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PPO > SEC Filings for PPO > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for POLYPORE INTERNATIONAL, INC.

Form 10-Q for POLYPORE INTERNATIONAL, INC.


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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 2011, we generated total net sales of $763.1 million. We operate in two primary businesses: energy storage and separations media. We manufacture our products at facilities in North America, Europe and Asia. Net sales from foreign locations were $473.2 million for fiscal 2011.

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 electric drive vehicle ("EDV") applications, and lead-acid batteries, which are used globally in transportation and numerous industrial applications. We believe that the long-term growth drivers for the energy storage business - growth in Asia, strong demand for consumer electronics and growing demand for EDVs - are positive. The energy storage business is comprised of two reportable segments, as described below.

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 energy storage systems ("ESS"). Demand for lithium batteries is driven by the need for increased mobility in consumer electronics and the need to provide fuel efficiency to meet mileage standards, reduce CO2 emissions in Europe and address many other increasing transportation needs in developing economies in EDVs. Since late 2009, we have announced $334.0 million of capacity expansions and as of September 29, 2012, have completed substantially all of the expenditures associated with these expansions. We completed the Charlotte, North Carolina and Ochang, Korea expansions and the first phase of the new Concord, North Carolina facility. The Charlotte expansion and the first phase of the new Concord facility were partially funded by a grant from the U.S. Department of Energy ("DOE") of $49.3 million. In mid-2012, we completed the second phase of expansion at the Concord facility and initial capacity has been qualified for commercial sales. For the final phase of the expansion at Concord, equipment installation is substantially complete. During 2012, demand for lithium separators has been impacted by lower than expected production of EDVs and economic weakness in consumer electronics. Although we believe the long-term growth drivers are positive, our sales have and may continue to be impacted by these factors in the near term. Accordingly, production from the second and final phases of the Concord expansions will ramp up as needed based on the timing of customer qualification and demand.

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 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. The joint venture started production during the third quarter of 2012.

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


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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 an expansion of our PUREMAŽ 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. These policies are critical to the understanding of our operating results and financial condition and include policies related to the allowance for doubtful accounts, impairment of intangibles and goodwill, pension benefits, environmental matters and repairs and maintenance. For a discussion of each of these policies, please see the discussion entitled "Critical Accounting Policies" under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations



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



                                                                                      Percentage of Net Sales
                                              Three Months Ended                        Three Months Ended
($'s in millions)                  September 29, 2012      October 1, 2011     September 29, 2012    October 1, 2011
Net sales                          $             177.6    $           190.1                 100.0 %            100.0 %

Gross profit                                      59.2                 76.9                  33.3               40.5
Selling, general and
administrative expenses                           29.5                 33.1                  16.6               17.5
Operating income                                  29.7                 43.8                  16.7               23.0
Interest expense, net                              9.5                  8.5                   5.3                4.4
Other                                              0.7                 (0.4 )                 0.4               (0.2 )
Income before income taxes                        19.5                 35.7                  11.0               18.8
Income taxes                                       5.3                 12.1                   3.0                6.4
Net income                         $              14.2    $            23.6                   8.0 %             12.4 %




                                                                                      Percentage of Net Sales
                                              Nine Months Ended                          Nine Months Ended
($'s in millions)                  September 29, 2012      October 1, 2011     September 29, 2012    October 1, 2011
Net sales                          $             537.1    $           572.1                 100.0 %            100.0 %

Gross profit                                     200.5                243.9                  37.3               42.6
Selling, general and
administrative expenses                           95.5                 98.1                  17.8               17.1
Operating income                                 105.0                145.8                  19.5               25.5
Interest expense, net                             26.4                 25.9                   4.9                4.5
Other                                              1.7                  0.4                   0.3                0.1
Income before income taxes                        76.9                119.5                  14.3               20.9
Income taxes                                      23.4                 40.7                   4.3                7.1
Net income                         $              53.5    $            78.8                  10.0 %             13.8 %


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Comparison of the three months ended September 29, 2012 with the three months ended October 1, 2011

Net sales. Net sales for the three months ended September 29, 2012 were $177.6 million, a decrease of $12.5 million, or 6.6%, from the same period in the prior year. The decrease was primarily due to lower sales in the electronics and EDVs segment and the negative impact of foreign currency translation of $8.6 million.

