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**UNITED STATES**

**SECURITIES 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 April 3, 2010**

 

**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**

 

**POLYPORE INTERNATIONAL, INC.**

(Exact Name of Registrantas 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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.   x Yes  o No

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate website, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).   o Yes  o No

 

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

 

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

 

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

 

There were 44,504,177shares of the registrant’s common stock outstanding as of May 3, 2010.

 

 

 

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**Polypore International, Inc.**

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

**For the Three Months Ended April 3, 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 | 17       |
| **Item 3.**      | Quantitative  and Qualitative Disclosures About Market Risk                                 | 25       |
| **Item 4.**      | Controls and  Procedures                                                                    | 25       |
|             |                                                                                        |     |
| **PART II** | **OTHER INFORMATION**                                                                       |     |
| ** **       | ** **                                                                                  |     |
| **Item 1.**      | Legal Proceedings                                                                           | 26       |
| **Item 6.**      | Exhibits                                                                                    | 27       |
|             |                                                                                        |     |
| **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-looking Statements**

 

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, the financialcondition, results of operations and business of Polypore International and itssubsidiaries.  We have identified some ofthese 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 be contained under the captions “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” or “Controlsand Procedures,” the Company’s financial statements or the notes thereto orelsewhere in this Quarterly Report on 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 competitive nature of the markets in whichwe sell our products;

·                  the failure to continue to develop innovativeproducts;

·                  the loss of our customers;

·                  the vertical integration by our customers of theproduction of our products into their own manufacturing process;

·                  increases in prices for raw materials or the loss ofkey supplier contracts;

·                  our substantial indebtedness;

·                  interest rate risk related to our variable rateindebtedness;

·                  our inability to generate cash;

·                  restrictions related to the senior secured creditfacilities;

·                  employee slowdowns, strikes or similar actions;

·                  product liability claims exposure;

·                  risks in connection with our operations outside theUnited States;

·                  the incurrence of substantial costs to comply with, oras a result of violations of, or liabilities under environmental laws;

·                  the failure to protect our intellectual property;

·                  the loss of senior management;

·                  the incurrence of additional debt, contingentliabilities and expenses in connection with futureacquisitions;

·                  the failure to effectively integrate newly acquiredoperations;

·                  the adverse impact on our financial condition ofrestructuring activities;

·                  the absence of expected returns from the amount ofintangible assets we have recorded;

·                  the adverse impact from legal proceedings on ourfinancial condition;

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

·                  economic uncertainty and the current crisis in globalcredit and financial markets.

 

Becauseour actual results, performance or achievements could differ materially fromthose expressed in, or implied by, the forward-looking statements, we cannotgive any assurance that any of the events anticipated by the forward-lookingstatements will occur or, if any of them do, what impact they will have onPolypore International’s results of operations and financial condition.  You are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date of thisQuarterly Report on Form 10-Q.  Wedo not undertake any obligation to update these forward-looking statements toreflect new information, future events or otherwise, except as may be requiredunder federal securities laws.

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**PolyporeInternational, Inc.**

**CondensedConsolidated Balance Sheets**

* *
| **(in thousands, except share data)**                                                                                                                               | ** ** | **April 3, 2010****(unaudited)** | ** **    | **January 2, 2010*** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|---------------|---------------------------|------------|
| **Assets**                                                                                                                                                          |       |                                  |          |                      |       |
| Current  assets:                                                                                                                                                    |       |                                  |          |                      |       |
| Cash  and cash equivalents                                                                                                                                          | ** ** | **$**                                 | **126,745**   |                      | $          | 114,975 |   |
| Accounts  receivable, net                                                                                                                                           | ** ** | **97,878**                            |          | 107,122                   |       |
| Inventories                                                                                                                                                         | ** ** | **71,517**                            |          | 72,498                    |       |
| Deferred  income taxes                                                                                                                                              | ** ** | **1,892**                             |          | 1,791                     |       |
| Prepaid  and other                                                                                                                                                  | ** ** | **14,111**                            |          | 15,373                    |       |
| Total  current assets                                                                                                                                               | ** ** | **312,143**                           |          | 311,759                   |       |
| Property,  plant and equipment, net                                                                                                                                 | ** ** | **381,625**                           |          | 388,036                   |       |
| Goodwill                                                                                                                                                            | ** ** | **469,319**                           |          | 469,319                   |       |
| Intangibles  and loan acquisition costs, net                                                                                                                        | ** ** | **160,252**                           |          | 165,971                   |       |
| Environmental  indemnification receivable                                                                                                                           | ** ** | **14,038**                            |          | 14,667                    |       |
| Other                                                                                                                                                               | ** ** | **2,734**                             |          | 2,841                     |       |
| Total  assets                                                                                                                                                       | ** ** | **$**                                 | **1,340,111** |                      | $          | 1,352,593 |   |
|                                                                                                                                                                | ** ** | ** **                            |          |                      |       |
| **Liabilities and shareholders’ equity**                                                                                                                       | ** ** | ** **                            |          |                      |       |
| Current  liabilities:                                                                                                                                               | ** ** | ** **                            |          |                      |       |
| Accounts  payable                                                                                                                                                   | ** ** | **$**                                 | **20,655**    |                      | $          | 17,570 |   |
| Accrued  liabilities                                                                                                                                                | ** ** | **69,175**                            |          | 59,835                    |       |
| Income  taxes payable                                                                                                                                               | ** ** | **3,478**                             |          | 608                       |       |
| Current  portion of debt                                                                                                                                            | ** ** | **3,703**                             |          | 10,860                    |       |
| Total  current liabilities                                                                                                                                          | ** ** | **97,011**                            |          | 88,873                    |       |
| Debt,  less current portion                                                                                                                                         | ** ** | **777,386**                           |          | 792,573                   |       |
| Pension  and postretirement benefits, less current portion                                                                                                          | ** ** | **60,457**                            |          | 66,269                    |       |
| Environmental  reserve, less current portion                                                                                                                        | ** ** | **9,840**                             |          | 30,412                    |       |
| Deferred  income taxes                                                                                                                                              | ** ** | **70,212**                            |          | 74,160                    |       |
| Other                                                                                                                                                               | ** ** | **14,712**                            |          | 15,961                    |       |
| Commitments  and contingencies                                                                                                                                      | ** ** | ** **                            |          |                      |       |
|                                                                                                                                                                | ** ** | ** **                            |          |                      |       |
| Shareholders’  equity:                                                                                                                                         | ** ** | ** **                            |          |                      |       |
| Preferred  stock – 15,000,000 shares authorized, no shares issued and outstanding                                                                              | ** ** | **—**                            | ** **    | **—**                | ** ** |
| Common  stock, $.01 par value – 200,000,000 shares authorized, 44,504,177 and  44,417,326 issued and outstanding at April 3, 2010 andJanuary 2, 2010 | ** ** | **445**                               |          | 444                       |       |
| Paid-in  capital                                                                                                                                                    | ** ** | **482,414**                           |          | 481,248                   |       |
| Accumulated  deficit                                                                                                                                                | ** ** | **(166,450**                          | **)**         | (183,998                  | )          |
| Accumulated  other comprehensive loss                                                                                                                               | ** ** | **(5,916**                            | **)**         | (13,349                   | )          |
| Total  shareholders’ equity                                                                                                                                    | ** ** | **310,493**                           |          | 284,345                   |       |
| Total  liabilities and shareholders’ equity                                                                                                                    | ** ** | **$**                                 | **1,340,111** |                      | $          | 1,352,593 |   |

 

----

* Derived fromaudited consolidated financial statements

 

*See notes to condensed consolidatedfinancial statements*

 

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**PolyporeInternational, Inc.**

**Condensed Consolidated Statements ofIncome (unaudited)**

 
| ** **                                                         | ** ** | **Three Months Ended** | ** **  |
|--------------------------------------------------------------------|------------|----------------------------------|-------------|
| **(in thousands, except per share data)** | ** ** | **April 3, 2010**      | ** **  | **April 4, 2009** | ** ** |
| Net  sales                                                         | ** ** | **$**                            | **145,339** |   | $ | 108,910 |   |
| Cost  of goods sold                                                | ** ** | **87,000**                       |        | 65,507 |   |
| Gross  profit                                                      | ** ** | **58,339**                       |        | 43,403 |   |
| Selling,  general and administrative expenses                      | ** ** | **27,267**                       |        | 25,200 |   |
| Business  restructuring                                            | ** ** | **455**                          |        | 555 |   |
| Operating  income                                                  | ** ** | **30,617**                       |        | 17,648 |   |
| Other  (income) expense:                                           | ** ** | ** **                       |        |   |   |
| Interest  expense, net                                             | ** ** | **12,277**                       |        | 14,147 |   |
| Gain  on sale of Italian subsidiary                                | ** ** | **(3,327**                       | **)**       | **—** | ** ** |
| Foreign  currency and other                                        | ** ** | **(452**                         | **)**       | (488 | ) |
|                                                               | ** ** | **8,498**                        |        | 13,659 |   |
| Income  before income taxes                                        | ** ** | **22,119**                       |        | 3,989 |   |
| Income  taxes                                                      | ** ** | **4,571**                        |        | 1,028 |   |
| Net  income                                                        | ** ** | **$**                            | **17,548**  |   | $ | 2,961 |   |
|                                                               | ** ** | ** **                       |        |   |   |
| Net  income per share – basic                                 | ** ** | **$**                            | **0.39**    |   | $ | 0.07 |   |
|                                                               | ** ** | ** **                       |        |   |   |
| Net  income per share – diluted                               | ** ** | **$**                            | **0.38**    |   | $ | 0.07 |   |
|                                                               | ** ** | ** **                       |        |   |   |
| Weighted  average shares outstanding:                              | ** ** | ** **                       |        |   |   |
| Basic                                                              | ** ** | **44,445,282**                   |        | 44,374,684 |   |
| Diluted                                                            | ** ** | **45,681,835**                   |        | 44,396,392 |   |

 

*Seenotes to condensed consolidated financial statements*

 

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**PolyporeInternational, Inc.**

