News Column

LYDALL INC /DE/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 5, 2014

OVERVIEW AND OUTLOOK Business

Lydall, Inc. and its subsidiaries (collectively, the "Company" or "Lydall") design and manufacture specialty engineered filtration media, thermal insulating solutions, automotive thermal and acoustical barriers, medical filtration media and devices and biopharmaceutical processing components for filtration/separation, thermal/acoustical, and bio/medical applications. On February 20, 2014, the Company completed an acquisition of certain industrial filtration businesses ("Industrial Filtration") of Andrew Industries Limited, an Altham, United Kingdom based corporation pursuant to the terms of a Sale and Purchase Agreement (the "Sale and Purchase Agreement") for $86.7 million in cash ("the Acquisition"). The Company funded the purchase price of the Acquisition from cash on hand and borrowings under the Company's Amended Credit Facility. The results of Industrial Filtration have been included in the Company's financial statements since the date of the acquisition. As a result, the consolidated financial results for the quarter ended March 31, 2014 do not reflect a full three months of the Industrial Filtration business. The Acquisition resulted in the inclusion of Industrial Filtration's assets and liabilities as of the acquisition date at their respective fair values. Accordingly, the Acquisition materially affected the Company's results of operations and financial position.



Lydall principally conducts its business through four reportable segments: Performance Materials, Industrial Filtration, Thermal/Acoustical Metals and Thermal/Acoustical Fibers, 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 new Industrial Filtration segment includes non-woven felt filtration media and filter bags used primarily in industrial air filtration applications. Non-woven 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 Metals ("T/A Metals") segment and Thermal/Acoustical Fibers ("T/A Fibers") segment offer innovative engineered products to assist in noise and heat abatement within the transportation sector. Included in Other Products and Services ("OPS") is the Life Sciences Vital Fluids business. Life Sciences Vital Fluids offers specialty products for blood filtration devices, blood transfusion single-use containers and bioprocessing single-use containers and products for containment of media, buffers and bulk intermediates used in biotech, pharmaceutical and diagnostic reagent manufacturing processes.



First Quarter 2014 Highlights

Net sales were $125.2 million in the current quarter, compared to $99.0 million in the first quarter of 2013. Net income was $3.7 million, or $0.22 per diluted share in the first quarter of 2014 compared to $4.5 million, or $0.26 per diluted share, in the first quarter of 2013. Operating income in the first quarter of 2014 was negatively impacted by purchase accounting adjustments in cost of sales of $1.3 million and transaction costs in corporate office expenses of $2.4 million related to the Acquisition. As a result, operating margin was negatively impacted by approximately 300 basis points in the first quarter

of 2014.



Below are financial highlights comparing Lydall's quarter ended March 31, 2014 ("Q1 2014") results to its quarter ended March 31, 2013 ("Q1 2013") results:

Net sales increased by $26.2 million, or 26.5%, compared to Q1 2013 as net

sales increased 7.3% organically, 17.9% from the Acquisition and 1.3% from

favorable foreign currency translation;

Gross margin decreased to 20.9%, compared to 21.6% in Q1 2013, driven by the

negative impact of purchase accounting adjustments of $1.3 million related to

the Acquisition, as all other segments reported improved gross margin impacting

the Company's overall gross margin favorably by approximately 100 basis points;

Selling, product development and administrative expenses were $18.6 million, or

14.8% of net sales, compared to $14.8 million, or 15.0% of net sales in Q1

2013; 20



- Industrial Filtration segment reported $1.1 million of expenses;

- Corporate office expenses included $2.4 million of transaction related costs;

Operating income was $7.6 million, or 6.1% of net sales, compared to $6.5

million, or 6.6% of net sales, in Q1 2013;

- Operating income from Performance Materials, T/A Metals, T/A Fibers, OPS and

corporate office ("pre-acquisition businesses") was $6.8 million, including the

$2.4 million of transaction related costs, or 6.4% of pre-acquisition

businesses net sales, compared to $6.5 million, or 6.6% in Q1 2013;

- Industrial Filtration segment operating income was $0.8 million, or 4.5% of

Industrial Filtration segment net sales

- Q1 2013 included operating income of $1.8 million from a non-recurring pricing

negotiation and non-recurring customer project in the Thermal/Acoustical Fibers

segment.



