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Table of Contents

 

 

 

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)

 

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’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.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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.

 

 

 



Table of Contents

 

Polypore International, Inc.

Index to Quarterly Report on Form 10-Q

For the Three Months Ended October 2, 2010

 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

29

Item 6.

Exhibits

30

 

 

 

SIGNATURES

 

 

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.

 

2



Table of Contents

 

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.

 

3



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Polypore International, Inc.

Condensed Consolidated Balance Sheets

 

 

 

October 2, 2010

 

 

 

(in thousands, except share data)

 

(unaudited)

 

January 2, 2010*

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

162,734

 

$

114,975

 

Accounts receivable, net

 

102,737

 

107,122

 

Inventories

 

75,730

 

72,498

 

Deferred income taxes

 

1,882

 

1,791

 

Prepaid and other

 

10,775

 

15,373

 

Total current assets

 

353,858

 

311,759

 

Property, plant and equipment, net

 

401,777

 

388,036

 

Goodwill

 

469,319

 

469,319

 

Intangibles and loan acquisition costs, net

 

150,930

 

165,971

 

Environmental indemnification receivable

 

11,204

 

14,667

 

Other

 

3,090

 

2,841

 

Total assets

 

$

1,390,178

 

$

1,352,593

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

23,081

 

$

17,570

 

Accrued liabilities

 

74,659

 

59,835

 

Income taxes payable

 

6,345

 

608

 

Current portion of debt

 

3,709

 

10,860

 

Total current liabilities

 

107,794

 

88,873

 

Debt, less current portion

 

778,948

 

792,573

 

Pension and postretirement benefits, less current portion

 

63,084

 

66,269

 

Environmental reserve, less current portion

 

8,677

 

30,412

 

Deferred income taxes

 

72,932

 

74,160

 

Other

 

13,118

 

15,961

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock — 15,000,000 shares authorized, no shares issued and outstanding

 

 

 

Common stock, $.01 par value — 200,000,000 shares authorized, 44,543,231 and 44,417,326 issued and outstanding at October 2, 2010 and January 2, 2010

 

445

 

444

 

Paid-in capital

 

483,938

 

481,248

 

Accumulated deficit

 

(138,136

)

(183,998

)

Accumulated other comprehensive loss

 

(622

)

(13,349

)

 

 

345,625

 

284,345

 

Total liabilities and shareholders’ equity

 

$

1,390,178

 

$

1,352,593

 

 


* Derived from audited consolidated financial statements

 

See notes to condensed consolidated financial statements

 

4



Table of Contents

 

Polypore International, Inc.

Condensed Consolidated Statements of Income (unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in thousands, except per share data)

 

October 2,
2010

 

October 3,
2009

 

October 2,
2010

 

October 3,
2009

 

Net sales

 

$

151,650

 

$

137,737

 

$

447,107

 

$

364,826

 

Cost of goods sold

 

94,362

 

89,777

 

270,342

 

226,885

 

Gross profit

 

57,288

 

47,960

 

176,765

 

137,941

 

Selling, general and administrative expenses

 

28,277

 

24,140

 

84,273

 

74,432

 

Business restructuring

 

91

 

190

 

(786

)

756

 

Operating income

 

28,920

 

23,630

 

93,278

 

62,753

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

12,125

 

14,214

 

35,439

 

42,983

 

Gain on sale of Italian subsidiary

 

 

 

(3,327

)

 

Foreign currency and other

 

47

 

688

 

(787

)

1,478

 

 

 

12,172

 

14,902

 

31,325

 

44,461

 

Income before income taxes

 

16,748

 

8,728

 

61,953

 

18,292

 

Income taxes

 

4,376

 

2,267

 

16,091

 

4,660

 

Net income

 

$

12,372

 

$

6,461

 

$

45,862

 

$

13,632

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.28

 

$

0.15

 

$

1.03

 

$

0.31

 

Diluted

 

$

0.27

 

$

0.14

 

$

0.99

 

$

0.31

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

44,527,914

 

44,385,858

 

44,494,644

 

44,380,047

 

Diluted

 

46,641,636

 

44,738,687

 

46,277,995

 

44,633,498

 

 

See notes to condensed consolidated financial statements

 

5



Table of Contents

 

Polypore International, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

Nine Months Ended

 

(in thousands)

 

October 2, 2010

 

October 3, 2009

 

Operating activities:

 

 

 

