Table of Contents

 

** **

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, DC 20549

** **

**FORM 10-Q**

** **

**(MarkOne)**

 

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

 

**For the quarterly period ended October 3,2009**

 

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

 

**For the transition period from             to             **

 

**Commission file number:  1-32266**

 

**POLYPORE INTERNATIONAL, INC.**

(Exact Name of Registrantas Specified in Its Charter)

 

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

 

**(704)587-8409**

(Registrant’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 xNo

 

There were 44,391,326shares of the registrant’s common stock outstanding as of November 3,2009.

 

 

 

----

**Table of Contents**

** **

**Polypore International, Inc.**

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

**For the Three Months Ended October 3, 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                                    | 31       |
| **Item 4.**      | Controls and  Procedures                                                                       | 31       |
|             |                                                                                           |     |
| **PART II** | **OTHER INFORMATION**                                                                          |     |
| **Item 1.**      | Legal Proceedings                                                                              | 32       |
| **Item 6.**      | Exhibits                                                                                       | 33       |
|             |                                                                                           |     |
| **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.

 

2

----

Table of Contents

 

**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 Polypore International,the following, among other things:

 

·                  the highly competitive nature of the markets in whichwe sell our products;

·                  the failure to continue to develop innovativeproducts;

·                  the loss of our customers;

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

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

·                  our substantial indebtedness;

·                  interest rate risk related to our variable rateindebtedness;

·                  our inability to generate cash;

·                  restrictions related to the senior secured creditfacilities;

·                  employee slowdowns, strikes or similar actions;

·                  product liability claims exposure;

·                  risks in connection with our operations outside theUnited States;

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

·                  the failure to protect our intellectual property;

·                  the loss of senior management;

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

·                  the failure to effectively integrate newly acquiredoperations;

·                  the adverse impact on our financial condition ofrestructuring activities;

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

·                  the adverse impact from legal proceedings on ourfinancial condition;

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

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

 

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

 

3

----

Table of Contents

 

**PART I — FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**PolyporeInternational, Inc.**

**CondensedConsolidated Balance Sheets**

* *
| **(in thousands, except share data)**                                                                                                                                | ** ** | **October 3, 2009** | ** **          | **January 3, 2009*** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------------|---------------------------|------------|
| ** **                                                                                                                                                           | ** ** | **(unaudited)**          | ** **          | ** **                | ** ** |
| **Assets**                                                                                                                                                           |       |                     |                |                      |       |
| Current  assets:                                                                                                                                                     |       |                     |                |                      |       |
| Cash  and cash equivalents                                                                                                                                           | ** ** | **$**                    | ** 120,191**   |                      | $          |  83,021 |   |
| Accounts  receivable, net                                                                                                                                            | ** ** | **101,867**              |                | 100,409                   |       |
| Inventories                                                                                                                                                          | ** ** | **77,315**               |                | 70,398                    |       |
| Refundable  income taxes                                                                                                                                             | ** ** | **944**                  |                | 6,277                     |       |
| Deferred  income taxes                                                                                                                                               | ** ** | **1,108**                |                | 1,222                     |       |
| Prepaid  and other                                                                                                                                                   | ** ** | **12,142**               |                | 14,275                    |       |
| Total  current assets                                                                                                                                                | ** ** | **313,567**              |                | 275,602                   |       |
| Property,  plant and equipment, net                                                                                                                                  | ** ** | **411,872**              |                | 416,796                   |       |
| Goodwill                                                                                                                                                             | ** ** | **600,768**              |                | 601,564                   |       |
| Intangibles  and loan acquisition costs, net                                                                                                                         | ** ** | **171,078**              |                | 184,854                   |       |
| Environmental  indemnification receivable                                                                                                                            | ** ** | **16,517**               |                | 17,389                    |       |
| Other                                                                                                                                                                | ** ** | **2,669**                |                | 2,649                     |       |
| Total  assets                                                                                                                                                        | ** ** | **$**                    | ** 1,516,471** |                      | $          |  1,498,854 |   |
|                                                                                                                                                                 |       |                     |                |                      |       |
| **Liabilities and equity**                                                                                                                                           |       |                     |                |                      |       |
| Current  liabilities:                                                                                                                                                |       |                     |                |                      |       |
| Accounts  payable                                                                                                                                                    | ** ** | **$**                    | ** 23,007**    |                      | $          |  23,806 |   |
| Accrued  liabilities                                                                                                                                                 | ** ** | **61,985**               |                | 58,777                    |       |
| Current  portion of debt                                                                                                                                             | ** ** | **3,738**                |                | 3,780                     |       |
| Current portion of capital lease  obligation                                                                                                                         | ** ** | **—**               |                | 1,495                     |       |
| Fair value of interest rate swap  agreements                                                                                                                         | ** ** | **1,550**                |                | 5,477                     |       |
| Total  current liabilities                                                                                                                                           | ** ** | **90,280**               |                | 93,335                    |       |
| Debt,  less current portion                                                                                                                                          | ** ** | **805,048**              |                | 796,216                   |       |
| Capital  lease obligation, less current portion                                                                                                                      | ** ** | **—**               |                | 1,824                     |       |
| Pension  and postretirement benefits, less current portion                                                                                                           | ** ** | **72,189**               |                | 66,266                    |       |
| Postemployment  benefits                                                                                                                                             | ** ** | **1,539**                |                | 2,425                     |       |
| Environmental  reserve, less current portion                                                                                                                         | ** ** | **35,220**               |                | 40,484                    |       |
| Deferred  income taxes                                                                                                                                               | ** ** | **78,186**               |                | 78,815                    |       |
| Other                                                                                                                                                                | ** ** | **21,263**               |                | 23,676                    |       |
| Commitments  and contingencies                                                                                                                                       |       |                     |                |                      |       |
|                                                                                                                                                                 |       |                     |                |                      |       |
| Equity:                                                                                                                                                              |       |                     |                |                      |       |
| Shareholders’  equity:                                                                                                                                          |       |                     |                |                      |       |
| Preferred  stock – 15,000,000 shares authorized, no shares issued andOutstanding                                                                                | ** ** | **—**               | ** **          | **—**                | ** ** |
| Common  stock, $.01 par value – 200,000,000 shares authorized,44,391,326 and 44,377,560 issued and  outstanding at October 3, 2009 andJanuary 3, 2009 | ** ** | **444**                  |                | 444                       |       |
| Paid-in  capital                                                                                                                                                     | ** ** | **481,056**              |                | 479,442                   |       |
| Retained  deficit                                                                                                                                                    | ** ** | **(53,039**              | **)**               | (66,671                   | )          |
| Accumulated  other comprehensive loss                                                                                                                                | ** ** | **(19,763**              | **)**               | (20,352                   | )          |
| Total  shareholders’ equity                                                                                                                                     | ** ** | **408,698**              |                | 392,863                   |       |
| Noncontrolling  interest                                                                                                                                             | ** ** | **4,048**                |                | 2,950                     |       |
| Total  equity                                                                                                                                                        | ** ** | **412,746**              |                | 395,813                   |       |
| Total  liabilities and equity                                                                                                                                        | ** ** | **$**                    | ** 1,516,471** |                      | $          |  1,498,854 |   |

 

----

* Derived fromaudited consolidated financial statements

*See notes to condensedconsolidated financial statements*

 

4

----

Tableof Contents

 

**PolyporeInternational, Inc.**

**Condensed Consolidated Statements ofIncome (unaudited)**

 
| ** **                                                | ** ** | **Three Months Ended**          | ** **        | **Nine Months Ended**               | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|-------------------|-------------------------------------|------------|
| **(in thousands, except per share  data)**                | ** ** | **October 3,********2009** | ** **        | **September  27,********2008** | ** ** | **October  3,********2009** | ** ** | **September 27,********2008** | ** ** |
| Net  sales                                                | ** ** | **$**                           | ** 137,737** |                                | $          |  154,923 | ** ** | **$** | ** 364,826** |   | $ |  464,917 |   |
| Cost  of goods sold                                       | ** ** | **89,777**                      |              | 108,055                             | ** ** | **226,885** |   | 303,894 |   |
| Business  interruption insurance recovery                 | ** ** | **—**                      |              | —                              | ** ** | **—** |   | (2,400 | ) |
| Gross  profit                                             | ** ** | **47,960**                      |              | 46,868                              | ** ** | **137,941** |   | 163,423 |   |
| Selling,  general and administrative expenses             | ** ** | **24,140**                      |              | 26,233                              | ** ** | **74,432** |   | 81,298 |   |
| Business  restructuring                                   | ** ** | **190**                         |              | —                              | ** ** | **756** |   | — |   |
| Operating  income                                         | ** ** | **23,630**                      |              | 20,635                              | ** ** | **62,753** |   | 82,125 |   |
| Other  (income) expense:                                  | ** ** | ** **                      |              |                                | ** ** | ** ** |   |   |   |
| Interest  expense, net                                    | ** ** | **14,214**                      |              | 14,600                              | ** ** | **42,983** |   | 46,623 |   |
| Foreign  currency and other                               | ** ** | **688**                         |              | (574                                | )          | **1,478** |   | (1,217 | ) |
|                                                      | ** ** | **14,902**                      |              | 14,026                              | ** ** | **44,461** |   | 45,406 |   |
| Income  from continuing operations before income taxes    | ** ** | **8,728**                       |              | 6,609                               | ** ** | **18,292** |   | 36,719 |   |
| Income  taxes                                             | ** ** | **2,267**                       |              | 1,521                               | ** ** | **4,660** |   | 9,905 |   |
| Income  from continuing operations                        | ** ** | **6,461**                       |              | 5,088                               | ** ** | **13,632** |   | 26,814 |   |
| Income  from discontinued operations, net of income taxes | ** ** | **—**                      |              | —                              | ** ** | **—** |   | 2,360 |   |
| Net  income                                               | ** ** | **$**                           | ** 6,461**   |                                | $          |  5,088 | ** ** | **$** | ** 13,632** |   | $ |  29,174 |   |
|                                                      | ** ** | ** **                      |              |                                | ** ** | ** ** |   |   |   |
| Net  income per share — basic:                       | ** ** | ** **                      |              |                                | ** ** | ** ** |   |   |   |
| Continuing  operations                                    | ** ** | **$**                           | ** 0.15**    |                                | $          |  0.11 | ** ** | **$** | ** 0.31** |   | $ |  0.63 |   |
| Discontinued  operations                                  |       | —                          |              | —                              |       | — |   | 0.06 |   |
| Net  income per share                                     | ** ** | **$**                           | ** 0.15**    |                                | $          |  0.11 | ** ** | **$** | ** 0.31** |   | $ |  0.69 |   |
|                                                      | ** ** | ** **                      |              |                                | ** ** | ** ** |   |   |   |
| Net  income per share —diluted:                      | ** ** | ** **                      |              |                                | ** ** | ** ** |   |   |   |
| Continuing  operations                                    | ** ** | **$**                           | ** 0.14**    |                                | $          |  0.11 | ** ** | **$** | ** 0.31** |   | $ |  0.63 |   |
| Discontinued  operations                                  |       | —                          |              | —                              |       | — |   | 0.06 |   |
| Net  income per share                                     | ** ** | **$**                           | ** 0.14**    |                                | $          |  0.11 | ** ** | **$** | ** 0.31** |   | $ |  0.69 |   |
|                                                      | ** ** | ** **                      |              |                                | ** ** | ** ** |   |   |   |
| Weighted  average shares outstanding - basic              | ** ** | **44,385,858**                  |              | 44,342,597                          | ** ** | **44,380,047** |   | 42,204,732 |   |
| Effect  of dilutive stock options                         | ** ** | **352,829**                     |              | 259,349                             | ** ** | **253,451** |   | 250,363 |   |
| Weighted  average shares outstanding - diluted            | ** ** | **44,738,687**                  |              | 44,601,946                          | ** ** | **44,633,498** |   | 42,455,095 |   |

 

*Seenotes to condensed consolidated financial statements*

 

5

----

Tableof Contents

 

