NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Financial Statement Presentation
Description of Business
Lydall, Inc. and its subsidiaries (the “Company” or “Lydall”) design and manufacture specialty engineered nonwoven filtration media, industrial thermal insulating solutions, and thermal and acoustical barriers for filtration/separation and heat abatement and sound dampening applications.
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. 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.
Thermal Acoustical Solutions (“TAS”) Developments
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.
Technical Nonwovens (“TNW”) Developments
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 (“PM”) Developments
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.
Looking Forward
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.
Liquidity and Cash Preservation
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.
Steps Taken to Protect Employees
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.
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. 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.
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 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.
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 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
provider. The adoption of this ASU did not have any 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 June 30, 2020.
Recent Accounting Pronouncements Not Yet Adopted
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.
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 Uncertainties
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.
Transfers of Financial Assets
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.
Condensed Consolidated Statements of Comprehensive Income
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:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, 2019
|
|
|
In thousands
|
As reported
|
As revised
|
|
As reported
|
As revised
|
|
Pension liability adjustment, net of tax
|
$
|
143
|
|
$
|
19,159
|
|
|
$
|
358
|
|
$
|
19,374
|
|
|
Comprehensive (loss) income
|
$
|
(5,697)
|
|
$
|
13,319
|
|
|
$
|
(2,394)
|
|
$
|
16,622
|
|
2. Revenue from Contracts with Customers
The Company accounts for revenue in accordance with ASC 606, "Revenue from Contracts from 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 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:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Dollar Change
|
|
Contract assets
|
|
$
|
27,969
|
|
|
$
|
28,245
|
|
|
$
|
(276)
|
|
|
Contract liabilities
|
|
$
|
3,762
|
|
|
$
|
1,441
|
|
|
$
|
2,321
|
|
The $0.3 million decrease in contract assets from December 31, 2019 to June 30, 2020 was primarily due to timing of billings to customers.
The $2.3 million increase in contract liabilities from December 31, 2019 to June 30, 2020 was primarily due to an increase in customer deposits, offset by $0.9 million of revenue recognized in the first six 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 revenue and cash flows are affected by economic factors. Disaggregated revenue by geographical region for the three-month and six-month periods ended June 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
40,190
|
|
|
$
|
31,236
|
|
|
$
|
22,575
|
|
|
$
|
(1,668)
|
|
|
$
|
92,333
|
|
|
Europe
|
|
16,501
|
|
|
15,418
|
|
|
11,424
|
|
|
(100)
|
|
|
43,243
|
|
|
Asia
|
|
1,782
|
|
|
5,353
|
|
|
3,449
|
|
|
—
|
|
|
10,584
|
|
|
Total Net Sales
|
|
$
|
58,473
|
|
|
$
|
52,007
|
|
|
$
|
37,448
|
|
|
$
|
(1,768)
|
|
|
$
|
146,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
47,822
|
|
|
$
|
42,667
|
|
|
$
|
64,235
|
|
|
$
|
(6,466)
|
|
|
$
|
148,258
|
|
|
Europe
|
|
15,729
|
|
|
17,791
|
|
|
25,203
|
|
|
(175)
|
|
|
58,548
|
|
|
Asia
|
|
1,551
|
|
|
8,620
|
|
|
3,834
|
|
|
—
|
|
|
14,005
|
|
|
Total Net Sales
|
|
$
|
65,102
|
|
|
$
|
69,078
|
|
|
$
|
93,272
|
|
|
$
|
(6,641)
|
|
|
$
|
220,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
86,107
|
|
|
$
|
66,967
|
|
|
$
|
79,676
|
|
|
$
|
(7,345)
|
|
|
$
|
225,405
|
|
|
Europe
|
|
33,776
|
|
|
32,356
|
|
|
34,964
|
|
|
(280)
|
|
|
100,816
|
|
|
Asia
|
|
3,810
|
|
|
10,087
|
|
|
6,569
|
|
|
—
|
|
|
20,466
|
|
|
Total Net Sales
|
|
$
|
123,693
|
|
|
$
|
109,410
|
|
|
$
|
121,209
|
|
|
$
|
(7,625)
|
|
|
$
|
346,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Performance Materials
|
|