The Company's effective tax rate was 49.5% and 29.8% for the quarters ended

March 31, 2014 and 2013, respectively:

- The Company recorded discrete tax charges of $1.0 million in the first quarter

of 2014, primarily for non-deductible transaction related expenses associated

with the Acquisition.

- The first quarter of 2013 included a discrete tax benefit of $0.5 million

related to the conclusion of certain U.S. federal income tax matters through

the year ended December 31, 2009.



Operational and Financial Overview

Net sales for the first quarter of 2014 increased by $26.2 million, or 26.5%, compared to the first quarter of 2013, primarily from the inclusion of Industrial Filtration segment net sales of $17.7 million from the acquisition date through March 31, 2014. In the Thermal/Acoustical Fibers ("T/A Fibers) segment, higher net sales of $4.6 million, or 16.4%, compared to the same quarter a year ago, were the result of increased consumer demand for vehicles in North America on Lydall's existing and new platforms. The Thermal Acoustical Metals ("T/A/ Metals") segment net sales increased $2.3 million, or 5.6%, and the Performance Materials segment net sales increased by $1.4 million, or 5.0%, compared to the first quarter of 2013. Higher net sales in the Thermal Acoustical Metals segment were due to continued favorable market conditions in North America and improving market conditions in Europe compared to the first quarter of 2013. Net sales for the Performance Materials segment increased due to higher air filtration net sales within the segments European operations, also as a result of improved market conditions. Consolidated operating income was $7.6 million, an increase of $1.1 million compared to the first quarter of 2013, primarily driven by the T/A Fibers segment which reported an increase of $1.2 million. The Industrial Filtration segment contributed $0.8 million to the increase in consolidated operating income, including the negative impact of $1.3 million purchase accounting adjustment related to inventory step-up included in cost of sales. Operating income increased by $0.6 million in both the T/A Metals and Performance Materials segments. These increases were offset to some extent by an increase in corporate office expenses of $2.1 million, primarily due to $2.4 million of transaction related costs associated with the Industrial Filtration acquisition. Operating income in the first quarter of 2013 included a non-recurring completed pricing negotiation and a non-recurring customer project that contributed to an increase in operating income of $1.8 million in the T/A Fibers segment. Consolidated operating margin in the first quarter of 2014 was 6.1% compared to 6.6% in the first quarter of 2013. Operating margin was lower due to the inclusion of the Industrial Filtration segment. Operating margins increased in the Company's Performance Materials, T/A Metals and T/A Fibers segments by 1.9%, 1.1% and 0.5%, respectively. These increases were primarily the result of increased net sales and improved absorption of fixed costs in the first quarter of 2014 compared to the first quarter of 2013. Liquidity Cash was $51.1 million at March 31, 2014 compared to $75.4 million at December 31, 2013. The Acquisition in February 2014 was funded by borrowing of $60.0 million from the Company's $100 million amended domestic credit facility, with the remaining purchase price funded from the Company's cash. On February 18, 2014, the Company amended and restated its $35.0 million senior secured domestic revolving credit facility ("Amended Credit Facility") with a financial institution and two additional lenders, increasing the available borrowing from $35 million to $100 million. The Company entered into this Amended Credit Facility in part to fund $60 million of the purchase price of the Industrial Filtration acquisition. 21 As of March 31, 2014, the Company had borrowing availability of $37.4 million under the Amended Credit Facility, net of standby letters of credit outstanding of $2.6 million. As of March 31, 2014, the Company's foreign subsidiaries' various credit arrangements with banks totaled 9.0 million (approximately $12.4 million) all of which was available for borrowings, primarily restricted to borrowings by the respective foreign subsidiary. Outlook

