Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****      Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended October 2,2010**

 

**Or**

 

**o****         Transition reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**For the transition period from                        to                        **

 

**Commission file number:  1-32266**

 

**POLYPOREINTERNATIONAL, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Delaware**                                                                        | ** ** | **43-2049334**                     |
|-------------------------------------------------------------------------------------|------------|------------------------------------|
| (State or Other Jurisdiction of

Incorporation or Organization)                     |       | (IRS Employer

Identification No.) |
|                                                                                |       |                               |
| **11430 North Community House Road, Suite 350**

**Charlotte, North Carolina** | ** ** | **28277**                          |
| (Address of Principal Executive Offices)                                            |       | (Zip Code)                         |

 

**(704) 587-8409**

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate website, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files).  o Yes o No

 

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

 

| Large accelerated filer o |   | Accelerated filer x         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer o   |   | Smaller reporting company o |

 

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

 

Therewere 44,543,231 shares of the registrant’s common stock outstanding as of November 1,2010.

 

 

 

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**Polypore International, Inc.**

**Index to Quarterly Report on Form 10-Q**

**For the Three Months Ended October 2, 2010**

** **
| ** **       | ** **                                                                                  | **Page**   |
|------------------|---------------------------------------------------------------------------------------------|------------|
|             | ** **                                                                                  |       |
| **PART I**       | **FINANCIAL  INFORMATION**                                                                  |       |
| ** **       | ** **                                                                                  |       |
| **Item 1.**      | Financial  Statements                                                                       | 4          |
| **Item 2.**      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 18         |
| **Item 3.**      | Quantitative  and Qualitative Disclosures About Market Risk                                 | 28         |
| **Item 4.**      | Controls and  Procedures                                                                    | 28         |
| ** **       | ** **                                                                                  | ** ** |
| **PART II** | **OTHER  INFORMATION**                                                                      |       |
| ** **       | ** **                                                                                  |       |
| **Item  1.**     | Legal Proceedings                                                                           | 29         |
| **Item 6.**      | Exhibits                                                                                    | 30         |
|             |                                                                                        |       |
| **SIGNATURES**   |                                                                                        |

 

Inthis Quarterly Report on Form 10-Q, the words “Polypore International,” “Company,”“we,” “us” and “our” refer to Polypore International, Inc. together withits subsidiaries, unless the context indicates otherwise.

 

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**Forward-lookingStatements**

 

ThisQuarterly Report on Form 10-Q includes “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”), and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”), and the Private Securities Litigation Reform Act of1995.  All statements other thanstatements of historical facts included in this Quarterly Report on Form 10-Qthat address activities, events or developments that we expect, believe oranticipate will or may occur in the future are forward-looking statements,including, in particular, the statements about Polypore International’s plans,objectives, strategies and prospects regarding, among other things, thefinancial condition, results of operations and business of PolyporeInternational and its subsidiaries.  Wehave identified some of these forward-looking statements with words like “believe,”“may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate”or “continue” and other words and terms of similar meaning.  These forward-looking statements may becontained under the captions “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” or “Controls and Procedures,” the Company’sfinancial statements or the notes thereto or elsewhere in this Quarterly Reporton Form 10-Q.

 

Theseforward-looking statements are based on current expectations about futureevents affecting us and are subject to uncertainties and factors relating toour operations and business environment, all of which are difficult to predictand many of which are beyond our control. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q,including the risks outlined under the caption entitled “Item 1A. Risk Factors”in our Annual Report on Form 10-K for the fiscal year ended January 2,2010, will be important in determining future results.  Although we believe that the expectationsreflected in our forward-looking statements are reasonable, we do not knowwhether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by knownor unknown risks and uncertainties, including with respect to PolyporeInternational, the following, among other things:

 

·      the highly competitivenature of the markets in which we sell our products;

·      the failure to continue todevelop innovative products;

·      the loss of our customers;

·      the vertical integration byour customers of the production of our products into their own manufacturingprocess;

·      increases in prices for rawmaterials or the loss of key supplier contracts;

·      our substantialindebtedness;

·      interest rate risk relatedto our variable rate indebtedness;

·      our inability to generatecash;

·      restrictions related to thesenior secured credit facility;

·      employee slowdowns, strikesor similar actions;

·      product liability claimsexposure;

·      risks in connection with ouroperations outside the United States;

·      the incurrence ofsubstantial costs to comply with, or as a result of violations of, orliabilities under environmental laws;

·      the failure to protect ourintellectual property;

·      the loss of seniormanagement;

·      the incurrence of additionaldebt, contingent liabilities and expenses in connection with future acquisitions;

·      the failure to effectivelyintegrate newly acquired operations;

·      the adverse impact on ourfinancial condition of restructuring activities;

·      the absence of expectedreturns from the amount of intangible assets we have recorded;

·      the adverse impact fromlegal proceedings on our financial condition;

·      natural disasters,epidemics, terrorist acts and other events beyond our control; and

·      economic uncertainty and thecurrent crisis in global credit and financial markets.

 

Because our actual results,performance or achievements could differ materially from those expressed in, orimplied by, the forward-looking statements, we cannot give any assurance thatany of the events anticipated by the forward-looking statements will occur or,if any of them do, what impact they will have on Polypore International’sresults of operations and financial condition. You are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date of this Quarterly Report on Form 10-Q.  We do not undertake any obligation to updatethese forward-looking statements to reflect new information, future events orotherwise, except as may be required under federal securities laws.

 

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**PART I — FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**Polypore International, Inc.**

**Condensed Consolidated Balance Sheets**

* *
| ** **                                                                                                                                                             | ** ** | **October 2, 2010** | ** **    | ** **                     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|---------------|--------------------------------|------------|
| **(in thousands, except share data)**                                                                                                              | ** ** | **(unaudited)**               | ** **    | **January 2, 2010*** | ** ** |
| **Assets**                                                                                                                                                             |       |                          |          |                           |       |
| Current assets:                                                                                                                                                        |       |                          |          |                           |       |
| Cash and cash equivalents                                                                                                                                              | ** ** | **$**                         | **162,734**   |                           | $          | 114,975 |   |
| Accounts receivable, net                                                                                                                                               | ** ** | **102,737**                   |          | 107,122                        |       |
| Inventories                                                                                                                                                            | ** ** | **75,730**                    |          | 72,498                         |       |
| Deferred income taxes                                                                                                                                                  | ** ** | **1,882**                     |          | 1,791                          |       |
| Prepaid and other                                                                                                                                                      | ** ** | **10,775**                    |          | 15,373                         |       |
| Total current assets                                                                                                                                                   | ** ** | **353,858**                   |          | 311,759                        |       |
| Property, plant and equipment, net                                                                                                                                     | ** ** | **401,777**                   |          | 388,036                        |       |
| Goodwill                                                                                                                                                               | ** ** | **469,319**                   |          | 469,319                        |       |
| Intangibles and loan acquisition costs, net                                                                                                                            | ** ** | **150,930**                   |          | 165,971                        |       |
| Environmental indemnification receivable                                                                                                                               | ** ** | **11,204**                    |          | 14,667                         |       |
| Other                                                                                                                                                                  | ** ** | **3,090**                     |          | 2,841                          |       |
| Total assets                                                                                                                                                           | ** ** | **$**                         | **1,390,178** |                           | $          | 1,352,593 |   |
|                                                                                                                                                                   |       |                          |          |                           |       |
| **Liabilities and shareholders’  equity**                                                                                                                         |       |                          |          |                           |       |
| Current liabilities:                                                                                                                                                   |       |                          |          |                           |       |
| Accounts payable                                                                                                                                                       | ** ** | **$**                         | **23,081**    |                           | $          | 17,570 |   |
| Accrued liabilities                                                                                                                                                    | ** ** | **74,659**                    |          | 59,835                         |       |
| Income taxes payable                                                                                                                                                   | ** ** | **6,345**                     |          | 608                            |       |
| Current portion of debt                                                                                                                                                | ** ** | **3,709**                     |          | 10,860                         |       |
| Total current liabilities                                                                                                                                              | ** ** | **107,794**                   |          | 88,873                         |       |
| Debt, less current portion                                                                                                                                             | ** ** | **778,948**                   |          | 792,573                        |       |
| Pension and postretirement benefits, less current  portion                                                                                                             | ** ** | **63,084**                    |          | 66,269                         |       |
| Environmental reserve, less current portion                                                                                                                            | ** ** | **8,677**                     |          | 30,412                         |       |
| Deferred income taxes                                                                                                                                                  | ** ** | **72,932**                    |          | 74,160                         |       |
| Other                                                                                                                                                                  | ** ** | **13,118**                    |          | 15,961                         |       |
| Commitments and contingencies                                                                                                                                          |       |                          |          |                           |       |
|                                                                                                                                                                   |       |                          |          |                           |       |
| Shareholders’ equity:                                                                                                                                             |       |                          |          |                           |       |
| Preferred stock — 15,000,000 shares authorized, no  shares issued and outstanding                                                                                 | ** ** | **—**                    | ** **    | **—**                     | ** ** |
| Common stock, $.01 par value — 200,000,000 shares  authorized, 44,543,231 and 44,417,326 issued and outstanding at  October 2, 2010 and January 2, 2010 | ** ** | **445**                       |          | 444                            |       |
| Paid-in capital                                                                                                                                                        | ** ** | **483,938**                   |          | 481,248                        |       |
| Accumulated deficit                                                                                                                                                    | ** ** | **(138,136**                  | **)**         | (183,998                       | )          |
| Accumulated other comprehensive loss                                                                                                                                   | ** ** | **(622**                      | **)**         | (13,349                        | )          |
|                                                                                                                                                                   | ** ** | **345,625**                   |          | 284,345                        |       |
| Total liabilities and shareholders’ equity                                                                                                                        | ** ** | **$**                         | **1,390,178** |                           | $          | 1,352,593 |   |

 

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* Derived from audited consolidated financialstatements

 

*See notes to condensed consolidated financialstatements*

 

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**Polypore International, Inc*.***

**CondensedConsolidated Statements of Income (unaudited)**

 
| ** **                                                         | ** ** | **Three Months Ended** | ** **  | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **October 2,********2010**  | ** **  | **October 3,********2009** | ** ** | **October 2,  2010** | ** ** | **October 3,********2009** | ** ** |
| Net sales                                                          | ** ** | **$**                            | **151,650** |                            | $          | 137,737 | ** ** | **$** | **447,107** |   | $ | 364,826 |   |
| Cost of goods sold                                                 | ** ** | **94,362**                       |        | 89,777                          | ** ** | **270,342** |   | 226,885 |   |
| Gross profit                                                       | ** ** | **57,288**                       |        | 47,960                          | ** ** | **176,765** |   | 137,941 |   |
| Selling, general and administrative expenses                       | ** ** | **28,277**                       |        | 24,140                          | ** ** | **84,273** |   | 74,432 |   |
| Business restructuring                                             | ** ** | **91**                           |        | 190                             | ** ** | **(786** | **)** | 756 |   |
| Operating income                                                   | ** ** | **28,920**                       |        | 23,630                          | ** ** | **93,278** |   | 62,753 |   |
| Other (income) expense:                                            | ** ** | ** **                       |        |                            |       |   |   |   |   |
| Interest expense, net                                              | ** ** | **12,125**                       |        | 14,214                          | ** ** | **35,439** |   | 42,983 |   |
| Gain on sale of Italian subsidiary                                 | ** ** | **—**                       | ** **  | **—**                      | ** ** | **(3,327** | **)** | **—** | ** ** |
| Foreign currency and other                                         | ** ** | **47**                           |        | 688                             | ** ** | **(787** | **)** | 1,478 |   |
|                                                               | ** ** | **12,172**                       |        | 14,902                          | ** ** | **31,325** |   | 44,461 |   |
| Income before income taxes                                         | ** ** | **16,748**                       |        | 8,728                           | ** ** | **61,953** |   | 18,292 |   |
| Income taxes                                                       | ** ** | **4,376**                        |        | 2,267                           | ** ** | **16,091** |   | 4,660 |   |
| Net income                                                         | ** ** | **$**                            | **12,372**  |                            | $          | 6,461 | ** ** | **$** | **45,862** |   | $ | 13,632 |   |
|                                                               |       |                             |        |                            |       |   |   |   |   |
| Net income per share:                                              | ** ** | ** **                       |        |                            |       |   |   |   |   |
| Basic                                                              | ** ** | **$**                            | **0.28**    |                            | $          | 0.15 | ** ** | **$** | **1.03** |   | $ | 0.31 |   |
| Diluted                                                            | ** ** | **$**                            | **0.27**    |                            | $          | 0.14 | ** ** | **$** | **0.99** |   | $ | 0.31 |   |
|                                                               |       |                             |        |                            |       |   |   |   |   |
| Weighted average shares outstanding:                               | ** ** | ** **                       |        |                            |       |   |   |   |   |
| Basic                                                              | ** ** | **44,527,914**                   |        | 44,385,858                      | ** ** | **44,494,644** |   | 44,380,047 |   |
| Diluted                                                            | ** ** | **46,641,636**                   |        | 44,738,687                      | ** ** | **46,277,995** |   | 44,633,498 |   |

 

*See notes to condensed consolidated financialstatements*

 

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**Polypore International, Inc.**