 

 

Net income

 

$

45,862

 

$

13,632

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation expense

 

23,716

 

26,011

 

Amortization expense

 

12,295

 

12,604

 

Amortization of loan acquisition costs

 

1,941

 

1,941

 

Stock-based compensation

 

1,672

 

1,559

 

Loss on disposal of property, plant and equipment

 

59

 

186

 

Foreign currency (gain) loss

 

(395

)

223

 

Deferred income taxes

 

3,190

 

(3,650

)

Business restructuring

 

(786

)

756

 

Gain on sale of Italian subsidiary

 

(3,327

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,579

 

(262

)

Inventories

 

(4,102

)

(5,561

)

Prepaid and other current assets

 

2,693

 

2,310

 

Accounts payable and accrued liabilities

 

22,531

 

(6,678

)

Income taxes payable

 

2,874

 

5,154

 

Other, net

 

1,710

 

(70

)

Net cash provided by operating activities

 

112,512

 

48,155

 

Investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(41,467

)

(10,715

)

Net payments associated with stock sale of Italian subsidiary

 

(14,908

)

 

Net cash used in investing activities

 

(56,375

)

(10,715

)

Financing activities:

 

 

 

 

 

Principal payments on debt

 

(9,900

)

(6,108

)

Proceeds from stock option exercises

 

1,019

 

55

 

Net cash used in financing activities

 

(8,881

)

(6,053

)

Effect of exchange rate changes on cash and cash equivalents

 

503

 

5,783

 

Net increase in cash and cash equivalents

 

47,759

 

37,170

 

Cash and cash equivalents at beginning of period

 

114,975

 

83,021

 

Cash and cash equivalents at end of the period

 

$

162,734

 

$

120,191

 

 

See notes to condensed consolidated financial statements

 

6



Table of Contents

 

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:

 

(in thousands)

 

October 2, 2010

 

January 2, 2010

 

Raw materials

 

$

30,283

 

$

30,466

 

Work-in-process

 

13,208

 

15,909

 

Finished goods

 

32,239

 

26,123

 

Total

 

$

75,730

 

$

72,498

 

 

3.                                      Debt

 

Debt, in order of priority, consists of:

 

(in thousands)

 

October 2, 2010

 

January 2, 2010

 

Senior credit facilities:

 

 

 

 

 

Revolving credit facility

 

$

 

$

 

Term loan facilities

 

351,752

 

363,678

 

8.75% senior subordinated notes

 

430,905

 

439,755

 

 

 

782,657

 

803,433

 

Less current maturities

 

3,709

 

10,860

 

Long-term debt

 

$

778,948

 

$

792,573

 

 

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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Table of Contents

 

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:

 

 

 

Gain (Loss) Recognized in Other Comprehensive Income

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in thousands)

 

October 2, 2010

 

October 3, 2009

 

October 2, 2010

 

October 3, 2009

 

 

 

 

 

 

 

 

 

 

 

Euro-denominated senior subordinated notes

 

$

(17,835

)

$

(8,535

)

$

8,850

 

$

(9,480

)

Interest rate swap agreements

 

 

876

 

 

2,468

 

 

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:

 

 

 

Pension Plans

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in thousands)

 

October 2, 2010

 

October 3, 2009

 

October 2, 2010

 

October 3, 2009

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

331

 

$

427

 

$

1,008

 

$

1,226

 

Interest cost

 

1,078

 

1,170

 

3,297

 

3,355

 

Expected return on plan assets

 

(185

)

(204

)

(567

)

(586

)

Amortization of prior service cost

 

(13

)

(14

)

(38

)

(40

)

Recognized net actuarial gain

 

(6

)

(4

)

(18

)

(11

)

Net periodic benefit cost

 

$

1,205

 

$

1,375

 

$

3,682

 

$

3,944

 

 

 

 

Other Postretirement Benefits

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in thousands)

 

October 2, 2010

 

October 3, 2009

 

October 2, 2010

 

October 3, 2009

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

4

 

$

3

 

$

10

 

$

9

 

Interest cost

 

34

 

33

 

102

 

99

 

Recognized net actuarial loss

 

3

 

 

9

 

 

Net periodic benefit cost

 

$

41

 

$

36

 

$

121

 

$

108

 

 

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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Table of Contents

 

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.

