Unassociated Document

0001144204-11-025334.txt : 20110502 0001144204-11-025334.hdr.sgml : 20110502 20110502135628 ACCESSION NUMBER: 0001144204-11-025334 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20110331 FILED AS OF DATE: 20110502 DATE AS OF CHANGE: 20110502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYDALL INC /DE/ CENTRAL INDEX KEY: 0000060977 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 060865505 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07665 FILM NUMBER: 11799708 BUSINESS ADDRESS: STREET 1: ONE COLONIAL RD STREET 2: P O BOX 151 CITY: MANCHESTER STATE: CT ZIP: 06045-0151 BUSINESS PHONE: 2036461233 FORMER COMPANY: FORMER CONFORMED NAME: COLONIAL BOARD CO DATE OF NAME CHANGE: 19700115 10-Q 1 v220010_10q.htm Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-7665

LYDALL, INC.

(Exact name of registrant as specified in its charter)

Delaware	06-0865505
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

One Colonial Road, Manchester, Connecticut	06042
(Address of principal executive offices)	(zip code)

(860) 646-1233

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock $.10 par value per share.
Total Shares outstanding April 22, 2011	17,154,780

LYDALL, INC.

INDEX

			Page Number
Part I.	Financial Information
	Item 1.	Financial Statements	3
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
	Item 4.	Controls and Procedures	24
Part II.	Other Information
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 5.	Other Information	27
	Item 6.	Exhibits	29
Signature			30
Exhibit Index			31

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)

	Quarter Ended March 31,
	2011			2010
	(Unaudited)
Net sales	$	108,110		$	75,579
Cost of sales		88,918			61,573
Gross profit		19,192			14,006
Selling, product development and administrative expenses		14,676			14,675
Gain on sale of product line		(405	)		-
Operating income (loss)		4,921			(669	)
Interest expense		210			220
Other expense (income), net		39			(102	)
Income (loss) before income taxes		4,672			(787	)
Income tax expense (benefit)		1,729			(316	)
Net income (loss)	$	2,943		$	(471	)
Earnings (loss) per share:
Basic	$	.18		$	(.03	)
Diluted	$	.17		$	(.03	)
Weighted average number of common shares outstanding:
Basic		16,735			16,651
Diluted		16,838			16,651

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

	March 31, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	22,304		$	24,988
Accounts receivable, net		63,480			47,080
Inventories, net		36,991			37,444
Taxes receivable		1,676			1,867
Prepaid expenses and other current assets, net		6,523			4,652
Total current assets		130,974			116,031
Property, plant and equipment, at cost		252,214			246,460
Accumulated depreciation		(164,401	)		(158,224	)
Net, property, plant and equipment		87,813			88,236
Goodwill and other intangible assets		24,475			24,094
Other assets, net		3,098			3,527
Total assets	$	246,360		$	231,888
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,607		$	1,496
Accounts payable		37,628			33,963
Accrued payroll and other compensation		10,366			9,022
Accrued taxes		5,066			3,113
Other accrued liabilities		4,736			5,077
Total current liabilities		59,403			52,671
Long-term debt		3,206			3,392
Deferred tax liabilities		6,133			5,360
Pension and other long-term liabilities		14,699			15,010

Stockholders’ equity:
Preferred stock		—			—
Common stock		2,363			2,364
Capital in excess of par value		55,178			54,799
Retained earnings		174,765			171,822
Accumulated other comprehensive loss		(4,187	)		(8,330	)
Treasury stock, at cost		(65,200	)		(65,200	)
Total stockholders’ equity		162,919			155,455
Total liabilities and stockholders’ equity	$	246,360		$	231,888

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Quarter Ended March 31,
	2011			2010
	(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	2,943		$	(471	)
Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities:
Gain on sale of product line		(405	)		-
Depreciation and amortization		3,646			3,655
Amortization of debt issuance costs		101			101
Deferred income taxes		532			(541	)
Stock based compensation		420			359
Loss on disposition of property, plant and equipment		2			30
Changes in operating assets and liabilities:
Accounts receivable		(15,163	)		(8,680	)
Inventories		1,279			(5,204	)
Accounts payable		2,952			5,635
Accrued payroll and other compensation		1,041			2,644
Accrued taxes		1,769			752
Other, net		(1,222	)		1,783
Net cash (used for) provided by operating activities		(2,105	)		63

Cash flows from investing activities:
Receipt from acquisition net assets adjustment		-			276
Capital expenditures		(1,552	)		(1,780	)
Reimbursement of cash from leasing company		613			-
Net cash used for investing activities		(939	)		(1,504	)
Cash flows from financing activities:
Debt repayments		(357	)		(342	)
Common stock issued		22			8
Net cash used for financing activities		(335	)		(334	)
Effect of exchange rate changes on cash		695			(700	)
Decrease in cash and cash equivalents		(2,684	)		(2,475	)
Cash and cash equivalents at beginning of period		24,988			22,721
Cash and cash equivalents at end of period	$	22,304		$	20,246

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Financial Statement Presentation

Lydall, Inc. and its subsidiaries (the “Company” or “Lydall”) design and manufacture specialty engineered filtration media, industrial thermal insulating solutions, automotive thermal and acoustical barriers, temperature-control equipment, medical filtration media and devices and biopharmaceutical processing components for thermal/acoustical, filtration/separation, and bio/medical applications.

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 all material respects, in accordance with the same accounting principles followed in the preparation of the Company’s annual financial statements for the year ended December 31, 2010. The year-end condensed consolidated balance sheet was derived from the December 31, 2010 audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Management believes that all adjustments, which include only normal recurring adjustments necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows for the periods reported, have been included. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Certain prior year amounts have been reclassified to be consistent with the current quarter presentation.

2. Inventories

Inventories as of March 31, 2011 and December 31, 2010 were as follows:

In thousands	March 31, 2011			December 31, 2010
Raw materials	$	16,953		$	15,587
Work in process		8,609			11,759
Finished goods		11,678			10,758
		37,240			38,104
Less: Progress billings		(249	)		(660	)
Total inventories	$	36,991		$	37,444

Included in work in process is gross tooling inventory of $2.8 million and $7.1 million at March 31, 2011 and December 31, 2010, respectively. Tooling inventory, net of progress billings, was $2.6 million and $6.4 million at March 31, 2011 and December 2010, respectively.

3. Long-term Debt and Financing Arrangements

As of March 31, 2011 and December 31, 2010, the majority of debt outstanding was capital lease obligations. As of March 31, 2011 and December 31, 2010, the Company had no borrowings outstanding under its $35 million senior secured domestic credit facility, or any foreign subsidiary credit arrangement, other than letters of credit.

On March 11, 2009, the Company entered into a $35 million senior secured domestic credit facility (“Domestic Credit Facility”) with a financial institution. The Borrowing Base under the Domestic Credit Facility is determined based on certain percentages of eligible domestic accounts receivable, eligible domestic inventories and eligible domestic fixed assets, reduced by applicable reserves. The Domestic Credit Facility has a term of three years.

Interest is charged on borrowings at the Company’s option of either: (i) the Prime Rate plus an Applicable Margin or (ii) the Eurodollar Rate plus an Applicable Margin. The Prime Rate is a fluctuating rate equal to the higher of the financial institution’s prime rate or the federal funds rate plus 50 basis points. The Eurodollar Rate is a fluctuating LIBOR rate offered for deposits in U.S. dollars. The Applicable Margin added to the Prime Rate ranges from 125 basis points to 175 basis points and the Applicable Margin added to the Eurodollar Rate ranges from 425 basis points to 475 basis points depending on the type of collateral that supports the outstanding borrowings. The Company also pays 50 basis points per annum on the average daily unused portion of the Domestic Credit Facility and 425 basis points per annum on the daily outstanding balance of letters of credit.

The loan agreement governing the Domestic Credit Facility contains a number of affirmative and negative covenants, including financial covenants. Among others, at all times the Company and its domestic subsidiaries must maintain Excess Availability, as defined in the loan agreement, of not less than $5.0 million. If the borrowings under the Domestic Credit Facility exceed $5.0 million, or Excess Availability under the Domestic Credit Facility is less than $12.5 million, the Company is required to meet a minimum fixed charge coverage ratio. The fixed charge coverage ratio requires that, at the end of any month, the ratio of consolidated EBITDA, as defined in the loan agreement, to fixed charges may not be less than 1 to 1 for the immediately preceding 12 month period. At no time during the quarter ended March 31, 2011 did borrowings under the Domestic Credit Facility exceed $5.0 million or was Excess Availability less than $12.5 million, therefore, the Company was not subject to the fixed charge coverage ratio.

The Company expects to fund its operating cash requirements from existing cash balances, cash generated by operations, and through borrowings, if needed, under its Domestic Credit Facility and foreign credit facilities. As of April 30, 2011, the Company had availability of approximately $20.0 million under the Domestic Credit Facility. The Company’s foreign subsidiaries had various credit arrangements with banks totaling €7.0 million (approximately $10.0 million) with €5.7 million (approximately $8.1 million) available for borrowings, primarily restricted to borrowings at the respective foreign subsidiary.

4. Equity Compensation Plans

As of March 31, 2011, the Company had two stock option plans – the 1992 Stock Incentive Compensation Plan (“1992 Plan”) and the 2003 Stock Incentive Compensation Plan (“2003 Plan”), collectively, the “Plans,” under which incentive and non-qualified stock options and time and performance based restricted shares have been granted to employees and outside directors from authorized but unissued shares of common stock or treasury shares. The 1992 Plan expired in May 2002; however, the 1992 Plan continues to govern all outstanding awards under that plan until the awards themselves are exercised or terminate in accordance with their terms. The 2003 Plan authorized 2.5 million share options and restricted shares for employees and outside directors.

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 four years. The number of performance based restricted shares that vest or forfeit depend upon achievement of certain targets during the performance period. Stock-based compensation expense includes the estimated effects of forfeitures. 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 compensation expense of $0.4 million for the quarters ended March 31, 2011 and March 31, 2010, for all stock-based compensation plans, including restricted stock awards. No compensation costs were capitalized as part of inventory.

Stock Options

The following table is a summary of option activity of the Company’s plans during the quarter ended March 31, 2011:

In thousands except per share amounts and years	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		907		$	8.62
Granted		—		$	—
Exercised		(4	)	$	5.13
Forfeited/Cancelled		(19	)	$	8.22
Outstanding at March 31, 2011		884		$	8.65		6.3	$	1,040
Options exercisable at March 31, 2011		517		$	9.64		4.5	$	347

There were no options granted during the quarters ended March 31, 2011 and 2010. There were minimal options exercised during the quarters ended March 31, 2011 and 2010. At March 31, 2011, the total unrecognized compensation cost related to unvested stock option awards was approximately $1.0 million, with a weighted average expected amortization period of 3.0 years.

Restricted Stock

At March 31, 2011, the total unrecognized compensation cost related to unvested restricted stock awards was approximately $1.9 million, with a weighted average expected amortization period of 2.6 years. The following is a summary of the status of the Company’s unvested restricted shares as of March 31, 2011:

In thousands except per share amounts	Shares			Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2010		430		$	6.27
Granted		22		$	5.54
Vested		—		$	—
Forfeited		(34	)	$	5.57
Unvested at March 31, 2011		418		$	6.29

5. Employer Sponsored Benefit Plans

As of March 31, 2011, the Company maintains one defined benefit pension plan that covers the majority of domestic Lydall employees. The pension plan is noncontributory and benefits are based on either years of service or eligible compensation paid while a participant is in the plan. The Company’s domestic pension plan is closed to new employees and benefits are no longer accruing under the pension plan. The Company’s funding policy is to fund not less than the ERISA minimum funding standard and not more than the maximum amount that can be deducted for federal income tax purposes. The Company expects to contribute approximately $2.5 million in cash to its defined benefit pension plan in 2011. Contributions of $0.4 million were made during the first quarter of 2011. Contributions were minimal during the first quarter of 2010.

The following is a summary of the components of net periodic benefit cost for the quarters ended March 31, 2011 and 2010:

	Quarter Ended
	March 31,
In thousands	2011			2010
Components of net periodic benefit cost:
Interest cost	$	646		$	642
Expected return on assets		(662	)		(583	)
Amortization of actuarial loss		140			145
Net periodic benefit cost	$	124		$	204

6. Income Taxes

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, France, Germany and the Netherlands. With few exceptions, the Company is no longer subject to U.S. federal examinations for years before 2006, state and local examinations for years before 2006, and non-U.S. income tax examinations for years before 2007.

