UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 

FORM 10-Q
 
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31,September 30, 2020
 
OR

☐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 /DE/
(Exact name of registrant as specified in its charter)
Delaware06-0865505
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
One Colonial Road,Manchester,Connecticut06042
(Address of principal executive offices)(zip code)
 
(860) (860) 646-1233
(Registrant’s telephone number, including area code) 
None
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueLDLNew York Stock Exchange


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 ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐Accelerated filer ☒Non-accelerated filer ☐ 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 ☒
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Total Shares outstanding AprilOctober 15, 202017,694,74317,733,429





LYDALL, INC.
INDEX
 
Page
Number
3
Part I.Financial Information
Item 1.
5
6
7
8
Page
Number
Cautionary Note Concerning Forward – Looking Statements
Part I.Financial Information
Item 1.
Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
6
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
7
Condensed Consolidated Balance Sheets (Unaudited)
8
Condensed Consolidated Statements of Cash Flows (Unaudited)
9
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
10
Notes to Condensed Consolidated Financial Statements (Unaudited)
119
Item 2.
3133
Item 3.
4248
Item 4.
4248
Part II.Other Information
Item 1.
4450
Item 1A.
4451
Item 2.
4754
Item 5.6.
4856
SignatureItem 6.
Exhibits57
49
Signature
50


2



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, Inc. 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:

•The impact of the coronavirus pandemic ("COVID-19") on the Company's businesses;
•Overall economic and business conditions and the effects on the Company’s markets;
•Ability to meet financial covenants in the Company's credit agreement;
•Outlook for the secondfourth quarter and full year 2020;
•Ability to improve operational effectiveness;
•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, reduction-in-force, or other cost savings programs;
•Expected gross margin, operating margin and working capital improvements from cost control and other improvement programs;
•Future impact of raw material commodity costs;
•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;
•Future impact of the variability of interest rates and foreign currency exchange rates and impacts of hedging instruments;
•Expected future impact of recently issued accounting pronouncements upon adoption;
•Future effective income tax rates 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.

3



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, the duration, severity, and severityimpact of COVID-19 and the impact of COVID-19or other new pandemics and the measures taken in response thereto, in particular the impact the virus has on the Company's operations and ability to meet customer demands; 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; 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’sthe Company's Annual Report on Form 10-K for the year ended December 31, 2019. The Company does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
4




PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
LYDALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)Amounts)
 
Quarter Ended  
March 31,		Three Months Ended  
September 30,		Nine Months Ended  
September 30,
2020 20192020201920202019
(Unaudited)(Unaudited)(Unaudited)
Net sales$200,527
 $218,025
Net sales$207,085 $205,274 $553,772 $644,110 
Cost of sales161,959
 175,969
Cost of sales169,155 168,918 448,856 520,423 
Gross profit38,568
 42,056
Gross profit37,930 36,356 104,916 123,687 
Selling, product development and administrative expenses33,027
 33,006
Selling, product development and administrative expenses32,227 28,909 95,418 94,011 
Impairment of goodwill and other long-lived assets61,109
 —
Impairment of goodwill and other long-lived assets0 0 61,109 0 
Restructuring expensesRestructuring expenses14,984 0 14,984 0 
Operating (loss) income(55,568) 9,050
Operating (loss) income(9,281)7,447 (66,595)29,676 
Employee benefit plans settlement expenses385
 —
Employee benefit plans settlement expenses0 186 385 25,701 
Interest expense2,857
 3,628
Interest expense4,537 3,666 11,870 11,025 
Other (income) expense, net(418) 399
Other expense (income), netOther expense (income), net276 (885)106 (1,359)
(Loss) income before income taxes(58,392) 5,023
(Loss) income before income taxes(14,094)4,480 (78,956)(5,691)
Income tax (benefit) expense(2,015) 1,106
Income tax (benefit) expense(2,334)1,574 (4,944)(5,519)
Loss from equity method investment44
 27
Income from equity method investmentIncome from equity method investment(50)(98)(24)(120)
Net (loss) income$(56,421) $3,890
Net (loss) income$(11,710)$3,004 $(73,988)$(52)
(Loss) earnings per share:   (Loss) earnings per share:
Basic$(3.25) $0.23
Basic$(0.67)$0.17 $(4.26)$0.00 
Diluted$(3.25) $0.22
Diluted$(0.67)$0.17 $(4.26)$0.00 
Weighted average number of common shares outstanding:   Weighted average number of common shares outstanding:
Basic17,336
 17,254
Basic17,384 17,270 17,364 17,264 
Diluted17,336
 17,318
Diluted17,384 17,330 17,364 17,264 
 
See accompanying Notes to Condensed Consolidated Financial Statements.






















5



LYDALL, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In Thousands)
 
 Quarter Ended  
March 31,
 2020 2019
 (Unaudited)
Net (loss) income$(56,421) $3,890
Other comprehensive (loss) income:   
Foreign currency translation adjustments(9,957) (127)
Pension liability adjustment, net of tax331
 215
Unrealized gain (loss) on hedging activities, net of tax446
 (675)
Comprehensive (loss) income$(65,601) $3,303
Three Months Ended  
September 30,		Nine Months Ended  
September 30,
2020201920202019
(Unaudited)(Unaudited)
Net (loss) income$(11,710)$3,004 $(73,988)$(52)
Other comprehensive income (loss):
Foreign currency translation8,245 (8,726)3,434 (6,396)
Pension and other postretirement benefit plans, net of tax(49)21 282 19,395 
Unrealized gain/(loss) on derivative instruments, net of tax(1,963)(148)(2,202)(2,174)
Comprehensive (loss) income$(5,477)$(5,849)$(72,474)$10,773 
 

See accompanying Notes to Condensed Consolidated Financial Statements.
 

6



LYDALL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

September 30,
2020		December 31,
2019
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents$122,043 $51,331 
Accounts receivable, net of allowance for doubtful accounts of $2,465 and $1,842, respectively113,258 107,786 
Contract assets27,186 28,245 
Inventories71,167 80,544 
Taxes receivable6,636 3,427 
Prepaid expenses6,117 3,814 
Other current assets8,516 8,450 
Total current assets354,923 283,597 
Property, plant and equipment, at cost491,291 487,371 
Accumulated depreciation(286,713)(265,729)
Property, plant and equipment, net204,578 221,642 
Operating lease right-of-use assets21,522 23,116 
Goodwill85,385 133,912 
Other intangible assets, net99,445 115,577 
Other assets, net7,785 8,093 
Total assets$773,638 $785,937 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt$9,844 $9,928 
Accounts payable101,785 73,426 
Accrued payroll and other compensation24,806 17,198 
Accrued taxes10,125 5,638 
Other accrued liabilities39,214 23,668 
Total current liabilities185,774 129,858 
Long-term debt273,195 262,713 
Long-term operating lease liabilities17,369 18,424 
Deferred tax liabilities27,016 34,561 
Benefit plan liabilities18,770 18,957 
Other long-term liabilities3,201 3,004 
Commitments and Contingencies (Note 16)
Stockholders' equity:
Preferred stock0 0 
Common stock255 253 
Capital in excess of par value96,536 94,140 
Retained earnings266,641 340,629 
Accumulated other comprehensive loss(24,465)(25,979)
Treasury stock, at cost(90,654)(90,623)
Total stockholders’ equity248,313 318,420 
Total liabilities and stockholders’ equity$773,638 $785,937 
 March 31,
2020		 December 31,
2019
 (Unaudited)  
ASSETS   
Current assets:   
Cash and cash equivalents$87,827
 $51,331
Accounts receivable, less allowances (2020 - $2,303; 2019 - $1,842)112,277
 107,786
Contract assets26,737
 28,245
Inventories81,182
 80,544
Taxes receivable3,219
 3,427
Prepaid expenses3,852
 3,814
Other current assets9,728
 8,450
Total current assets324,822
 283,597
Property, plant and equipment, at cost473,385
 487,371
Accumulated depreciation(268,609) (265,729)
Net, property, plant and equipment204,776
 221,642
Operating lease right-of-use assets22,266
 23,116
Goodwill82,668
 133,912
Other intangible assets, net109,181
 115,577
Other assets, net7,547
 8,093
Total assets$751,260
 $785,937
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:   
Current portion of long-term debt$9,916
 $9,928
Accounts payable93,020
 73,426
Accrued payroll and other compensation16,887
 17,198
Other accrued liabilities28,594
 29,306
Total current liabilities148,417
 129,858
Long-term debt278,240
 262,713
Long-term operating lease liabilities17,726
 18,424
Deferred tax liabilities31,799
 34,561
Benefit plan liabilities18,417
 18,957
Other long-term liabilities3,084
 3,004
    
Commitments and Contingencies (Note 15)

 

Stockholders’ equity:   
Preferred stock—
 —
Common stock254
 253
Capital in excess of par value94,905
 94,140
Retained earnings284,208
 340,629
Accumulated other comprehensive loss(35,159) (25,979)
Treasury stock, at cost(90,631) (90,623)
Total stockholders’ equity253,577
 318,420
Total liabilities and stockholders’ equity$751,260
 $785,937

See accompanying Notes to Condensed Consolidated Financial Statements.


7



LYDALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
For the Three Months Ended March 31,For the Nine Months Ended September 30,
2020 2019 20202019
(Unaudited) (Unaudited)
Cash flows from operating activities:   Cash flows from operating activities:
Net (loss) income$(56,421) $3,890
Adjustments to reconcile net (loss) income to net cash provided by operating activities:   
Net lossNet loss$(73,988)$(52)
Adjustments to reconcile net loss to net cash provided by operating activities:Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on divestitureGain on divestiture0 (1,459)
Depreciation and amortization12,230
 11,935
Depreciation and amortization42,349 36,682 
Impairment of goodwill and long-lived assets61,109
 —
Impairment of goodwill and long-lived assets61,109 0 
Deferred income taxes(2,896) (260)Deferred income taxes(6,911)(12,849)
Employee benefit plans settlement expenses385
 —
Employee benefit plans settlement expenses385 25,701 
Stock-based compensation914
 982
Stock-based compensation2,508 2,073 
Loss on disposition of property, plant and equipment20
 —
Loss from equity method investment44
 27
Other, netOther, net47 0 
Loss (gain) on disposition of property, plant and equipmentLoss (gain) on disposition of property, plant and equipment164 (43)
Income from equity method investmentIncome from equity method investment(24)(120)
Changes in operating assets and liabilities:   Changes in operating assets and liabilities:
Accounts receivable(7,800) (11,395)Accounts receivable(8,288)10,528 
Contract assets1,313
 447
Contract assets1,269 (4,330)
Inventories(2,026) (6,617)Inventories10,117 (6,206)
Accounts payable21,127
 15,498
Accounts payable28,391 13,427 
Accrued payroll and other compensation(68) 2,443
Accrued payroll and other compensation7,192 4,935 
Accrued taxes(1,447) 396
Accrued taxes4,558 1,810 
Other, net257
 (2,976)Other, net5,735 (7,133)
Net cash provided by operating activities26,741
 14,370
Net cash provided by operating activities74,613 62,964 
Cash flows from investing activities:   Cash flows from investing activities:
Capital expenditures(9,157) (9,239)Capital expenditures(20,540)(27,236)
Collections of finance receivables1,658
 —
Collections of finance receivables4,257 0 
Proceeds from divestitureProceeds from divestiture0 2,298 
Proceeds from the sale of property, plant and equipment—
 256
Proceeds from the sale of property, plant and equipment14 297 
Business acquisitions, net of cash acquiredBusiness acquisitions, net of cash acquired0 869 
Net cash used for investing activities(7,499) (8,983)Net cash used for investing activities(16,269)(23,772)
Cash flows from financing activities:   Cash flows from financing activities:
Proceeds from borrowings20,000
 —
Proceeds from borrowings20,000 0 
Debt repayments(4,500) (7,067)Debt repayments(9,500)(38,185)
Proceeds from servicing receivables2,852
 —
Proceeds from servicing receivables207 0 
Common stock issued31
 —
Common stock issued32 5 
Common stock repurchased(8) (43)Common stock repurchased(31)(50)
Net cash provided by (used for) financing activities18,375
 (7,110)Net cash provided by (used for) financing activities10,708 (38,230)
Effect of exchange rate changes on cash(1,121) 360
Effect of exchange rate changes on cash1,660 (1,280)
Increase (decrease) in cash and cash equivalents36,496
 (1,363)Increase (decrease) in cash and cash equivalents70,712 (318)
Cash and cash equivalents at beginning of period51,331
 49,237
Cash and cash equivalents at beginning of period51,331 49,237 
Cash and cash equivalents at end of period$87,827
 $47,874
Cash and cash equivalents at end of period$122,043 $48,919 
 
Non-cash capital expenditures of $2.3$4.8 million and $3.1$3.8 million were included in accounts payable at March 31,September 30, 2020 and 2019, respectively.

See accompanying Notes to Condensed Consolidated Financial Statements.

8


LYDALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

In thousands of dollars and sharesCommon 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, 201925,328
 $253
 $94,140
 $340,629
 $(25,979) $(90,623) $318,420
Net loss 
  
  
 (56,421)  
  
 (56,421)
Other comprehensive loss, net of tax 
  
  
  
 (9,180)  
 (9,180)
Stock repurchased 
  
  
  
  
 (8) (8)
Stock issued (canceled) under employee plans70
 1
 30
  
  
  
 31
Stock-based compensation expense 
  
 735
  
  
  
 735
Stock issued to directors3
  
  
  
  
  
 —
Balance at March 31, 202025,401
 254
 94,905
 284,208
 (35,159) (90,631) 253,577
In thousands of dollars and sharesCommon 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, 201825,254
 $253
 $90,851
 $411,325
 $(42,685) $(90,469) $369,275
Net income 
  
  
 3,890
  
  
 3,890
Other comprehensive loss, net of tax 
  
  
  
 (587)  
 (587)
Stock repurchased 
  
  
  
  
 (42) (42)
Stock issued (canceled) under employee plans(26) (1)  
  
  
  
 (1)
Stock-based compensation expense 
  
 862
  
  
  
 862
Adoption of ASC 606 (1) 
  
  
 (183)  
  
 (183)
Balance at March 31, 201925,228
 252
 91,713
 415,032
 (43,272) (90,511) 373,214
(1) During the quarter ended March 31, 2019, the Company recorded an adjustment reducing retained earnings and contract assets by $0.2 million to correct an error in the adoption of ASC 606.

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(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.

Recent DevelopmentsDevelopments: COVID-19

The impact of the novel strain of the coronavirus identified in late 2019 (“COVID-19”) has grown throughout the world, including in all global and regional markets served by the Company. GovernmentalDuring 2020, governmental authorities have implemented numerous measures attempting to contain and mitigate the effects of COVID-19, including travel bans and restrictions, quarantines, social distancing orders, shelter in place orders, and shutdowns of non-essential activities. The Company’s manufacturing facilities are located in areas that have been affected by the pandemic and shutdowns. Certain Company facilities in the shutdowns. The Company’s China facilitiesUnited States, Europe, and Asia carried out a planned shut down in conjunction with the lunar New Year in late January which was extended to late Februaryshutdowns as a result of government imposed restrictions.government-imposed restrictions or in conjunction with customer plant closures during the first quarter. The Company’s Asia facilities did not resumeresumed operations untilin late February and other facilities ramped back up moderately, in line with customer demand. demand, during the second quarter. In the third quarter, the Company has seen a stronger recovery in the Performance Materials segment, specifically in the Filtration business, and in the Thermal Acoustical Solutions and Technical Nonwovens segments as discussed below.

Performance Materials (“PM”) Developments

Performance Materials sales were down 4.6% in the first half of 2020 from the comparative period in 2019 with incremental demand for specialty filtration media products more than offset by softer demand in the Sealing and Advanced Solutions business.PM’s Filtration sales continued to be very strong in the third quarter, up approximately 37.8% from the comparative period in the prior year, led by continued demand for fine fiber meltblown media used in personal protective equipment such as N95 respirators and surgical and medical masks. This demand is expected to moderate into the fourth quarter and expected to be down slightly on a sequential basis due to normal seasonality. Weaker demand in automotive, agricultural, and construction equipment markets resulted in a sales decline of approximately 1.7% in the Sealing and Advanced Solutions business in the third quarter of 2020 from the comparative period in 2019.

As a result of continued strong demand for filtration products, the Company approved investments to add 2 production lines in Performance Materials’ Rochester facility for the production of fine fiber meltblown filtration media used in the N95 respirator and surgical and medical masks.In addition, the Company has an agreement with the U.S. Government that provides partial funding of the dateinvestments in the production lines and funding for other technical resources.

In the third quarter of this report, all of2020, the Company’s plantsCompany announced an investment in China are operatinga new fine fiber meltblown production line in its French facility to support the European Union face mask production and all of its automotive customer plantsair filter production in China have re-opened.the fight against COVID-19. The Company has not,a tentative agreement with the French Government to date, experienced any significant disruption it its supply chains in China since resuming operations.partially fund a portion of this investment.

Beginning in late March 2020,In the third quarter, the Company rampedinitiated actions to close underperforming operating locations in Europe and discontinue production of a lower efficiency air filtration media product and, in turn, fully depreciated the supporting machinery and equipment in North America. These actions are part of the Company's ongoing assessment of underperforming assets and focus of resources on the significant investments to expand fine fiber meltblown production.These actions are expected to be completed in 2021 and projected to improve overall segment margin performance beginning in 2021. For additional information, see Note 12, "Restructuring".

Technical Nonwovens (“TNW”) Developments

During the first half of 2020, TNW experienced slowdowns in all geographic locations; predominantly in its facilities in South Carolina, the United Kingdom, and China. TNW’s Texel business in Canada, however, is a leading supplier of nonwoven products used in the production of healthcare applications including medical wipes, pads, and gowns. In response to the COVID-19 pandemic, the Company re-prioritized its manufacturing capabilities in North America and Europe to focus on serving customers for these products.

9


TNW’s sales in the first half of 2020 declined 18.8% from the comparable period in 2019 on generally slower demand in industrial end markets globally. In the third quarter of 2020, sales increased 12.5% on a sequential basis from the previous quarter but decreased 8.5% compared to the prior year quarter. Softer industrial end markets and lower sales into automotive applications resulted in the year-over-year sales declines in the quarter. Third quarter 2020 sales were down its 10.0% in Industrial Filtration and 6.8% in Advanced Materials businesses from the same period in the previous year.

Thermal Acoustical Solutions (“TAS”) Developments

As previously disclosed, the Company ramped-down its TAS operations in North Carolina in the United States, as well as in France and Germany, coinciding with the shutdown of its major automotive customers' facilities in those regions. In addition,regions beginning in late March 2020. During the Company has experienced slowdowns in its Performance Materials facility in Pennsylvaniafirst half of 2020, TAS sales decreased 35.4% from prior year, heavily impacted by customer shutdowns during March, April, and its Technical Nonwovens facility in South Carolina as a result of those facilities’ exposureMay. TAS began to automotive end market applications. The ramp up oframp-up production in allmid-second quarter of these regions is dependent on the Company’s customers resuming operations.

It is also likely that the global automotive industry will experience significantly lower demand for new vehicle sales as a result of the global economic slowdown caused by the COVID-19 pandemic because new vehicle sales are highly dependent on the strength of the consumer. If unemployment remains at a high level, new vehicle sales will likely be significantly lower than historical and previously projected sales levels.

In contrast, the Company has been deemed an essential supplier to certain customers which has driven incremental demand in select specialty filtration product lines in its Performance Materials business which is a leading producer of media used in N95 respirator, surgical, and medical masks. In addition, the Technical Nonwovens business in Canada is a leading supplier of nonwoven products used in medical wipes, pads, and gowns. In response, the Company has re-prioritized its manufacturing capabilities2020 in North America and Europe as customers began to focus on serving customers forre-open their plants in these products.regions. During the third quarter 2020, part sales were down 0.8% from the previous year as TAS continued to see stronger demand in North America and Europe with sales increasing significantly compared to second quarter 2020.
The
As customer demand increased in North America, the Company has been actively monitoring the global outbreak and spreadbegan to experience an increase of COVID-19 cases, particularly at its North American operation, resulting in workforce shortages and taking stepsother operational inefficiencies causing higher overtime, outsourcing costs, and logistics costs. In addition, recent recoveries in the manufacturing industries are causing higher commodity pricing in North America. In late third quarter 2020, as a result of labor shortages and operational inefficiencies directly related to mitigate the potential risksCOVID-19, TAS was unable to manufacture parts timely, resulting in customer production line stoppages. In early October 2020, due to the unforeseen and unforeseeable nature of the COVID-19 pandemic, which is out of the Company’s control, the Company posedinvoked force majeure or commercial impracticability as legal excuse for delayed performance of contracts and defense to any claim that may be asserted by customers.A recent resurgence of cases in that same facility has caused the Company to expand its spread and related circumstances and impacts. The Company continuesdeclaration of force majeure or commercial impracticability to assess and update its business continuity plans in the context of this pandemic.other impacted customers. The Company has taken precautionsvarious actions to help keep its workforce healthyresolve these issues and safe, including establishingexpects TAS to continue to incur incremental costs in the Lydall Emergency Preparedness Team (“LEPT”), implementing strict travel restrictions, enforcing rigorous hygiene protocols, increasing sanitization efforts at all facilitiesfourth quarter of 2020.

Liquidity and implementing remote working arrangements for the vast majority of its employees who work outside the plants.Cash Preservation

The Company has also takencontinued to experience working capital cash flow improvements through September 30, 2020, generating $74.6 million in cash from operating activities. As the Company continues to ramp-up production and invest in new fine fiber meltblown production equipment to meet customer demand, the Company expects cash outflows to support working capital requirements and capital projects.

During the first nine months of 2020, the Company took significant measures to reduce its overall cash expenditures, including the furlough or lay-off of hourly/salary plant workers and select furloughs of corporate and other salaried employees, deferred company contributions to its pension plans and matching contributions under the Company's 401(k) defined contribution plan, reduction of purchase obligations for raw materials, and reduction/delay of non-critical capital spending. With these actions initiated in early 2020,As a result, the Company has reduced its monthly cash expenditures and plansexpenditures. The Company may elect to continue to do so as long ascertain actions if the COVID-19 pandemic continues.

In addition, the Company has taken advantage of specific benefits, including wage recovery provided by social programs in Europe and China and deferred domestic employer tax in the U.S. through the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. Through September 30, 2020, the Company benefited from $2.0 million in social cost reimbursements predominately in Europe and China. The Company may pursue, wherever it qualifies, governmental assistance and take advantage of governmental programs. The Company cannot guarantee, however, that it will qualify for, or receive, any additional assistance that it pursues.

As noted above, the Company reached an agreement with the U.S. Government in June 2020 that provides funding to cover a portion of the cost to install 2 new production lines for the production of meltblown material for N95 respirators, surgical and medical masks, and for other technical resources. The Company will receive monthly payments in accordance with the agreement to fund up to $13.5 million. Additionally, the Company has a tentative agreement with the French Government to fund up to 30% of the Company’s investment in its facility in France supporting the European Union face mask production and air filter production.

