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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

OR

¨    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)

One Colonial Road, Manchester, Connecticut     06040

                    (Address of principal executive offices)                 (zip code)

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

None

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

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

Indicate by check mark whether the registrant 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.

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LYDALL, INC.

INDEX

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PART I.     FINANCIAL INFORMATION

Item 1.    Financial Statements

LYDALL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In Thousands)

See accompanying Notes to Consolidated Condensed Financial Statements.

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LYDALL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(In Thousands Except Per Share Data)

See accompanying Notes to Consolidated Condensed Financial Statements.

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LYDALL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In Thousands)

See accompanying Notes to Consolidated Condensed Financial Statements.

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LYDALL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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LYDALL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

The following table illustrates the effect on net income and earnings per share had compensation cost been recognized based on the fair value of the options at the grant dates for awards under those plans consistent with FAS 123 using the Black-Scholes fair value method for option pricing for the three months ended March 31, 2003 and 2002. There were no grants issued during the three months ended March 31, 2003 or 2002.

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LYDALL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

The table below presents the gross carrying amount and, as applicable, the accumulated amortization of the Company’s acquired intangible assets other than goodwill included in “Other assets” in the Consolidated Condensed Balance Sheets as of March 31, 2003 and December 31, 2002:

Amortization expense was approximately $.1 million for the three months ended March 31, 2003 and 2002.

The following table presents estimated amortization expense for each of the next five years:

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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 “Outlook” section of this Item and elsewhere within this report and are generally identified through the use of language such as “believe,” “expect,” “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 14 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, 2002.

Results of Operations

Net Sales

Lydall, Inc. recorded net sales of $70.4 million in the first quarter of 2003 compared with $59.7 million for the same quarter of 2002, representing an increase of $10.7 million, or 17.9 percent. Foreign currency translation increased net sales by approximately 5.0 percent for the period. After adjusting for the foreign currency translation impact, the increase of approximately 12.9 percent was primarily the result of a strong sales quarter for the automotive business driven by the start-up of the Volkswagen Golf platform and the continued new BMW Mini business in Europe, as well as the introduction of new automotive products. Increased sales of active thermal products, air filtration products in Europe, liquid filtration products and increased revenues from the warehouse distribution operation of the transport business also contributed to the overall increased sales performance. These increases were partially offset by lower sales of Vital Fluids’ blood filtration devices, lower specialty product sales and lower revenues from the trucking operations of the transport business.

Gross Margin

Gross margin for the first quarter of 2003 was $17.2 million, or 24.4 percent of net sales compared with $16.4 million, or 27.4 percent of net sales for the same quarter of 2002. The overall dollar increase in gross margin was attributable to the significant increase in net sales for the period when compared with the first quarter of 2002. The decline in gross margin percentage primarily related to the Columbus operation, as gross margin contribution was approximately $1.1 million lower for the first quarter of 2003 compared with the first quarter of 2002. This lower performance is related to the significant incremental costs incurred for labor and variable overhead expenses as the operation continues to take actions to improve operating performance. Additionally, increased costs for employee benefits and energy, as well as manufacturing inefficiencies at certain operations all negatively impacted gross margin performance for the quarter.

Selling, Product Development and Administrative Expenses

For the quarter ended March 31, 2003, selling, product development and administrative expenses were $13.6 million compared with $11.4 million for the same period of 2002 an increase of $2.2 million, or 19.2 percent. As a percentage of net sales these costs remained relatively flat for the first quarter of 2003 at 19.4

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Other Income/Expense

Other expense for the quarter ended March 31, 2003 was $.3 million compared to $.2 million for the first quarter of 2002 and consisted primarily of interest expense for both periods.

Income Taxes

The effective tax rate for the three months ended March 31, 2003 was 35.5 percent compared with 35.1 percent for the same period of 2002.

Segment Results

Thermal/Acoustical

Thermal/Acoustical net sales increased $9.8 million, or 28.2 percent to $44.5 million for the first quarter of 2003 compared with $34.7 million for the same period of 2002. Foreign currency translation increased segment net sales by approximately 6.0 percent for the period. After removing the foreign currency translation impact, the increase was primarily the result of a strong sales quarter for the automotive business. This increased automotive sales performance was driven by the start-up of the Volkswagen Golf platform and the continued new BMW Mini business in Europe, as well as the introduction of new automotive products in the United States such as thermal/acoustical pipe-wrap products and acoustical tunnel insulators. Additionally, sales of active thermal products were up significantly in the first quarter compared with the first quarter of 2002.

Thermal/Acoustical operating income for the first quarter of 2003 increased $.2 million, or 4.4 percent to $5.4 million from $5.2 million for the same period of 2002. Foreign currency translation increased segment operating income by approximately 4.4 percent for the period. Segment operating margin decreased to 12.2 percent for the quarter compared with 14.9 percent for the same period of 2002. The Columbus operation, which had lower performance at the gross margin line of approximately $1.1 million for the first quarter of 2003 compared with the first quarter of 2002, was the significant driver of the overall decline in operating margin percentage for the segment. The remainder of the decline related to increased employee benefit costs year-over-year across all operations and manufacturing inefficiencies at certain operations.

Filtration/Separation

Filtration/Separation net sales increased $1.5 million, or 8.6 percent to $18.5 million for the quarter ended March 31, 2003 compared with $17.0 million for the same period of 2002. Foreign currency translation increased segment net sales by approximately 5.5 percent for the period. The remainder of the increase was substantially related to sales growth in air filtration products in Europe and increased sales of liquid filtration products. These increases were slightly offset by lower sales to Vital Fluids’ blood filtration customers.