In assessing the need for reserves for uncertainties in income taxes recognized, a significant number of estimates and judgments must be made by the Company. The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.4 million as of March 31, 2011. There have been no significant changes to this amount during the quarter ended March 31, 2011.

The Company’s effective tax rates in future periods could be affected by earnings being lower or higher than anticipated in countries where tax rates differ from the United States federal rate, the relative impact of permanent tax adjustments on higher or lower earnings from domestic operations, changes in net deferred tax asset valuation allowances, changes in tax rates or tax laws and the completion of tax audits.

7. Comprehensive Income

Comprehensive income (loss) for the periods ended March 31, 2011 and 2010 was as follows:

	Quarter Ended
	March 31,
In thousands	2011		2010
Net income (loss)	$	2,943	$	(471	)
Changes in accumulated other comprehensive income (loss):
Foreign currency translation adjustments		4,059		(4,507	)
Pension liability adjustment, net of tax		84		90
Unrealized loss on derivative instruments, net of tax		-		(14	)
Total comprehensive income (loss)	$	7,086	$	(4,902	)

8. Earnings Per Share

For the three months ended March 31, 2011 and 2010, basic earnings (loss) per share were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Unexercised stock options and unvested restricted shares are excluded from this calculation but are included in the diluted earnings per share calculation using the treasury stock method as long as their effect is not anti-dilutive.

The following table provides a reconciliation of weighted-average shares used to determine basic and diluted earnings per share.

	Quarter Ended
	March 31,
In thousands	2011		2010
Basic average common shares outstanding		16,735		16,651
Effect of dilutive options and restricted stock awards		103		-
Diluted average common shares outstanding		16,838		16,651

For the quarters ended March 31, 2011 and March 31, 2010, stock options and restricted stock awards for 1.0 million and 1.1 million shares of common stock, respectively, were not considered in computing diluted earnings per common share because they were anti-dilutive.

Additionally, for the three months ended March 31, 2010, the dilutive effect of stock options and restricted stock grants of approximately 0.1 million shares were not included in the computation of diluted loss per share as the net loss position would have made their effect anti-dilutive.

9. Segment Information

The Company’s reportable segments are Performance Materials and Thermal/Acoustical. The Performance Materials segment reports results of Industrial Filtration; Life Sciences Filtration; and Industrial Thermal Insulation products. The Thermal/Acoustical segment reports the results of the Company’s automotive products. All other businesses are aggregated in Other Products and Services (“OPS”). OPS comprises the Life Sciences Vital Fluids business and Affinity® temperature control equipment business (“Affinity”).

Performance Materials Segment

The Performance Materials segment includes filtration media solutions for air, fluid power, and industrial applications (“Industrial Filtration”), air and liquid life science applications (“Life Sciences Filtration”), and industrial thermal insulation solutions for building products, appliances, and energy and industrial markets (“Industrial Thermal Insulation”).

Industrial 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, and industrial processes. Lydall has leveraged its extensive technical expertise and applications knowledge into a suite of media products covering the vast liquid filtration landscape across the engine and industrial fields. The LyPore® Liquid Filtration Media and activated carbon containing ActiPure® Filtration Media series address a variety of application needs in fluid power including hydraulic filters, air-water and air-oil coalescing, industrial fluid processes, diesel filtration and fuel filtration.

Life Sciences Filtration products include the LyPore® and ActiPure® Filtration Media developed to meet the requirements of life science applications including Biopharmaceutical pre-filtration and clarification, diagnostic and analytical testing, respiratory protection, medical air filtration, drinking water filtration and high purity process filtration such as that found in food and beverage and medical applications. Lydall also offers Solupor® Membrane specialty microporous membranes that are utilized in various markets and applications including air and liquid filtration and transdermal drug delivery. Solupor® membranes are based on ultra-high molecular weight polyethylene and incorporate an uncommon combination of mechanical strength, chemical inertness, and high porosity in a unique open structure.

Industrial Thermal Insulation products are high performance nonwoven veils, papers, mats and specialty composites for the building products, appliance, and energy and industrial markets. The Manniglas® Thermal Insulation brand is diverse in its product application ranging from high temperature seals and gaskets in ovens and ranges to specialty veils for HVAC and cavity wall insulation. appLY® (Mat) Needled Glass Mats have been developed to expand Lydall’s high temperature technology portfolio for broad application into the appliance market and supplements the Lytherm® Insulation Media product brand, traditionally utilized in the industrial market for kilns and furnaces used in metal processing. Lydall’s Cryotherm® Super-Insulating Media, CRS-Wrap® Super-Insulating Media and Cryo-LiteTM 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.

Thermal/Acoustical Segment

The Thermal/Acoustical segment offers a full line of innovative engineered products to assist in noise and heat abatement within the transportation sector. Lydall products are found in the interior (dash insulators), underbody (fuel tank, exhaust) and under hood (engine compartment) of cars, trucks, SUV’s, heavy duty trucks and recreational vehicles. Lydall’s patented products include ZeroClearance®, AMS®, Flexshield® and dBCore® comprising of organic and inorganic fiber composites (fiber parts) as well as metal combinations (metal parts).

Other Products and Services

The Life Sciences Vital Fluids business offers specialty products for blood filtration devices, blood transfusion single use containers and bioprocessing single-use containers and products for containment of media, buffers and bulk intermediates used in biotech, pharmaceutical and diagnostic reagent manufacturing processes.

The Affinity business designs and manufactures high precision, specialty engineered temperature-control equipment for semiconductor, pharmaceutical, life sciences and industrial applications.

The tables below presents net sales and operating income (loss) by segment for the quarters ended March 31, 2011 and 2010, and also a reconciliation of total segment net sales and operating income (loss) to total consolidated net sales and operating income (loss).

	Quarter Ended March 31,
In thousands	2011			2010
Performance Materials:
Industrial Filtration	$	20,471		$	15,844
Industrial Thermal Insulation		11,952			8,789
Life Sciences Filtration		4,046			2,519
Performance Materials Segment net sales	$	36,469		$	27,152
Thermal/Acoustical:
Metal parts	$	35,513		$	25,570
Fiber parts		19,264			9,946
Tooling		7,194			5,021
Thermal/Acoustical Segment net sales	$	61,971		$	40,537
Other Products and Services:
Life Sciences Vital Fluids	$	3,768		$	4,150
Affinity		6,437			4,138
Other Products and Services net sales	$	10,205		$	8,288
Eliminations and Other		(535	)		(398	)
Consolidated Net Sales	$	108,110		$	75,579

Operating Income (Loss) by Segment:

	Quarter Ended March 31,
In thousands	2011			2010
Performance Materials	$	6,297		$	2,003
Thermal/Acoustical		2,186			1,358
Other Products and Services
Life Sciences Vital Fluids		(285	)		180
Affinity		381			(24	)
Corporate Office Expenses		(3,658	)		(4,186	)
Consolidated Operating Income (Loss)	$	4,921		$	(669	)

10. Commitments and Contingencies

In the first quarter of 2011, the Company entered into three operating leases for manufacturing equipment at its North American automotive facility included in the Thermal/Acoustical segment. The estimated future minimum payments for this equipment are $3.2 million through the first quarter of 2018, or annual payments of approximately $0.4 million to $0.5 million.

A suit was filed against a subsidiary of the Company on March 31, 2005, in the Vermont Superior Court by Stamp Tech, a safety equipment supplier (“Equipment Supplier”), by and through its alleged assignee, a non-employee temporary worker, with respect to personal injuries allegedly suffered by the alleged assignee. The plaintiff alleges that the Company subsidiary removed safety equipment that would have prevented the injury. The Vermont Superior Court granted two motions for partial summary judgment filed by the Company. In December 2007, the plaintiff appealed to the Vermont Supreme Court. The Vermont Supreme Court issued an order on September 4, 2009, overturning the lower Court’s grant of summary judgment in the Company’s favor and remanding the case back to the Superior Court for further proceedings. On August 20, 2010, the Company filed a third party complaint against the Equipment Supplier asserting claims for breach of contract and negligence related to the Equipment Supplier’s installation of a safety device on the equipment that allegedly injured the plaintiff. The Company also claims that the Equipment Supplier is bound to defend and indemnify the Company for the plaintiff’s injuries. The Equipment Supplier filed an answer denying the Company’s claims on or about October 12, 2010 and a Motion to Dismiss the Company’s Third Party Complaint on January 12, 2011. The Company has objected to the Equipment Supplier’s Motion to Dismiss and filed a motion to add the Equipment Supplier as the real party in interest. These motions are currently pending. A trial ready date had been set for March, 2011. In the meantime, the parties have agreed to conduct a mediation that is currently scheduled for May 9, 2011.

The Company believes that it has meritorious defenses to the above claim and intends to contest it vigorously. While it is not possible to predict or determine the outcome of this claim or to provide possible ranges of losses that may arise, the Company believes the losses associated with this claim will not have a material adverse effect on the Company’s consolidated financial position or liquidity, but could possibly be material to its consolidated results of operations of any one period. As of March 31, 2011, there were no reserves recorded by the Company related to this claim because the Company believes a loss is not probable as the claim is without merit.

In addition to the above, from time-to-time the Company is subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as, but not limited to, patent, employment, personal injury, commercial and environmental matters. Although there can be no assurance, the Company is not aware of any matters pending that are expected to be material with respect to the Company’s business, results of operations or cash flows.

11. Recently Issued Accounting Standards

In January 2010, the FASB issued guidance on improving disclosures about fair value measurements. This guidance requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. This guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of this guidance has not had and is not expected to have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In general, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements within the meaning of Section 21E. All such forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company based on current expectations and assumptions relating to the Company’s business, the economy and other future conditions. Forward-looking statements generally can be identified through the use of the words “believes,” “anticipates,” “may,” “plans,” “projects,” “expects,” “estimates,” “forecasts,” “predicts,” “targets,” and other similar expressions in connection with the discussion of future operating or financial performance. Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. Accordingly, the Company’s actual results may differ materially from those contemplated by the forward-looking statements. Investors, therefore, are cautioned against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Forward-looking statements in this Quarterly Report on Form 10-Q include, among others, statements relating to:

Overall economic and business conditions and the effects of the Japanese natural disaster on the Company’s markets;

Business strategies, synergies, or operating efficiencies, such as manufacturing inefficiencies at the Company’s North American automotive facility;

The ability of the Company to improve gross margins of fiber-based products at its North American automotive facility;

Expected automobile production in the North American or European automotive markets;

The cost and availability of raw materials and energy and ability to pass through to customers increases in such costs;

Benefits realized from savings and operating efficiency improvements as a result of Lean Six Sigma and operational excellence initiatives;

Future amounts of stock-based compensation expense;

Pension plan funding requirements;

Future levels of capital spending;

The Company’s ability to meet cash operating requirements;

The Company’s ability to meet financial covenants in its domestic credit facility;

The Company’s ability to remediate identified control deficiencies over financial reporting;

Future effective income tax rates and realization of deferred tax assets;

Estimates of fair values of reporting units and long-lived assets used in assessing goodwill and long-lived assets for possible impairment;

The expected outcomes of contingencies; and

The ability to complete future strategic transactions.

All forward-looking statements are inherently subject to a number of risks and uncertainties that could cause the actual results of the Company to differ materially from those reflected in forward-looking statements. See identified risks discussed in Part I, Item 1A - Risk Factors of Lydall’s Annual Report on Form 10-K for the year ended December 31, 2010 and Part 2, Item 1A – Risk Factors of this quarterly report on Form 10-Q. The occurrence of one or more of these risks, or other unidentified risks, could cause Lydall’s actual results to vary materially from recent results or from the anticipated future results.

Lydall does not undertake to update any forward-looking statement made in this report or that may from time to time be made by or on behalf of the Company.