 

9



Table of Contents

 

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:

 

(in thousands)

 

Balance at
January 2,
2010

 

Restructuring
Charges

 

Other

 

Cash
Payments

 

Foreign
Currency
Translation

 

Balance at
October 2,
2010

 

2009 Restructuring Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits

 

$

132

 

$

(54

)

$

 

$

(60

)

$

 

$

18

 

Other

 

 

360

 

 

(360

)

 

 

 

 

132

 

306

 

 

(420

)

 

18

 

2008 Restructuring Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits

 

7,312

 

 

(6,616

)

(322

)

(359

)

15

 

Other

 

617

 

242

 

(591

)

(242

)

(26

)

 

 

 

7,929

 

242

 

(7,207

)

(564

)

(385

)

15

 

2006 Restructuring Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits

 

2,674

 

(1,334

)

 

(224

)

(235

)

881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

10,735

 

$

(786

)

$

(7,207

)

$

(1,208

)

$

(620

)

$

914

 

 

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.

 

10



Table of Contents

 

Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

10.          Comprehensive Income

 

Comprehensive income is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in thousands)

 

October 2, 2010

 

October 3, 2009

 

October 2, 2010

 

October 3, 2009

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

12,372

 

$

6,461

 

$

45,862

 

$

13,632

 

Foreign currency translation adjustment, net of deferred taxes

 

320

 

(3,019

)

12,693

 

(1,689

)

Net actuarial gain (loss) and prior service credit, net of deferred taxes

 

(69

)

(171

)

34

 

(190

)

Unrealized gain on interest rate swap agreements, net of deferred taxes

 

 

876

 

 

2,468

 

Comprehensive income

 

$

12,623

 

$

4,147

 

$

58,589

 

$

14,221

 

 

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:

 

11



Table of Contents

 

Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in thousands)

 

October 2, 2010

 

October 3, 2009

 

October 2, 2010

 

October 3, 2009

 

Net sales to external customers (by major product group):

 

 

 

 

 

 

 

 

 

Lead-acid battery separators

 

$

79,154

 

$

76,900

 

$

225,073

 

$

194,946

 

Lithium battery separators

 

34,143

 

23,276

 

97,134

 

61,240

 

Energy storage

 

113,297

 

100,176

 

322,207

 

256,186

 

Healthcare

 

22,941

 

24,921

 

77,401

 

74,705

 

Filtration and specialty

 

15,412

 

12,640

 

47,499

 

33,935

 

Separations media

 

38,353

 

37,561

 

124,900

 

108,640

 

Total net sales to external customers

 

$

151,650

 

$

137,737

 

$

447,107

 

$

364,826

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Energy storage

 

$

23,222

 

$

21,249

 

$

63,785

 

$

44,056

 

Separations media

 

6,653

 

4,566

 

31,168

 

24,472

 

Corporate

 

(615

)

(805

)

(1,673

)

(1,558

)

Segment operating income

 

29,260

 

25,010

 

93,280

 

66,970

 

Business restructuring

 

91

 

190

 

(786

)

756

 

Non-recurring costs

 

249

 

1,190

 

788

 

3,461

 

Total operating income

 

28,920

 

23,630

 

93,278

 

62,753

 

Reconciling items:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

12,125

 

14,214

 

35,439

 

42,983

 

Gain on sale of Italian subsidiary

 

 

 

(3,327

)

 

Foreign currency and other

 

47

 

688

 

(787

)

1,478

 

Income before income taxes

 

$

16,748

 

$

8,728

 

$

61,953

 

$

18,292

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Energy storage

 

$

8,527

 

$

8,877

 

$

25,453

 

$

26,454

 

Separations media

 

3,468

 

4,200

 

10,558

 

12,161

 

Total depreciation and amortization

 

$

11,995

 

$

13,077

 

$

36,011

 

$

38,615

 

 

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

 

12



Table of Contents

 

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

 

(in thousands)

 

Combined
Guarantor
Subsidiaries

 

Combined
Non-Guarantor
Subsidiaries

 

The
Company

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

74,444

 

$

88,290

 

$

 

$

162,734

 

Accounts receivable, net

 

36,914

 

65,823

 

 

 

102,737

 

Inventories

 

26,795

 

48,935

 

 

 

75,730

 

Deferred income taxes

 

1,826

 

56

 

 

 

1,882

 

Prepaid and other

 

2,726

 

7,955

 

94

 

 

10,775

 

Total current assets

 

68,261

 

197,213

 

88,384

 