**Condensed Consolidated Statements of Cash Flows(unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** **  |
|------------------------------------------------------------------------------------|------------|---------------------------------|-------------|
| **(in thousands)**                                                            | ** ** | **October 2, 2010**   | ** **  | **October 3, 2009** | ** ** |
| **Operating activities:**                                                          |       |                            |        |   |   |
| Net income                                                                         | ** ** | **$**                           | **45,862**  |   | $ | 13,632 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: | ** ** | ** **                      |        |   |   |
| Depreciation expense                                                               | ** ** | **23,716**                      |        | 26,011 |   |
| Amortization expense                                                               | ** ** | **12,295**                      |        | 12,604 |   |
| Amortization of loan acquisition costs                                             | ** ** | **1,941**                       |        | 1,941 |   |
| Stock-based compensation                                                           | ** ** | **1,672**                       |        | 1,559 |   |
| Loss on disposal of property, plant and equipment                                  | ** ** | **59**                          |        | 186 |   |
| Foreign currency (gain) loss                                                       | ** ** | **(395**                        | **)**       | 223 |   |
| Deferred income taxes                                                              | ** ** | **3,190**                       |        | (3,650 | ) |
| Business restructuring                                                             | ** ** | **(786**                        | **)**       | 756 |   |
| Gain on sale of Italian subsidiary                                                 | ** ** | **(3,327**                      | **)**       | **—** | ** ** |
| Changes in operating assets and liabilities:                                       | ** ** | ** **                      |        |   |   |
| Accounts receivable                                                                | ** ** | **2,579**                       |        | (262 | ) |
| Inventories                                                                        | ** ** | **(4,102**                      | **)**       | (5,561 | ) |
| Prepaid and other current assets                                                   | ** ** | **2,693**                       |        | 2,310 |   |
| Accounts payable and accrued liabilities                                           | ** ** | **22,531**                      |        | (6,678 | ) |
| Income taxes payable                                                               | ** ** | **2,874**                       |        | 5,154 |   |
| Other, net                                                                         | ** ** | **1,710**                       |        | (70 | ) |
| Net cash provided by  operating activities                                         | ** ** | **112,512**                     |        | 48,155 |   |
| **Investing activities:**                                                          | ** ** | ** **                      |        |   |   |
| Purchases of property, plant and equipment                                         | ** ** | **(41,467**                     | **)**       | (10,715 | ) |
| Net payments associated with stock sale of Italian  subsidiary                     | ** ** | **(14,908**                     | **)**       | **—** | ** ** |
| Net cash used in  investing activities                                             | ** ** | **(56,375**                     | **)**       | (10,715 | ) |
| **Financing activities:**                                                          | ** ** | ** **                      |        |   |   |
| Principal payments on debt                                                         | ** ** | **(9,900**                      | **)**       | (6,108 | ) |
| Proceeds from stock option exercises                                               | ** ** | **1,019**                       |        | 55 |   |
| Net cash used in financing activities                                              | ** ** | **(8,881**                      | **)**       | (6,053 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                      | ** ** | **503**                         |        | 5,783 |   |
| **Net increase in cash and cash  equivalents**                                     | ** ** | **47,759**                      |        | 37,170 |   |
| Cash and cash equivalents at beginning of period                                   | ** ** | **114,975**                     |        | 83,021 |   |
| **Cash and cash equivalents at end  of the period**                                | ** ** | **$**                           | **162,734** |   | $ | 120,191 |   |

 

*See notes to condensed consolidated financialstatements*

 

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**Polypore International, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

**1.****                                     ****Description of Business and Basis of Presentation**

 

**Descriptionof Business**

 

PolyporeInternational, Inc. (the “Company”) is a leading global high technologyfiltration company that develops, manufactures and markets specializedmicroporous membranes used in separation and filtration processes. The Companyhas a global presence in the major geographic markets of North America, SouthAmerica, Europe and Asia.

 

**Basis of Presentation**

 

The accompanying unaudited condensed consolidatedfinancial statements of the Company are prepared in accordance with U.S.generally accepted accounting principles for interim financialinformation.  Accordingly, the unauditedcondensed consolidated financial statements and notes do not contain certaininformation included in the Company’s annual financial statements. In theopinion of management, all normal and recurring adjustments that are necessaryfor a fair presentation have been made. Operating results for the three months ended October 2, 2010 arenot necessarily indicative of the results that may be expected for the fiscalyear ending January 1, 2011.  Theunaudited condensed consolidated financial statements should be read inconjunction with the consolidated financial statements in the Company’s AnnualReport on Form 10-K for the fiscal year ended January 2, 2010.

 

**2****.****                                     ****Inventories**

 

Inventories are carried at the lower of cost ormarket using the first-in, first-out (“FIFO”) method of accounting and consistof:

 
| **(in thousands)** | ** ** | **October 2, 2010** | ** ** | **January 2, 2010** | ** ** |
|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Raw materials           | ** ** | **$**                         | **30,283** |                          | $          | 30,466 |   |
| Work-in-process         | ** ** | **13,208**                    |       | 15,909                        |       |
| Finished goods          | ** ** | **32,239**                    |       | 26,123                        |       |
| Total                   | ** ** | **$**                         | **75,730** |                          | $          | 72,498 |   |

 

**3.****                                     ****Debt**

 

Debt, in order of priority, consists of:

 
| **(in thousands)**         | ** ** | **October 2, 2010** | ** **  | **January 2, 2010** | ** ** |
|---------------------------------|------------|-------------------------------|-------------|-------------------------------|------------|
| Senior credit facilities:       |       |                          |        |                          |       |
| Revolving credit facility       | ** ** | **$**                         | **—**  | ** **                    | **$**      | **—** | ** ** |
| Term loan facilities            | ** ** | **351,752**                   |        | 363,678                       |       |
| 8.75% senior subordinated notes | ** ** | **430,905**                   |        | 439,755                       |       |
|                            | ** ** | **782,657**                   |        | 803,433                       |       |
| Less current maturities         | ** ** | **3,709**                     |        | 10,860                        |       |
| Long-term debt                  | ** ** | **$**                         | **778,948** |                          | $          | 792,573 |   |

 

On November 3, 2010, the Company issued anotice of redemption for $75,000,000 principal amount of its outstanding 8.75%senior subordinated dollar notes due 2012 at a redemption price equal to $1,000per $1,000 principal amount of the notes, together with accrued and unpaidinterest to the redemption date.  The notes will be redeemed on December 3,2010.

 

**4.****                                     ****Derivatives and Hedging Transactions**

 

The Company has euro-denominated senior subordinatednotes (€150,000,000, or $205,905,000, at October 2, 2010) held in the U.S.that effectively hedge a portion of the Company’s net investment in its foreignsubsidiaries. The translation of the euro-denominated notes held in the U.S.results in foreign currency gains or losses that are included in “Accumulatedother comprehensive loss” in the accompanying condensed consolidated balancesheets.

 

To reduce the interest rate risk inherent in theCompany’s variable rate debt, the Company may utilize interest rate swapagreements to convert all or a portion of the variable rate debt to a fixedrate obligation.  In January 2008,the Company entered into two interest rate swap agreements that effectivelyfixed the interest rate on a portion of its term debt.  The interest rate swap agreements hadnotional amounts of $50,000,000 and $200,000,000 and expired on June 30,2009 and December 31,

 

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**PolyporeInternational, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

2009, respectively. The Company designated these swap agreements as cash flow hedges withchanges in fair value, net of income taxes, recorded to “Accumulated othercomprehensive loss” in the accompanying condensed consolidated balancesheets.  The Company recognizedadditional interest expense of $1,534,000 and $5,127,000 for the three and ninemonths ended October 3, 2009, respectively, representing the differencebetween the fixed interest rate on the swap agreements and the variableinterest rate on the term debt.

 

The impact of the translation of euro-denominatedsenior subordinated notes and changes in fair value of the interest rate swapagreements on other comprehensive income is as follows:

 
| ** **                                 | ** ** | **Gain (Loss) Recognized in Other Comprehensive Income** | ** **  |
|--------------------------------------------|------------|----------------------------------------------------------------------------------------|-------------|
| ** **                                 | ** ** | **Three Months Ended**                                                       | ** **  | **Nine Months Ended** | ** ** |
| **(in thousands)**                    | ** ** | **October 2, 2010**                                                          | ** **  | **October 3, 2009** | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
|                                       |       |                                                                                   |        |   |   |   |   |   |   |
| Euro-denominated senior subordinated notes | ** ** | **$**                                                                                  | **(17,835** | **)** | $ | (8,535 | ) | **$** | **8,850** |   | $ | (9,480 | ) |
| Interest rate swap agreements              | ** ** | **—**                                                                             |        | 876 | ** ** | **—** |   | 2,468 |   |
|                                            |            |                                                                                        |             |  |  |  |  |  |  |  |  |  |  |

 

**5.****                                     ****Fair Value of Financial Instruments**

 

TheCompany’s financial instruments include cash and cash equivalents, accountsreceivable, accounts payable, accrued liabilities and long-term debt.  The carrying value of cash and cashequivalents, accounts receivable, accounts payable and accrued liabilitiesapproximates fair value due to the short-term maturities of these assets andliabilities.  The carrying amount ofborrowings under the senior secured credit facilities approximates fair valuebecause the interest rates adjust to market interest rates. The fair value ofthe 8.75% senior subordinated notes, based on quoted market prices, was$433,060,000 at October 2, 2010.

 

**6.****                                     ****EmployeeBenefit Plans**

 

The Company and its subsidiaries sponsor multipledefined benefit pension plans and an other postretirement benefit plan.  The following table provides the components ofnet periodic benefit cost:

 
| ** **                         | ** ** | **Pension Plans**           | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| **(in thousands)**            | ** ** | **October 2, 2010**    | ** ** | **October 3, 2009** | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
|                               |       |                             |       |   |   |   |   |   |   |
| Service cost                       | ** ** | **$**                            | **331**    |   | $ | 427 | ** ** | **$** | **1,008** |   | $ | 1,226 |   |
| Interest cost                      | ** ** | **1,078**                        |       | 1,170 | ** ** | **3,297** |   | 3,355 |   |
| Expected return on plan assets     | ** ** | **(185**                         | **)**      | (204 | ) | **(567** | **)** | (586 | ) |
| Amortization of prior service cost | ** ** | **(13**                          | **)**      | (14 | ) | **(38** | **)** | (40 | ) |
| Recognized net actuarial gain      | ** ** | **(6**                           | **)**      | (4 | ) | **(18** | **)** | (11 | ) |
| Net periodic benefit cost          | ** ** | **$**                            | **1,205**  |   | $ | 1,375 | ** ** | **$** | **3,682** |   | $ | 3,944 |   |

 
| ** **                    | ** ** | **Other Postretirement Benefits** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended**            | ** ** | **Nine Months Ended** | ** ** |
| **(in thousands)**       | ** ** | **October 2, 2010**               | ** ** | **October 3, 2009** | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
|                          |       |                                        |       |   |   |   |   |   |   |
| Service cost                  | ** ** | **$**                                       | **4**      |   | $ | 3 | ** ** | **$** | **10** |   | $ | 9 |   |
| Interest cost                 | ** ** | **34**                                      |       | 33 | ** ** | **102** |   | 99 |   |
| Recognized net actuarial loss | ** ** | **3**                                       |       | — | ** ** | **9** |   | — |   |
| Net periodic benefit cost     | ** ** | **$**                                       | **41**     |   | $ | 36 | ** ** | **$** | **121** |   | $ | 108 |   |

 

**7.****                                     ****Environmental Matters**

 

Environmentalobligations are accrued when such expenditures are probable and reasonablyestimable. The amount of liability recorded is based on currently availableinformation, including the progress of remedial investigations, current statusof discussions with regulatory authorities regarding the method and extent ofremediation, presently enacted laws and existing

 

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**PolyporeInternational, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

technology.Accruals for estimated losses from environmental obligations are adjusted asfurther information develops or circumstances change. Costs of futureexpenditures for environmental obligations are not discounted to their presentvalue. The Company does not currently anticipate any material loss in excess ofthe amounts accrued. However, the Company’s future remediation expenses may beaffected by a number of uncertainties including, but not limited to, thedifficulty in estimating the extent and method of remediation, the evolvingnature of environmental regulations, and the availability and application oftechnology. The Company does not expect the resolution of such uncertainties tohave a material adverse effect on its consolidated financial position orliquidity. Recoveries of environmental costs from other parties are recognizedas assets when their receipt is deemed probable. Environmental reserves, whichare predominately euro-denominated, were $17,107,000 and $45,397,000 as of October 2,2010 and January 2, 2010, respectively.

 

OnMarch 9, 2010, the Company sold 100% of the stock of its Italiansubsidiary, Daramic S.r.l. (Note 14). As a result of the stock sale, the buyeracquired all assets and liabilities of Daramic S.r.l., including the Potenza, Italyfacility and environmental obligations of $22,291,000 associated with thePotenza site. The buyer has fully indemnified the Company with regard toenvironmental, health and safety matters related to this site.

 

Inconnection with the acquisition of Membrana GmbH (“Membrana”) in 2002, theCompany recorded a reserve for environmental obligations. The reserve providesfor costs to remediate known environmental issues and operational upgradeswhich are required in order for the Company to remain in compliance with localregulations. The initial estimate and subsequent finalization of the reservewas included in the allocation of purchase price at the date of acquisition.The environmental reserve for the Membrana facility was $16,689,000 and$19,852,000 at October 2, 2010 and January 2, 2010, respectively. TheCompany anticipates that expenditures will be made over the next seven to tenyears.

 

TheCompany has indemnification agreements for certain environmental matters fromAcordis A.G. (“Acordis”) and Akzo Nobel N.V. (“Akzo”), the prior owners ofMembrana. Akzo originally provided broad environmental protections to Acordiswith the right to assign such indemnities to Acordis’s successors. Akzo’sindemnifications relate to conditions existing prior to December 1999,which is the date that Membrana was sold to Acordis. In addition to the Akzoindemnification, Acordis provides separate indemnification of claims incurredfrom December 1999 through February 2002, the acquisition date. TheCompany will receive indemnification payments under the indemnificationagreements as expenditures are made against approved claims. Amounts receivableunder the indemnification agreements were $15,214,000 and $17,618,000 at October 2,2010 and January 2, 2010, respectively. The current portion of theindemnification receivable is included in “Prepaid and other” in theaccompanying condensed consolidated balance sheets.

 

In connection with the 2008acquisition of Microporous Holding Corporation (“Microporous”), the Companyidentified potential environmental contamination at the manufacturing site inPiney Flats, Tennessee. As part of the acquisition, the seller purchased anenvironmental insurance policy on behalf of the Company. Subsequent to theacquisition, the Company performed additional environmental studies andconfirmed that environmental contamination was present.  The environmental reserve, net of relatedreceivables from the insurance company, was $209,000 and $500,000 at October 2,2010 and January 2, 2010, respectively. The Company recorded the estimated cost of remediation and the relatedreceivable from the insurance company in the allocation of purchase price atthe date of acquisition.

 

**8.****                                     ****Business Restructuring**

 

**2009 Restructuring Plan**

 

In2009, the North American market for lead-acid battery separators hadsignificant excess capacity and a highly consolidated customer base.  As a result of these factors and managementestimates at that time about future demand requirements in North America, theCompany implemented a restructuring plan in its energy storage segment in thefourth quarter of 2009 to better align lead-acid battery separator productioncapacity with demand in North America.

 

Therestructuring plan included idling capacity and reducing headcount at theCompany’s manufacturing facility in Owensboro, Kentucky.  The total cost of the plan is estimated to beapproximately $23,225,000, including estimated cash charges of $3,329,000 forseverance and benefits and other exit costs and a non-cash impairment charge of$19,896,000 for buildings and equipment. The total cost recognized through October 2, 2010 was $20,407,000,which included cash charges of $511,000 for severance and other exit costs andthe non-cash impairment charge.  Thetiming, scope and cash costs associated with the plan are subject to change asthe Company implements the plan and continues to evaluate its business needsand costs.  During the first nine monthsof 2010, worldwide demand for lead-acid battery separators has exceeded previousestimates.  As a result, the Company iscurrently utilizing portions of the facility that were previously idled and thetiming, scope and future cash costs associated with this plan are uncertain atthis time.

 

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**PolyporeInternational, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

**2008 Restructuring Plan**

 

Asupply contract between the Company’s lead-acid battery separator business anda large customer expired on December 31, 2008 and was not renewed. Inresponse, the Company implemented a restructuring plan in the fourth quarter of2008 for its energy storage segment to align lead-acid battery separatorproduction capacity with demand, reduce costs and position the Company to meetfuture growth opportunities.

 

Theplan included closing the Company’s facility in Potenza, Italy,streamlining production at the Company’s facility in Owensboro, Kentucky andreducing selling, general and administrative resources associated with thelead-acid battery separator business. The total cost of the restructuring plan was $61,407,000. Therestructuring plan included costs associated with closing the Potenza, Italyfacility and the termination of production employees at Potenza, Italy andOwensboro, Kentucky and certain selling, general and administrativeemployees.  The restructuring alsoincluded a non-cash impairment charge of $28,929,000 for buildings andmachinery and equipment that will no longer be used in Potenza, Italy. On March 9,2010, the Company sold 100% of the stock of its Italian subsidiary, DaramicS.r.l. (Note 14). As a result of the stock sale, the buyer acquired all of theassets and liabilities of Daramic S.r.l., including restructuring obligationsassociated with the Potenza, Italy facility of $7,207,000, consistingprimarily of severance payments due to terminated employees.

 

**2006 Restructuring Plan**

 

In December 2006, the Company’s separations media segment exitedthe production of cellulosic membranes and realigned the cost structure at itsWuppertal, Germany facility. The total cost of the plan was $33,753,000,consisting of a $17,492,000 non-cash impairment charge for buildings andequipment, $10,466,000 for employee layoffs and $5,795,000 for other costsrelated to the shutdown of portions of the Wuppertal facility.  During the three months ended July 3,2010, the Company reduced the estimated costs of severance and benefits andrelated accrual by $1,334,000 to reflect actual costs expected to be incurred.

 

Restructuringreserve activity during the nine months ended October 2, 2010, includingthe impact of the stock sale of Daramic S.r.l. on the 2008 plan, consisted of:

 
| **(in thousands)**  | ** ** | **Balance at  January 2,  2010** | ** ** | **Restructuring  Charges** | ** ** | **Other**  | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  October 2,  2010** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|----------------------------|------------|------------|------------|--------------------|------------|------------------------------------|------------|--------------------------------------------|------------|
| 2009 Restructuring Plan: |       |                                       |       |                       |       |       |       |               |       |                               |       |                                       |       |
| Severance and benefits   | ** ** | **$**                                      | **132**    | ** **                 | **$**      | **(54**    | **)**      | **$**              | **—** | ** **                         | **$**      | **(60**                                    | **)**      | **$** | **—** | ** ** | **$** | **18** | ** ** |
| Other                    | ** ** | **—**                                 | ** ** | **360**                    | ** ** | **—** | ** ** | **(360**           | **)**      | **—**                         | ** ** | **—**                                 | ** ** |
|                     | ** ** | **132**                                    | ** ** | **306**                    | ** ** | **—** | ** ** | **(420**           | **)**      | **—**                         | ** ** | **18**                                     | ** ** |
| 2008 Restructuring Plan: |       |                                       |       |                       |       |       |       |               |       |                               |       |                                       |       |
| Severance and benefits   | ** ** | **7,312**                                  | ** ** | **—**                 | ** ** | **(6,616** | **)**      | **(322**           | **)**      | **(359**                           | **)**      | **15**                                     | ** ** |
| Other                    | ** ** | **617**                                    | ** ** | **242**                    | ** ** | **(591**   | **)**      | **(242**           | **)**      | **(26**                            | **)**      | **—**                                 | ** ** |
|                     | ** ** | **7,929**                                  | ** ** | **242**                    | ** ** | **(7,207** | **)**      | **(564**           | **)**      | **(385**                           | **)**      | **15**                                     | ** ** |
| 2006 Restructuring Plan: |       |                                       |       |                       |       |       |       |               |       |                               |       |                                       |       |
| Severance and benefits   | ** ** | **2,674**                                  | ** ** | **(1,334**                 | **)**      | **—** | ** ** | **(224**           | **)**      | **(235**                           | **)**      | **881**                                    | ** ** |
| ** **               | ** ** | ** **                                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                                 | ** ** |
| Total                    | ** ** | **$**                                      | **10,735** | ** **                 | **$**      | **(786**   | **)**      | **$**              | **(7,207** | **)**                              | **$**      | **(1,208**                                 | **)**      | **$** | **(620** | **)** | **$** | **914** | ** ** |

 

**9****.****                                     ****IncomeTaxes**

 

Theincome tax provision for the interim periods presented is computed at theeffective rate expected to be applicable in each respective full year using thestatutory rates on a country-by-country basis. Income tax expense recorded in the financial statements differs from thefederal statutory income tax rate due to a variety of factors, including stateincome taxes, the mix of income between U.S. and foreign jurisdictions taxed atvarying rates, and various changes in estimates of permanent differences andvaluation allowances.  In the nine monthsended October 2, 2010, the Company’s effective tax rate was also impactedby the sale of its Italian subsidiary, Daramic S.r.l.

 

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**PolyporeInternational, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

**10.          ComprehensiveIncome**

 

Comprehensive income is as follows:

 
| ** **                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                                                    | ** ** | **October 2, 2010**    | ** ** | **October 3, 2009**   | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
|                                                                       |       |                             |       |                            |       |   |   |   |   |
| Net income                                                                 | ** ** | **$**                            | **12,372** |                            | $          | 6,461 | ** ** | **$** | **45,862** |   | $ | 13,632 |   |
| Foreign currency translation adjustment, net of  deferred taxes            | ** ** | **320**                          |       | (3,019                          | )          | **12,693** |   | (1,689 | ) |
| Net actuarial gain (loss) and prior service  credit, net of deferred taxes | ** ** | **(69**                          | **)**      | (171                            | )          | **34** |   | (190 | ) |
| Unrealized gain on interest rate swap agreements,  net of deferred taxes   | ** ** | **—**                       |       | 876                             | ** ** | **—** |   | 2,468 |   |
| Comprehensive income                                                       | ** ** | **$**                            | **12,623** |                            | $          | 4,147 | ** ** | **$** | **58,589** |   | $ | 14,221 |   |

 

**11.          Related Party Transactions**

 

The Company’s German subsidiary has a 33% equityinvestment in a patent and trademark service provider and a 25% equityinvestment in a research company.  Theinvestments are accounted for under the equity method of accounting.  The Company’s equity investment balance forthese two investments was $632,000 and $434,000 at October 2, 2010 and January 2,2010, respectively.  During the threemonths ended July 3, 2010, the Company increased its ownership interest inthe patent and trademark provider from 25% to 33% for an investment of$183,000.  Charges from the affiliatesfor work performed were $405,000 and $1,042,000 for the three and nine monthsended October 2, 2010, respectively. Charges from the affiliates for workperformed were $269,000 and $842,000 for the three and nine months ended October 3,2009, respectively.  Amounts due to theaffiliates were $56,000 and $123,000 at October 2, 2010 and January 2,2010, respectively.

 

**12.          Segment Information**

 

TheCompany’s operations are principally managed on a products basis and arecomprised of three operating segments that have been aggregated into tworeportable segments: energy storage and separations media. The energy storagesegment produces and markets membranes that provide the critical function ofseparating the cathode and anode in a variety of battery markets, includinglithium, industrial and transportation applications. The separations mediasegment produces and markets membranes used as the high technology filtrationelement in various medical and industrial applications.

 

TheCompany evaluates the performance of segments and allocates resources tosegments based on operating income before interest, income taxes, depreciationand amortization. In addition, it evaluates business segment performance beforebusiness restructuring charges and the impact of certain non-recurringcosts.  Financial information relating tothe reportable operating segments is presented below:

 

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**PolyporeInternational, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** **  | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| **(in thousands)**                                    | ** ** | **October 2, 2010**    | ** **  | **October 3, 2009**   | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
| Net sales to external customers (by major product  group): | ** ** | ** **                       | ** **  | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Lead-acid battery separators                               | ** ** | **$**                            | **79,154**  |                            | $          | 76,900 | ** ** | **$** | **225,073** |   | $ | 194,946 |   |
| Lithium battery separators                                 | ** ** | **34,143**                       |        | 23,276                          | ** ** | **97,134** |   | 61,240 |   |
| Energy storage                                             | ** ** | **113,297**                      |        | 100,176                         | ** ** | **322,207** |   | 256,186 |   |
| Healthcare                                                 | ** ** | **22,941**                       |        | 24,921                          | ** ** | **77,401** |   | 74,705 |   |
| Filtration and specialty                                   | ** ** | **15,412**                       |        | 12,640                          | ** ** | **47,499** |   | 33,935 |   |
| Separations media                                          | ** ** | **38,353**                       |        | 37,561                          | ** ** | **124,900** |   | 108,640 |   |
| Total net sales to external customers                      | ** ** | **$**                            | **151,650** |                            | $          | 137,737 | ** ** | **$** | **447,107** |   | $ | 364,826 |   |
|                                                       |       |                             |        |                            |       |   |   |   |   |
| Operating income:                                          | ** ** | ** **                       |        |                            | ** ** | ** ** |   |   |   |
| Energy storage                                             | ** ** | **$**                            | **23,222**  |                            | $          | 21,249 | ** ** | **$** | **63,785** |   | $ | 44,056 |   |
| Separations media                                          | ** ** | **6,653**                        |        | 4,566                           | ** ** | **31,168** |   | 24,472 |   |
| Corporate                                                  | ** ** | **(615**                         | **)**       | (805                            | )          | **(1,673** | **)** | (1,558 | ) |
| Segment operating income                                   | ** ** | **29,260**                       |        | 25,010                          | ** ** | **93,280** |   | 66,970 |   |
| Business  restructuring                                    | ** ** | **91**                           |        | 190                             | ** ** | **(786** | **)** | 756 |   |
| Non-recurring costs                                        | ** ** | **249**                          |        | 1,190                           | ** ** | **788** |   | 3,461 |   |
| Total operating income                                     | ** ** | **28,920**                       |        | 23,630                          | ** ** | **93,278** |   | 62,753 |   |
| Reconciling items:                                         | ** ** | ** **                       |        |                            | ** ** | ** ** |   |   |   |
| Interest expense, net                                      | ** ** | **12,125**                       |        | 14,214                          | ** ** | **35,439** |   | 42,983 |   |
| Gain on sale of Italian subsidiary                         |       | —                           |        | —                          | ** ** | **(3,327** | **)** | — |   |
| Foreign currency and other                                 | ** ** | **47**                           |        | 688                             | ** ** | **(787** | **)** | 1,478 |   |
| Income before income taxes                                 | ** ** | **$**                            | **16,748**  |                            | $          | 8,728 | ** ** | **$** | **61,953** |   | $ | 18,292 |   |
|                                                       |       |                             |        |                            |       |   |   |   |   |
| Depreciation and amortization:                             | ** ** | ** **                       |        |                            | ** ** | ** ** |   |   |   |
| Energy storage                                             | ** ** | **$**                            | **8,527**   |                            | $          | 8,877 | ** ** | **$** | **25,453** |   | $ | 26,454 |   |
| Separations media                                          | ** ** | **3,468**                        |        | 4,200                           | ** ** | **10,558** |   | 12,161 |   |
| Total depreciation and amortization                        | ** ** | **$**                            | **11,995**  |                            | $          | 13,077 | ** ** | **$** | **36,011** |   | $ | 38,615 |   |

 

**13.          U.S. Department of Energy Grant**

 

OnFebruary 1, 2010, the Company finalized an agreement with the U.S.Department of Energy (“DOE”), formally awarding the Company a grant of$49,264,000 to help fund an estimated $102,000,000 expansion of its U.S.lithium battery separator production capacity. The Company recognizes grant awards when qualifying expenditures areincurred.  For capital expenditures, theCompany deducts grant awards from the cost of the related asset.  For expense reimbursements, the Companydeducts grant awards from the related expenses.

 

TheCompany recognized grant awards for capital expenditures of $3,005,000 and$8,452,000 for the three and nine months ended October 2, 2010,respectively.  The Company recognizedgrant awards for expenses of $603,000 and $2,003,000 for the three and nine monthsended October 2, 2010, respectively. Amounts due from the DOE were $385,000 and $2,718,000 at October 2,2010 and January 2, 2010, respectively, and classified as “Prepaid andother” in the accompanying condensed consolidated balance sheets.

