Employer Sponsored Benefit Plans

The Company maintains a domestic defined benefit pension plan ("U.S. Lydall Pension Plan") and acquired two domestic pension plans in the Interface acquisition ("Interface Pension Plans"), (collectively, "domestic defined benefit pension plans").

The U.S. Lydall Pension Plan covers certain domestic Lydall employees, is noncontributory and benefits are based on either years of service or eligible compensation paid while a participant is in a plan. The plan has been closed to new employees for several years and benefits under the pension plan are no longer accruing. During the fourth quarter of 2018, the Company authorized the termination of the U.S. Lydall Pension Plan under which approximately 900 participants, including 200 active employees, have accrued benefits. The Company anticipates completing the termination of this plan in 2019. At December 31, 2018, the benefit obligations have been valued at the amount expected to be required to settle the obligations, using assumptions regarding the portion of obligations expected to be settled through participant acceptance of lump sum payments or annuities and the cost to purchase those annuities. Overall, the Company estimates it will incur pension expense of approximately $29.0 million to $33.0 million in 2019 when the plan settlement is completed. Of that settlement amount, the Company is expected to make a one-time cash contribution of approximately $2.0 million to $4.0 million to purchase annuities for participants and make lump sum payments. The estimated expense is subject to change based on valuations at the actual date of settlement.

The Interface Pension Plans cover Interface's union and non-union employees, the plans are closed to new employees and benefits are no longer accruing for the majority of participants. Certain union employees of Interface business participate in a multi-employer pension plan. Contributions to this multi-employer plan are required to be made monthly based upon the total monthly hours worked by the covered employees multiplied by the employer contribution rate published by the fund. Total contributions related to the multi-employer plan from the date of acquisition through December 31, 2018 were immaterial. As of the acquisition date, the Company remeasured the fair value of plan liabilities and funded status of the Interface Pension Plans. An underfunded liability of $11.2 million was included in benefit plan liabilities within the Company’s Condensed Consolidated Balance Sheets.

The Company also acquired Interface's domestic post-retirement benefit plan and recorded a liability of $4.1 million and German pension plans and recorded a liability of $2.9 million included in benefit plan liabilities within the Company’s Condensed Consolidated Balance Sheets. The Interface post-retirement benefits include life insurance and medical benefits for certain domestic employees and these plans are closed to new employees. The German noncontributory plan is closed to new employees.

The Company’s funding policy for all of its domestic defined benefit pension plans (US Lydall Pension plan and Interface Pension Plans) 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.

Plan assets and benefit obligations of the domestic defined benefit pension plans were as follows:



	December 31,
In thousands	2018			2017
Change in benefit obligation:
Net benefit obligation at beginning of year	$	51,882		$	50,086
Benefit obligation assumed through acquisition	52,392			—
Service Cost	46			—
Interest cost	2,595			2,058
Actuarial (gain)/loss	(876		)	2,126
Gross benefits paid	(3,360		)	(2,388		)
Net benefit obligation at end of year	$	102,679		$	51,882
Change in plan assets:
Fair value of plan assets at beginning of year	$	44,174		$	37,038
Fair value of plan assets through acquisition	43,230			—
Actual (loss)/return on plan assets	(4,092		)	5,924
Contributions	7,500			3,600
Gross benefits paid	(3,360		)	(2,388		)
Fair value of plan assets at end of year	$	87,452		$	44,174
Net benefit obligation in excess of plan assets	$	(15,227	)	$	(7,708	)
Balance sheet amounts:
Current liabilities	$	(3,078	)	$	—
Noncurrent liabilities	$	(12,149	)	$	(7,708	)
Total liabilities	$	(15,227	)	$	(7,708	)
Amounts recognized in accumulated other comprehensive income, net of tax consist of:
Net actuarial loss	$	21,850		$	17,632
Net amount recognized	$	21,850		$	17,632

At December 31, 2018, in addition to the accrued benefit liability of $15.2 million recognized for the Company’s domestic defined benefit pension plans, the Company also had foreign pension plans with an accrued benefit liability of $4.7 million and accumulated other comprehensive loss, net of tax, of $0.4 million. At December 31, 2017, in addition to the accrued benefit liability of $7.7 million recognized for the Company’s domestic defined benefit pension plan, the Company also had foreign regulatory labor agreements with an accrued benefit liability of $1.9 million and accumulated other comprehensive loss, net of tax, of $0.4 million.