The Company's overall outlook going into the second quarter of 2014 remains positive as European and Asian markets have improved, and the Company is well positioned to capitalize on opportunities for sales growth as well as operating margin expansion. Favorable demand for felt filtration media and filter bags used in industrial air filtration applications is expected to continue in the second quarter of 2014. The Company expects to begin commercial production of parts at its Thermal/Acoustical Metals operation in China during the second quarter of 2014. The Company remains focused on the integration of the acquired Industrial Filtration business. Lydall Lean Six Sigma continuous improvement program is a key component to a successful integration, as well as driving expanded gross margins and operating margins. The Company expects the acquisition to be accretive to Lydall's 2014 full-year earnings and free cash flow, inclusive of transaction expenses, purchase accounting adjustments and incremental amortization of intangible assets. The Company expects transaction related expenses, purchase accounting adjustments and incremental amortization of intangible assets to be in the range of $0.8 million to $1.0 million in the second quarter of 2014. Results of Operations



All of the following tabular comparisons, unless otherwise indicated, are for the quarters ended March 31, 2014 (Q1-14) and March 31, 2013 (Q1-13).

Net Sales Quarter Ended Percent In thousands Q1-14 Q1-13 Change Net sales $ 125,226$ 99,029 26.5 % Net sales for the current quarter increased $26.2 million, or 26.5%, compared to the first quarter of 2013. This increase is primarily related to the acquisition of Industrial Filtration which occurred on February 20, 2014. As a result, Industrial Filtration segment net sales of $17.7 million since the date of the acquisition are included in the Company's first quarter 2014 consolidated net sales. Pre-acquisition business net sales increased $8.5 million, or 8.6%, in the first quarter of 2014 compared to the same period in 2013. In the T/A Fibers and T/A Metals segments, higher sales volumes resulted in improved net sales of $4.6 million, or 16.4%, and $2.3 million, or 5.6%, respectively, compared to the same quarter a year ago. Additionally, net sales increased in the Performance Materials segment by $1.4 million, or 5.0%, and in the Life Sciences Vital Fluids business by $0.4 million, or 9.7%, in the first quarter of 2014 compared to the first quarter of 2013. Foreign currency translation increased net sales by $1.3 million, or 1.3%, for the current quarter, compared with the first quarter of 2013, favorably impacting the T/A Metals segment by $0.9 million, or 2.2%, and the Performance Materials segment by $0.4 million, or 1.4%. Gross Profit Quarter Ended Percent



In thousands Q1-14 Q1-13 Change Gross profit $ 26,199$ 21,365 22.6 % Gross margin 20.9 % 21.6 %

22 Gross margin for the first quarter of 2014 was 20.9% compared to 21.6% in the first quarter of 2013. The decrease in gross margin was related to the inclusion of Industrial Filtration from the date of the acquisition. The Industrial Filtration segment gross margin included the negative impact of a $1.3 million purchase accounting adjustment in cost of sales relating to inventory step-up. Pre-acquisition business gross margins increased 100 basis points in the first quarter of 2014 compared to the same period in 2013. This increase was primarily the result of higher net sales across all of the Company's pre-acquisition businesses and improved absorption of fixed costs. Gross margin in the first quarter of 2013 was favorably impacted by a $1.8 million completed pricing negotiation and a non-recurring customer project in the T/A Fibers segment.



Selling, Product Development and Administrative Expenses

Quarter Ended Percent In thousands Q1-14 Q1-13 Change Selling, product development and administrative expenses $ 18,573$ 14,848 25.1 % Percentage of sales 14.8 % 15.0 % The increase in selling, product development and administrative expenses for the quarter ended March 31, 2014 compared to the same period of 2013 was primarily due to $1.1 million of selling, product development and administrative expenses related to the Industrial Filtration segment from the date of the acquisition and $2.4 million of transaction related costs incurred in the first quarter of 2014 by the corporate office, also related to the acquisition. Interest Expense Quarter Ended Percent In thousands Q1-14 Q1-13 Change Interest expense $ 212$ 78 171.8 %



Weighted average interest rate 1.7 % 5.5 %

The increase in interest expense for the quarter ended March 31, 2014 compared to the same period of 2013 was due to borrowings under the Company's Amended Credit Facility used to finance the acquisition of Industrial Filtration, partially offset by lower average principal balances on capital lease obligations. Other Income/Expense



Other income and expense for the quarters ended March 31, 2014 and 2013 consisted of insignificant activity related to foreign exchange transaction gains and losses and interest income.