 

**14.          Sale of Italian Subsidiary**

 

OnMarch 9, 2010, the Company sold 100% of the stock of its wholly-ownedItalian subsidiary, Daramic S.r.l., for €13,385,000 ($18,175,000 at March 9,2010).  The Company recognized a gain of$3,327,000 on the sale, net of direct transaction costs.  As a result of the stock sale, the buyeracquired all of the assets and liabilities of Daramic S.r.l., including thePotenza, Italy facility, which was closed in 2008, and environmental andrestructuring obligations associated with the Potenza site.  In addition to assuming all assets andliabilities, the buyer fully indemnified the Company with regard to allenvironmental, health and safety matters related to this site.  In connection with the sale, the Company isrequired to make net cash payments to the buyer of €16,047,000, consisting ofthe settlement of an acquired intercompany receivable due to Daramic S.r.l.from affiliates of the Company, reduced by the purchase price of Daramic S.r.l.due from the buyer.  The Company paid€11,047,000 ($14,908,000) at closing and will pay the remaining €5,000,000($6,864,000 at October 2, 2010) on December 15, 2010.  The

 

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**PolyporeInternational, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

remainingpayment is secured by a letter of credit and has been classified as “Accruedliabilities” in the accompanying condensed consolidated balance sheet at October 2,2010.

 

**15.**          **Financial Statements ofGuarantors**

 

TheCompany’s senior subordinated notes are unconditionally guaranteed, jointly andseverally, on a senior basis by certain of the Company’s 100% ownedsubsidiaries (“Guarantors”).  Managementhas determined that separate complete financial statements of the Guarantorswould not be material to users of the financial statements.

 

Thefollowing sets forth condensed consolidating financial statements of theGuarantors and non-Guarantor subsidiaries.

 

**Condensed ConsolidatingBalance SheetOctober 2, 2010**

** **
| **(in thousands)**                                    | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The  Company** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                 |       |                                  |       |                                      |       |             |       |             |       |             |       |
| Cash and cash equivalents                                  |       | $                                     | —     |                                      | $          | 74,444           |       | $                | 88,290     |             | $          | — |   | $ | 162,734 |   |
| Accounts receivable, net                                   |       | 36,914                                |       | 65,823                                    |       | —           |       | —           |       | 102,737          |       |
| Inventories                                                |       | 26,795                                |       | 48,935                                    |       | —           |       | —           |       | 75,730           |       |
| Deferred income taxes                                      |       | 1,826                                 |       | 56                                        |       | —           |       | —           |       | 1,882            |       |
| Prepaid and other                                          |       | 2,726                                 |       | 7,955                                     |       | 94               |       | —           |       | 10,775           |       |
| Total current assets                                       |       | 68,261                                |       | 197,213                                   |       | 88,384           |       | —           |       | 353,858          |       |
| Due from affiliates                                        |       | 435,905                               |       | 235,309                                   |       | 288,297          |       | (959,511         | )          | —           |       |
| Investment in subsidiaries                                 |       | 199,096                               |       | 290,196                                   |       | 429,907          |       | (919,199         | )          | —           |       |
| Property, plant and equipment, net                         |       | 157,648                               |       | 244,129                                   |       | —           |       | —           |       | 401,777          |       |
| Goodwill                                                   |       | —                                |       | —                                    |       | 469,319          |       | —           |       | 469,319          |       |
| Intangibles and loan acquisition costs, net                |       | 9                                     |       | —                                    |       | 150,921          |       | —           |       | 150,930          |       |
| Other                                                      |       | 1,581                                 |       | 12,713                                    |       | —           |       | —           |       | 14,294           |       |
| Total assets                                               |       | $                                     | 862,500    |                                      | $          | 979,560          |       | $                | 1,426,828  |             | $          | (1,878,710 | ) | $ | 1,390,178 |   |
| ** **                                                 | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Liabilities and shareholders’  equity**             | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Accounts payable and accrued liabilities                   |       | $                                     | 26,716     |                                      | $          | 56,496           |       | $                | 14,528     |             | $          | — |   | $ | 97,740 |   |
| Income taxes payable                                       |       | —                                |       | 6,429                                     |       | (84              | )          | —           |       | 6,345            |       |
| Current portion of debt                                    |       | —                                |       | 480                                       |       | 3,229            |       | —           |       | 3,709            |       |
| Total current liabilities                                  |       | 26,716                                |       | 63,405                                    |       | 17,673           |       | —           |       | 107,794          |       |
| Due to affiliates                                          |       | 439,183                               |       | 189,889                                   |       | 330,439          |       | (959,511         | )          | —           |       |
| Debt, less current portion                                 |       | —                                |       | 46,002                                    |       | 732,946          |       | —           |       | 778,948          |       |
| Pension and postretirement benefits, less current  portion |       | 3,389                                 |       | 59,695                                    |       | —           |       | —           |       | 63,084           |       |
| Environmental reserve, less current portion                |       | 360                                   |       | 8,317                                     |       | —           |       | —           |       | 8,677            |       |
| Deferred income taxes and other                            |       | 43,647                                |       | 42,258                                    |       | 145              |       | —           |       | 86,050           |       |
| Shareholders’ equity                                  |       | 349,205                               |       | 569,994                                   |       | 345,625          |       | (919,199         | )          | 345,625          |       |
| Total liabilities and shareholders’ equity            |       | $                                     | 862,500    |                                      | $          | 979,560          |       | $                | 1,426,828  |             | $          | (1,878,710 | ) | $ | 1,390,178 |   |

 

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**PolyporeInternational, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

**CondensedConsolidating Balance SheetJanuary 2, 2010**

 
| **(in thousands)**                                    | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                 |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Cash and cash equivalents                                  |       | $                                     | —     |                                      | $          | 45,585               |       | $                | 69,390     |             | $          | — |   | $ | 114,975 |   |
| Accounts receivable, net                                   |       | 40,965                                |       | 66,157                                    |       | —               |       | —           |       | 107,122          |       |
| Inventories                                                |       | 27,094                                |       | 45,404                                    |       | —               |       | —           |       | 72,498           |       |
| Deferred income taxes                                      |       | 2,369                                 |       | (578                                      | )          | —               |       | —           |       | 1,791            |       |
| Prepaid and other                                          |       | 5,180                                 |       | 10,131                                    |       | 62                   |       | —           |       | 15,373           |       |
| Total current assets                                       |       | 75,608                                |       | 166,699                                   |       | 69,452               |       | —           |       | 311,759          |       |
| Due from affiliates                                        |       | 348,934                               |       | 326,033                                   |       | 293,841              |       | (968,808         | )          | —           |       |
| Investment in subsidiaries                                 |       | 186,148                               |       | 308,965                                   |       | 366,661              |       | (861,774         | )          | —           |       |
| Property, plant and equipment, net                         |       | 133,738                               |       | 254,298                                   |       | —               |       | —           |       | 388,036          |       |
| Goodwill                                                   |       | —                                |       | —                                    |       | 469,319              |       | —           |       | 469,319          |       |
| Intangibles and loan acquisition costs, net                |       | 18                                    |       | —                                    |       | 165,953              |       | —           |       | 165,971          |       |
| Other                                                      |       | 2,283                                 |       | 15,225                                    |       | —               |       | —           |       | 17,508           |       |
| Total assets                                               |       | $                                     | 746,729    |                                      | $          | 1,071,220            |       | $                | 1,365,226  |             | $          | (1,830,582 | ) | $ | 1,352,593 |   |
| ** **                                                 |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| **Liabilities and shareholders’  equity**             |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Accounts payable and accrued liabilities                   |       | $                                     | 17,547     |                                      | $          | 54,754               |       | $                | 5,104      |             | $          | — |   | $ | 77,405 |   |
| Income taxes payable                                       |       | —                                |       | 287                                       |       | 321                  |       | —           |       | 608              |       |
| Current portion of debt                                    |       | —                                |       | 501                                       |       | 10,359               |       | —           |       | 10,860           |       |
| Total current liabilities                                  |       | 17,547                                |       | 55,542                                    |       | 15,784               |       | —           |       | 88,873           |       |
| Due to affiliates                                          |       | 380,397                               |       | 279,283                                   |       | 309,128              |       | (968,808         | )          | —           |       |
| Debt, less current portion                                 |       | —                                |       | 48,356                                    |       | 744,217              |       | —           |       | 792,573          |       |
| Pension and postretirement benefits, less current  portion |       | 3,026                                 |       | 63,243                                    |       | —               |       | —           |       | 66,269           |       |
| Environmental reserve, less current portion                |       | 1,101                                 |       | 29,311                                    |       | —               |       | —           |       | 30,412           |       |
| Deferred income taxes and other                            |       | 35,630                                |       | 42,739                                    |       | 11,752               |       | —           |       | 90,121           |       |
| Shareholders’ equity                                  |       | 309,028                               |       | 552,746                                   |       | 284,345              |       | (861,774         | )          | 284,345          |       |
| Total liabilities and shareholders’ equity            |       | $                                     | 746,729    |                                      | $          | 1,071,220            |       | $                | 1,365,226  |             | $          | (1,830,582 | ) | $ | 1,352,593 |   |

 

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**Polypore International, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

**Condensed ConsolidatingStatement of Income For the three months ended October 2, 2010**

 
| **(in thousands)**                      | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                         |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Net sales                                    |       | $                                     | 54,638     |                                      | $          | 97,012               |       | $                | —     |             | $          | — |   | $ | 151,650 |   |
| Cost of goods sold                           |       | 20,915                                |       | 73,447                                    |       | —               |       | —           |       | 94,362           |       |
| Gross profit                                 |       | 33,723                                |       | 23,565                                    |       | —               |       | —           |       | 57,288           |       |
| Selling, general and administrative expenses |       | 17,458                                |       | 10,113                                    |       | 706                  |       | —           |       | 28,277           |       |
| Business restructuring                       |       | 22                                    |       | 69                                        |       | —               |       |             |       | 91               |       |
| Operating income (loss)                      |       | 16,243                                |       | 13,383                                    |       | (706                 | )          | —           |       | 28,920           |       |
| Interest expense and other                   |       | (1,528                                | )          | 2,746                                     |       | 10,954               |       | —           |       | 12,172           |       |
| Equity in earnings of subsidiaries           |       | —                                |       | —                                    |       | (16,188              | )          | 16,188           |       | —           |       |
| Income before income taxes                   |       | 17,771                                |       | 10,637                                    |       | 4,528                |       | (16,188          | )          | 16,748           |       |
| Income taxes                                 |       | 9,299                                 |       | 2,921                                     |       | (7,844               | )          | —           |       | 4,376            |       |
| Net income                                   |       | $                                     | 8,472      |                                      | $          | 7,716                |       | $                | 12,372     |             | $          | (16,188 | ) | $ | 12,372 |   |

 

**Condensed ConsolidatingStatement of Income****For the three months ended October 3, 2009**

** **
| **(in thousands)**                      | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                         |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Net sales                                    |       | $                                     | 46,734     |                                      | $          | 91,003               |       | $                | —     |             | $          | — |   | $ | 137,737 |   |
| Cost of goods sold                           |       | 21,779                                |       | 67,998                                    |       | —               |       | —           |       | 89,777           |       |
| Gross profit                                 |       | 24,955                                |       | 23,005                                    |       | —               |       | —           |       | 47,960           |       |
| Selling, general and administrative expenses |       | 15,644                                |       | 7,691                                     |       | 805                  |       | —           |       | 24,140           |       |
| Business restructuring                       |       | —                                |       | 190                                       |       | —               |       | —           |       | 190              |       |
| Operating income (loss)                      |       | 9,311                                 |       | 15,124                                    |       | (805                 | )          | —           |       | 23,630           |       |
| Interest expense and other                   |       | (235                                  | )          | 2,097                                     |       | 13,040               |       | —           |       | 14,902           |       |
| Equity in earnings of subsidiaries           |       | —                                |       | —                                    |       | (15,183              | )          | 15,183           |       | —           |       |
| Income before income taxes                   |       | 9,546                                 |       | 13,027                                    |       | 1,338                |       | (15,183          | )          | 8,728            |       |
| Income taxes                                 |       | 3,532                                 |       | 3,858                                     |       | (5,123               | )          | —           |       | 2,267            |       |
| Net income                                   |       | $                                     | 6,014      |                                      | $          | 9,169                |       | $                | 6,461      |             | $          | (15,183 | ) | $ | 6,461 |   |

 

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**Polypore International, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

**Condensed ConsolidatingStatement of Income**

**For the nine months ended October 2,2010**

 
| **(in thousands)**                      | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                         |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Net sales                                    |       | $                                     | 152,966    |                                      | $          | 294,141              |       | $                | —     |             | $          | — |   | $ | 447,107 |   |
| Cost of goods sold                           |       | 64,062                                |       | 206,280                                   |       | —               |       | —           |       | 270,342          |       |
| Gross profit                                 |       | 88,904                                |       | 87,861                                    |       | —               |       | —           |       | 176,765          |       |
| Selling, general and administrative expenses |       | 50,893                                |       | 31,617                                    |       | 1,763                |       | —           |       | 84,273           |       |
| Business restructuring                       |       | 223                                   |       | (1,009                                    | )          | —               |       | —           |       | (786             | )          |
| Operating income (loss)                      |       | 37,788                                |       | 57,253                                    |       | (1,763               | )          | —           |       | 93,278           |       |
| Interest expense and other                   |       | (6,548                                | )          | 6,978                                     |       | 34,222               |       | —           |       | 34,652           |       |
| Gain on sale of Italian subsidiary           |       | —                                |       | (3,327                                    | )          | —               |       | —           |       | (3,327           | )          |
| Equity in earnings of subsidiaries           |       | —                                |       | —                                    |       | (59,557              | )          | 59,557           |       | —           |       |
| Income before income taxes                   |       | 44,336                                |       | 53,602                                    |       | 23,572               |       | (59,557          | )          | 61,953           |       |
| Income taxes                                 |       | 24,427                                |       | 13,954                                    |       | (22,290              | )          | —           |       | 16,091           |       |
| Net income                                   |       | $                                     | 19,909     |                                      | $          | 39,648               |       | $                | 45,862     |             | $          | (59,557 | ) | $ | 45,862 |   |

