UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 29, 2014
Or
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 1-32266
POLYPORE INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
| 43-2049334 |
(State or Other Jurisdiction of |
| (IRS Employer Identification No.) |
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11430 North Community House Road, Suite 350 |
| 28277 |
(Address of Principal Executive Offices) |
| (Zip Code) |
(704) 587-8409
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
| Accelerated filer o |
| Non-accelerated filer o |
| Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
There were 45,078,288 shares of the registrant’s common stock outstanding as of April 30, 2014.
Polypore International, Inc.
Index to Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 29, 2014
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | |
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In this Quarterly Report on Form 10-Q, the words “Polypore International,” “Company,” “we,” “us” and “our” refer to Polypore International, Inc. together with its subsidiaries, unless the context indicates otherwise.
Forward-looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements, including, in particular, the statements about Polypore International’s plans, objectives, strategies and prospects regarding, among other things, the financial condition, results of operations and business of Polypore International. We have identified some of these forward-looking statements with words like “believe,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate” or “continue” and other words and terms of similar meaning. These forward-looking statements may be contained under the captions entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or “Controls and Procedures,” the Company’s financial statements or the notes thereto or elsewhere in this Quarterly Report on Form 10-Q.
These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q, including the risks outlined under the caption entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, will be important in determining future results. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including with respect to Polypore International, the following, among other things:
· the highly competitive nature of the markets in which we sell our products;
· the failure to continue to develop innovative products;
· the loss of our customers;
· the vertical integration by our customers of the production of our products into their own manufacturing processes;
· increases in prices for raw materials or the loss of key supplier contracts;
· our substantial indebtedness;
· interest rate risk related to our variable rate indebtedness;
· our inability to generate cash;
· restrictions contained in our senior secured credit agreement;
· employee slowdowns, strikes or similar actions;
· product liability claims exposure;
· risks in connection with our operations outside the United States, including compliance with applicable anti-corruption laws;
· the incurrence of substantial costs to comply with, or as a result of violations of, or liabilities under environmental laws;
· the failure to protect our intellectual property;
· the loss of senior management;
· the incurrence of additional debt, contingent liabilities and expenses in connection with future acquisitions;
· the failure to effectively integrate newly acquired operations;
· lithium market demand not materializing as anticipated;
· the absence of expected returns from the intangible assets we have recorded; and
· natural disasters, epidemics, terrorist acts and other events beyond our control.
Because our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements, we cannot give any assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on Polypore International’s results of operations and financial condition. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to update these forward-looking statements to reflect new information, future events or otherwise, except as may be required under federal securities laws.
PART I — FINANCIAL INFORMATION
Polypore International, Inc.
Condensed consolidated balance sheets
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| March 29, 2014 |
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(in thousands, except share data) |
| (unaudited) |
| December 28, 2013* |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 177,441 |
| $ | 163,423 |
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Accounts receivable, net |
| 113,308 |
| 113,506 |
| ||
Inventories |
| 113,586 |
| 113,860 |
| ||
Prepaid and other |
| 16,362 |
| 18,118 |
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Total current assets |
| 420,697 |
| 408,907 |
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Property, plant and equipment, net |
| 587,627 |
| 595,375 |
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Goodwill |
| 444,512 |
| 444,512 |
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Intangibles and loan acquisition costs, net |
| 90,376 |
| 93,792 |
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Other |
| 7,617 |
| 7,627 |
| ||
Total assets |
| $ | 1,550,829 |
| $ | 1,550,213 |
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Liabilities and shareholders’ equity |
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Current liabilities: |
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Accounts payable |
| $ | 24,157 |
| $ | 31,764 |
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Accrued liabilities |
| 48,420 |
| 49,266 |
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Income taxes payable |
| 5,082 |
| 4,055 |
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Current portion of debt |
| 192,500 |
| 16,875 |
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Total current liabilities |
| 270,159 |
| 101,960 |
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Debt, less current portion |
| 446,250 |
| 629,375 |
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Pension obligations, less current portion |
| 103,943 |
| 102,821 |
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Deferred income taxes |
| 69,151 |
| 70,332 |
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Other |
| 26,440 |
| 26,149 |
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Commitments and contingencies |
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Shareholders’ equity: |
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Preferred stock — 15,000,000 shares authorized, no shares issued and outstanding |
| — |
| — |
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Common stock, $.01 par value — 200,000,000 shares authorized, 47,096,179 issued and 45,078,316 outstanding at March 29, 2014 and 46,926,205 issued and 44,916,570 outstanding at December 28, 2013 |
| 471 |
| 469 |
| ||
Paid-in capital |
| 575,356 |
| 569,362 |
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Retained earnings |
| 145,776 |
| 137,379 |
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Accumulated other comprehensive loss |
| (11,943 | ) | (12,865 | ) | ||
Treasury stock, at cost — 2,017,863 shares at March 29, 2014 and 2,009,635 shares at December 28, 2013 |
| (80,950 | ) | (80,668 | ) | ||
Total Polypore shareholders’ equity |
| 628,710 |
| 613,677 |
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Noncontrolling interest |
| 6,176 |
| 5,899 |
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Total shareholders’ equity |
| 634,886 |
| 619,576 |
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Total liabilities and shareholders’ equity |
| $ | 1,550,829 |
| $ | 1,550,213 |
|
* Derived from audited consolidated financial statements
See notes to condensed consolidated financial statements
Polypore International, Inc.
Condensed consolidated statements of income
(unaudited)
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| Three Months Ended |
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(in thousands, except per share data) |
| March 29, 2014 |
| March 30, 2013 |
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Net sales |
| $ | 161,002 |
| $ | 145,941 |
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Cost of goods sold |
| 102,486 |
| 96,746 |
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Gross profit |
| 58,516 |
| 49,195 |
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Selling, general and administrative expenses |
| 36,156 |
| 30,736 |
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Operating income |
| 22,360 |
| 18,459 |
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Other (income) expense: |
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Interest expense, net |
| 9,620 |
| 9,791 |
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Foreign currency and other |
| 598 |
| 648 |
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| 10,218 |
| 10,439 |
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Income from continuing operations before income taxes |
| 12,142 |
| 8,020 |
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Income taxes |
| 3,400 |
| 2,193 |
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Income from continuing operations |
| 8,742 |
| 5,827 |
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Income from discontinued operations, net of income taxes |
| — |
| 3,364 |
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Net income |
| 8,742 |
| 9,191 |
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Less: Net income attributable to noncontrolling interest |
| 345 |
| 170 |
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Net income attributable to Polypore International, Inc. |
| $ | 8,397 |
| $ | 9,021 |
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Net income attributable to Polypore International, Inc.: |
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Income from continuing operations |
| $ | 8,397 |
| $ | 5,657 |
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Income from discontinued operations |
| — |
| 3,364 |
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Net income attributable to Polypore International, Inc. |
| $ | 8,397 |
| $ | 9,021 |
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Net income attributable to Polypore International, Inc. per share — basic: |
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Continuing operations |
| $ | 0.19 |
| $ | 0.12 |
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Discontinued operations |
| — |
| 0.07 |
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Net income attributable to Polypore International, Inc. per share |
| $ | 0.19 |
| $ | 0.19 |
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Net income attributable to Polypore International, Inc. per share — diluted: |
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Continuing operations |
| $ | 0.18 |
| $ | 0.12 |
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Discontinued operations |
| — |
| 0.07 |
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Net income attributable to Polypore International, Inc. per share |
| $ | 0.18 |
| $ | 0.19 |
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Weighted average shares outstanding — basic |
| 44,884,728 |
| 46,613,321 |
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Weighted average shares outstanding — diluted |
| 45,423,573 |
| 47,295,430 |
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See notes to condensed consolidated financial statements
Polypore International, Inc.