In addition to the significant measures taken to reduce and contain costs, the Company has taken recent actiontook actions in March 2020 to provide additional liquidity, primarily including the incrementala $20.0 million draw down on its amended credit facilityfacility.On May 11, 2020, the Company entered into an amended credit agreement (see Note 6, "Long-term Debt and Financing Arrangements" for the key amended terms and conditions) to modify certain financial maintenance covenants, at least one of which the Company expected to fail during the second quarter of 2020 as a result of the impact of COVID-19.On October 14, 2020, the Company amended
10


its 2018 Credit Agreement to allow certain restructuring and other charges, as defined by the amendment, to be excluded from EBITDA in March. During the first quarter,calculation of the Company's financial covenants. The Company was in compliance with those modified financial covenants as of and for the three-month period ended September 30, 2020, and management does not anticipate noncompliance in the foreseeable future.

Through September of 2020, the Company generated $26.7$74.6 million of net cash provided by operations and had cash on hand of $87.8$122.0 million at March 31,as of September 30, 2020. On May 11, 2020,The Company continues to maintain the necessary capital to meet its debt obligations and interest payments. As previously disclosed in late 2019, the Company entered into an amended credit agreement ("2020 Amendment"). See Note 6, "Long-term Debt and Financing Arrangements"arrangements with a banking institution to sell trade accounts receivable balances for the key amended terms and conditions.




The recent automotive production ramp down across most of the world will also impact the Company's daily working capital significantly.selected customers. The Company has experienced working capital cash flow improvementscontinues to sell trade accounts receivable balances under these arrangements. See Transfer of Financial Assets in March and April but does not expect the benefits to continue in May and beyond if the production ramp down continues. Upon restart, the Company would expect an initial cash outflow to support working capital requirements in the first month followed by a few monthsthis Note 1, “Basis of benefit afterwards, resulting in a neutral impact over that period.Financial Statement Presentation” for more information.

The Company is also pursuing, wherever it qualifies, governmental assistance during this time. For example, the Company is working with local governments to take advantage of specific programs including wage recovery provided by social programs in Europe and is deferring domestic employer payroll tax and other payments under the provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act. Additionally, the Company is seeking to take advantage of governmental programs to receive cash, for example, through the Main Street Lending Program, to help defray costs. The Company cannot guarantee that it will qualify for, or receive, any of the assistance that it is pursuing.

The spread of COVID-19 and the measures taken to constrain the spread of the virus have had, and will continue to have, a material negative impact on the Company’s financial results, and such negative impact may continue well beyond the containment of such outbreak. There is inherent uncertainty in the assumptions the Company uses to estimate its future liquidity due to the impact of the COVID-19 outbreak. In addition, the magnitude, duration, and speed of the global pandemic is uncertain. Consequently, the impact on the Company's business, financial condition or longer-term financial or operational results is uncertain.

Under Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), or ASC 205-40, the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. Given the expected impact of the COVID-19 pandemic and economic slowdown However, management believes, based on the Company's business, the Company revised its forecastactions taken to reduce cash expenditures and evaluated its liquidity position and ability to comply with financial covenants in its May 11, 2020 Amended Credit Agreement as of the date of the issuance of the consolidated financial statements. Based on this evaluation, management believes, despite the expected impact of COVID-19 on the Company's business, that the Company’s financial position, that net cash provided by operations combined with its cash and cash equivalents and borrowing availability under its 2018 Credit Agreement, and the May 11, 2020 Amended Credit Agreement as described in Note 6, "Long-term Debt and Financing Arrangements",Facility will be sufficient to fund its current obligations, capital spending, debt service requirements, and working capital requirementsneeds over at least the next twelve months.

Steps Taken to Protect Employees

The Company continues to monitor the global outbreak and spread of COVID-19 and take steps to mitigate the potential risks to the Company and its employees posed by the spread, related circumstances, and economic impacts of COVID-19. As the Company brings employees back to work, it has implemented changes to help ensure the safety and health of all its employees and continues to assess and update its business continuity plans in the context of this pandemic. The Company established the Lydall Emergency Preparedness Team (“LEPT”), implementing strict travel restrictions, enforcing rigorous hygiene protocols, increasing sanitization efforts at all facilities and implementing remote working arrangements for the majority of its employees who work outside the plants. The Company will continue its work to ensure it maintains a safe and healthy work environment and continue to allow remote working arrangements as long as necessary, where appropriate.

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 audited financial statements for the year ended December 31, 2019, but does not include all disclosures required by U.S. GAAP. Management believes thatIn the opinion of management, the condensed consolidated financial information reflects 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 interim periods reported, but do not include all the disclosures required by U.S. GAAP. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this report. Certain amounts in prior year financial statements and notes thereto have been included. For further information, referreclassified to conform to current year presentation. The statements should be read in conjunction with 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, 2019.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations, and financial condition, including sales, expenses, reserves and allowances, manufacturing, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as athe result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19.it. The Company has made estimates of the impact of COVID-19 within its financial statements and there may be changes to those estimates in future periods. Actual results could differ from those estimates.


11


Recent Accounting Pronouncements Adopted

Effective January 1, 2020, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326)." The new standard amends guidance on reporting credit losses for assets held at amortized cost basis. The Company has determined the only financial assets subject to the new



standard are its trade receivables and contract assets. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and disclosures.

Effective January 1, 2020, the Company adopted the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement," which adds, amends, and removes certain disclosure requirements related to fair value measurements.  Among other changes, this standard requires certain additional disclosure surrounding Level 3 assets, including changes in unrealized gains or losses in other comprehensive income and certain inputs in those measurements.  Please refer to Note 5, “Impairments of Goodwill and Other Long-Lived Assets”, for discussion of level 3 unobservablethe inputs used in the quantitative impairment assessments for the quarterthree-month period ended March 31, 2020.

Effective January 1, 2020, the Company adopted FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract."  The amendments in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider.  The adoption of this ASU did not have anya material impact on the Company’s consolidated financial statements and disclosures.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848); Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update are elective, and provide optional expedients and exceptions in accounting for contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance in this update is effective for transactions entered into between March 12, 2020 and December 31, 2022. The Company adopted this ASU upon issuance and notes no impact to the Company's consolidated financial statements and disclosures as of March 31,September 30, 2020.

Recent Accounting Pronouncements Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)." The amendments in this update are intended to simplify the accounting for convertible debt instruments and convertible preferred stock. This ASU is effective for fiscal years and interim periods beginning after December 15, 2021 with early adoption permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements and related disclosures.

In January 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." The amendments in this update are intended to reduce diversity in practice and increase comparability of the accounting for interaction of equity securities, investments accounted for under the equity method of accounting, and the accounting for certain forward contracts and purchased options accounted for under Topic 815. This ASU is effective for fiscal years and interim periods beginning after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The new standard is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740, and by clarifying and amending existing guidance in other areas of the same topic. This ASU is effective for fiscal years and interim periods beginning after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." This ASU requires entities to disclose the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates. This ASU also requires entities to disclose an explanation for significant gains and losses related to changes in the benefit obligation for the period. This ASU is effective for fiscal years beginning after December 15, 2020
12


with early adoption permitted.  The Company is currently evaluating the method and impact the adoption of this ASU will have on its 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, 2019.

Risks and uncertaintiesUncertainties

Worldwide economic cycles, political changes, and the COVID-19 pandemic affect the markets that the Company’s businesses serve and affect demand for the Company's products and could impact profitability. Among other factors, disruptions in the global credit and financial markets, including diminished liquidity and credit availability, changes in international trade agreements, swings in consumer confidence and spending, and unstable economic growth and fluctuations in unemployment rates has caused economic instability and can have a negative impact on the Company’s results of operations, financial condition, and liquidity.





Transfers of financial assetsFinancial Assets 

In December 2019, the Company entered into 2 arrangements with a banking institution to sell trade accounts receivable balances for select customers. Under the programs, the Company has no risk of loss due to credit default and is charged a fee based on the nominal value of receivables sold and the time between the sale of the trade accounts receivables to banking institutions and collection from the customer.  Under one of the programs, the Company services the trade receivables after sale and receives 90.0% of the trade receivables in cash at the time of sale and the remaining 10.0% in cash, net of fees, at the earlier of customer payment or 150 days.  In the quarterthree-month and nine-month periods ended March 31,September 30, 2020, under both programs, the Company sold $32.7$21.3 million and $64.3 million, respectively, in trade receivable balances, received $30.2$59.1 million in total cash under the programs, and incurred $0.1$0.2 million in fees.  The Company expects to receive the remainder, net of fees, in the secondfourth quarter of 2020. At March 31, 2020,

Condensed Consolidated Statements of Comprehensive Income

In connection with the preparation of its 2019 audited financial statements, the Company held $2.9 millionidentified that in proceedsits previously filed unaudited interim financial statements for the three-month and six-month periods ended June 30, 2019 and the nine-month period ended September 30, 2019, the Company had incorrectly excluded, from servicing receivables owedits Condensed Consolidated Statements of Comprehensive Income, the impact to comprehensive income resulting from the banking institution whichsettlement of its U.S. Lydall Pension Plan (see Note 11, "Employer Sponsored Benefit Plans"). As a result, unaudited comprehensive income for such periods was paid in early April.understated by approximately $19.0 million. This amount is presentederror did not have any impact on the Company’s corresponding previously filed Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows. Management has concluded that such errors did not result in the financing sectionpreviously issued unaudited financial statements being materially misstated. In connection with the filing of this Quarterly Report on Form 10-Q, the Company has revised the Condensed Consolidated Statements of Cash FlowsComprehensive Income for the nine-month period ended September 30, 2019 as Proceeds from servicing receivables.follows:

Nine Months Ended September 30, 2019
In thousandsAs reportedAs revised
Pension liability adjustment, net of tax$379 $19,395 
Comprehensive (loss) income$(8,243)$10,773 

2. Revenue from Contracts with Customers

The Company accounts for revenue in accordance with ASC 606, "Revenue from Contracts fromwith Customers". 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. 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
13


Company make such judgments about revenue recognition.
Unfulfilled performance obligations are generally expected to be satisfied within one year.
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 long-term liabilities on the Company’s Condensed Consolidated Balance Sheets.

Contract assets and liabilities consisted of the following:
In thousandsSeptember 30, 2020December 31, 2019Dollar Change
Contract assets$27,186 $28,245 $(1,059)
Contract liabilities$3,414 $1,441 $1,973 
In thousandsMarch 31, 2020 December 31, 2019 Dollar Change
Contract assets$26,737
 $28,245
 $(1,508)
Contract liabilities$2,013
 $1,441
 $572


The $1.5$1.1 million decrease in contractcontact assets from December 31, 2019 to March 31,September 30, 2020 was primarily due to timing of billings to customers.

The $0.6$2.0 million increase in contract liabilities from December 31, 2019 to March 31,September 30, 2020 was primarily due to an increase in customer deposits, offset by $0.7$1.1 million of revenue recognized in the first threenine months of 2020 related to contract liabilities at December 31, 2019.

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 revenuerevenues and cash flows are affected by economic factors. Disaggregated revenue by geographical region for the quartersthree-month and nine-month periods ended March 31,September 30, 2020and and 2019 were as follows:


For the Three Months Ended September 30, 2020For the Three Months Ended September 30, 2019
In thousandsNorth AmericaEuropeAsiaTotal Net SalesNorth AmericaEuropeAsiaTotal Net Sales
Performance Materials$45,759 $18,776 $3,282 $67,817 $42,693 $15,203 $2,104 $60,000 
Technical Nonwovens34,727 17,318 6,464 58,509 42,128 16,544 5,240 63,912 
Thermal Acoustical Solutions57,841 22,861 4,821 85,523 61,315 22,208 4,403 87,926 
Eliminations and Other(4,569)(195)0 (4,764)(6,405)(159)0 (6,564)
Total Net Sales$133,758 $58,760 $14,567 $207,085 $139,731 $53,796 $11,747 $205,274 

  Quarter Ended March 31, 2020
In thousands Performance Materials Technical Nonwovens Thermal Acoustical Solutions Eliminations and Other Consolidated Net Sales
           
North America $45,917
 $35,731
 $57,101
 $(5,677) $133,072
Europe 17,275
 16,938
 23,540
 (180) 57,573
Asia 2,028
 4,734
 3,120
 —
 9,882
Total Net Sales $65,220
 $57,403
 $83,761
 $(5,857) $200,527
  Quarter Ended March 31, 2019
In thousands Performance Materials Technical Nonwovens Thermal Acoustical Solutions Eliminations and Other Consolidated Net Sales
           
North America $46,377
 $37,189
 $63,602
 $(6,268) $140,900
Europe 16,657
 19,049
 26,442
 (206) 61,942
Asia 1,546
 9,368
 4,269
 —
 15,183
Total Net Sales $64,580
 $65,606
 $94,313
 $(6,474) $218,025

14


For the Nine Months Ended September 30, 2020For the Nine Months Ended September 30, 2019
In thousandsNorth AmericaEuropeAsiaTotal Net SalesNorth AmericaEuropeAsiaTotal Net Sales
Performance Materials$131,866 $52,552 $7,092 $191,510 $136,892 $47,589 $5,201 $189,682 
Technical Nonwovens101,694 49,674 16,551 167,919 121,984 53,384 23,228 198,596 
Thermal Acoustical Solutions137,517 57,825 11,390 206,732 189,152 73,853 12,506 275,511 
Eliminations and Other(11,914)(475)0 (12,389)(19,139)(540)0 (19,679)
Total Net Sales$359,163 $159,576 $35,033 $553,772 $428,889 $174,286 $40,935 $644,110 

3. Inventories
 
Inventories as of March 31,September 30, 2020 and December 31, 2019 were as follows:
In thousands March 31,
2020		 December 31,
2019
Raw materials $36,198
 $36,322
Work in process 15,403
 14,873
Finished goods 29,581
 29,349
Total inventories $81,182
 $80,544


In thousandsSeptember 30,
2020		December 31,
2019
Raw materials$31,442 $36,322 
Work in process14,228 14,873 
Finished goods25,497 29,349 
Total inventories$71,167 $80,544 
Included in work in process is net tooling inventory of $2.1$2.0 million and $1.8 million at March 31,September 30, 2020 and December 31, 2019, respectively.
 
4. Goodwill and Other Intangible Assets
 
Goodwill:Goodwill

The Company testsperforms an assessment of its goodwill for impairment at least annually in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value may exceed its fair value. There were no such events or changes in circumstances during the three-month period ended September 30, 2020. See Note 5, "Impairments of Goodwill and Other Long-Lived Assets", for discussion of the goodwill impairment recorded during the three-month period ended March 31, 2020.

The changes in the carrying amount of goodwill by segment as of and for the three monthsnine-month period ended March 31,September 30, 2020 were as follows:
In thousandsDecember 31,
2019		Currency translation adjustmentsImpairmentSeptember 30,
2020
Performance Materials$80,658 $(22)$(48,671)$31,965 
Technical Nonwovens53,254 166 0 53,420 
Total goodwill$133,912 $144 $(48,671)$85,385 
 In thousands December 31,
2019		 Currency translation adjustments Impairment March 31,
2020
 
 Performance Materials $80,658
 $(54) $(48,671) $31,933
 Technical Nonwovens 53,254
 (2,519) —
 50,735
 Total goodwill $133,912
 $(2,573) $(48,671) $82,668









Goodwill Impairment

During the first quarter ofthree-month period ended March 31, 2020, the Company performed a goodwill impairment analysis in the Performance Materials and Technical Nonwovens reporting units and recorded a goodwill impairment charge of $48.7 million in the Performance Materials reporting unit. See Note 5, "Impairments of Goodwill and Other Long-Lived Assets", for further discussion of the goodwill impairment.


15


Other Intangible Assets: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,September 30, 2020 and December 31, 2019:
 September 30, 2020December 31, 2019
In thousandsGross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
Amortized intangible assets    
Customer Relationships$141,784 $(44,636)$142,400 $(30,648)
Patents791 (670)759 (607)
Technology2,500 (1,102)2,500 (977)
Trade Names7,322 (6,544)7,293 (5,143)
License Agreements629 (629)610 (610)
Other570 (570)551 (551)
Total other intangible assets$153,596 $(54,151)$154,113 $(38,536)
  March 31, 2020 December 31, 2019
In thousands Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
Amortized intangible assets  
  
  
  
Customer Relationships $140,524
 $(34,606) $142,400
 $(30,648)
Patents 759
 (633) 759
 (607)
Technology 2,500
 (1,019) 2,500
 (977)
Trade Names 7,105
 (5,449) 7,293
 (5,143)
License Agreements 603
 (603) 610
 (610)
Other 545
 (545) 551
 (551)
Total amortized intangible assets $152,036
 $(42,855) $154,113
 $(38,536)


5. Impairments of Goodwill and Other Long-Lived Assets

During the first quarter ofthree-month period ended March 31, 2020, the Company experienced disruptions in some operations from lower customer demand directly attributable to the COVID-19 pandemic. Many of the Company's automotive customers temporarily ceased operations due to the impact of the COVID-19 pandemic on the global economy resulting in the following:

•The Company’s China facilities carried out a planned shut downshutdown in conjunction with the lunar New Year in late January, which was extended to late February as a result of government imposed restrictions.  The facilities did not resume operations until late February and ramped back up moderately in line with customer demand. Currently, all of the Company’s plants in China are operating and all of its automotive customer plants in China have re-opened.  The Company has not experienced any significant disruption it its supply chains in China since resuming operations;

•On March 20, 2020, the Company announced ramp downsramp-downs at its Thermal Acoustical Solutions ("TAS") operations in North America and Europe as a direct result of customer stoppages;stoppages. The Company's facilities in North America and Europe have since resumed operations;

•Leading economic indicators began to signal a broad economic recession and a future decline in automotive sales;

•Certain of the Company’s Performance Materials ("PM") and Technical Nonwovens ("TNW") operations with exposure to automotive end markets also experienced reductions in sales, which, in some cases, have been partially offset by increases in sales of other products. These operations also have exposure to various industrial end markets. Leading economic indicators for certain of these markets also began signalingsignaled a downturn in demand; and

•The Company's share price and market capitalization experienced a significant decline.

The
During the three-month period ended March 31, 2020, the Company considered the combination of the above to be triggering events that required an impairment analysis for the goodwill held at the PM and TNW reporting units, and for certain long-lived assets. Therefore, during the first quarter ofthree-month period ended March 31, 2020, in accordance with both ASC 350 Intangibles - Goodwill and Other, and with ASC 360 Property, Plant & Equipment, the Company performed an impairment analysis of its goodwill held by the PM and TNW reporting units, and on certain of its long-lived assets (principally land, machinery and equipment, customer relationships, and buildings and improvements).








16

As a result of these impairment tests, the Company recorded the following impairment charges during the first quarter ofthree-month period ended March 31, 2020:
In thousandsPerformance MaterialsTechnical NonwovensThermal Acoustical SolutionsTotals
Impairment of goodwill$48,671 $0 $0 $48,671 
Impairment of other long-lived assets12,438 0 0 12,438 
Total impairments$61,109 $0 $0 $61,109 
In thousands Performance Materials Technical Nonwovens Thermal Acoustical Solutions Totals
Impairment of goodwill $48,671
 $—
 $—
 $48,671
Impairment of other long-lived assets 12,438
 —
 —
 12,438
Total impairments $61,109
 $—
 $—
 $61,109
Goodwill


Goodwill

TheDuring the three-month period ended March 31, 2020, the Company performed a quantitative goodwill impairment assessment for both the PM and TNW reporting units. In the quantitative impairment assessment, the Company weighted equally both an income approach (discounted cash flow model) and a market approach both level 3 unobservable inputs (unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs), to determine the fair value of the reporting units. The Company’s significant assumptions in the discounted cash flow model included, but were not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and the tax rate.

Lower expected demand in automotive and other end markets due to the COVID-19 pandemic resulted in a reduction in sales and cash generation projections as compared to prior projections for the reporting units. Projected future cash flows includes management estimates and assumptions that are based on the best available information as of the date of the assessment.  Future cash flows can be affected by numerous factors including changes in economic, industry or market conditions, changes in the underlying business or products of the reporting unit, changes in competition, and changes in technology. The cash flows of the Company's reporting units can be significantly affected by the depth of the estimated decline in automotive and other end markets and ourthe Company's estimates of the pace and level of their recovery as well as the ability of the Company to increase production in response to the recovery.

The weighted average cost of capital for the PM reporting unit increased from 9.2 percent in the fourth quarter ofthree-month period ended December 31, 2019 to 11.5 percent in the first quarter ofthree-month period ended March 31, 2020. The weighted average cost of capital for the TNW reporting unit increased from 9.2 percent in the fourth quarter ofthree-month period ended December 31, 2019 to 10.8 percent in the first quarter ofthree-month period ended March 31, 2020. There are inherent uncertainties and management judgment required in an analysis of goodwill impairment. The Company believes the income approach was appropriate because it provided a fair value estimate based upon the reporting unit's expected long-term operations and cash flow performance.

The Company also used a form of the market approach, which was derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting unit operates giving consideration to risk profiles, size, geography, and diversity of products and services. The EBITDA multiples used in the market approach for both reporting units declined from the fourth quarter ofthree-month period ended December 31, 2019 to the first quarter ofthree-month period ended March 31, 2020 due to market-related changes in the industries in which these reporting units operate as a result of COVID-19.

Other assumptions included adding an implied control premium to the valuation based on estimating the fair value on a controlling basis, which was derived from research on control premiums observed in recent mergers and acquisitions in the industries in which the Company operates. The control premium for both reporting units increased by 5 percent from the fourth quarter ofthree-month period ended December 31, 2019 to the first quarter ofthree-month period ended March 31, 2020. Control premiums can be higher in periods of depressed stock prices. The Company believes the market approach was appropriate because it provided a fair value using multiples from companies with operations and economic characteristics similar to the PM reporting unit.

The Company also performed an overall reconciliation to corroborate the fair value derived from the income and market approaches to Lydall'sthe Company's overall market capitalization. The revised projections, together with a deterioration in the inputs described above, drove a reduction in the fair value of both reporting units. As a result, the carrying value of the PM reporting unit was determined to exceed its fair value by $48.7 million, resulting in the impairment charge. After recording the impairment charge incurred during the first quarter ofthree-month period ended March 31, 2020, the remaining goodwill associated with the PM reporting unit was $31.9 million. The fair value of the TNW reporting unit exceeded its carrying value and, therefore, no impairment was required. Any declines in financial projections, including changes to key assumptions, could have a material adverse impact on the fair value of the reporting units, and therefore could result in further impairment charges.

In the fourth quarter ofthree-month period ended December 31, 2019, as part of its annual impairment assessment, the Company determined that the fair value of the PM reporting unit was less than its carrying value and recorded a goodwill impairment of $63.0 million.

17

Other Long-Lived Assets

During the first quarter ofthree-month period ended March 31, 2020, the Company performed the following impairment assessments for long livedlong-lived assets in accordance with ASC 360:

•As a result of the COVID 19COVID-19 pandemic and the Company's action plan to address the risks associated with it, the Company accelerated certain actions. One such action was a review of a low-performingan underperforming European plant within the PM segment. As a result of a strategic shift regarding this plant, the Company performed an impairment assessment on the long-lived assets of the plant. To determine the recoverability of this asset group, the Company completed an undiscounted cash flow analysis (income approach) and compared it to the asset group carrying value. The impairment test concluded that the assets were not recoverable asbecause the resulting undiscounted cash flows were less than theirthe carrying amount. The Company determined that the carrying value of the assets exceeded theirthe fair value and recorded a long-lived asset impairment charge of $12.4 million.

