultant or independent contractor) or have any material financial interest in, any business competitive with the Company in (a) any market in which the company for which I have worked in the two (2) preceding years has sold or attempted to sell any of its product in the two (2) years preceding my termination or (b) if the Company has assigned me to duties in a geographic area, within two hundred fifty (250) miles of any such geographic area in which I have worked in the two (2) years preceding my termination,


(ii)	induce or encourage any employee of the Company to terminate his or her employment with the Company, or


(iii)	solicit, induce or encourage any person, business or entity which is a supplier of, a purchaser from, or a contracting party with, the Company to terminate any written or oral agreement, order or understanding with the Company or to conduct business in a way that results in an adverse impact to the Company.

I further understand and agree that the remedy at law for any breach or threatened breach of my agreement not to compete contained in this section would be inadequate and that any breach or attempted breach would result in irreparable damage to the Company, the monetary amount of which would be impossible to ascertain. Thus, I agree that in the event of any breach or threatened breach of my agreement not to

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compete, in addition to all other available legal or equitable remedies, the Company may obtain injunctive relief to remedy damage caused by such breach or threatened breach, and that the Company shall be entitled to recover from me its costs and expenses, including reasonable attorney fees, incurred in remedying such breach or threatened breach.


5.	GENERAL TERMS

I represent and agree that I have and will assume no obligations to others inconsistent with any of my obligations to the Company under this Agreement.

In consideration of my employment, I agree to conform to the policies of the Company. I understand that my employment is for an indefinite period and can be terminated at any time, with or without cause or prior notice by either the Company or me, and will remain so unless a written agreement for a specific term is entered into and executed by me and the Company’s CEO. No other representations or agreements have been made regarding the term or termination of my employment. I understand that no employee of the Company other than its CEO has the authority to enter into any agreement, commitment or guarantees binding on the Company regarding my employment and then only by a signed, written document.

This Agreement, which is ancillary to any other agreement I may have with the Company, (a) is intended as the complete and exclusive statement of my agreement with the Company with respect to its subject matter, (b) shall be binding upon my heirs, executors and administrators, (c) shall be assignable by the Company to its successors; (d) shall not be modified unless in writing and signed by me and the Company, (e) shall be governed by and construed in accordance with the law of the State of Connecticut, the Company’s home office state, and (f) if any part of this Agreement is found invalid by any court, the remainder shall be valid and enforceable in law and equity.



Employee Name:	/S/ Randall B. Gonzales	By:	/S/ Dale G. Barnhart
Name Printed	Randall B. Gonzales	Name/Title:	Dale G. Barnhart, President and CEO
Date:	March 8, 2018	Date:	March 12, 2018

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EXHIBIT B

TERMINATION, VOLUNTARY RELEASE AND WAIVER OF RIGHTS AGREEMENT

I, Randall B. Gonzales, unqualifiedly accept and agree to the relinquishment of my title, responsibilities and obligations as an employee of Lydall, Inc. ("the Company"), and concurrently and unconditionally agree to sever my relationship as an employee of the Company, in consideration for the voluntary payment to me by the Company of the separation benefits set forth in Section 1 of the Severance Agreement dated as of March 12, 2018 by and between me and the Company (the "Severance Agreement"), which is made a part hereof.

1. In exchange for this consideration, which I understand that the Company is not otherwise obligated to provide to me, I voluntarily agree to waive and forego any and all claims, rights, interests, covenants, contracts, warranties, promises, undertakings, actions, suits, causes of action, obligations, debts, attorneys' fees or other expenses, accounts, judgments, fines, fees, losses and liabilities, of any kind, nature or description, in law, equity or otherwise (collectively, "Claims") that I may have against the Company and to release the Company and their respective affiliates, subsidiaries, officers, directors, employees, representatives, agents, successors and assigns (hereinafter collectively referred to as "Releasees") from any obligations any of them may owe to me, accepting the aforestated consideration as full settlement of any monies or obligations owed to me by Releasees that may have arisen at any time prior to the date of my execution of this Termination, Voluntary Release and Waiver of Rights Agreement (the "Agreement"), except as specifically provided below in the following paragraph number 2.