 

353,858

 

Due from affiliates

 

435,905

 

235,309

 

288,297

 

(959,511

)

 

Investment in subsidiaries

 

199,096

 

290,196

 

429,907

 

(919,199

)

 

Property, plant and equipment, net

 

157,648

 

244,129

 

 

 

401,777

 

Goodwill

 

 

 

469,319

 

 

469,319

 

Intangibles and loan acquisition costs, net

 

9

 

 

150,921

 

 

150,930

 

Other

 

1,581

 

12,713

 

 

 

14,294

 

Total assets

 

$

862,500

 

$

979,560

 

$

1,426,828

 

$

(1,878,710

)

$

1,390,178

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

26,716

 

$

56,496

 

$

14,528

 

$

 

$

97,740

 

Income taxes payable

 

 

6,429

 

(84

)

 

6,345

 

Current portion of debt

 

 

480

 

3,229

 

 

3,709

 

Total current liabilities

 

26,716

 

63,405

 

17,673

 

 

107,794

 

Due to affiliates

 

439,183

 

189,889

 

330,439

 

(959,511

)

 

Debt, less current portion

 

 

46,002

 

732,946

 

 

778,948

 

Pension and postretirement benefits, less current portion

 

3,389

 

59,695

 

 

 

63,084

 

Environmental reserve, less current portion

 

360

 

8,317

 

 

 

8,677

 

Deferred income taxes and other

 

43,647

 

42,258

 

145

 

 

86,050

 

Shareholders’ equity

 

349,205

 

569,994

 

345,625

 

(919,199

)

345,625

 

Total liabilities and shareholders’ equity

 

$

862,500

 

$

979,560

 

$

1,426,828

 

$

(1,878,710

)

$

1,390,178

 

 

13



Table of Contents

 

Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Condensed Consolidating Balance Sheet
January 2, 2010

 

(in thousands)

 

Combined
Guarantor
Subsidiaries

 

Combined
Non-Guarantor
Subsidiaries

 

The Company

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

45,585

 

$

69,390

 

$

 

$

114,975

 

Accounts receivable, net

 

40,965

 

66,157

 

 

 

107,122

 

Inventories

 

27,094

 

45,404

 

 

 

72,498

 

Deferred income taxes

 

2,369

 

(578

)

 

 

1,791

 

Prepaid and other

 

5,180

 

10,131

 

62

 

 

15,373

 

Total current assets

 

75,608

 

166,699

 

69,452

 

 

311,759

 

Due from affiliates

 

348,934

 

326,033

 

293,841

 

(968,808

)

 

Investment in subsidiaries

 

186,148

 

308,965

 

366,661

 

(861,774

)

 

Property, plant and equipment, net

 

133,738

 

254,298

 

 

 

388,036

 

Goodwill

 

 

 

469,319

 

 

469,319

 

Intangibles and loan acquisition costs, net

 

18

 

 

165,953

 

 

165,971

 

Other

 

2,283

 

15,225

 

 

 

17,508

 

Total assets

 

$

746,729

 

$

1,071,220

 

$

1,365,226

 

$

(1,830,582

)

$

1,352,593

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

17,547

 

$

54,754

 

$

5,104

 

$

 

$

77,405

 

Income taxes payable

 

 

287

 

321

 

 

608

 

Current portion of debt

 

 

501

 

10,359

 

 

10,860

 

Total current liabilities

 

17,547

 

55,542

 

15,784

 

 

88,873

 

Due to affiliates

 

380,397

 

279,283

 

309,128

 

(968,808

)

 

Debt, less current portion

 

 

48,356

 

744,217

 

 

792,573

 

Pension and postretirement benefits, less current portion

 

3,026

 

63,243

 

 

 

66,269

 

Environmental reserve, less current portion

 

1,101

 

29,311

 

 

 

30,412

 

Deferred income taxes and other

 

35,630

 

42,739

 

11,752

 

 

90,121

 

Shareholders’ equity

 

309,028

 

552,746

 

284,345

 

(861,774

)

284,345

 

Total liabilities and shareholders’ equity

 

$

746,729

 

$

1,071,220

 

$

1,365,226

 

$

(1,830,582

)

$

1,352,593

 

 

14



Table of Contents

 

Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Condensed Consolidating Statement of Income
For the three months ended October 2, 2010

 

(in thousands)

 

Combined
Guarantor
Subsidiaries

 

