Forward-looking statements in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are not guarantees of future performance and involve risks and uncertainties that could cause actual results to materially differ from those projected. Refer to the "Forward-Looking Statements" section of this MD&A, Part II, Item 1A - Risk Factors of this Form 10-Q, and Part I, Item IA - Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of these risks and uncertainties.



OVERVIEW AND OUTLOOK

Business

Lydall, Inc. and its subsidiaries (collectively, "Lydall", "the Company", "we", and "our") design, manufacture, and market specialty filtration and advanced materials solutions that contribute to a cleaner, quieter, and safer world. The Company operates in a variety of attractive end markets supported by global megatrends such as the demand for indoor air quality and lower emissions, near sourcing of supply chains, and vehicle electrification redefining safety and sound. Lydall solves our customers' problems culminating in demanding applications, including: high performance air and liquid specialty filtration, molecular filtration, engineered fiber based sealing solutions, specialty insulation including high temperature and ultra-low temperature (cryogenic) insulation, needle punch nonwoven materials for industrial, geosynthetic, medical and other specialty applications; and thermal management and acoustical products and solutions to assist in the reduction of noise, vibration, and harshness. The Company principally conducts its business through three reportable segments: Performance Materials, Technical Nonwovens, and Thermal Acoustical Solutions.

The Performance Materials segment is a worldwide leader in delivering innovative specialty filtration, sealing, and advanced materials solutions for demanding applications. Specifically, the segment's offerings include: (1) specialty filtration media solutions for a variety of applications in the global air and liquid filtration market such as personal protective equipment ("PPE"), indoor air quality, life sciences, transportation, and industrial applications; (2) gasket materials and parts for a broad range of applications in the global sealing market for parts in large/heavy duty equipment for commercial, industrial, agriculture and construction end markets; and (3) advanced materials that include highly engineered insulation solutions for cryogenic storage of liquid hydrogen/nitrogen, energy storage, and advanced composite materials for aerospace and defense applications.

The Technical Nonwovens segment is a global leader in engineered nonwoven materials for industrial filtration applications and advanced materials products. The primary industrial filtration markets include air pollution and emissions control, power generation, and liquid filtration solutions. Advanced materials products include geotextile felts for separation, reinforcement, filtration, drainage, and protection; thermal and acoustic insulation for transportation and automotive applications; and highly customized and technical solutions for acoustic media, medical, building & construction, and safety apparel. Specifically, the segment's offerings include needle punched nonwoven and highly engineered felts made from a variety of synthetic fibers. Automotive media is provided to Tier 1 and Tier 2 suppliers as well as the Company's 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 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).



Recent Developments

Merger Agreement

As previously announced, on June 21, 2021, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Unifrax Holding Co. ("Parent"), Outback Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent ("Merger Sub"), and solely with respect to certain payment obligations of Parent thereunder, Unifrax I LLC ("Unifrax"). Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Unifrax is a global provider of specialty materials focused on thermal management, specialty filtration, battery materials, emission control, and fire protection applications and is backed by Clearlake Capital Group, L.P.

Subject to the terms and conditions of the Merger Agreement, each share of common stock, par value $0.01 per share, of the Company (the "common stock") (other than shares of common stock held by the Company as treasury stock) issued and outstanding immediately prior to the effective time of the Merger (the "Effective Time") (other than dissenting shares) will be


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converted into the right to receive $62.10 per share in cash, without interest. If the Merger is consummated, the Company's securities will be de-listed from the New York Stock Exchange (the "NYSE") and de-registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as soon as practicable following the Effective Time.

The completion of the Merger is subject to customary closing conditions, including, among others, (i) the approval of the Company's stockholders holding a majority of the outstanding shares of common stock and (ii) the expiration or termination of any waiting period applicable to the consummation of the Merger under the Hart-Scott Rodino Antitrust Improvements Act of 1976, and the expiration of applicable waiting periods or clearances of the Merger, as applicable, under the antitrust and foreign investment laws of certain other jurisdictions. Subject to the satisfaction or (to the extent permissible) waiver of such conditions, the Merger is currently expected to close in the second half of 2021. However, the Company cannot assure completion of the Merger by any particular date, if at all or that, if completed, it will be completed on the terms set forth in the Merger Agreement. The Company's Condensed Consolidated Financial Statements and related disclosures for the three and six-month periods ended June 30, 2021 and 2020 do not reflect any potential impacts or effects the Merger may have on the Company's financial statements if the Merger is finalized.

COVID-19 Pandemic

In early 2020, the World Health Organization ("WHO") characterized COVID-19 as a pandemic. In an effort to contain COVID-19 and slow its spread, governments throughout the world enacted various measures, including orders to close "non-essential" businesses, for residents to shelter in place, and to practice social distancing. These actions and the global health crisis caused by COVID-19 has adversely impacted, and may continue to adversely impact, global business activity and the Company's financial performance. Despite the recent availability of vaccines, a level of risk and uncertainty remains that the residual effects of the pandemic, such as supply chain disruptions, could have an adverse impact in certain areas of our business. The Company has implemented changes to help ensure the safety and health of all its employees and continues to assess and update its business continuity plans in the context of this pandemic. The Company will continue its efforts to maintain a safe and healthy work environment, including the continuation of remote working arrangements, where deemed appropriate.