 

**Condensed ConsolidatingStatement of Income**

**For the nine months ended October 3,2009**

 
| **(in thousands)**                      | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                         |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Net sales                                    |       | $                                     | 124,406    |                                      | $          | 240,420              |       | $                | —     |             | $          | — |   | $ | 364,826 |   |
| Cost of goods sold                           |       | 57,271                                |       | 169,614                                   |       | —               |       | —           |       | 226,885          |       |
| Gross profit                                 |       | 67,135                                |       | 70,806                                    |       | —               |       | —           |       | 137,941          |       |
| Selling, general and administrative expenses |       | 48,536                                |       | 24,338                                    |       | 1,558                |       | —           |       | 74,432           |       |
| Business restructuring                       |       | —                                |       | 756                                       |       | —               |       | —           |       | 756              |       |
| Operating income (loss)                      |       | 18,599                                |       | 45,712                                    |       | (1,558               | )          | —           |       | 62,753           |       |
| Interest expense and other                   |       | (1,305                                | )          | 5,694                                     |       | 40,072               |       | —           |       | 44,461           |       |
| Equity in earnings of subsidiaries           |       | —                                |       | —                                    |       | (39,859              | )          | 39,859           |       | —           |       |
| Income (loss) before income taxes            |       | 19,904                                |       | 40,018                                    |       | (1,771               | )          | (39,859          | )          | 18,292           |       |
| Income taxes                                 |       | 7,364                                 |       | 12,699                                    |       | (15,403              | )          | —           |       | 4,660            |       |
| Net income                                   |       | $                                     | 12,540     |                                      | $          | 27,319               |       | $                | 13,632     |             | $          | (39,859 | ) | $ | 13,632 |   |

 

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**Polypore International, Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(unaudited)**

 

**Condensed ConsolidatingStatement of Cash Flows**

**For the nine months ended October 2,2010**

 
| **(in thousands)**                                        | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| Net cash provided by  (used in) operating activities           |       | $                                     | 74,336     |                                      | $          | 57,043               |       | $                | (23,507    | )                | $          | 4,640 |   | $ | 112,512 |   |
| **Investing activities:**                                      |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Purchases of property, plant and equipment                     |       | (32,413                               | )          | (9,054                                    | )          | —               |       | —           |       | (41,467          | )          |
| Net payments associated with stock sale of Italian  subsidiary |       | —                                |       | (14,908                                   | )          | —               |       | —           |       | (14,908          | )          |
| Net cash used in  investing activities                         |       | (32,413                               | )          | (23,962                                   | )          | —               |       | —           |       | (56,375          | )          |
| **Financing activities:**                                      |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Principal payments on debt                                     |       | —                                |       | (340                                      | )          | (9,560               | )          | —           |       | (9,900           | )          |
| Proceeds from stock option exercises                           |       | —                                |       | —                                    |       | 1,019                |       | —           |       | 1,019            |       |
| Intercompany transactions, net                                 |       | (42,633                               | )          | (3,675                                    | )          | 50,948               |       | (4,640           | )          | —           |       |
| Net cash provided by  (used in) financing activities           |       | (42,633                               | )          | (4,015                                    | )          | 42,407               |       | (4,640           | )          | (8,881           | )          |
| Effect of exchange rate changes on cash and cash  equivalents  |       | 710                                   |       | (207                                      | )          | —               |       | —           |       | 503              |       |
| **Net increase in cash and cash  equivalents**                 |       | —                                |       | 28,859                                    |       | 18,900               |       | —           |       | 47,759           |       |
| Cash and cash equivalents at beginning of period               |       | —                                |       | 45,585                                    |       | 69,390               |       | —           |       | 114,975          |       |
| **Cash and cash equivalents at end  of period**                |       | $                                     | —     |                                      | $          | 74,444               |       | $                | 88,290     |             | $          | — |   | $ | 162,734 |   |

 

**Condensed ConsolidatingStatement of Cash Flows For the nine months ended October 3, 2009**

 
| **(in thousands)**                                       | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| Net cash provided by  (used in) operating activities          |       | $                                     | 18,389     |                                      | $          | 42,597               |       | $                | (3,007     | )                | $          | (9,824 | ) | $ | 48,155 |   |
| **Investing activities:**                                     |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Purchases of property, plant and equipment                    |       | (6,220                                | )          | (4,495                                    | )          | —               |       | —           |       | (10,715          | )          |
| Net cash used in  investing activities                        |       | (6,220                                | )          | (4,495                                    | )          | —               |       | —           |       | (10,715          | )          |
| **Financing activities:**                                     |       |                                  |       |                                      |       |                 |       |             |       |             |       |
| Principal payments on debt                                    |       | (3,319                                | )          | (367                                      | )          | (2,422               | )          | —           |       | (6,108           | )          |
| Proceeds from stock option exercises                          |       | —                                |       | —                                    |       | 55                   |       | —           |       | 55               |       |
| Intercompany transactions, net                                |       | (9,124                                | )          | (9,914                                    | )          | 9,214                |       | 9,824            |       | —           |       |
| Net cash provided by  (used in) financing activities          |       | (12,443                               | )          | (10,281                                   | )          | 6,847                |       | 9,824            |       | (6,053           | )          |
| Effect of exchange rate changes on cash and cash  equivalents |       | 274                                   |       | 5,509                                     |       | —               |       | —           |       | 5,783            |       |
| **Net increase in cash and cash  equivalents**                |       | —                                |       | 33,330                                    |       | 3,840                |       | —           |       | 37,170           |       |
| Cash and cash equivalents at beginning of period              |       | —                                |       | 25,657                                    |       | 57,364               |       | —           |       | 83,021           |       |
| **Cash and cash equivalents at end  of period**               |       | $                                     | —     |                                      | $          | 58,987               |       | $                | 61,204     |             | $          | — |   | $ | 120,191 |   |

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

*Thefollowing discussion of our financial condition and results of operationsshould be read together with our unaudited condensed consolidated financialstatements and the related notes included elsewhere in this Quarterly Report onForm 10-Q and our audited consolidated financial statements and therelated notes included in our Annual Report on Form 10-K for the fiscalyear ended January 2, 2010.*

 

**Overview**

 

Weare a leading global high technology filtration company that develops,manufactures and markets specialized microporous membranes used in separationand filtration processes. In fiscal 2009, we generated total net sales of$516.9 million. We operate in two business segments: (i) the energystorage segment, which accounted for approximately 71% of our fiscal 2009 netsales; and (ii) the separations media segment, which accounted forapproximately 29% of our fiscal 2009 net sales. We manufacture our products atfacilities in North America, Europe and Asia. Net sales from foreign locationswere $351.5 million for fiscal 2009.

 

*Energy Storage Segment*

 

Inthe energy storage segment, our membrane separators are a critical performancecomponent in lithium batteries, which are primarily used in consumerelectronics and electric drive vehicle (“EDV”) applications, and lead-acidbatteries, which are used globally in transportation and numerous industrialapplications. We believe the global economic recession adversely impacted salesin 2009 and although we have seen economic improvement, the economicenvironment is still uncertain and could have an adverse impact in the near future.  Although the short-term economic outlook isuncertain, we believe that the long-term growth drivers for the energy storagebusiness — growth in Asia, increasing demand for consumer electronics and applicationproliferation, including EDV’s — remain intact. We have and will continue to position ourselves to capitalize on thesefuture growth opportunities.

 

Lithiumbatteries are the power source in a wide variety of electronics applicationsranging from notebook computers and mobile phones to cordless power tools.  In addition to consumer electronicsapplications, growth in lithium batteries is being driven by applicationproliferation and growing demand in EDV’s. The development and investment in lithium batteries for use in EDVapplications is accelerating and we are making sales into this market.  In order to meet the growing demand, we havemade and are continuing to make significant investments in lithium batteryseparator capacity.  In 2008, wecompleted a lithium battery separator capacity expansion at our Charlotte, NCfacility and acquired a lithium battery separator company in South Korea.  In late 2009, we initiated a $102.0 millionexpansion aimed at enhancing our position as a market leader in supplyinglithium separators for EDV applications. The expansion is being partially funded by a $49.3 million grant fromthe U.S. Department of Energy (“DOE”). The first phase of this expansion will increase capacity at our existingCharlotte, NC facility, with production beginning to ramp up toward the end of2010.  The second phase is theconstruction of a new lithium battery separator facility in Concord, NC.  Construction of the Concord, NC facilitystarted in the third quarter of 2010 with production expected to start in early2012.  In early 2010, we initiated a$30.0 million capacity expansion at our Korean facility to serve growth inconsumer electronics applications in Asia, with start-up expected in the secondhalf of 2011.  In November 2010, weannounced an additional $32.0 million lithium battery separator expansiontargeted at the EDV market at our Charlotte, NC facility that is expected tobegin production toward the end of 2011.

 

Inthe lead-acid battery market, the high proportion of aftermarket replacementsales and the steady growth of the worldwide fleet of motor vehicles provide uswith a growing recurring revenue base in lead-acid battery separators.Worldwide demand for lead-acid battery separators is expected to continue togrow at slightly more than annual economic growth.  The Asia-Pacific region is the fastestgrowing market for lead-acid battery separators.  Growth in this region is driven by theincreasing penetration of automobile ownership, growth in industrial andmanufacturing sectors, export incentives and ongoing conversion to thepolyethylene-based membrane separators we produce.  We have positioned ourselves to benefit fromgrowth in Asia by expanding capacity at our Prachinburi, Thailand facility,acquiring battery separator manufacturing assets and subsequently expanding ouroperations in India, acquiring the remaining 40% minority interest in ourproduction facility in Tianjin, China and establishing an Asian TechnicalCenter in Thailand.  In 2010, we reachedan agreement to enter into a joint venture with a customer, Camel Group Co., Ltd.(“Camel”), a leading battery manufacturer in China, to produce lead-acidbattery separators primarily for Camel’s use. The joint venture will be located at Camel’s facility in Xiangfan, Chinaand is expected to start production in early 2012.  We will own 65% of the joint venture and ourcontribution will primarily consist of redeployed production assets from ourformer facility in Potenza, Italy. We will continue to focus our resources and assets to capitalize ongrowth in this important region.

 

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*Separations Media Segment*

 

Inthe separations media segment, our filtration membranes and modules are used inhealthcare and high-performance filtration and specialty applications. Thehealthcare business and a portion of the filtration and specialty business havehistorically been relatively unaffected by the economy.  We believe that the separations media segmentwill continue to benefit from continued growth in demand for higher levels ofpurity in a growing number of applications.

 

Healthcareapplications include hemodialysis, blood oxygenation and plasmapheresis. Growthin demand for hemodialysis membranes is driven by the increasing worldwidepopulation of end-stage renal disease patients. We estimate that conversion tosingle-use dialyzers and increasing treatment frequency will result inadditional dialyzer market growth. In the third quarter of 2010, we began a$25.0 million expansion of hemodialysis membrane (PUREMA ®) production capacityat our Wuppertal, Germany facility and expect to start production in the secondhalf of 2011.

 

Weproduce a wide range of membranes and membrane-based elements for micro-,ultra- and nanofiltration and gasification/degasification of liquids. Micro-,ultra- and nanofiltration membrane element market growth is being driven byseveral factors, including end-market growth in applications such as water treatmentand pharmaceutical processing, displacement of conventional filtration media bymembrane filtration due to membranes’ superior cost and performance attributesand increasing purity requirements in industrial and other applications.

 

**Critical accounting policies**

 

Criticalaccounting policies are those accounting policies that can have a significantimpact on the presentation of our financial condition and results ofoperations, and that require the use of complex and subjective estimates basedon past experience and management’s judgment. Because of uncertainty inherentin such estimates, actual results may differ from these estimates. Below arethose policies that we believe are critical to the understanding of ouroperating results and financial condition. Management has discussed thedevelopment and selection of these critical accounting policies with the AuditCommittee of our Board of Directors.

 

*Allowance for doubtful accounts*

 

Accountsreceivable are primarily composed of amounts owed to us through our operatingactivities and are presented net of an allowance for doubtful accounts. Weestablish an allowance for doubtful accounts based upon factors surrounding thecredit risk of specific customers, historical trends and other information. Wecharge accounts receivables off against our allowance for doubtful accountswhen we deem them to be uncollectible on a specific identification basis. Thedetermination of the amount of the allowance for doubtful accounts is subjectto judgment and estimated by management. If circumstances or economicconditions deteriorate, we may need to increase the allowance for doubtfulaccounts.

 

*Impairment of intangibles and goodwill*

 

Identified intangible assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount may not berecoverable.  Goodwill andindefinite-lived intangible assets are not amortized, but are subject to annualimpairment testing unless circumstances dictate more frequent assessments.  We perform our annual impairment assessmentfor goodwill and indefinite-lived intangibles as of the first day of the fourthquarter of each fiscal year and more frequently whenever events or changes incircumstances indicate that the fair value of the asset may be less than thecarrying amount.  Goodwill impairmenttesting is a two-step process performed at the reporting unit level.  Our reporting units are at the operatingsegment level.  Step one compares thefair value of our reporting units to their carrying amount.  The fair value of the reporting unit isdetermined using the income approach, corroborated by comparison to marketcapitalization and key multiples of comparable companies.  Under the income approach, we determine fairvalue based on estimated future cash flows of each reporting unit, discountedby an estimated weighted-average cost of capital.  If the fair value of the reporting unit isgreater than its carrying amount, there is no impairment.  If the reporting unit’s carrying amountexceeds its fair value, then the second step must be completed to measure theamount of impairment, if any.  Step twocalculates the implied fair value of goodwill by deducting the fair value ofall tangible and intangible net assets of the reporting unit from the fairvalue of the reporting unit as calculated in step one.  In this step, the fair value of the reportingunit is allocated to all of the reporting unit’s assets and liabilities in ahypothetical purchase price allocation as if the reporting unit had beenacquired on that date.  If the carryingamount of goodwill exceeds the implied fair value of goodwill, an impairmentloss will be recognized in an amount equal to the excess.

