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 July 3, 2010

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 44,525,896 shares of the registrant’s common stock outstanding as of August 2, 2010.

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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

(in thousands, except share data)	July 3, 2010			January 2, 2010*
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	135,721		$	114,975
Accounts receivable, net	98,927			107,122
Inventories	72,287			72,498
Deferred income taxes	2,039			1,791
Prepaid and other	13,120			15,373
Total current assets	322,094			311,759
Property, plant and equipment, net	369,535			388,036
Goodwill	469,319			469,319
Intangibles and loan acquisition costs, net	154,348			165,971
Environmental indemnification receivable	10,145			14,667
Other	2,852			2,841
Total assets	$	1,328,293		$	1,352,593

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	25,090		$	17,570
Accrued liabilities	58,384			59,835
Income taxes payable	6,725			608
Current portion of debt	3,668			10,860
Total current liabilities	93,867			88,873
Debt, less current portion	758,045			792,573
Pension and postretirement benefits, less current portion	56,768			66,269
Environmental reserve, less current portion	8,209			30,412
Deferred income taxes	66,753			74,160
Other	12,437			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, 44,524,380 and 44,417,326 issued and outstanding at July 3, 2010 and January 2, 2010	445			444
Paid-in capital	483,150			481,248
Accumulated deficit	(150,508		)	(183,998		)
Accumulated other comprehensive loss	(873		)	(13,349		)
	332,214			284,345
Total liabilities and shareholders’ equity	$	1,328,293		$	1,352,593

* 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)

	Three Months Ended					Six Months Ended
(in thousands, except per share data)	July 3, 2010			July 4, 2009		July 3, 2010			July 4, 2009
Net sales	$	150,118		$	118,179	$	295,457		$	227,089
Cost of goods sold	88,980			71,601		175,980			137,108
Gross profit	61,138			46,578		119,477			89,981
Selling, general and administrative expenses	28,729			25,092		55,996			50,292
Business restructuring	(1,332		)	11		(877		)	566
Operating income	33,741			21,475		64,358			39,123
Other (income) expense:
Interest expense, net	11,037			14,622		23,314			28,769
Gain on sale of Italian subsidiary	—			—		(3,327		)	—
Foreign currency and other	(382		)	1,278		(834		)	790
	10,655			15,900		19,153			29,559
Income before income taxes	23,086			5,575		45,205			9,564
Income taxes	7,144			1,365		11,715			2,393
Net income	$	15,942		$	4,210	$	33,490		$	7,171

Net income per share:
Basic	$	0.36		$	0.09	$	0.75		$	0.16
Diluted	$	0.34		$	0.09	$	0.73		$	0.16

Weighted average shares outstanding:
Basic	44,510,737			44,379,598		44,478,009			44,377,141
Diluted	46,243,097			44,633,246		46,004,799			44,544,756

See notes to condensed consolidated financial statements

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Polypore International, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Six Months Ended
(in thousands)	July 3, 2010			July 4, 2009
Operating activities:
Net income	$	33,490		$	7,171
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	15,807			17,085
Amortization expense	8,209			8,453
Amortization of loan acquisition costs	1,294			1,294
Stock-based compensation	1,058			753
Loss on disposal of property, plant and equipment	51			259
Foreign currency (gain) loss	(507		)	244
Deferred income taxes	1,630			(3,414		)
Business restructuring	(877		)	566
Gain on sale of Italian subsidiary	(3,327		)	—
Changes in operating assets and liabilities:
Accounts receivable	2,382			11,553
Inventories	(4,273		)	(13,403		)
Prepaid and other current assets	292			(350		)
Accounts payable and accrued liabilities	11,964			(13,738		)
Income taxes payable	4,063			4,221
Other, net	1,905			(3,603		)
Net cash provided by operating activities	73,161			17,091
Investing activities:
Purchases of property, plant and equipment	(24,501		)	(4,766		)
Net payments associated with stock sale of Italian subsidiary	(14,908		)	—
Net cash used in investing activities	(39,409		)	(4,766		)
Financing activities:
Principal payments on debt	(8,973		)	(2,594		)
Proceeds from stock option exercises	845			55
Net cash used in financing activities	(8,128		)	(2,539		)
Effect of exchange rate changes on cash and cash equivalents	(4,878		)	3,898
Net increase in cash and cash equivalents	20,746			13,684
Cash and cash equivalents at beginning of period	114,975			83,021
Cash and cash equivalents at end of the period	$	135,721		$	96,705

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 July 3, 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)	July 3, 2010		January 2, 2010
Raw materials	$	27,886	$	30,466
Work-in-process	14,206		15,909
Finished goods	30,195		26,123
Total	$	72,287	$	72,498

3. Debt

Debt, in order of priority, consists of:

(in thousands)	July 3, 2010		January 2, 2010
Senior credit facilities:
Revolving credit facility	$	—	$	—
Term loan facilities	348,643		363,678
8.75% senior subordinated notes	413,070		439,755
	761,713		803,433
Less current maturities	3,668		10,860
Long-term debt	$	758,045	$	792,573

4. Derivatives and Hedging Transactions

The Company has euro-denominated senior subordinated notes (€150,000,000, or $188,070,000, at July 3, 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, 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 $1,817,000 and $3,593,000 for the three and six months ended

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

July 4, 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 changes in the translation of euro-denominated senior subordinated notes and 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					Six Months Ended
(in thousands)	July 3, 2010		July 4, 2009			July 3, 2010		July 4, 2009