Gross profit. Gross profit was $59.2 million, a decrease of $17.7 million, or 23.0%, from the same period in the prior year. Gross profit as a percent of net sales was 33.3% for the three months ended September 29, 2012 compared to 40.5% for the three months ended October 1, 2011. The decrease in consolidated gross profit and gross profit margin was primarily due to lower sales and the costs associated with growth investments, including non-cash depreciation expense. We expect gross profit and gross profit margins to improve as the costs associated with our capacity expansions are offset by higher sales.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $3.6 million for the three months ended September 29, 2012 compared to the prior year, primarily due to a $3.4 million decrease in performance-based incentive compensation expense and $1.2 million lower amortization expense, partially offset by a $1.5 million increase in stock-based compensation expense.

Segment operating income. Segment operating income, which excludes stock-based compensation and certain non-recurring and other costs, was $33.7 million, a decrease of $12.7 million, or 27.4%, from the same period in the prior year. Segment operating income as a percent of net sales was 19.0% for the three months ended September 29, 2012 compared to 24.4% for the three months ended October 1, 2011. The decrease in segment operating income and segment operating income margin was the result of lower sales and the costs associated with growth investments, including $2.0 million of additional non-cash depreciation expense, partially offset by a decline in performance-based incentive compensation expense. We expect segment operating income and segment operating income margins to improve as the costs associated with our capacity expansions are offset by higher sales.

Interest expense. Interest expense for the three months ended September 29, 2012 decreased by $1.0 million from the same period in the prior year, primarily due to lower capitalized interest associated with capacity expansion projects.

Income taxes. Income tax expense for the interim periods presented is computed at the effective rate expected to be applicable in each respective full year using the statutory rates on a country-by-country basis. The effective tax rate was 27.2% for the three months ended September 29, 2012 compared to 33.8% for the same period in the prior year. The mix of earnings between the tax jurisdictions has a significant impact on the effective tax rate. Each tax jurisdiction has its own set of tax laws and tax rates, and income earned by our subsidiaries is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the jurisdictions in which we operate range from 0% to 39%.

The components of our effective tax rate are as follows:

                                                 Three Months Ended
                                        September 29, 2012   October 1, 2011
U.S. federal statutory rate                           35.0 %            35.0 %
State income taxes                                     0.7               1.1
Mix of income in taxing jurisdictions                 (7.7 )            (3.6 )
Other                                                 (0.8 )             1.3
Total effective tax rate                              27.2 %            33.8 %

Comparison of the nine months ended September 29, 2012 with the nine months ended October 1, 2011

Net sales. Net sales for the nine months ended September 29, 2012 were $537.1 million, a decrease of $35.0 million, or 6.1%, from the same period in the prior year. The decrease was primarily due to lower sales in the electronics and EDVs segment and the negative impact of foreign currency translation of $20.8 million.

Gross profit. Gross profit was $200.5 million, a decrease of $43.4 million, or 17.8%, from the same period in the prior year. Gross profit as a percent of net sales was 37.3% for the nine months ended September 29, 2012 compared to 42.6% for the nine months ended October 1, 2011. The decrease in consolidated gross profit and gross profit margin was primarily due to lower sales and the costs associated with growth investments, including non-cash depreciation expense. We expect gross profit and gross profit margins to improve as the costs associated with our capacity expansions are offset by higher sales.


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Selling, general and administrative expenses. Selling, general and administrative expenses decreased $2.6 million for the nine months ended September 29, 2012 compared to the prior year, primarily due to a $9.0 million decrease in performance-based incentive compensation expense and $2.0 million lower amortization expense, partially offset by a $7.8 million increase in stock-based compensation expense.