**PolyporeInternational, Inc.**

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

 
| ** **                                                                                          | ** ** | **Nine Months Ended**     | ** **        |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------|-------------------|
| **(in thousands)**                                                                                  | ** ** | **October 3,  2009** | ** **        | **September 27,  2008** | ** ** |
| **Operating activities:**                                                                           |       |                      |              |   |   |
| Net  income                                                                                         | ** ** | **$**                     | ** 13,632**  |   | $ |  29,174 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                  |       |                      |              |   |   |
| Depreciation  expense                                                                               | ** ** | **26,011**                |              | 27,714 |   |
| Amortization  expense                                                                               | ** ** | **12,604**                |              | 13,980 |   |
| Amortization  of loan acquisition costs                                                             | ** ** | **1,941**                 |              | 1,941 |   |
| Stock  compensation                                                                                 | ** ** | **1,559**                 |              | 808 |   |
| Loss  on disposal of property, plant and equipment                                                  | ** ** | **186**                   |              | 946 |   |
| Foreign  currency (gain) loss                                                                       | ** ** | **223**                   |              | (1,878 | ) |
| Deferred  income taxes                                                                              | ** ** | **(3,650**                | **)**             | (133 | ) |
| Business  restructuring                                                                             | ** ** | **756**                   |              | — |   |
| Gain  on sale of synthetic paper business                                                           | ** ** | **—**                |              | (3,774 | ) |
| Changes  in operating assets and liabilities, net of acquisitions:                                  |       |                      |              |   |   |
| Accounts  receivable                                                                                | ** ** | **(262**                  | **)**             | 5,810 |   |
| Inventories                                                                                         | ** ** | **(5,561**                | **)**             | 2,732 |   |
| Prepaid  and other current assets                                                                   | ** ** | **2,310**                 |              | (3,172 | ) |
| Accounts  payable and accrued liabilities                                                           | ** ** | **(6,678**                | **)**             | 3,426 |   |
| Refundable  income taxes                                                                            | ** ** | **5,154**                 |              | — |   |
| Other,  net                                                                                         | ** ** | **(70**                   | **)**             | 2,526 |   |
| Net cash provided by operating activities                                                           | ** ** | **48,155**                |              | 80,100 |   |
| **Investing activities:**                                                                           |       |                      |              |   |   |
| Purchases  of property, plant and equipment                                                         | ** ** | **(10,715**               | **)**             | (40,038 | ) |
| Acquisitions,  net of cash acquired                                                                 | ** ** | **—**                |              | (86,050 | ) |
| Proceeds  from sale of synthetic paper business                                                     | ** ** | **—**                |              | 4,000 |   |
| Net cash used in investing activities                                                               | ** ** | **(10,715**               | **)**             | (122,088 | ) |
| **Financing activities:**                                                                           |       |                      |              |   |   |
| Principal  payments on debt and capital lease                                                       | ** ** | **(6,108**                | **)**             | (18,569 | ) |
| Proceeds  from revolving credit facility                                                            | ** ** | **—**                |              | 46,000 |   |
| Payments  on revolving credit facility                                                              | ** ** | **—**                |              | (46,000 | ) |
| Proceeds  from stock option exercises                                                               | ** ** | **55**                    |              | 1,522 |   |
| 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                                                | ** ** | **(6,053**                | **)**             | 67,902 |   |
| Effect  of exchange rate changes on cash and cash equivalents                                       | ** ** | **5,783**                 |              | (794 | ) |
| **Net increase in cash and cash equivalents**                                                       | ** ** | **37,170**                |              | 25,120 |   |
| Cash  and cash equivalents at beginning of period                                                   | ** ** | **83,021**                |              | 54,934 |   |
| **Cash and cash equivalents at end of the period**                                                  | ** ** | **$**                     | ** 120,191** |   | $ |  80,054 |   |

 

*See notes to condensedconsolidated financial statement**s*

 

6

----

Tableof Contents

 

**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 ninemonths ended October 3, 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 the date of the filing of this Form 10-Q with the Securities andExchange Commission.

 

**2.             Recent Accounting Pronouncements**

** **

**RecentlyAdopted Accounting Pronouncements**

 

In September 2006,the FASB issued fair value measurement guidance, 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 adoption of this guidance in the first quarter of 2008 did not havea material impact on the Company’s consolidated financial statements.

 

In December 2007,the FASB issued business combinations guidance, which provides revisedstandards requiring the acquirer to recognize and measure, at fair value on theacquisition date, identifiable assets and goodwill acquired, liabilitiesassumed, and any non-controlling interest in the acquiree.  Transaction and restructuring costs generallywill be expensed as incurred. This guidance also provides disclosurerequirements to enable users of the financial statements to evaluate the natureand financial effects of the business combination.  The adoption of this guidance on January 4,2009, the first day of the Company’s 2009 fiscal year, did not impact theCompany’s financial statements.

 

In December 2007,the FASB issued guidance on noncontrolling interests in consolidated financialstatements.  This guidance establishesaccounting and reporting standards for ownership interests in subsidiaries heldby parties other than the parent, the amount of consolidated net incomeattributable to the parent and to the noncontrolling interest, changes in aparent’s ownership interest and the valuation of retained noncontrolling equityinvestments when a subsidiary is deconsolidated.  The adoption of this guidance on January 4,2009 did not have a material impact on the Company’s consolidated financialstatements.   Noncontrolling interests of$2,950,000 at January 3, 2009 were reclassified from “Other” non-currentliabilities to equity.

 

In March 2008, theFASB issued guidance on disclosures about derivative instruments and hedgingactivities, which 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, and howderivative instruments and related hedged items affect a company’s financialposition, financial performance and cash flows. The adoption of this guidance in the first quarter of 2009 did not havea material impact on the Company’s consolidated financial statements.

 

In April 2009,the FASB issued guidance on interim disclosures about the fair value offinancial instruments, which requires disclosures about fair value of financialinstruments for interim and annual reporting periods.  The adoption of this guidance in the firstquarter of 2009 did not have a material impact on the Company’s consolidatedfinancial statements.

 

In May 2009, theFASB issued guidance on subsequent events, which establishes general standardsof accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are issued or are available to be issued.  The adoption did not have an impact on theCompany’s consolidated financial statements.

 

7

----

Tableof Contents

** **

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

On July 1, 2009, the FASB AccountingStandards Codification (ASC) was implemented as the sole source ofauthoritative GAAP. Pursuant to these provisions, the Company modified its consolidatedfinancial statements by replacing references to former authoritativepronouncements with references to the topics outlined in the ASC. The adoptionof this referencing standard did not have an affect on the Company’sconsolidated financial statements.

 

**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 September 27, 2008.  The Company paid additional expensessubsequent to September 27, 2008, with final net offering proceedstotaling $84,847,000.  The net proceedswere used to repay outstanding borrowings under the Company’s revolving creditfacility and 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)** | ** ** | **October  3, 2009** | ** ** | **January 3, 2009** | ** ** |
|--------------------|------------|---------------------------|------------|--------------------------|------------|
| Raw materials      | ** ** | **$**                     | **31,292** |                     | $          | 29,266 |   |
| Work-in-process    | ** ** | **18,083**                |       | 12,100                   |       |
| Finished  goods    | ** ** | **27,940**                |       | 29,032                   |       |
| Total              | ** ** | **$**                     | **77,315** |                     | $          | 70,398 |   |

 

**5.             Debt**

 

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

 
| **(in  thousands)**              | ** ** | **October 3, 2009** | ** **  | **January 3, 2009** | ** ** |
|----------------------------------|------------|--------------------------|-------------|--------------------------|------------|
| Senior  credit facilities:       |       |                     |        |                     |       |
| Revolving  credit facility       | ** ** | **$**                    | **—**  | ** **               | **$**      | **—** | ** ** |
| Term  loan facilities            | ** ** | **365,431**              |        | 366,057                  |       |
| 8.75%  senior subordinated notes | ** ** | **443,355**              |        | 433,875                  |       |
| Other                            | ** ** | **—**               |        | 64                       |       |
|                             | ** ** | **808,786**              |        | 799,996                  |       |
| Less  current maturities         | ** ** | **3,738**                |        | 3,780                    |       |
| Long-term  debt                  | ** ** | **$**                    | **805,048** |                     | $          | 796,216 |   |

 

**6.             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 October 3, 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. The Company designated these swap agreements as cash flow hedgeswith changes in fair value, net of income taxes, recorded to “Accumulated othercomprehensive loss” in the accompanying balance sheet.**

** **

**The Company has euro-denominated senior subordinated notes(€150,000,000, or $218,355,000, at October 3, 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 changes in the fair value of the interest rate swap agreements andthe translation of euro-denominated**senior subordinated notes onother comprehensive income is as follows:

 

8

----

Table of Contents

 

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 
| ** **                                  | ** ** | **Gain (Loss) Recognized in Other Comprehensive Income** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **Three Months Ended**                                   | ** ** | **Nine Months Ended** | ** ** |
| **(in  thousands)**                         | ** ** | **October 3, 2009**                                 | ** ** | **September 27****,  2008** | ** ** | **October 3, 2009** | ** ** | **September 27****,  2008** | ** ** |
|                                        |       |                                                     |       |   |   |   |   |   |   |
| Interest  rate swap agreements              | ** ** | **$**                                                    | **876**    |   | $ | 138 | ** ** | **$** | **2,468** |   | $ | (391 | ) |
| Euro-denominated  senior subordinated notes | ** ** | **(8,535**                                               | **)**      | 17,025 | ** ** | **(9,480** | **)** | 585 |   |
|                                             |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |

** **

**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 of theinterest rate swap agreements on interest expense is as follows:**

 
| ** **                     | ** ** | **Gain (Loss) Recognized in Income** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended**               | ** ** | **Nine Months Ended** | ** ** |
| **(in  thousands)**            | ** ** | **October 3, 2009**             | ** ** | **September 27****,  2008** | ** ** | **October 3, 2009** | ** ** | **September 27****,  2008** | ** ** |
|                           |       |                                 |       |   |   |   |   |   |   |
| Interest  rate swap agreements | ** ** | **$**                                | **(1,534** | **)** | $ | (525 | ) | **$** | **(5,127** | **)** | $ | (642 | ) |
|                                |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

**7.             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, accounts payable and accrued liabilitiesapproximates fair value due to the short-term maturities of these assets andliabilities.  The carrying amount ofborrowings under the senior secured credit facilities approximates fair valuebecause the interest rates adjust to market interest rates. The fair value ofthe 8.75% senior subordinated notes, based on a quoted market price, was$422,412,000 at October 3, 2009.

 

The Company measures thefair value of the interest rate swap agreement on a recurring basis.  The Fair Value Measurements and DisclosuresTopic of the FASB ASC establishes a three-tier value hierarchy, whichprioritizes the inputs used in measuring fair value as follows:

 

·                  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 October 3, 2009, the fair valueof the interest rate swap agreement was $1,550,000.  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.