OVERVIEW AND OUTLOOK

Business

Lydall, Inc. and its subsidiaries (collectively, the “Company” or “Lydall”) design and manufacture specialty engineered filtration media, industrial thermal insulating solutions, medical filtration media and devices and biopharmaceutical processing components, automotive thermal and acoustical barriers and temperature-control equipment, for thermal/acoustical, filtration/separation and bio/medical applications. Lydall principally conducts its business through two reportable segments: Performance Materials and Thermal/Acoustical with sales globally.

The Thermal/Acoustical segment offers a full line of innovative engineered products to assist in noise and heat abatement within the transportation sector. Lydall products are found in the interior (dash insulators), underbody (fuel tank, exhaust) and under hood (engine compartment) of cars, trucks, SUV’s, heavy duty trucks and recreational vehicles. Lydall’s patented products include organic and inorganic fiber composites (fiber parts) as well as metal combinations (metal parts).

Included in Other Products and Services (“OPS”) are the Life Sciences Vital Fluids business and the Affinity® temperature control equipment (“Affinity”) business. Life Sciences Vital Fluids offers specialty products for blood filtration devices, blood transfusion single-use containers and bioprocessing single-use containers and products for containment of media, buffers and bulk intermediates used in biotech, pharmaceutical and diagnostic reagent manufacturing processes. The Affinity business designs and manufactures high precision, specialty engineered temperature-control equipment for semiconductor, pharmaceutical, life sciences and industrial applications.

First Quarter 2011 Highlights

Below are financial highlights comparing Lydall’s first quarter 2011 results to its first quarter 2010 results:

Consolidated net sales increased by $32.5 million, or 43.0%, to a record quarterly amount of $108.1 million;

Foreign currency translation had an immaterial impact on net sales growth;

Segment net sales increased as follows:

Performance Materials segment increased by $9.3 million, or 34.3%;

Thermal/Acoustical segment increased by $21.4 million, or 52.9%;

Other Products and Services increased by $1.9 million, or 23.1%;

Gross margin percentage decreased to 17.8% compared to 18.5% primarily due to negative gross profit on fiber parts in the Thermal/Acoustical segment;

Consolidated operating income was $4.9 million, compared to an operating loss of $(0.7) million;

Performance Materials segment reported operating income of $6.3 million, compared to operating income of $2.0 million;

Thermal/Acoustical segment reported operating income of $2.2 million, compared to operating income of $1.4 million;

OPS reported operating income of $0.1 million, compared to operating income of $0.2 million;

Corporate office expenses were $3.7 million, compared with $4.2 million;

Pretax income was $4.7 million, compared to pretax loss of $(0.8) million;

Net income was $2.9 million, or $.17 per share, compared to a net loss of $(0.5) million, or $(.03) per share;

Cash used by operations was $(2.1) million compared to cash provided by operations of $0.1 million.

Operational and Financial Overview

The Company reported first quarter 2011 net sales of $108.1 million, a record quarterly amount, reflecting an increase of $32.5 million, or 43.0%, compared to the first quarter of 2010. The 2010 trend in increased demand for the Company’s products in most of the markets served continued in the first quarter of 2011, as net sales increased by $12.3 million, or 12.9% from the fourth quarter of 2010, which itself had record net sales. The Company is also benefiting from increased market share in many of the markets served by its products. The Company reported operating income of $4.9 million, or 4.6% of net sales, compared to an operating loss of $(0.7) million in the first quarter of 2010. This improved performance was primarily driven by the operating results of the Performance Material segment, which reported operating income of $6.3 million, or 17.3% of net sales, compared to operating income of $2.0 million, or 7.4% of net sales in the first quarter of 2010. The Thermal/Acoustical segment reported operating income of $2.2 million, or 3.5% of net sales, compared to operating income of $1.4 million, or 3.4% of net sales in the first quarter of 2010. While improvements continued to be made in the gross profit of fiber parts at the North American automotive facility (“NA Auto”), the operating results of this segment were adversely impacted by the negative gross profit generated by fiber parts in the first quarter of 2011, compared to the first quarter of 2010 when fiber parts generated a positive gross profit. While consolidated net sales improved by 43% in the first quarter of 2011, compared to the first quarter of 2010, consolidated selling, product development and administrative expenses remained at amounts consistent with the first quarter of 2010, resulting in a reduction of 580 basis points as a percentage of net sales.

Performance Materials Segment

The Performance Materials segment reported record net sales of $36.5 million in the first quarter of 2011, which represented an increase of 34.3% from the first quarter of 2010, and operating income of $6.3 million, or 17.3% of net sales. Gross margin percentage and operating income percentage of net sales both increased primarily as a result of improved absorption of fixed costs from higher volumes of net sales of Industrial Filtration and Industrial Thermal Insulation products and, to a lesser extent, Life Sciences Filtration products. Backlog at March 31, 2011 was greater than amounts as of December 31, 2010. The Company has been monitoring the impact of the Japanese natural disaster on its customers and the Company’s supply chain. The Company has not been materially impacted by a reduction or delay in orders from customers or disruptions in the Company’s ability to procure raw materials, but there is no assurance that a broader supply chain disruption for customers or the Company would not negatively impact the Company’s future financial results.

Looking forward, the Company continues to believe that there are growth opportunities in the markets served through new product development and strategic transactions.

Thermal/Acoustical Segment

The Thermal/Acoustical segment reported record net sales of $62.0 million in the first quarter of 2011, an increase of 52.9% from the first quarter of 2010. This increase was driven by higher consumer demand of automobiles on Lydall’s existing platforms, as well as from sales of parts on new platforms awarded to the Company. Segment net sales were approximately 57% of the Company’s consolidated net sales in the first quarter of 2011, compared to approximately 54% of net sales in the first quarter of 2010.

According to a published automotive market forecasting service, production of cars and light trucks in North America and Europe in the first quarter of 2011 increased by approximately 9%, or 0.7 million vehicles, compared to the first quarter of 2010, indicating that the Thermal/Acoustical segment increased market share through the introduction of new products and growth of the automotive platforms served. The same service predicts that production of cars and light trucks in North America and Europe for 2011 will grow in the range of 4% - 6% compared to 2010. Backlog at March 31, 2011 was greater than amounts as of December 31, 2010. The Company is monitoring the impact of the Japanese natural disaster on Lydall’s customers, who have experienced some shortages of parts and supplies from other automotive suppliers, resulting in certain instances of delayed production and temporary shut-downs by OEMs. The Company has not been significantly impacted by delays or cancellation of part orders from OEMs or by disruption in its supply chain, but there is no assurance that a broader automotive OEM supply chain disruption would not negatively impact the Company’s future financial results. Also, possible economic instability from this natural disaster, or other factors, could negatively impact consumer confidence and spending, which could have a negative impact on the volume of orders from OEMs in the future.

During the first quarter of 2011 and continuing into the second quarter of 2011, the Thermal/Acoustical segment is experiencing higher raw material costs, specifically aluminum and fiber. While the Company is able to pass through some of its incremental aluminum costs to its OEM customers, the timing of customer pricing increases typically lags increases in raw material costs. The Company does not have similar pass through arrangements for fiber-based products and, as a result, bears the negative impact of increases in fiber costs.

The Thermal/Acoustical segment reported operating income in the first quarter of 2011 of $2.2 million compared to operating income of $1.4 million in the first quarter of 2010. Beginning late in the second quarter of 2010, the segment was impacted by negative gross profit from the fiber parts of the NA Auto facility. The Company estimates that the operating results for the segment in the first quarter of 2011 included negative gross profit of $(0.4) million on $19.3 million of fiber parts net sales from the NA Auto facility, an improvement from the fourth quarter of 2010 when fiber parts net sales of $12.7 million generated an estimated negative gross profit of $(1.2) million. While the Company has undertaken a comprehensive improvement plan to improve the financial results, the expected benefit of these actions has not yet been completely realized.

Liquidity

At March 31, 2011, the Company had a cash balance of $22.3 million and no borrowings under any credit facility. The Company expects to fund its operating cash requirements from existing cash balances, cash generated by operations and from available borrowings, as needed, under its domestic credit facility and foreign credit facilities. At April 30, 2011, the Company had availability of approximately $20.0 million under its Domestic Credit Facility and various credit arrangements with foreign banks totaling €7.0 million (approximately $10.0 million) with €5.7 million (approximately $8.1 million) available for borrowings, primarily restricted to borrowings at the respective foreign subsidiary.

Results of Operations

Note: All of the following tabular comparisons, unless otherwise indicated, are for the three-month periods ended March 31, 2011 (Q1-11) and March 31, 2010 (Q1-10).

Net Sales

In thousands	Quarter Ended
	Q1-11		Q1-10		Percent Change
Net sales	$	108,110	$	75,579		43.0	%

The increase in the first quarter 2011 net sales of $32.5 million, or 43.0%, compared with the first quarter of 2010, was primarily attributable to higher sales volumes from the Thermal/Acoustical segment of $21.4 million, or 52.9%, and the Performance Materials segment of $9.3 million, or 34.3%. Net sales of OPS increased by $1.9 million, or 23.1%, including an increase of $2.3 million from the Affinity business, partially offset by a $0.4 million decrease from the Life Sciences Vital Fluids business. Foreign currency translation had a minimal impact in the current quarter compared to the first quarter of 2010.

Gross Profit

In thousands	Quarter Ended
	Q1-11			Q1-10			Percent Change
Gross profit	$	19,192		$	14,006			37.0	%
Percentage of sales		17.8	%		18.5	%

The Performance Materials segment reported a 550 basis point gross margin improvement in the first quarter of 2011, compared to the same quarter of 2010, primarily as a result of significantly higher net sales and the resulting improved absorption of fixed costs. The Affinity business also reported improved gross margin percentage due to improved absorption of fixed costs from higher net sales. More than offsetting those improvements in gross margin percentage were reductions from the Thermal/Acoustical segment and, to a lesser extent, the Life Sciences Vital Fluids business included in OPS. Thermal/Acoustical segment gross margin percentage decreased due to an estimated negative gross profit of $(0.4) million on $19.3 million of fiber parts net sales in the first quarter of 2011, compared to the first quarter of 2010 when fiber parts generated a positive gross profit. The reduction in Life Sciences Vital Fluids gross margin percentage was primarily due to a reduction in net sales and higher fixed overhead costs in the first quarter of 2011 compared to the first quarter of 2010.

Selling, Product Development and Administrative Expenses

In thousands	Quarter Ended
	Q1-11			Q1-10			Percent Change
Selling, product development and administrative expenses	$	14,676		$	14,675			-	%
Percentage of net sales		13.6	%		19.4	%

While net sales increased by $32.5 million, or 43.0%, in the first quarter of 2011, compared to the first quarter of 2010, selling, product development and administrative expenses were essentially the same in both periods. During the first quarter of 2011, salaries and wages, research and development trials and sales commission expenses each increased by $0.3 million, while incentive compensation expense increased by $0.2 million compared to the first quarter of 2010. These increases were offset by lower legal expenses of $0.9 million and severance related charges of $0.5 million compared to the first quarter of 2010. Higher legal expenses in the first quarter of 2010 were primarily related to litigation and settlement costs with a former employee.

Divestiture

In thousands	Quarter Ended
	Q1-11		Q1-10		Percent Change
Gain on sale of product line	$	405	$	-		-	%

On June 30, 2010, the Company divested its electrical papers product line business for total consideration of $5.8 million, of which $4.8 million was paid on June 30, 2010. This transaction contained multiple deliverables, some of which were delivered on June 30, 2010, while others have been and will continue to be delivered in subsequent periods. As part of the sale transaction, the Company entered into a Manufacturing Agreement and a License Agreement with the buyer. Under the Manufacturing Agreement, the Company is obligated to manufacture and sell electrical paper products to the buyer for a two-year period. Pursuant to the License Agreement, a separate unit of accounting, the Company granted the buyer the right to use certain process technology and agreed to provide certain services to the buyer to facilitate the transfer of know-how for the manufacture of electrical paper products. Under the License Agreement, the buyer is obligated to pay the Company the additional $1.0 million on the earlier of June 30, 2012 or completion by Lydall of its obligations to provide services to the buyer.

The Company recorded a gross gain of $2.6 million related to the delivered elements during the quarter ended June 30, 2010 and deferred $3.2 million, with the deferred amount recognized in income as services under the License Agreement are delivered in subsequent periods, including $0.4 million recognized during the quarter ended March 31, 2011. The remainder of the gain, approximately $2.0 million, will be recognized on a straight-line basis over the period that the Company satisfies its obligations under the License Agreement.