Combined
Non-Guarantor
Subsidiaries

 

The Company

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

54,638

 

$

97,012

 

$

 

$

 

$

151,650

 

Cost of goods sold

 

20,915

 

73,447

 

 

 

94,362

 

Gross profit

 

33,723

 

23,565

 

 

 

57,288

 

Selling, general and administrative expenses

 

17,458

 

10,113

 

706

 

 

28,277

 

Business restructuring

 

22

 

69

 

 

 

 

91

 

Operating income (loss)

 

16,243

 

13,383

 

(706

)

 

28,920

 

Interest expense and other

 

(1,528

)

2,746

 

10,954

 

 

12,172

 

Equity in earnings of subsidiaries

 

 

 

(16,188

)

16,188

 

 

Income before income taxes

 

17,771

 

10,637

 

4,528

 

(16,188

)

16,748

 

Income taxes

 

9,299

 

2,921

 

(7,844

)

 

4,376

 

Net income

 

$

8,472

 

$

7,716

 

$

12,372

 

$

(16,188

)

$

12,372

 

 

Condensed Consolidating Statement of Income
For the three months ended October 3, 2009

 

(in thousands)

 

Combined
Guarantor
Subsidiaries

 

Combined
Non-Guarantor
Subsidiaries

 

The Company

 

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 before income taxes

 

9,546

 

13,027

 

1,338

 

(15,183

)

8,728

 

Income taxes

 

3,532

 

3,858

 

(5,123

)

 

2,267

 

Net income

 

$

6,014

 

$

9,169

 

$

6,461

 

$

(15,183

)

$

6,461

 

 

15



Table of Contents

 

Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Condensed Consolidating Statement of Income

For the nine months ended October 2, 2010

 

(in thousands)

 

Combined
Guarantor
Subsidiaries

 

Combined
Non-Guarantor
Subsidiaries

 

The Company

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

152,966

 

$

294,141

 

$

 

$

 

$

447,107

 

Cost of goods sold

 

64,062

 

206,280

 

 

 

270,342

 

Gross profit

 

88,904

 

87,861

 

 

 

176,765

 

Selling, general and administrative expenses

 

50,893

 

31,617

 

1,763

 

 

84,273

 

Business restructuring

 

223

 

(1,009

)

 

 

(786

)

Operating income (loss)

 

37,788

 

57,253

 

(1,763

)

 

93,278

 

Interest expense and other

 

(6,548

)

6,978

 

34,222

 

 

34,652

 

Gain on sale of Italian subsidiary

 

 

(3,327

)

 

 

(3,327

)

Equity in earnings of subsidiaries

 

 

 

(59,557

)

59,557

 

 

Income before income taxes

 

44,336

 

53,602

 

23,572

 

(59,557

)

61,953

 

Income taxes

 

24,427

 

13,954

 

(22,290

)

 

16,091

 

Net income

 

$

19,909

 

$

39,648

 

$

45,862

 

$

(59,557

)

$

45,862

 

 

Condensed Consolidating Statement of Income

For the nine months ended October 3, 2009

 

(in thousands)

 

Combined
Guarantor
Subsidiaries

 

Combined
Non-Guarantor
Subsidiaries

 

The Company

 

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) before income taxes

 

19,904

 

40,018

 

(1,771

)

(39,859

)

18,292

 

Income taxes

 

7,364

 

12,699

 

(15,403

)

 

4,660

 

Net income

 

$

12,540

 

$

27,319

 

$

13,632

 

$

(39,859

)

$

13,632

 

 

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Table of Contents

 

Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Condensed Consolidating Statement of Cash Flows

For the nine months ended October 2, 2010

 

(in thousands)

 

Combined
Guarantor
Subsidiaries

 

Combined
Non-Guarantor
Subsidiaries

 

The Company

 

Eliminations

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

74,336

 

$

57,043

 

$

(23,507

)

$

4,640

 

$

112,512

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(32,413

)

(9,054

)

 

 

(41,467

)

Net payments associated with stock sale of Italian subsidiary

 

 

(14,908

)

 

 

(14,908

)

Net cash used in investing activities

 

(32,413

)

(23,962

)

 

 

(56,375

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Principal payments on debt

 

 

(340

)

(9,560

)

 

(9,900

)

Proceeds from stock option exercises

 

 

 

1,019

 

 

1,019

 

Intercompany transactions, net

 

(42,633

)