Among other factors, a strong rebound in demand in many end markets in conjunction with supply disruptions is causing higher commodity prices for certain of the Company's primary raw material inputs including, but not limited to, aluminum, aluminized steel, polypropylene, and microfiber glass. Supply chain issues, including transportation and logistics problems, are causing periodic supply chain disruptions, and in selected cases, material shortages in various markets served by the Company. These issues have caused an adverse impact on the Company's financial performance. Given the dynamic nature of the situations, we cannot estimate with certainty the future impacts from higher commodity prices, supply chain issues and the COVID-19 pandemic on our financial condition, results of operations or cash flows.

Performance Materials Developments

Market Trends

Demand for the Performance Materials segment's filtration and sealing and advance solutions products continue to be strong. However, in the second quarter of 2021, the segment experienced some supply chain challenges for select raw materials used in sealing products, and higher commodity prices for polypropylene and other fibers used in filtration products. Although the Company expects this trend to continue through 2021, the Company is working to mitigate inflationary costs through customer pricing where contracts allow for such increases to be passed on to customers.

Other

As previously disclosed, the Performance Materials segment undertook actions to exit underperforming facilities in Europe. In June 2021, the Company reached an agreement to sell an operating facility in the Netherlands. The sale was completed on July 9, 2021. See Note 3, "Divestiture Activities", in the Notes to Condensed Consolidated Financial Statements for additional information.








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Technical Nonwovens Developments

Market Trends

Demand for the Technical Nonwovens segment's geosynthetic, medical, and filtration products is strong. The segment has experienced lower demand in North America for nonwoven products used in automotive applications as global semiconductor chip shortages impact the automotive industry. However, the Company does not expect these issues to have a material adverse impact on the segment's financial performance in 2021. The segment continues to see significant commodity price increases on polypropylene fibers and other raw material fibers as well as price increases around freight and logistics. Although the Company expects this trend to continue through 2021, the Company anticipates the ability to mitigate these higher costs primarily through increased customer pricing.

Thermal Acoustical Solutions Developments

Market Trends

Customer demand continues to be strong for the Thermal Acoustical Solutions segment. However, customer orders from month to month have been volatile as certain automotive customers temporarily slow or halt production of certain vehicle models due to a global semiconductor chip shortage negatively impacting the automotive industry and its supply chain. As a result, customer orders have been delayed adversely impacting the segment's financial performance during the second quarter. Raw material shortages affecting the automotive industry could continue to have a negative impact on the segment's financial performance for the remainder of 2021.

Consistent with the Company's other segments, the Thermal Acoustical Solutions segment is experiencing higher commodity pricing, primarily for aluminum, aluminized steel, and polyester fiber. The segment is able to pass through the higher commodity costs for certain customers; however, commodity price increases have had, and could continue to have, an adverse impact on the segment's financial performance in 2021 to the extent these costs cannot be passed on to customers.

SECOND QUARTER 2021 HIGHLIGHTS

Below are financial performance highlights for the three-month period ended June 30, 2021 compared to the three-month period ended June 30, 2020:

The chart below reflects the change in consolidated net sales by segment:


                     [[Image Removed: ldl-20210630_g1.jpg]]

Consolidated net sales were $221.7 million in the second quarter of 2021, compared to $146.2 million in the second quarter of 2020, resulting in an increase of $75.6 million, or 51.7%. The increase was primarily driven by $39.4 million of higher sales in the Company's Thermal Acoustical Solutions segment, mainly due to improved demand for products across all regions as a result of the continued recovery from the COVID-19 pandemic. Additionally, the Technical Nonwovens segment experienced


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an increase in sales of $20.4 million led by higher demand in industrial filtration markets. The Performance Materials segment experienced an increase in sales of $18.7 million that was primarily attributable to continued demand in sealing markets and specialty filtration products. The change in consolidated net sales is summarized in the following chart:



                [[Image Removed: ldl-20210630_g2.jpg]]

(1) Includes Parts volume and pricing change of $69.2 million and Tooling Sales of $0.4 million between comparable periods in the second quarters of 2021 and 2020.

Consolidated operating income was $9.4 million for the three-month period ended June 30, 2021 compared to an operating loss of $(1.7) million in the corresponding period in 2020. Operating income for the three-month period ended June 30, 2020 was adversely impacted by COVID-19-related plant shutdowns in the Company's Thermal Acoustical Solutions business and lower production of the Company's industrial filtration products. The $11.1 million increase was primarily a result of higher operating income of $9.4 million in the Performance Materials segment, driven by a favorable product mix due to higher sales for specialty filtration products and sealing and insulation products. Operating income for the Thermal Acoustical Solutions segment increased $4.8 million mainly due to the recovery from COVID-19 related shutdowns during the second quarter of 2020. The Technical Nonwovens segment also experienced an increase in operating income with a $2.1 million improvement from the comparable period in 2020. The increase in Technical Nonwovens was primarily attributable to higher sales volume driven by the recovery from the COVID-19 pandemic.






















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The chart below reflects the change in consolidated operating income by segment:

[[Image Removed: ldl-20210630_g3.jpg]] Consolidated net income was $5.8 million, or $0.32 per diluted share, for the three-month period ended June 30, 2021 compared to a net loss of $(5.9) million, or $(0.34) per diluted share, in the corresponding period in 2020.

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