**CondensedConsolidated Statements of Cash Flows (unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** **  |
|------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| **(in thousands)**                                                            | ** ** | **April 3, 2010**      | ** **  | **April 4, 2009** | ** ** |
| **Operating activities:**                                                          |       |                             |        |   |   |
| Net  income                                                                        | ** ** | **$**                            | **17,548**  |   | $ | 2,961 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: | ** ** | ** **                       |        |   |   |
| Depreciation  expense                                                              | ** ** | **8,074**                        |        | 8,579 |   |
| Amortization  expense                                                              | ** ** | **4,131**                        |        | 4,323 |   |
| Amortization  of loan acquisition costs                                            | ** ** | **647**                          |        | 647 |   |
| Stock-based  compensation                                                          | ** ** | **528**                          |        | 308 |   |
| Loss  on disposal of property, plant and equipment                                 | ** ** | **33**                           |        | 123 |   |
| Foreign  currency gain                                                             | ** ** | **(588**                         | **)**       | (622 | ) |
| Deferred  income taxes                                                             | ** ** | **338**                          |        | (1,462 | ) |
| Business  restructuring                                                            | ** ** | **455**                          |        | 555 |   |
| Gain  on sale of Italian subsidiary                                                | ** ** | **(3,327**                       | **)**       | **—** | ** ** |
| Changes  in operating assets and liabilities:                                      | ** ** | ** **                       |        |   |   |
| Accounts  receivable                                                               | ** ** | **6,491**                        |        | 12,867 |   |
| Inventories                                                                        | ** ** | **(1,020**                       | **)**       | (11,485 | ) |
| Prepaid  and other current assets                                                  | ** ** | **(1,059**                       | **)**       | 1,233 |   |
| Accounts  payable and accrued liabilities                                          | ** ** | **13,499**                       |        | (7,345 | ) |
| Income  taxes payable                                                              | ** ** | **815**                          |        | 5,166 |   |
| Other,  net                                                                        | ** ** | **1,187**                        |        | (1,039 | ) |
| Net cash provided by operating activities                                          | ** ** | **47,752**                       |        | 14,809 |   |
| **Investing activities:**                                                          | ** ** | ** **                       |        |   |   |
| Purchases  of property, plant and equipment                                        | ** ** | **(11,963**                      | **)**       | (2,612 | ) |
| Net  payments associated with stock sale of Italian subsidiary                     | ** ** | **(14,908**                      | **)**       | **—** | ** ** |
| Net cash used in investing activities                                              | ** ** | **(26,871**                      | **)**       | (2,612 | ) |
| **Financing activities:**                                                          | ** ** | ** **                       |        |   |   |
| Principal  payments on debt                                                        | ** ** | **(8,056**                       | **)**       | (1,293 | ) |
| Proceeds  from stock option exercises                                              | ** ** | **637**                          | ** **  | **—** | ** ** |
| Net  cash used in financing activities                                             | ** ** | **(7,419**                       | **)**       | (1,293 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                      | ** ** | **(1,692**                       | **)**       | 2,148 |   |
| **Net increase in cash and cash equivalents**                                      | ** ** | **11,770**                       |        | 13,052 |   |
| Cash  and cash equivalents at beginning of period                                  | ** ** | **114,975**                      |        | 83,021 |   |
| **Cash and cash equivalents at end of the period**                                 | ** ** | **$**                            | **126,745** |   | $ | 96,073 |   |

 

*See notes to condensedconsolidated financial statements*

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**(unaudited)**

 

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

 

**Description of Business**

 

Polypore International, Inc.(the “Company”) is a leading global high technology filtration company thatdevelops, manufactures and markets specialized microporous membranes used inseparation and filtration processes. The Company has a global presence in themajor geographic markets of North America, South America, Europe and Asia.

 

**Basisof Presentation**

 

**Theaccompanying unaudited condensed consolidated financial statements of theCompany are prepared in accordance with U.S. generally accepted accountingprinciples for interim financial information. Accordingly, the unaudited condensed consolidated financial statementsand notes do not contain certain information included in the Company’s annualfinancial statements. In the opinion of management, all normal and recurringadjustments that are necessary for a fair presentation have been made.  Operating results for the three months ended April 3,2010 are not necessarily indicative of the results that may be expected for thefiscal year ending January 1, 2011. The unaudited condensed consolidated financial statements should be readin conjunction with the consolidated financial statements in the Company’sAnnual Report on Form 10-K for the fiscal year ended January 2, 2010.**

 

**2**.             Inventories

 

**Inventoriesare carried at the lower of cost or market using the first-in, first-out (“FIFO”)method of accounting and consist of:**

 
| **(in thousands)** | ** ** | **April  3, 2010** | ** ** | **January 2, 2010** | ** ** |
|--------------------|------------|-------------------------|------------|--------------------------|------------|
| Raw materials      | ** ** | **$**                   | **27,230** |                     | $          | 30,466 |   |
| Work-in-process    | ** ** | **14,496**              |       | 15,909                   |       |
| Finished  goods    | ** ** | **29,791**              |       | 26,123                   |       |
| Total              | ** ** | **$**                   | **71,517** |                     | $          | 72,498 |   |

 

**3.             Debt**

 

**Debt,in order of priority, consists of:**

 
| **(in thousands)**               | ** ** | **April  3, 2010** | ** **  | **January 2, 2010** | ** ** |
|----------------------------------|------------|-------------------------|-------------|--------------------------|------------|
| Senior  credit facilities:       |       |                    |        |                     |       |
| Revolving  credit facility       | ** ** | **$**                   | **—**  | ** **               | **$**      | **—** | ** ** |
| Term  loan facilities            | ** ** | **352,974**             |        | 363,678                  |       |
| 8.75%  senior subordinated notes | ** ** | **428,115**             |        | 439,755                  |       |
|                             | ** ** | **781,089**             |        | 803,433                  |       |
| Less  current maturities         | ** ** | **3,703**               |        | 10,860                   |       |
| Long-term  debt                  | ** ** | **$**                   | **777,386** |                     | $          | 792,573 |   |

 

**4.             Derivatives and HedgingTransactions**

 

**To reduce the interest rate risk inherent in the Company’s variablerate debt, the Company may utilize interest rate swap agreements to convert allor a portion of the variable rate debt to a fixed rate obligation.  In January 2008, the Company enteredinto two interest rate swap agreements that effectively fixed the interest rateon a portion of its term debt.  Theinterest rate swap agreements had notional amounts of $50,000,000 and$200,000,000 and expired on June 30, 2009 and December 31, 2009,respectively.  The Company designatedthese swap agreements as cash flow hedges with changes in fair value, net ofincome taxes, recorded to “Accumulated other comprehensive loss” in thecondensed consolidated balance sheets. In the three months ended April 4, 2009, the Company recognizedadditional interest expense of $1,776,000, representing the difference betweenthe fixed interest rate on the swap agreements and the variable interest rateon the term debt.**

** **

**The Company has euro-denominated senior subordinated notes(€150,000,000, or $203,115,000, at April 3, 2010)**held in the U.S. thateffectively 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 areincluded in “Accumulated other comprehensive loss” in the accompanying balancesheets.

** **

**Theimpact of changes in the fair value of the**

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**interestrate swap agreements and translation of euro-denominated**senior subordinated noteson other comprehensive income is as follows:

 
| ** **                                  | ** ** | **Gain Recognized in Other  Comprehensive Income** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                  | ** ** | **Three Months Ended**                             | ** ** |
| **(in  thousands)**                         | ** ** | **April  3, 2010**                            | ** ** | **April 4, 2009** | ** ** |
| Euro-denominated  senior subordinated notes | ** ** | **$**                                              | **11,640** |   | $ | 7,230 | ** ** |
| Interest  rate swap agreements              | ** ** | **—**                                         |       | 733 | ** ** |
|                                             |            |                                                    |            |  |  |  |  |

 

**5.             Fair Value of Financial Instruments**

 

The Company’s financialinstruments include cash and cash equivalents, accounts receivable, accountspayable, 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 carrying amountof the 8.75% senior subordinated notes approximates fair value because thenotes, based on a quoted market price, were trading at par value at April 3,2010.

 

**6.             Employee Benefit Plans**

 

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

 
| ** **                            | ** ** | **Pension Plans**       | ** ** | **Other Postretirement Benefits** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **Three Months Ended**  | ** ** | **Three Months Ended**            | ** ** |
| **(in thousands)**                    | ** ** | **April  3, 2010** | ** ** | **April 4, 2009**            | ** ** | **April  3, 2010** | ** ** | **April 4, 2009** | ** ** |
| Service  cost                         | ** ** | **$**                   | **351**    |                              | $          | 520 | ** ** | **$** | **3** |   | $ | 4 |   |
| Interest  cost                        | ** ** | **1,155**               |       | 984                               | ** ** | **34** |   | 30 |   |
| Expected  return on plan assets       | ** ** | **(199**                | **)**      | (220                              | )          | **—** |   | — |   |
| Amortization  of prior service cost   | ** ** | **(13**                 | **)**      | (18                               | )          | — |   | — |   |
| Recognized  net actuarial (gain) loss | ** ** | **(6**                  | **)**      | 189                               | ** ** | **3** |   | — |   |
| Net  periodic benefit cost            | ** ** | **$**                   | **1,288**  |                              | $          | 1,455 | ** ** | **$** | **40** |   | $ | 34 |   |

 

**7.             Environmental Matters**

 

Environmental obligationsare accrued when such expenditures are probable and reasonably estimable. Theamount of liability recorded is based on currently available information,including the progress of remedial investigations, current status ofdiscussions 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. TheCompany does not currently anticipate any material loss in excess of theamounts 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 $20,400,000 and $45,397,000 as of April 3,2010 and January 2, 2010, respectively.

 

On March 9, 2010,the Company sold 100% of the stock of its Italian subsidiary, Daramic S.r.l.,(Note 15). 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 of $22,291,000 associated with the Potenza site. Thebuyer has fully indemnified the Company with regard to environmental, healthand safety 

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

matters related to thissite.

 

In connection with theacquisition of Membrana GmbH (“Membrana”) in 2002, the Company recorded areserve for environmental obligations. The reserve provides for costs toremediate known environmental issues and operational upgrades which arerequired 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 $18,484,000 and$19,852,000 at April 3, 2010 and January 2, 2010, respectively. TheCompany anticipates that expenditures will be made over the next seven to tenyears.