(3,675

)

50,948

 

(4,640

)

 

Net cash provided by (used in) financing activities

 

(42,633

)

(4,015

)

42,407

 

(4,640

)

(8,881

)

Effect of exchange rate changes on cash and cash equivalents

 

710

 

(207

)

 

 

503

 

Net increase in cash and cash equivalents

 

 

28,859

 

18,900

 

 

47,759

 

Cash and cash equivalents at beginning of period

 

 

45,585

 

69,390

 

 

114,975

 

Cash and cash equivalents at end of period

 

$

 

$

74,444

 

$

88,290

 

$

 

$

162,734

 

 

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

 

Eliminations

 

Consolidated

 

Net cash provided by (used in) 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

 

(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 provided by (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 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

 

 

17



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 condensed 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 January 2, 2010.

 

Overview

 

We are a leading global high technology filtration company that develops, manufactures and markets specialized microporous membranes used in separation and filtration processes. In fiscal 2009, we generated total net sales of $516.9 million. We operate in two business segments: (i) the energy storage segment, which accounted for approximately 71% of our fiscal 2009 net sales; and (ii) the separations media segment, which accounted for approximately 29% of our fiscal 2009 net sales. We manufacture our products at facilities in North America, Europe and Asia. Net sales from foreign locations were $351.5 million for fiscal 2009.

 

Energy Storage Segment

 

In the energy storage segment, our membrane separators are a critical performance component in lithium batteries, which are primarily used in consumer electronics and electric drive vehicle (“EDV”) applications, and lead-acid batteries, which are used globally in transportation and numerous industrial applications. We believe the global economic recession adversely impacted sales in 2009 and although we have seen economic improvement, the economic environment is still uncertain and could have an adverse impact in the near future.  Although the short-term economic outlook is uncertain, we believe that the long-term growth drivers for the energy storage business — growth in Asia, increasing demand for consumer electronics and application proliferation, including EDV’s — remain intact.  We have and will continue to position ourselves to capitalize on these future growth opportunities.

 

Lithium batteries are the power source in a wide variety of electronics applications ranging from notebook computers and mobile phones to cordless power tools.  In addition to consumer electronics applications, growth in lithium batteries is being driven by application proliferation and growing demand in EDV’s.  The development and investment in lithium batteries for use in EDV applications is accelerating and we are making sales into this market.  In order to meet the growing demand, we have made and are continuing to make significant investments in lithium battery separator capacity.  In 2008, we completed a lithium battery separator capacity expansion at our Charlotte, NC facility and acquired a lithium battery separator company in South Korea.  In late 2009, we initiated a $102.0 million expansion aimed at enhancing our position as a market leader in supplying lithium separators for EDV applications.  The expansion is being partially funded by a $49.3 million grant from the U.S. Department of Energy (“DOE”).  The first phase of this expansion will increase capacity at our existing Charlotte, NC facility, with production beginning to ramp up toward the end of 2010.  The second phase is the construction of a new lithium battery separator facility in Concord, NC.  Construction of the Concord, NC facility started in the third quarter of 2010 with production expected to start in early 2012.  In early 2010, we initiated a $30.0 million capacity expansion at our Korean facility to serve growth in consumer electronics applications in Asia, with start-up expected in the second half of 2011.  In November 2010, we announced an additional $32.0 million lithium battery separator expansion targeted at the EDV market at our Charlotte, NC facility that is expected to begin production toward the end of 2011.

 

In the lead-acid battery market, the high proportion of aftermarket replacement sales and the steady growth of the worldwide fleet of motor vehicles provide us with a growing recurring revenue base in lead-acid battery separators. Worldwide demand for lead-acid battery separators is expected to continue to grow at slightly more than annual economic growth.  The Asia-Pacific region is the fastest growing market for lead-acid battery separators.  Growth in this region is driven by the increasing penetration of automobile ownership, growth in industrial and manufacturing sectors, export incentives and ongoing conversion to the polyethylene-based membrane separators we produce.  We have positioned ourselves to benefit from growth in Asia by expanding capacity at our Prachinburi, Thailand facility, acquiring battery separator manufacturing assets and subsequently expanding our operations in India, acquiring the remaining 40% minority interest in our production facility in Tianjin, China and establishing an Asian Technical Center in Thailand.  In 2010, we reached an agreement to enter into a joint venture with a customer, Camel Group Co., Ltd. (“Camel”), a leading battery manufacturer in China, to produce lead-acid battery separators primarily for Camel’s use.  The joint venture will be located at Camel’s facility in Xiangfan, China and is expected to start production in early 2012.  We will own 65% of the joint venture and our contribution will primarily consist of redeployed production assets from our former facility in Potenza, Italy.  We will continue to focus our resources and assets to capitalize on growth in this important region.