Interest Expense

In thousands	Quarter Ended
	Q1-11			Q1-10			Percent Change
Interest expense	$	210		$	220			(4.5	)%
Weighted average interest rate		5.3	%		5.3	%

The decrease in interest expense in the first quarter of 2011 compared to the same quarter of 2010 was primarily due to lower average principal balances on capital lease obligations.

Other Income/Expense

Other income and expense for the quarters ended March 31, 2011 and 2010 consisted of insignificant activity related to foreign exchange transaction gains and losses and investment income.

Income Taxes

The Company’s effective tax rate for the quarter ended March 31, 2011 was 37.0% compared to 40.2% in the first quarter of 2010. The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.4 million as of March 31, 2011.

Segment Results

The following table presents sales information for the key product and service groups included within each operating segment and OPS for the quarter ended March 31, 2011 compared with the quarter ended March 31, 2010:

In thousands	Quarter Ended March 31, 2011			Quarter Ended March 31, 2010			Dollar Change
Performance Materials:
Industrial Filtration	$	20,471		$	15,844		$	4,627
Industrial Thermal Insulation		11,952			8,789			3,163
Life Sciences Filtration		4,046			2,519			1,527
Performance Materials Segment net sales	$	36,469		$	27,152		$	9,317

Thermal/Acoustical:
Metal parts	$	35,513		$	25,570		$	9,943
Fiber parts		19,264			9,946			9,318
Tooling		7,194			5,021			2,173
Thermal/Acoustical Segment net sales	$	61,971		$	40,537		$	21,434

Other Products and Services:
Life Sciences Vital Fluids	$	3,768		$	4,150		$	(382	)
Affinity		6,437			4,138			2,299
Other Products and Services net sales	$	10,205		$	8,288		$	1,917
Eliminations and Other		(535	)		(398	)		(137	)
Consolidated Net Sales	$	108,110		$	75,579		$	32,531

Operating Income (Loss) by Segment:

	Quarter Ended March 31, 2011						Quarter Ended March 31, 2010
In thousands	Operating Income			Operating Margin %			Operating Income			Operating Margin %			Dollar Change
Performance Materials	$	6,297			17.3	%	$	2,003			7.4	%	$	4,294
Thermal/Acoustical		2,186			3.5	%		1,358			3.4	%		828
Other Products and Services
Life Sciences Vital Fluids		(285	)		(7.6	)%		180			4.3	%		(465	)
Affinity		381			5.9	%		(24	)		(0.6	)%		405
Corporate Office Expenses		(3,658	)		-			(4,186	)		-			528
Consolidated Operating Income	$	4,921			4.6	%	$	(669	)		(0.9	)%	$	5,590

Performance Materials

Segment net sales increased by $9.3 million, or 34.3%, in the first quarter of 2011 compared to the first quarter of 2010. Net sales of Industrial Filtration products increased by $4.6 million, or 29.2%, compared to the first quarter of 2010, due to higher volumes of air filtration product net sales. Net sales of Industrial Thermal Insulation products increased by $3.2 million, or 36.0%, compared to the same period of 2010, primarily from improvement in capital project investments by customers in the cryogenic and electrical markets, resulting in increased demand for the Company’s energy and industrial products. Net sales of Life Sciences Filtration products increased by $1.5 million, or 60.6%, compared to the first quarter of 2010, due primarily from increased volumes of products sold for water filtration and transdermal drug delivery applications. Higher volume of sales in the Industrial Filtration, Industrial Thermal Insulation and Life Sciences Filtration markets in the first quarter of 2011 was due to improved markets conditions and share gains compared to the first quarter of 2010.

The Performance Materials segment reported operating income of $6.3 million in the first quarter of 2011, or 17.3% of net sales, compared to operating income of $2.0 million, or 7.4% of net sales in the first quarter of 2010. Higher net sales and an increase in gross profit due to improved absorption of fixed costs resulted in higher operating income in the current quarter compared to the first quarter of 2010. Operating income in the first quarter of 2011 includes a $0.4 million gain from services provided to the buyer of the electrical papers product line in accordance with the terms of a license agreement.

Thermal/Acoustical

Segment net sales for the first quarter of 2011 increased by $21.4 million, or 52.9%, compared to the first quarter of 2010. Automotive parts net sales increased by $19.3 million, or 54.2%, compared to the first quarter of 2010, including higher metal and fiber parts net sales of $9.9 million and $9.3 million, respectively. Tooling net sales in the first quarter of 2011 were higher by $2.2 million compared to the first quarter of 2010, as a greater number of automotive platforms launched in the first quarter of 2011. Also, the first quarter of 2010 was still being impacted by weaker consumer demand for automobiles as a result of the global economic recession.

For the quarter ended March 31, 2011, operating income for the segment was $2.2 million, compared with operating income of $1.4 million in the first quarter of 2010, an increase of $0.8 million due to higher net sales. The positive impact of higher automotive parts net sales and gross margin performance of metal parts on the segment’s operating results was weakened by negative gross profit by fiber parts of the NA Auto facility, compared to the first quarter of 2010 when fiber parts generated a positive gross profit. Also negatively impacting operating income in the first quarter of 2011 was higher raw material costs, specifically inflation in aluminum and fiber, compared to the first quarter of 2010.

Other Products and Services

OPS net sales increased by $1.9 million, or 23.1%, due to increased volumes of net sales from the Affinity business of $2.3 million, or 55.6%. Life Sciences Vital Fluids net sales decreased by $0.4 million, or 9.2%, in the first quarter of 2011 compared to the same period of 2010. The increase in Affinity net sales was attributable to a significant increase in capital equipment spending in the semiconductor industry. The decrease in the Life Sciences Vital Fluids business was primarily caused by lower volumes of blood filtration and bioprocessing product net sales.

OPS reported operating income of $0.1 million in the first quarter of 2011, compared to operating income of $0.2 million in the first quarter of 2010. The Affinity business reported operating income of $0.4 million in the first quarter of 2011 compared to breakeven in the first quarter of 2010, as a result of higher net sales and an improvement in the absorption of fixed costs, partially offset by higher salaries and wages expenses. The Life Sciences Vital Fluids business reported an operating loss of $(0.3) million in the first quarter of 2011, compared to operating income of $0.2 million in the same quarter of 2010. This reduction in Life Sciences Vital Fluids operating results was due to lower net sales as well as increases in fixed overhead costs.

Corporate Office Expenses

The decrease in corporate office expenses of $0.5 million in the first quarter of 2011 compared to the first quarter of 2010 was principally due to lower legal and settlement costs of $0.9 million, primarily related to litigation with a former employee in the first quarter of 2010, partially offset by higher incentive and stock-based compensation expenses of $0.3 million.

Liquidity and Capital Resources

The Company assesses its liquidity in terms of its ability to generate cash to fund operating, investing and financing activities. The principal source of liquidity is cash from operations. In addition to operating cash flows, other significant factors that affect the overall management of liquidity include capital expenditures, working capital investments, strategic transactions, income tax payments, outcomes of contingencies, pension funding and availability of lines of credit and long-term financing. The Company manages worldwide cash requirements by considering available funds among domestic and foreign subsidiaries.

Financing Arrangements

As of March 31, 2011 and December 31, 2010, the Company had no borrowings outstanding under its $35 million senior secured domestic credit facility, or any foreign subsidiary credit arrangement, other than letters of credit.

On March 11, 2009, the Company entered into a $35 million senior secured domestic credit facility (“Domestic Credit Facility”) having a three-year term with a financial institution. The borrowing base under the Domestic Credit Facility is determined based on certain percentages of eligible domestic accounts receivable, eligible domestic inventories and eligible domestic fixed assets, reduced by applicable reserves.

The loan agreement governing the Domestic Credit Facility contains a number of affirmative and negative covenants, including financial covenants. Among others, the Company and its domestic subsidiaries at all times must maintain Excess Availability, as defined in the loan agreement, of not less than $5.0 million. If the borrowings under the Domestic Credit Facility exceed $5.0 million, or Excess Availability under the Credit Facility is less than $12.5 million, the Company is required to meet a minimum fixed charge coverage ratio. The fixed charge coverage ratio requires that, at the end of any month, the ratio of consolidated EBITDA, as defined in the loan agreement, to fixed charges may not be less than 1 to 1 for the immediately preceding 12 month period. At no time during the first quarter of 2011 did borrowings under the Domestic Credit Facility exceed $5.0 million or was Excess Availability less than $12.5 million, therefore, the Company was not subject to the fixed charge coverage ratio.

Operating Cash Flows

Net cash used by operating activities in the first quarter of 2011 was $2.1 million compared with net cash provided by operating activities of $0.1 million in the first quarter of 2010. In the first quarter of 2011 compared to the same period for 2010, net income improved by $3.4 million. However, since December 31, 2010, operating assets and liabilities increased by $9.3 million, primarily by an increase in accounts receivable of $15.2 million during the quarter ended March 31, 2011. The increase in accounts receivable was caused by a significant increase in net sales during the first quarter of 2011, primarily the last two months of the quarter, compared to the last two months of the fourth quarter of 2010, with accounts receivable days outstanding being consistent with December 31, 2010.

Investing Cash Flows

In the first quarter of 2011, net cash used for investing activities was $0.9 million compared with net cash used for investing activities of $1.5 million in the first quarter of 2010. Capital expenditures were $1.6 million for the first quarter of 2011, compared with $1.8 million for the same period of 2010. Capital spending for 2011 is expected to be approximately $12.0 million to $14.0 million. In the first quarter of 2011, the Company received $0.6 million from a leasing company as a result of a sale-leaseback transaction for equipment.

Financing Cash Flows

In the first quarter of 2011, net cash used for financing activities was $0.3 million, which was consistent with net cash used in the first quarter of 2010. Cash used for financing activities was primarily due to capital lease payments in both periods.

Other

By letter dated September 14, 2010, the Company provided notice to the Pension Benefit Guaranty Corporation (the “PBGC”) pursuant to Section 4063(a) of ERISA of the occurrence of a Section 4062(e) event with respect to a Lydall pension plan and requested that the PBGC determine its liability, if any, as a result of the Section 4062(e) event. The Section 4062(e) event relates to the substantial cessation by the Company in the second quarter of 2009 of its operations at its St. Johnsbury, Vermont facility and the resulting separation from employment of greater than 20% of the active participants in a Lydall pension plan. Under Section 4062(e), the PBGC has the authority to require additional contributions to the Plan by the Company or to require the Company to post a bond or fund an escrow in order to secure obligations under the Plan attributable to the separation from employment of the affected employees. The PBGC could also elect not to require any further action by the Company. The Company is currently exchanging information with the PBGC and, at this time, is unable to estimate the impact, if any, on the Company’s cash position. The Company does not expect the resolution of this matter to have a significant impact on its results of operations.

Critical Accounting Estimates

The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Footnote 1 of the “Notes to Consolidated Financial Statements” and Critical Accounting Estimates in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and the “Notes to Condensed Consolidated Financial Statements” of this report describe the significant accounting policies and critical accounting estimates used in the preparation of the consolidated financial statements. The Company’s management is required to make judgments and estimates about the effect of matters that are inherently uncertain. Actual results could differ from management’s estimates. There have been no significant changes in the Company’s critical accounting estimates during the quarter ended March 31, 2011.

During the fourth quarter of 2010, the Company performed its annual impairment analysis of $4.7 million of goodwill in the Life Sciences Vital Fluids reporting unit, included in OPS. The Company’s goodwill impairment testing analysis (“analysis”) included projecting cash flows for the years 2011 – 2015 and discounting those amounts based on appropriate market risks and other market factors. Based on those projections and other assumptions used in the analysis, the Company concluded that the fair value of this reporting unit exceeded its carrying value of net assets. As a result, there was no impairment of goodwill.

The projected cash flows of the Life Sciences Vital Fluids reporting unit include assumptions for growth in future years resulting from a strategic initiative to increase market share in the bioprocessing market. In 2010 and during the first quarter of 2011, the Life Sciences Vital Fluids business initiated the qualification of products with a number of new customers, however, there is a lengthy period of time required for customer qualification and the expected improved operating results to be realized by the business. If future operating performance does not meet expectations or other key assumptions change or are not met, there can be no assurance that the fair value of the reporting unit will continue to exceed its carrying value which could potentially result in a non-cash impairment charge to income from operations.