 

Determiningthe fair value of a reporting unit is judgmental in nature and requires the useof significant estimates and assumptions, including revenue growth rates,strategic plans and future market conditions, among others.  There can be no assurance that our estimatesand assumptions made for purposes of the goodwill impairment testing will proveto be accurate

 

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predictionsof the future.  If our assumptionsregarding forecasted revenue or margin growth rates of certain reporting unitsare not achieved or changes in strategy or market conditions occur, we may berequired to record goodwill impairment charges in future periods.  It is not possible at this time to determineif any such future impairment charge would result or, if it does, whether suchcharge would be material.

 

In2009, we completed our annual impairment test as of the first day of the fourthquarter and recognized a goodwill impairment charge of $131.5 million for thelead-acid reporting unit of our energy storage segment.

 

*Pension and other postretirement benefits*

 

Certainassumptions are used in the calculation of the actuarial valuation of ourdefined benefit pension plans and other postretirement benefits. Two criticalassumptions, discount rate and expected return on assets, are importantelements of plan expense and/or liability measurement and differences betweenactual results and these two actuarial assumptions can materially affect ourprojected benefit obligation or the valuation of our plan assets. Otherassumptions involve demographic factors such as retirement, expected increasesin compensation, mortality and turnover. The discount rate enables us to stateexpected future cash flows at a present value on the measurement date. Thediscount rate assumptions are based on the market rate for high quality fixedincome investments, and are thus subject to change each year. AtJanuary 2, 2010, a 1% decrease in the discount rate would increase ourprojected benefit obligations and the unfunded status of our pension plans by$13.0 million. The expected rates of return on our pension plans’ assetsare based on the asset allocation of each plan and the long-term projectedreturn of those assets. For 2009, if the expected rate of return on pensionplan assets were reduced by 1%, the result would have increased our netperiodic benefit expense for fiscal 2009 by $0.2 million. AtJanuary 2, 2010, if the actual plan assets were reduced by 1%, theunfunded status of our pension plans would increase by $0.2 million.

 

*Environmental matters*

 

Environmentalobligations are accrued when such expenditures are probable and reasonablyestimable. The amount of liability recorded is based on currently availableinformation, including the progress of remedial investigations, current statusof discussions with regulatory authorities regarding the method and extent ofremediation, presently enacted laws and existing technology. Accruals forestimated losses from environmental obligations are adjusted as furtherinformation develops or circumstances change. We do not currently anticipateany material loss in excess of the amounts accrued. Future remediation expensesmay be affected by a number of uncertainties including, but not limited to, thedifficulty in estimating the extent and method of remediation, the evolvingnature of environmental regulations, and the availability and application oftechnology. If actual results are less favorable than those projected bymanagement, we may be required to recognize additional expense and liabilities.

 

Inconnection with the acquisition of Membrana GmbH (“Membrana”) in 2002, werecorded a reserve for costs to remediate known environmental issues andoperational upgrades at the Wuppertal, Germany facility. We also have indemnificationagreements for certain environmental matters from Acordis A.G. (“Acordis”) andAkzo Nobel N.V. (“Akzo”), the prior owners of Membrana. Recoveries ofenvironmental costs from other parties are recognized as assets when theirreceipt is deemed probable. We have recorded a receivable with regard to theAkzo indemnification agreement. If indemnification claims cannot be enforcedagainst Acordis and Akzo, we may be required to reduce the amount ofindemnification receivable recorded.

 

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**Results ofOperations**

 

Thefollowing table sets forth, for the periods indicated, certain operating datain amount and as a percentage of net sales:

 
| ** **                                   | ** ** | ** **                       | ** ** | **Percentage of Net Sales** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**           | ** ** |
| **($’s in millions)**         | ** ** | **October 2, 2010**    | ** ** | **October 3, 2009**              | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
|                                         |       |                             |       |                                       |       |   |   |   |   |
| Net sales                                    |       | $                                | 151.7      |                                       | $          | 137.7 |   | 100.0 | % | 100.0 | % |
|                                         |       |                             |       |                                       |       |   |   |   |   |
| Gross profit                                 |       | 57.3                             |       | 47.9                                       |       | 37.8 |   | 34.8 |   |
|                                         |       |                             |       |                                       |       |   |   |   |   |
| Selling, general and administrative expenses |       | 28.3                             |       | 24.1                                       |       | 18.6 |   | 17.5 |   |
| Business restructuring                       |       | 0.1                              |       | 0.2                                        |       | 0.1 |   | 0.2 |   |
| Operating income                             |       | 28.9                             |       | 23.6                                       |       | 19.1 |   | 17.1 |   |
|                                         |       |                             |       |                                       |       |   |   |   |   |
| Interest expense, net                        |       | 12.1                             |       | 14.2                                       |       | 8.0 |   | 10.3 |   |
| Foreign currency and other                   |       | —                           |       | 0.7                                        |       | — |   | 0.5 |   |
| Income before income taxes                   |       | 16.8                             |       | 8.7                                        |       | 11.1 |   | 6.3 |   |
| Income taxes                                 |       | 4.4                              |       | 2.2                                        |       | 2.9 |   | 1.6 |   |
| Net income                                   |       | $                                | 12.4       |                                       | $          | 6.5 |   | 8.2 | % | 4.7 | % |

 
| ** **                                   | ** ** | ** **                      | ** ** | **Percentage of Net Sales** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended**            | ** ** |
| **($’s in millions)**         | ** ** | **October 2, 2010**   | ** ** | **October 3, 2009**              | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
|                                         |       |                            |       |                                       |       |   |   |   |   |
| Net sales                                    |       | $                               | 447.1      |                                       | $          | 364.8 |   | 100.0 | % | 100.0 | % |
|                                         |       |                            |       |                                       |       |   |   |   |   |
| Gross profit                                 |       | 176.8                           |       | 137.9                                      |       | 39.5 |   | 37.8 |   |
|                                         |       |                            |       |                                       |       |   |   |   |   |
| Selling, general and administrative expenses |       | 84.3                            |       | 74.4                                       |       | 18.8 |   | 20.4 |   |
| Business restructuring                       |       | (0.8                            | )          | 0.8                                        |       | (0.2 | ) | 0.2 |   |
| Operating income                             |       | 93.3                            |       | 62.7                                       |       | 20.9 |   | 17.2 |   |
|                                         |       |                            |       |                                       |       |   |   |   |   |
| Interest expense, net                        |       | 35.4                            |       | 43.0                                       |       | 7.9 |   | 11.8 |   |
| Gain on sale of Italian subsidiary           |       | (3.3                            | )          | —                                     |       | (0.7 | ) | — |   |
| Foreign currency and other                   |       | (0.8                            | )          | 1.4                                        |       | (0.2 | ) | 0.4 |   |
| Income before income taxes                   |       | 62.0                            |       | 18.3                                       |       | 13.9 |   | 5.0 |   |
| Income taxes                                 |       | 16.1                            |       | 4.6                                        |       | 3.6 |   | 1.2 |   |
| Net income                                   |       | $                               | 45.9       |                                       | $          | 13.7 |   | 10.3 | % | 3.8 | % |

 

***Comparison of the three months ended October 2, 2010 with thethree months ended October 3, 2009***

 

*Net sales*.  Net sales for the three months ended October 2,2010 were $151.7 million, an increase of $14.0 million, or 10.2%, from the sameperiod in the prior year.  Energy storagesales for the three months ended October 2, 2010 were $113.3 million, anincrease of $13.1 million, or 13.1%. Lithium battery separator sales increased by $10.8 million due to strongdemand in consumer electronics, application proliferation and new productlaunches, including EDV’s.  Lead-acidbattery separator sales increased by $2.3 million due primarily to continuedgrowth in Asia, somewhat offset by the effect of foreign currency translationof $1.6 million.  In addition, theprior-year period included advance purchases of $3.7 million by a NorthAmerican customer.

 

Separationsmedia sales for the three months ended October 2, 2010 were $38.4 million,an increase of $0.9 million, or 2.4%, from the same period in the prior year,including the negative effect of foreign currency translation of $3.0million.  Healthcare sales decreased by $1.9million, or 7.6%, as solid demand in hemodialysis and blood oxygenationapplications was more than offset by the effect of foreign currencytranslation.  Filtration and specialtyproduct sales increased by $2.8 million, or 22.2%, due to strong demand in allkey applications, somewhat offset by the effect of foreign currencytranslation.

 

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*Gross profit.** *Gross profit as a percent ofsales was 37.8% for the three months ended October 2, 2010, as compared to34.8% in the same period of the prior year. Energy storage gross profit as a percent of sales was 37.5% for thethree months ended October 2, 2010, as compared to 37.0% in the sameperiod of the prior year.  The increasein gross profit margin was due to higher production volumes and productionefficiencies, somewhat offset by increased costs associated with growthinvestments.  Separations media grossprofit as a percent of sales was 38.5% for the three months ended October 2,2010, as compared to 28.8% in the same period of the prior year.  The increase in gross profit margin wasprimarily due to product mix and production efficiencies.  In the third and fourth quarters of 2009, filtrationproduction was reduced because of lower sales related to the macro-economicenvironment at that time.

 

*Selling, general and administrative expenses.** *Selling, general andadministrative expenses increased by $4.2 million for the three months ended October 2,2010 as compared to the prior year, primarily due to growth investments and theaccrual of variable incentives under performance-based compensation plans.

 

*Interest expense.*  Interest expense for the three months ended October 2,2010 decreased by $2.1 million from the same period in the prior year due tothe capitalization of interest expense related to capacity expansions and $1.5million of additional interest expense recognized under interest rate swapagreements that expired in the prior year.

 

OnNovember 3, 2010, we issued a notice of redemption for $75.0 millionprincipal amount of our outstanding 8.75% senior subordinated dollar notes due2012.  The notes will be redeemed on December 3, 2010.  On an annualized basis, the redemption willreduce interest expense by approximately $6.6 million.

 

*Income taxes**.** *The income tax provision for theinterim periods presented is computed at the effective rate expected to beapplicable in each respective full year using the statutory rates on a country-by-countrybasis.  The effective tax rate was 26.1%for the three months ended October 2, 2010, as compared to 26.0% for thesame period in the prior year.  Oureffective tax rate fluctuates due to a variety of factors, including stateincome taxes, the mix of income between U.S. and foreign jurisdictions taxed atvarying rates, and various changes in estimates of permanent differences andvaluation allowances.

 

Themix of earnings between the various tax jurisdictions in which we do businesshas a significant impact on our effective tax rate.  Each tax jurisdiction has its own set of taxlaws and tax rates.  The income earned byour subsidiaries in each jurisdiction is taxed independently by these variousjurisdictions.   Currently, theapplicable statutory income tax rates in the jurisdictions in which we operaterange from 0% to 39%.   Therefore, theamount of income tax expense in each jurisdiction as compared to ourconsolidated income before income taxes has a significant impact on our annualeffective tax rate.

 

Theeffect of each of these items on our effective tax rate is quantified in thetable below:

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **October 2,  2010**        | ** ** | **October 3,  2009** | ** ** |
| U.S. federal statutory rate                           | ** ** | **35.0**                         | **%**      | 35.0 | % |
| State income taxes                                    | ** ** | **0.7**                          |       | (0.4 | ) |
| Mix of income in taxing jurisdictions                 | ** ** | **(5.9**                         | **)**      | (9.7 | ) |
| Other permanent differences and valuation  allowances | ** ** | **(3.7**                         | **)**      | 1.1 |   |
| Total effective tax rate on income                    | ** ** | **26.1**                         | **%**      | 26.0 | % |

 

***Comparison of the nine months ended October 2, 2010 with the ninemonths ended October 3, 2009***

 

*Net sales.** *Net sales for the nine months ended October 2, 2010 were $447.1million, an increase of $82.3 million, or 22.6%, from the same period in theprior year.  Energy storage sales for thenine months ended October 2, 2010 were $322.2 million, an increase of$66.0 million, or 25.8%.  Lithium batteryseparator sales increased by $35.9 million due to strong demand in consumerelectronics, application proliferation and new product launches, including EDV’s.  Lead-acid battery separator sales increasedby $30.1 million due to global economic improvement and continued growth inAsia.  The impact of foreign currencytranslation was not significant for the nine months ended October 2, 2010.

 

Separationsmedia sales for the nine months ended October 2, 2010 were $124.9 million,an increase of $16.3 million, or 15.0% from the same period in the prior year,including the negative effect of foreign currency translation of $3.2million.   Healthcare sales increased by$2.7 million, or 3.6%, as solid demand in hemodialysis and blood oxygenationapplications was somewhat offset by the effect of foreign currencytranslation.  Filtration and specialtyproduct sales increased by $13.6 million, or 40.1%, due to strong demand in allkey applications, somewhat offset by the effect of foreign currencytranslation.

 

*Gross profit**. *Gross profit as a percent of net sales was 39.5% for the nine monthsended October 2, 2010, as compared to 37.8% in the same period of theprior year.  Energy storage gross profitas a percent of net sales was 37.5% for the nine months ended October 2,2010, as compared to 36.3% in the same period of the prior year. The increasein gross profit margin was due

 

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tohigher production volumes and production efficiencies, somewhat offset byincreased costs associated with growth investments.  Separations media gross profit as a percentof sales was 44.9% for the nine months ended October 2, 2010, as comparedto 41.4% in the same period of the prior year. The increase in gross profit margin was primarily due to product mix andproduction efficiencies.  In the thirdand fourth quarters of 2009, filtration production was reduced because of lowersales related to the macro-economic environment at that time.

 

*Selling, general and administrative expenses**. *Selling, general andadministrative expenses increased by $9.9 million for the nine months ended October 2,2010 as compared to the prior year, primarily due to growth investments and theaccrual of variable incentives under performance-based compensation plans.