Segment operating income. Segment operating income, which excludes stock-based compensation and certain non-recurring and other costs, was $118.8 million, a decrease of $32.2 million, or 21.3%, from the same period in the prior year. Segment operating income as a percent of net sales was 22.1% for the nine months ended September 29, 2012 compared to 26.4% for the nine months ended October 1, 2011. The decrease in segment operating income and segment operating income margin was the result of lower sales and the costs associated with growth investments, including $5.7 million of additional non-cash depreciation expense, partially offset by a decline in performance-based incentive compensation expense. We expect segment operating income and segment operating income margins to improve as the costs associated with our capacity expansions are offset by higher sales.

Interest expense. Interest expense for the nine months ended September 29, 2012 was $26.4 million, which was comparable to the same period in the prior year.

Income taxes. Income tax expense for the interim periods presented is computed at the effective rate expected to be applicable in each respective full year using the statutory rates on a country-by-country basis. The effective tax rate was 30.4% for the nine months ended September 29, 2012 compared to 34.1% for the same period in the prior year. The mix of earnings between the tax jurisdictions has a significant impact on the effective tax rate. Each tax jurisdiction has its own set of tax laws and tax rates, and income earned by our subsidiaries is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the jurisdictions in which we operate range from 0% to 39%.

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

                                                 Nine Months Ended
                                        September 29, 2012   October 1, 2011
U.S. federal statutory rate                           35.0 %            35.0 %
State income taxes                                     0.7               1.1
Mix of income in taxing jurisdictions                 (5.3 )            (3.6 )
Other                                                    -               1.6
Total effective tax rate                              30.4 %            34.1 %

Financial reporting segments

Electronics and EDVs

Comparison of the three months ended September 29, 2012 with the three months ended October 1, 2011

Net sales. Net sales for the three months ended September 29, 2012 were $43.5 million, a decrease of $12.6 million, or 22.5%, from the same period in the prior year. The decrease was primarily due to lower production levels of EDVs and economic weakness in consumer electronics.

Segment operating income. Segment operating income was $10.5 million, a decrease of $16.0 million, or 60.4%, from the same period in the prior year. Segment operating income as a percent of net sales was 24.1% for the three months ended September 29, 2012, compared to 47.2% for the three months ended October 1, 2011. The decrease in segment operating income and segment operating income margin was due to lower sales, the costs associated with new capacity, including an additional $2.0 million of non-cash depreciation expense, and customer and product mix. We expect segment operating income and segment operating income margins to improve as the costs associated with our capacity expansions are offset by higher sales.

Comparison of the nine months ended September 29, 2012 with the nine months ended October 1, 2011

Net sales. Net sales for the nine months ended September 29, 2012 were $133.2 million, a decrease of $15.8 million, or 10.6%, from the same period in the prior year. The decrease was due to economic weakness in consumer electronics, offset to some extent by higher year-to-date sales for EDV applications.

Segment operating income. Segment operating income was $41.8 million, a decrease of $26.9 million, or 39.2%, from the same period in the prior year. Segment operating income as a percent of net sales was 31.4% for the nine months ended


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September 29, 2012, compared to 46.1% for the nine months ended October 1, 2011. The decrease in segment operating income and segment operating income margin was due to lower sales and the costs associated with new capacity, including an additional $5.5 million of non-cash depreciation expense. We expect segment operating income and segment operating income margins to improve as the costs associated with our capacity expansions are offset by higher sales.

Transportation and Industrial

Comparison of the three months ended September 29, 2012 with the three months ended October 1, 2011

Net sales. Net sales for the three months ended September 29, 2012 were $92.9 million, an increase of $3.0 million, or 3.3%, from the same period in the prior year, including the $4.7 million negative effect of foreign currency translation. The increase was primarily due to growth in Asia, offset to some extent by economic weakness in Europe.

Segment operating income. Segment operating income was $19.1 million, a decrease of $1.9 million, or 9.0%, from the same period in the prior year. Segment operating income as a percent of net sales was 20.6% for the three months ended September 29, 2012, compared to 23.4% for the three months ended October 1, 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 meet growing demand in Asia and the costs associated with growth investments in Asia.