•As a result of the temporary plant closures announced on March 20, 2020 in response to the COVID-19 pandemic's effects on the automotive sector, the Company performed impairment assessments on the long-lived assets for its TAS plants. The Company considered each operating plant's asset group, primarily consisting of machinery and equipment, and buildings and improvements. To determine the recoverability of each asset group, the Company completed an undiscounted cash flow analysis (income approach) and compared it to each asset groups' carrying value. For two of the asset groups, the undiscounted cash flows exceeded the carrying value of the asset group so no further assessment of impairment was necessary. For two of the European plants, the undiscounted cash flows did not exceed the plants' carrying values. As part of step two of the impairment assessment, the Company used the market approach to determine fair value based on independent appraisals of the long-lived assets. The Company determined that impairment was not necessary since the fair value of the long-lived asset groups for each operating plant exceeded their carrying amounts.

There were no events or circumstances during the three-month period ended September 30, 2020 that indicated any further triggering events under ASC 360 were present. Changes in future operating results could result in a future non-cash impairment charge.

During the fourth quarter ofthree-month period ended December 31, 2019, the Company determined that fair value of a certain asset group in the PM segment exceeded its carrying value and recorded a long-lived asset impairment charge of $1.2 million.

6. Long-term Debt and Financing Arrangements

On August 31, 2018, the Company amended and restated its $175 million senior secured revolving credit agreement ("2018 Credit Agreement"), which increased the available borrowing from $175 million to $450 million, added three3 additional lenders, and extended the maturity date from July 7, 2021 to August 31, 2023. On May 11, 2020, the Company amended its 2018 Credit Agreement ("2020 Amendment") which, among other changes, decreased available borrowings from $450 million to $314 million.million and modified certain financial covenants contained in the 2018 Credit Agreement.

2018 Credit Agreement

Under the terms of the 2018 Credit Agreement, the lenders provided up to a $450 million credit facility (the “Facility”) to the Company, including a term loan commitment of $200 million and revolving loans to or for the benefit of the Company and its subsidiaries of up to $250 million. The Facility was secured by substantially all of the assets of the Company.

Interest was 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 Dollar 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 2018 Credit Agreement). The Applicable Rate added to the Base Rate Committed Loans ranged from 0.00% to 1.25%, and the Applicable Rate added to Eurocurrency Rate Committed Loans and Letters of Credit ranged from 0.75% to 2.00%. The Company paid a quarterly fee ranging from 0.15% to 0.275% on the unused portion of the revolving commitment.

The Company has entered into multiplean interest rate swapsswap in place to convert a portion of the Company's one-month LIBOR-based borrowings from a variable rate to a fixed rate.See Note 7, "Derivatives". for additional information.
18


The Company is permitted to prepay term and revolving borrowings in whole or in part at any time without premium or penalty, subject to certain minimum payment requirements, and the Company was generally permitted to irrevocably cancel unutilized portions of the revolving commitments under the 2018 Credit Agreement. The Company is required to repay the term commitment



in an amount of $2.5 million per quarter beginning with the quarter ending December 31, 2018 through the quarter ending June 30, 2023.

The 2018 Credit Agreement contained covenants required of the Company and its subsidiaries, including various affirmative and negative financial and operational covenants. The Company was required to meet certain quarterly financial covenants calculated from the four fiscal quarters most recently ended, including: (i) a minimum Consolidated Fixed Charge Coverage Ratio, which requires that at the end of each fiscal quarter the ratio of (a) consolidated EBITDA to (b) the sum of consolidated interest charges, redemptions, non-financed maintenance capital expenditures, restricted payments and taxes paid, each as defined in the 2018 Credit Agreement, may not be lower than 1.25 to 1.0; and (ii) a Consolidated Net Leverage Ratio, which required that at the end of each fiscal quarter the ratio of consolidated funded indebtedness minus consolidated domestic cash to consolidated EBITDA, as defined in the 2018 Credit Agreement, could not be greater than 3.5 to 1.0. The Company was in compliance with all covenants at March 31, 2020.

At March 31, 2020, the Company had $288.5 million of borrowings outstanding and standby letters of credit outstanding of $1.9 million. The borrowings outstanding included a $143.6 million term loan, net of $0.4 million in debt issuance costs being amortized to interest expense over the debt maturity period.

In addition to the amounts outstanding under the Facility, the Company has various foreign credit facilities totaling approximately $7.0 million. At March 31, 2020, the Company's foreign subsidiaries had $0.1 million in borrowings outstanding as well as $1.4 million in standby letters of credit outstanding.

The Company also has finance lease agreements for machinery and equipment at multiple operations requiring monthly principal and interest payments through 2020.

Total outstanding debt consists of:
In thousands Effective Rate Maturity March 31, 2020 December 31, 2019
Revolver loan 2.99% 8/31/2023 $144,500
 $126,500
Term loan, net of debt issuance costs 2.99% 8/31/2023 143,632
 146,106
Finance leases 1.60% 2020 24
 35
   
   288,156
 272,641
Less portion due within one year  
   (9,916) (9,928)
Total long-term debt, net of debt issuance costs  
   $278,240
 $262,713

The carrying value of the Company’s debt outstanding on its 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 (observable inputs other than quoted prices in active markets, such as quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data) of the fair value hierarchy.

The weighted average interest rate on long-term debt was 4.4% for the three months ended March 31, 2020 and 4.3% for the year ended December 31, 2019.

2020 AmendmentAmendments to the 2018 Credit Agreement

On May 11, 2020, the Company amended its $450 million senior secured revolving 2018 Credit Agreement. The principal purpose of the Amendment was to modify certain financial maintenance covenants contained in the 2018 Credit Agreement, at least one of which the Company expected to fail as early as the second quarter of 2020 as a result of the impact of COVID-19. KeyThe amended terms and conditions include:included the following:

The maximum •Modified the financial covenants as follows:

◦Consolidated Net Leverage Ratio, applicablewhich requires that on the last day of each fiscal quarter isthe ratio not be greater than 6.5:1 through the period ending March 31, 2021, stepping down to 4.50:1 for the period ending June 30, 2021 through the period ending March 31, 2022, and 3.50:1 for the periodperiods ending June 30, 2022 and thereafter;

◦The minimum Consolidated Fixed Charge Coverage Ratio, applicablewhich requires that on the last day of each fiscal quarter isthe ratio not be lower than 1.10:1 calculated on a trailing twelve month basis through the period ending June 30, 2020, stepping up to 1.25:1 calculated on a distinct quarterly basis for the quartersperiods ended September 30, 2020 through June 30, 2021, and 1.25:1 calculated on a trailing twelve month basis beginning with the period ending September 30, 2021 and thereafter;




The amended terms also provide that•Required the Company maintain a minimum cash and cash equivalents balancesbalance of $40 million, excluding deposit accounts in China;

The•Decreased the term loan facility isfrom $200 million to $144 million and decreased the revolving credit facility isfrom $250 million to $170 million for a total overall facility of $314 million. Themillion; and eliminated the accordion feature has been eliminated, and there is no change to the maturity date;feature;

There is•Established a floor on the Base and Eurocurrrency Rate of 1%;

The range for•Modified the definition of the Applicable Rate, as determined based on the Company’s Consolidated Net Leverage Ratio, and added toby increasing the range for the Base Rate for Committed Loans isto 2.00% to 3.25% and increasing the range for the Applicable Rate added to Eurocurrency Rate Committed Loans and Letters of Credit isto 3.00% to 4.25%;

The•Increased the quarterly commitment fee isto 0.375% on the unused portion of the revolving commitment; and

The•Required the Company willto pay an amendment fee to the Lenders based on their commitment levels.

There was no modification to the maturity date of the facility.

On October 14, 2020, the Company further amended its 2018 Credit Agreement to allow certain restructuring and other charges, as defined by the amendment, to be excluded from EBITDA in the calculation of the Company's financial covenants. The Company believes that its liquidity resources, including the 2020 AmendmentFacility, are sufficient to meet its working capital needs and other cash requirements. The Company was in compliance with those modified financial covenants at September 30, 2020, and management does not anticipate noncompliance in the foreseeable future.

At September 30, 2020, the Company had $283.5 million of borrowings outstanding and standby letters of credit outstanding of $1.8 million. The borrowings outstanding included a $138.5 million term loan, net of $0.5 million in debt issuance costs being
19


amortized to interest expense over the debt maturity period. The Company had available borrowings of $23.7 million and $121.6 million at September 30, 2020 and December 31, 2019, respectively.

In addition to the amounts outstanding under the Facility, the Company has various foreign credit facilities totaling approximately $9.4 million. At September 30, 2020, the Company's foreign subsidiaries had $0.2 million in borrowings outstanding as well as $1.3 million in standby letters of credit outstanding.

The Company also has a finance lease agreement for equipment at a North America operation requiring monthly principal and interest payments through October 31, 2020.

Total outstanding debt consists of:
In thousandsEffective RateMaturitySeptember 30, 2020December 31, 2019
Revolver loan5.25 %8/31/2023$144,500 $126,500 
Term loan, net of debt issuance costs5.25 %8/31/2023138,536 146,106 
Finance leases1.60 %10/31/20203 35 
   283,039 272,641 
Less portion due within one year  (9,844)(9,928)
Total long-term debt, net of debt issuance costs  $273,195 $262,713 
The weighted average interest rate on long-term debt was 5.2% for the nine-month period ended September 30, 2020 and 4.3% for the year-ended December 31, 2019.

7. Derivatives

The Company selectively uses financial instruments to manage market risk associated with exposure to fluctuations in interest rates and foreign currency rates. These financial exposures are monitored and managed by the Company as an integral part of its risk management program.

Interest Rate Hedging

The Company’s interest rate exposure is most sensitive to fluctuations in interest rates in the United States and Europe, which impactimpacts 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.(see Note 8, "Fair Value Measurements" for additional information).

In November 2018, the Company entered into a five-yearfive-year interest rate swap agreement with a bank which convertsto convert the interest on a notional $139.0 million of the Company's one-month LIBOR-based borrowings under its 2018 Credit Agreement from a variable rate, plus the borrowing spread, to a fixed rate of 3.09% plus the borrowing spread. The notional amount reduces quarterly by fluctuating amounts through August 2023. In April 2017, the Company entered into a three-yearthree-year interest rate swap agreement with a bank which convertsto convert the interest on a notional $60.0 million of the Company's one-month LIBOR-based borrowings under its 2018 Credit Agreement from a variable rate, plus the borrowing spread, to a fixed rate of 1.58% plus the borrowing spread. The notional amount reduced quarterly by $5.0 million through March 31, 2020 and is now settled. ThesePrior to May 11, 2020, these interest rate swap agreements were accounted for as cash flow hedges. Effectiveness of thesethe remaining derivative agreements areagreement was assessed quarterly, or more frequently, if necessary, by ensuring that the critical terms of the swaps continueswap continued to match the critical terms of the hedged debt.debt in order to report gains or losses on the derivative instrument in other comprehensive income.

On May 11, 2020, the Company amended its 2018 Credit Agreement, see Note 6, "Long-term Debt and Financing Arrangements". The amendment included, among other modifications, the establishment of a floor on the base and Eurocurrency rate of 1%. As a result, the Company determined that the critical terms of the swap no longer matched the critical terms of the hedged debt and performed an assessment of the effectiveness of the interest rate swap agreement. The Company concluded the interest rate swap agreement is no longer effective. The Company also concluded that the hedged forecasted transaction (the occurrence of variable interest rate payments on the hedged debt) continues to be probable of occurring. Therefore, as of May 11, 2020, the Company discontinued hedge accounting. After May 11, 2020, any fair value gains or losses on the derivative agreement are recorded as interest expense in the Company's Consolidated Statement of Operations. The cumulative loss on the discontinued hedge relationship through May 11, 2020, which was recorded in Accumulated Other Comprehensive Income, will be amortized into earnings / (losses) through August 31, 2023, the maturity date of the hedged debt. The loss included in Accumulated Other Comprehensive Income related to the discontinued hedging relationship at
20

September 30, 2020 was $4.5 million, net of tax. The amount reclassified out of other comprehensive income into interest expense on the Company's Condensed Consolidated Statement of Operations for the three and nine-months ended September 30, 2020 was $0.9 million and $1.4 million, respectively. The Company expects $3.1 million to be reclassified from Accumulated Other Comprehensive Income over the next twelve months.

Net Investment Hedges

The Company’s operations are subject to certain risks, including foreign currency exchange rate fluctuations. From time to time, the Company enters into cross-currency swaps designated as hedges, recorded at fair value using Level 2 observable market inputs,(see Note 8, "Fair Value Measurements"), to protect the Company's net investments in subsidiaries denominated in currencies other than the US dollar.

In November 2019, the Company entered into 3 fixed-to-fixed cross-currency swaps with banking institutions with aggregate notional amounts totaling €67.8 million ($75 million U.S. dollar equivalent). These swaps hedge a portion of Lydall, Inc'sthe Company's net investment in a Euro functional currency denominated subsidiary against the variability of exchange rate translation impacts between the U.S. Dollardollar and Euro. These contracts require monthly cash interest exchanges over the life of the contracts with the Company recognizing a reduction to interest expense due to the favorable interest rate differential between the U.S. dollar and Euro. Also, settlement of the notional €22.6 million ($25 million U.S. Dollardollar equivalent) cross-currency swaps occur at maturity dates of August 2021, August 2022 and August 2023. The Company assesses hedge effectiveness of the cross-currency swaps quarterly by ensuring the critical terms of the swaps continue to match the critical terms of the designated net investment. The Company elected to assess effectiveness using the spot method, and as a result, records the interest rate differential monthly in the Company's Statement of Operations.


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.

The following table sets forth the fair value amounts of derivative instruments held by the Company presented in the Condensed Consolidated Balance Sheets as Other current assets and Other currentaccrued liabilities:
 March 31, 2020 December 31, 2019
In thousandsAsset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives
Derivatives designated as hedging instruments:       
Interest rate contracts$—
 $7,376
 $2
 $4,538
Cross-currency swaps1,606
 —
 —
 1,817
Total derivatives$1,606
 $7,376
 $2
 $6,355

September 30, 2020December 31, 2019
In thousandsAsset DerivativesLiability DerivativesAsset DerivativesLiability Derivatives
Interest rate contracts$0 $5,967 $2 $4,538 
Cross-currency swaps0 3,310 0 1,817 
Total derivatives$0 $9,277 $2 $6,355 

The following table sets forth the (loss) income recorded in accumulated other comprehensive (loss) income, net of tax, for the quartersthree and nine-month periods ended March 31,September 30, 2020 and 2019 for derivatives held by the Company and designated as hedging instruments:
 Quarters Ended March 31,
In thousands2020 2019
Cash flow hedges:   
Interest rate contracts$(2,173) $(675)
Cross-currency swaps2,619
 —
Total derivatives$446
 $(675)


For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands2020201920202019
Cash flow hedges:
Interest rate contracts$706 $(148)$(1,059)$(2,174)
Cross-currency swaps(2,669)0 (1,143)0 
Total derivatives$(1,963)$(148)$(2,202)$(2,174)


8. LeasesFair Value Measurements

From timeFair value is defined as the exchange price that would be received for an asset or paid to time,transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
21

The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires the Company enters into arrangements with vendors to providemaximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•Level 1 - Quoted prices in active markets for identical assets or liabilities.

•Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

•Level 3 - Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. This includes certain tangiblepricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following table presents the carrying value and fair value of financial instruments that are not carried at fair value:

September 30, 2020December 31, 2019
In thousandsCarrying ValueFair ValueCarrying ValueFair Value
Debt$283,500 $288,891 $273,000 $269,434 

The fair values of the Company’s long-term debt outstanding were computed based on discounted future cash flows (observable inputs), as applicable, which falls under Level 2 of the fair value hierarchy. Differences from carrying values are attributable to interest rate changes subsequent to when the transactions occurred.

The fair values of cash and cash equivalents, accounts receivable, net and accounts payable approximate their carrying amounts due to the short-term maturities of these instruments.

Recurring Fair Value Measures

The Company holds derivative instruments for interest rate swap contracts and cross-currency swaps that are measured using observable market inputs such as forward rates and its counterparties' credit risks. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy. At September 30, 2020 and December 31, 2019, these derivative instruments were included in other current assets used inand other accrued liabilities on the Consolidated Balance Sheet. Based on the Company's operations which qualify as a lease pursuantcontinued ability to ASC Topic 842, Leases. The tangible assets leased include Buildings, Office Equipment, Machinerytrade and Vehicles. The Company's leases have remaining terms of a few months to 13 years, some of which have options to extend for a period of up to 7 yearsenter into interest rate swaps and some of which have options to terminate within 1 year.

At inception of the arrangement,cross-currency swaps, the Company determines if an arrangement is a lease based on assessment ofconsiders the terms and conditions ofmarkets for their fair value instruments to be open.

Nonrecurring Fair Value Measurements

During the contract. Operating leases are included in Operating lease right-of-use (“ROU”) assets, Other accrued liabilities, and Long-term operating lease liabilities in the Company's condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, Current portion of long-term debt, and Long-term debt in the Company's condensed consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

While the overwhelming majority of leases have fixed payment schedules, some leases have variable lease schedules based on market indices such as LIBOR or include additional payments based on excess consumption of services. For leases on a variable schedule based on a market index, the current lease payment amount is used in the calculation of the lease liability and corresponding asset included on the balance sheet. For leases with additional payments based on excess consumption of services, no amount is included in the calculation of the lease liability or corresponding asset as it is not probable excess consumption will continue in the future.

As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Atthree-month period ended March 31, 2020, the weighted average discount rate usedCompany incurred a $48.7 million impairment charge for operatinggoodwill at its Performance Materials segment and finance leases is 4.34% and 1.65%, respectively. The implicit rate is used when readily determinable from a lease.


The operating lease ROU$12.4 million impairment charge for a certain asset also includes any lease payments made in advancegroup at one of the assets usePerformance Materials' European businesses. See Note 5, "Impairment of Goodwill and excludes lease incentives received. The Company's lease terms may include options to extend or terminateOther Long-Lived Assets" for information regarding the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for as one component as permitted by ASC 842.calculation of fair value.

After consideration of any options to terminate early which are reasonably certain to be executed or any options to extend which are not reasonably certain to be executed, any lease with a term of 12 months or less is considered short-term. As permitted by ASC 842, short-term leases are excluded from the ROU Asset and Lease Liability accounts on the condensed consolidated balance sheets. Consistent with all other operating leases, short-term lease expense is recorded on a straight-line basis over the lease term.
The components of lease expense are as follows:
 Quarters Ended March 31,
In thousands2020 2019
Finance lease expense:   
Amortization of right-of-use assets$8
 $33
Interest on lease liabilities—
 1
Operating lease expense1,590
 1,644
Short-term lease expense382
 224
Variable lease expense42
 36
Total lease expense$2,022
 $1,938


Supplemental balance sheet information related to leases are as follows:
In thousands, except lease termMarch 31, 2020 December 31, 2019
Operating leases:   
Operating lease right-of-use assets$22,266
 $23,116
    
Short-term lease liabilities, included in "Other accrued liabilities"$4,614
 $4,789
Long-term lease liabilities17,726
 18,424
Total operating lease liabilities$22,340
 $23,213
    
Finance leases:   
Property, plant and equipment$421
 $456
Accumulated depreciation(132) (143)
Property, plant and equipment, net$289
 $313
    
Short-term lease liabilities, included in debt$24
 $35
Long-term lease liabilities, included in debt—
 —
Total finance lease liabilities$24
 $35
    
Weighted average remaining lease term:   
Operating leases6.8 years
 7.1 years
Finance leases20.9 years
 20.4 years









Supplemental cash flow information related to leases are as follows:
 Three Months Ended March 31,
In thousands2020 2019
Cash paid for amounts included in the measurement of lease liabilities:  
Operating cash flows from operating leases$1,574
 $1,673
Operating cash flows from finance leases—
 1
Financing cash flows from finance leases10
 67
    
Right-of-use assets obtained in exchange for lease obligations:  
Operating leases704
 1,131
Finance leases—
 —


As of March 31, 2020, future lease payments maturities were as follows:
In thousands   
Years Ending December 31,Operating Leases Finance Leases
2020 (excluding the three months ended March 31, 2020)$4,250

$24
20214,527

—
20223,716

—
20232,703

—
20241,884

—
Thereafter9,324

—
Total lease payments26,404

24
Less imputed interest(4,064)
—
Total discounted future lease payments$22,340

$24

As of December 31, 2019, future lease payment maturities were as follows:
In thousands   
Years Ending December 31,Operating Leases Finance Leases
2020$5,680

$36
20214,329

—
20223,555

—
20232,659

—
20241,848

—
Thereafter9,465

—
Total lease payments27,536

36
Less imputed interest(4,323) (1)
Total discounted future lease payments$23,213
 $35


9. Equity Compensation Plans
 
As of March 31,September 30, 2020, the Company’s equity compensation plans consisted of the 2003 Stock Incentive Compensation Plan (the “2003 Plan”), and the Amended and Restated 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, amended and approved by shareholdersstockholders on April 27, 2012,24, 2020, authorizes 1.753.0 million shares of common stock for awards. The 2012 Plan also authorizesauthorized an additional 1.2 million19,720 shares of common stock to the extent awards granted under prior stock plans that were outstanding as of April 27, 201224, 2020 are forfeited. The 2012 Plan provides for the following types of awards:



options, restricted stock, restricted stock units and other stock-based awards. During the fourth quarter of 2019, additional shares of common stock were issued pursuant to separate inducement share agreements with two2 individuals as material inducement to their employment with the Company (the "Inducement Grants"). The Inducement Grants awarded stock options and restricted stock to the two2 individuals. Amounts shown below are inclusive of the Plans and the Inducement Grants.

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
22


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 and performance-based restricted stock grants are expensed over the vesting period of the award, which is typically two to four years. The number of performance basedperformance-based restricted shares that ultimately vest or forfeit dependdepends upon achievement of certain targets duringrelative performance metrics as measured against the performance of the S&P 600 industrial index during a three-year performance period. The Company estimates the grant date value of performance awards using a Monte Carlo simulation model on the date of grant. The Company accounts for forfeitures as they occur. Compensation expense for performance based awards granted prior to December 2018 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. In December 2018, the performance metric changed to a 3-year relative Total Shareholder Return (TSR) compared to the S&P 600 industrial index instead of a pre-established earnings-per-share target to better align compensation to the long-term interests of shareholders. Stock options issued under the current plan must have an exercise price that may not be less than the fair market value of the Company’s common stock on the date of grant. The Plans provide for automatic acceleration of vesting in the event of a change in control of the Company.

