Exhibit 10.1

 

LYDALL, INC.

ANNUAL INCENTIVE PERFORMANCE PROGRAM

 

(Effective January 1, 2012)

 

 

 

This Annual Incentive Performance Program (this “AIP Program”) sets forth the
terms and conditions under which designated employees of Lydall, Inc. and its
subsidiaries (collectively, “Lydall” or the “Company”) may receive cash
incentive payments based on the annual financial performance of the Company.

 

1.Purpose. The purpose of this AIP Program is to retain and incentivize
Participating Employees (as defined below) by providing annual cash bonus
opportunities to reward them when specified performance metrics are achieved.

 

2.Effective Date. This AIP Program is effective as of January 1, 2012 and shall
continue indefinitely until terminated by the Compensation Committee (the
“Compensation Committee”) of the Board of Directors (the “Board”) of Lydall,
Inc.

 

3.Eligibility. Only Participating Employees are eligible to participate in this
AIP Program. “Participating Employees” are officers of Lydall, Inc. and Senior
Vice Presidents of Lydall subsidiaries (“Group A Participating Employees”) and
other employees of Lydall who are designated by the Chief Executive Officer
(“Group B Participating Employees”).

 

4.Program Elements. The following elements and defined terms apply to this AIP
Program:

 

a.Program Year. A “Program Year” is the calendar year.

 

b.Base Salary. “Base Salary” is the Participating Employee’s regular earnings as
indicated on his or her final paycheck of the Program Year, plus any separately
recorded holiday and vacation pay. Base Salary is reduced by earnings attributed
to any leave of absence.

 

c.Target Bonus Percentage. “Target Bonus Percentage” is a specified percentage
of a Participating Employee’s Base Salary that is assigned as part of his or her
compensation package. Target Bonus Percentages may change from year-to-year
based upon approval of the Chief Executive Officer or, in the case of the Chief
Executive Officer and his/her direct reports, based upon approval by the
Compensation Committee.

 

d.Target Bonus Amount. “Target Bonus Amount” for each Participating Employee is
the product obtained by multiplying his or her Base Salary by his or her Target
Bonus Percentage.

 

e.Performance Metrics. “Performance Metrics” are the following designated
measures of financial performance for any given Program Year for Lydall on a
consolidated basis or for a Business Unit (as defined below):

 

(i)Operating Income (or “OI”) — defined as operating income from continuing
operations.

 

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(ii)Free Cash Flow (or “FCF”) — defined as Operating Income, plus
depreciation/amortization, plus/minus changes in working capital, minus capital
spending. For purposes of the foregoing, working capital is defined as trade
accounts receivable, plus inventory minus accounts payable, provided that, in
making such calculation, the accounts payable opening balance will be calculated
as the average of the month-ending balances for September, October, November and
December for the preceding Program Year and the accounts payable closing balance
will be calculated as the average of the month-ending balances for September,
October, November and December for the current Program Year.

 

(iii)Gross Margin (or “GM”) — defined as the percentage resulting from: (A) the
excess, if any, of net sales from continuing operations over cost of sales from
continuing operations; (B) divided by net sales from continuing operations.

 

 

f.Performance Targets. “Performance Targets” are the specific measures of
financial performance (expressed with reference to consolidated and Business
Unit Performance Metrics) that are established and approved by the Compensation
Committee for each Program Year.

 

g.Business Units. Performance Targets may be established for such business units
of the Company as may be determined by the Compensation Committee from
time-to-time (each, a “Business Unit” and, collectively, the “Business Units”).

 

 

h.Applicability and Relative Weight of Performance Metrics. The applicable
Performance Metrics and the relative weight of each such Performance Metric (the
“Performance Metric Weight”) for the respective Participating Employees are set
forth below:

 

Participating Employee
Employed At: Consolidated OI Business Unit OI Consolidated FCF Business Unit FCF
Consolidated GM   Business Unit GM Corporate Headquarters* 50% N/A 25% N/A 25%
N/A Business Unit* N/A 50% N/A 25% N/A 25%

* Includes both Group A and Group B Participating Employees.

 

5.AIP Program Operation. This AIP Program shall operate as set forth below:

 

a.Establishment of Performance Targets. No later than March 31 of each Program
Year, the Compensation Committee shall establish the consolidated and Business
Unit Performance Targets for such Program Year. All Performance Targets and
actual performance with respect to those targets are subject to adjustment by
the Compensation Committee, in its discretion, if determined necessary or
appropriate to adjust for the effects of extraordinary items, unusual or
non-recurring events, changes in accounting principles, realized investment
gains or losses, discontinued operations, acquisitions, divestitures, material
restructuring or impairment charges and other similar items.

 

b.Determination of Cash Bonus Factors for OI and FCF. Cash bonus awards with
respect to the OI and FCF Performance Metrics are determined based upon the
achievement of the Performance Targets with reference to the applicable cash
bonus factor set forth in the following table (hereinafter, the “OI and FCF Cash
Bonus Factor”):

 

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% of Performance Target Achieved for
OI and FCF OI and FCF Cash Bonus Factor 80 or less 0 81 .05 82 .10 83 .15 84 .20
85 .25 86 .30 87 .35 88 .40 89 .45 90 .50 91 .55 92 .60 93 .65 94 .70 95 .75 96
.80 97 .85 98 .90 99 .95 100 1.00

  

c.Determination of Cash Bonus Factor for GM Achieved At Or Below Target. Cash
bonus awards with respect to the GM Performance Metric for performance achieved
at or below the Performance Target are determined on a linear basis upon the
achievement of the Performance Targets with reference to the applicable cash
bonus factor set forth in the following table (hereinafter, the “GM Cash Bonus
Factor”):

  

GM Basis Points Below Relative to Target GM Cash Bonus Factor (for both Group A
and Group B) -100 or less 0 -90 .10 -80 .20 -70 .30 -60 .40 -50 .50 -40 .60 -30
.70 -20 .80 -10 .90 Target 1.00

 

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d.Determination of Actual Financial Performance. As soon as practicable
following the completion of each Program Year and the availability of Lydall’s
audited consolidated financial statements for such Program Year, the
Compensation Committee shall: (i) determine the consolidated and Business Unit
Operating Income, Free Cash Flow and Gross Margin achieved for the Program Year
(each “Performance Metric Achieved”); and (ii) certify in writing the extent to
which the Performance Target for each has been achieved, if at all (such
certification is referred to as the “Committee Certification”). If, in
determining and certifying the achievement of any Performance Targets for the
Program Year, the Compensation Committee determines that it is necessary or
appropriate to make adjustments by virtue of the authority set forth in
paragraph (a) above, the Committee Certification shall include a brief statement
setting forth the amount of the adjustment and the reasons therefor.

 

e.Determination of Cash Bonus Amount. Each Participating Employee shall be
entitled to receive a cash bonus equal to the product of his or her: (i) Target
Bonus Amount, (ii) Performance Metric Weight for the applicable Performance
Metric, and (iii) Cash Bonus Factor for the applicable Performance Metric
Achieved (as set forth in Committee Certification) for the applicable Program
Year.

 

f.Exceeding Consolidated Performance Targets for OI and FCF. If Lydall achieves
financial results in excess of the consolidated OI and FCF Performance Targets
for a given Program Year, the following shall apply:

 

(i)Creation of Additional Bonus Pools and Eligibility to Participate. For the
consolidated OI and FCF Performance Metrics, thirty percent of the amount, if
any, which the consolidated Performance Metric Achieved (as set forth in the
Committee Certification) exceeds the corresponding consolidated Performance
Target shall be allocated to a separate bonus pool (each, an “Additional Bonus
Pool” and, collectively, the “Additional Bonus Pools”). All Participating
Employees employed at corporate headquarters are eligible to participate in each
of the Additional Bonus Pools. Participating Employees employed by a Business
Unit are eligible to participate in an Additional Bonus Pool only if their
respective Business Unit achieves at least 100% of the Business Unit Performance
Target corresponding to the respective Additional Bonus Pool for the Program
Year.

 

(ii)Distribution of Additional Bonus Pool Amounts. Subject to the limitation set
forth in Section 5(e)(iii) below, amounts allocated to each Additional Bonus
Pool shall be distributed as follows: each Participating Employee eligible to
share in the respective Additional Bonus Pool shall receive a payment determined
by the ratio of such Participating Employee’s Target Bonus Amount with respect
to the relevant Performance Metric (whether consolidated or Business Unit) to
the aggregate Target Bonus Amounts with respect to such Performance Metric (both
consolidated and Business Unit) for all Participating Employees eligible to
share in each such Additional Bonus Pool.

 

(iii)Limitation on Payments from Each Additional Bonus Pool. Notwithstanding any
other provision of this AIP Program, the following limitations shall apply with
respect to the amount of the additional bonus that may be paid to any
Participating Employee from any Additional Bonus Pool: (A) the amount of any
additional bonus paid to any Group A Participating Employee from any Additional
Bonus Pool shall not exceed 100% of the Target Bonus Amount of such Group A
Participating Employee for the Performance Metric corresponding to each such
pool; and (B) the amount of any additional bonus paid to any Group B
Participating Employee from any Additional Bonus Pool shall not exceed 50% of
the Target Bonus Amount of such Group B Participating Employee for the
Performance Metric corresponding to each such pool.

 

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g.Exceeding Consolidated Performance Targets for GM. If Lydall achieves
financial results in excess of the consolidated GM Performance Target for a
given Program Year, cash bonus awards with respect to the GM Performance Metric
are determined on a linear basis with reference to the GM Cash Bonus Factor set
forth in the following table, provided that Participating Employees employed by
a Business Unit are eligible to receive a GM Cash Bonus Factor in excess of 1.00
only if their respective Business Unit achieves its GM Performance Target for
the Program Year.

 

GM Basis Points Below Relative to Target GM Cash Bonus Factor   Group A
Participating Employees Group B Participating Employees +10 1.025 1.0125 +20
1.05 1.025 +40 1.10 1.05 +80 1.20 1.10 +120 1.30 1.15 +160 1.40 1.20 +200 1.50
1.25 +240 1.60 1.30 +280 1.70 1.35 +320 1.80 1.40 +360 1.90 1.45 +400 (or above)
2.00 1.50

 

6.General Terms and Conditions

 

a.Plan Administration. The Compensation Committee shall be responsible for
overseeing the administration and interpretation of this AIP Program and for
overseeing the implementation of its provisions. The Compensation Committee
reserves the right, in its sole discretion, to modify, amend or terminate this
AIP Program at any time. All decisions of the Compensation Committee regarding
the interpretation, construction, implementation and administration of this AIP
Program shall be final and binding.

 

b.Repayment of Bonus. The following shall apply with respect to the repayment of
bonuses paid under this AIP Program:

 

(i)To the extent not required to be repaid by the other provisions to this
Section 6 (b), if, at any time, the Compensation Committee, in its sole
discretion, determines that any action or omission by a Participating Employee
constituted (i) wrongdoing that contributed to any material misstatement in or
omission from any report or statement filed by the Company with the U.S.
Securities and Exchange Commission; (ii) intentional misconduct or gross
misconduct; (iii) a breach of a fiduciary duty to the Company or its
shareholders; or (iv) fraud, then in each such case, commencing with the first
Program Year during which such action or omission occurred, the Participating
Employee committing such act or omission shall be terminated from participation
in this AIP Program and such Participating Employee shall immediately repay to
the Company, upon notice to the Participating Employee by the Company, up to
100% (as determined by the Company) of the gross amount paid to the
Participating Employee pursuant to this AIP Program during and after such
Program Year.

 

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(ii)To the extent not required to be repaid by the other provisions to this
Section 6 (b), any bonus paid pursuant to this AIP Program also shall be subject
to recoupment in accordance with the applicable provisions of any law,
government regulation or stock exchange listing requirement (and any policy
adopted by the Company pursuant to any such law, government regulation or stock
exchange listing requirement).

 

Additionally, at the discretion of the Compensation Committee, if the Company is
required to restate any of its financial statements filed with the U.S.
Securities and Exchange Commission, other than restatements due solely to facts
external to the Company and its affiliates such as a change in accounting
principles or a change in securities laws or regulations with retroactive
effect, Participating Employees may be required to disgorge and repay to the
Company any bonus paid pursuant to this AIP Program to the extent such bonus
exceeded the amount that would have been paid for such Program Year if it had
been based upon the restated financial statements.

 

c.Payment. All cash bonuses shall be paid after issuance of the Committee
Certification.

 

d.Active Employment Condition. To be eligible to receive a bonus payout under
this AIP Program, a Participating Employee must be an employee in good standing
as of the date the cash bonus is actually paid by Lydall, except as otherwise
specifically agreed to by the Board or the Compensation Committee.

 

e.No Guarantee That Cash Bonuses Will Be Paid. Lydall and the Compensation
Committee reserve the right to withhold, reduce or deny payment of a cash bonus
otherwise payable under the AIP Program subject to any limitations that may be
imposed by applicable law.

 

f.Not an ERISA Regulated Program. This is not an ERISA regulated program.

 

g.Nonassignability. No rights of any Participating Employee may be sold,
exchanged, transferred, assigned, pledged or otherwise disposed of (including
through the use of any cash-settled instrument), either voluntarily or
involuntarily by operation of law, other than by will or by the laws of descent
and distribution.

h.Program Creates No Employment Rights. Nothing in this AIP Program shall confer
upon any Participating Employee a right to continue in the employ of Lydall or
affect any right which Lydall may have to terminate such employment.

 

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i.Program Unfunded. This AIP Program is unfunded and nothing in the program
shall be construed to create a trust or to establish or evidence any
Participating Employee’s claim of any right to payment of a cash bonus other
than as a general unsecured creditor.

j.Governing Law. All rights and obligations under this AIP Program shall be
governed by and construed in accordance with the laws of the State of Delaware,
without regard to principles of conflict of laws.

k.Tax Withholding. All payments hereunder shall be subject to applicable income,
employment and other tax withholding as may be required by law.

l.Section 409A of the Code. Lydall intends that cash payments under this AIP
Program shall be exempt from Section 409A of the Internal Revenue Code (the
“Code”) as short-term deferrals and shall not constitute “deferred compensation”
within the meaning of Section 409A of the Code (absent a valid deferral election
under the terms of another plan or arrangement maintained by Lydall). This AIP
Program shall be interpreted, construed and administered in accordance with the
foregoing intent. Notwithstanding the foregoing, Lydall shall have no liability
to any Participating Employee or otherwise if this AIP Program or any cash bonus
award paid or payable hereunder is subject to the additional tax and penalties
under Section 409A of the Code.

m.No Effect on Benefits. Awards and payments under this AIP Program shall
constitute special incentive payments to the Participating Employee and shall
not be required to be taken into account in computing the amount of salary or
compensation of the Participating Employee for the purpose of determining any
contributions to or any benefits under any pension, retirement, profit-sharing,
bonus, life insurance, severance or other benefit plan of Lydall or under any
agreement with a Participating Employee, unless Lydall has elected to implement
a different arrangement or practice.

 

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