2. I do not waive, nor has the Company asked me to waive, any rights arising exclusively under the Fair Labor Standards Act, except as such waiver may henceforth be made in a manner provided by law. I do not waive, nor has the Company asked me to waive, any vested benefits that I may have or that I may have derived from the course of my employment with the Company. I understand that such vested benefits will be subject to and administered in accordance with the established and usual terms governing same. I do not waive any rights which may in the future, after the execution of this Agreement, arise exclusively from a substantial breach by the Company of a material obligation of the Company expressly undertaken in consideration of my entering into this Agreement.

3. Except as set forth in paragraph 2, I do fully, irrevocably and forever waive, relinquish and agree to forego any and all Claims whatsoever, whether known or unknown, that I may have or may hereafter have against the Releasees or any of them arising out of or by reason of any cause, matter or thing whatsoever from the beginning of the world to the date hereof, including without limitation any and all matters relating to my employment with the Company and the cessation thereof and all matters arising under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000 et seq ., the Americans with Disabilities Act of 1990, 42 U.S.C. § 12101 et seq ., the Family and Medical Leave Act of 1993, 29 U.S.C. § 2601 et seq ., the Age Discrimination in Employment Act of 1967, 29 U.S.C. § 621 et seq ., the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq ., all as amended, or under any other laws, ordinances, Employee orders, regulations or administrative or judicial case law arising under the statutory or common laws of the United States, the State of Connecticut or any other applicable county or municipal ordinance.

4. As a material inducement to the Company to enter into this Agreement, I, the undersigned, recognize that I may have been privy to certain confidential, proprietary and trade secret information of the Company which, if known to third parties, could be used in a manner that would reduce the value of the Company for its shareholders. In order to reduce the risk of that happening, I, the undersigned, agree that

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for a period of two (2) years after termination of employment, I, the undersigned, will not, directly or indirectly, assist, or be part of or have any involvement in, any effort to acquire control of the Company through the acquisition of its stock or substantially all of its assets, without the prior consent of the Board of Directors of the Company. This provision shall not prevent the undersigned from owning up to not more than one percent (1%) of the outstanding publicly traded stock of any company.

5. I further acknowledge pursuant to the Older Worker's Benefit Protection Act (29 U.S.C. § 626(f)), I expressly agree that the following statements are true:

a. The payment of the consideration described in Section __ of the Severance Agreement is in addition to the standard employee benefits and anything else of value which the Company owes me in connection with my employment with the Company or the separation of employment.

b. I have twenty-one days from date of receipt to consider and sign this agreement. If I choose to sign this Agreement before the end of the twenty-one day period, that decision is completely voluntary and has not been forced on me by the Company.

c. I will have seven (7) days after signing the Agreement in which to revoke it, and the Agreement will not become effective or enforceable until the end of those seven (7) days.

d. I am now being advised in writing to consult an attorney before signing this Agreement.

I acknowledge that I have been given sufficient time to freely consult with an attorney or counselor of my own choosing and that I knowingly and voluntarily execute this Agreement, after bargaining over the terms hereof, with knowledge of the consequences made clear, and with the genuine intent to release claims without threats, duress, or coercion on the part of the Company. I do so understanding and acknowledging the significance of such waiver.

6. Further, in view of the above-referenced consideration voluntarily provided to me by the Company, after due deliberation, I agree to waive any right to further litigation or claim against any or all of the Releasees except as specifically provided in paragraph number 2 above. I hereby agree to indemnify and hold harmless the Releasees and their respective agents or representatives from and against any and all losses, costs, damages or expenses, including, without limitation, attorneys fees incurred by said parties, or any of them, arising out of any breach of this Agreement by me or by any person acting on my behalf, or the fact that any representation made herein by the undersigned was false when made.

7. As a material inducement to the Company to enter into this Agreement, I, the undersigned, understand and agree that if I should fail to comply with the conditions hereof or to carry out the agreement set forth herein, all amounts previously paid under this Agreement shall be immediately forfeited to the Company and that the right or claim to further payments and/or benefits hereunder would likewise be forfeited.