Income Taxes The Company's effective tax rate for the first quarter of 2014 was 49.5% compared to an effective tax rate of 29.8% in the first quarter of 2013. The difference in the Company's effective tax rate for the quarter ended March 31, 2014 compared to statutory federal income tax rates was primarily due to discrete income tax charges of approximately $1.0 million primarily for non-deductible transaction related expenses associated with the acquisition of the Industrial Filtration business. During the first quarter of 2013, the Company concluded certain U.S. federal income tax matters through the year ended December 31, 2009 and recognized a discrete tax benefit of $0.5 million. 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, United Kingdom and the Netherlands. With few exceptions, the Company is no longer subject to U.S. federal examinations for years before 2010, state and local examinations for years before 2002, 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 lower or higher than anticipated in countries where tax rates differ from the United States federal rate, the relative impact of permanent tax adjustments on higher or lower earnings from domestic operations, changes in net deferred tax asset valuation allowances, the impact of the completion of acquisitions or divestitures, changes in tax rates or tax laws and the completion of tax audits. 23 Segment Results The following tables present 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, 2014 compared with the quarter ended March 31, 2013: Net sales by segment: Quarter Ended In thousands Q1-14 Q1-13 Dollar Change Performance Materials Segment: Filtration $ 17,873$ 16,650 $ 1,223 Thermal Insulation 8,528 8,156 372 Life Sciences Filtration 2,452 2,677 (225 )

Performance Materials Segment net sales 28,853 27,483



1,370

Industrial Filtration Segment: Industrial Filtration 17,656 -



17,656

Industrial Filtration net sales 17,656 -



17,656

Thermal/Acoustical Metals Segment: Metal parts 37,025 33,109



3,916

Tooling 5,431 7,093 (1,662 ) Thermal/Acoustical Metals Segment net sales 42,456 40,202



2,254

Thermal/Acoustical Fibers Segment: Fiber parts 30,322 27,784



2,538

Tooling 2,191 143



2,048

Thermal/Acoustical Fibers Segment net sales 32,513 27,927

4,586 Other Products and Services: Life Sciences Vital Fluids 4,724 4,307 417

Other Products and Services net sales 4,724 4,307

417 Eliminations and Other (976 ) (890 ) (86 ) Consolidated Net Sales $ 125,226$ 99,029$ 26,197 Operating income by segment: Quarter Ended Q1-14 Q1-13 Operating Operating Operating Operating Dollar In thousands Income Margin % Income Margin % Change Performance Materials $ 1,863 6.5 % $ 1,277 4.6 % $ 586 Industrial Filtration 786 4.5 % - 0.0 % 786 Thermal/Acoustical Metals 3,653 8.6 % 3,018 7.5 % 635 Thermal/Acoustical Fibers 7,341 22.6 % 6,154 22.0 % 1,187 Other Products and Services 420 8.9 % 356 8.3 % 64 Corporate Office Expenses (6,437 ) (4,288 ) (2,149 ) Consolidated Operating Income $ 7,626 6.1 % $ 6,517

6.6 % $ 1,109 24 Performance Materials Segment net sales were $28.9 million in the first quarter of 2014, an increase of $1.4 million, or 5.0%, compared to net sales of $27.5 million in the first quarter of 2013. Higher demand for fluid power and air filtration products of $1.2 million primarily in Europe contributed to the increase in segment net sales. Thermal Insulation net sales increased by $0.4 million in the first quarter of 2014, compared to the same quarter of 2013, offset by lower net sales of $0.2 million associated with Life Sciences Filtration products. The segment reported operating income of $1.9 million, in the first quarter of 2014, or 6.5% of net sales, compared to operating income of $1.3 million, or 4.6% of net sales, in the first quarter of 2013. The increase in operating income was the result of higher net sales of $1.4 million in the first quarter of 2014 compared to the first quarter of 2013 as well as higher absorption of fixed overhead costs. Selling, product development and administrative costs were flat compared to the prior year quarter. Industrial Filtration Segment net sales were $17.7 million from the acquisition date through March 31, 2014. Additionally, the segment reported operating income of $0.8 million, which included the impact of a $1.3 million purchase accounting adjustment in cost of sales related to inventory step-up. There were no comparative results for the quarter ended March 31, 2013 as the Industrial Filtration segment was created through the acquisition of that business on February 20, 2014. Thermal/Acoustical Metals

