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Neenah Paper:
UnFOLDING
1 Letter to Shareholders
4 Neenah Paper At A Glance
5 Fine Paper
6 Technical Products
7 Pulp
8 Board of Directors / Executive Team
9
Index to Financials
IBC Shareholder Information
Annual Report 2005
Neenah Paper manufactures and distributes a wide range of premium
and specialty paper grades, with well-known brands such as CLASSIC®,
ENVIRONMENT®, KIMDURA® and MUNISING LP®. The company also
produces and sells bleached pulp, primarily for use in the manufacture
of tissue and writing papers. Neenah Paper is based in Alpharetta,
Georgia, and has manufacturing operations in Wisconsin, Michigan and
in the Canadian provinces of Ontario and Nova Scotia. Additional
information about Neenah Paper can be found at the company’s web
site at www.neenah.com.
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Neenah Paper:
UnFOLDING
1 Letter to Shareholders
4 Neenah Paper At A Glance
5 Fine Paper
6 Technical Products
7 Pulp
8 Board of Directors / Executive Team
9
Index to Financials
IBC Shareholder Information
Annual Report 2005
Neenah Paper manufactures and distributes a wide range of premium
and specialty paper grades, with well-known brands such as CLASSIC®,
ENVIRONMENT®, KIMDURA® and MUNISING LP®. The company also
produces and sells bleached pulp, primarily for use in the manufacture
of tissue and writing papers. Neenah Paper is based in Alpharetta,
Georgia, and has manufacturing operations in Wisconsin, Michigan and
in the Canadian provinces of Ontario and Nova Scotia. Additional
information about Neenah Paper can be found at the company’s web
site at www.neenah.com.
2005 Annual Report
“ We are evolving into something more
than the sum of three businesses.”
– Sean T. Erwin
President and Chief Executive Officer
To Neenah Paper Shareholders:
As years go, 2005 was a meaningful one for Neenah
A Challenging and Exciting First Year
Paper. It marked our first full year as a stand-alone
Consolidated net sales for 2005 were $733 million versus
public company. For us, it was a year of challenge,
$772 million in 2004. The decrease in sales was in pulp,
learning and progress. Neenah Paper, like most man-
where volumes declined due to the decision to close
ufacturing companies, faced significant pressures
the No. mill at Terrace Bay on May and selling prices
from the higher cost of energy and materials. Our
pulp operations in Canada were additionally affected
by the continued strengthening of the Canadian
dollar, which is up by over 30 percent in a little over
two years.
We responded to these challenges while also taking
actions to strengthen and build our business for the
long term. The successful launch of the new EAMES™
line of fine papers, the start-up of a new paper machine
headbox at our Munising Technical Products mill and
cost savings initiatives executed at all our mills are just a
few examples of actions we completed. We also invested
in our infrastructure and supply chain capabilities with
the implementation of the first phase of our Oracle ERP
system. Additionally, while making things happen today,
we were able to further define our strategic plans and
actions going forward.
that were lower as a result of higher price discounts
given to Kimberly-Clark in 2005, compared with 2004,
when our operations were part of that company.
In both 2004 and 2005, we recorded non-cash impair-
ment charges to write down the amount of our Terrace
Bay fixed assets to a value based on expectations of
its future cash-generating capabilities. At the spin-off
in 2004, there was a pre-tax impairment charge of
$3 million. In 2005, an additional $54 million pre-tax
charge was taken, bringing the value of the fixed assets
to zero.
An operating loss of $3 million was reported for 2005,
and included the effects of the charges for impairment
and the No. mill closure of $60 million. The compara-
ble 2004 operating loss was $40 million, but included
the impairment charge of $3 million. As expected at
the spin-off, results were impacted by higher pulp
2
Neenah Paper, Inc.: UnFOLDING
As we evolve, the future of Neenah Paper will be in increasing
the size and proportion of our two paper businesses.
discounts, added corporate expenses as a stand-alone
2005 was a particularly tough year to be in the Canadian
company, and interest expense for the debt we incurred
forest products industry. The strong rise of the Cana-
at the spin-off. Additional factors impacting results in
dian dollar combined with escalating costs for energy
2005 were a stronger Canadian dollar and increased
energy and material costs. These factors were partly off-
set by our cost improvement programs, which delivered
over $25 million of savings in 2005, and selling price
and materials put virtually the entire industry in a loss
position. Our Pulp segment reported an operating loss
of $93 million, including the effects of the charges for
impairment and the No. mill closure of $60 million.
increases implemented across all product segments.
As a result of the difficult environment, we worked to
Our Fine Paper segment continued to outperform the
market due to the quality and position of our products
and the strength of our brands. Net sales of $222 million
represented a slight year-on-year increase, despite a
market that declined more than three percent. The
launch of the EAMES™ Paper Collection in the second
quarter was an unqualified success, further solidifying
Neenah’s position as the innovative brand leader in the
premium paper market. We broadened our product line
with the addition of new translucent Web+Plus™ papers.
Our mills continued to deliver cost savings and recently
entered into an agreement with a waste-to-energy firm
in Wisconsin to process some of our manufacturing
byproducts to generate steam. This allows us to signi-
make progress on a number of fronts to address costs.
In March, we made the difficult decision to shut down
the older No. mill at Terrace Bay. Its small scale did not
justify the investment necessary to compete successfully
in today’s global pulp market. Later in the year, the
Terrace Bay team re-engineered their approach to
the annual maintenance down, saving millions of
dollars. Following the down, the mill set numerous
new production records and for the year was able to
decrease manufacturing costs by seven percent, despite
rising wood and energy costs. Both Terrace Bay and
Pictou received Sustainable Forestry Initiative® certifica-
tion in 2005, indicating our forests are being managed
in an environmentally responsible manner.
ficantly cut natural gas consumption at our Neenah mill,
While we successfully negotiated labor agreements at
an example of environmental stewardship that also
each of our paper mills and the Pictou mill, the year
reduces cost.
In Technical Products, volumes increased three percent,
driven by growth in tape and abrasives, although net
sales fell slightly, from $32 to $3 million. Sales were
affected by lower shipments of heat transfer papers,
ended on a somber note, as a revised labor agreement
with the woodlands workers at Terrace Bay was not
reached. The woodland workers chose to go on strike
on January 30, 2006, ultimately requiring the mill to
shut down for lack of wood in mid-February.
which were sold through a distributor until mid-year, at
Where We Go from Here
which point we terminated that agreement and began
As the theme for this annual report points out, as a new
to work directly with customers to restore growth for this
technologically advanced product. A key challenge that
company, Neenah’s story is an unfolding one. While that
is true, the message of that story has remained consis-
Technical Products faced in 2005 was from rising oil-
tent since day one. We have always believed that the
based latex costs. To help offset this, our mills delivered
foundation for our future lies in our ability to sustain
cost savings of over $3 million and we also implemented
surcharges and price increases.
growth, create value from our Pulp business and deliver
attractive returns. In 2005, we further developed and
began executing a strategic plan that would bring those
objectives to fruition.
2005 Annual Report
3
Strong brands, innovative products, motivated people – at
Neenah Paper, that’s what drives our growth.
An Evolving Portfolio
have increased our research and development staff and
At the time Neenah Paper was spun off in November
capabilities. In fact, to emphasize the different direc-
2004, it was comprised of three separate business units
tions available to us, you may have noticed we have
– a very well known branded premium fine paper fran-
changed the name of this segment from Technical Paper
chise, a technical paper business and pulp operations.
to Technical Products.
Half of our sales were pulp. As we evolve, the future of
Neenah Paper will be in increasing the size and propor-
tion of our two paper businesses, through organic
growth and also potentially through acquisitions.
Growth starts with the top line, but requires constant
attention to the bottom line as well. Our “Ring-the-Bell”
costs savings program remains active and will continue
to be part of our performance expectations each year.
We own some of the strongest, most admired brands in
We will also deliver profits through increased size and
the fine paper industry, giving us a solid foundation
scale, improvements in our Technical Products mix and
upon which to build. Our Technical Products business
control over corporate expenses, debt and taxes.
centers on producing a wide range of synthetic and
paper-based products. Our research and development
activities are now leading us in new directions, where
our processes and proprietary capabilities can create
value for customers and shareholders. These strengths
will be leveraged as we evaluate new opportunities.
Growth Expectations
Strong brands, innovative products, motivated people –
at Neenah Paper, that’s what drives our growth. Prior to
the spin-off, our paper businesses were to some extent in
a “harvest” mode. We are now choosing how we invest
in and manage these businesses for long-term growth.
In the Fine Paper segment, we are encouraging custom-
ers to “trade up” to the value and quality of Neenah
Paper to present their message, and we hope to help
grow the premium paper segment, which is now only
three percent of the uncoated market. We are also
exploring new sales and distribution channels for our
products, including retailers and high-end packaging.
In our Technical Products segment, we are restoring an
important component – customer development partner-
Delivering Value
At Neenah Paper, return on capital is an important met-
ric to us and to our shareholders. We will drive this
through wise capital investment decisions, cost savings
initiatives, and tough but necessary decision-making.
Our job is to make things happen.
Neenah’s Board of Directors has adopted strong corpo-
rate governance policies and has taken an active interest
in ensuring that shareholders’ interests are both repre-
sented and protected. These actions should help deliver
value and returns to our shareholders.
2005 was an exciting, challenging year for Neenah
Paper, a year of tough decisions and determined actions.
But to put it in perspective, it was just year one of what
we hope will be a long unfolding journey into our future.
I’d like to thank our employees, directors, customers
and shareholders – both for your support and for shar-
ing our vision for success.
ships – and are now jointly working with our customers
Sean T. Erwin
to explore how our products, processes and technology
Chairman, President and Chief Executive Officer
can meet their specific needs. To facilitate that, we
NEENAH PAPER AT A GLANCE
Neenah Paper: Setting a new standard in fine paper, technical
products and pulp.
Our Fine Paper business produces premium writing, text, cover, specialty and private watermark papers that
are used in identity packages, annual reports, invitations, personal stationery and high-end packaging. Our
premium paper brands are some of the most recognized and preferred in the industry, including CLASSIC®,
CLASSIC CREST®, ENVIRONMENT®, NEENAH®, UV/ULTRA® II Papers and the EAMES™ Paper Collection.
Our Technical Products business is an industry leader in research, technology and problem-solving, focused
on durable, saturated, synthetic and coated base papers. Our customers are located in 40 countries around
the world. For more than half a century, our innovative paper products have replaced those made from wood,
plastic, cloth and leather. Our technical papers are not end-use products; they are essential components in
the manufacture of other products. Our papers fit a wide array of applications, including abrasives, labels,
decorative components, heat transfer and medical packaging.
Our Pulp business consists of mills in Pictou, Nova Scotia and Terrace Bay, Ontario, together with related
timberlands. These mills produce northern softwood kraft pulp and northern hardwood kraft pulp, which
are used in the manufacture of tissue, publication, premium writing, printing and other specialty papers.
2005 NET SALES
technical products
17%
fine paper
30%
pulp
53%
Fine Paper Neenah Paper’s powerhouse of fine paper brands reads
like a veritable who’s who in premium paper. For more than 20 years,
OUR BRANDS
designers and printers have considered Neenah brands, such as
CLASSIC CREST® and CLASSIC® Linen, to be their first choice for aes-
thetics, performance, consistency, availability, quality, and value. Today,
Neenah’s fine paper brands continue to occupy a premium position in
the marketplace. Our introduction of the EAMES™ Paper Collection
put us on the leading edge of paper innovation. As more and more cus-
tomers look to high-quality paper to convey their messages, we see
an opportunity to tip the scale in Neenah’s favor.