8. As a further material inducement to the Company to enter into this Agreement, the undersigned provides as follows:

First . I represent that I have not filed any complaints or charges against the Company, or any of the Releasees relating to the relinquishment of my former titles and responsibilities at the Company or the terms of my employment with the Company and that if any agency or court assumes jurisdiction of any

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complaint or charge against the Company or any of the Releasees on behalf of me concerning my employment with the Company, I understand and agrees that I have, by my knowing and willing execution of this Agreement waived my rights to any form of recovery or relief against the Company, or any of the Releasees, including but not limited to, attorney's fees. Provided, however, that this provision shall not preclude the undersigned from pursuing appropriate legal relief against the Company for redress of a substantial breach of a material obligation of the Company expressly undertaken in consideration of my entering into this Agreement.

Second . I acknowledge and understand that the consideration for this release shall not be in any way construed as an admission by the Company or any of the Releasees of any improper acts or any improper employment decisions, and that the Company, specifically disclaims any liability on the part of itself, the Releasees, and their respective agents, employees, representatives, successors or assigns in this regard.

Third . I acknowledge and agree that this Agreement shall be binding upon me, upon the Company, and upon our respective administrators, representatives, Employees, successors, heirs and assigns and shall inure to the benefit of said parties and each of them.

Fourth . I represent, understand and agree that this Agreement sets forth the entire agreement between the parties hereto, and fully supersedes any and all prior agreements or understandings between the parties pertaining to the subject matter hereof, except for the confidentiality and non-competition agreement previously executed by me, the terms of which retain their full force and effect, and which are in no way limited or curtailed by this Agreement. (A copy of that agreement is attached to the Employment Agreement as Exhibit A and is made a part hereof.)

Fifth. Modification . This Agreement may not be altered or changed except by an agreement in writing that has been properly executed by the party against whom any waiver, change, modification or discharge is sought.

Sixth . Severability . All provisions and terms of this Agreement are severable. The invalidity or unenforceability of any particular provision(s) or term(s) of this Agreement shall not affect the validity or enforceability of the other provisions and such other provisions shall be enforceable in law or equity in all respects as if such particular invalid or unenforceable provision(s) or term(s) were omitted. Notwithstanding the foregoing, the language of all parts of this Agreement shall, in all cases, be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties.

Seventh . No Disparagement . Unless otherwise required by a court of competent jurisdiction or pursuant to any recognized subpoena power, I agree and promise that I will not make any oral or written statements or reveal any information to any person, company, or agency which is disparaging or damaging to the reputation or business of the Company, its subsidiaries, directors, officers or affiliates, or which would interfere in any way with the business relations between the Company or any of its subsidiaries or affiliates and any of their customers, suppliers or vendors whether present or in the future.

Eighth . Confidentiality . The Company and the undersigned agree to refrain from disclosing to third parties and to keep strictly confidential all details of this Agreement and any and all information relating to its negotiation, except as necessary to each party's accountants or attorneys.

Ninth . Termination of Agreement . Notwithstanding anything to the contrary in this Agreement, this Agreement may be terminated by the Company and all further payment obligations of the Company

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will cease, if: (a) the undersigned is terminated for "Cause" prior to the undersigned's separation date; or (b) facts are discovered after the undersigned's separation date that would have supported a termination for "Cause" had such facts been discovered prior to the undersigned's separation date.

AFFIRMATION OF RELEASOR

I, Randall B. Gonzales, warrant that I am competent to execute this Termination, Voluntary Release and Waiver of Rights Agreement and that I accept full responsibility thereof.

I, Randall B. Gonzales, warrant that I have had the opportunity to consult with an attorney of my choosing with respect to this matter and the consequences of my executing this Termination, Voluntary Release and Waiver of Rights Agreement.

I, Randall B. Gonzales, have read this Termination, Voluntary Release and Waiver of Rights Agreement carefully and I fully understand its terms. I execute this document voluntarily with full and complete knowledge of its significance.

Executed this day of , 20XX, at .