Filtration/Separation operating income decreased $.2 million, or 5.7 percent to $2.6 million for the quarter ended March 31, 2003 compared with $2.8 million for the same period of 2002. Foreign currency translation

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Other Products and Services

Other Products and Services net sales decreased $.5 million, or 5.5 percent to $8.0 million for the first quarter of 2003 compared with the same period of 2002. This decrease was primarily related to lower sales of specialty products, which were impacted by the continued soft economy and reduced revenues from the trucking operation of the transport business which was also impacted by the continued slow economy and poor weather conditions during the quarter. These decreases were partially offset by an increase in revenues from the warehouse distribution operation of the transport business as the Newport News Distribution Center was not yet performing at normal operating levels during the first quarter of 2002.

Other Products and Services operating income decreased $.1 million, or 18.8 percent to $.6 million for the quarter ended March 31, 2003 compared with $.7 million for the same period of 2002. This decrease primarily related to lower margin contributions from specialty products, which more than offset improved profitability in the transport businesses.

Outlook

We believe Lydall’s thermal/acoustical and filtration/separation businesses are healthy and expect them to grow, primarily through the introduction of new products and penetration of new markets. Lydall continued to garner new automotive business in late-2002 and the first quarter of 2003 and has received approvals for several future vehicle platforms. Demand for the Company’s bioprocessing products is expected to increase as existing customers expand utilization and the products gain validation with new customers. Lydall intends to leverage its market position in the air and liquid filtration markets by expanding the Company’s technology base and range of products.

For the year ended December 31, 2002, the Company recognized pension expense of $1.5 million. For 2003, the Company has lowered its expected return on plan assets from 9.25 percent to 8.75 percent and reduced its discount rate from 7.25 percent to 6.75 percent. As a result of these changes in assumptions and the lower than expected return on plan assets in 2002, pension expense has increased significantly from 2002 and is currently estimated to be approximately $2.5 million for 2003, of which approximately $.6 million has been recorded as of March 31, 2003.

The Company recently announced its plans to close the Charter Medical operation in Lakewood, New Jersey and to consolidate the operations into its facility in Winston-Salem, North Carolina. The Company estimates that the costs of exiting the Lakewood facility and commencing operations in Winston-Salem, including severance payments, asset write-offs, relocation costs and start-up costs at the Winston-Salem facility will approximate $.6 million and will be substantially incurred during the second quarter of 2003. The Company expects that these exit and start-up costs will be recovered through improved operating and administrative efficiencies within one year.

Liquidity and Capital Resources

At March 31, 2003, cash and cash equivalents were $1.1 million compared with $2.6 million at December 31, 2002. Working capital at March 31, 2003 was $53.3 million compared with $44.6 million at December 31, 2002. The increase in working capital during the quarter was primarily due to an increase in trade accounts receivable related to the increased sales performance during the quarter and increases in inventories related to new business primarily in the Thermal/Acoustical Segment compared with the fourth quarter of 2002.

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Capital expenditures were $4.1 million for the first quarter of 2003, which included a payment for the purchase of certain foreign assets, not yet settled in cash at December 31, 2002, of $1.6 million, compared with $2.4 million for the same period of 2002.

The funded status of the Company’s defined benefit pension plans is dependent upon many factors, including returns on invested assets. Declines in the value of equity securities during the past few years have negatively impacted the value of the plans’ assets; and consequently have had a negative impact on the funded status of the plans. The minimum contribution the Company must make to fund its pension plans for the 2003 plan year is estimated to be approximately $2.4 million and must be contributed no later than September 15, 2004. Additionally, due to the declines in the value of equity securities and a decrease in prevailing interest rate yields, the Company may be required to record an additional minimum pension liability through an after tax charge to equity upon final measurement of the plans’ funded status during the fourth quarter of 2003.

In January 2003, Lydall entered into an interest rate swap to convert the variable base rate on certain borrowings with an initial principal amount of $6.0 million under its domestic credit facility to a fixed rate; taking advantage of the favorable interest rate environment in the United States. The swap, with a final maturity on September 15, 2005, requires Lydall to pay a fixed base rate of 2.2 percent on the outstanding borrowings and has scheduled maturity dates that are identical to the payment schedule of the borrowings.

As of March 31, 2003, the Company had unused borrowing capacity of approximately $36.1 million under various credit facilities. Management believes that the Company’s cash and cash equivalents, operating cash flow and unused borrowing capacity at March 31, 2003 are sufficient to meet current and anticipated requirements for the foreseeable future.

Critical Accounting Policies

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 at 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 and 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, 2002 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 policies during the first quarter of 2003.

Recently Issued Accounting Standards

In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (FAS 149). FAS 149 amends Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” for certain decisions made by the FASB as part of the Derivatives Implementation Group process. FAS 149 is effective for applicable contracts entered into or modified after June 30, 2003 and should be applied prospectively, except for certain provisions specifically referenced within the pronouncement. The Company is currently reviewing and assessing the provisions of FAS 149 to determine the statement’s impact upon adoption, if any.

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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, 2002.

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 – Controller and Interim Chief Financial Officer, have conducted an evaluation within the past 90 days of the effectiveness of disclosure controls and procedures pursuant to the Exchange Act. Based on that evaluation, the President and Chief Executive Officer and Vice President – Controller and Interim Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective in ensuring that all material information required to be filed in this quarterly report 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 been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its last evaluation. During the evaluation, no significant deficiencies or material weaknesses were identified.

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PART II.    OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K

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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.

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CERTIFICATIONS

I, Christopher R. Skomorowski, certify that:

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CERTIFICATIONS

I, Thomas P. Smith, certify that:

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LYDALL, INC.

Index to Exhibits

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