 

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Table of Contents

 

Separations Media Segment

 

In the separations media segment, our filtration membranes and modules are used in healthcare and high-performance filtration and specialty applications. The healthcare business and a portion of the filtration and specialty business have historically been relatively unaffected by the economy.  We believe that the separations media segment will continue to benefit from continued growth in demand for higher levels of purity in a growing number of applications.

 

Healthcare applications include hemodialysis, blood oxygenation and plasmapheresis. Growth in demand for hemodialysis membranes is driven by the increasing worldwide population of end-stage renal disease patients. We estimate that conversion to single-use dialyzers and increasing treatment frequency will result in additional dialyzer market growth. In the third quarter of 2010, we began a $25.0 million expansion of hemodialysis membrane (PUREMA ®) production capacity at our Wuppertal, Germany facility and expect to start production in the second half of 2011.

 

We produce a wide range of membranes and membrane-based elements for micro-, ultra- and nanofiltration and gasification/degasification of liquids. Micro-, ultra- and nanofiltration membrane element market growth is being driven by several factors, including end-market growth in applications such as water treatment and pharmaceutical processing, displacement of conventional filtration media by membrane filtration due to membranes’ superior cost and performance attributes and increasing purity requirements in industrial and other applications.

 

Critical accounting policies

 

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

 

Allowance for doubtful accounts

 

Accounts receivable are primarily composed of amounts owed to us through our operating activities and are presented net of an allowance for doubtful accounts. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. We charge accounts receivables off against our allowance for doubtful accounts when we deem them to be uncollectible on a specific identification basis. The determination of the amount of the allowance for doubtful accounts is subject to judgment and estimated by management. If circumstances or economic conditions deteriorate, we may need to increase the allowance for doubtful accounts.

 

Impairment of intangibles and goodwill

 

Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing unless circumstances dictate more frequent assessments.  We perform our annual impairment assessment for goodwill and indefinite-lived intangibles as of the first day of the fourth quarter of each fiscal year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount.  Goodwill impairment testing is a two-step process performed at the reporting unit level.  Our reporting units are at the operating segment level.  Step one compares the fair value of our reporting units to their carrying amount.  The fair value of the reporting unit is determined using the income approach, corroborated by comparison to market capitalization and key multiples of comparable companies.  Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital.  If the fair value of the reporting unit is greater than its carrying amount, there is no impairment.  If the reporting unit’s carrying amount exceeds its fair value, then the second step must be completed to measure the amount of impairment, if any.  Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one.  In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date.  If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to the excess.

 

Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans and future market conditions, among others.  There can be no assurance that our estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate

 

19



Table of Contents

 

predictions of the future.  If our assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not achieved or changes in strategy or market conditions occur, we may be required to record goodwill impairment charges in future periods.  It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

 

In 2009, we completed our annual impairment test as of the first day of the fourth quarter and recognized a goodwill impairment charge of $131.5 million for the lead-acid reporting unit of our energy storage segment.

 

Pension and other postretirement benefits

 

Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit pension plans and other postretirement benefits. Two critical assumptions, discount rate and expected return on assets, are important elements of plan expense and/or liability measurement and differences between actual results and these two actuarial assumptions can materially affect our projected benefit obligation or the valuation of our plan assets. Other assumptions involve demographic factors such as retirement, expected increases in compensation, mortality and turnover. The discount rate enables us to state expected future cash flows at a present value on the measurement date. The discount rate assumptions are based on the market rate for high quality fixed income investments, and are thus subject to change each year. At January 2, 2010, a 1% decrease in the discount rate would increase our projected benefit obligations and the unfunded status of our pension plans by $13.0 million. The expected rates of return on our pension plans’ assets are based on the asset allocation of each plan and the long-term projected return of those assets. For 2009, if the expected rate of return on pension plan assets were reduced by 1%, the result would have increased our net periodic benefit expense for fiscal 2009 by $0.2 million. At January 2, 2010, if the actual plan assets were reduced by 1%, the unfunded status of our pension