Condensed consolidated statements of comprehensive income
(unaudited)
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| Three Months Ended |
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(in thousands) |
| March 29, 2014 |
| March 30, 2013 |
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Net income |
| $ | 8,742 |
| $ | 9,191 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
| 660 |
| (3,946 | ) | ||
Change in net actuarial loss and prior service credit |
| 22 |
| 903 |
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Income taxes related to other comprehensive income (loss) |
| 172 |
| 622 |
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Other comprehensive income (loss) |
| 854 |
| (2,421 | ) | ||
Comprehensive income |
| 9,596 |
| 6,770 |
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Less: Comprehensive income attributable to noncontrolling interest |
| 277 |
| 212 |
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Comprehensive income attributable to Polypore International, Inc. |
| $ | 9,319 |
| $ | 6,558 |
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See notes to condensed consolidated financial statements
Polypore International, Inc.
Condensed consolidated statements of cash flows
(unaudited)
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| Three Months Ended |
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(in thousands) |
| March 29, 2014 |
| March 30, 2013 |
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Operating activities: |
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Net income |
| $ | 8,742 |
| $ | 9,191 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation expense |
| 10,941 |
| 11,361 |
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Amortization expense |
| 2,786 |
| 2,964 |
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Amortization of loan acquisition costs |
| 618 |
| 618 |
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Stock-based compensation |
| 5,377 |
| 4,467 |
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Foreign currency loss |
| 896 |
| 555 |
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Deferred income taxes |
| (1,728 | ) | (2,841 | ) | ||
Changes in operating assets and liabilities: |
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Accounts receivable |
| 364 |
| 12,382 |
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Inventories |
| 399 |
| (5,865 | ) | ||
Prepaid and other current assets |
| 1,868 |
| 333 |
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Accounts payable and accrued liabilities |
| (7,741 | ) | 2,188 |
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Income taxes payable |
| 1,187 |
| 203 |
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Other, net |
| 574 |
| 799 |
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Net cash provided by operating activities |
| 24,283 |
| 36,355 |
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Investing activities: |
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Purchases of property, plant and equipment, net |
| (3,748 | ) | (6,228 | ) | ||
Net cash used in investing activities |
| (3,748 | ) | (6,228 | ) | ||
Financing activities: |
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Principal payments on debt |
| (7,500 | ) | (7,500 | ) | ||
Payments on revolving credit facility |
| — |
| (25,000 | ) | ||
Repurchases of common stock |
| (282 | ) | (476 | ) | ||
Proceeds from stock option exercises |
| 619 |
| 202 |
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Contributions from noncontrolling interest |
| — |
| 700 |
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Net cash used in financing activities |
| (7,163 | ) | (32,074 | ) | ||
Effect of exchange rate changes on cash and cash equivalents |
| 646 |
| 273 |
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Net increase (decrease) in cash and cash equivalents |
| 14,018 |
| (1,674 | ) | ||
Cash and cash equivalents at beginning of period |
| 163,423 |
| 44,873 |
| ||
Cash and cash equivalents at end of period |
| $ | 177,441 |
| $ | 43,199 |
|
See notes to condensed consolidated financial statements
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
1. Description of Business and Basis of Presentation
Description of Business
Polypore International, Inc. (the “Company”) is a leading global high-technology filtration company that develops, manufactures and markets specialized microporous membranes used in separation and filtration processes. The Company has a global presence in the major geographic markets of North America, South America, Europe and Asia.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries after elimination of intercompany accounts and transactions. The unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, the unaudited condensed consolidated financial statements and notes do not contain certain information included in the Company’s annual financial statements. In the opinion of management, all normal and recurring adjustments that are necessary for a fair presentation have been made. Certain amounts previously presented in the condensed consolidated financial statements for prior periods have been reclassified to conform to current classifications. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013. Operating results for the three months ended March 29, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 2015.
On December 19, 2013, the Company completed the sale of its Microporous business. The operating results of this business have been presented as discontinued operations for the three months ended March 30, 2013. All disclosures and amounts in the notes to the condensed consolidated financial statements relate to the Company’s continuing operations, unless otherwise indicated.
2. Recent Accounting Pronouncements
In July 2013, the FASB issued guidance on the presentation of certain unrecognized tax benefits in the financial statements. This guidance requires that an unrecognized tax benefit be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward rather than as a liability if certain criteria are met. The guidance is effective for annual and interim periods beginning after December 15, 2013. The adoption of this guidance in the Company’s March 29, 2014 condensed consolidated financial statements did not have an impact on the Company’s financial statement presentation, financial condition or results of operations.
3. 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) |
| March 29, 2014 |
| December 28, 2013 |
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Raw materials |
| $ | 37,341 |
| $ | 39,357 |
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Work-in-process |
| 21,131 |
| 22,079 |
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Finished goods |
| 55,114 |
| 52,424 |
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| $ | 113,586 |
| $ | 113,860 |
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Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
4. Debt
Debt, in order of priority, consists of:
(in thousands) |
| March 29, 2014 |
| December 28, 2013 |
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Senior credit agreement: |
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Revolving credit facility |
| $ | — |
| $ | — |
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Term loan facility |
| 273,750 |
| 281,250 |
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| 273,750 |
| 281,250 |
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7.5% senior notes |
| 365,000 |
| 365,000 |
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| 638,750 |
| 646,250 |
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Less current portion |
| 192,500 |
| 16,875 |
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Long-term debt |
| $ | 446,250 |
| $ | 629,375 |
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On April 8, 2014 (the “closing date”), the Company entered into a new senior secured credit agreement, used cash on hand and initial borrowings under the new credit agreement to pay all outstanding principal and interest under the previous senior secured credit agreement, and issued a redemption notice for its outstanding 7.5% senior notes.
The new credit agreement provides for a $150,000,000 revolving credit facility and a $500,000,000 term loan facility and matures in April 2019. The new credit agreement is guaranteed by the Company’s domestic subsidiaries and is secured by substantially all assets of the Company and its domestic subsidiaries and a first priority pledge of 65% of the voting capital stock of its foreign subsidiaries. The Company’s ability to pay dividends on its common stock is limited under the terms of the credit agreement. The Company is also subject to certain financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio. Interest rates are, at the Company’s option, equal to either an alternate base rate or the Eurocurrency base rate, plus a specified margin.
On April 8, 2014, the Company used cash on hand of $140,750,000, proceeds from the initial draw under the new term loan facility of $100,000,000 and borrowings under the new revolving credit facility of $33,000,000 to pay all outstanding principal and interest under the previous senior secured credit agreement. On May 8, 2014, the Company borrowed the remaining $400,000,000 available under the new term loan facility and used the proceeds to purchase and retire all of the previously outstanding 7.5% senior notes and pay redemption premiums and accrued and unpaid interest at the redemption date. The total purchase price for the notes was $385,531,000, consisting of principal of $365,000,000 and redemption premiums of $20,531,000. The redemption premiums will be recognized as expense in the second quarter of 2014.
At March 29, 2014, the current portion of debt reflects the impact of the debt reduction and refinancing transactions that occurred on April 8, 2014, and consists of $140,750,000 of cash and $33,000,000 of borrowings under the new revolving credit facility used to pay outstanding principal under the previous term loan facility, and $18,750,000 of principal payments due in the next twelve months under the new credit agreement. The Company intends to repay borrowings under the new revolving credit facility within the next twelve months.
Minimum scheduled principal repayments of the new term loan are as follows:
(in thousands) |
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2014 |
| $ | 12,500 |
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2015 |
| 25,000 |
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2016 |
| 31,250 |
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2017 |
| 43,750 |
| |
2018 |
| 62,500 |
| |
2019 |
| 325,000 |
| |
|
| $ | 500,000 |
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Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
5. Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates 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 Company’s 7.5% senior notes, based on a quoted market price and classified as level one in the fair value hierarchy, was $385,988,000 at March 29, 2014.
6. Income Taxes
The income tax provision for the interim periods presented is computed at the effective rate expected to be applicable in each respective full year using the statutory rates on a country-by-country basis. Income tax expense recorded in the financial statements differs from the federal statutory income tax rate due to a variety of factors, including state income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates and changes in estimates of permanent differences and valuation allowances.