The Company incurred equity compensation expense of $0.9$0.7 million and $1.0$0.6 million for the quartersthree-month periods ended March 31,September 30, 2020 and March 31,2019, respectively, and $2.5 million and $2.1 million for the nine-month periods ended September 30, 2020 and 2019, respectively, for the Plans, including restricted stock awards. The Company also incurred equity compensation expense of $0.2 million and $0.2 million for the three-month periods ended September 30, 2020 and 2019, respectively, and $0.5 million and $0.5 million for the nine-month periods ended September 30, 2020 and 2019, respectively, for stock awards granted to Directors. 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,for the three and nine-month periods ended September 30, 2020:
In thousands except per share
amounts
 Shares 
Weighted-
Average
Exercise Price
 
Aggregate
Intrinsic Value
Outstanding at March 31, 2020 761
 $26.35
 $—
Exercisable at March 31, 2020 303
 $33.46
 $—
Unvested at March 31, 2020 458
 $21.64
 $—

For the Three Months Ended September 30, 2020For the Nine Months Ended September 30, 2020
In thousands except per share
amounts		SharesWeighted-
Average
Exercise Price		SharesWeighted-
Average
Exercise Price
Stock Options outstanding at the beginning of the period748 $25.36 683 $27.15 
  Granted11 $16.27 180 $17.37 
  Exercised0 $0 (4)$8.67 
  Forfeited or Expired(71)$26.25 (171)$25.46 
Stock Options outstanding at September 30, 2020688 $25.11 688 $25.11 
Exercisable at September 30, 2020305 $32.54 305 $32.54 
Unvested at September 30, 2020383 $19.20 383 $19.20 
 
There were 110,220was 0 cash received from exercise of stock options granted and 3,575 stock options exercised during the quarterthree-month period ended March 31,September 30, 2020. The amount of cash received from the exercise of stock options was less than $0.1 million during the quarternine-month period ended March 31,September 30, 2020. The intrinsic value of stock options exercised was less than $0.1 million with a tax benefit of less than $0.1 million during the quarternine-month period ended March 31,September 30, 2020.

There were 0 stock options granted and 0 stock options exercised during the quarter ended March 31, 2019.

At March 31,September 30, 2020, the total unrecognized compensation cost related to non-vested stock option awards was approximately $3.2$2.1 million, with a weighted average expected amortization period of 3.12.7 years.

Restricted Stock
 
Restricted stock includes both performance-based and time-based awards. There were 53,713The following is a summary of the Company's unvested time-based restricted stock shares for the three and 40,335nine-month periods ended September 30, 2020:

For the Three Months Ended September 30, 2020For the Nine Months Ended September 30, 2020
In thousandsSharesShares
Unvested at the beginning of the period220 159 
  Granted0 77 
  Vested(5)(8)
  Forfeited or Expired(12)(25)
Unvested at September 30, 2020203 203 
23


The following is a summary of the Company's unvested performance-based restricted shares granted duringfor the quarterthree and nine-month periods ended March 31, 2020. There were 0 performance-based restricted shares that vested during the quarter March 31, 2020. There were 2,702 time-based restricted shares that vested during the quarter ended March 31, 2020.September 30, 2020:

There were 33,932 time-based restricted stock shares granted during the quarter ended March 31, 2019. There were 0 performance-based restricted stock shares granted during the quarter ended March 31, 2019. There were 0 performance-based restricted stock shares that vested during the quarter ended March 31, 2019. There were 5,468 time-based restricted stock shares that vested during the quarter ended March 31, 2019.
For the Three Months Ended September 30, 2020For the Nine Months Ended September 30, 2020
In thousandsSharesShares
Unvested at the beginning of the period161 129 
  Granted5 71 
  Vested0 0 
  Forfeited or Expired(18)(52)
Unvested at September 30, 2020148 148 

At March 31,September 30, 2020, there were 357,664350,348 total unvested restricted stock awards with total unrecognized compensation cost related to these awards of $6.0$4.4 million with a weighted average expected amortization period of 3.62.1 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.




10. Stock Repurchases
 
During the three monthsnine-month period ended March 31,September 30, 2020, the Company purchased 9162,340 shares of common stock valued at less than $0.1 million, through tax 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.

11. Employer Sponsored Benefit Plans
 
Prior to the quarter ended March 31, 2020, theThe Company maintained twomaintains one domestic pension plans:plan: the Retirement Income Plan for Employees of Interface Performance Materials, Inc. ("IPM Pension Plan"), and the Interface Sealing Solutions, Inc. Pension Plan ("ISS Pension Plan"). During the quarterthree-month period ended March 31, 2020, the Company settled the pension obligation of the Interface Sealing Solutions, Inc. Pension Plan ("ISS Pension PlanPlan") through lump sum distributions to participants or by irrevocably transferring pension liabilities to an insurance company through the purchase of a group annuity contract. This purchase, funded with pension assets, resulted in a pre-tax settlement loss of $0.4 million in the quarterthree-month period ended March 31, 2020, related to the recognition of accumulated deferred actuarial losses. The settlement loss and expenses were included as non-operating expense in the condensed consolidated statements of operations.

The IPM Pension Plan covers a portion of Interface's union and non-union employees. The plan is closed to new employees and benefits are no longer accruing for the majority of participants. The Company expects to make required contributions of approximately $1.2 million to the IPM Pension Plan during 2020. There were 0 contributions made during the three-month period ended September 30, 2020, as the Company took advantage of the delay in minimum funding contribution due dates as allowed under the CARES Act, and is delaying payment of the minimum funding contributions of $0.3 million originally due during April 2020, and $0.3 million originally due during July 2020. These and other required minimum funding contributions for the remainder of 2020 will be made later in 2020. Contributions of $0.4 million and $0.6 million were made during the quartersnine-month period ended March 31, 2020September 30, 2020. Contributions of $0.3 million and March 31,$1.1 million were made during the three-month and nine-month periods ended September 30, 2019, respectively.respectively, inclusive of contributions made to the ISS Pension Plan.

Prior to 2020, the Company also maintained the U.S.LydallU.S. Lydall Pension Plan. During the second quarter of 2019, the Company settled the pension obligation of the U.S. Lydall Pension Plan through lump sum distributions to participants or by irrevocably transferring pension liabilities to two insurance companies through the purchase of group annuity contracts. NaN contributions were made to the U.S. Lydall Pension Plan during the quarter ended March 31, 2019.














24

The following is a summary of the components of net periodic benefit cost for the domestic defined benefit pension plans for
the quartersthree-month and nine-month periods ended March 31,September 30, 2020 and 2019:
For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands2020201920202019
Components of employer benefit cost  
Service cost$40 $30 $120 $90 
Interest cost428 530 1,285 2,356 
Expected return on assets(532)(488)(1,597)(2,105)
Amortization of actuarial loss0 0 2 464 
Net periodic benefit cost$(64)$72 $(190)$805 
Settlement loss0 186 385 25,701 
Total employer benefit plan cost$(64)$258 $195 $26,506 
  Quarters Ended March 31,
In thousands 2020 2019
Components of employer benefit cost  
  
Service cost $40
 $30
Interest cost 430
 982
Expected return on assets (533) (872)
Amortization of actuarial loss 2
 278
Net periodic benefit cost $(61) $418
Settlement loss 385
 —
Total employer benefit plan cost $324
 $418


The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit cost in other income.

12. Income Taxes
Restructuring

During the third quarter of 2020, the Company’s Performance Materials segment undertook actions to discontinue production of a lower efficiency air filtration media product and, in turn, fully depreciated the supporting machinery and equipment in North America and consolidated certain product lines and began exiting underperforming facilities in Europe. These restructuring activities, which are projected to conclude in the first half of 2021, are expected to reduce operating costs, increase production efficiency, and enhance the Company’s flexibility by better aligning its manufacturing operations with the segment's customer base. Accordingly, the Company expects to record total pre-tax expenses of approximately $17.0 to $20.0 million, primarily related to severance and employee retention expenses, in connection with these restructuring activities, of which approximately $11.5 to $14.5 million are expected to result in cash expenditures. The Company's effective tax rate forCompany incurred non-cash expenditures of approximately $5.5 million, which consisted of fully depreciating and/or amortizing long-lived assets and, to a lesser extent, writing-off inventory.

In North America, the Company decided to shut down 2 underperforming nonwoven manufacturing carded lines and ancillary equipment, originally acquired in 2018, that served commercial and residential HVAC markets with low to medium efficiency air filtration media. The Company experienced lower demand as a result of COVID-19, which accelerated a market shift from lower efficiency air filtration media to higher performance rated air filtration media. As a result, the Company recorded a pre-tax restructuring charge of $5.4 million, primarily due to accelerated depreciation of property, plant and equipment and other intangible assets. The Company does not anticipate incurring additional restructuring expenses related to the closure of these manufacturing Carded lines.

The Company undertook actions to consolidate global production facilities in the Sealing & Advanced Solutions business from 5 facilities to 4, resulting in the closure of an underperforming facility in Germany. In the first quarter of 2020, the Company performed an impairment analysis of the long-lived assets and determined that the carrying value of the assets did not exceed their fair value and recorded an impairment charge of $12.4 million (see Note 5, “Impairments of Goodwill and Other Long-Lived Assets” for additional information). The closure is expected to be completed in the first quarter of 2021. In addition, the Company decided to close a small volume membrane filtration production facility in the Netherlands. In the fourth quarter of 2019, the Company performed an impairment of the long-lived assets for this facility and recorded an impairment charge of $1.2 million. The assets have been fully depreciated through September 30, 2020. The closure is expected to be completed in the second quarter of 2021.

As a result of the 2 facility closures in Europe, the Company recorded pre-tax restructuring charges of $9.6 million consisting of severance costs, legal expenses, and inventory write-offs and anticipates it could incur an additional $2.0 million to $5.0 million in restructuring expenses, primarily related to severance costs from these facility closures.








25

The following table summarizes the total restructuring charges by cost type:

In ThousandsSeverance and Related ExpensesFacility Exit and Asset Write-Off ExpensesTotal
Expense incurred during quarter ended:
September 30, 2020$9,484 $5,500 $14,984 
Total pre-tax expense incurred$9,484 $5,500 $14,984 

For the three and nine-month periods ended September 30, 2020, $15.0 million was 3.5%included in restructuring expenses on the Company’s Condensed Consolidated Statements of Operations with $14.8 million recorded in the Performance Materials segment and $0.2 million recorded within Corporate Office expenses.

There were cash outflows of $0.2 million for the restructuring program for the three and nine months ended September 30, 2020.

The following table summarizes the accrued liability balance by cost type for the restructuring actions:

In ThousandsTotal
Balance as of December 31, 2019$0 
Pre-tax restructuring expenses, excluding asset write-off expenses9,485 
Cash paid(203)
Currency translation adjustments(119)
Balance as of September 30, 2020$9,163 

The above accrued liability balances were included in Other accrued liabilities on the Company’s Condensed Consolidated Balance Sheets.

13. Income Taxes
For the three-month period ended September 30, 2020, the Company's effective tax rate was 16.6% compared to an effective tax rate of 22.0%35.1% for the first quarterthree-month period ended September 30, 2019. For the three months ended September 30, 2020, the rate was negatively impacted by valuation allowance activity of $2.0 million, offset by a state tax benefit of $0.8 million. resulting in a lower effective tax rate when in a pre-tax loss position. For the three months ended September 30, 2019, the effective tax rate was negatively impacted by losses in jurisdictions in which no tax benefit can be recognized.

For the nine-month period ended September 30, 2020, the Company's effective tax rate was 6.3% compared to an effective tax rate of 97.0% for the nine-month period ended September 30, 2019. DuringFor the first quarter ofnine months ended September 30, 2020, the Company had a pre-tax loss primarily resulting from impairment charges of $61.1 million. The impairment charges significantly impacted the Company's effective tax rate because $48.7 million of the impairment charges related to non-deductible goodwill, resulting in a low effective tax rate for the first quarter ofnine months ended September 30, 2020 when in a pre-tax loss position. Additionally, the effective rate was negatively impacted by valuation allowance activity of $0.3$2.7 million. TheFor the nine-month period ended September 30, 2019, the Company recorded a tax benefit of $5.5 million primarily driven by $10.5 million of tax benefit related to the pension plan settlement. Excluding the tax benefit of the pension plan settlement, the Company's effective tax rate infor the first quarter ofnine months ended September 30, 2019 was 25.2%. This was negatively impacted by valuation allowance activity of$0.3$1.8 million from losses in jurisdictions in which no tax benefit can be recognized, partially offset by an uncertain tax position release due to statutory expiration of $0.2 million andthe Company's 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, Canada, China, France, Germany, Hong Kong, India, the Netherlands, and the United Kingdom. With few exceptions, the Company is no longer subject to U.S. federal examinations for years before 2016, state and local examinations for years before 2015, and non-U.S. income tax examinations for years before 2013.



The Company’s effective tax rates in future periods could be affected by an increase or decrease in earnings in countries where tax rates differ from the United States federal tax rate, the relative impact of permanent tax adjustments on earnings from domestic operations, changes in net deferred tax asset valuation allowances, including valuation allowances on loss
26


carryforwards in which no tax benefit can be recognized, stock vesting, pension plan terminations, the completion of acquisitions or divestitures, changes in tax rates or tax laws and the completion of ongoing tax planning strategies and audits.

On July 20, 2020, the U.S. Treasury Department and IRS released T.D. 9902 final regulations for publication in the Federal Register related to the global intangible low-taxed income (“GILTI”) high-tax exception. The final regulations largely adopt the framework of the 2019 proposed regulations, with certain key departures. The most significant departures are that an election to apply the GILTI high-tax exception may be made annually instead of once every five years, and that the calculation is made with respect to each “tested unit” of a controlled foreign corporation, rather than on a qualified business unit by qualified business unit basis. The company has evaluated the final regulations and included the impacts of these changes in the Company’s third quarter financial statements.
13.
14. (Loss) Earnings (Loss) Per Share
 
For the quartersthree-month and nine-month periods ended March 31,September 30, 2020 and 2019, basic earnings per share were computed by dividing net (loss) income (loss) 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 2020 2019
Basic weighted-average common shares outstanding 17,336
 17,254
Effect of dilutive options and restricted stock awards —
 64
Diluted weighted-average common shares outstanding 17,336
 17,318

For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands2020201920202019
Basic weighted-average common shares outstanding17,384 17,270 17,364 17,264 
Effect of dilutive options and restricted stock awards0 60 0 0 
Diluted weighted-average common shares outstanding17,384 17,330 17,364 17,264 
 
Dilutive stock optionsawards totaling 27,40777,707 and 28,085 shares of Common Stock were excluded from the diluted per share computation for the three monthsthree-month and nine-month periods ended March 31,September 30, 2020, as the Company reported a net loss during those periods and, therefore, the effect of including these options would be antidilutive. Dilutive stock options totaling 53,892 shares of Common Stock were excluded from the diluted per share computation for the nine-month period ended September 30, 2019, as the Company reported a net loss during that period and, therefore, the effect of including these options would be antidilutive.

For each of the quartersthree-month periods ended March 31,September 30, 2020 and 2019, stock options for 708,734658,654 shares and 519,342584,725 shares of Common Stock were not considered in computing diluted earnings per common share because they were antidilutive.

For each of the nine-month periods ended September 30, 2020 and 2019, stock options for 722,006 shares and 542,669 shares of Common Stock were not considered in computing diluted earnings per common share because they were antidilutive.
14.
15. Segment Information

As of March 31,September 30, 2020, the Company’s reportable segments were Performance Materials, Technical Nonwovens, and Thermal Acoustical Solutions.

Performance Materials Segment
 
The Performance Materials segment includes filtration media solutions primarily for air, fluid power, life science and industrial applications (“Filtration”), and sealing and gasket solutions, thermal insulation, energy storage, and other engineered products (“Sealing and Advanced Solutions”).

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 high efficiency specialty filtration products constitute the critical filtration media component of clean-air systems for applications in clean-space, commercial, industrialIndoor Air Quality (commercial, residential, and residentialspecialized HVAC applications such as cleanrooms and hospital environments), respiratory Personal Protective Equipment (N95 respirators and surgical masks), power generation, respiratory protection, and specialty industrial processes.process applications. Lydall has leveraged its extensive technical expertise and applications knowledge into a suite of media products covering the vast liquid filtration landscape across the transportation 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
27


coalescing, industrial fluid processes and diesel fuel filtration. LyPore® media and Solupor® ultra-high molecular weight polyethylene membranes also serve critical liquid filtration/separation applications such as biopharmaceutical pre-filtration and clarification, lateral flow diagnostic and analytical testing, potable water filtration and high purity process filtration such as those found in food and beverage and medical applications.

Sealing and Advanced Solutions products include nonwoven specialty engineered materials for a multitude of applications. Interface fiber-reinforced gasket materials serve the heavy-duty diesel, automobile, small engine, transmission and compressor markets. These products handle demanding sealing challenges with a diverse range of metallic, non-metallic, rubber-coated and laminate materials that comprise the extensive Sealing materials portfolio. Interface Engineered Components are ready to useready-to-use soft and hard gasket parts sold directly to OEMs and aftermarket applications. An example is Select-a-Seal® rubber-edged composite (REC) technology that provides robust sealing, compression, adhesion, and shear strength for driveline applications. Advanced Solutions’ nonwoven veils, papers, and specialty composites for the building products, appliance, energy, and industrial markets include Manniglas® Thermal Insulation Papers, and Lytherm® Insulation Media for high temperature technology applications. Lydall’sThe Company'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. Additional specialty composite materials include specialty fiber calendar bowl products to service the printing and textile industries and press pad materials for industrial lamination processes.

Technical Nonwovens Segment

The Technical Nonwovens segment primarily produces needle punch nonwoven solutions for a multitude of 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 an 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 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 ourthe 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 and industrial sectors 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). Within the transportation sector, Lydall’sthe Company’s 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. 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
28


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 quartersthree-month and nine-month periods ended March 31,September 30, 2020 and 2019, 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:
For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands2020201920202019
Performance Materials Segment:
Filtration$30,899 $22,427 $86,422 $71,093 
Sealing and Advanced Solutions36,918 37,573 105,088 118,589 
Performance Materials Segment net sales67,817 60,000 191,510 189,682 
Technical Nonwovens Segment (1):
Industrial Filtration29,643 32,935 90,425 114,005 
Advanced Materials (2)28,866 30,977 77,494 84,591 
Technical Nonwovens Segment net sales58,509 63,912 167,919 198,596 
Thermal Acoustical Solutions Segment:
Parts79,687 80,309 189,456 250,591 
Tooling5,836 7,617 17,276 24,920 
Thermal Acoustical Solutions Segment net sales85,523 87,926 206,732 275,511 
     Eliminations and Other (2)(4,764)(6,564)(12,389)(19,679)
Consolidated Net Sales$207,085 $205,274 $553,772 $644,110 
  Quarters Ended  
March 31,
In thousands 2020 2019
Performance Materials Segment:    
Filtration $25,887
 $23,934
Sealing and Advanced Solutions 39,333
 40,646
Performance Materials Segment net sales 65,220
 64,580
     
Technical Nonwovens Segment (1):    
Industrial Filtration 31,369
 42,364
Advanced Materials (2) 26,034
 23,242
Technical Nonwovens Segment net sales 57,403
 65,606
     
Thermal Acoustical Solutions Segment:    
Parts 77,321
 84,576
Tooling 6,440
 9,737
Thermal Acoustical Solutions Segment net sales 83,761
 94,313
     
     Eliminations and Other (2) (5,857) (6,474)
Consolidated Net Sales $200,527
 $218,025


Operating income (loss) by segment:
For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands2020201920202019
Performance Materials (3)$(6,759)$712 $(58,257)$5,474 
Technical Nonwovens (1),(2),(4)5,061 7,165 15,558 19,743 
Thermal Acoustical Solutions1,174 5,022 517 21,870 
Corporate Office Expenses(8,757)(5,452)(24,413)(17,411)
Consolidated Operating Income$(9,281)$7,447 $(66,595)$29,676 
(1)The Technical Nonwovens segment includes the results of Geosol through the date of disposition of May 9, 2019.
  Quarters Ended  
March 31,
In thousands 2020 2019
Performance Materials (3) $(56,941) $1,459
Technical Nonwovens (1),(2),(4) 3,813
 4,734
Thermal Acoustical Solutions 5,628
 9,491
Corporate Office Expenses (8,068) (6,634)
Consolidated Operating Income $(55,568) $9,050
(2)Included in the Technical Nonwovens segment and Eliminations and Other is the following:
•$3.9 million and $4.3 million of intercompany sales to the Thermal Acoustical Solutions segment for the three-month periods ended September 30, 2020 and 2019, respectively.
•$10.2 million and $13.6 million of intercompany sales to the Thermal Acoustical Solutions segment for the nine-month periods ended September 30, 2020 and 2019, respectively.
(3)Included in the Performance Materials segment is the following:
•$61.1 million of impairment charges related to goodwill and other long-lived assets for the nine-month period ended September 30, 2020.
•$14.8 million restructuring charges for the three and nine-month periods ending September 30, 2020.
•$4.0 million and $4.1 million of intangible assets amortization for the three-month periods ended September 30, 2020 and 2019, respectively.
•$11.9 million and $12.2 million of intangible assets amortization for the nine-month periods ended September 30, 2020 and 2019, respectively.

29

(1)The Technical Nonwovens segment reports the results of Geosol through the date of disposition of May 9, 2019.
(2)Included in the Technical Nonwovens segment and Eliminations and Other is $5.0 million and $4.7 million in intercompany sales to the Thermal Acoustical Solutions segment for the quarters ended March 31, 2020 and 2019, respectively.
(3)Included in the Performance Materials segment is $61.1 million of impairment charges related to goodwill and other long-lived assets for the quarter ended March 31, 2020 and $4.0 million of intangible assets amortization for the quarters ended March 31, 2020 and 2019.
(4)Included in the Technical Nonwovens segment is $1.2 million and $1.3 million of intangible assets amortization for the quarters ended March 31, 2020 and 2019, respectively.


15.(4)Included in the Technical Nonwovens segment is the following:
•$1.2 million and $1.3 million of intangible assets amortization for the three-month periods ended September 30, 2020 and 2019, respectively.
•$3.5 million and $3.8 million of intangible assets amortization for the nine-month periods ended September 30, 2020 and 2019, respectively.

16. Commitments and Contingencies
 
Environmental Remediation

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 Per and Polyfluorinated Substances (“PFAS”) 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 2018, the Company received a response from the NHDES to the site investigation report outlining proposed remedial actions. The Company recorded an additional $0.1 million of expense in 2018 associated with the expected costs to remediate the impacts of the discharge of regulated contaminants in accordance with standards established by the NHDES. During 2018 the environmental liability was fully reduced reflecting payments made to vendors, resulting in 0 balance at December 31, 2018. Additionally, the Company incurred $0.2 million of capital expenditures in 2018, in relation to the lining of the Company's fresh water lagoons. The site investigation isand remedial action plan are ongoing. 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 cash flows.

In December 2018, the New York State Department of Environmental Conservation (“NYDEC”) informed the Company that the newly acquired Interface site located at Hoosick Falls, NY will be the subject of an investigation in to the possibility of it being an inactive hazardous disposable waste site.  The letter specifically references PFAS that have been detected in a nearby water supply, soil and/or surface water.  Notably, the PFAS contamination has been identified in the Hoosick Falls area for some time and other large manufacturers in the area have previously been identified as a source.  The NYDEC approved a site characterization plan in December 2019. The Company recorded expense of $0.3 million in the fourth quarter of 2019 as a result of the site characterization plan preparation and site characterization activities. Additional site characterization activities which will continue intoare planned for the secondfourth quarter of 2020. The Company does not know the scope or extent of its future obligations, if any, that may arise from the site investigation and therefore is unable to estimate the cost of any corrective action. Accordingly, the Company cannot assure that the costs of any future corrective at this location would not have a material effect on the Company's financial condition, results of operations or cash flows.