Euro-denominated senior subordinated notes	$	15,045	$	(8,175	)	$	26,685	$	(945	)
Interest rate swap agreements	—		859			—		1,592

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 $412,692,000 at July 3, 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						Six Months Ended
(in thousands)	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Service cost	$	326		$	279		$	677		$	799
Interest cost	1,064			1,201			2,219			2,185
Expected return on plan assets	(183		)	(162		)	(382		)	(382		)
Amortization of prior service cost	(12		)	(8		)	(25		)	(26		)
Recognized net actuarial gain	(6		)	(196		)	(12		)	(7		)
Net periodic benefit cost	$	1,189		$	1,114		$	2,477		$	2,569

	Other Postretirement Benefits
	Three Months Ended						Six Months Ended
(in thousands)	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Service cost	$	3		$	2		$	6		$	6
Interest cost	34			36			68			66
Recognized net actuarial loss	3			—			6			—
Net periodic benefit cost	$	40		$	38		$	80		$	72

7. Environmental Matters

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 $16,399,000 and $45,397,000 as of July 3, 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 15). 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 $16,001,000 and $19,852,000 at July 3, 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 $13,896,000 and $17,618,000 at July 3, 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 July 3, 2010 and January 2, 2010, respectively. The Company recorded the estimated cost of remediation and the related receivables 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 about future demand requirements in North America, the Company implemented a restructuring plan in its energy storage segment 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 July 3, 2010 was $20,316,000, which included cash charges of $420,000 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 six 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, 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 15). 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 six months ended July 3, 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
July 3,
2010

2009 Restructuring Plan:

Severance and benefits

132

(72

)

—

(60

)

—

Other

—

287

—

(287

)

—

132

215

—

(347

)

—

2008 Restructuring Plan:

Severance and benefits

7,312

—

(6,616

)

(220

)

(360

)

116

Other

617

242

(591

)

(242

)

(26

)

—

7,929

242

(7,207

)

(462

)

(386

)

116

2006 Restructuring Plan:

Severance and benefits

2,674

(1,334

)

—

(167

)

(313

)

860

Total

10,735

(877

)

(7,207

)

(976

)

(699

)

976

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 six months ended July 3, 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. Acquisitions

In December 2009, the Company acquired the remaining 40% noncontrolling interest in a lead-acid battery separator manufacturing facility located in Tianjin, China for $3,600,000. The purchase price in excess of the carrying amount of the noncontrolling interest was recorded as additional paid-in capital.

11. Comprehensive Income

Comprehensive income is as follows:

	Three Months Ended					Six Months Ended
(in thousands)	July 3, 2010		July 4, 2009			July 3, 2010		July 4, 2009

Net income	$	15,942	$	4,210		$	33,490	$	7,171
Foreign currency translation adjustment, net of deferred taxes	4,985		(1,824		)	12,373		1,330
Net actuarial gain (loss) and prior service credit, net of deferred taxes	58		(164		)	103		(19		)
Unrealized gain on interest rate swap agreements, net of deferred taxes	—		859			—		1,592
Comprehensive income	$	20,985	$	3,081		$	45,966	$	10,074

12. 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. 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 additional investment of $183,000. The investments are accounted for under the equity method of accounting. The Company’s equity investment balance for these two investments was $554,000 and $434,000 at July 3, 2010 and January 2, 2010, respectively. Charges from the affiliates for work performed were $256,000 and $637,000 for the three and six months ended July 3, 2010, respectively. Charges from the affiliates for work performed were $466,000 and $573,000 for the three and six months ended July 4, 2009, respectively. Amounts due to the affiliates were $47,000 and $123,000 at July 3, 2010 and January 2, 2010, respectively.

13. 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)

	Three Months Ended						Six Months Ended
(in thousands)	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009
Net sales to external customers (by major product group):
Lead-acid battery separators	$	74,906		$	61,603		$	145,919		$	118,046
Lithium battery separators	32,592			20,661			62,991			37,964
Energy storage	107,498			82,264			208,910			156,010
Healthcare	25,535			24,836			54,460			49,784
Filtration and specialty	17,085			11,079			32,087			21,295
Separations media	42,620			35,915			86,547			71,079
Total net sales to external customers	$	150,118		$	118,179		$	295,457		$	227,089

Operating income:
Energy storage	$	21,195		$	13,518		$	40,563		$	22,807
Separations media	12,033			9,942			24,515			19,906
Corporate	(530		)	(445		)	(1,058		)	(753		)
Segment operating income	32,698			23,015			64,020			41,960
Business restructuring	(1,332		)	11			(877		)	566
Non-recurring costs	289			1,529			539			2,271
Total operating income	33,741			21,475			64,358			39,123
Reconciling items:
Interest expense, net	11,037			14,622			23,314			28,769
Gain on sale of Italian subsidiary	—			—			(3,327		)	—
Foreign currency and other	(382		)	1,278			(834		)	790
Income before income taxes	$	23,086		$	5,575		$	45,205		$	9,564

Depreciation and amortization:
Energy storage	$	8,387		$	8,647		$	16,926		$	17,577
Separations media	3,424			3,989			7,090			7,961
Total depreciation and amortization	$	11,811		$	12,636		$	24,016		$	25,538

14. 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 $3,063,000 and $5,447,000 for the three and six months ended July 3, 2010, respectively. The Company recognized grant awards for expenses of $527,000 and $1,400,000 for the three and six months ended July 3, 2010, respectively. Amounts due from the DOE were $1,261,000 and $2,718,000 at July 3, 2010 and January 2, 2010, respectively, and classified as “Prepaid and other” in the accompanying condensed consolidated balance sheets.