 

*Interest expense.*  Interest expense for the nine months ended October 2,2010 decreased by $7.6 million from the same period in the prior year due tothe capitalization of interest expense related to capacity expansions, theeffect of foreign currency fluctuations on our euro-denominated debt and $5.1million of additional interest expense recognized under interest rate swapagreements that expired in the prior year.

 

OnNovember 3, 2010, we issued a notice of redemption for $75.0 millionprincipal amount of our outstanding 8.75% senior subordinated dollar notes due2012.  The notes will be redeemed on December 3, 2010.  On an annualized basis, the redemption willreduce interest expense by approximately $6.6 million.

 

*Income taxes**. *The income tax provision for the interim periods presented is computedat the effective rate expected to be applicable in each respective full yearusing the statutory rates on a country-by-country basis.  The effective tax rate was 26.0% for the ninemonths ended October 2, 2010, as compared to 25.5% for the same period inthe prior year.  Our effective tax ratefluctuates due to a variety of factors, including state income taxes, the mixof income between U.S. and foreign jurisdictions taxed at varying rates, andvarious changes in estimates of permanent differences and valuation allowances.Additionally, our effective tax rate was also impacted by the sale of ourItalian subsidiary, Daramic S.r.l.

 

Themix of earnings between the various tax jurisdictions in which we do businesshas a significant impact on our effective tax rate.  Each tax jurisdiction has its own set of taxlaws and tax rates.  The income earned byour subsidiaries in each jurisdiction is taxed independently by these variousjurisdictions.   Currently, the applicablestatutory income tax rates in the jurisdictions in which we operate range from0% to 39%.   Therefore, the amount ofincome tax expense in each jurisdiction as compared to our consolidated incomebefore income taxes has a significant impact on our annual effective tax rate.

 

Theeffect of each of these items on our effective tax rate is quantified in thetable below:

 
| ** **                                            | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **October 2,  2010**       | ** ** | **October 3,  2009** | ** ** |
| U.S. federal statutory rate                           | ** ** | **35.0**                        | **%**      | 35.0 | % |
| State income taxes                                    | ** ** | **0.7**                         |       | (0.4 | ) |
| Mix of income in taxing jurisdictions                 | ** ** | **(5.9**                        | **)**      | (9.7 | ) |
| Other permanent differences and valuation  allowances | ** ** | **(1.2**                        | **)**      | 0.6 |   |
| Sale of Italian subsidiary                            | ** ** | **(2.6**                        | **)**      | — |   |
| Total effective tax rate on income                    | ** ** | **26.0**                        | **%**      | 25.5 | % |

 

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**Business Restructuring**

 

The components of restructuring activity in the ninemonths ended October 2, 2010, including the impact of the stock sale ofDaramic S.r.l. on the 2008 plan, were as follows:

 
| **(in millions)**   | ** ** | **Balance at  January 2,  2010** | ** ** | **Restructuring  Charges** | ** ** | **Other** | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  October 2,  2010** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|----------------------------|------------|-----------|------------|--------------------|------------|------------------------------------|------------|--------------------------------------------|------------|
| 2009 Restructuring Plan: |       |                                       |       |                       |       |      |       |               |       |                               |       |                                       |       |
| Severance and benefits   |       | $                                          | 0.1        |                       | $          | (0.1      | )          | $                  | —     |                               | $          | —                                     |       | $ | — |   | $ | — |   |
| Other                    |       | —                                     |       | 0.4                        |       | —    |       | (0.4               | )          | —                             |       | —                                     |       |
|                     |       | 0.1                                        |       | 0.3                        |       | —    |       | (0.4               | )          | —                             |       | —                                     |       |
| 2008 Restructuring Plan: |       |                                       |       |                       |       |      |       |               |       |                               |       |                                       |       |
| Severance and benefits   |       | 7.3                                        |       | —                     |       | (6.6      | )          | (0.3               | )          | (0.4                               | )          | —                                     |       |
| Other                    |       | 0.6                                        |       | 0.2                        |       | (0.6      | )          | (0.2               | )          | —                             |       | —                                     |       |
|                     |       | 7.9                                        |       | 0.2                        |       | (7.2      | )          | (0.5               | )          | (0.4                               | )          | —                                     |       |
| 2006 Restructuring Plan: |       |                                       |       |                       |       |      |       |               |       |                               |       |                                       |       |
| Severance and benefits   |       | 2.7                                        |       | (1.3                       | )          | —    |       | (0.3               | )          | (0.2                               | )          | 0.9                                        |       |
|                     |       |                                       |       |                       |       |      |       |               |       |                               |       |                                       |       |
| Total                    |       | $                                          | 10.7       |                       | $          | (0.8      | )          | $                  | (7.2       | )                                  | $          | (1.2                                       | )          | $ | (0.6 | ) | $ | 0.9 |   |

 

Cashrestructuring payments for the next twelve months are not expected to besignificant.

 

*2009 restructuring plan. *In 2009, the North American marketfor lead-acid battery separators had significant excess capacity and a highlyconsolidated customer base.  As a resultof these factors and our estimates at that time about future demand requirementsin North America, we implemented a restructuring plan in our energy storagesegment in the fourth quarter of 2009 to better align lead-acid batteryseparator production capacity with demand in North America.

 

Therestructuring plan included idling capacity and reducing headcount at ourmanufacturing facility in Owensboro, Kentucky. The total cost of the plan is estimated to be approximately $23.2million, including estimated cash charges of $3.3 million for severance andbenefits and other exit costs and a non-cash impairment charge of $19.9 millionfor buildings and equipment.  The totalcost recognized through October 2, 2010 was $20.4 million, which includedcash charges of $0.5 million for severance and other exit costs and thenon-cash impairment charge.  The timing,scope and cash costs associated with the plan are subject to change as weimplement the plan and continue to evaluate our business needs and costs.  During the first nine months of 2010,worldwide demand for lead-acid battery separators has exceeded previous estimates.  As a result, we are currently utilizingportions of the facility that were previously idled and the timing, scope andfuture cash costs associated with this plan are uncertain at this time.

 

*2008 restructuring plan.*  A supply contract between our lead-acidbattery separator business and a large customer expired on December 31,2008 and was not renewed. In response, we implemented a restructuring plan inthe fourth quarter of 2008 for our energy storage segment to align lead-acidbattery separator production capacity with demand, reduce costs and positionourselves to meet future growth opportunities.

 

Theplan included closing our facility in Potenza, Italy, streamliningproduction at our facility in Owensboro, Kentucky and reducing selling, generaland administrative resources associated with the lead-acid battery separatorbusiness. The total cost of the restructuring plan was $61.4 million. Therestructuring plan included costs associated with closing the Potenza, Italyfacility and the termination of production employees at Potenza, Italy andOwensboro, Kentucky and certain selling, general and administrative employees.The restructuring also included a non-cash impairment charge of $28.9 millionfor buildings and machinery and equipment that will no longer be used inPotenza, Italy.  On March 9,2010, we sold 100% of the stock of our Italian subsidiary, Daramic S.r.l.  As a result of the stock sale, the buyeracquired all of the assets and liabilities of Daramic S.r.l., includingrestructuring obligations associated with the Potenza, Italy facility of$7.2 million, consisting primarily of severance payments due to terminatedemployees.

 

*2006 restructuring plan.*  In December 2006, our separations mediasegment exited the production of cellulosic membranes and we realigned the coststructure at our Wuppertal, Germany facility. The total cost of the plan was$33.8 million, consisting of a $17.5 million non-cash impairmentcharge for buildings and equipment, $10.5 million for employee layoffs and$5.8 million for other costs related to the shutdown of portions of theWuppertal facility.   In May 2010,we reduced the estimated costs of severance and benefits and related accrual by$1.3 million to reflect actual costs expected to be incurred.

 

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**Liquidity and Capital Resources**

 

Cashand cash equivalents increased to $162.7 million at October 2, 2010from $115.0 million at January 2, 2010.  The $47.7 million increase in cash consistsof cash flow from operating activities of $112.5 million, reduced by purchasesof property, plant and equipment for capacity expansion projects, paymentsassociated with the stock sale of our Italian subsidiary, Daramic S.r.l., andprincipal payments on debt.

 

*Operating activities*.  Net cash provided by operating activities was$112.5 million in the nine months ended October 2, 2010, consisting ofcash flows from operations of $84.2 million and changes in operating assets andliabilities of $28.3 million.  The changein operating assets and liabilities was primarily due to a $22.5 millionincrease in accounts payable and accrued liabilities related to timing ofpayments, accrued interest under our senior subordinated notes and higheraccrued variable incentive compensation under performance-based compensationplans.  Interest payments on our seniorsubordinated notes are made semi-annually in May and November.  Changes in other operating assets andliabilities were not significant. Accounts receivable days sales outstanding is consistent with the prioryear and we have not experienced significant changes in accounts receivableaging or customer payment terms and believe that we have adequately providedfor potential bad debts.  Inventoryincreased based on production and capacity planning for expected customerorders.  Our inventory is generally notsubject to obsolescence and does not have a shelf life and we do not believethere is a significant risk of inventory impairment.

 

*Investing activities*.  We have initiated lithium battery separatorexpansion projects in the U.S. and Korea for total expected costs of $102.0million and $30.0 million, respectively. Capital expenditures for the U.S. expansion project will be partiallyfunded by a $49.3 million grant from the DOE. On November 3, 2010, we announced an additional $32.0 millioncapacity expansion at our lithium battery separator production facility inCharlotte, NC.  In the three months endedOctober 2, 2010, we started a $25.0 million expansion of our hemodialysismembrane (PUREMA ®) production capacity in Europe.  Capital expenditures for these projects willoccur in 2010 through early 2012.  Totalcapital spending for fiscal year 2010 is currently estimated at approximately$75.0 million, net of DOE grant awards. In the nine months ended October 2, 2010, capital expenditures were$41.5 million, net of DOE grant awards of $8.5 million.

 

Asa result of the March 9, 2010 stock sale of our Italian subsidiary,Daramic S.r.l., the buyer acquired the Potenza, Italy manufacturingfacility and assumed all liabilities of the subsidiary, including environmentalobligations and severance costs associated with closing this facility in2008.  As a result of the stock sale, wewere required to make net cash payments to the buyer of €16.0 million, of which€11.0 million ($14.9 million) was paid at closing and the remaining €5.0million ($6.9 million at October 2, 2010) will be paid on December 15,2010.

 

*Financing activities**.*  During the nine months ended October 2,2010, we made principal payments on debt of $9.9 million, including a $7.1million mandatory prepayment associated with the 2009 excess cash flowcalculation as defined in our credit agreement.

 

Weintend to fund our ongoing operations with cash on hand, cash generated byoperations and availability under the senior secured credit facility.

 

Oursenior secured credit facility provides for a $322.9 million term loanfacility ($305.3 million outstanding at October 2, 2010), a€35.0 million term loan facility ($46.5 million outstanding at October 2,2010) and a $90.0 million revolving credit facility. At October 2,2010, we had $80.6 million of borrowings available under the revolvingcredit facility ($90.0 million revolving credit facility less$9.4 million of undrawn standby letters of credit). The term loans maturein July 2014 and the revolving credit facility matures in July 2013.Interest rates under the senior secured credit facility are, at our option,equal to either an alternate base rate or Eurocurrency base rate plus aspecified margin. At October 2, 2010, interest rates on the U.S. dollarterm loan and Eurodollar term loan were 2.26% and 2.58%, respectively.

 

Whenloans are outstanding under the revolving credit facility, we are required tomaintain a senior leverage ratio of indebtedness to Adjusted EBITDA of lessthan 3.00 to 1.00. At October 2, 2010, our senior leverage ratio was 1.70to 1.00 and, therefore, had no effect on borrowings available under therevolving credit facility.

 

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AdjustedEBITDA, as defined under the senior secured credit facility, was as follows:

 
| **(in millions)**                            | ** ** | **Twelve Months Ended  October 2, 2010** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Net loss                                          |       | $                                                            | (85.1      | ) |
| Add/Subtract:                                     |       |                                                         |       |
| Depreciation and amortization                     |       | 48.8                                                         |       |
| Interest expense, net                             |       | 49.5                                                         |       |
| Income taxes                                      |       | 15.0                                                         |       |
| Stock-based compensation                          |       | 2.3                                                          |       |
| Foreign currency gain                             |       | (1.4                                                         | )          |
| Loss on disposal of property, plant and equipment |       | 0.2                                                          |       |
| Business restructuring                            |       | 19.8                                                         |       |
| Gain on sale of Italian subsidiary                |       | (3.3                                                         | )          |
| Goodwill impairment                               |       | 131.5                                                        |       |
| Costs related to the FTC complaint                |       | 1.0                                                          |       |
| Other non-cash or non-recurring charges           |       | (0.3                                                         | )          |
| Adjusted EBITDA                                   |       | $                                                            | 178.0      |   |

 

Thecalculation of the senior leverage ratio as defined under the senior creditfacility as of October 2, 2010 is as follows:

 
| **(in millions)** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| Indebtedness (1)       |       | $          | 301.8      |   |
| Adjusted EBITDA        |       | $          | 178.0      |   |
| Actual leverage ratio  |       | 1.70x      |       |

 

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(1)          Calculated as the sum ofoutstanding borrowings under the senior secured credit facility, less theamount of cash on hand (not to exceed $50.0 million).

 

Thesenior secured credit agreement contains certain restrictive covenants which,among other things, limit capital spending, the incurrence of additionalindebtedness, investments, dividends, transactions with affiliates, assetsales, acquisitions, mergers and consolidations, prepayments of otherindebtedness, liens and encumbrances and other matters customarily restrictedin such agreements. The facilities also contain certain customary events ofdefault, subject to grace periods, as appropriate. We believe that annualcapital expenditure limitations imposed by the senior credit facilities willnot significantly inhibit us from meeting our ongoing capital expenditureneeds.