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.

16. Changes in













30


17. Stockholders' Equity and Accumulated Other Comprehensive Income (Loss)

Changes in stockholders' equity for the three and nine-month periods ended September 30, 2020 were as follows:

For the Three Months Ended September 30,For the Nine Months Ended  
September 30,
In thousands2020201920202019
Beginning Balance$253,262 $387,105 $318,420 $369,275 
Comprehensive (loss) income, net of tax(5,477)(5,849)(72,474)10,773 
Stock repurchased(23)(7)(31)(62)
Stock issued under employee plans0 5 4 5 
Stock-based compensation expense551 417 2,006 1,611 
Stock issued to directors0 0 388 252 
Adoption of ASC 606 (1)
0 0 0 (183)
Ending Balance$248,313 $381,671 $248,313 $381,671 

The following table discloses the changes by classification withincomponents of accumulated other comprehensive (loss) income (loss) forare shown below:

For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In Thousands2020201920202019
Foreign currency translation:
Beginning balance$(22,833)$(16,128)$(18,022)$(18,458)
Net gain (loss) on foreign currency translation8,245 (8,726)3,434 (6,396)
Other comprehensive income (loss), net of tax8,245 (8,726)3,434 (6,396)
Ending balance(14,588)(24,854)(14,588)(24,854)
Pension and other postretirement benefit plans:
Beginning balance(2,749)(2,879)(3,080)(22,253)
Amounts reclassified from accumulated other comprehensive (loss) income (2)(49)21 282 19,395 
Other comprehensive (loss) income, net of tax(49)21 282 19,395 
Ending balance(2,798)(2,858)(2,798)(2,858)
Unrealized gain/(loss) on derivative instruments:
Beginning balance(5,116)(4,000)(4,877)(1,974)
Net loss on derivative instruments (3)(2,669)(148)(3,306)(2,174)
Amounts reclassified from accumulated other comprehensive income (4)706 0 1,104 0 
Other comprehensive loss, net of tax(1,963)(148)(2,202)(2,174)
Ending balance(7,079)(4,148)(7,079)(4,148)
Total accumulated other comprehensive loss$(24,465)$(31,860)$(24,465)$(31,860)

(1) During the three monthsthree-month period ended March 31, 2019, the Company recorded an adjustment reducing retained earnings and contract assets by $0.2 million to correct an error in the adoption of ASC 606.

31


(2) For the three-months ended September 30, 2020 and 2019:
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, 2018 $(18,458) $(22,253)  $(1,974)  $(42,685)
Other comprehensive loss (127) —
  (675)(c) (802)
Amounts reclassified from accumulated other comprehensive loss —
 215
(a) —
  215
Balance at March 31, 2019 (18,585) (22,038)  (2,649)  (43,272)
Balance at December 31, 2019 (18,022) (3,080)  (4,877)  (25,979)
Other comprehensive (loss) income (9,957) —
  446
(c) (9,511)
Amounts reclassified from accumulated other comprehensive loss —
 331
(b) —
  331
Balance at March 31, 2020 $(27,979) $(2,749)  $(4,431)  $(35,159)

(a)Amount represents amortization of actuarial losses, a component of net periodic benefit cost, related to the U.S. Lydall Pension Plan. This2019, amount represents routine amortization of actuarial gains and losses in net periodic benefit cost and other activity of less than $0.1 million, net of less than $0.1 million tax benefit. For the nine-months ended September 30, 2020, amount was $0.2 million, net of $0.1 million tax benefit, for the three months ended March 31, 2019.
(b) Amount represents the settlement of the ISS Pension Plan in the first quarter of 2020. This2020 of $0.4 million, net of $0.1 million tax benefit, and routine amortization of actuarial gains and losses in net periodic benefit cost and other activity of less than $0.1 million, net of less than $0.1 million tax benefit. For the nine-months ended September 30, 2019, amount wasrepresents the settlement of the Lydall Pension Plan in the second quarter of 2019 of $19.0 million, net of $11.5 million tax benefit, and routine amortization of actuarial losses in net periodic benefit cost during the first five months of fiscal year 2019 prior to the plan termination of $0.4 million, net of $0.1 million tax benefit.
(c)Amount represents unrealized gains (losses) on the fair value of hedging activities, net of taxes, for the three months ended March 31, 2020 and 2019.

(3) Amount represents unrealized losses on the fair value of hedging activities, net of tax benefits of $0.8 million and less than $0.1 million for the three-month periods ended September 30, 2020 and 2019, respectively, and $1.0 million and $0.7 million for the nine-month periods ended September 30, 2020 and 2019, respectively.

17.(4) Amounts represents the impact of de-designation of the interest rate swap agreement, net of tax expenses of $0.2 million and $0.3 million, for the three-month and nine-month periods ended September 30, 2020, respectively.

18. Subsequent Events

On May 11,October 14, 2020, the Company amended its 2018 Credit Agreement. See Note 6, "Long-term DebtAgreement to allow certain restructuring and Financing Arrangements" forother charges, as defined by the key amended terms and conditions.
amendment, to be excluded from EBITDA in the calculation of the Company's modified financial covenants.

32



Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW AND OUTLOOKOverview 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. LydallThe Company principally conducts its business through three reportable segments: Performance Materials, Technical Nonwovens and Thermal Acoustical Solutions, with sales globally. The Performance Materials ("PM") segment includes filtration media solutions primarily for air, fluid power, life science and industrial applications (“Filtration”), and gasket and sealing solutions, thermal insulation, energy storage, and other engineered products (“Sealing and Advanced Solutions”). 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 and industrial sectors.

Recent Developments - COVID-19

The impact of the novel strain of the coronavirus identified in late 2019 (“COVID-19”) has grown throughout the world, including in all global and regional markets served by the Company. GovernmentalDuring 2020, governmental authorities have implemented numerous measures attempting to contain and mitigate the effects of COVID-19, including travel bans and restrictions, quarantines, social distancing orders, shelter in place orders and shutdowns of non-essential activities. The Company’s manufacturing facilities are located in areas that have been affected by the pandemic and shutdowns. Certain Company facilities in the shutdowns. The Company’s China facilitiesUnited States, Europe and Asia carried out a planned shut down in conjunction with the lunar New Year in late January which was extended to late Februaryshutdowns as a result of government imposed restrictions.government-imposed restrictions or in conjunction with customer plant closures during the first quarter. The Company’s Asia facilities did not resumeresumed operations untilin late February and other facilities ramped back up moderately, in line with customer demand. demand, during the second quarter. In the third quarter, the Company has seen a stronger recovery in its Performance Materials segment, specifically in its Filtration business, and in the Thermal Acoustical Solutions and Technical Nonwovens segments as discussed below.

Performance Materials (“PM”) Developments

Performance Materials sales were down 4.6% in the first half of 2020 from the comparative period in 2019 with incremental demand for specialty filtration media products more than offset by softer demand in the Sealing and Advanced Solutions business.PM’s Filtration sales continued to be very strong in the third quarter, up approximately 37.8% from the comparative period in the prior year, led by continued demand for fine fiber meltblown media used in personal protective equipment such as N95 respirators and surgical and medical masks. This demand is expected to moderate into the fourth quarter and expected to be down slightly on a sequential basis due to normal seasonality. Weaker demand in automotive, agricultural, and construction equipment markets resulted in a sales decline of approximately 1.7% in the Sealing and Advanced Solutions business in the third quarter of 2020 from the comparative period in 2019.

As a result of continued strong demand for filtration products, the Company approved investments to add two production lines in Performance Materials’ Rochester facility for the production of fine fiber meltblown filtration media used in the N95 respirator and surgical and medical masks.In addition, the Company reached an agreement with the U.S. Government that provides partial funding of the dateinvestments in the production lines in addition to funding for other technical resources.

In the third quarter of this report, all of the Company’s plants in China are operating and all of its automotive customer plants in China have re-opened.  The Company has not, to date, experienced any significant disruption it its supply chains in China since resuming operations.

Beginning in late March 2020, the Company rampedannounced an investment in a new fine fiber meltblown production line in its French facility to support the European Union face mask production and air filter production in the fight against COVID-19. This investment is being partially funded by the French Government.

In the third quarter, the Company initiated actions to close underperforming operating locations in Europe and discontinue production of a lower efficiency air filtration media product and, in turn, fully depreciated the supporting machinery and equipment in North America. These actions are part of the Company's ongoing assessment of underperforming assets and focus
33


of resources on the significant investments to expand fine fiber meltblown production.These actions are expected to be completed in 2021 and projected to improve overall segment margin performance beginning in 2021. For additional information, see Note 12, "Restructuring".

Technical Nonwovens (“TNW”) Developments

During the first half of 2020, TNW experienced slowdowns in all geographic locations; predominantly in its facilities in South Carolina, the United Kingdom, and China. TNW’s Texel business in Canada, however, is a leading supplier of nonwoven products used in the production of healthcare applications including medical wipes, pads, and gowns. In response to the COVID-19 pandemic, the Company re-prioritized its manufacturing capabilities in North America and Europe to focus on serving customers for these products.

TNW’s sales in the first half of 2020 declined 18.8% from the comparable period in 2019 on generally slower demand in industrial end markets globally. In the third quarter of 2020, sales increased 12.5% on a sequential basis from the previous quarter but decreased 8.5% compared to the prior year quarter. Softer industrial end markets and lower sales into automotive applications resulted in the year-over-year sales declines in the quarter. Third quarter 2020 sales were down its 10.0% in Industrial Filtration and 6.8% in Advanced Materials businesses from the same period in the previous year.

Thermal Acoustical Solutions (“TAS”) Developments

As previously disclosed, the Company ramped-down its TAS operations in North Carolina in the United States, as well as in France and Germany, coinciding with the shutdown of its major automotive customers' facilities in those regions beginning in late March 2020. During the first half of 2020, TAS sales decreased 35.4% from prior year, heavily impacted by customer shutdowns during March, April, and May. TAS began to ramp-up production in mid-second quarter of 2020 in North America and Europe as customers began to re-open their plants in these regions. During the third quarter 2020, part sales were down 0.8% from the previous year as TAS continued to see stronger demand in North America and Europe with sales increasing significantly compared to second quarter 2020.

As customer demand increased in North America, the Company began to experience an increase of COVID-19 cases, particularly at its North American operation, resulting in workforce shortages and other operational inefficiencies causing higher overtime, outsourcing costs, and logistics costs. In addition, recent recoveries in the Company has experienced slowdownsmanufacturing industries are causing higher commodity pricing in its Performance Materials facility in Pennsylvania and its Technical Nonwovens facility in South CarolinaNorth America. In late third quarter 2020, as a result of those facilities’ exposurelabor shortages and operational inefficiencies directly related to automotive end market applications.COVID-19, TAS was unable to manufacture parts timely, resulting in customer production line stoppages. In early October 2020, due to the unforeseen and unforeseeable nature of the COVID-19 pandemic, which is out of the Company’s control, the Company invoked force majeure or commercial impracticability as legal excuse for delayed performance of contracts and defense to any claim that may be asserted by customers.A recent resurgence of cases in that same facility has caused the Company to expand its declaration of force majeure or commercial impracticability to other impacted customers. The resumptionCompany has taken various actions to resolve these issues and expects TAS to continue to incur incremental costs in the fourth quarter of production in all2020.

Looking Forward

The continuation of these regionsthe ramp-up of production is dependent on customer demand and no additional outbreaks of COVID-19 that could cause a major slowdown in demand impacting the Company’s customers resuming operations.

It is also likely thatability to operate because of government mandates, employee illnesses or other related unforeseen events. The Company anticipates the global automotive industry will experience significantlycontinue to stabilize in the fourth quarter, but fourth quarter volumes are expected to be lower demand for new vehicle salesthan the comparative 2019 period as a result of the global economic slowdown caused by the COVID-19 pandemic because newpandemic. New vehicle sales are highly dependent on the strength of the consumer. If unemployment remains at a high level,higher levels, new vehicle sales will likelycould be significantly lower than historical and previously projected sales levels.

In contrast, The Company expects workforce shortages directly driven by COVID-19 to continue into the fourth quarter for the TAS segment. The Company also expects to face continued headwinds in PM’s sealing businesses but stronger demand for filtration products is expected to offset this decline. Additionally, the Company has been deemed an essential supplierexpects seasonally strong construction activity, which drives demand for geosynthetic products, to certain customers which has driven incremental demanddecline as winter approaches and continued softness in select specialty filtration product linesindustrial end markets in its Performance Materials business which is a leading producer of media used in N95 respirator, surgical, and medical masks. In addition, the Technical Nonwovens businesssegment in Canada is a leading supplierthe fourth quarter of nonwoven products used in medical wipes, pads,2020.

Liquidity and gowns. In response, the Company has re-prioritized its manufacturing capabilities in North America and Europe to focus on serving customers for these products.Cash Preservation

The Company has been actively monitoringcontinued to experience working capital cash flow improvements through September 30, 2020 generating $74.6 million in cash from operating activities. As the global outbreak and spread of COVID-19 and taking steps to mitigate the potential risks to the Company posed by its spread and related circumstances and impacts. The Company continues to assessramp up production and update its business continuity plansinvest in new fine fiber meltblown production equipment to meet customer demand, the context of this pandemic. The Company has taken precautionsexpects cash outflows to help keep its workforce healthysupport working capital requirements and safe, including establishing the Lydall Emergency Preparedness Team (“LEPT”), implementing strict travel restrictions, enforcing rigorous hygiene protocols, increasing sanitization efforts at all facilities and implementing remote working arrangements for the vast majority of its employees who work outside the plants.capital projects.

34



TheDuring the nine months of 2020, the Company has also takentook significant measures to reduce its overall cash expenditures, including the furlough or lay-off of hourly/salary plant workers and select furloughs of corporate and other salaried employees, the deferral ofdeferred company contributions to its pension plans and matching contributions under the Company's 401(k) defined contribution plan, the reduction of purchase obligations for raw materials and the reduction/delay of non-critical capital spending. With these actions initiated in early 2020,As a result, the Company has reduced its monthly cash expenditures and plansexpenditures. The Company may elect to continue to do so as long ascertain actions if the COVID-19 pandemic continues.

In addition, the Company has taken advantage of specific benefits, including wage recovery provided by social programs in Europe and China and deferred domestic employer tax in the U.S. through the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. Through September 30, 2020, the Company benefited from $2.0 million in social cost reimbursements predominately in Europe and China. The Company may pursue, wherever it qualifies, governmental assistance and take advantage of governmental programs. The Company cannot guarantee, however, that it will qualify for, or receive, any additional assistance that it pursues.

As noted above, the Company reached an agreement with the U.S. Government in June 2020 that provides funding to cover a portion of the cost to install two new production lines for the production of meltblown material for N95 respirator, surgical and medical masks and for other technical resources. The Company will receive monthly payments in accordance with the agreement to fund up to $13.5 million. Additionally, the Company has a tentative agreement with the French Government to fund up to 30% of the Company’s investment in its facility in France supporting the European Union face mask production and air filter production.

In addition to the significant measures taken to reduce and contain costs, the Company has taken recent actiontook actions in March 2020 to provide additional liquidity, primarily including the incremental $20.0a $20.0 million draw down on its amended credit facilityfacility.On May 11, 2020, the Company entered into an amended credit agreement (see Note 6, "Long-term Debt and Financing Arrangements" for the key amended terms and conditions) to modify certain financial maintenance covenants, at least one of which the Company expected to fail during the second quarter of 2020 as a result of the impact of COVID-19.On October 14, 2020, the Company amended its 2018 Credit Agreement to allow certain restructuring and other charges, as defined by the amendment, to be excluded from EBITDA in March. During the first quarter,calculation of the Company's financial covenants. The Company was in compliance with those modified financial covenants as of and for the three-month period ended September 30, 2020, and management does not anticipate noncompliance in the foreseeable future.

Through September of 2020, the Company generated $26.7$74.6 million of net cash provided by operations and had cash on hand of $87.8$122.0 million at March 31,as of September 30, 2020. On May 11, 2020,The Company continues to maintain the necessary capital to meet its debt obligations and interest payments. As previously disclosed in late 2019, the Company amended its $450 million senior secured revolving credit agreement ("2018 Credit Agreement"). See Note 6. "Long-term Debt and Financing Arrangements"entered into arrangements with a banking institution to the Condensed Consolidated Financial Statements and Item 2, "Liquidity and Capital Resources"sell trade accounts receivable balances for highlights of the key amended terms and conditions.

The recent automotive production ramp down across most of the world will also impact the Company's daily working capital significantly.selected customers. The Company has experienced working capital cash flow improvements in March and April but does not expect the benefitscontinues to continue in May and beyond if the production ramp down continues. Upon restart, the Company would expect an initial cash outflow to support working capital requirements in the first month followed by a few monthssell trade accounts receivable balances under these arrangements. See Transfer of benefit afterwards, resulting in a neutral impact over that period.Financial Assets under Note 1, “Basis of Financial Statement Presentation” for more information.

The Company is also pursuing, wherever it qualifies, governmental assistance during this time. For example, the Company is working with local governments to take advantage of specific programs including wage recovery provided by social programs in Europe and is deferring domestic employer payroll tax and other payments under the provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act. Additionally, the Company is seeking to take advantage of governmental programs to receive cash, for example, through the Main Street Lending Program, to help defray operating costs. The Company cannot guarantee that it will qualify for, or receive, any of the assistance that it is pursuing.

The spread of COVID-19 and the measures taken to constrain the spread of the virus have had, and will continue to have, a material negative impact on the Company’s financial results, and such negative impact may continue well beyond the containment of such outbreak. There is inherent uncertainty in the assumptions the Company uses to estimate its future liquidity due to the impact of the COVID-19 outbreak. In addition, the magnitude, duration, and speed of the global pandemic is uncertain. Consequently, the impact on the Company's business, financial condition or longer-term financial or operational results is uncertain.

Under Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), or ASC 205-40, the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. Given the expected impact of the COVID-19 pandemic and economic slowdown However, management believes, based on the Company's business, the Company revised its forecastactions taken to reduce cash expenditures and evaluated its liquidity position and ability to comply with financial covenants in its May 11, 2020 Amended Credit Agreement as of the date of the issuance of the consolidated financial statements. Based on this evaluation, management believes, despite the expected impact of COVID-19 on the Company's business, that the Company’s financial position, that net cash provided by operations combined with its cash and cash equivalents and borrowing availability under its 2018 Credit Agreement, and the May 11, 2020 Amended Credit Agreement as described in Item 2, "Liquidity and Capital Resources",Facility will be sufficient to fund its current obligations, capital spending, debt service requirements and working capital requirementsneeds over at least the next twelve months.

Steps Taken to Protect Employees


The Company continues to monitor the global outbreak and spread of COVID-19 and take steps to mitigate the potential risks to the Company and its employees posed by the spread, related circumstances, and economic impacts of COVID-19. As the Company brings employees back to work, it has implemented changes to help ensure the safety and health of all its employees and continues to assess and update its business continuity plans in the context of this pandemic. The Company established the Lydall Emergency Preparedness Team (“LEPT”), implementing strict travel restrictions, enforcing rigorous hygiene protocols, increasing sanitization efforts at all facilities and implementing remote working arrangements for the majority of its employees who work outside the plants. The Company will continue its work to ensure it maintains a safe and healthy work environment and continue to allow remote working arrangements as long as necessary where appropriate.













35



FirstThird Quarter 2020 Highlights
 
Below are financial performance highlights comparing Lydall’s quarterfor the three-month period ended March 31,September 30, 2020 (“Q1 2020”) resultscompared to its quarterthe three-month period ended March 31, 2019 (“Q1 2019”) results:September 30, 2019:
 
•Net sales were $200.5$207.1 million in Q1the third quarter of 2020, compared to $218.0$205.3 million in Q1the third quarter of 2019, a decreasean increase of $17.5$1.8 million, or 8.0%.0.9%, driven by $7.8 million in higher sales in the Company's Performance Materials segment, resulting from higher demand in filtration products for face mask media in response to the COVID-19 pandemic, partially offset by lower sales in the Company's Technical Nonwovens and Thermal Acoustical Solutions segments. The change in consolidated net sales is summarized in the following table:
Components (in thousands)Change in Net SalesPercent Change
   Parts volume and pricing change$648 0.3 %
   Change in tooling sales(1,827)(0.9)%
   Foreign currency translation2,990 1.5 %
      Total$1,811 0.9 %
Components (in thousands)
 Change in Net Sales Percent Change
   Acquisitions and divestitures $513
 0.2 %
   Parts volume and pricing change (12,535) (5.7)%
   Change in tooling sales (3,230) (1.5)%
   Foreign currency translation (2,246) (1.0)%
      Total $(17,498) (8.0)%


•Gross margin was 19.2%increased to 18.3% for the three-month period ended September 30, 2020 as compared to 17.7% in the first quarter of 2020, compared to 19.3%corresponding period in the first quarter of 2019. Gross margin from the TAS segment lowered consolidated gross margin by approximately 140 basis points primarily due to unfavorable product mix on reduced volume of higher margin acoustical parts, increased labor costs and unfavorable absorption of fixed costs related to plant ramp downs in response to the COVID-19 pandemic. The TNW segment reported flat gross margin but, based on segment mix, was negative to consolidated gross margin in the quarter by approximately 30 basis points. The Performance Materials segment favorably impacted consolidated gross margin by approximately 160 basis points, primarily driven by increased demand for face mask media in response to the COVID-19 pandemic coupled with favorable material costs in the first quarter of 2020 compared to the first quarter of 2019. The COVID-19 pandemic had an unfavorable impact of approximately 50 basis points on Lydall's consolidated gross margin, principally impacting the Thermal Acoustical Solutions and, to a lesser extent, the Technical Nonwovens segments.

Operating loss was $(55.6) million in Q1 2020, compared to operating income of $9.1 million in Q1 2019. The operating loss was driven by first quarter 2020 goodwill and other long-lived asset impairment charges in the Performance Materials segment of $61.1 million. The following components are included in operating income for Q1 2020 and Q1 2019 and impact the comparability of each quarter:
  Q1 2020 Q1 2019
Components (in thousands except per share amounts)
 Operating income effect EPS impact Operating income effect EPS impact
   Impairment of goodwill and long-lived assets (61,109) $(3.35) —
 $—
   Strategic initiatives expenses (1,908) $(0.08) (841) $(0.04)
   TNW restructuring expenses —
 $—
 (376) $(0.02)

Net loss was $(56.4) million, or $(3.25) per diluted share, in Q1 2020 compared to net income of $3.9 million, or $0.22 per diluted share, in Q1 2019.

Liquidity

Cash was $87.8 million at March 31, 2020, compared to $51.3 million at December 31, 2019. Net cash provided by operations was $26.7 million in the first quarter of 2020 compared to $14.4 million in the first quarter of 2019, with the improvement primarily driven by increases in payable days across Lydall operations. At the end of the first quarter the Company drew down an incremental $20 million on its Amended Credit Facility. On May 11, 2020 the Company amended its 2018 Credit Agreement. See Note 6. "Long-term Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements and Item 2, "Liquidity and Capital Resources" for highlights of the key amended terms and conditions.










