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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

(Mark One)    

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 3, 2015

Or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                  to                                   

Commission File Number 1-32266

Polypore International, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  43-2049334
(IRS Employer
Identification No.)

11430 North Community House Road, Suite 350
Charlotte, North Carolina

(Address of Principal Executive Offices)

 

28277
(Zip Code)

(704) 587-8409

Registrant's Telephone Number, Including Area Code

         Securities registered pursuant to Section 12(b) of the Act:

Title of each class:   Name of each exchange on which registered:
Common stock, par value $0.01 per share   New York Stock Exchange

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes    o No

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes    ý No

         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. ý 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). ý Yes    o No

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý

         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 ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

         The aggregate market value of the voting common stock of the registrant held by non-affiliates at June 27, 2014 was $1,347,633,000, as computed by reference to the closing price of such stock on such date. For purposes of this calculation, executive officers, directors and 10% shareholders are deemed to be affiliates of the registrant.

         There were 44,859,492 shares of the registrant's common stock outstanding as of February 20, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's definitive proxy statement for the 2015 Annual Meeting of Stockholders, which is expected to be filed within 120 days of January 3, 2015, are incorporated by reference into Part III.

   


Table of Contents


Polypore International, Inc.
Index to Annual Report on Form 10-K
For the Fiscal Year Ended January 3, 2015

 
   
  Page  
 

Part I

 

 

       
 

Item 1.

 

Business

    3  
 

Item 1A.

 

Risk Factors

    15  
 

Item 1B.

 

Unresolved Staff Comments

    22  
 

Item 2.

 

Properties

    23  
 

Item 3.

 

Legal Proceedings

    23  
 

Item 4.

 

Mine Safety Disclosures

    23  
 

Part II

 

 

       
 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    24  
 

Item 6.

 

Selected Financial Data

    25  
 

Item 7.

 

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

    27  
 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    42  
 

Item 8.

 

Financial Statements and Supplementary Data

    43  
 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    76  
 

Item 9A.

 

Controls and Procedures

    76  
 

Part III

 

 

       
 

Item 10.

 

Directors, Executive Officers and Corporate Governance

    77  
 

Item 11.

 

Executive Compensation

    77  
 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    77  
 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

    78  
 

Item 14.

 

Principal Accountant Fees and Services

    78  
 

Part IV

 

 

       
 

Item 15.

 

Exhibits and Financial Statement Schedules

    78  
 

Signatures

    82  

        In this Annual Report on Form 10-K, the words "Polypore International," "Company," "we," "us" and "our" refer to Polypore International, Inc. together with its subsidiaries, unless the context indicates otherwise. References to "fiscal year" mean the 52- or 53- week period ending on the Saturday that is closest to December 31. The fiscal year ended January 3, 2015, or "fiscal 2014," included 53 weeks. The fiscal years ended December 28, 2013, or "fiscal 2013," and December 29, 2012, or "fiscal 2012," included 52 weeks.

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Forward-looking Statements

        This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), 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 Annual Report on Form 10-K 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. 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 entitled "Business," "Properties," "Controls and Procedures," "Management's Discussion and Analysis of Financial Condition and Results of Operations" or "Risk Factors," the Company's financial statements or the notes thereto or elsewhere in this Annual Report on Form 10-K.

        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 Annual Report on Form 10-K, including the risks outlined under the caption below entitled "Risk Factors," 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 ability to consummate the proposed transactions with 3M Company ("3M") and Asahi Kasei Corporation ("Asahi Kasei");

    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 processes;

    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 contained in our senior secured credit agreement;

    employee slowdowns, strikes or similar actions;

    product liability claims exposure;

    risks in connection with our operations outside the United States, including compliance with applicable anti-corruption laws;

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

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    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;

    lithium market demand not materializing as anticipated;

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

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

    cyber risk and failure to maintain the integrity of our information technology networks and systems.

        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 Annual Report on Form 10-K. We do not undertake any obligation to update these forward-looking statements or the factors set forth in the caption below entitled "Risk Factors" to reflect new information, future events or otherwise, except as may be required under federal securities laws.

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Item 1.    Business

General

Overview

        Polypore International, Inc., a Delaware corporation, is a leading global high-technology filtration company that develops, manufactures and markets specialized microporous membranes used in separation and filtration processes. The microporous membranes we produce are highly-engineered polymeric structures that contain millions of pores per square inch, enabling the management of ions, gases and particles that range in size from the cellular to the nano or molecular level.

        Our products and technologies are used in two primary businesses: energy storage and separations media. The energy storage business produces and markets membranes that provide the critical function of separating the cathode and anode in a variety of battery markets and is comprised of two reportable segments. The electronics and EDVs segment produces and markets membranes for lithium batteries that are used in portable electronic devices, cordless power tools, electric drive vehicles ("EDVs") and emerging applications such as energy storage systems ("ESS"). The transportation and industrial segment produces and markets membranes for lead-acid batteries that are used in automobiles, other motor vehicles, forklifts and uninterruptible power supply systems. The separations media business, which is a reportable segment, produces and markets membranes and membrane modules used in hemodialysis, blood oxygenation, plasmapheresis, other medical applications and various high-performance microfiltration, ultrafiltration and gasification/degasification applications.

        Information concerning segments and geographic information appears under Note 18, "Segment Information" in the notes to consolidated financial statements for the year ended January 3, 2015 included in Item 8 of this Report.

        On February 23, 2015, we entered into integrated transactions with 3M Company ("3M"), Asahi Kasei Corporation ("Asahi Kasei") and EMS Holdings Corporation ("EMS"), an affiliate of Asahi Kasei, pursuant to which we will sell our separations media business to 3M and, immediately thereafter, will be merged with EMS. In connection with the integrated transactions, at the time of the merger, each share of our common stock (other than any (a) dissenting shares, (b) shares owned by Asahi Kasei and EMS, the Company or any of their respective subsidiaries (which will be cancelled)) issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive $60.50 in cash without interest (the "Merger Consideration"), payable to the holder of such share. Each option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the merger will immediately accelerate and vest and be cancelled and converted into the right to receive a payment in cash of an amount, subject to the amount of any required tax withholding, equal to the product of the total number of shares of our common stock subject to such cancelled option and the excess, if any, of the Merger Consideration over the applicable exercise price of the option; provided that any such option with respect to which the exercise price per share subject to the option is equal to or greater than the Merger Consideration shall be cancelled in exchange for no consideration. Each restricted share of our common stock that is outstanding immediately prior to the effective time of the merger will immediately accelerate and vest and be cancelled and converted into the right to receive a payment in cash of an amount, subject to the amount of any tax withholding, equal to the Merger Consideration, without interest, treating such restricted share in the same manner as the other shares of our common stock.

        The integrated transactions are subject to customary closing conditions, including regulatory and stockholder approval. Furthermore, we have the right to terminate the integrated transactions if we enter into a definitive agreement for an alternative transaction that constitutes a "Superior Proposal" (as defined in the applicable agreements), provided we comply with certain notice and other requirements, including paying Asahi Kasei and 3M a termination fee equal to $39.0 million and

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$16.8 million, respectively. Certain other actions by us causing termination of the integrated transactions could result in our being required to pay the foregoing termination fees to Asahi Kasei and 3M. There are no assurances that the proposed integrated transactions will be consummated on any given timetable, or at all.

Discontinued operations

        On December 19, 2013, we completed the sale of the Microporous business, which consisted of the production facilities in Piney Flats, Tennessee, and Feistritz, Austria. Microporous was previously included in the transportation and industrial segment. The results of operations from this business are classified as discontinued operations and are excluded from continuing operations and segment results for all periods presented. All disclosures and amounts in this Annual Report on Form 10-K relate to our continuing operations, unless otherwise indicated.

Competitive strengths

Serve end markets that have attractive long-term growth characteristics

        We produce a variety of separation and filtration products for end markets with attractive growth characteristics, which in many cases are supported by a growing, recurring revenue base.

    The total lithium battery market is expected to grow at a compound annual growth rate of 16% through 2020 on an energy capacity basis, driven by the application of lithium battery technology in new markets such as EDVs and ESS. We believe that growth in lithium battery separator demand will exceed battery growth due to increasing demand for large-format lithium batteries used in EDVs and other new applications and increasing power cell requirements in end-user devices such as power tools and hybrid vehicles.

    In the motor vehicle battery market, the high proportion of aftermarket 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. Lead-acid battery separator growth is strongest in the Asia Pacific region due, we believe, to increasing per capita penetration of automobiles, growth in the industrial and manufacturing sectors and a high rate of conversion to polyethylene-based membrane separators.

    The hemodialysis membrane market, which we believe will increase in excess of 6% annually, provides a growing, recurring revenue base for our synthetic dialysis membranes.

    The micro- and ultrafiltration membrane element market is expected to grow in excess of 8% annually, driven by several factors including the superior performance of membrane filtration and the increasing need for purity in end markets such as water treatment, food and beverage processing and pharmaceutical, semiconductor and flat panel display manufacturing as populations increase and water sources become more scarce.

Leading market positions

        We believe that we are well-positioned in each of the markets in which we compete. For example, in terms of market share (based on revenue and volume):

    We believe, based on independent industry research, that we are among the top three lithium battery separator providers, serving the entire breadth of lithium battery applications.

    We believe, based on internal company estimates, that we are the global market leader in the lead-acid battery separator market.

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    We believe, based on internal company estimates, that we are the world's leading supplier of membranes used in blood oxygenation and that we are uniquely positioned as the leading independent supplier of synthetic membranes used in hemodialysis (i.e., not a supplier of dialyzers).

    We believe, based on internal company estimates, that in the industrial and specialty filtration market, we are the world leader in membrane gasification and degasification for liquids with our Liqui-Cel® Membrane Contactors. We also believe, based on internal company estimates, that we are the world's leading independent supplier of polyethersulfone flat sheet membranes.

        We believe, based on the information above and other company estimates, that we are among the top three in terms of market share (based on revenue and volume) in products comprising a total of approximately 80% of our fiscal 2014 net sales. These products include lithium battery separators, lead-acid battery separators, blood oxygenation membranes and membrane contactors for gasification/degasification of liquids.

Proven innovation through broad product and process technology

        We have established our leading market positions through our ability to utilize core technical expertise and broad product and process capabilities to develop customized solutions that meet demanding requirements in specific applications. Over time, we have demonstrated a commitment to innovation, developing technical expertise and a high level of customer service. As of January 3, 2015, our research and development effort was supported by approximately 100 engineers, scientists, PhDs and other personnel, who work directly with our manufacturing and marketing groups to commercialize innovative products that address market needs. We also maintain technical centers strategically located in Asia, Europe and North America.

        We have leveraged our established filtration and separation technology and membrane expertise to supply a broad portfolio of membranes based on flat sheet, hollow fiber and tubular technology. We are able to draw upon our experiences across multiple end markets and various membrane technologies to create innovative solutions in new niche applications in addition to our existing markets. For example, our Liqui-Cel® Membrane Contactor product line, which combines our gasification/degasification membrane technology with patented module design features, provides superior performance to conventional gasification/degasification methods in multiple sectors such as semiconductor and flat panel display manufacturing, pharmaceutical processing and power and boiler feedwater applications. We believe that our capabilities in product innovation, which combine multiple technologies, a global technical infrastructure and extensive experience in microporous membrane development and manufacturing, are difficult to replicate.

Strong customer relationships with leading manufacturers

        We have cultivated strong, collaborative relationships with a diverse base of customers worldwide who are among the leaders in their respective industries. Our research and development, technical service and application development teams are closely involved with our customers. We often enter into joint agreements in which we partner with our customers on product development and end-use testing. As a result, many of our products have been customized to our customers' manufacturing processes and end-use specifications. In addition, we are often selected as a customer's exclusive supplier for our microporous membrane products.

Global presence

        As of January 3, 2015, we manufacture, market and service our products through 15 manufacturing sites and 14 sales and service locations throughout the Americas, Europe and Asia. In the energy storage business, we remain focused on growth in the Asia Pacific region and on driving worldwide

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improvements in production efficiency. By strategically positioning our manufacturing, sales and marketing, and technical service personnel near our customers, we can respond to their needs more effectively, provide a higher level of service, reduce shipping costs and improve delivery and response times. In addition, our global presence enables us to participate in faster growth markets in developing regions of the world.

State-of-the-art manufacturing facilities

        We believe we have state-of-the-art manufacturing facilities and capabilities. Our equipment, manufacturing techniques and process technologies have been developed over many years with significant intellectual property, know-how and capital investments. Our wide range of manufacturing processes enables us to produce specialized products that are difficult and costly to replicate in the market. We continually evaluate projects that will improve or enhance our global manufacturing capabilities.

Strong and experienced management team

        Our senior management team has significant experience leading high-technology companies, driving growth through development of new applications and technologies and cultivating strong relationships with existing customers. Management has also demonstrated a track record of successfully leading companies larger in size and scope than ours. The team has an average of more than 20 years of management experience.

Business strategy

        We intend to:

    grow with our current customer and application base by capitalizing on our core capabilities in microporous membranes and modules;

    leverage existing and developing product and process technologies to pursue new, high value-added markets and applications; and

    maximize access to key customers and end markets through strategic relationships and acquisitions.

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Products and markets

        Our two businesses, energy storage and separations media, are organized into three reportable segments. The following table describes our key products and end markets served:

Segment
  Applications   Major brands   End markets

Energy storage—transportation and industrial

  Lead-acid batteries   Daramic®
Duralife®
DARAK®
  Transportation and industrial batteries

Energy storage—electronics and EDVs

 

Rechargeable and disposable lithium batteries

 

CELGARD®

 

Consumer electronics devices (such as mobile phones, audio/video players, notebook computers, tablets and cameras), cordless power tools, large-format applications such as EDVs (bikes, scooters, cars, trucks, buses and industrial utility vehicles) and emerging applications such as energy storage systems

Separations media

 

Hemodialysis

 

PUREMA®
DIAPES®
SYNPHAN®

 

Hemodialysis dialyzers which replicate function of healthy kidneys to treat end-stage renal disease patients

 

Blood oxygenation

 

CELGARD®
HEXPET®
OXYPHAN®
OXYPLUS®

 

Heart-lung machine oxygenation unit for open-heart surgical procedures and intensive care artificial lung applications

 

Plasmapheresis

 

MicroPES®
PLASMAPHAN®

 

Blood cell and plasma separation equipment

 

Industrial and specialty filtration applications

 

Liqui-Cel®

 

Liquid gasification/degasification for beverage, pharmaceutical, semiconductor and flat panel display manufacturing, and power and boiler feedwater applications

     

MicroPES®
DuraPES®

 

Specialty filtration applications including ultrapure water, cold sterile filtration of beverages, ultrapure chemicals for the electronics industry and pharmaceutical processing

     

SuperPhobic®

 

Solvent/ink deaeration for ink jet printers, paper coating processes and semiconductor manufacturing

     

MicroModule® MiniModule®

 

Liquid degasification in laboratory, biotechnology and analytical testing equipment and ink degasification for ink jet printers

     

Accurel®

 

Specialty filtration applications including ultrapure chemicals for the electronics industry, vent and process air cleaning, industrial wastewater treatment and pharmaceutical processing

     

Liqui-Flux®

 

Drinking water and beverage filtration, process water treatment and pre-filtration for reverse osmosis

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Energy storage

        In the energy storage business, our membrane separators are a critical performance component in lithium and lead-acid batteries, performing the core function of regulating ion exchange and thus allowing the charge and discharge process to occur between a battery's positive and negative electrodes. These membrane separators require specialized technical engineering and must be manufactured to extremely demanding requirements and specifications including thickness, porosity, mechanical strength and chemical and electrical resistance. For example, membrane pores must be large enough to allow ions to pass through, but small enough to prevent contamination from conductive particles that cause short circuits. The energy storage business is comprised of two reportable segments.

Electronics and EDVs

        We develop, manufacture and market a broad line of patented polypropylene and polyethylene monolayer and multilayer membrane separators for lithium batteries that are used in numerous applications such as consumer electronics devices, EDVs, cordless power tools and ESS. Lithium batteries provide critical performance advantages relative to alternative battery technologies, such as faster charging rates, improved battery life and higher power density, which results in more compact, lightweight batteries. These advantages create the potential for expansion by lithium batteries into additional product designs. According to B3 Corporation, a research firm specializing in lithium batteries, the total lithium battery market is expected to grow at a compound annual growth rate of 16% through 2020 on an energy capacity basis, driven by the application of lithium battery technology in new markets such as EDVs and ESS. B3 Corporation forecasts a compound annual growth rate through 2020 on an energy capacity basis of greater than 30% for EDVs and ESS and 6% for consumer electronics applications. Many factors influence membrane separator usage in lithium batteries, but because many new applications are incorporating large-format lithium batteries that require much greater membrane separator volume per battery, we believe that membrane separator growth will exceed battery unit sales growth and, although not perfectly correlated, will more closely approximate the growth rate in energy capacity.