In addition to the domestic pension plans included in the table above, the Interface post-retirement benefits include life insurance and medical benefits for certain domestic employees with an accrued benefit liability of $4.1 million at December 31, 2018. From the August 31, 2018 acquisition to December 31, 2018, benefit expense of $0.1 million was recognized and benefit payments of $0.1 million were made from Company assets.

The U.S. Lydall Pension Plan liability, net of tax, included in other comprehensive income increased by $1.8 million for the year ended December 31, 2018. The Interface Pension Plans liability, net of tax, included in other comprehensive income increased by $1.8 million at December 31, 2018. The U.S. Lydall Pension Plan liability, net of tax, included in other comprehensive income increased by $2.1 million for the year ended December 31, 2017. These changes are mainly due to changes in pension assumptions, primarily the discount rates.

Aggregated information for the domestic defined benefit pension plans with an accumulated benefit obligation in excess of plan assets is provided in the tables below:



	December 31,
In thousands	2018		2017
Projected benefit obligation	$	102,679	$	51,882
Accumulated benefit obligation	$	104,188	$	51,882
Fair value of plan assets	$	87,452	$	44,174

Components of net periodic benefit cost for the domestic defined benefit pension plan:



	December 31,
In thousands	2018			2017			2016
Service cost	$	46		$	—		$	—
Interest cost	2,595			2,058			2,139
Expected return on plan assets	(3,339		)	(2,376		)	(2,419		)
Amortization of actuarial net loss	1,024			1,092			933
Total net periodic benefit cost	$	326		$	774		$	653

It is estimated that $0.5 million of actuarial net loss will be amortized from accumulated other comprehensive loss into net periodic benefit costs for the domestic defined benefit pension plans in 2019. For the U.S. Lydall Pension Plan settlement loss of approximately $29.0 million to $33.0 million will also be expensed when the U.S. plan terminates in 2019.

The major assumptions used in determining the year-end benefit obligation and annual net cost for the domestic defined benefit pension plans are presented in the following table:



	Benefit Obligation				Net Cost
For the years ended December 31,	2018		2017		2018		2017		2016
Discount rate	3.99	%	3.71	%	3.75	%	4.21	%	4.56	%
Expected return on plan assets	4.08	%	5.80	%	5.79	%	6.30	%	7.00	%

Plan Assets

The domestic defined benefit pension plans are administered by the Lydall Retirement Committee (the "Committee"), which is appointed by the Board of Directors. The Committee’s responsibilities are to establish a funding policy for the domestic pension plans and to appoint and oversee the investment advisor responsible for the plan investments. The Committee is a named fiduciary under the plan, and the Committee has granted discretion to the investment advisor with respect to management of the investments. The assets of the U.S. Lydall Pension Plan are invested with the purpose to fund the plan termination which the Company anticipates completing in 2019. The Interface Pension Plans are invested for the purpose of investment diversification. In determining the expected return on plan assets, the Committee considers the relative weighting of plan assets, the historical performance of marketable debt and equity securities and economic and other indicators of future performance.

Investment management objective for the U.S. Lydall Pension Plan is a liability driven strategy to lessen the risk prior to plan termination with liquidity of assets to match the expected plan termination lump sum and annuity payments in 2019.

Investment management objectives for the Interface Pension Plans include maintaining an adequate level of diversification to balance market risk and to provide sufficient liquidity for near-term payments of benefits accrued under the Plan and to pay the expenses of administration. Investment decisions are based on the returns and risk relative to the Plan's liabilities, an approach commonly referred to as liability-driven investing. The long-term investment objective of the Interface Pension Plan is to achieve a total return equal to or greater than the assumed weighted rate of return, currently 4.08%. Though it is the intent of the Committee to achieve income and growth, that intent does not include taking extraordinary risks or engaging in investment activities not commonly considered prudent under the standards imposed by ERISA. The allowable investments include: securities, mutual funds, sub-advisers, independent investment managers and/or programs, and cash or cash equivalents. Prohibited investments include: single strategy hedge funds, investment in individual securities, direct investment in venture capital, CMO derivatives and commodities.