Technical Nonwovens
|
|
Thermal Acoustical Solutions
|
|
Eliminations and Other
|
|
Consolidated Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
94,199
|
|
|
$
|
79,856
|
|
|
$
|
127,837
|
|
|
$
|
(12,734)
|
|
|
$
|
289,158
|
|
|
Europe
|
|
32,386
|
|
|
36,840
|
|
|
51,645
|
|
|
(381)
|
|
|
120,490
|
|
|
Asia
|
|
3,097
|
|
|
17,988
|
|
|
8,103
|
|
|
—
|
|
|
29,188
|
|
|
Total Net Sales
|
|
$
|
129,682
|
|
|
$
|
134,684
|
|
|
$
|
187,585
|
|
|
$
|
(13,115)
|
|
|
$
|
438,836
|
|
3. Inventories
Inventories as of June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
June 30,
2020
|
|
December 31,
2019
|
|
Raw materials
|
|
$
|
35,148
|
|
|
$
|
36,322
|
|
|
Work in process
|
|
15,531
|
|
|
14,873
|
|
|
Finished goods
|
|
29,621
|
|
|
29,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
80,300
|
|
|
$
|
80,544
|
|
Included in work in process is net tooling inventory of $2.2 million and $1.8 million at June 30, 2020 and December 31, 2019, respectively.
4. Goodwill and Other Intangible Assets
Goodwill:
The Company tests its goodwill for impairment annually in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value may exceed its fair value. There were no such events or changes in circumstances during the three month period ended June 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 six-month period ended June 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31,
2019
|
|
Currency translation adjustments
|
|
Impairment
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
|
|
|
Performance Materials
|
|
$
|
80,658
|
|
|
$
|
(45)
|
|
|
$
|
(48,671)
|
|
|
$
|
31,942
|
|
|
Technical Nonwovens
|
|
53,254
|
|
|
(1,245)
|
|
|
—
|
|
|
52,009
|
|
|
Total goodwill
|
|
$
|
133,912
|
|
|
$
|
(1,290)
|
|
|
$
|
(48,671)
|
|
|
$
|
83,951
|
|
Goodwill Impairment
During the three-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.
Other Intangible Assets:
The table below presents the gross carrying amount and, as applicable, the accumulated amortization of the Company’s acquired intangible assets other than goodwill included in “Other intangible assets, net” in the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
In thousands
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
$
|
141,462
|
|
|
$
|
(39,622)
|
|
|
$
|
142,400
|
|
|
$
|
(30,648)
|
|
|
Patents
|
|
760
|
|
|
(661)
|
|
|
759
|
|
|
(607)
|
|
|
Technology
|
|
2,500
|
|
|
(1,060)
|
|
|
2,500
|
|
|
(977)
|
|
|
Trade Names
|
|
7,205
|
|
|
(5,989)
|
|
|
7,293
|
|
|
(5,143)
|
|
|
License Agreements
|
|
611
|
|
|
(611)
|
|
|
610
|
|
|
(610)
|
|
|
Other
|
|
550
|
|
|
(550)
|
|
|
551
|
|
|
(551)
|
|
|
Total amortized intangible assets
|
|
$
|
153,088
|
|
|
$
|
(48,493)
|
|
|
$
|
154,113
|
|
|
$
|
(38,536)
|
|
5. Impairments of Goodwill and Other Long-Lived Assets
During the three-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 down 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 downs at its Thermal Acoustical Solutions ("TAS") operations in North America and Europe as a direct result of customer stoppages;
•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 signaling a downturn in demand; and
•The Company's share price and market capitalization experienced a significant decline.
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 three-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).
As a result of these impairment tests, the Company recorded the following impairment charges during the three-month period ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
During 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 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 our 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 three-month period ended December 31, 2019 to 11.5 percent in the three-month period ended March 31, 2020. The weighted average cost of capital for the TNW reporting unit increased from 9.2 percent in the three-month period ended December 31, 2019 to 10.8 percent in the
three-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 three-month period ended December 31, 2019 to the three-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 three-month period ended December 31, 2019 to the three-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 the 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 the impairment charge incurred during the three-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 three-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.
