Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

** **

**(MarkOne)**

 

| **x**                                                                                                                                                                                                                                                                                    | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                               | ** **                                                                                               |
| **For the quarterly period ended July 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**                                                                                                                                                                                                                                                      |

 

**POLYPORE INTERNATIONAL, INC.**

(Exact Name of Registrantas Specified in Its Charter)

 

| **Delaware**                                                                     | ** ** | **43-2049334**                     |
|----------------------------------------------------------------------------------|------------|------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)                 |       | (IRS Employer  Identification No.) |
|                                                                             |       |                               |
| **11430  North Community House Road, Suite 350  Charlotte, North Carolina** | ** ** | **28277**                          |
| (Address of  Principal Executive Offices)                                        |       | (Zip Code)                         |

 

**(704)587-8409**

(Registrant’sTelephone Number, 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.  x Yes o No

 

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

 

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

 

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

 

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

 

There were 44,391,326shares of the registrant’s common stock outstanding as of August 4, 2009.

 

 

 

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**Polypore International, Inc.**

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

**For the Three Months Ended July 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 |       | 21       |
| **Item 3.**      |       | Quantitative  and Qualitative Disclosures About Market Risk                                    |       | 32       |
| **Item 4.**      |       | Controls and  Procedures                                                                       |       | 32       |
|             |       |                                                                                           |       |     |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                          |       |     |
| **Item 1.**      |       | Legal Proceedings                                                                              |       | 33       |
| **Item 4.**      |       | Submission of  Matters to a Vote of Security Holders                                           |       | 33       |
| **Item 6.**      |       | Exhibits                                                                                       |       | 34       |
|             |       |                                                                                           |       |     |
| **SIGNATURES**   |       |                                                                                           |

 

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

 

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**Forward-looking Statements**

 

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

·                  the failure tocontinue to develop innovative products;

·                  the loss of ourcustomers;

·                  the verticalintegration by our customers of the production of our products into their own manufacturingprocess;

·                  increases inprices for raw materials or the loss of key supplier contracts;

·                  our substantialindebtedness;

·                  interest raterisk related to our variable rate indebtedness;

·                  our inabilityto generate cash;

·                  restrictionsrelated to the senior secured credit facilities;

·                  employeeslowdowns, strikes or similar actions;

·                  productliability claims exposure;

·                  risks inconnection with our operations outside the United States;

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

·                  the failure toprotect our intellectual property;

·                  the loss ofsenior management;

·                  the incurrenceof additional debt, contingent liabilities and expenses in connection withfuture  acquisitions;

·                  the failure toeffectively integrate newly acquired operations;

·                  the adverseimpact on our financial condition of past restructuring activities;

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

·                  the adverseimpact from legal proceedings on our financial condition;

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

·                  economicuncertainty and the current crisis in global credit and financial markets.

 

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

 

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**PART I — FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**PolyporeInternational, Inc.**

**CondensedConsolidated Balance Sheets**

 
| **(in thousands, except share data)**                                                                                                                                           | ** ** | **July 4, 2009** | ** **    | **January 3, 2009*** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------|---------------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **(unaudited)**       | ** **    | ** **                | ** ** |
| **Assets**                                                                                                                                                                      |       |                  |          |                      |       |
| Current  assets:                                                                                                                                                                |       |                  |          |                      |       |
| Cash  and cash equivalents                                                                                                                                                      | ** ** | **$**                 | **96,705**    |                      | $          | 83,021 |   |
| Accounts  receivable, net                                                                                                                                                       | ** ** | **88,165**            |          | 100,409                   |       |
| Inventories                                                                                                                                                                     | ** ** | **83,459**            |          | 70,398                    |       |
| Refundable  income taxes                                                                                                                                                        | ** ** | **1,826**             |          | 6,277                     |       |
| Deferred  income taxes                                                                                                                                                          | ** ** | **1,229**             |          | 1,222                     |       |
| Prepaid  and other                                                                                                                                                              | ** ** | **14,364**            |          | 14,275                    |       |
| Total  current assets                                                                                                                                                           | ** ** | **285,748**           |          | 275,602                   |       |
| Property,  plant and equipment, net                                                                                                                                             | ** ** | **405,704**           |          | 416,796                   |       |
| Goodwill                                                                                                                                                                        | ** ** | **600,770**           |          | 601,564                   |       |
| Intangibles  and loan acquisition costs, net                                                                                                                                    | ** ** | **175,133**           |          | 184,854                   |       |
| Environmental  indemnification receivable                                                                                                                                       | ** ** | **14,525**            |          | 17,389                    |       |
| Other                                                                                                                                                                           | ** ** | **2,546**             |          | 2,649                     |       |
| Total  assets                                                                                                                                                                   | ** ** | **$**                 | **1,484,426** |                      | $          | 1,498,854 |   |
|                                                                                                                                                                            |       |                  |          |                      |       |
| **Liabilities and equity**                                                                                                                                                      |       |                  |          |                      |       |
| Current  liabilities:                                                                                                                                                           |       |                  |          |                      |       |
| Accounts  payable                                                                                                                                                               | ** ** | **$**                 | **20,586**    | ** **                | **$**      | 23,806 | ** ** |
| Accrued  liabilities                                                                                                                                                            | ** ** | **47,446**            |          | 58,777                    |       |
| Current  portion of debt                                                                                                                                                        | ** ** | **3,718**             |          | 3,780                     |       |
| Current portion of capital lease  obligation                                                                                                                                    | ** ** | **1,527**             |          | 1,495                     |       |
| Fair value of interest rate swap  agreements                                                                                                                                    | ** ** | **2,944**             |          | 5,477                     |       |
| Total  current liabilities                                                                                                                                                      | ** ** | **76,221**            |          | 93,335                    |       |
| Debt,  less current portion                                                                                                                                                     | ** ** | **795,516**           |          | 796,216                   |       |
| Capital  lease obligation, less current portion                                                                                                                                 | ** ** | **1,053**             |          | 1,824                     |       |
| Pension  and postretirement benefits, less current portion                                                                                                                      | ** ** | **68,344**            |          | 66,266                    |       |
| Postemployment  benefits                                                                                                                                                        | ** ** | **1,884**             |          | 2,425                     |       |
| Environmental  reserve, less current portion                                                                                                                                    | ** ** | **36,981**            |          | 40,484                    |       |
| Deferred  income taxes                                                                                                                                                          | ** ** | **75,628**            |          | 78,815                    |       |
| Other                                                                                                                                                                           | ** ** | **21,558**            |          | 23,676                    |       |
| Commitments  and contingencies                                                                                                                                                  |       |                  |          |                      |       |
|                                                                                                                                                                            |       |                  |          |                      |       |
| Equity:                                                                                                                                                                         |       |                  |          |                      |       |
| Shareholders’  equity:                                                                                                                                                     |       |                  |          |                      |       |
| Preferred  stock — 15,000,000 shares authorized, no shares issued andoutstanding                                                                                           | ** ** | **—**            | ** **    | **—**                | ** ** |
| Common  stock, $.01 par value — 200,000,000 shares authorized,44,388,162 and 44,377,560 issued and  outstanding at July 4, 2009 andJanuary 3, 2009, respectively | ** ** | **444**               |          | 444                       |       |
| Paid-in  capital                                                                                                                                                                | ** ** | **480,250**           |          | 479,442                   |       |
| Retained  deficit                                                                                                                                                               | ** ** | **(59,500**           | **)**         | (66,671                   | )          |
| Accumulated  other comprehensive loss                                                                                                                                           | ** ** | **(17,449**           | **)**         | (20,352                   | )          |
| Total  shareholders’ equity                                                                                                                                                | ** ** | **403,745**           |          | 392,863                   |       |
| Noncontrolling  interest                                                                                                                                                        | ** ** | **3,496**             |          | 2,950                     |       |
| Total  equity                                                                                                                                                                   | ** ** | **407,241**           |          | 395,813                   |       |
| Total  liabilities and equity                                                                                                                                                   | ** ** | **$**                 | **1,484,426** |                      | $          | 1,498,854 |   |

 

----

* Derived fromaudited consolidated financial statements

 

*See notes to condensedconsolidated financial statements*

 

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**PolyporeInternational, Inc.**

**Condensed Consolidated Statements ofIncome (Unaudited)**

 
| ** **                                                | ** ** | **Three Months Ended**       | ** **  | **Six Months Ended**          | ** ** |
|-----------------------------------------------------------|------------|------------------------------|-------------|-------------------------------|------------|
| **(in thousands, except per share  data)**                | ** ** | **July 4,********2009** | ** **  | **June 28,********2008** | ** ** | **July 4,********2009** | ** ** | **June 28,********2008** | ** ** |
| Net  sales                                                | ** ** | **$**                        | **118,179** |                          | $          | 164,665 | ** ** | **$** | **227,089** |   | $ | 309,994 |   |
| Cost  of goods sold                                       | ** ** | **71,601**                   |        | 105,470                       | ** ** | **137,108** |   | 195,839 |   |
| Business  interruption insurance recovery                 | ** ** | **—**                   |        | (1,900                        | )          | **—** |   | (2,400 | ) |
| Gross  profit                                             | ** ** | **46,578**                   |        | 61,095                        | ** ** | **89,981** |   | 116,555 |   |
| Selling,  general and administrative expenses             | ** ** | **25,092**                   |        | 29,747                        | ** ** | **50,292** |   | 55,065 |   |
| Business  restructuring                                   | ** ** | **11**                       |        | —                        | ** ** | **566** |   | — |   |
| Operating  income                                         | ** ** | **21,475**                   |        | 31,348                        | ** ** | **39,123** |   | 61,490 |   |
| Other  (income) expense:                                  | ** ** | ** **                   |        |                          | ** ** | ** ** |   |   |   |
| Interest  expense, net                                    | ** ** | **14,622**                   |        | 16,083                        | ** ** | **28,769** |   | 32,023 |   |
| Foreign  currency and other                               | ** ** | **1,278**                    |        | (546                          | )          | **790** |   | (643 | ) |
|                                                      | ** ** | **15,900**                   |        | 15,537                        | ** ** | **29,559** |   | 31,380 |   |
| Income  from continuing operations before income taxes    | ** ** | **5,575**                    |        | 15,811                        | ** ** | **9,564** |   | 30,110 |   |
| Income  taxes                                             | ** ** | **1,365**                    |        | 4,637                         | ** ** | **2,393** |   | 8,384 |   |
| Income  from continuing operations                        | ** ** | **4,210**                    |        | 11,174                        | ** ** | **7,171** |   | 21,726 |   |
| Income  from discontinued operations, net of income taxes | ** ** | **—**                   |        | —                        | ** ** | **—** |   | 2,360 |   |
| Net  income                                               | ** ** | **$**                        | **4,210**   |                          | $          | 11,174 | ** ** | **$** | **7,171** |   | $ | 24,086 |   |
|                                                      | ** ** | ** **                   |        |                          | ** ** | ** ** |   |   |   |
| Net  income per share — basic:                       | ** ** | ** **                   |        |                          | ** ** | ** ** |   |   |   |
| Continuing  operations                                    | ** ** | **$**                        | **0.09**    |                          | $          | 0.27 | ** ** | **$** | **0.16** |   | $ | 0.53 |   |
| Discontinued  operations                                  |       | —                       |        | —                        |       | — |   | 0.06 |   |
| Net  income per share                                     | ** ** | **$**                        | **0.09**    |                          | $          | 0.27 | ** ** | **$** | **0.16** |   | $ | 0.59 |   |
|                                                      | ** ** | ** **                   |        |                          | ** ** | ** ** |   |   |   |
| Net  income per share —diluted:                      | ** ** | ** **                   |        |                          | ** ** | ** ** |   |   |   |
| Continuing  operations                                    | ** ** | **$**                        | **0.09**    |                          | $          | 0.26 | ** ** | **$** | **0.16** |   | $ | 0.53 |   |
| Discontinued  operations                                  |       | —                       |        | —                        |       | — |   | 0.05 |   |
| Net  income per share                                     | ** ** | **$**                        | **0.09**    |                          | $          | 0.26 | ** ** | **$** | **0.16** |   | $ | 0.58 |   |
|                                                      | ** ** | ** **                   |        |                          | ** ** | ** ** |   |   |   |
| Weighted  average shares outstanding - basic              | ** ** | **44,379,598**               |        | 41,946,581                    | ** ** | **44,377,141** |   | 41,135,800 |   |
| Effect  of dilutive stock options                         | ** ** | **253,648**                  |        | 248,319                       | ** ** | **167,615** |   | 241,157 |   |
| Weighted  average shares outstanding - diluted            | ** ** | **44,633,246**               |        | 42,194,900                    | ** ** | **44,544,756** |   | 41,376,957 |   |

 

*Seenotes to condensed consolidated financial statements*

 

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**PolyporeInternational, Inc.**

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

 
| ** **                                                                                          | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| **(in thousands)**                                                                                  | ** ** | **July 4,  2009** | ** ** | **June 28,  2008** | ** ** |
| **Operating activities:**                                                                           |       |                   |       |   |   |
| Net  income                                                                                         | ** ** | **$**                  | **7,171**  |   | $ | 24,086 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                  |       |                   |       |   |   |
| Depreciation  expense                                                                               | ** ** | **17,085**             |       | 18,160 |   |
| Amortization  expense                                                                               | ** ** | **8,453**              |       | 9,281 |   |
| Amortization  of loan acquisition costs                                                             | ** ** | **1,294**              |       | 1,294 |   |
| Stock  compensation                                                                                 | ** ** | **753**                |       | 533 |   |
| Loss  on disposal of property, plant and equipment                                                  | ** ** | **259**                |       | 503 |   |
| Foreign  currency (gain) loss                                                                       | ** ** | **244**                |       | (1,427 | ) |
| Deferred  income taxes                                                                              | ** ** | **(3,414**             | **)**      | 1,130 |   |
| Business  restructuring                                                                             | ** ** | **566**                |       | — |   |
| Gain  on sale of synthetic paper business                                                           | ** ** | **—**             |       | (3,774 | ) |
| Changes  in operating assets and liabilities, net of acquisitions:                                  |       |                   |       |   |   |
| Accounts  receivable                                                                                | ** ** | **11,553**             |       | 661 |   |
| Inventories                                                                                         | ** ** | **(13,403**            | **)**      | (3,271 | ) |
| Prepaid  and other current assets                                                                   | ** ** | **(350**               | **)**      | (808 | ) |
| Accounts  payable and accrued liabilities                                                           | ** ** | **(13,738**            | **)**      | (2,661 | ) |
| Refundable  income taxes                                                                            | ** ** | **4,221**              |       | — |   |
| Other,  net                                                                                         | ** ** | **(3,603**             | **)**      | (912 | ) |
| Net cash provided by operating activities                                                           | ** ** | **17,091**             |       | 42,795 |   |
| **Investing activities:**                                                                           |       |                   |       |   |   |
| Purchases  of property, plant and equipment                                                         | ** ** | **(4,766**             | **)**      | (28,309 | ) |
| Acquisitions,  net of cash acquired                                                                 | ** ** | **—**             |       | (86,783 | ) |
| Proceeds  from sale of synthetic paper business                                                     | ** ** | **—**             |       | 4,000 |   |
| Net cash used in investing activities                                                               | ** ** | **(4,766**             | **)**      | (111,092 | ) |
| **Financing activities:**                                                                           |       |                   |       |   |   |
| Principal  payments on debt                                                                         | ** ** | **(2,594**             | **)**      | (17,204 | ) |
| Proceeds  from revolving credit facility                                                            | ** ** | **—**             |       | 46,000 |   |
| Payments  on revolving credit facility                                                              | ** ** | **—**             |       | (46,000 | ) |
| Proceeds  from stock option exercises                                                               | ** ** | **55**                 |       | 1,200 |   |
| Proceeds  from issuance of common stock, net of underwriting fees and other offering  related costs | ** ** | **—**             |       | 84,949 |   |
| Net  cash provided by (used in) financing activities                                                | ** ** | **(2,539**             | **)**      | 68,945 |   |
| Effect  of exchange rate changes on cash and cash equivalents                                       | ** ** | **3,898**              |       | 494 |   |
| **Net increase in cash and cash equivalents**                                                       | ** ** | **13,684**             |       | 1,142 |   |
| Cash  and cash equivalents at beginning of period                                                   | ** ** | **83,021**             |       | 54,934 |   |
| **Cash and cash equivalents at end of the period**                                                  | ** ** | **$**                  | **96,705** |   | $ | 56,076 |   |

 

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

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

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

 

**Description of Business**

** **

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

 

**Basisof Presentation**

** **

**Theaccompanying unaudited condensed consolidated financial statements of theCompany are prepared in accordance with U.S. generally accepted accountingprinciples for interim financial information. Accordingly, the unaudited condensed consolidated financial statementsand notes do not contain certain information included in the Company’s annualfinancial statements. In the opinion of management, all normal and recurringadjustments that are necessary for a fair presentation have been made.  Operating results for the three and sixmonths ended July 4, 2009 are not necessarily indicative of the resultsthat may be expected for the fiscal year ending January 2, 2010.  The unaudited condensed consolidatedfinancial statements should be read in conjunction with the Company’sconsolidated financial statements in the Company’s Annual Report on Form 10-Kfor the fiscal year ended January 3, 2009.**

** **

The Company has evaluated subsequent eventsthrough August 7, 2009, the date on which the Form 10-Q was filedwith the Securities and Exchange Commission.

 

**2.             Recent Accounting Pronouncements**

** **

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. The Company 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.  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 FSPs 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), *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.  The Company adopted FSP141(R)-1 upon issuance.  The adoption ofFAS 141(R) and FSP 141(R)-1 did not have a material impact on the Company’sconsolidated financial statements.

 

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. This standard is effective for fiscal years beginning after December 15,2008. The Company adopted FAS 160 in the first quarter of 2009 withretrospective application of the presentation and disclosure requirements.  Noncontrolling interests of $2,950,000 at January 3,2009 were reclassified from “Other” non-current liabilities to equity.

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

In March 2008, theFASB 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 uses derivative instruments, howderivative instruments and related hedged items are accounted for under FASBStatement No. 133, *Accounting for DerivativeInstruments and Hedging Activities*(“FAS 133”) and howderivative instruments and related hedged items affect a company’s financialposition, financial performance and cash flows. FAS 161 is effective forfinancial statements issued for fiscal years beginning after November 15,2008.  The adoption of FAS 161 did nothave a material 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, *Interim Disclosures about Fair Value of FinancialInstruments* ( “APB 28-1”). FSP 107-1 and APB 28-1 amend 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 amendAccounting Principles Board Opinion No. 28, *Interim Financial Reporting*, to require those disclosures insummarized financial information at interim reporting periods. The Companyadopted FSP 107-1 and APB 28-1 upon issuance. The adoption did not have a material impact on the Company’sconsolidated financial statements.

 

In May 2009, theFASB issued Statement No. 165*, Subsequent Events*(“FAS 165”).  FAS 165 establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  The new standard iseffective for interim or annual periods ending after June 15, 2009.  The adoption of FAS 165 did not have animpact on the Company’s consolidated financial statements.

 

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.

 

**3.             Issuance of Common Stock**

** **

**In May 2008,the Company completed a follow-on public offering of 8,031,000 shares of commonstock at $24.00 per share, pursuant to which 3,750,000 shares were sold by theCompany and 4,281,000 shares were sold by certain selling shareholders,including certain of the Company’s executive officers.  The Company received net proceeds from theoffering of $84,949,000, net of underwriting fees of $4,275,000 and otheroffering related costs through June 28, 2008.  The Company paid additional expensessubsequent to June 28, 2008, with final net offering proceeds totaling$84,847,000.  The net proceeds were usedto repay outstanding borrowings under the Company’s revolving credit facilityand for general corporate purposes.**

** **

**4**.             Inventories

** **

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

 
| **(in thousands)** | ** ** | **July 4, 2009** | ** ** | **January 3, 2009** | ** ** |
|--------------------|------------|-----------------------|------------|--------------------------|------------|
| Raw materials      | ** ** | **$**                 | **30,361** |                     | $          | 29,266 |   |
| Work-in-process    | ** ** | **17,814**            |       | 12,100                   |       |
| Finished  goods    | ** ** | **35,284**            |       | 29,032                   |       |
| Total              | ** ** | **$**                 | **83,459** |                     | $          | 70,398 |   |

 

**5.             Goodwill**

 

Goodwillis tested annually for impairment as of the first day of the fourth quarter andat interim dates upon the occurrence of certain events or substantive changesin circumstances. Because of fluctuations in the Company’s stock price, theCompany tested goodwill for impairment at January 3, 2009 and April 4,2009 and concluded that the fair value of the Company’s reporting unitsexceeded the carrying amount and there was no impairment of goodwill.  No events or substantive changes incircumstances have occurred since the last interim test that would indicate aninterim goodwill impairment test should be performed as of July 4, 2009.

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**6.             Debt**

 

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

 
| **(in  thousands)**              | ** ** | **July 4, 2009** | ** **  | **January 3, 2009** | ** ** |
|----------------------------------|------------|-----------------------|-------------|--------------------------|------------|
| Senior  credit facilities:       |       |                  |        |                     |       |
| Revolving  credit facility       | ** ** | **$**                 | **—**  | ** **               | **$**      | **—** | ** ** |
| Term  loan facilities            | ** ** | **364,414**           |        | 366,057                  |       |
| 8.75%  senior subordinated notes | ** ** | **434,820**           |        | 433,875                  |       |
| Other                            | ** ** | **—**            |        | 64                       |       |
|                             | ** ** | **799,234**           |        | 799,996                  |       |
| Less  current maturities         | ** ** | **3,718**             |        | 3,780                    |       |
| Long-term  debt                  | ** ** | **$**                 | **795,516** |                     | $          | 796,216 |   |

 

**7.             Derivatives and HedgingTransactions**

 

**To reduce the interest rate risk inherent in the Company’s variablerate debt, the Company may utilize interest rate swap agreements to convert allor a portion of the variable rate debt to a fixed rate obligation.  At July 4, 2009, the Company has aninterest rate swap agreement with a notional principal amount of $200,000,000that effectively fixes the interest rate on that amount of term debt at 5.54%and expires on December 31, 2009. The Company had an interest rate swapagreement which expired on June 30, 2009 with a notional amount of$50,000,000. In accordance with FAS 133, the Company designated these swapagreements as cash flow hedges with changes in fair value, net of income taxes,recorded to “Accumulated other comprehensive loss” in the accompanying balancesheet.**

** **

**The Company has euro-denominated senior subordinated notes(€150,000,000, or $209,820,000, at July 4, 2009)**held in the U.S. thateffectively hedge a portion of the Company’s net investment in its foreignsubsidiaries. The translation of the euro-denominated notes held in the U.S.results in foreign currency gains or losses that areincluded in “Accumulated other comprehensive loss” in the accompanying balancesheet.

** **

**Theimpact of the interest rate swaps and the euro-denominated**senior subordinated notes onother comprehensive income is as follows:

 
| ** **                                  | ** ** | **Gain (Loss) Recognized in Other Comprehensive Income** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **Three Months Ended**                                   | ** ** | **Six Months Ended** | ** ** |
| **(in  thousands)**                         | ** ** | **July 4, 2009**                                    | ** ** | **June 28, 2008** | ** ** | **July 4, 2009** | ** ** | **June 28, 2008** | ** ** |
|                                        |       |                                                     |       |   |   |   |   |   |   |
| Interest  rate swap agreements              | ** ** | **$**                                                    | **859**    |   | $ | 1,849 | ** ** | **$** | **1,592** |   | $ | (529 | ) |
| Euro-denominated  senior subordinated notes | ** ** | **(8,175**                                               | **)**      | 510 | ** ** | **(945** | **)** | (16,440 | ) |
|                                             |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |

** **

**For the interest rate swap agreements, the Company recognizes thedifference between the fixed interest rate on the swap agreements and thevariable interest rate on the term debt as interest expense. The impact ofinterest rate swaps on interest expense is as follows:**

 
| ** **                     | ** ** | **Gain (Loss) Recognized in Income** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended**               | ** ** | **Six Months Ended** | ** ** |
| **(in  thousands)**            | ** ** | **July 4, 2009**                | ** ** | **June 28, 2008** | ** ** | **July 4, 2009** | ** ** | **June 28, 2008** | ** ** |
|                           |       |                                 |       |   |   |   |   |   |   |
| Interest  rate swap agreements | ** ** | **$**                                | **(1,817** | **)** | $ | (409 | ) | **$** | **(3,593** | **)** | $ | (117 | ) |
|                                |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

**8.             Fair Value of Financial Instruments**

 

The Company’s financialinstruments include cash and cash equivalents, accounts receivable, accountspayable, accrued liabilities, an interest rate swap agreement and long-termdebt.  The carrying value of cash andcash equivalents, accounts receivable, 

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

accounts payable andaccrued liabilities approximates fair value due to the short-term maturities ofthese assets and liabilities.  The carryingamount of borrowings under the senior secured credit facilities approximatesfair value because the interest rates adjust to market interest rates. The fairvalue of the 8.75% senior subordinated notes, based on a quoted market price,was $378,034,500 at July 4, 2009.

 

The Company measures thefair value of the interest rate swap agreement on a recurring basis.  FAS 157 establishes a three-tier valuehierarchy, which prioritizes the inputs used in measuring fair value asfollows:

 

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

·                  Level Two: inputs other than the quoted prices inactive markets that are observable either directly or indirectly, and

·                  Level Three: unobservable inputs in which there islittle or no market data, which requires the Company to develop its ownassumptions

 

This hierarchy requiresthe Company to use observable market data, when available, and to minimize theuse of unobservable inputs when determining fair value.

 

At July 4, 2009, the fair value ofthe interest rate swap agreement was $2,944,000.  The fair value of the swap agreement wasdetermined within level two of the fair value hierarchy under a market approachmodel using the notional amount of the interest rate swap agreement multipliedby the observable inputs of time to maturity, interest rates and creditspreads.

 

**9.             Employee Benefit Plans**

** **

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

** **
| ** **                            | ** ** | **Pension Plans**      | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| **(in thousands)**                    | ** ** | **July 4, 2009**  | ** ** | **June 28, 2008** | ** ** | **July 4, 2009** | ** ** | **June 28, 2008** | ** ** |
|                                  |       |                   |       |   |   |   |   |   |   |
| Service  cost                         | ** ** | **$**                  | **279**    |   | $ | 606 | ** ** | **$** | **799** |   | $ | 1,199 |   |
| Interest  cost                        | ** ** | **1,201**              |       | 1,079 | ** ** | **2,185** |   | 2,136 |   |
| Expected  return on plan assets       | ** ** | **(162**               | **)**      | (289 | ) | **(382** | **)** | (571 | ) |
| Amortization  of prior service cost   | ** ** | **(8**                 | **)**      | (21 | ) | **(26** | **)** | (42 | ) |
| Recognized  net actuarial (gain) loss | ** ** | **(196**               | **)**      | 114 | ** ** | **(7** | **)** | 224 |   |
| Net  periodic benefit cost            | ** ** | **$**                  | **1,114**  |   | $ | 1,489 | ** ** | **$** | **2,569** |   | $ | 2,946 |   |

 
| ** **                     | ** ** | **Other Postretirement Benefits** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended**            | ** ** | **Six Months Ended** | ** ** |
| **(in thousands)**             | ** ** | **July 4, 2009**             | ** ** | **June 28, 2008** | ** ** | **July 4, 2009** | ** ** | **June 28, 2008** | ** ** |
|                           |       |                              |       |   |   |   |   |   |   |
| Service  cost                  | ** ** | **$**                             | **2**      |   | $ | 17 | ** ** | **$** | **6** |   | $ | 34 |   |
| Interest  cost                 | ** ** | **36**                            |       | 34 | ** ** | **66** |   | 68 |   |
| Recognized  net actuarial loss | ** ** | **—**                        |       | 4 | ** ** | **—** |   | 8 |   |
| Net  periodic benefit cost     | ** ** | **$**                             | **38**     |   | $ | 55 | ** ** | **$** | **72** |   | $ | 110 |   |

** **

**10.          Environmental Matters**

 

The Company accounts forenvironmental liabilities in accordance 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 be affectedby a number 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.The Company does not expect the resolution of such uncertainties to have a 

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

material adverse effecton the financial condition of the Company. Recoveries of environmental costsfrom other parties are recognized as assets when their receipt is deemedprobable. Environmental reserves, which are predominately euro-denominated,were $47,910,000 and $49,220,000 as of July 4, 2009 and January 3,2009, respectively.

 

In connection with theacquisition of Membrana GmbH (“Membrana”) in 2002, the Company recorded areserve for environmental obligations. The reserve provides for costs toremediate known environmental issues and operational upgrades which arerequired in order for the Company to remain in compliance with localregulations. The initial estimate and subsequent finalization of the reserve wasincluded in the allocation of purchase price at the date of acquisition. Theenvironmental reserve for the Membrana facility was $21,589,000 and $22,627,000at July 4, 2009 and January 3, 2009, respectively. The Companyanticipates that expenditures will be made over the next seven to ten years.

 

The Company hasindemnification agreements for certain environmental matters from Acordis A.G.(“Acordis”) and Akzo Nobel N.V. (“Akzo”), the prior owners of Membrana.Akzo originally provided broad environmental protections to Acordis with theright to assign such indemnities to Acordis’s successors. Akzo’sindemnifications relate to conditions existing prior to December 1999,which is the date that Membrana was sold to Acordis. 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 July 4, 2009 and January 3,2009, amounts receivable under the indemnification agreements were $17,214,000and $17,867,000, respectively. The current portion of the indemnificationreceivable is included in “Prepaid and other” in the accompanying consolidatedbalance sheets.

 

In 2004, the Companyidentified potential environmental contamination at its manufacturing facilityin Potenza, Italy. Based on environmental studies and the initial remediationplan presented to local authorities, the Company recorded a reserve forenvironmental obligations. In 2006, the Company further refined the remediationplan after consultations with local authorities. In December 2008, theCompany implemented a restructuring plan which included the closure of thismanufacturing facility. Based on discussions with local authorities,environmental consultants and internal personnel, the Company increased theenvironmental reserve at Potenza as part of a restructuring charge by$18,560,000 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 $23,331,000 and $23,502,000 at July 4, 2009and January 3, 2009, respectively. It is reasonably possible that there isexposure to loss in excess of the amount accrued. The Company cannot estimatethe amount of possible liability in excess of the amount accrued due to anumber of factors, including the lack of local regulations, effectiveness ofexisting remediation technology and the amount of time local authorities mayrequire monitoring procedures. The Company believes that additional costsrelated to this matter, if any, will not have a material adverse effect on thefinancial condition of the Company. The Company anticipates that expenditureswill be made over the next seven to ten years.

 

In connection with theacquisition of Microporous Holding Corporation (“Microporous”), the Companyidentified potential environmental contamination at the manufacturing site inPiney Flats, Tennessee. As part of the acquisition, the seller purchased anenvironmental insurance policy on behalf of the Company and also providedindemnification for a portion of the insurance policy deductible. Subsequent tothe acquisition, the Company performed additional environmental studies andconfirmed that environmental contamination was present. The Company recordedthe estimated cost of remediation and the related receivables from theinsurance company and the seller in applying purchase accounting for theacquisition. As discussed in more detail in Note 13, the Company reached anagreement with the seller in July 2009 which, among other things, releasesthe seller from its obligation to provide indemnification for a portion of theinsurance policy deductible. Accordingly, the Company reduced the receivable related to thisenvironmental matter by $219,000 at July 4, 2009. The receivable balanceat July 4, 2009 and January 3, 2009 was $2,303,000 and $2,522,000,respectively. The current portion of the receivable is included in “Prepaid andother” and the non-current portion is classified in “Environmentalindemnification receivable” in the accompanying consolidated balance sheets.

 

**11.          Business Restructuring**

** **

**2008Restructuring Plan**

 

A supply contract betweenthe Company’s lead-acid battery separator business and a large customer expiredon December 31, 2008 and was not renewed. In response, the Companyimplemented a restructuring plan in its energy storage segment to align 

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

lead-acid batteryseparator production capacity with demand, reduce costs and position theCompany to meet future growth opportunities.

 

The plan included closingthe Company’s facility in Potenza, Italy, streamlining production at theCompany’s facility in Owensboro, Kentucky and reducing selling, general andadministrative resources associated with the lead-acid battery separatorbusiness.  The total cost of therestructuring plan, including environmental costs recorded in the environmentalreserve of $18,560,000, is expected to be approximately $61,541,000.  The plan was implemented and a restructuringcharge of $59,942,000 was recorded in the fourth quarter of 2008.  The restructuring plan included thetermination of approximately 175 employees, consisting of production employeesat Potenza, Italy and Owensboro, Kentucky and certain selling, general andadministrative employees.  During thethree months ended July 4, 2009, the Company reduced the estimated cost ofseverance and benefits and related accrual by $592,000 to reflect actual costsexpected to be incurred.  After thisadjustment, the total cost of severance and benefits is expected to beapproximately $9,815,000. The Company estimates that other costs, consistingprimarily of costs associated with closing the Potenza, Italy facility, areexpected to be approximately $4,237,000, of which $3,204,000 has beenrecognized through July 4, 2009 and the remainder will be recognized overthe next three years.  The restructuringcharge recorded in the fourth quarter of 2008 also included a non-cash impairmentcharge of $28,929,000 for buildings and machinery and equipment that will nolonger be used in Potenza, Italy.  Cashpayments for severance and other exit costs are expected to be paid over thenext three years.  The timing, scope andcosts of these restructuring measures are subject to change as the Companyimplements the plan and continues to evaluate its business needs and costs.

 

**2006Restructuring Plan**

 

In December 2006,the Company’s separations media segment exited the production of cellulosic membranesand realigned the cost structure at its Wuppertal, Germany facility. The totalcost of the plan, all of which has been incurred, was $33,753,000, consistingof a $17,492,000 non-cash impairment charge for buildings and equipment,$10,466,000 for employee layoffs and $5,795,000 for other costs related to theshutdown of portions of the Wuppertal facility. The other costs included in therestructuring plan are related to local regulations surrounding complete orpartial shutdowns of a facility.

 

Restructuring reserveactivity during the six months ended July 4, 2009 consisted of:

 
| **(in thousands)**           | ** ** | **Balance at  January 3, 2009** | ** ** | **Restructuring  Charges** | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  July 4, 2009** | ** ** |
|------------------------------|------------|--------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| 2008  Restructuring Plan:    |       |                                 |       |                       |       |               |       |                               |       |                              |       |
| Severance  and benefit costs |       | $                                    | 9,847      |                       | $          | (592               | )          | $                                  | (1,099     | )                                 | $          | (19 | ) | $ | 8,137 |   |
| Other                        |       | 829                                  |       | 1,158                      |       | (1,241             | )          | (2                                 | )          | 744                               |       |
|                         |       | 10,676                               |       | 566                        |       | (2,340             | )          | (21                                | )          | 8,881                             |       |
|                         | ** ** | ** **                           | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| 2006  Restructuring Plan:    |       |                                 |       |                       |       |               |       |                               |       |                              |       |
| Severance  and benefit costs |       | 2,884                                |       | —                     |       | (141               | )          | 7                                  |       | 2,750                             |       |
| Other                        |       | 492                                  |       | —                     |       | (387               | )          | (22                                | )          | 83                                |       |
|                         |       | 3,376                                |       | —                     |       | (528               | )          | (15                                | )          | 2,833                             |       |
|                         | ** ** | ** **                           | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| Total                        |       | $                                    | 14,052     |                       | $          | 566                |       | $                                  | (2,868     | )                                 | $          | (36 | ) | $ | 11,714 |   |

 

**12**.          Income Taxes

 

The income tax provisionfor the interim periods presented is computed at the effective rate expected tobe applicable in each respective full year using the statutory rates on acountry-by-country basis.  Income taxexpense recorded in the financial statements differs from the Federal statutoryincome tax rate due to a variety of factors, including state income taxes, themix of income between U.S. and foreign jurisdictions taxed at varying rates andvarious changes in estimates of permanent differences and valuation allowances.

 

**13.          Acquisitions**

 

On February 29,2008, the Company purchased 100% of the capital stock of Microporous. Theacquisition broadens the Company’s participation in the deep-cycle industrialbattery market, adds to its membrane technology portfolio and product breadth,enhances service to common customers and adds cost-effective productioncapacity. The purchase price for

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

Microporous stock,including acquisition-related costs, was $26,980,000. The Company also repaid$33,643,000 in indebtedness of Microporous and assumed $14,235,000 of debt. Theassumed debt was repaid subsequent to the acquisition. The purchase agreementprovided for additional cash payments to the seller for the three yearsfollowing the acquisition contingent upon the acquired business meeting definedearn-out provisions.  At January 3,2009, the Company estimated that the additional purchase price for the fiscal2008 earn-out was $1,062,000 and allocated this amount to goodwill. In July 2009,the Company reached an agreement with the seller that effectively eliminatesthe Company’s current and future obligations under the earn-out provision inexchange for releasing the seller from all claims under the original purchase agreement,including its environmental indemnification obligations. The impact of thisagreement on amounts previously recognized in purchase accounting was a netreduction in future cash payments of $794,000. These amounts were reversedthrough purchase accounting with a corresponding decrease to goodwill. Inaddition to the amounts previously recognized, the Company will not have tomake earn-out payments that would have been due under the original agreementfor 2009 and 2010.

 

On April 1, 2008,the Company acquired the battery separator manufacturing assets of Super-TechBattery Components Pvt. Ltd., located in Bangalore, India for $1,949,000.

 

On May 20, 2008, theCompany purchased 100% of the capital stock of Yurie-Wide Corporation, a SouthKorean company, for $23,223,000, including acquisition-related costs. Theacquisition broadens the Company’s participation in the lithium batteryseparator market, adds to its membrane technology portfolio and product breadthand adds cost-effective production capacity.

 

The results of operationsfrom the acquisitions described above are included in the Company’s energystorage segment from the date of acquisition. The Company accounts foracquisitions in conformity with FASB Statement No. 141, *Business Combinations,* and FASB Statement No. 142,*Goodwill and Other Intangible Assets*.The following table summarizes the aggregate purchase price allocations forthese acquisitions based upon the fair values of the assets acquired andliabilities assumed at the date of acquisition.

 
| **(in thousands)**                    | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| Current  assets                       |       | $          | 16,156     |   |
| Property,  plant and equipment        |       | 58,807     |       |
| Intangible  assets                    |       | 19,194     |       |
| Goodwill                              |       | 31,211     |       |
| Total  assets acquired                |       | 125,368    |       |
| Current  liabilities                  |       | 8,767      |       |
| Debt  assumed                         |       | 14,235     |       |
| Deferred  taxes and other liabilities |       | 16,571     |       |
| Total  liabilities assumed            |       | 39,573     |       |
| Net  assets acquired                  |       | $          | 85,795     |   |

 

The excess of thepurchase price over the fair value of the net assets acquired was allocated togoodwill. The goodwill is not deductible for income tax purposes.

 

Pro forma information is not presentedbecause the impact of these acquisitions, either individually or in theaggregate, on the Company’s consolidated results of operations for the threeand six months ended June 28, 2008 is not considered to be significant.

 

**14.**          **Joint Venture**

 

Effective January 1,2007, the Company purchased from Nippon Sheet Glass Company, Limited (“NSG”) a60% share in Daramic NSG Tianjin PE Separator Co., LTD (“DNPET”) for$5,475,000, including acquisition-related costs. DNPET is a lead-acid batteryseparator manufacturing facility located in Tianjin, China. The acquisitionsupports the Company’s strategy of expanding capacity in the high growthAsia-Pacific region. Under the terms of the agreement, the Company was entitledto all of the earnings and cash flow from DNPET for the first two years andbeginning in fiscal 2009, earnings and cash flows are allocated based onownership percentages. Under the original terms of the agreement, on January 1,2009 and January 1, 2012, the Company can exercise a call option and NSG canexercise a put option for the Company to purchase NSG’s 40% ownership interestfor $3,600,000. If exercised, the Company is required to close the acquisitionwithin six months of notification.  TheCompany and NSG agreed to extend the first option date to August 12, 2009.  DNPET is included in the Company’s energystorage segment.  For the three and sixmonths ended July 4, 2009, noncontrolling interest amounts are not presentedseparately in the condensed consolidated statements of income due toimmateriality.

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**15.          Business Interruption InsuranceRecovery**

 

**On September 30,2007, a customer in the Company’s energy storage segment experienced a fire atone of their facilities.  The Companyfiled a business interruption insurance claim with its insurance provider andrecovered $2,400,000, of which $1,900,000 was recovered in the three monthsended June 28, 2008, related to this claim.**

** **

**16.          Comprehensive Income**

 

**Comprehensiveincome is as follows:**

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **(in thousands)**                                                              | ** ** | **July 4, 2009**  | ** ** | **June 28, 2008** | ** ** | **July 4, 2009** | ** ** | **June 28, 2008** | ** ** |
|                                                                            |       |                   |       |                   |       |   |   |   |   |
| Net  income                                                                     | ** ** | **$**                  | **4,210**  |                   | $          | 11,174 | ** ** | **$** | **7,171** |   | $ | 24,086 |   |
| Foreign  currency translation adjustment, net of deferred taxes                 | ** ** | **(1,824**             | **)**      | (3,872                 | )          | **1,330** |   | (11,044 | ) |
| Net  actuarial gain (loss) and prior service credit, net of deferred taxes      | ** ** | **(164**               | **)**      | 8                      | ** ** | **(19** | **)** | (258 | ) |
| Unrealized  gain (loss) on interest rate swap agreements, net of deferred taxes | ** ** | **859**                |       | 1,849                  | ** ** | **1,592** |   | (529 | ) |
| Comprehensive  income                                                           | ** ** | **$**                  | **3,081**  |                   | $          | 9,159 | ** ** | **$** | **10,074** |   | $ | 12,255 |   |

** **

**17.          Related Party Transactions**

** **

**TheCompany’s German subsidiary has 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 $425,000 and $413,000 at July 4, 2009 and January 3,2009, respectively.  Charges from theaffiliates for work performed were $466,000 and $573,000 for the three and sixmonths ended July 4, 2009, respectively. Charges from the affiliates for work performed were $519,000 and$859,000 for the three months and six months ended June 28, 2008,respectively.  Amounts due to theaffiliates were approximately $39,000 and $98,000 at July 4, 2009 and January 3,2009, respectively.

** **

**18.          Segment Information**

 

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

 

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

 

14

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Table ofContents

 

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 
| ** **                                                 | ** ** | **Three  Months Ended** | ** **  | **Six  Months Ended**   | ** ** |
|------------------------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| **(in thousands)**                                         | ** ** | **July 4,  2009**  | ** **  | **June 28,  2008** | ** ** | **July 4,  2009** | ** ** | **June 28,  2008** | ** ** |
| Net  sales to external customers (by major product group): | ** ** | ** **              | ** **  | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Lead-acid  battery separators                              | ** ** | **$**                   | **61,603**  |                    | $          | 97,111 | ** ** | **$** | **118,046** |   | $ | 177,702 |   |
| Lithium  battery separators                                | ** ** | **20,661**              |        | 24,838                  | ** ** | **37,964** |   | 48,209 |   |
| Energy  storage                                            | ** ** | **82,264**              |        | 121,949                 | ** ** | **156,010** |   | 225,911 |   |
| Healthcare                                                 | ** ** | **24,836**              |        | 27,364                  | ** ** | **49,784** |   | 54,663 |   |
| Filtration  and specialty                                  | ** ** | **11,079**              |        | 15,352                  | ** ** | **21,295** |   | 29,420 |   |
| Separations  media                                         | ** ** | **35,915**              |        | 42,716                  | ** ** | **71,079** |   | 84,083 |   |
| Total  net sales to external customers                     | ** ** | **$**                   | **118,179** |                    | $          | 164,665 | ** ** | **$** | **227,089** |   | $ | 309,994 |   |
|                                                       | ** ** | ** **              |        |                    | ** ** | ** ** |   |   |   |
| Operating  income:                                         | ** ** | ** **              |        |                    | ** ** | ** ** |   |   |   |
| Energy  storage                                            | ** ** | **$**                   | **13,518**  |                    | $          | 24,047 | ** ** | **$** | **22,807** |   | $ | 47,669 |   |
| Separations  media                                         | ** ** | **9,942**               |        | 7,567                   | ** ** | **19,906** |   | 14,373 |   |
| Corporate                                                  | ** ** | **(445**                | **)**       | (266                    | )          | **(753** | **)** | (552 | ) |
| Segment  operating income                                  | ** ** | **23,015**              |        | 31,348                  | ** ** | **41,960** |   | 61,490 |   |
| Business restructuring                                     | ** ** | **11**                  |        | —                  | ** ** | **566** |   | — |   |
| Non-recurring  costs                                       | ** ** | **1,529**               |        | —                  | ** ** | **2,271** |   | — |   |
| Total  operating income                                    | ** ** | **21,475**              |        | 31,348                  | ** ** | **39,123** |   | 61,490 |   |
| Reconciling  items:                                        | ** ** | ** **              |        |                    | ** ** | ** ** |   |   |   |
| Interest  expense, net                                     | ** ** | **14,622**              |        | 16,083                  | ** ** | **28,769** |   | 32,023 |   |
| Foreign  currency and other                                | ** ** | **1,278**               |        | (546                    | )          | **790** |   | (643 | ) |
| Income  from continuing operations before income taxes     | ** ** | **$**                   | **5,575**   |                    | $          | 15,811 | ** ** | **$** | **9,564** |   | $ | 30,110 |   |
|                                                       | ** ** | ** **              |        |                    | ** ** | ** ** |   |   |   |
| Depreciation  and amortization:                            | ** ** | ** **              |        |                    | ** ** | ** ** |   |   |   |
| Energy  storage                                            | ** ** | **$**                   | **8,647**   |                    | $          | 9,552 | ** ** | **$** | **17,577** |   | $ | 18,160 |   |
| Separations  media                                         | ** ** | **3,989**               |        | 4,759                   | ** ** | **7,961** |   | 9,281 |   |
| Total  depreciation and amortization                       | ** ** | **$**                   | **12,636**  |                    | $          | 14,311 | ** ** | **$** | **25,538** |   | $ | 27,441 |   |

 

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

 

On August 5, 2009, Celgard,LLC, a 100% owned subsidiary of the Company, was selected for a grant award of$49,200,000 from the U.S. Department of Energy (DOE).   The grant, which is contingent uponfinalizing the contractual agreement with the DOE, will fund an expansion ofthe Company’s existing lithium battery separator capacity.

 

**20.          SupplyAgreement**

 

A supply agreement withExide Corporation (“Exide”), a customer of the Company’s energy storagesegment, expires on December 15, 2009. The Company is currently engaged in discussions with Exide but does nothave a new agreement at this time.

 

**21.          Discontinued Operations**

 

In January 2008, theCompany sold a non-core synthetic paper business, a component of the energystorage segment, for $4,000,000, resulting in a gain on sale of approximately$2,372,000, net of income taxes of $1,402,000. The results of operations and the gain on sale from the synthetic paperbusiness are presented as discontinued operations for all periods presented inthe Company’s condensed consolidated statements of income.

 

15

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**Table of Contents**

** **

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

** **

**22.          Financial Statements ofGuarantors**

** **

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

 

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

 

**Condensed Consolidating Balance SheetJuly 4, 2009**

** **
| **(in thousands)**                                         | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined   Non-Guarantor  Subsidiaries** | ** ** | **The  Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|------------------|------------|
| **Assets**                                                 |       |                                  |       |                                       |       |             |       |                                    |       |             |       |
| Cash  and cash equivalents                                 |       | $                                     | —     |                                       | $          | 38,458           |       | $                                       | 58,247     |             | $          | — |   | $ | 96,705 |   |
| Accounts  receivable, net                                  |       | 30,959                                |       | 57,206                                     |       | —           |       | —                                  |       | 88,165           |       |
| Inventories                                                |       | 31,655                                |       | 51,804                                     |       | —           |       | —                                  |       | 83,459           |       |
| Refundable  income taxes                                   |       | 659                                   |       | 1,836                                      |       | (669             | )          | —                                  |       | 1,826            |       |
| Deferred  income taxes                                     |       | 1,229                                 |       | —                                     |       | —           |       | —                                  |       | 1,229            |       |
| Prepaid  and other                                         |       | 2,460                                 |       | 12,123                                     |       | (219             | )          | —                                  |       | 14,364           |       |
| Total  current assets                                      |       | 66,962                                |       | 161,427                                    |       | 57,359           |       | —                                  |       | 285,748          |       |
| Due  from affiliates                                       |       | 334,278                               |       | 372,061                                    |       | 299,858          |       | (1,006,197                              | )          | —           |       |
| Investment  in subsidiaries                                |       | 234,756                               |       | 295,491                                    |       | 315,355          |       | (845,602                                | )          | —           |       |
| Property,  plant and equipment, net                        |       | 151,341                               |       | 254,363                                    |       | —           |       | —                                  |       | 405,704          |       |
| Goodwill                                                   |       | —                                |       | —                                     |       | 600,770          |       | —                                  |       | 600,770          |       |
| Intangibles  and loan acquisition costs, net               |       | 25                                    |       | —                                     |       | 175,108          |       | —                                  |       | 175,133          |       |
| Other                                                      |       | 3,073                                 |       | 13,998                                     |       | —           |       | —                                  |       | 17,071           |       |
| Total  assets                                              |       | $                                     | 790,435    |                                       | $          | 1,097,340        |       | $                                       | 1,448,450  |             | $          | (1,851,799 | ) | $ | 1,484,426 |   |
|                                                       | ** ** | ** **                            | ** ** | ** **                                 | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **       | ** ** |
| **Liabilities and equity**                                 | ** ** | ** **                            | ** ** | ** **                                 | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **       | ** ** |
| Accounts  payable and accrued liabilities                  |       | $                                     | 16,664     |                                       | $          | 46,039           |       | $                                       | 5,329      |             | $          | — |   | $ | 68,032 |   |
| Current  portion of debt                                   |       | —                                |       | 489                                        |       | 3,229            |       | —                                  |       | 3,718            |       |
| Current  portion of capital lease obligation               |       | 1,527                                 |       | —                                     |       | —           |       | —                                  |       | 1,527            |       |
| Fair  value of interest rate swap agreements               |       | —                                |       | —                                     |       | 2,944            |       | —                                  |       | 2,944            |       |
| Total  current liabilities                                 |       | 18,191                                |       | 46,528                                     |       | 11,502           |       | —                                  |       | 76,221           |       |
| Due  to affiliates                                         |       | 380,665                               |       | 339,706                                    |       | 285,826          |       | (1,006,197                              | )          | —           |       |
| Debt,  less current portion                                |       | —                                |       | 47,489                                     |       | 748,027          |       | —                                  |       | 795,516          |       |
| Capital  lease obligation, less current portion            |       | 1,053                                 |       | —                                     |       | —           |       | —                                  |       | 1,053            |       |
| Pension  and postretirement benefits, less current portion |       | 2,837                                 |       | 65,507                                     |       | —           |       | —                                  |       | 68,344           |       |
| Postemployment  benefits                                   |       | —                                |       | 1,884                                      |       | —           |       | —                                  |       | 1,884            |       |
| Environmental  reserve, less current portion               |       | 2,061                                 |       | 34,920                                     |       | —           |       | —                                  |       | 36,981           |       |
| Deferred  income taxes and other                           |       | 67,365                                |       | 30,471                                     |       | (650             | )          | —                                  |       | 97,186           |       |
| Shareholders’  equity                                 |       | 318,263                               |       | 527,339                                    |       | 403,745          |       | (845,602                                | )          | 403,745          |       |
| Noncontrolling  interest                                   |       | —                                |       | 3,496                                      |       | —           |       | —                                  |       | 3,496            |       |
| Total  liabilities and equity                              |       | $                                     | 790,435    |                                       | $          | 1,097,340        |       | $                                       | 1,448,450  |             | $          | (1,851,799 | ) | $ | 1,484,426 |   |

 

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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                                   |       | 1,197                                       |       | 4,463                |       | —                                       |       | 6,277            |       |
| Deferred  income taxes                                     |       | 1,222                                 |       | —                                      |       | —               |       | —                                       |       | 1,222            |       |
| Prepaid  and other                                         |       | 3,831                                 |       | 10,541                                      |       | (97                  | )          | —                                       |       | 14,275           |       |
| Total  current assets                                      |       | 67,497                                |       | 146,375                                     |       | 61,730               |       | —                                       |       | 275,602          |       |
| Due  from affiliates                                       |       | 314,895                               |       | 358,691                                     |       | 294,702              |       | (968,288                                     | )          | —           |       |
| Investment  in subsidiaries                                |       | 249,190                               |       | 303,521                                     |       | 285,123              |       | (837,834                                     | )          | —           |       |
| 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                                              |       | $                                     | 790,317    |                                        | $          | 1,086,717            |       | $                                            | 1,427,942  |             | $          | (1,806,122 | ) | $ | 1,498,854 |   |
| **Liabilities and equity**                                 |       |                                  |       |                                        |       |                 |       |                                         |       |             |       |
| Accounts  payable and accrued liabilities                  |       | $                                     | 22,954     |                                        | $          | 53,243               |       | $                                            | 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                                 |       | 24,449                                |       | 53,793                                      |       | 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                                 |       | 322,683                               |       | 515,151                                     |       | 392,863              |       | (837,834                                     | )          | 392,863          |       |
| Noncontrolling  interest                                   |       | —                                |       | 2,950                                       |       | —               |       | —                                       |       | 2,950            |       |
| Total  liabilities and equity                              |       | $                                     | 790,317    |                                        | $          | 1,086,717            |       | $                                            | 1,427,942  |             | $          | (1,806,122 | ) | $ | 1,498,854 |   |

 

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**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**CondensedConsolidating Statement of Income For the three months ended July 4, 2009**

 
| **(in thousands)**                                            | ** ** | **Combined   Guarantor  Subsidiaries** | ** ** | **Combined   Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|-----------------|------------|----------------------------------------------|------------|------------------|------------|
|                                                          |       |                                   |       |                                       |       |            |       |                                         |       |             |       |
| Net  sales                                                    |       | $                                      | 40,562     |                                       | $          | 77,617          |       | $                                            | —     |             | $          | — |   | $ | 118,179 |   |
| Cost  of goods sold                                           |       | 18,505                                 |       | 53,096                                     |       | —          |       | —                                       |       | 71,601           |       |
| Gross profit                                                  |       | 22,057                                 |       | 24,521                                     |       | —          |       | —                                       |       | 46,578           |       |
| Selling,  general and administrative expenses                 |       | 16,546                                 |       | 8,101                                      |       | 445             |       | —                                       |       | 25,092           |       |
| Business  restructuring                                       |       | —                                 |       | 11                                         |       | —          |       | —                                       |       | 11               |       |
| Operating income (loss)                                       |       | 5,511                                  |       | 16,409                                     |       | (445            | )          | —                                       |       | 21,475           |       |
| Interest  expense and other                                   |       | (561                                   | )          | 2,498                                      |       | 13,963          |       | —                                       |       | 15,900           |       |
| Equity  in earnings of subsidiaries                           |       | —                                 |       | —                                     |       | (13,287         | )          | 13,287                                       |       | —           |       |
| Income  (loss) from continuing operations before income taxes |       | 6,072                                  |       | 13,911                                     |       | (1,121          | )          | (13,287                                      | )          | 5,575            |       |
| Income  taxes                                                 |       | 2,246                                  |       | 4,450                                      |       | (5,331          | )          | —                                       |       | 1,365            |       |
| Income from continuing operations                             |       | $                                      | 3,826      |                                       | $          | 9,461           |       | $                                            | 4,210      |             | $          | (13,287 | ) | $ | 4,210 |   |

 

**Condensed Consolidating Statement of Income****For thethree months ended June 28, 2008**

** **
| **(in thousands)**                                     | ** ** | **Combined   Guarantor  Subsidiaries** | ** ** | **Combined   Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|-----------------|------------|----------------------------------------------|------------|------------------|------------|
|                                                   |       |                                   |       |                                       |       |            |       |                                         |       |             |       |
| Net  sales                                             |       | $                                      | 61,550     |                                       | $          | 103,115         |       | $                                            | —     |             | $          | — |   | $ | 164,665 |   |
| Cost  of goods sold                                    |       | 29,687                                 |       | 75,783                                     |       | —          |       | —                                       |       | 105,470          |       |
| Business  interruption insurance recovery              |       | (1,900                                 | )          | —                                     |       | —          |       | —                                       |       | (1,900           | )          |
| Gross profit                                           |       | 33,763                                 |       | 27,332                                     |       | —          |       | —                                       |       | 61,095           |       |
| Selling,  general and administrative expenses          |       | 18,798                                 |       | 10,662                                     |       | 287             |       | —                                       |       | 29,747           |       |
| Operating income (loss)                                |       | 14,965                                 |       | 16,670                                     |       | (287            | )          | —                                       |       | 31,348           |       |
| Interest  expense and other                            |       | (2,221                                 | )          | 3,177                                      |       | 14,581          |       | —                                       |       | 15,537           |       |
| Equity  in earnings of subsidiaries                    |       | —                                 |       | —                                     |       | (20,541         | )          | 20,541                                       |       | —           |       |
| Income  from continuing operations before income taxes |       | 17,186                                 |       | 13,493                                     |       | 5,673           |       | (20,541                                      | )          | 15,811           |       |
| Income  taxes                                          |       | 6,359                                  |       | 3,779                                      |       | (5,501          | )          | —                                       |       | 4,637            |       |
| Income from continuing operations                      |       | $                                      | 10,827     |                                       | $          | 9,714           |       | $                                            | 11,174     |             | $          | (20,541 | ) | $ | 11,174 |   |

 

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Table of Contents

 

**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

**Condensed Consolidating Statement ofIncome For the six months ended July 4, 2009**

 
| **(in thousands)**                                            | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|-----------------------------------------|------------|------------------|------------|
|                                                          |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Net sales                                                     |       | $                                     | 77,672     |                                      | $          | 149,417         |       | $                                       | —     |             | $          | — |   | $ | 227,089 |   |
| Cost of goods  sold                                           |       | 35,492                                |       | 101,616                                   |       | —          |       | —                                  |       | 137,108          |       |
| Gross Profit                                                  |       | 42,180                                |       | 47,801                                    |       | —          |       | —                                  |       | 89,981           |       |
| Selling, general  and administrative expenses                 |       | 32,892                                |       | 16,647                                    |       | 753             |       | —                                  |       | 50,292           |       |
| Business  restructuring                                       |       | —                                |       | 566                                       |       | —          |       | —                                  |       | 566              |       |
| Operating income (loss)                                       |       | 9,288                                 |       | 30,588                                    |       | (753            | )          | —                                  |       | 39,123           |       |
| Interest expense  and other                                   |       | (1,070                                | )          | 3,597                                     |       | 27,032          |       | —                                  |       | 29,559           |       |
| Equity in  earnings of subsidiaries                           |       | —                                |       | —                                    |       | (24,676         | )          | 24,676                                  |       | —           |       |
| Income (loss)  from continuing operations before income taxes |       | 10,358                                |       | 26,991                                    |       | (3,109          | )          | (24,676                                 | )          | 9,564            |       |
| Income taxes                                                  |       | 3,832                                 |       | 8,841                                     |       | (10,280         | )          | —                                  |       | 2,393            |       |
| Income from continuing operations                             |       | $                                     | 6,526      |                                      | $          | 18,150          |       | $                                       | 7,171      |             | $          | (24,676 | ) | $ | 7,171 |   |

 

**Condensed Consolidating Statement ofIncome For the six months ended June 28, 2008**

 
| **(in thousands)**                                            | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|-----------------------------------------|------------|------------------|------------|
|                                                          |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Net sales                                                     |       | $                                     | 115,434    |                                      | $          | 194,560         |       | $                                       | —     |             | $          | — |   | $ | 309,994 |   |
| Cost of goods  sold                                           |       | 54,140                                |       | 141,699                                   |       | —          |       | —                                  |       | 195,839          |       |
| Business  interruption insurance recovery                     |       | (2,400                                | )          | —                                    |       | —          |       | —                                  |       | (2,400           | )          |
| Gross profit                                                  |       | 63,694                                |       | 52,861                                    |       | —          |       | —                                  |       | 116,555          |       |
| Selling, general  and administrative expenses                 |       | 34,515                                |       | 19,997                                    |       | 553             |       | —                                  |       | 55,065           |       |
| Operating income (loss)                                       |       | 29,179                                |       | 32,864                                    |       | (553            | )          | —                                  |       | 61,490           |       |
| Interest expense  and other                                   |       | (2,796                                | )          | 5,175                                     |       | 29,001          |       | —                                  |       | 31,380           |       |
| Equity in  earnings of subsidiaries                           |       | —                                |       | —                                    |       | (40,345         | )          | 40,345                                  |       | —           |       |
| Income (loss)  from continuing operations before income taxes |       | 31,975                                |       | 27,689                                    |       | 10,791          |       | (40,345                                 | )          | 30,110           |       |
| Income taxes                                                  |       | 11,831                                |       | 7,488                                     |       | (10,935         | )          | —                                  |       | 8,384            |       |
| Income from continuing operations                             |       | $                                     | 20,144     |                                      | $          | 20,201          |       | $                                       | 21,726     |             | $          | (40,345 | ) | $ | 21,726 |   |

 

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**Polypore International, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

**CondensedConsolidating Statement of Cash Flows For the six months ended July 4, 2009**

 
| **(in thousands)**                                            | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|-----------------------------------------|------------|------------------|------------|
| Net cash provided by operating activities                     |       | $                                     | 12,315     |                                      | $          | 20,712          |       | $                                       | (5,935     | )                | $          | (10,001 | ) | $ | 17,091 |   |
| **Investing  activities:**                                    |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Purchases of  property, plant and equipment                   |       | (2,182                                | )          | (2,584                                    | )          | —          |       | —                                  |       | (4,766           | )          |
| Net cash used in investing activities                         |       | (2,182                                | )          | (2,584                                    | )          | —          |       | —                                  |       | (4,766           | )          |
| **Financing  activities:**                                    |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Principal  payments on debt                                   |       | (740                                  | )          | (240                                      | )          | (1,614          | )          | —                                  |       | (2,594           | )          |
| Proceeds from  stock option exercises                         |       |                                  |       |                                      |       | 55              |       |                                    |       | 55               |       |
| Intercompany  transactions, net                               |       | (9,507                                | )          | (8,871                                    | )          | 8,377           |       | 10,001                                  |       | —           |       |
| Net cash used in financing activities                         |       | (10,247                               | )          | (9,111                                    | )          | 6,818           |       | 10,001                                  |       | (2,539           | )          |
| Effect of  exchange rate changes on cash and cash equivalents |       | 114                                   |       | 3,784                                     |       | —          |       | —                                  |       | 3,898            |       |
| **Net  increase (decrease) in cash and cash equivalents**     |       | —                                |       | 12,801                                    |       | 883             |       | —                                  |       | 13,684           |       |
| Cash and cash  equivalents at beginning of period             |       | —                                |       | 25,657                                    |       | 57,364          |       | —                                  |       | 83,021           |       |
| **Cash  and cash equivalents at end of period**               |       | $                                     | —     |                                      | $          | 38,458          |       | $                                       | 58,247     |             | $          | — |   | $ | 96,705 |   |

 

**CondensedConsolidating Statement of Cash Flows For the six months ended June 30, 2008**

 
| **(in thousands)**                                                                                  | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications  and Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|-----------------------------------------|------------|------------------|------------|
| Net cash provided by operating activities                                                           |       | $                                     | 28,727     |                                      | $          | 32,581          |       | $                                       | (28,450    | )                | $          | 9,937 |   | $ | 42,795 |   |
| **Investing  activities:**                                                                          |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Purchases of  property, plant and equipment                                                         |       | (15,790                               | )          | (12,519                                   | )          | —          |       | —                                  |       | (28,309          | )          |
| Acquisitions,  net of cash acquired                                                                 |       | —                                |       | —                                    |       | (86,783         | )          | —                                  |       | (86,783          | )          |
| Proceeds from  sale of synthetic paper business                                                     |       | 4,000                                 |       | —                                    |       | —          |       | —                                  |       | 4,000            |       |
| Net cash used in investing activities                                                               |       | (11,790                               | )          | (12,519                                   | )          | (86,783         | )          | —                                  |       | (111,092         | )          |
| **Financing  activities:**                                                                          |       |                                  |       |                                      |       |            |       |                                    |       |             |       |
| Principal  payments on debt                                                                         |       | (5,510                                | )          | (10,080                                   | )          | (1,614          | )          | —                                  |       | (17,204          | )          |
| Proceeds from  stock option exercises                                                               |       | —                                |       | —                                    |       | 1,200           |       | —                                  |       | 1,200            |       |
| Proceeds from  issuance of common stock, net of underwriting fees and other offering related  costs |       | —                                |       | —                                    |       | 84,949          |       | —                                  |       | 84,949           |       |
| Intercompany  transactions, net                                                                     |       | (11,902                               | )          | (34,200                                   | )          | 56,039          |       | (9,937                                  | )          | —           |       |
| Net cash provided by (used in) financing activities                                                 |       | (17,412                               | )          | (44,280                                   | )          | 140,574         |       | (9,937                                  | )          | 68,945           |       |
| Effect of  exchange rate changes on cash and cash equivalents                                       |       | 475                                   |       | 19                                        |       | —          |       | —                                  |       | 494              |       |
| **Net  increase (decrease) in cash and cash equivalents**                                           |       | —                                |       | (24,199                                   | )          | 25,341          |       | —                                  |       | 1,142            |       |
| Cash and cash  equivalents at beginning of period                                                   |       | —                                |       | 40,055                                    |       | 14,879          |       | —                                  |       | 54,934           |       |
| **Cash  and cash equivalents at end of period**                                                     |       | $                                     | —     |                                      | $          | 15,856          |       | $                                       | 40,220     |             | $          | — |   | $ | 56,076 |   |

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

** **

*Thefollowing discussion of our financial condition and results of operationsshould be read together with our unaudited condensed consolidated financialstatements and the related notes included elsewhere in this Quarterly Report onForm 10-Q and our audited consolidated financial statements and therelated notes included in our Annual Report on Form 10-K for the fiscalyear ended January 3, 2009.*

 

**Overview**

 

We area leading global high technology filtration companythat develops, manufactures and markets specialized microporous membranes usedin separation and filtration processes. In fiscal 2008, we generated total netsales of $610.5 million. We operate in two business segments: (i) theenergy storage segment, which accounted for approximately 74% of our fiscal2008 net sales; and (ii) the separations media segment, which accountedfor approximately 26% of our fiscal 2008 net sales. We manufacture our productsat facilities in North America, Europe and Asia. Net sales from foreignlocations were $388.4 million for fiscal 2008.

 

*EnergyStorage Segment*

 

In the energy storage segment, our membrane separatorsare a critical performance component in lithium batteries, which are primarilyused in consumer electronic applications, and lead-acid batteries, which areused globally in transportation and industrial applications. We believe theglobal economic recession adversely impacted sales in the first half of 2009and may continue to have an adverse impact in the second half of 2009.  Although the short-term economic outlook isuncertain, we believe that the energy storage segment will continue to benefitfrom continued growth in demand by consumers for mobile power.

 

Lithium batteries are the power source in a widevariety of electronics applications ranging from notebook computers and mobilephones to cordless power tools. In addition, many new and developingapplications such as electric and hybrid electric vehicles incorporatelarge-format batteries that will require much greater membrane separator volumeper battery. As a result, we believe that in the long term, 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, we acquired Yurie-Wide Corporation,a South Korean company, which we subsequently renamed Celgard Korea, Inc.(“Celgard Korea”). The acquisition broadens our participation in the lithiumbattery separator market, adds to our membrane technology portfolio and productbreadth and adds cost-effective production capacity. After the acquisition, wediscontinued Celgard Korea sales and made significant operational changes toalign Celgard Korea’s operations with our global standards. In the secondquarter of 2009, Celgard Korea made its first post-acquisition sales.

 

On August 5, 2009, Celgard, LLC, our 100% ownedsubsidiary, was selected for a grant award of $49.2 million from the U.S.Department of Energy (DOE).   The grant,which is contingent upon finalizing the contractual agreement with the DOE,will fund an expansion of our existing lithium battery separator capacity.

 

In the motor vehicle battery market, the highproportion of aftermarket sales and the steady growth of the worldwide fleet ofmotor vehicles provide us with a growing, recurring revenue base in lead-acidbattery membrane separators. We believe we will also benefit from the worldwideconversion of alternative separator materials to the higher-performancepolyethylene-based membrane separators such as those we produce. Growth isstrongest in the Asia-Pacific region as a result of increasing per capitapenetration of automobiles, growth in the industrial and manufacturing sectors,and a high rate of conversion to polyethylene-based membrane separators. Wehave positioned ourselves to benefit from this growth by expanding capacity atour Prachinburi, Thailand facility, acquiring a production facility in Tianjin,China and establishing an Asian Technical Center in Thailand. In addition, on April 1,2008, we acquired the battery separator manufacturing assets of Super-TechBattery Components Pvt. Ltd., located in Bangalore, India.

 

In February 2008, we purchased 100% of the stockof Microporous Holding Corporation, the parent company of MicroporousProducts L.P. (“Microporous”). The acquisition of Microporous addsrubber-based battery separator technology to our product line. This acquisitionbroadens our participation in the deep-cycle industrial battery market (*e.g.,* forklift and stationarybatteries), adds to our membrane technology portfolio and product breadth,enhances service to common customers and adds cost-effective productioncapacity.

 

A supply contract between our lead-acid batteryseparator business and Johnson Controls, Inc. (“JCI”) 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 initial plan included closing our facility in Potenza,Italy, streamlining production at our facility in Owensboro, Kentucky andreducing selling, general and administrative resources associated with thelead-acid battery 

 

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separator business. The total estimated cost of theplan is expected to be approximately $61.5 million, including cash chargesof $32.6 million for severance and environmental, and a $28.9 millionnon-cash impairment charge. We began implementing the restructuring plan duringthe fourth quarter and recorded restructuring charges of $59.9 million.

 

A supply agreement with Exide Corporation (“Exide”), acustomer of our energy storage segment, expires on December 15, 2009.  We are currently engaged in discussions withExide but do not have a new agreement at this time.

 

*SeparationsMedia Segment*

 

In the separations media segment, our filtrationmembranes and modules are used in healthcare and high-performance filtrationand specialty applications. The healthcare business and a portion of thefiltration and specialty business have historically been relatively unaffectedby the economy, and we believe that the separations media segment will continueto benefit from continued growth in demand for higher levels of purity in agrowing number of applications.

 

Healthcare applications include hemodialysis, bloodoxygenation, and plasmapheresis. Growth in demand for hemodialysis membranes isdriven by the increasing worldwide population of end-stage renal diseasepatients. We estimate that conversion to single-use dialyzers and increasingtreatment frequency will result in additional dialyzer market growth.

 

We produce a wide range of membranes andmembrane-based elements for micro-, ultra- and nanofiltration and gasification/degasificationof liquids. Micro-, ultra- and nanofiltration membrane element market growth isbeing driven by several factors, including end-market growth in applicationssuch as water treatment and pharmaceutical processing, displacement ofconventional filtration media by membrane filtration due to membranes’ superiorcost and performance attributes and increasing purity requirements inindustrial and other applications.

 

**Critical accounting policies**

** **

Critical accounting policies are those accounting policiesthat can have a significant impact on the presentation of our financialcondition and results of operations, and that require the use of complex andsubjective estimates based on past experience and management’s judgment.Because of uncertainty inherent in such estimates, actual results may differfrom these estimates. Below are those policies that we believe are critical tothe understanding of our operating results and financial condition. Managementhas discussed the development and selection of these critical accountingpolicies with the Audit Committee of our Board of Directors.

 

*Allowancefor doubtful accounts*

 

Accounts receivable are primarily composed of amountsowed to us through our operating activities and are presented net of anallowance for doubtful accounts. We establish an allowance for doubtfulaccounts based upon factors surrounding the credit risk of specific customers,historical trends and other information. We charge accounts receivables offagainst our allowance for doubtful accounts when we deem them to beuncollectible on a specific identification basis. The determination of theamount of the allowance for doubtful accounts is subject to judgment andestimated by management. If circumstances or economic conditions deteriorate, wemay need to increase the allowance for doubtful accounts.

 

*Impairmentof intangibles and goodwill*

 

Identified intangible assets are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. In accordance with FASB Statement No. 142,*Goodwill and Other Intangible Assets*,goodwill and indefinite-lived intangible assets are not amortized, but aresubject to an annual impairment test unless circumstances dictate more frequentassessments. Goodwill impairment testing is a two-step process performed at thereporting unit level. Our reporting units are at the operating segment level.Step one compares the fair value of our reporting units to their carryingamount. The fair value of the reporting unit is determined using the incomeapproach, corroborated by a comparison to market capitalization and keymultiples of comparable companies. Under the income approach, we determine fairvalue based on estimated future cash flows of each reporting unit, discountedby an estimated weighted-average cost of capital. If the fair value of thereporting unit is greater than its carrying amount, there is no impairment. Ifthe reporting unit’s carrying amount exceeds its fair value, then the secondstep must be completed to measure the amount of impairment, if any. Step two ofthe goodwill impairment test calculates the implied fair value of the reportingunit’s goodwill with the carrying value of its goodwill. If the carrying amountof goodwill exceeds the implied fair value of goodwill, an impairment loss willbe recognized in an amount equal to the excess.

 

Determining the fair value of a reporting unit isjudgmental in nature and requires the use of significant estimates andassumptions, including revenue growth rates, operating margins, discount rates,strategic plans and future market conditions, among others. Given the currenteconomic environment and the uncertainties regarding the impact on ourbusiness, there can be no assurance that our estimates and assumptions made forpurposes of our goodwill impairment testing will prove to be accuratepredictions of the future. If our assumptions regarding forecasted revenue ormargin growth rates are not achieved, or changes in discount rates, strategy ormarket conditions occur, we may be required to record goodwill impairmentcharges in 

 

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future periods. It is not possible at this time todetermine if a future impairment charge will occur and if it does, whether suchcharge will be material. At April 4, 2009, the date of our last interimstep one impairment analysis, a 5% decrease in the estimated free cash flowassumptions would have resulted in a reduction in fair values of approximately$47.9 million for our energy storage segment and $19.0 million forour separations media segment. For the energy storage segment, the 5% decreasewould have resulted in the carrying value of the lead-acid battery separatorreporting unit exceeding its fair value by $12.7 million and would haverequired a step two analysis to determine the amount of goodwill impairment, ifany.

 

At April 4, 2009, a .5% increase in the discountrate would have resulted in a reduction in fair values of $42.2 millionfor our energy storage segment and $17.3 million for our separations mediasegment. For the energy storage segment, the .5% increase in the discount ratewould have resulted in the carrying value of the lead-acid battery separatorreporting unit exceeding its fair value by $9.1 million and would haverequired a step two analysis to determine the amount of goodwill impairment, ifany.

 

Goodwill is tested annually for impairmentas of the first day of the fourth quarter and at interim dates upon theoccurrence of certain events or substantive changes in circumstances.  Because of fluctuations in our stock price,we tested goodwill for impairment at January 3, 2009 and April 4,2009 and concluded that the fair value of our reporting units exceeded thecarrying amount and there was no impairment of goodwill.  No events or substantive changes incircumstances have occurred since the last interim test that would indicate aninterim goodwill impairment test should be performed as of July 4, 2009.

 

*Pension and other postretirementbenefits*

 

Certain assumptions are used in the calculation of theactuarial valuation of our defined benefit pension plans and otherpostretirement benefits. Two critical assumptions, discount rate and expectedreturn on assets, are important elements of plan expense and/or liabilitymeasurement and differences between actual results and these two actuarialassumptions can materially affect our projected benefit obligation or the valuationof our plan assets. Other assumptions involve demographic factors such asretirement, expected increases in compensation, mortality and turnover. Thediscount rate enables us to state expected future cash flows at a present valueon the measurement date. The discount rate assumptions are based on the marketrate for high quality fixed income investments, and are thus subject to changeeach year. At January 3, 2009, a 1% decrease in the discount rate wouldincrease our projected benefit obligations and the unfunded status of ourpension plans by $12.8 million. The expected rates of return on ourpension plans’ assets are based on the asset allocation of each plan and thelong-term projected return of those assets. At January 3, 2009, if theexpected rate of return on pension plan assets were reduced by 1%, the resultwould have increased our net periodic benefit expense for fiscal 2008 by$0.2 million dollars.

 

*Environmentalmatters*

 

We account for environmental liabilities in accordancewith AICPA Statement of Position 96-1, “*EnvironmentalRemediation Liabilities*.” Environmental obligations are accrued whensuch expenditures are probable and reasonably estimable. The amount ofliability recorded is based on currently available information, including theprogress of remedial investigations, current status of discussions withregulatory authorities regarding the method and extent of remediation,presently enacted laws and existing technology. Accruals for estimated lossesfrom environmental obligations are adjusted as further information develops orcircumstances change. We do not currently anticipate any material loss inexcess of the amounts accrued. 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.If actual results are less favorable than those projected by management, we maybe required to recognize additional expense and liabilities.

 

In connection with the acquisition ofMembrana GmbH (“Membrana”) in 2002, we recorded a reserve for costs toremediate known environmental issues and operational upgrades at the Wuppertal,Germany facility. In 2004, we identified and accrued for potentialenvironmental contamination at our manufacturing facility in Potenza, Italy. InDecember 2008, we implemented a restructuring plan which included theclosure of the Potenza, Italy manufacturing facility and increased theenvironmental reserve for the estimated additional costs of environmentalremediation and monitoring activities that will be required after closing thefacility.

 

We have indemnification agreements for certainenvironmental matters from Acordis A.G. (“Acordis”) and Akzo Nobel N.V. (“Akzo”),the prior owners of Membrana. Recoveries of environmental costs from otherparties are recognized as assets when their receipt is deemed probable. We haverecorded a receivable with regard to the Akzo indemnification agreement. Ifindemnification claims cannot be enforced against Acordis and Akzo, we may berequired to reduce the amount of indemnification receivable recorded.

 

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###### **Resultsof Operations**

###### ** **

The followingtable sets forth, for the periods indicated, certain operating data in amountand as a percentage of net sales:

 
| ** **                                             | ** ** | ** **             | ** ** | ** **             | ** ** | **Percentage of Net Sales** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
| **($’s in millions)**                             | ** ** | **July 4, 2009**  | ** ** | **June 28, 2008** | ** ** | **July 4, 2009**       | ** ** | **June 28, 2008** | ** ** |
|                                                   |       |                   |       |                   |       |                        |       |   |   |
| Net sales                                              |       | $                      | 118.2      |                   | $          | 164.7                       |       | 100.0 | % | 100.0 | % |
|                                                   |       |                   |       |                   |       |                        |       |   |   |
| Gross profit                                           |       | 46.6                   |       | 61.1                   |       | 39.4                        |       | 37.1 |   |
| Selling, general  and administrative expenses          |       | 25.1                   |       | 29.7                   |       | 21.2                        |       | 18.1 |   |
| Business  restructuring                                |       | —                 |       | —                 |       | —                      |       | — |   |
| Operating income                                       |       | 21.5                   |       | 31.4                   |       | 18.2                        |       | 19.0 |   |
| Interest  expense, net                                 |       | 14.6                   |       | 16.1                   |       | 12.4                        |       | 9.8 |   |
| Foreign currency  and other                            |       | 1.3                    |       | (0.5                   | )          | 1.1                         |       | (0.3 | ) |
| Income from  continuing operations before income taxes |       | 5.6                    |       | 15.8                   |       | 4.7                         |       | 9.6 |   |
| Income taxes                                           |       | 1.4                    |       | 4.6                    |       | 1.2                         |       | 2.8 |   |
| Income from  continuing operations=                    |       | $                      | 4.2        |                   | $          | 11.2                        |       | 3.5 | % | 6.8 | % |

 
| ** **                                             | ** ** | ** **            | ** ** | ** **             | ** ** | **Percentage  of Net Sales** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **Six Months Ended**  | ** ** | **Six Months Ended**   | ** ** |
| **($’s in millions)**                             | ** ** | **July 4, 2009** | ** ** | **June 28, 2008** | ** ** | **July 4, 2009**        | ** ** | **June 28, 2008** | ** ** |
|                                                   |       |                  |       |                   |       |                         |       |   |   |
| Net sales                                              |       | $                     | 227.1      |                   | $          | 310.0                        |       | 100.0 | % | 100.0 | % |
|                                                   |       |                  |       |                   |       |                         |       |   |   |
| Gross profit                                           |       | 90.0                  |       | 116.6                  |       | 39.6                         |       | 37.6 |   |
| Selling, general  and administrative expenses          |       | 50.3                  |       | 55.1                   |       | 22.1                         |       | 17.8 |   |
| Business  restructuring                                |       | 0.6                   |       | —                 |       | 0.3                          |       | — |   |
| Operating income                                       |       | 39.1                  |       | 61.5                   |       | 17.2                         |       | 19.8 |   |
| Interest  expense, net                                 |       | 28.8                  |       | 32.0                   |       | 12.7                         |       | 10.3 |   |
| Foreign currency  and other                            |       | 0.7                   |       | (0.6                   | )          | 0.3                          |       | (0.2 | ) |
| Income from  continuing operations before income taxes |       | 9.6                   |       | 30.1                   |       | 4.2                          |       | 9.7 |   |
| Income taxes                                           |       | 2.4                   |       | 8.4                    |       | 1.0                          |       | 2.7 |   |
| Income from  continuing operations                     |       | $                     | 7.2        |                   | $          | 21.7                         |       | 3.2 | % | 7.0 | % |

 

***Comparisonof the three months ended July 4, 2009 with the three months ended June 28,2008***

 

*Netsales.** *Net sales for the three months ended July 4, 2009were $118.2 million, a decrease of $46.5 million, or 28.2%, from the sameperiod in the prior year.  Energy storagesales for the three months ended July 4, 2009 were $82.3 million, adecrease of $39.7 million, or 32.5%. Energy storage sales of lead-acid and lithium battery separatorsdecreased by 36.6% and 16.8%, respectively, due to current macro-economicconditions and the negative impact of dollar/euro exchange rate fluctuations of$4.0 million.  Lead-acid battery separator sales were also impacted by theloss of a customer at the end of fiscal 2008. Sales to this customer in the three months ended June 28, 2008 were$15.3 million.

 

Separations media sales for the three months ended July 4, 2009were $35.9 million, a decrease of $6.8 million, or 15.9% from the same periodin the prior year, including the negative impact of dollar/euro exchange ratefluctuations of $4.3 million.  Healthcaresales decreased 9.5% as the impact of higher sales volumes of synthetichemodialysis membranes was more than offset by the negative impact ofdollar/euro exchange rate fluctuations. Filtration and specialty product sales decreased by 27.8% due to currentmacro-economic conditions and the negative impact of dollar/euro exchange ratefluctuations.

 

*GrossProfit**. *Gross profit as a percent of net sales was 39.4% for thethree months ended July 4, 2009, as compared to 37.1% in the same periodof the prior year.  Energy storage grossprofit as a percent of net sales was 36.2% for the three months ended July 4,2009, which is consistent with the prior year percentage.  Separations media gross profit as a percentof net sales 

 

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increased to 46.8%for the three months ended July 4, 2009, as compared to 36.8% in the sameperiod of the prior year.  The increasewas due primarily to production efficiencies and decreased energy costs.

 

*Selling, general and administrativeexpenses**. *Selling, general and administrative expenses decreasedby $4.6 million for the three months ended July 4, 2009.  Excluding the impact of dollar/euro exchangerate fluctuations, the decrease was $3.3 million, consisting of $4.1 million ofreduced discretionary spending and cost savings from the 2008 restructuringplan, partially offset by $1.0 million of increased operating costs in 2009 dueto the acquisition of Yurie-Wide Corporation in May 2008.

 

*Interest expense. *Interest expense for the three monthsended July 4, 2009 decreased by $1.5 million from the same period in theprior year.  The decrease in interestexpense was primarily driven by the positive impact of dollar/euro exchangerate fluctuations on our euro-denominated debt and lower interest rates underour senior credit facilities.

 

*Incometaxes**. *The income tax provision for the interim periodspresented is computed at the effective rate expected to be applicable in eachrespective full year using the statutory rates on a country-by-countrybasis.  The effective tax rate oncontinuing operations was 24.5% for the three months ended July 4, 2009,as compared to 29.3% for the same period in the prior year.  Our effective tax rate fluctuates due to avariety of factors, including state income taxes, the mix of income betweenU.S. and foreign jurisdictions taxed at varying rates, various changes inestimates of permanent differences and valuation allowances and the relativesize of our consolidated income (loss) before income taxes.

 

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

 

***Comparisonof the six months ended July 4, 2009 with the six months ended June 28,2008***

 

*Netsales.** *Net sales for the six months ended July 4, 2009were $227.1 million, a decrease of $82.9 million, or 26.7%, from the sameperiod in the prior year.  Energy storagesales for the six months ended July 4, 2009 were $156.0 million, adecrease of $69.9 million, or 30.9%. Energy storage sales of lead-acid and lithium battery separatorsdecreased by 33.6% and 21.2%, respectively, due to current macro-economicconditions and the negative impact of dollar/euro exchange rate fluctuations of$8.5 million.  Lead-acid battery separator sales were also impacted by theloss of a customer at the end of fiscal 2008. Sales to this customer in the six months ended June 28, 2008 were$28.1 million.

 

Separations media sales for the six months ended July 4, 2009 were$71.1 million, a decrease of $13.0 million, or 15.5% from the same period inthe prior year, including the negative impact of dollar/euro exchange ratefluctuations of $8.6 million.  Healthcare sales decreased 9.0% as the impact of higher sales volumes ofsynthetic hemodialysis membranes was more than offset by the negative impact ofdollar/euro exchange rate fluctuations. Filtration and specialty product sales decreased by 27.6% due to currentmacro-economic conditions and the negative impact of dollar/euro exchange ratefluctuations.

 

*GrossProfit**. *Gross profit as a percent of net sales was 39.6% forthe six months ended July 4, 2009, as compared to 37.6% in the same periodof the prior year.  Energy storage grossprofit as a percent of net sales was 35.8% for the six months ended July 4,2009, which is consistent with the prior year percentage.  Separations media gross profit as a percentof net sales increased to 48.1% for the six months ended July 4, 2009, ascompared to 36.1% in the same period of the prior year.  The increase was due primarily to production efficienciesand decreased energy costs.

 

*Selling, general and administrativeexpenses**. *Selling, general and administrative expenses decreasedby $4.8 million for the six months ended July 4, 2009.  Excluding the impact of dollar/euro exchangerate fluctuations, the decrease was $2.7 million, consisting of $6.2 million ofreduced discretionary spending and cost savings from the 2008 restructuringplan, partially offset by $2.5 million of increased operating costs in 2009 forthe acquisition of Yurie-Wide Corporation in May 2008.

 

*Interest expense. *Interest expense for the six months endedJuly 4, 2009 decreased by $3.2 million from the same period in the prioryear.  The decrease in interest expensewas primarily driven by the positive impact of dollar/euro exchange ratefluctuations on our euro-denominated debt and lower interest rates under oursenior credit facilities.

 

*Incometaxes**. *The income tax provision for the interim periodspresented is computed at the effective rate expected to be applicable in eachrespective full year using the statutory rates on a country-by-countrybasis.  The effective tax rate oncontinuing operations was 25.0% for the six months ended July 4, 2009, ascompared to 27.8% for the same period in the prior year.  Our effective tax rate fluctuates due to avariety of factors, including state income taxes, the mix of income betweenU.S. and foreign jurisdictions taxed at varying rates, various changes inestimates of permanent differences and valuation allowances, and the relativesize of our consolidated income (loss) before income taxes.

 

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

 

**Business Restructuring**

 

**The pre-taxcomponents of restructuring activity in the six months ended July 4, 2009were as follows:**

 
| **(in millions)**            | ** ** | **Balance at  January 3, 2009** | ** ** | **Restructuring  Charges** | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  July 4, 2009** | ** ** |
|------------------------------|------------|--------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| 2008 Restructuring Plan:     |       |                                 |       |                       |       |               |       |                               |       |                              |       |
| Severance and benefit  costs |       | $                                    | 9.9        |                       | $          | (0.6               | )          | $                                  | (1.1       | )                                 | $          | (0.1 | ) | $ | 8.1 |   |
| Other                        |       | 0.8                                  |       | 1.2                        |       | (1.2               | )          | —                             |       | 0.8                               |       |
|                         |       | 10.7                                 |       | 0.6                        |       | (2.3               | )          | (0.1                               | )          | 8.9                               |       |
|                         | ** ** | ** **                           | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| 2006 Restructuring Plan:     |       |                                 |       |                       |       |               |       |                               |       |                              |       |
| Severance and benefit  costs |       | 2.9                                  |       | —                     |       | (0.2               | )          | —                             |       | 2.7                               |       |
| Other                        |       | 0.5                                  |       | —                     |       | (0.4               | )          | —                             |       | 0.1                               |       |
|                         |       | 3.4                                  |       | —                     |       | (0.6               | )          | —                             |       | 2.8                               |       |
|                         | ** ** | ** **                           | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| Total                        |       | $                                    | 14.1       |                       | $          | 0.6                |       | $                                  | (2.9       | )                                 | $          | (0.1 | ) | $ | 11.7 |   |

 

We expect to make payments against the restructuring reserve ofapproximately $2.5 million over 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 included closing our facility in Potenza,Italy, streamlining production at our facility in Owensboro, Kentucky andreducing selling, general and administrative resources associated with thelead-acid battery separator business. The total cost of the restructuring plan, including environmental costsrecorded in the environmental reserve of $18.6 million, is expected to beapproximately $61.5 million.  The planwas implemented and a restructuring charge of $59.9 million was recorded in thefourth quarter of 2008.  The restructuringplan included the termination of approximately 175 employees, consisting ofproduction employees at Potenza, Italy and Owensboro, Kentucky and certainselling, general and administrative employees. During the three months ended July 4, 2009, we reduced theestimated cost of severance and benefits and related accrual by $0.6 million toreflect actual costs expected to be incurred. After this adjustment, the total cost of severance and benefits isexpected to be approximately $9.8 million. The Company estimates that othercosts, consisting primarily of costs associated with closing the Potenza, Italyfacility, are expected to be approximately $4.2 million, of which $3.2 millionhas been recognized through July 4, 2009 and the remainder will berecognized over the next three years. The restructuring charge recorded in thefourth quarter of 2008 also included a non-cash impairment charge of $28.9million for buildings and machinery and equipment that will no longer be usedin Potenza, Italy.  Cash payments forseverance and other exit costs are expected to be paid over the next threeyears.  The timing, scope and costs ofthese restructuring 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, was approximately $33.8 million, consisting ofa $17.5 million non-cash impairment charge for buildings and 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.

 

**Liquidity and Capital Resources**

** **

Cash and cash equivalents increased to$96.7 million at July 4, 2009 from $83.0 million at January 3,2009, due primarily to cash flow generated from operations.

 

*Operating activities.* Net cash provided by operating activities was $17.1 million in the sixmonths ended July 4, 2009, as compared to $42.8 million in the sixmonths ended June 28, 2008. Cash provided by operating activities in thesix months

 

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ended July 4, 2009 consisted of cash flows from operations of$32.4 million offset by an increase in working capital of $15.3 million.  Accounts receivable decreased due to lowersales while days sales outstanding was comparable to 2008 year-end.  We have not experienced significant changesin accounts receivable aging or customer payment terms and believe that we haveadequately provided for potential bad debts. Inventory increased based on production and capacity planning forexpected customer orders, including the build-up of inventory in anticipationof our seasonal European shutdowns.  Webelieve that inventory levels are consistent with expected future demand.  Our inventory is generally not subject toobsolescence and does not have a shelf life and we do not believe there is asignificant risk of inventory impairment. Accounts payable decreased primarily due to the timing of purchases andaccrued liabilities decreased primarily due to the payment of 2008 employeeincentive bonuses in 2009.

 

Net cash provided by operations was $42.8 million in the six monthsended June 28, 2008 and consisted of net income before non-cash expensesof $49.8 million, partially offset by an increase in working capital of $7.0million, excluding the impact of the acquisitions and foreign exchange ratefluctuations.  Accounts receivable anddays sales outstanding at June 28, 2008 were relatively unchanged from2007 year-end.  Inventories increased inanticipation of our seasonal European shutdowns.

 

*Investingactivities.*  Capital expenditures were $4.8 millionin the six months ended July 4, 2009. For fiscal 2009, we expect to spendapproximately $15 million to $20 million to maintain our existingfacilities. Because of current economic conditions, the timing and amounts ofcapital expenditures in excess of normal maintenance requirements will beintensely scrutinized and approved on a case-by-case basis.

 

*Financingactivities.*  Payments on debt were $2.6 million inthe six months ended July 4, 2009.

 

We intend to fund our ongoing operations with cash onhand, cash generated by operations and availability under the senior securedcredit facility.

 

Our senior secured credit facility provides for a$322.9 million term loan facility ($316.4 million outstanding at July 4,2009), a €35.0 million term loan facility ($48.0 million outstanding atJuly 4, 2009) and a $90.0 million revolving credit facility. At July 4,2009, we had $87.3 million of borrowings available under the revolvingcredit facility ($90.0 million revolving credit facility less$2.7 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 1.25% margin or the Eurocurrencybase rate plus a 2.25% margin. At July 4, 2009, interest rates on the U.S.dollar term loan and Eurodollar term loan were 2.57% and 3.01%, respectively.

 

When loans are outstanding under the revolving creditfacility, we are required to maintain a senior leverage ratio of indebtednessto Adjusted EBITDA of less than 3.00 to 1.00. At July 4, 2009, our seniorleverage ratio was 2.08 to 1.00 and the entire amount of the revolving creditfacility was available for borrowing.

 

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

 
| **(in millions)**                                                | ** ** | **Last Twelve Months  Ended July 4, 2009** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| Net loss                                                         |       | $                                               | (31.7      | ) |
| Add/Subtract:                                                    |       |                                            |       |
| Depreciation and  amortization                                   |       | 53.2                                            |       |
| Interest  expense, net                                           |       | 57.5                                            |       |
| Income taxes                                                     |       | 0.4                                             |       |
| Stock-based  compensation expense                                |       | 1.5                                             |       |
| Foreign currency  gain                                           |       | (1.1                                            | )          |
| Loss on disposal  of property, plant, and equipment              |       | 1.5                                             |       |
| Business  restructuring                                          |       | 60.5                                            |       |
| Costs related to  the strike at our Owensboro, Kentucky facility |       | 6.7                                             |       |
| Costs related to  the FTC complaint                              |       | 3.4                                             |       |
| Other non-cash  or non-recurring charges                         |       | 0.2                                             |       |
| Adjusted EBITDA                                                  |       | $                                               | 152.1      |   |

 

The calculation ofthe senior leverage ratio as defined under the senior credit facility as of July 4,2009 is as follows:

 
| **(in millions)**      | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| Indebtedness (1)       |       | $          | 317.0      |   |
| Adjusted EBITDA        |       | 152.1      |       |
| Actual leverage  ratio |       | 2.08       | x          |
|                        |            |            |            |  |

 

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| (1) | Calculated as the sum of outstanding borrowings  under the senior secured credit facility and the capital lease obligation,  less the amount of cash on hand (not to exceed $50.0 million). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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The senior secured credit agreement contains certainrestrictive covenants which, among other things, limit capital spending, theincurrence of additional indebtedness, investments, dividends, transactionswith affiliates, asset sales, acquisitions, mergers and consolidations,prepayments of other indebtedness, liens and encumbrances, and other matterscustomarily restricted in such agreements. The facilities also contain certaincustomary events of default, subject to grace periods, as appropriate. Webelieve that annual capital expenditure limitations imposed by the senior creditfacilities will not significantly inhibit us from meeting our ongoing capitalexpenditure needs.

 

To reduce the interest rate risk inherent in theCompany’s variable rate debt, the Company may utilize interest rate swapagreements to convert all or a portion of the variable rate debt to a fixedrate obligation.  At July 4, 2009the Company has an interest rate swap agreement with a notional principalamount of $200.0 million that effectively fixes the interest rate on thatamount of term debt at 5.54% and expires on December 31, 2009.

 

Future principal debt payments are expected to be paidout of cash flows from operations, borrowings on our revolving credit facilityand future refinancing of our debt. Our cash interest requirements for the nexttwelve months are estimated to be $51.2 million.

 

The 8.75% senior subordinated notes($434.8 million outstanding at July 4, 2009) will mature in 2012 andare guaranteed by most of our existing and future domestic restrictedsubsidiaries, 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 credit agreement, the term loansmature in July 2014 and the revolving credit facility matures in July 2013.The 8.75% senior subordinated notes mature on May 15, 2012. Because thesenior subordinated notes are subordinated to the senior secured creditfacility, if any amounts are outstanding under the senior subordinated notes atFebruary 1, 2012, the maturity dates for the term loans and the revolvingcredit facility will be accelerated to February 1, 2012.

 

We believe we have sufficient liquidity to meet ourcash requirements over both the short (next twelve months) and long term (inrelation to our debt service requirements). In evaluating the sufficiency ofour liquidity for both the shorter and longer term, we considered cash on hand,the expected cash flow to be generated by our operations and the availableborrowings under our senior secured credit facility compared to our anticipatedcash requirements for debt service, working capital, cash taxes and capitalexpenditures and funding requirements for long-term liabilities. We anticipatethat our cash on hand and operating cash flow, together with borrowings underthe revolving credit facility, will be sufficient to meet our anticipatedfuture operating expenses, capital expenditures and debt service obligations asthey become due for at least the next twelve months. However, our ability tomake scheduled 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 Annual Report onForm 10-K.

 

From time to time, we may explore additional financingmethods and other means to lower our cost of capital, which could include stockissuance or debt financing and the application of the proceeds therefrom to therepayment of bank debt or other indebtedness. In addition, in connection withany future acquisitions, we may require additional funding which may be providedin the form of additional debt or equity financing or a combination thereof.There can be no assurance that any additional financing will be available to uson acceptable terms.

 

***Foreign Operations***

 

We manufacture ourproducts at 14 strategically located facilities in North America, Europe andAsia.  Net sales from the foreignlocations were approximately $151.7 million and $200.0 million for the sixmonths ended July 4, 2009 and June 28, 2008, respectively.  Typically, we sell our products in the currencyof the country where the manufacturing facility that produces the product islocated.  Sales to foreign customers aresubject to numerous additional risks, including the impact of foreigngovernment regulations, currency fluctuations, political uncertainties anddifferences in business practices.  Therecan be no assurance that foreign governments will not adopt regulations or takeother action that would have a direct or indirect adverse impact on our businessor market opportunities within such governments’ countries.  Furthermore, there can be no assurance thatthe political, cultural and economic climate outside the United States will befavorable to our operations and growth strategy.

 

###### **Environmentalmatters**

###### ** **

We account for environmental liabilities in accordancewith AICPA Statement of Position 96-1, “*EnvironmentalRemediation Liabilities*.” Environmental obligations are accrued whensuch expenditures are probable and reasonably estimable. The amount ofliability recorded is based on currently available information, including theprogress of remedial investigations, current status of discussions withregulatory authorities regarding the method and extent of remediation,presently enacted laws 

 

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and existing technology. Accruals for estimated lossesfrom environmental obligations are adjusted as further information develops orcircumstances change. Costs of future expenditures for environmentalobligations are not discounted to their present value. We do not currentlyanticipate any material loss in excess of the amounts accrued. However, ourfuture remediation expenses may be affected by a number of uncertaintiesincluding, but not limited to, the difficulty in estimating the extent andmethod of remediation, the evolving nature of environmental regulations, andthe availability and application of technology. We do not expect the resolutionof such uncertainties to have a material adverse effect on the financialcondition of the Company. Recoveries of environmental costs from other partiesare recognized as assets when their receipt is deemed probable. Environmentalreserves, which are predominately euro-denominated, were $47.9 million and$49.2 million as of July 4, 2009 and January 3, 2009, respectively.

 

In connection with the acquisition of Membrana in2002, we recorded a reserve for environmental obligations. The reserve providesfor costs to remediate known environmental issues and operational upgradeswhich are required in order for us to remain in compliance with localregulations. The initial estimate and subsequent finalization of the reservewas included in the allocation of purchase price at the date of acquisition.The environmental reserve for the Membrana facility was $21.6 million and $22.6million at July 4, 2009 and January 3, 2009, respectively. Weanticipate that expenditures will be made over the next seven to ten years.

 

We have 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. We will receiveindemnification payments under the indemnification agreements as expendituresare made against approved claims. At July 4, 2009 and January 3,2009, amounts receivable under the indemnification agreements were $17.2million and $17.9 million, respectively. 

 

In 2004, we identified potential environmentalcontamination at our manufacturing facility in Potenza, Italy. Based onenvironmental studies and the initial remediation plan presented to localauthorities, we recorded a reserve for environmental obligations. In 2006, wefurther refined the remediation plan after consultations with local authorities.In December 2008, we implemented a restructuring plan which included theclosure of this manufacturing facility. Based on discussions with localauthorities, environmental consultants and internal personnel, we increased theenvironmental reserve at Potenza as part of a restructuring charge by $18.6 inthe fourth quarter of 2008 for the estimated additional costs of environmentalremediation and monitoring activities that will be required after closing thefacility. Discussions with the local authorities regarding the required levelof remediation are ongoing. The environmental reserve for the Potenza, Italyfacility was $23.3 million and $23.5 million at July 4, 2009 and January 3,2009, respectively. It is reasonably possible that there is exposure to loss inexcess of the amount accrued. The Company cannot estimate the amount ofpossible liability in excess of the amount accrued due to a number of factors,including the lack of local regulations, effectiveness of existing remediationtechnology and the amount of time local authorities may require monitoringprocedures. The Company believes that additional costs related to this matter,if any, will not have a material effect on the financial condition of theCompany. We anticipate that expenditures will be made over the next seven toten years.

 

In connection with the acquisition of Microporous, weidentified potential environmental contamination at the manufacturing site inPiney Flats, Tennessee. As part of the acquisition, the seller purchased anenvironmental insurance policy on behalf of us and also providedindemnification for a portion of the insurance policy deductible. Subsequent tothe acquisition, we performed additional environmental studies and confirmedthat environmental contamination was present. We recorded the estimated cost of remediation and the relatedreceivables from the insurance company and the seller in applying purchaseaccounting for the acquisition.  Wereached an agreement with the seller in July 2009 which, among otherthings, releases the seller from its obligation to provide indemnification fora portion of the insurance policy deductible. Accordingly, we reduced thereceivable related to this environmental matter by $0.2 million at July 4,2009. The receivable balance at July 4, 2009 and January 3, 2009 was$2.3 million and $2.5 million, respectively. 

 

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**Off-Balance Sheet Arrangements**

 

We are not a partyto any off-balance sheet arrangements that have, or are reasonably likely tohave, a material current or future effect on our financial condition, revenuesor expenses, results of operations, liquidity, capital expenditures or capital resources.

 

**New Accounting Standards**

 

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.  We adopted FAS 157 in thefirst 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.  Weadopted FSP 157-2 in the first quarter of 2009. In October 2008, the FASB issued FSP No. SFAS 157-3, *Determining Fair Value of a Financial Asset in aMarket That Is Not Active* (“FSP 157-3”), which clarifies theapplication of FAS 157 when the market for a financial asset is notactive.  We adopted FSP 157-3 uponissuance.  In April 2009, the FASB issued FSP No. SFAS 157-4,*Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions 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 FSPsin each period did not have a material impact on our consolidated financialstatements.

 

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.  We adopted FSP 141(R)-1 upon issuance.  The adoption of FAS 141(R) and FSP141(R)-1 did not have a material impact on our consolidated financialstatements.

 

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. We adoptedFAS 160 in the first quarter of 2009 with retrospective application of thepresentation and disclosure requirements. Noncontrolling interests of $3.0 million at January 3, 2009 werereclassified from “Other” non-current liabilities to shareholders’ equity.

 

**In March 2008, the FASBissued 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 uses derivative instruments, howderivative instruments and related hedged items are accounted for under FASBStatement No. 133, *Accounting for DerivativeInstruments and Hedging Activities*(“FAS 133”) and howderivative instruments and related hedged items affect a company’s financialposition, financial performance and cash flows. FAS 161 is effective forfinancial 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, 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 amend 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 amend Accounting Principles Board Opinion No. 28, *Interim Financial Reporting*, to requirethose disclosures in summarized financial information at interim reportingperiods. We adopted FSP 107-1 and APB 28-1 upon issuance.  The adoption did not have a material impacton our consolidated financial statements.

 

In May 2009, the FASB issued Statement No. 165,*Subsequent Events* (“FAS 165”).  FAS 165 establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are 

 

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available to be issued.  The new standard is effective for interim orannual periods ending after June 15, 2009. The adoption of FAS 165 did not have an impact on our consolidatedfinancial 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.  The disclosures required by theFSP will be included in our fiscal 2009 year-end financial statements.

 

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

We are exposed to various market risks, which arepotential losses arising from adverse changes in market rates and prices, suchas interest rates and foreign exchange fluctuations. We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

*Interestrate risk*

 

At July 4, 2009, we had fixed rate debt of$434.8 million and variable rate debt of $364.4 million. To reduce theinterest rate risk inherent in the Company’s variable rate debt, the Companymay utilize interest rate swap agreements to convert all or a portion of thevariable rate debt to a fixed rate obligation. At July 4, 2009, the Company has an interest rate swap agreementwith a notional principal amount of $200.0 million that effectively fixes theinterest rate on that amount of term debt at 5.54% and expires on December 31,2009. 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 agreement and holding other variables constant, would be$2.6 million over the next 12 months.

 

*Currencyrisk*

 

Outside of the United States, we maintain assets andoperations in Europe and Asia. The results of operations and financial positionof our foreign operations are principally measured in their respective currencyand translated into U.S. dollars. As a result, exposure to foreign currencygains and losses exists. The reported income of these subsidiaries will behigher or lower depending on a weakening or strengthening of the U.S. dollaragainst the respective foreign currency. Our subsidiaries and affiliates alsopurchase and sell products and services in various currencies. As a result, wemay be exposed to cost increases relative to the local currencies in themarkets in which we sell. Because a different percentage of our sales are in aforeign currency than our costs, a change in the relative value of the U.S.dollar could have a disproportionate impact on our sales compared to our costs,which could impact our margins. A portion of our assets are based in ourforeign locations and are translated into U.S. dollars at foreign currencyexchange rates in effect as of the end of each period, with the effect of suchtranslation reflected in other comprehensive income (loss). We have aeuro-denominated term loan and senior subordinated notes that effectively hedgeour net investment in foreign subsidiaries. Therefore, foreign currency gainsand losses resulting from the translation of the euro-denominated debt areincluded in accumulated other comprehensive income (loss). Accordingly, ourconsolidated shareholders’ equity will fluctuate depending upon the weakeningor strengthening of the U.S. dollar against the respective foreign currency,primarily the euro.

 

The dollar/euroexchange rates used in our financial statements for the periods ended as setforth below were as follows:

 
| ** **                                      | ** ** | **July 4, 2009** | ** ** | **June 28, 2008** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| Period end rate                                 |       | 1.3988                |       | 1.5751                 |       |
| Period average  rate for the three months ended |       | 1.3622                |       | 1.5624                 |       |
| Period average  rate for the six months ended   |       | 1.3341                |       | 1.5299                 |       |

 

Our strategy formanagement of currency risk relies primarily on conducting our operations in acountry’s respective currency and may, from time to time, involve currencyderivatives.  As of July 4, 2009, wedid not have any foreign currency derivatives outstanding.

 

**Item 4. Controls and Procedures**

 

An evaluation of the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) or 15d-15(e) promulgatedunder the Exchange Act) was performed under the supervision, and with theparticipation of, our management, including our Chief Executive Officer andChief Financial Officer. Our disclosure controls are designed to provide areasonable assurance that information required to be disclosed in reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission. Based upon our evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of July 4, 2009 toprovide reasonable assurance that information required to be disclosed in thereports that we file under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and is accumulated and communicated tomanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

 

During the three monthsended July 4, 2009, there has been no change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) or 15d-15(f) promulgatedunder the Exchange Act) that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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**PART II— OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

On March 20, 2008, we received a letter from theFederal Trade Commission (the “FTC”) requesting that the Company voluntarilyprovide certain documents and information to the FTC regarding our acquisitionof Microporous, which was completed on February 29, 2008. The letterstated that the FTC was conducting an investigation to determine whether theMicroporous acquisition will substantially lessen competition in any relevantmarket and thereby violate federal antitrust laws. We voluntarily responded tothe letter in writing and through supplemental telephone conversations andmeetings.

 

On April 7, 2008, we and our wholly-ownedsubsidiary, Daramic LLC, each received from the FTC a subpoena andinterrogatories requesting substantially similar documents and information asrequested in the FTC’s initial letter, as well as additional documents andinformation. We responded fully to this request and met on several occasionswith various members of the FTC staff in an effort to answer their questionsand resolve the investigation.

 

On September 9, 2008, the FTC issued anadministrative complaint against us alleging that our actions and theacquisition of Microporous have substantially lessened competition in NorthAmerican markets for lead-acid battery separators. We filed an answer to thecomplaint on October 15, 2008 denying the material allegations of thecomplaint. The matter was presented before an Administrative Law Judge of theFTC and the hearing concluded on June 12, 2009. The Administrative LawJudge’s decision is expected in September 2009, although the actual timingremains uncertain.  The AdministrativeLaw Judge’s decision is appealable by us and by the FTC.

 

We believe that the complaint is unfounded and thatthe Microporous acquisition is and will continue to be beneficial to ourcustomers and the industry. Therefore, we intend to continue to vigorouslydefend this action by the FTC. It is not possible, however, to predict withcertainty whether we will be successful in the litigation or through a judicialappellate process. If the FTC and the courts were to reach a conclusion adverseto us, the FTC could seek remedies including divestiture of some or all of theassets acquired in the Microporous acquisition as well as prospectiverestrictions on our future conduct. We believe that a final judicial resolutionto the challenge by the FTC to the Microporous acquisition could take severalyears.

 

On March 9, 2009, we filed a complaint against Trojan BatteryCompany (“Trojan”) in the United States District Court for the Western Districtof North Carolina alleging that Trojan had breached its contract with theCompany.  On or about March 19, 2009, Trojan filed a complaintagainst us in the United States District Court for the Central District ofCalifornia alleging that we had breached our contract with Trojan andchallenging our acquisition of Microporous under California antitrustlaw. In July 2009, we reached a settlement of the dispute with Trojanand both complaints have been dismissed with prejudice.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

The Company’sAnnual Meeting of Stockholders was held on May 14, 2009. Stockholderselected the director nominees and ratified the selection of Ernst &Young LLP as our independent registered public accounting firm for 2009.

 

The directornominees were elected based upon the following votes:

 
| **Nominees**                  | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------------------------|------------|---------------|------------|--------------------|------------|
| Kevin Kruse                   |       | 37,793,304    |       | 3,749,620          |       |
| Frederick C.  Flynn, Jr. |       | 41,388,087    |       | 154,837            |       |
| William Dries                 |       | 40,892,792    |       | 650,132            |       |

 

The ratificationof the section of Ernst & Young LLP as our independent registeredpublic accounting firm for 2009 received the following votes:

 
| ** ** | ** ** | **Number of Shares** | ** ** |
|------------|------------|----------------------|------------|
| For        |       | 40,920,395           |       |
| Against    |       | 622,284              |       |
| Abstain    |       | 245                  |       |

 

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**Item 6.  Exhibits**

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

 

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# **SIGNATURES**

# ** **

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date:  August 7, 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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