        We believe, based on independent industry research, that we are among the top three lithium battery separator providers, serving the entire breadth of lithium battery applications, and have been among the top three since the market's inception in the early 1990s. Major lithium battery manufacturers include Automotive Energy Supply Corporation (AESC), Amperex Technology Limited, BYD Company Limited, LG Chem Ltd., Nissan Motor Company, Ltd., Panasonic Corporation, Samsung SDI Co., Ltd., Sanyo Electric Company Limited (a Panasonic Corporation member company), Sony Corporation, Tianjin Lishen Battery Joint Stock Co., Ltd. and ZhuHai Coslight Battery Co., Ltd.

Transportation and industrial

        We develop, manufacture and market a complete line of high-performance polymer-based membrane separators for lead-acid batteries. Approximately 75% of our lead-acid battery separators are used in batteries for automobiles and other motor vehicles. The remaining approximately 25% are used in industrial battery applications such as forklifts, submarines and uninterruptible power supply systems. We believe that over 75% of lead-acid battery unit sales for motor vehicles are aftermarket batteries. Aftermarket sales are primarily driven by the size of the worldwide vehicle fleet rather than by new motor vehicle sales. According to independent industry research, the worldwide fleet of motor vehicles has averaged 3% annual growth for over 25 years, providing us with a growing, recurring revenue base. Lead-acid battery separator growth is strongest in the Asia Pacific region due, we believe, to increasing penetration of automobile ownership, growth in industrial and manufacturing sectors, export incentives and ongoing conversion to polyethylene-based membrane separators.

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        We believe we are the global market leader in the lead-acid battery separator market. Major lead-acid battery manufacturers include Camel Group Co., Ltd., East Penn Manufacturing Co., Inc., EnerSys, Exide Technologies, Johnson Controls, Inc. and Trojan Battery Company.

Separations media

        In the separations media business, our filtration membranes and modules are used in healthcare and high-performance filtration and specialty applications. These membranes perform the critical function of removing sub-micron particulates from fluids and introducing or removing gases (gasification/degasification) within liquids. Both healthcare and specialty filtration applications require membranes with precisely controlled pore size, structure, distribution and uniformity. Our supply relationships with customers in healthcare and certain filtration applications such as pharmaceutical manufacturing are reinforced by the rigorous testing, clinical studies and/or regulatory approval that our membranes undergo prior to end-product commercialization. In some cases, several years of development and qualification are required. The separations media business is a reportable segment serving two broad application end markets.

Healthcare

        We develop, manufacture and market a complete portfolio of patented polyethersulfone membranes used in the hemodialysis market. Hemodialysis is the artificial process that performs the function of a healthy kidney for patients with permanent kidney failure, a condition known as end-stage renal disease ("ESRD"). In a healthy person, the kidney carries out certain excretory and endocrine functions, including filtering toxins from the blood and controlling blood pressure. For an ESRD patient on dialysis, the dialyzer membrane performs these critical filtering functions. The membranes are produced as hollow fibers slightly larger than a human hair and wound to bundles of thousands of fibers. These fibers have nanopores in their walls at a density of millions of pores per square inch. The size and distribution of these nanopores are designed to separate harmful toxins from the healthy blood passing through the dialyzer. Growth in demand for dialyzers and dialyzer membranes is driven by several factors, including the aging population in developed countries, longer life expectancy of treated ESRD patients and improving access to treatment in developing countries. According to the European Renal Association—European Dialysis and Transplant Association, the number of worldwide ESRD patients has historically grown by a compound annual growth rate of approximately 6%. We estimate that continued patient population growth combined with conversion to single-use dialyzers and increasing treatment frequency will result in overall annual dialyzer market growth in excess of 6%.

        Our synthetic membrane, PUREMA®, is superior in performance compared to other synthetic membranes on the market. Dialyzers containing PUREMA® have been classified in the highest level (category 5) of Japan's dialyzer reimbursement rate system, reflecting the efficacy of our PUREMA® membrane. We believe the superior performance of our PUREMA® membranes is demonstrated by several long-term supply agreements with customers throughout the world. We are currently marketing PUREMA®'s performance advantages, including co-branding our customers' dialyzers with the PUREMA® logo.

        We believe, based on independent industry research, that we are uniquely positioned as the leading independent supplier of synthetic membranes in the hemodialysis market (i.e., not a supplier of dialyzers). Major dialyzer manufacturers include Asahi Kasei Kuraray Medical Co., Ltd., Bain Medical Equipment Co., Ltd., Baxter International, Inc., Bellco S.r.l., Fresenius Medical Care AG and Nipro Corp.

        We develop, manufacture and market polyolefin membranes used in the blood oxygenation market. As a component of heart-lung machines, blood oxygenators temporarily replace the functions of the lungs during on-pump open-heart surgery. The oxygenator contains highly specialized membranes which

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remove carbon dioxide from the blood while oxygen is diffused into the blood. We estimate that growth in the blood oxygenation market is modest as a result of the use of less-invasive alternative heart treatments. However, we believe that the market could grow as the number of patients receiving on-pump open-heart surgery increases due to the saturation of alternative heart treatments. Because blood oxygenators are designed to utilize a specific membrane technology and require regulatory approval, an oxygenator manufacturer's relationship with its membrane supplier is vital and switching costs can be substantial. We believe, based on independent industry research, that we are the world's leading supplier of membranes used in blood oxygenation. Major blood oxygenator producers include Maquet Cardiopulmonary AG, Medtronic, Inc., Sorin Group S.r.l. and Terumo Medical Corp. Our Oxyplus® membranes, which are made of polymethylpentene, are increasingly used in intensive care applications to serve as an artificial lung for patients with severe lung trauma or lung failure following sepsis, multi-organ failure, or infectious diseases. Major producers of such artificial lungs are Sorin Group S.r.l., Maquet Cardiopulmonary AG, Terumo Medical Corp., Medtronic, Inc. and Medos AG.

        We develop, manufacture and market polypropylene and polyethersulfone membranes for the plasmapheresis market. In plasmapheresis, plasma is separated from the blood and either retained for the production of therapeutic proteins or filtered and returned to the blood as a treatment for various autoimmune disorders. We believe that the plasmapheresis market is growing and that new treatment methodologies based on blood filtration may lead to additional growth. We believe we are a leading supplier of extracorporeal therapeutic plasmapheresis membranes. Major manufacturers of plasmapheresis equipment include Asahi Kasei Kuraray Medical Co., Ltd., Baxter International, Inc., Fresenius Medical Care AG and B. Braun AG.

Industrial and specialty filtration

        We produce a wide range of membranes and membrane-based elements for microfiltration and ultrafiltration as well as gasification/degasification of liquids, covering a broad range of applications in the filtration market. According to independent industry research, the global microfiltration and ultrafiltration membrane element market is growing in excess of 8% annually. Market growth is being driven by several factors, including end-market growth in various water treatment and pharmaceutical processing applications, 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. We currently serve a variety of filtration end markets, including water treatment, food and beverage processing and pharmaceutical, semiconductor and flat panel display manufacturing, and we are working closely with current and potential customers to develop innovative new products based on our technology and capabilities.

        We believe, based on internal company estimates, that we are the world leader in membrane gasification/degasification for liquids and that we are uniquely positioned as the leading independent supplier of polyethersulfone flat sheet membranes.

New product development

        We have focused our research and development efforts on developing products for new markets based on existing technologies and developing new process technologies to enhance existing businesses and allow entry into new businesses. We spent $19.9 million (3% of our net sales), $17.2 million (3% of our net sales) and $18.5 million (3% of our net sales) in fiscal 2014, fiscal 2013 and fiscal 2012, respectively, on research and development.

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        Our transportation and industrial research and development is performed at technical centers at our facilities in Owensboro, Kentucky; Selestat, France; and Bangalore, India. Our electronics and EDVs research and development is performed at technical centers at our facilities in Charlotte, North Carolina; Concord, North Carolina; and Ochang, South Korea. Our separations media research and development is performed at technical centers at our facilities in Wuppertal, Germany, and Charlotte, North Carolina. All of the products that we develop are subject to multiple levels of extensive and rigorous testing. The qualification of membrane separators for use in transportation and industrial applications, for instance, may require one or more years of testing by our staff and battery manufacturers.

Sales and marketing

        We sell our products and services to customers in both the domestic and international marketplace. We sell primarily to manufacturers and converters that incorporate our products into their finished goods. We employ a direct worldwide sales force and utilize approximately 100 professionals with extensive experience who manage major customer relationships. Many of our sales representatives are engineers or similarly trained technical personnel who have advanced knowledge of our products and the applications for which they are used. Our sales representatives are active in new product development efforts and are strategically located in the major geographic regions in which our products are sold. In certain geographic areas, we use distributors or other agents. We typically seek to enter into supply contracts with our major customers. These contracts typically describe the volume and selling price. In addition, these contracts reflect our close collaborative relationships with our customers, which are driven by our customers' need to develop new separators and membranes directly with us. In fiscal 2014, sales to our top five customers represented approximately 27% of our total net sales. No sales to an individual customer accounted for more than 10% of total net sales in fiscal 2014, 2013 or 2012.

Manufacturing and operations

General

        We have manufacturing facilities in the major geographic markets of the United States, Europe and Asia. We manufacture our lithium battery separators at our facilities in Charlotte, North Carolina; Concord, North Carolina; and Ochang, South Korea, and we have a finishing operation in Shanghai, China. We manufacture our lead-acid battery separators at our facilities in Owensboro, Kentucky; Corydon, Indiana; Selestat, France; Norderstedt, Germany; Prachinburi, Thailand; Tianjin, China; and Xiangyang, China (a 65% owned joint venture). We also have finishing operations in Bangalore and Baddi, India. We manufacture our healthcare membranes and industrial and specialty filtration membranes and membrane modules at facilities in Wuppertal and Obernburg, Germany, and Charlotte, North Carolina.

        In fiscal 2014, fiscal 2013 and fiscal 2012, we generated net sales from customers outside the United States of approximately 80%, 81% and 83%, respectively. We typically sell our products in the currency of the country in which the products are manufactured rather than the local currency of our customers.

        Our manufacturing facilities in the United States accounted for 37% of total sales for fiscal 2014, with facilities in Europe and Asia accounting for 40% and 23%, respectively. Our foreign operations are subject to certain risks that could materially affect our sales, profits, cash flows and financial position. These risks include fluctuations in foreign currency exchange rates, inflation, economic or political instability, shipping delays, changes in applicable laws and regulatory policies and various trade restrictions, all of which could have a significant impact on our ability to deliver products on a competitive and timely basis. The future imposition of, or significant increases in the level of, customs

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duties, import quotas or other trade restrictions could also have a material adverse effect on our business, financial condition and results of operations.

Manufacturing processes

        All of our membrane manufacturing processes involve an extrusion process. To produce our flat sheet and hollow fiber membranes, we use one of three basic membrane processes that begin with an extrusion step. These include phase separation (thermally-induced, solvent-induced or reaction-induced), dry stretch and extrusion/extraction processes. Each process, and its resulting product properties, is well-suited to the various membrane requirements for our target markets. To produce Liqui-Cel® Membrane Contactors and Liqui-Flux® membrane modules, hollow fibers are bonded together into a cartridge form by extruding either a polyolefin resin or using an epoxy or polyurethane adhesive before final assembly into a finished module.

        Membrane separators for batteries.    We manufacture our lithium battery separators using two processes, both of which begin with an extrusion step. Membrane porosity is created either during a thermal stretching process or during a solvent-induced process. Some special coated and non-woven laminate products are also manufactured for specialty battery and other applications.

        We manufacture Daramic®, our principal lead-acid battery separator used in industrial and automotive applications, using a composite extrusion/extraction process. The process stages are fully automated, although the process requires some handling as material is transferred from stage to stage. Initially, an ultra-high molecular weight polyethylene is mixed with porous silica and oil, which are heated and extruded into a film. The film is passed through an extraction bath to remove the excess oil from the silica pores to create the proper microporosity and film stiffness prior to drying.

        Hemodialysis, blood oxygenation, plasmapheresis and filtration membranes.    Membranes used in hemodialysis, blood oxygenation, plasmapheresis and filtration are produced using phase separation processes. For these phase separation processes, the polymer spinning solution is prepared by dissolving the polymer in a solvent prior to extrusion. A porous membrane is formed by separating the solvent and polymer phases using temperature (thermally-induced) or a "non-solvent" (solvent-induced), and then the solvent phase is extracted and the porous polymer membrane is dried. For blood oxygenation and certain filtration applications, hollow fiber and flat sheet membranes are also produced using our "dry stretch" process. We utilize the molecular behavior of semi-crystalline polymers (polyolefins) to create microporous structures. By controlling the extrusion process under which the film or fiber is formed, we create a distinct matrix of crystalline and amorphous regions that allows the formation of microvoids in a subsequent stretching step. After extrusion, our products can be stored or immediately processed on thermal stretching lines that create the final porous form.

Competition

        Our markets are highly competitive. Within our energy storage business, we face competition throughout the world. Our primary competitors in the market for membrane separators used in lithium batteries are Asahi Kasei E-materials Corp. (a subsidiary of Asahi Kasei Corporation), Toray Battery Separator Film Co., Ltd. (a subsidiary of Toray Industries, Inc.), Shenzhen Senior Technology Material Co., Ltd., SK Innovation Co., Ltd. (a subsidiary of SK Holdings Co., Ltd.) and Ube Industries Limited, as well as a number of smaller competitors. Our primary competitors in the market for membrane separators used in lead-acid batteries for transportation and industrial applications are Entek International LLC and Microporous, LLC in North America and Europe, Baoding Fengfan Rising Battery Separator Co., Ltd. in China and Nippon Sheet Glass Co., Ltd. in Japan. In addition, we have a number of smaller competitors in South Korea, Indonesia, China and Taiwan.

        Within our separations media business, we compete in the market for membranes used in dialysis with Asahi Kasei Kuraray Medical Co., Ltd., Fresenius Medical Care AG, Baxter International, Inc.

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and Toyobo Co., Ltd. In addition, our primary competitor in the blood oxygenation market is Terumo Medical Corp., and in the plasmapheresis market, our competitors are Asahi Kasei Kuraray Medical Co., Ltd. and Fresenius Medical Care AG. Our industrial and specialty filtration business competes across multiple markets and applications. Principal competitors include Dainippon Ink and Chemicals, Inc., Koch Membrane Systems (a division of Koch Industries), X-Flow B.V. (a subsidiary of Pentair, Ltd.), Millipore (a division of Merck KGaA) and Pall Corporation. Product innovation and performance, quality, service, utility and cost are the primary competitive factors, with technical support being highly valued by our customers. We believe that we are well-positioned in our end markets for the reasons set forth under "Competitive strengths" above.

Raw materials

        We employ a global purchasing strategy to achieve pricing leverage on our purchases of major raw materials. The major polyethylene and polypropylene resins we use are specialized petroleum-based products that are less affected by commodity pricing cycles than other petroleum-based products. In the event of future price increases for these major raw materials, we believe that we will generally be able to pass these increases on to our customers. The primary raw materials we use to manufacture most of our products are polyethylene and polypropylene resins, silica and oil. Our major suppliers of polyethylene resins are Ticona LLC and Korea Petrochemical Ind. Co., Ltd., and our major suppliers of polypropylene resins are Total Petrochemicals & Refining USA, Inc. and NEXEO Solutions. Our major suppliers of silica are PPG Industries, Inc. and Evonik Degussa GmbH, while our major suppliers of oil are Shell Chemical LP and Ergon, Inc.

        We believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on us because other suppliers with whom we conduct business or have conducted business in the past would be able to fulfill our requirements. However, the loss of one of our key suppliers could, in the short term, adversely affect our business until we secure alternative supply arrangements. We have never experienced any significant disruptions in supply as a result of shortages in raw materials.

Employees

        At January 3, 2015, we had approximately 2,400 employees worldwide. Employees at six of our 15 facilities are unionized and account for approximately 34% of our total employees. The following summarizes those employees represented by unions as of January 3, 2015:

Location
  Number of
unionized
employees
  % of total
employees
  Date of contract
renegotiation

Norderstedt, Germany

    48     72   Annual

Obernburg, Germany

    21     81   Annual

Wuppertal, Germany

    422     86   Annual

Selestat, France

    132     64   June 2016

Owensboro, Kentucky

    120     71   April 2017

Corydon, Indiana

    63     79   September 2018

Total

    806          

Environmental matters

        We are subject to a broad range of federal, state, local and foreign environmental laws and regulations which govern, among other things, air emissions, wastewater discharges and the handling, storage, disposal and release of waste and hazardous substances. It is our policy to comply with applicable environmental requirements at all of our facilities. We are also subject to laws, such as the

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Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), that may impose liability retroactively and without fault for releases or threatened releases of hazardous substances at on-site or off-site locations. From time to time, we have identified environmental compliance issues at our facilities.