Other Long-Lived Assets
During the three-month period ended March 31, 2020, the Company performed the following impairment assessments for long lived assets in accordance with ASC 360:
•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 actions. One such action was a review of a low-performing 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 as the resulting undiscounted cash flows were less than their carrying amount. The Company determined that the carrying value of the assets exceeded their 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 June 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 three-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 three 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 borrowings from $450 million to $314 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 an interest rate swap in place to convert a portion of the Company's borrowings from a variable rate to a fixed rate. See Note 7, "Derivatives" for additional information.
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.
2020 Amendment 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 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. The amended terms and conditions included the following:
•Modified the financial covenants as follows:
◦Consolidated Net Leverage Ratio, which requires that on the last day of each fiscal quarter the ratio not be greater than 6.5:1 through the period ending March 31, 2021, 4.50:1 for the period ending June 30, 2021 through the period ending March 31, 2022, and 3.50:1 for the periods ending June 30, 2022 and thereafter;
◦The minimum Consolidated Fixed Charge Coverage Ratio, which requires that on the last day of each fiscal quarter the ratio not be lower than 1.10:1 calculated on a trailing twelve month basis through the period
ending June 30, 2020, 1.25:1 calculated on a distinct quarterly basis for the periods 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;
•Required the Company maintain a minimum cash and cash equivalents balance of $40 million, excluding deposit accounts in China;
•Decreased the term loan facility from $200 million to $144 million and decreased the revolving credit facility from $250 million to $170 million for a total overall facility of $314 million; and eliminated the accordion feature;
•Established a floor on the Base and Eurocurrrency Rate of 1%;
•Modified the definition of the Applicable Rate, as determined based on the Company’s Consolidated Net Leverage Ratio, by increasing the range for the Base Rate for Committed Loans to 2.00% to 3.25% and increasing the range for the Eurocurrency Rate Committed Loans and Letters of Credit to 3.00% to 4.25%;
•Increased the quarterly commitment fee to 0.375% on the unused portion of the revolving commitment; and
•Required the Company to pay an amendment fee to the Lenders based on their commitment levels.
There was no modification to the maturity date of the facility. 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 at June 30, 2020, and management does not anticipate noncompliance in the foreseeable future.
At June 30, 2020, the Company had $286.0 million of borrowings outstanding and standby letters of credit outstanding of $1.6 million. The borrowings outstanding included a $141.0 million term loan, net of $0.5 million in debt issuance costs being amortized to interest expense over the debt maturity period. The Company has available borrowings of $23.9 million and $121.6 million at June 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 $7.1 million. At June 30, 2020, the Company's foreign subsidiaries had $0.1 million in borrowings outstanding as well as $1.3 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
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Revolver loan
|
|
5.25
|
%
|
|
8/31/2023
|
|
$
|
144,500
|
|
|
$
|
126,500
|
|
|
Term loan, net of debt issuance costs
|
|
5.25
|
%
|
|
8/31/2023
|
|
140,996
|
|
|
146,106
|
|
|
Finance leases
|
|
1.60
|
%
|
|
2020
|
|
14
|
|
|
35
|
|
|
|
|
|
|
|
|
285,510
|
|
|
272,641
|
|
|
Less portion due within one year
|
|
|
|
|
|
(9,855)
|
|
|
(9,928)
|
|
|
Total long-term debt, net of debt issuance costs
|
|
|
|
|
|
$
|
275,655
|
|
|
$
|
262,713
|
|
The weighted average interest rate on long-term debt was 4.8% for the six-month period ended June 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 impact interest paid on its debt. The Company has debt with variable rates of interest based generally on LIBOR. From time to time, the Company enters into interest rate swap agreements to manage interest rate risk. These instruments are designated as cash flow hedges and are recorded at fair value (see Note 8, "Fair Value Measurements" for additional information).