Comparison of the nine months ended September 29, 2012 with the nine months ended October 1, 2011

Net sales. Net sales for the nine months ended September 29, 2012 were $271.2 million, a decrease of $10.1 million, or 3.6%, from the same period in the prior year, primarily due to the $11.0 million negative effect of foreign currency translation. Sales volume growth in Asia was offset by mild winter weather in North America and Europe, which temporarily impacted replacement battery sales in the first quarter of 2012, and economic weakness in Europe.

Segment operating income. Segment operating income was $60.8 million, a decrease of $12.8 million, or 17.4%, from the same period in the prior year. Segment operating income as a percent of net sales was 22.4% for the nine months ended September 29, 2012, compared to 26.2% for the nine months ended October 1, 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 meet growing demand in Asia and the costs associated with growth investments in Asia.

Separations Media

Comparison of the three months ended September 29, 2012 with the three months ended October 1, 2011

Net sales. Net sales for the three months ended September 29, 2012 were $41.2 million, a decrease of $2.9 million, or 6.6%, from the same period in the prior year, primarily due to the negative effect of foreign currency translation of $3.9 million. Healthcare sales include the impact of production shutdowns at three customers due to the May earthquakes in Italy. The customers affected by the earthquakes in Italy resumed production by the end of the third quarter.

Segment operating income. Segment operating income was $9.7 million, an increase of $0.5 million, or 5.4%, from the same period in the prior year. Segment operating income as a percent of net sales was 23.5% for the three months ended September 29, 2012, compared to 20.9% for the three months ended October 1, 2011. The increase in segment operating income and segment operating income margin was primarily due to the production timing and product mix.

Comparison of the nine months ended September 29, 2012 with the nine months ended October 1, 2011

Net sales. Net sales for the nine months ended September 29, 2012 were $132.7 million, a decrease of $9.1 million, or 6.4%, from the same period in the prior year, primarily due to the negative effect of foreign currency translation of $9.8 million. Healthcare sales include the impact of production shutdowns at three customers due to the May earthquakes in Italy. The customers affected by the earthquakes in Italy resumed production by the end of the third quarter.


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Segment operating income. Segment operating income was $36.5 million, a decrease of $4.6 million, or 11.2%, from the same period in the prior year. Segment operating income as a percent of net sales was 27.5% for the nine months ended September 29, 2012, compared to 29.0% for the nine months ended October 1, 2011. The decrease in segment operating income and segment operating income margin was due to production timing and product mix.

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.

Comparison of the three months ended September 29, 2012 with the three months ended October 1, 2011

Corporate and other costs for the three months ended September 29, 2012 were $5.6 million, compared to $10.3 million for the three months ended October 1, 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 in the second quarter of 2012.

Comparison of the nine months ended September 29, 2012 with the nine months ended October 1, 2011

Corporate and other costs for the nine months ended September 29, 2012 were $20.3 million, compared to $32.4 million for the nine months ended October 1, 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.

Liquidity and Capital Resources

Cash and cash equivalents decreased by $40.0 million during the nine months ended September 29, 2012, as cash generated from operations and cash on hand were used to fund growth investments.

Operating activities. Net cash provided by operating activities was $86.6 million in the nine months ended September 29, 2012, consisting of cash generated from operations of $122.8 million, partially offset by changes in operating assets and liabilities. Accounts receivable and days sales outstanding are 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. Inventory increased based on production and capacity planning for expected customer order patterns. 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 lower accrued variable incentive compensation under performance-based compensation plans.

Investing activities. In the nine months ended September 29, 2012, total capital expenditures were $123.7 million, net of DOE grant awards of $2.2 million. Capital expenditures were primarily related to capacity expansions in our electronics and EDVs segment, which have been substantially completed. We expect total capital expenditures for fiscal 2012 to be approximately $140.0 million. As of September 29, 2012, we had $147.5 million of construction in progress which was primarily related to the capacity expansion projects.

Financing activities. On June 29, 2012, we refinanced our senior secured credit agreement with a new senior secured credit agreement. We received total . . .

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