 

The Company hasindemnification agreements for certain environmental matters from Acordis A.G.(“Acordis”) and Akzo Nobel N.V. (“Akzo”), the prior owners of Membrana. Akzooriginally provided broad environmental protections to Acordis with the rightto assign such indemnities to Acordis’s successors. Akzo’s indemnificationsrelate to conditions existing prior to December 1999, which is the date thatMembrana was sold to Acordis. In addition to the Akzo indemnification, Acordisprovides separate indemnification of claims incurred from December 1999through February 2002, the acquisition date. The Company will receiveindemnification payments under the indemnification agreements as expendituresare made against approved claims. Amounts receivable under the indemnificationagreements were $15,008,000 and $17,618,000 at April 3, 2010 and January 2,2010, respectively. The current portion of the indemnification receivable isincluded in “Prepaid and other” in the accompanying condensed consolidatedbalance sheets.

 

In connection with the2008 acquisition of Microporous Holding Corporation (“Microporous”), theCompany identified potential environmental contamination at the manufacturingsite in Piney Flats, Tennessee. As part of the acquisition, the sellerpurchased an environmental insurance policy on behalf of the Company.Subsequent to the acquisition, the Company performed additional environmentalstudies and confirmed that environmental contamination was present.  The environmental reserve for the PineyFlats, Tennessee facility was $1,916,000 and $1,949,000 at April 3, 2010and January 2, 2010, respectively.  The Company recorded the estimated cost of remediation and the relatedreceivables from the insurance company in the allocation of purchase price atthe date of acquisition. The receivable balance at April 3, 2010 and January 2,2010 was $1,449,000. The current portion of the receivable is included in “Prepaidand other” in the accompanying condensed consolidated balance sheets.

 

**8.             Business Restructuring**

 

**2009Restructuring Plan**

 

In 2009, the NorthAmerican market for lead-acid battery separators had significant excesscapacity and a highly consolidated customer base.  As a result of these factors and managementestimates about future demand requirements in North America, the Companyimplemented a restructuring plan in its energy storage segment to better alignlead-acid battery separator production capacity with demand in North America.

 

The restructuringplan included idling capacity and reducing headcount at the Company’smanufacturing facility in Owensboro, Kentucky. The total estimated cost of the plan is expected to be approximately$23,225,000, of which $20,314,000 has been recognized.  The total cost includes estimated cashcharges of $3,329,000 for severance and other exit costs and a non-cashimpairment charge of $19,896,000 for buildings and equipment. The timing, scopeand cash costs associated with the plan are subject to change as the Companyimplements the plan and continues to evaluate its business needs and costs. TheCompany currently estimates that total severance costs will be $370,000, ofwhich $60,000 has been recognized through April 3, 2010.  The Company estimates that other exit costs,consisting of costs associated with idling the Owensboro facility, are expectedto be $2,959,000, of which $358,000 has been recognized through April 3,2010 and the remainder will be recognized over the next three years.  

 

**2008Restructuring Plan**

 

A supply contract betweenthe Company’s lead-acid battery separator business and a large customer expiredon December 31, 2008 and was not renewed. In response, the Companyimplemented a restructuring plan in the fourth quarter of 2008 for its energystorage segment to align lead-acid battery separator production capacity withdemand, reduce costs and position the Company to meet future growthopportunities.

 

The plan included closingthe Company’s facility in Potenza, Italy, streamlining production at theCompany’s facility in Owensboro, Kentucky and reducing selling, general andadministrative resources associated with the lead-acid battery 

 

9

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Table of Contents

 

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

separator business.  The total cost of the restructuring plan was$61,407,000. The restructuring plan included costs associated with closing thePotenza, Italy facility, the termination of production employees at Potenza,Italy and Owensboro, 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 March9, 2010, the Company sold 100% of the stock of its Italian subsidiary, DaramicS.r.l. (Note 15). As a result of the stock sale, the buyer acquired all of theassets and liabilities of Daramic S.r.l., including restructuring obligations associatedwith the Potenza, Italy facility of $7,207,000, consisting primarily ofseverance payments due to terminated employees.

 

**2006Restructuring Plan**

 

In December 2006,the Company’s separations media segment exited the production of cellulosicmembranes and realigned the cost structure at its Wuppertal, Germany facility.The total cost of the plan was $33,753,000, consisting of a $17,492,000non-cash impairment charge for buildings and equipment, $10,466,000 foremployee layoffs and $5,795,000 for other costs related to the shutdown ofportions of the Wuppertal facility.

 

Restructuring reserveactivity during the three months ended April 3, 2010, including the impactof 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  April 3,  2010** | ** ** |
|---------------------------|------------|---------------------------------------|------------|----------------------------|------------|------------|------------|--------------------|------------|------------------------------------|------------|-------------------------------------|------------|
| 2009  Restructuring Plan: |       |                                  |       |                       |       |       |       |               |       |                               |       |                                |       |
| Severance  and benefits   | ** ** | **$**                                 | **132**    | ** **                 | **$**      | **(72**    | **)**      | **$**              | **—** | ** **                         | **$**      | **(60**                             | **)**      | **$** | **—** | ** ** | **$** | **—** | ** ** |
| Other                     | ** ** | **—**                            | ** ** | **285**                    | ** ** | **—** | ** ** | **(285**           | **)**      | **—**                         | ** ** | **—**                          | ** ** |
|                      | ** ** | **132**                               | ** ** | **213**                    | ** ** | **—** | ** ** | **(345**           | **)**      | **—**                         | ** ** | **—**                          | ** ** |
| 2008  Restructuring Plan: |       |                                  |       |                       |       |       |       |               |       |                               |       |                                |       |
| Severance  and benefits   | ** ** | **7,312**                             | ** ** | **—**                 | ** ** | **(6,616** | **)**      | **(207**           | **)**      | **(358**                           | **)**      | **131**                             | ** ** |
| Other                     | ** ** | **617**                               | ** ** | **242**                    | ** ** | **(591**   | **)**      | **(242**           | **)**      | **(26**                            | **)**      | **—**                          | ** ** |
|                      | ** ** | **7,929**                             | ** ** | **242**                    | ** ** | **(7,207** | **)**      | **(449**           | **)**      | **(384**                           | **)**      | **131**                             | ** ** |
| 2006  Restructuring Plan: |       |                                  |       |                       |       |       |       |               |       |                               |       |                                |       |
| Severance  and benefits   | ** ** | **2,674**                             | ** ** | **—**                 | ** ** | **—** | ** ** | **(85**            | **)**      | **(143**                           | **)**      | **2,446**                           | ** ** |
|                      | ** ** | ** **                            | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                          | ** ** |
| Total                     | ** ** | **$**                                 | **10,735** | ** **                 | **$**      | **455**    | ** ** | **$**              | **(7,207** | **)**                              | **$**      | **(879**                            | **)**      | **$** | **(527** | **)** | **$** | **2,577** | ** ** |

 

**9**.             Income Taxes

 

The income taxprovision for the interim periods presented is computed at the effective rateexpected to be applicable in each respective full year using the statutoryrates 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 three months ended April 3, 2010, the Company’seffective tax rate was also impacted by the sale of its Italian subsidiary,Daramic S.r.l.

 

**10.          Acquisitions**

 

In December 2009,the Company acquired the remaining 40% noncontrolling interest in Daramic NSGTianjin PE Separator Co., Ltd. (“DNPET”) for $3,600,000. DNPET is a lead-acidbattery separator manufacturing facility located in Tianjin, China.  The purchase price in excess of the carryingamount of the noncontrolling interest was recorded as additional paid-incapital.

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**11.          Comprehensive Income**

 

**Comprehensiveincome is as follows:**

 
| ** **                                                               | ** ** | **Three Months Ended**  | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| **(in thousands)**                                                       | ** ** | **April  3, 2010** | ** ** | **April 4, 2009** | ** ** |
|                                                                     |       |                    |       |   |   |
| Net  income                                                              | ** ** | **$**                   | **17,548** |   | $ | 2,961 |   |
| Foreign  currency translation adjustment, net of deferred taxes          | ** ** | **7,388**               |       | 3,154 |   |
| Net  actuarial loss and prior service credit, net of deferred taxes      | ** ** | **45**                  |       | 145 |   |
| Unrealized  gain on interest rate swap agreements, net of deferred taxes | ** ** | **—**              |       | 733 |   |
| Comprehensive  income                                                    | ** ** | **$**                   | **24,981** |   | $ | 6,993 |   |

 

**12.          Related Party Transactions**

 

**TheCompany’s German subsidiary has equity investments in two companies** thatprovide patent, trademark and research services for the Company.  The investments represent 25% ownership ineach of the firms and are accounted for by the equity method ofaccounting.  The Company’s equityinvestment account balance was $405,000 and $434,000 at April 3, 2010 and January 2,2010, respectively.  Charges from theaffiliates for work performed were $381,000 and $107,000 for the three monthsended April 3, 2010 and April 4, 2009, respectively.  Amounts due to the affiliates were $44,000and $123,000 at April 3, 2010 and January 2, 2010, respectively.

 

**13.          Segment Information**

 

The Company’s operationsare principally managed on a products basis and are comprised of threeoperating segments that have been aggregated into two reportable segments:energy storage and separations media. The energy storage segment produces andmarkets membranes that provide the critical function of separating the cathodeand anode in a variety of battery markets, including lithium, industrial andtransportation applications. The separations media segment produces and marketsmembranes used as the high technology filtration element in various medical andindustrial applications.