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 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 borrowings 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. Prior to May 11, 2020, these interest rate swap agreements were accounted for as cash flow hedges. Effectiveness of the remaining derivative agreement was assessed quarterly, or more frequently, if necessary, by ensuring that the critical terms of the swap continued to match the critical terms of the hedged 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 is 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 (losses) earnings 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 June 30, 2020 was $6.9 million. The amount reclassified out of other comprehensive income into interest expense on our Condensed Consolidated Statement of Operations for both the three and six months ended June 30, 2020 was $0.5 million. The Company expects $3.3 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 (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 three 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 the Company's net investment in a Euro functional currency denominated subsidiary against the variability of exchange rate translation impacts between the U.S. dollar 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. dollar 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 accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
In thousands
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
6,896
|
|
|
$
|
2
|
|
|
$
|
4,538
|
|
|
Cross-currency swaps
|
177
|
|
|
—
|
|
|
—
|
|
|
1,817
|
|
|
Total derivatives
|
$
|
177
|
|
|
$
|
6,896
|
|
|
$
|
2
|
|
|
$
|
6,355
|
|
The following table sets forth the (loss) income recorded in accumulated other comprehensive (loss) income, net of tax, for the three and six-month periods ended June 30, 2020 and 2019 for derivatives held by the Company and designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
In thousands
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
11
|
|
|
$
|
(1,351)
|
|
|
$
|
(2,162)
|
|
|
$
|
(2,026)
|
|
|
Cross-currency swaps
|
(1,093)
|
|
|
—
|
|
|
1,526
|
|
|
—
|
|
|
Total derivatives
|
$
|
(1,082)
|
|
|
$
|
(1,351)
|
|
|
$
|
(636)
|
|
|
$
|
(2,026)
|
|
8. Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to 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.
The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires the Company to maximize 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 pricing 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
In thousands
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Debt
|
$
|
286,000
|
|
|
$
|
292,543
|
|
|
$
|
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 June 30, 2020 and December 31, 2019, these derivative instruments were included in other current assets and other accrued liabilities on the Consolidated Balance Sheet. Based on the Company's continued ability to trade and enter into interest rate swaps and cross-currency swaps, the Company considers the markets for their fair value instruments to be open.
Nonrecurring Fair Value Measurements
During the three-month period ended March 31, 2020, the Company incurred a $48.7 million impairment charge for goodwill at its Performance Materials segment and a $12.4 million impairment charge for a certain asset group at one of the Performance Materials' European businesses. See Note 5, "Impairment of Goodwill and Other Long-Lived Assets" for information regarding the calculation of fair value.
9. Equity Compensation Plans
As of June 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 shareholders on April 24, 2020, authorizes 3.0 million shares of common stock for awards. The 2012 Plan also authorizes an additional 19,720 shares of common stock to the extent awards granted under prior stock plans that were outstanding as of April 24, 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 two individuals as material inducement to their employment with the Company (the "Inducement Grants"). The Inducement Grants awarded stock options and restricted stock to the two 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 the Company under its stock option plans have a term of ten years and generally vest ratably over a period of three to four years. Time-based restricted stock grants are expensed over the vesting period of the award, which is typically two to four years. The number of performance-based restricted shares that vest or forfeit depend upon achievement of certain targets during the performance period. The Company accounts for forfeitures as they occur. Compensation expense for performance-based awards 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 million and $0.5 million for the three-month periods ended June 30, 2020 and 2019, respectively, and $1.8 million and $1.5 million for the six-month periods ended June 30, 2020 and 2019, respectively, for the Plans, including restricted stock awards. No equity compensation costs were capitalized as part of inventory.