In the first quarter of 2014, segment net sales of $42.5 million were $2.3 million higher than the first quarter of 2013. Automotive parts net sales increased by $3.9 million, or 11.8%, compared to the first quarter of 2013 primarily due to increased demand from customers served by the Company's European automotive operations. Tooling net sales in the first quarter of 2014 decreased $1.7 million, or 23.4%, compared to the first quarter of 2013, due to timing of new product launches. For the first quarter of 2014, operating income for the segment was $3.7 million, or 8.6% of net sales, compared to $3.0 million, or 7.5% of net sales, in the first quarter of 2013. Contributing to the increase in operating income was favorable mix in sales between automotive parts and tooling. Net sales of higher margin automotive parts increased by $3.9 million in the first quarter of 2014 with lower margin tooling net sales declining by $1.7 million compared to the first quarter of 2013. Selling, product development and administrative costs increased by $0.3 million in the first quarter of 2014 compared to the first quarter of 2013 primarily due to expenses associated with the segment's operations in China which was established in the second quarter of 2013.



Thermal/Acoustical Fibers

Segment net sales increased by $4.6 million, or 16.4%, compared to the first quarter of 2013. Automotive parts net sales increased by $2.5 million, or 9.1%, compared to the first quarter of 2013. This increase was driven by higher consumer demand for vehicles in North America on Lydall's existing platforms and new platform awards. Tooling net sales in the first quarter of 2014 increased $2.0 million compared to the first quarter of 2013 due to timing of new product launches.

The segment reported operating income in the first quarter of 2014 of $7.3 million, or 22.6% of net sales, compared to operating income of $6.2 million, or 22.0% of net sales, in the first quarter of 2013. The increase in the first quarter 2014 operating income was primarily attributable to an increase in net sales volume compared to the prior year quarter as well as improved absorption of fixed costs and labor efficiencies. The first quarter of 2013 included $1.8 million of operating income from a completed non-recurring pricing negotiation and a non-recurring customer project. Selling, product development and administrative costs in the first quarter of 2014 were essentially flat compared to the prior year quarter. Other Products and Services



Life Sciences Vital Fluids net sales for the quarter ended March 31, 2014 increased $0.4 million, or 9.7%, compared to the same quarter a year ago, primarily due to increased volumes of bioprocessing net sales and to a lesser extent increased pricing.

25 Life Sciences Vital Fluids operating income was $0.4 million, or 8.9% of net sales, for the quarter ended March 31, 2014, compared to operating income of $0.4 million, or 8.3% of net sales, for the first quarter of 2013. This improvement was primarily due to higher net sales partially offset by increased selling, product development and administrative expenses. Corporate Office Expenses Corporate office expenses were $6.4 million in the first quarter of 2014, compared to $4.3 million in first quarter of 2013. The increase in corporate office expenses was primarily due to $2.4 million of transaction related costs associated with the Industrial Filtration acquisition on February 20, 2014, including investment banker and legal fees, and accounting professional services, partially offset to some extent by lower personnel costs.



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 payment service payments, outcomes of contingencies and pension funding. The Company manages worldwide cash requirements by considering available funds among domestic and foreign subsidiaries. The Company expects to finance its 2014 operating cash and capital spending requirements from existing cash balances, cash provided by operating activities and through borrowings under its existing credit agreements, as needed. At March 31, 2014, the Company had a cash balance of $51.1 million and borrowing availability of $37.4 million under the Amended Credit Facility net of standby letters of credit outstanding of $2.6 million. At March 31, 2014, the Company's foreign subsidiaries' various credit arrangements with banks totaled 9.0 million (approximately $12.4 million) all of which was available for borrowings, primarily restricted to borrowings by the respective foreign subsidiary. The Company's foreign subsidiaries had no borrowings outstanding on any of their respective credit arrangements at March 31, 2014 and December 31, 2013. The Company continually explores its core markets for suitable acquisitions, joint ventures, alliances and licensing agreements. If completed, such activities would be financed with existing cash balances, cash generated from operations, cash borrowings under existing credit facilities or other forms