Recently Issued Accounting Standards

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risks from those disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Company’s President and Chief Executive Officer (the “CEO”) and Vice President, Chief Financial Officer and Treasurer (the “CFO”), conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2011 because of a material weakness in its internal control over financial reporting described below. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management of the Company, with the participation of its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

In light of the material weakness described below, the Company performed additional analysis and other post−closing procedures to ensure that the Company's consolidated financial statements were prepared in accordance with generally accepted accounting principles and accurately reflect the results for the quarter ended March 31, 2011. As a result, notwithstanding the material weakness discussed below, management concluded that the consolidated financial statements included in this Form 10-Q fairly present in all material respects the Company’s financial position, results of operations and cash flows for the first quarter ended March 31, 2011.

Material Weakness in Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The Company did not maintain effective internal controls over the preparation and review of journal entries at one of its facilities, and such control failure was also not detected by the monitoring controls related to the review of the facility’s reported operating results. Specifically, the controls did not operate effectively to ensure the complete, accurate, and timely recording of journal entries at this facility. These control deficiencies could result in a material misstatement of the accounts at this facility that would result in a material misstatement of the Company's consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that these deficiencies represent a material weakness in internal control over financial reporting as of March 31, 2011.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during the first quarter ended March 31, 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Remediation of Material Weakness

Management has discussed this material weakness with the Audit Review Committee of its Board of Directors. As disclosed in the Company’s 2010 Annual Report on Form 10-K, to address this material weakness in internal controls, beginning in the fourth quarter of 2010, management designed and implemented remediation measures described below to address the material weakness and enhance the Company’s internal control over financial reporting. During the first quarter of 2011, management continued to monitor and evaluate these remediation measures that have been implemented to address the material weakness and enhance the Company’s internal control over financial reporting. Remediation measures included the following:

The Company reinforced existing company-wide financial reporting policies and procedures, and developed enhanced procedures and processes at the facility involving journal entries and corresponding supporting documentation, and the Company reinforced existing controls and expectations regarding roles and responsibilities;

The Company designed and implemented additional training programs to enhance the expertise of the finance function at the facility;

Management has taken steps to improve communication at the facility between finance personnel responsible for accounting for transactions and other operational functions within the facility to allow for improved monitoring practices concerning the review of monthly journal entries and reported financial results at the facility; and

The facility finance team changed its monitoring practices concerning the review of monthly journal entries and reported financial results.

Management believes that the remediation measures described above have strengthened the Company’s internal control over financial reporting and will remediate the identified material weakness. As management continues to evaluate and work to enhance internal control over financial reporting, management may determine that additional measures must be taken to address these control deficiencies or may determine that it needs to modify or otherwise adjust the remediation measures described above.

Because the reliability of the internal control process requires repeatable execution, the successful remediation of this material weakness will require review and evidence of effectiveness prior to management concluding that the controls are now effective. Some of the enhancements that have been implemented by management have not been in place for a sufficient period of time to demonstrate that their effectiveness is sustainable. Therefore, additional time is required to validate that the material weakness is fully remediated.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

In addition to the other information included in this Quarterly Report on Form 10-Q in Part I, “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Note Concerning Factors That May Affect Future Results,” the reader should carefully review and consider the factors discussed in Part I, Item 1A - Risk Factors of Lydall’s Annual Report on Form 10-K for the year ended December 31, 2010, and the additional factors presented below. Any and all of these factors could materially affect the Company’s business, financial condition or future results of operations. The risks, uncertainties and other factors described in Lydall’s Annual Report on Form 10-K and below constitute all material risk factors known to management as of the date of this report.

Thermal/Acoustical Segment – Supplier to the Global Automotive Market – The Company’s Thermal/Acoustical segment, a vendor to the automotive market, accounted for approximately 57% of consolidated net sales in the first quarter of 2011. This business is tied to general economic and industry conditions as demand for vehicles depends largely on the strength of the economy, employment levels, consumer confidence levels, the availability and cost of credit and the cost of fuel. These factors have had and could continue to have a substantial impact on the business. Negative economic conditions such as rising fuel prices could adversely impact the automotive business. Adverse developments could reduce demand for new vehicles, causing Lydall’s customers to reduce their vehicle production in North America and Europe and, as a result, demand for Company products would be adversely affected. Adverse global economic conditions and further deterioration could have a material adverse impact on the Company’s financial position and results of operations.

Thermal/Acoustical Segment - Fiber Parts - The Company cannot predict whether certain actions, including management changes, will succeed in improving the gross profit of fiber parts at the North American automotive facility, and as a result, there is no assurance that the operating results for the Thermal/Acoustical segment will improve during the remainder of 2011.

Impact of Japanese Natural Disaster on the Company’s Operations - The Company’s operations and financial results could be negatively impacted by the natural disaster in Japan, including disruption in the volume of orders from certain customers, possible interruption in the Company’s ability to source raw materials from suppliers, or other factors which could impact the Company’s ability to meet customer demand. Any of these factors could have a material adverse impact on the Company’s financial position and results of operations.

Environmental Laws and Regulations – The Company is subject to federal, state, local, and foreign environmental, and health and safety laws and regulations that affect ongoing operations. In order to maintain compliance with such requirements, Lydall must maintain adequate policies, procedures and oversight to ensure compliance with environmental, health and safety laws. Should the Company not maintain adequate policies, procedures and oversight to ensure compliance, then the Company could incur fines, legal costs, and clean-up requirements which could have a material impact on results of operations and cash flows of the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company’s Domestic Credit Facility, entered into on March 11, 2009, restricts the Company’s ability to repurchase common stock of the Company, subject to certain stated exceptions.

Should the Company have the ability to engage in repurchase activity in the future, the Company would take advantage of the safe harbor protections afforded by Rule 10b-18 promulgated under the Exchange Act, to engage in future repurchase activity in accordance with the provisions of the Exchange Act.

Item 5. Other Information

The Company’s Annual Meeting of Stockholders was held on April 29, 2011. Stockholders voted on four proposals presented to them for consideration:

1.)	Election of Nominees to the Board of Directors

Stockholders elected eight Directors to serve until the next Annual Meeting to be held in 2012 and until their successors are duly elected and qualified. The results of the voting were as follows:

	For	Withheld	Broker Non-Votes
Dale G. Barnhart	13,654,840	219,967	1,185,911
Kathleen Burdett	10,330,331	3,544,496	1,185,911
W. Leslie Duffy	13,701,936	172,871	1,185,911
Matthew T. Farrell	10,848,113	3,026,694	1,185,911
Marc T. Giles	13,692,055	182,752	1,185,911
William D. Gurley	13,694,937	179,870	1,185,911
Suzanne Hammett	10,810,155	3,064,652	1,185,911
S. Carl Soderstrom, Jr.	10,846,573	3,028,234	1,185,911

2.)	Advisory Vote on Executive Compensation

The results of the voting were as follows:

For:	13,593,235
Against:	192,646
Abstain:	88,926
Broker Non-Votes:	1,185,911

3.)	Advisory Vote on the Frequency of Future Advisory Votes on Executive Compensation

The results of the voting were as follows:

1 Year:	12,566,761
2 Years:	83,252
3 Years:	1,141,349
Abstain:	77,445
Broker Non-Votes:	1,185,911

4.)	Ratification of Appointment of Independent Auditors

Stockholders ratified the appointment of PricewaterhouseCoopers LLP as the Company’s independent auditors for fiscal year 2011. The results of the voting were as follows:

For:	14,569,393
Against:	483,488
Abstain:	7,837

After considering the results of the voting with respect to Proposal 3, and taking into account other considerations, the Board of Directors of the Company determined that the Company will hold future non-binding advisory votes to approve the compensation of its named executive officers (each, a “say-on-pay vote”) every year until the Company next holds a say-on-pay vote, at which time the Board may decide to conduct say-on-pay votes on a less frequent basis.

Item 6. Exhibits

Exhibit Number		Description

3.1		Certificate of Incorporation of the Registrant, as amended, filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K dated March 12, 2004 and incorporated herein by this reference.

3.2		Bylaws of the Registrant, as amended and restated as of December 11, 2003, filed as Exhibit 3.2 to the Registrant’s Annual Report on 10-K dated March 12, 2004 and incorporated herein by this reference.

10.1		Amended and Restated Lydall 2003 Stock Incentive Compensation Plan, filed herewith.

31.1		Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, filed herewith.

31.2		Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, filed herewith.

32.1		Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LYDALL, INC.

May 2, 2011	By:	/s/ James V. Laughlan
		James V. Laughlan Chief Accounting Officer and Controller (On behalf of the Registrant and as Principal Accounting Officer)

LYDALL, INC.

Index to Exhibits

Exhibit Number

3.1		Certificate of Incorporation of the Registrant, as amended, filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K dated March 12, 2004 and incorporated herein by this reference.

3.2		Bylaws of the Registrant, as amended and restated as of December 11, 2003, filed as Exhibit 3.2 to the Registrant’s Annual Report on 10-K dated March 12, 2004 and incorporated herein by this reference.

10.1		Amended and Restated Lydall 2003 Stock Incentive Compensation Plan, filed herewith.

31.1		Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, filed herewith.

31.2		Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, filed herewith.

32.1		Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

EX-10.1 2 v220010_ex10-1.htm Unassociated Document

Exhibit 10.1

AMENDED AND RESTATED

LYDALL

2003 STOCK INCENTIVE COMPENSATION PLAN

ARTICLE I

PURPOSE

1.1 Purpose. The purpose of the Lydall 2003 Stock Incentive Compensation Plan (the “Plan”) is to further the growth and prosperity of the Company and its Subsidiaries by enabling the Company to offer incentive awards to its employees, officers, Directors and consultants, whose past, present and/or potential contributions to the Company and its Subsidiaries have been, are or will be important to the success of the Company. The various types of long-term incentive awards that may be provided under the Plan are designed to enable the Company to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of its businesses.

ARTICLE II

ADMINISTRATION

2.1 Committee Membership. The Plan shall be administered by the Committee, the members of which shall be “Non-Employee Directors” as defined in Rule 16b-3 promulgated under the Exchange Act, and “Outside Directors” within the meaning of Section 162(m) of the Code. In addition, the members of the Committee shall satisfy the independence requirements of the New York Stock Exchange.

2.2 Powers of the Committee. The Committee shall have full authority to award, pursuant to the terms of the Plan: (i) Stock Options; (ii) Restricted Stock; (iii) Performance Shares; and/or (iv) Stock Awards. For purposes of illustration and not of limitation, the Committee shall have the authority (subject to the express provisions of this Plan):

(a) to select the officers, employees, Directors and consultants of the Company or any Subsidiary to whom Stock Options, Restricted Stock, Performance Shares, and/or Stock Awards may from time to time be awarded hereunder;

(b) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the number of shares, exercise price or types of consideration paid upon exercise of a Stock Option, such as other securities of the Company or other property, any restrictions or limitations on an award, such as performance criteria, and any vesting, exchange, surrender, cancellation, acceleration, termination, exercise or forfeiture provisions, as the Committee shall determine);

(c) to determine the Performance Goals, Performance Objectives and Performance Period for any grant of Performance Shares or the performance criteria or other factors which need to be attained for the vesting of an award granted hereunder, and to determine whether the Performance Objectives, performance criteria or other factors have been satisfied; and

(d) to alter or amend the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any such alteration or amendment that would alter the terms and conditions of an Incentive Stock Option so as to convert it into a Nonqualified Stock Option); provided, however, that no such alteration or amendment that would impair the rights of a Holder under any Agreement theretofore entered into hereunder may be made by the Committee without the Holder’s consent.

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Notwithstanding the foregoing, the Committee shall not have the power or authority to make or amend any award or interpret the Plan or any Agreement in any manner that would violate the prohibition on repricing in Section 2.5 hereof or the prohibition on extensions of credit in Section 2.6 hereof.

2.3 Interpretation of Plan.

(a) Committee Authority. Subject to Article IX below, the Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any award issued under the Plan (and to determine the form and substance of all Agreements relating thereto), and to otherwise supervise the administration of the Plan.

(b) Incentive Stock Options. No term or provision of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code.