Stock Options
The following table is a summary of outstanding and exercisable options for the three-month and six-month periods ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2020
|
|
|
|
|
|
For the Six Months Ended June 30, 2020
|
|
|
|
|
In thousands except per share
amounts
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
|
|
Stock Options outstanding at the beginning of the period
|
|
761
|
|
|
$
|
26.35
|
|
|
|
|
683
|
|
|
$
|
27.15
|
|
|
|
|
Granted
|
|
58
|
|
|
$
|
9.41
|
|
|
|
|
169
|
|
|
$
|
17.44
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
(4)
|
|
|
$
|
8.67
|
|
|
|
|
Forfeited or Expired
|
|
(71)
|
|
|
$
|
22.85
|
|
|
|
|
(100)
|
|
|
$
|
24.91
|
|
|
|
|
Stock Options outstanding at June 30, 2020
|
|
748
|
|
|
$
|
25.36
|
|
|
|
|
748
|
|
|
$
|
25.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2020
|
|
297
|
|
|
$
|
33.80
|
|
|
|
|
297
|
|
|
$
|
33.80
|
|
|
|
|
Unvested at June 30, 2020
|
|
451
|
|
|
$
|
19.79
|
|
|
|
|
451
|
|
|
$
|
19.79
|
|
|
|
There was no cash received from exercise of stock options during the three-month period ended June 30, 2020. The amount of cash received from the exercise of stock options was less than $0.1 million during the six-month period ended June 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 three-month and six-month periods ended June 30, 2020.
At June 30, 2020, the total unrecognized compensation cost related to non-vested stock option awards was approximately $2.7 million, with a weighted average expected amortization period of 2.9 years.
Restricted Stock
Restricted stock includes both performance-based and time-based awards. The following is a summary of the Company's unvested time-based restricted shares for the three-month and six-month periods ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2020
|
|
|
|
|
|
For the Six Months Ended June 30, 2020
|
|
|
In thousands
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
Unvested at the beginning of the period
|
|
203
|
|
|
|
|
|
|
159
|
|
|
|
Granted
|
|
23
|
|
|
|
|
|
|
77
|
|
|
|
Vested
|
|
—
|
|
|
|
|
|
|
(3)
|
|
|
|
Forfeited or Expired
|
|
(6)
|
|
|
|
|
|
|
(13)
|
|
|
|
Unvested at June 30, 2020
|
|
220
|
|
|
|
|
|
|
220
|
|
|
The following is a summary of the Company's unvested performance-based restricted shares for the three-month and six-month periods ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2020
|
|
|
|
For the Six Months Ended June 30, 2020
|
|
|
|
In thousands
|
|
Shares
|
|
|
|
Shares
|
|
|
|
Unvested at the beginning of the period
|
|
154
|
|
|
|
|
129
|
|
|
|
|
Granted
|
|
25
|
|
|
|
|
66
|
|
|
|
|
Vested
|
|
—
|
|
|
|
|
—
|
|
|
|
|
Forfeited or Expired
|
|
(18)
|
|
|
|
|
(34)
|
|
|
|
|
Unvested at June 30, 2020
|
|
161
|
|
|
|
|
161
|
|
|
|
At June 30, 2020, there were 381,242 total unvested restricted stock awards with total unrecognized compensation cost related to these awards of $5.3 million with a weighted average expected amortization period of 2.2 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 six-month period ended June 30, 2020, the Company purchased 916 shares of common stock valued at less than $0.1 million, through withholding, pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s equity compensation plans, in which the Company withholds that number of shares having fair value equal to each recipient’s minimum tax withholding due.
11. Employer Sponsored Benefit Plans
Prior to the three-month period ended June 30, 2020, the Company maintained two domestic pension plans: 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 three-month period ended March 31, 2020, the Company settled the pension obligation of the ISS Pension Plan 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 three-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 no contributions made during the three-month period ended June 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. This and other required minimum funding contributions for the remainder of 2020 will be made later in 2020. Contributions of $0.4 million were made during the six-month period ended June 30, 2020. Contributions of $0.3 million and $0.9 million were made during the three-month and six-month periods ended June 30, 2019, respectively, inclusive of contributions made to the ISS Pension Plan.
Prior to 2020, the Company also maintained the U.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. No contributions were made to the U.S. Lydall Pension Plan during the three-month and six-month periods ended June 30, 2019.