        We have conducted some cleanup of on-site releases at some facilities, and we may be required to conduct additional cleanups of on-site contamination at other facilities under regulatory supervision or voluntarily. Costs for such work and related measures (such as eliminating sources of contamination) could be substantial. 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 which are required in order for us to remain in compliance with local regulations. We had indemnification agreements with the prior owners of Membrana for a substantial portion of these costs. As of January 3, 2015, the reserve for such costs was $0.9 million. We do not anticipate that the remediation activities will disrupt operations at our facilities or have a material adverse effect on our business, financial condition or results of operations.

Intellectual property rights

        We consider our patents and trademarks, in the aggregate, to be important to our business and seek to protect our trade names, trademarks, brand names, proprietary technology and know-how in part through United States and foreign patents and trademark registrations and applications. However, no individual patent is material to our business, and the expiration or invalidation of any one patent would not have a material impact on our business. We own approximately 175 active unique patents and patent applications relating to our separator, membrane and module technologies. In general, the term of each of our U.S. patents depends on when the patent was filed. If the application for a U.S. utility patent was filed prior to June 8, 1995, the patent will expire either 20 years from the application filing date or 17 years from the patent issuance date, whichever is longer; if the application was filed on or after June 8, 1995, the patent will expire 20 years from the earliest date the application was filed.

        In general, trademarks are valid as long as they are in use and/or their registrations are properly maintained, and trademark registrations can generally be renewed indefinitely so long as the marks are in use. Some of our registered marks include CELGARD®, Liqui-Cel®, Daramic® and PUREMA®.

        In addition, we maintain certain trade secrets for which, in order to maintain the confidentiality of such trade secrets, we have not sought patent protection. Our policies require our employees to assign their intellectual property rights to us and to treat all proprietary technology as our confidential information.

        We have granted security interests or liens on some of our patents to financial institutions, including lenders under our senior secured credit agreement.

        If we fail to adequately protect and enforce our intellectual property rights, competitors may manufacture and market products similar to ours. The loss of protection for or enforcement of our intellectual property rights could reduce the market value of our products, reduce product sales, lower our profits or impair our financial condition. See "Risk Factors." If we are unable to adequately protect, police or enforce our intellectual property, we could lose a significant competitive advantage.

Available Information

        We are subject to the information reporting requirements of the Exchange Act, and, in accordance with these requirements, we file annual, quarterly and other reports, proxy statements and other information with the Securities and Exchange Commission ("SEC") relating to our business, financial results and other matters. The reports, proxy statements and other information we file may be

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inspected and copied at prescribed rates at the SEC's Public Reference Room and via the SEC's website (see below for more information).

        You may inspect a copy of the reports, proxy statements and other information we file with the SEC, without charge, at the SEC's Public Reference Room, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and you may obtain copies of the reports, proxy statements and other information we file with the SEC from those offices for a fee. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are available to the public at the SEC's website at www.sec.gov.

        Our website address is www.polypore.net. We use the Investor Relations section of our website as a channel for routine distribution of important information, including news releases, analyst presentations and financial information. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, on our website as soon as reasonably practicable after we electronically file or furnish them to the SEC. The contents of our website are not part of this Annual Report on Form 10-K, and the reference to our website does not constitute incorporation by reference into this Form 10-K of the information contained at that site.

Item 1A.    Risk Factors

        Our business faces many risks. As such, prospective investors and shareholders should carefully consider and evaluate all of the risk factors described below. These risk factors may change from time to time and may be amended, supplemented, or superseded by updates to the risk factors contained in periodic reports on Form 10-Q and Form 10-K that we file with the SEC in the future.

Our proposed transactions with 3M and Asahi Kasei may cause disruption in our business and, if the proposed transactions do not occur, we will have incurred significant expenses, may need to pay a termination fee and our stock price may decline.

        On February 23, 2015, we entered into integrated transactions with 3M, Asahi Kasei and EMS, pursuant to which we will sell our separations media business to 3M and, immediately thereafter, will be merged with EMS. In connection with the integrated transactions, at the time of the merger, each share of our common stock (other than any (a) dissenting shares, (b) shares owned by Asahi Kasei and EMS, the Company or any of their respective subsidiaries (which will be cancelled)) issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive $60.50 in cash without interest, payable to the holder of such share. Each option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the merger will immediately accelerate and vest and be cancelled and converted into the right to receive a payment in cash of an amount, subject to the amount of any required tax withholding, equal to the product of the total number of shares of our common stock subject to such cancelled option and the excess, if any, of the Merger Consideration over the applicable exercise price of the option; provided that any such option with respect to which the exercise price per share subject to the option is equal to or greater than the Merger Consideration shall be cancelled in exchange for no consideration. Each restricted share of our common stock that is outstanding immediately prior to the effective time of the merger will immediately accelerate and vest and be cancelled and converted into the right to receive a payment in cash of an amount, subject to the amount of any tax withholding, equal to the Merger Consideration, without interest, treating such restricted share in the same manner as the other shares of our common stock.

        The integrated transactions are subject to customary closing conditions, including regulatory and stockholder approval. Furthermore, we have the right to terminate the integrated transactions if we enter into a definitive agreement for an alternative transaction that constitutes a Superior Proposal,

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provided we comply with certain notice and other requirements, including paying Asahi Kasei and 3M a termination fee equal to $39.0 million and $16.8 million, respectively. Certain other actions by us causing termination of the integrated transactions could result in our being required to pay the foregoing termination fees to Asahi Kasei and 3M.

        The announcement of the proposed integrated transactions, whether or not consummated, may result in a loss of key personnel and may disrupt our sales, strategic growth initiatives, research and development or other key business activities, which may have an impact on our financial performance. The agreements governing the integrated transactions generally require us to operate our business in the ordinary course pending consummation of the proposed transactions, but include certain contractual restrictions on the conduct of our business that may affect our ability to execute on our business strategies and attain our financial goals. Additionally, the announcement of the integrated transactions, whether or not consummated, may impact our relationships with third parties, including suppliers, customers and others.

        The consummation of the integrated transactions is subject to certain conditions, including, among others: (1) adoption of the merger agreement by the stockholders of the Company, (2) expiration or termination of any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other consents and approvals required under applicable antitrust laws, (3) the absence of any law or order prohibiting the consummation of the integrated transactions, (4) the absence of certain governmental actions, (5) the absence of a material adverse effect on either the separations media business or the remaining business of the Company, (6) subject to certain exceptions, the accuracy of representations and warranties of the Company, Asahi Kasei, EMS and 3M and (7) the performance or compliance by the Company, Asahi Kasei, EMS and 3M with their respective covenants and agreements.

        We cannot predict whether the closing conditions for the integrated transactions will be satisfied. As a result, we cannot assure that the integrated transactions will be completed. If the closing conditions for the integrated transactions are not satisfied or waived, or if the transactions are not completed for any other reason, the market price of our common stock may decline. In addition, if the integrated transactions do not occur, we will nonetheless remain liable for significant expenses that we have incurred related to the transactions.

Because the specialized markets in which we sell our products are highly competitive, we may have difficulty growing our business.

        The markets in which we sell our products are highly competitive. Many of these markets require highly specialized products that are time and cost intensive to design and develop. In addition, innovative products, quality, service, utility, cost and technical support are the primary competitive factors in the separation and filtration membrane industry. Some of our competitors are much larger companies that have greater financial, technological, manufacturing and marketing resources than we do. Many of these competitors are also better established as suppliers to the markets that we serve. As a result, a reduction in overall demand or increased costs to design and produce our products within these markets could cause us to reduce our prices, which could lower our profit margins and impair our ability to grow our business.

We must continue to invest significant resources in developing innovative products in order to maintain a competitive edge in the highly specialized markets in which we operate.

        Our continued success depends, in part, upon our ability to maintain our technological capabilities and to continue to identify, develop and commercialize innovative products for the separation and filtration membrane industry. For example, products for some consumer electronics applications have a short lifecycle and require constant development. If we fail to continue to develop products for those

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markets or keep pace with technological developments by our competitors generally, we may lose market share which could result in reduced sales and impair our financial condition.

The loss of large volume customers could impact our sales and our profits.

        Our products are often sold to a relatively small number of large volume customers. For example, in fiscal 2014, sales to our top five customers represented approximately 27% of our total net sales. The loss of any large volume customer could impact our sales and our profits.

Vertical integration by our customers of the production of our products into their own manufacturing processes could reduce our sales and our profits.

        Our future sales and profits will depend to a significant extent upon whether our customers choose in the future to manufacture the separation and filtration membranes used in their products instead of purchasing these components from us. If any of our existing customers choose to vertically integrate the production of our products in such a manner, the loss of sales to these customers could reduce our sales and our profits.

Increases in prices for raw materials or the loss of key supplier contracts could reduce our profit margins.

        The primary raw materials we use in the manufacture of most of our products are polyethylene and polypropylene resins, silica and oil. In fiscal 2014, raw materials accounted for approximately 34% of our cost of sales. Although our major customer contracts generally allow us to pass increased costs on to our customers, we may not be able to pass on all raw material price increases to our customers in each case or without delay. The loss of any of our key suppliers could disrupt our business until we secure alternative supply arrangements. Furthermore, any new supply agreement we enter into may not have terms as favorable as those contained in our current supply arrangements.

Our substantial indebtedness could harm our ability to react to changes in our business or to market developments and prevent us from fulfilling our obligations under our indebtedness.

        As of January 3, 2015, our consolidated indebtedness was $487.5 million. Our cash interest requirements for the next twelve months are estimated to be $12.9 million. Our substantial level of indebtedness, as well as any additional borrowings we may make under the unused portions of our senior secured credit agreement, increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial debt could increase our vulnerability to general economic downturns and adverse competitive and industry conditions by limiting our flexibility to plan for, or to react to, changes in our business and in the industry in which we operate. This limitation could place us at a competitive disadvantage compared to competitors that have less debt and more cash to insulate their operations from market downturns and to finance new business opportunities.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

        At January 3, 2015, we had variable rate debt of $487.5 million. An interest rate increase would result in an increase in interest expense. Our earnings may not be sufficient to allow us to meet any such increases in interest rate expense and to pay principal and interest on our debt and meet our other obligations. If we do not have sufficient earnings, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell more securities, none of which we can guarantee we will be able to do on terms favorable to the Company or at all. We may, from time to time, enter into certain derivative instruments (or hedging agreements), in order to reduce our exposure to cash flow variability that may arise from interest rate volatility. No hedging activity can

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completely insulate us from the risks associated with changes in interest rates, and hedging agreements could also fix our interest rates above the market rates. As of January 3, 2015, we had an interest rate swap agreement to economically convert a portion of our LIBOR-based, variable rate debt into fixed rate debt. See Note 8, "Derivative Instruments and Hedging Activities," in the accompanying consolidated financial statements.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

        Our ability to make payments on and to refinance our indebtedness and to fund our operations will depend on our ability to generate cash in the future. However, our business may not generate sufficient cash flow from operations for a variety of reasons, including those mentioned elsewhere in this "Risk Factors" section. Without sufficient cash flow, future borrowings may not be available to us under our senior secured credit agreement in amounts sufficient to enable us to service our indebtedness or to fund our other liquidity or capital needs. If we cannot generate sufficient cash to service our debt, we will have to take such actions as reducing or delaying capital investments, selling assets, restructuring or refinancing our debt or seeking additional equity capital. Any of these actions may not be effected on commercially reasonable terms, or at all. In addition, our senior secured credit agreement may restrict us from adopting any of these alternatives.

The terms of our senior secured credit agreement may restrict our current and future operations, particularly our ability to respond to market changes or to take certain actions.

        Our senior secured credit agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests. For example, our senior secured credit agreement includes covenants restricting, among other things, our ability to incur, assume or permit to exist additional indebtedness or guarantees, engage in mergers, acquisitions and other business combinations, or amend or otherwise alter terms of our indebtedness and other material agreements. Our senior secured credit agreement also includes financial covenants requiring that we maintain a maximum leverage ratio and a minimum interest coverage ratio.

        A breach of any of these covenants or the inability to comply with financial covenants could result in a default under our senior secured credit agreement. If any such default occurs, the lenders may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under our credit agreement also have the right in these circumstances to terminate any commitments they have to provide further borrowings and to proceed against all collateral granted to them to secure the debt. If collateral (such as available cash) is repossessed by the lenders, we will be unable to access the capital and other resources necessary to operate our business, and we could incur immediate and significant losses.

Some of our employees are represented under collective bargaining agreements. Any employee slowdowns, strikes or failure to renew our collective bargaining agreements could disrupt our business.

        Approximately 34% of our employees are represented under collective bargaining agreements. A majority of those employees are located in France and Germany and are represented under industry-wide agreements that are subject to national and local government regulations. Many of these collective bargaining agreements must be renewed annually. Labor unions also represent our employees in Owensboro, Kentucky, and Corydon, Indiana.

        Labor organizing activities could result in additional employees becoming unionized. We may not be able to maintain constructive relationships with these labor unions or successfully negotiate new collective bargaining agreements in the future. The loss of a substantial number of these employees or

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a prolonged labor dispute could disrupt our business. Any such disruption could in turn reduce our sales, increase our costs to bring products to market and result in significant losses.

We generate most of our sales from manufacturing products that are used in a wide variety of industries and the potential for product liability exposure for our products could be significant.

        We manufacture a wide variety of products that are used in healthcare and consumer applications. Several of these products are used in medical devices that some consumers require in order to sustain their lives. As a result, we may face exposure to product liability claims in the event that the failure of our products results, or is alleged to result, in bodily injury and/or death. In addition, if any of our products are, or are alleged to be, defective, we may be required to make warranty payments or to participate in a recall involving those products. Consequently, end users of our products may look to us for contribution when faced with product recalls, product liability or warranty claims. The future costs associated with defending product liability claims or providing product warranties could be material and we may experience material losses in the future as a result. A successful product liability claim brought against us in excess of available insurance coverage or a requirement to participate in any product recall could substantially reduce our available cash from operations. Reduced cash could in turn reduce our profits or impair our financial condition.

Our operations outside the United States pose risks to our business that are not present with our domestic business, including compliance with applicable anti-corruption laws.

        Our manufacturing facilities in the United States accounted for 37% of total net sales for fiscal 2014, with facilities in Europe and Asia accounting for 40% and 23%, respectively. Typically, we sell our products in the currency of the country where the manufacturing facility that produced the products is located. In addition, as part of our growth and acquisition strategy, we may expand our operations in these or other foreign countries. Our foreign operations are, and any future foreign operations will be, subject to certain risks that are unique to doing business in foreign countries. These risks include fluctuations in foreign currency exchange rates, inflation, economic or political instability, shipping delays, changes in applicable laws and regulatory policies and inconsistent enforcement of such laws and policies and various trade restrictions. All of these risks could have a negative impact on our ability to deliver products to customers on a competitive and timely basis. This could reduce or impair our sales, profits, cash flows and financial position. The future imposition of, or significant increases in the level of, customs duties, import quotas or other trade restrictions could also increase our costs and reduce our profits.

        Countries around the world are increasingly enacting anti-corruption laws, many of which are patterned after the United States' Foreign Corrupt Practices Act ("FCPA"). The FCPA generally prohibits companies and their intermediaries from giving, or offering to give, anything of value to foreign officials with the intent of obtaining an improper business advantage. The FCPA's foreign counterparts contain similar prohibitions, although varying in both scope and jurisdiction. Our internal policies prohibit corruption in all forms and expressly mandate compliance with the FCPA in particular. Despite such policies and the FCPA training we provide to our employees, we cannot guarantee that our employees', agents' or other intermediaries' conduct will not periodically violate the anti-corruption laws of a particular nation. Our continued overseas expansion, especially in the aforementioned emerging markets, naturally increases the risk of such violations and consequently could cause a material adverse effect on our operations or financial condition.

We could incur substantial costs to comply with environmental laws, and violations of such laws may increase our costs or require us to change certain business practices.

        We use and generate a variety of chemicals and other hazardous by-products in our manufacturing operations. As a result, we are subject to a broad range of federal, state, local and foreign

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environmental laws and regulations. These environmental laws govern, among other things, air emissions, wastewater discharges and the handling, storage and release of waste and hazardous substances. Such laws and regulations can be complex and change often. We regularly incur costs to comply with environmental requirements, and such costs could increase significantly with changes in legal requirements or their interpretation or enforcement. Some of our manufacturing facilities have been the subject of actions to enforce environmental requirements. We could incur substantial costs, including clean-up costs, fines and sanctions and third-party property damage or personal injury claims, as a result of violations of environmental laws. Failure to comply with environmental requirements could also result in enforcement actions that materially limit or otherwise affect the operations of the facilities involved.

        Under certain environmental laws, a current or previous owner or operator of an environmentally contaminated site may be held liable for the entire cost of investigation, removal or remediation of hazardous materials at such property. This liability could result whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials.

        Contaminants have been detected at some of our present facilities, principally in connection with historical operations. Investigations and/or clean-ups of these contaminants have been undertaken by us or by former owners of the sites. The costs of investigating and remediating environmental conditions at some of our facilities may be substantial. If our remediation costs are higher than expected, our exposure to these costs would increase. This exposure could reduce our cash available for operations, consume valuable management time and reduce our profits or impair our financial condition.

