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
"Item 8. 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.
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 2012, we generated total net sales of $717.4 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 75% 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 key presence in the more
established consumer electronics market and participate in 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 and may continue to experience variability in the
short term as these markets emerge.
Since
2009, we have made significant investments in capacity expansion projects, all of which were funded by internally generated cash and a $49.3 million grant from the
U.S. Department of Energy ("DOE"). Beginning in 2013, cash flows from operations and lower capital expenditures position us to generate significant amounts of cash. In addition, the United
States Federal Trade Commission ("FTC") has ordered us to divest substantially all of the assets acquired in connection with the 2008 acquisition of Microporous Products L.P. ("Microporous").
We are pursuing our legal options and at the
same time, evaluating alternatives for these assets. If we divest of all or a portion of these assets, we would intend to sell the assets at fair market value which would provide additional cash. As
we transition into a period of substantial cash generation, we intend to maintain a total leverage ratio, defined in our credit agreement as the ratio of total indebtedness (total debt less cash on
hand of up to $50.0 million) to adjusted EBITDA (as defined in our credit agreement and calculated in the liquidity and capital resources section), of approximately 3.0x, while also evaluating
other alternatives for cash, including returning value to shareholders through share repurchases.
Energy Storage
In the energy storage business, our membrane separators are a critical performance 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 businessgrowth in Asia, demand for
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consumer
electronics and growing demand for EDVsare 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
CO
2
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.
Equipment installation for the Concord facility is substantially complete and production has started for portions of the facility. The remaining capacity at Concord will ramp up over time as the
nascent market for EDVs develops.
Although
sales declined during 2012, we expect overall demand to increase in 2013 and we believe the long-term demand drivers for our productsconsumer demand for
mobility, regulations for fuel efficiency and CO
2
emissions, conversion to lithium technology in hybrids, concerns about access to petroleum, efforts to reduce pollution, and increasing
transportation needs in developing countriesremain fully intact. While consumer electronics applications have attractive long-term market growth trends, EDV and eventually ESS
applications have the potential to be much larger markets. Based on industry forecasts and industry studies, unit sales of lithium batteries for EDV applications are expected to grow at a compound
annual growth rate of greater than 40% over the next five years. We believe lithium battery separator growth will exceed battery unit sales growth because the trend towards larger batteries will
require the use of more separator in each battery. Industry forecasts also predict EDV sales to be 5% or more of new car sales within the next five years. If 5% of new car sales were EDVs, we believe
the entire lithium battery separator market would virtually double in total size. Based on our current customer base, if only a portion of these industry forecasts materialize, we believe we will
completely utilize our current production 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. Hybrids are selling well and regulations around the world are driving development and introductions. New hybrids are coming
to market and some high-separator content vehicles have just been introduced in Europe. We believe our dry process products continue to be the preferred product in large format
lithium-ion 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 believe the factors that influenced our
decision to expand capacity remain valid, and we continue to expect significant sales growth 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 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
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sectors,
export incentives and ongoing conversion to the polyethylene-based membrane separators we produce. We are meeting growing demand in this region by investing in Asia and exporting from our
U.S. and European facilities. Our investments in Asia have included completing three capacity
expansions at our Prachinburi, Thailand facility, the most recent of which started production in the second quarter of 2012; acquiring battery separator manufacturing assets and subsequently expanding
our operations in Bangalore, India; acquiring a production facility in Tianjin, China; establishing an Asian Technical Center in Thailand; and entering into a joint venture with a customer, Camel
Group Co., Ltd. ("Camel"), to produce lead-acid battery separators in Xiangyang, China, primarily for Camel's use.
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 applications 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. In late 2011, we completed the expansion of our PUREMA ® hemodialysis membrane production capacity to support future market
growth.
For
filtration and specialty applications, we produce a wide range of membranes and membrane-based elements for micro-, ultra- and nanofiltration and gasification/degasification of
liquids. Micro-, ultra-and nanofiltration membrane element market growth is being driven by several factors, including end-market growth in applications such as water treatment and
pharmaceutical processing, displacement of conventional filtration media by membrane filtration due to membranes' superior cost and performance attributes, and increasing purity requirements in
industrial and other applications.
Critical accounting policies
Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial
condition and results of operations, and that require the use of complex and subjective estimates based on past experience and management's judgment. Because of 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
"Item 8. Financial Statements and Supplementary Data."
Allowance for doubtful accounts
Accounts receivable are primarily composed of amounts owed to us through our operating activities and are presented net of an allowance
for doubtful accounts. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. We charge accounts
receivables off against our allowance for doubtful accounts when we deem them to be uncollectible on a specific identification basis. The determination of the amount of the allowance for doubtful
accounts is subject to judgment and estimated by management. If circumstances or economic conditions deteriorate, we may need to increase the allowance for doubtful accounts.
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Impairment of intangibles and goodwill
Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing unless circumstances dictate more frequent assessments. We
perform our annual impairment assessment for goodwill and indefinite-lived intangibles as of the first day of the fourth quarter of each fiscal year and more frequently whenever events or changes in
circumstances indicate that the fair value of the asset may be less than the carrying amount. Our reporting units are at the operating segment level. In September 2011, the FASB amended the accounting
guidance on annual goodwill impairment testing to allow companies the option to assess certain qualitative factors or use the quantitative two-step goodwill impairment test. The guidance
states that if a company chooses the option to assess certain qualitative factors and determines, based on the assessment of qualitative factors, that it is more likely than not that the carrying
amount of a reporting unit is less than its fair value, then the first and second steps of the quantitative goodwill impairment test are unnecessary. However, if a qualitative assessment is performed
and indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step goodwill impairment test must be performed
at the reporting unit level.
When
performing a quantitative two-step goodwill impairment test, step one compares the fair value of our reporting units to their carrying amount. The fair value of the
reporting unit is determined using the income approach, corroborated by comparison to market capitalization and key multiples of comparable companies. Under the income approach, we determine fair
value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital. If the fair value of the reporting unit is greater than its carrying
amount, there is no impairment. If the reporting unit's carrying amount exceeds its fair value, then the second step must be completed to measure the amount of impairment, if any. Step two calculates
the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one. In
this step, the fair value of the reporting unit is allocated to all of the reporting unit's assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been
acquired on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to the excess.
Determining
the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans and
future market conditions, among others. There can be no assurance that our estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the
future. If our assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not achieved or changes in strategy or market conditions occur, we may be required to
record goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be
material.
In
fiscal 2012, our annual impairment test indicated that the fair value of the reporting units exceeded their respective carrying amounts by substantially more than 10%.
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/or liability measurement and differences between actual results and these two actuarial assumptions
can materially affect our projected benefit obligation or the valuation of our plan assets. Other assumptions involve demographic factors such as retirement, expected increases in compensation,
mortality and turnover. The discount rate enables us to state expected future cash flows at a present value on the measurement date. The discount rate assumptions are based on the market
31
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rate
for high quality fixed income investments. At December 29, 2012, a 1% decrease in the discount rate would increase our projected benefit obligations and the unfunded status of our pension
plans by $21.0 million. The expected rates of return on our pension plans' assets are based on the asset allocation of each plan and the long-term projected return of those assets.
For 2012, if the expected rate of return on pension plan assets were reduced by 1%, the result would have increased our net periodic benefit expense for fiscal 2012 by $0.1 million. At
December 29, 2012, if the actual plan assets were reduced by 1%, the unfunded status of our pension plans would increase by $0.2 million.
Environmental matters
Environmental obligations are accrued when such expenditures are probable and reasonably estimable. The amount of liability recorded is
based on currently available information, including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation,
presently enacted laws and existing technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. We do not currently
anticipate any material loss in excess of the amounts accrued. Future remediation expenses may be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the
extent and method of remediation, the evolving nature of environmental regulations and the availability and application of technology. Recoveries of environmental costs from other parties are
recognized as assets when their receipt is deemed probable.
In
connection with the acquisition of Membrana GmbH ("Membrana") in 2002, we recorded a reserve for environmental obligations. The reserve provides for costs to remediate known
environmental issues and operational upgrades which are required in order for us to remain in compliance with local regulations. The initial estimate and subsequent finalization of the reserve was
included in the allocation of purchase price at the date of acquisition. At December 29, 2012, the environmental reserve for the Membrana facility, which is denominated in euros, was
$11.1 million. We anticipate the expenditures associated with the reserve will be made in the next twelve months.
We
have indemnification agreements for certain environmental matters from Acordis A.G. ("Acordis") and Akzo Nobel N.V. ("Akzo"), the prior owners of Membrana. Akzo originally
provided broad environmental protections to Acordis with the right to assign such indemnities to Acordis's successors. Akzo's indemnifications relate to conditions existing prior to December 1999,
which is the date that Membrana was sold to Acordis. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through February 2002, the
acquisition date. We will receive indemnification payments under the indemnification agreements after expenditures are
made against approved claims. At December 29, 2012, the amounts receivable, which are denominated in euros, under the indemnification agreements were $11.5 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 2012, 2011 and 2010. 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.
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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)
|
|
2012
|
|
2011
|
|
2010
|
|
Net sales
|
|
$
|
717.4
|
|
$
|
763.1
|
|
$
|
616.6
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
263.9
|
|
|
322.1
|
|
|
246.9
|
|
Selling, general and administrative expenses
|
|
|
123.9
|
|
|
132.6
|
|
|
114.0
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
140.0
|
|
|
189.5
|
|
|
132.9
|
|
Interest expense, net
|
|
|
36.0
|
|
|
34.4
|
|
|
46.7
|
|
Other
|
|
|
2.5
|
|
|
(2.0
|
)
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
101.5
|
|
|
157.1
|
|
|
88.6
|
|
Income taxes
|
|
|
30.5
|
|
|
51.9
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
71.0
|
|
$
|
105.2
|
|
$
|
63.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
(percent of sales)
|
|
2012
|
|
2011
|
|
2010
|
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
36.8
|
|
|
42.2
|
|
|
40.0
|
|
Selling, general and administrative expenses
|
|
|
17.3
|
|
|
17.4
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
19.5
|
|
|
24.8
|
|
|
21.6
|
|
Interest expense, net
|
|
|
5.0
|
|
|
4.5
|
|
|
7.6
|
|
Other
|
|
|
0.4
|
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
14.1
|
|
|
20.6
|
|
|
14.4
|
|
Income taxes
|
|
|
4.2
|
|
|
6.8
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9.9
|
%
|
|
13.8
|
%
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
Fiscal 2012 compared with fiscal 2011
Net sales.
Net sales for fiscal 2012 were $717.4 million, a decrease of $45.7 million, or 6.0%, from fiscal 2011, as higher
sales in
the transportation and industrial and separations media segments were more than offset by lower sales in the electronics and EDVs segment and the negative impact of foreign currency translation of
$24.4 million.
Gross profit.
Gross profit was $263.9 million, a decrease of $58.2 million, or 18.1%, from fiscal 2011. Gross profit as a
percent of
net sales was 36.8% for fiscal 2012 compared to 42.2% for fiscal 2011. The decrease in consolidated gross profit and gross profit margin was primarily due to lower sales, costs associated with growth
investments, including non-cash depreciation expense, and costs to export lead-acid separators from U.S. and European production facilities to meet growing demand in Asia.
Selling, general and administrative expenses.
Selling, general and administrative expenses decreased $8.7 million in fiscal 2012
compared to
fiscal 2011, primarily due to a $13.8 million decrease in
performance-based incentive compensation expense and $3.2 million lower amortization expense, partially offset by a $7.0 million increase in stock-based compensation expense. Selling,
general and administrative expenses were 17.3% of consolidated net sales in fiscal 2012 and 17.4% in fiscal 2011.
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Segment operating income.
Segment operating income, which excludes stock-based compensation and certain non-recurring and other costs,
was $158.1 million, a decrease of $41.3 million, or 20.7%, from fiscal 2011. Segment operating income as a percent of net sales was 22.0% for fiscal 2012 compared to 26.1% for fiscal
2011. The decrease in segment operating income and segment operating income margin was the result of lower sales, costs associated with growth investments, including $7.5 million of additional
non-cash depreciation expense, and costs to export lead-acid separators from U.S. and European production facilities to meet growing demand in Asia, partially offset by a
decline in performance-based incentive compensation expense.
Interest expense.
Interest expense for fiscal 2012 increased by $1.6 million from fiscal 2011, primarily resulting from a decrease
in
capitalized interest due to lower capital expenditures associated with capacity expansion projects.
Income taxes.
Income taxes as a percentage of pre-tax income for fiscal 2012 were 30.1% compared to 33.0% for fiscal 2011. 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 state income taxes, changes in estimates of permanent differences and valuation allowances. The mix of earnings between the tax jurisdictions has the most 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%.
The
components of our effective tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal 2012
|
|
Fiscal 2011
|
|
U.S. federal statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes
|
|
|
0.6
|
|
|
1.1
|
|
Mix of income in taxing jurisdictions
|
|
|
(7.6
|
)
|
|
(2.7
|
)
|
Other
|
|
|
2.1
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
Total effective tax rate
|
|
|
30.1
|
%
|
|
33.0
|
%
|
|
|
|
|
|
|
Fiscal 2011 compared with fiscal 2010
Net sales.
Net sales for fiscal 2011 were $763.1 million, an increase of $146.5 million, or 23.8%, from fiscal 2010. The
increase was
due to higher sales across all segments and the positive impact of foreign currency translation of $13.3 million. By segment, electronics and EDVs increased $70.0 million, transportation
and industrial increased $57.2 million and separations media increased $19.3 million.
Gross profit.
Gross profit was $322.1 million, an increase of $75.2 million, or 30.5%, from fiscal 2010. Gross profit as a
percent of
net sales was 42.2% for fiscal 2011 compared to 40.0% for fiscal 2010. The increase in consolidated gross profit and gross profit margin was primarily due to higher production volumes and production
efficiencies in the electronics and EDVs segment and the transportation and industrial segment.
Selling, general and administrative expenses.
Selling, general and administrative expenses increased $18.6 million in fiscal 2011
compared to
fiscal 2010, primarily due to costs associated with growth investments and higher stock-based compensation expense. Selling, general and administrative expenses were 17.4% of consolidated net sales in
fiscal 2011 compared to 18.4% in fiscal 2010.