7. 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 provides the components of net periodic benefit cost:
|
| Three Months Ended |
| ||||
(in thousands) |
| March 29, 2014 |
| March 30, 2013 |
| ||
Service cost |
| $ | 524 |
| $ | 563 |
|
Interest cost |
| 1,080 |
| 1,127 |
| ||
Expected return on plan assets |
| (109 | ) | (191 | ) | ||
Amortization of prior service credit |
| (32 | ) | (13 | ) | ||
Recognized net actuarial loss |
| 269 |
| 432 |
| ||
Net periodic benefit cost |
| $ | 1,732 |
| $ | 1,918 |
|
8. 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 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 $2,633,000 and $2,882,000 at March 29, 2014 and December 28, 2013, respectively. The Company anticipates the expenditures associated with the reserve will be made in the next twelve months. The reserve is included in “Accrued liabilities” in the accompanying condensed consolidated balance sheets.
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
9. 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 $876,000 and $676,000 at March 29, 2014 and December 28, 2013, respectively. Charges from the affiliates for work performed were $357,000 and $266,000 for the three months ended March 29, 2014 and March 30, 2013, respectively. Amounts due to the affiliates were $155,000 and $254,000 at March 29, 2014 and December 28, 2013, respectively.
10. Noncontrolling Interest
In 2010, the Company formed a joint venture with 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 owned 65% by the Company and 35% by Camel. During the three months ended March 30, 2013, the Company and Camel made equity contributions of $1,300,000 and $700,000, respectively, to fund capital expenditures.
Daramic Xiangyang has notes payable to Camel and the Company for the purchase of certain assets. The notes payable and related interest will be paid by Daramic Xiangyang using available free cash flow, as defined in the joint venture agreement. The note payable to Camel had a principal balance of $10,348,000 and $5,910,000 at March 29, 2014 and December 28, 2013, respectively, and is included in “Other” non-current liabilities in the accompanying condensed consolidated balance sheets. The note payable to the Company eliminates in consolidation.
11. Commitments and Contingencies
The Company’s employees at the Selestat, France facility are represented under a labor union collective bargaining agreement. The collective bargaining agreement at the Selestat facility, covering approximately 5% of the Company’s workers, expires in June 2014.
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 was $5,377,000 and $4,467,000 for the three months ended March 29, 2014 and March 30, 2013, respectively. The income tax benefit related to stock-based compensation expense was $1,920,000 and $1,587,000 for the three months ended March 29, 2014 and March 30, 2013, respectively. 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 condensed consolidated statements of income.
The 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. On February 27, 2014, the Company granted 369,745 stock options and 104,474 shares of restricted stock under the 2007 Plan with an aggregate grant-date fair value of $9,973,000, to be recognized over the vesting period for each award. The stock options granted are time-vested options that vest annually in equal one-third installments and have 10-year terms and an exercise price of $34.98, the fair market value of the Company’s stock on the grant date.
The fair value of the options granted was estimated on the date of grant based on the Black-Scholes option pricing model with the following assumptions:
|
| February 27, 2014 |
|
Expected term (years) |
| 5.4 |
|
Risk-free interest rate |
| 1.60 | % |
Expected volatility |
| 53.7 | % |
Dividend yield |
| — |
|
The potential expected term of the stock options ranges from the vesting period of the options (three years) to the contractual term of the options (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
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
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.
13. 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 businesses — energy storage and separations media.
The energy storage business produces and markets membranes that provide the critical function of separating the cathode and anode in a variety of battery markets and is comprised of the following reportable segments:
· Electronics and EDVs - produces 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 industrial - produces and markets membranes for lead-acid batteries that are used in automobiles, other motor vehicles, forklifts and uninterruptible power supply systems.
The separations media business 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.
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
Financial information relating to the reportable segments is presented below:
|
| Three Months Ended |
| ||||
(in thousands) |
| March 29, 2014 |
| March 30, 2013 |
| ||
Net sales to external customers (by major product group): |
|
|
|
|
| ||
Electronics and EDVs |
| $ | 30,072 |
| $ | 24,375 |
|
Transportation and industrial |
| 79,101 |
| 76,113 |
| ||
Energy storage |
| 109,173 |
| 100,488 |
| ||
Healthcare |
| 32,157 |
| 29,498 |
| ||
Filtration and specialty |
| 19,672 |
| 15,955 |
| ||
Separations media |
| 51,829 |
| 45,453 |
| ||
Net sales |
| $ | 161,002 |
| $ | 145,941 |
|
|
|
|
|
|
| ||
Operating income: |
|
|
|
|
| ||
Electronics and EDVs |
| $ | 3,061 |
| $ | (2,019 | ) |
Transportation and industrial |
| 16,966 |
| 16,241 |
| ||
Energy storage |
| 20,027 |
| 14,222 |
| ||
Separations media |
| 17,757 |
| 15,509 |
| ||
Corporate and other |
| (8,434 | ) | (5,833 | ) | ||
Segment operating income |
| 29,350 |
| 23,898 |
| ||
Stock-based compensation |
| 5,377 |
| 4,467 |
| ||
Non-recurring and other costs |
| 1,613 |
| 972 |
| ||
Total operating income |
| 22,360 |
| 18,459 |
| ||
Reconciling items: |
|
|
|
|
| ||
Interest expense, net |
| 9,620 |
| 9,791 |
| ||
Foreign currency and other |
| 598 |
| 648 |
| ||
Income from continuing operations before income taxes |
| $ | 12,142 |
| $ | 8,020 |
|
|
|
|
|
|
| ||
Depreciation and amortization: |
|
|
|
|
| ||
Electronics and EDVs |
| $ | 4,324 |
| $ | 4,401 |
|
Transportation and industrial |
| 2,850 |
| 2,769 |
| ||
Energy storage |
| 7,174 |
| 7,170 |
| ||
Separations media |
| 3,716 |
| 3,436 |
| ||
Corporate and other |
| 2,837 |
| 2,822 |
| ||
Discontinued operations |
| — |
| 897 |
| ||
|
| $ | 13,727 |
| $ | 14,325 |
|
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
14. Discontinued Operations
On December 19, 2013, as required by the divestiture provisions of the Federal Trade Commission’s order, the Company completed the sale of its Microporous business, which consisted of the production facilities in Piney Flats, Tennessee, and Feistritz, Austria, for $120,000,000. The Company recognized a gain of $35,855,000 on the sale, net of direct transaction costs and income taxes. The sales price and resulting gain are subject to adjustment in subsequent periods upon finalization of working capital.
Microporous was previously included in the transportation and industrial segment. The results of operations of Microporous are classified as discontinued operations and are presented separately in the accompanying condensed consolidated statement of income for the three months ended March 30, 2013. Summarized results of operations reported as discontinued operations are as follows:
|
| Three Months Ended |
| |
(in thousands) |
| March 30, 2013 |
| |
Net sales |
| $ | 17,572 |
|
|
|
|
| |
Income from discontinued operations before income taxes |
| 5,119 |
| |
|
|
|
| |
Income from discontinued operations, net of income taxes |
| 3,364 |
| |
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
15. 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
March 29, 2014
(in thousands) |
| Combined |
| Combined |
| The Company |
| Eliminations |
| Consolidated |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | — |
| $ | 50,255 |
| $ | 127,186 |
| $ | — |
| $ | 177,441 |
|
Accounts receivable, net |
| 32,391 |
| 80,917 |
| — |
| — |
| 113,308 |
| |||||
Inventories |
| 35,743 |
| 77,843 |
| — |
| — |
| 113,586 |
| |||||
Prepaid and other |
| 4,635 |
| 8,714 |
| 3,013 |
| — |
| 16,362 |
| |||||
Total current assets |
| 72,769 |
| 217,729 |
| 130,199 |
| — |
| 420,697 |
| |||||
Due from affiliates |
| 558,909 |
| 945,602 |
| 470,704 |
| (1,975,215 | ) | — |
| |||||
Investment in subsidiaries |
| 126,992 |
| 580,635 |
| 717,781 |
| (1,425,408 | ) | — |
| |||||
Property, plant and equipment, net |
| 300,546 |
| 287,081 |
| — |
| — |
| 587,627 |
| |||||
Goodwill |
| — |
| — |
| 444,512 |
| — |
| 444,512 |
| |||||
Intangibles and loan acquisition costs, net |
| — |
| — |
| 90,376 |
| — |
| 90,376 |
| |||||
Other |
| 727 |
| 6,562 |
| 328 |
| — |
| 7,617 |
| |||||
Total assets |
| $ | 1,059,943 |
| $ | 2,037,609 |
| $ | 1,853,900 |
| $ | (3,400,623 | ) | $ | 1,550,829 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable and accrued liabilities |
| $ | 19,492 |
| $ | 40,411 |
| $ | 12,674 |
| $ | — |
| $ | 72,577 |
|
Income taxes payable |
| — |
| 5,670 |
| (588 | ) | — |
| 5,082 |
| |||||
Current portion of debt |
| — |
| — |
| 192,500 |
| — |
| 192,500 |
| |||||
Total current liabilities |
| 19,492 |
| 46,081 |
| 204,586 |
| — |
| 270,159 |
| |||||
Due to affiliates |
| 512,508 |
| 895,002 |
| 567,705 |
| (1,975,215 | ) | — |
| |||||
Debt, less current portion |
| — |
| — |
| 446,250 |
| — |
| 446,250 |
| |||||
Pension obligations, less current portion |
| — |
| 103,943 |
| — |
| — |
| 103,943 |
| |||||
Deferred income taxes and other |
| 48,843 |
| 46,275 |
| 473 |
| — |
| 95,591 |
| |||||
Shareholders’ equity |
| 479,100 |
| 946,308 |
| 634,886 |
| (1,425,408 | ) | 634,886 |
| |||||
Total liabilities and shareholders’ equity |
| $ | 1,059,943 |
| $ | 2,037,609 |
| $ | 1,853,900 |
| $ | (3,400,623 | ) | $ | 1,550,829 |
|
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
Condensed consolidating balance sheet
December 28, 2013
(in thousands) |
| Combined |
| Combined |
| The Company |
| Eliminations |
| Consolidated |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | — |
| $ | 87,082 |
| $ | 76,341 |
| $ | — |
| $ | 163,423 |
|
Accounts receivable, net |
| 32,860 |
| 80,646 |
| — |
| — |
| 113,506 |
| |||||
Inventories |
| 38,974 |
| 74,886 |
| — |
| — |
| 113,860 |
| |||||
Prepaid and other |
| 7,541 |
| 8,503 |
| 2,074 |
| — |
| 18,118 |
| |||||
Total current assets |
| 79,375 |
| 251,117 |
| 78,415 |
| — |
| 408,907 |
| |||||
Due from affiliates |
| 551,141 |
| 903,815 |
| 467,441 |
| (1,922,397 | ) | — |
| |||||
Investment in subsidiaries |
| 129,588 |
| 577,878 |
| 755,626 |
| (1,463,092 | ) | — |
| |||||
Property, plant and equipment, net |
| 303,888 |
| 291,487 |
| — |
| — |
| 595,375 |
| |||||
Goodwill |
| — |
| — |
| 444,512 |
| — |
| 444,512 |
| |||||
Intangibles and loan acquisition costs, net |
| — |
| — |
| 93,792 |
| — |
| 93,792 |
| |||||
Other |
| 727 |
| 6,755 |
| 145 |
| — |
| 7,627 |
| |||||
Total assets |
| $ | 1,064,719 |
| $ | 2,031,052 |
| $ | 1,839,931 |
| $ | (3,385,489 | ) | $ | 1,550,213 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable and accrued liabilities |
| $ | 26,865 |
| $ | 40,916 |
| $ | 13,249 |
| $ | — |
| $ | 81,030 |
|
Income taxes payable |
| — |
| 3,873 |
| 182 |
| — |
| 4,055 |
| |||||
Current portion of debt |
| — |
| — |
| 16,875 |
| — |
| 16,875 |
| |||||
Total current liabilities |
| 26,865 |
| 44,789 |
| 30,306 |
| — |
| 101,960 |
| |||||
Due to affiliates |
| 510,356 |
| 851,659 |
| 560,382 |
| (1,922,397 | ) | — |
| |||||
Debt, less current portion |
| — |
| — |
| 629,375 |
| — |
| 629,375 |
| |||||
Pension obligations, less current portion |
| — |
| 102,821 |
| — |
| — |
| 102,821 |
| |||||
Deferred income taxes and other |
| 51,401 |
| 44,788 |
| 292 |
| — |
| 96,481 |
| |||||
Shareholders’ equity |
| 476,097 |
| 986,995 |
| 619,576 |
| (1,463,092 | ) | 619,576 |
| |||||
Total liabilities and shareholders’ equity |
| $ | 1,064,719 |
| $ | 2,031,052 |
| $ | 1,839,931 |
| $ | (3,385,489 | ) | $ | 1,550,213 |
|
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
Condensed consolidating statement of income
For the three months ended March 29, 2014
(in thousands) |
| Combined |
| Combined |
| The Company |
| Eliminations |
| Consolidated |
| |||||
Net sales |
| $ | 49,230 |
| $ | 111,772 |
| $ | — |
| $ | — |
| $ | 161,002 |
|
Cost of goods sold |
| 23,402 |
| 79,084 |
| — |
| — |
| 102,486 |
| |||||
Gross profit |
| 25,828 |
| 32,688 |
| — |
| — |
| 58,516 |
| |||||
Selling, general and administrative expenses |
| 19,163 |
| 11,875 |
| 5,118 |
| — |
| 36,156 |
| |||||
Operating income (loss) |
| 6,665 |
| 20,813 |
| (5,118 | ) | — |
| 22,360 |
| |||||
Interest expense and other |
| (1,826 | ) | 2,340 |
| 9,704 |
| — |
| 10,218 |
| |||||
Equity in earnings of subsidiaries |
| — |
| — |
| (17,879 | ) | 17,879 |
| — |
| |||||
Income from continuing operations before income taxes |
| 8,491 |
| 18,473 |
| 3,057 |
| (17,879 | ) | 12,142 |
| |||||
Income taxes |
| 4,582 |
| 4,503 |
| (5,685 | ) | — |
| 3,400 |
| |||||
Net income |
| 3,909 |
| 13,970 |
| 8,742 |
| (17,879 | ) | 8,742 |
| |||||
Less: Net income attributable to noncontrolling interest |
| — |
| — |
| 345 |
| — |
| 345 |
| |||||
Net income attributable to Polypore International, Inc. |
| $ | 3,909 |
| $ | 13,970 |
| $ | 8,397 |
| $ | (17,879 | ) | $ | 8,397 |
|
Condensed consolidating statement of income
For the three months ended March 30, 2013
(in thousands) |
| Combined |
| Combined |
| The Company |
| Eliminations |
| Consolidated |
| |||||
Net sales |
| $ | 35,138 |
| $ | 110,803 |
| $ | — |
| $ | — |
| $ | 145,941 |
|
Cost of goods sold |
| 16,647 |
| 80,099 |
| — |
| — |
| 96,746 |
| |||||
Gross profit |
| 18,491 |
| 30,704 |
| — |
| — |
| 49,195 |
| |||||
Selling, general and administrative expenses |
| 15,007 |
| 11,412 |
| 4,317 |
| — |
| 30,736 |
| |||||
Operating income (loss) |
| 3,484 |
| 19,292 |
| (4,317 | ) | — |
| 18,459 |
| |||||
Interest expense and other |
| (1,400 | ) | 2,141 |
| 9,698 |
| — |
| 10,439 |
| |||||
Equity in earnings of subsidiaries |
| — |
| — |
| (16,087 | ) | 16,087 |
| — |
| |||||
Income from continuing operations before income taxes |
| 4,884 |
| 17,151 |
| 2,072 |
| (16,087 | ) | 8,020 |
| |||||
Income taxes |
| 3,910 |
| 5,587 |
| (7,304 | ) | — |
| 2,193 |
| |||||
Income from continuing operations |
| 974 |
| 11,564 |
| 9,376 |
| (16,087 | ) | 5,827 |
| |||||
Income from discontinued operations, net of income taxes |
| 1,489 |
| 2,060 |
| (185 | ) | — |
| 3,364 |
| |||||
Net income |
| 2,463 |
| 13,624 |
| 9,191 |
| (16,087 | ) | 9,191 |
| |||||
Less: Net income attributable to noncontrolling interest |
| — |
| — |
| 170 |
| — |
| 170 |
| |||||
Net income attributable to Polypore International, Inc. |
| $ | 2,463 |
| $ | 13,624 |
| $ | 9,021 |
| $ | (16,087 | ) | $ | 9,021 |
|
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
Condensed consolidating statement of comprehensive income
For the three months ended March 29, 2014
(in thousands) |
| Combined |
| Combined |
| The Company |
| Eliminations |
| Consolidated |
| |||||
Net income |
| $ | 3,909 |
| $ | 13,970 |
| $ | 8,742 |
| $ | (17,879 | ) | $ | 8,742 |
|
Foreign currency translation adjustment, net of income tax benefit of $172 |
| — |
| 884 |
| (278 | ) | 226 |
| 832 |
| |||||
Change in net actuarial loss and prior service credit |
| — |
| 22 |
| — |
| — |
| 22 |
| |||||
Equity in earnings of subsidiaries |
| — |
| — |
| 1,132 |
| (1,132 | ) | — |
| |||||
Comprehensive income |
| 3,909 |
| 14,876 |
| 9,596 |
| (18,785 | ) | 9,596 |
| |||||
Less: Comprehensive income attributable to noncontrolling interest |
| — |
| — |
| 277 |
| — |
| 277 |
| |||||
Comprehensive income attributable to Polypore International, Inc. |
| $ | 3,909 |
| $ | 14,876 |
| $ | 9,319 |
| $ | (18,785 | ) | $ | 9,319 |
|
Condensed consolidating statement of comprehensive income
For the three months ended March 30, 2013
(in thousands) |
| Combined |
| Combined |
| The Company |
| Eliminations |
| Consolidated |
| |||||
Net income |
| $ | 2,463 |
| $ | 13,624 |
| $ | 9,191 |
| $ | (16,087 | ) | $ | 9,191 |
|
Foreign currency translation adjustment, net of income tax benefit of $486 |
| — |
| (4,277 | ) | 742 |
| 75 |
| (3,460 | ) | |||||
Change in net actuarial loss and prior service credit, net of income tax benefit of $136 |
| — |
| 1,039 |
| — |
| — |
| 1,039 |
| |||||
Equity in earnings of subsidiaries |
| — |
| — |
| (3,163 | ) | 3,163 |
| — |
| |||||
Comprehensive income |
| 2,463 |
| 10,386 |
| 6,770 |
| (12,849 | ) | 6,770 |
| |||||
Less: Comprehensive income attributable to noncontrolling interest |
| — |
| — |
| 212 |
| — |
| 212 |
| |||||
Comprehensive income attributable to Polypore International, Inc. |
| $ | 2,463 |
| $ | 10,386 |
| $ | 6,558 |
| $ | (12,849 | ) | $ | 6,558 |
|
Polypore International, Inc.
Notes to condensed consolidated financial statements
(unaudited)
Condensed consolidating statement of cash flows
For the three months ended March 29, 2014
(in thousands) |
| Combined |
| Combined |
| The Company |
| Eliminations |
| Consolidated |
| |||||
Net cash provided by (used in) operating activities |
| $ | 11,625 |
| $ | 18,599 |
| $ | (6,456 | ) | $ | 515 |
| $ | 24,283 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Purchases of property, plant and equipment, net |
| (707 | ) | (3,041 | ) | — |
| — |
| (3,748 | ) | |||||
Net cash used in investing activities |
| (707 | ) | (3,041 | ) | — |
| — |
| (3,748 | ) | |||||
Financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Principal payments on debt |
| — |
| — |
| (7,500 | ) | — |
| (7,500 | ) | |||||
Repurchases of common stock |
| — |
| — |
| (282 | ) | — |
| (282 | ) | |||||
Proceeds from stock option exercises |
| — |
| — |
| 619 |
| — |
| 619 |
| |||||
Intercompany transactions, net |
| (10,918 | ) | (53,031 | ) | 64,464 |
| (515 | ) | — |
| |||||
Net cash provided by (used in) financing activities |
| (10,918 | ) | (53,031 | ) | 57,301 |
| (515 | ) | (7,163 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| — |
| 646 |
| — |
| — |
| 646 |
| |||||
Net increase (decrease) in cash and cash equivalents |
| — |
| (36,827 | ) | 50,845 |
| — |
| 14,018 |
| |||||
Cash and cash equivalents at beginning of period |
| — |
| 87,082 |
| 76,341 |
| — |
| 163,423 |
| |||||
Cash and cash equivalents at end of period |
| $ | — |
| $ | 50,255 |
| $ | 127,186 |
| $ | — |
| $ | 177,441 |
|
Condensed consolidating statement of cash flows
For the three months ended March 30, 2013
(in thousands) |
| Combined |
| Combined |
| The Company |
| Eliminations |
| Consolidated |
| |||||
Net cash provided by (used in) operating activities |
| $ | 14,072 |
| $ | 23,661 |
| $ | (3,561 | ) | $ | 2,183 |
| $ | 36,355 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Purchases of property, plant and equipment, net |
| (2,261 | ) | (3,967 | ) | — |
| — |
| (6,228 | ) | |||||
Net cash used in investing activities |
| (2,261 | ) | (3,967 | ) | — |
| — |
| (6,228 | ) | |||||
Financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Principal payments on debt |
| — |
| — |
| (7,500 | ) | — |
| (7,500 | ) | |||||
Payments on revolving credit facility |
| — |
| — |
| (25,000 | ) | — |
| (25,000 | ) | |||||
Repurchases of common stock |
| — |
| — |
| (476 | ) | — |
| (476 | ) | |||||
Proceeds from stock option exercises |
| — |
| — |
| 202 |
| — |
| 202 |
| |||||
Contributions from noncontrolling interest |
| — |
| — |
| 700 |
| — |
| 700 |
| |||||
Intercompany transactions, net |
| (11,811 | ) | (18,729 | ) | 32,723 |
| (2,183 | ) | — |
| |||||
Net cash provided by (used in) financing activities |
| (11,811 | ) | (18,729 | ) | 649 |
| (2,183 | ) | (32,074 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| — |
| 273 |
| — |
| — |
| 273 |
| |||||
Net increase (decrease) in cash and cash equivalents |
| — |
| 1,238 |
| (2,912 | ) | — |
| (1,674 | ) | |||||
Cash and cash equivalents at beginning of period |
| — |
| 28,098 |
| 16,775 |
| — |
| 44,873 |
| |||||
Cash and cash equivalents at end of period |
| $ | — |
| $ | 29,336 |
| $ | 13,863 |
| $ | — |
| $ | 43,199 |
|
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 28, 2013.
The following discussion includes financial information prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), as well as segment operating income, which is considered a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a financial performance that excludes amounts that are included in the most directly comparable measure calculated and presented in accordance with GAAP. The presentation of segment operating income is intended to supplement investors’ understanding of our operating performance and is not intended to replace net income as determined in accordance with GAAP. Segment operating income is defined as operating income before stock-based compensation and certain non-recurring and other costs and is used by management to evaluate business segment performance and allocate resources. See Note 13, “Segment Information,” in the accompanying condensed consolidated financial statements for a reconciliation of segment operating income to income from continuing operations before income taxes.
All disclosures and amounts in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section relate to our continuing operations, unless otherwise indicated.
Overview
We are a leading global high-technology filtration company that develops, manufactures and markets specialized microporous membranes used in separation and filtration processes. In fiscal 2013, we generated total net sales of $636.3 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 presence in the more established consumer electronics market, but our most significant growth opportunity is the potentially larger and developing electric drive vehicle (“EDV”) and energy storage systems (“ESS”) markets where lithium is the disruptive technology. As described in more detail below, the long-term growth drivers for lithium batteries are positive, but we have experienced and may continue to experience variability in the short term as these markets emerge.
On April 8, 2014, we entered into a new senior secured credit agreement, used cash on hand and initial borrowings under the new credit agreement to pay all outstanding principal and interest under the previous senior secured credit agreement, and issued a redemption notice for our outstanding 7.5% senior notes. On May 8, 2014, we used additional borrowings under our new senior secured credit agreement to redeem the 7.5% senior notes and pay redemption premiums and accrued and unpaid interest at that date. The debt reduction and refinancing will provide substantial interest savings and provide flexibility to pursue growth and value-creation opportunities as we continue to generate cash. We will continue to evaluate alternatives for cash, including returning value to shareholders through share repurchases.
Energy Storage
In the energy storage business, our membrane separators are a critical functional component in lithium batteries, which are primarily used in consumer electronics and EDV applications, and lead-acid batteries, which are used globally in transportation and numerous industrial applications. We believe that the long-term growth drivers for the energy storage business — growth in Asia, demand for consumer electronics and growing demand for EDVs — are positive. The energy storage business is comprised of two reportable segments.
Electronics and EDVs. Lithium batteries are the power source in a wide variety of applications, including consumer electronics applications such as notebook computers, tablets, mobile phones and cordless power tools; EDVs; and emerging applications such as ESS. Demand for lithium batteries in consumer electronics is driven by the need for increased mobility. In EDV applications, demand is driven by the need to increase fuel efficiency to meet mileage standards in many countries such as the U.S. and China, the need to reduce carbon dioxide (“CO2”) emissions around the world but especially in Europe due to regulations, conversion from nickel metal hydride to lithium battery technology in hybrid vehicles due to greater energy and power density, concern in developed countries and emerging markets over future access to petroleum at stable prices, smog and pollution control, and the need to address increasing transportation needs in developing economies. Since late 2009, we have
expanded capacity at our existing Charlotte, North Carolina and Ochang, South Korea facilities and built a new facility in Concord, North Carolina. Production started for portions of the Concord facility in 2012 and the remaining capacity will ramp up over time as the nascent market for EDVs develops.
We have patent-protected ceramic coating technology in which interest and usage is growing in both EDV and consumer electronics applications. We believe that this technology has value for current and future customers, and we have enforced and intend to continue to enforce our intellectual property rights around this and other patent-protected technology. In December 2013, we signed a technology licensing agreement with Sumitomo Chemical Co., Ltd. (“Sumitomo”), which confirms the value of our intellectual property position regarding ceramic coatings and provides for recurring technology licensing fees.
In January 2014, we entered into a long-term supply agreement with Samsung SDI Co., Ltd. (“Samsung”) that includes guaranteed purchase and supply volume requirements, volume-based price incentives and an initial four-year term with a two-year extension provision. We believe that this agreement highlights the value of our capacity investments and proven industry-leading products and technology. We will continue to seek long-term relationships with our customers and believe that the Sumitomo and Samsung agreements confirm the value of our technology and our ability to provide certainty of supply for high-growth applications like EDVs and ESS.
In January 2014, after a lengthy period of unsuccessful discussions with LG Chem, Ltd. (“LG”) regarding various business terms of our relationship, we filed a complaint against LG alleging infringement of our patent covering ceramic coating technology. LG has not purchased separator from us since the third quarter of 2013.
We believe the long-term demand drivers for our products—consumer demand for mobility, regulations for better fuel efficiency and lower CO2 emissions, conversion from nickel metal hydride to lithium battery technology in hybrids, concerns about access to petroleum, efforts to reduce pollution, and increasing transportation needs in developing countries—remain intact. While consumer electronics applications have attractive long-term market growth trends, EDV and ESS applications represent our most significant growth opportunity and the long-term outlook continues to be positive. Based on industry forecasts and industry studies, the use of lithium technology in EDV applications is expected to grow at a compound annual growth rate in excess of 40% through 2020 on an energy capacity basis. Many factors influence membrane separator usage in lithium-ion batteries, but because many new applications are incorporating large-format lithium batteries that require much greater membrane separator volume per battery, we believe that membrane separator growth will exceed battery unit sales growth and, although not perfectly correlated, will more closely approximate the growth rate in energy capacity. We believe the electrification of the worldwide fleet of vehicles is just beginning, from hybrids to plug-ins to full battery electric vehicles, including automobiles, buses, taxis and commercial fleet vehicles. We believe our dry process products continue to be the preferred product in large format lithium-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 are qualified on more than fifty EDV models and have field-proven products, significant production capacity already in place, technical advantages, low-cost manufacturing capabilities and intellectual property around ceramic coatings for lithium battery separators. We believe the factors that influenced our decision to expand capacity remain valid, and we continue to expect significant sales growth and expect to utilize our current production capacity as the EDV market develops and as ESS experiences more meaningful adoption. Although the long-term growth drivers are positive for these applications, short-term fluctuations in demand can be expected in the early stages of adoption while initial penetration rates are low. Given the high-separator content for these applications and the potential size of these markets, small changes in end-market demand can have a significant impact on our business.
Transportation and industrial. In the lead-acid battery market, the high proportion of aftermarket replacement sales and the steady growth of the worldwide fleet of motor vehicles provide us with a growing recurring revenue base in lead-acid battery separators. Worldwide demand for lead-acid battery separators is expected to continue to grow at slightly more than annual economic growth. The Asia-Pacific region is the fastest growing market for lead-acid battery separators. Growth in this region is driven by the increasing penetration of automobile ownership, growth in industrial and manufacturing sectors, export incentives and ongoing conversion to the polyethylene-based membrane separators we produce.
Separations Media
In the separations media business, our filtration membranes and modules are used in healthcare and high-performance filtration and specialty applications. We believe that the separations media business will continue to benefit from continued growth in demand for higher levels of purity in a growing number of applications. The separations media business is a reportable segment.
For healthcare applications, we produce membranes used in blood filtration 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.
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 impairment of goodwill, pension benefits, repairs and maintenance and stock-based compensation. For a discussion of each of these policies, please see the discussion entitled “Critical accounting policies” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 28, 2013.
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) |
| March 29, 2014 |
| March 30, 2013 |
| March 29, 2014 |
| March 30, 2013 |
| ||
Net sales |
| $ | 161.0 |
| $ | 145.9 |
| 100.0 | % | 100.0 | % |
|
|
|
|
|
|
|
|
|
| ||
Gross profit |
| 58.5 |
| 49.2 |
| 36.3 |
| 33.7 |
| ||
Selling, general and administrative expenses |
| 36.1 |
| 30.7 |
| 22.4 |
| 21.0 |
| ||
Operating income |
| 22.4 |
| 18.5 |
| 13.9 |
| 12.7 |
| ||
Interest expense, net |
| 9.6 |
| 9.8 |
| 6.0 |
| 6.7 |
| ||
Other |
| 0.7 |
| 0.7 |
| 0.4 |
| 0.5 |
| ||
Income from continuing operations before income taxes |
| 12.1 |
| 8.0 |
| 7.5 |
| 5.5 |
| ||
Income taxes |
| 3.4 |
| 2.2 |
| 2.1 |
| 1.5 |
| ||
Income from continuing operations |
| $ | 8.7 |
| $ | 5.8 |
| 5.4 | % | 4.0 | % |
Comparison of the three months ended March 29, 2014 with the three months ended March 30, 2013
Net sales. Net sales for the three months ended March 29, 2014 were $161.0 million, an increase of $15.1 million, or 10.3%, from the same period in the prior year, due to higher sales in all segments and the positive impact of foreign currency translation of $0.8 million. See “Financial reporting segments” below for more information.
Gross profit. Gross profit was $58.5 million, an increase of $9.3 million from the same period in the prior year. Gross profit as a percent of net sales was 36.3% for the three months ended March 29, 2014 compared to 33.7% for the three months ended March 30, 2013. The increase in consolidated gross profit was due to higher sales in all segments. The increase in gross profit as a percent of net sales was primarily due to the electronics and EDVs segment, as sales increased with no significant changes in production-related fixed costs. Gross profit as a percent of net sales was consistent with the same period in the prior year in the transportation and industrial and separations media segments. See “Financial reporting segments” below for more information.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $5.4 million for the three months ended March 29, 2014 compared to the prior year primarily due to a $1.9 million increase in performance-based incentive compensation expense, a $1.1 million increase in litigation costs associated with patent enforcement and a $0.9 million increase in stock-based compensation expense. Selling, general and administrative expenses were 22.4% of consolidated net sales for the three months ended March 29, 2014 and 21.0% for the same period in the prior year.
Segment operating income. Segment operating income, which excludes stock-based compensation and certain non-recurring and other costs, was $29.4 million, an increase of $5.5 million from the same period in the prior year. Segment operating income as a percent of net sales was 18.3% for the three months ended March 29, 2014 compared to 16.4% for the three months ended March 30, 2013. The increase in consolidated segment operating income was due to higher sales in all segments. The increase in segment operating income margin was primarily due to higher sales in the electronics and EDVs segment, as sales increased with no significant changes in fixed costs. Segment operating income as a percent of net sales was consistent with the same period in the prior year in the transportation and industrial and separations media segments. See “Financial reporting segments” below for more information.
Interest expense. Interest expense for the three months ended March 29, 2014 was $9.6 million, which is comparable to the same period in the prior year. As a result of the debt reduction and refinancing transactions that were completed on May 8, 2014, we expect annualized interest savings of approximately $20.0 million to $25.0 million, depending on market interest rates, interest rate hedging strategies and average revolver borrowings.
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 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 42%.
The components of our effective tax rate are as follows:
|
| Three Months Ended |
| ||
|
| March 29, 2014 |
| March 30, 2013 |
|
U.S. federal statutory rate |
| 35.0 | % | 35.0 | % |
State income taxes |
| 0.2 |
| (1.9 | ) |
Mix of income in taxing jurisdictions |
| (8.1 | ) | (6.0 | ) |
Other |
| 0.9 |
| 0.2 |
|
Total effective tax rate |
| 28.0 | % | 27.3 | % |
Discontinued operations
On December 19, 2013, we completed the sale of our Microporous business, which consisted of the production facilities in Piney Flats, Tennessee, and Feistritz, Austria, for $120.0 million. We recognized a gain of $35.8 million on the sale, net of direct transaction costs and income taxes. The sales price and resulting gain are subject to adjustment in subsequent periods upon finalization of working capital. Microporous was previously included in the transportation and industrial segment. The results of operations of Microporous are classified as discontinued operations and are excluded from continuing operations and segment results for the three months ended March 30, 2013.
Financial reporting segments
Electronics and EDVs
Comparison of the three months ended March 29, 2014 with the three months ended March 30, 2013
Net sales. Net sales for the three months ended March 29, 2014 were $30.1 million, an increase of $5.7 million, or 23.4%, from the same period in the prior year. Net sales increased primarily due to higher volumes in EDV applications, partially offset by lower sales volumes in consumer electronics applications. The impact of price/product mix on sales was insignificant. We are working on new projects and development opportunities for consumer electronics applications, including qualification for smartphone and tablet devices, but it may take several quarters to see the results of these efforts. As a result, we cannot currently predict when or if sales volumes into consumer electronics applications will improve. Although we expect over time to regain some or all of our supply position in consumer electronics, sales into EDV applications represent our most significant growth opportunity and the long-term outlook continues to be positive, especially considering that we are qualified on more than fifty EDV models and have field-proven products, significant production capacity already in place,
technical advantages, low-cost manufacturing capabilities and intellectual property around ceramic coatings for lithium battery separators. In the first quarter of 2014, sales volumes into EDV applications increased as continued market growth more than offset the fact that we did not have any sales to LG during the quarter. We have had no sales to LG since the third quarter of 2013.
Segment operating income. Segment operating income was $3.1 million, or 10.3% of net sales, an increase of $5.1 million from the same period in the prior year. The increase in segment operating income and segment operating income margin was due to higher sales volume. The key driver of operating income and operating income margin is sales and the amount of fixed costs relative to sales. In the three months ended March 29, 2014, net sales were $30.1 million, or 30% of our total production capacity in terms of sales, as compared to sales in the three months ended March 30, 2013 of $24.4 million, or 24% of capacity. There were no changes in production capacity in 2014 as compared to 2013. In 2014 and 2013, excluding the final phase of expansion at our Concord facility, which will be completed, qualified and ramped up as demand develops, we had total production capacity sufficient to generate approximately $400.0 million in annual lithium battery separator sales, depending on the mix of products and grades produced. Because of the increase in sales with no significant change in fixed costs, operating income and operating income margin increased.
Transportation and Industrial
Comparison of the three months ended March 29, 2014 with the three months ended March 30, 2013
Net sales. Net sales for the three months ended March 29, 2014 were $79.1 million, an increase of $3.0 million, or 3.9%, from the same period in the prior year, as higher sales volumes in Europe and Asia were partially offset by lower sales in South America and the negative impact of foreign currency translation of $0.6 million.
Segment operating income. Segment operating income was $17.0 million, an increase of $0.8 million from the same period in the prior year. Segment operating income as a percent of net sales was 21.5% for the three months ended March 29, 2014, which is comparable to the same period in the prior year.
Separations Media
Comparison of the three months ended March 29, 2014 with the three months ended March 30, 2013
Net sales. Net sales for the three months ended March 29, 2014 were $51.8 million, an increase of $6.4 million, or 14.1%, from the same period in the prior year, including the positive impact of foreign currency translation of $1.4 million. Net sales increased in healthcare due to higher volumes and in filtration and specialty products due to higher sales into microelectronics and other degasification applications.
Segment operating income. Segment operating income was $17.7 million, an increase of $2.2 million from the same period in the prior year. Segment operating income as a percent of net sales was 34.2% for the three months ended March 29, 2014, which is comparable to the same period in the prior year. Segment operating income margins can fluctuate between quarters due to production timing and mix, but are expected to be relatively consistent to the prior year on an annual basis.
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 March 29, 2014 with the three months ended March 30, 2013
Corporate and other costs for the three months ended March 29, 2014 were $8.4 million, compared to $5.8 million for the three months ended March 30, 2013. The increase was primarily due to higher performance-based incentive compensation expense.
Foreign operations
As of March 29, 2014, we manufactured our products at 15 strategically located facilities in the United States, Europe and Asia. Net sales from foreign locations were $103.5 million (64.3% of consolidated sales) and $100.0 million (68.5% of consolidated sales) for the three months ended March 29, 2014 and March 30, 2013, respectively. In the electronics and EDVs segment, we primarily produce in the U.S. for customers located in Asia. The majority of sales from foreign production facilities are attributable to the transportation and industrial and separations media segments. In the transportation and industrial segment, we have production facilities in the U.S., Europe and Asia and generally produce in the same geographic region that we sell, though we do export some production from U.S. and European facilities to meet growing demand in Asia. In the separations media segment, the majority of production is at our manufacturing facility in Germany and sales are made to customers worldwide. Operating results generated by production facilities within business segments were 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.
Liquidity and capital resources
Cash and cash equivalents increased by $14.0 million during the three months ended March 29, 2014, as cash generated from operations was used to make scheduled principal payments under our previous senior secured credit agreement and fund capital expenditures.
Operating activities. Net cash provided by operating activities was $24.3 million in the three months ended March 29, 2014, consisting of cash generated from operations of $27.6 million partially offset by changes in operating assets and liabilities. Accounts receivable is consistent with prior year and days sales outstanding increased by approximately 5.0% due to timing of receipts and lower sales as compared to the fourth quarter of 2013. 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 levels and days sales in ending inventory are consistent with the prior year. 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.
Investing activities. In the three months ended March 29, 2014, total capital expenditures were $3.7 million compared to $6.2 million for the same period in the prior year. We currently estimate capital expenditures for fiscal 2014 to be approximately $50.0 million. As of March 29, 2014, we had $141.3 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. During the three months ended March 29, 2014, financing activities consisted primarily of scheduled principal payments of $7.5 million under our previous term loan facility.
On April 8, 2014 (the “closing date”), subsequent to the first quarter of 2014, we entered into a new senior secured credit agreement, used cash on hand and initial borrowings under the new credit agreement to pay all outstanding principal and interest under the previous senior secured credit agreement, and issued a redemption notice for our outstanding 7.5% senior notes.
The new credit agreement provides for a $150.0 million revolving credit facility and a $500.0 million term loan facility and matures in April 2019. On April 8, 2014, we used cash on hand of $140.8 million, proceeds from the initial draw under the new term loan facility of $100.0 million and borrowings under the new revolving credit facility of $33.0 million to pay all outstanding principal and interest under the previous senior secured credit agreement. On May 8, 2014, we borrowed the remaining $400.0 million available under the new term loan facility and used the proceeds to purchase and retire all of the previously outstanding 7.5% senior notes and pay redemption premiums and accrued and unpaid interest at
the redemption date. The total purchase price for the notes was $385.5 million, consisting of principal of $365.0 million and redemption premiums of $20.5 million. The redemption premiums will be recognized as expense in the second quarter of 2014.
Interest rates under the new senior secured credit agreement are, at our option, equal to either an alternate base rate or the Eurocurrency base rate, plus a specified margin. At the closing date, the interest rate on borrowings under the new senior secured credit agreement was 2.15%.
We intend to fund our ongoing operations with cash on hand, cash generated by operations and borrowings under our new senior secured credit agreement. As of March 29, 2014, approximately 28% 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. During the three months ended March 29, 2014, we repatriated foreign earnings of approximately $55.1 million related to the sale of the Microporous business. Except for the proceeds from the sale of Microporous business, our intent is to indefinitely reinvest earnings of our foreign operations and our current operating plans do not demonstrate a need to repatriate foreign earnings to fund our U.S. operations. However, if these funds were needed for our operations in the U.S., we would be required to accrue and pay any applicable U.S. and local taxes to repatriate these funds.
At March 29, 2014, we were in compliance with the debt covenants under our previous senior secured credit agreement. Adjusted EBITDA, as defined under our new senior secured credit agreement, would have been as follows at March 29, 2014:
(in millions) |
| Twelve Months Ended |
| |
Net income |
| $ | 36.2 |
|
Add/Subtract: |
|
|
| |
Depreciation and amortization expense |
| 54.8 |
| |
Interest expense, net |
| 39.3 |
| |
Income taxes |
| 15.5 |
| |
Stock-based compensation |
| 21.6 |
| |
Foreign currency loss |
| 0.4 |
| |
Loss on disposal of property, plant and equipment |
| 1.2 |
| |
Litigation costs associated with patent enforcement |
| 3.2 |
| |
Other non-cash or non-recurring items |
| (1.0 | ) | |
Adjusted EBITDA |
| $ | 171.2 |
|
Under our new senior secured credit agreement, we are required to maintain a maximum ratio of indebtedness to adjusted EBITDA of 4.25 to 1.00 and a minimum ratio of adjusted EBITDA to cash interest expense of 3.00 to 1.00. The first financial covenant compliance measurement date under our new senior secured credit agreement is June 28, 2014.
Our new 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.
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 $24.5 million, including $13.2 million of interest related to the 7.5% senior notes that were redeemed on May 8, 2014.
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 the “Risk Factors” section in our most recent Annual Report on Form 10-K.
From time to time, we may explore additional financing methods and other means to lower our cost of capital, which could include 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 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 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. The environmental reserve for the Membrana facility, which is denominated in euros, was $2.6 million at March 29, 2014. We anticipate the expenditures associated with the reserve will be made in the next twelve months.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, which are potential losses arising from adverse changes in market rates and prices, such as interest rates and foreign exchange fluctuations. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Interest rate risk
After our debt reduction and refinancing completed May 8, 2014, we had variable rate debt of $533.0 million. Although we do not currently utilize interest rate derivatives, we may in the future to reduce the interest rate risk inherent in our variable rate debt. The pre-tax earnings and cash flow impact resulting from a 100 basis point increase in interest rates on our variable rate debt, holding other variables constant, would be $5.3 million per year.
Currency risk
Outside of the United States, we maintain assets and operations in Europe and Asia. The results of operations and financial position of our foreign operations are principally measured in their respective currency and translated into U.S. dollars. As a result, exposure to foreign currency fluctuations exists. The reported income of these subsidiaries will be higher or lower depending on a weakening or strengthening of the U.S. dollar against the respective foreign currency. Our subsidiaries and affiliates also purchase and sell products and services in various currencies. As a result, we may be exposed to cost increases relative to the local currencies in the markets in which we sell. Because the percentage of our sales in foreign currencies differs
from the percentage of our costs in foreign currencies, a change in the relative value of the U.S. dollar could have a disproportionate impact on our sales compared to our costs, which could impact our margins. A portion of our assets are based in our foreign locations and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period, with the effect of such translation reflected in accumulated other comprehensive income (loss). Accordingly, our consolidated shareholders’ equity will fluctuate depending upon the weakening or strengthening of the U.S. dollar against the respective foreign currency, primarily the euro.
The dollar/euro exchange rates used in our financial statements for the periods ended as set forth below were as follows:
|
| March 29, 2014 |
| March 30, 2013 |
|
Period end rate |
| 1.3744 |
| 1.2820 |
|
Period average rate for the three months ended |
| 1.3711 |
| 1.3206 |
|
Our strategy for management of currency risk relies primarily on conducting our operations in a country’s respective currency and may, from time to time, involve foreign currency derivatives. As of March 29, 2014, we did not have any foreign currency derivatives outstanding.
Item 4. Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) was performed under the supervision, and with the participation of, our management, including our Chief Executive Officer and Chief Financial Officer. Our disclosure controls are designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 29, 2014 to ensure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During the three months ended March 29, 2014, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides detail about our share repurchase activity during the three months ended March 29, 2014:
Fiscal Month |
| Total Number of |
| Average Price |
| Total Number |
| Maximum |
| |
December 29, 2013 – February 1, 2014 |
| — |
| $ | — |
| — |
| — |
|
February 2, 2014 – March 1, 2014 |
| 8,228 |
| 34.33 |
| — |
| — |
| |
March 2, 2014 – March 29, 2014 |
| — |
| — |
| — |
| — |
| |
Total |
| 8,228 |
| $ | 34.33 |
| — |
| — |
|
During the three months ended March 29, 2014, the Company withheld and repurchased 8,228 shares of common stock to satisfy certain employees’ withholding tax liabilities related to restricted stock grants.
Exhibit No. |
| Exhibit Description |
|
|
|
10.1 |
| Amended and Restated Credit Agreement, dated as of April 8, 2014, among Polypore International, Inc., Bank |
|
| of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer; and Wells Fargo Bank, National Association, as Syndication Agent; Compass Bank, Fifth Third Bank, HSBC Bank USA, National Association, PNC Bank, National Association, RBS Citizens Bank, N.A, and Regions Bank as Co-Documentation Agents; and Bank of America Merrill Lynch and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Book Managers |
31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 |
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 |
| Interactive Data Files |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 8, 2014 |
| POLYPORE INTERNATIONAL, INC. |
|
|
|
|
|
|
| By: | /s/ Robert B. Toth |
|
| Robert B. Toth |
|
| President and Chief Executive Officer |
|
| (principal executive officer) |
|
|
|
|
|
|
| By: | /s/ Lynn Amos |
|
| Lynn Amos |
|
| Chief Financial Officer |
|
| (principal financial officer and principal accounting officer) |