The following discussion of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

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 2008, we generated total net sales of $610.5 million. We operate in two business segments: (i) the energy storage segment, which accounted for approximately 74% of our fiscal 2008 net sales; and
(ii) the separations media segment, which accounted for approximately 26% of our fiscal 2008 net sales. We manufacture our products at facilities in North America, Europe and Asia. Net sales from foreign locations were $388.4 million for fiscal 2008.

Energy Storage Segment

In the energy storage segment, our membrane separators are a critical performance component in lithium batteries, which are primarily used in consumer electronic applications, and lead-acid batteries, which are used globally in transportation and industrial applications. We believe the global economic recession adversely impacted sales in the first quarter of 2009 and may continue to have an adverse impact in the second quarter of 2009. Although the short-term economic outlook is uncertain, especially for the more economically sensitive consumer electronics portion of our business, we believe that the energy storage segment will continue to benefit from continued growth in demand by consumers for mobile power.

Lithium batteries are the power source in a wide variety of electronics applications ranging from notebook computers and mobile phones to cordless power tools. In addition, many new and developing applications such as electric and hybrid electric vehicles incorporate large-format batteries that will require much greater membrane separator volume per battery. As a result, we believe that membrane separator growth will exceed battery unit sales growth. We completed a lithium battery separator capacity expansion at our Charlotte, North Carolina facility in the third quarter of 2008.

In May 2008, we acquired Yurie-Wide Corporation, a South Korean company, which we subsequently renamed Celgard Korea, Inc. ("Celgard Korea"). The acquisition broadens our participation in the lithium battery separator market, adds to our membrane technology portfolio and product breadth and adds cost-effective production capacity. After the acquisition, we discontinued Celgard Korea sales and made significant operational changes to align Celgard Korea's operations with our global standards. Celgard Korea will not generate any revenues until their manufacturing processes and products meet our higher quality standards, which we expect to occur during 2009.

In the motor vehicle battery market, the high proportion of aftermarket sales and the steady growth of the worldwide fleet of motor vehicles provide us with a growing, recurring revenue base in lead-acid battery membrane separators. We believe we will also benefit from the worldwide conversion of alternative separator materials to the higher-performance polyethylene-based membrane separators such as those we produce. Growth is strongest in the Asia-Pacific region as a result of increasing per capita penetration of automobiles, growth in the industrial and manufacturing sectors, and a high rate of conversion to polyethylene-based membrane separators. We have positioned ourselves to benefit from this growth by expanding capacity at our Prachinburi, Thailand facility, acquiring a production facility in Tianjin, China and establishing an Asian Technical Center in Thailand.

In February 2008, we purchased 100% of the stock of Microporous Holding Corporation, the parent company of Microporous Products L.P. ("Microporous"). The acquisition of Microporous adds rubber-based battery separator technology to our product line. This acquisition broadens our participation in the deep-cycle industrial battery market (e.g., forklift and stationary batteries), adds to our membrane technology portfolio and product breadth, enhances service to common customers and adds cost-effective production capacity. On April 1, 2008, we acquired the battery separator manufacturing assets of Super-Tech Battery Components Pvt. Ltd., located in Bangalore, India.

A supply contract between our lead-acid battery separator business and Johnson Controls, Inc. ("JCI") expired on December 31, 2008 and was not renewed. In response, we implemented a restructuring plan in our energy storage segment to align lead-acid battery separator production capacity with demand, reduce costs and position ourselves to meet future growth opportunities. The initial plan includes closing our facility in Potenza, Italy, streamlining production at our facility in Owensboro, Kentucky and reducing selling, general and administrative resources associated with the lead-acid separator business. The total estimated cost of the plan is expected to be approximately $61.6 million, including cash charges of $32.7 million for severance, environmental, and other exit costs and a non-cash impairment charge of $28.9 million. We began implementing the restructuring plan during the fourth quarter and recorded restructuring charges of $59.9 million.

Separations Media Segment

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

Healthcare applications include hemodialysis, blood oxygenation, and plasmapheresis. Growth in demand for hemodialysis membranes is driven by the increasing worldwide population of end-stage renal disease patients. We estimate that conversion to single-use dialyzers and increasing treatment frequency will result in additional dialyzer market growth.

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

Critical accounting policies

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

Allowance for doubtful accounts

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

Impairment of intangibles and goodwill

Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible assets are not amortized, but are subject to an annual impairment test unless circumstances dictate more frequent assessments. Goodwill impairment testing is a two-step process performed at the reporting unit level. Our reporting units are at the operating segment level. Step one compares the fair value of our reporting units to their carrying amount. The fair value of the reporting unit is determined using the income approach, corroborated by a 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 of the goodwill impairment test calculates the implied fair value of the reporting unit's goodwill with the carrying value of its goodwill. 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, operating margins, discount rates, strategic plans and future market conditions, among others. Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions made for purposes of our goodwill impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates are not achieved, or changes in discount rates, 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 future impairment charge will occur and if they do, whether such charge will be material.

At April 4, 2009 a 5% decrease in the estimated free cash flow assumptions would have resulted in a reduction in fair values of approximately $47.9 million for our energy storage segment and $19.0 million for our separations media segment. For the energy storage segment, the 5% decrease would have resulted in the carrying value of the lead-acid battery separator reporting

unit exceeding its fair value by $12.7 million and would require a step two analysis to determine the amount of goodwill impairment, if any.

At April 4, 2009, a .5% increase in the discount rate would have resulted in a reduction in fair values of $42.2 million for our energy storage segment and $17.3 million for our separations media segment. For the energy storage segment, the .5% increase in the discount rate would have resulted in the carrying value of the lead-acid battery separator reporting unit exceeding its fair value by $9.1 million and would require a step two analysis to determine the amount of goodwill impairment, if any.

Pension and other postretirement benefits

Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit pension plans and other postretirement benefits. Two critical assumptions, discount rate and expected return on assets, are important elements of plan expense and/or liability measurement and differences between actual results and these two actuarial assumptions can materially affect our projected benefit obligation or the valuation of our plan assets. Other assumptions involve demographic factors such as retirement, expected increases in compensation, mortality and turnover. The discount rate enables us to state expected future cash flows at a present value on the measurement date. The discount rate assumptions are based on the market rate for high quality fixed income investments, and are thus subject to change each year. At January 3, 2009, a 1% decrease in the discount rate would increase our projected benefit obligations and the unfunded status of our pension plans by $12.8 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. At January 3, 2009, if the expected rate of return on pension plan assets were reduced by 1%, the result would have increased our net periodic benefit expense for fiscal 2008 by $0.2 million dollars. At January 3, 2009, if the actual plan assets were reduced by 1%, the unfunded status of our pension plans would increase by $0.2 million.

Environmental matters

We account for environmental liabilities in accordance with AICPA Statement of Position 96-1, "Environmental Remediation Liabilities." Environmental obligations are accrued when such expenditures are probable and reasonably estimable. The amount of liability recorded is based on currently available information, including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation, presently enacted laws and existing technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. We do not currently anticipate any material loss in excess of the amounts accrued. Future remediation expenses may be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the extent and method of remediation, the evolving nature of environmental regulations, and the availability and application of technology. If actual results are less favorable than those projected by management, we may be required to recognize additional expense and liabilities.

In connection with the acquisition of Membrana GmbH ("Membrana") in 2002, we recorded a reserve for costs to remediate known environmental issues and operational upgrades at the Wuppertal, Germany facility. In 2004, we identified and accrued for potential environmental contamination at our manufacturing facility in Potenza, Italy. In December 2008, we implemented a restructuring plan which included the closure of the Potenza, Italy manufacturing facility and increased the environmental reserve for the estimated additional costs of environmental remediation and monitoring activities that will be required after closing the facility.

We have indemnification agreements for certain environmental matters from Acordis A.G. ("Acordis") and Akzo Nobel N.V. ("Akzo"), the prior owners of Membrana. Recoveries of environmental costs from other parties are recognized as assets when their receipt is deemed probable. We have recorded a receivable with regard to the Akzo indemnification agreement. If indemnification claims cannot be enforced against Acordis and Akzo, we may be required to reduce the amount of indemnification receivable recorded.