Segment operating income.
Segment operating income, which excludes stock-based compensation and certain non-recurring and other costs,
was $199.4 million, an increase of $62.8 million, or 46.0%, from fiscal 2010. Segment operating income as a percent of net sales was 26.1% for fiscal 2011 compared to 22.2% for fiscal
2010. The increase in segment operating income and segment operating
34
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income
margin was the result of higher production volumes and production efficiencies, offset to some extent by higher costs associated with growth investments.
Interest expense.
Interest expense for fiscal 2011 decreased by $12.3 million from fiscal 2010, due to the repayment and
refinancing of our
senior notes in late 2010 and capitalized interest associated with capacity expansion projects in 2011.
Income taxes.
Income taxes as a percentage of pre-tax income for fiscal 2011 were 33.0% compared to 28.2% for fiscal 2010. 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 state income taxes, changes in estimates of permanent differences and valuation allowances. The mix of earnings between the tax jurisdictions has the most 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%.
The
components of our effective tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
|
Fiscal 2010
|
|
U.S. federal statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes
|
|
|
1.1
|
|
|
0.7
|
|
Mix of income in taxing jurisdictions
|
|
|
(2.7
|
)
|
|
(7.7
|
)
|
Other
|
|
|
(0.4
|
)
|
|
0.2
|
|
|
|
|
|
|
|
Total effective tax rate
|
|
|
33.0
|
%
|
|
28.2
|
%
|
|
|
|
|
|
|
Financial reporting segments
Electronics and EDVs
Fiscal 2012 compared with fiscal 2011
Net sales.
Net sales for fiscal 2012 were $167.4 million, a decrease of $33.6 million, or 16.7%, from fiscal 2011. Net sales
decreased
because of lower volumes and the impact of customer and price/product mix. Net sales were down 7.3% due to lower volumes in both consumer electronics and EDV applications. For consumer electronics,
sales volumes were lower due to weakness in end-market demand and capacity limitations in the prior year, which caused us to miss some sales qualification opportunities for devices being
sold in the market today. Consumer electronics demand is typically cyclical and economically sensitive in the short term. For EDV applications, sales volumes declined because inventory levels built up
in the supply chain in 2011 were reduced in 2012 as end-market demand was less than originally premised. Net sales declined by 7.2% due to changes in customer mix, as our larger,
lower-priced customers represented a larger percentage of total sales. Pricing for lithium battery separators is volume based, with higher volume customers receiving lower sales prices. Net sales
declined by 2.2% due to price/product mix.
We
expect overall demand for EDVs to be higher in 2013 based on customer forecasts, the recent startup of new battery and EDV production facilities, continued momentum in planned EDV
launches and the impact of the prior year reduction of inventory levels in the supply chain that is not expected to repeat during 2013.
Segment operating income.
Segment operating income was $47.2 million, a decrease of $43.9 million, or 48.2%, from fiscal 2011.
Segment
operating income as a percent of net sales was 28.2% for fiscal 2012 compared to 45.3% for fiscal 2011. The decrease in segment operating income and segment operating income margin was due to lower
sales and the costs associated with growth investments.
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Since
2009, we have completed five separate capacity expansions and added the fixed costs required to operate the new capacity, including costs to start-up and qualify
portions of the equipment and non-cash depreciation expense of $6.7 million in 2012. We completed the
start-up and qualification process for a portion of the capacity at our new Concord production facility during 2012. The final phase of new capacity at Concord will be qualified and
ramped-up as demand develops. Excluding the final phase of expansion at Concord, we have 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. During 2012, sales were $167.4 million, which is greater than 40% of our current production capacity in
terms of sales.
The
key driver of profitability is sales and the resulting benefit of higher production volumes. Because this is a low variable production cost business, operating income and operating
income margins fluctuate primarily based on production volumes and the application of fixed costs to those production volumes. When sales volumes increase, operating income margins increase as the
production cost per unit is lower due to the allocation of fixed costs to more units of production. Conversely, when sales volumes decline, operating income margins decrease as the production cost per
unit is higher due to the allocation of fixed costs to less units of production. Because of this, we expect segment operating income and segment operating income margins to improve as the costs
associated with our capacity expansions are allocated to more units of production as sales increase.
During
the fourth quarter of 2012, we reduced headcount which will reduce operating costs by approximately $2.0 million on an annualized basis beginning in 2013. We will continue
to monitor and adjust our capacity and cost structure to meet expected levels of demand.
Fiscal 2011 compared with fiscal 2010
Net sales.
Net sales for fiscal 2011 were $201.0 million, an increase of $70.0 million, or 53.4%, from fiscal 2010. Net sales
increased
by $76.8 million due to higher volumes, offset by $6.8 million of customer mix and price/product mix. The increase in sales volume was driven primarily by growing demand for EDV
applications, continued growth in consumer electronics and the benefit of new capacity from the first phase of our Charlotte, North Carolina expansion. Pricing for lithium battery separators is volume
based, with higher volume customers receiving lower sales prices. The decline in sales relating to mix and price was due to the increase in sales to larger volume customers.
Segment operating income.
Segment operating income was $91.1 million, an increase of $39.7 million, or 77.2%, from fiscal
2010. Segment
operating income as a percent of net sales was 45.3% for fiscal 2011 compared to 39.2% for fiscal 2010. The increase in segment operating income and segment operating
income margin was due to higher production volumes and production efficiencies, offset to some extent by growth investments associated with new capacity.
Transportation and Industrial
Fiscal 2012 compared with fiscal 2011
Net sales.
Net sales for fiscal 2012 were $367.7 million, a decrease of $4.2 million, or 1.1%, from fiscal 2011, as growth in
Asia was
more than offset by the $13.0 million negative effect of foreign currency translation and economic weakness in North America and Europe. Sales in Asia, which is the fastest growing market for
lead-acid separators, increased 30% in fiscal 2012.
Segment operating income.
Segment operating income was $83.2 million, a decrease of $12.9 million, or 13.4%, from fiscal 2011.
Segment
operating income as a percent of net sales was 22.6% for fiscal 2012 compared to 25.8% for fiscal 2011. The decrease in segment operating income and segment operating income margin was due to the
costs of exporting goods from our U.S. and European manufacturing facilities to Asia and costs associated with growth investments to meet growing demand in Asia.
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Fiscal 2011 compared with fiscal 2010
Net sales.
Net sales for fiscal 2011 were $371.9 million, an increase of $57.2 million, or 18.2%, from fiscal 2010. The
increase was
primarily due to an increase in sales volume with strong demand across all geographic regions, higher sales prices to offset higher raw material costs and the $6.7 million positive effect of
foreign currency translation.
Segment operating income.
Segment operating income was $96.1 million, an increase of $17.0 million, or 21.5%, from fiscal
2010. Segment
operating income as a percent of net sales was 25.8% for fiscal 2011 compared to 25.1% for fiscal 2010. The increase in segment operating income and segment operating income margin was due to higher
production volumes and production efficiencies, offset to some extent by higher costs associated with growth investments. Higher raw material costs were offset with price increases.
Separations Media
Fiscal 2012 compared with fiscal 2011
Net sales.
Net sales for fiscal 2012 were $182.3 million, a decrease of $7.9 million, or 4.2%, from fiscal 2011, as higher
sales in
both healthcare and filtration and specialty products were more than offset by the $11.4 million negative effect of foreign currency translation.
Segment operating income.
Segment operating income was $52.5 million, a decrease of $2.2 million, or 4.0%, from fiscal 2011.
Segment
operating income as a percent of net sales was 28.8% in fiscal 2012 and fiscal 2011.
Fiscal 2011 compared with fiscal 2010
Net sales.
Net sales for fiscal 2011 were $190.2 million, an increase of $19.3 million, or 11.3%, from fiscal 2010, including
the
positive effect of foreign currency translation of $6.6 million. Healthcare sales increased by 12.1% due to growth in hemodialysis and blood oxygenation applications and foreign currency
translation. Filtration and specialty product sales increased by 9.9% due to growth across all key applications and foreign currency translation.
Segment operating income.
Segment operating income was $54.7 million, an increase of $4.0 million, or 7.9%, from fiscal 2010.
Segment
operating income as a percent of net sales was 28.8% for fiscal 2011 compared to 29.7% for fiscal 2010. The increase in segment operating income was due to higher sales, offset to some extent by
higher energy costs and costs associated with our new capacity.
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 2012 compared with fiscal 2011.
Corporate and other costs for fiscal 2012 were $24.8 million, compared to $42.5 million
for
fiscal 2011. The decrease was primarily due to lower performance-based
incentive compensation expense and a decline in amortization expense as certain intangible assets became fully amortized.
Fiscal 2011 compared with fiscal 2010.
Corporate and other costs for fiscal 2011 were $42.5 million, compared to
$44.6 million for
fiscal 2010. The decrease was primarily due to lower performance-based incentive compensation expense.
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Foreign Operations
As of December 29, 2012, we manufacture our products at 16 strategically located facilities in the United States, Europe and
Asia. Net sales from the foreign locations were $467.1 million (65.1% of consolidated sales), $463.2 million (60.7% of consolidated sales) and $384.8 million (62.4% of
consolidated sales) for fiscal 2012, 2011 and 2010, respectively. Pre-tax income from foreign production facilities was $77.1 million (76.0% of consolidated pre-tax
income), $75.5 million (48.1% of consolidated pre-tax income) and $70.7 million (79.8% of consolidated pre-tax income) for fiscal 2012, 2011 and 2010,
respectively. The fluctuation in the relationship between foreign net sales and foreign pre-tax income as a percent of consolidated amounts is due primarily to the mix of operating results
between segments. The majority of sales and pre-tax income from U.S. production facilities is attributable to the electronics and EDVs segment, where we primarily produce in the U.S. for
customers located in Asia. Pre-tax income in the U.S. includes corporate expenses. The majority of sales and pre-tax income from foreign production facilities is 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 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. In 2012, U.S. operating results as a percent of consolidated amounts was lower because of a decline in
sales and profitability in the electronics and EDVs segment and higher stock-based compensation expense in the U.S. Foreign sales and profitability increased as a percent of consolidated
results as growth in the transportation and industrial and separations media segments occurred primarily outside of the U.S. In 2011, U.S. operating results as a percent of consolidated amounts was
higher because of an increase in sales and profitability in the electronics and EDVs segment as compared to 2010. The amount of pre-tax income 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 United States 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.
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Liquidity and capital resources
During 2012, cash and cash equivalents decreased by $47.7 million, as cash generated from operations and cash on hand were used
to fund growth investments and repay borrowings under the senior credit agreement.
Operating activities.
Net cash provided by operating activities was $104.8 million in fiscal 2012, consisting of cash generated
from
operations of $159.1 million, partially offset by a net increase in working capital. Accounts receivable and days sales outstanding were consistent with the prior year, and 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. The increase in inventory was due to higher
levels of raw materials and work-in-process/finished goods. The increase in raw materials was associated with new production capacity and the timing of bulk raw material
purchases. Work-in-process/finished goods inventory increased from 45 days sales in ending inventory in the fourth quarter of 2011 to 59 days in the fourth
quarter of 2012. In 2011, we were operating at high levels of capacity utilization and as a result, inventory and inventory days were low. During 2012, we added new production capacity and increased
work-in-process and finished goods levels in order to maintain flexibility to meet customer needs and capture growth. We produce inventory to meet 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 the timing of payments and lower
accrued variable incentive compensation under performance-based compensation plans.
Investing activities.
In fiscal 2012, total capital expenditures were $137.1 million, net of DOE grant awards of $1.7 million.
Capital
expenditures were primarily related to capacity expansions in our electronics and EDVs segment. We have substantially completed our capacity expansion projects and currently estimate capital
expenditures to be $50.0 million in fiscal 2013. As of December 29, 2012, we had $152.2 million of construction in progress, primarily related to the expansions in the electronics
and EDVs segment, portions of which will be qualified and ramped up over time as market demand develops.
Financing activities.
On June 29, 2012, we refinanced our senior secured credit agreement with a new senior secured credit
agreement. In
connection with the refinancing, we borrowed $50.0 million under a new $150.0 million revolving credit facility and $300.0 million under a new term loan facility, the proceeds of
which were used to repay outstanding principal and interest under the previous credit agreement and pay loan acquisition costs of $6.2 million. We repaid $15.0 million of borrowings
under the revolving credit facility in the fourth quarter of 2012 and made scheduled principal payments on debt of $4.7 million in fiscal 2012.
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 December 29, 2012,
approximately 60% 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, or any
material adverse tax consequences that would impact our ability to transfer funds held by foreign subsidiaries to the U.S.
Beginning
in 2013, cash flows from operations and lower capital expenditures position us to generate significant amounts of cash. In addition, the FTC has ordered us to divest
substantially all of the assets acquired in connection with the 2008 acquisition of Microporous. We are pursuing our legal options and at the same time, evaluating alternatives for these
assets. If we divest of all or a portion of these assets, we would intend to sell the assets at fair market value which would provide additional cash. As we transition into a period of substantial
cash generation, we intend to maintain a total leverage ratio, defined in our credit agreement as the ratio of total indebtedness (total debt less cash on hand of up to $50.0 million) to
adjusted EBITDA (as defined in our credit agreement and
39
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calculated
below), of approximately 3.0x, while also evaluating other alternatives for cash, including returning value to shareholders through share repurchases. On February 19, 2013, the Board
of Directors authorized the repurchase of up to 4.0 million shares of our common stock by December 31, 2013. The timing, price and volume of repurchases will be based on market
conditions, relevant securities laws and other factors. The stock repurchases may be made from time to time on the open market or in privately negotiated transactions. The stock repurchase program
does not require us to repurchase any specific number of shares, and we may terminate the repurchase program at any time. The cash proceeds received from any potential divestiture of all or a portion
of the Microporous assets in Piney Flats, Tennessee, and Feistritz, Austria, may be a factor in the amount of shares repurchased.
Our
credit agreement provides for a $300.0 million term loan facility ($296.3 million outstanding at December 29, 2012) and a $150.0 million revolving credit
facility ($35.0 million outstanding at December 29, 2012). At December 29, 2012, the Company had $115.0 million of borrowings available under the revolving credit facility.