The following is a summary of the components of net periodic benefit cost for the domestic defined benefit pension plans for
the three-month and six-month periods ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
In thousands
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Components of employer benefit cost
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
40
|
|
|
$
|
30
|
|
|
$
|
80
|
|
|
$
|
60
|
|
|
Interest cost
|
|
428
|
|
|
833
|
|
|
857
|
|
|
1,827
|
|
|
Expected return on assets
|
|
(532)
|
|
|
(744)
|
|
|
(1,065)
|
|
|
(1,616)
|
|
|
Amortization of actuarial loss
|
|
—
|
|
|
186
|
|
|
2
|
|
|
464
|
|
|
Net periodic benefit cost
|
|
$
|
(64)
|
|
|
$
|
305
|
|
|
$
|
(126)
|
|
|
$
|
735
|
|
|
Settlement loss
|
|
—
|
|
|
25,515
|
|
|
385
|
|
|
25,515
|
|
|
Total employer benefit plan cost
|
|
$
|
(64)
|
|
|
$
|
25,820
|
|
|
$
|
259
|
|
|
$
|
26,250
|
|
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
For the three-month period ended June 30, 2020, the Company's effective tax rate was 9.2% compared to an effective tax rate of 54.0% for the three-month period ended June 30, 2019. For the three months ended June 30, 2020, the rate was negatively impacted by valuation allowance activity of $0.5 million and a foreign withholding tax liability of $0.4 million, resulting in a
lower effective tax rate when in a pre-tax loss position. For the three months ended June 30, 2019, the Company had a pre-tax loss primarily resulting from a pension plan settlement of $25.5 million, resulting in a $10.5 million tax benefit. Excluding the tax benefit of the pension plan settlement, the Company's effective tax rate for the three months ended June 30, 2019 was 22.7%. This was negatively impacted by valuation allowance activity of $0.9 million, partially offset by the Company's geographical mix of earnings.
For the six-month period ended June 30, 2020, the Company's effective tax rate was 4.0% compared to an effective tax rate of 69.7% for the six-month period ended June 30, 2019. For the six months ended June 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 six months ended June 30, 2020 when in a pre-tax loss position. Additionally, the effective rate was negatively impacted by valuation allowance activity of $0.7 million. For the six-month period ended June 30, 2019, the Company had a pre-tax loss primarily resulting from a pension plan settlement of $25.5 million, resulting in a $10.5 million tax benefit. Excluding the tax benefit of the pension plan settlement, the Company's effective tax rate for the six months ended June 30, 2019 was 22.5%. This was negatively impacted by valuation allowance activity of $1.2 million partially, offset by the 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 is evaluating the final regulations and is assessing potential impacts of these changes to the Company’s financial statements.
13. Loss Per Share
For the three-month and six-month periods ended June 30, 2020 and 2019, basic earnings per share were computed by dividing net 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
In thousands
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Basic weighted-average common shares outstanding
|
|
17,372
|
|
|
17,267
|
|
|
17,354
|
|
|
17,260
|
|
|
Effect of dilutive options and restricted stock awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Diluted weighted-average common shares outstanding
|
|
17,372
|
|
|
17,267
|
|
|
17,354
|
|
|
17,260
|
|
Dilutive stock awards totaling 4,432 and 19,710 shares of Common Stock were excluded from the diluted per share computation for the three-month and six-month periods ended June 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 54,713 and 69,730 shares of Common Stock were excluded from the diluted per share computation for the three-month and six-month periods ended June 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 three-month periods ended June 30, 2020 and 2019, stock options for 732,512 shares and 520,189 shares of Common Stock were not considered in computing diluted earnings per common share because they were antidilutive.
For each of the six-month periods ended June 30, 2020 and 2019, stock options for 715,046 shares and 521,293 shares of Common Stock were not considered in computing diluted earnings per common share because they were antidilutive.
14. Segment Information
As of June 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 products constitute the critical media component of clean-air systems for applications in clean-space, commercial, industrial and residential HVAC, power generation, respiratory protection (including face mask material), and industrial processes. The Company 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 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 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. The 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 our porotex® family of high temperature filtration felts including microvel® and optivel® products. Technical Nonwovens Advanced Materials
products are sold under the brand names Thermofit® thermo-formable products, Ecoduo® recycled content materials, Duotex® floor protection products, and Versaflex® composite molding materials. Technical Nonwovens also offers extensive finishing and coating capabilities which provide custom engineered properties tailored to meet the most demanding applications. The business leverages a wide range of fiber types and extensive technical capabilities to provide products that meet our customers’ needs across a variety of applications providing both high performance and durability.