 

The8.75% senior subordinated notes ($430.9 million outstanding at October 2,2010) will mature in 2012 and are guaranteed by most of our existing and futuredomestic restricted subsidiaries, subject to certain exceptions. Except undercertain circumstances, the 8.75% senior subordinated notes do not requireprincipal payments prior to their maturity in 2012. Interest on the 8.75%senior subordinated notes is payable semi-annually. The 8.75% seniorsubordinated notes contain customary covenants and events of default, includingcovenants that limit our ability to incur debt, pay dividends and makeinvestments.

 

OnNovember 3, 2010, we issued a notice of redemption for $75.0 millionprincipal amount of our outstanding 8.75% senior subordinated dollar notes due2012 at a redemption price equal to $1,000 per $1,000 principal amount of thenotes, together with accrued and unpaid interest to the redemption date. The notes will be redeemed on December 3, 2010.

 

Futuredebt service payments are expected to be paid out of cash flows fromoperations, borrowings under our revolving credit facility and futurerefinancing of our debt. Our cash interest requirements for the next twelvemonths, including the impact of redeeming $75.0 million of outstanding 8.75%senior subordinated dollar notes on December 3, 2010, are estimated to be$41.1 million.

 

Asstated in the credit agreement, the term loans mature in July 2014 and therevolving credit facility matures in July 2013. The 8.75% seniorsubordinated notes mature on May 15, 2012. Because the senior subordinatednotes are subordinated to the senior secured credit facility, if any amountsare outstanding under the senior subordinated notes at February 1, 2012,the maturity dates for the term loans and the revolving credit facility will beaccelerated to February 1, 2012.

 

Webelieve we have sufficient liquidity to meet our cash requirements over boththe short (next twelve months) and long term (in relation to our debt servicerequirements). In evaluating the sufficiency of our liquidity, we consideredcash on hand, expected cash flow to be generated from operations and availableborrowings under our senior secured credit facility compared to our anticipatedcash requirements for debt service, working capital, cash taxes, capital expendituresand funding requirements for long-term liabilities. We anticipate that our cashon hand and operating cash flow, together with borrowings under the revolvingcredit facility, will be sufficient to meet our anticipated future operatingexpenses, capital expenditures and

 

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debtservice obligations as they become due for at least the nexttwelve months. However, our ability to make scheduled payments ofprincipal, to pay interest on or to refinance our indebtedness and to satisfyour other debt obligations will depend upon our future operating performance,which will be affected by general economic, financial, competitive,legislative, regulatory, business and other factors beyond our control. See “Item 1A.Risk Factors” in our most recent Annual Report on Form 10-K.

 

Fromtime to time, we may explore additional financing methods and other means tolower our cost of capital, which could include stock issuance or debt financingand the application of the proceeds therefrom to the repayment of bank debt orother indebtedness. In addition, in connection with any future acquisitions, wemay require additional funding which may be provided in the form of additionaldebt or equity financing or a combination thereof. There can be no assurancethat any additional financing will be available to us on acceptable terms or atall.

 

***Foreign Operations***

 

Wemanufacture our products at 14 strategically located facilities in NorthAmerica, Europe and Asia.  Net sales fromthe foreign locations were approximately $300.1 million and $242.7 million forthe nine months ended October 2, 2010 and October 3, 2009,respectively.  Typically, we sell ourproducts in the currency of the country where the manufacturing facility thatproduces the product is located.  Salesto foreign customers are subject to numerous additional risks, including theimpact of foreign government regulations, currency fluctuations, politicaluncertainties and differences in business practices.  There can be no assurance that foreigngovernments will not adopt regulations or take other action that would have adirect or indirect adverse impact on our business or market opportunitieswithin such governments’ countries. Furthermore, there can be no assurance that the political, cultural andeconomic climate outside the United States will be favorable to our operationsand growth strategy.

 

***Seasonality***

 

Operationsat our European production facilities are traditionally subjected to shutdownsduring the month of August each year for employee vacations.  In view of these seasonal fluctuations, webelieve that comparisons to our operating results for the third quarter of anyfiscal year with those of the other quarters during the same fiscal year may beof limited relevance in predicting our future financial performance.

 

**Environmentalmatters**

 

Environmentalobligations are accrued when such expenditures are probable and reasonablyestimable. The amount of liability recorded is based on currently availableinformation, including the progress of remedial investigations, current statusof discussions with regulatory authorities regarding the method and extent ofremediation, presently enacted laws and existing technology. Accruals forestimated losses from environmental obligations are adjusted as furtherinformation develops or circumstances change. Costs of future expenditures forenvironmental obligations are not discounted to their present value. We do notcurrently anticipate any material loss in excess of the amounts accrued.However, our future remediation expenses may be affected by a number ofuncertainties including, but not limited to, the difficulty in estimating theextent and method of remediation, the evolving nature of environmentalregulations and the availability and application of technology. We do notexpect the resolution of such uncertainties to have a material adverse effecton our consolidated financial position or liquidity. Recoveries ofenvironmental costs from other parties are recognized as assets when theirreceipt is deemed probable. At October 2, 2010, environmental reserves,which are predominately euro-denominated, were $17.1 million.

 

OnMarch 9, 2010, we sold 100% of the stock of our Italian subsidiary,Daramic S.r.l. As a result of the stock sale, the buyer acquired all assets andliabilities of Daramic S.r.l., including the Potenza, Italy facility andenvironmental obligations associated with the Potenza site. The buyer has fullyindemnified us with regard to environmental, health and safety matters relatedto this site.

 

Inconnection with the acquisition of Membrana in 2002, we recorded a reserve forenvironmental obligations. The reserve provides for costs to remediate knownenvironmental issues and operational upgrades which are required in order forus to remain in compliance with local regulations. The initial estimate andsubsequent finalization of the reserve was included in the allocation ofpurchase price at the date of acquisition. At October 2, 2010, theenvironmental reserve for the Membrana facility was $16.7 million. Weanticipate that expenditures will be made over the next seven to ten years.

 

Wehave indemnification agreements for certain environmental matters from AcordisA.G. (“Acordis”) and Akzo Nobel N.V. (“Akzo”), the prior owners ofMembrana. Akzo originally provided broad environmental protections to Acordiswith the right to assign such indemnities to Acordis’s successors. Akzo’sindemnifications relate to conditions existing prior to December 1999,which is the date that Membrana was sold to Acordis. In addition to the Akzoindemnification, Acordis provides separate indemnification of claims incurredfrom December 1999 through February 2002, the acquisition date. Wewill receive

 

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indemnificationpayments under the indemnification agreements as expenditures are made againstapproved claims. At October 2, 2010, amounts receivable under theindemnification agreements were $15.2 million.

 

Inconnection with the 2008 acquisition of Microporous, we identified potentialenvironmental contamination at the manufacturing site in Piney Flats,Tennessee. As part of the acquisition, the seller purchased an environmentalinsurance policy on our behalf. Subsequent to the acquisition, we performedadditional environmental studies and confirmed that environmental contaminationwas present.  The environmental reserve,net of related receivables from the insurance company, was $0.2 million at October 2,2010. We recorded the estimated cost of remediation and the related receivablesfrom the insurance company in the allocation of purchase price at the date ofacquisition.

 

**Off-BalanceSheet Arrangements**

 

Weare not a party to any off-balance sheet arrangements that have, or arereasonably likely to have, a material current or future effect on our financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

Weare exposed to various market risks, which are potential losses arising fromadverse changes in market rates and prices, such as interest rates and foreignexchange fluctuations. We do not enter into derivatives or other financialinstruments for trading or speculative purposes.

 

*Interest rate risk*

 

AtOctober 2, 2010, we had fixed rate debt of $430.9 million andvariable rate debt of $351.8 million. To reduce the interest rate risk inherentin our variable rate debt, we may utilize interest rate swap agreements toconvert all or a portion of the variable rate debt to a fixed rateobligation.  At October 2, 2010,there were no outstanding interest rate swap agreements.  The pre-tax earnings and cash flow impactresulting from a 100 basis point increase in interest rates on our variablerate debt, holding other variables constant, would be $3.5 million peryear.

 

*Currency risk*

 

Outsideof the United States, we maintain assets and operations in Europe and Asia. Theresults of operations and financial position of our foreign operations areprincipally measured in their respective currency and translated into U.S.dollars. As a result, exposure to foreign currency gains and losses exists. Thereported income of these subsidiaries will be higher or lower depending on aweakening or strengthening of the U.S. dollar against the respective foreigncurrency. Our subsidiaries and affiliates also purchase and sell products andservices in various currencies. As a result, we may be exposed to costincreases relative to the local currencies in the markets in which we sell.Because the percentage of our sales in foreign currencies differs from thepercentage of our costs in foreign currencies, a change in the relative valueof the U.S. dollar could have a disproportionate impact on our sales comparedto our costs, which could impact our margins. A portion of our assets are basedin our foreign locations and are translated into U.S. dollars at foreigncurrency exchange rates in effect as of the end of each period, with the effectof such translation reflected in accumulated other comprehensive income (loss).We have euro-denominated senior subordinated notes held in the U.S. thateffectively hedge our net investment in foreign subsidiaries. Foreign currencygains and losses resulting from the translation of the euro-denominated seniorsubordinated notes are included in accumulated other comprehensive income(loss). Accordingly, our consolidated shareholders’ equity will fluctuatedepending upon the weakening or strengthening of the U.S. dollar against therespective foreign currency, primarily the euro.

 

Thedollar/euro exchange rates used in our financial statements for the periodsended as set forth below were as follows:

 
| ** **                                     | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Period end rate                                |       | 1.3727                   |       | 1.4557                   |       |
| Period average rate for the three months ended |       | 1.2927                   |       | 1.4293                   |       |
| Period average rate for the nine months ended  |       | 1.3182                   |       | 1.3658                   |       |

 

Ourstrategy for management of currency risk relies primarily on conducting ouroperations in a country’s respective currency and may, from time to time, involvecurrency derivatives.  As of October 2,2010, we did not have any foreign currency derivatives outstanding.

 

**Item 4.  Controls and Procedures**

 

Anevaluation of the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) or 15d-15(e) promulgated under theExchange Act) was performed under the supervision, and with the participationof, our management,

 

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includingour Chief Executive Officer and Chief Financial Officer. Our disclosurecontrols are designed to ensure that information required to be disclosed inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission. Based upon our evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of October 2, 2010 toensure that information required to be disclosed in the reports that we fileunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andforms, and is accumulated and communicated to management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

Duringthe three months ended October 2, 2010, there has been no change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) or15d-15(f) promulgated under the Exchange Act) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

OnMarch 20, 2008, we received a letter from the United States Federal TradeCommission (the “FTC” or the “Commission”) requesting that we voluntarilyprovide certain documents and information to the FTC regarding our acquisitionof Microporous Holding Corporation, the parent company of Microporous ProductsL.P. (“Microporous”), which was completed on February 29, 2008. The letterstated that the FTC was conducting an investigation to determine whether theMicroporous acquisition will substantially lessen competition in any relevantmarket and thereby violate federal antitrust laws. We voluntarily responded tothe letter in writing and through supplemental telephone conversations andmeetings.

 

OnApril 7, 2008, we and our wholly-owned subsidiary, Daramic LLC, eachreceived from the FTC a subpoena and interrogatories requesting substantiallysimilar documents and information as requested in the FTC’s initial letter, aswell as additional documents and information. We responded fully to thisrequest and met on several occasions with various members of the FTC staff andCommissioners in an effort to answer their questions and resolve theinvestigation.

 

OnSeptember 9, 2008, the FTC issued an administrative complaint against usalleging that our actions and the acquisition of Microporous have substantiallylessened competition in North American markets for lead-acid batteryseparators. We filed an answer to the complaint on October 15, 2008denying the material allegations of the complaint. The matter was presentedbefore an Administrative Law Judge (“ALJ”) of the FTC and the hearing concludedon June 12, 2009. In October 2009, the ALJ granted our request tore-open the record to take additional evidence. On February 22, 2010, the FTC’s ALJ issued an initial decision inwhich he recommended to the Commission that it order us to divest substantiallyall of the acquired Microporous assets, which includes the manufacturingfacilities located in Piney Flats, Tennessee and Feistritz, Austria and restorethe competitive environment to that which existed prior to the acquisition,while ruling in our favor on other portions of the complaint.  On March 15, 2010, we filed a Notice ofAppeal with the Commission.  Oralargument for the appeal was heard by the Commission on July 28, 2010 andwe are awaiting a ruling on the appeal.

 

We believe that the initial decision is inconsistent with the law andthe facts presented at the hearing and that the Microporous acquisition is andwill continue to be beneficial to our customers and the industry. Therefore, weintend to continue to vigorously defend our position and to pursue an appeal ofthe decision. It is not possible, however, to predict with certainty whether wewill be successful in the appellate process or the timing of a final decision.If the FTC and the appellate courts affirm the ALJ’s initial decision, then wemay be required to divest some or all of the assets acquired in the Microporousacquisition and we may be subject to some prospective restrictions on ourfuture conduct.

 

Webelieve that the final resolution of this matter will not have a materialadverse impact on our business, financial condition or results of operations.

 

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**Item 6.    Exhibits**

 
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                              |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                      |
| 31.1                 |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 31.2                 |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 32.1                 |       | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
| 32.2                 |       | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Date:  November 4, 2010 |   | **POLYPORE  INTERNATIONAL, INC.**                          |
|------------------------------|--------|-----------------------------------------------------------------|
|                         |   | (Registrant)                                                    |
|                         |   |                                                            |
|                         |   |                                                            |
|                         | By:    | /s/ Robert B. Toth                                              |
|                         |   | Robert B. Toth                                                  |
|                         |   | President  and Chief Executive Officer                          |
|                         |   | (principal  executive officer)                                  |
|                         |   |                                                            |
|                         |   |                                                            |
|                         | By:    | /s/ Lynn Amos                                                   |
|                         |   | Lynn  Amos                                                      |
|                         |   | Chief  Financial Officer                                        |
|                         |   | (principal  financial officer and principal accounting officer) |

 

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