VOLUME MIx
BRANDED
83%
UNBRANDED
17%
2005
• CLASSIC CREST®
• CLASSIC COTTON®
• CLASSIC® LINEN
• CLASSIC® LAID
• CLASSIC COLUMNS®
• NEENAH® BOND
• UV/ULTRA® II
• ATLAS™ BOND
• ENVIRONMENT®
PAPERS
• EAMES™ PAPER
COLLECTION
• OLD COUNCIL
TREE® BOND
2005 FINE PAPER HIgHLIgHTS
• Net sales up one percent for the year
•
•
•
Launched the exclusive EAMES™ Paper Collection, which offers three new color palettes and unique
surface finishes previously unexplored on paper
Entered into a joint agreement with Sihl Paper, a global manufacturer of specialty papers based in
Switzerland, to manufacture UV/ULTRA® II Web+Plus™ papers to provide Neenah Paper customers
a broader range of printing applications for these translucent papers
Began purchasing “green steam” from Minergy Corporation at our Neenah, Wisconsin mill. By
purchasing this steam we will significantly reduce natural gas consumption and reduce paper mill
byproducts going to landfill
Fine Paper Neenah Paper’s powerhouse of fine paper brands reads
like a veritable who’s who in premium paper. For more than 20 years,
OUR BRANDS
designers and printers have considered Neenah brands, such as
CLASSIC CREST® and CLASSIC® Linen, to be their first choice for aes-
thetics, performance, consistency, availability, quality, and value. Today,
Neenah’s fine paper brands continue to occupy a premium position in
the marketplace. Our introduction of the EAMES™ Paper Collection
put us on the leading edge of paper innovation. As more and more cus-
tomers look to high-quality paper to convey their messages, we see
an opportunity to tip the scale in Neenah’s favor.
VOLUME MIx
BRANDED
83%
UNBRANDED
17%
2005
• CLASSIC CREST®
• CLASSIC COTTON®
• CLASSIC® LINEN
• CLASSIC® LAID
• CLASSIC COLUMNS®
• NEENAH® BOND
• UV/ULTRA® II
• ATLAS™ BOND
• ENVIRONMENT®
PAPERS
• EAMES™ PAPER
COLLECTION
• OLD COUNCIL
TREE® BOND
2005 FINE PAPER HIgHLIgHTS
• Net sales up one percent for the year
•
•
•
Launched the exclusive EAMES™ Paper Collection, which offers three new color palettes and unique
surface finishes previously unexplored on paper
Entered into a joint agreement with Sihl Paper, a global manufacturer of specialty papers based in
Switzerland, to manufacture UV/ULTRA® II Web+Plus™ papers to provide Neenah Paper customers
a broader range of printing applications for these translucent papers
Began purchasing “green steam” from Minergy Corporation at our Neenah, Wisconsin mill. By
purchasing this steam we will significantly reduce natural gas consumption and reduce paper mill
byproducts going to landfill
Premium paper makes an impression. It influences
how the world perceives your company. Corporations
print on Neenah Fine Paper to communicate quality.
Even more important, they select Neenah Fine Paper
to communicate a message. With the expanding
spectrum of Neenah Fine Paper brands, we command
a strong market position.
1. What’s good for the environment is good for FedEx Kinko’s. They chose Neenah
ENVIRONMENT® brand papers, made with 100 percent post-consumer fiber, for
several of their resumé, executive and card stock papers.
2. Designers often turn to nature for inspiration. Neenah’s Fine Paper brands are a design
inspiration in themselves.
3. Everything about the Starwood Preferred Guest Platinum program connotes elite status.
That includes the welcome package, printed on Neenah EAMES™ Painting.
4. The designer’s choice. For more than two decades, graphic designers have specified
Neenah’s Fine Paper brands for their clients – and for themselves.
5. The most important rule of all. Design firm Rule29 selected CLASSIC CREST® for their
award-winning, self-promotional hardbound book, Rules 1–28.
6. What do many award-winning annual reports have in common? Neenah Fine Paper –
brands such as CLASSIC®, CLASSIC CREST®, ENVIRONMENT®, EAMES™ and more.
1.
Premium paper makes an impression. It influences
how the world perceives your company. Corporations
print on Neenah Fine Paper to communicate quality.
Even more important, they select Neenah Fine Paper
to communicate a message. With the expanding
spectrum of Neenah Fine Paper brands, we command
a strong market position.
1. What’s good for the environment is good for FedEx Kinko’s. They chose Neenah
ENVIRONMENT® brand papers, made with 100 percent post-consumer fiber, for
several of their resumé, executive and card stock papers.
2. Designers often turn to nature for inspiration. Neenah’s Fine Paper brands are a design
inspiration in themselves.
3. Everything about the Starwood Preferred Guest Platinum program connotes elite status.
That includes the welcome package, printed on Neenah EAMES™ Painting.
4. The designer’s choice. For more than two decades, graphic designers have specified
Neenah’s Fine Paper brands for their clients – and for themselves.
5. The most important rule of all. Design firm Rule29 selected CLASSIC CREST® for their
award-winning, self-promotional hardbound book, Rules 1–28.
6. What do many award-winning annual reports have in common? Neenah Fine Paper –
brands such as CLASSIC®, CLASSIC CREST®, ENVIRONMENT®, EAMES™ and more.
1.
2005 Annual Report
5
FINE PAPER
2.
3.
5.
4.
6.
6
Neenah Paper, Inc.: UnFOLDING
TECHNICAL PRODUCTS
1.
2.
3.
4.
5.
Technical Products Neenah’s Technical Products division takes a
proactive stance in developing solutions that meet customers’ specific
OUR BRANDS
needs. Our Research and Development group works closely with cus-
tomers to find new and improved uses for our products. Our expertise
and experience in developing specialty substrate materials has made
Neenah Technical Products a preferred supplier around the world. Our
continued focus and investment in R&D opens new opportunities for
our solutions and ensures that we maintain a leadership position in
our categories.
VOLUME gROWTH
KIMDURA®
EPIC II®
DURAFORM®
DURAFLEx®
BUCKSKIN®
PREVAIL®
TExOPRINT®
MUNISINg LP®
TECHNI-PRINT®
KIMLON®
PHOTOTRANS®
HEIRLOOM®
NEENAH™
Tape
Pre-Mask
Abrasive
Other
2004
2005
2005 TECHNICAL PRODUCTS HIgHLIgHTS
• Expanded our Research and Development capabilities
•
Introduced new heat transfer technology with PHOTOTRANS® ImageClip™ Heat Transfer Paper
•
Launched the first breathable reinforced paper that withstands ozone sterilization
for medical packaging
•
Initiated a development project for Neenah™ Mirror Finish Abrasive Paper
• Arranged a supply agreement with Performance Industrial Tape Specialists Co. Ltd. (PITS)
• Added two new KIMDURA® Synthetic Papers, KIMDURA UV and KIMDURA Multi-Task
Labels, tags, tapes, pre-mask, medical packaging,
book components, furniture components, abrasives,
heat transfer and more – chances are, you’ve come
across Neenah’s Technical Products before. They’re
in items you use everyday.
1. Scratch the surface of a great abrasive and you’ll find a great backing material. Like Neenah’s
latex-saturated and coated papers, used worldwide for nearly 50 years.
2. Neenah makes heat transfer history. New PHOTOTRANS® ImageClip™ does away with
those annoying plastic polymer windows around the image area.
3. Some label stock offers strength, while others offer good graphic qualities. Neenah Paper’s
KIMDURA® line of synthetic paper provides both, including resistance to UV radiation.
4. It’s tempting to say that Neenah wrote the book on bookbinding. Actually, Neenah just
supplies the binding components – from decorative converting base papers to stretch
papers for the spine.
5. Neenah Paper Medical Packaging Paper is extremely heat stable, so it holds up under
widely used processes.
6. Cellulose pulp reinforced with long, nylon fibers and saturated with durable latex. That’s the
formula for Prevail® Paper. Paper so strong you can even put grommets in it.
6.
Labels, tags, tapes, pre-mask, medical packaging,
book components, furniture components, abrasives,
heat transfer and more – chances are, you’ve come
across Neenah’s Technical Products before. They’re
in items you use everyday.
1. Scratch the surface of a great abrasive and you’ll find a great backing material. Like Neenah’s
latex-saturated and coated papers, used worldwide for nearly 50 years.
2. Neenah makes heat transfer history. New PHOTOTRANS® ImageClip™ does away with
those annoying plastic polymer windows around the image area.
3. Some label stock offers strength, while others offer good graphic qualities. Neenah Paper’s
KIMDURA® line of synthetic paper provides both, including resistance to UV radiation.
4. It’s tempting to say that Neenah wrote the book on bookbinding. Actually, Neenah just
supplies the binding components – from decorative converting base papers to stretch
papers for the spine.
5. Neenah Paper Medical Packaging Paper is extremely heat stable, so it holds up under
widely used processes.
6. Cellulose pulp reinforced with long, nylon fibers and saturated with durable latex. That’s the
formula for Prevail® Paper. Paper so strong you can even put grommets in it.
6.
Technical Products Neenah’s Technical Products division takes a
proactive stance in developing solutions that meet customers’ specific
OUR BRANDS
needs. Our Research and Development group works closely with cus-
tomers to find new and improved uses for our products. Our expertise
and experience in developing specialty substrate materials has made
Neenah Technical Products a preferred supplier around the world. Our
continued focus and investment in R&D opens new opportunities for
our solutions and ensures that we maintain a leadership position in
our categories.
VOLUME gROWTH
KIMDURA®
EPIC II®
DURAFORM®
DURAFLEx®
BUCKSKIN®
PREVAIL®
TExOPRINT®
MUNISINg LP®
TECHNI-PRINT®
KIMLON®
PHOTOTRANS®
HEIRLOOM®
NEENAH™
Tape
Pre-Mask
Abrasive
Other
2004
2005
2005 TECHNICAL PRODUCTS HIgHLIgHTS
• Expanded our Research and Development capabilities
•
Introduced new heat transfer technology with PHOTOTRANS® ImageClip™ Heat Transfer Paper
•
Launched the first breathable reinforced paper that withstands ozone sterilization
for medical packaging
•
Initiated a development project for Neenah™ Mirror Finish Abrasive Paper
• Arranged a supply agreement with Performance Industrial Tape Specialists Co. Ltd. (PITS)
• Added two new KIMDURA® Synthetic Papers, KIMDURA UV and KIMDURA Multi-Task
Pulp Neenah Paper’s Pulp division produces approximately 600,000
metric tons of chlorine-free pulp annually from our two Canadian pulp
OUR STRENgTHS
operations. Our mills are SFI® certified, adhering to the latest in forest
management technology and practices. Our focus in pulp continues to
be on reducing costs, and in 2005, we closed the oldest and smallest of
our two pulp mills at our Terrace Bay, Ontario facility.
2005 VOLUMES By LOCATION
TERRACE BAy
375,000 metric tons
PICTOU
265,000 metric tons
2005
FLExIBLE PRODUCTION
Softwood and hardwood
pulp and various blends
SUSTAINABILITy
Sustainable Forestry
Initiative® (SFI)
certification
STRATEgIC LOCATION
Pulp mills service
customers in North
America and Europe
CHLORINE-FREE
100% elemental chlorine-
free (ECF) pulp
REFORESTATION
Seedling tree nursery at
the Pictou timberland
2005 PULP HIgHLIgHTS
•
Achieved SFI® (Sustainable Forest Initiative) and ISO 14000 certification for Pictou and
Terrace Bay woodlands operations
•
Shutdown the Terrace Bay No. 1 mill, saving $2–$4 million annually
•
Upgraded Pictou baling to meet market demands for integrity and appearance
•
Delivered significant cost savings by modifying annual maintenance approach at Terrace Bay
Pulp Neenah Paper’s Pulp division produces approximately 600,000
metric tons of chlorine-free pulp annually from our two Canadian pulp
OUR STRENgTHS
operations. Our mills are SFI® certified, adhering to the latest in forest
management technology and practices. Our focus in pulp continues to
be on reducing costs, and in 2005, we closed the oldest and smallest of
our two pulp mills at our Terrace Bay, Ontario facility.