 

**8.             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:**

 

9

----

Table of Contents

 

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 
| ** **                            | ** ** | **Pension Plans**        | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended** | ** ** |
| **(in thousands)**                    | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** |
|                                  |       |                     |       |   |   |   |   |   |   |
| Service  cost                         | ** ** | **$**                    | **427**    |   | $ | 596 | ** ** | **$** | **1,226** |   | $ | 1,795 |   |
| Interest  cost                        | ** ** | **1,170**                |       | 1,062 | ** ** | **3,355** |   | 3,198 |   |
| Expected  return on plan assets       | ** ** | **(204**                 | **)**      | (284 | ) | **(586** | **)** | (855 | ) |
| Amortization  of prior service cost   | ** ** | **(14**                  | **)**      | (21 | ) | **(40** | **)** | (63 | ) |
| Recognized  net actuarial (gain) loss | ** ** | **(4**                   | **)**      | 111 | ** ** | **(11** | **)** | 335 |   |
| Net  periodic benefit cost            | ** ** | **$**                    | **1,375**  |   | $ | 1,464 | ** ** | **$** | **3,944** |   | $ | 4,410 |   |

 
| ** **                     | ** ** | **Other Postretirement Benefits** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended**            | ** ** | **Nine Months Ended** | ** ** |
| **(in thousands)**             | ** ** | **October 3, 2009**          | ** ** | **September 27, 2008** | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** |
|                           |       |                              |       |   |   |   |   |   |   |
| Service  cost                  | ** ** | **$**                             | **3**      |   | $ | 17 | ** ** | **$** | **9** |   | $ | 51 |   |
| Interest  cost                 | ** ** | **33**                            |       | 34 | ** ** | **99** |   | 102 |   |
| Recognized  net actuarial loss | ** ** | **—**                        |       | 5 | ** ** | **—** |   | 13 |   |
| Net  periodic benefit cost     | ** ** | **$**                             | **36**     |   | $ | 56 | ** ** | **$** | **108** |   | $ | 166 |   |

** **

**9.             Environmental Matters**

 

Environmental obligationsare accrued when such expenditures are probable and reasonably estimable. The amountof liability recorded is based on currently available information, includingthe progress 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. Costs of future expenditures for environmentalobligations are not discounted to their present value. The Company does notcurrently anticipate any material loss in excess of the amounts accrued.However, the Company’s future remediation expenses may be affected by a numberof uncertainties including, but not limited to, the difficulty in estimatingthe extent and method of remediation, the evolving nature of environmentalregulations, and the availability and application of technology. The Companydoes not expect the resolution of such uncertainties to have a material adverseeffect on the financial condition of the Company. Recoveries of environmentalcosts from other parties are recognized as assets when their receipt is deemedprobable. Environmental reserves, which are predominately euro-denominated,were $48,597,000 and $49,220,000 as of October 3, 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 reservewas included in the allocation of purchase price at the date of acquisition.The environmental reserve for the Membrana facility was $21,466,000 and$22,627,000 at October 3, 2009 and January 3, 2009, respectively. TheCompany anticipates that expenditures will be made over the next seven to tenyears.

 

The Company hasindemnification agreements for certain environmental matters from Acordis A.G.(“Acordis”) and Akzo Nobel N.V. (“Akzo”), the prior owners of Membrana.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 October 3, 2009 and January 3,2009, amounts receivable under the indemnification agreements were $17,914,000and $17,867,000, respectively. The current portion of the indemnificationreceivable is included in “Prepaid and other” in the accompanying condensedconsolidated balance sheets.

 

10

----

Tableof Contents

** **

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

** **

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 this manufacturingfacility. Based on discussions with local authorities, environmentalconsultants and internal personnel, the Company increased the environmentalreserve at Potenza as part of a restructuring charge by $18,560,000 in thefourth 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 $24,141,000 and $23,502,000 at October 3, 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 adverse effect on the financial condition ofthe Company. The Company anticipates that expenditures will be made over thenext 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 environmental reserve for the PineyFlats, Tennessee facility was $2,990,000 and $3,076,000 at October 3, 2009and January 3, 2009, respectively. The Company recorded the estimated cost of remediation and the relatedreceivables from the insurance company and the seller in applying purchaseaccounting for the acquisition. As discussed in more detail in Note 12, theCompany reached an agreement with the seller in July 2009 which, amongother things, releases the seller from its obligation to provideindemnification for a portion of the insurance policy deductible.  Accordingly, the Company reduced thereceivable related to this environmental matter by $219,000. The receivablebalance at October 3, 2009 and January 3, 2009 was $2,141,000 and $2,522,000,respectively. The current portion of the receivable is included in “Prepaid andother” in the accompanying condensed consolidated balance sheets.

 

**10.          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 alignlead-acid battery separator production capacity with demand, reduce costs andposition the Company 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 and administrativeresources associated with the lead-acid battery separator business.  The total cost of the restructuring plan,including environmental costs recorded in the environmental reserve of$18,560,000, is expected to be approximately $62,015,000.  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 thenine months ended October 3, 2009, the Company reduced the estimated costof severance and benefits and related accrual by $592,000 to reflect actualcosts expected to be incurred.  Afterthis adjustment, 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 $4,711,000, of which $3,394,000 has beenrecognized through October 3, 2009 and the remainder will be recognizedover the next three years.  Therestructuring charge recorded in the fourth quarter of 2008 also included anon-cash impairment charge of $28,929,000 for buildings and machinery andequipment that will no longer be used in Potenza, Italy.  Cash payments for severance and other exitcosts are expected to be paid over the next three years.  The timing, scope and costs of these restructuringactions are subject to change as the Company implements the plan and continuesto evaluate its business needs and costs.

 

**2006Restructuring Plan**

 

In December 2006,the Company’s separations media segment exited the production of cellulosicmembranes and realigned the cost structure at its Wuppertal, Germany facility.The total cost of the plan, all of which has been incurred, was $33,753,000,consisting of a $17,492,000 non-cash impairment charge for buildings andequipment, $10,466,000 for employee layoffs and 

 

11

----

Table ofContents

 

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

$5,795,000 for othercosts related to the shutdown of portions of the Wuppertal facility. The othercosts included in the restructuring plan are related to local regulationssurrounding complete or partial shutdowns of a facility.

 

Restructuring reserve activityduring the nine months ended October 3, 2009 consisted of:

 
| **(in thousands)**           | ** ** | **Balance at  January 3, 2009** | ** ** | **Restructuring  Charges** | ** ** | **Cash  Payments** | ** ** | **Foreign  Currency  Translation** | ** ** | **Balance at  October 3, 2009** | ** ** |
|------------------------------|------------|--------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| 2008  restructuring plan:    |       |                                 |       |                       |       |               |       |                               |       |                                 |       |
| Severance  and benefit costs |       | $                                    | 9,847      |                       | $          | (592               | )          | $                                  | (1,393     | )                                    | $          | 301 |   | $ | 8,163 |   |
| Other                        |       | 829                                  |       | 1,348                      |       | (1,510             | )          | 28                                 |       | 695                                  |       |
|                         |       | 10,676                               |       | 756                        |       | (2,903             | )          | 329                                |       | 8,858                                |       |
|                         | ** ** | ** **                           | ** ** | ** **                 |       |               | ** ** | ** **                         | ** ** | ** **                           | ** ** |
| 2006  restructuring plan:    |       |                                 |       |                       |       |               |       |                               |       |                                 |       |
| Severance  and benefit costs |       | 2,884                                |       | —                     |       | (189               | )          | 118                                |       | 2,813                                |       |
| Other                        |       | 492                                  |       | —                     |       | (472               | )          | (20                                | )          | —                               |       |
|                         |       | 3,376                                |       | —                     |       | (661               | )          | 98                                 |       | 2,813                                |       |
|                         | ** ** | ** **                           | ** ** | ** **                 |       |               | ** ** | ** **                         | ** ** | ** **                           | ** ** |
| Total                        |       | $                                    | 14,052     |                       | $          | 756                |       | $                                  | (3,564     | )                                    | $          | 427 |   | $ | 11,671 |   |

** **

**11**.          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.

 

**12.          Acquisitions**

 

On February 29,2008, the Company purchased 100% of the capital stock of Microporous. Theacquisition broadened the Company’s participation in the deep-cycle industrialbattery market, added to its membrane technology portfolio and product breadth,enhanced service to common customers and added cost-effective production capacity.The purchase price for Microporous stock, including acquisition-related costs,was $26,980,000. The Company also repaid $33,643,000 in indebtedness ofMicroporous and assumed $14,235,000 of debt. The assumed debt was repaidsubsequent to the acquisition. The purchase agreement provided for additionalcash payments to the seller for the three years following the acquisitioncontingent upon the acquired business meeting defined earn-out provisions.  At January 3, 2009, the Companyestimated that the additional purchase price for the fiscal 2008 earn-out was$1,062,000 and allocated this amount to goodwill. In July 2009, theCompany reached an agreement with the seller that effectively eliminated theCompany’s current and future obligations under the earn-out provision inexchange for releasing the seller from all claims under the original purchaseagreement, including its environmental indemnification obligations. The impactof this agreement on amounts previously recognized in purchase accounting was anet reduction 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 broadened the Company’s participation in the lithium batteryseparator market, added to its membrane technology portfolio and productbreadth and added 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 following table summarizes the aggregate purchase price allocationsfor these acquisitions based upon the fair values of the assets acquired andliabilities assumed at the date of acquisition.

 

12

----

Table ofContents

 

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 
| **(in thousands)**                    | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| Current  assets                       |       | $          | 16,158     |   |
| Property,  plant and equipment        |       | 58,807     |       |
| Intangible  assets                    |       | 19,194     |       |
| Goodwill                              |       | 31,209     |       |
| 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 ninemonths ended September 27, 2008 is not considered to be significant.

 

**13.**          **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 flows from DNPET for the first two years andbeginning in fiscal 2009, earnings and cash flows will be allocated based onownership percentages. Under the original terms of the agreement, on January 1,2009 and January 1, 2012, the Company could exercise a call option and NSGcould exercise a put option for the Company to purchase NSG’s 40% ownershipinterest for $3,600,000. The Company and NSG agreed to extend the first optiondate and on August 10, 2009, the Company provided written notice toexercise its call option.  Under theterms of the agreement, the Company is required to complete the acquisitionwithin six months of exercising the call option. DNPET is included in theCompany’s energy storage segment.  Forthe three and nine months ended October 3, 2009, noncontrolling interestamounts are not presented separately in the condensed consolidated statementsof income due to immateriality.

 

**14.          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 in 2008.**

** **

**15.          Comprehensive Income**

 

**Comprehensiveincome is as follows:**

 
| ** **                                                                      | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**       | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in thousands)**                                                              | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** |
|                                                                            |       |                     |       |                        |       |   |   |   |   |
| Net  income                                                                     | ** ** | **$**                    | **6,461**  |                        | $          | 5,088 | ** ** | **$** | **13,632** |   | $ | 29,174 |   |
| Foreign  currency translation adjustment, net of deferred taxes                 | ** ** | **(3,019**               | **)**      | 2,597                       | ** ** | **(1,689** | **)** | (8,447 | ) |
| Net  actuarial gain (loss) and prior service credit, net of deferred taxes      | ** ** | **(171**                 | **)**      | 280                         | ** ** | **(190** | **)** | 22 |   |
| Unrealized  gain (loss) on interest rate swap agreements, net of deferred taxes | ** ** | **876**                  |       | 138                         | ** ** | **2,468** |   | (391 | ) |
| Comprehensive  income                                                           | ** ** | **$**                    | **4,147**  |                        | $          | 8,103 | ** ** | **$** | **14,221** |   | $ | 20,358 |   |

 

13

----

**Table of Contents**

** **

**PolyporeInternational, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**16.          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 $445,000 and $413,000 at October 3, 2009 and January 3,2009, respectively.  Charges from theaffiliates for work performed were $269,000 and $842,000 for the three and ninemonths ended October 3, 2009, respectively.  Charges from the affiliates for workperformed were $416,000 and $1,275,000 for the three months and nine monthsended September 27, 2008, respectively. Amounts due to the affiliates were approximately $57,000 and $98,000 at October 3,2009 and January 3, 2009, respectively.

** **

**17.          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 consumer electronics,industrial and transportation applications. The separations media segmentproduces and markets membranes used as the high technology filtration elementin various medical and industrial 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:

 
| ** **                                                 | ** ** | **Three  Months Ended**   | ** **  | **Nine  Months Ended**       | ** ** |
|------------------------------------------------------------|------------|---------------------------|-------------|------------------------------|------------|
| **(in thousands)**                                         | ** ** | **October 3,  2009** | ** **  | **September 27,  2008** | ** ** | **October 3,  2009** | ** ** | **September 27,  2008** | ** ** |
| Net  sales to external customers (by major product group): | ** ** | ** **                | ** **  | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Lead-acid  battery separators                              | ** ** | **$**                     | **76,900**  |                         | $          | 86,893 | ** ** | **$** | **194,946** |   | $ | 264,595 |   |
| Lithium  battery separators                                | ** ** | **23,276**                |        | 28,643                       | ** ** | **61,240** |   | 76,852 |   |
| Energy  storage                                            | ** ** | **100,176**               |        | 115,536                      | ** ** | **256,186** |   | 341,447 |   |
| Healthcare                                                 | ** ** | **24,921**                |        | 24,415                       | ** ** | **74,705** |   | 79,078 |   |
| Filtration  and specialty                                  | ** ** | **12,640**                |        | 14,972                       | ** ** | **33,935** |   | 44,392 |   |
| Separations  media                                         | ** ** | **37,561**                |        | 39,387                       | ** ** | **108,640** |   | 123,470 |   |
| Total  net sales to external customers                     | ** ** | **$**                     | **137,737** |                         | $          | 154,923 | ** ** | **$** | **364,826** |   | $ | 464,917 |   |
|                                                       | ** ** | ** **                |        |                         | ** ** | ** ** |   |   |   |
| Operating  income:                                         | ** ** | ** **                |        |                         | ** ** | ** ** |   |   |   |
| Energy  storage                                            | ** ** | **$**                     | **21,249**  |                         | $          | 21,296 | ** ** | **$** | **44,056** |   | $ | 69,650 |   |
| Separations  media                                         | ** ** | **4,566**                 |        | 5,893                        | ** ** | **24,472** |   | 20,266 |   |
| Corporate                                                  | ** ** | **(805**                  | **)**       | (276                         | )          | **(1,558** | **)** | (828 | ) |
| Segment  operating income                                  | ** ** | **25,010**                |        | 26,913                       | ** ** | **66,970** |   | 89,088 |   |
| Business restructuring                                     | ** ** | **190**                   |        | —                       | ** ** | **756** |   | — |   |
| Non-recurring  costs                                       | ** ** | **1,190**                 |        | 6,278                        | ** ** | **3,461** |   | 6,963 |   |
| Total  operating income                                    | ** ** | **23,630**                |        | 20,635                       | ** ** | **62,753** |   | 82,125 |   |
| Reconciling  items:                                        | ** ** | ** **                |        |                         | ** ** | ** ** |   |   |   |
| Interest  expense, net                                     | ** ** | **14,214**                |        | 14,600                       | ** ** | **42,983** |   | 46,623 |   |
| Foreign  currency and other                                | ** ** | **688**                   |        | (574                         | )          | **1,478** |   | (1,217 | ) |
| Income  from continuing operations before income taxes     | ** ** | **$**                     | **8,728**   |                         | $          | 6,609 | ** ** | **$** | **18,292** |   | $ | 36,719 |   |
|                                                       | ** ** | ** **                |        |                         | ** ** | ** ** |   |   |   |
| Depreciation  and amortization:                            | ** ** | ** **                |        |                         | ** ** | ** ** |   |   |   |
| Energy  storage                                            | ** ** | **$**                     | **8,877**   |                         | $          | 9,666 | ** ** | **$** | **26,454** |   | $ | 27,826 |   |
| Separations  media                                         | ** ** | **4,200**                 |        | 4,587                        | ** ** | **12,161** |   | 13,868 |   |
| Total  depreciation and amortization                       | ** ** | **$**                     | **13,077**  |                         | $          | 14,253 | ** ** | **$** | **38,615** |   | $ | 41,694 |   |

 

14

----

Table of Contents

 

**Polypore International, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**18.          Lithium Battery Separator Plant Expansion**

 

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) to help fund an estimated$101,600,000 expansion of its U.S. lithium battery separator productioncapacity. The grant is contingent upon finalizing the contractual agreementwith the DOE.

 

**19.          Supply Agreement**

 

A supply agreement withExide Technologies (“Exide”), a customer of the Company’s energy storagesegment, expires on December 31, 2009. The Company has engaged in numerous discussions with Exide but does nothave a new agreement at this time.

 

**20.          Energy Storage Lead-Acid Battery Separator Business**

 

The North American marketfor lead-acid battery separators has significant excess capacity and a highlyconsolidated customer base.  In addition,demand for the Company’s lead-acid battery separators has continued to benegatively impacted by the current economic environment and purchases by Exidehave declined significantly in 2009.  Asa result of these factors and management estimates based on recent discussionswith customers about future demand requirements in North America, the Companyplans to implement a restructuring plan to better align lead-acid batteryseparator production capacity with demand in North America. The restructuringplan, which was approved by the Company’s Board of Directors on October 30,2009, will include idling capacity and reducing headcount at the Company’smanufacturing facility in Owensboro, Kentucky. The current estimated cost of the plan is expected be in the range of$24,000,000 to $31,000,000, including estimated cash charges of $5,000,000 to$8,000,000 for severance and other costs and an estimated non-cash impairmentcharge of $19,000,000 to $23,000,000 for buildings and equipment.  The Company expects to implement the plan andrecord an estimated restructuring charge of $19,000,000 to $24,000,000 in thefourth quarter of 2009, with the remainder of the restructuring charge to berecognized as costs are incurred.  Thetiming, scope and costs of these planned restructuring actions are subject tochange as the Company implements the plan and continues to evaluate it businessneeds and costs.

 

The Company is in theprocess of performing its annual goodwill impairment assessment as of the firstday of the fourth quarter. The preliminary results of the Company’s Step 1goodwill impairment testing, including the impact of the factors discussedabove, indicate that the carrying value of the lead-acid reporting unit of theenergy storage segment exceeds its fair value. The Company expects to complete the goodwill impairment testing andrecord goodwill impairment, if any, in the fourth quarter of 2009.  Goodwill associated with the lead-acidreporting unit as of October 3, 2009 was $353,000,000.

 

**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

----

Table of Contents

 

**PolyporeInternational, Inc.**

**Notesto Condensed Consolidated Financial Statements**

**(unaudited)**

 

**22.**          FinancialStatements of Guarantors

 

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 SheetOctober 3, 2009**

** **
| **(in thousands)**                                         | ** ** | **Combined   Guarantor   Subsidiaries** | ** **    | **Combined   Non-Guarantor   Subsidiaries** | ** ** | **The   Company** | ** ** | **Reclassifications  and Eliminations** | ** **   | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|---------------|---------------------------------------------|------------|-------------------|------------|-----------------------------------------|--------------|------------------|------------|
| **Assets**                                                 |       |                                    |          |                                        |       |              |       |                                    |         |             |       |
| Cash  and cash equivalents                                 |       | $                                       | —        |                                        | $          | 58,987            |       | $                                       | 61,204       |             | $          | — |   | $ | 120,191 |   |
| Accounts  receivable, net                                  |       | 39,101                                  |          | 62,766                                      |       | —            |       | —                                  |         | 101,867          |       |
| Inventories                                                |       | 29,034                                  |          | 48,281                                      |       | —            |       | —                                  |         | 77,315           |       |
| Refundable  income taxes                                   |       | 35                                      |          | 909                                         |       | —            |       | —                                  |         | 944              |       |
| Deferred  income taxes                                     |       | 1,108                                   |          | —                                      |       | —            |       | —                                  |         | 1,108            |       |
| Prepaid  and other                                         |       | 2,035                                   |          | 10,007                                      |       | 100               |       | —                                  |         | 12,142           |       |
| Total  current assets                                      |       | 71,313                                  |          | 180,950                                     |       | 61,304            |       | —                                  |         | 313,567          |       |
| Due  from affiliates                                       |       | 356,558                                 |          | 371,442                                     |       | 302,819           |       | (1,030,819                              | )            | —           |       |
| Investment  in subsidiaries                                |       | 236,730                                 |          | 294,635                                     |       | 338,835           |       | (870,200                                | )            | —           |       |
| Property,  plant and equipment, net                        |       | 152,067                                 |          | 259,805                                     |       | —            |       | —                                  |         | 411,872          |       |
| Goodwill                                                   |       | —                                  |          | —                                      |       | 600,768           |       | —                                  |         | 600,768          |       |
| Intangibles  and loan acquisition costs, net               |       | 22                                      |          | —                                      |       | 171,056           |       | —                                  |         | 171,078          |       |
| Other                                                      |       | 3,232                                   |          | 15,954                                      |       | —            |       | —                                  |         | 19,186           |       |
| Total  assets                                              |       | $                                       |  819,922 |                                        | $          |  1,122,786   |       | $                                       | 1,474,782    |             | $          |  (1,901,019 | ) | $ | 1,516,471 |   |
| **Liabilities and equity**                                 | ** ** | ** **                              | ** **    | ** **                                  | ** ** | ** **        | ** ** | ** **                              | ** **   | ** **       | ** ** |
| Accounts  payable and accrued liabilities                  |       | $                                       |  17,798  |                                        | $          |  52,230      |       | $                                       |  14,964 |             | $          |  — |   | $ |  84,992 |   |
| Current  portion of debt                                   |       | —                                  |          | 509                                         |       | 3,229             |       | —                                  |         | 3,738            |       |
| Fair  value of interest rate swap agreements               |       | —                                  |          | —                                      |       | 1,550             |       | —                                  |         | 1,550            |       |
| Total  current liabilities                                 |       | 17,798                                  |          | 52,739                                      |       | 19,743            |       | —                                  |         | 90,280           |       |
| Due  to affiliates                                         |       | 403,531                                 |          | 336,569                                     |       | 290,719           |       | (1,030,819                              | )            | —           |       |
| Debt,  less current portion                                |       | —                                  |          | 49,294                                      |       | 755,754           |       | —                                  |         | 805,048          |       |
| Pension  and postretirement benefits, less current portion |       | 2,941                                   |          | 69,248                                      |       | —            |       | —                                  |         | 72,189           |       |
| Postemployment  benefits                                   |       | —                                  |          | 1,539                                       |       | —            |       | —                                  |         | 1,539            |       |
| Environmental  reserve, less current portion               |       | 2,061                                   |          | 33,159                                      |       | —            |       | —                                  |         | 35,220           |       |
| Deferred  income taxes and other                           |       | 67,399                                  |          | 32,182                                      |       | (132              | )          | —                                  |         | 99,449           |       |
| Shareholders’  equity                                 |       | 326,192                                 |          | 544,008                                     |       | 408,698           |       | (870,200                                | )            | 408,698          |       |
| Noncontrolling  interest                                   |       | —                                  |          | 4,048                                       |       | —            |       | —                                  |         | 4,048            |       |
| Total  liabilities and equity                              |       | $                                       |  819,922 |                                        | $          |  1,122,786   |       | $                                       | 1,474,782    |             | $          |  (1,901,019 | ) | $ | 1,516,471 |   |

 

16

----

Table of Contents

 

**PolyporeInternational, Inc.**

**Notesto Condensed 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 |   |

 

17

----

Table of Contents

 

**PolyporeInternational, Inc.**

**Notesto Condensed Consolidated Financial Statements**

**(unaudited)**

 

**CondensedConsolidating Statement of Income**

**Forthe three months ended October 3, 2009**

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

 

**Condensed Consolidating Statement of Income****For thethree months ended September 27, 2008**

 
| **(in thousands)**                                            | ** ** | **Combined   Guarantor  Subsidiaries** | ** **  | **Combined   Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** **   | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|-------------|--------------------------------------------|------------|-----------------|------------|-----------------------------------------|--------------|------------------|------------|
|                                                          |       |                                   |        |                                       |       |            |       |                                    |         |             |       |
| Net  sales                                                    |       | $                                      | 57,271      |                                       | $          | 97,652          |       | $                                       |  — |             | $          |  — |   | $ |  154,923 |   |
| Cost  of goods sold                                           |       | 30,114                                 |        | 77,941                                     |       | —          |       | —                                  |         | 108,055          |       |
| Gross profit                                                  |       | 27,157                                 |        | 19,711                                     |       | —          |       | —                                  |         | 46,868           |       |
| Selling,  general and administrative expenses                 |       | 17,315                                 |        | 8,642                                      |       | 276             |       | —                                  |         | 26,233           |       |
| Operating income (loss)                                       |       | 9,842                                  |        | 11,069                                     |       | (276            | )          | —                                  |         | 20,635           |       |
| Interest  expense and other                                   |       | (3,693                                 | )           | 3,853                                      |       | 13,866          |       | —                                  |         | 14,026           |       |
| Equity  in earnings of subsidiaries                           |       | —                                 |        | —                                     |       | (13,997         | )          | 13,997                                  |         | —           |       |
| Income  (loss) from continuing operations before income taxes |       | 13,535                                 |        | 7,216                                      |       | (145            | )          | (13,997                                 | )            | 6,609            |       |
| Income  taxes                                                 |       | 5,008                                  |        | 1,746                                      |       | (5,233          | )          | —                                  |         | 1,521            |       |
| Income from continuing operations                             |       | $                                      |  8,527 |                                       | $          |  5,470     |       | $                                       |  5,088  |             | $          |  (13,997 | ) | $ |  5,088 |   |

 

18

----

Table of Contents

 

**PolyporeInternational, Inc.**

**Notesto Condensed Consolidated Financial Statements**

**(unaudited)**

 

**CondensedConsolidating Statement of Income**

**Forthe nine months ended October 3, 2009**

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

 

**CondensedConsolidating Statement of Income**

**Forthe nine months ended September 27, 2008**

 
| **(in thousands)**                                            | ** ** | **Combined   Guarantor   Subsidiaries** | ** **    | **Combined   Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications and  Eliminations** | ** **   | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------|---------------|--------------------------------------------|------------|-----------------|------------|-----------------------------------------|--------------|------------------|------------|
|                                                          |       |                                    |          |                                       |       |            |       |                                    |         |             |       |
| Net  sales                                                    |       | $                                       |  172,705 |                                       | $          |  292,212   |       | $                                       |  — |             | $          |  — |   | $ |  464,917 |   |
| Cost  of goods sold                                           |       | 84,254                                  |          | 219,640                                    |       | —          |       | —                                  |         | 303,894          |       |
| Business  interruption insurance recovery                     |       | (2,400                                  | )             | —                                     |       | —          |       | —                                  |         | (2,400           | )          |
| Gross profit                                                  |       | 90,851                                  |          | 72,572                                     |       | —          |       | —                                  |         | 163,423          |       |
| Selling,  general and administrative expenses                 |       | 51,830                                  |          | 28,639                                     |       | 829             |       | —                                  |         | 81,298           |       |
| Operating income (loss)                                       |       | 39,021                                  |          | 43,933                                     |       | (829            | )          | —                                  |         | 82,125           |       |
| Interest  expense and other                                   |       | (6,489                                  | )             | 9,028                                      |       | 42,867          |       |                                    |         | 45,406           |       |
| Equity  in earnings of subsidiaries                           |       | —                                  |          | —                                     |       | (54,342         | )          | 54,342                                  |         | —           |       |
| Income  (loss) from continuing operations before income taxes |       | 45,510                                  |          | 34,905                                     |       | 10,646          |       | (54,342                                 | )            | 36,719           |       |
| Income  taxes                                                 |       | 16,839                                  |          | 9,234                                      |       | (16,168         | )          | —                                  |         | 9,905            |       |
| Income from continuing operations                             |       | $                                       |  28,671  |                                       | $          |  25,671    |       | $                                       |  26,814 |             | $          |  (54,342 | ) | $ |  26,814 |   |

 

19

----

Table of Contents

 

**PolyporeInternational, Inc.**

**Notesto Condensed Consolidated Financial Statements**

**(unaudited)**

 

**Condensed Consolidating Statement of Cash Flows**

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

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

 

**Condensed Consolidating Statement of Cash Flows For the nine months ended September 27, 2008**

 
| **(in thousands)**                                                                                  | ** ** | **Combined  Guarantor  Subsidiaries** | ** **   | **Combined   Non-Guarantor  Subsidiaries** | ** ** | **The Company** | ** ** | **Reclassifications   and Eliminations** | ** **    | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|--------------|--------------------------------------------|------------|-----------------|------------|------------------------------------------|---------------|------------------|------------|
| Net cash provided by operating activities                                                           |       | $                                     |  48,909 |                                       | $          |  47,371    |       | $                                        |  (23,232 | )                | $          |  7,052 |   | $ |  80,100 |   |
| **Investing activities:**                                                                           |       |                                  |         |                                       |       |            |       |                                     |          |             |       |
| Purchases  of property, plant and equipment                                                         |       | (20,790                               | )            | (19,248                                    | )          | —          |       | —                                   |          | (40,038          | )          |
| Acquisitions,  net of cash acquired                                                                 |       | —                                |         | —                                     |       | (86,050         | )          | —                                   |          | (86,050          | )          |
| Proceeds  from sale of synthetic paper business                                                     |       | 4,000                                 |         | —                                     |       | —          |       | —                                   |          | 4,000            |       |
| Net cash used in investing activities                                                               |       | (16,790                               | )            | (19,248                                    | )          | (86,050         | )          | —                                   |          | (122,088         | )          |
| **Financing activities:**                                                                           |       |                                  |         |                                       |       |            |       |                                     |          |             |       |
| Principal  payments on debt and capital lease                                                       |       | (5,883                                | )            | (10,273                                    | )          | (2,413          | )          | —                                   |          | (18,569          | )          |
| Proceeds  from stock option exercises                                                               |       | —                                |         | —                                     |       | 1,522           |       | —                                   |          | 1,522            |       |
| Proceeds  from issuance of common stock, net of underwriting fees and other offering  related costs |       | —                                |         | —                                     |       | 84,949          |       | —                                   |          | 84,949           |       |
| Intercompany  transactions, net                                                                     |       | (26,742                               | )            | (29,712                                    | )          | 63,506          |       | (7,052                                   | )             | —           |       |
| Net cash provided by (used in) financing  activities                                                |       | (32,625                               | )            | (39,985                                    | )          | 147,564         |       | (7,052                                   | )             | 67,902           |       |
| Effect  of exchange rate changes on cash and cash equivalents                                       |       | 506                                   |         | (1,300                                     | )          | —          |       | —                                   |          | (794             | )          |
| **Net increase (decrease) in cash and cash equivalents**                                            |       | —                                |         | (13,162                                    | )          | 38,282          |       | —                                   |          | 25,120           |       |
| Cash  and cash equivalents at beginning of period                                                   |       | —                                |         | 40,055                                     |       | 14,879          |       | —                                   |          | 54,934           |       |
| **Cash and cash equivalents at end of period**                                                      |       | $                                     |  — |                                       | $          |  26,893    |       | $                                        |  53,161  |             | $          |  — |   | $ |  80,054 |   |

 

20

----

 

Table of Contents

 

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

 

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

 

*EnergyStorage Segment*

 

In the energy storagesegment, our membrane separators are a critical performance component inlithium batteries, which are primarily used in consumer electronics andelectric drive vehicle (“EDV”) applications, and lead-acid batteries, which areused globally in transportation and numerous industrial applications. Webelieve the global economic recession adversely impacted sales in 2009 and maycontinue to have an adverse impact in the near future.  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 thepower source in a wide variety of electronics applications ranging fromnotebook computers and mobile phones to cordless power tools. In addition toconsumer electronics applications, development and investment in lithiumbatteries for use in EDV applications is accelerating.  In order to keep up with market growth, wecompleted a lithium battery separator capacity expansion at our Charlotte,North Carolina facility in the third quarter of 2008 and on August 5,2009, we were 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 provide funds for an estimated $101.6 million expansion of our existinglithium battery separator manufacturing capacity in the United States.

 

In May 2008, weacquired Yurie-Wide Corporation, a South Korean company, which we subsequentlyrenamed Celgard Korea, Inc. (“Celgard Korea”). The acquisition broadenedour participation in the lithium battery separator market, added to ourmembrane technology portfolio and product breadth and added cost-effectiveproduction capacity.  In the secondquarter of 2009, Celgard Korea commercialized its products and made its firstpost-acquisition sales.  We areevaluating expansion options targeted at further penetration of the Asianconsumer electronics battery markets.

 

In the lead-acid batterymarket, the high proportion of aftermarket replacement sales and the steadygrowth of the worldwide fleet of motor vehicles provide us with a growingrecurring revenue base in lead-acid battery separators. Worldwide demand forlead-acid battery separators is expected to continue to grow at slightly morethan annual economic growth.  TheAsia-Pacific region is the fastest growing market for lead-acid batteryseparators.  Growth in this region isdriven by the increasing penetration of automobile ownership, growth inindustrial and manufacturing sectors, export incentives and ongoing conversionto the polyethylene-based membrane separators we produce.  We have positioned ourselves to benefit fromgrowth in Asia by expanding capacity at our Prachinburi, Thailand facility,acquiring a production facility in Tianjin, China and establishing an AsianTechnical Center in Thailand.  Inaddition, on April 1, 2008, we acquired the battery separatormanufacturing assets of Super-Tech Battery Components Pvt. Ltd., locatedin Bangalore, India.  We will continue tofocus our resources and assets to capitalize on growth in this importantregion.

 

In the North Americanregion, the lead-acid battery separator market is characterized by belowaverage growth, excess capacity and a highly consolidated customer base.  On October 30, 2009 our Board ofDirectors approved a restructuring plan to better align lead-acid batteryseparator production capacity with demand in North America. The restructuringplan will include idling capacity and reducing headcount at our manufacturingfacility in Owensboro, Kentucky.  Thecurrent estimated cost of the plan is expected be in the range of $24.0 millionto $31.0 million, including estimated cash charges of $5.0 million to $8.0million for severance and other costs and an estimated non-cash impairmentcharge of $19.0 million to $23.0 million for buildings and equipment.  We expect to implement the plan and record anestimated restructuring charge of $19.0 million to $24.0 million in the fourthquarter of 2009, with the remainder of the restructuring charge to berecognized as costs are incurred.  Thetiming, scope and costs of these planned restructuring actions are subject tochange as we implement the plan and continue to evaluate our business needs andcosts.

 

21

----

Table of Contents

 

A supply agreement forlead-acid battery separators with Exide Technologies (“Exide”), a customer ofour energy storage segment, expires on December 31, 2009.  We have engaged in numerous discussions withExide but do not have a new agreement at this time.

 

In February 2008, wepurchased 100% of the stock of Microporous Holding Corporation, the parentcompany of Microporous Products L.P. (“Microporous”). The acquisition ofMicroporous added rubber-based battery separator technology to our productline. This acquisition broadened our participation in the deep-cycle industrialbattery market (*e.g.,* forkliftand stationary batteries), added to our membrane technology portfolio andproduct breadth, enhances service to common customers and added cost-effectiveproduction capacity.

 

A supply contract betweenour lead-acid battery separator business and Johnson Controls, Inc. (“JCI”)expired on December 31, 2008 and was not renewed. In response, weimplemented a restructuring plan in our energy storage segment to alignlead-acid battery separator production capacity with demand, reduce costs andposition ourselves to meet future growth opportunities. The plan includedclosing our facility in Potenza, Italy, streamlining production at our facilityin Owensboro, Kentucky and reducing selling, general and administrativeresources associated with the lead-acid battery separator business. The totalestimated cost of the plan is expected to be approximately $62.0 million,including cash charges of $33.1 million for severance, environmental andother exit costs and a $28.9 million non-cash impairment charge. We implementedthe restructuring plan and a restructuring charge of $59.9 million wasrecorded during the fourth quarter of 2008.

 

*SeparationsMedia Segment*

 

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

 

Healthcare applicationsinclude hemodialysis, blood oxygenation and plasmapheresis. Growth in demandfor hemodialysis membranes is driven by the increasing worldwide population ofend-stage renal disease patients. We estimate that conversion to single-usedialyzers and increasing treatment frequency will result in additional dialyzermarket growth.

 

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

 

**Critical accounting policies**

** **

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

 

*Allowancefor doubtful accounts*

 

Accounts receivable areprimarily composed of amounts owed to us through our operating activities andare presented net of an allowance for doubtful accounts. We establish anallowance for doubtful accounts based upon factors surrounding the credit riskof specific customers, historical trends and other information. We chargeaccounts receivables off against our allowance for doubtful accounts when wedeem them to be uncollectible on a specific identification basis. Thedetermination of the amount of the allowance for doubtful accounts is subjectto judgment and estimated by management. If circumstances or economicconditions deteriorate, we may need to increase the allowance for doubtfulaccounts.

 

*Impairmentof intangibles and goodwill*

 

Identified intangibleassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable. Goodwill andindefinite-lived intangible assets are not amortized, but are subject to anannual impairment test unless circumstances dictate more frequent assessments.Goodwill impairment testing is a two-step process performed at the reportingunit level. Our reporting units are at the operating segment level. Step 1compares the fair value of our reporting units to their carrying amount. Thefair value of the reporting unit is determined using the income approach,corroborated by a comparison to market capitalization and key multiples ofcomparable companies. Under the income approach, we determine fair value basedon estimated future cash flows of each reporting unit, discounted by anestimated 

 

22

----

Table of Contents

 

weighted-average cost ofcapital. If the fair value of the reporting unit is greater than its carryingamount, there is no impairment. If the reporting unit’s carrying amount exceedsits fair value, then the second step must be completed to measure the amount ofimpairment, if any. Step 2 of the goodwill impairment test calculates theimplied fair value of the reporting unit’s goodwill with the carrying value ofits goodwill. If the carrying amount of goodwill exceeds the implied fair valueof goodwill, an impairment loss will be recognized in an amount equal to theexcess.

 

Determining the fair valueof a reporting unit is judgmental in nature and requires the use of significantestimates and assumptions, including revenue growth rates, operating margins,discount rates, strategic plans and future market conditions, among others.Given the current economic environment and the uncertainties regarding theimpact on our business, there can be no assurance that our estimates andassumptions made for purposes of our goodwill impairment testing will prove tobe accurate predictions of the future. If our assumptions regarding forecastedrevenue or margin growth rates are not achieved, or changes in discount rates,strategy or market conditions occur, we may be required to record goodwillimpairment charges in future periods.

 

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.  We have not completedthe Step 1 annual goodwill impairment test, but preliminary results indicate thatthe carrying value of the lead-acid reporting unit of the energy storagesegment exceeds its fair value. We expect to complete our goodwill impairment testingand record goodwill impairment, if any, in the fourth quarter of 2009. Goodwill associated with thelead-acid reporting unit as of October 3, 2009 was $353.0 million.

 

*Pensionand other postretirement benefits*

 

Certain assumptions areused in the calculation of the actuarial valuation of our defined benefitpension plans and other postretirement benefits. Two critical assumptions,discount rate and expected return on assets, are important elements of planexpense and/or liability measurement and differences between actual results andthese two actuarial assumptions can materially affect our projected benefitobligation or the valuation of our plan assets. Other assumptions involvedemographic factors such as retirement, expected increases in compensation,mortality and turnover. The discount rate enables us to state expected futurecash flows at a present value on the measurement date. The discount rateassumptions are based on the market rate for high quality fixed incomeinvestments, and are thus subject to change each year. At January 3, 2009,a 1% decrease in the discount rate would increase our projected benefitobligations and the unfunded status of our pension plans by $12.8 million.The expected rates of return on our pension plans’ assets are based on theasset allocation of each plan and the long-term projected return of thoseassets. At January 3, 2009, if the expected rate of return on pension planassets were reduced by 1%, the result would have increased our net periodicbenefit expense for fiscal 2008 by $0.2 million dollars.

 

*Environmentalmatters*

 

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

 

In connection with theacquisition of Membrana GmbH (“Membrana”) in 2002, we recorded a reservefor costs to remediate known environmental issues and operational upgrades atthe Wuppertal, Germany facility. In 2004, we identified and accrued forpotential environmental contamination at our manufacturing facility in Potenza,Italy. In December 2008, we implemented a restructuring plan whichincluded the closure of the Potenza, Italy manufacturing facility and increasedthe environmental reserve for the estimated additional costs of environmentalremediation and monitoring activities that will be required after closing thefacility.

 

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

 

23

----

Table of Contents

 

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

 

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

 
| ** **                                             | ** ** | ** **               | ** ** | **Percentage of Net Sales**  | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **Three Months Ended**   | ** ** | **Three Months Ended**       | ** ** |
| **($’s in millions)**                             | ** ** | **October 3, 2009** | ** ** | **September 27,  2008** | ** ** | **October 3, 2009** | ** ** | **September 27,  2008** | ** ** |
|                                                   |       |                     |       |                         |       |   |   |   |   |
| Net  sales                                             |       | $                        | 137.7      |                         | $          | 154.9 |   | 100.0 | % | 100.0 | % |
|                                                   |       |                     |       |                         |       |   |   |   |   |
| Gross  profit                                          |       | 47.9                     |       | 46.8                         |       | 34.8 |   | 30.2 |   |
|                                                   |       |                     |       |                         |       |   |   |   |   |
| Selling,  general and administrative expenses          |       | 24.1                     |       | 26.2                         |       | 17.5 |   | 16.9 |   |
| Business  restructuring                                |       | 0.2                      |       | —                       |       | 0.2 |   | — |   |
| Operating  income                                      |       | 23.6                     |       | 20.6                         |       | 17.1 |   | 13.3 |   |
|                                                   |       |                     |       |                         |       |   |   |   |   |
| Interest  expense, net                                 |       | 14.2                     |       | 14.6                         |       | 10.3 |   | 9.4 |   |
| Foreign  currency and other                            |       | 0.7                      |       | (0.6                         | )          | 0.5 |   | (0.4 | ) |
| Income  from continuing operations before income taxes |       | 8.7                      |       | 6.6                          |       | 6.3 |   | 4.3 |   |
| Income  taxes                                          |       | 2.2                      |       | 1.5                          |       | 1.6 |   | 1.0 |   |
| Income  from continuing operations                     |       | $                        | 6.5        |                         | $          | 5.1 |   | 4.7 | % | 3.3 | % |

 
| ** **                                             | ** ** | ** **                | ** ** | **Percentage  of Net Sales** | ** ** |
|--------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
|                                                   | ** ** | **Nine  Months Ended**    |       | **Nine  Months Ended**       |       |
| **($’s in  millions)**                            | ** ** | **October 3,  2009** | ** ** | **September 27,  2008** | ** ** | **October 3,  2009** | ** ** | **September 27,  2008** | ** ** |
|                                                   |       |                      |       |                         |       |   |   |   |   |
| Net  sales                                             |       | $                         | 364.8      |                         | $          | 464.9 |   | 100.0 | % | 100.0 | % |
|                                                   |       |                      |       |                         |       |   |   |   |   |
| Gross  profit                                          |       | 137.9                     |       | 163.4                        |       | 37.8 |   | 35.2 |   |
|                                                   |       |                      |       |                         |       |   |   |   |   |
| Selling,  general and administrative expenses          |       | 74.4                      |       | 81.3                         |       | 20.4 |   | 17.5 |   |
| Business  restructuring                                |       | 0.8                       |       | —                       |       | 0.2 |   | — |   |
| Operating  income                                      |       | 62.7                      |       | 82.1                         |       | 17.2 |   | 17.7 |   |
|                                                   |       |                      |       |                         |       |   |   |   |   |
| Interest  expense, net                                 |       | 43.0                      |       | 46.6                         |       | 11.8 |   | 10.0 |   |
| Foreign  currency and other                            |       | 1.4                       |       | (1.2                         | )          | 0.4 |   | (0.2 | ) |
| Income  from continuing operations before income taxes |       | 18.3                      |       | 36.7                         |       | 5.0 |   | 7.9 |   |
| Income  taxes                                          |       | 4.6                       |       | 9.9                          |       | 1.2 |   | 2.1 |   |
| Income  from continuing operations                     |       | $                         | 13.7       |                         | $          | 26.8 |   | 3.8 | % | 5.8 | % |

 

***Comparison of the three months ended October 3, 2009 with thethree months ended September 27, 2008***

 

*Netsales*.  Net sales for the three monthsended October 3, 2009 were $137.7 million, a decrease of $17.2 million, or11.1%, from the same period in the prior year. Energy storage sales for the three months ended October 3, 2009 were$100.2 million, a decrease of $15.3 million, or 13.2%.  Lithium battery separator sales decreased by18.5% due to the impact of current macro-economic conditions.  Lead-acid battery separator sales decreasedby 11.5%, including the negative impact of dollar/euro exchange ratefluctuations of $1.4 million.  The mostsignificant factor impacting lead-acid separator sales in the third quarter of2009 as compared to the same period in the prior year was the loss of acustomer at the end of fiscal 2008. Sales to this customer in the third quarter of 2008 were $13.9million.  In addition, demand for theCompany’s lead-acid battery separators has continued to be negatively impactedby the current economic environment particularly in North America andEurope.  The economic impact in NorthAmerica and Europe was partially offset in the third quarter of 2009 by advanceorders from Exide.  In the third and fourthquarters of 2009, Exide placed advance orders of approximately $9.0 million for2010 usage and demand.  We shippedapproximately $3.7 million of these orders during the third quarter of 2009 andexpect to ship the remaining orders in the fourth quarter of 2009.  We believe that these advance orders willreduce Exide’s purchases of battery separators in 2010 and therefore, couldimpact our lead-acid battery separator sales in 2010.  Demand in Asia, which is the fastest growingmarket for lead-acid separators, continues to be strong as sales in this regionincreased 44.6% in the third quarter of 2009. 

 

24

----

Table of Contents

 

Sales to Exide have significantly declined in2009.  In 2008, Exide representedapproximately $86.0 million of the Company’s sales and based on currentforecasts, the Company expects sales to Exide in 2009 will be approximately$60.0 million.

 

Separationsmedia sales for the three months ended October 3, 2009 were $37.5 million,a decrease of $1.9 million, or 4.8% from the same period in the prior year,including the negative impact of dollar/euro exchange rate fluctuations of $1.6million.  Healthcare sales increased 2.0%as the impact of higher sales volumes of synthetic hemodialysis membranesoffset the negative impact of dollar/euro exchange rate fluctuations.  Filtration and specialty product salesdecreased by 16.0% due to current macro-economic conditions and the negativeimpact of dollar/euro exchange rate fluctuations.

 

*Gross Profit**. *Gross profit as a percent of net saleswas 34.8% for the three months ended October 3, 2009, as compared to 30.2%in the same period of the prior year. Energy storage gross profit as a percent of net sales was 37.0% for thethree months ended October 3, 2009, as compared to 29.1% in the sameperiod of the prior year, which included $6.0 million of incremental costsassociated with a strike at the Owensboro, Kentucky lead-acid battery separatorfacility.  Excluding the $6.0 million ofstrike-related costs, gross profit margin improved by 2.7 percentage points duecost savings and production efficiencies associated with the 2008 restructuringplan.  Separations media gross profit asa percent of net sales was 28.8% for the three months ended October 3,2009, as compared to 33.5% in the same period of the prior year.  The decrease was due primarily to reducedfiltration production caused by reduced sales related to the macro-economic conditionsand this trend is expected to continue in the fourth quarter.

 

*Selling,general and administrative expenses**. *Selling, general and administrativeexpenses decreased by $2.1 million for the three months ended October 3,2009.  Excluding the impact ofdollar/euro exchange rate fluctuations, the decrease was $1.9 million,consisting primarily of reduced discretionary spending and cost savings fromthe 2008 restructuring plan, partially offset by $0.9 million of increasedcosts associated with the FTC litigation.

 

*Interest expense. *Interest expense for the three months ended October 3,2009 remained consistent with that of the same period in the prior year.

 

*Income taxes**. *The income tax provision for the interimperiods presented is computed at the effective rate expected to be applicablein each respective full year using the statutory rates on a country-by-countrybasis.  The effective tax rate oncontinuing operations was 26.0% for the three months ended October 3,2009, as compared to 23.0% 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 factorimpacting our effective tax rate is the mix of earnings between the various taxjurisdictions in which we do business. Each tax jurisdiction has its own set of tax laws and tax rates.  The income earned by our subsidiaries in eachjurisdiction is taxed independently by these various jurisdictions.   Currently, the applicable statutory incometax rates in the jurisdictions that we operate in range from 0% to 39%.   Therefore, the amount of income tax expensein each jurisdiction as compared to our consolidated income before income taxeshas a significant impact on our annual effective tax rate.

 

***Comparison of the nine months ended October 3, 2009 with the ninemonths ended September 27, 2008***

 

*Net sales*.  Net salesfor the nine months ended October 3, 2009 were $364.8 million, a decrease of$100.1 million, or 21.5%, from the same period in the prior year.  Energy storage sales for the nine monthsended October 3, 2009 were $256.2 million, a decrease of $85.2 million, or25.0%.  Lithium battery separator salesdecreased by 20.3% due to the impact of current macro-economic conditions.  Lead-acid battery separator sales decreasedby 26.3%, including the negative impact of dollar/euro exchange ratefluctuations of $9.9 million.  Lead-acidbattery separator sales were impacted by the loss of a customer at the end offiscal 2008.  Sales to this customer inthe nine months ended September 27, 2008 were $42.0 million.  In addition, demand for the Company’slead-acid battery separators has been negatively impacted by the currenteconomic environment, particularly in North America and Europe.  Another factor impacting 2009 sales has beenthe significant decline in sales to Exide. In 2008, Exide represented approximately $86.0 million of the Company’ssales and based on current forecasts, the Company expects sales to Exide in2009 will be approximately $60.0 million. In the third and fourth quarters of 2009, Exide placed advance orders ofapproximately $9.0 million for 2010 usage and demand.  We shipped approximately $3.7 million ofthese orders during the third quarter of 2009 and expect to ship the remainingorders in the fourth quarter of 2009.  Webelieve that these advance orders will reduce Exide’s purchases of batteryseparators in 2010 and therefore, could impact our lead-acid battery separatorsales in 2010.  Demand in Asia, which isthe fastest growing market for lead-acid separators, continues to be strong assales in this region increased 22.2% compared to the same period in the prioryear.

 

Separationsmedia sales for the nine months ended October 3, 2009 were $108.6 million,a decrease of $14.9 million, or 12.1% from the same period in the prior year,including the negative impact of dollar/euro exchange rate fluctuations of$10.2 million.   Healthcare salesdecreased 5.6% as the impact of higher sales volumes of synthetic hemodialysismembranes was more than 

 

25

----

Table of Contents

 

offsetby the negative impact of dollar/euro exchange rate fluctuations.  Filtration and specialty product salesdecreased by 23.6% due to current macro-economic conditions and the negativeimpact of dollar/euro exchange rate fluctuations.

 

*Gross Profit**. *Gross profit as a percent of net saleswas 37.8% for the nine months ended October 3, 2009, as compared to 35.2%in the same period of the prior year. Energy storage gross profit as a percent of net sales was 36.3% for thenine months ended October 3, 2009, as compared to 35.1% in the same periodof the prior year, which included $6.0 million of incremental costs associatedwith a strike at the Owensboro, Kentucky lead-acid battery separatorfacility.  Excluding the $6.0 million ofstrike-related costs, gross profit remained relatively consistent with theprior year percentage.  Separations mediagross profit as a percent of net sales increased to 41.4% for the nine monthsended October 3, 2009, as compared to 35.3% in the same period of theprior year.  The increase was dueprimarily to production efficiencies and decreased energy costs.

 

*Selling,general and administrative expenses**. *Selling, general and administrativeexpenses decreased by $6.9 million for the nine months ended October 3,2009.  Excluding the impact ofdollar/euro exchange rate fluctuations, the decrease was $4.1 million,consisting primarily of reduced discretionary spending and cost savings fromthe 2008 restructuring plan, partially offset by $1.9 million of increasedcosts associated with the FTC litigation.

 

*Interest expense. *Interest expense for the nine months ended October 3,2009 decreased by $3.6 million from the same period in the prior year.  The decrease in interest expense wasprimarily due to the lower interest rates under our senior credit facilitiesand positive impact of dollar/euro exchange rate fluctuations on oureuro-denominated debt.

 

*Income taxes**. *The income tax provision for the interimperiods presented is computed at the effective rate expected to be applicablein each respective full year using the statutory rates on a country-by-countrybasis.  The effective tax rate oncontinuing operations was 25.5% for the nine months ended October 3, 2009,as compared to 27.0% 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 factorimpacting our effective tax rate is the mix of earnings between the various taxjurisdictions in which we do business. Each tax jurisdiction has its own set of tax laws and tax rates.  The income earned by our subsidiaries in eachjurisdiction is taxed independently by these various jurisdictions.   Currently, the applicable statutory incometax rates in the jurisdictions in which we operate range from 0% to 39%.   Therefore, the amount of income tax expensein each jurisdiction as compared to our consolidated income (loss) beforeincome taxes has a significant impact on our annual effective tax rate.

 

**Business Restructuring**

 

**The pre-tax components of restructuring activity in the nine monthsended October 3, 2009 were as follows:**

 
| **(in  millions)**           | ** ** | **Balance  at  January 3, 2009** | ** ** | **Restructuring    Charges** | ** ** | **Cash    Payments** | ** ** | **Foreign    Currency   Translation** | ** ** | **Balance  at   October 3,   2009** | ** ** |
|------------------------------|------------|---------------------------------------|------------|------------------------------|------------|----------------------|------------|---------------------------------------|------------|------------------------------------------|------------|
| 2008  restructuring plan:    |       |                                  |       |                         |       |                 |       |                                  |       |                                     |       |
| Severance  and benefit costs |       | $                                     | 9.9        |                         | $          | (0.6                 | )          | $                                     | (1.4       | )                                        | $          | 0.3 |   | $ | 8.2 |   |
| Other                        |       | 0.8                                   |       | 1.4                          |       | (1.5                 | )          | —                                |       | 0.7                                      |       |
|                         |       | 10.7                                  |       | 0.8                          |       | (2.9                 | )          | 0.3                                   |       | 8.9                                      |       |
|                         | ** ** | ** **                            | ** ** | ** **                   | ** ** | ** **           | ** ** | ** **                            | ** ** | ** **                               | ** ** |
| 2006  restructuring plan:    |       |                                  |       |                         |       |                 |       |                                  |       |                                     |       |
| Severance  and benefit costs |       | 2.9                                   |       | —                       |       | (0.2                 | )          | 0.1                                   |       | 2.8                                      |       |
| Other                        |       | 0.5                                   |       | —                       |       | (0.5                 | )          | —                                |       | —                                   |       |
|                         |       | 3.4                                   |       | —                       |       | (0.7                 | )          | 0.1                                   |       | 2.8                                      |       |
|                         | ** ** | ** **                            | ** ** | ** **                   | ** ** | ** **           | ** ** | ** **                            | ** ** | ** **                               | ** ** |
| Total                        |       | $                                     | 14.1       |                         | $          | 0.8                  |       | $                                     | (3.6       | )                                        | $          | 0.4 |   | $ | 11.7 |   |

 

We expect to makepayments against the restructuring reserve of approximately $2.6 millionover the next twelve months.

 

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

 

The plan included closingour facility in Potenza, Italy, streamlining production at our facility inOwensboro, Kentucky and reducing selling, general and administrative resourcesassociated with the lead-acid battery separator business.  The total cost of the restructuring plan,including environmental costs recorded in the environmental reserve of $18.6million, is expected to be approximately $62.0 million.  The plan was implemented and a restructuringcharge of $59.9 million was recorded in the fourth quarter of 2008.  The restructuring plan included thetermination of approximately 175 employees, consisting of

 

26

----

 

 

Table of Contents

 

productionemployees at Potenza, Italy and Owensboro, Kentucky and certain selling,general and administrative employees. During the nine months ended October 3, 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 is expectedto be approximately $9.8 million. The Company estimates that other costs,consisting primarily of costs associated with closing the Potenza, Italyfacility, are expected to be approximately $4.7 million, of which $3.4 millionhas been recognized through October 3, 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 $33.8 million, consisting of a$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 equivalentsincreased to $120.2 million at October 3, 2009 from$83.0 million at January 3, 2009, due primarily to cash flowgenerated from operations.

 

*Operatingactivities.*  Net cash provided by operating activities was$48.2 million in the nine months ended October 3, 2009, as compared to$80.1 million in the nine months ended September 27, 2008. Cashprovided by operating activities in the nine months ended October 3, 2009consisted of cash flows from operations of $53.3 million offset by an increasein working capital of $5.1 million. Accounts receivable was similar to 2008 fiscal year-end levels and dayssales outstanding increased 7% due to the timing of sales during the thirdquarter.  We have not experiencedsignificant changes in accounts receivable aging or customer payment terms andbelieve that we have adequately provided for potential bad debts.  Inventory increased from 2008 fiscal year-endbased on production and capacity planning for expected customer orders.  While current inventory levels are higherthan 2008 fiscal year-end levels, they have decreased from the second quarteras expected due to lower production related to the seasonal European shutdownand increased customer order levels.  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 and accrued liabilities decreased due to the timing ofpayments and a decrease in the employee incentive accrual as compared to year-end,offset to some extent by the timing of interest payments under our seniorsubordinated notes, which are paid semi-annually in May and November.  Refundable income taxes decreased due to thereceipt of a $5.0 million federal income tax refund that was received in thefirst quarter of 2009.

 

Net cash provided byoperations was $80.1 million in the nine months ended September 27, 2008and consisted of cash flows from operations of $68.8 million and a decrease inworking capital of $11.3 million, excluding the impact of theacquisitions.  Accounts receivabledecreased and days sales outstanding also decreased compared to year-end.  The increase in accounts payable and accruedliabilities was due to the timing of interest payments under our senior subordinatednotes, which are paid semi-annually in May and November.

 

*Investingactivities.*  Capital expenditures were $10.7 millionin the nine months ended October 3, 2009. As announced on August 5,2009, we were selected for a grant award of $49.2 million from the DOE.  The grant will help fund an estimated $101.6million expansion of our U.S. lithium battery separator productioncapacity.  We expect to begin the projectin the fourth quarter of 2009, with the majority of the capital expendituresand DOE grant reimbursements to take place in fiscal 2010 and 2011.  The first phase is expected to be completedin 2010 and the second phase in early 2012. We currently estimate that capital expenditures for fiscal 2009 will beapproximately $25 million to $30 million.

 

*Financingactivities.*  During the nine months ended October 3,2009, we made principal payments of debt of $6.1 million, including $2.3million for the early buyout of our capital lease.

 

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

 

Our senior secured creditfacility provides for a $322.9 million term loan facility($315.6 million outstanding at October 3, 2009), a €35.0 millionterm loan facility ($49.8 million outstanding at October 3, 2009) anda $90.0 million revolving credit facility. At October 3, 2009, we had$87.2 million of borrowings available under the revolving credit facility($90.0 million revolving credit facility less $2.8 million of undrawnstandby letters of credit). The term loans mature in July 2014 and the 

 

27

----

Table of Contents

 

revolving credit facilitymatures in July 2013. Interest rates under the senior secured creditfacility are, at our option, equal to either an alternate base rate plus a1.25% margin or the Eurocurrency base rate plus a 2.25% margin. At October 3,2009, interest rates on the U.S. dollar term loan and Eurodollar term loan were2.52% and 2.65%, respectively.

 

When loans areoutstanding under the revolving credit facility, we are required to maintain asenior leverage ratio of indebtedness to Adjusted EBITDA of less than 3.00 to1.00. At October 3, 2009, our senior leverage ratio was 2.13 to 1.00 andthe entire amount of the revolving credit facility was available for borrowing.

 

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

 
| **(in millions)**                                                | ** ** | **Last Twelve Months   Ended October 3, 2009** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net  loss                                                        |       | $                                                   | (30.3      | ) |
| Add/Subtract:                                                    |       |                                                |       |
| Depreciation  and amortization                                   |       | 52.0                                                |       |
| Interest  expense, net                                           |       | 57.1                                                |       |
| Income  taxes                                                    |       | 1.2                                                 |       |
| Stock  compensation                                              |       | 2.0                                                 |       |
| Foreign  currency gain                                           |       | (0.5                                                | )          |
| Loss  on disposal of property, plant and equipment               |       | 0.9                                                 |       |
| Business  restructuring                                          |       | 60.7                                                |       |
| Costs  related to the strike at the Owensboro, Kentucky facility |       | 0.8                                                 |       |
| Costs  related to the FTC litigation                             |       | 4.2                                                 |       |
| Other  non-cash or non-recurring charges                         |       | 0.2                                                 |       |
| Adjusted  EBITDA                                                 |       | $                                                   | 148.3      |   |

 

Thecalculation of the senior leverage ratio as defined under the senior creditfacility as of October 3, 2009 is as follows:

 
| **(in millions)**      | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| Indebtedness  (1)      |       | $          | 315.4      |   |
| Adjusted  EBITDA       |       | 148.3      |       |
| Actual  leverage ratio |       | 2.13       | x          |
|                        |            |            |            |  |

 

----

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

 

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

 

To reduce the interestrate risk inherent in our variable rate debt, we may utilize interest rate swapagreements to convert all or a portion of the variable rate debt to a fixedrate obligation.  At October 3,2009, we have an interest rate swap agreement with a notional principal amountof $200.0 million that effectively fixes the interest rate on that amount ofterm debt at 5.54% and expires on December 31, 2009.

 

Future principal debtpayments are expected to be paid out of cash flows from operations, borrowingson our revolving credit facility and future refinancing of our debt. Our cashinterest requirements for the next twelve months are estimated to be $50.3 million.

 

The 8.75% seniorsubordinated notes ($443.4 million outstanding at October 3, 2009)will mature in 2012 and are guaranteed by most of our existing and futuredomestic restricted subsidiaries, subject to certain exceptions. Except undercertain circumstances, the 8.75% senior subordinated notes do not requireprincipal payments prior to their maturity in 2012. Interest on the 8.75%senior subordinated notes is payable semi-annually in cash. The 8.75% seniorsubordinated notes contain customary covenants and events of default, includingcovenants that limit our ability to incur debt, pay dividends and makeinvestments.

 

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

 

28

----

Table of Contents

 

We believe we have sufficientliquidity to meet our cash requirements over both the short (next twelvemonths) and long term (in relation to our debt service requirements). Inevaluating the sufficiency of our liquidity for both the shorter and longerterm, we considered cash on hand, the expected cash flow to be generated by ouroperations, funds available from the DOE grant and the available borrowingsunder our senior secured credit facility compared to our anticipated cashrequirements 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 and funds received from the DOE grant, will be sufficientto meet our anticipated future operating expenses, capital expenditures anddebt service obligations as they become due for at least the nexttwelve months. However, our ability to make scheduled payments ofprincipal, to pay interest on or to refinance our indebtedness and to satisfyour other debt obligations will depend upon our future operating performance,which will be affected by general economic, financial, competitive,legislative, regulatory, business and other factors beyond our control. See “Item 1A.Risk Factors” in our most recent Annual Report on Form 10-K.

 

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

 

***ForeignOperations***

 

Wemanufacture our products at 14 strategically located facilities in NorthAmerica, Europe and Asia.  Net sales fromthe foreign locations were approximately $242.7 million and $298.6 million forthe nine months ended October 3, 2009 and September 27, 2008,respectively.  Typically, we sell ourproducts in the currency of the country where the manufacturing facility that producesthe product is located.  Sales to foreigncustomers are subject to numerous additional risks, including the impact offoreign government regulations, currency fluctuations, political uncertaintiesand differences in business practices. There can be no assurance that foreign governments will not adoptregulations or take other action that would have a direct or indirect adverseimpact on our business or market opportunities within such governments’countries.  Furthermore, there can be noassurance that the political, cultural and economic climate outside the UnitedStates will be favorable to our operations and growth strategy.

 

***Seasonality***

 

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

 

###### **Environmentalmatters**

 

Environmental obligationsare accrued when such expenditures are probable and reasonably estimable. Theamount of liability recorded is based on currently available information,including the progress of remedial investigations, current status ofdiscussions with regulatory authorities regarding the method and extent ofremediation, presently enacted laws and existing technology. Accruals forestimated losses from environmental obligations are adjusted as furtherinformation develops or circumstances change. Costs of future expenditures forenvironmental obligations are not discounted to their present value. We do notcurrently anticipate any material loss in excess of the amounts accrued.However, our future remediation expenses may be affected by a number ofuncertainties including, but not limited to, the difficulty in estimating theextent and method of remediation, the evolving nature of environmentalregulations and the availability and application of technology. We do notexpect the resolution of such uncertainties to have a material adverse effecton the financial condition of the Company. Recoveries of environmental costsfrom other parties are recognized as assets when their receipt is deemedprobable. Environmental reserves, which are predominately euro-denominated,were $48.6 million and $49.2 million as of October 3, 2009 and January 3,2009, respectively.

 

In connection with theacquisition of Membrana in 2002, we recorded a reserve for environmentalobligations. The reserve provides for costs to remediate known environmentalissues and operational upgrades which are required in order for us to remain incompliance with local regulations. The initial estimate and subsequentfinalization of the reserve was included in the allocation of purchase price atthe date of acquisition. The environmental reserve for the Membrana facilitywas $21.5 million and $22.6 million at October 3, 2009 and January 3,2009, respectively. We anticipate that expenditures will be made over the nextseven to ten years.

 

We have indemnificationagreements for certain environmental matters from Acordis A.G. (“Acordis”) andAkzo Nobel N.V. (“Akzo”), the prior owners of Membrana. Akzo originallyprovided broad environmental protections to Acordis with the right to assignsuch indemnities to Acordis’s successors. Akzo’s indemnifications relate toconditions existing prior to December 

 

29

----

Table of Contents

 

1999, which is the datethat Membrana was sold to Acordis. The Akzo agreement provides indemnificationof claims through December 2007, with the indemnification percentage decreasingeach 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 2006and 50% of claims reported through December 2007. In addition to the Akzoindemnification, Acordis provides separate indemnification of claims incurredfrom December 1999 through February 2002, the acquisition date. Wewill receive indemnification payments under the indemnification agreements asexpenditures are made against approved claims. At October 3, 2009 and January 3,2009, amounts receivable under the indemnification agreements were $17.9million.

 

In 2004, we identifiedpotential environmental contamination at our manufacturing facility in Potenza,Italy. Based on environmental studies and the initial remediation planpresented to local authorities, we recorded a reserve for environmentalobligations. In 2006, we further refined the remediation plan afterconsultations with local authorities. In December 2008, we implemented arestructuring plan which included the closure of this manufacturing facility.Based on discussions with local authorities, environmental consultants andinternal personnel, we increased the environmental reserve at Potenza as partof a restructuring charge by $18.6 million in the fourth quarter of 2008 forthe estimated additional costs of environmental remediation and monitoringactivities that will be required after closing the facility. Discussions withthe local authorities regarding the required level of remediation are ongoing.The environmental reserve for the Potenza, Italy facility was $24.1 million and$23.5 million at October 3, 2009 and January 3, 2009, respectively.It is reasonably possible that there is exposure to loss in excess of theamount accrued. The Company cannot estimate the amount of possible liability inexcess of the amount accrued due to a number of factors, including the lack oflocal regulations, effectiveness of existing remediation technology and theamount of time local authorities may require monitoring procedures. The Companybelieves that additional costs related to this matter, if any, will not have amaterial effect on the financial condition of the Company. We anticipate thatexpenditures will be made over the next seven to ten years.

 

In connection with theacquisition of Microporous, we identified potential environmental contaminationat the manufacturing site in Piney Flats, Tennessee. As part of theacquisition, the seller purchased an environmental insurance policy on behalfof us and also provided indemnification for a portion of the insurance policydeductible. Subsequent to the acquisition, we performed additionalenvironmental studies and confirmed that environmental contamination waspresent.  The environmental reserve forthe Piney Flats, Tennessee facility was $3.0 million and $3.1 million at October 3,2009 and January 3, 2009, respectively. We recorded the estimated cost ofremediation and the related receivables from the insurance company and theseller in applying purchase accounting for the acquisition. We 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, we reduced the receivable related tothis environmental matter by $0.2 million at July 4, 2009. The receivablebalance at October 3, 2009 and January 3, 2009 was $2.1 million and$2.5 million, respectively.

 

**Off-Balance Sheet Arrangements**

 

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

 

**New Accounting Standards**

 

See Note 2 to thecondensed consolidated financial statements in Part I for informationrelated to new accounting standards.

 

30

----

Table of Contents

 

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

 

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

 

*Interestrate risk*

 

At October 3, 2009,we had fixed rate debt of $443.4 million and variable rate debt of $365.4million. 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 October 3, 2009, the Company has aninterest rate swap agreement with a notional principal amount of $200.0 millionthat effectively fixes the interest rate on that amount of term debt at 5.54%and expires on December 31, 2009. The pre-tax earnings and cash flowimpact resulting from a 100 basis point increase in interest rates on ourvariable rate debt, giving effect to the interest rate swap agreement andholding other variables constant, would be $3.2 million over the next 12months.

 

*Currencyrisk*

 

Outside of the UnitedStates, we maintain assets and operations in Europe and Asia. The results ofoperations and financial position of our foreign operations are principallymeasured in their respective currency and translated into U.S. dollars. As aresult, exposure to foreign currency gains and losses exists. The reportedincome of these subsidiaries will be higher or lower depending on a weakeningor strengthening of the U.S. dollar against the respective foreign currency.Our subsidiaries and affiliates also purchase and sell products and services invarious currencies. As a result, we may be exposed to cost increases relativeto the local currencies in the markets in which we sell. Because a differentpercentage of our sales are in a foreign currency than our costs, a change inthe relative value of the U.S. dollar could have a disproportionate impact onour sales compared to our costs, which could impact our margins. A portion ofour assets are based in our foreign locations and are translated into U.S.dollars at foreign currency exchange rates in effect as of the end of eachperiod, with the effect of such translation reflected in other comprehensiveincome (loss). We have a euro-denominated term loan and senior subordinatednotes that effectively hedge our net investment in foreign subsidiaries.Therefore, foreign currency gains and losses resulting from the translation ofthe euro-denominated debt are included in accumulated other comprehensiveincome (loss). Accordingly, our consolidated shareholders’ equity willfluctuate depending upon the weakening or strengthening of the U.S. dollaragainst the respective foreign currency, primarily the euro.

 

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

 
| ** **                                      | ** ** | **October 3,  2009** | ** ** | **September 27****,  2008** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|----------------------------------|------------|
| Period  end rate                                |       | 1.4557                    |       | 1.4616                           |       |
| Period  average rate for the three months ended |       | 1.4293                    |       | 1.5044                           |       |
| Period  average rate for the nine months ended  |       | 1.3658                    |       | 1.5214                           |       |

 

Ourstrategy for management of currency risk relies primarily on conducting ouroperations in a country’s respective currency and may, from time to time,involve currency derivatives.  As of October 3,2009, we did not have any foreign currency derivatives outstanding.

 

**Item 4.  Controls and Procedures**

 

An evaluation of the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) or15d-15(e) promulgated under the Exchange Act) was performed under thesupervision, and with the participation of, our management, including our ChiefExecutive Officer and Chief Financial Officer. Our disclosure controls aredesigned to provide a reasonable assurance that information required to bedisclosed in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission. Based upon our evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of October 3, 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.

 

Duringthe three months ended October 3, 2009, there has been no change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) or15d-15(f) promulgated under the Exchange Act) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

31

----

Table of Contents

 

**PART II – OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

On March 20, 2008,we received a letter from the Federal Trade Commission (the “FTC”) requestingthat the Company voluntarily provide certain documents and information to theFTC regarding our acquisition of Microporous, which was completed on February 29,2008. The letter stated that the FTC was conducting an investigation todetermine whether the Microporous acquisition will substantially lessencompetition in any relevant market and thereby violate federal antitrust laws.We voluntarily responded to the letter in writing and through supplementaltelephone conversations and meetings.

 

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

 

On September 9,2008, the FTC issued an administrative complaint against us alleging that ouractions and the acquisition of Microporous have substantially lessenedcompetition in North American markets for lead-acid battery separators. Wefiled an answer to the complaint on October 15, 2008 denying the materialallegations of the complaint. The matter was presented before an AdministrativeLaw Judge of the FTC and the hearing concluded on June 12, 2009. In October 2009,the Administrative Law Judge granted the Company’s request to re-open therecord to take additional evidence.  As aresult, the Administrative Law Judge’s decision is expected in December 2009,at the earliest, although the actual timing remains uncertain.  The Administrative Law Judge’s decision isappealable by us and by the FTC.

 

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

 

On March 9, 2009, wefiled a complaint against Trojan Battery Company (“Trojan”) in the UnitedStates District Court for the Western District of North Carolina alleging thatTrojan had breached its contract with the Company.  On or about March 19,2009, Trojan filed a complaint against us in the United States District Courtfor the Central District of California alleging that we had breached ourcontract with Trojan and challenging our acquisition of Microporous underCalifornia antitrust law. In July 2009, we reached a settlement ofthe dispute with Trojan and both complaints have been dismissed with prejudice.

 

32

----

Table of Contents

 

**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 |

 

33

----

Table of Contents

 

# **SIGNATURES**

# ** **

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

 

 
| Date: November 6,  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) |

 

34

----