2.4 Delegation by Committee. Except to the extent prohibited by applicable law or the applicable rules of any stock exchange on which the Common Stock is listed, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it; provided, however, that the Committee shall not delegate its responsibility with respect to: (i) any award to any Director or executive officer of the Company; (ii) any award intended to constitute “qualified performance-based compensation” under Section 162(m) of the Code; or (iii) the certification as to the satisfaction of any performance criteria in accordance with Section 162(m) of the Code. Any allocation or delegation of responsibilities or powers may be revoked by the Committee at any time.

2.5 Prohibition Against Repricing. The exercise price of an outstanding Option granted under the Plan may not be decreased after the date of grant, nor may an outstanding Option granted under the Plan be surrendered to the Company as consideration for the grant of a new Option with a lower exercise price, payment of cash, or grant of any other equity award, except as provided in Section 3.3 hereof (relating to the adjustment of awards upon changes in the capitalization of the Company).

2.6 Prohibition Against Loans. Anything in the Plan to the contrary notwithstanding, neither the Company nor any Subsidiary shall, directly or indirectly, extend any credit, or arrange for the extension of any credit, in the form of a personal loan to any officer, employee, Director or consultant of the Company or any Subsidiary for the purpose of obtaining the benefits of any award under the Plan.

ARTICLE III

STOCK SUBJECT TO PLAN

3.1 Number of Shares. The total number of shares of Common Stock reserved and available for issuance under the Plan is 2,500,000 shares of Common Stock, subject to adjustment as provided in Section 3.3 below. Shares of Common Stock under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any shares of Common Stock that have been granted pursuant to a Stock Option cease to be subject to a Stock Option, or if any shares of Restricted Stock or Performance Shares are forfeited or any award otherwise terminates without a payment being made to the Holder in the form of Common Stock, such shares shall again be available for distribution in connection with future grants and awards under the Plan.

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3.2 Additional Restrictions. Subject to the provisions of Section 3.3 below, the following additional maximums are imposed under the Plan:

(a) The maximum number of shares of Common Stock that may be issued pursuant to Options that are intended to be Incentive Stock Options shall be 2,000,000 shares;

(b) The maximum number of shares of Common Stock that may be covered by awards granted to any one individual under Article V (relating to Stock Options) shall be 250,000 shares during any one calendar-year period; and

(c) For any award of Restricted Stock or Performance Shares that are intended to be “performance based compensation” (as that term is used for purposes of §162(m) of the Code), no more than 250,000 shares of Common Stock may be subject to such awards granted to any one individual during any one calendar year period.

(d) The maximum number of shares of Common Stock that may be issued as Restricted Stock, Performance Shares and Stock Awards combined shall be 1,300,000 shares.

3.3 Adjustment Upon Changes in Capitalization, Etc. In the event of any dividend payable in shares of Common Stock, or any stock split or reverse stock split of the Common Stock, any then outstanding awards granted under the Plan shall be appropriately adjusted in such a manner as to preserve the economic benefits or potential economic benefits of such awards and the aggregate number of shares of Common Stock then reserved for issuance under the Plan, or permitted to be issued under various types of awards as provided in Section 3.2 hereof, shall be similarly adjusted. In the event of any merger, reorganization, consolidation, dividend (other than a cash dividend or a stock dividend covered by the preceding sentence) payable on shares of Common Stock, combination or exchange of shares, or other extraordinary or unusual event which results in a change in the shares of Common Stock of the Company as a whole, the Committee shall determine, in its sole discretion, whether such change equitably requires an adjustment in the terms of any award or the aggregate number of shares of Common Stock then reserved for issuance under the Plan. Any such adjustments shall be made by the Committee, whose determination shall be final, binding and conclusive.

ARTICLE IV

ELIGIBILITY

4.1 General. Awards may be made or granted to employees, officers, Directors and consultants, whose past, present and/or potential contributions to the Company and its Subsidiaries have been, are or will be important to the success of the Company, to give them an opportunity to acquire a proprietary interest in the Company.

4.2 Incentive Stock Options. No Incentive Stock Option shall be granted to any person who is not an employee of the Company or a Subsidiary at the time of grant.

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ARTICLE V

STOCK OPTIONS

5.1 Grant and Exercise. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Nonqualified Stock Options. Any Stock Option granted under the Plan shall contain such terms, not inconsistent with this Plan, or with respect to Incentive Stock Options, not inconsistent with the Plan and the Code, as the Committee may from time to time approve. The Committee shall have the authority to grant Incentive Stock Options or Nonqualified Stock Options, or both types of Stock Options, which may be granted alone or in addition to other awards granted under the Plan. To the extent that any Stock Option intended to qualify as an Incentive Stock Option does not so qualify, it shall constitute a separate Nonqualified Stock Option.

5.2 Terms and Conditions. Stock Options granted under the Plan shall be subject to the following terms and conditions:

(a) Option Term. The term of each Stock Option shall be fixed by the Committee; provided, however, that a Stock Option may be granted only within the ten-year period commencing from the Effective Date and may only be exercised within ten years of the date of grant (or five years in the case of an Incentive Stock Option granted to an optionee who, at the time of grant, owns Common Stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company (a “10% Stockholder”)).

(b) Exercise Price. The exercise price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant and may not be less than 100 percent of the Fair Market Value on the day of grant; provided, however, that the exercise price of an Incentive Stock Option granted to a 10% Stockholder shall not be less than 110 percent of the Fair Market Value on the date of grant.

(c) Exercisability. Stock Options shall be exercisable in four equal annual installments commencing as of the first anniversary of the date of grant or at such time or times and subject to such terms and conditions as shall be determined by the Committee and as set forth in Article VIII, below. The Committee may waive such installment exercise provisions at any time at or after the time of grant in whole or in part, based upon such factors as the Committee shall determine, on a case by case basis.

(d) Method of Exercise. Subject to whatever installment exercise and vesting period provisions are applicable in a particular case, Stock Options may be exercised in whole or in part at any time during the term of the Option, by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased. Such notice shall be accompanied by:

(i) a cash payment equal to the aggregate exercise price;

(ii) Mature Shares having a Fair Market Value equal to the aggregate exercise price;

(iii) an election to make a cashless exercise through a registered broker-dealer; and/or

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(iv) any other form of payment which is acceptable to the Committee.

Cash payments shall be made by wire transfer, certified or bank check or personal check, in each case payable to the order of the Company; provided, however, that the Company shall not be required to deliver certificates for shares of Common Stock with respect to which an Option is exercised until the Company has confirmed the receipt of good and available funds in payment of the purchase price thereof. Payments in the form of Mature Shares shall be valued at the Fair Market Value of the Common Stock on the date prior to the date of exercise. Such payments shall be made by physical delivery of stock certificates in negotiable form (or, in the discretion of the Committee, by electronic delivery in any manner acceptable to the Committee) that is effective to transfer good and valid title thereto to the Company, free of any liens or encumbrances. Payments in the form of a cashless exercise shall be made by authorizing a third-party broker-dealer to sell all or a portion of the shares of Common Stock acquired upon exercise of the Option, and to remit to the Company a sufficient portion of the sale proceeds to pay the aggregate exercise price and any applicable tax withholding resulting from such exercise. Unless otherwise determined by the Committee at or after the time of grant, the Company shall not issue any shares of Common Stock acquired upon the cashless exercise of an Option until the Holder or the third-party broker-dealer shall deliver (or cause to be delivered) to the Company the aggregate exercise price and any applicable tax withholding amount. A Holder shall have none of the rights of a stockholder with respect to the shares subject to the Option until such shares shall be transferred to the Holder upon the exercise of the Option.

(e) Transferability. No Stock Option shall be transferable by the Holder other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the Holder’s lifetime, only by the Holder (or, to the extent of legal incapacity or incompetency, the Holder’s guardian or legal representative).

(f) Termination by Reason of Death. Subject to the provisions of Section 11.3, below, and unless otherwise determined by the Committee and set forth in the Agreement, if a Holder is an employee of the Company or a Subsidiary at the time of grant and if a Holder’s employment by the Company or a Subsidiary terminates by reason of death, any Stock Option held by such Holder, unless otherwise determined by the Committee and set forth in the Agreement, shall thereupon automatically terminate, except that the portion of such Stock Option that has vested on or prior to the date of death may thereafter be exercised by the legal representative of the estate or by the legatee of the Holder under the will of the Holder, for a period of one year (or such other greater or lesser period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter.

(g) Termination by Reason of Disability. Subject to the provisions of Section 11.3, below, and unless otherwise determined by the Committee and set forth in the Agreement, if a Holder is an employee of the Company or a Subsidiary at the time of grant and if a Holder’s employment by the Company or any Subsidiary terminates by reason of Disability, any Stock Option held by such Holder, unless otherwise determined by the Committee and set forth in the Agreement, shall thereupon automatically terminate, except that the portion of such Stock Option that has vested on or prior to the date of termination may thereafter be exercised by the Holder for a period of one year (or such other greater or lesser period as the Committee may specify at the time of grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter.

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(h) Other Termination. Subject to the provisions of Section 11.3, below, and unless otherwise determined by the Committee and set forth in the Agreement, if a Holder is an employee of the Company or a Subsidiary at the time of grant and if such Holder’s employment by the Company or any Subsidiary terminates for any reason other than death or Disability, the Stock Option shall thereupon automatically terminate, except that if the Holder’s employment is terminated by the Company or a Subsidiary without cause or due to Normal Retirement, then the portion of such Stock Option that has vested on or prior to the date of termination of employment may be exercised for the lesser of three months (or, in the case of a Nonqualified Stock Option, one year) after termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter.

(i) Additional Incentive Stock Option Limitation. In the case of an Incentive Stock Option, the aggregate Fair Market Value (on the date of grant of the Option) of the shares of Common Stock with respect to which Incentive Stock Options become exercisable for the first time by a Holder during any calendar year (under all plans of the Company and its Parent and Subsidiaries) shall not exceed $100,000.

ARTICLE VI

RESTRICTED STOCK

6.1 Grant. Shares of Restricted Stock may be awarded either alone or in addition to other awards granted under the Plan and may be in the form of Performance Shares. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be awarded, the number of shares to be awarded, the price (if any) to be paid by the Holder, the duration of the Restriction Period, variances to the vesting schedule and rights to acceleration thereof, performance criteria (if any) and all other terms and conditions of the awards.

6.2 Terms and Conditions. Each award of Restricted Stock shall be subject to the following terms and conditions:

(a) Certificates. Restricted Stock, when issued, will be represented by a stock certificate or certificates registered in the name of the Holder to whom such Restricted Stock shall have been awarded. During the Restriction Period, certificates representing the Restricted Stock and any securities constituting Retained Distributions shall bear a legend to the effect that ownership of the Restricted Stock (and such Retained Distributions), and the enjoyment of all rights appurtenant thereto, are subject to the restrictions, terms and conditions provided in the Plan and the Agreement.

(b) Rights of Holder. Shares of Restricted Stock shall constitute issued and outstanding shares of Common Stock for all corporate purposes. The Holder shall have the right to vote such shares of Restricted Stock and to exercise all other rights, powers and privileges of a holder of Common Stock with respect to such shares of Restricted Stock, except that: (i) the Holder shall not be entitled to delivery of the stock certificate or certificates representing such Restricted Stock until the Restriction Period shall have expired and all other vesting requirements with respect thereto shall have been fulfilled; (ii) the Company shall retain custody of the stock certificate or certificates representing the Restricted Stock during the Restriction Period; (iii) the Company shall retain custody of all Retained Distributions made or declared with respect to the Restricted Stock, subject to the same restrictions, terms and conditions as are applicable to the Restricted Stock, until such time, if ever, as the Restricted Stock shall have become vested and the Restriction Period shall have expired; and (iv) a breach by the Holder of any of the restrictions, terms or conditions contained in this Plan or the Agreement or otherwise established by the Committee with respect to any Restricted Stock or Retained Distributions shall cause a forfeiture of such Restricted Stock and any Retained Distributions with respect thereto.