2005 VOLUMES By LOCATION
TERRACE BAy
375,000 metric tons
PICTOU
265,000 metric tons
2005
FLExIBLE PRODUCTION
Softwood and hardwood
pulp and various blends
SUSTAINABILITy
Sustainable Forestry
Initiative® (SFI)
certification
STRATEgIC LOCATION
Pulp mills service
customers in North
America and Europe
CHLORINE-FREE
100% elemental chlorine-
free (ECF) pulp
REFORESTATION
Seedling tree nursery at
the Pictou timberland
2005 PULP HIgHLIgHTS
•
Achieved SFI® (Sustainable Forest Initiative) and ISO 14000 certification for Pictou and
Terrace Bay woodlands operations
•
Shutdown the Terrace Bay No. 1 mill, saving $2–$4 million annually
•
Upgraded Pictou baling to meet market demands for integrity and appearance
•
Delivered significant cost savings by modifying annual maintenance approach at Terrace Bay
From facial tissue to fine writing paper, Neenah
pulp is the quality ingredient for a variety of paper
products. Our pulp operations produce both bleached
northern hardwood and softwood kraft pulp. The
latter has exceptional tensile strength and low
coarseness. In other words, it’s a high-quality pulp.
1. Before it became pulp, it was a tree growing in Neenah Paper’s Pictou, Nova Scotia,
woodlands. And before it was a tree, it was a seedling growing in Neenah’s nursery
facilities, part of Neenah’s Sustainable Forestry Initiative® (SFI) program.
2. Where does the pulp from Neenah’s pulp mills go? Some of it goes to Neenah’s
paper mills, where it is turned into Neenah paper.
3. The majority of Neenah’s pulp production goes into the manufacture of tissue
paper products.
4. If you ever wondered what wood chips used to make Neenah pulp look like –
they look like this.
5. Things that people use in everyday living, like these rolls of masking tape, also use
Neenah pulp.
1.
From facial tissue to fine writing paper, Neenah
pulp is the quality ingredient for a variety of paper
products. Our pulp operations produce both bleached
northern hardwood and softwood kraft pulp. The
latter has exceptional tensile strength and low
coarseness. In other words, it’s a high-quality pulp.
1. Before it became pulp, it was a tree growing in Neenah Paper’s Pictou, Nova Scotia,
woodlands. And before it was a tree, it was a seedling growing in Neenah’s nursery
facilities, part of Neenah’s Sustainable Forestry Initiative® (SFI) program.
2. Where does the pulp from Neenah’s pulp mills go? Some of it goes to Neenah’s
paper mills, where it is turned into Neenah paper.
3. The majority of Neenah’s pulp production goes into the manufacture of tissue
paper products.
4. If you ever wondered what wood chips used to make Neenah pulp look like –
they look like this.
5. Things that people use in everyday living, like these rolls of masking tape, also use
Neenah pulp.
1.
2005 Annual Report
7
PULP
4.
2.
3.
5.
Neenah Paper, Inc.: UnFOLDING
Sean T. Erwin
Chairman of the Board,
President and Chief
Executive Officer,
Neenah Paper, Inc.
Edward Grzedzinski
Former Chief Executive
Officer, NOVA
Information Systems
Mary Ann Leeper, Ph.D.
President and Chief
Operating Officer,
Female Health Company
Timothy S. Lucas, CPA
Independent Consultant,
Lucas Financial
Reporting
Board of
Directors
Executive
Team
John F. McGovern
Partner, Aurora Capital,
LLC
Former Executive
Vice President and
Chief Financial Officer,
Georgia-Pacific
Corporation
Philip C. Moore
Partner, McCarthy
Tétrault, L.L.P.
Stephen M. Wood, Ph.D.
Independent Consultant,
AFD Group, LLC
Former Chief Executive
Officer, Kraton Polymers
Steven S. heinrichs
Senior Vice President,
General Counsel and
Secretary
Bonnie C. Lind
Senior Vice President,
Chief Financial Officer
and Treasurer
William K. O’Connor
Senior Vice President,
Sales and Marketing
James r. Piedmonte
Senior Vice President,
Operations
A Special Thanks
On January 0, 2006, Neenah’s Board of Directors elected John F. McGovern to serve as a director
of Neenah Paper to replace James G. Grosklaus who resigned from the Board on November 3, 2005. Jim,
as a former Executive Vice President with Kimberly-Clark, had a tremendous knowledge of our businesses
and was instrumental in their growth and success. We would like to express our sincere appreciation to Jim
for his contributions in helping set our new company on the road to success.
Annual Report 2005
9
10 Business Summary
14 Selected Financial Data
16 Management’s Discussion and Analysis of
Financial Condition and Results of Operations
30 Quantitative and Qualitative Disclosures About Market Risk
33 Report of Management on Internal Control
34 Reports of Independent Registered Public Accounting Firm
36 Consolidated and Combined Statements of Operations
37 Consolidated Balance Sheets
38 Consolidated and Combined Statements of Changes
in Stockholders’ and Invested Equity
39 Consolidated and Combined Statements of Cash Flows
40 Notes to Consolidated and Combined Financial Statements
71 Production Notes
10
Business Summary
Overview
packaging and heat transfer technical products markets. We are
Neenah, a Delaware corporation, was incorporated in April
also a global supplier of materials used to create customer
2004 in contemplation of the Spin-Off by Kimberly-Clark
specifi c components for furniture, book covers and original
Corporation (“Kimberly-Clark”) of its Canadian pulp business
equipment manufacturers’ products. Our customers are
and its fi ne paper and technical products businesses in the
located in more than 35 countries and include 3M Company,
United States (collectively, the “Pulp and Paper Business”). We
Perfecseal, Avery Dennison Corporation and Saint-Gobain
had no material assets or activities until Kimberly-Clark’s trans-
Group. Our technical products manufacturing facility is located
fer to us of the Pulp and Paper business on November 30,
in Munising, Michigan.
2004. On that date, Kimberly-Clark completed the distribution
Our pulp business primarily produces northern bleached
of all of the shares of our common stock to the stockholders of
softwood kraft pulp used by paper mills to manufacture tissue
Kimberly-Clark (the “Spin-Off”). Kimberly-Clark stockholders
and printing and writing papers. Our pulp business consists of
received a dividend of one share of our common stock for
mills located in Pictou, Nova Scotia and Terrace Bay, Ontario,
every 33 shares of Kimberly-Clark common stock held. Based
together with related timberlands. The Pictou mill is comprised of
on a private letter ruling Kimberly-Clark received from the
a single-line pulp facility, which produces primarily softwood pulp,
Internal Revenue Service, receipt of our shares in the Spin-Off
as well as timberlands encompassing approximately one million
was tax-free for United States federal income tax purposes.
acres of owned and 200,000 acres of licensed or managed land in
Following the Spin-Off, we are an independent, public com-
Nova Scotia. Timberland operations on land owned and licensed
pany and Kimberly-Clark has no ownership interest in us.
by the Pictou mill are provided by third-party contractors. In 2005,
We are a leading North American producer of premium
the Pictou mill produced approximately 265,000 metric tons of
fi ne papers and technical products. We also produce bleached
bleached kraft pulp.
kraft market pulp in Canada, where we own approximately one
On May 1, 2005, we closed the smaller of two single-line
million acres of timberlands and have non-exclusive rights to
pulp mills at the Terrace Bay facility (the “No. 1 Mill”). The
harvest wood off approximately 4.8 million acres of other tim-
No. 1 Mill was originally constructed in 1948 and had annual
berlands. We have three primary operations: our fi ne paper
capacity of approximately 125,000 tons of bleached kraft pulp.
business, our technical products business and our pulp business.
Following the closure of the No. 1 Mill, the Terrace Bay mill is
Our fi ne paper business is a leading producer of premium
comprised of a single-line pulp facility, which produces primar-
writing, text, cover and specialty papers used in corporate
ily softwood pulp, and a timberlands operation. Terrace Bay
annual reports, corporate identity packages, invitations, per-
holds non-exclusive rights under a sustainable forest license
sonal stationery and high-end packaging. Our products include
to harvest wood off approximately 4.6 million acres of land
some of the most recognized and preferred papers in North
owned by the Province of Ontario. In 2005, the Terrace Bay
America, where we enjoy leading market positions in many of
mill produced approximately 375,000 metric tons of pulp,
our product categories. We sell our products primarily to
including approximately 45,000 metric tons at the No. 1 Mill.
authorized paper distributors, converters and specialty busi-
nesses. Our fi ne paper manufacturing facilities are located in
Neenah and Whiting, Wisconsin.
Our technical products business is a leading producer of
durable, saturated and coated base papers and fi lms for a variety
of end uses. We sell our technical products globally into 15 prod-
uct categories, and we focus on categories where we believe we
are a market leader or have a competitive advantage, which
include, among others, the specialty tape, label, abrasive, medical
Recent Developments
In February 2006, we suspended pulp manufacturing activities at
our Terrace Bay pulp mill as a result of a lack of wood fi ber for its
operations. The mill’s fi ber supply has been exhausted as a
result of a strike by the approximately 250 woodlands workers
employed by our forestry operations that supply wood fi ber to
the mill (See “Employee and Labor Relations”). Pulp shipments
will continue until the mill’s fi nished goods inventory is exhausted.
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
11
Most of the approximately 400 hourly and salaried workers
Technical Products Business. The technical products
employed at the mill were laid off for an indefi nite period dur-
business is a leading producer of durable, saturated and
ing the two weeks following the commencement of closure
coated base papers and fi lms for a variety of end uses, includ-
activities. A small group of hourly and salaried employees will
ing tapes, premask, abrasives, labels, medical packaging,
remain at the facility for security operations, boiler and related
decorative components and heat transfer papers. Net sales of
equipment operation and maintenance during the warm shut-
our technical products business were approximately $131 mil-
down. An extended work stoppage at the mill could have a
lion in 2005, $132 million in 2004 and $122 million in 2003.
material impact on our liquidity and results of operations.
KIMDURA®, MUNISING LP®, PREVAIL™ and NEENAH®
Products
Fine Paper Business. The fi ne paper business manufactures
and sells branded, world-class premium writing, text, cover
and specialty papers used in corporate annual reports, corpo-
rate identity packages, invitations, personal stationery and
high-end packaging. Net sales of the fi ne paper business were
approximately $222 million in 2005, $221 million in 2004 and
$210 million in 2003.
Premium writing papers are used for business and personal
stationery, corporate letterhead, corporate identity packages,
private watermarked papers, envelopes and similar end-use appli-
cations. Market leading writing papers are sold by the fi ne paper
business under the CLASSIC®, ENVIRONMENT®, NEENAH®,
ATLAS® and OLD COUNCIL TREE® trademarks, which are
denoted by a brand watermark in each sheet of writing paper.
During 2005, we successfully introduced the EAMES™ Paper
Collection which leveraged processes from both our fi ne paper
and technical product businesses to create three unique fi n-
ishes and 16 new colors inspired by the work of the designers
Charles and Ray Eames. The fi ne paper business also sells private
watermarked and other custom-manufactured writing papers.
Text and cover papers are used in applications such as
corporate annual reports, corporate identity packages, insert
advertising, direct mail, facility brochures, business cards, hang
tags, scrapbooks, and a variety of other uses where colors, tex-
tured fi nishes or heavier weight papers are desired. Our brands
in this category include CLASSIC®, CLASSIC CREST® and
are brands of our technical products business.
Products of the technical products business are typically
sold to other manufacturers as a component of a fi nished
product. The technical products business sells its products into
fi ve major market segments – tape, premask, abrasives, label
and medical packaging – and 10 other specialty segments.
Several key market segments served, including tape and abra-
sives, are global in scope.
The technical products business produces tape base sheets
from latex saturated crepe and fl at papers and sells them to
manufacturers to produce fi nished pressure sensitive products
for sale in automotive, automotive aftermarket, industrial gen-
eral purpose, transportation, manufacturing and building
construction applications. Premask paper is used as a protective
over-wrap for products during the manufacturing process and
for applying signs, labeling and other fi nished products.
The technical products business is a leading producer of
latex saturated and coated abrasive backing papers for use by
sandpaper manufacturers. The fi nished lightweight sandpaper
is sold in the automotive, automotive aftermarket, construc-
tion, metal and woodworking industries for both waterproof
and dry sanding applications.
Label and tag products are produced from saturated (latex
impregnated) base label stock and purchased synthetic (bi-axially
stretched polypropylene fi lm) base label stock. Top coatings are
applied to the base label stock to allow for high-quality variable
and digital printing. The synthetic label stock of the technical
ENVIRONMENT®. We also sell a variety of custom paper col-
products business is recognized as a high-quality, UV (ultra vio-
ors, paper fi nishes, and duplex/laminated papers.
let) stable product used for outdoor applications. The business
The fi ne paper business produces and sells other specialty
sells its label and tag stock to pressure sensitive coaters,
papers, including translucent papers, art papers and papers for
who in turn sell the coated label and tag stock to the label
optical scanning and other specialized applications, under the
printing community.
UV/ULTRA® II trademark and other brands.
12
Business Summary
The technical products business’s medical packaging
Markets and Customers
paper is a polymer impregnated base sheet that provides a
Fine Paper Business. Premium papers are used primarily
breathable sterilization barrier. When sealed together with fi lm,
for stationery and corporate identifi cation applications and
this paper becomes a medical packaging material that allows
represent approximately 3% of the uncoated free sheet mar-
sterilization from steam, ethylene oxide, or gamma radiation
ket. The stationery segment of this market is divided into
and at the same time provides unique barrier properties.
cotton and sulfi te grades. The text and cover paper segment
Decorative components papers, designed for durability
of the market, used in corporate identifi cation applications, is
and fl exibility, are made from light- and medium-weight latex
split between smooth papers and textured papers. Text papers
saturated papers. The base paper can be reinforced with syn-
have traditionally been utilized for special, high-end collateral
thetic fi ber for additional tear strength. Coatings can also be
material such as corporate brochures, annual reports and spe-
applied for printability. A variety of different base weights,
cial edition books. Cover papers are used as covers primarily
colors and textures are available for sale to coater converters,
for business cards, pocket folders, brochures and report cov-
distributors, publishers and printers for use in book covers,
ers, including annual corporate reports.
stationery and fancy packaging.
The fi ne paper business sells its products through our
Heat transfer papers are used to transfer an image from
sales and marketing organizations primarily in three channels:
paper to tee shirts, hats, coffee mugs, and other surfaces. The
authorized paper distributors, converters and direct sales to
technical products business produces and applies a proprietary
specialty businesses. Distributor sales account for more than
imaging coating to its heat transfer papers for use in digital
80% of our customer base in the fi ne paper business, including
printing applications. Heat transfer papers are primarily sold
distributor-owned paper stores. There is also a small but grow-
through large retail outlets and through master distributors
ing sales channel in offi ce supply catalogs and business copy
who then offer small quantity options and services to the large
center stores, primarily to distributors in North America. Less
number of customers in the supply channel.
than 5% of the sales of our fi ne paper business in 2005 were
The technical products business also produces and sells
exported to international distributors in Europe, South Africa,
several other specialty papers including furniture backer, clean
Asia and Australia.
room paper and release paper.
Sales to the fi ne paper business’s two largest customers
Pulp Business. Our pulp mills produce virgin northern
(both of which are distributors) represented approximately
bleached softwood and hardwood kraft pulp and various
35% of its total sales in 2005. We have limited our distribution
blends of each for sale to paper mill customers located primar-
agreements to improve our ability to control the marketing of
ily in North America and Europe. In 2005, more than 75% of our
our products. Although a complete loss of either of these cus-
mills’ output was consumed by Kimberly-Clark and approxi-
tomers would cause a temporary decline in the business’s sales
mately 5% was used by our fi ne paper and technical products
volume, the decline could be partially offset by expanding
businesses. The Pictou pulp mill’s major products are Pictou
sales to existing distributors, and further offset over a several
HARMONY® Softwood (northern bleached softwood kraft pulp)
month period with the addition of new distributors.
and Pictou Hardwood (northern bleached hardwood kraft pulp).
Technical Products Business. The technical products
The Terrace Bay mill’s major product is a fully bleached northern
business relies on a direct sales team and marketing organiza-
softwood kraft pulp used to manufacture publication, printing
tion to sell its products into 15 separate market segments in
and writing, specialty papers and tissue grades. The Terrace
the U.S. and more than 35 export markets. Such segments,
Bay operation also sells softwood and hardwood logs from its
broadly defi ned as polymer impregnated and synthetic paper,
timberlands operations to sawmills and veneer manufacturers
include papers used as components in the following applica-
who, in turn, sell wood chips and sawdust to Terrace Bay.
tions: saturated label, clean room papers, release papers,
Net sales of our pulp business were approximately $401
abrasives, masking tape, decal premask, heat transfer, medical
million in 2005, $449 million in 2004 and $405 million in 2003.
packaging, decorative components, durable printing papers,
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
13
furniture components, washable tag and industrial compo-
In 2005, Terrace Bay and Pictou produced about 335,000
nents. Our technical products business is recognized as a
metric tons and 225,000 metric tons, respectively, of northern
leading specialty paper manufacturer in the following market
bleached softwood kraft pulp. In 2005, approximately 80% of
segments: furniture components, washable tag, decal premask,
our pulp mills’ northern bleached softwood kraft pulp produc-
saturated label, clean room, saturated release paper, rein-
tion was transferred to Kimberly-Clark. Our pulp mills have
forced medical packaging and saturated abrasive backings.
historically transferred more than 90% of their output of north-
Several traditional products (abrasives, tapes, labels) are
ern bleached softwood kraft pulp to Kimberly-Clark.
used in markets that are directly affected by economic busi-
In 2005, worldwide demand for northern bleached
ness cycles. Other market segments such as heat transfer
hardwood market pulp was estimated to be 18.1 million metric
papers used in small/home offi ce and consumer applications
tons of which an estimated 1.7 million metric tons were northern
are relatively stable. Price competition is common in most of
bleached hardwood kraft pulp produced in Canada. In 2005, the
the segments served by the technical products business and
United States consumed approximately 0.6 million metric tons of
has increased due to a trend of using fi lm and other lower cost
Canadian northern bleached hardwood kraft pulp, followed by
substrates instead of paper in some applications.
Asia at 0.54 and Europe at 0.25 million metric tons.
The technical products business relies on a team of direct
In 2005, both our Terrace Bay and Pictou mills produced
sales representatives and customer service representatives to
about 40,000 metric tons of northern bleached hardwood kraft
market and sell approximately 95% of its sales volume directly to
pulp. In 2005, our pulp mills transferred approximately 50,000
customers and converters. Less than 5% of the sales of the tech-
metric tons of northern bleached hardwood kraft pulp to
nical products business are sold through industrial distributors.
Kimberly-Clark and less than 10,000 metric tons to our fi ne
The technical products business has over 500 customers
paper business. The balance of the pulp mills’ output of north-
worldwide. The distribution of sales in 2005 was approximately
ern bleached hardwood kraft pulp was sold to paper mills in
70% in North America, 15% in Europe and 15% in Latin
the northeastern and midwestern United States.
America and Asia. Customers typically convert and transform
Northern bleached softwood kraft pulp and northern
base papers and fi lm into fi nished rolls and sheets by adding
bleached hardwood kraft pulp are commodity products whose
adhesives, coatings and fi nishes. Such transformed product is
prices are subject to substantial increase or decrease depending
then sold to end-users.
on production capacity and customer demand. Northern
Several of the smaller customers of the technical products
bleached hardwood kraft pulp is subject to increasing competi-
business are large multinational corporations with multiple
tion, primarily from lower-priced South American eucalyptus pulp
manufacturing locations. The primary global customers of the
and excess capacity of northern bleached hardwood kraft pulp.
technical products business are 3M Company, Perfecseal,
Historically, our pulp mills have transferred their pulp
Avery Dennison Corporation and Saint-Gobain Group.
directly to Kimberly-Clark and used brokers for sales to external
Pulp Business. Northern bleached softwood kraft pulp is
customers. We will utilize our internal sales team to generate
used by paper mills to manufacture tissue and printing and writ-
sales to external customers.
ing paper. In 2005, worldwide demand for northern bleached
For the years ended December 31, 2005, 2004 and 2003,
softwood kraft market pulp (which excludes pulp produced for
we had pulp sales to Kimberly-Clark of $309 million, $351 mil-
internal consumption by integrated pulp manufacturers) was
lion and $305 million, respectively. No single customer, other
estimated to be 13.0 million metric tons, of which about
than Kimberly-Clark, accounted for more than 10% of our net
6.6 million metric tons were produced in Canada. Western
sales in those years.
Europe consumed an estimated 5.7 million metric tons of
Geographic Information. For geographic information
northern bleached softwood kraft pulp in 2005, followed by
regarding the revenue and assets attributable to each of the prod-
the United States at 2.9 million metric tons and China at 1.6
uct segments discussed above see Note 13 of the Consolidated
million metric tons.
and Combined Financial Statements appearing hereafter.
14
Selected Financial Data
The following table sets forth our selected historical fi nancial and
liabilities of Kimberly-Clark’s fi ne paper and technical products
other data. You should read the information set forth below in
businesses in the United States and its Canadian pulp business
conjunction with “Management’s Discussion and Analysis of
and give effect to allocations of expenses from Kimberly-Clark.
Financial Condition and Results of Operations” and our historical
For a description of these allocations, see Note 1 of the notes to
consolidated and combined fi nancial statements and the notes
our audited historical consolidated and combined fi nancial state-
to those consolidated and combined fi nancial statements
ments included elsewhere in this Annual Report. The historical
included elsewhere in this Annual Report. The statement of oper-
fi nancial and other data for periods prior to November 30, 2004
ations data for each of the years ended December 31, 2005,
will not be indicative of our future performance, nor do they
2004 and 2003 and the balance sheet data as of December 31,
refl ect what our fi nancial position and results of operations would
2005 and 2004 set forth below are derived from our audited his-
have been had we operated as a separate, independent com-
torical consolidated and combined fi nancial statements included
pany during the periods presented.
elsewhere in this Annual Report. The statement of operations
Prior to the Spin-Off, all of the operations of our pulp and
data for the years ended December 31, 2002 and 2001 and the
paper business were included in the consolidated income tax
balance sheet data as of December 31, 2003 and 2002 set
returns of Kimberly-Clark. Under the tax-sharing agreement,
forth below are derived from our audited historical combined
Kimberly-Clark will indemnify us for all income tax liabilities
fi nancial statements not included in this Annual Report. The bal-
and retain rights to all tax refunds relating to operations in the
ance sheet data as of December 31, 2001 set forth below are
consolidated income tax returns for periods through the date
derived from our unaudited historical combined fi nancial state-
of the Spin-Off. Accordingly, the combined balance sheets for
ments not included in this Annual Report.
2003, 2002 and 2001 do not include current or prior period
The consolidated and combined fi nancial statements refl ect
income tax receivables or payables related to our operations,
the consolidated operations of Neenah and its subsidiaries as a
which were fi led on a consolidated basis with Kimberly-Clark.
separate, stand-alone entity subsequent to November 30, 2004.
The income tax provisions were determined as if our business
The historical fi nancial and other data for periods through
were a separate taxpayer.
November 30, 2004 have been prepared on a combined basis
from Kimberly-Clark’s consolidated fi nancial statements using
the historical results of operations and bases of the assets and
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
15
(dollars in millions except per share)
Year Ended December 31,
Consolidated and Combined Statement of Operations Data (a)
Net sales
Cost of products sold
Gross profi t
Selling, general and administrative expenses
Restructuring costs and asset impairment loss (b) (c)
Other (income) and expense – net
Operating income (loss)
Interest expense
Income (loss) before income taxes
Provision (benefi t) for income taxes
Net income (loss)
Earnings (loss) per basic share (d)
Earnings (loss) per diluted share (d)
Other Financial Data (c)
Net cash fl ow provided by (used in):
Operating activities
Investment activities
Financing activities
Capital expenditures
Ratio of earnings to fi xed charges (e)
2005
2004
2003
2002
2001
$ 733.4
655.9
77.5
53.2
59.8
(4.7)
(30.8)
18.2
(49.0)
(19.3)
$ (29.7)
$ (2.02)
$ (2.02)
$ 22.8
(25.8)
(3.6)
25.7
(e)
$ 772.1
647.9
124.2
45.8
112.8
5.5
(39.9)
1.4
(41.3)
(14.9)
$ (26.4)
$ (1.79)
$ (1.79)
$ 76.0
(19.1)
(37.8)
19.1
(e)
$ 710.3
602.4
107.9
34.6
–
10.0
63.3
–
63.3
24.4
$ 38.9
$ 2.64
$ 2.64
$ 73.6
(23.6)
(50.0)
24.4
71.3x
$ 702.0
570.4
131.6
33.6
–
(1.3)
99.3
–
99.3
37.0
$ 62.3
$ 4.23
$ 4.23
$ 111.8
(16.0)
(95.8)
18.4
125.1x
$ 744.0
601.2
142.8
37.2
–
(4.5)
110.1
–
110.1
35.5
$ 74.6
$ 5.06
$ 5.06
$ 145.2
(26.1)
(119.1)
29.1
123.3x
(dollars in millions)
As of December 31,
Consolidated and Combined Balance Sheet Data (c)
Working capital
Total assets
Long-term debt
Total liabilities
Total stockholders’ and invested equity
2005
2004
2003
2002
2001
$ 123.9
537.0
226.3
371.7
165.3
$ 116.4
557.3
225.0
360.2
197.1
$ 101.7
592.0
–
158.3
433.7
$ 98.4
540.3
–
146.6
393.7
$ 114.1
602.0
–
151.9
450.1
(a)
As noted elsewhere in this Annual Report, for periods prior to the Spin-Off, our historical fi nancial results will not be indicative of our future performance, nor
do they refl ect what our fi nancial position and results of operations would have been had we operated as a separate, independent company during the peri-
ods presented.
(b) In 2005, we recorded a $53.7 million pre-tax non-cash impairment loss to write off the carrying value of the Terrace Bay facility’s tangible long-lived assets. In
addition, we recorded a $6.1 million pre-tax charge for exit costs in connection with the closure of the smaller of the two single-line pulp mills at our Terrace
Bay facility. The charge included $5.0 million for one-time termination benefi ts related to early retirement, severance and defi ned benefi t pension plans, $0.3
for other associated exit costs and $0.8 million for a non-cash asset impairment loss (See Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Asset Impairment Loss).
(c)
In 2004, we recorded a $112.8 million pre-tax, non-cash impairment loss to reduce the carrying amount of the Terrace Bay facility (See Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Asset Impairment Loss).
(d) As a result of the net loss in 2005 and 2004, 48,000 and 61,000 incremental shares, respectively, resulting from the assumed exercises of “in-the-money”
stock options and vesting of restricted stock and restricted stock units were excluded from the diluted earnings per share calculation, as the effect would
have been anti-dilutive. For 2003, 2002 and 2001, basic and diluted earnings per share were computed using the number of shares of Neenah common
stock outstanding at the Spin-Off date.
(e)
For purposes of determining the ratio of earnings to fi xed charges, earnings consist of income before income taxes (less interest) plus fi xed charges. Fixed
charges consist of interest expense, including amortization of debt issuance costs, and the estimated interest portion of rental expense. For the years ended
December 31, 2005 and 2004, our earnings were insuffi cient to cover fi xed charges by $49.0 million and $41.3 million, respectively.
16
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis presents the factors that
market pulp in Canada, where we own approximately one million
had a material effect on our results of operations during the years
acres of timberlands and have non-exclusive rights to harvest
ended December 31, 2005, 2004 and 2003. Also discussed is
our fi nancial position as of the end of those periods. You should
read this discussion in conjunction with our consolidated and
combined fi nancial statements and the notes to those consoli-
dated and combined fi nancial statements included elsewhere in
this Annual Report. This Management’s Discussion and Analysis
of Financial Condition and Results of Operations contains
wood off approximately 4.8 million acres of other timberlands.
We have three primary operations: our fi ne paper business,
our technical products business and our pulp business.
In managing this diverse pulp and paper business,
management believes that achieving and maintaining a leader-
ship position for its fi ne paper and technical products businesses,
forward-looking statements. See “Forward-Looking Statements”
responding effectively to competitive challenges, employing
for a discussion of the uncertainties, risks and assumptions
capital optimally, controlling costs, and managing currency and
associated with these statements.
I N T R O D U C T I O N
commodity risks are important to the long-term success of the
business. The pulp cycle and general economic conditions also
impact our results. In this discussion and analysis, we will refer
to these factors.
This Management’s Discussion and Analysis of Financial
Market Leadership. Achieving and maintaining leadership
Condition and Results of Operations is intended to provide
for our fi ne paper and technical products businesses have
investors with an understanding of the historical performance
been an important part of our past performance. We have long
of our business, its fi nancial condition and its prospects. The
been recognized as a leading manufacturer of world class pre-
results of operations of our business after the Spin-Off are and
mium writing, text and cover papers used in corporate annual
will continue to be signifi cantly different from the results of
reports, corporate identity packages, invitations, personal
operations of our business prior to the Spin-Off. This difference
stationery and high-end packaging. Maintaining our leadership
results from, among other things, the prices at which we sell
is important to our results, particularly in light of the competi-
pulp to Kimberly-Clark after the Spin-Off, which are signifi -
tive environment in which we operate.
cantly different from the prices refl ected in transfers of pulp to
Competitive Environment. Our past results have been and
other Kimberly-Clark operations prior to the Spin-Off; interest
future prospects will be signifi cantly affected by the competi-
expense of new long-term debt and incremental selling; gen-
tive environment in which we operate. We experience intense
eral and administrative expenses related primarily to reduced
competition for sales of our principal products in our major
economies of scale as a result of operating on a stand-alone
markets. Our paper business competes directly with well-
basis. We will discuss and provide our analysis of the following:
known competitors, some of which are larger and more
(cid:129) Overview of Business;
(cid:129) Business Segments;
diversifi ed in most of our markets. In our pulp business, we
have experienced, and will continue to experience, intense
(cid:129) Separation from Kimberly-Clark;
competition from suppliers of softwood pulps and southern
(cid:129) Results of Operations and Related Information;
hemisphere suppliers of hardwood pulps. We expect our
(cid:129) Liquidity and Capital Resources; and
competitors to continue to be aggressive in the future.
(cid:129) Critical Accounting Policies and Use of Estimates.
Cost Control. To improve and maintain our competitive
O V E R V I E W O F B U S I N E S S
position, we must control our raw material, manufacturing, dis-
tribution and other costs. A signifi cant share of our investments
in capital improvements are intended to achieve cost savings
We are a leading North American producer of premium fi ne
and improvements in productivity.
papers and technical products. We also produce bleached kraft
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
17
Cyclical Nature of the Pulp Industry. Revenues in the
Foreign Currency and Commodity Risk. Sales of pulp by
pulp industry and our pulp business tend to be cyclical, with
our Canadian manufacturing facilities are invoiced in U.S. dol-
periods of shortage and rapidly rising market prices leading
lars in accordance with industry practice; therefore, no currency
to increased production and increased industry investment
effects are presented in our analysis of the change in net sales
until supply exceeds demand. Those periods are then typically
for our pulp operations. However, we are exposed to changes
followed by periods of reduced market prices and excess
in foreign currency exchange rates because most of the costs
and idled capacity until the cycle is repeated.
relating to our pulp business are incurred in Canadian dollars.
General Economic Conditions. The markets for all of our
These risks could have a material impact on our results of
products are affected to a signifi cant degree by general economic
operations if not effectively managed. The following charts
conditions. Downturns and improvements in the U.S. economy
illustrate changes in currency and pulp prices that occurred
or in our export markets affect the demand for our products.
during the periods covered by this Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Pulp Price History: Average Quarterly Prices U.S. dollars per metric ton
$700
$600
$500
$400
Northern bleached softwood kraft pulp
Northern bleached hardwood kraft pulp
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2002
2003
2004
2005
Exchange Rate History: Average Quarterly Exchange Rates value of Canadian dollar versus U.S. dollar
$0.85
$0.80
$0.75
$0.70
$0.65
$0.60
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2002
2003
2004
2005
18
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
B U S I N E S S S E G M E N T S
operation. Terrace Bay holds non-exclusive rights under a
Our fi ne paper business is a leading producer of premium writing,
text, cover and specialty papers used in corporate annual reports,
corporate identity packages, invitations, personal stationery and
high-end packaging. Our products include some of the most rec-
ognized and preferred papers in North America, where we enjoy
leading market positions in many of our product categories. We
sell our products primarily to authorized paper distributors, con-
verters and specialty businesses, with sales to distributors and
distributor owned paper stores accounting for approximately 85%
of sales. We believe that our fi ne paper manufacturing facilities
located in Neenah and Whiting, Wisconsin are among the
most effi cient in their markets and make us one of the lowest
cost producers.
Our technical products business is a leading producer of
durable, saturated and coated base papers and fi lms for a vari-
ety of end uses. We sell our technical products globally into 15
product categories, and we focus on nine categories where we
believe we are a market leader, which include, among others,
the tape, label, abrasive, medical packaging and heat transfer
technical products markets. We are also a global supplier of
materials used to create customer specifi c components for
furniture, book covers and original equipment manufacturers’
products. Our customers are located in more than 35 countries
and include 3M Company, Perfecseal, Avery Dennison
Corporation and Saint-Gobain Group. Our technical products
manufacturing facility is located in Munising, Michigan.
Our pulp business consists of two mills located in Pictou,
Nova Scotia and Terrace Bay, Ontario, together with related
timberlands. The Pictou mill is comprised of a single-line pulp
facility which produces primarily softwood pulp, as well as
timberlands encompassing approximately one million acres
of owned and 200,000 acres of licensed or managed land in
Nova Scotia. In 2005, the Pictou mill produced approximately
255,000 metric tons of bleached kraft pulp. In May, 2005, we
closed the smaller of the two single-line pulp facilities at Terrace
Bay (the “No. 1 Mill”). Following the closure of the No.1 Mill,
the Terrace Bay mill is comprised of a single-line pulp facility
which produces primarily softwood pulp and a timberlands
sustainable forest license to harvest wood off approximately
4.6 million acres of land owned by the Province of Ontario. In
2005, the Terrace Bay mill produced approximately 375,000
metric tons of pulp, including approximately 45,000 metric
tons produced by the No. 1 Mill.
S E PA R AT I O N F R O M K I M B E R LY- C L A R K
Neenah Paper, Inc. was incorporated under the laws of the State
of Delaware in April 2004, as a wholly owned subsidiary of
Kimberly-Clark. We had no material assets or activities until
the transfer to us by Kimberly-Clark of the businesses described
in this Annual Report, which occurred immediately prior to the
Spin-Off. Prior to the Spin-Off, Kimberly-Clark had conducted
such businesses through various divisions and subsidiaries.
Following the Spin-Off, we became an independent public
company, and Kimberly-Clark has no continuing ownership
interest in us.
Prior to the Spin-Off, we entered into several agreements
with Kimberly-Clark in connection with the separation of our
business from Kimberly-Clark’s businesses. These agreements
included a distribution agreement, a pulp supply agreement,
a corporate services agreement, an employee matters agree-
ment and a tax-sharing agreement. The distribution agreement
provided for the transfer to us of the assets relating to
Kimberly-Clark’s Canadian pulp business and its fi ne paper
and technical products business in the United States, and the
assumption by us of the liabilities relating to these businesses.
The pulp supply agreement supports our transition from a cap-
tive pulp producer to a market supplier of pulp. The corporate
services agreement facilitates an orderly transition from being
a part of a larger company to a stand-alone company. The
employee matters agreement allocates responsibilities relating
to employee compensation and benefi t plans and programs
and other related matters. The tax-sharing agreement governs
tax obligations arising out of our business both before and after
the Spin-Off.
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
19
R E S U LT S O F O P E R AT I O N S A N D
Canadian laws, if the work stoppage continues through May
R E L AT E D I N F O R M AT I O N
2006, we will be required to make payments to laid-off workers
In this section, we discuss and analyze our net sales, income
before interest and income taxes (which we refer to as “operat-
ing income” in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations) and other infor-
mation relevant to an understanding of our results of operations
for the years ended December 31, 2005, 2004 and 2003.
Executive Summary:
of approximately $8 million in the second quarter of 2006.
Additional payments of from one to three times that amount
could be required dependent upon, among other things, the
duration of the work stoppage. We will continue to incur certain
operating costs for the mill during the work stoppage, including
costs for a limited number of hourly and salaried employees
who will remain at the facility for security operations, boiler and
related equipment operation and maintenance during the win-
Our operating results were adversely affected by asset
ter months. In addition, pulp shipments will continue until the
impairment losses in each of 2005 and 2004 and restructuring
mill’s fi nished goods inventory is exhausted.
activities in 2005 at our Terrace Bay facility. In May 2005, we
Pursuant to the terms of our pulp supply agreement
closed the No. 1 Mill at the Terrace Bay facility following a
with Kimberly-Clark, during the continuance of a “Terrace Bay
strategic review of the facility’s operations which indicated
Force Majeure Event,” or a different “Force Majeure Event”
that the No. 1 Mill’s small scale and high cost did not justify
(as defi ned in the Pulp Supply Agreement), we are generally
the investment necessary to make it competitive in the global
excused, without penalty, from our obligations to supply and
pulp market. In December 2004 and 2005, we recorded pre-
Kimberly-Clark is excused, also without penalty, from its com-
tax non-cash asset impairment losses of $112.8 million and
mitments to purchase pulp under the pulp supply agreement
$53.7 million, respectively, that in total reduced the carrying
during the continuance, and to the extent of, such event. A
value of the Terrace Bay facility’s long-lived assets to zero (see
strike, labor disturbance and other events beyond our control
Note 12 of Notes to Consolidated and Combined Financial
are considered force majeure events under the pulp supply
Statements included elsewhere in this Annual Report).
agreement if such events ultimately prevent us from supplying
Excluding the impact of the restructuring activities
contractually agreed upon quantities of pulp to Kimberly-Clark.
and asset impairment losses, operating results in 2005 were
We have suspended substantially all capital expenditures
unfavorable to the prior year primarily due to the continued
at Terrace Bay for the duration of the work stoppage. We have
strength of the Canadian dollar relative to the U.S. dollar,
planned capital expenditures for 2006 of approximately $30 to
increased discounts on pulp sales to Kimberly-Clark pursuant
$35 million. The timing and amount of actual capital expendi-
to our pulp purchase agreement, costs related to our opera-
tures in 2006 will depend on, among other things, the outcome
tion as a stand-alone company and higher raw material and
of negotiations with the labor union (See “Management’s
energy costs, partially offset by higher selling prices.
Discussion and Analysis of Financial Condition and Results
In February 2006, we suspended pulp manufacturing activi-
of Operations – Liquidity and Capital Resources”).
ties at our Terrace Bay pulp mill as a result of a lack of wood fi ber
Availability under our revolving credit facility fl uctuates
for its operations. The mill’s fi ber supply has been exhausted as a
over time depending on the value of our inventory, receivables
result of a strike by the approximately 250 unionized woodlands
and various capital assets. An extended work stoppage could
workers employed by our forestry operations that supply wood
result in a decrease in the value of the assets securing our credit
fi ber to the mill.
facility and a reduction in availability under the revolving credit
Most of the approximately 400 hourly and salaried workers
facility. An extended work stoppage at the mill could have a
employed at the mill were laid off for an indefi nite period dur-
material impact on our liquidity and results of operations.
ing the two weeks following the commencement of closure
activities. Pursuant to the terms of our labor agreements and
20
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Analysis of Net Sales – Years Ended
December 31, 2005, 2004 and 2003
Our fi ne paper business net sales increased $1.5 million,
or 0.7%, primarily due to higher average net selling prices,
The following table presents net sales by segment, expressed as
partially offset by lower product mix. Favorable pricing was pri-
a percentage of total net sales before intersegment eliminations:
marily due to realization of a price increase for most branded
Year Ended December 31,
2005
2004
2003
Fine Paper
Technical Products
Pulp
Consolidated
30 %
17
53
28 %
16
56
100 %
100 %
29 %
16
55
100 %
The following table presents our net sales by segment for
the periods indicated:
(in millions)
Year Ended December 31,
Fine Paper
Technical Products
Pulp
Intersegment sales
Consolidated
Commentary:
Year 2005 versus 2004
2005
2004
2003
$ 222.3
130.6
400.7
(20.2)
$ 733.4
$ 220.8
132.3
448.6
(29.6)
$ 772.1
$ 210.4
121.6
405.1
(26.8)
$ 710.3
Change in Net Sales Versus Prior Year
Change Due To
Total
Change
Net
Volume
Product
Price
Mix
$ 1.5
$
(0.2)
$ 3.3
$
(1.6)
(1.7)
(47.9)
3.7
(52.0)
2.1
(16.5)
(7.5)
20.6
9.4
$ (38.7)
–
$ (48.5)
–
$ (11.1)
9.4
$ 20.9
Fine Paper
Technical
Products
Pulp (a)
Intersegment
sales
Consolidated
(a)
Sales of pulp by our Canadian manufacturing facilities are invoiced in
U.S. dollars in accordance with industry practice; therefore, no currency
effects are presented in our analysis of the change in net sales for our
pulp operations.
Consolidated net sales decreased $38.7 million, or 5.0%,
in 2005 compared with 2004 primarily due to lower pulp vol-
ume and higher discounts on pulp shipments to Kimberly-Clark,
products implemented in December 2004 and an additional
increase for selected branded products in the third quarter of
2005. Product mix decreased as a result of shipping a higher
proportion of lower-priced grades. Unit volumes were essentially
unchanged from the prior year while the uncoated free sheet
market decreased approximately 3% in 2005.
Our technical products business net sales decreased $1.7
million, or 1.3%, as 3% growth in unit volumes and favorable
product pricing was more than offset by lower heat transfer ship-
ments and a product mix with a higher proportion of relatively
lower priced premask and tape volume. The volume improve-
ment refl ected strong growth in sales of premask and tape
products partially offset by reduced label shipments. Favorable
average net selling prices were due to realization of a price
increase implemented in the fourth quarter of 2004 and a sur-
charge implemented in the third quarter of 2005 to recover
increased costs for oil-based latex. Sales and mix were adversely
affected by reduced heat transfer shipments related to our termi-
nation of a distribution agreement and the shift in sales volumes.
Our pulp business net sales decreased $47.9 million, or
10.7%, primarily due to lower shipment volumes and higher
discounts on pulp shipments to Kimberly-Clark, partially offset
by a shift in product mix to a higher proportion of softwood
pulp shipments. Pulp shipment volume was 11% lower than
the prior year due to the closure of the No. 1 Mill and, to a
lesser extent, extended downtime at the Terrace Bay mill to
replenish wood chip inventories. Average net selling prices
were unfavorable to the prior year as marginally higher aver-
age market prices for softwood pulp were more than offset
by higher discounts (approximately $27.4 million) on shipments
to Kimberly-Clark pursuant to our pulp supply agreement.
Product mix increased from the prior year due to a higher pro-
portion of softwood shipments and increased sales of logs to
partially offset by improvement in pulp product mix.
sawmills and veneer manufacturers.
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
21
Year 2004 versus 2003
Change in Net Sales Versus Prior Year
Change Due To
subsequent to the Spin-Off (in December 2004) were reduced
by $12.9 million or 3.2% of total 2003 pulp revenues, refl ecting
the one-time effect of revised sales terms in the new pulp sup-
ply agreement with Kimberly-Clark which transfers title at
Total
Change
Net
Volume
Product
Price
Mix
product delivery rather than shipment date.
$ 10.4
$ 15.2
$
(1.1)
$
(3.7)
The following table sets forth line items from our consoli-
Fine Paper
Technical
Products
Pulp (a)
Intersegment
sales
Consolidated
10.7
43.5
8.5
(9.2)
(0.5)
53.1
2.7
(0.4)
(2.8)
$ 61.8
–
$ 14.5
–
$ 51.5
(2.8)
(4.2)
$
(a)
Sales of pulp by our Canadian manufacturing facilities are invoiced in
U.S. dollars in accordance with industry practice; therefore, no currency
effects are presented in our analysis of the change in net sales for our
pulp operations.
Consolidated net sales increased $61.8 million, or 8.7%,
in 2004 compared with 2003 primarily due to higher average
market prices for softwood and hardwood pulp and unit volume
growth in the fi ne paper and technical products businesses.
Our fi ne paper business net sales increased $10.4 million,
or 4.9%, primarily due to 7% growth in unit volumes. Unit
volumes increased due to a strengthening U.S. economy that
boosted market demand for premium papers, new product
introductions and higher promotional spending. Product mix
was unfavorable as sales volumes shifted to a higher propor-
tion of lower-priced grades.
Our technical products business net sales increased
$10.7 million, or 8.8%, primarily due to 7% growth in unit vol-
umes. The volume growth refl ected increased market demand
as a result of an improving global economy and new product
introductions. Product mix was favorable as sales volumes
shifted to a higher proportion of higher priced grades.
Our pulp business net sales increased $43.5 million, or
10.7%, primarily due to higher softwood pulp prices. Average
market prices for softwood and hardwood pulp increased 15%
and 2%, respectively. The higher prices in 2004, particularly for
softwood pulp, refl ected increased global demand. Net sales
dated and combined statements of operations as a percentage
of net sales for the periods indicated and is intended to pro-
vide a perspective of trends in our historical results:
Year Ended December 31,
2005
2004
2003
Net sales
Cost of products sold
Gross profi t
Selling, general and
administrative expenses
Restructuring costs and
asset impairment loss
Other (income) and
expense – net
Operating income (loss)
Interest expense
Income (loss) before
income taxes
Provision (benefi t) for
income taxes
Net income (loss)
100.0 %
89.4
10.6
100.0 %
83.9
16.1
100.0 %
84.8
15.2
7.3
5.9
8.2
14.6
(0.7)
(4.2)
2.5
0.7
(5.1)
0.2
(6.7)
(5.3)
4.9
–
1.4
8.9
–
8.9
(2.6)
(4.1)%
(1.9)
(3.4)%
3.4
5.5 %
Analysis of Operating Income (Loss) – Years Ended
December 31, 2005, 2004 and 2003
The following table sets forth our pre-tax income (loss) by seg-
ment for the periods indicated:
(in millions)
Year Ended December 31,
Fine Paper
Technical Products
Pulp
Unallocated corporate
costs
Total
2005
2004
2003
$ 58.4
10.5
(93.2)
$ 67.0
21.9
(120.5)
$ 63.2
16.6
(16.5)
(6.5)
$ (30.8)
(8.3)
$ (39.9)
–
$ 63.3
22
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Commentary:
Year 2005 versus 2004
Fine Paper
Technical Products
Pulp (a)
Unallocated corporate costs
Consolidated
Change in Operating Income Versus Prior Year
Total
Change
$
(8.6)
(11.4)
27.3
1.8
$ 9.1
Volume
$
$
(0.1)
0.8
(7.0)
–
(6.3)
Net
Price (b)
$
(0.2)
(1.5)
(12.2)
–
$ (13.9)
Change Due To
Material
and
Energy
Costs (c) Currency
Other (d)
$
(4.3)
(6.4)
(11.5)
–
$ (22.2)
$
–
–
(15.9)
–
$ (15.9)
$
(4.0)
(4.3)
73.9
1.8
$ 67.4
(a)
The operating loss for our pulp business in 2005 and 2004 includes restructuring costs and asset impairment losses of $59.8 million and $112.8 million,
respectively.
(b) Includes price changes, net of pulp discounts and changes in product mix.
(c)
Includes price changes for raw materials and energy.
(d) Includes restructuring costs, annual maintenance-related downtime spending, other materials, manufacturing labor, distribution and selling, general and
administrative expenses.
Our operating loss of $30.8 million in 2005 decreased
branded product price increases implemented in December
$9.1 million versus the prior year period. Excluding Restructuring
2004 and the third quarter of 2005.
costs and asset impairment losses related to our Terrace
Operating income for our technical products business
Bay mill of $59.8 million and $112.8 million, in 2005 and
decreased $11.4 million due to higher manufacturing costs,
2004 respectively, operating results in the current year were
costs associated with our operation as a stand-alone company
$43.9 million unfavorable to 2004. Higher raw material and
and lower average net selling prices, partially offset by favor-
energy costs, unfavorable currency translation effects related to
able volume. The increase in manufacturing costs was primarily
the strengthening of the Canadian dollar compared to the U.S.
due to higher costs for oil-based latex and increased utility
dollar, higher discounts on pulp sales to Kimberly-Clark and
costs related to higher coal prices. Net price was unfavorable
costs associated with our operation as a stand-alone company
as higher average prices were more than offset by lower heat
were the primary drivers of the unfavorable comparison.
transfer shipments and the shift in product mix to selling a
Operating income for our fi ne paper business decreased
higher proportion of relatively lower priced premask and tape
$8.6 million primarily due to increased manufacturing and
products. Volume was favorable to the prior year primarily due
distribution costs and costs associated with our operation as
to the strong growth in premask sales.
a stand-alone company. The increase in manufacturing costs
Our pulp business incurred an operating loss of $93.2 million
was primarily due to higher raw material prices including an
in 2005, which was $27.3 million favorable to the prior year.
11% increase in average hardwood pulp prices, gas prices that
Operating results for our pulp business were affected by
increased more than 20% from the prior year and increased
Restructuring costs and asset impairment losses related to
costs for chemicals and dyes. The increase in distribution costs
our Terrace Bay mill of $59.8 million and $112.8 million in 2005
was primarily due to an increase in fuel prices. In addition, net
and 2004, respectively. Excluding the effect of Restructuring
price was unfavorable to the prior year as an increase in the
activities in both years, our pulp business recorded an operat-
proportion of unbranded product sales more than offset
ing loss of $33.4 million in 2005 which was $25.7 unfavorable
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
23
23
to the prior year. The unfavorable comparison to the prior
benefi ts of approximately $20.6 million and $40.8 million
year was primarily due to higher discounts on pulp shipments
were recorded in 2005 and 2004, respectively, as a result of the
to Kimberly-Clark pursuant to our pulp supply agreement,
impairment losses, resulting in net after-tax charges of approxi-
unfavorable currency translation effects, increased fi ber and
mately $33.1 million and $72.0 million. The cumulative effect
energy-related manufacturing costs and costs associated with
of the impairment charges was to reduce the carrying value
our operation as a stand-alone company. These unfavorable
of the Terrace Bay facilities tangible long-lived assets to zero.
factors were partially offset by lower maintenance spending,
In May 2005, the No.1 Mill was closed and early retire-
costs savings related to the closure of the No. 1 Mill and
ment and severance packages were offered to approximately
higher average market prices for softwood pulp. The decrease
150 employees. During 2005, we recorded approximately
in maintenance spending was primarily due to reducing sched-
$5.0 million for one-time termination benefi ts related to early
uled downtime at Terrace Bay.
retirement, severance and defi ned benefi t pension plans in
Restructuring Costs and Asset Impairment Losses
In December 2005 and 2004, we recorded pre-tax, non-cash
impairment losses of approximately $53.7 million and $112.8
million, respectively, to reduce the carrying amount of the
Terrace Bay facility to its estimated fair value. Deferred tax
Year 2004 versus 2003
connection with the closure of the mill and approximately $0.3
million for other exit costs. In addition, we recorded a pre-tax,
non-cash asset impairment loss of approximately $0.8 million
to write off the carrying value of the long-lived assets of the
No. 1 Mill.
Change in Operating Income Versus Prior Year
Change Due To
Total
Change
$ 3.8
5.3
(104.0)
(8.3)
$ (103.2)
Volume
$ 5.6
2.0
0.6
–
$ 8.2
Net
Price (b)
$
(6.7)
(1.5)
52.1
–
$ 43.9
Material
and
Energy
Costs (c)
$
$
(2.0)
(2.0)
(5.6)
–
(9.6)
Currency
Other (d)
$
–
1.5
(29.4)
–
$ (27.9)
$ 6.9
5.3
(121.7)
(8.3)
$ (117.8)
Fine Paper
Technical Products
Pulp (a)
Unallocated corporate costs
Consolidated
(a)
The operating loss for our pulp business in 2004 includes restructuring costs and asset impairment loss of $112.8 million.
(b)
Includes price changes, net of pulp discounts and changes in product mix.
(c)
Includes price changes for raw materials and energy.
(d) Includes restructuring costs, annual maintenance-related downtime spending, other materials, manufacturing labor, distribution and selling, general
and administrative expenses.
Overall operating income decreased $103.2 million, and we
programs. These gains were partially offset by higher costs for
incurred an operating loss of $39.9 million in 2004 primarily due
fi ber, energy and other materials and a less profi table product
to the impairment loss for Terrace Bay ($112.8 million pre-tax).
mix. In addition, results in 2003 included charges of $1.1 mil-
Our fi ne paper business operating income increased $3.8
lion for a workforce reduction and $1.3 million for a write-off
million primarily due to the higher sales volumes and improved
of a paper machine.
manufacturing operations and the benefi ts of cost-reduction
24
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Our technical products business operating income increased
none of Kimberly-Clark’s cash, cash equivalents, debt or inter-
$5.3 million, or 31.9% due to improved manufacturing opera-
est income or expense was allocated to the Pulp and Paper
tions, higher sales volumes and favorable foreign currency effects.
Business for periods prior to the Spin-Off.
The improved manufacturing costs were due to increased produc-
The effective tax benefi t rate was 39.4% and 36.1% for the
tivity, reduced waste and the benefi ts of cost reduction programs.
years 2005 and 2004, respectively. The increase in the benefi t
Our pulp business operating loss increased $104.0 million
rate between 2005 and 2004 was primarily due to an increase
in 2004 and we incurred an operating loss of $120.5 million pri-
in the proportion of non-taxable income items to the pre-tax
marily due to the impairment loss for Terrace Bay. Higher selling
loss and generating a higher proportion of the pre-tax losses
prices of 15% and 2% for softwood and hardwood pulp, respec-
in tax jurisdictions with relatively higher marginal tax rates. The
tively, were partially offset by unfavorable currency effects and
effective tax rate in 2003 was 38.5%. The change in the effec-
increased manufacturing costs. The higher costs resulted from
tive benefi t and tax rates in 2004 and 2003, respectively, was
a 7% decrease in the average exchange rate for the U.S. dollar
primarily due to lower state and local income taxes (see Note 4
relative to the Canadian dollar as well as higher fi ber and main-
of Notes to Consolidated and Combined Financial Statements
tenance costs.
included elsewhere in this Annual Report for a reconciliation of
We incurred $8.3 million of corporate expenses in 2004,
the annual effective tax rates).
including approximately $4.5 million of one-time start-up costs
relating to our becoming an independent public company and
other post-Spin-Off costs to operate as a stand-alone com-
pany. There were no comparable costs in 2003.
Additional Statement of Operations Commentary:
Selling, general and administrative expenses were $53.2 million,
$45.8 million and $34.6 million for the years ended 2005, 2004
and 2003. We incurred $29.6 million of expenses in 2005 related
to our operation as a stand-alone company following the Spin-
Off, of which $22.2 million was refl ected in selling, general and
administrative expenses. The increase in selling, general and
administrative expenses in 2004 versus 2003 is primarily due to
$4.5 million of one-time start-up costs related to our becoming
an independent public company and other post Spin-Off costs
to operate as a stand-alone company.
In 2005, we incurred $18.2 million of net interest expense
(including $2.0 million of amortization of debt issuance costs)
primarily on our $225 million of senior notes. In 2004, we
incurred $1.4 million of net interest expense on our $225 mil-
lion of senior notes for the month of December (following the
Spin-Off). Kimberly-Clark used a centralized approach to cash
management and the fi nancing of its operations. As a result,
L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S
(in millions)
Year Ended December 31,
Net cash fl ow provided
by (used in):
Operating activities
Investment activities
Financing activities
Capital expenditures
2005
2004
2003
$ 22.8
(25.8)
(3.6)
25.7
$ 76.0
(19.1)
(37.8)
19.1
$ 73.6
(23.6)
(50.0)
24.4
Operating Cash Flow Commentary
Cash provided by operations of $22.8 million for the year
ended December 31, 2005 decreased $53.2 million from
2004. This decrease was the result of lower earnings (excluding
the non-cash effects of the Terrace Bay impairment loss and
related deferred tax benefi ts and depreciation) and higher
income tax payments, partially offset by a decrease in our
investment in operating working capital. The decrease in
operating working capital was primarily due to lower accounts
receivable, partially offset by a decrease in accounts payable
related to the timing of payments following the Spin-Off. Cash
provided by operations of $76.0 million for the year ended
December 31, 2004 increased $2.4 million from 2003. This
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
25
increase was the result of increased earnings (excluding
Financing Commentary:
the non-cash effects of the Terrace Bay impairment loss and
Our liquidity requirements are being provided by cash gener-
related deferred tax benefi ts and depreciation), partially offset
ated from operations and short- and long-term borrowings.
by a smaller decrease in operating working capital than 2003,
Prior to the Spin-Off, our fi nancing (net of cash transfers to
as discussed below.
Kimberly-Clark) was provided by Kimberly-Clark.
During 2005, higher discounts on pulp shipments to
In 2005, we fi nanced the acquisition of our ERP software
Kimberly-Clark and lower pulp volume resulted in lower
($3.6 million) through third-party fi nancing payable over
accounts receivable and reduced our investment in operating
three years. We fi nanced our current year insurance premiums
working capital (excluding the effects of a stronger Canadian
($2.3 million) through the issuance of a short-term note.
dollar relative to the U.S. dollar). Our reduced investment in
Payments under the agreements for our ERP software and
operating working capital due to lower accounts receivable
insurance premiums in the current year were $1.1 million
was partially offset by an increase of $7.6 million in inventories
and $2.3 million, respectively.
(excluding the effects of a stronger Canadian dollar relative
We paid cash dividends of $0.40 per share or $5.9 million
to the U.S. dollar). We built pulp fi nished good inventories
in 2005.
to comply with contractually required safety stock levels as
Management believes that the ability to generate cash from
we transition to being a supplier of market pulp. During 2004,
operations and our borrowing capacity under our revolving credit
higher average selling prices for pulp resulted in signifi cantly
facility are adequate to fund working capital, capital spending
higher accounts receivable and increased our investment in
and other cash needs for the next 12 months. Our ability to gen-
working capital at December 31, 2004 to $118.4 million.
erate adequate cash from operations beyond 2006, however, will
Investing Commentary:
Capital spending in 2005 of $25.7 million was $6.6 million
higher than the comparable prior year period. The increased
spending was primarily for the acquisition and installation of
enterprise resource planning (“ERP”) software and leasehold
improvements at our new research and development center.
We anticipate capital expenditures for 2006 will be
approximately $30 to $35 million. The timing and amount of
capital expenditures will depend on the outcome of negotia-
tions with regulatory authorities and labor unions, the results
of engineering studies and the remediation methods ultimately
selected. These capital expenditures are not expected to have
a material adverse effect on our fi nancial condition, results of
operations or liquidity.
depend on, among other things, our ability to successfully imple-
ment our business strategies and cost cutting initiatives, and to
manage the impact of changes in pulp prices and currencies. We
can give no assurance that we will be able to successfully imple-
ment those strategies and cost cutting initiatives, or successfully
manage our pulp pricing and currency exposures.