The following table presents the target allocation of the domestic defined benefit pension plan assets for 2019 and the actual allocation of plan assets as of December 31, 2018 and 2017 by major asset category:



	Target Allocation	Actual Allocation of Plan Assets December 31,
Asset Category	2019	2018		2017
Domestic equities	11% - 32%	16	%	26	%
International equities	5% - 24%	11	%	26	%
Fixed income	30% - 69%	44	%	40	%
U.S. government securities	2% - 13%	3	%	—	%
Corporate and foreign bonds	2% - 13%	2	%	—	%
Inflation hedge mutual funds	2% - 13%	3	%	—	%
Hedge fund of funds	2% - 9%	5	%	7	%
Cash and cash equivalents	0% - 32%	16	%	1	%

Domestic and international equities consist primarily of mutual funds valued at the closing price reported in the active market in which individual securities are traded.

Fixed income consists of mutual funds and a long duration fixed income held in proprietary funds pooled with other investor accounts which use the net asset value (NAV) per share practical expedient to measure fair value. The fixed income mutual funds are valued using quoted market prices.

Inflation hedge mutual funds invest primarily in a portfolio of inflation-protected debt securities, real-estate related securities and commodity/natural resource-related securities. The mutual fund is designed to protect against the long-term effects of inflation on an investment portfolio with the long-term objective of preservation of capital with current income.

U.S. government securities include U.S. Treasury Notes and Bonds which represent middle range and long term fixed income investments.

Corporate and foreign bonds primarily include a diversified portfolio of U.S. corporate debt obligations.

Hedge funds are mutual funds and pooled funds that employ a range of investment strategies for diversification including equity and fixed income, credit driven, macro and multi oriented strategies. Certain hedge funds were measured at fair value using the NAV practical expedient and are not classified in the fair value hierarchy.

Cash and cash equivalents include investments readily converted to cash valued in the active market in which the funds were traded and are classified within Level 1 of the fair value hierarchy. Non-government money market funds are classified as Level 2.

The investments of the domestic defined benefit plans are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fixed income long duration fund and certain hedge funds were measured at fair value using the NAV practical expedient and are included as a reconciling item to the fair value table.

The following tables set forth the fair value of the assets by major asset category as of December 31, 2018 and December 31, 2017:



December 31, 2018
In thousands	Level 1		Level 2		Level 3		Measured at NAV		Total

Domestic equity	$	13,941	$	—	$	—	$	—	$	13,941
International equity	9,547		—		—		—		9,547
Fixed income	10,977		—		—		27,727		38,704
U.S. government securities	—		2,466		—		—		2,466
Corporate and foreign bonds	—		1,448		—		—		1,448
Inflation hedge mutual funds	2,808		—		—		—		2,808
Hedge fund of funds	4,129		—		—		312		4,441
Cash and cash equivalents	12,027		2,070		—		—		14,097
Total Assets at Fair Value	$	53,429	$	5,984	$	—	$	28,039	$	87,452



December 31, 2017
In thousands	Level 1		Level 2		Level 3		Measured at NAV		Total

Domestic equity	$	11,577	$	—	$	—	$	—	$	11,577
International equity	11,626		—		—		—		11,626
Fixed income	—		—		—		17,360		17,360
Hedge fund of funds	—		—		—		3,054		3,054
Cash and cash equivalents	557		—		—		—		557
Total Assets at Fair Value	$	23,760	$	—	$	—	$	20,414	$	44,174

Estimated Future Contributions and Benefit Payments

The Company expects to contribute approximately $3.5 million to $5.5 million in cash to its domestic defined benefit pension plans in 2019.

The U.S. Lydall pension plan is estimated to pay a partial year of benefits in 2019 as the U.S. plan is expected to terminate in 2019. The benefit payments for 2020 and thereafter only include benefit payments for the Interface Pension Plans. Estimated future benefit payments for the next 10 years for the domestic defined benefit pension plans are as follows:



In thousands	2019		2020		2021		2022		2023		2024-2028
Benefit payments	$	4,023	$	3,099	$	3,186	$	3,241	$	3,264	$	16,995

Employee Savings Plan

The Company also sponsors a 401(k) Plan. Employer contributions to this plan amounted to $2.9 million in 2018, $2.6 million in 2017, and $2.5 million in 2016. Matching contributions by the Company are made on employee pretax contributions up to five percent of compensation, with the first three percent matched at 100% and the next two percent matched at 50%.