Form 10-Q

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NQIRYWS9Wg8CS7q5jpoqaHNjSj9UJa4ZWFbJbPQBPaRMjlJ8AXVXnpLyEbVq4nS2 u426vs/7bdZIFZo9o97nuQ== 0001193125-05-157849.txt : 20050804 0001193125-05-157849.hdr.sgml : 20050804 20050804165105 ACCESSION NUMBER: 0001193125-05-157849 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050804 DATE AS OF CHANGE: 20050804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYDALL INC /DE/ CENTRAL INDEX KEY: 0000060977 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] 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: 05999959 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 d10q.htm FORM 10-Q Form 10-Q

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 June 30, 2005

¨ 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)

Registrant’s telephone number, including area code: (860) 646-1233

One Colonial Road

Manchester, CT 06040

(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 is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

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 July 26, 2005		16,164,568

LYDALL, INC.

INDEX


			Page Number
Part I.	Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Statements of Operations	3-4

		Condensed Consolidated Balance Sheets	5

		Condensed Consolidated Statements of Cash Flows	6

		Notes to Condensed Consolidated Financial Statements	7-14

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15-23

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23

	Item 4.	Controls and Procedures	23-24

Part II.	Other Information

	Item 1.	Legal Proceedings	24

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

	Item 5.	Other Information	25

	Item 6.	Exhibits	25

Signature			26

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)


	Quarter Ended June 30,
	2005		2004
	(Unaudited)
Net sales	$	81,474	$	74,659
Cost of sales		64,163		59,075

Gross margin		17,311		15,584
Selling, product development and administrative expenses		13,406		14,200

Operating income		3,905		1,384
Interest expense		502		371
Other (income) expense, net		140		23

Income before income taxes		3,263		990
Income tax expense		1,171		346

Net income	$	2,092	$	644

Earnings per share:
Basic	$	0.13	$	0.04
Diluted	$	0.13	$	0.04

Weighted average number of common shares outstanding:
Basic		16,067		16,097
Diluted		16,137		16,173

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)


	Six Months Ended June 30,
	2005		2004
	(Unaudited)
Net sales	$	153,995	$	147,074
Cost of sales		120,604		116,269

Gross margin		33,391		30,805
Selling, product development and administrative expenses		28,109		27,671

Operating income		5,282		3,134
Interest expense		832		676
Other (income) expense, net		190		25

Income from continuing operations before income taxes		4,260		2,433
Income tax expense		1,525		851

Net income	$	2,735	$	1,582

Earnings per share:
Basic	$	0.17	$	0.10
Diluted	$	0.17	$	0.10
Weighted average number of common shares outstanding:
Basic		16,064		16,124
Diluted		16,148		16,207

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)


	June 30, 2005			December 31, 2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,313		$	1,580
Accounts receivable, net		52,062			49,909
Inventories, net		40,824			40,082
Prepaid expenses and other current assets		5,537			6,308
Deferred tax assets		2,721			2,818

Total current assets		102,457			100,697
Property, plant and equipment, at cost		200,139			199,519
Accumulated depreciation		(94,461	)		(90,573	)

		105,678			108,946
Other assets, net		38,702			38,754

Total assets	$	246,837		$	248,397

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	4,623		$	5,172
Accounts payable		27,271			27,125
Accrued payroll and other compensation		6,248			5,220
Other accrued liabilities		7,964			8,931

Total current liabilities		46,106			46,448
Long-term debt		32,227			32,941
Deferred tax liabilities		10,636			10,098
Pension and other long-term liabilities		15,106			14,406

Commitments and contingencies

Stockholders’ equity:
Preferred stock		—			—
Common stock		2,250			2,253
Capital in excess of par value		45,842			46,147
Unearned compensation		(398	)		(555	)
Treasury stock, at cost		(63,981	)		(64,486	)
Retained earnings		166,142			163,407
Accumulated other comprehensive loss		(7,093	)		(2,262	)

Total stockholders’ equity		142,762			144,504

Total liabilities and stockholders’ equity	$	246,837		$	248,397

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Six Months Ended June 30,
	2005			2004
	(Unaudited)
Cash flows from operating activities:
Net income	$	2,735		$	1,582
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		7,542			8,305
Deferred income taxes		471			173
Amortization of unearned compensation		157			262
Loss on dispositions of property, plant and equipment		52			147
Changes in operating assets and liabilities:
Accounts receivable		(4,150	)		(11,440	)
Inventories		(2,200	)		(728	)
Accounts payable		1,115			5,472
Accrued payroll and other compensation		1,371			1,624
Other, net		965			7,154

Net cash provided by operating activities		8,058			12,551

Cash flows from investing activities:
Capital expenditures		(8,683	)		(15,545	)
Release of restricted cash		—			2,516

Net cash used for investing activities		(8,683	)		(13,029	)

Cash flows from financing activities:
Debt proceeds		57,899			28,976
Debt repayments		(60,538	)		(27,010	)
Reimbursement of cash from leasing company		3,133			—
Common stock issued		197			761
Common stock repurchased		—			(1,912	)

Net cash provided by financing activities		691			815

Effect of exchange rate changes on cash		(333	)		(279	)

(Decrease) Increase in cash and cash equivalents		(267	)		58
Cash and cash equivalents at beginning of period		1,580			3,008

Cash and cash equivalents at end of period	$	1,313		$	3,066

See accompanying Notes to Condensed Consolidated Financial Statements.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements include the accounts of Lydall, Inc. and its subsidiaries (collectively, the “Company” or the “Registrant”). 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, 2004. The year-end condensed consolidated balance sheet was derived from the December 31, 2004 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, 2004. Certain prior year components of the condensed consolidated financial statements have been reclassified to be consistent with current year presentation.

During the second quarter of 2005, the Company reclassified certain shipping costs billed to customers. Emerging Issues Task Force Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs” (EITF 00-10) specifies that amounts billed to a customer in a sale transaction represent revenues earned for the goods provided and should be classified as revenue. As a result, the Company has reclassified to net sales $0.3 million of shipping and handling costs directly billed to customers in its Statements of Operations for the six months ended June 30, 2005 that were originally reported as a reduction in Cost of Sales in its Statements of Operations for the period ended March 31, 2005. Amounts billed to customers for shipping and handling charges for the quarter and six months ended June 30, 2004 of $0.3 million and $0.6 million, respectively, have also been reclassified.

The Company has expanded certain of its significant accounting policy disclosures, described in Note 1 of the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, to provide additional information with respect to those policies, as described below:

Revenue recognition–The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin 104, “Revenue Recognition” (SAB 104). SAB 104 requires revenue to be recognized: (1) once evidence of an arrangement exists; (2) product delivery has occurred; (3) pricing is fixed or determinable; and (4) collection is reasonably assured. The four criteria required to recognize revenue by SAB 104 are considered to be met, and the passage of title to the customer occurs, at the respective FOB point and revenue is recognized at that time. The Company’s standard sales and shipping terms are FOB shipping point, therefore, substantially all revenue is recognized upon shipment. However, in limited circumstances, the Company conducts business with certain customers on FOB destination terms and in these instances revenue is recognized upon receipt by the customer. The Company generally does not provide specific customer inspection or acceptance provisions in its sales terms, with the exception of tooling sales discussed in “Pre-production design and development costs” below.

Sales returns and allowances are recorded as identified or communicated by the customer and internally approved. The Company does not provide customers with general rights of return for products sold; however, in limited circumstances, the Company will allow sales returns and allowances from customers if the products sold do not conform to specifications.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Shipping and handling costs consist primarily of costs incurred to deliver products to customers and internal costs related to preparing products for shipment and are recorded in cost of sales. Shipping and handling costs billed to customers are recorded as net sales in accordance with the revenue recognition policy discussed above.

Pre-production design and development costs–The Company enters into contractual agreements with certain customers to design and develop molds, dies and tools (collectively, “tooling”). The Company accounts for these pre-production design and development costs pursuant to Emerging Issues Task Force Issue No. 99-5, “Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements” (EITF 99-5). The majority of all tooling contracts are executed under sales terms where revenue is recognized upon acceptance of the tooling by the customer. For tooling sales arrangements, applicable costs are recorded in inventory as incurred and subsequently recognized, along with the related revenue, upon customer acceptance of the tooling.

Periodically, the Company enters into contractually guaranteed reimbursement arrangements related to the sale of tooling to customers. Under these arrangements, revenue is recognized upon acceptance of the tooling by the customer and amounts due under such arrangements are settled over the part supply arrangement, in accordance with the specific terms of the arrangement. The amounts due from the customer in such transactions are recorded in “Prepaid expenses and other current assets” or “Other assets, net” based upon the expected term of the reimbursement arrangement.

Occasionally, the Company incurs costs in excess of those contractually reimbursed for customer owned tooling. In those cases, the Company capitalizes these costs when the customer provides the Company the noncancelable right to use the tooling during the part supply arrangement; otherwise, such non-reimbursed costs are expensed as incurred. These capitalized costs are then amortized over the expected life of the part supply arrangement. For such part supply arrangements, tooling costs are recorded in inventory as incurred and, upon customer acceptance of the tooling, the related revenue and costs are recorded, as applicable, and any non-reimbursed portion of the costs is reclassified to “Other assets, net” and amortized over the life of the part supply arrangement (typically not to exceed three years).

The Company also may progress bill on certain tooling being constructed, these billings are recorded as a reduction of the associated inventory until the appropriate revenue recognition criteria have been met.

2.	Inventories, net of valuation reserves, as of June 30, 2005 and December 31, 2004 were as follows:


In thousands	June 30, 2005			December 31, 2004
Raw materials	$	14,441		$	14,203
Work in process		13,000			15,386
Finished goods		14,045			12,879

		41,486			42,468
Less: Progress billings		(662	)		(2,386	)

Total inventories	$	40,824		$	40,082

Progress billings relate to tooling inventory, which is included in work in process inventory.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Basic and diluted earnings per common share are calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Basic earnings per share are equal to net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share are equal to net income divided by the weighted average number of common shares outstanding during the period, including the effect of stock options and stock awards, where such effect is dilutive.


	Quarter Ended June 30, 2005					Quarter Ended June 30, 2004
In thousands except per share amounts	Net Income		Average Shares	Per Share Amount		Net Income		Average Shares	Per Share Amount
Basic earnings per share	$	2,092	16,067	$	.13	$	644	16,097	$	.04
Effect of dilutive options and awards		—	70		—		—	76		—

Diluted earnings per share	$	2,092	16,137	$	.13	$	644	16,173	$	.04


	Six Months Ended June 30, 2005					Six Months Ended June 30, 2004
In thousands except per share amounts	Net Income		Average Shares	Per Share Amount		Net Income		Average Shares	Per Share Amount
Basic earnings per share	$	2,735	16,064	$	.17	$	1,582	16,124	$	.10
Effect of dilutive options and awards		—	84		—		—	83		—

Diluted earnings per share	$	2,735	16,148	$	.17	$	1,582	16,207	$	.10

The Company has stock option plans under which employees and directors have options to purchase Common Stock. The Company applies APB Opinion 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its stock option plans. Accordingly, compensation cost is not recognized in the financial statements on the grant date or over the life of the stock options as the exercise price is set on the date of the grant and is not less than the fair market value per share on that date. Restricted share grants are expensed over the vesting period of the award. The Company has adopted those provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of Statement of Financial Accounting Standards No. 123,” which require the disclosure of pro forma effects on net income and earnings per share as if compensation cost had been recognized based upon the fair value method at the date of grant for options awarded.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables illustrate the effect on net income and earnings per share had compensation cost been recognized for the Company’s stock based compensation based on the fair value of the options at the grant dates using the Black-Scholes fair value method for option pricing. The following weighted-average assumptions were used for grants during the quarters ended June 30, 2005 and 2004: zero dividend yield for both periods; expected volatility of 47 percent and 48 percent, respectively; risk-free interest rate of 3.7 percent and 4.6 percent, respectively; and an expected 7 year life for both periods. There were no grants issued during the quarters ended March 31, 2005 or 2004.


	Quarter Ended June 30,						Six Months Ended June 30,
In thousands except per share amounts	2005			2004			2005			2004
Net income – as reported	$	2,092		$	644		$	2,735		$	1,582
Add: Stock-based employee compensation expense included in net income, net of related tax effects		50			84			100			168
Less: Total stock-based employee compensation expense under FAS 123, using the fair value method, net of related tax effects		(456	)		(512	)		(904	)		(1,045	)

Net income – pro forma	$	1,686		$	216		$	1,931		$	705

Basic earnings per common share:
Net income – as reported	$	.13		$	.04		$	.17		$	.10
Net income – pro forma	$	.10		$	.01		$	.12		$	.04
Diluted earnings per common share:
Net income – as reported	$	.13		$	.04		$	.17		$	.10
Net income – pro forma	$	.10		$	.01		$	.12		$	.04

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R (FAS 123R), “Share-Based Payment,” which changed the accounting for certain equity compensation programs. In April 2005, the Securities and Exchange Commission deferred the implementation date of FAS 123R, which will now be effective for the Company on January 1, 2006.

Total goodwill included in “Other assets, net” in the Condensed Consolidated Balance Sheets was $30.9 million as of June 30, 2005 and December 31, 2004. As of June 30, 2005 and December 31, 2004, $26.2 million of goodwill was attributed to operations in the Thermal/Acoustical Segment and $4.7 million was attributed to operations in the Filtration/Separation Segment. There were no impairments or dispositions of goodwill during the quarter or six months ended June 30, 2005.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below presents the gross carrying amount and, as applicable, the accumulated amortization of the Company’s acquired intangible assets included in “Other assets, net” in the Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004.


	June 30, 2005					December 31, 2004
In thousands	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
License agreements	$	377	$	(168	)	$	377	$	(152	)
Patents		756		(348	)		743		(318	)
Non-compete agreements		145		(108	)		145		(93	)
Other		72		(14	)		62		(10	)

Total amortized intangible assets	$	1,350	$	(638	)	$	1,327	$	(573	)

Unamortized intangible assets:
Trademarks	$	450				$	450

Amortization expense for intangible assets for the quarter and six months ended June 30, 2005 was not material. Estimated amortization expense for intangible assets for each of the next five years is approximately $0.1 million.

In the first quarter of 2004, the Company began the consolidation of its Columbus operation into other Lydall facilities and had substantially completed the restructuring activities as of December 31, 2004. Accrued restructuring costs as of June 30, 2005 and March 31, 2005 were approximately $50 thousand.

Pretax costs for the restructuring program by type and segment were as follows:


In thousands	Severance and Related Costs			Accelerated Depreciation			Facility Exit and Move Costs			Total
Total estimated costs	$	721		$	2,227		$	2,547		$	5,495
Costs incurred through December 31, 2004		(734	)		(2,227	)		(2,385	)		(5,346	)
Costs incurred during the quarter ended March 31, 2005		20			—			(42	)		(22	)
Costs incurred during the quarter ended June 30, 2005		—			—			(14	)		(14	)

Estimated remaining costs as of June 30, 2005	$	7		$	—		$	106		$	113


In thousands	Thermal/ Acoustical			Corporate Office Expenses			Total
Total estimated costs	$	4,795		$	700		$	5,495
Costs incurred through June 30, 2005		(4,682	)		(700	)		(5,382	)

Estimated remaining costs as of June 30, 2005	$	113		$	—		$	113

Costs incurred, other than severance, have been expensed as incurred. Total pretax project costs through June 30, 2005 were $5.4 million, of which $5.2 million was charged to cost of sales and $0.2 million was charged to administrative expense. In addition to these pretax charges, an after-tax charge of $0.5 million

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

was recorded in the fourth quarter of 2003 related to the write-off of deferred tax assets that are not expected to be realized as a result of the restructuring. The expected remaining pretax charges of $0.1 million as of June 30, 2005 are primarily comprised of facility exit costs that are expected to be substantially incurred during the third quarter of 2005 and will be recorded primarily in cost of sales.

As of June 30, 2005, the company maintains three defined benefit pension plans that cover the majority of domestic Lydall employees. The pension plans are noncontributory and benefits are based on either years of service or eligible compensation paid while a participant is in a plan. The Company also provides an unfunded Supplemental Executive Retirement Plan (SERP) that provides supplemental income payments after retirement to certain former and current senior executives.


	Quarter Ended June 30,						Six Months Ended June 30,
In thousands	2005			2004			2005			2004
Components of net periodic benefit cost:
Service cost	$	452		$	427		$	906		$	857
Interest cost		614			544			1,232			1,088
Expected return on assets		(596	)		(574	)		(1,192	)		(1,148	)
Amortization of unrecognized actuarial loss		209			167			421			334

Net periodic benefit cost	$	679		$	564		$	1,367		$	1,131

The Company expects to contribute $3.2 million to its defined benefit pension plans for the 2005 plan year in accordance with its planned funding practices and requirements. Up to $2.5 million of this amount may, at the Company’s discretion, be contributed in 2006, prior to September 15, 2006. No contributions were made during the quarter or six months ended June 30, 2005.

8.	Comprehensive (loss) income for the periods ended June 30, 2005 and 2004 was as follows:


	Quarter Ended June 30,						Six Months Ended June 30,
In thousands	2005			2004			2005			2004
Net income	$	2,092		$	644		$	2,735		$	1,582
Changes in accumulated other comprehensive (loss) income:
Foreign currency translation adjustments		(2,436	)		(400	)		(4,943	)		(1,483	)
Unrealized gain on derivative instruments, net of tax		42			43			112			42

Total comprehensive (loss) income	$	(302	)	$	287		$	(2,096	)	$	141

Lydall’s reportable segments are: Thermal/Acoustical and Filtration/Separation. All other products are aggregated in Other Products and Services. For a full description of each segment, refer to the “Notes to Consolidated Financial Statements” reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net sales by segment were as follows:


	Quarter Ended June 30,						Six Months Ended June 30,
In thousands	2005			2004			2005			2004
Thermal/Acoustical:
Automotive	$	44,288		$	34,196		$	81,654		$	68,389
Passive thermal		6,725			7,326			12,994			13,724
Active thermal		5,183			4,479			9,347			8,388

Thermal/Acoustical Segment net sales	$	56,196		$	46,001		$	103,995		$	90,501
Filtration/Separation:
Filtration	$	15,461		$	17,889		$	30,978		$	35,295
Vital Fluids		2,733			4,053			4,711			7,602

Filtration/Separation Segment net sales	$	18,194		$	21,942		$	35,689		$	42,897
Other Products and Services:
Transport, distribution and warehousing services	$	5,511		$	4,981		$	10,794		$	9,819
Specialty products		2,307			2,182			4,783			4,823

Other Products and Services net sales	$	7,818		$	7,163		$	15,577		$	14,642
Eliminations and Other		(734	)		(447	)		(1,266	)		(966	)

Consolidated Net Sales	$	81,474		$	74,659		$	153,995		$	147,074

Operating income by segment was as follows:


	Quarter Ended June 30,						Six Months Ended June 30,
In thousands	2005			2004			2005			2004
Thermal/Acoustical	$	5,134		$	2,187		$	9,003		$	4,990
Filtration/Separation		1,913			4,304			3,820			7,174
Other Products and Services		718			633			1,307			1,149
Eliminations and Other		—			(43	)		—			—
Corporate Office Expenses		(3,860	)		(5,697	)		(8,848	)		(10,179	)

Consolidated Operating Income	$	3,905		$	1,384		$	5,282		$	3,134

10.

In April 2005, Lydall Gerhardi GmbH and Co. KG entered into a lease agreement for a high speed manufacturing line with GEFA Leasing GmbH. The lease has an expected 7 year term, an effective interest rate of 4.25 percent and aggregate principal payments of €2,995,000. The lease also contains a purchase option, which provides the Company with the option to purchase the equipment anytime after the fourth year of the lease term for a stated percentage of the original purchase price. Principal and interest payments are required to be paid monthly. This lease was recorded as a capital lease during the second quarter of 2005 on the Company’s balance sheet. As the Company had substantially completed the transaction to acquire this high speed manufacturing line prior to its decision to finance the equipment through a leasing arrangement, this arrangement was accounted for as a sales-leaseback transaction. There was no gain or loss on this transaction as the equipment was sold at the amount originally paid and recorded in the Company’s Condensed Consolidated Balance Sheets. The cash received from the leasing company as reimbursement of the original funds expended of $3.1 million has been presented as a cash inflow from financing activities on the Company’s Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005. The amounts originally paid by the Company for this equipment were shown as capital expenditures within investing activities on the Company’s Consolidated Statements of Cash Flows for the year ended December 31, 2004.

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (FAS 151). FAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Additionally, FAS 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. The provisions of FAS 151 are applicable to inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R). The standard is applicable to awards issued after the effective date and all awards prior to the effective date that remain unvested on the effective date and requires that all equity-based compensation be recorded in the consolidated financial statements at the grant date fair value. In April 2005, the Securities and Exchange Commission announced a deferral of the effective date of FAS 123R. Under this deferral, FAS 123R is required to be adopted by the Company as of January 1, 2006. The adoption of FAS 123R is expected to have a material impact on the Company’s results of operations and the Company believes that the pro forma disclosures in Note 4 provide an appropriate short-term indicator of the level of expense that will be recognized in accordance with FAS 123R. However, the total expense recorded in future periods will depend on several factors, including the number of share-based awards that vest and the fair value of those vested awards.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets, an amendment to APB Opinion No. 29” (FAS 153). The Statement eliminates the exception to measure exchanges at fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance. FAS 153 is effective for nonmonetary exchanges in fiscal periods beginning after June 15, 2005. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (FIN 47). This interpretation clarifies the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligation are conditional on a future event and where an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for conditional asset retirement obligations occurring during fiscal years ending after December 15, 2005. The adoption of this interpretation 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 Impact Future Results

In the interest of more meaningful disclosure, Lydall and its management make statements regarding the future outlook of the Company, which constitute “forward-looking statements” under the securities laws. These forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company, based on assumptions and estimates currently believed to be valid. Forward-looking statements are included under the “Overview and Outlook” section of this Item and elsewhere within this report and are generally identified through the use of language such as “believe,” “expect,” “may,” “plan,” “project,” “estimate,” “anticipate” and other words of similar meaning in connection with the discussion of future operating or financial performance. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Some of the factors that might cause such a difference include risks and uncertainties which are detailed in Note 16 and in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Overview and Outlook

Business Environment Overview

Lydall designs and manufactures specialty engineered automotive thermal and acoustical barriers, passive and active industrial thermal and insulating solutions, filtration media, medical filtration media, devices and biopharmaceutical processing components for demanding thermal/acoustical and filtration/separation applications. Lydall’s thermal/acoustical and filtration/separation businesses are in markets that present growth opportunities and we expect the businesses to grow over the long term, primarily through the introduction of new products, expansion of share in existing markets and penetration of new markets. As many of Lydall’s operations conduct business on a worldwide basis, Lydall’s results can be impacted by global, regional and industry economic and political factors.

The global automotive industry is sensitive to changes in certain economic and competitive conditions. Based upon market information, our customers, particularly the “Big 3” domestic automotive manufacturers, are currently experiencing the impact of these conditions, which could continue to adversely affect vehicle production volumes. While the Company did not experience a decline related to the reductions in North American automotive production in the second quarter or first six months of 2005 compared with the same periods of 2004, a continued reduction in vehicle production volumes could have a material adverse effect on the Company’s profitability in future quarters.

During the second quarter and six months ended June 30, 2005, the Company experienced a decline in sales of filtration media used in clean room applications of $0.5 million and $1.3 million, respectively as the construction of clean rooms declined compared with the same periods of 2004. Based upon current market trends and forecasts, the Company is expecting a continued decline in clean room media sales for the full-year 2005 compared with the prior year, related to the forecasted market decline in clean room construction. The Company also experienced a decline in sales of certain other air filtration media related to market pricing competition during the first half of 2005 compared with the first half of 2004 and is expecting a continued short term decline in sales related to this increased pricing competition. However, the decline is anticipated to be of a lesser extent during the second half of 2005 than that experienced during the first six months of 2005, as compared with the same periods in the prior year.

Similar to other public companies, the Sarbanes-Oxley Act of 2002 required the Company to devote internal resources and incur substantial external costs related to the use of consultants and for increased audit fees during 2004 and the first quarter of 2005. The Company incurred approximately $3.9 million in external

consulting and audit costs during 2004 and $0.2 million and $1.5 million for the second quarter and six months ended June 30, 2005 related to this initiative. Although the Company expects these costs to decline from the initial year levels, the costs of compliance related to internal efforts and consulting and audit costs are expected to continue to have a material impact on the results of operations and cash flows going forward.

Operational Matters

The Company substantially completed the restructuring and consolidation of its domestic automotive manufacturing operations as of December 31, 2004. The expected synergies of the consolidation are to maximize production capacity utilization, reallocate administrative costs to more beneficial operational efforts and more effectively respond to market demands for increasingly faster, technologically advanced cost-effective solutions. The total costs related to the restructuring effort recorded through June 30, 2005 were $5.4 million, with only minor charges being incurred during the second quarter and first six months of 2005. Total remaining costs expected to be incurred of $0.1 million are planned to be substantially incurred during the third quarter of 2005. The cost savings related to this restructuring plan have not been substantial through the second quarter of 2005 compared with the previous operating costs of the domestic automotive business. Although the Company believes there has been a favorable reallocation of costs to other operational efforts and that the Company is responding to market demands more effectively, the benefits of maximizing production capacity utilization have not translated into improved operating margins to date. This is primarily due to higher than originally planned costs incurred to expand operations and production lines to absorb the consolidation of the Columbus operation and higher than expected costs to integrate processes at the two remaining locations that were realigned during this process. The restructuring activities, along with the expected improved efficiencies from the integrated processes, as well as the effects of lean manufacturing and other cost saving initiatives unrelated to the restructuring, are anticipated to lead to improvement in gross margin and operating income; however, the timing and extent of such improvements are not quantifiable at this time.

The St. Nazaire, France automotive facility is strategically located to complement the Company’s operations in Germany and support the Company’s long-term growth strategy in Europe by enabling Lydall to service all major European automotive manufacturers. During 2004, the facility began to provide much needed relief to the overcapacity issues that the automotive operation in Germany had been experiencing for some time. The transfer of production of certain parts began in the second quarter of 2004 and the platforms scheduled to be transferred from Germany were completed and were in production at the facility as of the end of the first quarter of 2005. During the second quarter and first half of 2005, the operation in Germany demonstrated improvement in lowering production costs due to the transition of business to the St. Nazaire operation. Additionally, the St. Nazaire operation was slightly profitable during the second quarter of 2005 and break-even year to date, as compared with operating losses that were incurred for the comparable periods of 2004. The improvement in performance at the St. Nazaire facility is expected to continue as the operation continues to increase overall capacity utilization and expand production.

In January 2005, the Charter Medical, Ltd. subsidiary of Lydall announced a voluntary product recall of certain of its blood transfer and storage products upon the discovery of procedural deficiencies in the sterilization validation process. Neither the Company nor Charter Medical has been notified of any adverse events or reports from customers with regard to these products. The Company estimated the cost of the recall and resultant corrective actions to be approximately $0.5 million to $0.6 million and the Company accrued $0.5 million related to this matter during the fourth quarter of 2004. As of June 30, 2005, the actual costs incurred continue to be in-line with the original estimate. Although the net reduction in sales for the year related to the product recall is still expected to be approximately $1.0 million, the phase out of certain other blood related products is expected to result in an incremental reduction in sales for the year.

The Company continued its focus on “Lean” initiatives, including the launching of Lean Six Sigma company-wide. As this process continues, the Company anticipates that these efforts will identify ways to improve processes and correspondingly leverage work flow, headcount, costs and other synergies across the organization.

The Company is currently in negotiations with a union at one of its facilities relating to its labor contract that expired on March 31, 2005. The union is working without a contract and negotiations have been proceeding without incident. Although currently no work stoppage is anticipated by the Company, if this were to occur it may have a material impact on the results of operations of the Company.

Results of Operations

The following table presents the key income statement line items for the quarter and six months ended June 30, 2005 on a comparative basis with the quarter and six months ended June 30, 2004 and provides each as a relative percentage of consolidated net sales for the period:


	Quarter Ended June 30,						Six Months Ended June 30,
In thousands	2005			2004			2005			2004
Net sales	$	81,474		$	74,659		$	153,995		$	147,074
Cost of sales	$	64,163		$	59,075		$	120,604		$	116,269
As a percent of net sales		78.8	%		79.1	%		78.3	%		79.1	%
Gross margin	$	17,311		$	15,584		$	33,391		$	30,805
As a percent of net sales		21.2	%		20.9	%		21.7	%		20.9	%
Selling, product development and administrative expenses	$	13,406		$	14,200		$	28,109		$	27,671
As a percent of net sales		16.5	%		19.0	%		18.3	%		18.8	%
Operating income	$	3,905		$	1,384		$	5,282		$	3,134
As a percent of net sales		4.8	%		1.9	%		3.4	%		2.1	%
Net income	$	2,092		$	644		$	2,735		$	1,582
As a percent of net sales		2.6	%		0.9	%		1.8	%		1.1	%

Net Sales

The Company recorded an increase in net sales of $6.8 million and $6.9 million for the quarter and six months ended June 30, 2005, respectively, compared with the quarter and six months ended June 30, 2004. Foreign currency translation, primarily related to a stronger Euro during the first half of 2005 compared with the same period of 2004, increased net sales by 1.4 percent and 1.5 percent for the quarter and six months ended June 30, 2005, respectively. After adjusting for foreign currency translation, the increase in net sales for the quarter and six-month periods was primarily the result of stronger sales from the Automotive business of $9.3 million and $11.7 million, respectively, on a constant currency basis compared with the same periods of 2004. The increase in automotive sales for the quarter and six months ended June 30, 2005 was driven by both the domestic automotive business, which achieved significant sales increases of 38.7 percent and 23.6 percent, respectively, and the European automotive business that attained sales increases of 12.2 percent and 10.2 percent, respectively, on a constant currency basis, from the comparable periods of the prior year. These increases were partially offset by lower sales in the Filtration business of $2.7 million and $4.9 million, on a constant currency basis, for the quarter and six months ended June 30, 2005, respectively, compared with the same periods in the prior year. Additionally, sales from the Vital Fluids business were also down sharply for both the quarter and six-month periods. Sales of Industrial Thermal products were relatively unchanged, with increased sales of active thermal products being largely offset by a reduction in sales of passive thermal products for both the quarter and six months ended June 30, 2005 compared with the same periods of the prior year. Net sales of Other Products and Services were up modestly for both the quarter and year to date compared with the same periods of 2004.

Gross Margin

Although gross margin for the quarter and six months ended June 30, 2005 increased by $1.7 million and $2.6 million, respectively, from the comparable periods of 2004, gross margin for the quarter and six months ended June 30, 2004 was negatively impacted by restructuring costs at the gross margin line related to the closure of the Columbus operation and the transfer of production to the Company’s other domestic automotive facilities of approximately $1.4 million and $2.6 million, respectively. Additionally, the negative gross margin performance related to the ramp-up of the automotive plant in France of approximately $0.5 million and $0.8 million also lowered gross margin performance for the quarter and six months ended June 30, 2004, respectively. After removing the impact of these 2004 matters, overall gross margin and gross margin as a percent of net sales declined for the quarter and six months ended June 30, 2005 compared with the same periods of 2004. These declines were primarily attributable to the Filtration business that experienced significantly lower sales volumes for the quarter and six months ended June 30, 2005 compared with the same periods in 2004, which negatively impacted overall gross margin. Additionally, the negative impact on absorption related to the reduced production runs in the Filtration business during these periods, resulted in higher per-unit manufacturing costs. To a lesser extent, the Vital Fluids and Industrial Thermal businesses also contributed to the decline in gross margin, primarily due to lower sales volumes and product mix changes. Although domestic automotive operations showed improved sales and increased gross margin contribution for both the quarter and year to date 2005 these increases did not translate into commensurate profit increases as a percent of sales due to the continued challenge of integrating operations of the Columbus facility while at the same time bringing considerable new business on line. Decreases in gross margin performance were partially offset by a strong margin improvement from the European automotive businesses for the quarter and six months ended June 30, 2005 as significant progress was achieved on improving overall profitability through operational improvements and improved absorption of costs related to increased sales volume from the comparable periods in the prior year.

Selling, Product Development and Administrative Expenses

Although selling, product development and administrative expenses for the quarter decreased by $0.8 million from the second quarter of 2004 and increased $0.4 million for the six months ended June 30, 2005 compared with the first six months of 2004, selling, product development and administrative expenses for the quarter and six months ended June 30, 2004 were negatively impacted by nonrecurring expenses associated with legal matters by the Company against a former employee of $1.1 million and $1.2 million, respectively. Sarbanes-Oxley Section 404 compliance costs were $0.6 million lower for the quarter and essentially flat for the six months ended June 30, 2005, compared with the same periods in 2004. After adjusting for these items, selling, product development and administrative expenses increased by $0.9 million and $1.6 million for the quarter and six months ended June 30, 2005 compared with the same periods of 2004. The primary driver of the increase related to the increase in selling, product development and administrative expenses of the St. Nazaire operation of $0.4 million and $0.8 million for the quarter and six months ended June 30, 2005, respectively, which was operating at start-up levels during the first six months of 2004 and is now functioning on a more fully operational basis. Additionally, selling, product development and administrative expenses were approximately $0.2 million and $0.7 million higher within the Filtration/Separation Segment primarily related to incremental selling and product development spending in the Filtration businesses and strategic hirings within both the Vital Fluids and Filtration businesses.

Interest Expense

Interest expense was $0.5 million and $0.8 million for the quarter and six months ended June 30, 2005, compared with $0.4 million and $0.7 million for the same periods of 2004. Interest expense was higher for the quarter and six-month periods due to increased overall average debt levels and higher average borrowing rates on outstanding debt.

Other Income/Expense

Other (income) expense for the quarter and six-month periods ended June 30, 2005 and 2004 consisted of minor activity related to foreign exchange transaction gains and losses and investment income.

Income Taxes

The Company’s effective tax rate was 35.9 percent and 35.8 percent for the quarter and six months ended June 30, 2005, respectively, compared with 35.0 percent for the same periods of 2004.

Segment Results

The following table presents sales information for the key product and service groups included within each operating segment for the quarter and six months ended June 30, 2005 compared with the quarter and six months ended June 30, 2004:


	Quarter Ended June 30,
In thousands	2005		2004		Dollar Change			Percentage Change
Thermal/Acoustical:
Automotive	$	44,288	$	34,196	$	10,092		29.5
Passive thermal		6,725		7,326		(601	)	(8.2	)
Active thermal		5,183		4,479		704		15.7

Thermal/Acoustical Segment net sales	$	56,196	$	46,001	$	10,195		22.2
Filtration/Separation:
Filtration	$	15,461	$	17,889	$	(2,428	)	(13.6	)
Vital Fluids		2,733		4,053		(1,320	)	(32.6	)

Filtration/Separation Segment net sales	$	18,194	$	21,942	$	(3,748	)	(17.1	)
Other Products and Services:
Transport, distribution and warehousing services	$	5,511	$	4,981	$	530		10.6
Specialty products		2,307		2,182		125		5.7

Other Products and Services net sales	$	7,818	$	7,163	$	655		9.1


	Six Months Ended June 30,
In thousands	2005		2004		Dollar Change			Percentage Change
Thermal/Acoustical:
Automotive	$	81,654	$	68,389	$	13,265		19.4
Passive thermal		12,994		13,724		(730	)	(5.3	)
Active thermal		9,347		8,388		959		11.4

Thermal/Acoustical Segment net sales	$	103,995	$	90,501	$	13,494		14.9
Filtration/Separation:
Filtration	$	30,978	$	35,295	$	(4,317	)	(12.2	)
Vital Fluids		4,711		7,602		(2,891	)	(38.0	)

Filtration/Separation Segment net sales	$	35,689	$	42,897	$	(7,208	)	(16.8	)
Other Products and Services:
Transport, distribution and warehousing services	$	10,794	$	9,819	$	975		9.9
Specialty products		4,783		4,823		(40	)	(0.8	)

Other Products and Services net sales	$	15,577	$	14,642	$	935		6.4

Operating income by segment was as follows:


	Quarter Ended June 30, 2005				Quarter Ended June 30, 2004
In thousands	Operating Income		Operating Margin%		Operating Income		Operating Margin%		Dollar Change			Percentage Change
Thermal/Acoustical	$	5,134	9.1	%	$	2,187	4.8	%	$	2,947		134.8
Filtration/Separation	$	1,913	10.5	%	$	4,304	19.6	%	$	(2,391	)	(55.6	)
Other Products and Services	$	718	9.2	%	$	633	8.8	%	$	85		13.4


	Six Months Ended June 30, 2005				Six Months Ended June 30, 2004
In thousands	Operating Income		Operating Margin%		Operating Income		Operating Margin%		Dollar Change			Percentage Change
Thermal/Acoustical	$	9,003	8.7	%	$	4,990	5.5	%	$	4,013		80.4
Filtration/Separation	$	3,820	10.7	%	$	7,174	16.7	%	$	(3,354	)	(46.8	)
Other Products and Services	$	1,307	8.4	%	$	1,149	7.8	%	$	158		13.8

Thermal/Acoustical

After adjusting for the favorable impact of foreign currency translation, segment net sales increased by 20.5 percent and 13.2 percent for the quarter and six months ended June 30, 2005, respectively. This increase was primarily the result of increased overall sales from the Automotive businesses of approximately $9.3 million and $11.7 million for the quarter and six months ended June 30, 2005, respectively, on a constant currency basis, compared with the same periods of 2004. Sales growth of automotive products was achieved in both North America and in Europe through platform and content expansion. Sales from the Industrial Thermal businesses were relatively flat for the quarter and six months ended June 30, 2005 compared with the same periods in the prior year as modest increases in sales of Affinity^® temperature-control active thermal products were largely offset by sales declines in passive thermal products such as cryogenic and appliance insulation and building material products used principally in heating, ventilation and air conditioning (HVAC) applications.

Although segment operating income and margin increased significantly for the quarter and six months ended June 30, 2005 compared with the same periods of 2004, segment operating income for the quarter and six months ended June 30, 2004 was negatively impacted by restructuring costs associated with closing of the Columbus operation of approximately $1.3 million and $2.4 million, respectively, and operating losses at the St. Nazaire facility of approximately $0.8 million and $1.4 million, respectively. After adjusting for these items, segment operating income increased by $0.8 million for the quarter and $0.2 million for the six months ended June 30, 2005 and segment operating margin decreased by 0.2 percentage points for the quarter and by 1.0 percentage point for the six months ended June 30, 2005 compared with the same periods of 2004. The relatively flat performance for the quarter and decline in performance for the six months ended June 30, 2005 compared with the same periods of 2004 was primarily the result of the lower than anticipated performance of the Company’s Hamptonville automotive operation that has been negatively impacted due to the challenge of integrating the manufacturing operations of the Columbus facility while at the same time bringing considerable new business on line. The European automotive operations have made significant progress on improving overall profitability in 2005 with the transfer of business from the German operation to the St. Nazaire facility, which translated into improved absorption of overall costs in France and the elimination of certain incremental costs at the operation in Germany. Operating income of the Industrial Thermal businesses declined by $0.9 million and $1.1 million for the quarter and six months ended June 30, 2005 compared with the same periods in 2004 primarily related to changes in product mix between the passive and active thermal businesses. Foreign currency translation increased segment operating income by 2.6 percent and 2.2 percent for the quarter and six months ended June 30, 2005, respectively.

Filtration/Separation

After adjusting for the favorable impact of foreign currency translation, segment net sales decreased by 18.3 percent and 18.2 percent for the quarter and six months ended June 30, 2005, respectively. The decrease for the quarter and six-month periods was primarily related to substantially lower sales of filtration media of $2.7 million and $4.9 million, respectively, on a constant currency basis, compared with the same periods in the prior year. These declines were primarily related to reductions in air filtration media sales used in clean room filtration applications due to the reduction in clean room builds in Asia compared with 2004 levels, as well as lower sales of other air filtration media resulting from sales losses due to pricing competition in certain markets. Vital Fluids sales were lower by $1.3 million and $2.9 million for the quarter and year to date, respectively, compared with the quarter and six months ended June 30, 2004 substantially related to significantly lower sales of blood transfusion and cell therapy products of $0.8 million and $2.4 million for the quarter and six month periods compared with the same periods in the prior year, primarily related to the product recall previously disclosed, related delays in the resumption of shipping of these products and the phase out of certain other blood related products. Lower sales of products for bioprocessing applications accounted for most of the remaining overall reduction in sales in the Vital Fluids business for both the quarter and six month periods compared with the same periods in 2004.

The reduction in segment operating income and margin performance for the quarter and six months ended June 30, 2005 compared with the same periods in 2004 was substantially related to lower sales of filtration media and the corresponding reduction in gross margin contribution. Exacerbating the impact on gross margin caused by the lower sales volume of filtration products was the negative impact on absorption related to the reduced production runs during the period, which resulted in higher per-unit manufacturing costs. Operating income for the Vital Fluids business was also negatively impacted by the significantly lower sales during the quarter and six months ended June 30, 2005 compared with the same periods in the prior year. Additionally, selling, product development and administrative expenses were approximately $0.2 million and $0.7 million higher across the segment primarily related to incremental selling and product development spending in the Filtration businesses and strategic hirings within both the Vital Fluids and Filtration businesses. Foreign currency translation increased segment operating income by 1.6 percent and 1.3 percent for the quarter and six months ended June 30, 2005, respectively.

Other Products and Services (OPS)

The increase in net sales from OPS for the quarter and six months ended June 30, 2005 was primarily related to increased revenues from the trucking operations of the Transport business of $0.6 million and $0.9 million, respectively, related to increased business volume from certain customers and negotiated price increases.

Operating income and margin percentage from OPS improved slightly for the quarter and six months ended June 30, 2005 compared with the same periods in the prior year primarily as a result of the increased sales performance from the trucking operations of the Transport business.

Liquidity and Capital Resources

Cash and cash equivalents were approximately $1.3 million as of June 30, 2005 compared with $1.6 million as of December 31, 2004.

Working capital as of June 30, 2005 was $56.4 million compared with $54.3 million as of December 31, 2004. The net increase in working capital of $2.1 million was primarily related to increased trade accounts receivable as of June 30, 2005 compared with December 31, 2004, which was a result of higher sales volume during the second quarter of 2005 compared with the fourth quarter of 2004.

Capital expenditures were $8.7 million for the first six months of 2005 compared with $15.5 million for the same period of 2004. The substantial decrease in capital spending through the first half of 2005 compared with the same period of 2004 was primarily related to capital equipment purchases of $6.9 million made during the first half of 2004 for the St. Nazaire facility.

Pension cost for 2005 is currently estimated to be $2.8 million, of which, $1.4 million has been recorded as of June 30, 2005. The Company expects to contribute $3.2 million to its defined benefit pension plans for the 2005 plan year in accordance with its planned funding practices and requirements. Up to $2.5 million of this amount may, at the Company’s discretion, be contributed in 2006, prior to September 15, 2006. No contributions were made during the quarter or six months ended June 30, 2005.

As of June 30, 2005, the Company had unused borrowing capacity of approximately $41.1 million under various credit facilities, of which, $14.0 million was available as of that date due to certain restrictive debt covenants. Management believes that the Company’s cash and cash equivalents, cash flows from operations and unused borrowing capacity as of June 30, 2005 are sufficient to meet current and anticipated requirements for the foreseeable future.

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. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Note 1 of the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and Note 1 in “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 or six months ended June 30, 2005.

Recently Issued Accounting Standards

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets, an amendment to APB Opinion No. 29” (FAS 153). The Statement eliminates the exception to measure exchanges at fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance. FAS 153 will be effective for nonmonetary exchanges in fiscal periods beginning after June 15, 2005. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (FIN 47). This interpretation clarifies the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligation are conditional on a future event and where an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 will be effective for conditional asset retirement obligations occurring during fiscal years ending after December 15, 2005. The adoption of this interpretation is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

There have been no significant 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, 2004.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Company’s President and Chief Executive Officer and Vice President, Chief Financial Officer and Treasurer, conducted an evaluation as of June 30, 2005 of the effectiveness 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 President and Chief Executive Officer and Vice President, Chief Financial Officer and Treasurer concluded that the disclosure controls and procedures were effective in

ensuring that all material information required to be disclosed in the reports the Company files and submits under the Securities and Exchange Act of 1934 has been made known to them on a timely basis and that such information has been properly recorded, processed, summarized and reported, as required.

Changes in Internal Controls

There have not been any changes in the Company’s internal controls over financial reporting during the Company’s second quarter ended June 30, 2005 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART

II. OTHER INFORMATION

Item 1.

Legal Proceedings

A suit was filed against a subsidiary in the Caledona Superior Court, Caledona County, Vermont on March 31, 2005 by a non-employee temporary worker. The claim relates to an injury to the plaintiff and alleges that the subsidiary removed safety equipment that would have prevented the injury and alleges indemnity through a contract between the subsidiary and a safety equipment supplier. This claim is insured and therefore the Company believes its maximum exposure is the applicable deductible of $250,000. No reserve has been recorded related to this claim as of June 30, 2005 as the Company believes the allegations are without merit.

In November 2004, the Company filed suit against the purchaser of certain assets of the fiberboard operation. The suit was to protect its claim on a note receivable from the purchaser, as it was expected that the purchaser would file for bankruptcy. During the third quarter of 2004, the Company had recorded a reserve of $0.5 million for the remaining balance of the note receivable, as the Company believed that the purchaser did not have the financial ability to pay the remaining amount owed to the Company. The purchaser filed for bankruptcy during the first quarter of 2005 and subsequently filed a counterclaim against the Company for $1.6 million alleging a breach of contract by the Company related to the purchase of the assets. No reserve has been recorded related to this counter claim as of June 30, 2005, as the Company believes the counterclaim is without merit.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

In August 2003, the Company’s Board of Directors approved a Stock Repurchase Program (the “Repurchase Program”) to mitigate the potentially dilutive effects of stock options and shares of restricted and unrestricted stock granted by the Company. Under the approved Repurchase Program, shares may be purchased by the Company up to the quantity of shares underlying options and other equity-based awards granted after January 1, 2003 under shareholder approved plans. The Company intends to take advantage of the safe harbor protections afforded by Rule 10b-18 promulgated under the Exchange Act, and to engage in future repurchase activity in accordance with the provisions of the Exchange Act. There were no shares of common stock repurchased by the Company during the quarter ended June 30, 2005. There were approximately 441,000 shares that remained available for repurchase under the Repurchase Program as of June 30, 2005.

Item 5.

Other Information

On August 1, 2005, the Company entered into agreements with Bertrand Ploquin, President of Lydall Thermique Acoustique and John F. Tattersall, Vice President, General Manager, Lydall Industrial Thermal Solutions.

Mr. Ploquin’s Letter of Understanding sets forth an annual base compensation of €200,000 for 2005, bonus participation, company car and certain other social benefits. This Letter of Understanding also sets forth severance in the event of involuntary termination by the Company, other than for misconduct in the performance of his role, and termination benefits in the event of a change in control of the Company. This agreement has been filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q for the period ended June 30, 2005.

Mr. Tattersall’s agreement provides benefits to him in the event of involuntary termination by the Company, other than for cause. It also sets forth severance in the event of termination due to a change in control of the Company or due to death or permanent and total disability. Benefits will vary depending on the nature of the termination and may include payments related to salary, expense reimbursement, severance, bonus, health benefits, pension enhancement, car allowance and outplacement services. This agreement has been filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q for the period ended June 30, 2005.

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		Letter of Understanding with Bertrand Ploquin (regarding severance in the event of termination), filed herewith.

10.2		Agreement with John F. Tattersall (regarding severance in the event of termination), 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.

August 4, 2005	By:	/S/ JOHN J. KRAWCZYNSKI
		John J. Krawczynski
		Controller
		(On behalf of the Registrant and as Principal Accounting Officer)

EX-10.1 2 dex101.htm LETTER OF UNDERSTANDING WITH BERTRAND PLOQUIN Letter of Understanding with Bertrand Ploquin

Exhibit 10.1



		Mr. Bertrand Ploquin 18 Allée des Grèbes 44500 La Baule

		July 26, 2005


Dear Mr. Ploquin				Monsieur Ploquin,

Further to our last discussions, we are pleased to confirm that Lydall Inc, as ultimate shareholder of Lydall Thermique Acoustique SAS (the Company), proposes to you the following terms and conditions for the exercise of your duties as President of Lydall Thermique Acoustique SAS. These terms or conditions must be ratified by the Compensation and Stock Option Committee of Lydall Inc’s Board of Directors.				Suite à nos dernières discussions, nous sommes heureux de vous confirmer que Lydall Inc., en tant qu’actionnaire ultime de Lydall Thermique Acoustique S.A.S. (la « Société »), vous propose les termes et les conditions suivants pour l’exercice de vos fonctions de Président de Lydall Thermique Acoustique S.A.S. Ces termes et conditions doivent être ratifiés par le Comité de rémunération du Conseil d’administration de Lydall Inc.

For purposes of this letter of understanding, the global automotive business is referenced as “Group”.				Dans le cadre de cette lettre, l’activité automobile mondiale est défini comme étant le « Groupe ».

In your capacity of President of Lydall Thermique Acoustique, your duties are subject to the following terms and conditions from 1st August 2005:				En tant que Président de Lydall Thermique Accoustique, vos fonctions seront soumises aux termes et conditions suivants à compter du 1^er Août 2005.

Remuneration				Rémunération

For 2005, your gross annual fixed remuneration is €200,000 (two hundred thousand euros) payable in twelve equal instalments. This will be reevaluated on a periodic basis.				Pour l’année 2005, votre rémunération fixe brute annuelle s’élève à 200.000 € (deux cent mille euros) payable en douze mensualités égales. Cette rémunération sera réévaluée sur une base périodique.

You are eligible for a bonus up to 40% of your fixed annual remuneration, which will depend upon meeting certain requirements in accordance with the practices in force within the Company. This bonus depends on the overall results of both the Company and the Group and is awarded for an annual period of professional duties.				Vous pourrez bénéficier d’un bonus pouvant aller jusqu’à 40% de votre rémunération fixe brute annuelle, en fonction de la réalisation de conditions conformément aux pratiques en vigueur au sein de la Société. Ce bonus dépend des résultats d’ensemble de la Société et du Groupe et sera attribuée pour une période annuelle d’activité professionnelle.

Company car				Véhicule de fonction

You will benefit from a company car, which shall be leased by the group for a monthly amount				Vous bénéficierez d’un véhicule de société en leasing dont le coût supporté par la société ne


that may not exceed EUR 950 per month.				pourra excéder 950 euros par mois.

The company shall pay the compulsory and optional insurance and for maintenance, gas and repairs.				La Société acquittera les coûts d’assurance, de l’entretien et du carburant.

You will be authorized to have unrestricted use of the vehicle entrusted to you.				Vous êtes autorisé à utiliser le véhicule qui vous est confié pour tout usage.

The use of a company car for personal requirements shall constitute a benefit in kind, which will be taken into account in particular for the calculation of your tax and social security payments.				L’usage privé du véhicule de société constitue un avantage en nature, qui sera pris en compte notamment pour le calcul de vos charges sociales et impôts.

Any fines related to the use of the company car shall be paid in full by you, even if they are addressed to the Company or one of the other companies of the group.				Toute amende liée à l’utilisation du véhicule de société devra être acquittée par vous, même si la contravention est adressée à la Société ou toute société du Groupe.

You will undertake to inform the Company of any claim or incident that could take place in respect of the vehicle, within 48 hours of the discovery of said claim or incident.				Vous vous engagez à informer la Société de toute réclamation ou incident concernant le véhicule dans les 48 heures après avoir eu connaissance de la réclamation ou de l’incident.

You have read the insurance contract and will undertake to comply with the clauses thereof.				Vous avez pris connaissance du contrat d’assurance et vous engagez à respecter les dispositions de celui-ci.

The car that is made available to you must be given back to the company in the event of the termination of your duties as President from the effective date of discontinuance of duties.				Le véhicule devra être restitué à la Société lors de la cessation de vos fonctions en tant que Président, à compter de la date de cessation effective de vos fonctions.

Paid holidays				Congés payés

You will benefit of 6 weeks of paid holidays per year, accrued on a monthly basis, to be taken at dates to be agreed.				Vous bénéficierez de six semaines de congés payés par an, acquis sur une base mensuelle, à des dates qui seront déterminées par accord.

Benefits				Avantages sociaux

You will benefit from the private and welfare insurance contract in force in Lydall Thermique Acoustique.				Vous bénéficierez des dispositions en vigueur au sein de Lydall Thermique Acoustique en ce qui concerne les régimes de prévoyance et mutuelle.

You will also benefit from a private insurance called GSC “complementary regime” option 2 for 24 months providing unemployment insurance benefits in the event of revocation of your office as President of Lydall Thermique Acoustique.				Vous bénéficierez d’une assurance privée appelée « GSC », régime complémentaire avec l’option 2 pour 24 mois, vous permettant de pouvoir bénéficier d’indemnités journalières en cas de révocation de vos fonctions de Président de Lydall Thermique Acoustique.

To the extent that you do not qualify for full coverage under the GSC insurance due to the				Dans l’hypothèse où vous ne pourriez obtenir l’ensemble des garanties de l’assurance GSC


waiting period of up to 18 months, the Company will enhance your severance payments as outlined under “Termination”.		en raison de la période d’attente allant jusqu’à 18 mois, la Société déterminera les indemnités de rupture conformément au paragraphe « Cessation des fonctions » ci-dessous.

Exclusivity, confidentiality		Exclusivité, confidentialité

You will be required to work exclusively for Lydall group and not to engage into any other professional activity, even non paid and/or non competing.		Vous vous engagez à consacrer entièrement votre activité professionnelle au groupe Lydall et vous interdisez l’exercice de toute autre activité professionnelle, même non concurrente, ou non rémunérée.

You will also undertake to maintain absolute discretion as regards all information which you may obtain by virtue of your offices within Lydall Thermique Acoustique and not to provide information on this company or on the Group, or its clients.		Vous vous engagez également à maintenir la plus absolue discrétion concernant les informations que vous avez pu obtenir dans le cadre de vos fonctions au sein de Lydall Thermique Acoustique, et de ne communiquer aucune information sur la société, le Groupe, ou ses clients.

Termination		Cessation des fonctions

In the event of termination of your office as President at the initiative of the Company, other than for gross misconduct in the performance of your office, you will receive a compensation as follows:		En cas de cessation de vos fonctions de Président à l’initiative de la Société, pour tout motif autre qu’une faute grave dans l’exercice de ces fonctions, vous recevrez une indemnité dans les conditions suivantes :

These provisions do not apply in the event of termination of your office further to a change of control where specific provisions are provided below in the section called “Change of Control”.		Ces dispositions ne sont pas applicables en cas de cessation de vos fonctions suite à un changement de contrôle, où des dispositions spécifiques sont prévues ci-dessous dans la section intitulée “Changement de contrôle”.

The compensation will amount to 12 months’ gross remuneration on the basis of your gross remuneration (including bonus) of the last 12 months of work,		Le montant de cette indemnité sera égal à 12 mois de rémunération brute (comprenant les avantages en nature et bonus) des douze derniers mois de travail ,

•	The payment of the compensation will be conditioned upon the signature of a settlement agreement providing for a release of claims against Lydall, Inc, Lydall Thermique Acoustique and the Group concerning the performance and termination of your offices within the Lydall group.	•	Le paiement de cette indemnité sera conditionné à la signature d’un protocole d’accord transactionnel prévoyant une renonciation à instance et action à l’encontre de Lydall Inc, Lydall Thermique Acoustique, et du Groupe, concernant l’exercice et la fin de vos mandats et fonctions au sein du Groupe Lydall.

•	This settlement agreement shall be signed within 15 days as from the date of effect of your revocation, and shall also provide for your resignation	•	Ce protocole d’accord transactionnel devra être signé dans les 15 jours à compter de la date d’effet de votre révocation, et devra prévoir votre


	from all other corporate offices you hold within the Lydall group;		démission de tous les mandats que vous détenez au sein du Groupe Lydall.

•	If, in view of the procedure and cause of your revocation, you consider it is not of your interest to sign a settlement agreement as defined above, Lydall will not be liable for any payment to you;	•	Si, au vu de la procédure et du motif de votre révocation, vous considérez que ce n’est pas dans votre intérêt de signer ce protocole d’accord transactionnel, selon les termes ci-dessus, Lydall ne sera pas tenu de vous verser cette indemnité.

•	The compensation shall be regarded as a gross amount from which Lydall will deduct before payment the all social security contributions which would be payable at the date of payment.	•	Le montant de l’indemnité sera considéré comme un montant brut, duquel Lydall déduira, avant paiement, les charges sociales qui pourront être dues à la date dudit paiement.

To the extent that you have not yet qualified for full benefits under the GSC policy due to the 18 month waiting period when you are terminated, Lydall agrees to add to you termination pay a proportional amount equal to the portion of GSC insurance not yet payable.		Dans l’hypothèse où vous ne pourriez obtenir, lors de la cessation de vos fonctions, la totalité des garanties prévues par la GSC en raison du délai d’attente de 18 mois, Lydall accepte d’augmenter l’indemnité prévue ci-dessus d’un montant proportionnel à la part de la garantie GSC qui n’a pas été payée.

Non-competition		Non-concurrence

You will undertake, following the termination of your office for any reason whatsoever, not to directly or indirectly perform or acquire an interest, in any way, either alone or jointly with other parties, for any reason whatsoever or under any legal form whatsoever, any activity that directly competes with the Group’s business activities in France, Germany and North America or which may pose a threat to the business activities of the Group, without the consent of the Company.		Vous vous engagez, lors de la cessation de votre mandat, pour quelque motif que ce soit, à ne pas exercer ou acquérir une participation, que ce soit directement ou indirectement, de quelque manière que ce soit et pour quelque motif que ce soit, seul ou avec un tiers, dans toute activité qui serait directement concurrente des activités du Groupe en France, en Allemagne, et en Amérique du Nord ou qui pourrait être considérée comme une menace pour les activités du Groupe, sans l’accord de la Société.

You will undertake not to acquire or set up direct or indirect holdings, in companies, enterprises or groups performing business activities that compete with those performed by Group, without the consent of the Company.		Vous vous engagez à ne pas créer ou acquérir une participation, directe ou indirecte, dans une société, entreprise ou groupe, dont les activités sont concurrentes avec les activités du Groupe, sans l’accord de la Société.

You will undertake not to take up a position of manager, director, corporate officer, employee or consultant in any other company, enterprise		Vous vous engagez à n’accepter aucun poste de directeur, de mandataire, administrateur, salarié ou de consultant dans toute société,


or group, the activity of which may be liable to pose a threat to Group, without the consent of the Company.		entreprise ou groupe, dont les activités seraient concurrentes à celles du Groupe, sans l’accord de la Société.

You shall undertake not to directly or indirectly employ, for any reason whatsoever, even within the scope of a business activity that does not compete with those performed by the Group, employees or corporate officers from any of the companies making up the Group, within the consent of the Company.		Vous vous engagez à ne pas embaucher, de manière directe ou indirecte, pour quelque motif que ce soit, même si le domaine d’activité n’est pas concurrent du Groupe, des employés ou mandataires des sociétés du Groupe, sans l’accord de la Société.

Undertakings provided above shall be limited to:		Les obligations prévues ci-dessus seront limitées :

•	The geographical areas in France, Germany and the United States where the Group’s business is carried out or will carry out business activities;	•	aux zones d’implantation géographiques en France, Allemagne et Etats-Unis où le Groupe exerce ses activités ou exercera de futures activités ;

•	a time period of 12 months following the effective termination of your office.	•	à une période de 12 mois à compter de la cessation effective de vos fonctions.

In case of any breach of this non-competition obligation, the company may claim any damages before the court the amount of which will be in accordance with the harm suffered.		En cas de violation de cette clause de non-concurrence, la Société pourra demander tout dommage-intérêt devant la juridiction compétente, en raison du préjudice subi.

In compensation for compliance with the non-competition obligation, you will receive in the event of termination at the initiative of the Company (except in the event of gross or serious misconduct) a monthly indemnity the gross amount of which will be equal to 5/10ths of your 12 months of compensation of the last 12 months of work.		En contrepartie de cette obligation de non-concurrence, vous percevrez en cas de cessation de vos fonctions à l’initiative de la Société (sauf en cas de faute lourde ou grave), une indemnité mensuelle d’un montant brut égal à 5/10^ème de vos 12 mois de rémunération des 12 derniers mois de travail.

The Company may release you from this non-competition obligation, and, accordingly, will be released from the payment of the financial compensation, on condition that it informs you in writing within eight days of the termination of your duties.		La Société pourra vous libérer de cette obligation de non-concurrence, et, en conséquence, sera libérée du paiement de la contrepartie financière, à la condition que vous soyez informé par écrit dans les huit jours à compter de la cessation de vos fonctions.

Change of control		Changement de contrôle

If you are terminated by the Company other than for “Cause” and such termination of duties occurs within 12 months following a “Change of Control” of the Company (as defined below), you will be entitled to a compensation as		Si la Société met fin à vos fonctions pour un motif autre qu’une « Cause » et cette cessation intervient dans les douze mois suivant un Changement de Contrôle de la Société (tel que défini ci-dessous), vous bénéficierez d’une


follows:				indemnité dans les conditions suivantes:

The compensation will equal 12 months’ gross remuneration calculated on the basis of your gross remuneration (including bonus) of the last 12 months of work. The terms of payment will be determined within 30 days following a Change of Control.				L’indemnité sera égale à 12 mois de votre rémunération brute annuelle (incluant les avantages en nature et bonus) sur la base de votre rémunération brute des 12 derniers mois de travail. Les conditions de paiement seront fixées dans les 30 jours suivant un Changement de Contrôle.

Definitions				Définitions

Change of Control. For the purposes of this Agreement, a “Change of Control” shall be deemed to have occurred if (a) any person or persons acting together which would constitute a “group” for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (other than Lydall Inc or any subsidiary of Lydall Inc.) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 25% of the total voting power of all classes of capital stock of Lydall Inc. entitled to vote generally in the election of the Board; (b) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a “Current Director” shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Lydall Inc’s shareholders, was approved by at least a majority of the Current Directors then on the Board); (c) the shareholders of Lydall Inc approve (i) a plan of complete liquidation of Lydall Inc or (ii) an agreement providing for the merger or consolidation of Lydall Inc other than a merger or consolidation in which (x) the holders of the common stock of Lydall Inc immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the Board of Directors of the continuing or surviving corporation or, (d) the shareholders of Lydall Inc approve an agreement (or agreements) providing for the sale or other				Changement de contrôle : Dans le cadre de cet accord, un « Changement de Contrôle » sera supposé avoir lieu si (a) une ou toute personne agissant ensemble, qui serait considérée comme un « groupe » au sens de la section 13(d) du Securities Exchange Act de 1934, tel que modifié (« l’ Exchange Act »), (autre que la société Lydall Inc ou toute filiale de Lydall Inc), venait à détenir (comme défini dans la règle 13d-3 du Exchange Act), directement ou indirectement, au moins 25% du total des droits de vote de toutes les catégories d’actions composant le capital social de Lydall Inc, ayant le droit de vote généralement pour les élections du Conseil (b) les Administrateurs Actuels (comme défini ci-dessous) cessent pour quelque raison que ce soit de représenter au moins la majorité des membres du Conseil (à cet effet, un “Administrateur Actuel” signifie tout membre du Conseil à la date des présentes et tout successeur d’un Administrateur Actuel, dont l’élection ou la nomination pour l’élection par les actionnaires de Lydall Inc, a été approuvée par au moins la majorité des Administrateurs Actuels présents au sein du Conseil à ce moment-là) (c) les actionnaires de Lydall Inc approuvent (i) un plan de liquidation totale de Lydall Inc, ou (ii) un accord prévoyant la fusion ou consolidation de Lydall Inc autre qu’une fusion ou consolidation dans laquelle (x) les détenteurs des actions ordinaires de Lydall Inc, immédiatement avant la fusion ou consolidation, ont, directement ou indirectement, au moins la majorité du capital de la société absorbante ou survivante, immédiatement après la fusion ou consolidation, ou (y) le Conseil immédiatement avant la fusion ou consolidation représente, immédiatement après la fusion ou


disposition (in one transaction or a series of transactions) of all or substantially all of the assets of Lydall Inc.				consolidation, une majorité du Conseil d’Administration de la société survivante ou absorbante, ou (d) les actionnaires de Lydall Inc. approuvent un accord (ou des accords) prévoyant la cession ou disposition (dans une transaction ou une série de transactions) de tout ou une majorité des actifs de Lydall Inc.

b. Cause. The word “cause”, as used in this Agreement, shall mean (i) conviction of a crime involving moral turpitude,[this may not be enforceable in France] or (ii) material and unexcused breach of your obligations under this Agreement, which results in material harm to the Company and which is not cured within the period set forth below; provided, however, that a termination shall not be for “cause” hereunder unless, such conviction or breach is detailed in a written notice of intent to terminate, providing for sixty (60) days from receipt by you to cure the breach prior to your termination; except that such notice would not be required if[he is the President]the Company would be immediately harmed.				b. Cause signifie (i) condamnation à un crime impliquant une turpitude morale, ou (ii) une violation matérielle et inexcusable de vos obligations dans le cadre du présent accord, qui entraîne un préjudice pour la Société, et auquel il n’est pas remédié dans la période prévue ci-dessous ; considérant toutefois qu’une telle cessation ne sera pas considérée comme une « Cause » , tel que définie ci-dessus, à moins qu’une telle violation n’ait été précisée dans une lettre d’intention de mettre fin aux fonctions, et prévoyant un délai de 60 jours à compter de la réception de cette lettre par M. Ploquin en vue de remédier à cette violation avant de pouvoir mettre fin à ses fonctions. Toutefois, cette lettre de notification ne sera pas requise si la Société subissait immédiatement un préjudice.

I trust the above reflects the content of our discussion, and I would be grateful if you could confirm your acceptance of the above by returning me a signed copy of this letter by [•] 2005 at the latest.				J’espère que les dispositions ci-dessus reflètent le contenu de nos discussions et vous serais gré de bien vouloir confirmer votre accord à la présente en nous retournant une copie signée de la présente le [•] 2005 au plus tard.

Fait en double exemplaires,

/s/ David Freeman Date: 8/1/2005 Mr. David Freeman Chief Executive Officer Lydall, Inc.				/s/ Bertrand Ploquin

EX-10.2 3 dex102.htm AGREEMENT WITH JOHN F. TATTERSALL Agreement with John F. Tattersall

Exhibit 10.2

SEVERANCE AGREEMENT

THIS AGREEMENT is made and entered into as of the 1st day of August, 2005, by and between LYDALL, INC., a Delaware corporation (the “Company”), and John F. Tattersall of 16 Cinnamon Lane, Clifton Park, NY 12065 (the “Executive”).

W I T N E S S E T H

WHEREAS, the Company and the Executive (the “Parties”) have agreed to enter into this agreement (the “Agreement) relating to the severance of the employment of the Executive by the Company;

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows:

1.0	Termination of Employment by the Company.

1.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or Cause. The Company may terminate the Executive’s employment at any time. If termination is for reasons other than (i) the Executive’s Permanent and Total Disability (as defined in Section 1.2) or (ii) for Cause (as defined in Section 1.3), termination shall be effective upon the Company giving the Executive a written notice of termination at least 30 days before the date of termination (or such lesser notice period as to which the Executive may agree). In the event of such a termination of employment pursuant to this Section, the Executive shall be entitled to receive (i) the benefits described in Section 3 if such termination of employment does not occur within 12 months following a “Change of Control” (as defined in Section 5), or (ii) the benefits described in Section 4 if such termination of employment occurs within 12 months following a “Change of Control” (as defined in Section 5).

1.2 Termination Due to Permanent and Total Disability. If the Executive incurs a Permanent and Total Disability, as defined below, the Company may terminate the Executive’s employment by giving the Executive written notice of termination at least 30 days before the date of such termination (or such lesser notice period as the Executive may agree to). In the event of such termination of the Executive’s employment because of Permanent and Total Disability, the Executive shall be entitled to receive (i) his base salary through the date which is twelve months following the date of such termination of employment, reduced by any amounts paid to the Executive under any

disability program maintained by the Company, such base salary to be paid at the normal time for the payment of such base salary, (ii) a bonus for the year of termination of employment and for the next succeeding year (to be paid at the normal time for payment of such bonuses) in an amount equal to the average of the three highest annual bonuses earned by the Executive under the Company’s annual incentive bonus plan for any of the five calendar years preceding the calendar year of his termination of employment (or, if the Executive was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which the Executive was eligible), with any deferred bonuses counting for the year earned rather than the year paid; (iii) any other compensation and benefits to the extent actually earned by the Executive under any other benefit plan or program of the Company as of the date of such termination of employment, such compensation and benefits to be paid at the normal time for payment of such compensation and benefits, and (iv) any reimbursement amounts owed for “Business Expenses” defined herein as: reasonable, documented and necessary expenses incurred by the Executive in performing his duties, provided the Executive properly accounts therefore in accordance with the policies established by the company. In addition, if the Executive elects to continue coverage under the Company’s health plan pursuant to COBRA, the Company for a period of twelve months following termination of the Executive’s employment by reason of Permanent and Total Disability will pay the same percentage of the Executive’s premium for COBRA coverage for the Executive and, if applicable, his spouse and dependent children, as the Company paid at the applicable time for coverage under such plan for actively employed senior executives generally. For the period of twelve months following the termination of the Executive’s employment by reason of Permanent and Total Disability, the Company will continue to provide the life insurance benefits that the Company would have provided to the Executive if the Executive had continued in employment with the Company for such period, but only if the Executive timely pays the portion of the premium for such coverage that senior executives of the Company generally are required to pay for such coverage, if any. For purposes of this Agreement, the Executive shall be considered to have incurred a Permanent and Total Disability if and only if the Executive has incurred a disability entitling the Executive to disability benefits under the Company’s long-term disability plan.

1.3 Termination for Cause. The Company may terminate the Executive’s employment immediately for Cause for any of the following reasons: (i) an act or acts of dishonesty or fraud on the part of the Executive resulting or intended to result directly or indirectly in substantial gain or personal enrichment to which the Executive was not legally entitled at the expense of the Company or any of its subsidiaries; (ii) a willful material breach by the Executive of his duties

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or responsibilities under this Agreement resulting in demonstrably material injury to the Company or any of its subsidiaries; (iii) the Executive’s conviction of a felony or any crime involving moral turpitude, (iv) habitual neglect or insubordination (defined as refusal to execute or carry out directions from the Board or its duly appointed designees) where the Executive has been given written notice of the acts or omissions constituting such neglect or insubordination and the Executive has failed to cure such conduct, where susceptible to cure, within thirty days following such notice, or (v) a material breach by the Executive of any of his obligations under the Confidentiality and Non-Compete Agreement executed by the Executive and attached hereto as Exhibit A. The Company shall exercise its right to terminate the Executive’s employment for Cause by giving the Executive written notice of termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Executive’s employment for Cause, the Executive shall be entitled to receive only (i) his base salary earned through the date of such termination of employment plus his base salary for the period of any vacation time earned but not taken for the year of termination of employment, such base salary to be paid at the normal time for payment of such base salary, (ii) any other compensation and benefits to the extent actually earned by the Executive under any other benefit plan or program of the Company as of the date of such termination of employment, such compensation and benefits to be paid and at the normal time for payment of such compensation and benefits and (iii) any reimbursement of Business Expenses. The Executive will not be entitled to a bonus payment.

2.0	Termination of Employment By Death.

In the event of the death of the Executive during the course of his employment hereunder, the Executive’s estate (or other person or entity having such entitlement pursuant to the terms of the applicable plan or program) shall be entitled to receive (i) the Executive’s base salary earned through the date of the Executive’s death plus the Executive’s base salary for the period of vacation time earned but not taken for the year of the Executive’s death, such base salary to be paid at the normal time for payment of such base salary, (ii) if earned, a bonus for the year of the Executive’s death (to be paid within 90 days after the Executive’s death) in an amount equal to a pro rata portion of the average of the three highest annual bonuses earned by the Executive under the Company’s annual incentive bonus plan for any of the five calendar years preceding the calendar year of the Executive’s death (or, if the Executive was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which the Executive was eligible), with any

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deferred bonuses counting for the year earned rather than the year paid and with the pro rata portion being determined by dividing the number of days of the Executive’s employment during such calendar year up to his death by 365 (366 if a leap year), (iii) any other compensation and benefits to the extent actually earned by the Executive under any other benefit plan or program of the Company as of the date of such termination of employment, such compensation and benefits to be paid at the normal time for payment of such compensation and benefits, and (iv) any reimbursement of Business Expenses. In addition, in the event of such death, the Executive’s beneficiaries shall receive any death benefits owed to them under the Company’s employee benefit plans. If the Executive’s spouse and/or dependent children elect to continue coverage under the Company’s health plan following the Executive’s death pursuant to COBRA, the Company for a period of 12 months following the Executive’s death will pay the same percentage of the premium for COBRA coverage for the Executive’s spouse and/or dependent children, as applicable, as the Company would have paid in respect of the Executive’s coverage under such plan if the Executive had continued in employment with the Company for such period.

3.0	Benefits Upon Termination Without Cause (No Change of Control).

If the Executive’s employment hereunder is terminated by the Company, other than for Cause or Permanent and Total Disability, and such termination of employment does not occur within 12 months following a “Change of Control” of the Company (as defined in Section 5), the Executive shall be entitled to the following:

(a) Salary. The Company shall pay to the Executive his base salary earned through the date of such termination of employment and any other compensation and benefits to the extent actually earned by the Executive under any benefit plan or program of the Company as of the date of such termination of employment, such base salary, compensation and benefits to be paid at the normal time for payment of such base salary, compensation and benefits.

(b) Expense Reimbursement. The Company shall reimburse the Executive for any Business Expenses.

(c) Severance Payment. The Company shall pay to the Executive 12 months’ severance, at the Executive’s annual rate of base salary immediately preceding his termination of employment, in equal installments spread over the period of 12 months beginning on the date of termination.

(d) Bonus. If the date of termination occurs after the first anniversary of the Executive’s hire date, the Company

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shall pay to the Executive in addition, the average of his annual bonuses earned under the Company’s annual incentive bonus plan for the three calendar years preceding his termination of employment (or, if the Executive was not eligible for a bonus in each of those three calendar years, then the average of such bonuses for all of the calendar years in such three-year period for which he was eligible), with any deferred bonuses counting for the year earned rather than the year paid. Such installments shall be paid at the times that salary payments are normally made by the Company.

(e) Health Benefits. If the Executive elects to continue coverage under the Company’s health plan pursuant to COBRA, then for the period beginning on the date of the Executive’s termination of employment and ending on the earlier of (i) the date which is 12 months after the date of such termination of employment or (ii) the date on which the Executive commences substantially full-time employment as an employee of an employer that offers health benefits, the Company will pay the same percentage of the Executive’s premium for COBRA coverage for the Executive and, if applicable, his spouse and dependent children, as the Company paid at the applicable time for coverage under such plan for actively employed senior executives generally. The Executive shall notify the Company promptly if he, while eligible for benefits under this subsection (d), commences substantially full-time employment as an employee of an employer that offers health insurance benefits.

(f) Outplacement. The Company will provide the Executive with outplacement services selected by the Executive, at the Company’s expense not to exceed $10,000.

4.0	Benefits Upon Termination Without Cause (Change of Control).

If the Executive’s employment hereunder is terminated by the Company, other than for Cause or Permanent and Total Disability, and such termination of employment occurs within 12 months following a “Change of Control” of the Company (as defined in Section 5), the Executive shall be entitled to the following:

(a) Salary. The Company shall pay to the Executive his base salary earned through the date of such termination of employment and any other compensation and benefits to the extent actually earned by the Executive under any benefit plan or program of the Company as of the date of such termination of employment, such base salary, compensation and benefits to be paid at the normal time for payment of such base salary, compensation and benefits.

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(b) Expense Reimbursement. The Company shall reimburse the Executive for any Business Expenses.

(c) Severance. The Company shall pay to the Executive as a severance benefit an amount equal to two (2) times the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses earned under the Company’s annual incentive bonus plan for any of the five calendar years preceding his termination of employment (or, if the Executive was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which the Executive was eligible), with any deferred bonuses counting for the year earned rather than the year paid. Such severance benefit shall be paid in a lump sum within 30 days after the date of such termination of employment.

(d) Bonus. The Company shall pay to the Executive as a bonus for the year of termination of his employment an amount equal to a portion (determined as provided in the next sentence) of the Executive’s expected bonus opportunity under the Company’s annual incentive bonus plan for the calendar year of the termination of the Executive’s employment or, if none, such portion of the bonus awarded to the Executive under the Company’s annual incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of his employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by the Company, in its sole reasonable discretion, as of the time of the Executive’s termination by dividing the number of days of the Executive’s employment during such calendar year up to his termination of employment by 365 (366 if a leap year) and prorating accordingly the expected bonus calculated by the Company, based on information available on or about the date of termination of the Executive. Such payment shall be made in a lump sum within 30 days after the date of such termination of employment, and the Executive shall have no right to any further bonuses under said plan.

(e) Health Benefit. During the period of 12 months beginning on the date of the Executive’s termination of employment, the Executive (and, if applicable, the Executive’s spouse and dependent children) shall remain covered by the medical and dental, plans of the Company that covered the Executive immediately prior to his termination of employment as if the Executive had remained in employment for such period; provided, however, that the coverage under any such plan is conditioned on the timely payment by the Executive (or his spouse or dependent

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children) of the portion of the premium for such coverage that other employees with the Company generally are required to pay for such coverage.

(f) Pension Enhancement. The Company shall supplement the benefits payable in respect of the Executive under the Company’s Pension Plan (and any successor plans thereto) (collectively, the “Pension Plans”) by paying the difference between (i) the benefits that the Executive would have been entitled to receive under the Pension Plans if he had been credited with one additional year of service (but no additional years of age) for purposes of the benefit accrual formula under the Pension Plans as of the date of termination of the Executive’s employment and (ii) the benefits that the Executive is entitled to receive under the Pension Plans determined without regard to this subsection. Such benefits shall be payable in the same form and at the same time as the benefits under the respective Pension Plans.

(g) Car Allowance. The Company will pay the Executive a car allowance, in an amount equal to Executive’s lease allowance at the time of termination, per month for 12 months following termination of the Executive’s employment to replace the Company-leased automobile, which leased automobile will be returned to the Company by the Executive on the date of termination of the Executive’s employment.

(h) Outplacement. The Company will provide the Executive with out-placement services selected by the Executive, at the Company’s expense not to exceed $10,000.

5.0	Change of Control.

For the purposes of this Agreement, a “Change of Control” shall be deemed to have occurred if (a) any person or persons acting together which would constitute a “group” for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (other than the Company or any subsidiary of the Company) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 25% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board; (b) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a “Current Director” shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company’s shareholders, was approved by at least a majority of the Current Directors then on the Board); (c) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or

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(ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (d) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company.

6.0	Golden Parachute Excise Tax.

(a) In the event that any payment or benefit received or to be received by the Executive pursuant to this Agreement or any other plan, program or arrangement of the Company or any of its affiliates would constitute an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), then the payments under this Agreement shall be reduced (by the minimum possible amounts) until no amount payable to the Executive under this Agreement constitutes an “excess parachute payment” within the meaning of Section 280G of the Code; provided, however, that no such reduction shall be made if the net after-tax payment (after taking into account Federal, state, local or other income and excise taxes) to which the Executive would otherwise be entitled without such reduction would be greater than the net after-tax payment (after taking into account Federal, state, local or other income and excise taxes) to the Executive resulting from the receipt of such payments with such reduction. If, as a result of subsequent events or conditions (including a subsequent payment or absence of a subsequent payment under this Agreement or other plan, program or arrangement of the Company or any of its affiliates), it is determined that payments under this Agreement have been reduced by more than the minimum amount required to prevent any payments from constituting an “excess parachute payment”, then an additional payment shall be promptly made to the Executive in an amount equal to the additional amount that can be paid without causing any payment to constitute an excess parachute payment.

(b) All determinations required to be made under this Section shall be made by the Company and reviewed by a nationally recognized independent accounting firm mutually agreeable to the Company and the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations to the Company and the Executive as requested by the Company or the Executive. All fees and expenses of the Accounting Firm shall be borne solely by the Company and shall be paid by

-8-

the Company upon demand of the Executive as incurred or billed by the Accounting Firm. All determinations made by the Accounting Firm pursuant to this Section 11 shall be final and binding upon the Company and the Executive.

(c) To the extent any payment or benefit is to be reduced pursuant to this Section, the payments described in this Agreement will be reduced in the following order: the severance payment, then the bonus payment, and then any supplemental pension benefits, in each case only to the extent necessary.

7.0	Entitlement to Other Benefits.

Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Executive or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company.

8.0	General Provisions.

8.1 Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Executive and any deductions and withholdings required by law.

8.2 Notices. All notices, demands, requests, consents, approvals or other communications (collectively “Notices”) required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and may be personally served or may be faxed with a copy deposited in the United States mail, registered or certified, return receipt requested, postage prepaid, addressed as follows:


To the Company:		Lydall, Inc. P.O. Box 151 One Colonial Road Manchester, CT 06045-0151 Attn: General Counsel

To the Executive:		John F. Tattersall 16 Cinnamon Lane Clifton Park, NY 12065

or such other address as such party shall have specified most recently by written notice. Notice mailed as provided herein shall be deemed given on the fifth business day following the date so mailed or on the date of actual receipt, whichever is earlier.

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8.3 No Disparagement. The Executive shall not during the period of his employment with the Company, nor during the two-year period beginning on the date of termination of his employment for any reason, disparage the Company or any of its subsidiaries or affiliates or any of their shareholders, directors, officers, employees or agents. The Executive agrees that the terms of this Section shall survive the term of this Agreement and the termination of the Executive’s employment.

8.4 Proprietary Information and Inventions. The Confidentiality and Non-Compete Agreement executed on March 31, 2000 by the Executive and attached hereto as Exhibit A is incorporated by reference in this Agreement, and the Executive agrees to continue to be bound thereby.

8.5 Covenant to Notify Management. The Executive agrees to abide by the ethics policies of the Company as well as the Company’s other rules, regulations, policies and procedures. The Executive agrees to comply in full with all governmental laws and regulations as well as ethics codes applicable. In the event that the Executive is aware or suspects the Company, or any of its officers or agents, of violating any such laws, ethics, codes, rules, regulations, policies or procedures, the Executive agrees to bring all such actual and suspected violations to the attention of the Company immediately so that the matter may be properly investigated and appropriate action taken. The Executive understands that the Executive may be liable for failing to take prompt steps to stop or eliminate violations of ethical standards, Company policies and governmental laws and regulations once such matters become apparent to the Executive. As a result, the Executive has an affirmative duty to report such alleged violations to the Company without delay and is precluded from filing a complaint with any court having jurisdiction over wrongful conduct unless the Executive has first notified the Company of the facts and permits it to investigate and correct the concerns.

8.6 Amendments and Waivers. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either Party hereto at any time of any breach by the other Party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

8.7 Beneficial Interests. This Agreement shall inure to the benefit of and be enforceable by a) the Company’s successors and assigns and b) the Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amounts are still

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payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s devisee, legatee, or other designee or, if there be no such designee, to the Executive’s estate.

8.8 Successors. The Company will require any successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform.

8.9 Assignment. This Agreement and the rights, duties, and obligations hereunder may not be assigned or delegated by any Party without the prior written consent of the other Party and any attempted assignment or delegation without such prior written consent shall be void and be of no effect. Notwithstanding the foregoing provisions of this Section, the Company may assign or delegate its rights, duties and obligations hereunder to any affiliate or to any person or entity which succeeds to all or substantially all of the business of the Company or one of its subsidiaries through merger, consolation, reorganization, or other business combination or by acquisition of all or substantially all of the assets of the Company or one of its subsidiaries.

8.10 Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut.

8.11 Statute of Limitations. The Executive and the Company hereby agree that there shall be a one year statute of limitations for the filing of any requests for arbitration or any lawsuit relating to this Agreement or the terms or conditions of Executive’s employment by the Company. If such a claim is filed more than one year subsequent to the Executive’s last day of employment it shall be precluded by this provision, regardless of whether or not the claim has accrued at that time.

8.12 Right to Injunctive and Equitable Relief. The Executive’s obligations under Section 8.3 are of a special and unique character, which gives them a peculiar value. The Company cannot be reasonably or adequately compensated for damages in an action at law in the event the Executive breaches such obligations. Therefore, the Executive expressly agrees that the Company shall be entitled to injunctive and other equitable relief without bond or other security in the event of such breach in addition to any other rights or remedies which the Company may possess or be entitled to pursue. Furthermore, the obligations of the Executive and the rights and remedies of the Company under Section 8.3 and this Section are cumulative and in

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addition to, and not in lieu of, any obligations, rights, or remedies as created by applicable law.

8.13 Severability or Partial Invalidity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

8.14 Entire Agreement. This Agreement, along with the Confidentiality and Non-Compete Agreement by and between the Executive and the Company, constitutes the entire agreement of the Parties and supersedes all prior written or oral and all contemporaneous oral agreements, understandings, and negotiations between the Parties with respect to the subject matter hereof. This Agreement may not be changed orally and may only be modified in writing signed by both Parties. This Agreement, along with the Confidentiality and Non-Compete Agreement, is intended by the Parties as the final expression of their agreement with respect to such terms as are included herein and therein and may not be contradicted by evidence of any prior or contemporaneous agreement. The Parties further intend that this Agreement, along with the Confidentiality and Non-Compete Agreement, constitutes the complete and exclusive statement of their terms and that no extrinsic evidence may be introduced in any judicial proceeding involving such agreements.

8.15 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument.

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the day and year first above written.


LYDALL, INC.

By:	/s/ DAVID FREEMAN	Date 8/1/2005
	David Freeman
	Chief Executive Officer and President

/s/ JOHN F. TATTERSALL		Date 7/27/2005
John F. Tattersall

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EX-31.1 4 dex311.htm CERTIFICATION PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)

Exhibit 31.1

CERTIFICATION

I, David Freeman, 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:

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;

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;

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

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 the registrant’s board of directors (or persons performing the equivalent functions):

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

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.


		August 4, 2005						/s/ DAVID FREEMAN
								David Freeman
								President and Chief Executive Officer

EX-31.2 5 dex312.htm CERTIFICATION PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)

Exhibit 31.2

CERTIFICATION

I, Thomas P. Smith, 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;

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):

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.


		August 4, 2005						/S/ THOMAS P. SMITH
								Thomas P. Smith
								Vice President, Chief Financial Officer and Treasurer

EX-32.1 6 dex321.htm CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 Certifications Pursuant to 18 U.S.C. Section 1350

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 June 30, 2005 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:

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

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.


		August 4, 2005						/s/ DAVID FREEMAN
								David Freeman
								President and Chief Executive Officer

		August 4, 2005						/S/ THOMAS P. SMITH
								Thomas P. Smith
								Vice President, Chief Financial Officer and Treasurer

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