 

The Company evaluates theperformance of segments and allocates resources to segments based on operatingincome before interest, income taxes, depreciation and amortization. Inaddition, it evaluates business segment performance before businessrestructuring charges and the impact of certain non-recurring costs, includingcosts associated with the FTC complaint. Financial information relating to thereportable operating segments is presented below:

 

11

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** **  |
|------------------------------------------------------------|------------|----------------------------------|-------------|
| **(in thousands)**                                    | ** ** | **April 3, 2010**      | ** **  | **April 4, 2009** | ** ** |
| Net  sales to external customers (by major product group): | ** ** | ** **                       | ** **  | ** ** | ** ** |
| Lead-acid  battery separators                              | ** ** | **$**                            | **71,013**  |   | $ | 56,443 |   |
| Lithium  battery separators                                | ** ** | **30,399**                       |        | 17,303 |   |
| Energy  storage                                            | ** ** | **101,412**                      |        | 73,746 |   |
| Healthcare                                                 | ** ** | **28,925**                       |        | 24,948 |   |
| Filtration  and specialty                                  | ** ** | **15,002**                       |        | 10,216 |   |
| Separations  media                                         | ** ** | **43,927**                       |        | 35,164 |   |
| Total  net sales to external customers                     | ** ** | **$**                            | **145,339** |   | $ | 108,910 |   |
|                                                       | ** ** | ** **                       |        |   |   |
| Operating  income:                                         | ** ** | ** **                       |        |   |   |
| Energy  storage                                            | ** ** | **$**                            | **19,368**  |   | $ | 9,289 |   |
| Separations  media                                         | ** ** | **12,482**                       |        | 9,964 |   |
| Corporate                                                  | ** ** | **(528**                         | **)**       | (308 | ) |
| Segment  operating income                                  | ** ** | **31,322**                       |        | 18,945 |   |
| Business  restructuring                                    | ** ** | **455**                          |        | 555 |   |
| Non-recurring  costs                                       | ** ** | **250**                          |        | 742 |   |
| Total  operating income                                    | ** ** | **30,617**                       |        | 17,648 |   |
| Reconciling  items:                                        | ** ** | ** **                       |        |   |   |
| Interest  expense, net                                     | ** ** | **12,277**                       |        | 14,147 |   |
| Gain  on sale of Italian subsidiary                        | ** ** | **(3,327**                       | **)**       | — |   |
| Foreign  currency and other                                | ** ** | **(452**                         | **)**       | (488 | ) |
| Income  before income taxes                                | ** ** | **$**                            | **22,119**  |   | $ | 3,989 |   |
|                                                       | ** ** | ** **                       |        |   |   |
| Depreciation  and amortization:                            | ** ** | ** **                       |        |   |   |
| Energy  storage                                            | ** ** | **$**                            | **8,539**   |   | $ | 8,930 |   |
| Separations  media                                         | ** ** | **3,666**                        |        | 3,972 |   |
| Total  depreciation and amortization                       | ** ** | **$**                            | **12,205**  |   | $ | 12,902 |   |

 

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

 

On February 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 productioncapacity.  The Company recognizes grantawards when qualifying expenditures are incurred.  For capital expenditures, the Company deductsgrant awards from the cost of the related asset.  Reimbursements of direct and indirectexpenses are recorded as a reduction of the related expenses.

 

For the quarter ended April 3,2010, the Company recognized grant awards for capital expenditures of$2,384,000 and direct and indirect expenses of $873,000.  Amounts due from the DOE for grant awards atApril 3, 2010 and January 2, 2010 were $5,976,000 and $2,718,000, respectively,and are classified as “Prepaid and other” in the accompanying condensedconsolidated balance sheets.

 

**15.          Sale of Italian Subsidiary**

 

On March 9, 2010,the Company sold 100% of the stock of its wholly-owned Italian subsidiary,Daramic S.r.l., for $18,175,000.  TheCompany recognized a gain of $3,327,000 on the sale, net of direct transactioncosts.  As a result of the stock sale,the buyer acquired all of the assets and liabilities of Daramic S.r.l.,including the Potenza, Italy facility, which was closed in 2008, andenvironmental and restructuring obligations associated with the Potenzasite.  In addition to assuming all assetsand liabilities, 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 $21,679,000, which consistsof the 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$14,908,000 at closing and will pay the remaining $6,771,000 (€5,000,000) on December 15,2010.  The remaining payment is securedby a letter of credit and has been classified as “Accrued liabilities” in theaccompanying condensed consolidated balance sheet at April 3, 2010.

 

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Table of Contents

 

**Polypore International, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**(unaudited)**

 

**16.**          FinancialStatements of Guarantors

 

The Company’s seniorsubordinated notes are unconditionally guaranteed, jointly and severally, on asenior basis by certain of the Company’s 100% owned subsidiaries (“Guarantors”).  Management has determined that separatecomplete financial statements of the Guarantors would not be material to usersof the financial statements.

 

The following sets forthcondensed consolidating financial statements of the Guarantors andnon-Guarantor subsidiaries.

 

**Condensed Consolidating Balance Sheet**

**April 3, 2010**

** **
| **(in thousands)**                                         | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The  Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|------------------|------------|
| **Assets**                                                 |       |                                  |       |                                      |       |             |       |                                    |       |             |       |
| Cash  and cash equivalents                                 |       | $                                     | —     |                                      | $          | 54,323           |       | $                                       | 72,422     |             | $          | — |   | $ | 126,745 |   |
| Accounts  receivable, net                                  |       | 32,697                                |       | 65,181                                    |       | —           |       | —                                  |       | 97,878           |       |
| Inventories                                                |       | 25,774                                |       | 45,743                                    |       | —           |       | —                                  |       | 71,517           |       |
| Deferred  income taxes                                     |       | 2,469                                 |       | (577                                      | )          | —           |       | —                                  |       | 1,892            |       |
| Prepaid  and other                                         |       | 8,783                                 |       | 5,297                                     |       | 31               |       | —                                  |       | 14,111           |       |
| Total  current assets                                      |       | 69,723                                |       | 169,967                                   |       | 72,453           |       | —                                  |       | 312,143          |       |
| Due  from affiliates                                       |       | 377,177                               |       | 282,895                                   |       | 294,505          |       | (954,577                                | )          | —           |       |
| Investment  in subsidiaries                                |       | 193,200                               |       | 290,511                                   |       | 392,705          |       | (876,416                                | )          | —           |       |
| Property,  plant and equipment, net                        |       | 141,093                               |       | 240,532                                   |       | —           |       | —                                  |       | 381,625          |       |
| Goodwill                                                   |       | —                                |       | —                                    |       | 469,319          |       | —                                  |       | 469,319          |       |
| Intangibles  and loan acquisition costs, net               |       | 15                                    |       | —                                    |       | 160,237          |       | —                                  |       | 160,252          |       |
| Other                                                      |       | 2,256                                 |       | 14,516                                    |       | —           |       | —                                  |       | 16,772           |       |
| Total  assets                                              |       | $                                     | 783,464    |                                      | $          | 998,421          |       | $                                       | 1,389,219  |             | $          | (1,830,993 | ) | $ | 1,340,111 |   |
|                                                       | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **       | ** ** |
| **Liabilities and shareholders’ equity**              | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **       | ** ** |
| Accounts  payable and accrued liabilities                  |       | $                                     | 18,938     |                                      | $          | 56,429           |       | $                                       | 14,463     |             | $          | — |   | $ | 89,830 |   |
| Income  taxes payable                                      |       | —                                |       | 3,526                                     |       | (48              | )          |                                    |       | 3,478            |       |
| Current  portion of debt                                   |       | —                                |       | 474                                       |       | 3,229            |       | —                                  |       | 3,703            |       |
| Total  current liabilities                                 |       | 18,938                                |       | 60,429                                    |       | 17,644           |       | —                                  |       | 97,011           |       |
| Due  to affiliates                                         |       | 395,185                               |       | 238,820                                   |       | 320,572          |       | (954,577                                | )          | —           |       |
| Debt,  less current portion                                |       | —                                |       | 45,616                                    |       | 731,770          |       | —                                  |       | 777,386          |       |
| Pension  and postretirement benefits, less current portion |       | 3,225                                 |       | 57,232                                    |       | —           |       | —                                  |       | 60,457           |       |
| Environmental  reserve, less current portion               |       | 1,099                                 |       | 8,741                                     |       | —           |       | —                                  |       | 9,840            |       |
| Deferred  income taxes and other                           |       | 34,689                                |       | 41,495                                    |       | 8,740            |       | —                                  |       | 84,924           |       |
| Shareholders’  equity                                 |       | 330,328                               |       | 546,088                                   |       | 310,493          |       | (876,416                                | )          | 310,493          |       |
| Total  liabilities and shareholders’ equity           |       | $                                     | 783,464    |                                      | $          | 998,421          |       | $                                       | 1,389,219  |             | $          | (1,830,993 | ) | $ | 1,340,111 |   |

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**(unaudited)**

 

**Condensed Consolidating Balance Sheet**

**January 2, 2010**

 
| **(in thousands)**                                         | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and 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 Condensed Consolidated FinancialStatements**

**(unaudited)**

 

**CondensedConsolidating Statement of Income**

**Forthe three months ended April 3, 2010**

 
| **(in thousands)**                            | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|----------------------------------------|------------|------------------|------------|
|                                          |       |                                  |       |                                      |       |                 |       |                                   |       |             |       |
| Net  sales                                    |       | $                                     | 46,193     |                                      | $          | 99,146               |       | $                                      | —     |             | $          | — |   | $ | 145,339 |   |
| Cost  of goods sold                           |       | 20,824                                |       | 66,176                                    |       | —               |       | —                                 |       | 87,000           |       |
| Gross profit                                  |       | 25,369                                |       | 32,970                                    |       | —               |       | —                                 |       | 58,339           |       |
| Selling,  general and administrative expenses |       | 16,024                                |       | 10,715                                    |       | 528                  |       | —                                 |       | 27,267           |       |
| Business  restructuring                       |       | 201                                   |       | 254                                       |       | —               |       |                                   |       | 455              |       |
| Operating income (loss)                       |       | 9,144                                 |       | 22,001                                    |       | (528                 | )          | —                                 |       | 30,617           |       |
| Interest  expense and other                   |       | (2,970                                | )          | 2,361                                     |       | 12,434               |       | —                                 |       | 11,825           |       |
| Gain on sale of Italian subsidiary            |       | —                                |       | (3,327                                    | )          | —               |       | —                                 |       | (3,327           | )          |
| Equity  in earnings of subsidiaries           |       | —                                |       | —                                    |       | (23,574              | )          | 23,574                                 |       | —           |       |
| Income  before income taxes                   |       | 12,114                                |       | 22,967                                    |       | 10,612               |       | (23,574                                | )          | 22,119           |       |
| Income  taxes                                 |       | 6,353                                 |       | 5,154                                     |       | (6,936               | )          | —                                 |       | 4,571            |       |
| Net Income                                    |       | $                                     | 5,761      |                                      | $          | 17,813               |       | $                                      | 17,548     |             | $          | (23,574 | ) | $ | 17,548 |   |

 

