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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 2, 2010

Or

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

For the transition period from                          to                         

Commission file number:  1-32266

POLYPORE INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

(704) 587-8409

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes o No

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

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

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

There were 44,543,231 shares of the registrant’s common stock outstanding as of November 1, 2010.

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Polypore International, Inc.

Index to Quarterly Report on Form 10-Q

For the Three Months Ended October 2, 2010

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

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Forward-looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995.  All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements, including, in particular, the statements about Polypore International’s plans, objectives, strategies and prospects regarding, among other things, the financial condition, results of operations and business of Polypore International and its subsidiaries.  We have 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 be contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or “Controls and Procedures,” the Company’s financial statements or the notes thereto or elsewhere in this Quarterly Report on Form 10-Q.

These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control.  Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q, including the risks outlined under the caption entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2010, will be important in determining future results.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct.  They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including with respect to Polypore International, the following, among other things:

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

·      the failure to continue to develop innovative products;

·      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;

·      our substantial indebtedness;

·      interest rate risk related to our variable rate indebtedness;

·      our inability to generate cash;

·      restrictions related to the senior secured credit facility;

·      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 loss of senior management;

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

·      the failure to effectively integrate newly acquired operations;

·      the adverse impact on our financial condition of restructuring activities;

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

·      the adverse impact from legal proceedings on our financial condition;

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

·      economic uncertainty and the current crisis in global credit and financial markets.

Because our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements, we cannot give any assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on Polypore International’s results of operations and financial condition.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.  We do not undertake any obligation to update these forward-looking statements to reflect new information, future events or otherwise, except as may be required under federal securities laws.

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PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

Polypore International, Inc.

Condensed Consolidated Balance Sheets

* Derived from audited consolidated financial statements

See notes to condensed consolidated financial statements

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Polypore International, Inc.

Condensed Consolidated Statements of Income (unaudited)

See notes to condensed consolidated financial statements

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Polypore International, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

See notes to condensed consolidated financial statements

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.                                      Description of Business and Basis of Presentation

Description of Business

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles for interim financial information.  Accordingly, the unaudited condensed consolidated financial statements and notes do not contain certain information included in the Company’s annual financial statements. In the opinion of management, all normal and recurring adjustments that are necessary for a fair presentation have been made.  Operating results for the three months ended October 2, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2011.  The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.

2.                                      Inventories

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

3.                                      Debt

Debt, in order of priority, consists of:

On November 3, 2010, the Company issued a notice of redemption for $75,000,000 principal amount of its outstanding 8.75% senior subordinated dollar notes due 2012 at a redemption price equal to $1,000 per $1,000 principal amount of the notes, together with accrued and unpaid interest to the redemption date.  The notes will be redeemed on December 3, 2010.

4.                                      Derivatives and Hedging Transactions

The Company has euro-denominated senior subordinated notes (€150,000,000, or $205,905,000, at October 2, 2010) held in the U.S. that effectively hedge a portion of the Company’s net investment in its foreign subsidiaries. The translation of the euro-denominated notes held in the U.S. results in foreign currency gains or losses that are included in “Accumulated other comprehensive loss” in the accompanying condensed consolidated balance sheets.

To reduce the interest rate risk inherent in the Company’s variable rate debt, the Company may utilize interest rate swap agreements to convert all or a portion of the variable rate debt to a fixed rate obligation.  In January 2008, the Company entered into two interest rate swap agreements that effectively fixed the interest rate on a portion of its term debt.  The interest rate swap agreements had notional amounts of $50,000,000 and $200,000,000 and expired on June 30, 2009 and December 31,

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

2009, respectively.  The Company designated these swap agreements as cash flow hedges with changes in fair value, net of income taxes, recorded to “Accumulated other comprehensive loss” in the accompanying condensed consolidated balance sheets.  The Company recognized additional interest expense of $1,534,000 and $5,127,000 for the three and nine months ended October 3, 2009, respectively, representing the difference between the fixed interest rate on the swap agreements and the variable interest rate on the term debt.

The impact of the translation of euro-denominated senior subordinated notes and changes in fair value of the interest rate swap agreements on other comprehensive income is as follows:

5.                                      Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt.  The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturities of these assets and liabilities.  The carrying amount of borrowings under the senior secured credit facilities approximates fair value because the interest rates adjust to market interest rates. The fair value of the 8.75% senior subordinated notes, based on quoted market prices, was $433,060,000 at October 2, 2010.

6.                                      Employee Benefit Plans

The Company and its subsidiaries sponsor multiple defined benefit pension plans and an other postretirement benefit plan.  The following table provides the components of net periodic benefit cost:

7.                                      Environmental Matters

Environmental obligations are accrued when such expenditures are probable and reasonably estimable. The amount of liability recorded is based on currently available information, including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation, presently enacted laws and existing

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental obligations are not discounted to their present value. The Company does not currently anticipate any material loss in excess of the amounts accrued. However, the Company’s future remediation expenses may be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the extent and method of remediation, the evolving nature of environmental regulations, and the availability and application of technology. The Company does not expect the resolution of such uncertainties to have a material adverse effect on its consolidated financial position or liquidity. Recoveries of environmental costs from other parties are recognized as assets when their receipt is deemed probable. Environmental reserves, which are predominately euro-denominated, were $17,107,000 and $45,397,000 as of October 2, 2010 and January 2, 2010, respectively.

On March 9, 2010, the Company sold 100% of the stock of its Italian subsidiary, Daramic S.r.l. (Note 14). As a result of the stock sale, the buyer acquired all assets and liabilities of Daramic S.r.l., including the Potenza, Italy facility and environmental obligations of $22,291,000 associated with the Potenza site. The buyer has fully indemnified the Company with regard to environmental, health and safety matters related to this site.

In connection with the acquisition of Membrana GmbH (“Membrana”) in 2002, the Company recorded a reserve for environmental obligations. The reserve provides for costs to remediate known environmental issues and operational upgrades which are required in order for the Company to remain in compliance with local regulations. The initial estimate and subsequent finalization of the reserve was included in the allocation of purchase price at the date of acquisition. The environmental reserve for the Membrana facility was $16,689,000 and $19,852,000 at October 2, 2010 and January 2, 2010, respectively. The Company anticipates that expenditures will be made over the next seven to ten years.

The Company has indemnification 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 the right to assign such indemnities to Acordis’s successors. Akzo’s indemnifications relate to conditions existing prior to December 1999, which is the date that Membrana was sold to Acordis. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through February 2002, the acquisition date. The Company will receive indemnification payments under the indemnification agreements as expenditures are made against approved claims. Amounts receivable under the indemnification agreements were $15,214,000 and $17,618,000 at October 2, 2010 and January 2, 2010, respectively. The current portion of the indemnification receivable is included in “Prepaid and other” in the accompanying condensed consolidated balance sheets.

In connection with the 2008 acquisition of Microporous Holding Corporation (“Microporous”), the Company identified potential environmental contamination at the manufacturing site in Piney Flats, Tennessee. As part of the acquisition, the seller purchased an environmental insurance policy on behalf of the Company. Subsequent to the acquisition, the Company performed additional environmental studies and confirmed that environmental contamination was present.  The environmental reserve, net of related receivables from the insurance company, was $209,000 and $500,000 at October 2, 2010 and January 2, 2010, respectively.  The Company recorded the estimated cost of remediation and the related receivable from the insurance company in the allocation of purchase price at the date of acquisition.

8.                                      Business Restructuring

2009 Restructuring Plan

In 2009, the North American market for lead-acid battery separators had significant excess capacity and a highly consolidated customer base.  As a result of these factors and management estimates at that time about future demand requirements in North America, the Company implemented a restructuring plan in its energy storage segment in the fourth quarter of 2009 to better align lead-acid battery separator production capacity with demand in North America.

The restructuring plan included idling capacity and reducing headcount at the Company’s manufacturing facility in Owensboro, Kentucky.  The total cost of the plan is estimated to be approximately $23,225,000, including estimated cash charges of $3,329,000 for severance and benefits and other exit costs and a non-cash impairment charge of $19,896,000 for buildings and equipment.  The total cost recognized through October 2, 2010 was $20,407,000, which included cash charges of $511,000 for severance and other exit costs and the non-cash impairment charge.  The timing, scope and cash costs associated with the plan are subject to change as the Company implements the plan and continues to evaluate its business needs and costs.  During the first nine months of 2010, worldwide demand for lead-acid battery separators has exceeded previous estimates.  As a result, the Company is currently utilizing portions of the facility that were previously idled and the timing, scope and future cash costs associated with this plan are uncertain at this time.

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

2008 Restructuring Plan

A supply contract between the Company’s lead-acid battery separator business and a large customer expired on December 31, 2008 and was not renewed. In response, the Company implemented a restructuring plan in the fourth quarter of 2008 for its energy storage segment to align lead-acid battery separator production capacity with demand, reduce costs and position the Company to meet future growth opportunities.

The plan included closing the Company’s facility in Potenza, Italy, streamlining production at the Company’s facility in Owensboro, Kentucky and reducing selling, general and administrative resources associated with the lead-acid battery separator business.  The total cost of the restructuring plan was $61,407,000. The restructuring plan included costs associated with closing the Potenza, Italy facility and the termination of production employees at Potenza, Italy and Owensboro, Kentucky and certain selling, general and administrative employees.  The restructuring also included a non-cash impairment charge of $28,929,000 for buildings and machinery and equipment that will no longer be used in Potenza, Italy. On March 9, 2010, the Company sold 100% of the stock of its Italian subsidiary, Daramic S.r.l. (Note 14). As a result of the stock sale, the buyer acquired all of the assets and liabilities of Daramic S.r.l., including restructuring obligations associated with the Potenza, Italy facility of $7,207,000, consisting primarily of severance payments due to terminated employees.

2006 Restructuring Plan

In December 2006, the Company’s separations media segment exited the production of cellulosic membranes and realigned the cost structure at its Wuppertal, Germany facility. The total cost of the plan was $33,753,000, consisting of a $17,492,000 non-cash impairment charge for buildings and equipment, $10,466,000 for employee layoffs and $5,795,000 for other costs related to the shutdown of portions of the Wuppertal facility.  During the three months ended July 3, 2010, the Company reduced the estimated costs of severance and benefits and related accrual by $1,334,000 to reflect actual costs expected to be incurred.

Restructuring reserve activity during the nine months ended October 2, 2010, including the impact of the stock sale of Daramic S.r.l. on the 2008 plan, consisted of:

9.                                      Income Taxes

The income tax provision for the interim periods presented is computed at the effective rate expected to be applicable in each respective full year using the statutory rates on a country-by-country basis.  Income tax expense recorded in the financial statements differs from the federal statutory income tax rate due to a variety of factors, including state income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates, and various changes in estimates of permanent differences and valuation allowances.  In the nine months ended October 2, 2010, the Company’s effective tax rate was also impacted by the sale of its Italian subsidiary, Daramic S.r.l.

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

10.          Comprehensive Income

Comprehensive income is as follows:

11.          Related Party Transactions

The Company’s German subsidiary has a 33% equity investment in a patent and trademark service provider and a 25% equity investment in a research company.  The investments are accounted for under the equity method of accounting.  The Company’s equity investment balance for these two investments was $632,000 and $434,000 at October 2, 2010 and January 2, 2010, respectively.  During the three months ended July 3, 2010, the Company increased its ownership interest in the patent and trademark provider from 25% to 33% for an investment of $183,000.  Charges from the affiliates for work performed were $405,000 and $1,042,000 for the three and nine months ended October 2, 2010, respectively. Charges from the affiliates for work performed were $269,000 and $842,000 for the three and nine months ended October 3, 2009, respectively.  Amounts due to the affiliates were $56,000 and $123,000 at October 2, 2010 and January 2, 2010, respectively.

12.          Segment Information

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

The Company evaluates the performance of segments and allocates resources to segments based on operating income before interest, income taxes, depreciation and amortization. In addition, it evaluates business segment performance before business restructuring charges and the impact of certain non-recurring costs.  Financial information relating to the reportable operating segments is presented below:

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

13.          U.S. Department of Energy Grant

On February 1, 2010, the Company finalized an agreement with the U.S. Department of Energy (“DOE”), formally awarding the Company a grant of $49,264,000 to help fund an estimated $102,000,000 expansion of its U.S. lithium battery separator production capacity.  The Company recognizes grant awards when qualifying expenditures are incurred.  For capital expenditures, the Company deducts grant awards from the cost of the related asset.  For expense reimbursements, the Company deducts grant awards from the related expenses.

The Company recognized grant awards for capital expenditures of $3,005,000 and $8,452,000 for the three and nine months ended October 2, 2010, respectively.  The Company recognized grant awards for expenses of $603,000 and $2,003,000 for the three and nine months ended October 2, 2010, respectively.  Amounts due from the DOE were $385,000 and $2,718,000 at October 2, 2010 and January 2, 2010, respectively, and classified as “Prepaid and other” in the accompanying condensed consolidated balance sheets.

14.          Sale of Italian Subsidiary

On March 9, 2010, the Company sold 100% of the stock of its wholly-owned Italian subsidiary, Daramic S.r.l., for €13,385,000 ($18,175,000 at March 9, 2010).  The Company recognized a gain of $3,327,000 on the sale, net of direct transaction costs.  As a result of the stock sale, the buyer acquired all of the assets and liabilities of Daramic S.r.l., including the Potenza, Italy facility, which was closed in 2008, and environmental and restructuring obligations associated with the Potenza site.  In addition to assuming all assets and liabilities, the buyer fully indemnified the Company with regard to all environmental, health and safety matters related to this site.  In connection with the sale, the Company is required to make net cash payments to the buyer of €16,047,000, consisting of the settlement of an acquired intercompany receivable due to Daramic S.r.l. from affiliates of the Company, reduced by the purchase price of Daramic S.r.l. due from the buyer.  The Company paid €11,047,000 ($14,908,000) at closing and will pay the remaining €5,000,000 ($6,864,000 at October 2, 2010) on December 15, 2010.  The

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

remaining payment is secured by a letter of credit and has been classified as “Accrued liabilities” in the accompanying condensed consolidated balance sheet at October 2, 2010.

15.          Financial Statements of Guarantors

The Company’s senior subordinated notes are unconditionally guaranteed, jointly and severally, on a senior basis by certain of the Company’s 100% owned subsidiaries (“Guarantors”).  Management has determined that separate complete financial statements of the Guarantors would not be material to users of the financial statements.

The following sets forth condensed consolidating financial statements of the Guarantors and non-Guarantor subsidiaries.

Condensed Consolidating Balance Sheet
October 2, 2010