The term loan facility and the revolving credit facility mature in June 2017. Because we intend to pay back outstanding borrowings under the revolving credit facility within the next twelve months, we
have classified these borrowings as current liabilities.
Interest
rates under the senior secured credit agreement are, at our option, equal to either an alternate base rate or Eurocurrency base rate plus a specified margin. At
December 29, 2012, the interest rate on borrowings under the senior secured credit agreement was 2.71%.
Under
the credit agreement, we are required to maintain 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 secured credit agreement, was as follows:
|
|
|
|
|
(in millions)
|
|
Fiscal 2012
|
|
Net income
|
|
$
|
71.0
|
|
Add/Subtract:
|
|
|
|
|
Depreciation and amortization expense
|
|
|
55.7
|
|
Interest expense, net
|
|
|
36.0
|
|
Income taxes
|
|
|
30.5
|
|
Stock-based compensation
|
|
|
16.3
|
|
Foreign currency loss
|
|
|
0.6
|
|
Loss on disposal of property, plant and equipment
|
|
|
1.0
|
|
Costs related to the FTC litigation
|
|
|
0.3
|
|
Write-off of loan acquisition costs associated with refinancing of senior credit agreement
|
|
|
2.5
|
|
Other non-cash or non-recurring charges
|
|
|
0.2
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
214.1
|
|
|
|
|
|
As
of December 29, 2012, the calculation of the senior leverage ratio, as defined under the senior secured credit agreement, was as follows:
|
|
|
|
|
(in millions)
|
|
Fiscal 2012
|
|
Indebtedness(1)
|
|
$
|
286.4
|
|
Adjusted EBITDA
|
|
$
|
214.1
|
|
Actual senior leverage ratio
|
|
|
1.34x
|
|
Required maximum senior leverage ratio
|
|
|
2.50x
|
|
-
(1)
-
Calculated
as the sum of outstanding borrowings under the senior secured credit agreement, less cash on hand (not to exceed $50.0 million).
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As
of December 29, 2012, the calculation of the interest coverage ratio, as defined under the senior secured credit agreement, was as follows:
|
|
|
|
|
(in millions)
|
|
Fiscal 2012
|
|
Adjusted EBITDA
|
|
$
|
214.1
|
|
Interest expense, net(1)
|
|
$
|
36.2
|
|
Actual interest coverage ratio
|
|
|
5.91x
|
|
Required minimum interest coverage ratio
|
|
|
3.00x
|
|
-
(1)
-
Calculated
as cash interest expense, as defined under the senior secured credit agreement, for the twelve months ended December 29, 2012.
The
senior secured 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 contains certain customary events of default, subject to grace periods, as appropriate.
The
7.5% senior notes mature on November 15, 2017 and are guaranteed by most of our existing and future domestic restricted subsidiaries, subject to certain exceptions. Except
under certain circumstances, the 7.5% senior notes do not require principal payments prior to their maturity in 2017. Interest on the 7.5% senior notes is payable semi-annually on
May 15 and November 15. The 7.5% senior notes contain customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends and make
investments.
Future
debt service payments are expected to be paid out of cash flows from operations, borrowings on our revolving credit facility and future refinancing of our debt. Our cash interest
requirements for the next twelve months are estimated to be $36.8 million.
We
believe we have sufficient liquidity to meet our cash requirements over both the short (next twelve months) and long term (in relation to our debt service requirements). In evaluating
the sufficiency of our liquidity, we considered cash on hand, expected cash flow to be generated from operations and available borrowings under our senior secured credit 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 "Item 1A. 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.
Environmental matters
Environmental obligations are accrued when such expenditures are probable and reasonably estimable. The amount of liability recorded is
based on currently available information, including the progress of remedial investigations, current status of discussions with regulatory authorities regarding
41
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the
method and extent of remediation, presently enacted laws and existing technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental obligations are not discounted to their present value. We do not currently anticipate any material loss in excess of the amounts
accrued. Future remediation expenses may be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the extent and method of remediation, the evolving nature
of environmental regulations and the availability and application of technology. We do not expect the resolution of such uncertainties to have a material adverse effect on our consolidated financial
position or liquidity. Recoveries of environmental costs from other parties are recognized as assets when their receipt is deemed probable.
In
connection with the acquisition of Membrana in 2002, we recorded a reserve for environmental obligations. The reserve provides for costs to remediate known environmental issues and
operational upgrades which are required in order for us to remain in compliance with local regulations. The initial estimate and subsequent finalization of the reserve was included in the allocation
of purchase price at the date of acquisition. The environmental reserve for the Membrana facility, which is denominated in euros, was $11.1 million at December 29, 2012. We anticipate
the expenditures associated with the reserve will be made in the next twelve months.
We
have indemnification agreements for certain environmental matters from Acordis and Akzo, the prior owners of Membrana. Akzo originally provided broad environmental protections to
Acordis with the right to assign such indemnities to Acordis's successors. Akzo's indemnifications relate to conditions existing prior to December 1999, which is the date that Membrana was sold to
Acordis. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through February 2002, the acquisition date. We will receive
indemnification payments under the indemnification agreements after expenditures are made against approved claims. At December 29, 2012, amounts receivable, which are denominated in euros,
under the indemnification agreements were $11.5 million.
Contractual Obligations
The following table sets forth our contractual obligations at December 29, 2012. 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 "Item 8. Financial Statements and Supplementary Data."
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by Period
|
|
(in millions)
|
|
Total
|
|
2013
|
|
2014 - 2015
|
|
2016 - 2017
|
|
Thereafter
|
|
Revolving credit facility and long-term debt(1)
|
|
$
|
331.3
|
|
$
|
50.0
|
|
$
|
41.3
|
|
$
|
240.0
|
|
$
|
|
|
7.5% senior notes
|
|
|
365.0
|
|
|
|
|
|
|
|
|
365.0
|
|
|
|
|
Cash interest payments(2)
|
|
|
172.6
|
|
|
36.8
|
|
|
70.6
|
|
|
65.2
|
|
|
|
|
Operating lease obligations(3)
|
|
|
12.0
|
|
|
3.2
|
|
|
4.0
|
|
|
2.3
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
880.9
|
|
$
|
90.0
|
|
$
|
115.9
|
|
$
|
672.5
|
|
$
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Borrowings
under the revolving credit facility mature in June 2017. We intend to pay back outstanding borrowings under the revolving credit facility within
the next twelve months.
-
(2)
-
Includes
cash interest requirements on the term loan facility and the 7.5% senior notes through maturity in 2017 and on the revolving credit facility
through the expected repayment date in 2013.
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Interest
rates under the term loan facility and the revolving credit facility are variable and the table assumes that these rates are the same rates that were in effect at December 29, 2012.
-
(3)
-
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 period average rate for 2012 for all periods presented.
-
(4)
-
As
discussed in the notes to consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data," we have
long-term liabilities for pension obligations of $103.5 million as of December 29, 2012. 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 2013 will be $1.8 million.
-
(5)
-
As
discussed in the notes to consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data," we have recorded a
liability at December 29, 2012 of $9.4 million 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.
-
(6)
-
As
discussed in the notes to consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data," we have a net
environmental receivable of $0.4 million, consisting of an environmental obligation of $11.1 million offset by the related indemnification receivable of $11.5 million.
Indemnification payments are received after expenditures are made against approved claims. As a result, we expect to make environmental obligation payments and receive indemnification payments over
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.
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Item 8. Financial Statements and Supplementary Data
The Company's report of independent registered public accounting firm and consolidated financial statements and related notes appear on
the following pages of this Annual Report on Form 10-K.
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 29, 2012 and December 31, 2011, and the related
consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 29, 2012. 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 29, 2012 and December 31, 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 29, 2012, 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 December 29, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 26, 2013 expressed an unqualified opinion thereon.
Charlotte,
North Carolina
February 26, 2013
45
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Report of Independent Registered Public Accounting Firm
The
Board of Directors
of Polypore International, Inc.
We
have audited Polypore International, Inc.'s internal control over financial reporting as of December 29, 2012, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Polypore International, Inc.'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 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, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
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, Polypore International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 29, 2012, based on the
COSO criteria.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Polypore
International, Inc. as of December 29, 2012 and December 31, 2011, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for
each of the three years in the period ended December 29, 2012 of Polypore International, Inc. and our report dated February 26, 2013 expressed an unqualified opinion thereon.
Charlotte,
North Carolina
February 26, 2013
46
Table of Contents
Polypore International, Inc.
Consolidated balance sheets
|
|
|
|
|
|
|
|
(in thousands, except share data)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,873
|
|
$
|
92,574
|
|
Accounts receivable, net
|
|
|
137,315
|
|
|
134,016
|
|
Inventories
|
|
|
119,909
|
|
|
90,444
|
|
Deferred income taxes
|
|
|
21,693
|
|
|
3,171
|
|
Prepaid and other
|
|
|
23,506
|
|
|
21,560
|
|
|
|
|
|
|
|
Total current assets
|
|
|
347,296
|
|
|
341,765
|
|
Property, plant and equipment, net
|
|
|
638,801
|
|
|
527,778
|
|
Goodwill
|
|
|
469,319
|
|
|
469,319
|
|
Intangibles and loan acquisition costs, net
|
|
|
121,729
|
|
|
133,586
|
|
Other
|
|
|
8,927
|
|
|
9,431
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,586,072
|
|
$
|
1,481,879
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
32,316
|
|
$
|
34,332
|
|
Accrued liabilities
|
|
|
45,872
|
|
|
61,907
|
|
Income taxes payable
|
|
|
1,603
|
|
|
5,881
|
|
Current portion of debt
|
|
|
50,000
|
|
|
3,682
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
129,791
|
|
|
105,802
|
|
Debt, less current portion
|
|
|
646,250
|
|
|
705,836
|
|
Pension obligations, less current portion
|
|
|
103,491
|
|
|
78,086
|
|
Deferred income taxes
|
|
|
98,667
|
|
|
76,601
|
|
Other
|
|
|
25,036
|
|
|
16,161
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
Preferred stock15,000,000 shares authorized, no shares issued and outstanding
|
|
|
|
|
|
|
|
Common stock, $.01 par value200,000,000 shares authorized, 46,627,064 and 46,499,180 issued and outstanding at December 29, 2012 and
December 31, 2011
|
|
|
466
|
|
|
465
|
|
Paid-in capital
|
|
|
545,196
|
|
|
527,243
|
|
Retained earnings (accumulated deficit)
|
|
|
55,768
|
|
|
(15,183
|
)
|
Accumulated other comprehensive loss
|
|
|
(22,353
|
)
|
|
(17,127
|
)
|
|
|
|
|
|
|
Total Polypore shareholders' equity
|
|
|
579,077
|
|
|
495,398
|
|
Noncontrolling interest
|
|
|
3,760
|
|
|
3,995
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
582,837
|
|
|
499,393
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,586,072
|
|
$
|
1,481,879
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
47
Table of Contents
Polypore International, Inc.
Consolidated statements of income
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
Year ended
December 29, 2012
|
|
Year ended
December 31, 2011
|
|
Year ended
January 1, 2011
|
|
Net sales
|
|
$
|
717,373
|
|
$
|
763,074
|
|
$
|
616,625
|
|
Cost of goods sold
|
|
|
453,459
|
|
|
441,013
|
|
|
369,767
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
263,914
|
|
|
322,061
|
|
|
246,858
|
|
Selling, general and administrative expenses
|
|
|
123,903
|
|
|
132,596
|
|
|
113,938
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
140,011
|
|
|
189,465
|
|
|
132,920
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
36,049
|
|
|
34,384
|
|
|
46,747
|
|
Foreign currency and other
|
|
|
(28
|
)
|
|
(2,018
|
)
|
|
(1,347
|
)
|
Write-off of loan acquisition costs associated with refinancing of senior credit agreement
|
|
|
2,478
|
|
|
|
|
|
|
|
Costs related to purchase of 8.75% senior subordinated notes
|
|
|
|
|
|
|
|
|
2,263
|
|
Gain on sale of Italian subsidiary
|
|
|
|
|
|
|
|
|
(3,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
38,499
|
|
|
32,366
|
|
|
44,336
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
101,512
|
|
|
157,099
|
|
|
88,584
|
|
Income taxes
|
|
|
30,561
|
|
|
51,859
|
|
|
25,009
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
70,951
|
|
$
|
105,240
|
|
$
|
63,575
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.52
|
|
$
|
2.28
|
|
$
|
1.43
|
|
Diluted
|
|
$
|
1.50
|
|
$
|
2.23
|
|
$
|
1.39
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,540,385
|
|
|
46,182,204
|
|
|
44,562,421
|
|
Diluted
|
|
|
47,229,595
|
|
|
47,119,997
|
|
|
45,748,058
|
|
See notes to consolidated financial statements
48
Table of Contents
Polypore International, Inc.
Consolidated statements of comprehensive income
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year ended
December 29, 2012
|
|
Year ended
December 31, 2011
|
|
Year ended
January 1, 2011
|
|
Net income
|
|
$
|
70,951
|
|
$
|
105,240
|
|
$
|
63,575
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
10,058
|
|
|
(13,479
|
)
|
|
16,775
|
|
Change in net actuarial loss and prior service credit
|
|
|
(20,883
|
)
|
|
(6,999
|
)
|
|
(7,476
|
)
|
Income tax benefit related to other comprehensive income
|
|
|
5,599
|
|
|
3,082
|
|
|
4,319
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(5,226
|
)
|
|
(17,396
|
)
|
|
13,618
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
65,725
|
|
$
|
87,844
|
|
$
|
77,193
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
49
Table of Contents
Polypore International, Inc.
Consolidated statements of shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share data)
|
|
Shares of
Common
Stock
|
|
Common
Stock
|
|
Paid-in
Capital
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Non-
controlling
Interest
|
|
Total
|
|
Balance at January 2, 2010
|
|
|
44,417,326
|
|
$
|
444
|
|
$
|
481,248
|
|
$
|
(183,998
|
)
|
$
|
(13,349
|
)
|
$
|
|
|
$
|
284,345
|
|
Net income for the year ended January 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
63,575
|
|
|
|
|
|
|
|
|
63,575
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
2,295
|
|
|
|
|
|
|
|
|
|
|
|
2,295
|
|
Stock option exercises
|
|
|
1,161,815
|
|
|
12
|
|
|
6,848
|
|
|
|
|
|
|
|
|
|
|
|
6,860
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
6,769
|
|
|
|
|
|
|
|
|
|
|
|
6,769
|
|
Restricted stock grants
|
|
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
581
|
|
|
581
|
|
Change in net actuarial loss and prior service credit, net of income tax benefit of $2,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,165
|
)
|
|
|
|
|
(5,165
|
)
|
Foreign currency translation adjustment, net of income tax benefit of $2,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,783
|
|
|
7
|
|
|
18,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
|
45,582,557
|
|
|
456
|
|
|
497,160
|
|
|
(120,423
|
)
|
|
269
|
|
|
588
|
|
|
378,050
|
|
Net income for the year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
105,240
|
|
|
|
|
|
|
|
|
105,240
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
9,298
|
|
|
|
|
|
|
|
|
|
|
|
9,298
|
|
Stock option exercises
|
|
|
912,243
|
|
|
9
|
|
|
6,649
|
|
|
|
|
|
|
|
|
|
|
|
6,658
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
14,136
|
|
|
|
|
|
|
|
|
|
|
|
14,136
|
|
Restricted stock grants
|
|
|
4,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,350
|
|
|
3,350
|
|
Change in net actuarial loss and prior service credit, net of income tax benefit of $2,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,812
|
)
|
|
|
|
|
(4,812
|
)
|
Foreign currency translation adjustment, net of income tax benefit of $895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,584
|
)
|
|
57
|
|
|
(12,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
70,951
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(242
|
)
|
|
(242
|
)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
50
Table of Contents
Polypore International, Inc.
Consolidated statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year ended
December 29, 2012
|
|
Year ended
December 31, 2011
|
|
Year ended
January 1, 2011
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
70,951
|
|
$
|
105,240
|
|
$
|
63,575
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
42,320
|
|
|
34,812
|
|
|
31,492
|
|
Amortization expense
|
|
|
13,347
|
|
|
16,530
|
|
|
16,415
|
|
Amortization of loan acquisition costs
|
|
|
2,471
|
|
|
2,454
|
|
|
2,621
|
|
Stock-based compensation
|
|
|
16,278
|
|
|
9,298
|
|
|
2,295
|
|
Loss on disposal of property, plant and equipment
|
|
|
971
|
|
|
375
|
|
|
1,120
|
|
Foreign currency (gain) loss
|
|
|
729
|
|
|
(2,065
|
)
|
|
(1,416
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
(338
|
)
|
|
(14,136
|
)
|
|
(6,769
|
)
|
Deferred income taxes
|
|
|
9,822
|
|
|
28,640
|
|
|
4,292
|
|
Write-off of loan acquisition costs associated with refinancing of senior credit agreement
|
|
|
2,478
|
|
|
|
|
|
|
|
Costs related to purchase of 8.75% senior subordinated notes
|
|
|
|
|
|
|
|
|
2,263
|
|
Gain on sale of Italian subsidiary
|
|
|
|
|
|
|
|
|
(3,327
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,810
|
)
|
|
(18,795
|
)
|
|
(11,984
|
)
|
Inventories
|
|
|
(28,304
|
)
|
|
(15,614
|
)
|
|
(6,198
|
)
|
Prepaid and other current assets
|
|
|
3,603
|
|
|
(2,046
|
)
|
|
3,805
|
|
Accounts payable and accrued liabilities
|
|
|
(23,003
|
)
|
|
(661
|
)
|
|
21,850
|
|
Income taxes payable
|
|
|
(4,098
|
)
|
|
245
|
|
|
2,597
|
|
Other, net
|
|
|
369
|
|
|
556
|
|
|
4,576
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
104,786
|
|
|
144,833
|
|
|
127,207
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(137,111
|
)
|
|
(156,330
|
)
|
|
(68,787
|
)
|
Payments associated with the stock sale of Italian subsidiary, net
|
|
|
|
|
|
|
|
|
(21,519
|
)
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(137,111
|
)
|
|
(156,330
|
)
|
|
(90,306
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from new senior credit agreement
|
|
|
350,000
|
|
|
|
|
|
|
|
Principal payments in connection with refinancing of senior credit agreement
|
|
|
(342,291
|
)
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(4,674
|
)
|
|
(4,519
|
)
|
|
(10,017
|
)
|
Payments on revolving credit facility
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
Loan acquisition costs
|
|
|
(6,228
|
)
|
|
(627
|
)
|
|
(7,954
|
)
|
Proceeds from stock option exercises
|
|
|
1,338
|
|
|
6,658
|
|
|
6,860
|
|
Excess tax benefit from stock-based compensation
|
|
|
338
|
|
|
14,136
|
|
|
6,769
|
|
Noncontrolling interest
|
|
|
(242
|
)
|
|
1,936
|
|
|
581
|
|
Proceeds from issuance of 7.5% senior notes
|
|
|
|
|
|
|
|
|
365,000
|
|
Purchase of 8.75% senior subordinated notes
|
|
|
|
|
|
|
|
|
(422,549
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(16,759
|
)
|
|
17,584
|
|
|
(61,310
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,383
|
|
|
(3,468
|
)
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(47,701
|
)
|
|
2,619
|
|
|
(25,020
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
92,574
|
|
|
89,955
|
|
|
114,975
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
44,873
|
|
$
|
92,574
|
|
$
|
89,955
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest
|
|
$
|
33,284
|
|
$
|
32,174
|
|
$
|
46,468
|
|
Cash paid for income taxes, net of refunds
|
|
|
24,837
|
|
|
22,975
|
|
|
16,323
|
|
See notes to consolidated financial statements
51
Table of Contents
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. 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.
generally accepted accounting principles 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.
Accounting Period
The Company's fiscal year is the 52- or 53-week period ending the Saturday nearest to December 31. The
fiscal years ended December 29, 2012, December 31, 2011 and January 1, 2011 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 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
52
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
2. Accounting Policies (Continued)
accounts
was $3,026,000 and $2,681,000 at December 29, 2012 and December 31, 2011, 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 receivables 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)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Raw materials
|
|
$
|
44,285
|
|
$
|
34,405
|
|
Work-in-process
|
|
|
28,051
|
|
|
15,456
|
|
Finished goods
|
|
|
47,573
|
|
|
40,583
|
|
|
|
|
|
|
|
|
|
$
|
119,909
|
|
$
|
90,444
|
|
|
|
|
|
|
|
Property, Plant and Equipment
Property, plant and equipment are stated at cost. 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, $3,344,000 and $1,432,000 in 2012, 2011 and 2010, respectively. 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 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.
In
September 2011, the FASB amended the accounting guidance on annual goodwill impairment testing to allow companies the option to assess certain qualitative factors or use the
quantitative
53
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
2. Accounting Policies (Continued)
two-step
goodwill impairment test. The guidance states that if a company chooses the option to assess certain qualitative factors and determines, based on the assessment of qualitative
factors, that it is more likely than not that the carrying amount of a reporting unit is less than its fair value, then the first and second steps of the quantitative goodwill impairment test are
unnecessary. However, if a qualitative assessment is performed and indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative
two-step goodwill impairment test must be performed at the reporting unit level.
When
performing a quantitative two-step goodwill impairment test, step one 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.
In
July 2012, the FASB issued accounting guidance on the annual testing of indefinite-lived intangible assets for impairment that allows companies the option to assess certain
qualitative factors or use the quantitative impairment test. The guidance states that if a company chooses the option to assess certain qualitative factors and determines, based on the assessment of
qualitative factors, that it is not more likely than not that an indefinite-lived intangible asset might be impaired, it is unnecessary to perform the quantitative impairment test. For
indefinite-lived intangible assets, if a quantitative impairment test is performed, the fair value of the assets is compared to the carrying value and if the carrying value is greater, an impairment
loss is recognized for the difference.
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
54
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
2. Accounting Policies (Continued)
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.
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 $18,487,000, $17,555,000 and $14,752,000 in 2012, 2011 and 2010, respectively.
Government Grants
Grant awards are recognized when there is reasonable assurance that the Company will receive the grant and comply with the conditions
attached to the grant. For capital expenditures, the Company deducts grant awards from the cost of the related asset. For expense reimbursements, the Company deducts grant awards from the related
expenses. The Company was awarded a $49,264,000 grant from the U.S. Department of Energy ("DOE") to help fund an expansion of its U.S. lithium battery separator production capacity. As of
December 29, 2012, the Company has recognized and received the entire amount of the DOE grant. The Company has also been awarded state and local grants in connection with certain of its U.S.
expansions.
The
Company recognized grant awards for capital expenditures of $1,670,000, $23,550,000 and $13,762,000 in 2012, 2011 and 2010 respectively. The Company recognized grant awards for
expenses of $2,566,000, $4,715,000 and $2,731,000 in 2012, 2011 and 2010, 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.
55
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
2. Accounting Policies (Continued)
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 and
long-term debt. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates their fair value due to the
short-term maturities of these assets and liabilities. The carrying amount of borrowings under the senior secured credit agreement approximates fair value because the interest rates adjust
to market interest rates. The fair value of the 7.5% senior notes, based on a quoted market price and classified as level one in the fair value hierarchy, was $396,938,000 at December 29, 2012.
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 December 29, 2012, the Company did not have any financial assets and liabilities required to be measured at fair value on a recurring basis. See Note 9 for pension
assets measured at fair value on a recurring basis.
3. Property, Plant and Equipment
Property, plant and equipment consist of:
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Land
|
|
$
|
24,464
|
|
$
|
23,907
|
|
Buildings and land improvements
|
|
|
158,196
|
|
|
139,431
|
|
Machinery and equipment
|
|
|
559,198
|
|
|
475,107
|
|
Construction in progress
|
|
|
152,201
|
|
|
101,796
|
|
|
|
|
|
|
|
|
|
|
894,059
|
|
|
740,241
|
|
Less accumulated depreciation
|
|
|
255,258
|
|
|
212,463
|
|
|
|
|
|
|
|
|
|
$
|
638,801
|
|
$
|
527,778
|
|
|
|
|
|
|
|
56
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
4. Goodwill
There were no changes in the carrying amount of goodwill for the years ended December 29, 2012 and December 31, 2011, and the carrying amount of goodwill at those dates was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Transportation
and Industrial
|
|
Electronics
and EDVs
|
|
Separations
Media
|
|
Total
|
|
Goodwill
|
|
$
|
352,154
|
|
$
|
36,336
|
|
$
|
212,279
|
|
$
|
600,769
|
|
Accumulated impairment charges
|
|
|
(131,450
|
)
|
|
|
|
|
|
|
|
(131,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
220,704
|
|
$
|
36,336
|
|
$
|
212,279
|
|
$
|
469,319
|
|
|
|
|
|
|
|
|
|
|
|
5. Intangibles, Loan Acquisition and Other Costs
Intangibles, loan acquisition and other costs consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
December 31, 2011
|
|
(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
|
|
|
18
|
|
$
|
193,666
|
|
$
|
98,210
|
|
$
|
193,462
|
|
$
|
86,567
|
|
Technology and patents
|
|
|
9
|
|
|
40,648
|
|
|
37,666
|
|
|
40,338
|
|
|
35,563
|
|
Loan acquisition costs
|
|
|
6
|
|
|
14,808
|
|
|
3,171
|
|
|
17,252
|
|
|
6,895
|
|
Trade names
|
|
|
15
|
|
|
400
|
|
|
129
|
|
|
400
|
|
|
102
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
Indefinite
|
|
|
11,383
|
|
|
|
|
|
11,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
260,905
|
|
$
|
139,176
|
|
$
|
262,713
|
|
$
|
129,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense, including amortization of loan acquisition costs classified as interest expense, was $15,818,000, $18,984,000 and $19,036,000 in 2012, 2011 and 2010, respectively.
The Company's estimate of amortization expense for the next five years is as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
2013
|
|
$
|
14,332
|
|
2014
|
|
|
14,323
|
|
2015
|
|
|
14,318
|
|
2016
|
|
|
14,318
|
|
2017
|
|
|
13,584
|
|
57
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
6. Accrued Liabilities
Accrued liabilities consist of:
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Compensation expense and other fringe benefits
|
|
$
|
12,233
|
|
$
|
26,449
|
|
Current portion of environmental reserve
|
|
|
11,092
|
|
|
11,873
|
|
Other
|
|
|
22,547
|
|
|
23,585
|
|
|
|
|
|
|
|
|
|
$
|
45,872
|
|
$
|
61,907
|
|
|
|
|
|
|
|
7. Debt
Debt, in order of priority, consists of:
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Senior credit agreement:
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
35,000
|
|
$
|
|
|
Term loan facility
|
|
|
296,250
|
|
|
344,518
|
|
|
|
|
|
|
|
|
|
|
331,250
|
|
|
344,518
|
|
7.5% senior notes
|
|
|
365,000
|
|
|
365,000
|
|
|
|
|
|
|
|
|
|
|
696,250
|
|
|
709,518
|
|
Less current portion, including borrowings under the revolving credit facility
|
|
|
50,000
|
|
|
3,682
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
646,250
|
|
$
|
705,836
|
|
|
|
|
|
|
|
On
June 29, 2012, the Company refinanced its previous senior secured credit agreement with a new senior secured credit agreement. The credit agreement provides for a $150,000,000
revolving credit facility ($50,000,000 of which was borrowed in connection with the refinancing) and a $300,000,000 term loan facility. The proceeds from the credit agreement were used to pay
outstanding principal and interest under the previous credit agreement and loan acquisition costs of $6,228,000, which were capitalized and will be amortized over the life of the credit agreement. In
connection with the refinancing, the Company wrote-off unamortized loan acquisition costs of $2,478,000 associated with the previous credit agreement. Interest rates under the credit
agreement are, at the Company's option, equal to either an alternate base rate or the Eurocurrency base rate, plus a specified margin.
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 66% of the voting capital stock of its foreign subsidiaries secure indebtedness under the credit agreement. 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 senior leverage ratio and a minimum interest coverage ratio. The Company was in compliance with
all covenants as of December 29, 2012.
At
December 29, 2012, the Company had $35,000,000 outstanding under the revolving credit facility and $115,000,000 available for borrowing. The revolving credit facility matures
in June 2017. The Company intends to pay back outstanding borrowings under the revolving credit facility within the
58
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
7. Debt (Continued)
next
twelve months and accordingly, has included these borrowings in "Current portion of debt" in the accompanying December 29, 2012 consolidated balance sheet.
The
term loan matures in June 2017. Minimum scheduled principal repayments of the term loan are as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
2013
|
|
$
|
15,000
|
|
2014
|
|
|
16,875
|
|
2015
|
|
|
24,375
|
|
2016
|
|
|
33,750
|
|
2017
|
|
|
206,250
|
|
|
|
|
|
|
|
$
|
296,250
|
|
|
|
|
|
In
2010, the Company issued $365,000,000 aggregate principal amount of 7.5% senior notes due 2017. Interest on the notes is payable semi-annually on May 15 and
November 15. The notes are effectively subordinated to all of the Company's existing and future secured debt and will rank senior to any of the Company's existing and future senior subordinated
debt. The Company's domestic subsidiaries, subject to certain exceptions, guarantee the notes. At any time prior to November 15, 2013, the Company may redeem the notes, in whole or in part, at
a price equal to 100% of the principal amount of the notes plus a make-whole premium. On or after November 15, 2013, the Company may redeem some or all of the notes at redemption
prices specified in the indenture governing the notes. In addition, the Company may on any one or more occasions redeem up to 35% of the notes using the proceeds of certain equity offerings completed
before November 15, 2013 at the redemption price defined in the indenture. The Company incurred loan acquisition costs of $8,581,000 in connection with the issuance of the notes.
The
Company used proceeds from the issuance of the 7.5% senior notes and cash on hand to purchase and retire all of the previously outstanding 8.75% senior subordinated notes through
tender offer or redemption. The total purchase price for the notes was $422,549,000, consisting of principal of $421,801,000 and tender premiums and expenses of $748,000. In connection with the
purchase, the Company incurred a $2,263,000 charge to income, comprised of the tender premiums and expenses and write-off of unamortized loan acquisition costs of $1,515,000.
59
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
8. Income Taxes
Significant components of deferred tax assets and liabilities consist of:
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Pension obligations
|
|
$
|
30,892
|
|
$
|
21,211
|
|
Net operating loss carryforwards
|
|
|
17,705
|
|
|
36,070
|
|
Other
|
|
|
22,676
|
|
|
17,848
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
71,273
|
|
|
75,129
|
|
Valuation allowance
|
|
|
(3,797
|
)
|
|
(9,580
|
)
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
67,476
|
|
|
65,549
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(96,668
|
)
|
|
(87,458
|
)
|
Goodwill and intangibles
|
|
|
(39,841
|
)
|
|
(47,957
|
)
|
Other
|
|
|
(7,941
|
)
|
|
(3,564
|
)
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(144,450
|
)
|
|
(138,979
|
)
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
(76,974
|
)
|
$
|
(73,430
|
)
|
|
|
|
|
|
|
The
valuation allowance decreased by $5,783,000. During 2012, the Company determined that it will not realize the benefit of certain net operating loss carryforwards that were previously
fully offset by a valuation allowance because the carryforwards will be utilized during the period in which a tax holiday is in effect. Accordingly, the net operating loss carryforward and associated
valuation allowance were eliminated from net deferred tax assets.
Deferred
taxes are reflected in the consolidated balance sheet as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Current deferred tax asset
|
|
$
|
21,693
|
|
$
|
3,171
|
|
Non-current deferred tax liability
|
|
|
(98,667
|
)
|
|
(76,601
|
)
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
(76,974
|
)
|
$
|
(73,430
|
)
|
|
|
|
|
|
|
A
reconciliation of the beginning and ending amounts of unrecognized tax benefits, which are included in "Other" non-current liabilities in the accompanying consolidated
balance sheets, is as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
January 1, 2011
|
|
Balance at beginning of year
|
|
$
|
9,373
|
|
$
|
8,103
|
|
$
|
7,230
|
|
Increase related to prior year positions
|
|
|
62
|
|
|
1,270
|
|
|
1,161
|
|
Decrease related to settlements with taxing authorities
|
|
|
|
|
|
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
9,435
|
|
$
|
9,373
|
|
$
|
8,103
|
|
|
|
|
|
|
|
|
|
60
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
8. Income Taxes (Continued)
The
amount of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate is $8,168,000, $8,045,000 and $7,812,000 as of December 29, 2012,
December 31, 2011 and January 1, 2011, respectively. Accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense and were
$399,000, $362,000 and $337,000 at December 29, 2012, December 31, 2011 and January 1, 2011, respectively.
The
Company has operations in North America, Europe and Asia and files tax returns in numerous tax jurisdictions. The Company is not subject to income tax adjustments in the U.S. for tax
years prior to 2005 and in foreign jurisdictions for tax years prior to 2004. Tax audits are currently being conducted on a German subsidiary for the tax years 2004 through 2008 and on a French
subsidiary for the tax years 2006 through 2008. Although the outcome of tax audits is uncertain, management believes that adequate provisions have been made for potential liabilities resulting from
such audits. Because audit outcomes and the timing of audit settlements are subject to significant uncertainty, the Company cannot make a reasonable estimate of the impact on earnings in the next
twelve months from these audits. Management is not aware of any issues for open tax years that upon final resolution will have a material adverse effect on the Company's consolidated financial
position, cash flows or operating results.
At
December 29, 2012, the Company has net operating loss carryforwards in the U.S. of $50,925,000 that expire beginning in 2027. The Company expects to utilize the U.S. net
operating loss carryforwards during the next twelve months and has classified these amounts as current deferred tax assets in the accompanying December 29, 2012 consolidated balance sheet. The
Company also has foreign net
operating losses of $824,000 that expire at various dates beginning in 2015. The Company utilized approximately $36,311,000 of net operating loss carryfowards during 2012.
Income
before income taxes includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
January 1, 2011
|
|
United States
|
|
$
|
24,410
|
|
$
|
81,605
|
|
$
|
17,900
|
|
Foreign
|
|
|
77,102
|
|
|
75,494
|
|
|
70,684
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,512
|
|
$
|
157,099
|
|
$
|
88,584
|
|
|
|
|
|
|
|
|
|
61
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
8. Income Taxes (Continued)
Income
tax expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
January 1, 2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
U.S. taxes on domestic income
|
|
$
|
1,007
|
|
$
|
1,021
|
|
$
|
1,732
|
|
Foreign taxes
|
|
|
19,732
|
|
|
22,198
|
|
|
18,985
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
20,739
|
|
|
23,219
|
|
|
20,717
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
U.S. taxes on domestic income
|
|
|
10,117
|
|
|
29,940
|
|
|
8,120
|
|
Foreign taxes
|
|
|
(295
|
)
|
|
(1,300
|
)
|
|
(3,828
|
)
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
9,822
|
|
|
28,640
|
|
|
4,292
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,561
|
|
$
|
51,859
|
|
$
|
25,009
|
|
|
|
|
|
|
|
|
|
Income
taxes at the Company's effective tax rate differed from income taxes at the statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
January 1, 2011
|
|
Computed income taxes at the expected statutory rate
|
|
$
|
35,529
|
|
$
|
54,985
|
|
$
|
31,004
|
|
State and local taxes
|
|
|
590
|
|
|
1,771
|
|
|
560
|
|
Foreign taxes
|
|
|
(7,722
|
)
|
|
(6,553
|
)
|
|
(10,712
|
)
|
Other
|
|
|
2,164
|
|
|
1,656
|
|
|
4,157
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
30,561
|
|
$
|
51,859
|
|
$
|
25,009
|
|
|
|
|
|
|
|
|
|
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 income taxes has been provided thereon. The Company has not provided additional U.S. federal and state income taxes on
an estimated $199,000,000 of undistributed earnings of consolidated foreign subsidiaries. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the
complexities associated with this hypothetical calculation.
The
Company has entered into an agreement with the Board of Investment in Thailand under which, subject to certain limitations, 100% of the Company's income from manufacturing activities
in Thailand was tax-free through 2010 and portions of income will be tax-free through 2019. The income tax benefits recognized from this tax holiday were $1,821,000, $2,300,000
and $2,128,000 in 2012, 2011 and 2010, respectively. The Company has entered into an agreement with the Ministry of Strategy and Finance in South Korea which, subject to certain limitations,
effectively exempts 100% of the Company's income in South Korea from income taxes through 2016. The income tax benefit recognized from this tax holiday was $1,379,000 in 2012.
62
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
9. Employee Benefit Plans
Pension Plans
The Company and its subsidiaries sponsor multiple defined benefit pension plans based in subsidiaries located outside of the United
States. The following table sets forth the funded status of the defined benefit pension plans:
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
(97,667
|
)
|
$
|
(90,881
|
)
|
Service cost
|
|
|
(1,658
|
)
|
|
(1,552
|
)
|
Interest cost
|
|
|
(4,739
|
)
|
|
(5,021
|
)
|
Actuarial loss
|
|
|
(20,890
|
)
|
|
(6,962
|
)
|
Benefit payments
|
|
|
3,778
|
|
|
3,440
|
|
Foreign currency translation and other
|
|
|
(2,649
|
)
|
|
3,309
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
(123,825
|
)
|
|
(97,667
|
)
|
Change in plan assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
17,895
|
|
|
19,729
|
|
Actual return on plan assets
|
|
|
1,794
|
|
|
241
|
|
Company contributions
|
|
|
2,230
|
|
|
1,848
|
|
Benefit payments
|
|
|
(3,778
|
)
|
|
(3,440
|
)
|
Foreign currency translation and other
|
|
|
388
|
|
|
(483
|
)
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
18,529
|
|
|
17,895
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(105,296
|
)
|
$
|
(79,772
|
)
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet consist of:
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
(1,805
|
)
|
$
|
(1,686
|
)
|
Pension obligations
|
|
|
(103,491
|
)
|
|
(78,086
|
)
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(105,296
|
)
|
$
|
(79,772
|
)
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income (loss), pre-tax, consist of:
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
35,987
|
|
$
|
15,637
|
|
Prior service credit
|
|
|
(182
|
)
|
|
(229
|
)
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
35,805
|
|
$
|
15,408
|
|
|
|
|
|
|
|
The
funded status of the Company's pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. The funded status of the
pension plans as of December 29, 2012 has decreased primarily as a result of lower discount rates being used to value the pension plans in 2012 as compared to 2011.
The
accumulated benefit obligation for all defined benefit pension plans was $114,425,000 and $90,931,000 at December 29, 2012 and December 31, 2011, respectively. Each of
the Company's
63
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
9. Employee Benefit Plans (Continued)
defined
benefit pension plans had accumulated benefit obligations in excess of plan assets at December 29, 2012.
The
following table provides the components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
January 1, 2011
|
|
Service cost
|
|
$
|
1,658
|
|
$
|
1,552
|
|
$
|
1,357
|
|
Interest cost
|
|
|
4,739
|
|
|
5,021
|
|
|
4,752
|
|
Expected return on plan assets
|
|
|
(844
|
)
|
|
(910
|
)
|
|
(1,068
|
)
|
Amortization of prior service credit
|
|
|
(50
|
)
|
|
(54
|
)
|
|
(52
|
)
|
Recognized net actuarial (gain) loss
|
|
|
472
|
|
|
69
|
|
|
(41
|
)
|
Other
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
5,975
|
|
$
|
5,678
|
|
$
|
5,030
|
|
|
|
|
|
|
|
|
|
The
amount of prior service credit and net actuarial loss included in accumulated other comprehensive loss and expected to be recognized in net periodic benefit cost in 2013 is
$1,680,000.
Weighted
average assumptions used to determine the benefit obligation and net periodic benefit costs consist of:
|
|
|
|
|
|
|
|
Weighted average assumptions as of the end of the year
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Discount rate used to determine the benefit obligation
|
|
|
3.60
|
%
|
|
4.90
|
%
|
Discount rate used to determine the net periodic benefit costs
|
|
|
4.90
|
%
|
|
5.40
|
%
|
Expected return on plan assets
|
|
|
4.00
|
%
|
|
4.00
|
%
|
Rate of compensation increase
|
|
|
2.52
|
%
|
|
2.53
|
%
|
The
Company's pension plan assets are invested to obtain a reasonable long-term rate of return at an acceptable level of investment risk. Risk tolerance is established
through consideration of plan liabilities, plan funded status and corporate financial condition. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio
reviews, liability measurements and asset/liability studies. The Company's expected return on plan assets is based on historical market data for each asset class and expected market conditions. The
assets in the pension plans are diversified across equity and fixed income investments, except for certain pension plans funded by insurance contracts. The investment portfolio has target allocations
of approximately 23% equity and 77% fixed income. The actual portfolio allocation was 19% equity, 42% bonds and 39% insurance contracts at December 29, 2012 and was 18% equity, 45% bonds and
37% insurance contracts at December 31, 2011. The equity securities are considered level one securities in the fair value hierarchy and primarily include investments in European companies. The
bonds, which are primarily investment grade European bonds, and insurance contracts are level two securities.
64
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
9. Employee Benefit Plans (Continued)
In
2013, the Company expects to contribute $1,805,000 to its pension plans. The estimated future benefit payments expected to be paid for each of the next five years and the sum of
payments expected for the next five years thereafter are:
|
|
|
|
|
(in thousands)
|
|
|
|
2013
|
|
$
|
3,562
|
|
2014
|
|
|
3,672
|
|
2015
|
|
|
3,847
|
|
2016
|
|
|
4,138
|
|
2017
|
|
|
4,525
|
|
2018 - 2022
|
|
|
28,253
|
|
401(k) Plans
The Company sponsors a 401(k) plan for U.S. salaried employees. Salaried employees are eligible to participate in the plan on
January 1, April 1, July 1 or October 1 after their date of employment. Under the plan, employer contributions are defined as 5.00% of a participant's base salary plus a
matching of employee contributions allowing for a maximum matching contribution of 3.00% of a participant's earnings. The cost of the plan recognized as expense was $4,283,000, $3,540,000 and
$2,557,000 in 2012, 2011 and 2010, respectively.
The
Company sponsors a 401(k) plan for U.S. hourly employees subject to collective bargaining agreements. Depending on the applicable collective bargaining agreement, employer basic
contributions are defined as 3.00% or 3.50% of a participant's base earnings plus a company matching contribution, limited to certain maximum percentage contributions. The Company also makes a
separate contribution for employees who were hired prior to January 1, 2000 and who are not eligible for certain other benefit plans. The cost of the plan recognized as expense was $650,000,
$664,000 and $592,000 in 2012, 2011 and 2010, respectively.
10. Environmental Matters
Environmental obligations are accrued when such expenditures are probable and reasonably estimable. The amount of liability recorded is based on currently available information,
including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation, presently enacted laws and existing
technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental
obligations are not discounted to their present value. The Company does not currently anticipate any material loss in excess of the amounts accrued. However, the Company's future remediation expenses
may be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the extent and method of remediation, the evolving nature of environmental regulations and the
availability and application of technology. The Company does not expect the resolution of such uncertainties to have a material adverse effect on its consolidated financial position or liquidity.
Recoveries of environmental costs from other parties are recognized as assets when receipt is deemed probable.
In
connection with the acquisition of Membrana GmbH ("Membrana") in 2002, the Company recorded a reserve for environmental obligations. The reserve provides for costs to remediate
known
65
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
10. Environmental Matters (Continued)
environmental
issues and operational upgrades which are required in order for the Company to remain in compliance with local regulations. The initial estimate and subsequent finalization of the
reserve was included in the allocation of purchase price at the date of acquisition. The environmental reserve for the Membrana facility, which is denominated in euros, was $11,079,000 and $11,957,000
at December 29, 2012 and December 31, 2011, respectively. The Company anticipates the expenditures associated with the reserve will be made in the next twelve months and includes the
current portion of the reserve in "Accrued liabilities" in the accompanying consolidated balance sheets.
The
Company has indemnification agreements for certain environmental matters from Acordis A.G. ("Acordis") and Akzo Nobel N.V. ("Akzo"), the prior owners of Membrana. Akzo
originally provided broad environmental protections to Acordis with the right to assign such indemnities to Acordis's successors. Akzo's indemnifications relate to conditions existing prior to
December 1999, which is the date that Membrana was sold to Acordis. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through
February 2002, the acquisition date. The Company receives indemnification payments under the indemnification agreements after expenditures are made against approved claims. At December 29, 2012
and December 31, 2011, the amounts receivable, which are denominated in euros, under the indemnification agreements were $11,542,000 and $12,099,000, respectively. The Company includes the
current portion of the receivable in "Prepaid and other" in the accompanying consolidated balance sheets.
11. Commitments and Contingencies
Leases
The Company leases certain equipment and facilities under operating leases. Rent expense under operating leases was $3,627,000,
$2,750,000 and $2,279,000 in 2012, 2011 and 2010, respectively.
Future
minimum operating lease payments at December 29, 2012 are:
|
|
|
|
|
(in thousands)
|
|
|
|
2013
|
|
$
|
3,170
|
|
2014
|
|
|
2,427
|
|
2015
|
|
|
1,576
|
|
2016
|
|
|
1,142
|
|
2017
|
|
|
1,132
|
|
Thereafter
|
|
|
2,512
|
|
|
|
|
|
|
|
$
|
11,959
|
|
|
|
|
|
Raw Materials
The Company employs a global purchasing strategy to achieve pricing leverage on its purchases of major raw materials. Accordingly, the
Company purchases the majority of each type of raw material from one primary supplier with additional suppliers having been qualified to supply the Company if an interruption in supply were to occur.
The Company believes that alternative sources of raw materials are readily available and the loss of any particular supplier would not have a material impact on the
66
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
11. Commitments and Contingencies (Continued)
results
of operations. However, the loss of raw material supply sources could, in the short term, adversely affect the Company's business until alternative supply arrangements were secured.
Collective Bargaining Agreements
On December 29, 2012, approximately 30% of the Company's employees were represented under collective bargaining agreements. A
majority of those employees are located in Germany and France and are represented under industry-wide agreements that are subject to national and local government regulations. Labor unions
also represent the Company's employees in Owensboro, Kentucky, and Corydon, Indiana. The collective bargaining agreement at the Corydon facility, covering approximately 3% of the Company's workers,
expires in August 2013.
Federal Trade Commission Litigation
On September 9, 2008, the Federal Trade Commission (the "FTC") issued an administrative complaint against the Company alleging
that the February 29, 2008 acquisition of Microporous Holding Corporation, the parent company of Microporous Products L.P. ("Microporous"), and the Company's related actions have
substantially lessened competition in North American markets for lead-acid battery separators. After challenging the complaint before an Administrative Law Judge of the FTC and
subsequently before the Commissioners of the FTC, the Company was ordered to divest substantially all of the Microporous assets that were acquired in February 2008.
On
January 28, 2011, the Company filed a petition with the U.S. Court of Appeals for the 11
th
Circuit to review the FTC's November 5, 2010 order and
opinion. On July 11, 2012, the 11
th
Circuit affirmed the FTC's decision. The Company believes that this decision is inconsistent with the law and the facts presented at the
hearing and that the Microporous acquisition is and will continue to be beneficial to its customers and the industry. Therefore, on January 15, 2013, the Company filed an appeal with the U.S.
Supreme Court.
The
Company believes that a final judicial resolution to the challenge by the FTC to the Microporous acquisition could take several months to a year. Although it is difficult to predict
the outcome, timing or impact of this matter at this time, the Company believes that the final resolution will not have a material adverse impact on its business or financial condition.
The
Company's core energy storage business produces polymer-based membrane battery separators used in transportation, industrial and consumer electronics applications. The acquisition of
the Microporous business extended the Company's product portfolio into the niche, mature deep cycle market for rubber-based battery separators, with considerable overlap to customers it currently
serves with other products. The Company does not believe that a required divestiture of all or a portion of the Microporous assets would significantly impact its core energy storage business or the
long-term growth drivers impacting this business, including growth in Asia, demand for consumer electronics and growing demand for electric drive vehicles.
For
the fiscal year ended December 29, 2012, the Microporous business represented approximately 10% of consolidated revenue and approximately 13% of consolidated operating income,
including the facility that the Company completed and shifted production to in Feistritz, Austria post-acquisition. At December 29, 2012, Microporous assets were less than 5% of
consolidated assets. The impact of a final resolution to this matter may be affected by a number of uncertainties, including, but not limited to,
67
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
11. Commitments and Contingencies (Continued)
whether
the Company is required to divest all or a portion of the Microporous assets, the timing of a potential divestiture, the proceeds of such a divestiture and the incremental growth in its core
businesses. If the Company was required to divest of all or a portion of the Microporous assets, it would intend to sell the assets at fair market value.
Other
The Company is from time to time subject to various claims and other matters arising out of the normal conduct of business. The amount
recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional information that becomes available. Actual costs to
be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures. Subject to the imprecision in estimating future contingent liability costs,
the Company believes that based on present information, it is unlikely that a liability, if any, exists that would have a material adverse effect on the consolidated operating results, financial
position or cash flows of the Company.
12. Stock-Based Compensation Plans
The Company offers stock-based compensation plans to attract, retain, motivate and reward key officers, non-employee directors and employees. Stock-based compensation expense
includes costs associated with stock options and restricted stock and is classified as "Selling, general and administrative expenses" in the accompanying consolidated statements of income.
The
amended and restated 2007 Stock Incentive Plan ("2007 Plan") allows for the grant of stock options, restricted stock and other instruments for up to a total of 4,751,963 shares of
common stock. Stock options granted under the 2007 Plan have 10-year terms and are issued with an exercise price not less than the fair market value of the Company's stock on the grant
date. Stock options granted under the 2007 Plan may vest based on satisfaction of certain annual performance criteria or may vest over time. Stock options granted under the 2006 Stock Option Plan
("2006 Plan") have a 10-year term and are fully vested as of January 1, 2011.
A
summary of outstanding stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted-
average
exercise
price
|
|
Weighted
average
remaining
contractual
term (years)
|
|
Aggregate
intrinsic
value
(in thousands)
|
|
Outstanding at December 31, 2011
|
|
|
3,241,822
|
|
$
|
37.01
|
|
|
|
|
|
|
|
Granted
|
|
|
43,500
|
|
|
38.50
|
|
|
|
|
|
|
|
Exercised
|
|
|
(116,183
|
)
|
|
11.52
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(47,500
|
)
|
|
53.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2012
|
|
|
3,121,639
|
|
|
37.73
|
|
|
7.7
|
|
$
|
26,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 29, 2012
|
|
|
1,820,639
|
|
|
25.58
|
|
|
7.0
|
|
|
37,420
|
|
Expected to vest
|
|
|
1,297,773
|
|
|
54.76
|
|
|
8.6
|
|
|
|
|
Stock
option expense was $16,100,000, $9,206,000 and $2,254,000 in 2012, 2011 and 2010, respectively. The income tax benefit related to stock option expense was $5,724,000, $3,242,000
and
68
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
12. Stock-Based Compensation Plans (Continued)
$850,000
in 2012, 2011 and 2010, respectively. As of December 29, 2012, the Company had $29,049,000 of total pre-tax unrecognized stock option expense, net of estimated forfeitures,
which is expected to be recognized over a weighted average period of 1.7 years.
Exercise
prices for options outstanding at December 29, 2012 ranged from $5.24 to $56.98. The intrinsic value is based on the Company's closing stock price of $46.13 at
December 29, 2012, which would have been received by the option holder had the options been exercised at that date. The total intrinsic value of options exercised during 2012, 2011 and 2010
amounted to $3,116,000, $48,063,000 and $35,805,000, respectively.
The
Company is required to estimate the fair value of stock options on the grant date using an option-pricing model. The weighted average grant-date fair value of options
granted during 2012, 2011 and 2010 amounted to $18.97, $26.73 and $9.40 per share, respectively. The fair value of each stock option granted was estimated on the date of grant based on the
Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
assumptions
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Expected term (years)
|
|
|
5.3
|
|
|
4.8
|
|
|
4.5
|
|
Risk-free interest rate
|
|
|
0.86
|
%
|
|
0.90
|
%
|
|
1.9
|
%
|
Expected volatility
|
|
|
56.0
|
%
|
|
56.1
|
%
|
|
55.7
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
The
potential expected term of the stock options ranges from the vesting period of the options (three years to four years) to the contractual term of the options of ten years. The
Company determines the expected term of the options based on historical experience, vesting periods, structure of the option plans and contractual term of the options. The Company's
risk-free interest rate is based on the interest rate of U.S. Treasury bills with a term approximating the expected term of the options and is measured at the date of the stock option
grant. Expected volatility is estimated based on the Company's historical stock prices and implied volatility from traded options. The Company does not anticipate paying dividends.
A
summary of stock options that are expected to vest is as follows:
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted-
average
grant-date
fair value
|
|
December 31, 2011
|
|
|
2,314,856
|
|
$
|
21.95
|
|
Granted
|
|
|
43,500
|
|
|
18.97
|
|
Vested
|
|
|
(1,060,583
|
)
|
|
16.92
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
|
1,297,773
|
|
|
25.97
|
|
|
|
|
|
|
|
|
The
total fair value of options vested during 2012, 2011 and 2010 was $17,945,000, $4,014,000 and $2,098,000, respectively.
69
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
12. Stock-Based Compensation Plans (Continued)
Under the 2007 Plan, the Company granted restricted shares of 11,701, 4,380 and 3,416 in 2012, 2011 and 2010, respectively, to members of its Board of Directors for service to the
Company.
A
summary of the status of unvested restricted stock is as follows:
|
|
|
|
|
|
|
|
|
|
Restricted
stock
|
|
Weighted-
average
grant-date
fair value
|
|
Unvested at December 31, 2011
|
|
|
7,712
|
|
$
|
43.23
|
|
Granted
|
|
|
11,701
|
|
|
34.62
|
|
Vested
|
|
|
(3,652
|
)
|
|
36.51
|
|
|
|
|
|
|
|
|
Unvested at December 29, 2012
|
|
|
15,761
|
|
|
38.40
|
|
|
|
|
|
|
|
|
The
expense associated with these restricted stock grants, which vest over three years, was $178,000, $92,000 and $41,000 in 2012, 2011 and 2010, respectively.
13. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Foreign currency translation adjustment
|
|
$
|
3,749
|
|
$
|
(6,060
|
)
|
Net actuarial loss and prior service credit
|
|
|
(26,102
|
)
|
|
(11,067
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(22,353
|
)
|
$
|
(17,127
|
)
|
|
|
|
|
|
|
14. Related Party Transactions
The Company's German subsidiary has a 33% equity investment in a patent and trademark service provider and a 25% equity investment in a research company. The investments are accounted
for under the equity method of accounting and were $650,000 and $588,000 at December 29, 2012 and December 31, 2011, respectively. Charges from the affiliates for work performed were
$1,801,000, $979,000 and $1,269,000 in 2012, 2011 and 2010, respectively. Amounts due to the affiliates were $239,000 and $107,000 at December 29, 2012 and December 31, 2011,
respectively.
15. Noncontrolling Interest
In 2010, the Company entered into a joint venture agreement with a customer, Camel Group Co., Ltd ("Camel"), a leading battery manufacturer in China, to produce
lead-acid battery separators primarily for Camel's use. The joint venture, Daramic Xiangyang Battery Separator Co., Ltd. ("Daramic Xiangyang"), is located at Camel's facility
and started production during the third quarter of 2012. In accordance with the joint venture agreement, the Company made cash contributions of $7,370,000 for a 65% ownership interest in the joint
venture, and Camel contributed cash of $2,554,000 and land for a 35% ownership interest. In exchange for notes payable, Daramic Xiangyang purchased
from Camel a building and from the Company certain production equipment that was previously located at the Company's former facility in Potenza, Italy. The notes payable and related interest will be
paid by Daramic Xiangyang using available free cash flow, as defined in the joint venture
70
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
15. Noncontrolling Interest (Continued)
agreement.
The building note payable to Camel has a principal balance of $5,910,000 and is included in "Other" non-current liabilities in the accompanying December 29, 2012
consolidated balance sheet, and the equipment note payable to the Company eliminates in consolidation.
16. Sale of Italian Subsidiary
On March 9, 2010, the Company sold 100% of the stock of its wholly-owned Italian subsidiary, Daramic S.r.l., for €13,385,000 ($18,175,000 at March 9,
2010). The Company recognized a gain of $3,327,000 on the sale, net of direct transaction costs. As a result of the stock sale, the buyer acquired all of the assets and liabilities of
Daramic S.r.l., including the Potenza, Italy facility, which was closed in 2008, and environmental and restructuring obligations associated with the Potenza site. In addition to assuming all
assets and liabilities, the buyer fully indemnified the Company with regard to all environmental, health and safety matters related to this site. In connection with the sale, the Company was required
to make net cash payments to the buyer of €16,047,000, consisting of the settlement of an acquired intercompany receivable due to Daramic S.r.l. from affiliates of the Company,
reduced by the purchase price of Daramic S.r.l. due from the buyer. The Company paid €11,047,000 ($14,908,000) at closing and the remaining €5,000,000
($6,611,000) on December 15, 2010.
17. Segment Information
The Company's operations are principally managed on a products basis and are comprised of three reportable segments for financial reporting purposes. The Company's three reportable
segments are presented in the context of its two primary businessesenergy 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 the
following reportable segments:
-
-
Electronics and EDVsproduces and markets membranes for lithium batteries that are used in portable electronic
devices, cordless power tools, electric drive vehicles ("EDVs") and energy storage systems ("ESS").
-
-
Transportation and industrialproduces 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 is a reportable segment and produces and markets membranes and membrane modules used as the high-technology filtration element in various
medical and industrial applications.
The
Company evaluates the performance of segments and allocates resources to segments based on operating income before depreciation and amortization. In addition, it evaluates business
segment performance before stock-based compensation and certain non-recurring and other costs.
71
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
17. Segment Information (Continued)
Financial
information relating to the reportable segments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
January 1, 2011
|
|
Net sales to external customers (by major product group):
|
|
|
|
|
|
|
|
|
|
|
Electronics and EDVs
|
|
$
|
167,370
|
|
$
|
200,991
|
|
$
|
131,036
|
|
Transportation and industrial
|
|
|
367,684
|
|
|
371,847
|
|
|
314,727
|
|
|
|
|
|
|
|
|
|
Energy storage
|
|
|
535,054
|
|
|
572,838
|
|
|
445,763
|
|
Healthcare
|
|
|
114,778
|
|
|
120,387
|
|
|
107,345
|
|
Filtration and specialty
|
|
|
67,541
|
|
|
69,849
|
|
|
63,517
|
|
|
|
|
|
|
|
|
|
Separations media
|
|
|
182,319
|
|
|
190,236
|
|
|
170,862
|
|
|
|
|
|
|
|
|
|
Total net sales to external customers
|
|
$
|
717,373
|
|
$
|
763,074
|
|
$
|
616,625
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
Electronics and EDVs
|
|
$
|
47,195
|
|
$
|
91,130
|
|
$
|
51,412
|
|
Transportation and industrial
|
|
|
83,253
|
|
|
96,058
|
|
|
79,121
|
|
|
|
|
|
|
|
|
|
Energy storage
|
|
|
130,448
|
|
|
187,188
|
|
|
130,533
|
|
Separations media
|
|
|
52,479
|
|
|
54,680
|
|
|
50,654
|
|
Corporate and other
|
|
|
(24,818
|
)
|
|
(42,447
|
)
|
|
(44,590
|
)
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
158,109
|
|
|
199,421
|
|
|
136,597
|
|
Stock-based compensation
|
|
|
16,278
|
|
|
9,298
|
|
|
2,295
|
|
Non-recurring and other costs
|
|
|
1,820
|
|
|
658
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
140,011
|
|
|
189,465
|
|
|
132,920
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
36,049
|
|
|
34,384
|
|
|
46,747
|
|
Foreign currency and other
|
|
|
(28
|
)
|
|
(2,018
|
)
|
|
(1,347
|
)
|
Write-off of loan acquisition costs associated with refinancing of senior credit agreement
|
|
|
2,478
|
|
|
|
|
|
|
|
Cost related to purchase of 8.75% senior subordinated notes
|
|
|
|
|
|
|
|
|
2,263
|
|
Gain on sale of Italian subsidiary
|
|
|
|
|
|
|
|
|
(3,327
|
)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
101,512
|
|
$
|
157,099
|
|
$
|
88,584
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
Electronics and EDVs
|
|
$
|
16,137
|
|
$
|
9,395
|
|
$
|
6,460
|
|
Transportation and industrial
|
|
|
12,558
|
|
|
11,787
|
|
|
12,722
|
|
|
|
|
|
|
|
|
|
Energy storage
|
|
|
28,695
|
|
|
21,182
|
|
|
19,182
|
|
Separations media
|
|
|
13,437
|
|
|
13,360
|
|
|
12,033
|
|
Corporate and other
|
|
|
13,535
|
|
|
16,800
|
|
|
16,692
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
55,667
|
|
$
|
51,342
|
|
$
|
47,907
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
Electronics and EDVs
|
|
$
|
115,845
|
|
$
|
116,208
|
|
$
|
50,699
|
|
Transportation and industrial
|
|
|
12,984
|
|
|
17,671
|
|
|
4,144
|
|
|
|
|
|
|
|
|
|
Energy storage
|
|
|
128,829
|
|
|
133,879
|
|
|
54,843
|
|
Separations media
|
|
|
8,282
|
|
|
22,451
|
|
|
13,944
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
137,111
|
|
$
|
156,330
|
|
$
|
68,787
|
|
|
|
|
|
|
|
|
|
72
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
17. Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
January 1, 2011
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Electronics and EDVs
|
|
$
|
397,973
|
|
$
|
291,451
|
|
$
|
179,158
|
|
Transportation and industrial
|
|
|
314,905
|
|
|
283,292
|
|
|
258,488
|
|
|
|
|
|
|
|
|
|
Energy storage
|
|
|
712,878
|
|
|
574,743
|
|
|
437,646
|
|
Separations media
|
|
|
244,978
|
|
|
273,631
|
|
|
260,207
|
|
Corporate and other
|
|
|
628,216
|
|
|
633,505
|
|
|
650,643
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,586,072
|
|
$
|
1,481,879
|
|
$
|
1,348,496
|
|
|
|
|
|
|
|
|
|
Net
sales by geographic location, based on the country from which the product is shipped, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
January 1, 2011
|
|
Net sales to unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
250,228
|
|
$
|
299,923
|
|
$
|
231,852
|
|
Germany
|
|
|
164,896
|
|
|
170,103
|
|
|
154,054
|
|
France
|
|
|
70,903
|
|
|
81,719
|
|
|
65,671
|
|
China
|
|
|
86,627
|
|
|
82,861
|
|
|
77,957
|
|
Other
|
|
|
144,719
|
|
|
128,468
|
|
|
87,091
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
717,373
|
|
$
|
763,074
|
|
$
|
616,625
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment by geographic location were as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
|
|
United States
|
|
$
|
333,194
|
|
$
|
235,051
|
|
|
|
|
Germany
|
|
|
152,943
|
|
|
154,586
|
|
|
|
|
Other
|
|
|
152,664
|
|
|
138,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
638,801
|
|
$
|
527,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
18. Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal year ended December 29, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
173,705
|
|
$
|
185,814
|
|
$
|
177,618
|
|
$
|
180,236
|
|
Gross profit
|
|
|
71,024
|
|
|
70,240
|
|
|
59,242
|
|
|
63,408
|
|
Net income
|
|
|
18,773
|
|
|
20,481
|
|
|
14,232
|
|
|
17,465
|
|
Net income per sharebasic
|
|
$
|
0.40
|
|
$
|
0.44
|
|
$
|
0.31
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
Net income per sharediluted
|
|
$
|
0.40
|
|
$
|
0.43
|
|
$
|
0.30
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
185,674
|
|
$
|
196,376
|
|
$
|
190,062
|
|
$
|
190,962
|
|
Gross profit
|
|
|
79,466
|
|
|
87,514
|
|
|
76,904
|
|
|
78,177
|
|
Net income
|
|
|
25,681
|
|
|
29,507
|
|
|
23,605
|
|
|
26,447
|
|
Net income per sharebasic
|
|
$
|
0.56
|
|
$
|
0.64
|
|
$
|
0.51
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
Net income per sharediluted
|
|
$
|
0.55
|
|
$
|
0.63
|
|
$
|
0.50
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
74
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
19. Financial Statements of Guarantors
The Company's senior notes are unconditionally guaranteed, jointly and severally, on a senior basis by certain of the Company's 100% owned subsidiaries ("Guarantors"). Management has
determined that separate complete financial statements of the Guarantors would not be material to users of the financial statements.
The
following sets forth condensed consolidating financial statements of the Guarantors and non-Guarantor subsidiaries.
Condensed consolidating balance sheet
December 29, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
28,098
|
|
$
|
16,775
|
|
$
|
|
|
$
|
44,873
|
|
Accounts receivable, net
|
|
|
43,965
|
|
|
93,350
|
|
|
|
|
|
|
|
|
137,315
|
|
Inventories
|
|
|
44,713
|
|
|
75,196
|
|
|
|
|
|
|
|
|
119,909
|
|
Prepaid and other
|
|
|
24,917
|
|
|
19,744
|
|
|
538
|
|
|
|
|
|
45,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
113,595
|
|
|
216,388
|
|
|
17,313
|
|
|
|
|
|
347,296
|
|
Due from affiliates
|
|
|
554,190
|
|
|
330,148
|
|
|
482,869
|
|
|
(1,367,207
|
)
|
|
|
|
Investment in subsidiaries
|
|
|
123,765
|
|
|
381,295
|
|
|
636,860
|
|
|
(1,141,920
|
)
|
|
|
|
Property, plant and equipment, net
|
|
|
333,194
|
|
|
305,607
|
|
|
|
|
|
|
|
|
638,801
|
|
Goodwill
|
|
|
|
|
|
|
|
|
469,319
|
|
|
|
|
|
469,319
|
|
Intangibles and loan acquisition costs, net
|
|
|
|
|
|
|
|
|
121,729
|
|
|
|
|
|
121,729
|
|
Other
|
|
|
884
|
|
|
8,043
|
|
|
|
|
|
|
|
|
8,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,125,628
|
|
$
|
1,241,481
|
|
$
|
1,728,090
|
|
$
|
(2,509,127
|
)
|
$
|
1,586,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
26,476
|
|
$
|
47,155
|
|
$
|
4,557
|
|
$
|
|
|
$
|
78,188
|
|
Income taxes payable
|
|
|
|
|
|
723
|
|
|
880
|
|
|
|
|
|
1,603
|
|
Current portion of debt
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,476
|
|
|
47,878
|
|
|
55,437
|
|
|
|
|
|
129,791
|
|
Due to affiliates
|
|
|
579,388
|
|
|
344,398
|
|
|
443,421
|
|
|
(1,367,207
|
)
|
|
|
|
Debt, less current portion
|
|
|
|
|
|
|
|
|
646,250
|
|
|
|
|
|
646,250
|
|
Pension obligations, less current portion
|
|
|
|
|
|
103,491
|
|
|
|
|
|
|
|
|
103,491
|
|
Deferred income taxes and other
|
|
|
78,392
|
|
|
45,166
|
|
|
145
|
|
|
|
|
|
123,703
|
|
Shareholders' equity
|
|
|
441,372
|
|
|
700,548
|
|
|
582,837
|
|
|
(1,141,920
|
)
|
|
582,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,125,628
|
|
$
|
1,241,481
|
|
$
|
1,728,090
|
|
$
|
(2,509,127
|
)
|
$
|
1,586,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
19. Financial Statements of Guarantors (Continued)
Condensed consolidating balance sheet
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
65,495
|
|
$
|
27,079
|
|
$
|
|
|
$
|
92,574
|
|
Accounts receivable, net
|
|
|
51,831
|
|
|
82,185
|
|
|
|
|
|
|
|
|
134,016
|
|
Inventories
|
|
|
31,603
|
|
|
58,841
|
|
|
|
|
|
|
|
|
90,444
|
|
Prepaid and other
|
|
|
6,345
|
|
|
18,324
|
|
|
62
|
|
|
|
|
|
24,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
89,779
|
|
|
224,845
|
|
|
27,141
|
|
|
|
|
|
341,765
|
|
Due from affiliates
|
|
|
549,943
|
|
|
282,244
|
|
|
377,981
|
|
|
(1,210,168
|
)
|
|
|
|
Investment in subsidiaries
|
|
|
177,143
|
|
|
321,215
|
|
|
570,456
|
|
|
(1,068,814
|
)
|
|
|
|
Property, plant and equipment, net
|
|
|
235,051
|
|
|
292,727
|
|
|
|
|
|
|
|
|
527,778
|
|
Goodwill
|
|
|
|
|
|
|
|
|
469,319
|
|
|
|
|
|
469,319
|
|
Intangibles and loan acquisition costs, net
|
|
|
|
|
|
|
|
|
133,586
|
|
|
|
|
|
133,586
|
|
Other
|
|
|
157
|
|
|
9,274
|
|
|
|
|
|
|
|
|
9,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,052,073
|
|
$
|
1,130,305
|
|
$
|
1,578,483
|
|
$
|
(2,278,982
|
)
|
$
|
1,481,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
41,301
|
|
$
|
51,391
|
|
$
|
3,547
|
|
$
|
|
|
$
|
96,239
|
|
Income taxes payable
|
|
|
|
|
|
5,231
|
|
|
650
|
|
|
|
|
|
5,881
|
|
Current portion of debt
|
|
|
|
|
|
453
|
|
|
3,229
|
|
|
|
|
|
3,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
41,301
|
|
|
57,075
|
|
|
7,426
|
|
|
|
|
|
105,802
|
|
Due to affiliates
|
|
|
554,230
|
|
|
247,424
|
|
|
408,514
|
|
|
(1,210,168
|
)
|
|
|
|
Debt, less current portion
|
|
|
|
|
|
42,832
|
|
|
663,004
|
|
|
|
|
|
705,836
|
|
Pension obligations, less current portion
|
|
|
|
|
|
78,086
|
|
|
|
|
|
|
|
|
78,086
|
|
Deferred income taxes and other
|
|
|
47,140
|
|
|
45,476
|
|
|
146
|
|
|
|
|
|
92,762
|
|
Shareholders' equity
|
|
|
409,402
|
|
|
659,412
|
|
|
499,393
|
|
|
(1,068,814
|
)
|
|
499,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,052,073
|
|
$
|
1,130,305
|
|
$
|
1,578,483
|
|
$
|
(2,278,982
|
)
|
$
|
1,481,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
19. Financial Statements of Guarantors (Continued)
Condensed consolidating statement of income
Year ended December 29, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
208,079
|
|
$
|
509,294
|
|
$
|
|
|
$
|
|
|
$
|
717,373
|
|
Cost of goods sold
|
|
|
78,775
|
|
|
374,684
|
|
|
|
|
|
|
|
|
453,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
129,304
|
|
|
134,610
|
|
|
|
|
|
|
|
|
263,914
|
|
Selling, general and administrative expenses
|
|
|
62,346
|
|
|
47,671
|
|
|
13,886
|
|
|
|
|
|
123,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
66,958
|
|
|
86,939
|
|
|
(13,886
|
)
|
|
|
|
|
140,011
|
|
Interest expense and other
|
|
|
(9,404
|
)
|
|
7,396
|
|
|
38,029
|
|
|
|
|
|
36,021
|
|
Write-off of loan acquisition costs associated with refinancing of senior credit agreement
|
|
|
|
|
|
|
|
|
2,478
|
|
|
|
|
|
2,478
|
|
Equity in earnings of subsidiaries
|
|
|
|
|
|
|
|
|
(100,859
|
)
|
|
100,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
76,362
|
|
|
79,543
|
|
|
46,466
|
|
|
(100,859
|
)
|
|
101,512
|
|
Income taxes
|
|
|
35,524
|
|
|
19,522
|
|
|
(24,485
|
)
|
|
|
|
|
30,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
40,838
|
|
$
|
60,021
|
|
$
|
70,951
|
|
$
|
(100,859
|
)
|
$
|
70,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed consolidating statement of income
Year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
272,521
|
|
$
|
490,553
|
|
$
|
|
|
$
|
|
|
$
|
763,074
|
|
Cost of goods sold
|
|
|
85,050
|
|
|
355,963
|
|
|
|
|
|
|
|
|
441,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
187,471
|
|
|
134,590
|
|
|
|
|
|
|
|
|
322,061
|
|
Selling, general and administrative expenses
|
|
|
73,171
|
|
|
52,518
|
|
|
6,907
|
|
|
|
|
|
132,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
114,300
|
|
|
82,072
|
|
|
(6,907
|
)
|
|
|
|
|
189,465
|
|
Interest expense and other
|
|
|
(8,936
|
)
|
|
5,535
|
|
|
35,767
|
|
|
|
|
|
32,366
|
|
Equity in earnings of subsidiaries
|
|
|
|
|
|
|
|
|
(123,890
|
)
|
|
123,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
123,236
|
|
|
76,537
|
|
|
81,216
|
|
|
(123,890
|
)
|
|
157,099
|
|
Income taxes
|
|
|
54,975
|
|
|
20,908
|
|
|
(24,024
|
)
|
|
|
|
|
51,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
68,261
|
|
$
|
55,629
|
|
$
|
105,240
|
|
$
|
(123,890
|
)
|
$
|
105,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
19. Financial Statements of Guarantors (Continued)
Condensed consolidating statement of income
Year ended January 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
213,491
|
|
$
|
403,134
|
|
$
|
|
|
$
|
|
|
$
|
616,625
|
|
Cost of goods sold
|
|
|
87,714
|
|
|
282,053
|
|
|
|
|
|
|
|
|
369,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
125,777
|
|
|
121,081
|
|
|
|
|
|
|
|
|
246,858
|
|
Selling, general and administrative expenses
|
|
|
74,726
|
|
|
37,165
|
|
|
2,047
|
|
|
|
|
|
113,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
51,051
|
|
|
83,916
|
|
|
(2,047
|
)
|
|
|
|
|
132,920
|
|
Interest expense and other
|
|
|
(8,631
|
)
|
|
7,775
|
|
|
46,256
|
|
|
|
|
|
45,400
|
|
Costs related to purchase of 8.75% senior subordinated notes
|
|
|
|
|
|
|
|
|
2,263
|
|
|
|
|
|
2,263
|
|
Gain on sale of Italian subsidiary
|
|
|
|
|
|
(3,327
|
)
|
|
|
|
|
|
|
|
(3,327
|
)
|
Equity in earnings of subsidiaries
|
|
|
|
|
|
|
|
|
(85,932
|
)
|
|
85,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
59,682
|
|
|
79,468
|
|
|
35,366
|
|
|
(85,932
|
)
|
|
88,584
|
|
Income taxes
|
|
|
35,882
|
|
|
17,336
|
|
|
(28,209
|
)
|
|
|
|
|
25,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,800
|
|
$
|
62,132
|
|
$
|
63,575
|
|
$
|
(85,932
|
)
|
$
|
63,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
19. Financial Statements of Guarantors (Continued)
Condensed consolidating statement of comprehensive income
Year ended December 29, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Net income
|
|
$
|
40,838
|
|
$
|
60,021
|
|
$
|
70,951
|
|
$
|
(100,859
|
)
|
$
|
70,951
|
|
Foreign currency translation adjustment, net of income tax expense of $249
|
|
|
|
|
|
10,313
|
|
|
(332
|
)
|
|
(172
|
)
|
|
9,809
|
|
Change in net actuarial loss and prior service credit, net of income tax benefit of $5,848
|
|
|
(306
|
)
|
|
(14,729
|
)
|
|
|
|
|
|
|
|
(15,035
|
)
|
Equity in earnings of subsidiaries
|
|
|
|
|
|
|
|
|
(4,894
|
)
|
|
4,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
40,532
|
|
$
|
55,605
|
|
$
|
65,725
|
|
$
|
(96,137
|
)
|
$
|
65,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed consolidating statement of comprehensive income
Year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Net income
|
|
$
|
68,261
|
|
$
|
55,629
|
|
$
|
105,240
|
|
$
|
(123,890
|
)
|
$
|
105,240
|
|
Foreign currency translation adjustment, net of income tax benefit of $895
|
|
|
|
|
|
(12,706
|
)
|
|
116
|
|
|
6
|
|
|
(12,584
|
)
|
Change in net actuarial loss and prior service credit, net of income tax benefit of $2,187
|
|
|
(111
|
)
|
|
(4,701
|
)
|
|
|
|
|
|
|
|
(4,812
|
)
|
Equity in earnings of subsidiaries
|
|
|
|
|
|
|
|
|
(17,512
|
)
|
|
17,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
68,150
|
|
$
|
38,222
|
|
$
|
87,844
|
|
$
|
(106,372
|
)
|
$
|
87,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
19. Financial Statements of Guarantors (Continued)
Condensed consolidating statement of comprehensive income
Year ended January 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Net income
|
|
$
|
23,800
|
|
$
|
62,132
|
|
$
|
63,575
|
|
$
|
(85,932
|
)
|
$
|
63,575
|
|
Foreign currency translation adjustment, net of income tax benefit of $2,008
|
|
|
|
|
|
(2,682
|
)
|
|
20,367
|
|
|
1,098
|
|
|
18,783
|
|
Change in net actuarial loss and prior service credit, net of income tax benefit of $2,311
|
|
|
(47
|
)
|
|
(5,118
|
)
|
|
|
|
|
|
|
|
(5,165
|
)
|
Equity in earnings of subsidiaries
|
|
|
|
|
|
|
|
|
(6,749
|
)
|
|
6,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
23,753
|
|
$
|
54,332
|
|
$
|
77,193
|
|
$
|
(78,085
|
)
|
$
|
77,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
19. Financial Statements of Guarantors (Continued)
Condensed consolidating statement of cash flows
Year ended December 29, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Net cash provided by (used in) operating activities
|
|
$
|
92,466
|
|
$
|
51,826
|
|
$
|
(34,012
|
)
|
$
|
(5,494
|
)
|
$
|
104,786
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(115,663
|
)
|
|
(21,448
|
)
|
|
|
|
|
|
|
|
(137,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(115,663
|
)
|
|
(21,448
|
)
|
|
|
|
|
|
|
|
(137,111
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from new senior credit agreement
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
|
|
350,000
|
|
Principal payments in connection with refinancing of senior credit agreement
|
|
|
|
|
|
(41,865
|
)
|
|
(300,426
|
)
|
|
|
|
|
(342,291
|
)
|
Principal payments on debt
|
|
|
|
|
|
(117
|
)
|
|
(4,557
|
)
|
|
|
|
|
(4,674
|
)
|
Payments on revolving credit facility
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
|
|
(15,000
|
)
|
Loan acquisition costs
|
|
|
|
|
|
|
|
|
(6,228
|
)
|
|
|
|
|
(6,228
|
)
|
Proceeds from stock option exercises
|
|
|
|
|
|
|
|
|
1,338
|
|
|
|
|
|
1,338
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
338
|
|
|
|
|
|
338
|
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
(242
|
)
|
|
|
|
|
(242
|
)
|
Intercompany transactions, net
|
|
|
23,197
|
|
|
(27,176
|
)
|
|
(1,515
|
)
|
|
5,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
23,197
|
|
|
(69,158
|
)
|
|
23,708
|
|
|
5,494
|
|
|
(16,759
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
|
|
|
(37,397
|
)
|
|
(10,304
|
)
|
|
|
|
|
(47,701
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
65,495
|
|
|
27,079
|
|
|
|
|
|
92,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
|
|
$
|
28,098
|
|
$
|
16,775
|
|
$
|
|
|
$
|
44,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
19. Financial Statements of Guarantors (Continued)
Condensed consolidating statement of cash flows
Year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Net cash provided by (used in) operating activities
|
|
$
|
145,862
|
|
$
|
50,084
|
|
$
|
(53,039
|
)
|
$
|
1,926
|
|
$
|
144,833
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(113,648
|
)
|
|
(42,682
|
)
|
|
|
|
|
|
|
|
(156,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(113,648
|
)
|
|
(42,682
|
)
|
|
|
|
|
|
|
|
(156,330
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
|
|
|
(485
|
)
|
|
(4,034
|
)
|
|
|
|
|
(4,519
|
)
|
Loan acquisition costs
|
|
|
|
|
|
|
|
|
(627
|
)
|
|
|
|
|
(627
|
)
|
Proceeds from stock option exercises
|
|
|
|
|
|
|
|
|
6,658
|
|
|
|
|
|
6,658
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
14,136
|
|
|
|
|
|
14,136
|
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
1,936
|
|
|
|
|
|
1,936
|
|
Intercompany transactions, net
|
|
|
(32,214
|
)
|
|
3,874
|
|
|
30,266
|
|
|
(1,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(32,214
|
)
|
|
3,389
|
|
|
48,335
|
|
|
(1,926
|
)
|
|
17,584
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
(3,468
|
)
|
|
|
|
|
|
|
|
(3,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
7,323
|
|
|
(4,704
|
)
|
|
|
|
|
2,619
|
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
58,172
|
|
|
31,783
|
|
|
|
|
|
89,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
|
|
$
|
65,495
|
|
$
|
27,079
|
|
$
|
|
|
$
|
92,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
Table of Contents
Polypore International, Inc.
Notes to consolidated financial statements (Continued)
19. Financial Statements of Guarantors (Continued)
Condensed consolidating statement of cash flows
Year ended January 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-Guarantor
Subsidiaries
|
|
The Company
|
|
Eliminations
|
|
Consolidated
|
|
Net cash provided by (used in) operating activities
|
|
$
|
96,565
|
|
$
|
78,646
|
|
$
|
(52,953
|
)
|
$
|
4,949
|
|
$
|
127,207
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(52,679
|
)
|
|
(16,108
|
)
|
|
|
|
|
|
|
|
(68,787
|
)
|
Payments associated with the stock sale of Italian subsidiary, net
|
|
|
|
|
|
(21,519
|
)
|
|
|
|
|
|
|
|
(21,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(52,679
|
)
|
|
(37,627
|
)
|
|
|
|
|
|
|
|
(90,306
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
|
|
|
(456
|
)
|
|
(9,561
|
)
|
|
|
|
|
(10,017
|
)
|
Loan acquisition costs
|
|
|
|
|
|
|
|
|
(7,954
|
)
|
|
|
|
|
(7,954
|
)
|
Proceeds from stock option exercises
|
|
|
|
|
|
|
|
|
6,860
|
|
|
|
|
|
6,860
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
6,769
|
|
|
|
|
|
6,769
|
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
581
|
|
|
|
|
|
581
|
|
Proceeds from issuance of 7.5% senior notes
|
|
|
|
|
|
|
|
|
365,000
|
|
|
|
|
|
365,000
|
|
Purchase of 8.75% senior subordinated notes
|
|
|
|
|
|
|
|
|
(422,549
|
)
|
|
|
|
|
(422,549
|
)
|
Intercompany transactions, net
|
|
|
(45,100
|
)
|
|
(26,151
|
)
|
|
76,200
|
|
|
(4,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(45,100
|
)
|
|
(26,607
|
)
|
|
15,346
|
|
|
(4,949
|
)
|
|
(61,310
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,214
|
|
|
(1,825
|
)
|
|
|
|
|
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
12,587
|
|
|
(37,607
|
)
|
|
|
|
|
(25,020
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
45,585
|
|
|
69,390
|
|
|
|
|
|
114,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
|
|
$
|
58,172
|
|
$
|
31,783
|
|
$
|
|
|
$
|
89,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
Table of Contents