**Condensed Consolidating Statement of Income**

**For the three months ended April 4, 2009**

 
| **(in thousands)**                            | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|------------------|------------|
|                                          |       |                                  |       |                                      |       |                 |       |                                    |       |             |       |
| Net  sales                                    |       | $                                     | 37,110     |                                      | $          | 71,800               |       | $                                       | —     |             | $          | — |   | $ | 108,910 |   |
| Cost  of goods sold                           |       | 16,987                                |       | 48,520                                    |       | —               |       | —                                  |       | 65,507           |       |
| Gross profit                                  |       | 20,123                                |       | 23,280                                    |       | —               |       | —                                  |       | 43,403           |       |
| Selling,  general and administrative expenses |       | 16,346                                |       | 8,546                                     |       | 308                  |       | —                                  |       | 25,200           |       |
| Business  restructuring                       |       | —                                |       | 555                                       |       | —               |       |                                    |       | 555              |       |
| Operating income (loss)                       |       | 3,777                                 |       | 14,179                                    |       | (308                 | )          | —                                  |       | 17,648           |       |
| Interest  expense and other                   |       | (509                                  | )          | 1,099                                     |       | 13,069               |       | —                                  |       | 13,659           |       |
| Equity  in earnings of subsidiaries           |       | —                                |       | —                                    |       | (12,202              | )          | 12,202                                  |       | —           |       |
| Income  (loss) before income taxes            |       | 4,286                                 |       | 13,080                                    |       | (1,175               | )          | (12,202                                 | )          | 3,989            |       |
| Income  taxes                                 |       | 2,293                                 |       | 2,871                                     |       | (4,136               | )          | —                                  |       | 1,028            |       |
| Net Income                                    |       | $                                     | 1,993      |                                      | $          | 10,209               |       | $                                       | 2,961      |             | $          | (12,202 | ) | $ | 2,961 |   |

 

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**Polypore International, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**(unaudited)**

 

**Condensed Consolidating Statement of Cash Flows**

**For the three months ended April 3, 2010**

 
| **(in thousands)**                                             | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|-----------------------------------------|------------|------------------|------------|
| Net cash provided by (used in) operating  activities           |       | $                                     | 23,802     |                                      | $          | 21,422          |       | $                                       | (2,888     | )                | $          | 5,416 |   | $ | 47,752 |   |
| **Investing activities:**                                      |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Purchases  of property, plant and equipment                    |       | (10,300                               | )          | (1,663                                    | )          | —          |       | —                                  |       | (11,963          | )          |
| Net  payments associated with stock sale of Italian subsidiary |       | —                                |       | (14,908                                   | )          | —          |       | —                                  |       | (14,908          | )          |
| Net cash used in investing activities                          |       | (10,300                               | )          | (16,571                                   | )          | —          |       | —                                  |       | (26,871          | )          |
| **Financing activities:**                                      |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Principal  payments on debt                                    |       | —                                |       | (119                                      | )          | (7,937          | )          | —                                  |       | (8,056           | )          |
| Issuance  of common stock                                      |       | —                                |       | —                                    |       | 637             |       |                                    |       | 637              |       |
| Intercompany  transactions, net                                |       | (13,488                               | )          | 5,684                                     |       | 13,220          |       | (5,416                                  | )          | —           |       |
| Net cash provided by (used in) financing  activities           |       | (13,488                               | )          | 5,565                                     |       | 5,920           |       | (5,416                                  | )          | (7,419           | )          |
| Effect  of exchange rate changes on cash and cash equivalents  |       | (14                                   | )          | (1,678                                    | )          | —          |       | —                                  |       | (1,692           | )          |
| **Net increase in cash and cash equivalents**                  |       | —                                |       | 8,738                                     |       | 3,032           |       | —                                  |       | 11,770           |       |
| Cash  and cash equivalents at beginning of period              |       | —                                |       | 45,585                                    |       | 69,390          |       | —                                  |       | 114,975          |       |
| **Cash and cash equivalents at end of period**                 |       | $                                     | —     |                                      | $          | 54,323          |       | $                                       | 72,422     |             | $          | — |   | $ | 126,745 |   |

 

**Condensed Consolidating Statement of Cash Flows**

**For the three months ended April 4, 2009**

 
| **(in thousands)**                                            | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|-----------------------------------------|------------|------------------|------------|
| Net cash provided by (used in) operating  activities          |       | $                                     | 1,658      |                                      | $          | 13,271          |       | $                                       | (39        | )                | $          | (81 | ) | $ | 14,809 |   |
| **Investing activities:**                                     |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Purchases  of property, plant and equipment                   |       | (1,421                                | )          | (1,191                                    | )          | —          |       | —                                  |       | (2,612           | )          |
| Net cash used in investing activities                         |       | (1,421                                | )          | (1,191                                    | )          | —          |       | —                                  |       | (2,612           | )          |
| **Financing activities:**                                     |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Principal  payments on debt                                   |       | (368                                  | )          | (118                                      | )          | (807            | )          | —                                  |       | (1,293           | )          |
| Intercompany  transactions, net                               |       | 101                                   |       | (285                                      | )          | 103             |       | 81                                      |       | —           |       |
| Net cash used in financing activities                         |       | (267                                  | )          | (403                                      | )          | (704            | )          | 81                                      |       | (1,293           | )          |
| Effect  of exchange rate changes on cash and cash equivalents |       | 30                                    |       | 2,118                                     |       | —          |       | —                                  |       | 2,148            |       |
| **Net increase (decrease) in cash and cash equivalents**      |       | —                                |       | 13,795                                    |       | (743            | )          | —                                  |       | 13,052           |       |
| Cash  and cash equivalents at beginning of period             |       | —                                |       | 25,657                                    |       | 57,364          |       | —                                  |       | 83,021           |       |
| **Cash and cash equivalents at end of period**                |       | $                                     | —     |                                      | $          | 39,452          |       | $                                       | 56,621     |             | $          | — |   | $ | 96,073 |   |

 

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of 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**

 

We area leading global high technologyfiltration company that develops, manufactures and markets specializedmicroporous membranes used in separation and filtration processes. In fiscal2009, we generated total net sales of $516.9 million. We operate in twobusiness segments: (i) the energy storage segment, which accounted forapproximately 71% of our fiscal 2009 net sales; and (ii) the separationsmedia segment, which accounted for approximately 29% of our fiscal 2009 netsales. We manufacture our products at facilities in North America, Europe andAsia. Net sales from foreign locations were $351.5 million for fiscal2009.

 

*EnergyStorage Segment*

 

In the energy storagesegment, our membrane separators are a critical performance component inlithium batteries, which are primarily used in consumer electronics and electricdrive vehicle (“EDV”) applications, and lead-acid batteries, which are usedglobally in transportation and numerous industrial applications. We believe theglobal economic recession adversely impacted sales in 2009 and although we haveseen some economic improvement during the first quarter of 2010, the economicenvironment is still uncertain and could have an adverse impact in the nearfuture.  Although the short-term economicoutlook is uncertain, we believe that the long-term growth drivers for theenergy storage business — growth in Asia, increasing demand for consumerelectronics and the emergence of EDV applications — remain intact.  We have and will continue to positionourselves to capitalize on these future growth opportunities.

 

Lithium batteries are thepower source in a wide variety of electronics applications ranging fromnotebook computers and mobile phones to cordless power tools. In addition toconsumer electronics applications, development and investment in lithiumbatteries for use in EDV applications is accelerating and we are making earlysales into this market.  In late 2008, wecompleted a lithium battery separator capacity expansion at our Charlotte, NCfacility. In late 2009, we initiated a $102.0 million expansion aimed at enhancingour position as a market leader in supplying lithium separators for EDVapplications.  The expansion will bepartially funded by a $49.3 million grant from the U.S. Department of Energy (“DOE”)and includes the existing Charlotte, NC facility and construction of a newmanufacturing facility in Concord, NC, which is expected to begin in the secondhalf of 2010.  In 2008, we acquired alithium battery separator company in South Korea which was subsequently renamedCelgard Korea, Inc. In early 2010, we initiated a $30.0 million capacityexpansion at this facility to serve growth in consumer electronics applicationsin Asia.

 

In the lead-acid batterymarket, the high proportion of aftermarket replacement sales and the steadygrowth of the worldwide fleet of motor vehicles provide us with a growingrecurring revenue base in lead-acid battery separators. Worldwide demand forlead-acid battery separators is expected to continue to grow at slightly morethan annual economic growth.  TheAsia-Pacific region is the fastest growing market for lead-acid batteryseparators.  Growth in this region isdriven by the increasing penetration of automobile ownership, growth inindustrial and manufacturing sectors, export incentives and ongoing conversionto the polyethylene-based membrane separators we produce.  We have positioned ourselves to benefit fromgrowth in Asia by expanding capacity at our Prachinburi, Thailand facility,acquiring the remaining 40% minority interest in our production facility inTianjin, China and establishing an Asian Technical Center in Thailand.  In addition, on April 1, 2008, weacquired the battery separator manufacturing assets of Super-Tech BatteryComponents Pvt. Ltd., located in Bangalore, India. We are in the processof expanding our operations in India. We will continue to focus our resourcesand assets to capitalize on growth in this important region.

 

*SeparationsMedia Segment*

 

In the separations mediasegment, our filtration membranes and modules are used in healthcare andhigh-performance filtration and specialty applications. The healthcare businessand a portion of the filtration and specialty business have historically beenrelatively unaffected by the economy, and we believe that the separations mediasegment will continue to benefit from continued growth in demand for higherlevels of purity in a growing number of applications.

 

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Healthcare applicationsinclude hemodialysis, blood oxygenation and plasmapheresis. Growth in demandfor hemodialysis membranes is driven by the increasing worldwide population ofend-stage renal disease patients. We estimate that conversion to single-usedialyzers and increasing treatment frequency will result in additional dialyzermarket growth. In April 2010, we approved a $25.0 million expansion ofhemodialysis membrane (PUREMA®) production capacity at our Wuppertal, Germanyfacility that will commence in the second half of 2010 for start-up in thesecond half of 2011.

 

We produce a wide rangeof membranes and membrane-based elements for micro-, ultra- and nanofiltrationand gasification/degasification of liquids. Micro-, ultra- and nanofiltrationmembrane element market growth is being driven by several factors, includingend-market growth in applications such as water treatment and pharmaceuticalprocessing, displacement of conventional filtration media by membranefiltration due to membranes’ superior cost and performance attributes andincreasing purity requirements in industrial and other applications.

 

**Critical accounting policies**

 

Critical accountingpolicies are those accounting policies that can have a significant impact onthe presentation of our financial condition and results of operations, and thatrequire the use of complex and subjective estimates based on past experienceand management’s judgment. Because of uncertainty inherent in such estimates,actual results may differ from these estimates. Below are those policies thatwe believe are critical to the understanding of our operating results andfinancial condition. Management has discussed the development and selection ofthese critical accounting policies with the Audit Committee of our Board of Directors.

 

*Allowancefor doubtful accounts*

 

Accounts receivable areprimarily composed of amounts owed to us through our operating activities andare presented net of an allowance for doubtful accounts. We establish anallowance for doubtful accounts based upon factors surrounding the credit riskof specific customers, historical trends and other information. We chargeaccounts receivables off against our allowance for doubtful accounts when wedeem 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.

 

*Impairmentof intangibles and goodwill*

 

Identifiedintangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable.  Goodwill and indefinite-lived intangibleassets are not amortized, but are subject to annual impairment testing unlesscircumstances 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 impairment losswill be recognized in an amount equal to the excess.

 

Determining the fairvalue of a reporting unit is judgmental in nature and requires the use ofsignificant 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 predictions of the future. If our assumptions regarding forecasted revenue or margin growth ratesof certain reporting units are not achieved or changes in strategy or marketconditions occur, we may be required to record goodwill impairment charges infuture periods.  It is not possible atthis time to determine if any such future impairment charge would result or, ifit does, whether such charge would be material.

 

In 2009, we completed ourannual impairment test as of the first day of the fourth quarter and recognizeda goodwill impairment charge of $131.5 million for the lead-acid reporting unitof our energy storage segment.

 

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*Pensionand other postretirement benefits*

 

Certain assumptions areused in the calculation of the actuarial valuation of our defined benefitpension plans and other postretirement benefits. Two critical assumptions,discount rate and expected return on assets, are important elements of planexpense and/or liability measurement and differences between actual results andthese two actuarial assumptions can materially affect our projected benefitobligation or the valuation of our plan assets. Other assumptions involvedemographic factors such as retirement, expected increases in compensation,mortality and turnover. The discount rate enables us to state expected futurecash flows at a present value on the measurement date. The discount rateassumptions are based on the market rate for high quality fixed incomeinvestments, and are thus subject to change each year. At January 2, 2010,a 1% decrease in the discount rate would increase our projected benefitobligations and the unfunded status of our pension plans by $13.0 million.The expected rates of return on our pension plans’ assets are based on theasset allocation of each plan and the long-term projected return of thoseassets. For 2009, if the expected rate of return on pension plan assets werereduced by 1%, the result would have increased our net periodic benefit expensefor fiscal 2009 by $0.2 million. At January 2, 2010, if the actualplan assets were reduced by 1%, the unfunded status of our pension plans wouldincrease by $0.2 million.

 

*Environmentalmatters*

 

Environmental obligationsare accrued when such expenditures are probable and reasonably estimable. Theamount of liability recorded is based on currently available information,including the progress of remedial investigations, current status ofdiscussions 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.

 

In connection with theacquisition of Membrana GmbH (“Membrana”) in 2002, we recorded a reservefor costs to remediate known environmental issues and operational upgrades atthe Wuppertal, Germany facility. We also have indemnification agreements forcertain environmental matters from Acordis A.G. (“Acordis”) and AkzoNobel 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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###### **Resultsof Operations**

 

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)**                    | ** ** | **April 3, 2010** | ** ** | **April 4, 2009**      | ** ** | **April 3, 2010** | ** ** | **April 4, 2009** | ** ** |
|                                          |       |                   |       |                        |       |   |   |   |   |
| Net  sales                                    |       | $                      | 145.3      |                        | $          | 108.9 |   | 100.0 | % | 100.0 | % |
|                                          |       |                   |       |                        |       |   |   |   |   |
| Gross  profit                                 |       | 58.3                   |       | 43.4                        |       | 40.1 |   | 39.9 |   |
| Selling,  general and administrative expenses |       | 27.2                   |       | 25.2                        |       | 18.7 |   | 23.1 |   |
| Business  restructuring                       |       | 0.5                    |       | 0.6                         |       | 0.3 |   | 0.5 |   |
| Operating  income                             |       | 30.6                   |       | 17.6                        |       | 21.1 |   | 16.2 |   |
| Interest  expense, net                        |       | 12.3                   |       | 14.1                        |       | 8.5 |   | 13.0 |   |
| Gain  on sale of Italian subsidiary           |       | (3.3                   | )          | —                      |       | (2.3 | ) | — |   |
| Foreign  currency and other                   |       | (0.5                   | )          | (0.5                        | )          | (0.3 | ) | (0.4 | ) |
| Income  before income taxes                   |       | 22.1                   |       | 4.0                         |       | 15.2 |   | 3.7 |   |
| Income  taxes                                 |       | 4.6                    |       | 1.0                         |       | 3.2 |   | 0.9 |   |
| Net  income                                   |       | $                      | 17.5       |                        | $          | 3.0 |   | 12.0 | % | 2.7 | % |

 

***Comparison of the three months ended April 3, 2010 with the threemonths ended April 4, 2009***

 

*Netsales*.  Net sales for the three months ended April 3,2010 were $145.3 million, an increase of $36.4 million, or 33.4%, from the sameperiod in the prior year.  Energy storagesales for the three months ended April 3, 2010 were $101.4 million, anincrease of $27.7 million, or 37.6%. Lithium battery separator sales increased by $13.1 million due toeconomic improvement in consumer electronics, continued applicationproliferation and new product launches, including initial sales into electricdrive vehicle applications.  Lead-acidbattery separator sales increased by $14.6 million due to global economicimprovement, continued growth in Asia and the positive impact of dollar/euroexchange rate fluctuations of $3.0 million.

 

Separationsmedia sales for the three months ended April 3, 2010 were $43.9 million,an increase of $8.7 million, or 24.7%, from the same period in the prioryear.  The positive impact of dollar/euroexchange rate fluctuations on sales was $2.1 million.  Healthcare sales increased by $3.9 million,or 15.6%, due to strong demand in hemodialysis and blood oxygenationapplications and the positive impact of dollar/euro exchange ratefluctuations.  Filtration and specialtyproduct sales increased by $4.8 million, or 47.1%, due to economic improvement,strong demand in Asia and the positive impact of dollar/euro exchange ratefluctuations.

 

*Gross Profit.** *Gross profit as a percent of sales was 40.1% for thethree months ended April 3, 2010, as compared to 39.9% in the same periodof the prior year.  Energy storage grossprofit as a percent of sales was 37.0% for the three months ended April 3,2010, as compared to 35.3% in the same period of the prior year.  The improvement in gross profit margin wasdue to higher production volumes and production efficiencies.  Separations media gross profit as a percentof sales was 47.4% for the three months ended April 3, 2010, as compared to49.4% in the same period of the prior year. The decline in gross profit margin was primarily due to increased energycosts.

 

*Selling,general and administrative expenses.** *Selling,general and administrative expenses increased by $2.0 million for the threemonths ended April 3, 2010, primarily due to growth investments and the $0.7million negative impact of dollar/euro exchange rate fluctuations.

 

*Interest expense.*  Interestexpense for the three months ended April 3, 2010 decreased by $1.8 millionfrom the same period in the prior year due to lower interest rates under oursenior credit facilities and the expiration of the interest rate swapagreements in the prior year.

 

*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 acountry-by-country basis.  The effectivetax rate was 20.7% for the three months ended April 3, 2010, as comparedto 25.8% for the same period in the prior year. Our effective tax rate fluctuates due to a variety of factors, includingstate income taxes, the mix of income between U.S. and foreign jurisdictions 

 

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taxedat varying rates, and various changes in estimates of permanent differences andvaluation allowances.  In the threemonths ended April 3, 2010, our effective tax rate was also impacted by thesale of our Italian subsidiary, Daramic S.r.l.

 

The mix of earningsbetween the various tax jurisdictions in which we do business has a significantimpact on our effective tax rate.  Eachtax jurisdiction has its own set of tax laws and tax rates.  The income earned by our subsidiaries in eachjurisdiction is taxed independently by these various jurisdictions.   Currently, the applicable statutory incometax rates in the jurisdictions in which we operate range from 0% to 39%.   Therefore, the amount of income tax expensein each jurisdiction as compared to our consolidated income before income taxeshas a significant impact on our annual effective tax rate.

 

The effect of each ofthese items on our effective tax rate on continuing operations is quantified inthe table below:

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **April 3, 2010**      | ** ** | **April 4, 2009** | ** ** |
| U.S. federal statutory rate                           | ** ** | **35.0**                         | **%**      | 35.0 | % |
| State income taxes                                    | ** ** | **0.4**                          |       | 0.2 |   |
| Mix  of income in taxing jurisdictions                | ** ** | **(8.9**                         | **)**      | (10.2 | ) |
| Other  permanent differences and valuation allowances | ** ** | **1.2**                          |       | 0.8 |   |
| Sale  of Italian subsidiary                           | ** ** | **(7.0**                         | **)**      | — |   |
| Total  effective tax rate on income                   | ** ** | **20.7**                         | **%**      | 25.8 | % |

 

**Business Restructuring**

 

**The components of restructuring activity in the three months ended April 3,2010, including the impact of the stock sale of Daramic S.r.l. on the 2008plan, were as follows:**

 
| **(in millions)**         | ** ** | **Balance at  January 2,  2010** | ** ** | **Restructuring  Charges** | ** ** | **Other** | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  April 3,  2010** | ** ** |
|---------------------------|------------|---------------------------------------|------------|----------------------------|------------|-----------|------------|--------------------|------------|------------------------------------|------------|-------------------------------------|------------|
| 2009  Restructuring Plan: |       |                                  |       |                       |       |      |       |               |       |                               |       |                                |       |
| Severance  and benefits   |       | $                                     | 0.1        |                       | $          | (0.1      | )          | $                  | —     |                               | $          | —                              |       | $ | — |   | $ | — |   |
| Other                     |       | —                                |       | 0.3                        |       | —    |       | (0.3               | )          | —                             |       | —                              |       |
|                      |       | 0.1                                   |       | 0.2                        |       | —    |       | (0.3               | )          | —                             |       | —                              |       |
| 2008  Restructuring Plan: |       |                                  |       |                       |       |      |       |               |       |                               |       |                                |       |
| Severance  and benefits   |       | 7.3                                   |       | —                     |       | (6.6      | )          | (0.2               | )          | (0.4                               | )          | 0.1                                 |       |
| Other                     |       | 0.6                                   |       | 0.3                        |       | (0.6      | )          | (0.3               | )          | —                             |       | —                              |       |
|                      |       | 7.9                                   |       | 0.3                        |       | (7.2      | )          | (0.5               | )          | (0.4                               | )          | 0.1                                 |       |
| 2006  Restructuring Plan: |       |                                  |       |                       |       |      |       |               |       |                               |       |                                |       |
| Severance  and benefits   |       | 2.7                                   |       | —                     |       | —    |       | (0.1               | )          | (0.1                               | )          | 2.5                                 |       |
|                      |       |                                  |       |                       |       |      |       |               |       |                               |       |                                |       |
| Total                     |       | $                                     | 10.7       |                       | $          | 0.5       |       | $                  | (7.2       | )                                  | $          | (0.9                                | )          | $ | (0.5 | ) | $ | 2.6 |   |

 

We expect to makepayments against the restructuring reserve of approximately $0.4 millionover the next twelve months.

 

*2009restructuring plan. *In 2009, the North American market for lead-acidbattery separators had significant excess capacity and a highly consolidatedcustomer base.  As a result of thesefactors and our estimates about future demand requirements in North America, weimplemented a restructuring plan to better align lead-acid battery separatorproduction capacity with demand in North America.

 

The restructuring planincluded idling capacity and reducing headcount at our manufacturing facilityin Owensboro, Kentucky.  The totalestimated cost of the plan is expected to be approximately $23.2 million, ofwhich $20.3 million has been recognized. The total cost includes estimated cash charges of $3.3 million forseverance and other costs and a non-cash impairment charge of $19.9 million forbuildings and equipment.  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.  Cash payments for other exit costs areexpected to be paid over the next three years. 

 

*2008restructuring plan.*  A supply contract between our lead-acidbattery separator business and a large customer expired on December 31, 2008and was not renewed. In response, we implemented a restructuring plan in thefourth 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.

 

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The plan included closingour facility in Potenza, Italy, streamlining production at our facility in Owensboro,Kentucky and reducing selling, general and administrative resources associatedwith the lead-acid battery separator business. The total cost of therestructuring plan was $61.4 million. The restructuring plan included costsassociated with closing the Potenza, Italy facility, the termination ofproduction employees at Potenza, Italy and Owensboro, Kentucky and certainselling, general and administrative employees. The restructuring also includeda non-cash impairment charge of $28.9 million for buildings and machinery andequipment that will no longer be used in Potenza, Italy.  On March 9, 2010, we sold 100% of the stock ofour Italian subsidiary, Daramic S.r.l.  Asa result of the stock sale, the buyer acquired all of the assets andliabilities of Daramic S.r.l., including restructuring obligations associatedwith the Potenza, Italy facility of $7.2 million, consisting primarily ofseverance payments due to terminated employees.

 

*2006restructuring 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 impairment chargefor 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.

 

**Liquidity and Capital Resources**

** **

Cash and cash equivalentsincreased to $126.7 million at April 3, 2010 from $115.0 millionat January 2, 2010.  The $11.7million increase in cash consists of cash flow from operations of $47.8million, reduced by purchases of property, plant and equipment, paymentsassociated with the stock sale of our Italian subsidiary Daramic S.r.l., andprincipal payments on debt.

 

*Operatingactivities*.  Net cash provided by operating activities was$47.8 million in the three months ended April 3, 2010 consisting of cashflows from operations of $27.8 million and an increase in operating assets andliabilities of $19.9 million.  Thedecrease in accounts receivable and days sales outstanding (3%) was dueprimarily to the timing of payments. We have not experienced significantchanges in accounts receivable aging or customer payment terms and believe thatwe have adequately provided for potential bad debts.  Inventory levels are consistent with year-endlevels.  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.  Accounts payable and accrued liabilitiesincreased due to the timing of payments and accrued interest on the 8.75%senior subordinated notes, which is paid semi-annually in the second and fourthquarter of our fiscal year.

 

Net cash provided by operatingactivities was $14.8 million in the three months ended April 4, 2009, ascompared to $31.4 million in the three months ended March 29, 2008.Cash provided by operating activities in the three months ended April 4,2009 consisted of cash flows from operations. Accounts receivable decreased dueto lower sales while days sales outstanding were comparable to the prior year.Inventories increased based on production and capacity planning for expectedcustomer order patterns. Accounts payable and accrued liabilities decreasedprimarily due to the timing of payments on accounts payable and accruedliabilities and partially offset by an increase in accrued interest on the8.75% senior subordinated notes. Interest for the 8.75% senior subordinatednotes is paid semi-annually in the second and fourth quarters.  Refundable income taxes decreased primarilydue to the receipt of a $5.0 million federal income tax refund.

 

*Investing activities.* We have initiated lithium battery separator expansion projects in the U.S.and Korea for total expected costs of $102.0 million and $30.0 million,respectively.  Capital expenditures forthe U.S. expansion project will be partially funded by a $49.3 million grantfrom the DOE.  In April 2010, we approveda $25.0 million expansion of our hemodialysis membrane (PUREMA ®) productioncapacity in Europe.   Capitalexpenditures for these projects will occur in 2010 through 2012.  Capital spending for fiscal year 2010 iscurrently estimated at approximately $75.0 million, net of DOE grantawards.  Capital expenditures, net of DOEgrant awards, were $12.0 million in the three months ended April 3, 2010.

 

As a result of the stocksale of our Italian subsidiary, Daramic S.r.l., the buyer acquired the Potenza,Italy manufacturing facility and assumed all liabilities of the subsidiary,including environmental obligations and severance costs associated with closingthis facility in 2008.  As a result ofthe stock sale, we will make net cash payments to the buyer of $21.7 million,of which $14.9 million was made at closing and the remaining $6.8 million (€5.0million) will be paid on December 15, 2010.

 

*Financingactivities**.* During the three months ended April 3, 2010, we made principalpayments of debt of $8.1 million, including a $7.1 million mandatoryprepayment associated with the 2009 excess cash flow calculation as defined inour credit agreement.

 

We intend to fund ourongoing operations with cash on hand, cash generated by operations andavailability under the senior secured credit facility.

 

Our senior secured creditfacility provides for a $322.9 million term loan facility($306.9 million outstanding at April 3, 2010), a €35.0 million termloan facility ($46.1 million outstanding at April 3, 2010) and a$90.0 million revolving credit facility. At April 3, 2010, we had$80.7 million of borrowings available under the revolving credit facility($90.0 million revolving credit facility less $9.3 million of undrawnstandby letters of credit). The term loans mature in July 2014 and therevolving credit facility matures in July 2013. Interest rates under the seniorsecured credit facility are, at our option, equal to either an alternate 

 

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base rate plus a 1.25%margin or the Eurocurrency base rate plus a 2.25% margin. At April 3,2010, interest rates on the U.S. dollar term loan and Eurodollar term loan were2.50% and 2.62%, respectively.

 

When loans areoutstanding under the revolving credit facility, we are required to maintain asenior leverage ratio of indebtedness to Adjusted EBITDA of less than 3.00 to1.00. At April 3, 2010, our senior leverage ratio was 1.84 to 1.00 and theentire amount of the revolving credit facility was available for borrowing.

 

Adjusted EBITDA, asdefined under the senior secured credit facility, was as follows:

 
| **(in millions)**                                  | ** ** | **Last Twelve Months  Ended April 3, 2010** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| Net  loss                                          |       | $                                                | (102.8     | ) |
| Add/Subtract:                                      |       |                                             |       |
| Depreciation  and amortization                     |       | 50.7                                             |       |
| Interest  expense, net                             |       | 55.2                                             |       |
| Income  taxes                                      |       | 7.2                                              |       |
| Stock  compensation                                |       | 2.5                                              |       |
| Foreign  currency gain                             |       | (0.5                                             | )          |
| Loss  on disposal of property, plant and equipment |       | 0.2                                              |       |
| Business  restructuring                            |       | 21.2                                             |       |
| Gain  on sale of Italian subsidiary                |       | (3.3                                             | )          |
| Goodwill  impairment                               |       | 131.5                                            |       |
| Costs  related to the FTC complaint                |       | 3.2                                              |       |
| Other  non-cash or non-recurring charges           |       | (0.3                                             | )          |
| Adjusted  EBITDA                                   |       | $                                                | 164.8      |   |

 

Thecalculation of the senior leverage ratio as defined under the senior creditfacility as of April 3, 2010 is as follows:

 
| **(in  millions)**     | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| Indebtedness  (1)      |       | $          | 303.0      |   |
| Adjusted  EBITDA       |       | $          | 164.8      |   |
| Actual  leverage ratio |       | 1.84x      |       |

 

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(1)   Calculated as the sum of outstanding borrowings underthe senior secured credit facility, less the amount of cash on hand (not toexceed $50.0 million).

 

The senior secured creditagreement contains certain restrictive covenants which, among other things,limit capital spending, the incurrence of additional indebtedness, investments,dividends, transactions with affiliates, asset sales, acquisitions, mergers andconsolidations, prepayments of other indebtedness, liens and encumbrances andother matters customarily restricted in such agreements. The facilities alsocontain certain customary events of default, subject to grace periods, asappropriate. We believe that annual capital expenditure limitations imposed bythe senior credit facilities will not significantly inhibit us from meeting ourongoing capital expenditure needs.

 

Future principal debtpayments are expected to be paid out of cash flows from operations, borrowingson our revolving credit facility and future refinancing of our debt. Our cashinterest requirements for the next twelve months are estimated to be$47.1 million.

 

The 8.75% seniorsubordinated notes ($428.1 million outstanding at April 3, 2010) willmature in 2012 and are guaranteed by most of our existing and future domesticrestricted subsidiaries, subject to certain exceptions. Except under certaincircumstances, the 8.75% senior subordinated notes do not require principalpayments prior to their maturity in 2012. Interest on the 8.75% seniorsubordinated notes is payable semi-annually in cash. The 8.75% seniorsubordinated notes contain customary covenants and events of default, includingcovenants that limit our ability to incur debt, pay dividends and makeinvestments.

 

As stated in the creditagreement, the term loans mature in July 2014 and the revolving creditfacility matures in July 2013. The 8.75% senior subordinated notes matureon May 15, 2012. Because the senior subordinated notes are subordinated tothe senior secured credit facility, if any amounts are outstanding under thesenior subordinated notes at February 1, 2012, the maturity dates for theterm loans and the revolving credit facility will be accelerated to February 1,2012.

 

We believe we havesufficient liquidity to meet our cash requirements over both the short (nexttwelve months) and long term (in relation to our debt service requirements). Inevaluating the sufficiency of our liquidity for both the shorter and longerterm, we considered cash on hand, the expected cash flow to be generated by ouroperations and the available borrowings under our senior secured creditfacility compared to our anticipated cash requirements for debt service,working capital, cash taxes and 

 

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capital expenditures andfunding requirements for long-term liabilities. We anticipate that our cash onhand and operating cash flow, together with borrowings under the revolvingcredit facility, will be sufficient to meet our anticipated future operatingexpenses, capital expenditures and debt service obligations as they become duefor at least the next twelve months. However, our ability to makescheduled payments of principal, to pay interest on or to refinance ourindebtedness and to satisfy our other debt obligations will depend upon ourfuture operating performance, which will be affected by general economic,financial, competitive, legislative, regulatory, business and other factorsbeyond our control. See “Item 1A. Risk Factors” in our most recent AnnualReport on Form 10-K.

 

From time to time, we mayexplore additional financing methods and other means to lower our cost ofcapital, which could include stock issuance or debt financing and the applicationof the proceeds therefrom to the repayment of bank debt or other indebtedness.In addition, in connection with any future acquisitions, we may requireadditional funding which may be provided in the form of additional debt orequity financing or a combination thereof. There can be no assurance that anyadditional financing will be available to us on acceptable terms.

 

***ForeignOperations***

 

Wemanufacture our products at 14 strategically located facilities in NorthAmerica, Europe and Asia.  Net sales fromthe foreign locations were approximately $101.2 million and $73.0 million forthe three months ended April 3, 2010 and April 4, 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.

 

###### **Environmentalmatters**

###### ** **

Environmental obligationsare accrued when such expenditures are probable and reasonably estimable. Theamount of liability recorded is based on currently available information,including the progress of remedial investigations, current status ofdiscussions 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 the financial condition of the Company. Recoveries of environmental costsfrom other parties are recognized as assets when their receipt is deemedprobable. At April 3, 2010, environmental reserves, which arepredominately euro-denominated, were $20.4 million.

 

On March 9, 2010, wesold 100% of the stock of our Italian subsidiary, Daramic S.r.l. As a result ofthe stock sale, the buyer acquired all assets and liabilities of DaramicS.r.l., including the Potenza, Italy facility and environmental obligationsassociated with the Potenza site. The buyer has fully indemnified us withregard to environmental, health and safety matters related to this site.

 

In connection with theacquisition of Membrana in 2002, we recorded a reserve for environmentalobligations. The reserve provides for costs to remediate known environmentalissues and operational upgrades which are required in order for us to remain incompliance with local regulations. The initial estimate and subsequentfinalization of the reserve was included in the allocation of purchase price atthe date of acquisition. At April 3, 2010, the environmental reserve forthe Membrana facility was $18.5 million. We anticipate that expenditures willbe made over the next seven to ten years.

 

We have indemnificationagreements for certain environmental matters from Acordis A.G. (“Acordis”) andAkzo Nobel N.V. (“Akzo”), the prior owners of Membrana. Akzo originallyprovided broad environmental protections to Acordis with the right to assignsuch indemnities to Acordis’s successors. Akzo’s indemnifications relate to conditionsexisting prior to December 1999, which is the date that Membrana was soldto Acordis. In addition to the Akzo indemnification, Acordis provides separateindemnification of claims incurred from December 1999 through February 2002,the acquisition date. We will receive indemnification payments under theindemnification agreements as expenditures are made against approved claims. AtApril 3, 2010, amounts receivable under the indemnification agreementswere $15.0 million.

 

In connection with the2008 acquisition of Microporous, we identified potential environmentalcontamination at the manufacturing site in Piney Flats, Tennessee. As part ofthe acquisition, the seller purchased an environmental insurance policy onbehalf of us. Subsequent to the acquisition, we performed additionalenvironmental studies and confirmed that 

 

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environmentalcontamination was present.  At April 3,2010, the environmental reserve for the Piney Flats, Tennessee facility was$1.9 million. We recorded the estimated cost of remediation and the relatedreceivables from the insurance company in the allocation of purchase price atthe date of acquisition. At April 3, 2010, the receivable balance was $1.4million.

 

**Off-Balance Sheet Arrangements**

 

We arenot a party to any off-balance sheet arrangements that have, or are reasonablylikely to have, a material current or future effect on our financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

We are exposed to variousmarket risks, which are potential losses arising from adverse changes in marketrates and prices, such as interest rates and foreign exchange fluctuations. Wedo not enter into derivatives or other financial instruments for trading orspeculative purposes.

 

*Interestrate risk*

 

At April 3, 2010, wehad fixed rate debt of $428.1 million and variable rate debt of $353.0million. To reduce the interest rate risk inherent in the Company’s variablerate debt, the Company may utilize interest rate swap agreements to convert allor a portion of the variable rate debt to a fixed rate obligation.  At April 3, 2010, there were nooutstanding interest rate swap agreements. The pre-tax earnings and cash flow impact resulting from a 100 basispoint increase in interest rates on our variable rate debt, holding othervariables constant, would be $3.5 million per year.

 

*Currencyrisk*

 

Outside of the UnitedStates, we maintain assets and operations in Europe and Asia. The results ofoperations and financial position of our foreign operations are principallymeasured in their respective currency and translated into U.S. dollars. As aresult, exposure to foreign currency gains and losses exists. The reportedincome of these subsidiaries will be higher or lower depending on a weakeningor strengthening of the U.S. dollar against the respective foreign currency.Our subsidiaries and affiliates also purchase and sell products and services invarious currencies. As a result, we may be exposed to cost increases relativeto the local currencies in the markets in which we sell. Because a differentpercentage of our sales are in a foreign currency than our costs, a change inthe relative value of the U.S. dollar could have a disproportionate impact onour sales compared to our costs, which could impact our margins. A portion of ourassets are based in our foreign locations and are translated into U.S. dollarsat foreign currency exchange rates in effect as of the end of each period, withthe effect of such translation reflected in other comprehensive income (loss).We have a euro-denominated term loan and senior subordinated notes thateffectively hedge our net investment in foreign subsidiaries. Therefore,foreign currency gains and losses resulting from the translation of theeuro-denominated debt 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:

 
| ** **                                      | ** ** | **April 3, 2010** | ** ** | **April 4, 2009** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Period  end rate                                |       | 1.3541                 |       | 1.3443                 |       |
| Period  average rate for the three months ended |       | 1.3856                 |       | 1.3060                 |       |

 

Ourstrategy for management of currency risk relies primarily on conducting ouroperations in a country’s respective currency and may, from time to time,involve currency derivatives.  As of April 3,2010, we did not have any foreign currency derivatives outstanding.

 

**Item 4.  Controls and Procedures**

 

An evaluation of the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) or15d-15(e) promulgated under the Exchange Act) was performed under thesupervision, and with the participation of, our management, including our ChiefExecutive Officer and Chief Financial Officer. Our disclosure controls aredesigned to provide a reasonable assurance that information required to bedisclosed in reports 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 April 3, 2010 toprovide reasonable assurance that information required to be disclosed in thereports that we file under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and is accumulated and communicated to 

 

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management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

Duringthe three months ended April 3, 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**

 

On March 20, 2008,we received a letter from the United States Federal Trade Commission (the “FTC”or the “Commission”) requesting that we voluntarily provide certain documentsand information to the FTC regarding our acquisition of Microporous HoldingCorporation, the parent company of Microporous Products L.P. (“Microporous”),which was completed on February 29, 2008. The letter stated that the FTCwas conducting an investigation to determine whether the Microporousacquisition will substantially lessen competition in any relevant market andthereby violate federal antitrust laws. We voluntarily responded to the letterin writing and through supplemental telephone conversations and meetings.

 

On April 7, 2008, weand our wholly-owned subsidiary, Daramic LLC, each received from the FTC asubpoena and interrogatories requesting substantially similar documents andinformation as requested in the FTC’s initial letter, as well as additionaldocuments and information. We responded fully to this request and met onseveral occasions with various members of the FTC staff and Commissioners in aneffort to answer their questions and resolve the investigation.

 

On September 9, 2008, the FTC issued anadministrative complaint against us alleging that our actions and theacquisition of Microporous have substantially lessened competition in NorthAmerican markets for lead-acid battery separators. We filed an answer to thecomplaint on October 15, 2008 denying the material allegations of thecomplaint. The matter was presented before an Administrative Law Judge (“ALJ”)of the FTC and the hearing concluded on June 12, 2009. In October 2009,the ALJ granted our request to re-open the record to take additionalevidence.  On February 22, 2010, theFTC’s ALJ issued an initial decision in which he recommended to the Commissionthat it order us to divest substantially all of the acquired Microporousassets, which includes the manufacturing facilities located in Piney Flats,Tennessee and Feistritz, Austria and restore the competitive environment tothat which existed prior to the acquisition, while ruling in our favor on otherportions of the complaint.  On March 15,2010, we filed a Notice of Appeal with the Commission.

 

We believe thatthe initial decision is inconsistent with the law and the facts presented atthe hearing and that the Microporous acquisition is and will continue to bebeneficial to our customers and the industry. Therefore, we intend to continueto vigorously defend our position and to pursue an appeal of the decision. Itis not possible, however, to predict with certainty whether we will besuccessful in the appellate process. If the FTC and the courts affirm the ALJ’sinitial decision, then we may be required to divest some or all of the assetsacquired in the Microporous acquisition and we may be subject to someprospective restrictions on our future conduct. We believe that a finaljudicial resolution to the challenge by the FTC to the Microporous acquisitioncould take several years.

 

We believe that the finalresolution of this matter will not have a material adverse impact on ourbusiness, 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**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| Date: May 6, 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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