NAME

STATE OF )

) SS:

COUNTY OF )

Subscribed and sworn to before me, a Notary Public in and for said County and State, this day of , 20XX, under the pains and penalties of perjury.

, Notary Public

My Commission Expires:

County of Residence:



Lydall, Inc	Telephone 860-646-1233
One Colonial Road	Facsimile 860-646-4917
P.O. Box 151	Facsimile 860-646-8847
Manchester, CT 06045-0151	www.lydall.com

January 5, 2018

Randall B. Gonzales

[REDACTED]

Dear Randy:

I am pleased to extend an invitation to you to join Lydall, Inc. as Executive Vice President and Chief Financial Officer. Your starting date will be on a mutually agreed upon date subject to the details noted below, and is contingent upon successful fulfillment of all pre-employment requirements as outlined below. Chad A. McDaniel, Senior Vice President, General Counsel and Chief Administrative Officer, will assist you in all of the pre-employment procedures that may be required. As discussed, the particulars are as follows:

Compensation

Your base annual rate of compensation is $390,000 and will be paid on a bi-weekly basis. You will be eligible to participate in the Company Annual Incentive Performance (AIP) program at sixty (60%) percent of your actual paid base salary, in accordance with Plan Provisions. For the 2018 performance period, you will eligible to receive an amount equivalent to full year incentive compensation, without regard to any pro-rating due to your start date. You will receive a written description of the program with related targets during your orientation.

Equity Awards

Each year, you’ll be eligible to receive equity awards comparable to and at levels consistent with other members of the senior leadership team. Additionally, the Compensation Committee of the Board of Directors will grant to you the following equity awards: (a) a long-term incentive stock award estimated at a value of $390,000, split equally between shares of performance-based restricted stock and non-qualified stock options; and (b) a time-based restricted stock award covering that number of shares of the Company’s common stock equal to $400,000, vesting in three equal annual installments starting on the first anniversary of the date of grant.

The equity awards will be effective on or soon after your start date, provided there is no blackout period at that time; otherwise they will be granted at the close of market on the first full trading day after any blackout period has been lifted following your start date.

Start Date and Related Contingencies

You have indicated your intention to provide your current employer with your notice of resignation on Monday, January 15, 2018 with your last day being on Friday, March 9, 2018. By doing so, it is your belief that (a) you will remain eligible to receive your 2017 annual cash incentive payment of a minimum of $125,000 (“Minimum 2017 Bonus Amount”); and (b) the following number of shares subject to stock option awards will vest on their respective vesting dates: (i) 2,211 options vesting on March 2, 2018; (i) 1,627 options vesting on March 6, 2018; (i) 2,594 options vesting on March 7, 2018 (collectively, the “March 2018 Options”).

If, upon giving your notice of resignation on January 15 ^th , your current employer does not allow you to receive your Minimum 2017 Bonus and/or allow the March 2018 Options to vest in full, then your start date will be on or before Monday, January 29, 2018. In consideration of the advance of your start date, Lydall will agree to provide you with the following additional compensation arrangements: (a) a cash sign-on bonus equal to the difference between the Minimum 2017 Bonus Amount and the actual amount you receive up to a maximum amount of $100,000 (such amount to be paid 60 days after your start date); and (b) a time-based restricted stock award covering that number of shares of the Company’s common stock equal to an additional $300,000, vesting in three equal annual installments starting on the first anniversary of the date of grant.

Health Premium Bridge

The Company will provide reimbursement in your first paycheck for documented COBRA premiums paid by you to bridge the Lydall health coverage waiting period.

Employment Agreement

Attached is an Agreement that outlines the terms of your severance arrangements.

Benefits

You are eligible for a comprehensive benefit package that includes medical, dental, disability, life, 401(k), and stock purchase plans. The applicable waiting periods and vesting schedules are outlined in the Benefits Handbook which will be provided to you during your orientation. A Summary of Benefits has been provided for your review. As a senior executive officer, you are also eligible for the following benefits (subject to reasonable underwriting requirements and reasonable premium costs):

•

Executive Life Program – In place of the Basic Life insurance described in the Summary of Benefits provided to all employees, you will participate in an executive life program that provides three times your annual base salary under an individually-owned universal life policy. The premiums for this benefit will be taxable to you as ordinary income. The other life programs (AD&D, Business Travel, and Supplemental) in the Summary of Benefits will apply to you as described.

