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. During the first quarter of 2020, governmental authorities 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 the shutdowns. Certain Company facilities in the United States, Europe and Asia carried out shutdowns as a result of government-imposed restrictions or in conjunction with customer plant closures during the first quarter. The Company’s Asia facilities did not resume operations until late February and other facilities ramped back up moderately, in line with customer demand, during the second quarter. Although the Company is beginning to see an increase in orders, it does not expect operations supporting the automotive markets to reach pre-COVID-19 production levels in the near term.

As previously disclosed, the Company ramped down its Thermal Acoustical Solutions operations in North Carolina, 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 quarter of 2020, TAS sales were down 11.2% from 2019 as the pandemic expanded. April’s parts sales were heavily impacted by customer shutdowns with sales declining approximately 90% from the previous year. TAS began to ramp up production in mid-May 2020 in North America and Europe as customers began to re-open their plants in these regions, with sequential monthly sales growth in both May and June. However, given the facility shutdowns early in the quarter, parts sales in the second quarter were down 62.1% from the previous year.

During the first quarter of 2020, TNW experienced slowdowns in all geographic locations except Canada; predominantly in its facilities in South Carolina, the United Kingdom and China operations. 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 quarter of 2020 declined 12.5% from the comparable period in 2019. In the second quarter, softer industrial end markets and lower sales into automotive applications resulted in year over year sales decline in both April and May periods. While down from the prior year, sales in June increased sequentially from May, with seasonal increases in demand for geosynthetics and higher automotive demand partially offsetting weaker industrial end markets. Second quarter sales were down 25.0% in Industrial Filtration and 9.3% in Advanced Materials businesses.

Performance Materials’ sealing businesses also experienced slowdowns during the first quarter of 2020 as a result of its exposure to automotive end market applications, impacting the Sealing and Advanced Solutions business. In contrast, PM’s Filtration business has been deemed an essential supplier to certain customers which has driven incremental demand in specialty filtration product lines, including media used in N95 respirator, surgical, and medical masks. PM’s sales in the first quarter of 2020 were up 1.0% from the comparative period in 2019. PM’s Filtration sales were very strong in April, with gains of approximately 20.0% from the prior year, and this demand continued through the remainder of the quarter, with second quarter Filtration sales up 19.8% from the previous year. In contrast, exposure to automotive and other end markets resulted in sales decline of approximately 28.6% in the Sealing and Advanced Solutions business, with year over year sales declines spread across all months.

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

Any ramp up of production continues to be dependent on the Company’s customers resuming operations and no additional outbreaks of COVID-19 that could cause a second slow-down in demand impacting the Company’s ability to operate because of government mandates, employee illnesses or other related unforeseen events. The Company anticipates the global automotive industry will stabilize in the third quarter, but that volumes in the second half of 2020 will be lower than the comparative 2019 period as a result of the global economic slowdown caused by the COVID-19 pandemic. New vehicle sales are highly dependent on the strength of the consumer. If unemployment remains at higher levels, new vehicle sales could be significantly lower than historical and previously projected sales levels. The Company expects to face continued headwinds in its Performance Material's sealing businesses but stronger demand for filtration products is expected to offset this. Additionally, the Company expects seasonally strong construction activity driving geosynthetic demand, coupled with stable demand for medical related nonwoven products, to be offset by softness in industrial end markets in its Technical Nonwovens segment in the second half of 2020.

The recent automotive production ramp down across most of the world has impacted the Company's daily working capital significantly. The Company experienced working capital cash flow improvements through June 30, 2020 but does not expect the benefits to continue if production does not further ramp up. Upon ramping up production, the Company expects initial cash outflows to support working capital requirements and capital projects for its investments in new meltblown production equipment followed by a more normalized working capital flow over time.

The Company has also taken 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, the Company has reduced its monthly cash expenditures and plans to continue to do so as long as 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 June 30, 2020, the Company benefited from $1.7 million in social cost reimbursements predominately in Europe and China. The Company plans to continue to pursue, wherever it qualifies, governmental assistance. The Company may also take advantage of governmental programs such as the Main Street Lending Program, to help defray costs. 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.

In addition to the significant measures taken to reduce and contain costs, the Company took action in March 2020 to provide additional liquidity, primarily including a $20.0 million draw down on its amended credit facility. 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. The Company was in compliance with those modified financial covenants as of and for the three-month period ended June 30, 2020, and management does not anticipate noncompliance in the foreseeable future.

During the first half of 2020, the Company generated $40.4 million of net cash provided by operations and had cash on hand of $92.5 million as of June 30, 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 arrangements with a banking institution to sell trade accounts receivable balances for selected customers. The Company continues to sell trade accounts receivable balances under these arrangements. See Transfer of Financial Assets under Note 1, “Basis of Financial Statement Presentation” for more information.

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. However, management believes, based on the actions taken to reduce cash expenditures and the Company’s financial position that net cash provided by operations combined with its cash and cash equivalents and borrowing availability under its Credit Facility will be sufficient to fund its current obligations, capital spending, debt service requirements and working capital needs over at least the next twelve months.

The Company continues to monitor the global outbreak and spread of COVID-19 and to take steps to mitigate the potential risks to the Company and its employees posed by its spread and related circumstances and economic impacts. As the Company’s operations ramp up production and bring employees back to work, it has implemented changes to help ensure the safety and health of all our 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.

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. In the opinion of management, the condensed consolidated financial information reflects all adjustments necessary for a fair statement of the Company’s 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 reclassified to conform to current year presentation. The statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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 a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19. 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.

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 the inputs used in the quantitative impairment assessments for the three-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

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 June 30, 2020.

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 with early adoption permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements and disclosures.

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, 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.

In December 2019, the Company entered into two 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, with the exception of $0.5 million of trade accounts receivable balances sold from our foreign operations, 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 three-month and six-month periods ended June 30, 2020, under both programs, the Company sold $10.3 million and $43.0 million, respectively, in trade receivable balances, received $40.0 million in total cash under the programs, and incurred $0.1 million in fees. The Company expects to receive the remainder, net of fees, in the third quarter of 2020.

In connection with the preparation of its 2019 audited financial statements, the Company identified that in its 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 its Condensed Consolidated Statements of Comprehensive Income the impact to comprehensive income resulting from the settlement of its U.S. Lydall Pension Plan (see Note 11, "Employer Sponsored Benefit Plans"). As a result, unaudited comprehensive income for such periods was understated by approximately $19.0 million. This error 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 previously issued unaudited financial statements being materially misstated. The Company will revise the Condensed Consolidated Statements of Comprehensive Income for the nine-month period ended September 30, 2019 in connection with the future filing of its Quarterly Report on Form 10-Q for the period ended September 30, 2020. In connection with the filing of this Quarterly Report on Form 10-Q, the Company did, however, revise the Condensed Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended June 30, 2019 as follows: