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** **

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

** **

**FORM 10-Q**

** **

| **(Mark One)** | ** ** | ** **                                                                                             |
|----------------|------------|--------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                             |
| **x**          | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

** **

**For the quarterly period ended April 4, 2009**

** **

| **o** | ** ** | **Transition report pursuant to Section 13 or  15 (d) of the Securities Exchange Act of 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

** **

**For the transition period from                        to**

 

**Commission file number:  1-32266**

 

**POLYPOREINTERNATIONAL, INC.**

(Exact Name of Registrantas Specified in Its Charter)

 

| **Delaware**                                    | ** ** | **43-2049334**      |
|-------------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction of                 |       | (IRS Employer       |
| Incorporation or Organization)                  |       | 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 TelephoneNumber, Including Area Code)

 

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. xYes 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 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 xNo

 

There were 44,377,560shares of the registrant’s common stock outstanding as of May 4, 2009.

 

 

** **

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**Table of Contents**

 

**Polypore International, Inc.**

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

**For the Three Months Ended April 4, 2009**

** **
| ** **       | ** **                                                                                         | **Page**   |
|------------------|----------------------------------------------------------------------------------------------------|------------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                          | ** ** |
| **Item 1.**      | **Financial Statements**                                                                           | **4**      |
| **Item 2.**      | **Management’s  Discussion and Analysis of Financial Condition and****Results of Operations** | **19**     |
| **Item 3.**      | **Quantitative  and Qualitative Disclosures About Market Risk**                                    | **29**     |
| **Item 4.**      | **Controls and  Procedures**                                                                       | **29**     |
| ** **       | ** **                                                                                         | ** ** |
| **PART II** | **OTHER INFORMATION**                                                                              | ** ** |
| **Item 1.**      | **Legal Proceedings**                                                                              | **29**     |
| **Item 6.**      | **Exhibits**                                                                                       | **30**     |
| ** **       | ** **                                                                                         | ** ** |
| **SIGNATURES**   | ** **                                                                                         |

 

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

 

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**Forward-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 of 1995.  All statements other than statements ofhistorical facts included in this Quarterly Report on Form 10-Q thataddress 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” or the Company’s financial statements or the notes thereto.

 

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 3,2009, 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 innovative products;

·                  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 future  acquisitions;

·                  the failure to effectively integrate newly acquiredoperations;

·                  the adverse impact on our financial condition of pastrestructuring 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**

 

**Item1.  Financial Statements**

 

**PolyporeInternational, Inc.**

**CondensedConsolidated Balance Sheets**

* *
| **(in thousands, except share data)**                                                                                             | ** ** | **April 4, 2009** | ** **    | **January 3, 2009*** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|--------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **(unaudited)**             | ** **    | ** **                     | ** ** |
| **Assets**                                                                                                                                            |       |                        | ** **    |                           |       |
| Current assets:                                                                                                                                       |       |                        | ** **    |                           |       |
| Cash and cash equivalents                                                                                                                             | ** ** | **$**                       | **96,073**    | ** **                     | $          | 83,021 |   |
| Accounts receivable, net                                                                                                                              | ** ** | **84,982**                  | ** **    | 100,409                        |       |
| Inventories                                                                                                                                           | ** ** | **79,663**                  | ** **    | 70,398                         |       |
| Refundable income taxes                                                                                                                               | ** ** | **875**                     | ** **    | 6,277                          |       |
| Deferred income taxes                                                                                                                                 | ** ** | **1,233**                   | ** **    | 1,222                          |       |
| Prepaid and other                                                                                                                                     | ** ** | **12,483**                  | ** **    | 14,275                         |       |
| Total current assets                                                                                                                                  | ** ** | **275,309**                 | ** **    | 275,602                        |       |
| Property, plant and equipment, net                                                                                                                    | ** ** | **402,385**                 | ** **    | 416,796                        |       |
| Goodwill                                                                                                                                              | ** ** | **601,564**                 | ** **    | 601,564                        |       |
| Intangibles and loan acquisition costs, net                                                                                                           | ** ** | **179,177**                 | ** **    | 184,854                        |       |
| Environmental indemnification receivable                                                                                                              | ** ** | **16,800**                  | ** **    | 17,389                         |       |
| Other                                                                                                                                                 | ** ** | **2,463**                   | ** **    | 2,649                          |       |
| Total assets                                                                                                                                          | ** ** | **$**                       | **1,477,698** | ** **                     | $          | 1,498,854 |   |
|                                                                                                                                                  |       |                        | ** **    |                           |       |
| **Liabilities and equity**                                                                                                                            |       |                        | ** **    |                           |       |
| Current liabilities:                                                                                                                                  |       |                        | ** **    |                           |       |
| Accounts payable                                                                                                                                      | ** ** | **$**                       | **20,128**    | ** **                     | $          | 23,806 | ** ** |
| Accrued liabilities                                                                                                                                   | ** ** | **54,621**                  | ** **    | 58,777                         |       |
| Current portion of debt                                                                                                                               | ** ** | **3,761**                   | ** **    | 3,780                          |       |
| Current portion of capital  lease obligation                                                                                                          | ** ** | **1,511**                   | ** **    | 1,495                          |       |
| Fair value of interest  rate swap agreements                                                                                                          | ** ** | **4,310**                   | ** **    | 5,477                          |       |
| Total current liabilities                                                                                                                             | ** ** | **84,331**                  | ** **    | 93,335                         |       |
| Debt, less current portion                                                                                                                            | ** ** | **786,416**                 | ** **    | 796,216                        |       |
| Capital lease obligation, less current portion                                                                                                        | ** ** | **1,440**                   | ** **    | 1,824                          |       |
| Pension and postretirement benefits, less current portion                                                                                             | ** ** | **64,741**                  | ** **    | 66,266                         |       |
| Postemployment benefits                                                                                                                               | ** ** | **2,097**                   | ** **    | 2,425                          |       |
| Environmental reserve, less current portion                                                                                                           | ** ** | **38,452**                  | ** **    | 40,484                         |       |
| Deferred income taxes                                                                                                                                 | ** ** | **74,888**                  | ** **    | 78,815                         |       |
| Other                                                                                                                                                 | ** ** | **21,990**                  | ** **    | 23,676                         |       |
| Commitments and contingencies                                                                                                                         |       |                        | ** **    |                           |       |
|                                                                                                                                                  |       |                        | ** **    |                           |       |
| Equity:                                                                                                                                               |       |                        | ** **    |                           |       |
| Shareholders’ equity:                                                                                                                            |       |                        | ** **    |                           |       |
| Preferred stock — 15,000,000 shares authorized, no shares issued and  outstanding                                                                | ** ** | **—**                  | ** **    | **—**                     | ** ** |
| Common stock, $.01 par value — 200,000,000 shares authorized,  44,377,560 issued and outstanding at April 4, 2009 and January 3,  2009 | ** ** | **444**                     | ** **    | 444                            |       |
| Paid-in capital                                                                                                                                       | ** ** | **479,750**                 | ** **    | 479,442                        |       |
| Retained deficit                                                                                                                                      | ** ** | **(63,710**                 | **)**         | (66,671                        | )          |
| Accumulated other comprehensive loss                                                                                                                  | ** ** | **(16,320**                 | **)**         | (20,352                        | )          |
| Total shareholders’ equity                                                                                                                       | ** ** | **400,164**                 | ** **    | 392,863                        |       |
| Noncontrolling interest                                                                                                                               | ** ** | **3,179**                   | ** **    | 2,950                          |       |
| Total equity                                                                                                                                          | ** ** | **403,343**                 | ** **    | 395,813                        |       |
| Total liabilities and equity                                                                                                                          | ** ** | **$**                       | **1,477,698** | ** **                     | $          | 1,498,854 |   |

 

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* Derived fromaudited consolidated financial statements

 

*See notes to condensedconsolidated financial statements*

 

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**PolyporeInternational, Inc.**

**CondensedConsolidated Statements of Income (Unaudited)**

 
| ** **                                                         | ** ** | **Three Months Ended** | ** **  |
|--------------------------------------------------------------------|------------|----------------------------------|-------------|
| **(in thousands, except per share data)** | ** ** | **April 4, 2009**      | ** **  | **March 29, 2008** | ** ** |
| Net sales                                                          | ** ** | **$**                            | **108,910** | ** ** | $ | 145,329 |   |
| Cost of goods sold                                                 | ** ** | **65,507**                       | ** **  | 90,369 |   |
| Business interruption insurance recovery                           | ** ** | **—**                       | ** **  | (500 | ) |
| Gross profit                                                       | ** ** | **43,403**                       | ** **  | 55,460 |   |
| Selling, general and administrative expenses                       | ** ** | **25,200**                       | ** **  | 25,318 |   |
| Business restructuring                                             | ** ** | **555**                          | ** **  | **—** | ** ** |
| Operating income                                                   | ** ** | **17,648**                       | ** **  | 30,142 |   |
| Other (income) expense:                                            |       |                             | ** **  |   |   |
| Interest expense, net                                              | ** ** | **14,147**                       | ** **  | 15,940 |   |
| Foreign currency and other                                         | ** ** | **(488**                         | **)**       | (97 | ) |
| ** **                                                         |       | **13,659**                       | ** **  | 15,843 |   |
| Income from continuing operations before income taxes              | ** ** | **3,989**                        | ** **  | 14,299 |   |
| Income taxes                                                       | ** ** | **1,028**                        | ** **  | 3,747 |   |
| Income from continuing operations                                  | ** ** | **2,961**                        | ** **  | 10,552 |   |
| Income from discontinued operations, net of income taxes           | ** ** | **—**                       | ** **  | 2,360 |   |
| Net income                                                         | ** ** | **$**                            | **2,961**   | ** ** | $ | 12,912 |   |
|                                                               |       |                             | ** **  |   |   |
| Net income per share — basic and diluted:                     |       |                             | ** **  |   |   |
| Continuing operations                                              | ** ** | **$**                            | **0.07**    | ** ** | $ | 0.26 |   |
| Discontinued operations                                            | ** ** | **—**                       | ** **  | 0.06 |   |
| Net income per share per share                                     | ** ** | **$**                            | **0.07**    | ** ** | $ | 0.32 |   |
|                                                               |       |                             | ** **  |   |   |
| Weighted average shares outstanding - basic                        | ** ** | **44,374,684**                   | ** **  | 40,325,019 |   |
| Effect of dilutive stock options                                   | ** ** | **21,708**                       | ** **  | 336,426 |   |
| Weighted average shares outstanding - diluted                      | ** ** | **44,396,392**                   | ** **  | 40,661,445 |   |

 

*See notes to condensedconsolidated financial statements*

 

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**PolyporeInternational, Inc.**

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

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **April 4, 2009**      | ** ** | **March 29, 2008** | ** ** |
| **Operating activities:**                                                          |       |                             |       |   |   |
| Net income                                                                         | ** ** | **$**                            | **2,961**  | ** ** | $ | 12,912 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                             | ** ** |   |   |
| Depreciation expense                                                               | ** ** | **8,579**                        | ** ** | 8,577 |   |
| Amortization expense                                                               | ** ** | **4,323**                        | ** ** | 4,553 |   |
| Amortization of loan acquisition costs                                             | ** ** | **647**                          | ** ** | 647 |   |
| Stock compensation                                                                 | ** ** | **308**                          | ** ** | 266 |   |
| Loss on disposal of property, plant and equipment                                  | ** ** | **123**                          | ** ** | 127 |   |
| Foreign currency gain                                                              | ** ** | **(622**                         | **)**      | (605 | ) |
| Deferred income taxes                                                              | ** ** | **(1,462**                       | **)**      | 1,101 |   |
| Business restructuring                                                             | ** ** | **555**                          | ** ** | — |   |
| Gain on sale of synthetic paper business                                           | ** ** | **—**                       | ** ** | (3,774 | ) |
| Changes in operating assets and liabilities, net of acquisitions:                  |       |                             | ** ** |   |   |
| Accounts receivable                                                                | ** ** | **12,867**                       | ** ** | 2,861 |   |
| Inventories                                                                        | ** ** | **(11,485**                      | **)**      | (2,633 | ) |
| Prepaid and other current assets                                                   | ** ** | **1,233**                        | ** ** | 155 |   |
| Accounts payable and accrued liabilities                                           | ** ** | **(7,345**                       | **)**      | 5,548 |   |
| Refundable income taxes                                                            | ** ** | **5,166**                        | ** ** | 1,104 |   |
| Other, net                                                                         | ** ** | **(1,039**                       | **)**      | 538 |   |
| Net cash provided by operating activities                                          | ** ** | **14,809**                       | ** ** | 31,377 |   |
| **Investing activities:**                                                          |       |                             | ** ** |   |   |
| Purchases of property, plant and equipment                                         | ** ** | **(2,612**                       | **)**      | (12,296 | ) |
| Acquisitions, net of cash acquired                                                 | ** ** | **—**                       | ** ** | (61,736 | ) |
| Proceeds from sale of synthetic paper business                                     | ** ** | **—**                       | ** ** | 4,000 |   |
| Net cash used in investing activities                                              | ** ** | **(2,612**                       | **)**      | (70,032 | ) |
| **Financing activities:**                                                          |       |                             | ** ** |   |   |
| Principal payments on debt                                                         | ** ** | **(1,293**                       | **)**      | (11,102 | ) |
| Proceeds from revolving credit facility                                            | ** ** | **—**                       | ** ** | 17,000 |   |
| Net cash provided by (used in) financing activities                                | ** ** | **(1,293**                       | **)**      | 5,898 |   |
| Effect of exchange rate changes on cash and cash equivalents                       | ** ** | **2,148**                        | ** ** | 973 |   |
| **Net increase (decrease) in cash and cash  equivalents**                          | ** ** | **13,052**                       | ** ** | (31,784 | ) |
| Cash and cash equivalents at beginning of period                                   | ** ** | **83,021**                       | ** ** | 54,934 |   |
| **Cash and cash equivalents at end of the period**                                 | ** ** | **$**                            | **96,073** | ** ** | $ | 23,150 |   |

 

***See notes to condensed consolidated financial statements***

 

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**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

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

 

**Description of Business**

** **

Polypore International, Inc. (the “Company”) is a leading globalhigh technology filtration company that develops, manufactures and marketsspecialized microporous membranes used in separation and filtration processes.The Company has a global presence in the major geographic markets of NorthAmerica, South America, Western Europe and Asia.

 

**Basis of Presentation**

** **

**The accompanying unauditedcondensed consolidated financial statements of the Company are prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information.  Accordingly, theunaudited condensed consolidated financial statements and notes do not containcertain information included in the Company’s annual financial statements. Inthe opinion of management, all normal and recurring adjustments that arenecessary for a fair presentation have been made.  Operating results for the three months ended April 4,2009 are not necessarily indicative of the results that may be expected for thefiscal year ending January 2, 2010. The unaudited condensed consolidated financial statements should be readin conjunction with the Company’s consolidated financial statements in theCompany’s Annual Report on Form 10-K for the fiscal year ended January 3,2009.**

** **

**2.             RecentAccounting Pronouncements**

** **

In September 2006, the FASB issued Statement No. 157,*Fair Value Measurement* (“FAS 157”),which clarifies the definition of fair value, establishes a framework formeasuring the fair value of assets and liabilities under generally acceptedaccounting principles and expands disclosure about fair valuemeasurements.  The Company adopted FAS157 in the first quarter of 2008.  In February 2008,the FASB issued FSP No. SFAS 157-2, *EffectiveDate of SFAS No. 157* (“FSP 157-2”), which delays the effectivedate of FAS 157 for nonfinancial assets and liabilities to fiscal yearsbeginning after Nov. 15, 2008.  The Company adopted FSP 157-2 in the first quarter of2009.  In October 2008, the FASBissued FSP No. SFAS 157-3, *DeterminingFair Value of a Financial Asset in a Market That Is Not Active* (“FSP157-3”), which clarifies the application of FAS 157 when the market for afinancial asset is not active.  TheCompany adopted FSP 157-3 upon issuance.  InApril 2009, the FASB issued FSP No. SFAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly*, (“FSP 157-4”).  FSP 157-4 provides additional guidance forestimating fair value in accordance with FAS 157.  The Company adopted FSP 157-4 uponissuance.  The adoption of FAS 157 andsubsequent FSP’s in each period did not have a material impact on the Company’sconsolidated financial statements.

 

In December 2007, the FASB issued Statement No. 141(R),*Business Combinations—a replacement of FASBStatement No. 141* (“FAS 141(R)”). FAS 141(R) changesthe principles and requirements for how the acquirer of a business recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree.FAS 141(R) also provides guidance for recognizing and measuring thegoodwill acquired in the business combination and determines what informationto disclose to enable users of the financial statements to evaluate the natureand financial effects of the business combination. FAS 141(R) iseffective prospectively for fiscal years beginning after December 15,2008.  In April 2009, the FASBissued FSP No. SFAS 141(R)-1, *Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies* (“FSP 141(R)-1”). FSP 141(R)-1 amends FAS 141(R) to address application issuesrelated to the measurement, accounting and disclosure of assets and liabilitiesarising from contingencies in a business combination.  The Company adopted FSP 141( R)-1 uponissuance.  The adoption of FAS 141(R) andFSP 141(R)-1 did not have a material impact on the Company’s consolidatedfinancial statements.

 

In December 2007, the FASB issued Statement No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements — an amendment of ARB No. 51* (“FAS 160”).FAS 160 establishes accounting and reporting standards for ownershipinterests in subsidiaries held by parties other than the parent, the amount ofconsolidated net income attributable to the parent and to the noncontrollinginterest, changes in a parent’s ownership interest and the valuation ofretained noncontrolling equity investments when a subsidiary is deconsolidated.FAS 160 also establishes reporting requirements that provide sufficientdisclosures that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. This standard iseffective for fiscal years beginning after December 15, 2008. The Companyadopted FAS 160 in the first quarter of 2009 with retrospective application ofthe presentation and disclosure requirements. Noncontrolling interests of $2,950,000 at January 3, 2009 werereclassified from “Other” non-current liabilities to equity.

 

In March 2008, the FASB issued Statement No. 161,*Disclosures about Derivative Instruments andHedging Activities* (“FAS 161”). FAS 161 requires companieswith derivative instruments to disclose information about how and why a company

 

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**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

uses derivative instruments, how derivativeinstruments and related hedged items are accounted for under FASB Statement No. 133,*Accounting for Derivative Instruments and HedgingActivities*(“FAS 133”) and how derivative instruments and relatedhedged items affect a company’s financial position, financial performance andcash flows. FAS 161 is effective for financial statements issued forfiscal years beginning after November 15, 2008.  The adoption of FAS 161 did not have amaterial impact on the Company’s consolidated financial statements.

 

In April 2009, the FASB issued FSP No. SFAS 107-1(“FSP 107-1”) and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments* ( “APB 28-1”).FSP 107-1 and APB 28-1 amends FASB Statement No. 107, *Disclosures about Fair Value of Financial Instruments*,to require disclosures about fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements and also amends Accounting Principles Board Opinion No. 28, *Interim Financial Reporting*, to requirethose disclosures in summarized financial information at interim reportingperiods. The Company adopted FSP 107-1 and APB 28-1 upon issuance.  The adoption did not have a material impacton the Company’s consolidated financial statements.

 

In December 2008, the FASB issued FSP No. SFAS 132(R)-1,*Employers’ Disclosures about PostretirementBenefit Plan Assets*, (“FSP 132(R)-1”). FSP 132(R)-1 requiresenhanced disclosures about the plan assets of a company’s defined benefitpension and other postretirement plans intended to provide financial statementusers with a greater understanding of: 1) how investment allocationdecisions are made; 2) the major categories of plan assets; 3) theinputs and valuation techniques used to measure the fair value of plan assets;4) the effect of fair value measurements using significant unobservableinputs on changes in plan assets for the period; and 5) significantconcentrations of risk within plan assets. FSP 132 (R)-1 is effective for fiscal years ending after December 15,2009.

 

**3**.             Inventories

** **

**Inventories are carried at thelower of cost or market using the first-in, first-out (“FIFO”) method ofaccounting and consist of:**

 
| **(in thousands)** | ** ** | **April 4, 2009** | ** ** | **January 3, 2009** | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| Raw materials           | ** ** | **$**                       | **29,192** |                          | $          | 29,266 |   |
| Work-in-process         | ** ** | **17,759**                  |       | 12,100                        |       |
| Finished goods          | ** ** | **32,712**                  |       | 29,032                        |       |
| Total                   | ** ** | **$**                       | **79,663** |                          | $          | 70,398 |   |

 

**4.             Goodwill**

 

As discussed in more detail in Note 7 to the Company’s consolidatedfinancial statements in the Company’s Annual Report on Form 10-K for thefiscal year ended January 3, 2009, goodwill is tested annually forimpairment as of the first day of the fourth quarter or upon the occurrence ofcertain events or substantive changes in circumstances.  During the fourth quarter of 2008, theCompany experienced a significant decline in its stock price and marketcapitalization.  At January 3, 2009,the Company’s market capitalization approximated its book value.  As a result of the decline in stock price,the Company updated its annual impairment test for goodwill as of January 3,2009.  Based on the step one analysisperformed, the Company determined that the fair value of its reporting unitsexceeded the carrying amount and there was no impairment of goodwill at January 3,2009.

 

During the first quarter of 2009, the Company’s stock price and marketcapitalization continued to fluctuate and at April 3, 2009, the Company’smarket capitalization was less than its book value.  As a result, the Company prepared a step oneanalysis at April 4, 2009.  Inpreparing the step one analysis, future cash flows were based on the Company’smost recent forecast and, for years beyond the forecast, the Company’sestimates based on assumed growth rates. The determination of the discount rate was based on a weighted averagecost of capital using a risk-free rate adjusted by a stock-beta-adjusted riskpremium and a size premium. As compared to the January 3, 2009 step oneanalysis, the discount rate increased by 0.5% for each reporting unit toreflect the assumption that the estimated current cost of capital has increasedsince January 3, 2009.  Theaggregate estimated fair value of the reporting units, determined with the useof the income approach model, was compared with the Company’s marketcapitalization. The reasonableness of the excess of the fair value of thereporting units over the Company’s market capitalization at the quarter-end wasevaluated based upon many factors, including control premiums identifiable incomparable transactions. Based on the step one analysis performed, the Companydetermined that the fair value of its reporting units exceeded the carryingamount and there was no impairment of goodwill as of April 4, 2009.

 

Determiningthe fair value of a reporting unit is judgmental in nature and requires the useof significant estimates and assumptions, including revenue growth rates,operating margins, discount rates, strategic plans and future marketconditions, among others. If the Company’s assumptions regarding forecastedrevenue or margin growth rates of certain reporting units are 

 

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**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

notachieved, or changes in discount rates, strategy or market conditions occur,the Company may be required to record goodwill impairment charges in futureperiods.  It is not possible at this timeto determine if any such future impairment charge would result or, if it does,whether such charge would be material.

 

**5.             Debt**

 

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

 
| **(in thousands)**         | ** ** | **April 4, 2009** | ** **  | **January 3, 2009** | ** ** |
|---------------------------------|------------|-----------------------------|-------------|-------------------------------|------------|
| Senior credit facilities:       |       |                        |        |                          |       |
| Revolving credit facility       | ** ** | **$**                       | **—**  |                          | $          | — |   |
| Term loan facilities            | ** ** | **363,470**                 |        | 366,057                       |       |
| 8.75% senior subordinated notes | ** ** | **426,645**                 |        | 433,875                       |       |
| Other                           | ** ** | **62**                      |        | 64                            |       |
| ** **                      |       | **790,177**                 |        | 799,996                       |       |
| Less current maturities         | ** ** | **3,761**                   |        | 3,780                         |       |
| Long-term debt                  | ** ** | **$**                       | **786,416** |                          | $          | 796,216 |   |

 

**6.             FairValue of Financial Instruments**

 

The Company’s financial instruments include cash and cash equivalents,accounts receivable, accounts payable, accrued liabilities, interest rate swapagreements and long-term debt.  Thecarrying value of cash and cash equivalents, accounts receivable, accountspayable and accrued liabilities approximates their fair value due to theshort-term maturities of these assets and liabilities.  The carrying amount of borrowings undersenior secured credit facilities approximates fair value because the interestrates adjust to market interest rates. The fair value of the 8.75% seniorsubordinated notes, based on a quoted market price, was $294,428,000 at April 4,2009.

 

The Company measures the fair value of interest rate swap agreements ona recurring basis.  FAS 157 establishes athree-tier value hierarchy, which prioritizes the inputs used in measuring fairvalue as follows:

·                  Level One: observable inputs such as quoted prices in active markets,

·                  Level Two: inputs other than the quoted prices in active markets thatare observable either directly or indirectly, and

·                  Level Three: unobservable inputs in which there is little or no marketdata, which requires the Company to develop its own assumptions

 

This hierarchy requires the Company to use observable market data, whenavailable, and to minimize the use of unobservable inputs when determining fairvalue.

 

AtApril 4, 2009, the fair value of the interest rate swap agreements was$4,310,000.  The fair value of the swapagreements was determined within level two of the fair value hierarchy under amarket approach model using the notional amount of the interest rate swapagreements multiplied by the observable inputs of time to maturity, interestrates and credit spreads.

 

**7.             Derivativesand Hedging Transactions**

 

**To reducethe interest rate risk inherent in the Company’s variable rate debt, theCompany utilizes interest rate swap agreements to convert a portion of thevariable rate debt to a fixed rate obligation. The Company has two interest rate swap agreements with notionalprincipal amounts totaling $250,000,000. The swap agreement with a notionalamount of $50,000,000 effectively fixes the interest rate on that amount ofterm debt at 5.33% and expires on June 30, 2009. The swap agreement with anotional amount of $200,000,000 effectively fixes the interest rate on thatamount of term debt at 5.29% and expires on December 31, 2009.  In accordance with FAS 133, the Companydesignated these swap agreements as cash flow hedges with changes in fairvalue, net of income taxes, recorded to “Accumulated other comprehensive loss”in the accompanying balance sheet.  TheCompany recognizes the difference between the fixed interest rate on the swapagreements and the variable interest rate on the term debt as interest expense.**

** **

**The Companyhas euro-denominated senior subordinated notes (€150,000,000, or$201,645,000, at April 4, 2009)**held in the U.S. that effectively hedge aportion of the Company’s net investment in its foreign subsidiaries.  The translation of the euro-denominated notesheld in the U.S. results in foreign currency gains or losses that areincluded in “Accumulated other comprehensive loss” in the accompanying balancesheet.

 

**9**

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**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

**The following table shows theimpact of the interest rate swaps and the euro-denominated**senior subordinated notes onthe Company’s consolidated financial statements:

 
| ** **                                 | ** ** | **Gain (Loss) Recognized in Other  Comprehensive Income** | ** ** | **Gain (Loss) Recognized in Income** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                 | ** ** | **Three Months Ended**                                                   | ** ** | **Three Months Ended**                         | ** ** |
| **(in thousands)**                    | ** ** | **April 4, 2009**                                                        | ** ** | **March 29, 2008**                             | ** ** | **April 4, 2009** | ** ** | **March 29, 2008** | ** ** |
|                                       |       |                                                                               |       |                                                     |       |   |   |   |   |
| Interest rate swaps                        | ** ** | **$**                                                                              | **733**    |                                                     | $          | (2,378 | ) | **$** | **(1,776** | **)** | $ | 292 |   |
| Euro-denominated senior subordinated notes | ** ** | **7,230**                                                                          |       | (16,950                                                  | )          | **—** |   | — |   |
|                                            |            |                                                                                    |            |                                                          |            |  |  |  |  |  |  |  |  |

** **

**8.             EmployeeBenefit Plans**

** **

**The Companyand its subsidiaries sponsor multiple defined benefit pension plans and another postretirement benefit plan.  Thefollowing table provides the components of net periodic benefit cost:**

 
| ** **                         | ** ** | **Pension Plans**           | ** ** | **Other Postretirement Benefits** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**            | ** ** |
| **(in thousands)**            | ** ** | **April 4, 2009**      | ** ** | **March 29, 2008**                | ** ** | **April 4, 2009** | ** ** | **March 29, 2008** | ** ** |
| Service cost                       | ** ** | **$**                            | **520**    | ** **                                  | $          | 593 |   | **$** | **4** |   | $ | 17 |   |
| Interest cost                      | ** ** | **984**                          | ** ** | 1,057                                       |       | **30** |   | 34 |   |
| Expected return on plan assets     | ** ** | **(220**                         | **)**      | (282                                        | )          | **—** |   | — |   |
| Amortization of prior service cost | ** ** | **(18**                          | **)**      | (21                                         | )          | — |   | — |   |
| Recognized net actuarial loss      | ** ** | **189**                          | ** ** | 110                                         |       | — |   | 4 |   |
| Net periodic benefit cost          | ** ** | **$**                            | **1,455**  | ** **                                  | $          | 1,457 |   | **$** | **34** |   | $ | 55 |   |

** **

**9.             Environmental Matters**

 

The Company accounts for environmental liabilities inaccordance with AICPA Statement of Position 96-1, “*Environmental Remediation Liabilities*.” Environmentalobligations are accrued when such expenditures are probable and reasonablyestimable. The amount of liability recorded is based on currently availableinformation, including the progress of remedial investigations, current statusof discussions with regulatory authorities regarding the method and extent ofremediation, presently enacted laws and existing technology. Accruals forestimated losses from environmental obligations are adjusted as furtherinformation develops or circumstances change. Costs of future expenditures forenvironmental obligations are not discounted to their present value. 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 $47,109,000 and $49,220,000 as of April 4,2009 and January 3, 2009, respectively.

 

In connection with the acquisition of Membrana GmbH (“Membrana”)in 2002, the Company recorded a reserve for environmental obligations. Thereserve provides for costs to remediate known environmental issues andoperational upgrades which are required in order for the Company 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. The environmental reserve for the Membrana facilitywas $21,482,000 and $22,627,000 at April 4, 2009 and January 3, 2009,respectively. The Company anticipates that expenditures will be made over thenext seven to ten years.

 

The Company has indemnification agreements for certainenvironmental matters from Acordis A.G. (“Acordis”) and Akzo Nobel N.V. (“Akzo”),the prior owners of Membrana. Akzo originally provided broad environmentalprotections to Acordis with the right to assign such indemnities to Acordis’ssuccessors. Akzo’s indemnifications relate to conditions existing prior to December 1999,which is the date that Membrana was sold to Acordis. The Akzo agreementprovides indemnification of claims through December 2007, with theindemnification percentage decreasing each year during the coverage period.Through December 2003, Akzo pays 75% of any approved claim. After that,Akzo pays 65% of claims reported through December 2006 and 50% of claimsreported through December 2007. In addition to the Akzo indemnification,Acordis provides 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. At 

 

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**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

April 4, 2009 and January 3, 2009, amountsreceivable under the indemnification agreements were $17,249,000 and$17,867,000, respectively. The current portion of the indemnificationreceivable is included in “Prepaid and other” in the accompanying consolidatedbalance sheets.

 

In 2004, the Company identified potential environmentalcontamination at its manufacturing facility in Potenza, Italy. Based onenvironmental studies and the initial remediation plan presented to localauthorities, the Company recorded a reserve for environmental obligations. In2006, the Company further refined the remediation plan after consultations withlocal authorities. In December 2008, the Company implemented arestructuring plan which included the closure of this manufacturing facility.Based on discussions with local authorities, environmental consultants andinternal personnel, the Company increased the environmental reserve at Potenzaas part of a restructuring charge by $18,560,000 in the fourth quarter of 2008for the estimated additional costs of environmental remediation and monitoring activitiesthat will be required after closing the facility. Discussions with the localauthorities regarding the required level of remediation are ongoing. Theenvironmental reserve for the Potenza, Italy facility was $22,551,000 and$23,502,000 at April 4, 2009 and January 3, 2009, respectively. TheCompany anticipates that expenditures will be made over the next seven to tenyears.

 

In connection with the acquisition of MicroporousHolding Corporation, the parent company of Microporous Products, L.P. (“Microporous”),on February 29, 2008, the Company identified potential environmentalcontamination at the manufacturing site in Piney Flats, Tennessee. Subsequentto the acquisition, the Company performed additional environmental studies andconfirmed that environmental contamination was present. The environmentalreserve for the Piney Flats, Tennessee facility was $3,076,000 at April 4,2009 and January 3, 2009.  As partof the acquisition, the seller purchased an environmental insurance policy onbehalf of the Company and also provided indemnification for a portion of theinsurance policy deductible. At April 4, 2009 and January 3, 2009,amounts due under the insurance policy and indemnification agreement wereestimated to be $2,522,000. The Company recorded the estimated cost ofremediation and the related receivables from the insurance company andindemnification agreement in applying purchase accounting for the acquisition.The current portion of the indemnification receivable is included in “Prepaidand other” in the accompanying consolidated balance sheets.

 

**10.          BusinessRestructuring**

** **

**2008Restructuring Plan**

 

A supply contract between the Company’s lead-acidbattery separator business and a large customer expired on December 31,2008 and was not renewed. In response, the Company implemented a restructuringplan in its energy storage segment to align lead-acid battery separatorproduction capacity with demand, reduce costs and position the Company to meetfuture growth opportunities.

 

The plan includes closing the Company’s facility inPotenza, Italy, streamlining production at the Company’s facility in Owensboro,Kentucky and reducing selling, general and administrative resources associatedwith the lead-acid separator business. The total cost of the restructuring plan, including environmental costs recordedin the environmental reserve of $18,560,000, is expected to be approximately$61,575,000.  The plan was implementedand a restructuring charge of $59,942,000 was recorded in the fourth quarter of2008.  The restructuring plan includesthe termination of approximately 175 employees, consisting of productionemployees at Potenza, Italy and Owensboro, Kentucky and certain selling,general and administrative employees. The total cost of severance and benefitsis expected to be approximately $10,343,000. The Company estimates that othercosts, consisting primarily of costs associated with closing the Potenza, Italyfacility, are expected to be approximately $3,743,000, of which $2,665,000 hasbeen recognized through April 4, 2009 and the remainder will be recognizedover the next three years.  Therestructuring charge recorded in the fourth quarter of 2008 also included anon-cash impairment chargeof $28,929,000 for buildings and machinery andequipment that will no longer be used in Potenza, Italy.  Cash payments for severance and other exitcosts are expected to be paid over the next three years.  The timing, scope and costs of theserestructuring measures are subject to change as the Company implements the planand continues to evaluate its business needs and costs.

 

**2006Restructuring Plan**

 

In December 2006, the Company’s separations mediasegment exited the production of cellulosic membranes and realigned the coststructure at its Wuppertal, Germany facility. The total cost of the plan, allof which has been incurred, is expected to be approximately $33,753,000,consisting of a $17,492,000 non-cash impairment charge for buildings andequipment, $10,466,000 for employee layoffs and $5,795,000 for other costs relatedto the shutdown of portions of the Wuppertal facility. The other costs includedin the restructuring plan are related to local regulations surrounding completeor partial shutdowns of a facility.

 

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Restructuring reserve activity during the three months ended April 4,2009 consisted of:

 

**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 
| **(in thousands)**      | ** ** | **Balance at  January 3, 2009** | ** ** | **Restructuring  Charges** | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  April 4, 2009** | ** ** |
|------------------------------|------------|------------------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------------------------|------------|----------------------------------------------|------------|
| 2008 Restructuring Plan:     |       |                                           |       |                       |       |               |       |                               |       |                                         |       |
| Severance and benefit  costs |       | $                                              | 9,847      |                       | $          | (63                | )          | $                                  | (744       | )                                            | $          | (351 | ) | $ | 8,689 |   |
| Other                        |       | 829                                            |       | 618                        |       | (679               | )          | (30                                | )          | 738                                          |       |
|                         |       | 10,676                                         |       | 555                        |       | (1,423             | )          | (381                               | )          | 9,427                                        |       |
| ** **                   | ** ** | ** **                                     | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                                   | ** ** |
| 2006 Restructuring Plan:     |       |                                           |       |                       |       |               |       |                               |       |                                         |       |
| Severance and benefit  costs |       | 2,884                                          |       | —                     |       | (92                | )          | (103                               | )          | 2,689                                        |       |
| Other                        |       | 492                                            |       | —                     |       | (346               | )          | (27                                | )          | 119                                          |       |
|                         |       | 3,376                                          |       | —                     |       | (438               | )          | (130                               | )          | 2,808                                        |       |
| ** **                   | ** ** | ** **                                     | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                                   | ** ** |
| Total                        |       | $                                              | 14,052     |                       | $          | 555                |       | $                                  | (1,861     | )                                            | $          | (511 | ) | $ | 12,235 |   |

** **

**11**.          IncomeTaxes

** **

The income tax provision for the interim periods presented is computedat the effective rate expected to be applicable in each respective full yearusing the statutory rates on a country-by-country basis.  Income tax expense recorded in the financialstatements differs from the Federal statutory income tax rate due to a varietyof factors, including state income taxes, the mix of income between U.S. andforeign jurisdictions taxed at varying rates and various changes in estimatesof permanent differences and valuation allowances.

 

**12.          Acquisitions**

 

On February 29, 2008, the Company purchased 100%of the capital stock of Microporous. The acquisition broadens the Company’sparticipation in the deep-cycle industrial battery market, adds to its membranetechnology portfolio and product breadth, enhances service to common customersand adds cost-effective production capacity. The purchase price for Microporousstock, including acquisition-related costs, was $26,980,000. The Company alsorepaid $33,643,000 in indebtedness of Microporous and assumed $14,235,000 ofdebt. The assumed debt was repaid subsequent to the acquisition. The purchaseagreement provides for additional cash payments of up to $1,500,000 in each ofthe two years following the acquisition and up to $750,000 in the third yearfollowing the acquisition, contingent upon the acquired business meetingdefined earn-out provisions. The earn-out for fiscal 2008 was estimated to be$1,062,000 and was allocated to goodwill. The Company is currently engaged indiscussions with the seller regarding acquisition-related matters that mayinfluence the timing and/or amount of this payment.

 

On April 1, 2008, the Company acquired thebattery separator manufacturing assets of Super-Tech Battery ComponentsPvt. Ltd., located in Bangalore, India for $1,949,000.

 

On May 20, 2008, the Company purchased 100% ofthe capital stock of Yurie-Wide Corporation, a South Korean company, for$23,223,000, including acquisition-related costs. The acquisition broadens theCompany’s participation in the lithium battery separator market, adds to itsmembrane technology portfolio and product breadth and adds cost-effectiveproduction capacity.

 

The results of operations from the acquisitionsdescribed above are included in the Company’s energy storage segment from thedate of acquisition. The Company accounts for acquisitions in conformity withFASB Statement No. 141, *BusinessCombinations,* and FASB Statement No. 142, *Goodwill and Other Intangible Assets*. Thefollowing table summarizes the aggregate preliminary purchase price allocationsfor these acquisitions based upon the fair values of the assets acquired andliabilities assumed at the date of acquisition.

 
| **(in thousands)**              | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Current assets                       |       | $          | 16,374     |   |
| Property, plant and equipment        |       | 58,807     |       |
| Intangible assets                    |       | 19,194     |       |
| Goodwill                             |       | 32,005     |       |
| Total assets acquired                |       | 126,380    |       |
| Current liabilities                  |       | 8,767      |       |
| Debt assumed                         |       | 14,235     |       |
| Deferred taxes and other liabilities |       | 17,583     |       |
| Total liabilities assumed            |       | 40,585     |       |
| Net assets acquired                  |       | $          | 85,795     |   |

 

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**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

The excess of the purchase price over the fair valueof the net assets acquired was allocated to goodwill. The goodwill is notdeductible for income tax purposes.

 

**13.**          **Joint Venture**

 

Effective January 1, 2007, the Company purchasedfrom Nippon Sheet Glass Company, Limited (“NSG”) a 60% share in Daramic NSGTianjin PE Separator Co., LTD (“DNPET”) for $5,475,000, includingacquisition-related costs. DNPET is a lead-acid battery separator manufacturingfacility located in Tianjin, China. The acquisition supports the Company’sstrategy of expanding capacity in the high growth Asia-Pacific region. Underthe terms of the agreement, the Company was entitled to all of the earnings andcash flow from DNPET for the first two years and beginning in fiscal 2009,earnings and cash flows are allocated based on ownership percentages. Under theoriginal terms of the agreement, on January 1, 2009 and January 1,2012, the Company can exercise a call option and NSG can exercise a put optionfor the Company to purchase NSG’s 40% ownership interest for $3,600,000. TheCompany and NSG agreed to extend the first option date to July 1, 2009.DNPET is included in the Company’s energy storage segment.  For the three months ended April 4,2009, noncontrolling interest amounts of $229,000, net of applicable incometaxes, are not presented separately in the condensed consolidated statements ofincome due to immateriality.

 

**14.          Business Interruption InsuranceRecovery**

 

**On September 30, 2007, acustomer in the Company’s energy storage segment experienced a fire at one oftheir facilities.  The Company filed abusiness interruption insurance claim with its insurance provider and recovered$500,000 in the three months ended March 29, 2008 related to this claim.**

** **

**15.          Comprehensive Income**

 

**Comprehensive income is asfollows:**

 
| ** **                                                               | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                                                  | ** ** | **April 4, 2009**      | ** ** | **March 29, 2008** | ** ** |
|                                                                     |       |                             |       |   |   |
| Net income                                                               |       | $                                | 2,961      |   | $ | 12,912 |   |
| Foreign currency translation adjustment, net of deferred taxes           |       | 3,154                            |       | (7,172 | ) |
| Net actuarial loss and prior service credit, net of deferred taxes       |       | 145                              |       | (266 | ) |
| Unrealized gain on interest rate swap agreements, net of deferred  taxes |       | 733                              |       | (2,378 | ) |
| Comprehensive income                                                     |       | $                                | 6,993      |   | $ | 3,096 |   |

** **

**16.          RelatedParty Transactions**

** **

**The Company’s German subsidiaryhas equity investments in two companies** thatprovide patent, trademark and research services for the Company and othercompanies that have invested in them. The Company’s investments represent 25% ownership in each of the firmsand are accounted for by the equity method of accounting.  The Company’s equity investment accountbalance was $407,000 and $413,000 at April 4, 2009 and January 3,2009, respectively.  Charges from theaffiliates for work performed were $107,000 and $268,000 for the three monthsended April 4, 2009 and March 29, 2008, respectively.  Amounts due to the affiliates wereapproximately $133,000 and $98,000 at April 4, 2009 and January 3,2009, respectively.

** **

**17.          SegmentInformation**

 

The Company’s operations are principally managed on a products basisand are comprised of three operating segments that have been aggregated intotwo reportable segments: energy storage and separations media. The energystorage segment produces and markets membranes that provide the criticalfunction of separating the cathode and anode in a variety of battery markets,including lithium, industrial and transportation applications. The separationsmedia segment produces and markets membranes used as the high technologyfiltration element in various medical and industrial applications.

 

The Company evaluates the performance of segments and allocatesresources to segments based on operating income before interest, income taxes,depreciation and amortization. In addition, it evaluates business segmentperformance before business 

 

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**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

restructuring charges and the impact of certain non-recurring costs.Financial information relating to the reportable operating segments ispresented below:

 
| ** **                                                | ** ** | **Three Months Ended** | ** **  |
|-----------------------------------------------------------|------------|----------------------------------|-------------|
| **(in thousands)**                                   | ** ** | **April 4, 2009**      | ** **  | **March 29, 2008** | ** ** |
| Net sales to external customers (by major product group): | ** ** | ** **                       | ** **  | ** ** | ** ** |
| Lead-acid battery separators                              | ** ** | **$**                            | **56,443**  | ** ** | $ | 80,591 |   |
| Lithium battery separators                                | ** ** | **17,303**                       | ** **  | 23,370 |   |
| Energy storage                                            | ** ** | **73,746**                       | ** **  | 103,961 |   |
| Healthcare                                                | ** ** | **24,948**                       | ** **  | 27,300 |   |
| Filtration and specialty                                  | ** ** | **10,216**                       | ** **  | 14,068 |   |
| Separations media                                         | ** ** | **35,164**                       | ** **  | 41,368 |   |
| Total net sales to external customers                     | ** ** | **$**                            | **108,910** | ** ** | $ | 145,329 |   |
|                                                      |       |                             | ** **  |   |   |
| Operating income:                                         |       |                             | ** **  |   |   |
| Energy storage                                            | ** ** | **$**                            | **9,289**   | ** ** | $ | 23,830 |   |
| Separations media                                         | ** ** | **9,964**                        | ** **  | 6,806 |   |
| Corporate                                                 | ** ** | **(308**                         | **)**       | (266 | ) |
| Segment operating income                                  | ** ** | **18,945**                       | ** **  | 30,370 |   |
| Business restructuring                                    | ** ** | **555**                          | ** **  | — |   |
| Non-recurring costs                                       | ** ** | **742**                          | ** **  | 228 |   |
| Total operating income                                    | ** ** | **17,648**                       | ** **  | 30,142 |   |
| Reconciling items:                                        |       |                             | ** **  |   |   |
| Interest expense, net                                     | ** ** | **14,147**                       | ** **  | 15,940 |   |
| Foreign currency and other                                | ** ** | **(488**                         | **)**       | (97 | ) |
| Income from continuing operations before income taxes     | ** ** | **$**                            | **3,989**   | ** ** | $ | 14,299 |   |
|                                                      |       |                             | ** **  |   |   |
| Depreciation and amortization:                            |       |                             | ** **  |   |   |
| Energy storage                                            | ** ** | **$**                            | **8,930**   | ** ** | $ | 8,608 |   |
| Separations media                                         | ** ** | **3,972**                        | ** **  | 4,522 |   |
| Total depreciation and amortization                       | ** ** | **$**                            | **12,902**  | ** ** | $ | 13,130 |   |

** **

**18.          DiscontinuedOperations**

 

In January 2008, the Company sold a non-core synthetic paperbusiness, a component of the energy storage segment, for $4,000,000, resultingin a gain on sale of approximately $2,372,000, net of income taxes of$1,402,000.  The results of operationsand the gain on sale from the synthetic paper business are presented asdiscontinued operations for all periods presented in the Company’s condensedconsolidated statements of income.

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

** **

**19.**  FinancialStatements of Guarantors

** **

The senior subordinatednotes are unconditionally guaranteed, jointly and severally, on a senior basisby certain of the Company’s wholly 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 SheetApril 4, 2009**

** **
| **(in thousands)**                                    | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The  Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|----------------------------------------------|------------|------------------|------------|
| **Assets**                                                 | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                                   | ** ** | ** **       | ** ** |
| Cash and cash equivalents                                  |       | $                                     | —     |                                      | $          | 39,452           |       | $                                            | 56,621     |             | $          | — |   | $ | 96,073 |   |
| Accounts receivable, net                                   |       | 30,875                                |       | 54,107                                    |       | —           |       | —                                       |       | 84,982           |       |
| Inventories                                                |       | 32,358                                |       | 47,305                                    |       | —           |       | —                                       |       | 79,663           |       |
| Refundable income taxes                                    |       | 636                                   |       | 10,869                                    |       | (10,630          | )          | —                                       |       | 875              |       |
| Deferred income taxes                                      |       | —                                |       | —                                    |       | 1,233            |       | —                                       |       | 1,233            |       |
| Prepaid and other                                          |       | 3,272                                 |       | 9,327                                     |       | (116             | )          | —                                       |       | 12,483           |       |
| Total current assets                                       |       | 67,141                                |       | 161,060                                   |       | 47,108           |       | —                                       |       | 275,309          |       |
| Due from affiliates                                        |       | 335,974                               |       | 351,381                                   |       | 303,249          |       | (990,604                                     | )          | —           |       |
| Investment in subsidiaries                                 |       | 251,441                               |       | 279,881                                   |       | 309,660          |       | (840,982                                     | )          | —           |       |
| Property, plant and equipment, net                         |       | 153,501                               |       | 248,884                                   |       | —           |       | —                                       |       | 402,385          |       |
| Goodwill                                                   |       | —                                |       | —                                    |       | 601,564          |       | —                                       |       | 601,564          |       |
| Intangibles and loan acquisition costs, net                |       | 28                                    |       | —                                    |       | 179,149          |       | —                                       |       | 179,177          |       |
| Other                                                      |       | 3,171                                 |       | 16,092                                    |       | —           |       | —                                       |       | 19,263           |       |
| Total assets                                               |       | $                                     | 811,256    |                                      | $          | 1,057,298        |       | $                                            | 1,440,730  |             | $          | (1,831,586 | ) | $ | 1,477,698 |   |
| ** **                                                 | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                                   | ** ** | ** **       | ** ** |
| **Liabilities and equity**                                 | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                                   | ** ** | ** **       | ** ** |
| Accounts payable and accrued liabilities                   |       | $                                     | 24,229     |                                      | $          | 34,937           |       | $                                            | 15,583     |             | $          | — |   | $ | 74,749 |   |
| Current portion of debt                                    |       | —                                |       | 532                                       |       | 3,229            |       | —                                       |       | 3,761            |       |
| Current portion of capital lease obligation                |       | 1,511                                 |       | —                                    |       | —           |       | —                                       |       | 1,511            |       |
| Fair value of interest rate swap agreements                |       | —                                |       | —                                    |       | 4,310            |       | —                                       |       | 4,310            |       |
| Total current liabilities                                  |       | 25,740                                |       | 35,469                                    |       | 23,122           |       | —                                       |       | 84,331           |       |
| Due to affiliates                                          |       | 391,252                               |       | 321,411                                   |       | 277,941          |       | (990,604                                     | )          | —           |       |
| Debt, less current portion                                 |       | —                                |       | 45,757                                    |       | 740,659          |       | —                                       |       | 786,416          |       |
| Capital lease obligation, less current portion             |       | 1,440                                 |       | —                                    |       | —           |       | —                                       |       | 1,440            |       |
| Pension and postretirement benefits, less current  portion |       | 2,802                                 |       | 61,939                                    |       | —           |       | —                                       |       | 64,741           |       |
| Postemployment benefits                                    |       | —                                |       | 2,097                                     |       | —           |       | —                                       |       | 2,097            |       |
| Environmental reserve, less current portion                |       | 2,061                                 |       | 36,391                                    |       | —           |       | —                                       |       | 38,452           |       |
| Deferred income taxes and other                            |       | 67,296                                |       | 30,738                                    |       | (1,156           | )          | —                                       |       | 96,878           |       |
| Shareholders’ equity                                  |       | 320,665                               |       | 520,317                                   |       | 400,164          |       | (840,982                                     | )          | 400,164          |       |
| Noncontrolling interest                                    |       | —                                |       | 3,179                                     |       | —           |       | —                                       |       | 3,179            |       |
| Total liabilities and equity                               |       | $                                     | 811,256    |                                      | $          | 1,057,298        |       | $                                            | 1,440,730  |             | $          | (1,831,586 | ) | $ | 1,477,698 |   |

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**Condensed Consolidating Balance SheetJanuary 3, 2009**

 
| **(in thousands)**                                    | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|----------------------------------------------|------------|------------------|------------|
| **Assets**                                                 |       |                                  |       |                                      |       |                 |       |                                         |       |             |       |
| Cash and cash equivalents                                  |       | $                                     | —     |                                      | $          | 25,657               |       | $                                            | 57,364     |             | $          | — |   | $ | 83,021 |   |
| Accounts receivable, net                                   |       | 36,383                                |       | 64,026                                    |       | —               |       | —                                       |       | 100,409          |       |
| Inventories                                                |       | 25,444                                |       | 44,954                                    |       | —               |       | —                                       |       | 70,398           |       |
| Refundable income taxes                                    |       | 617                                   |       | 14,492                                    |       | (8,832               | )          | —                                       |       | 6,277            |       |
| Deferred income taxes                                      |       | —                                |       | —                                    |       | 1,222                |       | —                                       |       | 1,222            |       |
| Prepaid and other                                          |       | 3,831                                 |       | 10,541                                    |       | (97                  | )          | —                                       |       | 14,275           |       |
| Total current assets                                       |       | 66,275                                |       | 159,670                                   |       | 49,657               |       | —                                       |       | 275,602          |       |
| Due from affiliates                                        |       | 314,895                               |       | 358,691                                   |       | 294,702              |       | (968,288                                     | )          | —           |       |
| Investment in subsidiaries                                 |       | 250,996                               |       | 282,531                                   |       | 297,196              |       | (830,723                                     | )          | —           |       |
| Property, plant and equipment, net                         |       | 155,444                               |       | 261,352                                   |       | —               |       | —                                       |       | 416,796          |       |
| Goodwill                                                   |       | —                                |       | —                                    |       | 601,564              |       | —                                       |       | 601,564          |       |
| Intangibles and loan acquisition costs, net                |       | 31                                    |       | —                                    |       | 184,823              |       | —                                       |       | 184,854          |       |
| Other                                                      |       | 3,260                                 |       | 16,778                                    |       | —               |       | —                                       |       | 20,038           |       |
| Total assets                                               |       | $                                     | 790,901    |                                      | $          | 1,079,022            |       | $                                            | 1,427,942  |             | $          | (1,799,011 | ) | $ | 1,498,854 |   |
| **Liabilities and equity**                                 |       |                                  |       |                                      |       |                 |       |                                         |       |             |       |
| Accounts payable and accrued liabilities                   |       | $                                     | 31,577     |                                      | $          | 44,620               |       | $                                            | 6,386      |             | $          | — |   | $ | 82,583 |   |
| Current portion of debt                                    |       | —                                |       | 550                                       |       | 3,230                |       | —                                       |       | 3,780            |       |
| Current portion of capital lease obligation                |       | 1,495                                 |       | —                                    |       | —               |       | —                                       |       | 1,495            |       |
| Fair value of interest rate swap agreements                |       | —                                |       | —                                    |       | 5,477                |       | —                                       |       | 5,477            |       |
| Total current liabilities                                  |       | 33,072                                |       | 45,170                                    |       | 15,093               |       | —                                       |       | 93,335           |       |
| Due to affiliates                                          |       | 368,754                               |       | 326,642                                   |       | 272,892              |       | (968,288                                     | )          | —           |       |
| Debt, less current portion                                 |       | —                                |       | 47,520                                    |       | 748,696              |       | —                                       |       | 796,216          |       |
| Capital lease obligation, less current portion             |       | 1,824                                 |       | —                                    |       | —               |       | —                                       |       | 1,824            |       |
| Pension and postretirement benefits, less current  portion |       | 2,797                                 |       | 63,469                                    |       | —               |       | —                                       |       | 66,266           |       |
| Postemployment benefits                                    |       | —                                |       | 2,425                                     |       | —               |       | —                                       |       | 2,425            |       |
| Environmental reserve, less current portion                |       | 2,061                                 |       | 38,423                                    |       | —               |       | —                                       |       | 40,484           |       |
| Deferred income taxes and other                            |       | 67,749                                |       | 36,344                                    |       | (1,602               | )          | —                                       |       | 102,491          |       |
| Shareholders’ equity                                  |       | 314,644                               |       | 516,079                                   |       | 392,863              |       | (830,723                                     | )          | 392,863          |       |
| Noncontrolling interest                                    |       | —                                |       | 2,950                                     |       | —               |       | —                                       |       | 2,950            |       |
| Total liabilities and equity                               |       | $                                     | 790,901    |                                      | $          | 1,079,022            |       | $                                            | 1,427,942  |             | $          | (1,799,011 | ) | $ | 1,498,854 |   |

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**CondensedConsolidating 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) from continuing operations before  income taxes |       | 4,286                                 |       | 13,080                                    |       | (946                 | )          | (12,202                                      | )          | 3,989            |       |
| Income taxes                                                  |       | 2,293                                 |       | 2,871                                     |       | (4,136               | )          | —                                       |       | 1,028            |       |
| Income from continuing operations                             |       | $                                     | 1,993      |                                      | $          | 10,209               |       | $                                            | 2,961      |             | $          | (12,202 | ) | $ | 2,961 |   |

 

**Condensed Consolidating Statement of Income****For thethree months ended March 29, 2008**

** **
| **(in thousands)**                                | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|----------------------------------------------|------------|------------------|------------|
|                                                   |       |                                  |       |                                      |       |                 |       |                                         |       |             |       |
| Net sales                                              |       | $                                     | 53,884     |                                      | $          | 91,445               |       | $                                            | —     |             | $          | — |   | $ | 145,329 |   |
| Cost of goods sold                                     |       | 24,453                                |       | 65,916                                    |       | —               |       | —                                       |       | 90,369           |       |
| Business interruption insurance recovery               |       | (500                                  | )          | —                                    |       | —               |       | —                                       |       | (500             | )          |
| Gross profit                                           |       | 29,931                                |       | 25,529                                    |       | —               |       | —                                       |       | 55,460           |       |
| Selling, general and administrative expenses           |       | 15,717                                |       | 9,335                                     |       | 266                  |       | —                                       |       | 25,318           |       |
| Operating income (loss)                                |       | 14,214                                |       | 16,194                                    |       | (266                 | )          | —                                       |       | 30,142           |       |
| Interest expense and other                             |       | (575                                  | )          | 1,998                                     |       | 14,420               |       | —                                       |       | 15,843           |       |
| Equity in earnings of subsidiaries                     |       | —                                |       | —                                    |       | (18,766              | )          | 18,766                                       |       | —           |       |
| Income from continuing operations before income  taxes |       | 14,789                                |       | 14,196                                    |       | 4,080                |       | (18,766                                      | )          | 14,299           |       |
| Income taxes                                           |       | 6,011                                 |       | 4,208                                     |       | (6,472               | )          | —                                       |       | 3,747            |       |
| Income from continuing operations                      |       | $                                     | 8,778      |                                      | $          | 9,988                |       | $                                            | 10,552     |             | $          | (18,766 | ) | $ | 10,552 |   |

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**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 operating activities                     |       | $                                     | 9,478      |                                      | $          | 14,842               |       | $                                            | 2,690      |             | $          | (12,201 | ) | $ | 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                                  | )          | (114                                      | )          | (811                 | )          | —                                       |       | (1,293           | )          |
| Intercompany transactions, net                                |       | (7,719                                | )          | (1,860                                    | )          | (2,622               | )          | 12,201                                       |       | —           |       |
| Net cash used in financing activities                         |       | (8,087                                | )          | (1,974                                    | )          | (3,433               | )          | 12,201                                       |       | (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 |   |

 

**Condensed Consolidating Statement of Cash Flows For the three months ended March 29, 2008**

 
| **(in thousands)**                                       | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|----------------------------------------------|------------|------------------|------------|
| Net cash provided by operating activities                     |       | $                                     | 23,008     |                                      | $          | 24,427               |       | $                                            | 12,706     |             | $          | (28,764 | ) | $ | 31,377 |   |
| **Investing activities:**                                     |       |                                  |       |                                      |       |                 |       |                                         |       |             |       |
| Proceeds from sale of synthetic paper business                |       | 4,000                                 |       | —                                    |       | —               |       | —                                       |       | 4,000            |       |
| Purchases of property, plant and equipment                    |       | (7,360                                | )          | (4,936                                    | )          | —               |       | —                                       |       | (12,296          | )          |
| Acquisitions, net of cash acquired                            |       | —                                |       | —                                    |       | (61,736              | )          | —                                       |       | (61,736          | )          |
| Net cash used in investing activities                         |       | (3,360                                | )          | (4,936                                    | )          | (61,736              | )          | —                                       |       | (70,032          | )          |
| **Financing activities:**                                     |       |                                  |       |                                      |       |                 |       |                                         |       |             |       |
| Proceeds from revolving credit facility                       |       | —                                |       | —                                    |       | 17,000               |       | —                                       |       | 17,000           |       |
| Principal payments on debt                                    |       | (353                                  | )          | (9,804                                    | )          | (945                 | )          | —                                       |       | (11,102          | )          |
| Intercompany transactions, net                                |       | (19,770                               | )          | (30,040                                   | )          | 21,046               |       | 28,764                                       |       | —           |       |
| Net cash provided by (used in) financing  activities          |       | (20,123                               | )          | (39,844                                   | )          | 37,101               |       | 28,764                                       |       | 5,898            |       |
| Effect of exchange rate changes on cash and cash  equivalents |       | 475                                   |       | 498                                       |       | —               |       | —                                       |       | 973              |       |
| **Net decrease in cash and cash  equivalents**                |       | —                                |       | (19,855                                   | )          | (11,929              | )          | —                                       |       | (31,784          | )          |
| Cash and cash equivalents at beginning of period              |       | —                                |       | 40,055                                    |       | 14,879               |       | —                                       |       | 54,934           |       |
| **Cash and cash equivalents at  end of period**               |       | $                                     | —     |                                      | $          | 20,200               |       | $                                            | 2,950      |             | $          | — |   | $ | 23,150 |   |

 

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**Table of Contents**

** **

**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 consolidated financial statementsand the related notes included elsewhere in this Quarterly Report on Form 10-Qand our audited consolidated financial statements and the related notesincluded in our Annual Report on Form 10-K for the fiscal year ended January 3,2009.*

 

**Overview**

 

We area leading global high technologyfiltration company that develops, manufactures and markets specializedmicroporous membranes used in separation and filtration processes. In fiscal2008, we generated total net sales of $610.5 million. We operate in twobusiness segments: (i) the energy storage segment, which accounted forapproximately 74% of our fiscal 2008 net sales; and (ii) the separationsmedia segment, which accounted for approximately 26% of our fiscal 2008 netsales. We manufacture our products at facilities in North America, Europe andAsia. Net sales from foreign locations were $388.4 million for fiscal2008.

 

*EnergyStorage Segment*

 

In the energy storagesegment, our membrane separators are a critical performance component inlithium batteries, which are primarily used in consumer electronicapplications, and lead-acid batteries, which are used globally intransportation and industrial applications. We believe the global economicrecession adversely impacted sales in the first quarter of 2009 and maycontinue to have an adverse impact in the second quarter of 2009.  Although the short-term economic outlook isuncertain, especially for the more economically sensitive consumer electronicsportion of our business, we believe that the energy storage segment willcontinue to benefit from continued growth in demand by consumers for mobilepower.

 

Lithium batteries are thepower source in a wide variety of electronics applications ranging fromnotebook computers and mobile phones to cordless power tools. In addition, manynew and developing applications such as electric and hybrid electric vehiclesincorporate large-format batteries that will require much greater membraneseparator volume per battery. As a result, we believe that membrane separatorgrowth will exceed battery unit sales growth. We completed a lithium batteryseparator capacity expansion at our Charlotte, North Carolina facility in thethird quarter of 2008.

 

In May 2008, weacquired Yurie-Wide Corporation, a South Korean company, which we subsequentlyrenamed Celgard Korea, Inc. (“Celgard Korea”). The acquisition broadensour participation in the lithium battery separator market, adds to our membranetechnology portfolio and product breadth and adds cost-effective productioncapacity. After the acquisition, we discontinued Celgard Korea sales and madesignificant operational changes to align Celgard Korea’s operations with ourglobal standards. Celgard Korea will not generate any revenues until theirmanufacturing processes and products meet our higher quality standards, whichwe expect to occur during 2009.

 

In the motor vehiclebattery market, the high proportion of aftermarket sales and the steady growthof the worldwide fleet of motor vehicles provide us with a growing, recurringrevenue base in lead-acid battery membrane separators. We believe we will alsobenefit from the worldwide conversion of alternative separator materials to thehigher-performance polyethylene-based membrane separators such as those weproduce. Growth is strongest in the Asia-Pacific region as a result ofincreasing per capita penetration of automobiles, growth in the industrial andmanufacturing sectors, and a high rate of conversion to polyethylene-basedmembrane separators. We have positioned ourselves to benefit from this growthby expanding capacity at our Prachinburi, Thailand facility, acquiring aproduction facility in Tianjin, China and establishing an Asian TechnicalCenter in Thailand.

 

In February 2008, wepurchased 100% of the stock of Microporous Holding Corporation, the parentcompany of Microporous Products L.P. (“Microporous”). The acquisition ofMicroporous adds rubber-based battery separator technology to our product line.This acquisition broadens our participation in the deep-cycle industrialbattery market (*e.g.,* forkliftand stationary batteries), adds to our membrane technology portfolio andproduct breadth, enhances service to common customers and adds cost-effectiveproduction capacity. On April 1, 2008, we acquired the battery separatormanufacturing assets of Super-Tech Battery Components Pvt. Ltd., locatedin Bangalore, India.

 

A supply contract betweenour lead-acid battery separator business and Johnson Controls, Inc. (“JCI”)expired on December 31, 2008 and was not renewed. In response, weimplemented a restructuring plan in our energy storage segment to alignlead-acid battery separator production capacity with demand, reduce costs andposition ourselves to meet future growth opportunities. The initial planincludes closing our facility in Potenza, Italy, streamlining production at ourfacility in Owensboro, Kentucky and reducing selling, general andadministrative resources associated with the lead-acid separator business. Thetotal estimated cost of the plan is expected to be approximately$61.6 million, including cash charges of $32.7 million for severance,environmental, and other exit costs and a non-cash impairment charge of$28.9 million. We began implementing the restructuring plan during thefourth quarter and recorded restructuring charges of $59.9 million.

 

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*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.

 

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.

 

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 ofDirectors.

 

*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 doubtful accounts.

 

*Impairmentof intangibles and goodwill*

 

Identified intangibleassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable. In accordance withFASB Statement No. 142, *Goodwill andOther Intangible Assets*, goodwill and indefinite-lived intangibleassets are not amortized, but are subject to an annual impairment test unlesscircumstances dictate more frequent assessments. Goodwill impairment testing isa two-step process performed at the reporting unit level. Our reporting unitsare at the operating segment level. Step one compares the fair value of ourreporting units to their carrying amount. The fair value of the reporting unitis determined using the income approach, corroborated by a comparison to marketcapitalization and key multiples of comparable companies. Under the incomeapproach, we determine fair value based on estimated future cash flows of eachreporting unit, discounted by an estimated weighted-average cost of capital. Ifthe fair value of the reporting unit is greater than its carrying amount, thereis no impairment. If the reporting unit’s carrying amount exceeds its fairvalue, then the second step must be completed to measure the amount ofimpairment, if any. Step two of the goodwill impairment test calculates theimplied fair value of the reporting unit’s goodwill with the carrying value ofits goodwill. If the carrying amount of goodwill exceeds the implied fair valueof goodwill, an impairment loss will be recognized in an amount equal to theexcess.

 

Determining the fairvalue of a reporting unit is judgmental in nature and requires the use ofsignificant estimates and assumptions, including revenue growth rates,operating margins, discount rates, strategic plans and future marketconditions, among others. Given the current economic environment and theuncertainties regarding the impact on our business, there can be no assurancethat our estimates and assumptions made for purposes of our goodwill impairmenttesting will prove to be accurate predictions of the future. If our assumptionsregarding forecasted revenue or margin growth rates are not achieved, orchanges in discount rates, strategy or market conditions occur, we may berequired to record goodwill impairment charges in future periods. It is notpossible at this time to determine if any future impairment charge will occurand if they do, whether such charge will be material.

 

At April 4, 2009 a5% decrease in the estimated free cash flow assumptions would have resulted ina reduction in fair values of approximately $47.9 million for our energystorage segment and $19.0 million for our separations media segment. Forthe energy storage segment, the 5% decrease would have resulted in the carryingvalue of the lead-acid battery separator reporting 

 

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unit exceeding its fairvalue by $12.7 million and would require a step two analysis to determinethe amount of goodwill impairment, if any.

 

At April 4, 2009, a..5% increase in the discount rate would have resulted in a reduction in fairvalues of $42.2 million for our energy storage segment and$17.3 million for our separations media segment. For the energy storagesegment, the .5% increase in the discount rate would have resulted in thecarrying value of the lead-acid battery separator reporting unit exceeding itsfair value by $9.1 million and would require a step two analysis todetermine the amount of goodwill impairment, if any.

 

*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 3, 2009,a 1% decrease in the discount rate would increase our projected benefitobligations and the unfunded status of our pension plans by $12.8 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. At January 3, 2009, if the expected rate of return on pension planassets were reduced by 1%, the result would have increased our net periodicbenefit expense for fiscal 2008 by $0.2 million dollars. At January 3,2009, if the actual plan assets were reduced by 1%, the unfunded status of ourpension plans would increase by $0.2 million.

 

*Environmentalmatters*

 

We account forenvironmental liabilities in accordance with AICPA Statement of Position 96-1, “*Environmental Remediation Liabilities*.”Environmental obligations are accrued when such expenditures are probable andreasonably estimable. The amount of liability recorded is based on currentlyavailable information, including the progress of remedial investigations,current status of discussions with regulatory authorities regarding the methodand extent of remediation, presently enacted laws and existing technology.Accruals for estimated losses from environmental obligations are adjusted asfurther information 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. In 2004, we identified and accrued forpotential environmental contamination at our manufacturing facility in Potenza,Italy. In December 2008, we implemented a restructuring plan whichincluded the closure of the Potenza, Italy manufacturing facility and increasedthe environmental reserve for the estimated additional costs of environmental remediationand monitoring activities that will be required after closing the facility.

 

We have indemnificationagreements for certain environmental matters from Acordis A.G. (“Acordis”) andAkzo Nobel N.V. (“Akzo”), the prior owners of Membrana. Recoveries ofenvironmental costs from other parties are recognized as assets when theirreceipt is deemed probable. We have recorded a receivable with regard to theAkzo indemnification agreement. If indemnification claims cannot be enforcedagainst Acordis and Akzo, we may be required to reduce the amount ofindemnification receivable recorded.

 

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###### **Results of Operations**

###### ** **

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

 
| ** **                                             | ** ** | ** **                       | ** ** | **Percentage of Sales** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**  | ** ** |
| **($’s in millions)**                   | ** ** | **April 4, 2009**      | ** ** | **March 29, 2008**      | ** ** | **April 4, 2009** | ** ** | **March 29, 2008** | ** ** |
|                                                   |       |                             |       |                              |       |   |   |   |   |
| Net sales                                              |       | $                                | 108.9      |                              | $          | 145.3 |   | 100.0 | % | 100.0 | % |
|                                                   |       |                             |       |                              |       |   |   |   |   |
| Gross profit                                           |       | 43.4                             |       | 55.4                              |       | 39.9 |   | 38.2 |   |
| Selling, general and administrative expenses           |       | 25.2                             |       | 25.3                              |       | 23.1 |   | 17.4 |   |
| Business restructuring                                 |       | 0.6                              |       | —                            |       | 0.5 |   | — |   |
| Operating income                                       |       | 17.6                             |       | 30.1                              |       | 16.2 |   | 20.7 |   |
| Interest expense, net                                  |       | 14.1                             |       | 15.9                              |       | 13.0 |   | 11.0 |   |
| Foreign currency and other                             |       | (0.5                             | )          | (0.1                              | )          | (0.4 | ) | (0.1 | ) |
| Income from continuing operations before income  taxes |       | 4.0                              |       | 14.3                              |       | 3.7 |   | 9.8 |   |
| Income taxes                                           |       | 1.0                              |       | 3.7                               |       | 0.9 |   | 2.6 |   |
| Income from continuing operations                      |       | $                                | 3.0        |                              | $          | 10.6 |   | 2.7 | % | 7.3 | % |

 

***Comparison of the three months ended April 4, 2009 with the threemonths ended March 29, 2008***

 

*Net sales.** *Net sales for the three months ended April 4,2009 were $108.9 million, a decrease of $36.4 million, or 25.1%, from sameperiod in the prior year.  Energy storagesales for the three months ended April 4, 2009 were $73.7 million, adecrease of $30.2 million, or 29.1%. Energy storage sales of lead-acid and lithium battery separatorsdecreased by 30.0% and 26.0%, respectively, due to current macro-economicconditions, customers reducing inventory levels to manage working capital andthe negative impact of dollar/euro exchange rate fluctuations of $4.8 million. Lead-acid separator sales were also impacted by the loss of a customer at theend of fiscal 2008.

 

Separations media salesfor the three months ended April 4, 2009 were $35.2 million, a decrease of$6.2 million, or 15.0% from the same period in the prior year, primarily due tothe negative impact of dollar/euro exchange rate fluctuations of $4.3million.  Healthcare sales decreased 8.6%as the impact of higher sales volumes of synthetic hemodialysis membranes wasmore than offset by the negative impact of dollar/euro exchange ratefluctuations.  Filtration and specialtyproduct sales decreased by 27.4% due to current macro-economic conditions andthe negative impact of dollar/euro exchange rate fluctuations.

 

*Gross Profit**. *Gross profit as a percent of net saleswas 39.9% for the three months ended April 4, 2009, as compared to 38.2%in the same period of the prior year. Energy storage gross profit as a percent of net sales was 35.3% for thethree months ended April 4, 2009, as compared to the prior year percentageof 39.2%.  The reduction in gross profitas a percent of net sales was the result of lower production volumes whichresulted in higher production costs per unit as fixed costs were applied tolower production volumes.  Separationsmedia gross profit as a percent of net sales increased to 49.4% for the threemonths ended April 4, 2009, from 35.4% in the same period of the prioryear.  The increase was due primarily tothe timing and efficiency of production runs, improved manufacturing yields anddecreased energy costs.

 

*Selling,general and administrative expenses**. *Selling, general and administrativeexpenses decreased by $0.1 million for the three months ended April 4,2009.  The decrease was primarily due toreduced discretionary spending and cost savings from the 2008 restructuringplan, offset by costs associated with the FTC matter and increased operatingcosts in 2009 for the acquisitions of Microporous and Yurie-Wide Corporation inFebruary and May of 2008, respectively. Selling, general and administrativeexpenses as a percent of net sales was 23.1% for the three months ended April 4,2009, as compared to 17.4% in the same period in the prior year.  The increase in selling, general andadministrative expenses as a percent of sales is due primarily to lower sales.

 

*Interest expense. *Interest expense for the three months ended April 4,2009 decreased by $1.8 million from the same period in the prior year.  The decrease in interest expense wasprimarily driven by lower interest rates under our senior credit facilities andthe positive impact of dollar/euro exchange rate fluctuations on oureuro-denominated debt.

 

*Income taxes**. *The income tax provision for the interimperiods presented is computed at the effective rate expected to be applicablein each respective full year using the statutory rates on a country-by-countrybasis.  The effective tax rate oncontinuing operations was 25.8% for the three months ended April 4, 2009,as compared to 26.2% for the same period in the 

 

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prioryear.  Our effective tax rate fluctuatesdue to a variety of factors, including state income taxes, the mix of incomebetween U.S. and foreign jurisdictions taxed at varying rates, various changesin estimates of permanent differences and valuation allowances and the relativesize of our consolidated income before income taxes.

 

The primary factorimpacting our effective tax rate is the mix of earnings between the various taxjurisdictions in which we do business. Each tax 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 that we operate in 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 4, 2009**      | ** ** | **March 29, 2008** | ** ** |
| U.S. Federal statutory rate                                    |       | 35.0                             | %          | 35.0 | % |
| State income taxes                                             |       | 0.2                              |       | 1.0 |   |
| Mix of income in taxing jurisdictions                          |       | (10.2                            | )          | (11.2 | ) |
| Other permanent differences and valuation  allowances          |       | 0.8                              |       | 1.4 |   |
| Total effective tax rate on income from continuing  operations |       | 25.8                             | %          | 26.2 | % |

 

**Business Restructuring**

 

**The pre-tax components of restructuring activity in the three monthsended April 4, 2009 were as follows:**

 
| **(in millions)**       | ** ** | **Balance at  January 3, 2009** | ** ** | **Restructuring  Charges** | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  April 4, 2009** | ** ** |
|------------------------------|------------|------------------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------------------------|------------|----------------------------------------------|------------|
| 2008  Restructuring Plan:    |       |                                           |       |                       |       |               |       |                               |       |                                         |       |
| Severance  and benefit costs |       | $                                              | 9.9        |                       | $          | (0.1               | )          | $                                  | (0.7       | )                                            | $          | (0.4 | ) | $ | 8.7 |   |
| Other                        |       | 0.8                                            |       | 0.6                        |       | (0.7               | )          | —                             |       | 0.7                                          |       |
|                         |       | 10.7                                           |       | 0.5                        |       | (1.4               | )          | (0.4                               | )          | 9.4                                          |       |
| ** **                   | ** ** | ** **                                     | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                                   | ** ** |
| 2006  Restructuring Plan:    |       |                                           |       |                       |       |               |       |                               |       |                                         |       |
| Severance  and benefit costs |       | 2.9                                            |       | —                     |       | (0.1               | )          | (0.1                               | )          | 2.7                                          |       |
| Other                        |       | 0.5                                            |       | —                     |       | (0.4               | )          | 0.1                                |       |                                         |       |
|                         |       | 3.4                                            |       | —                     |       | (0.5               | )          | (0.1                               | )          | 2.8                                          |       |
| ** **                   | ** ** | ** **                                     | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                                   | ** ** |
| Total                        |       | $                                              | 14.1       |                       | $          | 0.5                |       | $                                  | (1.9       | )                                            | $          | (0.5 | ) | $ | 12.2 |   |

 

We expect to makepayments against the restructuring reserve of approximately $2.9 millionover the next twelve months.

 

*2008restructuring plan.*  A supply contract between our lead-acidbattery separator business and a large customer expired on December 31,2008 and was not renewed. In response, we implemented a restructuring plan inour energy storage segment to align lead-acid battery separator productioncapacity with demand, reduce costs and position ourselves to meet future growthopportunities.

 

The plan includes closingour facility in Potenza, Italy, streamlining production at our facility inOwensboro, Kentucky and reducing selling, general and administrative resourcesassociated with the lead-acid separator business.  The total cost of the restructuring plan, includingenvironmental costs included in the environmental reserve of $18.6 million, isexpected to be approximately $61.6 million. The plan was implemented and a restructuring charge of $59.9 million wasrecorded in the fourth quarter of 2008. The restructuring plan includes the termination of approximately 175employees, consisting of production employees at Potenza, Italy and Owensboro,Kentucky and certain selling, general and administrative employees. The totalcost of severance and benefits is expected to be approximately $10.3 million. TheCompany estimates that other costs, consisting primarily of costs associatedwith closing the Potenza, Italy facility, are expected to be approximately $3.7million, of which $2.7 million has been recognized through April 4, 2009and the remainder will be recognized over the next three years. Therestructuring charge recorded in the fourth quarter of 2008 also included anon-cash impairment charge of $28.9 million for buildings and machinery andequipment that will no longer be used in Potenza, Italy.  Cash payments for severance and other exitcosts are expected to be paid over the next three years.  The timing, scope and costs of theserestructuring measures are subject to change as we implement the plan andcontinue to evaluate our business needs and costs.

 

*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, allof which has been incurred, is expected to be approximately $33.8 million,consisting of a $17.5 million non-cash impairment charge for buildings and

 

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equipment,$10.5 million for employee layoffs and $5.8 million for other costsrelated to the shutdown of portions of the Wuppertal facility. The other costsincluded in the restructuring plan are related to local regulations surroundingcomplete or partial shutdowns of a facility. During fiscal 2007, the reservefor severance and benefit costs was reduced as a result of lower actualseverance expenses than originally estimated.

 

**Liquidity and Capital Resources**

** **

Cash and cash equivalentsincreased to $96.1 million at April 4, 2009 from $83.0 millionat January 3, 2009, due primarily to cash flow generated from operations.

 

*Operatingactivities.*  Net cash provided by operating activities was$14.8 million in the three months ended April 4, 2009, as compared to$31.4 million in the three months ended March 29, 2008. Cash providedby operating activities was due primarily to cash from operations.  Working capital in total remained fairlyconsistent with year-end levels. Accounts receivable decreased by$12.9 million (excluding the $2.5 million decrease due to movementsin foreign exchange rates) due to lower sales while days sales outstanding at April 4,2009 were comparable to the prior year.  Inventoriesincreased $11.5 million (excluding the $2.2 million decrease due tomovements in foreign exchange rates) based on production and capacity planningfor expected customer order patterns. Accounts payable and accrued liabilitiesdecreased by $7.6 million (excluding the $0.2 million decrease due tomovements in foreign exchange rates) primarily due to the timing of payments onaccounts payable and accrued liabilities and partially offset by an increase inaccrued interest on the 8.75% senior subordinated notes. Interest for the 8.75%senior subordinated notes is paid semi-annually in the second and fourthquarters.  Refundable income taxesdecreased $4.1 million (excluding the $1.3 million decrease due to movements inforeign exchange rates) primarily due to the receipt of a $5.0 million federalincome tax refund.

 

Net cash provided byoperations was $31.4 million in the three months ended March 29, 2008 andconsisted of net income before non-cash expenses and a decrease in workingcapital of $7.6 million, excluding the impact of the acquisition of Microporousand foreign exchange rate fluctuations. Accounts receivable decreased approximately $2.9 million (excluding the$4.5 million increase due to movements in foreign exchange rates and a$7.5 million increase resulting from acquisitions) from December 29, 2007to March 29, 2008 and days sales outstanding at March 29, 2008remained comparable to the prior year. Inventories increased approximately $2.6million (excluding the $2.8 million increase due to movements in foreignexchange rates and a $4.7 million increase resulting from acquisitions) due toplanned inventory builds in anticipation of our seasonal Europeanshutdowns.  Accounts payable and accruedliabilities increased approximately $5.6 million (excluding the$1.6 million increase due to movements in foreign exchange rates and a$5.9 million increase resulting from acquisitions) primarily due to an increasein accrued interest on the 8.75% senior subordinated notes.

 

*Investingactivities.*  Capital expenditures were $2.6 millionin the three months ended April 4, 2009. For fiscal 2009, we expect tospend approximately $15 million to $20 million to maintain ourexisting facilities.  Because of currenteconomic conditions, the timing and amounts of capital expenditures in excessof normal maintenance requirements will be intensely scrutinized and approvedon a case-by-case basis.

 

*Financingactivities.*  Payments on debt were $1.3 million inthe three months ended April 4, 2009.

 

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($317.2 million outstanding at April 4, 2009) and a€35.0 million term loan facility ($46.2 million at April 4,2009) and a $90.0 million revolving credit facility. At April 4,2009, we had $87.5 million of borrowings available under the revolvingcredit facility ($90.0 million revolving credit facility less$2.5 million of undrawn standby letters of credit). The term loans maturein July 2014 and the revolving credit facility matures in July 2013.Interest rates under the senior secured credit facility are, at our option,equal to either an alternate base rate plus a 1.00% margin or the Eurocurrencybase rate plus a 2.00% margin. At April 4, 2009, the interest rates on theU.S. dollar term loan and Eurodollar term loan were 2.50% and 3.14%,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 4, 2009, our senior leverage ratio was 1.94 to 1.00 and theentire amount of the revolving credit facility was available for borrowing.

 

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

 
| **(in millions)**                                           | ** ** | **Last Twelve Months  Ended April 4, 2009** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Net loss                                                         |       | $                                                                    | (25.1      | ) |
| Add/Subtract:                                                    |       |                                                                 |       |
| Depreciation and amortization                                    |       | 54.8                                                                 |       |
| Interest expense, net                                            |       | 58.9                                                                 |       |
| Income taxes                                                     |       | 4.1                                                                  |       |
| Stock-based compensation expense                                 |       | 1.3                                                                  |       |
| Foreign currency gain                                            |       | (2.4                                                                 | )          |
| Loss on disposal of property, plant, and equipment               |       | 1.7                                                                  |       |
| Business restructuring                                           |       | 60.4                                                                 |       |
| Pro forma results for Yurie-Wide Corporation  acquisition        |       | (0.3                                                                 | )          |
| Costs related to the strike at our Owensboro,  Kentucky facility |       | 6.7                                                                  |       |
| Costs related to the FTC complaint                               |       | 1.9                                                                  |       |
| Other non-cash or non-recurring charges                          |       | 0.9                                                                  |       |
| Adjusted EBITDA                                                  |       | $                                                                    | 162.9      |   |

 

Thecalculation of the senior leverage ratio as defined under the senior creditfacility as of April 4, 2009 is as follows:

 
| **(in millions)** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| Indebtedness (1)       |       | $          | 316.4      |   |
| Adjusted EBITDA        |       | 162.9      |       |
| Actual leverage ratio  |       | 1.94       | x          |
|                        |            |            |            |  |

 

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(1)   Calculated as the sum of outstanding borrowings underthe senior secured credit facilities and the capital lease obligation, less theamount of cash on hand (not to exceed $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.

 

In January 2008, theCompany entered into interest rate swap agreements that effectively fix theinterest rate on $250.0 million of the Company’s term loans. The interestrate swap agreement which terminates on June 30, 2009 fixes the interestrate on $50.0 million of the term loans at 5.33%. The interest rate swapagreement which terminates on December 31, 2009 fixes the interest rate on$200.0 million of the term loans at 5.29%.

 

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$52.2 million.

 

The 8.75% seniorsubordinated notes ($426.6 million outstanding at April 4, 2009) 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 capital expenditures and funding requirementsfor long-term liabilities. We anticipate that our cash on hand and operatingcash flow, together with borrowings under the revolving credit facility, willbe sufficient to meet our anticipated future operating expenses, capitalexpenditures and debt service obligations as they become due for at least thenext twelve months. However,

 

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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 theapplication of the proceeds therefrom to the repayment of bank debt or otherindebtedness. In addition, in connection with any future acquisitions, we mayrequire additional funding which may be provided in the form of additional debtor equity financing or a combination thereof. There can be no assurance thatany additional 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 $73.0 million and $93.6 million forthe three months ended April 4, 2009 and March 29, 2008,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**

###### ** **

We account forenvironmental liabilities in accordance with AICPA Statement of Position 96-1, “*Environmental Remediation Liabilities*.”Environmental obligations are accrued when such expenditures are probable andreasonably estimable. The amount of liability recorded is based on currentlyavailable information, including the progress of remedial investigations,current status of discussions with regulatory authorities regarding the methodand extent of remediation, presently enacted laws and existing technology.Accruals for estimated losses from environmental obligations are adjusted asfurther information develops or circumstances change. Costs of futureexpenditures for environmental obligations are not discounted to their presentvalue. We do not currently anticipate any material loss in excess of theamounts accrued. However, our future remediation expenses may be affected by anumber of uncertainties including, but not limited to, the difficulty inestimating the extent and method of remediation, the evolving nature ofenvironmental regulations, and the availability and application of technology.We do not expect the resolution of such uncertainties to have a materialadverse effect on our consolidated financial position or liquidity. Recoveriesof environmental costs from other parties are recognized as assets when theirreceipt is deemed probable. Environmental reserves, which are predominatelyeuro-denominated, were $47.1 million and $49.2 million as of April 4, 2009and January 3, 2009, respectively.

 

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. The environmental reserve for the Membrana facilitywas $21.5 million and $22.6 million at April 4, 2009 and January 3,2009, respectively. We anticipate that expenditures will be made over the nextseven 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 toconditions existing prior to December 1999, which is the date thatMembrana was sold to Acordis. The Akzo agreement provides indemnification ofclaims through December 2007, with the indemnification percentagedecreasing each year during the coverage period. Through December 2003,Akzo pays 75% of any approved claim. After that, Akzo pays 65% of claimsreported through December 2006 and 50% of claims reported through December 2007.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 4, 2009 and January 3, 2009, amounts receivable under theindemnification agreements were $17.2 million and $17.9 million, respectively.The current portion of the indemnification receivable is included in “Prepaidand other” in the accompanying consolidated balance sheets.

 

In 2004, we identifiedpotential environmental contamination at our manufacturing facility in Potenza,Italy. Based on environmental studies and the initial remediation planpresented to local authorities, we recorded a reserve for environmentalobligations. In 2006, we further refined the remediation plan afterconsultations with local authorities. In December 2008, we implemented arestructuring plan which included the closure of this manufacturing facility.Based on discussions with local authorities, environmental consultants andinternal personnel, we increased the environmental reserve at Potenza as partof a 

 

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restructuring charge by$18.6 in the fourth quarter of 2008 for the estimated additional costs ofenvironmental remediation and monitoring activities that will be required afterclosing the facility. Discussions with the local authorities regarding therequired level of remediation are ongoing. The environmental reserve for thePotenza, Italy facility was $22.5 million and $23.5 million at April 4,2009 and January 3, 2009, respectively. We anticipate that expenditureswill be made over the next seven to ten years.

 

In connection with theacquisition of Microporous on February 29, 2008, we identified potentialenvironmental contamination at the manufacturing site in Piney Flats,Tennessee. Subsequent to the acquisition, we performed additional environmentalstudies and confirmed that environmental contamination was present.  The environmental reserve for the PineyFlats, Tennessee facility was $3.1 million at April 4, 2009 and January 3,2009.  As part of the acquisition, theseller purchased an environmental insurance policy on our behalf and alsoprovided indemnification for a portion of the insurance policy deductible. At April 4,2009 and January 3, 2009, amounts due under the insurance policy andindemnification agreement were estimated to be $2.5 million. We recorded theestimated cost of remediation and the related receivables from the insurancecompany and indemnification agreement in applying purchase accounting for theacquisition. The current portion of the indemnification receivable is includedin “Prepaid and other” in the accompanying consolidated balance sheets.

 

**Off-Balance Sheet Arrangements**

 

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

 

**New Accounting Standards**

 

In September 2006,the FASB issued Statement No. 157, *FairValue Measurement* (“FAS 157”), which clarifies the definitionof fair value, establishes a framework for measuring the fair value of assetsand liabilities under generally accepted accounting principles and expandsdisclosure about fair value measurements. We adopted FAS 157 in the first quarter of 2008.  In February 2008, the FASB issued FSP No. SFAS157-2, *Effective Date of SFAS No. 157*(“FSP 157-2”), which delays the effective date of FAS 157 for nonfinancialassets and liabilities to fiscal years beginning after Nov. 15, 2008.  We adopted FSP 157-2 in the first quarter of2009.  In October 2008, the FASBissued FSP No. SFAS 157-3, *DeterminingFair Value of a Financial Asset in a Market That Is Not Active* (“FSP157-3”), which clarifies the application of FAS 157 when the market for afinancial asset is not active.  Weadopted FSP 157-3 upon issuance.  InApril 2009, the FASB issued FSP No. SFAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased and IdentifyingTransactions That Are Not Orderly*, (“FSP 157-4”).  FSP 157-4 provides additional guidancefor estimating fair value in accordance with FAS 157.  We adopted FSP 157-4 upon issuance.  The adoption of FAS 157 and subsequent FSP’sin each period did not have a material impact on our consolidated financialstatements.

 

In December 2007,the FASB issued Statement No. 141(R), *BusinessCombinations—a replacement of FASB Statement No. 141* (“FAS 141(R)”).FAS 141(R) changes the principles and requirements for how theacquirer of a business recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree. FAS 141(R) also provides guidance forrecognizing and measuring the goodwill acquired in the business combination anddetermines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination. FAS 141(R) is effective prospectively for fiscal yearsbeginning after December 15, 2008. In April 2009, the FASB issued FSP No. SFAS 141(R)-1, *Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination That Arise from Contingencies* (“FSP 141(R)-1”).  FSP 141(R)-1 amends FAS 141(R) toaddress application issues related to the measurement, accounting anddisclosure of assets and liabilities arising from contingencies in a businesscombination.  We adopted FSP 141(R)-1upon issuance.  The adoption of FAS 141(R) andFSP 141(R)-1 did not have a material impact on our consolidated financialstatements.

 

In December 2007,the FASB issued Statement No. 160, *NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51*(“FAS 160”). FAS 160 establishes accounting and reporting standardsfor ownership interests in subsidiaries held by parties other than the parent,the amount of consolidated net income attributable to the parent and to thenoncontrolling interest, changes in a parent’s ownership interest and thevaluation of retained noncontrolling equity investments when a subsidiary isdeconsolidated. FAS 160 also establishes reporting requirements thatprovide sufficient disclosures that clearly identify and distinguish betweenthe interests of the parent and the interests of the noncontrolling owners.This standard is effective for fiscal years beginning after December 15,2008. We adopted FAS 160 in the first quarter of 2009 with retrospectiveapplication of the presentation and disclosure requirements.  Noncontrolling interests of $3.0 million at January 3,2009 were reclassified from “Other” non-current liabilities to shareholders’equity.

 

**In March 2008,the FASB issued Statement No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (“FAS 161”).FAS 161 requires companies with derivative instruments to discloseinformation about how and why a company**

 

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** **

**usesderivative instruments, how derivative instruments and related hedged items areaccounted for under FASB Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities*(“FAS 133”)and how derivative instruments and related hedged items affect a company’sfinancial position, financial performance and cash flows. FAS 161 iseffective for financial statements issued for fiscal years beginning after November 15,2008.  The adoption of FAS 161 did nothave a material impact on our consolidated financial statements.**

** **

In April 2009, theFASB issued FSP No. SFAS 107-1 (“FSP 107-1”) and APB 28-1, *Interim Disclosures about Fair Value of FinancialInstruments* (“APB 28-1”). FSP 107-1 and APB 28-1 amends FASBStatement No. 107, *Disclosures aboutFair Value of Financial Instruments*, to require disclosures aboutfair value of financial instruments for interim reporting periods of publiclytraded companies as well as in annual financial statements and also amendsAccounting Principles Board Opinion No. 28, *Interim Financial Reporting*, to require those disclosures insummarized financial information at interim reporting periods. We adopted FSP107-1 and APB 28-1 upon issuance.  Theadoption did not have a material impact on our consolidated financialstatements.

 

In December 2008,the FASB issued FSP No. SFAS 132(R)-1, *Employers’ Disclosures about Postretirement Benefit Plan Assets*,(“FSP 132(R)-1”). FSP 132(R)-1 requires enhanced disclosures about the planassets of a company’s defined benefit pension and other postretirement plansintended to provide financial statement users with a greater understanding of:1) how investment allocation decisions are made; 2) the majorcategories of plan assets; 3) the inputs and valuation techniques used tomeasure the fair value of plan assets; 4) the effect of fair valuemeasurements using significant unobservable inputs on changes in plan assetsfor the period; and 5) significant concentrations of risk within planassets.  FSP 132 (R)-1 is effective forfiscal years ending after December 15, 2009.  The disclosures required by the FSP will beincluded in our fiscal 2009 year-end financial statements.

 

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**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 4, 2009, wehad fixed rate debt of $426.6 million and variable rate debt of $363.5million. In January 2008, we entered into interest rate swap agreementsthat effectively fix the interest rate on $250.0 million of our variablerate debt. The pre-tax earnings and cash flow impact resulting from a 100 basispoint increase in interest rates on our variable rate debt, giving effect tothe interest rate swap agreements and holding other variables constant, wouldbe $1.1 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 ofour assets are based in our foreign locations and are translated into U.S.dollars at foreign currency exchange rates in effect as of the end of eachperiod, with the effect of such translation reflected in other comprehensiveincome (loss). We have a euro-denominated term loan and euro-denominated seniorsubordinated notes that effectively hedge our net investment in foreignsubsidiaries. Therefore, foreign currency gains and losses resulting from thetranslation of the euro-denominated debt are included in accumulated othercomprehensive income (loss). Accordingly, our consolidated shareholders’ equitywill fluctuate depending upon the weakening or strengthening of the U.S. dollaragainst the respective foreign currency, primarily the euro.

 

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

 
| ** **          | ** ** | **Three Months Ended** | ** ** |
|---------------------|------------|------------------------|------------|
| ** **          | ** ** | **April 4, 2009** | ** ** | **March 29, 2008** | ** ** |
| Period end rate     |       | 1.3443                 |       | 1.5785 |   |
| Period average rate |       | 1.3060                 |       | 1.4974 |   |

 

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 4,2009, 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 4, 2009.

 

Duringthe three months ended April 4, 2009, there has been no change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-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 Federal Trade Commission (the “FTC”) requestingthat the Company voluntarily provide certain documents and information to theFTC regarding our acquisition of Microporous, which was completed on February 29,2008. The letter stated that the FTC was conducting an investigation todetermine whether the Microporous acquisition will substantially lessencompetition in any relevant market and thereby violate federal antitrust laws.We voluntarily responded to the letter in writing and through supplementaltelephone conversations and meetings.

 

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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 in an effort to answertheir questions and resolve the investigation.

 

On September 9,2008, the FTC issued an administrative complaint against us alleging that ouractions and the acquisition of Microporous have substantially lessenedcompetition in North American markets for lead-acid battery separators. Wefiled an answer to the complaint on October 15, 2008 denying the materialallegations of the complaint. Proceedings will be held before an AdministrativeLaw Judge of the FTC with an initial hearing currently scheduled to begin on May 12,2009. The timing of a final resolution of this matter is uncertain.

 

We believe that thecomplaint is unfounded and that the Microporous acquisition is and willcontinue to be beneficial to our customers and the industry. Therefore, weintend to vigorously defend this action by the FTC. It is not possible,however, to predict with certainty whether we will be successful in thelitigation or through a judicial appellate process. If the FTC and the courtswere to reach a conclusion adverse to us, the FTC could seek remedies includingdivestiture of some or all of the assets acquired in the Microporousacquisition. We believe that a final judicial resolution to the challenge bythe FTC to the Microporous acquisition could take several years.

 

On March 9, 2009, wefiled a complaint against Trojan Battery Company (“Trojan”) in the UnitedStates District Court for the Western District of North Carolina alleging thatTrojan had breached its contract with the Company by failing to pay when dueinvoices reflecting properly adjusted prices and asserting that Trojan hadengaged in unfair trade practices.  Thereafter, and on or about March 19,2009, Trojan filed a complaint against us in the United States District Courtfor the Central District of California alleging that we had breached ourcontract with Trojan and challenging our acquisition of Microporous underCalifornia antitrust law.  We believe that the Trojan complaint isunfounded and we intend to vigorously defend against it.   It is notpossible, however, to predict with certainty whether we will be successful ineither piece of litigation.

 

We believe that the finalresolution of these matters will not have a material adverse impact on ourbusiness, financial condition or results of operations.

 

**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 12, 2009 |   | **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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