Results of Operations
All of the following tabular comparisons, unless otherwise indicated, are for the quarters ended March 31, 2020 (Q1-20) and March 31, 2019 (Q1-19).

Net Sales
  Quarter Ended
In thousands Q1-20 Q1-19 Percent Change
Net sales $200,527
 $218,025
 (8.0)%
Net sales for the first quarter of 2020 decreased by $17.5 million, or 8.0%, compared to the first quarter of 2019. This decrease was primarily due to lower net parts sales of $10.6 million, or 4.8% of consolidated net sales, in the Thermal Acoustical Solutions segment, driven by temporary plant ramp downs across all of its operations beginning in mid-March as the Company's large OEM customers closed plants of their own due to the COVID-19 pandemic, and included decreased net tooling sales of $3.3 million in the first quarter of 2020 compared to the first quarter of 2019. The Technical Nonwovens segment reported a decrease in net sales of $8.2 million, or 3.8% of consolidated net sales, driven by reduced demand in the industrial filtration market, primarily China and, to a lesser extent, the US and Europe. These decreases to net sales were partially offset by increased Performance Materials net sales of $0.6 million, primarily due to increased sales in its air filtration market, driven by demand for face mask media in response to the COVID-19 pandemic. Foreign currency translation had a negative impact on net sales of $2.2 million, or 1.0% of consolidated net sales, primarily impacting the Technical Nonwovens and Thermal Acoustical Solutions segments by $0.8 million and the Performance Materials segment by $0.6 million.

Cost of Sales
  Quarter Ended
In thousands Q1-20 Q1-19 Percent Change
Cost of sales $161,959
 $175,969
 (8.0)%

Cost of sales for the first quarter of 2020 decreased by $14.0 million, or 8.0%, compared to the first quarter of 2019. The decrease was driven by decreased net sales of $17.5 million, primarily due to plant ramp downs in the Thermal Acoustical Solutions segment and, to a lesser extent, the Technical Nonwovens segment on reduced demand in the industrial filtration market due to the COVID-19 pandemic. Additionally, favorable raw material commodity costs across all segments and favorable product mix in the Performance Materials and Technical nonwovens segments drove lower cost of sales in the first quarter of 2020 compared to the first quarter of 2019. These decreases to cost of sales were partially offset by increased direct labor and unfavorable absorption of fixed costs caused by the plant ramp downs in the Thermal Acoustical Solutions segment driven by the COVID-19 pandemic. Foreign currency translation decreased cost of sales by $2.0 million, or 1.1%, in the first quarter of 2020 compared to the first quarter of 2019.

Gross Profit
  Quarter Ended
In thousands Q1-20 Q1-19 Percent Change
Gross profit $38,568
 $42,056
 (8.3)%
Gross margin 19.2% 19.3%  

Gross margin for the first quarter of 2020 decreased 10 basis points compared to the first quarter of 2019. The Thermal Acoustical Solutions segment negatively impacted consolidated gross margin by approximately 140 basis points driven by unfavorable product mix on reduced volume of higher margin acoustical parts. Additionally, increased direct labor and unfavorable absorption of fixed costs caused by the plant ramp down drove further gross margin reduction in the first quarter of 2020 compared to the first quarter of 2019. The Technical Nonwovens segment reported flat segment gross margin as favorable product mix and lower raw material commodity costs were completely offset by inventory write-off costs of $0.9 million, or 50 basis points of consolidated gross margin, related to a flood in one of its European facilities. The Company is pursuing a claim with its insurer to recover this loss. The flat Technical Nonwovens segment margin negatively impacted consolidated gross margin by approximately 30 basis points due to consolidated segment mix. The Performance Materials segment favorably impacted consolidated gross margin by approximately 160330 basis points, primarily due to favorable product mix, driven by increased demand for face mask media in response to the COVID-19 pandemic and higher liquid filtration sales, combined with favorable raw material commodity and production costs, and lower overhead costs. Gross margin from the Thermal Acoustical Solutions segment adversely impacted consolidated gross margin by approximately 160 basis points due to labor shortages and operating inefficiencies directly related to an increase in COVID-19 cases in its North American facility, resulting in higher freight and temporary labor expenses in order to meet larger OEM customers' demands. The Technical Nonwovens segment adversely impacted consolidated gross margin by approximately 110 basis points due to unfavorable overhead absorption on lower segment net sales combined with unfavorable product mix.

•Operating loss was $(9.3) million for the three-month period ended September 30, 2020 compared to operating income of $7.4 million in the corresponding period in 2019. The operating loss was driven by restructuring charges of $15.0 million primarily in the Performance Materials segment and significant operating inefficiencies in the Company's Thermal Acoustical Solutions segment as noted above. The following expenses adversely impacted operating income for the third quarters of 2020 and 2019:
For the Three Months Ended September 30, 2020
Components
(in thousands except per share amounts)
Operating Income ImpactPre-tax
EPS Impact		Tax Effect
EPS Impact (1)		Net
EPS Impact
   PM restructuring expenses$(14,984)$(0.86)$0.21 $(0.65)

For the Three Months Ended September 30, 2019
Components
(in thousands except per share amounts)
Operating Income ImpactPre-tax
EPS Impact		Tax Effect
EPS Impact (1)		Net
EPS Impact
  TNW restructuring expenses$(117)$(0.01)$0.00 $(0.01)

(1) Tax expense represents the statutory tax rate in the jurisdiction in which the expense was incurred.

•The net loss was $(11.7) million, or $(0.67) per diluted share, for the three-month period ended September 30, 2020 compared to net income of $3.0 million, or $0.17 per diluted share, in the corresponding period in 2019.

•Cash was $122.0 million at September 30, 2020, compared to $51.3 million at December 31, 2019. Net cash provided by operations was $74.6 million for the nine-month period ended September 30, 2020 compared to $63.0 million in the corresponding period in 2019, with the improvement primarily driven by increases in payable days across the Company's operations. On October 14, 2020, the Company amended its 2018 Credit Agreement to allow certain restructuring and other charges, as defined by the amendment, to be excluded from EBITDA in the calculation of the
36



Company's modified financial covenants. See Note 6. "Long-term Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements for highlights of the key amended terms and conditions.

Results of Operations
All of the following tabular comparisons are for the three-month and nine-month periods ended September 30, 2020 and 2019, unless otherwise indicated.

Net Sales
 For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands20202019Percent Change20202019Percent Change
Net sales$207,085 $205,274 0.9 %$553,772 $644,110 (14.0)%

Net sales for the three-month period ended September 30, 2020 increased by $1.8 million, or 0.9%, compared to the third quarter of 2019. This increase was primarily driven by an increase in Performance Materials segment sales of $7.8 million, or 3.8% of consolidated net sales, related to higher net sales of filtration products on higher demand in the air filtration market in response to the COVID-19 pandemic. This increase was partially offset by lower sealing and advanced solutions sales as large OEM customers continued to ramped-up production. The increase in Performance Materials segment sales was partially offset by a $5.4 million decrease, or 2.6% of consolidated sales, in the Technical Nonwovens segment, driven primarily by softness in industrial end markets, primarily air filtration, in North American and Europe. Additionally, the Thermal Acoustical Solutions segment reported a decrease in net sales of $2.4 million, or 1.2% of consolidated net sales, primarily due to lower tooling sales of $1.8 million and lower net parts sales of $0.6 million, as the Company continues to ramp-up production in line with it's large OEM customers. Foreign currency translation favorably impacted net sales by $3.0 million, or 1.5% of consolidated net sales.

Net sales for the nine-month period ended September 30, 2020 decreased by $90.3 million, or 14.0%, compared to the corresponding period in 2019. This decrease was primarily due to lower net parts sales of $61.1 million, or 9.5% of consolidated net sales, in the Thermal Acoustical Solutions segment, driven by temporary plant ramp downs across all of its operations in the first half of 2020 due to large OEM customer shutdowns resulting from the COVID-19 pandemic, and lower net tooling sales of $7.6 million. The Technical Nonwovens segment reported a decrease in net sales of $30.7 million, or 4.8% of consolidated net sales, driven primarily by the global softness in industrial end markets, primarily air filtration. The Performance Materials segment reported an increase in net sales of $1.8 million, or 0.3% of consolidated net sales, driven by increased net sales in filtration as demand increased in the air filtration market for face mask media in response to the COVID-19 pandemic, partially offset by decreased sealing and advanced solutions sales related to large OEM customer shutdowns beginning in mid-March due to COVID-19. Foreign currency translation had a negative impact on net sales of $1.2 million, or 0.2% of consolidated net sales.

Cost of Sales
 For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands20202019Percent Change20202019Percent Change
Cost of sales$169,155 $168,918 0.1 %$448,856 $520,423 (13.8)%

Cost of sales for the three-month period ended September 30, 2020 increased by $0.2 million, or 0.1%, compared to the corresponding period in 2019. The increase was primarily driven by a significant increase in variable overhead costs, principally in the Thermal Acoustical Solutions segment related to higher costs associated with COVID-19, primarily in the Company's North American plant, and, to a lesser extent, in the Technical Nonwovens segment related to unfavorable overhead costs on lower volume. Additionally, higher net sales in the Performance Materials segment due to higher demand for face mask media in response to COVID-19 contributed to the higher cost of sales. The increase in cost of sales was partially offset by lower net sales in the Technical Nonwovens and Thermal Acoustical Solutions segments and lower raw material commodity and production costs across all segments, coupled with favorable product mix in the Performance Materials and Thermal Acoustical Solutions segments. Foreign currency translation increased cost of sales by $2.5 million, or 1.5%, in the third quarter of 2020 compared to the third quarter of 2019.

Cost of sales for the nine-month period ended September 30, 2020 decreased by $71.6 million, or 13.8%, compared to of the corresponding period in 2019. The decrease was driven by lower net sales across all segments, primarily due to plant ramp
37


downs in the Thermal Acoustical Solutions segment as noted above and, to a lesser extent, the Technical Nonwovens segment due to the COVID-19 pandemic. In addition, lower raw material commodity and production costs across all segments contributed to lower cost of sales. These decreases to cost of sales were partially offset by higher overhead costs in the Thermal Acoustical Solutions and Technical Nonwovens segments due to the drivers noted above, combined with unfavorable product mix, primarily in the Thermal Acoustical Solutions segment resulting from lower fibers sales related to the sunsetting of major platforms in the second half of 2019 with select OEM manufacturers. Foreign currency translation decreased cost of sales by $1.1 million, or 0.2%, in the first nine months of 2020 compared to the first nine months of 2019.

Gross Profit
 For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands20202019Percent Change20202019Percent Change
Gross profit$37,930 $36,356 4.3 %$104,916 $123,687 (15.2)%
Gross margin18.3 %17.7 %18.9 %19.2 %

Gross margin for the three-month period ended September 30, 2020 increased 60 basis points compared to the corresponding period in 2019. The Performance Materials segment favorably impacted consolidated gross margin by approximately 330 basis points, primarily due to favorable product mix, driven by higher demand for face mask media in response to the COVID-19 pandemic and increased liquid filtration sales, combined with favorable customer pricing, and raw material commodity and production costs. The Thermal Acoustical Solutions segment adversely impacted consolidated gross margin by approximately 160 basis points driven by higher COVID-19-related costs as noted above. The Technical Nonwovens segment negatively impacted consolidated gross margin by approximately 110 basis points due to unfavorable overhead absorption on reduced segment net sales combined with unfavorable product mix in the third quarter of 2020 compared to the third quarter of 2019.

Gross margin for the for the nine-month period ended September 30, 2020 decreased 30 basis points compared to the corresponding period in 2019. The Thermal Acoustical Solutions segment negatively impacted consolidated gross margin by approximately 300 basis points driven by the significant reduction in segment net sales due to the COVID-19 pandemic and higher COVID-19-related costs in the third quarter of 2020. The Performance Materials segment favorably impacted consolidated gross margin by approximately 290 basis points due to the drivers noted above while the Technical Nonwovens segment had a minimal impact on consolidated gross margin in the first nine months of 2020 compared to the corresponding period in 2019.

Selling, Product Development and Administrative Expenses
 For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands20202019Percent Change20202019Percent Change
Selling, product development and administrative expenses$32,227 $28,909 11.5 %$95,418 $94,011 1.5 %
Percentage of sales15.6 %14.1 %17.2 %14.6 %
  Quarter Ended
In thousands Q1-20 Q1-19 Percent Change
Selling, product development and administrative expenses $33,027
 $33,006
 0.1%
Percentage of sales 16.5% 15.1%  

Selling, product development and administrative expenses for the first quarter ofthree-month period ended September 30, 2020 were essentially flat, but increased 140$3.3 million, or 150 basis points as a percentage of net sales, compared to the first quarter ofcorresponding period in 2019. Increased corporate strategic initiativesThe increase in selling, product development and administrative expenses were driven by higher compensation-related expenses of $1.1$2.6 million, higher consulting costs of $0.6 million, and higher bad debt expensean increase in other general administrative costs of $0.4 million$0.9 million. These increases were mostlypartially offset by decreased salarieslower travel expenses of $0.8 million and lower consulting expense of $0.5 million in the first quarter of 2020 compared to the first quarter of 2019. million.

Selling, product development and administrative expenses for the nine-month period ended September 30, 2020 increased 140$1.4 million, or 260 basis points as a percentage of net sales, compared to the first quartercorresponding period in 2019. The increase in selling, product development and administrative expenses were driven by higher compensation-related expenses of 2019 due to the drop$3.7 million and higher strategic initiatives expenses of $1.9 million. These increases were partially offset by lower salaries expenses of $1.7 million, lower travel expenses of $1.2 million, lower consulting expenses of $0.5 million, and a decrease in sales related to the COVID-19 pandemic in the last monthother general administrative costs of the first quarter of 2020.$0.8 million.



38


Impairment of Goodwill and Other Long-Lived Assets
 For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands20202019Dollar Change20202019Dollar Change
Impairment of goodwill and other long-lived assets$— $— $— $61,109 $— $61,109 
  Quarter Ended
In thousands Q1-20 Q1-19 Dollar Change
Impairment of goodwill and other long-lived assets $61,109
 $—
 $61,109


During the first quarter of 2020,As previously reported, the Company recorded a goodwill impairment charge of $48.7 million in the Performance Materials segment. Reducedsegment during the three-month period ended March 30, 2020. Lower expected demand in automotive and other end markets due to the COVID-19 pandemic resulted in a reduction in sales and cash generation projections as compared to prior projections for the reporting units. As a result of these revised projections and changes in other Company and market-based inputs to the determination of fair value, the carrying value of the Performance Materials reporting unit exceeded its fair value by 48.7$48.7 million, resulting in the impairment charge.

As a result of the COVID 19 pandemic and the Company's action plan to address the risks associated with it, the Company accelerated certain strategic actions. One such action was a review of a low-performingan underperforming European plant within the Performance Materials segment. As a result of a strategic shift regarding this plant, the Company performed an impairment assessment on the long-lived assets of the plant. The impairment test concluded that the asset group was not recoverable, and the Company then determined that carrying value of the asset group exceeded its fair value and recorded a long-lived asset impairment charge of $12.4 million.

Pension Plan Settlement ExpenseRestructuring Expenses
 For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands20202019Dollar Change20202019Dollar Change
Restructuring expenses$14,984 $— $14,984 $14,984 $— $14,984 

During the third quarter of 2020, the Company’s Performance Materials segment undertook actions to discontinue production of a lower efficiency air filtration media product and, in turn, fully depreciated the supporting machinery and equipment in North America and consolidated certain product lines and began exiting underperforming facilities in Europe. These restructuring activities, which are projected to conclude in the first half of 2021, are expected to reduce operating costs, increase production efficiency and enhance the Company’s flexibility by better aligning its manufacturing operations with the segment's customer base. Accordingly, the Company expects to record pre-tax expenses of approximately $17.0 to $20.0 million, primarily related to severance and employee retention expenses, in connection with these restructuring activities, of which approximately $11.5 to $14.5 million are expected to result in cash expenditures. The Company incurred non-cash expenditures of approximately $5.5 million which consisted of fully depreciating and/or amortizing long-lived assets and, to a lesser extent, writing-off inventory.

In North America, the Company decided to shut down two underperforming nonwoven manufacturing carded lines and ancillary equipment, originally acquired in 2018, that served commercial and residential HVAC markets with low to medium efficiency air filtration media. The Company experienced lower demand as a result of COVID-19, which accelerated a market shift from lower efficiency air filtration media to higher performance rated air filtration media. As a result, the Company recorded a pre-tax restructuring charge of $5.4 million, primarily due to accelerated depreciation of property, plant and equipment and other intangible assets.

The Company undertook actions to consolidate global production facilities in the Sealing and Advanced Solutions business from five facilities to four, resulting in the closure of an underperforming facility in Germany. In addition, the Company decided to close a small volume membrane filtration production facility in the Netherlands. As a result of the two facility closures in Europe, the Company recorded pre-tax restructuring charges of $9.6 million consisting of severance costs, legal expenses and inventory write-offs. The Company expects to generate annualized savings of $5.0 million to $6.0 million. See Note 12, "Restructuring" for additional information.



39


  Quarter Ended
In thousands Q1-20 Q1-19 Dollar Change
Employee benefit plans settlement expenses $385
 $—
 $385
Employee Benefit Plans Settlement Expenses
 For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands20202019Dollar Change20202019Dollar Change
Employee benefit plans settlement expenses$— $186 $(186)$385 $25,701 $(25,316)

In the first quarter of 2020, the Company settled the pension obligation of the Interface Sealing Solutions, Inc. Pension Plan ("pension settlement") through lump sum distributions to participants or by irrevocably transferring pension liabilities to an insurance company through the purchase of a group annuity contract. The settlement, funded with pension plan assets, resulted in a non-cash settlement expense of $0.4 million in the first quarter of 2020 related to the recognition of accumulated deferred actuarial losses.

In the second quarter of 2019, the Company settled the pension obligation of the U.S. Lydall Pension Plan through lump sum distributions to participants or by irrevocably transferring pension liabilities to two insurance companies through the purchase of group annuity contracts. The settlement, funded with Pension Plan assets, resulted in a non-cash settlement expense of $25.5 million in the second quarter of 2019 related to the recognition of accumulated deferred actuarial losses and an additional $0.2 million in the third quarter of 2019 to complete the termination of the pension plan.

Interest Expense
 Quarter Ended For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands Q1-20 Q1-19 Percent ChangeIn thousands20202019Percent Change20202019Percent Change
Interest expense $2,857
 $3,628
 (21.3)%Interest expense$4,537 $3,666 23.8 %$11,870 $11,025 7.7 %
Weighted average interest rate 4.4% 4.2%  Weighted average interest rate6.2 %4.4 %5.2 %4.3 %
 
The decreaseincrease in interest expense for the quarterthree and nine-month periods ended March 31,September 30, 2020 compared to the quarter ended March 31,corresponding period in 2019 was due to lower borrowingshigher interest rates related to continued debt pay down combined with athe amendment of the Company's Facility in the second quarter of 2020, partially offset by reduction to interest expense due to the favorable interest



rate differential between the U.S. dollar and Euro related to the net investment hedge the company entered into in the fourth quarter of 2019.

Other Income/(Income) Expense, net
For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands20202019Dollar Change20202019Dollar Change
Other expense (income), net$276 $(885)$1,161 $106 $(1,359)$1,465 
  Quarter Ended
In thousands Q1-20 Q1-19 Dollar Change
Other (income) expense, net $(418) $399
 $(817)

The increase in other income,Other expense (income), net, was unfavorable for the quarterthree-month period ended March 31,September 30, 2020 compared to the quarter ended March 31,corresponding 2019 wasperiod primarily relateddue to the absence of a gain of $0.6 million recognized for a change in estimate of the contingent purchase price of the 2018 PCC acquisition and higher foreign currency gainslosses 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.
Other expense (income), net, was unfavorable for the nine-month period ended September 30, 2020 compared to the corresponding 2019 period primarily due to the absence of the $1.5 million gain on the sale of a business that occurred in the second quarter of 2019 and a gain of $0.7 million recognized for a change in estimate of the contingent purchase price of the PCC acquisition in the first nine months of 2019. Additionally, 2020 included higher 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.





40


Income Taxes

TheFor the three-month period ended September 30, 2020, the Company's effective tax rate for the first quarter of 2020 was 3.5%16.6% compared to an effective tax rate of 22.0%35.1% for the first quarterthree-month period ended September 30, 2019. For the three months ended September 30, 2020, the rate was negatively impacted by valuation allowance activity of $2.0 million, offset by a state tax benefit of $0.8 million. resulting in a lower effective tax rate when in a pre-tax loss position. For the three months ended September 30, 2019, the effective tax rate was negatively impacted by losses in jurisdictions in which no tax benefit can be recognized.

For the nine-month period ended September 30, 2020, the Company's effective tax rate was 6.3% compared to an effective tax rate of 97.0% for the nine-month period ended September 30, 2019. DuringFor the first quarter ofnine months ended September 30, 2020, the Company had a pre-tax loss primarily resulting from impairment charges of $61.1 million. The impairment charges significantly impacted the Company's effective tax rate because $48.7 million of the impairment charges related to non-deductible goodwill, resulting in a low effective tax rate for the first quarter ofnine months ended September 30, 2020 when in a pre-tax loss position. Additionally, the effective rate was negatively impacted by valuation allowance activity of $0.3$2.7 million. TheFor the nine-month period ended September 30, 2019, the Company recorded a tax benefit of $5.5 million primarily driven by $10.5 million of tax benefit related to the pension plan settlement. Excluding the tax benefit of the pension plan settlement, the Company's effective tax rate infor the first quarter ofnine months ended September 30, 2019 was 25.2%. This was negatively impacted by valuation allowance activity of $0.3$1.8 million from losses in jurisdictions in which no tax benefit can be recognized, partially offset by an uncertain tax position release due to statutory expiration of $0.2 million andthe Company's 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, Canada, China, France, Germany, Hong Kong, India, the Netherlands, and the United Kingdom. With few exceptions, the Company is no longer subject to U.S. federal examinations for years before 2016, state and local examinations for years before 2015, and non-U.S. income tax examinations for years before 2013.

The Company’s effective tax rates in future periods could be affected by an increase or decrease in earnings in countries where tax rates differ from the United States federal tax rate, the relative impact of permanent tax adjustments on earnings from domestic operations, changes in net deferred tax asset valuation allowances, including valuation allowances on loss carryforwards in which no tax benefit can be recognized, stock vesting, pension plan terminations, the completion of acquisitions or divestitures, changes in tax rates or tax laws and the completion of ongoing tax planning strategies and audits.

On July 20, 2020, the U.S. Treasury Department and IRS released T.D. 9902 final regulations for publication in the Federal Register related to the global intangible low-taxed income (“GILTI”) high-tax exception. The final regulations largely adopt the framework of the 2019 proposed regulations, with certain key departures. The most significant departures are that an election to apply the GILTI high-tax exception may be made annually instead of once every five years, and that the calculation is made with respect to each “tested unit” of a controlled foreign corporation, rather than on a qualified business unit by qualified business unit basis. The company has evaluated the final regulations and included the impacts of these changes in the Company’s third quarter financial statements.
