Thermal Acoustical Solutions Segment
The Thermal Acoustical Solutions segment offers a full range of innovative engineered products tailored for the transportation 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, the 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 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 three-month and six- month periods ended June 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:
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|
|
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For the Three Months Ended
June 30,
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For the Six Months Ended
June 30,
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In thousands
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2020
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2019
|
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2020
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2019
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Performance Materials Segment:
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|
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Filtration
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$
|
29,636
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|
|
$
|
24,732
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|
|
$
|
55,523
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|
|
$
|
48,666
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Sealing and Advanced Solutions
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|
28,837
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|
|
40,370
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|
|
68,170
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|
|
81,016
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|
|
Performance Materials Segment net sales
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58,473
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65,102
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123,693
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|
|
129,682
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|
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|
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|
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|
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|
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Technical Nonwovens Segment (1):
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Industrial Filtration
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29,413
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38,706
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60,782
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81,070
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Advanced Materials (2)
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22,594
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30,372
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48,628
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|
53,614
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Technical Nonwovens Segment net sales
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52,007
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69,078
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|
|
109,410
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|
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134,684
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Thermal Acoustical Solutions Segment:
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Parts
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32,448
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85,705
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109,769
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170,281
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Tooling
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5,000
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|
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7,567
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|
11,440
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|
|
17,304
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Thermal Acoustical Solutions Segment net sales
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37,448
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|
|
93,272
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|
|
121,209
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|
187,585
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Eliminations and Other (2)
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(1,768)
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(6,641)
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(7,625)
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(13,115)
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Consolidated Net Sales
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$
|
146,160
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|
|
$
|
220,811
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|
|
$
|
346,687
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|
|
$
|
438,836
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Operating income by segment:
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|
|
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|
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For the Three Months Ended
June 30,
|
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|
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For the Six Months Ended
June 30,
|
|
|
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In thousands
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Performance Materials (3)
|
|
$
|
5,443
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|
|
$
|
3,303
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|
|
$
|
(51,498)
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|
|
$
|
4,762
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|
|
Technical Nonwovens (1),(2),(4)
|
|
6,684
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|
|
7,844
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|
|
10,497
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|
|
12,578
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Thermal Acoustical Solutions
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|
(6,285)
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|
|
7,357
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(657)
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16,848
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|
|
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Corporate Office Expenses
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|
(7,588)
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|
|
(5,325)
|
|
|
(15,656)
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|
|
(11,959)
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Consolidated Operating Income
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|
$
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(1,746)
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|
|
$
|
13,179
|
|
|
$
|
(57,314)
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|
|
$
|
22,229
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|
(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 $1.4 million and $4.6 million in intercompany sales to the Thermal Acoustical Solutions segment for the three-month periods ended June 30, 2020 and 2019, respectively, and $6.4 million and $9.3 million in intercompany sales to the Thermal Acoustical Solutions segment for the six-month periods ended June 30, 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 six-month period ended June 30, 2020, $4.0 million and $4.1 million of intangible assets amortization for the three-month periods ended June 30, 2020 and 2019, respectively, and $7.9 million and $8.1 million of intangible assets amortization for the six-month periods ended June 30, 2020 and 2019, respectively.
(4)Included in the Technical Nonwovens segment is $1.2 million and $1.3 million of intangible assets amortization for the three-month periods ended June 30, 2020 and 2019, respectively, and $2.3 million and $2.6 million of intangible assets amortization for the six-month periods ended June 30, 2020 and 2019.