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(c) Vesting; Forfeiture. Upon the expiration of the Restriction Period with respect to any shares of Restricted Stock, and the satisfaction of any other applicable restrictions, terms and conditions set forth in the applicable Agreement: (i) such shares of Restricted Stock shall become vested and (ii) any Retained Distributions with respect to such Restricted Stock shall become vested. Any shares of Restricted Stock and Retained Distributions that do not vest shall be forfeited to the Company and the Holder shall not thereafter have any rights with respect to such Restricted Stock and Retained Distributions that shall have been so forfeited. Subject to the terms of Article VIII below, the Restriction Period shall not be less than three years, unless otherwise determined by the Committee at or after the date of grant.

6.3 Performance Shares. The Committee may, in its sole discretion, grant Performance Shares which are restricted by corporate performance criteria identified by the Committee and set forth in the Agreement. If the Performance Shares are intended to constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Code:

(a) The Committee shall determine the applicable Performance Period and establish objective Performance Goals and Performance Objectives for such Performance Period prior to, or reasonably promptly following, the inception of a Performance Period but, to the extent required by Section 162(m) of the Code, by no later than the date that is the earlier of ninety days after the commencement of the Performance Period and the day prior to the date on which 25 percent of the Performance Period has elapsed; and

(b) Following the completion of each Performance Period, the Committee shall certify in writing, in accordance with the requirements of Section 162(m) of the Code to the extent applicable, whether the Performance Objectives and other material terms of the award of Performance Shares have been achieved or not. Unless the Committee otherwise determines, the Performance Shares shall not vest until the Committee makes the certification specified in this Section 6.3 (b).

ARTICLE VII

AUTOMATIC AWARDS TO OUTSIDE DIRECTORS

7.1 Stock Awards to Outside Directors. On June 30 and December 31 of each year during the term of the Plan, each person then serving as an Outside Director of the Company shall automatically receive a Stock Award consisting of that number of whole shares of Common Stock obtained by dividing 50 percent of the Annual Stock Retainer Amount by the Fair Market Value of a share of Common Stock as of the grant date, in each case rounded upward to the nearest number of whole shares.

7.2 Nonqualified Stock Options Granted to Outside Directors in Lieu of Cash-Based Retirement Benefits.

(a) On the date of the Annual Meeting of each year during the term of the Plan, each person then serving as an Outside Director of the Company shall automatically receive a Nonqualified Stock Option to purchase 325 shares of Common Stock.* No automatic awards, however, will be made prior to stockholder approval of the Plan.

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(b) The exercise price per share of Common Stock under a Nonqualified Stock Option granted under this Section 7.2 shall be the Fair Market Value of a share of Common Stock as of the date each such Nonqualified Stock Option is granted.

(c) Each Nonqualified Stock Option granted under this Section 7.2 shall become exercisable in three equal annual installments commencing as of the first anniversary of the date of grant and shall be exercisable until the earlier of ten years from the date of grant or the expiration of the three-year period provided in paragraph (d) below.

(d) Whenever a recipient of a Nonqualified Stock Option granted under this Section 7.2 ceases to be a Director of the Company for any reason whatsoever, all outstanding Nonqualified Stock Options granted under this Section 7.2, then held by such person, shall continue to vest and be exercisable in whole or in part for a period of three years from the date on which such person ceases to be a Director of the Company; provided, however, that, in no event, shall any such Nonqualified Stock Option be exercisable beyond the ten-year term of the Option specified in paragraph (c) above.

(e) Each Nonqualified Stock Option granted under this Section 7.2 shall be subject to the provisions of Section 5.2(d) and (e) hereof.

*By resolution dated February 24, 2011, the Board suspended the automatic award to Outside Directors of a nonqualified stock option to purchase 325 shares of Common Stock effective as of the date of such resolution.

7.3 .Additional Automatic Awards to Directors.

(a) Effective as of the close of business on the day on which the Annual Meeting of Stockholders of the Company is held, each person then serving as an Outside Director of the Company shall automatically receive a Nonqualified Stock Option covering the lesser of 3,000 shares of Common Stock or a number of shares of Common Stock having an aggregate Fair Market Value on the date of grant equal to $33,333.* Each person who is first elected a Director of the Company after February 25, 2011, and who qualifies as an Outside Director, also shall be granted, automatically upon such election, a restricted stock award covering 6,000 shares of common stock which shall vest in three (3) equal annual installments commencing as of the first anniversary of the date of grant, provided the Holder of such restricted stock award is a Director of the Company on such anniversary.

(b) The exercise price per share of Common Stock under a Nonqualified Stock Option granted under this Section 7.3 shall be the Fair Market Value of a share of Common Stock as of the date each such Nonqualified Stock Option is granted.

(c) Each Nonqualified Stock Option granted under this Section 7.3 shall become exercisable in four equal annual installments commencing as of the first anniversary of the date of grant, provided the Holder of such Nonqualified Stock Option is a Director of the Company on such anniversary, and shall be exercisable until the earlier of ten years from the date of grant or the expiration of the applicable period specified in paragraph (d) or (e) below.

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(d) Each Nonqualified Stock Option granted under this Section 7.3 to an Outside Director of the Company shall terminate if and when the optionee shall cease to serve as a Director of the Company, except as follows:

(i) If the optionee has continuously served as a Director of the Company for at least one year from the date of grant of a Nonqualified Stock Option and dies (x) while serving as a Director of the Company or (y) during any period after having ceased to be a Director when the Nonqualified Stock Option would otherwise be exercisable under subparagraph (ii) below, the Nonqualified Stock Option theretofore granted to such person may be exercised by a representative of such person’s estate; provided that such Nonqualified Stock Option may be exercised only within six months after the date of death and prior to the expiration date specified in such Nonqualified Stock Option;

(ii) If the optionee ceases for any reason (other than death) to be a Director of the Company subsequent to one year from the date of grant, such Nonqualified Stock Option may be exercised within three months from the date of such cessation and prior to the expiration date specified in such Nonqualified Stock Option; and

(iii) No Nonqualified Stock Option may be exercised for more than the number of shares for which the optionee might have exercised such Option at the time such optionee ceased for any reason to be a Director of the Company.

(e) Each Nonqualified Stock Option granted under this Section 7.3 shall be subject to the provisions of Section 5.2(d) and (e) hereof.

*By resolution dated February 24, 2011, the Board suspended the automatic award to Outside Directors of a nonqualified stock option covering the lesser of 3,000 shares of Common Stock or a number of shares of Common Stock having an aggregate Fair Market Value on the date of grant equal to $33,333 effective as of the date of such resolution.

ARTICLE VIII

ACCELERATED VESTING & BUYOUT OF AWARDS

UPON A CHANGE IN CONTROL

8.1 Accelerated Vesting and Exercisability. Upon the occurrence of a Change in Control of the Company, the vesting periods of any and all Stock Options and other awards granted and outstanding under the Plan shall be accelerated and all such Stock Options and awards shall immediately and entirely vest, and (except as provided in Section 8.2 below) the respective Holders thereof shall have the immediate right to purchase and/or receive any and all Common Stock subject to such Stock Options and awards on the terms set forth in this Plan and the respective Agreements respecting such Stock Options and awards.

8.2 Buyout of Awards in Connection with Certain Transactions. Upon the occurrence of a Change in Control of the Company, the Committee may require a Holder of any award granted under this Plan to relinquish such award to the Company upon the tender by the Company to Holder of cash in an amount equal to the Transaction Value of such award.

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8.3 Definition of “Change in Control.” For purposes of this Article VIII, a “Change in Control” of the Company shall mean the occurrence, after the Effective Date of the Plan, of any of the following events:

(a) a report on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) shall be filed with the Securities and Exchange Commission pursuant to the Exchange Act and that report discloses that any person (within the meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act), other than the Company (or one of its subsidiaries) or any employee benefit plan sponsored by the Company (or one of its subsidiaries), is the beneficial owner (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act), directly or indirectly, of 50 percent or more of the outstanding voting stock of the Company;

(b) any person (within the meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act), other than the Company (or one of its subsidiaries) or any employee benefit plan sponsored by the Company (or one of its subsidiaries), shall purchase securities pursuant to a tender offer or exchange offer to acquire any voting stock of the Company (or any securities convertible into voting stock of the Company) and, immediately after consummation of that purchase, that person is the beneficial owner (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act), directly or indirectly, of 50 percent or more of the outstanding voting stock of the Company;

(c) the consummation of: (i) a merger, consolidation or reorganization of the Company with or into any other person if, as a result of such merger, consolidation or reorganization, 50 percent or less of the combined voting power of the then outstanding securities of such other person immediately after such merger, consolidation or reorganization is held in the aggregate by the holders of voting stock of the Company immediately prior to such merger, consolidation or reorganization; (ii) any sale, lease, exchange or other transfer of all or substantially all of the assets of the Company and its consolidated subsidiaries to any other person if, as a result of such sale, lease, exchange or other transfer, 50 percent or less of the combined voting power of the then outstanding securities of such other person immediately after such sale, lease, exchange or other transfer is held in the aggregate by the holders of voting stock of the Company immediately prior to such sale, lease, exchange or other transfer; or (iii) a transaction immediately after the consummation of which any person (within the meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act) would be the beneficial owner (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act), directly or indirectly, of more than 50 percent of the outstanding voting stock of the Company;

(d) the stockholders of the Company approve the dissolution of the Company; or

(e) during any period of twelve consecutive months, the individuals who at the beginning of that period constituted the Board shall cease to constitute a majority of the Board, unless the election, or the nomination for election by the Company’s stockholders, of each director of the Company first elected during such period was approved by a vote of at least a majority of the Directors of the Company then still in office who were Directors of the Company at the beginning of any such period; or

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(f) the consummation of any other transaction which a majority of the Board determines to constitute a change in control of the Company.

ARTICLE IX

AMENDMENT AND TERMINATION

9.1 The Board may at any time, and from time to time, alter, amend, suspend or discontinue the Plan or any provision of the Plan; provided, however, that: (a) no alteration, amendment, suspension or discontinuance that would impair the rights of a Holder under any Agreement theretofore entered into hereunder shall be made without the Holder’s consent and (b) no alteration or amendment that would: (i) repeal the prohibition against repricing set forth in Section 2.5; (ii) increase the overall number of shares reserved and available for issuance under the Plan set forth in Section 3.1; (iii) increase the maximum share limitations set forth in Section 3.2; or (iv) decrease the minimum exercise price of Stock Options set forth in Section 5.2(b), shall be made without the approval of the Company’s stockholders.

ARTICLE X

TERM OF PLAN

10.1 Effective Date. The Plan shall be effective as of October 24, 2002 (the “Effective Date”), subject to the approval of the Plan by the Company’s stockholders within one year after the Effective Date. Any awards granted under the Plan prior to such approval shall be effective when made (unless otherwise specified by the Committee at the time of grant), but shall be conditioned upon, and subject to, such approval of the Plan by the Company’s stockholders and no awards shall vest or otherwise become free of restrictions prior to such approval.

10.2 Termination Date. Unless earlier terminated by the Board, this Plan shall continue to remain in effect for a period of ten years from the Effective Date; provided that the Plan shall continue to govern all outstanding awards until the awards themselves terminate in accordance with their terms.

ARTICLE XI

GENERAL PROVISIONS

11.1 Written Agreements. Each award granted under the Plan shall be confirmed by, and shall be subject to the terms of, the Agreement executed by the Company and the Holder. All Agreements shall be in writing and may be executed in any legally enforceable manner, including by electronic means. The Committee may terminate any award made under the Plan if the Agreement relating thereto is not executed and returned to the Company within ten days after the Agreement has been delivered to the Holder for his or her execution.

11.2 Unfunded Status of Plan. The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to a Holder by the Company, nothing contained herein shall give any such Holder any rights that are greater than those of a general creditor of the Company.

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11.3 Employees.