41



Segment Results
 
The following tables present segment net sales informationand operating income for the keyprimary product and service groups included within each operating segment as well as other products and services and operating income by segment,categories for the quarterthree-month and nine-month periods ended March 31,September 30, 2020 compared with the quarter ended March 31, 2019.and September 30, 2019, respectively.

Net sales by segment:

 Quarter EndedFor the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands Q1-20 Q1-19 Dollar ChangeIn thousands2020201920202019
Performance Materials Segment:      Performance Materials Segment:
Filtration $25,887
 $23,934
 $1,953
Filtration$30,899 $22,427 $86,422 $71,093 
Sealing and Advanced Solutions 39,333
 40,646
 (1,313)Sealing and Advanced Solutions36,918 37,573 105,088 118,589 
Performance Materials Segment net sales 65,220
 64,580
 640
Performance Materials Segment net sales67,817 60,000 191,510 189,682 
      
Technical Nonwovens Segment (1):      Technical Nonwovens Segment (1):
Industrial Filtration 31,369
 42,364
 (10,995)Industrial Filtration29,643 32,935 90,425 114,005 
Advanced Materials (2) 26,034
 23,242
 2,792
Advanced Materials (2)28,866 30,977 77,494 84,591 
Technical Nonwovens Segment net sales 57,403
 65,606
 (8,203)Technical Nonwovens Segment net sales58,509 63,912 167,919 198,596 
      
Thermal Acoustical Solutions Segment:      Thermal Acoustical Solutions Segment:
Parts 77,321
 84,576
 (7,255)Parts79,687 80,309 189,456 250,591 
Tooling 6,440
 9,737
 (3,297)Tooling5,836 7,617 17,276 24,920 
Thermal Acoustical Solutions Segment net sales 83,761
 94,313
 (10,552)Thermal Acoustical Solutions Segment net sales85,523 87,926 206,732 275,511 
Eliminations and Other (2) (5,857) (6,474) 617
 Eliminations and Other (2)(4,764)(6,564)(12,389)(19,679)
Consolidated Net Sales $200,527
 $218,025
 $(17,498)Consolidated Net Sales$207,085 $205,274 $553,772 $644,110 

Operating income (loss) by segment:

For the Three Months Ended  
September 30,		For the Nine Months Ended  
September 30,
In thousands2020201920202019
Performance Materials (3)$(6,759)$712 $(58,257)$5,474 
Technical Nonwovens (1),(2),(4)5,061 7,165 15,558 19,743 
Thermal Acoustical Solutions1,174 5,022 517 21,870 
Corporate Office Expenses(8,757)(5,452)(24,413)(17,411)
Consolidated Operating Income$(9,281)$7,447 $(66,595)$29,676 

(1)The Technical Nonwovens segment includes the results of Geosol through the date of disposition of May 9, 2019.
(2)Included in the Technical Nonwovens segment and Eliminations and Other is the following:
•$3.9 million and $4.3 million of intercompany sales to the Thermal Acoustical Solutions segment for the three-month periods ended September 30, 2020 and 2019, respectively.
•$10.2 million and $13.6 million of intercompany sales to the Thermal Acoustical Solutions segment for the nine-month periods ended September 30, 2020 and 2019, respectively.
(3)Included in the Performance Materials segment is the following:
•$61.1 million of impairment charges related to goodwill and other long-lived assets for the nine-month period ended September 30, 2020.
•$14.8 million restructuring charges for the three and nine-month periods ending September 30, 2020.
•$4.0 million and $4.1 million of intangible assets amortization for the three-month periods ended September 30, 2020 and 2019, respectively.
•$11.9 million and $12.2 million of intangible assets amortization for the nine-month periods ended September 30, 2020 and 2019, respectively.

42


  Quarter Ended
  Q1-20 Q1-19  
In thousands Operating Income Operating Margin % Operating Income Operating Margin % Dollar Change
Performance Materials (3) $(56,941) (87.3)% $1,459
 2.3% $(58,400)
Technical Nonwovens (1),(2),(4) 3,813
 6.6% 4,734
 7.2% (921)
Thermal Acoustical Solutions 5,628
 6.7% 9,491
 10.1% (3,863)
Corporate Office Expenses (8,068)   (6,634)   (1,434)
Consolidated Operating Income $(55,568) (27.7)% $9,050
 4.2% $(64,618)
(4)Included in the Technical Nonwovens segment is the following:
•$1.2 million and $1.3 million of intangible assets amortization for the three-month periods ended September 30, 2020 and 2019, respectively.
•$3.5 million and $3.8 million of intangible assets amortization for the nine-month periods ended September 30, 2020 and 2019, respectively.
(1)The Technical Nonwovens segment reports the results of Geosol through the date of disposition of May 9, 2019.
(2)Included in the Technical Nonwovens segment and Eliminations and Other is $5.0 million and $4.7 million in intercompany sales to the Thermal Acoustical Solutions segment for the quarters ended March 31, 2020 and 2019.
(3)Included in the Performance Materials segment is $61.1 million of impairment charges related to goodwill and other long-lived assets for the quarter ended March 31, 2020 and $4.0 million of intangible assets amortization for the quarters ended March 31, 2020 and 2019.
(4)Included in the Technical Nonwovens segment is $1.2 million and $1.3 million of intangible assets amortization for the quarters ended March 31, 2020 and 2019, respectively.

Performance Materials

Segment net sales increased $0.6$7.8 million in the firstthird quarter of 2020 compared to the firstthird quarter of 2019. The increase was primarily due to increaseddriven by higher net sales in filtration of $2.0$8.5 million as demand increased in the air filtration market for face mask media in response to the COVID-19 pandemic grew. These increases to net sales werepandemic. This increase was partially offset by decreasedlower sealing and advanced



solutions net sales of $1.3$0.7 million as these products partially serve the automotive industry and were impacted by lower demand dueas automotive customers continued to automotive customerramp-up production following shutdowns in the first quarterhalf of 2020 related to COVID-19 and ultimately led to a marginal impact on total net sales related to the pandemic.COVID-19. Foreign currency translation had a negative impact onpositively impacted segment net sales of $0.6by $0.9 million, or 0.9%, in the first quarter of 2020 compared to the first quarter of 2019.1.6%.

The Performance Materials segment reported an operating loss of $(56.9)($6.8) million in the firstthird quarter of 2020, compared to operating income of $1.5$0.7 million in the firstthird quarter of 2019. The changedecrease in operating income of $58.4$7.5 million was primarily driven by segment restructuring charges of $14.8 million in the third quarter of 2020. This decrease was partially offset by an improvement in segment gross margin of 780 basis points, primarily related to favorable product mix from increased demand for face mask media, combined with lower material commodity and production costs. Additionally, selling, product development and general administrative expenses decreased $0.3 million, or 280 basis points as a percent of segment net sales, primarily driven by lower travel expenses of $0.4 million, lower salaries of $0.2 million, lower bad debt expense of $0.2 million, and reduced other general administrative costs of $0.1 million. These decreases were partially offset by increased accrued cash incentive compensation of $0.6 million.

Segment net sales increased $1.8 million for the nine-month period ended September 30, 2020 compared to the corresponding period in 2019. The increase was driven by the drivers noted above. Foreign currency translation had a marginal impact on segment net sales in the first nine months of 2020 compared to the first nine months of 2019.

The Performance Materials segment reported an operating loss of ($58.3) million for the nine-month period ended September 30, 2020, compared to operating income of $5.5 million for the corresponding 2019 period. The decrease in operating income of $63.7 million was primarily driven by goodwill and other long-lived asset impairment charges of $61.1 million in the first quarter of 2020 and segment restructuring charges of $14.8 million in the third quarter of 2020. After adjusting for the impairment charges, the Performance Materials segment reported adjusted operating income of $4.2 million. The impairment charges wereThis decrease was partially offset by higheran improvement in segment gross margin of 260460 basis points, primarily due to favorable product mix driven by increased demand for face mask media, in responselower material commodity and production costs, lower fixed overhead costs from savings driven by the fourth quarter 2019 reduction-in-force program, and lower depreciation expense related to the COVID-19 pandemic, combined with lower raw material commodity costs and favorable material productivityasset-write off in one of the segment's European plants in the first quarter of 2020 compared to the first quarter of 2019. After excluding the impairment charges,2020. Additionally, selling, product development and general administrative expenses were favorable by 150decreased $2.9 million, or 170 basis points as a percentagepercent of segment net sales, primarily driven by decreased travel, consulting, and salaries expenses, partially offset by increased accrued cash incentive compensation.

Technical Nonwovens

Segment net sales decreased $5.4 million, or 8.5%, in the third quarter of 2020 compared to the third quarter of 2019. Industrial filtration net sales decreased $3.3 million, or 10.0%, driven by soft industrial end markets, primarily air filtration, in North America and Europe, as a result of the COVID-19 pandemic. Advanced materials net sales decreased $2.1 million, or 6.8%, in the third quarter of 2020 compared to the third quarter of 2019, driven primarily by lower geosynthetic product demand in Canada. Foreign currency translation positively impacted segment net sales by $0.8 million, or 1.2%.

The Technical Nonwovens segment reported operating income of $5.1 million, or 8.6% of segment net sales, in the third quarter of 2020, compared to $7.2 million, or 11.2% of net segment sales, in the third quarter of 2019. The decrease in operating income of $2.1 million was primarily driven by lower sales adversely impacting operating margin by 260 basis points. The decrease in operating margin was primarily driven by a decrease in gross margin of 180 basis points, primarily related to reduced customer pricing, unfavorable product mix, and unfavorable absorption on overhead costs, partially offset by lower material commodity and productivity costs. Selling, product development and general administrative expenses were flat with prior year with an increase in compensation costs offset by lower travel costs.

Segment net sales decreased $30.7 million, or 15.4%, in the first quarternine months of 2020 compared to the first quarter of 2019, primarily driven by decreased consulting and travel expenses.

Technical Nonwovens

Segment net sales decreased $8.2 million, or 12.5%, in the first quarter of 2020 compared to the first quarternine months of 2019. Foreign currency translation had a negative impact on segment net sales of $0.8$1.3 million, or 1.2%0.7%, in the first quarternine months of 2020 compared to the first quarter ofcorresponding period in 2019. Industrial filtration net sales decreased $11.0$23.6 million, or 26.0%20.7%, primarily driven by decreased demandsoft global industrial end markets across all regions as a result of the COVID-19 pandemic, coupled with the negative impact
43


of foreign currency. Advanced materials net sales increased $2.8decreased $7.1 million, or 12.0%8.4%, driven by increased demand$3.4 million in North America, and more specifically, increased geosynthetic and medical productlower sales in Canadaof automotive rolled-good material due to the plant ramp-downs in the first quarterhalf of 2020 compared to the first quarter of 2019.caused by COVID-19, coupled with lower geosynthetic product demand in Canada.

The Technical Nonwovens segment reported operating income of $3.8$15.6 million, or 6.6%9.3% of segment net sales, in the first nine months of 2020, compared to $19.7 million, or 9.9% of segment net sales, in the first nine months of 2019. The decrease in operating income of $4.2 million was driven by lower sales volume due to the COVID-19 pandemic, resulting in operating margin erosion of 60 basis points. The decrease in operating margin was primarily driven by higher selling, product development and general administrative expenses of 70 basis points, as a percentage of segment net sales, partially offset by improved gross margin of 10 basis points, as a percentage of segment sales. The gross margin improvement was primarily driven by lower raw material commodity costs and favorable product mix in North America related to personal protective equipment, partially offset by higher labor and variable overhead costs. The increase in selling, product development and general administrative expenses, as a percentage of segment net sales, was primarily due to the $30.7 million reduction in sales, but was partially offset by decreased expenses of $1.9 million, primarily driven by lower salaries expenses of $0.8 million, a decrease in travel expenses of $0.6 million, lower intangible amortization expense of $0.3 million, and lower other general administrative costs of $0.2 million.

Thermal Acoustical Solutions
Segment net sales decreased $2.4 million, or 2.7%, in the third quarter of 2020 compared to $4.7the third quarter of 2019. This decrease was primarily due to lower tooling sales of $1.8 million and, to a lesser extent, lower net parts sales of $0.6 million, as the Company continues to ramp-up production in line with it's large OEM customers ramp-up after plant closures in the first half of 2020 due to the COVID-19 pandemic. Foreign currency translation favorably impacted segment net sales by $1.3 million, or 7.2%1.5%.

The Thermal Acoustical Solutions segment reported operating income of $1.2 million, or 1.4% of segment net sales, in the firstthird quarter of 2020, compared to operating income of $5.0 million, or 5.7% of segment net sales, in the third quarter of 2019. The decrease in operating income of $0.9$3.8 million, and operating margin of 60or 430 basis points, was primarily attributable to higher selling, product development and general administrative expenses of 60 basis points as a percentage of segment net sales compared to the first quarter of 2019. This increase as a percentage of net sales, was primarily due to the $8.2 million reductiondegradation of gross margin of 350 basis points driven by operating inefficiencies due to work force shortages directly related to an increase in sales, whileCOVID-19 cases, resulting in higher expedited freight and temporary labor costs as the Company continued to ramp-up production at its facility in North America to meet its large OEM customers' demand. Operating income was further impacted by an increase in selling, product development and administrative expenses of $0.5 million for higher compensation and consulting expenses, partially offset by lower other general administrative expenses actually decreased $0.6 million, primarily driven by lower salaries and benefits expense of $0.6 million in the first quarter of 2020 compared to the first quarter of 2019. Gross margin was flat over the comparable period as favorable product mix and lower material commodity and productivity costs were completely offset by inventory write-off costs of $0.9 million, or 160 basis points, associated with a flood in one of the Company's European facilities and lower customer pricing in the first quarter of 2020 compared to the first quarter of 2019. The Company is pursuing a claim with its insurer to recover the loss associated with the inventory write-off loss.costs.

Thermal Acoustical Solutions
Segment net sales decreased $10.6$68.8 million, or 11.2%25.0%, infor the first quarter ofnine-month period ended September 30, 2020 compared to the first quarter of 2019. Foreign currency translation had a negative impact on segmentcorresponding 2019 period. This decrease was primarily due to lower net parts sales of $0.8$61.1 million, or 0.9%,driven by temporary plant ramp-downs across all of its operations in the first quarterhalf of 2020 compared to the first quarter of 2019. The decrease was driven by plant ramp downs across all of the Thermal Acoustical Solutions businesses as the Company's large OEM customers closed their own plants due to the COVID-19 pandemic. Additionally, net tooling sales decreased $7.6 million compared to the corresponding 2019 period. Foreign currency translation had a marginal impact on segment net sales.

The Thermal Acoustical Solutions segment reported operating income of $5.6$0.5 million, or 6.7%0.3% of segment net sales, infor the first quarter ofnine-month period ended September 30, 2020 compared to operating income of $9.5$21.9 million, or 10.1%7.9% of segment net sales, infor the first quarter of 2019.corresponding 2019 period. The decrease in operating income of $3.9$21.4 million and operating margin of 340 basis points was primarily due to lowerthe degradation of gross margin of 280 basis points and, to a lesser extent, increased selling, product development and administrative expenses as a percentage of net sales. Gross margin erosion was driven by unfavorable product mix of approximately 90 basis points on reduced volume of higher margin acoustical parts. Additionally, labor and overhead costs increased by approximately 210 basis points, primarily relatedthe significant reduction in segment net sales due to unfavorable absorption, partially offset by reduced, outsourcing and expedited freight expenses within the COVID-19 pandemic in addition to the operating inefficiencies in North America and Europe facilities. This decrease to gross margin was partially offset by favorable raw material commodity costs and productivity coststhat occurred in the firstthird quarter of 2020 compared to the first quarter of 2019, partially offset by lower customer pricing.as discussed above. Selling, product development and administrative expenses decreased $0.1 million, or 60 basis points$0.7 million; however, as a percentage of net sales, as decreased salaries of $0.2 million were essentiallyincreased due to the significant sales volume reduction. The reduction in selling, product development and administrative costs was driven by lower employee-related costs and travel expenses, partially offset by increasedan increase in bad debt expense of $0.3 million and higher consulting expenses of $0.2 million in the first quarter of 2020 compared to the first quarter of 2019.million.







Corporate Office Expenses
 
Corporate office expenses for the first quarter ofthree-month period ended September 30, 2020 were $8.1$8.8 million, compared to $6.6$5.5 million in the first quarter ofcorresponding period in 2019. The increase of $1.4$3.3 million was primarily due to increased corporate strategic initiativesan increase in compensation-related costs of $1.9 million, higher consulting costs of $0.5 million and an increase in other general administrative expenses of $1.1 million, higher accrued cash incentive compensation of $0.3 million and increased insurance expenses of $0.3 million, partially offset by decreased professional service costs of $0.3$0.9 million in the firstthird quarter of 2020 compared to the firstthird quarter of 2019.

Corporate office expenses for the nine-month period ended September 30, 2020 were $24.4 million, compared to $17.4 million in the corresponding period in 2019. The increase of $7.0 million was primarily due to an increase in corporate strategic
44


initiatives expenses of $1.9 million, higher compensation-related costs of $2.9 million, an increase in stock compensation expense of $0.5 million and higher other general administrative expenses of $1.7.

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.flows and borrowings under the Credit Facility. 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 employee benefit plan funding. The Company manages worldwide cash requirements by considering available funds among domestic and foreign subsidiaries. The Company expects to finance its 2020 operating cashactivities and capital spending requirements from existing cash balances, cash provided by operating activities and through borrowings under the Credit Facility, as needed.

In December 2019, the Company entered into two arrangements with a banking institution to sell trade accounts receivable balances for select customers. In the three-month and nine-month periods ended September 30, 2020, under both programs, the Company sold $21.3 million and $64.3 million, respectively, in trade receivable balances, received $59.1 million in total cash under the programs.  The Company expects to receive the remainder, net of fees, in the fourth quarter of 2020. See “Transfer of Financial Assets” in Note 1, “Basis of Financial Statement Presentation” for additional information.

In June 2020, the Company reached an agreement with the U.S. Government that provides funding to cover a portion of the cost to install two new production lines for the production of meltblown material for N95 respirator, surgical and medical masks and for other technical resources. The Company will receive monthly payments in accordance with the agreement to fund up to $13.5 million. Additionally, the Company has a tentative agreement with the French Government to fund up to 30% of the Company’s investment in its facility in France supporting the European Union face mask production and air filter production.
 
At March 31,September 30, 2020, the Company held $87.8$122.0 million in cash and cash equivalents, including $53.1$62.8 million in the U.S. with the remaining held by foreign subsidiaries.subsidiaries and $283.5 million of borrowings outstanding and standby letters of credit outstanding of $1.8 million.

The Company’s continued access to sources of liquidity depends on multiple factors, including global economic conditions, the COVID-19 pandemic’s effects on its customers and their production rates, the condition of global financial markets, the availability of sufficient amounts of financing, its operating performance and its credit ratings. The Company borrowed $20 million under the revolver portion of its Facility during the first quarter of 2020, in order to increase its cash position and preserve financial flexibility in light of the impact of the COVID-19 outbreak on its results of operations and liquidity. The Company is taking further actions to improve its liquidity, including capital expenditure and operating expense reductions and increased management and oversight of its working capital.

Interest rates on amounts outstanding under the Credit Agreement are variable based on LIBOR. The LIBOR benchmark has been the subject of national, international, and other regulatory guidance and proposals for reform. In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit rates for calculation of LIBOR after 2021. These reforms may cause LIBOR to perform differently than in the past, and LIBOR may ultimately cease to exist after 2021. Alternative, benchmark rate(s) may replace LIBOR and could affect the Company's debt securities, derivative instruments, receivables, debt payments and receipts. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact the Company's contracts that terminate after 2021. There is uncertainty about how applicable law, the courts or the Company will address the replacement of LIBOR with alternative rates on variable rate retail loan contracts and other contracts that do not include alternative rate fallback provisions. In addition, any changes to benchmark rates may have an uncertain impact on the Company's cost of funds and access to the capital markets, which could impact liquidity, financial position or results of operations.

The Company continues to assess strategic initiatives that could result in costs being incurred in future quarters related to restructuring activities.








45


Financing Arrangements

2020 Amendment to the 2018 Credit Agreement

On May 11, 2020,August 31, 2018, the Company amended and restated its $450$175 million senior secured revolving credit agreement ("2018 Credit Agreement (''2020 Amendment"Agreement"). The principal purpose of the Amendment was to modify certain financial maintenance covenants contained in the 2018 Credit Agreement, at least one of which the Company expected to fail as early as the second quarter of 2020 as a result of the impact of COVID-19. Key amended terms and conditions include:

The maximum Consolidated Net Leverage Ratio, applicable on the last day of each fiscal quarter, is 6.5:1 through the period ending March 31, 2021, stepping down to 4.50:1 for the period ending June 30, 2021 through the period ending March 31, 2022, and 3.50:1 for the period ending June 30, 2022 and thereafter;

The minimum Consolidated Fixed Charge Coverage Ratio, applicable on the last day of each fiscal quarter, is 1.10:1 on a trailing twelve month basis through the period ending June 30, 2020, stepping up to 1.25:1 on a distinct quarterly basis for the quarters ended September 30, 2020 through June 30, 2021, and on a trailing twelve month basis beginning with the period ending September 30, 2021 and thereafter;

The amended terms also provide that the Company maintain cash and cash equivalents balances of $40 million, excluding deposit accounts in China;

The term loan facility is $144 million and the revolving credit facility is $170 million for a total overall facility of $314 million. The accordion feature has been eliminated, and there is no change to the maturity date;

There is a floor on the Base and Eurocurrrency Rate of 1%;

The range for the Applicable Rate, as determined based on the Company’s Consolidated Net Leverage Ratio, and added to the Base Rate Committed Loans is 2.00% to 3.25% and the range for the Applicable Rate added to Eurocurrency Rate Committed Loans and Letters of Credit is 3.00% to 4.25%;

The quarterly fee is 0.375% on the unused portion of the revolving commitment; and




The Company will pay an amendment fee to the Lenders based on their commitment levels.

The Company believes that its liquidity resources including the 2020 Amendment to the 2018 Credit Agreement are sufficient to meet its working capital needs and other cash requirements.
2018 Credit Agreement

The 2018 Credit Agreement increased the available borrowing from $175 million to $450 million, and added three additional lenders and extended the maturity date from July 7, 2021 to August 31, 2023.

UnderOn May 11, 2020, the terms ofCompany amended its 2018 Credit Agreement ("2020 Amendment") which, among other changes, modified certain financial covenants contained in the 2018 Credit Agreement, decreased the lenders provided upterm loan facility from $200 million to a $450$144 million and reduced the revolving credit facility (the “Facility”)from $250 million to $170 million. On October 14, 2020, the Company including a term loan commitment of $200 millionamended its 2018 Credit Agreement to allow certain restructuring and revolving loansother charges, as defined by the amendment, to or forbe excluded from EBITDA in the benefitcalculation of the CompanyCompany's financial covenants. See Note 6, “Long-term Debt and its subsidiaries of up to $250 million. The Facility was secured by substantially all of the assets of the Company.Financing Arrangements” for additional information.

Interest was 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 Dollar 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 2018 Credit Agreement). The Applicable Rate added to the Base Rate Committed Loans ranged from 0.00% to 1.25%, and the Applicable Rate added to Eurocurrency Rate Committed Loans and Letters of Credit ranged from 0.75% to 2.00%. The Company paid a quarterly fee ranging from 0.15% to 0.275% on the unused portion of the revolving commitment. The Company has entered into multiplean interest rate swapsswap in place to convert a portion of the Company's one-month LIBOR-based borrowings from a variable rate to a fixed rate.See Note 7, "Derivatives". for additional information.

The Company is permitted to prepay termDiscussion and revolving borrowings in whole or in part at any time without premium or penalty, subject to certain minimum payment requirements, and the Company was generally permitted to irrevocably cancel unutilized portionsAnalysis of the revolving commitments under the 2018 Credit Agreement. The Company is required to repay the term commitment in an amount of $2.5 million per quarter beginning with the quarter ending December 31, 2018 through the quarter ending June 30, 2023.Cash Flows

The 2018 Credit Agreement contained covenants required of the Company and its subsidiaries, including various affirmative and negative financial and operational covenants. The Company was required to meet certain quarterly financial covenants calculated from the four fiscal quarters most recently ended, including: (i) a minimum Consolidated Fixed Charge Coverage Ratio, which requires that at the end of each fiscal quarter the ratio of (a) consolidated EBITDA to (b) the sum of consolidated interest charges, redemptions, non-financed maintenance capital expenditures, restricted payments and taxes paid, each as defined in the 2018 Credit Agreement, may not be lower than 1.25 to 1.0; and (ii) a Consolidated Net Leverage Ratio, which required that at the end of each fiscal quarter the ratio of consolidated funded indebtedness minus consolidated domestic cash to consolidated EBITDA, as defined in the 2018 Credit Agreement, could not be greater than 3.5 to 1.0. The Company was in compliance with all covenants at March 31, 2020.

At March 31, 2020, the Company had $288.5 million of borrowings outstanding and standby letters of credit outstanding of $1.9 million. The borrowings outstanding included a $143.6 million term loan, net of $0.4 million in debt issuance costs being amortized to interest expense over the debt maturity period.

In addition to the amounts outstanding under the Facility, the Company has various foreign credit facilities totaling approximately $7.0 million. At March 31, 2020, the Company's foreign subsidiaries had $0.1 million in borrowings outstanding as well as $1.4 million in standby letters of credit outstanding.

In November 2018, the Company entered into a five year interest rate swap agreement with a bank which converts the interest on a notional $139.0 million of the Company's one-month LIBOR-based borrowings under its 2018 Credit Agreement from a variable rate, plus the borrowing spread, to a fixed rate of 3.09% plus the borrowing spread. The notional amount reduces quarterly by fluctuating amounts through August 2023. In April 2017, the Company entered into a three-year interest rate swap agreement with a bank which converts the interest on a notional $60.0 million of the Company's one-month LIBOR-based borrowings under its 2018 Credit Agreement from a variable rate, plus the borrowing spread, to a fixed rate of 1.58% plus the borrowing spread. The notional amount reduced quarterly by $5.0 million through March 31, 2020 and is now settled. These interest rate swap agreements were accounted for as cash flow hedges. Effectiveness of these derivative agreements are assessed quarterly by ensuring that the critical terms of the swaps continue to match the critical terms of the hedged debt.




Operating Cash Flows
 
Net cash provided by operating activities infor the first three months ofnine-month period ended September 30, 2020 was $26.7$74.6 million compared with $14.4$63.0 million in the first three months ofcorresponding period in 2019. In the first threenine months of 2020, net loss and non-cash adjustments were $15.4$25.6 million compared to net income and non-cash adjustments of $16.6$49.9 million in the first threenine months of 2019. Since December 31, 2019, net operating assets and liabilities decreased by $11.4$49.0 million, compared to $13.0 million during the first three months of 2019 when net operating assets and liabilities increased $2.2 million fromcomparative nine-month period beginning December 31, 2018. The decrease in working capital since December 31, 2019 was primarily due to an increase of $21.1$28.4 million in accounts payable. This waspayable, $7.2 million in accrued payroll and other compensation and an decrease of $10.1 in inventory, partially offset by increases of $7.8 millionan increase in accounts receivable.receivable of $8.3 million. The increase in accounts payable was primarily driven by the timing of vendor payments, including capital expenditures within all segments of the Company. The increase in accounts receivable was primarily due to higher net sales in the firstthird quarter of 2020 compared to the fourth quarter of 2019.
 
Investing Cash Flows
 
In the first three months ofnine-month periods ended September 30, 2020 and 2019, net cash used for investing activities consisted of capital expenditures of $9.2 million.$20.5 and $27.2 million, respectively. In the first threenine months of 2020 net cash used for investing activities was partially offset by $1.7$4.3 million in cash inflows for collections of finance receivables under the Company’s receivable financing arrangements. In the first nine months of 2019, net cash used for investing activities included cash proceeds of $1.4 million from a final purchase price adjustment for the Interface acquisition less cash outflows of $0.5 million to fund an acquisition. The Company also received proceeds of $2.3 million from the divestiture of the Geosol business during the second quarter of 2019.

Financing Cash Flows

In the first three months ofnine-month period ended September 30, 2020, net cash provided by financing activities was $18.4$10.7 million compared to net cash used for financing activities of $7.1$38.2 million in the first three months ofcorresponding period in 2019. The Company made debt repayments of $4.5$9.5 million and $7.1$38.2 million in the first threenine months of 2020 and 2019, respectively. In the first threenine months of 2020, the Company borrowed $20.0 million from its Amended Credit Facility as a precautionary measure in light of the uncertainty caused by COVID-19. The Company held $2.9$0.2 million in proceeds from servicing receivables owed to the banking institution which was paid in early April.October.
 
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, "Significant Accounting Policies" 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, 2019, 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.
46

InDuring the first quarter ofthree-month period ended March 31, 2020, the Company recorded a goodwill impairment charge of $48.7 million, and a long-lived asset impairment charge of $12.4 million, both in the Performance Materials reporting unit. See Note 5, "Impairments of Goodwill and Other Long-Lived Assets", to the “Notes to Condensed Consolidated Financial Statements” of this report for additional discussion of the facts and circumstances surrounding and critical estimates made regarding the impairment charges. The Company continues to monitor the recoverability of the long-lived assets within the Thermal Acoustical Solutions segment taking into consideration on-going financial results and automotive market conditions.

There have been no other significant changes in the Company’s critical accounting estimates during the quarternine-month period ended March 31,September 30, 2020.

47



Item 3.Quantitative and Qualitative Disclosures about Market Risk
 
Lydall’sThe Company’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, India 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,U.S. dollar, the Euro, the Chinese Yuan, the British Pound Sterling, the Canadian Dollar, the Japanese Yen, the Indian Rupee 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 borrowings outstanding of $288.5$283.5 million from its Amended Credit Facility at March 31,September 30, 2020, 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 swapswaps or other hedging agreements to manage interest rate risk.

In November 2018, the Company entered into a five year interest rate swap agreement with a bank which converts the interest on a notional $139.0 million of the Company's one-month LIBOR-based borrowings under its 2018 Credit Agreement from a variable rate, plus the borrowing spread, to a fixed rate of 3.09% plus the borrowing spread. The notional amount reduces quarterly by fluctuating amounts through August 2023. In April 2017, the Company entered into a three-year interest rate swap agreement with a bank which converts the interest on a notional $60.0 million of the Company's one-month LIBOR-based borrowings under its 2018 Credit Agreement from a variable rate, plus the borrowing spread, to a fixed rate of 1.58% plus the borrowing spread. The notional amount reduced quarterly by $5.0 million through March 31, 2020. These interest rate swap agreements were accounted for as cash flow hedges.2020 and is now settled. Effectiveness of thesethe remaining derivative agreements areagreement was assessed quarterly, or more frequently, if necessary, by ensuring that the critical terms of the swaps continueswap continues to match the critical terms of the hedged debt.debt in order to report gains or losses on the derivative instrument in other comprehensive income.

On May 11, 2020, the Company amended its 2018 Credit Agreement, see Note 6, "Long-term Debt and Financing Arrangements". The amendment included, among other modifications, the establishment of a floor on the base and Eurocurrency rate of 1%. As a result, the Company performed an assessment of the effectiveness of the interest rate swap agreement to determine if the critical terms of the interest rate swap agreement continues to match the critical terms of the debt. The Company concluded the interest rate swap agreement is no longer effective. See Note 7. "Derivatives" for more information.

The Company has assessed its exposure to changes in interest rates by analyzing the sensitivity to the Company's earnings assuming various changes in market interest rates. Assuming a hypothetical increase of one percentage point in interest rates on the variable portion of the $288.5$283.5 million outstanding borrowings as of March 31,September 30, 2020, the Company’s net income would decrease by an estimated $1.3$1.4 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
48

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,September 30, 2020 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 quarterthree-month period ended March 31,September 30, 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company has not experienced any material impact to its internal control over financial reporting during the COVID-19 pandemic. Most of the Company’s corporate and non-production employees worked remotely during the period in which these financial statements were prepared due to the impact of COVID-19. The Company enhanced its oversight and monitoring during the financial close and reporting process, including higher awareness and monitoring of cybersecurity threats. Other than enhancing its oversight and monitoring processes, the Company did not alter or compromise its disclosure controls and procedures. The Company continues to monitor and assess the need to modify or enhance its disclosure controls to ensure disclosure controls and procedures continue to be effective.
49

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.

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 Per and Polyfluorinated Substances (“PFAS”) 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 2018, the Company received a response from the NHDES to the site investigation report outlining proposed remedial actions. The Company recorded an additional $0.1 million of expense in 2018 associated with the expected costs to remediate the impacts of the discharge of regulated contaminants in accordance with standards established by the NHDES. During 2018 the environmental liability was fully reduced reflecting payments made to vendors, resulting in no balance at December 31, 2018. Additionally, the Company incurred $0.2 million of capital expenditures in 2018, in relation to the lining of the Company's fresh water lagoons. The site investigation isand remedial action plan are ongoing. 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 cash flow.

In December 2018, the New York State Department of Environmental Conservation (“NYDEC”) informed the Company that the newly acquired Interface site located at Hoosick Falls, NY will be the subject of an investigation in to the possibility of it being an inactive hazardous disposable waste site.  The letter specifically references PFAS that have been detected in a nearby water supply, soil and/or surface water.  Notably, the PFAS contamination has been identified in the Hoosick Falls area for some time and other large manufacturers in the area have previously been identified as a source.  The NYDEC approved a site characterization plan in December 2019. The Company recorded expense of $0.3 million in the fourth quarter of 2019 as a result of the site characterization plan preparation and site characterization activities. Additional site characterization activities which will continue intoare planned for the secondfourth quarter of 2020. The Company does not know the scope or extent of its future obligations, if any, that may arise from the site investigation and therefore is unable to estimate the cost of any corrective action. Accordingly, the Company cannot assure that the costs of any future corrective at this location would not have a material effect on the Company's financial condition, results of operations or cash flows.

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.

Some of the Company’s OEM contracts in the Thermal Acoustical Solutions (“TAS”) segment contain provisions that require the Company to pay expedited freight if it fails or threatens to fail to deliver product timely and/or damages if the Company is the cause of production disruptions at customer facilities. Historically, the Company has paid expedited freight costs as needed to meet delivery obligations. In late third quarter 2020, as a result of labor shortages and operational inefficiencies directly related to COVID-19, TAS was unable to manufacture parts timely, resulting in customer production disruptions. Because of the unforeseen and unforeseeable nature of the COVID-19 pandemic, which is out of the Company’s control, in early October the Company invoked force majeure or commercial impracticability to certain customers as a legal excuse for delayed performance of contract and defense to claims that may be asserted by customers. A recent resurgence of cases in that same facility has caused the Company to expand its declaration of force majeure or commercial impracticability to other impacted customers. Although the Company believes it has a strong legal basis for asserting force majeure or commercial impracticability as a result of COVID-19, it is reasonably possible customers may assert claims against the Company, and the
50


Company could be subject to financial damages to customers, which could have a material effect on the Company’s consolidated results of operations and cash flows. The Company has not received any such claims and is unable to estimate the amount of any such future claims, if any, at this time

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, 2019, as updated by Part II, Item 1, Legal Proceedings, of this Report and by the new risk factor relating to COVID-19factors added below. The COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks wethe Company normally facefaces in operating ourthe business, including those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the risk factor disclosure in the Form 10-K is qualified by the information relating to COVID-19 that is described in this report, including the risk factorfactors set forth below. The risks described in this report and 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.


The Company’s financial condition and results of operations have been, and are expected to continue to be, adversely affected by the recent COVID-19 pandemic.

The global outbreak of COVID-19 has caused a material adverse effect on the level of economic activity around the world, including in all markets served by Lydall.the Company. In response to this outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations. LydallThe Company has implemented numerous measures attempting to manage and mitigate the effects of the virus. While the Company has implemented programs to mitigate the impact of these measures on its results of operations, there can be no assurance that these programs will be successful. The Company cannot predict the degree to, or the time period over, which its sales and operations will be affected by this outbreak and preventative measures, and the effects could be material.

The COVID-19 pandemic poses the risk that we or the Company’s affiliates, employees, suppliers, customers and others may be restricted or prevented from conducting business activities for indefinite or intermittent periods of time, including as a result of employee health and safety concerns, social distancing protocols, shutdowns, shelter in place orders, travel restrictions and other actions and restrictions that may be requested or mandated by governmental authorities. For example, the Company experienced a temporary reduction of its manufacturing and operating capacity in China as a result of government-mandated actions to control the spread of COVID-19. Additionally, beginning in late March 2020, the Company experienced the ramp downramp-down of its automotive manufacturing facilities in the Americas and European regions coinciding with the shutdown of its major automotive customer facilities in these regions. While othermany of the Company’s other facilities have been designated by its customers as essential business in jurisdictions in which facility closures have otherwise been mandated, the Company can give no assurance that this will not change in the future or that its businesses will continue to be classified as essential in each of the jurisdictions in which it operates.

Additionally, restrictions on the Company’s access to its manufacturing facilities or on its support operations or workforce, or similar limitations for its distributors and suppliers, could continue to limit customer demand and/or the Company’s capacity to meet customer demand and have a material adverse effect on its business, financial condition and results of operations. In addition, the Company has modified its business practices (including employee travel, employee work locations, limited/restricted third-party access to the Company's facilities, and cancellation of physical participation in meetings, events and conferences), and may take further actions as may be required by government authorities, for the continued health and safety of its employees, or that the Company otherwise determines are in the best interests of its employees, customers, partners, and suppliers. Further, the Company has experienced disruptions and operational inefficiencies from COVID-19-related illnesses and workforce shortages and may continue to experience such disruptions and operational inefficiencies in the future. The Company may experience disruptions or delays in its supply chain, as a result of such actions, which is likely to result in higher supply chain costs to the Company in order to maintain the supply of materials and components for its products.

Managing the impact of COVID-19 on the Company has and will continue to require significant investment of time from its management and employees, as well as resources across its global enterprise. The focus on managing and mitigating the impacts of COVID-19 on the Company’s business may cause it to divert or delay the application of its resources toward other or new initiatives or investments, which may cause a material adverse impact on its results of operations.

The Company may also experience impacts from market downturns and changes in consumer behavior related to pandemic fears and impacts on its workforce as a result of COVID-19. The Company has experienced a significant decline in demand from certain customers as a result of COVID-19. In addition, the Company’s customers may choose to delay or abandon
51

projects for which the Company provides products and/or services in response to the adverse impact of COVID-19 and the measures to contain its spread have had on the global economy.

In late third quarter 2020, the Thermal Acoustical Solutions segment caused interruption of two customer production lines as a result of labor shortages and operational inefficiencies directly related to COVID-19 causing the Company to invoke force majeure (or excusable delay) with these two customers. A recent resurgence of cases in that same facility has caused the Company to expand its declaration of force majeure (or excusable delay) with most of its automotive customers. If the COVID-19 pandemic becomes more pronounced in the markets in which the Company or its automotive industry customers operate, or there is a resurgence in the virus in markets currently recovering from the spread of COVID-19, then its operations in areas impacted by such events could experience further materially adverse financial impacts due to market changes and other resulting events and circumstances. The extent to which the COVID-19 outbreak continues to impact the Company’s financial condition will depend on future developments that are highly uncertain and are difficult to predict, including new government actions or restrictions, new information that may emerge concerning the severity, the longevity and the impact of COVID-19 on economic activity. To the extent the COVID-19 pandemic materially adversely affects the Company’s business and financial results, it may also have the effect of significantly heightening many of the other risks associated with ourthe Company's business and indebtedness, including those described in in ourthe most recent Annual Report on Form 10-K for the year ended December 31, 2019.

The COVID-19 pandemic presents significant challenges to the Company’s liquidity and ability to comply with its financial covenants.

The Company’s continued access to sources of liquidity and ability to comply with its financial covenants depends on multiple factors, including global economic conditions, the COVID-19 pandemic’s effects on its customers and their production rates, the condition of global financial markets, the availability of sufficient amounts of financing, its operating performance and its credit worthiness. The Company relies on the credit markets to provide it with liquidity to operate and grow its businesses beyond the

liquidity that operating cash flows provide. In March 2020, the Company drew down an incremental $20.0 million under its 2018 Credit Agreement to provide liquidity as it addresses critical issues that may arise. In addition, on May 11, 2020, the Company amended its 2018 Credit Agreement, which, among other changes, decreased available borrowings from $450 million to $315$314 million and modified financial covenants, at least one of which the Company expected to fail under the 2018 Credit Agreement as early as the second quarter of 2020. As a result of the impacts of the COVID-19 pandemic, the Company may be required to raise additional capital and itsCompany's access to and cost of financing will depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, its prospects and its credit ratings. The Company believes that its liquidity resources, including the Facility, are sufficient to meet its working capital needs and other cash requirements. The Company was in compliance with the modified financial covenants as of and for the three-month period ended September 30, 2020, and management does not anticipate noncompliance in the foreseeable future.

The Company may not be able to collect amounts owed to it or sell its inventory due to customers becoming significantly impacted by the COVID-19 pandemic.

The Company may experience an increase in uncollectible receivables if customers are severely impacted by COVID-19 and are unable to pay. Additionally, the Company may experience an increase in inventory write-off charges for those inventory items that have no alternative use for customers that are severely impacted by COVID-19.


Increased cybersecurity vulnerabilities and threats and more sophisticated and targeted computer crime pose a risk to the Company’s systems, networks, and data.

Increased global cybersecurity vulnerabilities and threats and more sophisticated and targeted cyber-related attacks pose an ongoing risk to the security of the Company’s systems and networks and the confidentiality, availability and integrity of the Company’s data. While the Company has not to date suffered a material loss from cyber incidents, from time to time, the Company experiences attacks on its systems and networks, including attacks that introduce malicious software into the Company's systems and networks, or gain access to and manipulate information in order to perpetrate a fraud on the Company or customers. Cyber threats are constantly evolving, thereby increasing the efforts and controls required to prevent, detect and successfully defend against them. While the Company attempts to mitigate these risks by employing a number of measures, including employee training, monitoring and testing, and maintenance of protective systems and contingency plans, the Company remains vulnerable to additional known or unknown threats. Moreover, as a result of the COVID-19 pandemic, a greater number of employees are working remotely, which further increases the Company's vulnerability to the cyber risks. The Company's systems and networks contain sensitive, confidential or personal data or information in certain of the Company’s businesses that is subject to foreign, federal, state and local privacy and security laws, regulations and customer-imposed controls.

52

Despite efforts made by the Company to protect sensitive, confidential or personal data or information, the Company remains vulnerable to security breaches, ransomware, theft, misplaced or lost data, programming errors, employee errors and/or malfeasance and the compromising or loss of sensitive, confidential or personal data or information could adversely impact the Company's results of operations and cash flows. Although the Company carries cybersecurity insurance, in the event of a cyber incident, that insurance may not be extensive enough or adequate in scope of coverage or amount to cover damages the Company may incur. In addition, a cyber-related attack could result in other negative consequences, including loss of information, damage to the Company’s reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action.

The General Data Protection Regulation ("GDPR"), which went into effect in the European Union ("EU") on May 25, 2018, among other things, mandates new requirements regarding the handling of personal data of employees and customers, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. If the Company fails to comply with these laws or regulations, we could be subject to significant litigation, monetary damages, regulatory enforcement actions or fines in one or more jurisdictions.
53

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
 
During the three monthsthree-month period ended March 31,September 30, 2020, the Company acquired 9161,424 shares of common stock through withholding, pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s equity compensation plans, which allow the Company to withhold the number of shares having fair value equal to each recipient’s tax withholding due.

PeriodTotal 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
July 1, 2020 - July 31, 20201,070 $15.86 — — 
August 1, 2020 - August 31, 2020— $— — — 
September 1, 2020 - September 30, 2020354 $18.84 — — 
 1,424 $16.60 — — 
54
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, 2020 - January 31, 2020 —
 $—
 —
 —
February 1, 2020 - February 29, 2020 —
 $—
 —
 —
March 1, 2020 - March 31, 2020 916
 $8.99
 —
 —
  916
 $8.99
 —
 —




Item 5.Other Information

2020 Amendment to the 2018 Credit Agreement

On May 11,October 14, 2020, certain of the Company’s subsidiaries entered into an agreement (the “2020 Amendment”) with the lenders under their existing senior secured revolving credit agreement in order to amend certain provisions of the Second Amended and Restated Credit Agreement, dated as of August 31, 2018 (the "2018 Credit Agreement" as amended by the 2020 Amendment, collectively the “Credit Agreement”), by and among Lydall, Inc., the other subsidiaries of the Company party thereto, as guarantors, each lender party thereto and Bank of America, N.A., inamended its capacity as administrative agent. The principal purpose of the 2020 Amendment was to modify certain financial maintenance covenants contained in the 2018 Credit Agreement at least oneto allow certain restructuring and other charges, as defined by the amendment, to be excluded from EBITDA in the calculation of which the Company expected to fail as early as the second quarter of 2020.Company's financial covenants. See Note 6, "Long-term Debt and Financing Arrangements" and Part 1, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Financing Arrangements” for additional information. A copy of the Amendment is filed herewith as Exhibit 10.110.2 and incorporated herein by reference. The above description of the Amendment is qualified in its entirety by reference to such exhibit.




55



Item 6.Exhibits
ExhibitItem 6.
Exhibits
Number
Description
Exhibit
Number		Description
10.1
10.1 
Third Amendment to Second Amended and Restated Credit Agreement, dated May 11, 2020, by and among Lydall, Inc., as borrower, the Guarantors named therein, and Bank of America, N.A., as Agent for the Lenders, filed herewith.as Exhibit 10.1 to the registrant's Form 10-Q dated May 11, 2020, and incorporated herein by this reference.

31.110.2 
Fourth Amendment to Second Amended and Restated Credit Agreement, dated October 14, 2020, by and among Lydall, Inc., as borrower, the Guarantors named therein, and Bank of America, N.A., as Agent for the Lenders, filed as Exhibit 10.2 to the registrant's Form 10-Q dated October 27, 2020, 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
Inline XBRL Instance Document

101.SCH
Inline XBRL Taxonomy Extension Schema Document

101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

56



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 11,October 27, 2020By:/s/ Randall B. Gonzales
Randall B. Gonzales
Executive Vice President and Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)

5057