of financing, as required. Financing Arrangements On February 18, 2014, the Company amended and restated its $35.0 million senior secured domestic revolving credit facility ("Amended Credit Facility") with a financial institution and two additional lenders, increasing the available borrowing from $35 million to $100 million. The Amended Credit Facility is secured by substantially all of the assets of the Company. The maturity date for the Amended Credit Facility is January 31, 2019, at which time amounts outstanding under the Amended Credit Facility are due and payable. The Company entered into this Amended Credit Facility in part to fund $60 million of the purchase price of the Industrial Filtration business. Under the terms of the Amended Credit Facility, the lenders are providing a $100 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 Amended Credit Facility may be increased by an aggregate amount not to exceed $50 million through an accordion feature, subject to specified conditions. 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 $30.0 million. The Company was in compliance with all covenants at March 31, 2014. 26 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 will pay a quarterly fee ranging from 20 basis points to 30 basis points on the unused portion of the $100 million available under the Amended Credit Agreement. In addition to the borrowing of $60 million under its Amended Credit Facility, which matures on January 31, 2019, the Company has contractual obligations associated with certain operating leases related to its Industrial Filtration properties of approximately $0.7 million per year through 2019, and $1.6 million thereafter. Operating Cash Flows Net cash used for operating activities in the first three months of 2014 was $2.9 million compared with net cash used for operating activities of $3.2 million in the first three months of 2013. In the first three months of 2014 compared to the same period for 2013, net income decreased by $0.8 million. Since December 31, 2013, net operating assets and liabilities increased by $12.6 million, primarily due to increases in accounts receivable of $20.3 million, partially offset by lower inventories of $3.6 million and higher accounts payable of $6.0 million. The increase in accounts receivable was primarily due to higher net sales in the first quarter of 2014 compared to the fourth quarter of 2013 across all of the Company's pre-acquisition businesses. Investing Cash Flows In the first quarter of 2014, net cash used for investing activities was $82.0 million compared to net cash used for investing activities of $2.5 million in the first quarter of 2013. Investing activities in the first quarter of 2014 primarily consisted of the cash outflow of $79.2 million to fund the acquisition of the Industrial Filtration business, net of cash acquired of $7.5 million. Capital expenditures were $2.8 million during the first quarter of 2014, compared with $2.5 million for the same period of 2013. Capital spending for full-year 2014 is expected to be approximately $17.0 million to $22.0 million Financing Cash Flows

In the first quarter of 2014, net cash provided by financing activities was $60.0 million compared to net cash provided by financing activities in the first quarter of 2013 of $0.2 million. The Company received proceeds of $60.0 million from borrowings under its Amended Credit Facility in the first quarter of 2014 to fund the acquisition of Industrial Filtration. Debt repayments were $0.2 million for the first quarters of 2014 and 2013. The Company received $0.4 million from the exercise of stock options in the first quarter of 2014, compared to $0.7 million in the first quarter of 2013. The Company acquired shares of common stock valued at $0.5 million and $0.3 million in the first quarters of 2014 and 2013, respectively, through withholding, pursuant to provisions in agreements with recipients of restricted stock granted under the Company's equity compensation plan, which allow the Company to withhold the number of shares having fair value equal to each recipient's tax withholding due. 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. Footnote 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, 2013, 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, 2014. The Company continues to monitor the recoverability of the long-lived assets at the Company's DSM Solutech B.V. ("Solutech") operation as a result of historical operating losses and negative cash flows. Future cash flows are dependent on the success of commercialization efforts of Solutech products by OEMs, the quality of Solutech products and technology advancements and management's ability to manage costs. In the event that Solutech's cash flows in the future do not meet current expectations, management, based upon conditions at the time, would consider taking actions as necessary to improve cash flow. A thorough analysis of all the facts and circumstances existing at the time would need to be performed to determine if recording an impairment loss was appropriate.



27


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