•

Executive Long-Term Disability (LTD) Program – You are provided an executive LTD policy that is in addition to the group LTD program. The group program provides 60% replacement income to a monthly maximum of $10,000. The executive program is designed to obtain replacement income to bring an executive up to 100% of base salary; however, it is limited to the supplemental insurance that can be obtained from the carrier based upon each individual executive’s circumstances and underwriting limitations.

Vacation

You will be eligible for four (4) weeks paid vacation per year, prorated for 2018. You will continue at that level until you are eligible for additional weeks according to the Vacation Policy. All other provisions of the Vacation Policy apply.

Company Car

You will be provided with a $1,150 monthly car allowance, as outlined in the Company Policy. A company gas card will also be provided for your use.

Moving and Relocation

The Company has agreed to provide full relocation assistance. You will receive a copy of the Full Relocation Benefit Policy during your orientation. You must follow all the requirements in this policy to be eligible for relocation benefits. Should you intend to delay your relocation process to the Summer of 2018, the Company will agree to reimburse you for reasonable temporary housing expense through July 2018.

Repayment Covenant

It is required that you sign the accompanying Lydall Repayment Policy that states you are subject to repay any cash bonus paid by the Company in connection with the contingency start date noted above, as well as all relocation costs to the Company in the event of your voluntary termination or a termination for “cause” within eighteen (18) months of your start date.

Other

Employment with the Company is contingent upon your: 1) passing a substance abuse screening; 2) signing the Confidentiality, Invention and Non-Compete Agreement; 3) ability to provide the Company with proper documentation to establish your identity and eligibility for employment in the U.S.; 4) completion of an Employment Application, as necessary; 5) satisfactory completion and receipt of references and background checks; and 6) providing a copy of any agreement with your current or prior employers, and confirmation that your employment would not be a violation of any such agreement. Any violation of the above terms may subject you to withdrawal of the offer or termination of employment.

This letter is not a contract of employment. If you accept the offer and the other conditions for employment are satisfied, your employment with Lydall will be at-will, and both parties remain free to terminate the employment relationship at any time, in which case, the provisions of this letter may no longer apply. The terms of this offer must remain confidential and any disclosure to third parties, other than your legal counsel and advisors, must receive the written approval of the Company in advance. This Letter Agreement supersedes all prior understanding, whether written or oral, relating to the terms of your employment with Lydall.

Prior to your first day of employment, you must have completed your screenings at the clinic the company identifies for your location.

Should you accept this invitation to join Lydall, you must bring on your first day of employment your personal documentation that proves your eligibility to work in the US. You can find a list of acceptable documents (unexpired) at http://www.uscis.gov/sites/default/files/files/form/i-9.pdf on page 9. This form I-9 will be completed on your first day during your orientation session.

We look forward to the contributions that you will bring to Lydall. Please feel free to contact me or Chad if you have any questions.

Sincerely,

/S/ Dale G. Barnhart

Dale G. Barnhart

President and Chief Executive Officer

Acceptance of Offer : /S/ Randall B. Gonzales January 9, 2018

Randall B. Gonzales Date

Exhibit 31.1

CERTIFICATION

I, Dale G. Barnhart, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Lydall, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting ,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



May 1, 2018		/s/ Dale G. Barnhart
		Dale G. Barnhart President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Randall B. Gonzales, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Lydall, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



May 1, 2018		/s/ Randall B. Gonzales
		Randall B. Gonzales Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer)

Exhibit 32.1

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lydall, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:


1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The foregoing certifications are accompanying the Form 10-Q solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States Code) and are not being filed as a part of this Form 10-Q or as a separate disclosure document.



May 1, 2018		/s/ Dale G. Barnhart
		Dale G. Barnhart President and Chief Executive Officer

May 1, 2018		/s/ Randall B. Gonzales
		Randall B. Gonzales Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer)