##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 o
    
    Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file number: 1-32266
 POLYPORE INTERNATIONAL, INC.
  Delaware
    
    43-2049334(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (IRS Employer
Identification No.)13800 South Lakes Drive 
Charlotte, North Carolina
    
    28273(Address of Principal Executive Offices)
    
    (Zip Code)
 (704) 587-8409
 
  þ o
  o o þ
 o þ




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##### 



Polypore International, Inc.
Index to Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2006
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    27PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    27Item 6.
    
    Exhibits
    
    
    27SIGNATURESEX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
   2




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##### Table of Contents



Forward-looking Statements
   
    
    the highly competitive nature of the markets in which we sell our products;
    
    the failure to continue to develop innovative products;
    
    the failure to successfully manage the transition in hemodialysis from cellulosic to
synthetic filtration membranes;
    
    the loss of our customers;
    
    the vertical integration by our customers of the production of our products into
their own manufacturing process;
    
    increases in prices for raw materials or the loss of key supplier contracts;
    
    employee slowdowns, strikes or similar actions;
    
    product liability claims exposure;
    
    risks in connection with our operations outside the United States;
    
    the incurrence of substantial costs to comply with, or as a result of violations of,
or liabilities under, environmental laws;
    
    the failure to protect our intellectual property;
    
    the failure to replace lost senior management;
    
    the incurrence of additional debt, contingent liabilities and expenses in connection
with future acquisitions;
    
    the failure to effectively integrate newly acquired operations; and
    
    the absence of expected returns from the amount of intangible assets we have recorded.
  3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Polypore International, Inc.
Condensed Consolidated Balance Sheets
 September 30, 2006
    
    December 31, 2005*(in thousands)
    
    (unaudited)AssetsCurrent assets:Cash and equivalents
    
    $
    63,795
    
    
    $
    28,060Accounts receivable, net
    
    
    98,131
    
    
    
    88,347Inventories
    
    
    66,434
    
    
    
    60,539Prepaid and other
    
    
    10,256
    
    
    
    9,035Total current assets
    
    
    238,616
    
    
    
    185,981Property, plant and equipment, net
    
    
    357,239
    
    
    
    370,871Goodwill
    
    
    567,587
    
    
    
    567,587Intangibles and loan acquisition costs, net
    
    
    208,945
    
    
    
    222,666Environmental indemnification receivable
    
    
    16,767
    
    
    
    16,366Other
    
    
    2,169
    
    
    
    1,105Total assets
    
    $
    1,391,323
    
    
    $
    1,364,576Liabilities and shareholders equityCurrent liabilities:Revolving credit obligations
    
    $
    
    
    
    $
    Accounts payable
    
    
    23,980
    
    
    
    23,209Accrued liabilities
    
    
    65,851
    
    
    
    32,804Income taxes payable
    
    
    6,291
    
    
    
    4,284Current portion of debt
    
    
    4,768
    
    
    
    1,224Current portion of capital lease obligation
    
    
    1,363
    
    
    
    1,326Total current liabilities
    
    
    102,253
    
    
    
    62,847Debt, less current portion
    
    
    1,024,831
    
    
    
    994,270Capital lease obligation, less current portion
    
    
    5,104
    
    
    
    6,018Pension and postretirement benefits
    
    
    56,335
    
    
    
    51,386Postemployment benefits
    
    
    4,579
    
    
    
    7,096Environmental reserve, less current portion
    
    
    22,783
    
    
    
    22,264Deferred income taxes
    
    
    100,548
    
    
    
    125,501Other
    
    
    3,862
    
    
    
    1,862Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock
    
    
    2
    
    
    
    2Paid-in capital
    
    
    125,183
    
    
    
    124,924Retained deficit
    
    
    (49,028
    )
    
    
    (22,207
    )Accumulated other comprehensive loss
    
    
    (5,129
    )
    
    
    (9,387
    )71,028
    
    
    
    93,332Total liabilities and shareholders equity
    
    $
    1,391,323
    
    
    $
    1,364,576
 
 * Derived from audited consolidated financial statements See notes to condensed consolidated financial statements
 4




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##### Table of Contents



Polypore International, Inc .  Condensed Consolidated Statements of Income (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    October 1,
    
    September 30,
    
    October 1,(in thousands, except share and per
share data)
    
    2006
    
    2005
    
    2006
    
    2005Net sales
    
    $
    116,384
    
    
    $
    105,764
    
    
    $
    354,771
    
    
    $
    330,876Cost of goods sold
    
    
    78,296
    
    
    
    74,316
    
    
    
    231,737
    
    
    
    220,030Gross profit
    
    
    38,088
    
    
    
    31,448
    
    
    
    123,034
    
    
    
    110,846Selling, general and administrative expenses
    
    
    19,973
    
    
    
    18,454
    
    
    
    64,489
    
    
    
    55,460Business restructuring
    
    
    36,333
    
    
    
    1,453
    
    
    
    37,658
    
    
    
    6,855Operating income (loss)
    
    
    (18,218
    )
    
    
    11,541
    
    
    
    20,887
    
    
    
    48,531Other (income) expense:Interest expense, net
    
    
    22,880
    
    
    
    20,580
    
    
    
    68,642
    
    
    
    61,178Change in accounting principle related to
postemployment benefits
    
    
    
    
    
    
    
    
    
    
    (2,593
    )
    
    
    Foreign currency and other
    
    
    284
    
    
    
    (126
    )
    
    
    2,265
    
    
    
    (3,531
    )23,164
    
    
    
    20,454
    
    
    
    68,314
    
    
    
    57,647Loss before income taxes and the cumulative
effect of a change in accounting principle
    
    
    (41,382
    )
    
    
    (8,913
    )
    
    
    (47,427
    )
    
    
    (9,116
    )Income taxes
    
    
    (17,264
    )
    
    
    (6,605
    )
    
    
    (20,375
    )
    
    
    (6,534
    )Loss before the cumulative effect of a change
in accounting principle
    
    
    (24,118
    )
    
    
    (2,308
    )
    
    
    (27,052
    )
    
    
    (2,582
    )Cumulative effect of a change in accounting
principle related to stock compensation, net of
income taxes of $139
    
    
    
    
    
    
    
    
    
    
    231
    
    
    
    Net loss
    
    $
    (24,118
    )
    
    $
    (2,308
    )
    
    $
    (26,821
    )
    
    $
    (2,582
    )Net loss per share  basic and diluted:Loss before cumulative effect of a change
in accounting principle
    
    $
    (140.27
    )
    
    $
    (13.46
    )
    
    $
    (157.63
    )
    
    $
    (15.06
    )Cumulative effect of a change in accounting
principle related to stock compensation, net
of income taxes
    
    
    
    
    
    
    
    
    
    
    1.35
    
    
    
    Net loss per share
    
    $
    (140.27
    )
    
    $
    (13.46
    )
    
    $
    (156.28
    )
    
    $
    (15.06
    )Weighted average shares outstanding  basic and
diluted
    
    
    171,938
    
    
    
    171,421
    
    
    
    171,622
    
    
    
    171,421
 See notes to condensed consolidated financial statements
 5




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Polypore International, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
 Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005Operating activities:Net loss
    
    $
    (26,821
    )
    
    $
    (2,582
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation expense
    
    
    30,689
    
    
    
    28,947Amortization expense
    
    
    13,259
    
    
    
    13,307Amortization of loan acquisition costs
    
    
    2,246
    
    
    
    2,044Amortization of debt discount
    
    
    17,990
    
    
    
    16,265Stock compensation
    
    
    230
    
    
    
    287Loss on disposal of property, plant and equipment
    
    
    842
    
    
    
    294Foreign currency and other
    
    
    538
    
    
    
    (3,860
    )Deferred income taxes
    
    
    (29,122
    )
    
    
    (2,284
    )Business restructuring
    
    
    37,658
    
    
    
    6,855Change in accounting principle related to postemployment benefits
    
    
    (2,593
    )
    
    
    Cumulative effect of change in accounting principle related to
stock compensation
    
    
    (370
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,913
    )
    
    
    6,181Inventories
    
    
    (3,259
    )
    
    
    3,294Prepaid and other current assets
    
    
    (562
    )
    
    
    (2,088
    )Accounts payable and accrued liabilities
    
    
    10,025
    
    
    
    1,533Income taxes payable
    
    
    1,420
    
    
    
    (5,386
    )Other, net
    
    
    4,147
    
    
    
    (2,522
    )Net cash provided by operating activities
    
    
    50,404
    
    
    
    60,285Investing activities:Purchases of property, plant and equipment
    
    
    (15,862
    )
    
    
    (9,994
    )Proceeds from sale of property, plant and equipment
    
    
    61
    
    
    
    24Net cash used in investing activities
    
    
    (15,801
    )
    
    
    (9,970
    )Financing activities:Principal payments on debt
    
    
    (1,116
    )
    
    
    (50,065
    )Loan acquisition costs
    
    
    (15
    )
    
    
    (798
    )Issuance of common stock
    
    
    399
    
    
    
    Net cash used in financing activities
    
    
    (732
    )
    
    
    (50,863
    )Effect of exchange rate changes on cash and equivalents
    
    
    1,864
    
    
    
    (2,692
    )Net increase (decrease) in cash and equivalents
    
    
    35,735
    
    
    
    (3,240
    )Cash and equivalents at beginning of period
    
    
    28,060
    
    
    
    33,149Cash and equivalents at end of the period
    
    $
    63,795
    
    
    $
    29,909
 See notes to condensed consolidated financial statements
 6




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##### Table of Contents



Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 1. Description of Business and Basis of Presentation
 Description of Business 
  Basis
of Presentation
 2. Accounting Pronouncements
 Accounting Changes and Error
Corrections
 Accounting for Early Retirement or
Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early
Retirement Arrangements)
 7




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##### Table of Contents



Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Inventory Costs Inventory Pricing
 Share-Based Payment Accounting for Stock Based Compensation
 Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement 109
 Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106,
and 132(R)
 8




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##### Table of Contents



Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 3. Inventories
  (in thousands)
    
    September 30, 2006
    
    December 31, 2005Raw materials
    
    $
    20,334
    
    
    $
    21,485Work-in-process
    
    
    10,908
    
    
    
    7,171Finished goods
    
    
    35,192
    
    
    
    31,883Total
    
    $
    66,434
    
    
    $
    60,539
 4. Debt
  (in thousands)
    
    September 30, 2006
    
    December 31, 2005Senior credit facilities:Revolving credit facility
    
    $
    
    
    
    $
    Term loan facilities
    
    
    368,574
    
    
    
    365,7358.75% senior subordinated notes
    
    
    415,320
    
    
    
    401,95510.50% senior discount notes, net of
unamortized original issue discount
of $55,499 and $73,489, respectively
    
    
    244,501
    
    
    
    226,511Other
    
    
    1,204
    
    
    
    1,2931,029,599
    
    
    
    995,494Less current maturities
    
    
    4,768
    
    
    
    1,224Long-term debt
    
    $
    1,024,831
    
    
    $
    994,270
 5. Pension and Other Postretirement Benefits
   Pension PlansThree Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Service cost
    
    $
    807
    
    
    $
    533
    
    
    $
    2,285
    
    
    $
    1,763Interest cost
    
    
    854
    
    
    
    699
    
    
    
    2,422
    
    
    
    2,315Expected return on plan assets
    
    
    (211
    )
    
    
    (192
    )
    
    
    (603
    )
    
    
    (650
    )Recognized net actuarial loss
    
    
    9
    
    
    
    13
    
    
    
    26
    
    
    
    43Net periodic benefit cost
    
    $
    1,459
    
    
    $
    1,053
    
    
    $
    4,130
    
    
    $
    3,471
 Other Postretirement BenefitsThree Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Service cost
    
    $
    7
    
    
    $
    7
    
    
    $
    23
    
    
    $
    21Interest cost
    
    
    29
    
    
    
    29
    
    
    
    86
    
    
    
    86Recognized net actuarial loss
    
    
    2
    
    
    
    
    
    
    
    6
    
    
    
    1Net periodic benefit cost
    
    $
    38
    
    
    $
    36
    
    
    $
    115
    
    
    $
    108
 9




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##### Table of Contents



Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 6. Environmental Matters
      7. Business Restructuring
 2006 Restructuring Plan
   10




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##### Table of Contents



Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 2005 Restructuring Plan
  Accounting for Costs Associated with Exit or Disposal Activities
 2004 Restructuring Plan
  ,
  Balance at
    
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    Balance atDecember 31,
    
    Restructuring
    
    Non-cash
    
    Cash
    
    Currency
    
    September 30,(in thousands)
    
    2005
    
    Charges
    
    Charges
    
    Payments
    
    Translation
    
    20062006 Restructuring Plan:Severance and benefit costs
    
    $
    
    
    
    $
    13,513
    
    
    $
    
    
    
    $
    (87
    )
    
    $
    (64
    )
    
    $
    13,362Asset impairment
    
    
    
    
    
    
    17,871
    
    
    
    (17,871
    )
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    4,624
    
    
    
    
    
    
    
    (11
    )
    
    
    (22
    )
    
    
    4,591
    
    
    
    36,008
    
    
    
    (17,871
    )
    
    
    (98
    )
    
    
    (86
    )
    
    
    17,9532005 Restructuring Plan:Severance and benefit costs
    
    
    1,506
    
    
    
    272
    
    
    
    
    
    
    
    (1,024
    )
    
    
    111
    
    
    
    865Other
    
    
    
    
    
    
    807
    
    
    
    
    
    
    
    (807
    )
    
    
    
    
    
    
    1,506
    
    
    
    1,079
    
    
    
    
    
    
    
    (1,831
    )
    
    
    111
    
    
    
    8652004 Restructuring Plan:Severance and benefit costs
    
    
    4,069
    
    
    
    
    
    
    
    
    
    
    
    (2,944
    )
    
    
    178
    
    
    
    1,303Raw materials
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    1
    
    
    
    Other
    
    
    265
    
    
    
    571
    
    
    
    
    
    
    
    (844
    )
    
    
    8
    
    
    
    4,366
    
    
    
    571
    
    
    
    
    
    
    
    (3,821
    )
    
    
    187
    
    
    
    1,303Total
    
    $
    5,872
    
    
    $
    37,658
    
    
    $
    (17,871
    )
    
    $
    (5,750
    )
    
    $
    212
    
    
    $
    20,121
 11




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##### Table of Contents



Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
  8. Share-based Compensation Plans
      Weighted-
    
    
    Weighted AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    Instrinsic ValueOptions
    
    
    Price
    
    
    Term (Years)
    
    
    (in thousands)2006 PlanOutstanding at December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issued
    
    
    13,219
    
    
    
    772Outstanding at September 30, 2006
    
    
    13,219
    
    
    
    772
    
    
    
    9.7
    
    
    
    1,424Vested and exercisable at
September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2004 PlanOutstanding at December 31, 2005
    
    
    8,741
    
    
    $
    800
    
    
    
    9.0
    
    
    $
    814Forfeited
    
    
    (1,060
    )
    
    
    725Unvested options forfeited upon
grant of options under the 2006
Plan
    
    
    (5,566
    )
    
    
    814Outstanding at September 30, 2006
    
    
    2,115
    
    
    
    749
    
    
    
    8.2
    
    
    
    278Vested and exercisable at
September 30, 2006
    
    
    1,389
    
    
    
    761
    
    
    
    8.5
    
    
    
    165
  12




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##### Table of Contents



Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Weighted Average Assumptions2006
    
    
    2005
    
    
    2004Weighted-average expected life (years)
    
    
    3.50
    
    
    
    4.00
    
    
    
    5.00Risk-free interest rate
    
    
    5.10
    %
    
    
    3.86
    %
    
    
    3.96
    %Expected volatility
    
    
    23.00
    %
    
    
    20.00
    %
    
    
    20.00
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
      9. Income Taxes
  10. Comprehensive Loss
  Three Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Net loss
    
    $
    (24,118
    )
    
    $
    (2,308
    )
    
    $
    (26,821
    )
    
    $
    (2,582
    )Other comprehensive
income (loss),
primarily foreign
currency
translation
    
    
    1,045
    
    
    
    195
    
    
    
    4,258
    
    
    
    (5,304
    )Comprehensive loss
    
    $
    (23,073
    )
    
    $
    (2,113
    )
    
    $
    (22,563
    )
    
    $
    (7,886
    )
 13




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##### Table of Contents



Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 11. Related Party Transactions
  12. Segment Information
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    October 1,
    
    September 30,
    
    October 1,(in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Net sales to external customers:Energy storage
    
    $
    83,109
    
    
    $
    76,018
    
    
    $
    254,071
    
    
    $
    233,934Separations media
    
    
    33,275
    
    
    
    29,746
    
    
    
    100,700
    
    
    
    96,942Total net sales to external customers
    
    $
    116,384
    
    
    $
    105,764
    
    
    $
    354,771
    
    
    $
    330,876Operating income (loss):Energy storage
    
    $
    17,746
    
    
    $
    13,842
    
    
    $
    53,225
    
    
    $
    45,330Separations media
    
    
    453
    
    
    
    60
    
    
    
    5,482
    
    
    
    11,378Corporate
    
    
    (84
    )
    
    
    (908
    )
    
    
    (162
    )
    
    
    (1,322
    )Segment operating income
    
    
    18,115
    
    
    
    12,994
    
    
    
    58,545
    
    
    
    55,386Business restructuring
    
    
    36,333
    
    
    
    1,453
    
    
    
    37,658
    
    
    
    6,855Total operating income (loss)
    
    
    (18,218
    )
    
    
    11,541
    
    
    
    20,887
    
    
    
    48,531Reconciling items:Interest expense, net
    
    
    22,880
    
    
    
    20,580
    
    
    
    68,642
    
    
    
    61,178Change in accounting principle
related to postemployment benefits
    
    
    
    
    
    
    
    
    
    
    (2,593
    )
    
    
    Foreign currency and other
    
    
    284
    
    
    
    (126
    )
    
    
    2,265
    
    
    
    (3,531
    )Total consolidated loss before
income taxes and cumulative effect
of a change in accounting principle
    
    $
    (41,382
    )
    
    $
    (8,913
    )
    
    $
    (47,427
    )
    
    $
    (9,116
    )Depreciation and amortization:Energy storage
    
    $
    7,785
    
    
    $
    8,363
    
    
    $
    23,511
    
    
    $
    25,045Separations media
    
    
    7,021
    
    
    
    5,529
    
    
    
    20,437
    
    
    
    17,209Total depreciation and amortization
    
    $
    14,806
    
    
    $
    13,892
    
    
    $
    43,948
    
    
    $
    42,254
 14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 The following discussion of our financial condition and results of operations should be read
together with our unaudited consolidated financial statements and the related notes included
elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements
and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2005.
 Overview
   Wards Motor Vehicles Facts and Figures,
     15




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##### Table of Contents



Critical accounting policies
  Results of Operations
  Three months ended
    
    Three months endedSeptember 30,
    
    October 1,
    
    September 30,
    
    October 1,($s in millions)
    
    2006
    
    2005
    
    2006
    
    2005Net sales
    
    $
    116.4
    
    
    $
    105.8
    
    
    
    100.0
    %
    
    
    100.0
    %Gross profit
    
    
    38.1
    
    
    
    31.4
    
    
    
    32.7
    %
    
    
    29.7
    %Selling, general and
administrative expenses
    
    
    20.0
    
    
    
    18.5
    
    
    
    17.2
    %
    
    
    17.4
    %Business restructuring
    
    
    36.3
    
    
    
    1.5
    
    
    
    31.2
    %
    
    
    1.4
    %Operating income (loss)
    
    
    (18.2
    )
    
    
    11.5
    
    
    
    (15.7
    )%
    
    
    10.9
    %Interest expense, net
    
    
    22.9
    
    
    
    20.6
    
    
    
    19.7
    %
    
    
    19.5
    %Foreign currency and other
    
    
    0.3
    
    
    
    (0.1
    )
    
    
    0.2
    %
    
    
    (0.1
    )%23.2
    
    
    
    20.5
    
    
    
    19.9
    %
    
    
    19.3
    %Loss before income taxes
    
    
    (41.4
    )
    
    
    (8.9
    )
    
    
    (35.6
    )%
    
    
    (8.4
    )%Income taxes
    
    
    (17.3
    )
    
    
    (6.6
    )
    
    
    (14.8
    )%
    
    
    (6.2
    )%Net loss
    
    $
    (24.1
    )
    
    $
    (2.3
    )
    
    
    (20.7
    )%
    
    
    (2.2
    )%
 Nine months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    September 30,
    
    October 1,($s in millions)
    
    2006
    
    2005
    
    2006
    
    2005Net sales
    
    $
    354.8
    
    
    $
    330.9
    
    
    
    100.0
    %
    
    
    100.0
    %Gross profit
    
    
    123.0
    
    
    
    110.8
    
    
    
    34.7
    %
    
    
    33.5
    %Selling, general and administrative
expenses
    
    
    64.5
    
    
    
    55.5
    
    
    
    18.2
    %
    
    
    16.8
    %Business restructuring
    
    
    37.7
    
    
    
    6.9
    
    
    
    10.6
    %
    
    
    2.1
    %Operating income
    
    
    20.9
    
    
    
    48.5
    
    
    
    5.9
    %
    
    
    14.7
    %Interest expense, net
    
    
    68.6
    
    
    
    61.2
    
    
    
    19.3
    %
    
    
    18.5
    %Change in accounting principle related to
postemployment benefits
    
    
    (2.6
    )
    
    
    
    
    
    
    (0.7
    )%
    
    
    
    %Foreign currency and other
    
    
    2.3
    
    
    
    (3.5
    )
    
    
    0.6
    %
    
    
    (1.1
    )%68.3
    
    
    
    57.6
    
    
    
    19.3
    %
    
    
    17.4
    %Loss before income taxes and the
cumulative effect of a change in
accounting principle
    
    
    (47.4
    )
    
    
    (9.1
    )
    
    
    (13.4
    )%
    
    
    (2.8
    )%Income taxes
    
    
    (20.4
    )
    
    
    (6.5
    )
    
    
    (5.7
    )%
    
    
    (2.0
    )%Loss before the cumulative effect of a
change in accounting principle
    
    
    (27.1
    )
    
    
    (2.6
    )
    
    
    (7.6
    )%
    
    
    (0.8
    )%Cumulative effect of a change in
accounting
principle, net of tax
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    %
    
    
    
    %Net loss
    
    $
    (26.8
    )
    
    $
    (2.6
    )
    
    
    (7.6
    )%
    
    
    (0.8
    )%
 16




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##### Table of Contents



Comparison of the three months ended September 30, 2006 with the three months ended October 1, 2005
 Net sales
   Gross Profit
   Selling, general and administrative expenses
  Interest expense
  Income taxes
  17




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##### Table of Contents



Comparison of the nine months ended September 30, 2006 with the nine months ended October 1, 2005
 Net sales
   Gross Profit
   Selling, general and administrative expenses
  Interest expense
  Income taxes
  18




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##### Table of Contents



Business restructuring
 2006 Restructuring Plan
   2005 Restructuring Plan
  2004 Restructuring Plan
  19




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##### Table of Contents



Balance at
    
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    Balance atDecember 31,
    
    Restructuring
    
    Non-cash
    
    Cash
    
    Currency
    
    September 30,(in millions)
    
    2005
    
    Charges
    
    Charges
    
    Payments
    
    Translation
    
    20062006 Restructuring Plan:Severance and benefit costs
    
    $
    
    
    
    $
    13.5
    
    
    $
    
    
    
    $
    (0.1
    )
    
    $
    (0.1
    )
    
    $
    13.3Asset impairments
    
    
    
    
    
    
    17.9
    
    
    
    (17.9
    )
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.6
    
    
    
    36.0
    
    
    
    (17.9
    )
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    17.92005 Restructuring Plan:Severance and benefit costs
    
    
    1.5
    
    
    
    0.3
    
    
    
    
    
    
    
    (1.0
    )
    
    
    0.1
    
    
    
    0.9Other
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    1.5
    
    
    
    1.1
    
    
    
    
    
    
    
    (1.8
    )
    
    
    0.1
    
    
    
    0.92004 Restructuring Plan:Severance and benefit costs
    
    
    4.1
    
    
    
    
    
    
    
    
    
    
    
    (2.9
    )
    
    
    0.2
    
    
    
    1.3Other
    
    
    0.3
    
    
    
    0.6
    
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    4.4
    
    
    
    0.6
    
    
    
    
    
    
    
    (3.8
    )
    
    
    0.2
    
    
    
    1.3Total
    
    $
    5.9
    
    
    $
    37.7
    
    
    $
    (17.9
    )
    
    $
    (5.8
    )
    
    $
    0.2
    
    
    $
    20.1
 Liquidity and Capital Resources
  Operating activities
  Investing activities
 20




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##### Table of Contents



Financing activities
     Twelve Months
    
    Three MonthsEnded
    
    Ended(in millions)
    
    September 30, 2006
    
    September 30, 2006Net loss
    
    $
    (10.0
    )
    
    $
    (20.8
    )Add:Depreciation and amortization
    
    
    55.8
    
    
    
    14.8Interest expense, net
    
    
    65.6
    
    
    
    16.8Provision for income taxes
    
    
    (15.8
    )
    
    
    (14.4
    )EBITDA
    
    
    95.6
    
    
    
    (3.6
    )Add:Foreign currency loss
    
    
    1.6
    
    
    
    0.5Operating lease payments on lease that was terminated (1)
    
    
    1.3
    
    
    
    Stock compensation costs
    
    
    0.2
    
    
    
    0.2Other non-cash charges (2)
    
    
    (2.2
    )
    
    
    (0.3
    )Business restructuring (3)
    
    
    18.5
    
    
    
    15.3Impairment of cellulosic buildings and equipment as part
of the 2006 business restructuring
    
    
    17.9
    
    
    
    17.9Loss on disposal of property, plant, and equipment
    
    
    1.1
    
    
    
    Adjusted EBITDA
    
    $
    134.0
    
    
    $
    30.0
 
 (1)
    
    Represents payments under an operating lease agreement that the Company terminated during the
second quarter of 2006 and purchased the equipment from the lessor.(2)
    
    Relates primarily to the adoption of EITF 05-5, Accounting for Early Retirement or Postemployment Programs with
Specific Features (Such As Terms Specified in Altersteilzeit Early
Retirement Arrangements) and other non-cash items.(3)
    
    The Credit Facility limits the add-back to Adjusted EBITDA for the cellulosic restructuring
(2006 Restructuring Plan) to $15.0 million. For the three and nine months ended September 30,
2006, the Company incurred cash charges of $18.1 million related to the cellulosics
restructuring. Thus, the business restructuring add-back for Adjusted EBITDA purposes for the
three and twelve months ended September 30, 2006 excludes $3.1 million of cellulosic
restructuring charges. The add-back also includes $0.3 million and $3.5 million for the three
and twelve months ended September 30, 2006, respectively, related to the 2005 and 2004
business restructurings. 21




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##### Table of Contents



Twelve MonthsEndedSeptember 30,(in millions)
    
    2006Adjusted EBITDA
    
    $
    134.0Consolidated interest expense, as defined in the Credit Agreement
    
    
    62.7Actual interest coverage ratio
    
    
    2.14xPermitted minimum interest coverage ratio
    
    
    1.70x
  Date or Period
    
    RatioApril 1, 2006 through March 31, 2007
    
    
    1.70 to 1.00June 30, 2007
    
    
    1.75 to 1.00September 29, 2007 through June 28, 2008
    
    
    1.90 to 1.00September 27, 2008 through January 3, 2009
    
    
    2.00 to 1.00January 4, 2009 through January 2, 2010
    
    
    2.75 to 1.00April 3, 2010 and each fiscal quarter thereafter
    
    
    3.00 to 1.00
  Twelve MonthsEndedSeptember 30,(in millions)
    
    2006Indebtedness, as defined in the Credit Agreement
    
    $
    791.6Adjusted EBITDA
    
    
    134.0Actual leverage ratio
    
    
    5.91xPermitted maximum leverage ratio
    
    
    6.90x
  Date or Period
    
    RatioApril 1, 2006 through March 31, 2007
    
    
    6.90 to 1.00June 30, 2007
    
    
    6.75 to 1.00September 29, 2007
    
    
    6.50 to 1.00December 29, 2007
    
    
    6.25 to 1.00March 29, 2008
    
    
    6.00 to 1.00June 28, 2008
    
    
    5.75 to 1.00September 27, 2008 through January 3, 2009
    
    
    5.50 to 1.00January 4, 2009 through October 3, 2009
    
    
    4.25 to 1.00January 2, 2010 and each fiscal quarter thereafter
    
    
    4.00 to 1.00
  22




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##### Table of Contents



Foreign Operations
  Seasonality
  23




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##### Table of Contents



Environmental matters
      Off-Balance Sheet Arrangements
  New Accounting Standards
 Accounting Changes and Error
Corrections
 24




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##### Table of Contents



Accounting for Early Retirement or
Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early
Retirement Arrangements)
 Inventory Costs Inventory Pricing
 Share-Based Payment Accounting for Stock Based Compensation
 Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement 109
 25




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##### Table of Contents



Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106,
and 132(R)
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest rate risk
  Currency risk
   September 30, 2006
    
    October 1, 2005Period end rate
    
    
    1.2688
    
    
    
    1.2225Period average rate for the three months ended
    
    
    1.2752
    
    
    
    1.2128Period average rate for the nine months ended
    
    
    1.2447
    
    
    
    1.2761
  26




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##### Table of Contents



Item 4. Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits
 Exhibit No.
    
    Exhibit Description10.1
    
    Contract, dated as of July 27, 2006, by and between Membrana, GmbH and Stefan Geyler31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 27




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##### Table of Contents



SIGNATURES
  Date: November 14, 2006
    POLYPORE INTERNATIONAL, INC.
(Registrant)By:
    /s/  Robert B. TothRobert B. TothPresident and Chief Executive Officer
(principal executive officer)By:
    /s/ Lynn AmosLynn AmosChief Financial Officer
(principal financial officer and principal
accounting officer)