        We anticipate additional investigations and clean-ups of on-site contamination under regulatory supervision or voluntarily at some of our sites. In addition, the imposition of more stringent clean-up requirements, the discovery of additional contaminants or the discovery of off-site contamination at or from one or more of our facilities could result in significant additional costs to us.

If we are unable to adequately protect our intellectual property, we could lose a significant competitive advantage.

        Our success with our products depends, in part, on our ability to protect our unique technologies and products against competitive pressure and to defend our intellectual property rights. If we fail to adequately protect our intellectual property rights, competitors may manufacture and market products similar to ours.

        Even though we have filed patent applications, we may not be granted patents for those applications. Our failure to secure these patents may limit our ability to protect the intellectual property rights that these applications were intended to cover. Moreover, even if we are granted a patent, that does not prove conclusively that the patent is valid and enforceable. Our existing or future patents that we receive or license may not provide competitive advantages for our products. Our competitors may invalidate, narrow or avoid the scope of any existing or future patents, trademarks, or other intellectual property rights that we receive or license. In addition, patent rights may not prevent our competitors from developing, using or selling products that are similar or functionally equivalent to our products. Patent rights are territorial; thus, the patent protection we do have will only extend to those countries in which we have issued patents. Even so, the laws of certain countries do not protect our intellectual property rights to the same extent as do the laws of the United States and various European countries. The loss of protection for our intellectual property could reduce the market value of our products, reduce product sales and lower our profits or impair our financial condition.

        We intend to enforce our intellectual property rights vigorously, and from time to time we may initiate claims against third parties that we believe are infringing our intellectual property rights if we are unable to resolve matters satisfactorily through negotiation or we may be required to participate in other administrative proceedings. Lawsuits brought to protect and enforce our intellectual property

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rights could be expensive, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Our failure to secure, protect and enforce our intellectual property rights could seriously harm our business.

        Security interests or liens have been granted to financial institutions on some of our patents. If we fail to satisfy our obligations, the financial institutions have rights to those patents.

Due to the unique products that we produce and the particular industry in which we operate, the loss of our senior management could disrupt our business.

        Our senior management is important to the success of our business. There is significant competition for executive personnel with unique experience in the separation and filtration membrane industry. As a result of this unique need and the competition for a limited pool of industry-based executive experience, we may not be able to retain our existing senior management. In addition, we may not be able to fill new positions or vacancies created by expansion or turnover or attract additional senior management personnel. All of our executive officers are free to pursue other business opportunities (other than our chief executive officer, who is bound by a non-compete provision of his employment agreement), including those that may compete with us. The loss of any member of our senior management without retaining a suitable replacement (either from inside or outside our existing management team) could disrupt our business.

We may pursue future acquisitions. If we incur contingent liabilities and expenses or additional debt in connection with future acquisitions or if we cannot effectively integrate newly acquired operations, our business could be disrupted.

        Acquisitions involve risks that the businesses acquired will not perform in accordance with expectations or that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect. Future acquisitions would likely result in the incurrence of debt and contingent liabilities. Such acquisitions could also increase our interest and amortization expenses as well as periodic impairment charges related to goodwill and other intangible assets. Acquisitions could also result in significant charges relating to integration costs. We may not be able to integrate successfully any business we acquire into our existing business. Any acquired businesses may not be profitable or as profitable as we had expected. The successful integration of new businesses depends on our ability to manage these new businesses and cut excess costs. The successful integration of future acquisitions may also require substantial attention from our senior management and the management of the acquired business. This could decrease the time that they have to service and attract customers and develop new products and services. In addition, because we may actively pursue a number of opportunities simultaneously, we may encounter unforeseen expenses, complications and delays. Such expenses and delays could include difficulties in employing sufficient staff and maintaining operational and management oversight. Our inability to complete the integration of new businesses in a timely and orderly manner could increase costs, reduce our profits and ultimately disrupt our business.

As part of our lithium battery capacity expansions, we have purchased a significant amount of property, plant and equipment, which may be subject to impairment if lithium market demand does not materialize as anticipated.

        Since late 2009, we have invested over $300.0 million in capacity expansions for our electronics and EDVs segment. Demand for lithium battery separators has been lower than originally anticipated, and we are currently operating our production facilities at levels below full capacity. If demand for lithium battery separators does not materialize as expected, we may have to recognize an impairment charge to such assets. Long-lived assets are reviewed annually for impairment. Impairment may result from, among other things, adverse market conditions, the loss of customers, significant changes in the expected adoption rate of EDVs and adverse changes in laws or regulations. Any future determination

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requiring the impairment of long-lived assets would reduce our profits for the fiscal period in which the write-off occurs.

We have recorded a significant amount of intangible assets, which may never generate the returns we expect.

        Our net identifiable intangible assets at January 3, 2015 were approximately 6% of our total assets. Such assets include customer relationships, trademarks and trade names, license agreements and technology acquired in acquisitions. Goodwill, which relates to the excess of cost over the fair value of the net assets of the businesses acquired, was approximately 32% of our total assets at January 3, 2015. Goodwill and identifiable intangible assets are recorded at fair value on the date of acquisition and are reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions and adverse changes in applicable laws or regulations. We may never realize the full value of our intangible assets. Any future determination requiring the write-off of a significant portion of intangible assets would reduce our profits for the fiscal period in which the write-off occurs.

Our operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts and other events beyond our control, which could adversely affect our business.

        Our operations may be subject to significant interruption if any of our facilities are damaged or destroyed. For example, certain of our products are manufactured at a single facility location for which we do not maintain a backup manufacturing facility. A natural or other disaster, such as a fire or flood, could significantly disrupt our operations, delay or prevent product manufacture and shipment for the time required to repair, rebuild or replace our manufacturing facilities, which could be lengthy, and result in large expenses to repair or replace the facilities. In addition, concerns about terrorism or an outbreak of epidemic diseases, especially in our major markets of North America, Europe and Asia could have a negative effect on travel and our business operations, and result in adverse consequences on our sales and financial performance.

Cyber risk and the failure to maintain the integrity of our operational or security systems or infrastructure, or those of third parties with which we do business, could have a material adverse effect on our business, financial condition and results of operations.

        We are increasingly dependent on information technology networks and systems, including the Internet, to process, transmit and store information. In particular, we depend on our information technology infrastructure for electronic communications among our locations around the world and between our personnel and suppliers and customers. Security breaches and other failures of this infrastructure can create system disruptions, shutdowns and unauthorized disclosure of confidential and/or proprietary information. If we are unable to prevent or adequately respond to such failures and breaches, our operations could be disrupted and we may suffer reputational, financial or other damage that has a material adverse effect on our business, financial condition or results of operations.

Item 1B.    Unresolved Staff Comments

        None.

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Item 2.    Properties

        Our manufacturing facilities are strategically located to serve our customers globally. We believe our facilities are suitable and adequate for our present purposes.

Location
  Floor area
(sq. ft.)
  Business segment   Certification

Owensboro, Kentucky(1)

    277,000   Transportation and Industrial   ISO 14001, ISO 9001

Prachinburi, Thailand

    166,000   Transportation and Industrial   ISO 14001, ISO 9001

Corydon, Indiana(1)

    161,000   Transportation and Industrial   ISO 14001, ISO 9001

Selestat, France

    153,000   Transportation and Industrial   ISO 14001, ISO 9001

Norderstedt, Germany

    124,000   Transportation and Industrial   ISO 14001, ISO 9001

Bangalore, India(2)

    76,000   Transportation and Industrial   ISO 14001, ISO 9001, OHSAS 18001

Baddi, India(2)

    20,000   Transportation and Industrial   ISO 14001, ISO 9001, OHSAS 18001

Tianjin, China

    47,000   Transportation and Industrial   ISO 14001, ISO 9001

Xiangyang, China(3)

    118,000   Transportation and Industrial   ISO 14001, ISO 9001

Ochang, South Korea

    108,000   Electronics and EDVs   ISO 14001, ISO 9001, OHSAS 18001, KOSHA 18001

Shanghai, China(2)

    47,000   Electronics and EDVs   ISO 9001

Concord, North Carolina(1)

    230,000   Electronics and EDVs   ISO/TS 16949

Charlotte, North Carolina(1)

    410,000   Electronics and EDVs and Separations Media   ISO 14001, ISO 9001, ISO/TS 16949

Wuppertal, Germany

    1,503,000   Separations Media   ISO 14001, ISO 9001

Obernburg, Germany(2)

    23,000   Separations Media   ISO 9001

(1)
These domestic facilities serve as collateral under the senior secured credit agreement.

(2)
Polypore owns the equipment and leases the facility.

(3)
Polypore holds a 65% ownership interest in the joint venture that owns this facility.

        Our corporate headquarters are located in leased office space in Charlotte, North Carolina, and we have leased sales offices in Shanghai, China; Shenzhen, China; Tokyo, Japan; and Sao Paulo, Brazil.

Item 3.    Legal Proceedings

        On January 30, 2014, we filed a complaint against LG Chem. Ltd. ("LG") alleging infringement of our patent covering ceramic coating technology. On July 21, 2014, the United States District Court for the Western District of North Carolina granted a motion for a preliminary injunction against LG relating to patent infringement of our ceramic coating technology, although the court has stayed enforcement of the injunction pending appeal.

        In early 2014, separate Inter Partes Review petitions were filed by Mitsubishi Plastics, Inc., LG and SK Innovations Co. seeking to invalidate our patent covering our ceramic coating technology. The Patent Trial and Appeal Board instituted proceedings for each, but not on all asserted grounds.

        On March 3, 2015, a putative class action lawsuit captioned Lax v. Toth, et al., Case No. 10741 (Del. Ch.) (the "Action") was filed in the Court of Chancery of the State of Delaware against the Company, the current members of the Board of Directors, Asahi Kasei and EMS. The Action, filed by a purported shareholder of the Company's common stock, challenges the contemplated integrated transactions with 3M, Asahi Kasei and EMS and alleges, among other things, that the members of the Board of Directors breached their fiduciary duties to our stockholders by engaging in a flawed sales process, agreeing to a transaction price that does not adequately compensate our stockholders, and agreeing to certain unfair deal protection terms. The Action also alleges that Asahi Kasei and EMS aided and abetted the alleged breaches of fiduciary duties. The Action seeks various remedies, including declaratory and injunctive relief, as well as damages and costs.

Item 4.    Mine Safety Disclosures

        Not applicable.

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Part II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "PPO" and has been traded on the NYSE since our initial public offering on June 28, 2007. As of February 13, 2015, there were approximately 8,600 holders of our common stock, representing primarily persons whose stock is held in nominee or "street name" accounts through brokers.

        We did not declare or pay any dividends on our common stock in fiscal 2014 or 2013, and we do not expect to pay any such dividends in fiscal 2015. Our senior secured credit agreement restricts or limits our ability to, among other things, declare dividends and make payments on or redeem or repurchase capital stock.

        The low and high sales prices for the Company's common stock for each full quarterly period within the two most recent fiscal years were as follows:

 
  Fiscal 2014   Fiscal 2013

First Quarter

  $29.39 - $40.91   $35.10 - $48.42

Second Quarter

  $33.35 - $48.72   $36.80 - $45.00

Third Quarter

  $39.25 - $48.47   $39.52 - $48.41

Fourth Quarter

  $36.38 - $54.40   $35.53 - $46.21

Issuer Purchases of Equity Securities

        The following table provides detail about our share repurchase activity during the three months ended January 3, 2015:

Fiscal Month
  Total
Number of
Shares
Purchased
  Average
Price
Paid per
Share
  Total Number of
Shares
Purchased as
Part of Publicly
Announced
Program
  Maximum
Number of
Shares that May
Yet Be Purchased
Under the
Program(1)
 

September 28, 2014 - November 1, 2014(2)

    84   $ 34.83         4,050,000  

November 2, 2014 - November 29, 2014

                4,050,000  

November 30, 2013 - January 3, 2015

                4,050,000  

Total

    84   $ 34.83         4,050,000  

(1)
In May 2014, the Company announced that its Board of Directors authorized the repurchase of up to 4,500,000 shares of the Company's common stock. The share repurchase program has no expiration date. During 2014, the Company repurchased 450,000 shares of common stock under the share repurchase program.

(2)
The Company withheld and repurchased 84 shares of common stock in October 2014 to satisfy certain employees' withholding tax liabilities related to restricted stock grants.

Performance Graph

        The following graph compares the cumulative total shareholder return of our common stock for the periods indicated with the total return of the Russell 2000 Index and the Standard & Poor's Index of Industrial Machinery Companies ("S&P Industrial Machinery Index"). The graph assumes $100 invested on December 31, 2009 in our common stock, the Russell 2000 Index and the S&P Industrial Machinery Index. Total return represents stock price changes and assumes the reinvestment of dividends.

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GRAPHIC

 
  Dec-09   Dec-10   Dec-11   Dec-12   Dec-13   Dec-14  

Polypore International, Inc.

    100.00     342.27     369.66     390.76     326.89     395.38  

Russell 2000

    100.00     126.86     121.56     141.43     196.34     205.95  

S&P Industrial Machinery Index

    100.00     135.94     123.35     157.25     229.28     240.86  

Item 6.    Selected Financial Data

        The following table presents selected historical consolidated financial data of Polypore International for the fiscal years ended January 3, 2015, December 28, 2013, December 29, 2012, December 31, 2011 and January 1, 2011. The fiscal year ended January 3, 2015 included 53 weeks, while all other fiscal years presented below included 52 weeks. The selected historical consolidated financial data has been derived from Polypore International's audited consolidated financial statements.

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        The information presented below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included in "Financial Statements and Supplementary Data."

Statement of operations data
(in millions, except share data):
  Fiscal
2014
  Fiscal
2013
  Fiscal
2012
  Fiscal
2011
  Fiscal
2010
 

Net sales

  $ 658.4   $ 636.3   $ 648.7   $ 685.7   $ 551.6  

Gross profit

    230.0     220.7     245.2     299.5     227.7  

Selling, general and administrative expenses

    145.2     132.8     121.4     129.8     111.3  

Operating income

    84.8     87.9     123.8     169.7     116.4  

Interest expense, net

    22.0     39.5     36.0     34.4     46.7  

Costs related to purchase of 7.5% senior notes

    24.9                  

Write-off of loan acquisition costs and other expenses associated with refinancing of senior credit agreement

    1.1         2.5          

Foreign currency and other

    (9.1 )   0.1     0.2     (1.9 )   (1.6 )

Costs related to purchase of 8.75% senior subordinated notes

                    2.3  

Gain on sale of Italian subsidiary

                    (3.3 )

Income from continuing operations before income taxes

    45.9     48.3     85.1     137.2     72.3  

Income taxes

    9.7     14.2     25.3     46.0     22.1  

Income from continuing operations

    36.2     34.1     59.8     91.2     50.2  

Income from discontinued operations, net of income taxes

        12.3     10.9     14.0     13.4  

Gain (loss) on sale of discontinued operations, net of income taxes

    (0.7 )   35.8              

Income (loss) from discontinued operations

    (0.7 )   48.1     10.9     14.0     13.4  

Net income

    35.5     82.2     70.7     105.2     63.6  

Less: Net income (loss) attributable to noncontrolling interest

    1.6     0.6     (0.3 )        

Net income attributable to Polypore International, Inc. 

  $ 33.9   $ 81.6   $ 71.0   $ 105.2   $ 63.6  

Net income attributable to Polypore International, Inc.:

                               

Income from continuing operations

  $ 34.6   $ 33.5   $ 60.1   $ 91.2   $ 50.2  

Income (loss) from discontinued operations

    (0.7 )   48.1     10.9     14.0     13.4  

Net income attributable to Polypore International, Inc. 

  $ 33.9   $ 81.6   $ 71.0   $ 105.2   $ 63.6  

Net income attributable to Polypore International, Inc. per share—basic:

                               

Continuing operations

  $ 0.77   $ 0.73   $ 1.29   $ 1.97   $ 1.13  

Discontinued operations

    (0.01 )   1.06     0.23     0.31     0.30  

Net income attributable to Polypore International, Inc. per share

  $ 0.76   $ 1.79   $ 1.52   $ 2.28   $ 1.43  

Net income attributable to Polypore International, Inc. per share—diluted:

                               

Continuing operations

  $ 0.76   $ 0.72   $ 1.27   $ 1.93   $ 1.10  

Discontinued operations

    (0.01 )   1.04     0.23     0.30     0.29  

Net income attributable to Polypore International, Inc. per share

  $ 0.75   $ 1.76   $ 1.50   $ 2.23   $ 1.39  

Weighted average shares outstanding—basic

    44,786,317     45,610,270     46,540,385     46,182,204     44,562,421  

Weighted average shares outstanding—diluted

    45,382,074     46,239,796     47,229,595     47,119,997     45,748,058  

Balance sheet data
(at end of period) (in millions)

   
 
   
 
   
 
   
 
   
 
 

Total assets

  $ 1,375.3   $ 1,554.0   $ 1,591.6   $ 1,481.9   $ 1,348.5  

Total debt, including current portion

    487.5     646.3     696.3     709.5     715.3  

Shareholders' equity

    617.3     619.6     582.8     499.4     378.1  

Other financial data
(in millions)

   
 
   
 
   
 
   
 
   
 
 

Depreciation and amortization

  $ 55.2   $ 56.3   $ 55.7   $ 51.3   $ 47.9  

Capital expenditures

    30.8     28.2     137.1     156.3     68.8  

Net cash provided by (used in):

                               

Operating activities

    112.1     155.1     104.5     144.8     127.2  

Investing activities

    (30.8 )   88.4     (137.1 )   (156.3 )   (90.3 )

Financing activities

    (194.4 )   (125.8 )   (16.5 )   17.6     (61.3 )

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in "Financial Statements and Supplementary Data." Some of the information contained in this discussion and analysis or included elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Please see "Forward-looking Statements" for more information. You should review "Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

        The following discussion includes financial information prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), as well as segment operating income, which is considered a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of financial performance that excludes amounts that are included in the most directly comparable measure calculated and presented in accordance with U.S. GAAP. The presentation of segment operating income is intended to supplement investors' understanding of our operating performance and is not intended to replace net income as determined in accordance with U.S. GAAP. Segment operating income is defined as operating income before stock-based compensation and certain non-recurring and other costs and is used by management to evaluate business segment performance and allocate resources. See Note 18, "Segment Information," in the accompanying consolidated financial statements for a reconciliation of segment operating income to income from continuing operations before income taxes.

        The results of operations of Microporous, which was sold in 2013, are classified as discontinued operations and are excluded from continuing operations and segment results for all periods presented. See Note 19, "Discontinued Operations," in the accompanying consolidated financial statements. All disclosures and amounts in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section relate to our continuing operations, unless otherwise indicated.

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 2014, we generated total net sales of $658.4 million. We operate in two primary businesses: energy storage, which includes the transportation and industrial segment and the electronics and EDVs segment, and separations media. The transportation and industrial and separations media segments represent approximately 80% of our total net sales and operate in stable, growing markets, have high recurring revenue bases and generate strong cash flows. In the electronics and EDVs segment, we have a presence in the more established consumer electronics market, but our most significant growth opportunity is the potentially larger and developing electric drive vehicle ("EDV") and energy storage systems ("ESS") markets where lithium is the disruptive technology. As described in more detail below, the long-term growth drivers for lithium batteries are positive, but we have experienced and may continue to experience variability in the short term as these markets emerge.

        During fiscal 2014, we refinanced our existing senior secured credit agreement. We used cash on hand and borrowings under the new senior secured credit agreement to retire our previously outstanding 7.5% senior notes and pay redemption premiums and other transaction-related expenses. The debt reduction and refinancing provides substantial interest savings and flexibility to pursue growth and value-creation opportunities as we continue to generate cash. We will continue to evaluate our alternatives for uses of cash, including returning value to shareholders through share repurchases.

        On February 23, 2015, we entered into integrated transactions with 3M Company ("3M"), Asahi Kasei Corporation ("Asahi Kasei") and EMS Holdings Corporation ("EMS"), an affiliate of Asahi

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Kasei, pursuant to which we will sell our separations media business to 3M and, immediately thereafter, will be merged with EMS. In connection with the integrated transactions, at the time of the merger, each share of our common stock (other than any (a) dissenting shares, (b) shares owned by Asahi Kasei and EMS, the Company or any of their respective subsidiaries (which will be cancelled)) issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive $60.50 in cash without interest (the "Merger Consideration"), payable to the holder of such share. Each option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the merger will immediately accelerate and vest and be cancelled and converted into the right to receive a payment in cash of an amount, subject to the amount of any required tax withholding, equal to the product of the total number of shares of our common stock subject to such cancelled option and the excess, if any, of the Merger Consideration over the applicable exercise price of the option; provided that any such option with respect to which the exercise price per share subject to the option is equal to or greater than the Merger Consideration shall be cancelled in exchange for no consideration. Each restricted share of our common stock that is outstanding immediately prior to the effective time of the merger will immediately accelerate and vest and be cancelled and converted into the right to receive a payment in cash of an amount, subject to the amount of any tax withholding, equal to the Merger Consideration, without interest, treating such restricted share in the same manner as the other shares of our common stock.

        The integrated transactions are subject to customary closing conditions, including regulatory and stockholder approval. Furthermore, we have the right to terminate the integrated transactions if we enter into a definitive agreement for an alternative transaction that constitutes a "Superior Proposal" (as defined in the applicable agreements), provided we comply with certain notice and other requirements, including paying Asahi Kasei and 3M a termination fee equal to $39.0 million and $16.8 million, respectively. Certain other actions by us causing termination of the integrated transactions could result in our being required to pay the foregoing termination fees to Asahi Kasei and 3M. There are no assurances that the proposed integrated transactions will be consummated on any given timetable, or at all.

Energy Storage

        In the energy storage business, our membrane separators are a critical functional component in lithium batteries, which are primarily used in consumer electronics and EDV applications, and lead-acid batteries, which are used globally in transportation and numerous industrial applications. We believe that the long-term growth drivers for the energy storage business—growth in Asia, demand for consumer electronics, and growing demand for EDVs—are positive. The energy storage business is comprised of two reportable segments.

        Electronics and EDVs.    Lithium batteries are the power source in a wide variety of applications, including consumer electronics applications such as notebook computers, tablets, mobile phones and cordless power tools; EDVs; and emerging applications such as ESS. Demand for lithium batteries in consumer electronics is driven by the need for increased mobility. In EDV applications, demand is driven by the need to increase fuel efficiency to meet mileage standards in many countries such as the U.S. and China, the need to reduce carbon dioxide ("CO2") emissions around the world but especially in Europe due to regulations, conversion from nickel metal hydride to lithium battery technology in hybrid vehicles due to greater energy and power density, concern in developed countries and emerging markets over future access to petroleum at stable prices, smog and pollution control, and the need to address increasing transportation needs in developing economies. Since late 2009, we have expanded capacity at our existing Charlotte, North Carolina and Ochang, South Korea facilities and built a new facility in Concord, North Carolina. Production started for portions of the Concord facility in 2012, and the remaining capacity will be completed, qualified and ramped up over time as the nascent market for EDVs develops.

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        In 2014, we entered into long-term supply agreements with Samsung SDI Co., Ltd. ("Samsung") and Panasonic Automotive and Industrial Division ("Panasonic"), respectively, that include guaranteed purchase and supply volume requirements and volume-based price incentives. The Samsung agreement has an initial four-year term with a two-year extension provision and the Panasonic agreement has a five-year term. We believe that these agreements highlight the value of our capacity investments and proven industry-leading products and technology.

        Interest in and usage of our patent-protected ceramic coating technology is growing in both EDV and consumer electronics applications. We believe that this technology has value for current and future customers, and we have enforced and intend to continue to enforce our intellectual property rights around this and other patent-protected technology. In December 2013, we signed a technology licensing agreement with Sumitomo Chemical Co., Ltd. ("Sumitomo"), which provides for an annual technology licensing fee. In January 2014, we filed a complaint against LG Chem. Ltd. ("LG") alleging infringement of our patent covering ceramic coating technology. In July 2014, the United States District Court for the Western District of North Carolina granted a motion for preliminary injunction against LG relating to patent infringement of our ceramic coating technology, although the court has stayed enforcement of the injunction pending appeal. We believe that the recently signed long-term supply agreements, the licensing agreement with Sumitomo and the preliminary injunction against LG confirm our ability to provide certainty of supply for high-growth applications like EDVs and ESS and the value of our technology and intellectual property.

        We believe the long-term demand drivers for our products—consumer demand for mobility, regulations for better fuel efficiency and lower CO2 emissions, conversion from nickel metal hydride to lithium battery technology in hybrids, concerns about access to petroleum, efforts to reduce pollution, and increasing transportation needs in developing countries—remain intact. While consumer electronics applications have attractive long-term market growth trends, EDV and ESS applications represent our most significant growth opportunity and the long-term outlook continues to be positive. Based on industry forecasts and industry studies, the use of lithium technology in these applications is expected to grow at a compound annual growth rate in excess of 30% through 2020 on an energy capacity basis. Many factors influence membrane separator usage in lithium batteries, but because many new applications are incorporating large-format lithium batteries that require much greater membrane separator volume per battery, we believe that membrane separator growth will exceed battery unit sales growth and, although not perfectly correlated, will more closely approximate the growth rate in energy capacity. We believe the electrification of the worldwide fleet of vehicles is just beginning, from hybrids to plug-ins to full battery electric vehicles, including automobiles, buses, taxis and commercial fleet vehicles. We believe our dry process products continue to be the preferred product in large-format lithium batteries for EDVs and ESS. We are currently working with existing and new customers on next-generation batteries, which is important considering the long lead times required to become qualified for EDV applications. EDV and ESS are emerging market applications and are being adopted around the world in many forms. We are qualified on more than seventy-five EDV models and have field-proven products, significant production capacity already in place, technical advantages, low-cost manufacturing capabilities and intellectual property around ceramic coatings for lithium battery separators. We believe the factors that influenced our decision to expand capacity remain valid, and we continue to expect significant sales growth and utilization of our current production capacity as the EDV market develops and as ESS experiences more meaningful adoption. Although the long-term growth drivers are positive for these applications, short-term fluctuations in demand can be expected in the early stages of adoption while initial penetration rates are low. Given the high separator content for these applications and the potential size of these markets, small changes in end-market demand can have a significant impact on our business.

        Transportation and industrial.    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

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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.

Separations Media

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

        For healthcare applications, we produce membranes used in blood filtration for 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 believe that conversion to single-use dialyzers and increasing treatment frequency will result in additional dialyzer market growth.

        For filtration and specialty applications, we produce a wide range of membranes and membrane-based elements used in the microfiltration, ultrafiltration and gasification/degasification of liquids. Microfiltration and ultrafiltration 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 the 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. For additional accounting policies, see Note 2 of the consolidated financial statements included in "Financial Statements and Supplementary Data."

Impairment of goodwill

        Goodwill is subject to annual impairment testing unless circumstances dictate more frequent assessments. We perform our annual impairment assessment for goodwill 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. Our reporting units are at the operating segment level.

        We perform a quantitative two-step goodwill impairment test. Step one of the goodwill impairment test 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

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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.

        In fiscal 2014, our annual impairment test indicated that the fair value of the reporting units substantially exceeded their respective carrying amounts.

Pension benefits

        Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit pension plans. Two critical assumptions, discount rate and expected return on assets, are important elements of plan expense and liability measurement, and differences between actual results and these two actuarial assumptions can materially affect the valuation of our projected benefit obligation. 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. At January 3, 2015, a decrease of one percentage point in the discount rate would increase our projected benefit obligations and the unfunded status of our pension plans by $25.8 million. The expected rate of return on our pension plan assets is based on the asset allocation of each plan and the long-term projected return of those assets. For 2014, if the expected rate of return on pension plan assets was reduced by one percentage point, the result would have increased our net periodic benefit expense for fiscal 2014 by $0.1 million. At January 3, 2015, if the actual plan assets were reduced by one percentage point, the unfunded status of our pension plans would increase by $0.2 million.

Repairs and maintenance

        Repair and maintenance costs, which include indirect labor and employee benefits associated with maintenance personnel and utility, maintenance and repair costs for equipment and facilities utilized in the manufacturing process, are treated as inventoriable costs. Repair and maintenance costs as a percent of cost of goods sold has been consistent for fiscal 2014, 2013 and 2012. Major planned maintenance activities outside of the normal production process are capitalized as property, plant and equipment if the costs are expected to provide future benefits by increasing the service potential of the asset to which the repair or maintenance applies. We have not had any major planned maintenance activities or capitalized significant repair and maintenance costs as property, plant and equipment in the last three fiscal years.

Stock-based compensation

        Stock-based compensation expense is based on the fair value of the award at grant date. The Black-Scholes option-pricing model, which is used for valuation of stock option awards, requires the use

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of significant assumptions, including expected term of the options and expected volatility. We determine expected term based on historical experience, vesting periods, structure of option plans and contractual term of the options. Expected volatility is estimated based on our historical stock prices and implied volatility from traded options. The assumptions used in calculating the fair value of awards involve inherent uncertainty and management judgment. If factors change or we use different assumptions for estimating stock-based compensation expense in future periods, stock-based compensation expense may differ materially in the future.

Results of operations

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

 
  Fiscal Year  
(in millions)
  2014   2013   2012  

Net sales

  $ 658.4   $ 636.3   $ 648.7  

Gross profit

    230.0     220.7     245.2  

Selling, general and administrative expenses

    145.2     132.8     121.4  

Operating income

    84.8     87.9     123.8  

Interest expense, net

    22.0     39.5     36.0  

Costs related to purchase of 7.5% senior notes

    24.9          

Write-off of loan acquisition costs and other expenses associated with refinancing of senior credit agreement

    1.1         2.5  

Other

    (9.1 )   0.1     0.2  

Income from continuing operations before income taxes

    45.9     48.3     85.1  

Income taxes

    9.7     14.2     25.3  

Income from continuing operations

  $ 36.2   $ 34.1   $ 59.8  

 

 
  Fiscal Year  
(percent of sales)
  2014   2013   2012  

Net sales

    100.0 %   100.0 %   100.0 %

Gross profit

    34.9     34.7     37.8  

Selling, general and administrative expenses

    22.0     20.9     18.7  

Operating income

    12.9     13.8     19.1  

Interest expense, net

    3.3     6.2     5.5  

Costs related to purchase of 7.5% senior notes

    3.8          

Write-off of loan acquisition costs and other expenses associated with refinancing of senior credit agreement

    0.2         0.4  

Other

    (1.4 )       0.1  

Income from continuing operations before income taxes

    7.0     7.6     13.1  

Income taxes

    1.5     2.2     3.9  

Income from continuing operations

    5.5 %   5.4 %   9.2 %

Fiscal 2014 compared with fiscal 2013

        Net sales.    Net sales for fiscal 2014 were $658.4 million, an increase of $22.1 million, or 3.5%, from fiscal 2013, due to higher sales in the transportation and industrial and separations media segments, partially offset by lower sales in the electronics and EDVs segment and the negative impact

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of foreign currency translation of $3.0 million. See "Financial reporting segments" below for more information.

        Gross profit.    Gross profit was $230.0 million, an increase of $9.3 million from fiscal 2013, primarily due to higher sales in the transportation and industrial and separations media segments, partially offset by lower sales in the electronics and EDVs segment. Gross profit as a percent of net sales was 34.9% for fiscal 2014, consistent with the prior year. See "Financial reporting segments" below for more information.

        Selling, general and administrative expenses.    Selling, general and administrative expenses were $145.2 million, an increase of $12.4 million from fiscal 2013, primarily due to a $6.2 million increase in litigation costs associated with patent enforcement, a $1.3 million increase in performance-based incentive compensation expense, and a $1.0 million increase in stock-based compensation expense. Selling, general and administrative expenses were 22.0% of consolidated net sales in fiscal 2014 and 20.9% in fiscal 2013.

        Segment operating income.    Segment operating income, which excludes stock-based compensation and certain non-recurring and other costs, was $115.3 million, an increase of $2.4 million from fiscal 2013 due to higher sales in the transportation and industrial and separations media segments, partially offset by lower sales in the electronics and EDVs segment and a $1.3 million increase in performance-based incentive compensation expense. Segment operating income as a percent of net sales was 17.5% for fiscal 2014, consistent with the prior year. See "Financial reporting segments" below for more information.

        Interest expense.    Interest expense was $22.0 million for fiscal 2014, a decrease of $17.5 million from the prior year. The decrease was the result of the debt reduction and refinancing transactions that were completed during the second quarter of 2014.

        Income taxes.    Income taxes as a percentage of pre-tax income for fiscal 2014 were 21.2% compared to 29.5% for fiscal 2013. Income taxes recorded in the financial statements differ from the federal statutory income tax rate and fluctuate between years due to a variety of factors including the mix of income between the U.S. and foreign jurisdictions taxed at varying rates and changes in estimates of permanent differences and valuation allowances. The mix of earnings between the tax jurisdictions has a significant impact on the effective tax rate. Each tax jurisdiction has its own set of tax laws and tax rates, and income earned by our subsidiaries 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%. During 2014, our effective tax rate was impacted by the reduction of taxable income in the U.S. for the costs incurred in connection with the refinancing of our senior secured credit agreement and purchase of our 7.5% senior notes. Since the U.S. is a relatively high tax rate jurisdiction, the decrease in U.S. taxable income from these costs resulted in a lower consolidated tax rate.

        The effect of each of these items on our effective tax rate is quantified as follows:

 
  Fiscal
2014
  Fiscal
2013
 

U.S. federal statutory rate

    35.0 %   35.0 %

Mix of income in taxing jurisdictions

    (12.0 )   (4.1 )

Costs associated with debt reduction and refinancing

    (5.5 )    

Other

    3.7     (1.4 )

Total effective tax rate

    21.2 %   29.5 %

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Fiscal 2013 compared with fiscal 2012

        Net sales.    Net sales for fiscal 2013 were $636.3 million, a decrease of $12.4 million, or 1.9%, from fiscal 2012, as higher sales in the transportation and industrial and separations media segments and the positive impact of foreign currency translation of $4.9 million were more than offset by lower sales in the electronics and EDVs segment. See "Financial reporting segments" below for more information.

        Gross profit.    Gross profit was $220.7 million, a decrease of $24.5 million from fiscal 2012. Gross profit as a percent of net sales was 34.7% for fiscal 2013 compared to 37.8% for fiscal 2012. The decrease in consolidated gross profit and gross profit as a percent of net sales was primarily due to lower sales in the electronics and EDVs segment. Gross profit as a percent of net sales was consistent with the prior year in the transportation and industrial and separations media segments. See "Financial reporting segments" below for more information.

        Selling, general and administrative expenses.    Selling, general and administrative expenses were $132.8 million, an increase of $11.4 million from fiscal 2012, primarily due to a $6.1 million increase in performance-based incentive compensation expense and a $4.4 million increase in stock-based compensation expense. Selling, general and administrative expenses were 20.9% of consolidated net sales in fiscal 2013 and 18.7% in fiscal 2012.

        Segment operating income.    Segment operating income, which excludes stock-based compensation and certain non-recurring and other costs, was $112.9 million, a decrease of $28.9 million from fiscal 2012. Segment operating income as a percent of net sales was 17.7% for fiscal 2013 compared to 21.9% for fiscal 2012. The decrease in segment operating income and segment operating income as a percent of net sales was primarily due to lower sales in the electronics and EDVs segment and an increase in performance-based incentive compensation expense. Operating income as a percent of net sales was consistent with the prior year in the transportation and industrial and separations media segments. See "Financial reporting segments" below for more information.

        Interest expense.    Interest expense for fiscal 2013 increased by $3.5 million from fiscal 2012, primarily resulting from a decrease in capitalized interest.

        Income taxes.    Income taxes as a percentage of pre-tax income for fiscal 2013 were 29.5% compared to 29.7% for fiscal 2012. The income tax expense recorded in the financial statements fluctuates between years due to the mix of income between the U.S. and foreign jurisdictions taxed at varying rates and a variety of other factors, including changes in estimates of permanent differences and valuation allowances. The mix of earnings between the tax jurisdictions has a significant impact on the effective tax rate. Each tax jurisdiction has its own set of tax laws and tax rates, and income earned by our subsidiaries is taxed independently by these various jurisdictions. The applicable statutory income tax rates in the jurisdictions in which we operate ranged from 0% to 42%.

        The effect of each of these items on our effective tax rate is quantified as follows:

 
  Fiscal
2013
  Fiscal
2012
 

U.S. federal statutory rate

    35.0 %   35.0 %

Mix of income in taxing jurisdictions

    (4.1 )   (8.3 )

Other

    (1.4 )   3.0  

Total effective tax rate

    29.5 %   29.7 %

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Discontinued operations

        On December 19, 2013, we completed the sale of our Microporous business, which consisted of the production facilities in Piney Flats, Tennessee, and Feistritz, Austria, for $120.0 million. We recognized a gain of $35.2 million on the sale, net of direct transaction costs and income taxes. Microporous was previously included in the transportation and industrial segment. The results of operations from this business are classified as discontinued operations and are excluded from continuing operations and segment results for all periods presented.

Financial reporting segments

Electronics and EDVs

Fiscal 2014 compared with fiscal 2013

        Net sales.    Net sales for fiscal 2014 were $126.8 million, a decrease of $3.5 million, or 2.7%, from fiscal 2013. Net sales decreased by 3.9% due to changes in price/customer mix, reflecting the impact of recently signed long-term supply agreements, which include purchase commitments and lower pricing. Pricing for lithium battery separators is generally volume-based, with higher volume customers receiving lower sales prices. Net sales increased by 1.2% due to higher sales volumes, as growth in sales into EDV applications more than offset lower sales into consumer electronics applications. Sales volumes into EDV applications increased due to growth with current customers, partially offset by the $22.5 million decline attributable to LG. We have had no sales to LG since the third quarter of 2013. EDV applications represent our most significant growth opportunity, and the long-term outlook continues to be positive, given that we are qualified on more than seventy-five EDV models and have field-proven products, significant production capacity already in place, technical advantages, low-cost manufacturing capabilities and intellectual property around ceramic coatings for lithium battery separators. For consumer electronics applications, we are working on new projects and development opportunities, but we cannot currently predict when or if sales volumes into these applications will improve.

        Segment operating income.    Segment operating income was $15.8 million, a decrease of $3.7 million from fiscal 2013. Segment operating income as a percent of net sales was 12.5% for fiscal 2014 compared to 15.0% for fiscal 2013. The decrease in segment operating income and segment operating income as a percent of net sales was primarily due to lower sales.

        The key drivers of operating income and operating income as a percent of net sales are sales and the amount of fixed costs relative to sales. In 2014, net sales were $126.8 million, or 32% of our total production capacity in terms of sales, as compared to 2013 sales of $130.3 million, or 33% of capacity. In 2014 and 2013, excluding the final phase of expansion at our Concord facility, which will be completed, qualified and ramped up as demand develops, we had total production capacity sufficient to generate approximately $400.0 million in annual lithium battery separator sales, depending on the mix of products and grades produced. Because of the decrease in sales with no significant change in fixed costs, operating income and operating income as a percent of net sales declined.

Fiscal 2013 compared with fiscal 2012

        Net sales.    Net sales for fiscal 2013 were $130.3 million, a decrease of $37.1 million, or 22.2%, from fiscal 2012. Net sales decreased primarily because of lower sales volumes in consumer electronics applications, partially offset by an increase in sales to EDV applications. Net sales decreased by $3.5 million due to price/product mix. For consumer electronics, sales volumes were lower due to weakness in end-market demand for devices such as laptop computers and capacity limitations in 2011, which caused us to miss some sales qualification opportunities for new devices such as smartphones and tablets. In 2013, sales volumes into EDV applications increased due to continued market growth,

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despite lower sales to LG during the second half of 2013. We had no sales to them in the fourth quarter of 2013.

        In December 2013, we entered into an agreement with Sumitomo to license our intellectual property related to ceramic coating separators for lithium batteries. In connection with the agreement, Sumitomo agreed to pay $3.5 million in technology licensing fees related to past usage of our ceramic coating technology and will also pay ongoing license fees based on future use of this technology.

        Segment operating income.    Segment operating income was $19.5 million, a decrease of $27.9 million from fiscal 2012. Segment operating income as a percent of net sales was 15.0% for fiscal 2013 compared to 28.3% for fiscal 2012. The decrease in segment operating income and segment operating income as a percent of net sales was due to lower sales volume.

        The key drivers of operating income and operating income as a percent of net sales are sales and the amount of fixed costs relative to sales. In 2013, net sales were $130.3 million, or 33% of our total production capacity in terms of sales, as compared to 2012 sales of $167.4 million, or 42% of capacity. There were no changes in production capacity in 2013 as compared to 2012. In 2013 and 2012, excluding the final phase of expansion at our Concord facility, which will be completed, qualified and ramped up as demand develops, we had total production capacity sufficient to generate approximately $400.0 million in annual lithium battery separator sales, depending on the mix of products and grades produced. Because of the decrease in sales with no significant change in fixed costs, operating income and operating income as a percent of net sales declined.

        In 2012, we added approximately $15.0 million of incremental fixed costs (including non-cash depreciation expense) associated with our new production capacity. During 2013, we recognized the full-year impact of these fixed costs, but also implemented certain cost savings actions, which resulted in fixed costs being relatively consistent between the two years. Since we have added substantially all of the fixed costs required to operate the new production capacity, operating income and operating income margins will continue to fluctuate primarily based on changes in sales.

Transportation and Industrial

Fiscal 2014 compared with fiscal 2013

        Net sales.    Net sales for fiscal 2014 were $323.2 million, an increase of $11.3 million, or 3.6%, from fiscal 2013, with higher sales in Asia and Europe partially offset by lower sales in the Americas and the negative impact of foreign currency translation of $2.7 million.

        Segment operating income.    Segment operating income was $71.3 million, an increase of $1.3 million from fiscal 2013. Segment operating income as a percent of net sales was 22.1% for fiscal 2014, consistent with the prior year.

Fiscal 2013 compared with fiscal 2012

        Net sales.    Net sales for fiscal 2013 were $311.9 million, an increase of $12.9 million, or 4.3%, from fiscal 2012 due to an increase in sales volumes across all geographic regions.

        Segment operating income.    Segment operating income was $70.0 million, an increase of $3.9 million from fiscal 2012. Segment operating income as a percent of net sales was 22.4% for fiscal 2013, which is consistent with the prior year.

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Separations Media

Fiscal 2014 compared with fiscal 2013

        Net sales.    Net sales for fiscal 2014 were $208.4 million, an increase of $14.3 million, or 7.4%, from fiscal 2013 due to higher sales in both healthcare and filtration and specialty products, partially offset by the negative impact of foreign currency translation of $0.3 million.

        Segment operating income.    Segment operating income was $60.8 million, an increase of $6.7 million from fiscal 2013 due to higher sales. Segment operating income as a percent of net sales was 29.2% in fiscal 2014 compared to 27.9% in fiscal 2013. The increase in segment operating income as a percent of net sales was due to product mix and production efficiencies.

Fiscal 2013 compared with fiscal 2012

        Net sales.    Net sales for fiscal 2013 were $194.1 million, an increase of $11.8 million, or 6.5%, from fiscal 2012 due to higher sales in both healthcare and filtration and specialty products and the positive impact of foreign currency translation of $4.7 million.

        Segment operating income.    Segment operating income was $54.1 million, an increase of $1.6 million from fiscal 2012. Segment operating income as a percent of net sales was 27.9% in fiscal 2013, which is consistent with the prior year.

Corporate and other costs

        Corporate and other costs include costs associated with the corporate office and other costs that are not allocated to the reporting segments for segment reporting purposes, including amortization of identified intangible assets and performance-based incentive compensation.

        Fiscal 2014 compared with fiscal 2013.    Corporate and other costs for fiscal 2014 were $32.6 million, an increase of $1.9 million from fiscal 2013, primarily due to higher performance-based incentive compensation expense.

        Fiscal 2013 compared with fiscal 2012.    Corporate and other costs for fiscal 2013 were $30.7 million, an increase of $6.6 million from fiscal 2012, primarily due to higher performance-based incentive compensation expense.

Foreign operations

        As of January 3, 2015, we manufactured our products at 15 strategically located facilities in the United States, Europe and Asia. Net sales from foreign locations were $416.9 million (63.3% of consolidated sales), $403.9 million (63.5% of consolidated sales) and $441.5 million (68.1% of consolidated sales) for fiscal 2014, 2013 and 2012, respectively. Pre-tax income from foreign production facilities was $67.5 million (147.1% of consolidated pre-tax income), $51.1 million (105.6% of consolidated pre-tax income) and $67.0 million (78.7% of consolidated pre-tax income) for fiscal 2014, 2013 and 2012, respectively. The fluctuation in the relationship between foreign net sales and foreign pre-tax income as a percent of consolidated amounts is primarily due to the mix of operating results between segments and corporate costs incurred in the U.S., including interest expense, stock-based compensation expense and in 2014, costs incurred in connection with the refinancing of our senior secured credit agreement and purchase of our 7.5% senior notes. The majority of sales and pre-tax income from U.S. production facilities are attributable to the electronics and EDVs segment, where we primarily produce in the U.S. for customers located in Asia. The majority of sales and pre-tax income from foreign production facilities are attributable to the transportation and industrial and separations media segments. In the transportation and industrial segment, we have production facilities in the U.S., Europe and Asia and generally produce in the same geographic region that we sell, though we do

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export some production from U.S. and European facilities to meet growing demand in Asia. In the separations media segment, the majority of production is at our manufacturing facility in Germany, and sales are made to customers worldwide. Operating results generated by production facilities within business segments was not significantly impacted by differences in economic, regulatory, geographic or other competitive factors.

        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 actions 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 U.S. will be favorable to our operations and growth strategy.

Seasonality

        Operations at our European production facilities are traditionally subject to shutdowns for approximately one month during the third quarter of each year for employee vacations. As a result, operating income during the third quarter of any fiscal year may be lower than operating income in other quarters during the same fiscal year. Because of the seasonal fluctuations, comparisons of our operating results for the third quarter of any fiscal year with those of the other quarters during the same fiscal year may be of limited relevance in predicting our future financial performance.

Liquidity and capital resources

        At January 3, 2015, cash and cash equivalents were $44.5 million, a decrease of $118.9 million from the prior year, as we used cash on hand and cash generated from operations to fund capital expenditures, reduce and refinance our debt and repurchase shares of common stock.

        Operating activities.    Net cash provided by operating activities was $112.1 million in fiscal 2014, with cash generated from operations of $122.5 million partially offset by changes in operating assets and liabilities of $10.4 million. Accounts receivable increased due to the timing of sales and cash receipts, and days sales outstanding was consistent with prior year. 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 decreased from prior year, and days in ending inventory decreased by approximately 14%. Inventory levels are impacted by production schedules and expected future customer demand, which is based on a number of factors, including discussions with customers, customer forecasts and industry and economic trends. 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 decreased primarily due to timing of payments.

        Investing activities.    In fiscal 2014, capital expenditures were $30.8 million, as compared to $28.2 million in the prior year. We currently estimate capital expenditures to be approximately $85.0 million in fiscal 2015, including planned capacity expansions in the transportation and industrial and separations media segments. Actual capital spending may vary depending on timing of payments and project approvals. As of January 3, 2015, we had $146.1 million of construction in progress, primarily related to the capacity expansion projects in the electronics and EDVs segment, remaining portions of which will be completed, qualified and ramped up over time as market demand develops. In fiscal 2013, investing activities also included net proceeds of $116.6 million from the sale of discontinued operations.

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        Financing activities.    During the second quarter of 2014, we completed a debt reduction and refinancing, using cash on hand and borrowings under the new senior secured credit agreement to repay all outstanding obligations under our previous senior secured credit agreement, redeem and retire our previously outstanding 7.5% senior notes, and pay loan acquisition costs. The total purchase price for the notes was $385.5 million, consisting of principal of $365.0 million and redemption premiums of $20.5 million.

        In May 2014, the Board of Directors authorized the repurchase of up to 4,500,000 shares of our common stock. The share repurchase program has no expiration date. During fiscal 2014, we repurchased 450,000 shares of common stock for $20.0 million under the share repurchase program. The timing, price and volume of future purchases will be based on market conditions, relevant securities laws and other factors. The share repurchases may be made from time to time on the open market or in privately negotiated transactions. The share repurchase program does not require us to repurchase any specific number of shares, and we may terminate the repurchase program at any time. In 2013, the Board of Directors authorized the repurchase of up to 4,000,000 shares of our common stock by December 31, 2013. We repurchased 2,000,000 shares of common stock for $80.3 million under this authorization.

        We intend to fund our ongoing operations with cash on hand, cash generated by operations and borrowings under the senior secured credit agreement. As of January 3, 2015, approximately 88% of our cash and cash equivalents were held by foreign subsidiaries. There were no significant restrictions on our ability to transfer funds with and among subsidiaries. Taxes have been provided on earnings distributed and expected to be distributed by the Company's foreign subsidiaries. All other foreign earnings are undistributed and considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state taxes has been provided thereon. Our current operating plans do not demonstrate a need to repatriate additional foreign earnings to fund our U.S. operations. However, if we decided to repatriate additional cash held by our foreign subsidiaries, we would be required to accrue and pay any applicable U.S. and local taxes to repatriate these funds.

        Our new senior credit agreement provides for a $150.0 million revolving credit facility and a $500.0 million term loan facility and matures in April 2019. At January 3, 2015, we had no amounts outstanding and $150.0 million available for borrowing under the revolving credit facility. Interest rates under the senior credit agreement are equal to, at our option, either an alternate base rate or the Eurodollar base rate, plus a specified margin. At January 3, 2015, the interest rate on borrowings under the senior credit agreement was 2.17%.

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        Under the senior credit agreement, we are subject to a maximum ratio of indebtedness to adjusted EBITDA and a minimum ratio of adjusted EBITDA to cash interest expense. Adjusted EBITDA, as defined under the senior credit agreement, was as follows:

(in millions)
  Fiscal 2014  

Income from continuing operations attributable to Polypore International, Inc. 

  $ 34.6  

Add/Subtract:

       

Depreciation and amortization expense

    55.2  

Interest expense, net

    22.0  

Income taxes

    9.7  

Stock-based compensation

    21.7  

Costs related to purchase of 7.5% senior notes

    24.9  

Write-off of loan acquisition costs and other expenses associated with refinancing of senior credit agreement

    1.1  

Foreign currency loss

    (8.6 )

Litigation costs associated with patent enforcement

    8.4  

Loss on disposal of property, plant and equipment

    0.3  

Other non-cash or non-recurring charges

    (1.8 )

Adjusted EBITDA

  $ 167.5  

        As of January 3, 2015, the calculation of the leverage ratio, as defined under the senior credit agreement, was as follows:

(in millions)
  Fiscal 2014  

Indebtedness(1)

  $ 443.0  

Adjusted EBITDA

  $ 167.5  

Actual leverage ratio

    2.65x  

Required maximum leverage ratio

    4.25x  

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

        As of January 3, 2015, the calculation of the interest coverage ratio, as defined under the senior credit agreement, was as follows:

(in millions)
  Fiscal 2014  

Adjusted EBITDA

  $ 167.5  

Interest expense(1)

  $ 12.0  

Actual interest coverage ratio

    13.95x  

Required minimum interest coverage ratio

    3.00x  

(1)
Calculated as cash interest expense for the twelve months ended January 3, 2015, as defined under the senior credit agreement and on a pro forma basis as if the refinancing of our previous senior credit agreement and purchase and retirement of the previously outstanding 7.5% senior notes had occurred on the first day of fiscal 2014.

        The senior credit agreement contains certain restrictive covenants which, among other things, limit 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 agreement also

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contains certain customary events of default, subject to grace periods, as appropriate. As of January 3, 2015, the Company was in compliance with the covenants contained in the senior credit agreement.

        In August 2014, we entered into a forward-starting interest rate swap to pay a fixed interest rate of 1.9% and receive one-month LIBOR on a notional amount of $250.0 million. The interest rate swap economically converts a portion of the Company's LIBOR-based, variable rate debt into fixed rate debt from its effective date of July 31, 2015 through its expiration on April 8, 2019.

        Future debt service payments are expected to be paid out of cash flows from operations, borrowings on our new revolving credit facility and future refinancing of our debt. Our cash interest requirements for the next twelve months are estimated to be $12.9 million, including the impact of the interest rate swap.

        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 credit agreement compared to our anticipated cash requirements for debt service, working capital, cash taxes, capital expenditures and funding 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 the "Risk Factors" in this 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 equity or debt financings 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.

Contractual Obligations

        The following table sets forth our contractual obligations at January 3, 2015. Some of the amounts included in this table are based on management's estimates and assumptions about these obligations, including their duration, anticipated actions by third parties and other actions. Because these estimates and assumptions are necessarily subjective, the timing and amount of payments under these obligations may vary from those reflected in this table. For more information on these obligations, see the notes to consolidated financial statements included in "Financial Statements and Supplementary Data."

 
  Payment due by Period  
(in millions)
  Total   2015   2016 - 2017   2018 - 2019   Thereafter  

Long-term debt

  $ 487.5   $ 25.0   $ 75.0   $ 387.5   $  

Cash interest payments(1)

    58.4     12.9     29.1     16.4      

Operating lease obligations(2)

    9.5     3.5     4.3     1.5     0.2  

  $ 555.4   $ 41.4   $ 108.4   $ 405.4   $ 0.2  

(1)
Includes cash interest requirements on the term loan facility through its maturity in April 2019 and on the interest rate swap from its effective date in July 2015 through its

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    expiration in April 2019. Variable interest rates used in determining cash interest requirements in the table are assumed to be the same rates that were in effect at January 3, 2015.

(2)
We lease certain equipment and facilities under operating leases. Some lease agreements provide us with the option to renew the lease agreement. Our future operating lease obligations would change if we exercised these renewal options. For leases denominated in foreign currencies, the table assumes that the exchange rate of the dollar to the respective foreign currencies is the average rate for 2014 for all periods presented.

(3)
As discussed in the notes to consolidated financial statements included in "Financial Statements and Supplementary Data," we have long-term liabilities for pension obligations of $121.0 million as of January 3, 2015. Our contributions for these benefit plans are not included in the table above since the timing and amount of payments are dependent upon many factors, including when an employee retires or leaves the Company, certain benefit elections by employees, return on plan assets, minimum funding requirements and foreign currency exchange rates. We estimate that contributions to the pension plans in fiscal 2015 will be $1.8 million.

(4)
As discussed in the notes to consolidated financial statements included in "Financial Statements and Supplementary Data," we have recorded a liability at January 3, 2015 of $10.3 million, including accrued interest and penalties, for unrecognized tax benefits. Payments related to this liability are not included in the table above since the timing and actual amounts of the payments, if any, are not known.

(5)
As discussed in the notes to consolidated financial statements included in "Financial Statements and Supplementary Data," we have an environmental reserve of $0.9 million at January 3, 2015. We anticipate the expenditures associated with the reserve will be made in the next twelve months.

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 7A.    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 January 3, 2015, we had variable rate debt of $487.5 million. To reduce the interest rate risk inherent in our variable rate debt, in August 2014 we entered into a forward-starting interest rate swap to pay a fixed interest rate of 1.9% and receive one-month LIBOR on a notional amount of $250.0 million. The interest rate swap economically converts a portion of the Company's LIBOR-based, variable rate debt into fixed rate debt from its effective date of July 31, 2015 through its expiration on April 8, 2019. The pre-tax earnings and cash flow impact resulting from a 100 basis point increase in interest rates on our variable rate debt, including the impact of the interest rate swap, is estimated to be $3.7 million per year.

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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 fluctuations 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 the percentage of our sales in foreign currencies differs from the percentage of our costs in foreign currencies, a change in the relative value of the U.S. dollar could have a disproportionate impact on sales compared to costs, which could impact margins. A portion of our assets are based in 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 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 fiscal years ended as set forth below were as follows:

 
  2014   2013   2012  

Period end rate

    1.2049     1.3760     1.3225  

Period average rate

    1.3296     1.3280     1.2862  

        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 foreign currency derivatives. As of January 3, 2015, we did not have any foreign currency derivatives outstanding.

Item 8.    Financial Statements and Supplementary Data

        The Company's reports of independent registered public accounting firms and consolidated financial statements and related notes appear on the following pages of this Annual Report on Form 10-K.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Polypore International, Inc.:

        We have audited the accompanying consolidated balance sheet of Polypore International, Inc. and subsidiaries as of January 3, 2015, and the related consolidated statements of income, comprehensive income (loss), shareholders' equity, and cash flows for the year ended January 3, 2015. In connection with our audit of the consolidated financial statements, we also have audited the related financial statement Schedule II. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Polypore International, Inc. and subsidiaries as of January 3, 2015, and the results of their operations and their cash flows for the year ended January 3, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Polypore International, Inc.'s internal control over financial reporting as of January 3, 2015, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2015 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

  /s/ KPMG LLP

Charlotte, North Carolina
March 4, 2015

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Polypore International, Inc.:

        We have audited Polypore International, Inc.'s (the Company) internal control over financial reporting as of January 3, 2015, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 3, 2015, based on criteria established in Internal Control—Integrated Framework (1992) issued by COSO.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of January 3, 2015, and the related consolidated statements of income, comprehensive income (loss), shareholders' equity, and cash flows for the year ended January 3, 2015, and our report dated March 4, 2015 expressed an unqualified opinion on those consolidated financial statements.

  /s/ KPMG LLP

Charlotte, North Carolina
March 4, 2015

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Report of Independent Registered Public Accounting Firm

The Board of Directors
of Polypore International, Inc.

        We have audited the accompanying consolidated balance sheets of Polypore International, Inc. as of December 28, 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the two years in the period ended December 28, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Polypore International, Inc. at December 28, 2013, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 28, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

  /s/ Ernst & Young LLP

Charlotte, North Carolina
February 25, 2014

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Polypore International, Inc.

Consolidated balance sheets

(in thousands, except share data)
  January 3, 2015   December 28, 2013  

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 44,458   $ 163,423  

Accounts receivable, net

    121,755     113,506  

Inventories

    101,176     113,860  

Prepaid and other

    16,673     19,557  

Total current assets

    284,062     410,346  

Property, plant and equipment, net

    558,235     595,375  

Goodwill

    444,512     444,512  

Intangibles and loan acquisition costs, net

    78,303     93,792  

Other

    10,180     9,984  

Total assets

  $ 1,375,292   $ 1,554,009  

Liabilities and shareholders' equity

             

Current liabilities:

             

Accounts payable

  $ 24,358   $ 31,764  

Accrued liabilities

    52,697     51,152  

Income taxes payable

    2,310     4,215  

Current portion of debt

    25,000     16,875  

Total current liabilities

    104,365     104,006  

Debt, less current portion

    462,500     629,375  

Pension obligations, less current portion

    121,038     102,821  

Deferred income taxes

    40,319     72,082  

Other

    29,736     26,149  

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, 47,330,740 issued and 44,859,492 outstanding at January 3, 2015 and 46,926,205 issued and 44,916,570 outstanding at December 28, 2013

    473     469  

Paid-in capital

    600,418     569,362  

Retained earnings

    171,287     137,379  

Accumulated other comprehensive loss

    (61,308 )   (12,865 )

Treasury stock, at cost—2,471,248 shares at January 3, 2015 and 2,009,635 shares at December 28, 2013

    (100,998 )   (80,668 )

Total Polypore International, Inc. shareholders' equity

    609,872     613,677  

Noncontrolling interest

    7,462     5,899  

Total shareholders' equity

    617,334     619,576  

Total liabilities and shareholders' equity

  $ 1,375,292   $ 1,554,009  

   

See notes to consolidated financial statements

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Polypore International, Inc.

Consolidated statements of income

(in thousands, except per share data)
  Year ended
January 3, 2015
  Year ended
December 28, 2013
  Year ended
December 29, 2012
 

Net sales

  $ 658,358   $ 636,282   $ 648,699  

Cost of goods sold

    428,335     415,553     403,490  

Gross profit

    230,023     220,729     245,209  

Selling, general and administrative expenses

    145,223     132,792     121,454  

Operating income

    84,800     87,937     123,755  

Other (income) expense:

                   

Interest expense, net

    22,007     39,473     36,049  

Costs related to purchase of 7.5% senior notes

    24,937          

Write-off of loan acquisition costs and other expenses associated with refinancing of senior credit agreement

    1,148         2,478  

Foreign currency and other

    (9,166 )   91     129  

    38,926     39,564     38,656  

Income from continuing operations before income taxes

    45,874     48,373     85,099  

Income taxes

    9,728     14,289     25,267  

Income from continuing operations

    36,146     34,084     59,832  

Income from discontinued operations, net of income taxes

        12,302     10,877  

Gain (loss) on sale of discontinued operations, net of income taxes

    (655 )   35,855      

Income (loss) from discontinued operations

    (655 )   48,157     10,877  

Net income

    35,491     82,241     70,709  

Less: Net income (loss) attributable to noncontrolling interest

    1,583     630     (242 )

Net income attributable to Polypore International, Inc. 

  $ 33,908   $ 81,611   $ 70,951  

Net income attributable to Polypore International, Inc.:

                   

Income from continuing operations

  $ 34,563   $ 33,454   $ 60,074  

Income (loss) from discontinued operations

    (655 )   48,157     10,877  

Net income attributable to Polypore International, Inc. 

  $ 33,908   $ 81,611   $ 70,951  

Net income attributable to Polypore International, Inc. per share—basic:

                   

Continuing operations

  $ 0.77   $ 0.73   $ 1.29  

Discontinued operations

    (0.01 )   1.06     0.23  

Net income attributable to Polypore International, Inc. per share

  $ 0.76   $ 1.79   $ 1.52  

Net income attributable to Polypore International, Inc. per share—diluted:

                   

Continuing operations

  $ 0.76   $ 0.72   $ 1.27  

Discontinued operations

    (0.01 )   1.04     0.23  

Net income attributable to Polypore International, Inc. per share

  $ 0.75   $ 1.76   $ 1.50  

Weighted average shares outstanding—basic

    44,786,317     45,610,270     46,540,385  

Weighted average shares outstanding—diluted

    45,382,074     46,239,796     47,229,595  

   

See notes to consolidated financial statements

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Polypore International, Inc.

Consolidated statements of comprehensive income (loss)

(in thousands)
  Year ended
January 3, 2015
  Year ended
December 28, 2013
  Year ended
December 29, 2012
 

Net income

  $ 35,491   $ 82,241   $ 70,709  

Other comprehensive income (loss):

                   

Foreign currency translation adjustment

    (31,918 )   3,745     10,065  

Change in net actuarial loss and prior service credit

    (23,785 )   10,207     (20,883 )

Unrealized loss on interest rate swap

    (2,265 )        

Income taxes related to other comprehensive income (loss)

    9,505     (4,285 )   5,599  

Other comprehensive income (loss)

    (48,463 )   9,667     (5,219 )

Comprehensive income (loss)

    (12,972 )   91,908     65,490  

Less: Comprehensive income (loss) attributable to noncontrolling interest

    1,563     809     (235 )

Comprehensive income (loss) attributable to Polypore International, Inc. 

  $ (14,535 ) $ 91,099   $ 65,725  

   

See notes to consolidated financial statements

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Polypore International, Inc.

Consolidated statements of shareholders' equity

(in thousands, except share data)
  Shares of
Common
Stock
  Common
Stock
  Shares of
Treasury
Stock
  Treasury
Stock
  Paid-in
Capital
  Retained
Earnings
(Accumulated
Deficit)
  Accumulated
Other
Comprehensive
Loss
  Non-
controlling
Interest
  Total  

Balance at December 31, 2011

    46,499,180   $ 465       $   $ 527,243   $ (15,183 ) $ (17,127 ) $ 3,995   $ 499,393  

Net income for the year ended December 29, 2012

                        70,951         (242 )   70,709  

Stock-based compensation

                    16,278                 16,278  

Stock option exercises

    116,183     1             1,337                 1,338  

Excess tax benefit from stock-based compensation

                    338                 338  

Restricted stock grants

    11,701                                  

Change in net actuarial loss and prior service credit, net of income tax benefit of $5,848

                            (15,035 )       (15,035 )

Foreign currency translation adjustment, net of income tax expense of $249

                            9,809     7     9,816  

Balance at December 29, 2012

    46,627,064     466             545,196     55,768     (22,353 )   3,760     582,837  

Net income for the year ended December 28, 2013

                        81,611         630     82,241  

Stock-based compensation

                    20,687                 20,687  

Stock option exercises

    209,237     2             2,317                 2,319  

Excess tax benefit from stock-based compensation

                    1,163                 1,163  

Restricted stock grants

    89,904     1             (1 )                

Restricted stock forfeitures

    (1,374 )       1,374                          

Repurchases of common stock

    (2,008,261 )       2,008,261     (80,668 )                     (80,668 )

Contributions from noncontrolling interest

                                1,330     1,330  

Change in net actuarial loss and prior service credit, net of income tax expense of $3,647

                            6,560         6,560  

Foreign currency translation adjustment, net of income tax expense of $638

                            2,928     179     3,107  

Balance at December 28, 2013

    44,916,570     469     2,009,635     (80,668 )   569,362     137,379     (12,865 )   5,899     619,576  

Net income for the year ended January 3, 2015

                        33,908         1,583     35,491  

Stock-based compensation

                    21,737                 21,737  

Stock option exercises

    296,666     3             3,561                 3,564  

Excess tax benefit from stock-based compensation

                    5,759                 5,759  

Restricted stock grants

    107,869     1             (1 )                

Restricted stock forfeitures

    (2,360 )       2,360                            

Repurchases of common stock

    (459,253 )       459,253     (20,330 )                   (20,330 )

Unrealized loss on interest rate swap, net of income tax benefit of $826

                            (1,439 )         (1,439 )

Change in net actuarial loss and prior service credit, net of income tax benefit of $9,180

                            (14,605 )       (14,605 )

Foreign currency translation adjustment, net of income tax expense of $501

                            (32,399 )   (20 )   (32,419 )

Balance at January 3, 2015

    44,859,492   $ 473     2,471,248   $ (100,998 ) $ 600,418   $ 171,287   $ (61,308 ) $ 7,462   $ 617,334  

   

See notes to consolidated financial statements

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Polypore International, Inc.

Consolidated statements of cash flows

(in thousands)
  Year ended
January 3, 2015
  Year ended
December 28, 2013
  Year ended
December 29, 2012
 

Operating activities:

                   

Net income

  $ 35,491   $ 82,241   $ 70,709  

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

                   

Depreciation expense

    44,122     44,812     42,320  

Amortization expense

    11,112     11,491     13,347  

Amortization of loan acquisition costs

    1,768     2,474     2,471  

Stock-based compensation

    21,737     20,687     16,278  

Excess tax benefit from stock-based compensation

    (5,759 )   (1,163 )   (338 )

Costs related to purchase of 7.5% senior notes

    24,937          

Write-off of loan acquisition costs and other expenses associated with refinancing of senior credit agreement

    1,148         2,478  

Deferred income taxes

    (8,228 )   (4,038 )   9,822  

Foreign currency (gain) loss

    (4,780 )   (60 )   729  

Loss on disposal of property, plant and equipment

    335     1,161     971  

(Gain) loss on sale of discontinued operations, net of income taxes

    655     (35,855 )    

Changes in operating assets and liabilities:

                   

Accounts receivable

    (14,023 )   9,795     (2,810 )

Inventories

    5,959     2,117     (28,304 )

Prepaid and other current assets

    2,167     8,180     1,487  

Accounts payable and accrued liabilities

    (10,533 )   4,105     (23,003 )

Income taxes payable

    (2,393 )   1,217     (1,982 )

Other, net

    8,414     7,926     369  

Net cash provided by operating activities

    112,129     155,090     104,544  

Investing activities:

                   

Purchases of property, plant and equipment, net

    (30,825 )   (28,235 )   (137,111 )

Net proceeds from the sale of discontinued operations

        116,613      

Net cash provided by (used in) investing activities

    (30,825 )   88,378     (137,111 )

Financing activities:

                   

Proceeds from new senior credit agreement

    500,000         350,000  

Principal payments in connection with refinancing of senior credit agreement

    (273,750 )       (342,291 )

Purchase of 7.5% senior notes

    (385,542 )        

Loan acquisition costs

    (4,080 )       (6,228 )

Principal payments on debt

    (20,000 )   (15,000 )   (4,674 )

Proceeds from revolving credit facility

    149,000     54,200      

Payments on revolving credit facility

    (149,000 )   (89,200 )   (15,000 )

Repurchases of common stock

    (20,330 )   (80,668 )    

Proceeds from stock option exercises

    3,564     2,319     1,338  

Excess tax benefit from stock-based compensation

    5,759     1,163     338  

Contributions from noncontrolling interest

        1,330      

Net cash used in financing activities

    (194,379 )   (125,856 )   (16,517 )

Effect of exchange rate changes on cash and cash equivalents

    (5,890 )   938     1,383  

Net increase (decrease) in cash and cash equivalents

    (118,965 )   118,550     (47,701 )

Cash and cash equivalents at beginning of period

    163,423     44,873     92,574  

Cash and cash equivalents at end of period

  $ 44,458   $ 163,423   $ 44,873  

Supplemental cash flow information:

                   

Cash paid for interest, net of capitalized interest

  $ 24,376   $ 36,973   $ 33,284  

Cash paid for income taxes, net of refunds

    20,485     22,006     24,837  

   

See notes to consolidated financial statements

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Polypore International, Inc.

Notes to consolidated financial statements

1. 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.

2. Accounting Policies

Basis of Presentation and Use of Estimates

        The accompanying consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries after elimination of intercompany accounts and transactions. The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform to current classifications. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

        On December 19, 2013, the Company completed the sale of its Microporous business. The results of operations from this business have been presented as discontinued operations. All disclosures and amounts in the notes to the consolidated financial statements relate to the Company's continuing operations, unless otherwise indicated.

Accounting Period

        The Company's fiscal year is the 52- or 53-week period ending the Saturday nearest to December 31. The fiscal year ended January 3, 2015 included 53 weeks. The fiscal years ended December 28, 2013 and December 29, 2012 included 52 weeks.

Revenue Recognition

        Revenue from product sales is recognized when a firm sales agreement is in place, delivery of the product has occurred and collectibility of the fixed and determinable sales price is reasonably assured. Amounts billed to customers for shipping and handling are recorded in "Net sales" in the accompanying consolidated statements of income. Shipping and handling costs incurred by the Company for the delivery of goods to customers are included in "Cost of goods sold" in the accompanying consolidated statements of income. Estimates for sales returns and allowances and product returns are recognized in the period in which the revenue is recorded. Product returns and warranty expenses were not material for all periods presented.

Cash Equivalents

        The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable and Concentrations of Credit Risk

        Accounts receivable potentially expose the Company to concentrations of credit risk. The Company provides credit in the normal course of business and performs ongoing credit evaluations on certain of

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

its customers' financial condition, but generally does not require collateral to support such receivables. Accounts receivable, net of allowance for doubtful accounts, are carried at cost, which approximates fair value. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The allowance for doubtful accounts was $2,394,000 and $3,262,000 at January 3, 2015 and December 28, 2013, respectively. The Company believes that the allowance for doubtful accounts is adequate to provide for potential losses resulting from uncollectible accounts. The Company charges accounts receivable off against the allowance for doubtful accounts when it deems them to be uncollectible on a specific identification basis.

Inventories

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

(in thousands)
  January 3, 2015   December 28, 2013  

Raw materials

  $ 35,700   $ 39,357  

Work-in-process

    11,846     22,079  

Finished goods

    53,630     52,424  

  $ 101,176   $ 113,860  

Property, Plant and Equipment

        Property, plant and equipment are stated at cost. Depreciation commences when the asset is substantially complete and ready for its intended use. Depreciation is computed for financial reporting purposes on the straight-line method over the estimated useful lives of the related assets. The estimated useful lives for buildings and land improvements range from 20 to 40 years, and the estimated useful lives for machinery and equipment range from 5 to 15 years. Costs of the construction of certain long-term assets include capitalized interest, which is amortized over the estimated useful life of the related asset. The Company capitalized interest of $2,638,000 in 2012. Repair and maintenance costs, which include indirect labor and employee benefits associated with maintenance personnel and utility, maintenance and repair costs for equipment and facilities utilized in the manufacturing process, are treated as inventoriable costs. Major planned maintenance activities outside of the normal production process are capitalized as property, plant and equipment if the costs are expected to provide future benefits by increasing the service potential of the asset to which the repair or maintenance applies.

        Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets.

Goodwill, Intangible Assets and Loan Acquisition Costs

        Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company performs its

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

annual impairment assessment 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. The Company's reporting units are at the operating segment level.

        The Company tests for goodwill impairment using the quantitative two-step goodwill impairment test. Step one of the goodwill impairment test compares the fair value of the Company's 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, the Company determines 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, 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.

        Intangible assets with finite lives are amortized over their respective estimated useful lives using the straight-line method. The useful life of customer relationships is based upon historical customer attrition rates and represents the estimated economic life of those relationships. Loan acquisition costs are amortized over the term of the related debt. Amortization expense for loan acquisition costs is classified as interest expense. Intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset.

Income Taxes

        Deferred tax assets and liabilities are based on temporary differences between the basis of certain assets and liabilities for income tax and financial reporting purposes. A valuation allowance is recognized if it is more likely than not that a portion of the deferred tax assets will not be realized in the future. The tax effects from unrecognized tax benefits are recognized in the financial statements if the position is more likely than not to be sustained upon audit, based on the technical merits of the position.

Stock-Based Compensation

        The Company records stock-based compensation based on the fair value of the award at the grant date. Stock-based compensation expense is recorded over the requisite service period using the straight-line method for service-based awards and in the service period corresponding to the performance target for performance-based awards. Excess tax benefits from employee stock option exercises are recorded as an increase to additional paid-in capital if an incremental tax benefit is realized following the ordering provisions of the tax law. Excess tax benefits are reported as a financing cash inflow rather than as a reduction of income taxes paid in the statement of cash flows.

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

Research and Development

        The cost of research and development is charged to expense as incurred and is included in "Selling, general and administrative expenses" in the accompanying consolidated statements of income. Research and development expense was $19,922,000, $17,184,000 and $18,487,000 in 2014, 2013 and 2012, respectively.

Net Income Per Share

        Basic net income per common share is based on the weighted average number of common shares outstanding in each year. Diluted net income per common share considers the impact of dilution from stock options and unvested restricted stock shares as measured under the treasury stock method. Potential common shares that would increase net income per share amounts or decrease net loss per share amounts are antidilutive and excluded from the diluted net income per common share computation.

Foreign Currency Translation

        The local currencies of the Company's foreign subsidiaries are the functional currencies. Assets and liabilities of the Company's foreign subsidiaries are translated into United States dollars at current exchange rates and resulting translation adjustments are reported in accumulated other comprehensive income (loss). Income statement amounts are translated at weighted average exchange rates prevailing during the period. Transaction gains and losses are included in the determination of net income.

Fair Value of Financial Instruments

        The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, long-term debt and an interest rate swap. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates the fair value due to the short-term maturities of these assets and liabilities. The carrying value of borrowings under the senior credit agreement approximates fair value because the interest rates adjust to market interest rates. See Note 8 for the fair value of the interest rate swap.

Fair Value Measurements

        Authoritative guidance establishes the following hierarchy that prioritizes the inputs to valuation methodologies used to measure fair value:

    Level one: observable inputs such as quoted market prices in active markets;

    Level two: inputs other than the quoted prices in active markets that are observable either directly or indirectly;

    Level three: unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions.

        As of January 3, 2015, the Company's only financial asset or liability required to be measured at fair value on a recurring basis was an interest rate swap, which is disclosed in Note 8. See Note 10 for pension assets measured at fair value on a recurring basis.

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

Derivative Instruments and Hedging Activities

        The Company may use derivative financial instruments to manage interest rate risk and does not use derivative instruments for trading or speculative purposes. The Company formally documents the nature of and relationship between the derivative instrument and the hedged item, as well as its risk management objective and strategy for undertaking the hedge transaction, and the method of assessing hedge effectiveness. When the Company uses derivative instruments, it minimizes its credit risk by entering into transactions with counterparties with high quality, investment-grade credit ratings, as well as limiting the amount of exposure with each counterparty and regularly monitoring its financial condition. The Company manages market risk by limiting the type of derivative instruments and strategies it uses and the degree of market risk that it plans to hedge through the use of derivative instruments.

        Derivative instruments are recorded at fair value in the consolidated balance sheets. Changes in fair value of a derivative instrument are recorded in earnings or to shareholders' equity in accumulated other comprehensive income (loss), depending on whether it has been designated as a hedge and, if so, the type of hedge. In order to qualify for hedge accounting, a specified level of hedge effectiveness between the derivative instrument and the item being hedged must exist at inception and throughout the hedged period. Hedge ineffectiveness and any changes in fair value excluded from the hedging transaction are recognized in earnings. For hedges of forecasted transactions, the significant characteristics and expected term of the forecasted transaction must be specifically identified, and it must be probable that they will occur. If it is no longer probable that the hedged forecasted transaction will occur, the Company recognizes the gain or loss related to the derivative instrument in earnings.

Recent Accounting Pronouncements

        In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which gives guidance on the presentation of certain unrecognized tax benefits in the financial statements. This guidance requires that an unrecognized tax benefit be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward rather than as a liability if certain criteria are met. The guidance is effective for annual and interim periods beginning after December 15, 2013. The adoption of this guidance in the Company's January 3, 2015 consolidated financial statements did not have an impact on the Company's financial statement presentation, financial condition or results of operations.

        In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that this standard will have on its consolidated financial statements and related disclosures.

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

3. Property, Plant and Equipment

        Property, plant and equipment consist of:

(in thousands)
  January 3, 2015   December 28, 2013  

Land

  $ 22,593   $ 24,184  

Buildings and land improvements

    150,931     157,928  

Machinery and equipment

    545,265     559,865  

Construction in progress

    146,053     139,344  

    864,842     881,321  

Less accumulated depreciation

    306,607     285,946  

  $ 558,235   $ 595,375  

4. Goodwill

        There were no changes in the carrying amount of goodwill for the years ended January 3, 2015 and December 28, 2013, and the carrying amount of goodwill at those dates was as follows:

(in thousands)
  Transportation
and Industrial
  Electronics
and EDVs
  Separations
Media
  Total  

Goodwill

  $ 327,347   $ 36,336   $ 212,279   $ 575,962  

Accumulated impairment charges

    (131,450 )           (131,450 )

  $ 195,897   $ 36,336   $ 212,279   $ 444,512  

5. Intangibles, Loan Acquisition and Other Costs

        Intangibles, loan acquisition and other costs consist of:

 
   
  January 3, 2015   December 28, 2013  
(in thousands)
  Weighted
Average
Life (years)
  Gross
Carrying
Amount
  Accumulated
Amortization
  Gross
Carrying
Amount
  Accumulated
Amortization
 

Intangible and other assets subject to amortization:

                             

Customer relationships

  17   $ 180,192   $ 117,785   $ 181,464   $ 107,554  

Loan acquisition costs

  5     6,979     1,047     14,808     5,645  

Intangible assets not subject to amortization:

                             

Trade names

  Indefinite     9,964         10,719      

      $ 197,135   $ 118,832   $ 206,991   $ 113,199  

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

5. Intangibles, Loan Acquisition and Other Costs (Continued)

        Amortization expense, including amortization of loan acquisition costs classified as interest expense, was $12,880,000, $13,595,000 and $15,078,000 in 2014, 2013 and 2012, respectively. The Company's estimate of amortization expense for the next five years is as follows:

(in thousands)
   
 

2015

  $ 12,442  

2016

    12,442  

2017

    12,442  

2018

    11,294  

2019

    4,110  

6. Accrued Liabilities

        Accrued liabilities consist of:

(in thousands)
  January 3, 2015   December 28, 2013  

Compensation expense and other fringe benefits

  $ 17,196   $ 18,421  

Current deferred tax liability

    9,663     1,970  

Other

    25,838     30,761  

  $ 52,697   $ 51,152  

7. Debt

        Debt, in order of priority, consists of:

(in thousands)
  January 3, 2015   December 28, 2013  

Senior credit agreement:

             

Revolving credit facility

  $   $  

Term loan facility

    487,500     281,250  

    487,500     281,250  

7.5% senior notes

        365,000  

    487,500     646,250  

Less current portion

    25,000     16,875  

Long-term debt

  $ 462,500   $ 629,375  

        On April 8, 2014, the Company entered into a new senior secured credit agreement that provides for a $150,000,000 revolving credit facility and a $500,000,000 term loan facility. At that date, the Company used cash on hand, proceeds from the initial draw of $100,000,000 under the new term loan facility and borrowings of $33,000,000 under the new revolving credit facility to pay all outstanding principal and interest under the previous senior secured credit agreement and loan acquisition costs. The Company incurred loan acquisition costs of approximately $4,080,000, of which $3,944,000 was capitalized and will be amortized over the life of the new credit agreement. The Company wrote off unamortized loan acquisition costs of $1,012,000 associated with the previous credit agreement.

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

7. Debt (Continued)

        On May 8, 2014, the Company borrowed the remaining $400,000,000 available under the new term loan facility and used the proceeds to purchase and retire all of the previously outstanding 7.5% senior notes. The total purchase price for the notes was $385,542,000, consisting of principal of $365,000,000, redemption premiums of $20,531,000 and other expenses associated with the transaction. In connection with the purchase, the Company incurred a $24,937,000 charge to income, comprised of the redemption premiums, write-off of unamortized loan acquisition costs of $4,395,000 and other expenses.

        The Company's domestic subsidiaries guarantee indebtedness under the credit agreement. Substantially all assets of the Company and its domestic subsidiaries and a first priority pledge of 65% of the voting capital stock of its foreign subsidiaries secure indebtedness under the credit agreement. Interest rates are equal to, at the Company's option, either an alternate base rate or the Eurodollar base rate, plus a specified margin. The Company's ability to pay dividends on its common stock is limited under the terms of the credit agreement. The Company is also subject to certain financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio, all of which the Company was in compliance with as of January 3, 2015. The revolving credit facility and term loan facility mature in April 2019.

        At January 3, 2015, the Company had no amounts outstanding under the revolving credit facility and the entire amount was available for borrowing.

        Minimum scheduled principal repayments of the term loan facility are as follows:

(in thousands)
   
 

2015

  $ 25,000  

2016

    31,250  

2017

    43,750  

2018

    62,500  

2019

    325,000  

  $ 487,500  

8. Derivative Instruments and Hedging Activities

        In August 2014, the Company entered into a forward-starting interest rate swap to pay a fixed interest rate of 1.9% and receive one-month LIBOR on a notional amount of $250,000,000 from its effective date of July 31, 2015 through its expiration on April 8, 2019. The Company's principal objective is to reduce significant, unanticipated earnings fluctuations and cash flow variability that may arise from volatility in interest rates. The interest rate swap economically converts a portion of the Company's LIBOR-based, variable rate debt into fixed rate debt. Under the contract, the Company agrees with a counterparty to exchange, at specified intervals, the difference between floating- and fixed-rate interest payments on the notional amount. The Company's interest rate swap is governed by a standard International Swaps and Derivatives Association master agreement.

        The interest rate swap has been designated as a cash flow hedge and is recorded at fair value in the consolidated balance sheet with changes in fair value, net of income taxes, recorded to shareholders' equity in "Accumulated other comprehensive loss." The fair value of the interest rate swap is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve (level two inputs in the fair value hierarchy), taking into

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Notes to consolidated financial statements (Continued)

8. Derivative Instruments and Hedging Activities (Continued)

consideration the risk of nonperformance, including counterparty credit risk. The interest rate swap is recorded in the consolidated balance sheet as of January 3, 2015 as follows:

(in thousands)
  Balance Sheet Location    
 

Interest rate swap (current portion)

  Accrued liabilities   $ (1,414 )

Interest rate swap (non-current portion)

  Other liabilities     (851 )

Total fair value of interest rate swap

      $ (2,265 )