(a) Competition; Interference; Solicitation; Disclosure of Confidential Information. If a Holder’s employment with the Company or a Subsidiary is terminated for any reason whatsoever and, subsequent thereto, such Holder: (i) accepts employment with a competitor of, or otherwise engages in competition with, the Company in violation of any agreement between the Holder and the Company; (ii) induces or encourages any employee of the Company to terminate his or her employment with the Company, in violation of any agreement between the Holder and the Company; (iii) solicits, induces, or encourages any person or entity which is a supplier of, a purchaser from, or a contracting party with, the Company to terminate any written or oral agreement, order or understanding with the Company or to conduct business in a way that results in an adverse impact on the Company in violation of any agreement between the Holder and the Company; or (iv) discloses to anyone outside the Company, or uses any confidential information or other property (including, but not limited to, intellectual property) of the Company in violation of the Company’s written policies or any agreement between the Holder and the Company, the Committee, in its sole discretion, may require such Holder to return to the Company the Economic Value of any award that was realized or obtained by such Holder at any time during the period beginning on the date that is six months prior to the date such Holder’s employment with the Company is terminated. The “Economic Value” shall mean the amount reportable by the Holder as taxable compensation for federal income tax purposes with respect to such award (for awards other than Incentive Stock Options) and, in the case of an Incentive Stock Option, the amount that would have been reportable by the Holder as taxable compensation for federal income tax purposes with respect to such award if such Incentive Stock Option had been a Nonqualified Stock Option.

(b) Termination for Cause. The Committee may, if a Holder’s employment with the Company or a Subsidiary is terminated for cause, annul any award granted under this Plan to such employee and, in such event, the Committee, in its sole discretion, may require such Holder to return to the Company the Economic Value of any award that was realized or obtained by such Holder at any time during the period beginning on the date that is six months prior to the date such Holder’s employment with the Company is terminated.

(c) No Right of Employment. Nothing contained in the Plan or in any award hereunder shall be deemed to confer upon any Holder, who is an employee of the Company or any Subsidiary, any right to continued employment with the Company or any Subsidiary, nor shall it interfere in any way with the right of the Company or any Subsidiary to terminate the employment of any Holder who is an employee at any time.

11.4 Investment Representations; Company Policy. The Committee may require each person acquiring shares of Common Stock pursuant to a Stock Option or other award under the Plan to represent to, and agree with, the Company in writing that the Holder is acquiring the shares for investment without a view to distribution thereof. Each person acquiring shares of Common Stock pursuant to a Stock Option or other award under the Plan shall be required to abide by all policies of the Company in effect at the time of such acquisition and thereafter with respect to the ownership and trading of the Company’s securities.

11.5 Additional Incentive Arrangements. Nothing contained in the Plan shall prevent the Board from adopting such other or additional incentive arrangements as it may deem desirable, including, but not limited to, the granting of Stock Options and the awarding of Common Stock and cash otherwise than under the Plan; and such arrangements may be either generally applicable or applicable only in specific cases.

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11.6 Withholding Taxes. Not later than the date as of which an amount must first be included in the gross income of the Holder for Federal income tax purposes with respect to any option or other award under the Plan, the Holder shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state and local taxes of any kind required by law to be withheld or paid with respect to such amount. If permitted by the Committee, tax withholding or payment obligations may be settled with Common Stock, including Common Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditioned upon such payment or arrangements and the Company or the Holder’s employer (if not the Company) shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Holder from the Company or any Subsidiary.

11.7 Governing Law. The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Connecticut (without regard to choice of law provisions); provided, however, that all matters relating to or involving corporate law shall be governed by the laws of the State of Delaware.

11.8 Other Benefit Plans. Any award granted under the Plan shall not be deemed compensation for purposes of computing benefits under any retirement plan of the Company or any Subsidiary and shall not affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation (unless required by specific reference in any such other plan to awards under this Plan).

11.9 Non-Transferability. Except as otherwise expressly provided in the Plan or the Agreement, no right or benefit under the Plan may be alienated, sold, assigned, hypothecated, pledged, exchanged, transferred, encumbered or charged, and any attempt to alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void.

11.10 Applicable Laws. The obligations of the Company with respect to all Stock Options and awards under the Plan shall be subject to: (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the Securities Act of 1933, as amended, and (ii) the rules and regulations of any securities exchange on which the Common Stock may be listed.

11.11 Conflicts. If any of the terms or provisions of the Plan or an Agreement conflict with the requirements of Section 422 of the Code, then such terms or provisions shall be deemed inoperative to the extent they so conflict with such requirements. Additionally, if this Plan or any Agreement does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein and therein with the same force and effect as if such provision had been set out at length herein and therein. If any of the terms or provisions of any Agreement conflict with any terms or provisions of the Plan, then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of the Plan. Additionally, if any Agreement does not contain any provision required to be included therein under the Plan, such provision shall be deemed to be incorporated therein with the same force and effect as if such provision had been set out at length therein.

11.12 Non-Registered Stock. The shares of Common Stock to be distributed under this Plan have not been, as of the Effective Date, registered under the Securities Act of 1933, as amended, or any applicable state or foreign securities laws and the Company has no obligation to any Holder to register the Common Stock or to assist the Holder in obtaining an exemption from the various registration requirements, or to list the Common Stock on a national securities exchange or any other trading or quotation system, including the NASDAQ National Market and NASDAQ SmallCap Market.

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11.13 Right of Off-Set. To the extent permitted by law, the Company or the Holder’s employer (if not the Company) shall have the right to deduct from any payment of any kind otherwise due to the Holder from the Company or any Subsidiary, under the Plan or any Agreement entered into hereunder, any amounts due and owing to the Company or the Holder’s employer, as the case may be, from the Holder.

ARTICLE XII

DEFINITIONS

12.1 Definitions. For purposes of the Plan, the following terms shall be defined as set forth below:

(a) “Agreement” shall mean the agreement between the Company and a Holder setting forth the terms and conditions of an award under the Plan.

(b) “Annual Stock Retainer Amount” shall mean the annual stock retainer equivalent to $36,000, subject to adjustment from time-to-time by the Board, that is paid to each Outside Director. “Board” shall mean the Board of Directors of the Company.

(d) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

(e) “Committee” shall mean the Compensation and Stock Option Committee of the Board or any other committee of the Board that the Board may designate to administer the Plan or any portion thereof. If no Committee is so designated, then all references in this Plan to “Committee” shall mean the Board.

(f) “Common Stock” means the Common Stock of the Company, par value $.10 per share.

(g) “Company” shall mean Lydall, Inc., a corporation organized and existing under the laws of the State of Delaware.

(h) “Director” shall mean a member of the Board.

(i) “Disability” shall mean physical or mental impairment as determined under procedures established by the Committee for purposes of the Plan.

(j) “Economic Value” shall have the meaning set forth in Section 11.3(a) hereof.

(k) “Effective Date” shall have the meaning set forth in Section 10.1 hereof.

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(l) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

(m) “Fair Market Value,” when used in reference to a share of Common Stock as of a particular date (such as the date of grant or the date of exercise of an award under the Plan), means the fair value per share of Common Stock as of such date, determined in accordance with the following procedures:

(i) if the Common Stock is listed on a national securities exchange or quoted on the NASDAQ National Market or NASDAQ SmallCap Market, then the fair value per share of the Common Stock shall be the last sale price per share of the Common Stock in the principal trading market for the Common Stock on such date, as reported by the exchange or NASDAQ, as the case may be;

(ii) if the Common Stock is not listed on a national securities exchange or quoted on the NASDAQ National Market or NASDAQ SmallCap Market, but is traded in the over-the-counter market, then the fair value per share of the Common Stock shall be the closing bid price per share for the Common Stock on such date, as reported by the OTC Bulletin Board or the National Quotation Bureau, Incorporated or similar publisher of such quotations; and

(iii) if the fair value per share of the Common Stock cannot be determined pursuant to clause (i) or (ii) above, then the fair value per share of the Common Stock shall be determined by the Committee in good faith.

(n) “Holder” shall mean a person who has received an award under the Plan.

(o) “Incentive Stock Option” shall mean any Stock Option intended to be designated as, and meeting the requirements of, an “incentive stock option” within the meaning of Section 422 of the Code.

(p) “Mature Shares” shall mean shares of Common Stock that have been held by the Holder for at least six months.

(q) “Nonqualified Stock Option” shall mean any Stock Option that is not an Incentive Stock Option, including, from and after the date an Incentive Stock Option ceases to qualify as such, any Incentive Stock Option that ceases to qualify as an Incentive Stock Option.

(r) “Normal Retirement” shall mean retirement from active employment with the Company or any Subsidiary on or after age 65.

(s) “Outside Director” shall mean a Director who, as of the close of business on the date of grant of any award hereunder, is not an employee of the Company or any Subsidiary.

(t) “Parent” shall mean any present or future “parent corporation” of the Company, as such term is defined in Section 424(e) of the Code.

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(u) “Performance Goals” shall mean (and may be expressed in terms of) any of the following business criteria: (i) net income; (ii) earnings per share; (iii) operating income; (iv) operating cash flow; (v) earnings before income taxes and depreciation; (vi) earnings before interest, taxes, depreciation and amortization; (vii) increases in operating margins; (viii) reductions in operating expenses; (ix) earnings on sales growth; (x) total stockholder return; (xi) return on equity; (xii) return on total capital; (xiii) return on invested capital; (xiv) return on assets; (xv) economic value added; (xvi) cost reductions and savings; (xvii) increase in surplus; (xviii) productivity improvements; or (xix) an executive’s attainment of personal objectives with respect to any of the foregoing criteria or such other criteria as the Committee deems appropriate such as growth and profitability, customer satisfaction, quality, safety, business development, negotiating transactions or developing long-term business goals. A Performance Goal may be measured over a Performance Period on a periodic, annual, cumulative or average basis and may be established on a corporate-wide basis or established with respect to one or more operating units, divisions, subsidiaries, acquired businesses, minority investments, partnerships or joint ventures. Unless otherwise determined by the Committee, the Performance Goals will be determined using generally accepted accounting principles consistently applied during a Performance Period.

(v) “Performance Objective” means the level or levels of performance required to be attained with respect to specified Performance Goals in order for any award of Performance Shares to vest.

(w) “Performance Period” means the calendar year, or such other shorter or longer period designated by the Committee, during which performance will be measured in order to determine a Holder’s entitlement to vesting of any Performance Shares.

(x) “Performance Shares” shall mean shares of Restricted Stock that are subject to restriction based on achievement of pre-defined corporate performance criteria.

(y) “Plan” shall mean the Lydall 2003 Stock Incentive Compensation Plan, as amended from time to time.

(z) “Restricted Stock” shall mean shares of Common Stock, received under an award made pursuant to Article VI hereof, that are subject to restrictions under Article VI.

(aa) “Restriction Period” shall mean the period of time during which an award of Restricted Stock is subject to forfeiture.

(bb) “Retained Distributions” shall mean all distributions, including regular cash dividends and other cash equivalent distributions, made or declared with respect to an award of Restricted Stock.

(cc) “Stock Award” shall mean an award of shares of Common Stock to an Outside Director pursuant to Section 7.1 hereof.

(dd) “Stock Option” or “Option” shall mean an option to purchase shares of Common Stock which is granted pursuant to the Plan.

(ee) “Subsidiary” shall mean any present or future “subsidiary corporation” of the Company, as such term is defined in Section 424(f) of the Code.

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(ff) “Transaction Value” shall mean the Fair Market Value of a share of Common Stock as of the date of repurchase, in the event the award to be repurchased under Section 8.2 hereof is comprised of shares of Common Stock, and the difference between Fair Market Value per share and the exercise price (if lower than Fair Market Value) in the event the award is a Stock Option; in each case, multiplied by the number of shares subject to the award.

# # # # # # #

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EX-31.1 3 v220010_ex31-1.htm Unassociated Document

Exhibit 31.1

CERTIFICATION

I, Dale G. Barnhart, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Lydall, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



May 2, 2011		/s/ Dale G. Barnhart
		Dale G. Barnhart President and Chief Executive Officer

EX-31.2 4 v220010_ex31-2.htm Unassociated Document

Exhibit 31.2

CERTIFICATION

I, Erika G. Turner, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Lydall, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



May 2, 2011		/s/ Erika G. Turner
		Erika G. Turner Vice President, Chief Financial Officer and Treasurer

EX-32.1 5 v220010_ex32-1.htm Unassociated Document

Exhibit 32.1

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lydall, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The foregoing certifications are accompanying the Form 10-Q solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States Code) and are not being filed as a part of this Form 10-Q or as a separate disclosure document.



May 2, 2011		/s/ Dale G. Barnhart
		Dale G. Barnhart President and Chief Executive Officer

May 2, 2011		/s/ Erika G. Turner
		Erika G. Turner Vice President, Chief Financial Officer and Treasurer