15. 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

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 ($6,269,000 at July 3, 2010) on December 15, 2010. The remaining payment is secured by a letter of credit and has been classified as “Accrued liabilities” in the accompanying condensed consolidated balance sheet at July 3, 2010.

16. 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

July 3, 2010

(in thousands)	Combined Guarantor Subsidiaries		Combined Non-Guarantor Subsidiaries		The Company			Reclassifications and Eliminations			Consolidated
Assets
Cash and cash equivalents	$	—	$	60,784	$	74,937		$	—		$	135,721
Accounts receivable, net	36,623		62,304		—			—			98,927
Inventories	24,723		47,564		—			—			72,287
Deferred income taxes	1,981		58		—			—			2,039
Prepaid and other	4,193		8,923		4			—			13,120
Total current assets	67,520		179,633		74,941			—			322,094
Due from affiliates	406,218		261,199		292,606			(960,023		)	—
Investment in subsidiaries	218,124		287,741		384,496			(890,361		)	—
Property, plant and equipment, net	145,375		224,160		—			—			369,535
Goodwill	—		—		469,319			—			469,319
Intangibles and loan acquisition costs, net	11		—		154,337			—			154,348
Other	1,496		11,501		—			—			12,997

Total assets	$	838,744	$	964,234	$	1,375,699		$	(1,850,384	)	$	1,328,293

Liabilities and shareholders’ equity

Accounts payable and accrued liabilities	$	22,296	$	56,263	$	4,915		$	—		$	83,474
Income taxes payable	—		6,773		(48		)	—			6,725
Current portion of debt	—		439		3,229			—			3,668
Total current liabilities	22,296		63,475		8,096			—			93,867
Due to affiliates	420,995		219,702		319,326			(960,023		)	—
Debt, less current portion	—		42,128		715,917			—			758,045
Pension and postretirement benefits, less current portion	3,309		53,459		—			—			56,768
Environmental reserve, less current portion	360		7,849		—			—			8,209
Deferred income taxes and other	40,499		38,545		146			—			79,190
Shareholders’ equity	351,285		539,076		332,214			(890,361		)	332,214

Total liabilities and shareholders’ equity	$	838,744	$	964,234	$	1,375,699		$	(1,850,384	)	$	1,328,293

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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		Reclassifications and 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

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Condensed Consolidating Statement of Income

For the three months ended July 3, 2010

(in thousands)	Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			The Company			Reclassifications and Eliminations			Consolidated

Net sales	$	52,135		$	97,983		$	—		$	—		$	150,118
Cost of goods sold	22,323			66,657			—			—			88,980
Gross profit	29,812			31,326			—			—			61,138
Selling, general and administrative expenses	17,411			10,789			529			—			28,729
Business restructuring	—			(1,332		)	—						(1,332		)
Operating income (loss)	12,401			21,869			(529		)	—			33,741
Interest expense and other	(2,050		)	1,871			10,834			—			10,655
Equity in earnings of subsidiaries	—			—			(19,795		)	19,795			—
Income before income taxes	14,451			19,998			8,432			(19,795		)	23,086
Income taxes	8,775			5,879			(7,510		)	—			7,144
Net income	$	5,676		$	14,119		$	15,942		$	(19,795	)	$	15,942

Condensed Consolidating Statement of Income

For the three months ended July 4, 2009

(in thousands)	Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries		The Company			Reclassifications and Eliminations			Consolidated

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

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Condensed Consolidating Statement of Income

For the six months ended July 3, 2010

(in thousands)	Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			The Company			Reclassifications and Eliminations			Consolidated

Net sales	$	98,328		$	197,129		$	—		$	—		$	295,457
Cost of goods sold	43,147			132,833			—			—			175,980
Gross Profit	55,181			64,296			—			—			119,477
Selling, general and administrative expenses	33,435			21,504			1,057			—			55,996
Business restructuring	201			(1,078		)	—			—			(877		)
Operating income (loss)	21,545			43,870			(1,057		)	—			64,358
Interest expense and other	(5,020		)	905			23,268			—			19,153
Equity in earnings of subsidiaries	—			—			(43,369		)	43,369			—
Income before income taxes	26,565			42,965			19,044			(43,369		)	45,205
Income taxes	15,128			11,033			(14,446		)	—			11,715
Net income	$	11,437		$	31,932		$	33,490		$	(43,369	)	$	33,490

Condensed Consolidating Statement of Income

For the six months ended July 4, 2009

(in thousands)	Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries		The Company			Reclassifications and Eliminations			Consolidated

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

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Polypore International, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Condensed Consolidating Statement of Cash Flows

For the six months ended July 3, 2010

(in thousands)	Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			The Company			Reclassifications and Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	49,034		$	40,931		$	(22,595	)	$	5,791		$	73,161
Investing activities:
Purchases of property, plant and equipment	(20,843		)	(3,658		)	—			—			(24,501		)
Net payments associated with stock sale of Italian subsidiary	—			(14,908		)	—			—			(14,908		)
Net cash used in investing activities	(20,843		)	(18,566		)	—			—			(39,409		)
Financing activities:
Principal payments on debt	—			(226		)	(8,747		)	—			(8,973		)
Issuance of common stock	—			—			845			—			845
Intercompany transactions, net	(27,549		)	(2,704		)	36,044			(5,791		)	—
Net cash provided by (used in) financing activities	(27,549		)	(2,930		)	28,142			(5,791		)	(8,128		)
Effect of exchange rate changes on cash and cash equivalents	(642		)	(4,236		)	—			—			(4,878		)
Net increase in cash and cash equivalents	—			15,199			5,547			—			20,746
Cash and cash equivalents at beginning of period	—			45,585			69,390			—			114,975
Cash and cash equivalents at end of period	$	—		$	60,784		$	74,937		$	—		$	135,721

Condensed Consolidating Statement of Cash Flows

For the six months ended July 4, 2009

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

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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 during the first half of 2010, 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 continued 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, development and investment in lithium batteries for use in EDV applications is accelerating and we are making sales into this market. In late 2008, we completed a lithium battery separator capacity expansion at our Charlotte, NC facility. 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 will be partially funded by a $49.3 million grant from the U.S. Department of Energy (“DOE”) and includes the existing Charlotte, NC facility and construction of a new manufacturing facility in Concord, NC. We expect production for the new capacity at our existing Charlotte, NC facility to begin ramping up in the fourth quarter of 2010. Construction of the new manufacturing facility in Concord, NC will begin in the third quarter of 2010. In 2008, we acquired a lithium battery separator company in South Korea which was subsequently renamed Celgard Korea, Inc. In early 2010, we initiated a $30.0 million capacity expansion at this facility to serve growth in consumer electronics applications in Asia with start-up expected in late 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 in India, acquiring the remaining 40% minority interest in our production facility in Tianjin, China and establishing an Asian Technical Center in Thailand. We are currently in the process of expanding our operation in India and expect it to be completed in the third quarter of 2010. 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.

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

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relatively unaffected by the economy, and 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 April 2010, we approved a $25.0 million expansion of hemodialysis membrane (PUREMA ®) production capacity at our Wuppertal, Germany facility that will commence in the second half of 2010 for start-up 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 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.

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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 plans would increase by $0.2 million.

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 technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. We do not currently anticipate any material loss in excess of the amounts accrued. 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. If actual results are less favorable than those projected by management, we may be required to recognize additional expense and liabilities.

In connection with the acquisition of Membrana GmbH (“Membrana”) in 2002, we recorded a reserve for costs to remediate known environmental issues and operational upgrades at the Wuppertal, Germany facility. We also have indemnification agreements for certain environmental matters from Acordis A.G. (“Acordis”) and Akzo Nobel N.V. (“Akzo”), the prior owners of Membrana. Recoveries of environmental costs from other parties are recognized as assets when their receipt is deemed probable. We have recorded a receivable with regard to the Akzo indemnification agreement. If indemnification claims cannot be enforced against Acordis and Akzo, we may be required to reduce the amount of indemnification receivable recorded.

Results of Operations

The following table sets forth, for the periods indicated, certain operating data in amount and as a percentage of net sales:

						Percentage of Net Sales
	Three Months Ended					Three Months Ended
($’s in millions)	July 3, 2010			July 4, 2009		July 3, 2010		July 4, 2009

Net sales	$	150.1		$	118.2	100.0	%	100.0	%

Gross profit	61.1			46.6		40.7		39.4
Selling, general and administrative expenses	28.7			25.1		19.1		21.2
Business restructuring	(1.3		)	—		(0.8	)	—
Operating income	33.7			21.5		22.4		18.2
Interest expense, net	11.0			14.6		7.3		12.4
Foreign currency and other	(0.3		)	1.3		(0.2	)	1.1
Income before income taxes	23.0			5.6		15.3		4.7
Income taxes	7.1			1.4		4.7		1.2
Net income	$	15.9		$	4.2	10.6	%	3.5	%

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						Percentage of Net Sales
	Six Months Ended					Six Months Ended
($’s in millions)	July 3, 2010			July 4, 2009		July 3, 2010		July 4, 2009

Net sales	$	295.5		$	227.1	100.0	%	100.0	%

Gross profit	119.5			90.0		40.4		39.6
Selling, general and administrative expenses	56.0			50.3		18.9		22.1
Business restructuring	(0.9		)	0.6		(0.3	)	0.3
Operating income	64.4			39.1		21.8		17.2
Interest expense, net	23.3			28.8		7.9		12.7
Gain on sale of Italian subsidiary	(3.3		)	—		(1.1	)	—
Foreign currency and other	(0.8		)	0.7		(0.3	)	0.3
Income before income taxes	45.2			9.6		15.3		4.2
Income taxes	11.7			2.4		4.0		1.0
Net income	$	33.5		$	7.2	11.3	%	3.2	%

Comparison of the three months ended July 3, 2010 with the three months ended July 4, 2009

Net sales. Net sales for the three months ended July 3, 2010 were $150.1 million, an increase of $31.9 million, or 27.0%, from the same period in the prior year. Energy storage sales for the three months ended July 3, 2010 were $107.5 million, an increase of $25.2 million, or 30.6%. Lithium battery separator sales increased by $11.9 million due to economic improvement in consumer electronics, continued application proliferation and new product launches, including EDV’s. Lead-acid battery separator sales increased by $13.3 million due to economic improvement in the Americas and Europe and continued growth in Asia, slightly offset by the effect of foreign currency translation of $0.8 million.

Separations media sales for the three months ended July 3, 2010 were $42.6 million, an increase of $6.7 million, or 18.7%, from the same period in the prior year. The negative effect of foreign currency translation was $2.3 million. Healthcare sales increased by $0.7 million, or 2.8%, due to strong demand in hemodialysis and blood oxygenation applications, somewhat offset by the effect of foreign currency translation. Filtration and specialty product sales increased by $6.0 million, or 54.1%, due to strong demand in all key applications, somewhat offset by the effect of foreign currency translation.

Gross Profit. Gross profit as a percent of sales was 40.7% for the three months ended July 3, 2010, as compared to 39.4% in the same period of the prior year. Energy storage gross profit as a percent of sales was 37.8% for the three months ended July 3, 2010, as compared to 36.2% in the same period of the prior year. The increase in gross profit margins was primarily due to higher production volumes and production efficiencies, somewhat offset by increased costs associated with growth investments. Separations media gross profit as a percent of sales was 48.1% for the three months ended July 3, 2010, which was consistent with 46.8% in the same period of the prior year.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $3.6 million for the three months ended July 3, 2010 as compared to the prior year, primarily due to the accrual of variable incentives under performance-based compensation plans.

Interest expense. Interest expense for the three months ended July 3, 2010 decreased by $3.6 million from the same period in the prior year due to lower interest rates under our senior credit facilities, the effect of foreign currency fluctuations on our euro-denominated debt and in the prior year, additional interest expense recognized under interest rate swap agreements.

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. The effective tax rate was 30.9% for the three months ended July 3, 2010, as compared to 24.5% for the same period in the prior year. Our effective tax rate fluctuates 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.

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The mix of earnings between the various tax jurisdictions in which we do business has a significant impact on our effective tax rate. Each tax jurisdiction has its own set of tax laws and tax rates. The income earned by our subsidiaries in each jurisdiction is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the jurisdictions in which we operate range from 0% to 39%. Therefore, the amount of income tax expense in each jurisdiction as compared to our consolidated income before income taxes has a significant impact on our annual effective tax rate.

The effect of each of these items on our effective tax rate on continuing operations is quantified in the table below:

	Three Months Ended
	July 3, 2010		July 4, 2009
U.S. federal statutory rate	35.0	%	35.0	%
State income taxes	0.6		(0.5	)
Mix of income in taxing jurisdictions	(7.5	)	(10.7	)
Other permanent differences and valuation allowances	2.8		0.7
Total effective tax rate on income	30.9	%	24.5	%

Comparison of the six months ended July 3, 2010 with the six months ended July 4, 2009

Net sales. Net sales for the six months ended July 3, 2010 were $295.5 million, an increase of $68.4 million, or 30.1%, from the same period in the prior year. Energy storage sales for the six months ended July 3, 2010 were $208.9 million, an increase of $52.9 million, or 33.9%. Lithium battery separator sales increased by $25.0 million due to economic improvement in consumer electronics, continued application proliferation and new product launches, including EDV’s. Lead-acid battery separator sales increased by $27.9 million due to economic improvement in the Americas and Europe, continued growth in Asia and the effect of foreign currency translation of $2.1 million.

Separations media sales for the six months ended July 3, 2010 were $86.6 million, an increase of $15.5 million, or 21.8% from the same period in the prior year. The effect of foreign currency translation was not significant. Healthcare sales increased by $4.7 million, or 9.4%, due to strong demand in hemodialysis and blood oxygenation applications. Filtration and specialty product sales increased by $10.8 million, or 50.7%, due to strong demand in all key applications.

Gross Profit. Gross profit as a percent of net sales was 40.4% for the six months ended July 3, 2010, as compared to 39.6% in the same period of the prior year. Energy storage gross profit as a percent of net sales was 37.4% for the six months ended July 3, 2010, as compared to 35.8% in the same period of the prior year. The increase in gross profit margin was due to higher production volumes and production efficiencies, somewhat offset by increased costs associated with growth investments. Separations media gross profit as a percent of sales was 47.7% for the six months ended July 3, 2010, which is consistent with 48.1% in the same period of the prior year.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $5.7 million for the six months ended July 3, 2010 as compared to the prior year, primarily due to the accrual of variable incentives under performance-based compensation plans.

Interest expense. Interest expense for the six months ended July 3, 2010 decreased by $5.5 million from the same period in the prior year due to lower interest rates under our senior credit facilities, the effect of foreign currency fluctuations on our euro-denominated debt and in the prior year, additional interest expense recognized under interest rate swap agreements.

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. The effective tax rate was 25.9% for the six months ended July 3, 2010, as compared to 25.0% for the same period in the prior year. Our effective tax rate fluctuates 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. Additionally, our effective tax rate was also impacted by the sale of our Italian subsidiary, Daramic S.r.l.

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The effect of each of these items on our effective tax rate on continuing operations is quantified in the table below:

	Six Months Ended
	July 3, 2010		July 4, 2009
U.S. federal statutory rate	35.0	%	35.0	%
State income taxes	0.6		(0.5	)
Mix of income in taxing jurisdictions	(7.5	)	(10.7	)
Other permanent differences and valuation allowances	1.4		1.2
Sale of Italian subsidiary	(3.6	)	—
Total effective tax rate on income	25.9	%	25.0	%

Business Restructuring

The components of restructuring activity in the six months ended July 3, 2010, including the impact of the stock sale of Daramic S.r.l. on the 2008 plan, were as follows:

(in millions)	Balance at January 2, 2010		Restructuring Charges			Other			Cash Payments			Foreign Currency Translation			Balance at July 3, 2010
2009 Restructuring Plan:
Severance and benefits	$	0.1	$	(0.1	)	$	—		$	—		$	—		$	—
Other	—		0.3			—			(0.3		)	—			—
	0.1		0.2			—			(0.3		)	—			—
2008 Restructuring Plan:
Severance and benefits	7.3		—			(6.6		)	(0.2		)	(0.4		)	0.1
Other	0.6		0.2			(0.6		)	(0.2		)	—			—
	7.9		0.2			(7.2		)	(0.4		)	(0.4		)	0.1
2006 Restructuring Plan:
Severance and benefits	2.7		(1.3		)	—			(0.2		)	(0.3		)	0.9

Total	$	10.7	$	(0.9	)	$	(7.2	)	$	(0.9	)	$	(0.7	)	$	1.0

We expect to make payments against the restructuring reserve of approximately $0.4 million over the next twelve months.

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 our estimates about future demand requirements in North America, we implemented a restructuring plan in our energy storage segment to better align lead-acid battery separator production capacity with demand in North America.

The restructuring plan included idling capacity and reducing headcount at our manufacturing facility in Owensboro, Kentucky. The total cost of the plan is estimated to be approximately $23.2 million, including estimated cash charges of $3.3 million for severance and benefits and other exit costs and a non-cash impairment charge of $19.9 million for buildings and equipment. The total cost recognized through July 3, 2010 was $20.3 million, which included cash charges of $0.4 million 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 we implement the plan and continue to evaluate our business needs and costs. During the first six months of 2010, worldwide demand for lead-acid battery separators has exceeded previous estimates. As a result, we are 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.

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

The plan included closing our facility in Potenza, Italy, streamlining production at our 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 $61.4 million. The restructuring plan included costs associated with closing the Potenza, Italy

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facility, 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 $28.9 million for buildings and machinery and equipment that will no longer be used in Potenza, Italy. On March 9, 2010, we sold 100% of the stock of our Italian subsidiary, Daramic S.r.l. 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 $7.2 million, consisting primarily of severance payments due to terminated employees.

2006 restructuring plan. In December 2006, our separations media segment exited the production of cellulosic membranes and we realigned the cost structure at our Wuppertal, Germany facility. The total cost of the plan was $33.8 million, consisting of a $17.5 million non-cash impairment charge for buildings and equipment, $10.5 million for employee layoffs and $5.8 million for other costs related to the shutdown of portions of the Wuppertal facility. During the three months ended July 3, 2010, we reduced the estimated costs of severance and benefits and related accrual by $1.3 million to reflect actual costs expected to be incurred.

Liquidity and Capital Resources

Cash and cash equivalents increased to $135.7 million at July 3, 2010 from $115.0 million at January 2, 2010. The $20.7 million increase in cash consists of cash flow from operations of $73.2 million, reduced by purchases of property, plant and equipment, payments associated with the stock sale of our Italian subsidiary, Daramic S.r.l., and principal payments on debt.

Operating activities. Net cash provided by operating activities was $73.2 million in the six months ended July 3, 2010, consisting of cash flows from operations of $56.9 million and changes in operating assets and liabilities of $16.3 million. The decrease in accounts receivable was primarily due to the timing of payments and was consistent with the 6% decrease in days sales outstanding. We have not experienced significant changes in accounts receivable aging or customer payment terms and believe that we have adequately provided for potential bad debts. Inventory increased based on production and capacity planning for expected customer orders, including the build-up of inventory in anticipation of our seasonal European shutdowns. Our inventory is generally not subject to obsolescence and does not have a shelf life and we do not believe there is a significant risk of inventory impairment. Accounts payable and accrued liabilities increased due to the timing of payments and the accrual of variable incentives under performance-based compensation plans.

Net cash provided by operating activities was $17.1 million in the six months ended July 4, 2009, as compared to $42.8 million in the six months ended June 28, 2008. Cash provided by operating activities in the six months ended July 4, 2009 consisted of cash flows from operations of $32.4 million, somewhat offset by changes in operating assets and liabilities of $15.3 million. Accounts receivable decreased due to lower sales while days sales outstanding was comparable to 2008 year-end. Inventory increased based on production and capacity planning for expected customer orders, including the build-up of inventory in anticipation of our seasonal European shutdowns. Accounts payable and accrued liabilities decreased due to the timing of payments, including the payment of 2008 employee incentive bonuses in 2009.

Investing activities. We have initiated lithium battery separator expansion projects in the U.S. and Korea for total expected costs of $102.0 million and $30.0 million, respectively. Capital expenditures for the U.S. expansion project will be partially funded by a $49.3 million grant from the DOE. In April 2010, we approved a $25.0 million expansion of our hemodialysis membrane (PUREMA ®) production capacity in Europe. Capital expenditures for these projects will occur in 2010 through 2012. Capital spending for fiscal year 2010 is currently estimated at approximately $75.0 million, net of DOE grant awards. In the six months ended July 3, 2010, capital expenditures were $24.5 million, net of DOE grant awards of $5.4 million.

As a result of the March 9, 2010 stock sale of our Italian subsidiary, Daramic S.r.l., the buyer acquired the Potenza, Italy manufacturing facility and assumed all liabilities of the subsidiary, including environmental obligations and severance costs associated with closing this facility in 2008. As a result of the stock sale, we are required to make net cash payments to the buyer of €16.0 million, of which €11.0 million ($14.9 million) was made at closing and the remaining €5.0 million ($6.3 million at July 3, 2010) will be paid on December 15, 2010.

Financing activities. During the six months ended July 3, 2010, we made principal payments on debt of $9.0 million, including a $7.1 million mandatory prepayment associated with the 2009 excess cash flow calculation as defined in our credit agreement.

We intend to fund our ongoing operations with cash on hand, cash generated by operations and availability under the senior secured credit facility.

Our senior secured credit facility provides for a $322.9 million term loan facility ($306.1 million outstanding at July 3, 2010), a €35.0 million term loan facility ($42.5 million outstanding at July 3, 2010) and a $90.0 million revolving credit facility. At July 3, 2010, we had $81.6 million of borrowings available under the revolving credit facility ($90.0 million revolving credit facility

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less $8.4 million of undrawn standby letters of credit). The term loans mature in July 2014 and the revolving credit facility matures in July 2013. Interest rates under the senior secured credit facility are, at our option, equal to either an alternate base rate or Eurocurrency base rate plus a specified margin. At July 3, 2010, interest rates on the U.S. dollar term loan and Eurodollar term loan were 2.35% and 2.43%, respectively.

When loans are outstanding under the revolving credit facility, we are required to maintain a senior leverage ratio of indebtedness to Adjusted EBITDA of less than 3.00 to 1.00. At July 3, 2010, our senior leverage ratio was 1.72 to 1.00 and, therefore, had no effect on borrowings available under the revolving credit facility.

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

(in millions)	Last Twelve Months Ended July 3, 2010
Net loss	$	(91.0	)
Add/Subtract:
Depreciation and amortization	49.9
Interest expense, net	51.6
Income taxes	12.9
Stock compensation	2.5
Foreign currency gain	(1.9		)
Loss on disposal of property, plant and equipment	0.1
Business restructuring	19.9
Gain on sale of Italian subsidiary	(3.3		)
Goodwill impairment	131.5
Costs related to the FTC complaint	2.0
Other non-cash or non-recurring charges	(0.3		)
Adjusted EBITDA	$	173.9

The calculation of the senior leverage ratio as defined under the senior credit facility as of July 3, 2010 is as follows:

(in millions)
Indebtedness (1)	$	298.6
Adjusted EBITDA	$	173.9
Actual leverage ratio	1.72x

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

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

The 8.75% senior subordinated notes ($413.1 million outstanding at July 3, 2010) will mature in 2012 and are guaranteed by most of our existing and future domestic restricted subsidiaries, subject to certain exceptions. Except under certain circumstances, the 8.75% senior subordinated notes do not require principal payments prior to their maturity in 2012. Interest on the 8.75% senior subordinated notes is payable semi-annually. The 8.75% senior subordinated notes contain customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends and make investments.

Future debt service payments are expected to be paid out of cash flows from operations, borrowings under our revolving credit facility and future refinancing of our debt. Our cash interest requirements for the next twelve months are estimated to be $44.9 million.

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

We believe we have sufficient liquidity to meet our cash requirements over both the short (next twelve months) and long term (in relation to our debt service requirements). In evaluating the sufficiency of our liquidity, we considered cash on hand, expected cash flow to be generated from operations and available borrowings under our senior secured credit facility compared to our anticipated cash requirements for debt service, working capital, cash taxes, capital expenditures and funding

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requirements for long-term liabilities. We anticipate that our cash on hand and operating cash flow, together with borrowings under the revolving credit facility, will be sufficient to meet our anticipated future operating expenses, capital expenditures and debt service obligations as they become due for at least the next twelve months. However, our ability to make scheduled payments of principal, to pay interest on or to refinance our indebtedness and to satisfy our other debt obligations will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. See “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K.

From time to time, we may explore additional financing methods and other means to lower our cost of capital, which could include stock issuance or debt financing and the application of the proceeds therefrom to the repayment of bank debt or other indebtedness. In addition, in connection with any future acquisitions, we may require additional funding which may be provided in the form of additional debt or equity financing or a combination thereof. There can be no assurance that any additional financing will be available to us on acceptable terms or at all.

Foreign Operations

We manufacture our products at 14 strategically located facilities in North America, Europe and Asia. Net sales from the foreign locations were approximately $201.5 million and $151.7 million for the six months ended July 3, 2010 and July 4, 2009, respectively. Typically, we sell our products in the currency of the country where the manufacturing facility that produces the product is located. Sales to foreign customers are subject to numerous additional risks, including the impact of foreign government regulations, currency fluctuations, political uncertainties and differences in business practices. There can be no assurance that foreign governments will not adopt regulations or take other action that would have a direct or indirect adverse impact on our business or market opportunities within such governments’ countries. Furthermore, there can be no assurance that the political, cultural and economic climate outside the United States will be favorable to our operations and growth strategy.

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 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. We do not currently anticipate any material loss in excess of the amounts accrued. However, our 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. We do not expect the resolution of such uncertainties to have a material adverse effect on our consolidated financial position or liquidity. Recoveries of environmental costs from other parties are recognized as assets when their receipt is deemed probable. At July 3, 2010, environmental reserves, which are predominately euro-denominated, were $16.4 million.

On March 9, 2010, we sold 100% of the stock of our Italian subsidiary, Daramic S.r.l. 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 associated with the Potenza site. The buyer has fully indemnified us with regard to environmental, health and safety matters related to this site.

In connection with the acquisition of Membrana in 2002, we 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 us 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. At July 3, 2010, the environmental reserve for the Membrana facility was $16.0 million. We anticipate that expenditures will be made over the next seven to ten years.

We have 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. We will receive indemnification payments under the indemnification agreements as expenditures are made against approved claims. At July 3, 2010, amounts receivable under the indemnification agreements were $13.9 million.

In connection with the 2008 acquisition of Microporous, we 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 our behalf. Subsequent to the acquisition, we performed additional environmental studies and confirmed that environmental

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contamination was present. The environmental reserve, net of related receivables from the insurance company, was $0.2 million at July 3, 2010. We recorded the estimated cost of remediation and the related receivables from the insurance company in the allocation of purchase price at the date of acquisition.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest rate risk

At July 3, 2010, we had fixed rate debt of $413.1 million and variable rate debt of $348.6 million. 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. At July 3, 2010, there were no outstanding interest rate swap agreements. The pre-tax earnings and cash flow impact resulting from a 100 basis point increase in interest rates on our variable rate debt, holding other variables constant, would be $3.5 million per year.

Currency risk

Outside of the United States, we maintain assets and operations in Europe and Asia. The results of operations and financial position of our foreign operations are principally measured in their respective currency and translated into U.S. dollars. As a result, exposure to foreign currency gains and losses exists. The reported income of these subsidiaries will be higher or lower depending on a weakening or strengthening of the U.S. dollar against the respective foreign currency. Our subsidiaries and affiliates also purchase and sell products and services in various currencies. As a result, we may be exposed to cost increases relative to the local currencies in the markets in which we sell. Because a different percentage of our sales are in a foreign currency than our costs, a change in the relative value of the U.S. dollar could have a disproportionate impact on our sales compared to our costs, which could impact our margins. A portion of our assets are based in our foreign locations and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period, with the effect of such translation reflected in accumulated other comprehensive income (loss). We have euro-denominated senior subordinated notes held in the U.S. that effectively hedge our net investment in foreign subsidiaries. Foreign currency gains and losses resulting from the translation of the euro-denominated senior subordinated notes are included in accumulated other comprehensive income (loss). Accordingly, our consolidated shareholders’ equity will fluctuate depending upon the weakening or strengthening of the U.S. dollar against the respective foreign currency, primarily the euro.

The dollar/euro exchange rates used in our financial statements for the periods ended as set forth below were as follows:

	July 3, 2010	July 4, 2009
Period end rate	1.2538	1.3988
Period average rate for the three months ended	1.2764	1.3622
Period average rate for the six months ended	1.3310	1.3341

Our strategy for management of currency risk relies primarily on conducting our operations in a country’s respective currency and may, from time to time, involve currency derivatives. As of July 3, 2010, we did not have any foreign currency derivatives outstanding.

Item 4. Controls and Procedures

An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) was performed under the supervision, and with the participation of, our management, including our Chief Executive Officer and Chief Financial Officer. Our disclosure controls are designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 3, 2010 to ensure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and

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Exchange Commission’s rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the three months ended July 3, 2010, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On March 20, 2008, we received a letter from the United States Federal Trade Commission (the “FTC” or the “Commission”) requesting that we voluntarily provide certain documents and information to the FTC regarding our acquisition of Microporous Holding Corporation, the parent company of Microporous Products L.P. (“Microporous”), which was completed on February 29, 2008. The letter stated that the FTC was conducting an investigation to determine whether the Microporous acquisition will substantially lessen competition in any relevant market and thereby violate federal antitrust laws. We voluntarily responded to the letter in writing and through supplemental telephone conversations and meetings.

On April 7, 2008, we and our wholly-owned subsidiary, Daramic LLC, each received from the FTC a subpoena and interrogatories requesting substantially similar documents and information as requested in the FTC’s initial letter, as well as additional documents and information. We responded fully to this request and met on several occasions with various members of the FTC staff and Commissioners in an effort to answer their questions and resolve the investigation.

On September 9, 2008, the FTC issued an administrative complaint against us alleging that our actions and the acquisition of Microporous have substantially lessened competition in North American markets for lead-acid battery separators. We filed an answer to the complaint on October 15, 2008 denying the material allegations of the complaint. The matter was presented before an Administrative Law Judge (“ALJ”) of the FTC and the hearing concluded on June 12, 2009. In October 2009, the ALJ granted our request to re-open the record to take additional evidence. On February 22, 2010, the FTC’s ALJ issued an initial decision in which he recommended to the Commission that it order us to divest substantially all of the acquired Microporous assets, which includes the manufacturing facilities located in Piney Flats, Tennessee and Feistritz, Austria and restore the competitive environment to that which existed prior to the acquisition, while ruling in our favor on other portions of the complaint. On March 15, 2010, we filed a Notice of Appeal with the Commission. Oral argument for the Appeal was heard by the Commission on July 28, 2010.

We believe that the initial decision is inconsistent with the law and the facts presented at the hearing and that the Microporous acquisition is and will continue to be beneficial to our customers and the industry. Therefore, we intend to continue to vigorously defend our position and to pursue an appeal of the decision. It is not possible, however, to predict with certainty whether we will be successful in the appellate process. If the FTC and the courts affirm the ALJ’s initial decision, then we may be required to divest some or all of the assets acquired in the Microporous acquisition and we may be subject to some prospective restrictions on our future conduct. We believe that a final judicial resolution to the challenge by the FTC to the Microporous acquisition could take several years.

We believe that the final resolution of this matter will not have a material adverse impact on our business, financial condition or results of operations.

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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	27
Item 4.	Controls and Procedures	27

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	28
Item 6.	Exhibits	29

SIGNATURES

Exhibit No.		Exhibit Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Date: August 6, 2010		POLYPORE INTERNATIONAL, INC.
		(Registrant)


	By:	/s/ Robert B. Toth
		Robert B. Toth
		President and Chief Executive Officer
		(principal executive officer)


	By:	/s/ Lynn Amos
		Lynn Amos
		Chief Financial Officer
		(principal financial officer and principal accounting officer)