15. 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 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 is 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, which will continue when the COVID-19 crisis abates to a point where the site investigation can safely proceed. 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 Accumulated Other Comprehensive Income (Loss)
The following table discloses the changes by classification within accumulated other comprehensive income (loss) for the three-month and six-month periods ended June 30, 2020 and 2019:
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|
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|
|
|
|
|
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In thousands
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Foreign Currency
Translation
Adjustment
|
|
Defined Benefit
Pension
Adjustment
|
|
|
Gains and Losses
on Cash Flow Hedges
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|
Total
Accumulated
Other
Comprehensive
(Loss) Income
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|
Balance at March 31, 2020
|
|
$
|
(27,979)
|
|
|
$
|
(2,749)
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|
|
|
$
|
(4,431)
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|
|
|
$
|
(35,159)
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|
|
Other comprehensive income (loss)
|
|
5,146
|
|
|
—
|
|
|
|
(1,082)
|
|
(a)
|
|
4,064
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|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
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|
|
—
|
|
|
|
397
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|
(b)
|
|
397
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|
|
Balance at June 30, 2020
|
|
$
|
(22,833)
|
|
|
$
|
(2,749)
|
|
|
|
$
|
(5,116)
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|
|
|
$
|
(30,698)
|
|
|
Balance at December 31, 2019
|
|
(18,022)
|
|
|
(3,080)
|
|
|
|
(4,877)
|
|
|
|
(25,979)
|
|
|
Other comprehensive loss
|
|
(4,811)
|
|
|
—
|
|
|
|
(636)
|
|
(a)
|
|
(5,447)
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
331
|
|
(c)
|
|
397
|
|
(b)
|
|
728
|
|
|
Balance at June 30, 2020
|
|
$
|
(22,833)
|
|
|
$
|
(2,749)
|
|
|
|
$
|
(5,116)
|
|
|
|
$
|
(30,698)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2019
|
|
$
|
(18,585)
|
|
|
$
|
(22,038)
|
|
|
|
$
|
(2,649)
|
|
|
|
$
|
(43,272)
|
|
|
Other comprehensive income (loss)
|
|
2,457
|
|
|
—
|
|
|
|
(1,351)
|
|
(a)
|
|
1,106
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
19,159
|
|
(d)
|
|
—
|
|
|
|
19,159
|
|
|
Balance at June 30, 2019
|
|
$
|
(16,128)
|
|
|
$
|
(2,879)
|
|
|
|
$
|
(4,000)
|
|
|
|
$
|
(23,007)
|
|
|
Balance at December 31, 2018
|
|
(18,458)
|
|
|
(22,253)
|
|
|
|
(1,974)
|
|
|
|
(42,685)
|
|
|
Other comprehensive income (loss)
|
|
2,330
|
|
|
—
|
|
|
|
(2,026)
|
|
(a)
|
|
304
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
19,374
|
|
(d)
|
|
—
|
|
|
|
19,374
|
|
|
Balance at June 30, 2019
|
|
$
|
(16,128)
|
|
|
$
|
(2,879)
|
|
|
|
$
|
(4,000)
|
|
|
|
$
|
(23,007)
|
|
(a) Amount represents unrealized losses on the fair value of hedging activities, net of taxes, for the three-month and six-month periods ended June 30, 2020 and 2019.
(b) Amount represents the impact of de-designation of the interest rate swap agreement. This amount was $0.5 million, net of $0.1 million tax benefit, for the three-month and six-month periods ended June 30, 2020.
(c) Amount represents the settlement of the ISS Pension Plan in the first quarter of 2020. This amount was $0.4 million, net of $0.1 million tax benefit.
(d) Amount represents the settlement of the Lydall Pension Plan in the second quarter of 2019. This amount was approximately $19.0 million, net of $11.5 million tax benefit, for the three-month and six-month periods ended June 30, 2019. Amount also represents amortization of actuarial losses, a component of net periodic benefit cost during the first five months of fiscal year 2019 prior to the plan termination. This amount was $0.1 million, net of less than $0.1 million tax benefit for the three-month period ended June 30, 2019 and $0.4 million, net of $0.1 million tax benefit for the six-month period ended June 30, 2019.
17. Subsequent Events
The Company has evaluated subsequent events through the issuance date of these financial statements. No material events were identified that require disclosure.