Results of Operations


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



                                                                        Percentage of Sales
                                      Three Months Ended                 Three Months Ended
($'s in millions)              April 4, 2009     March 29, 2008    April 4, 2009   March 29, 2008

Net sales                     $         108.9    $         145.3           100.0 %          100.0 %

Gross profit                             43.4               55.4            39.9             38.2
Selling, general and
administrative expenses                  25.2               25.3            23.1             17.4
Business restructuring                    0.6                  -             0.5                -
Operating income                         17.6               30.1            16.2             20.7
Interest expense, net                    14.1               15.9            13.0             11.0
Foreign currency and other               (0.5 )             (0.1 )          (0.4 )           (0.1 )
Income from continuing
operations before income
taxes                                     4.0               14.3             3.7              9.8
Income taxes                              1.0                3.7             0.9              2.6
Income from continuing
operations                    $           3.0    $          10.6             2.7 %            7.3 %

Comparison of the three months ended April 4, 2009 with the three months ended March 29, 2008

Net sales. Net sales for the three months ended April 4, 2009 were $108.9 million, a decrease of $36.4 million, or 25.1%, from same period in the prior year. Energy storage sales for the three months ended April 4, 2009 were $73.7 million, a decrease of $30.2 million, or 29.1%. Energy storage sales of lead-acid and lithium battery separators decreased by 30.0% and 26.0%, respectively, due to current macro-economic conditions, customers reducing inventory levels to manage working capital and the negative impact of dollar/euro exchange rate fluctuations of $4.8 million. Lead-acid separator sales were also impacted by the loss of a customer at the end of fiscal 2008.

Separations media sales for the three months ended April 4, 2009 were $35.2 million, a decrease of $6.2 million, or 15.0% from the same period in the prior year, primarily due to the negative impact of dollar/euro exchange rate fluctuations of $4.3 million. Healthcare sales decreased 8.6% as the impact of higher sales volumes of synthetic hemodialysis membranes was more than offset by the negative impact of dollar/euro exchange rate fluctuations. Filtration and specialty product sales decreased by 27.4% due to current macro-economic conditions and the negative impact of dollar/euro exchange rate fluctuations.

Gross Profit. Gross profit as a percent of net sales was 39.9% for the three months ended April 4, 2009, as compared to 38.2% in the same period of the prior year. Energy storage gross profit as a percent of net sales was 35.3% for the three months ended April 4, 2009, as compared to the prior year percentage of 39.2%. The reduction in gross profit as a percent of net sales was the result of lower production volumes which resulted in higher production costs per unit as fixed costs were applied to lower production volumes. Separations media gross profit as a percent of net sales increased to 49.4% for the three months ended April 4, 2009, from 35.4% in the same period of the prior year. The increase was due primarily to the timing and efficiency of production runs, improved manufacturing yields and decreased energy costs.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $0.1 million for the three months ended April 4, 2009. The decrease was primarily due to reduced discretionary spending and cost savings from the 2008 restructuring plan, offset by costs associated with the FTC matter and increased operating costs in 2009 for the acquisitions of Microporous and Yurie-Wide Corporation in February and May of 2008, respectively. Selling, general and administrative expenses as a percent of net sales was 23.1% for the three months ended April 4, 2009, as compared to 17.4% in the same period in the prior year. The increase in selling, general and administrative expenses as a percent of sales is due primarily to lower sales.

Interest expense. Interest expense for the three months ended April 4, 2009 decreased by $1.8 million from the same period in the prior year. The decrease in interest expense was primarily driven by lower interest rates under our senior credit facilities and the positive impact of dollar/euro exchange rate fluctuations on our euro-denominated debt.

Income taxes. The income tax provision for the interim periods presented is computed at the effective rate expected to be applicable in each respective full year using the statutory rates on a country-by-country basis. The effective tax rate on continuing operations was 25.8% for the three months ended April 4, 2009, as compared to 26.2% for the same period in the

prior year. Our effective tax rate fluctuates due to a variety of factors, including state income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates, various changes in estimates of permanent differences and valuation allowances and the relative size of our consolidated income before income taxes.

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

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

                                                              Three Months Ended
                                                        April 4, 2009   March 29, 2008
U.S. Federal statutory rate                                      35.0 %           35.0 %
State income taxes                                                0.2              1.0
Mix of income in taxing jurisdictions                           (10.2 )          (11.2 )
Other permanent differences and valuation allowances              0.8              1.4
Total effective tax rate on income from continuing
operations                                                       25.8 %           26.2 %

Business Restructuring



The pre-tax components of restructuring activity in the three months ended
April 4, 2009 were as follows:



                                                                           Foreign
                         Balance at       Restructuring       Cash         Currency        Balance at
(in millions)         January 3, 2009        Charges        Payments     Translation      April 4, 2009
2008 Restructuring
Plan:
Severance and
benefit costs         $            9.9   $          (0.1 ) $     (0.7 ) $         (0.4 ) $           8.7
Other                              0.8               0.6         (0.7 )              -               0.7
                                  10.7               0.5         (1.4 )           (0.4 )             9.4

2006 Restructuring
Plan:
Severance and
benefit costs                      2.9                 -         (0.1 )           (0.1 )             2.7
Other                              0.5                 -         (0.4 )            0.1
                                   3.4                 -         (0.5 )           (0.1 )             2.8

Total                 $           14.1   $           0.5   $     (1.9 ) $         (0.5 ) $          12.2

We expect to make payments against the restructuring reserve of approximately $2.9 million over the next twelve months.

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

The plan includes closing our facility in Potenza, Italy, streamlining production at our facility in Owensboro, Kentucky and reducing selling, general and administrative resources associated with the lead-acid separator business. The total cost of the restructuring plan, including environmental costs included in the environmental reserve of $18.6 million, is expected to be approximately $61.6 million. The plan was implemented and a restructuring charge of $59.9 million was recorded in the fourth quarter of 2008. The restructuring plan includes the termination of approximately 175 employees, consisting of production employees at Potenza, Italy and Owensboro, Kentucky and certain selling, general and administrative employees. The total cost of severance and benefits is expected to be approximately $10.3 million. The Company estimates that other costs, consisting primarily of costs associated with closing the Potenza, Italy facility, are expected to be approximately $3.7 million, of which $2.7 million has been recognized through April 4, 2009 and the remainder will be recognized over the next three years. The restructuring charge recorded in the fourth quarter of 2008 also included a non-cash impairment charge of $28.9 million for buildings and machinery and equipment that will no longer be used in Potenza, Italy. Cash payments for severance and other exit costs are expected to be paid over the next three years. The timing, scope and costs of these restructuring measures are subject to change as we implement the plan and continue to evaluate our business needs and costs.

2006 restructuring plan. In December 2006, our separations media segment exited the production of cellulosic membranes and we realigned the cost structure at our Wuppertal, Germany facility. The total cost of the plan, all of which has been incurred, is expected to be approximately $33.8 million, consisting of a $17.5 million non-cash impairment charge for buildings and

equipment, $10.5 million for employee layoffs and $5.8 million for other costs related to the shutdown of portions of the Wuppertal facility. The other costs included in the restructuring plan are related to local regulations surrounding complete or partial shutdowns of a facility. During fiscal 2007, the reserve for severance and benefit costs was reduced as a result of lower actual severance expenses than originally estimated.

Liquidity and Capital Resources

Cash and cash equivalents increased to $96.1 million at April 4, 2009 from $83.0 million at January 3, 2009, due primarily to cash flow generated from operations.

Operating activities. Net cash provided by operating activities was $14.8 million in the three months ended April 4, 2009, as compared to $31.4 million in the three months ended March 29, 2008. Cash provided by operating activities was due primarily to cash from operations. Working capital in total remained fairly consistent with year-end levels. Accounts receivable decreased by $12.9 million
(excluding the $2.5 million decrease due to movements in foreign exchange rates)
due to lower sales while days sales outstanding at April 4, 2009 were comparable to the prior year. Inventories increased $11.5 million (excluding the . . .