Our ability to issue additional stock will be constrained
because such an issuance of additional stock may cause the
Spin-Off to be taxable to Kimberly-Clark under Section 355(e)
of the Internal Revenue Code, and under the tax-sharing
agreement, we would be required to indemnify Kimberly-Clark
against that tax.
26
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Contractual Obligations
The following table presents the total contractual obligations for which cash fl ows are fi xed or determinable as of December 31, 2005:
(in millions)
2006
Unconditional purchase obligations $ 26.9
Long-term debt payments
1.2
Interest payments on long-term debt 16.7
Other postretirement benefi t
obligations
Operating leases
Open purchase orders
Contributions to pension trusts
Total contractual obligations
1.8
2.6
20.2
12.2
$ 81.6
2007
$ 26.7
1.3
16.7
2.0
1.6
–
–
$ 48.3
2008
2009
2010
$ 26.8
–
16.6
2.3
1.4
–
–
$ 47.1
$ 26.7
–
16.6
2.6
1.3
–
–
$ 47.2
$ 9.6
–
16.6
3.0
1.2
–
–
$ 30.4
Beyond
2010
$ 28.9
225.0
66.4
20.6
7.3
–
–
$ 348.2
Total
$ 145.6
227.5
149.6
32.3
15.4
20.2
12.2
$ 602.8
The unconditional purchase obligations are for the purchase
ations and require signifi cant judgments with regard to estimates
of raw materials, primarily wood chips. Although we are pri-
used. These critical judgments relate to the reported amounts of
marily liable for payments on the above operating leases and
assets and liabilities, disclosure of contingent assets and liabilities,
unconditional purchase obligations, based on historic operat-
and the reported amounts of revenue and expenses.
ing performance and forecasted future cash fl ows, we believe
The following summary provides further information
our exposure to losses, if any, under these arrangements is
about the critical accounting policies and should be read in
not material.
conjunction with the notes to the Consolidated and Combined
The open purchase orders displayed in the table represent
Financial Statements. We believe that the consistent applica-
amounts we anticipate will become payable within the next year
tion of our policies provides readers of Neenah’s fi nancial
for goods and services that we have negotiated for delivery.
statements with useful and reliable information about our
The above table includes future payments that we will
operating results and fi nancial condition.
make for postretirement benefi ts other than pensions. Those
We have discussed the application of these critical account-
amounts are estimated using actuarial assumptions, including
ing policies with our Board of Directors and Audit Committee.
expected future service, to project the future obligations.
C R I T I C A L A C C O U N T I N G P O L I C I E S A N D
U S E O F E S T I M AT E S
The preparation of fi nancial statements in conformity with
accounting principles generally accepted in the United States
requires estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the fi nancial state-
ments and the reported amounts of net sales and expenses
during the reporting period. Actual results could differ from these
estimates, and changes in these estimates are recorded when
known. The critical accounting policies used in the preparation of
the consolidated fi nancial statements are those that are important
both to the presentation of fi nancial condition and results of oper-
Revenue Recognition
We recognize sales revenue when all of the following have
occurred: (1) delivery has occurred, (2) persuasive evidence of an
agreement exists, (3) pricing is fi xed or determinable, and (4) col-
lection is reasonably assured. Delivery is not considered to have
occurred until the customer takes title and assumes the risks and
rewards of ownership. The timing of revenue recognition is largely
dependent on shipping terms. Revenue is recorded at the time of
shipment for terms designated free on board (“FOB”) shipping
point. With the exception of pulp sales to Kimberly-Clark and
certain other customers, our sales terms are FOB shipping point.
For pulp sales to Kimberly-Clark and other customers that are
designated FOB destination, revenue is recognized when the
product is delivered to the customer’s delivery site. Sales are
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
27
reported net of allowable discounts and estimated returns.
hedges are adjusted to fair value through other income. Fair value
Reserves for cash discounts, trade allowances, credit losses and
estimates are based on relevant market information, including
sales returns are estimated using historical experience.
current market rates and prices. The fair value estimates for deriv-
Deferred Income Tax Assets
As of December 31, 2005, we have recorded deferred income
tax assets totaling $29.3 million related to temporary differ-
ences, and we have established no valuation allowances against
these deferred income tax assets. As of December 31, 2004,
our net deferred income tax assets were $1.2 million. In deter-
mining the need for valuation allowances, we consider many
factors, including specifi c taxing jurisdictions, sources of taxable
ative instruments are provided to us by banks known to be
high-volume participants in these markets. We document relation-
ships between hedging instruments and hedged items, and link
derivatives designated as cash fl ow hedges to specifi c forecasted
transactions. We also assess and document, both at the hedge’s
inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting
changes in cash fl ows associated with the hedged items.
income, income tax strategies and forecasted earnings for
Pension Benefi ts
the entities in each jurisdiction. A valuation allowance would
In connection with the Spin-Off, and as set forth in the employee
be recognized if, based on the weight of available evidence,
matters agreement, obligations for Kimberly-Clark’s defi ned ben-
we conclude that it is more likely than not that some portion
efi t pension plans and defi ned contribution retirement plans
or all of the deferred income tax assets will not be realized.
related to active and former employees of the Canadian pulp
Prior to the Spin-Off, our operations were included in the
operations and active employees of the U.S. paper operations
consolidated income tax returns of Kimberly-Clark. Kimberly-
became our responsibility. Kimberly-Clark retained the obligations
Clark will indemnify us for all income tax liabilities and retain
for former employees of the U.S. paper operations. A share of
rights to all tax refunds for periods through the date of the
pension assets related to active employees of the U.S. paper
Spin-Off. Accordingly, the consolidated and combined balance
operations were transferred from Kimberly-Clark’s pension plan to
sheet for periods prior to the Spin-Off does not include current
a new pension plan established by us. The new plan provides
or prior period income tax receivables or payables related to
substantially similar benefi ts and credits our employees for service
our operations, which were fi led on a consolidated basis with
earned with Kimberly-Clark. With respect to Canadian employ-
Kimberly-Clark. For all periods, the income tax provisions have
ees, we assumed the existing pension assets and obligations
been determined as if we were a separate taxpayer.
of the related Kimberly-Clark pension plans.
Financial Instruments
Cash and cash equivalents include all cash balances and highly
liquid investments with an initial maturity of three months or
less. We place our temporary cash investments with high credit
quality fi nancial institutions.
We use derivative instruments to manage exposures to
foreign currency and commodity price risks. We principally use
foreign currency forward and pulp future contracts to hedge
against these exposures. Derivative instruments are recorded on
the balance sheet as assets or liabilities and measured at fair mar-
ket value. Derivative instruments that have been designated as
hedges of anticipated future cash fl ows are marked-to-market
through accumulated other comprehensive income (balance
sheet adjustments) until such time as the related forecasted trans-
actions affect earnings. Derivatives that are not designated as
Our funding policy for qualifi ed defi ned benefi t plans is
to contribute assets to fully fund the accumulated benefi t obli-
gation. Subject to regulatory and tax deductibility limits, any
funding shortfall is to be eliminated over a reasonable number
of years. Nonqualifi ed plans providing pension benefi ts in excess
of limitations imposed by the taxing authorities are not funded.
Consolidated and combined pension expense for defi ned
benefi t pension plans was $13.2 million, $10.7 million and $13.4
million for the years ended December 31, 2005, 2004 and 2003,
respectively. In addition, in May 2005 we recognized a pre-tax
charge of $1.6 million for a partial settlement of certain pension
obligations related to the closure of the No. 1 Mill. Pension
expense is calculated based upon a number of actuarial assump-
tions applied to each of the defi ned benefi t plans. The
28
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
weighted-average expected long-term rate of return on pension
factors, including reduced pension liabilities arising from higher
fund assets used to calculate pension expense in percents was
discount rates used to calculate our pension obligations or
8.41, 8.50 and 8.50 for the years ended December 31, 2005,
(iii) other actuarial gains, including whether such accumulated
2004 and 2003, respectively. The expected long-term rate of
actuarial losses at each measurement date exceed the “corri-
return on pension fund assets held by our (and prior to the Spin-
dor” determined under Statement of Accounting Standards
Off, Kimberly-Clark) pension trusts was determined based on
(“SFAS”) 87, Employers’ Accounting for Pensions.
several factors, including input from pension investment consul-
The discount (or settlement) rate that is utilized for
tants and projected long-term returns of broad equity and bond
determining the present value of future pension obligations
indices. Also considered were the plans’ historical 10-year and 15-
generally is based in the U.S. on the yield reported for the
year compounded annual returns. We anticipate that on average
long-term AA-rated corporate bond indexes, converted to an
the investment managers for our U.S. and Canadian plans will
equivalent one-year compound basis. The weighted-average
generate annual long-term rates of return of at least 8.0% and
discount rate in percents was 5.20 and 5.75 at December 31,
8.5%, respectively. Our expected long-term rate of return on the
2005 and 2004, respectively.
assets in the plans is based on an asset allocation assumption of
Our consolidated pension expense of $13.2 million in
about 60% with equity managers, with expected long-term rates
2005 is based on an expected weighted-average long-term
of return of approximately 10%, and 40% with fi xed income man-
rate of return on assets of 8.41%, a weighted-average discount
agers, with an expected long-term rate of return of about 6%. The
rate of 5.75% and various other assumptions. Pension expense
actual asset allocation is regularly reviewed and periodically rebal-
beyond 2005 will depend on future investment performance,
anced to the targeted allocation when considered appropriate.
our contributions to the pension trusts, changes in discount
Also, when deemed appropriate, hedging strategies are executed
rates and various other factors related to the covered employees
using index options and futures to limit the downside exposure
in the plans.
of certain investments by trading off upside potential above an
The fair value of the assets in our defi ned benefi t plans
acceptable level. Such hedging strategies were executed in 2005,
increased to approximately $375 million at December 31, 2005
2004 and 2003. We evaluate our investment strategy and long-
from about $329 million at December 31, 2004, primarily due
term rate of return on pension asset assumptions at least annually.
to investment gains, plan contributions and currency exchange
Pension expense is estimated based on the fair value of
effects exceeding payments for pension benefi ts. Lower dis-
assets rather than a calculated value that averages gains and
count rates caused the projected benefi t obligations of the
losses (“Calculated Value”) over a period of years. Investment
defi ned benefi t plans to exceed the fair value of plan assets by
gains or losses represent the difference between the expected
approximately $75 million at December 31, 2005, compared
return, calculated using the fair value of the assets, and the
with approximately $58 million at December 31, 2004. The accu-
actual return, based on the fair value of assets. The variance
mulated benefi t obligation exceeded the fair value of plan assets
between the actual and the expected gains and losses on pen-
by about $5.4 million at the end of 2005. At the end of 2004, the
sion assets is recognized in pension expense more rapidly than
fair value of plan assets exceeded the accumulated benefi t obli-
it would be if a Calculated Value for plan assets was used. As
gation by about $6.5 million. Contributions to pension trusts in
of December 31, 2005, our plans had cumulative unrecognized
2005 were $20.3 million (including $1.6 million for special termi-
investment losses and other actuarial losses of approximately
nation benefi ts related to the closure of the No. 1 Mill) compared
$147.8 million. These unrecognized net losses may increase
with $16.6 million in 2004. In addition, we made direct benefi t
our future pension expense if not offset by (i) actual investment
payments of approximately $0.1 million in each of 2005, 2004
returns that exceed the assumed investment returns, (ii) other
and 2003 for unfunded supplemental retirement benefi ts.
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
29
Impairment
between the fair value of the asset and its carrying amount. We
Property, plant and equipment are tested for impairment in
determine fair value based on an expected present value tech-
accordance with SFAS 144, Accounting for the Impairment or
nique in which multiple cash fl ow scenarios that refl ect a range
Disposal of Long-Lived Assets, whenever events or changes in
of possible outcomes and a risk free rate of interest are used to
circumstances indicate that the carrying amounts of such long-
estimate fair value.
lived assets may not be recoverable from future net pre-tax cash
The estimates and assumptions used in the impairment
fl ows. Impairment testing requires signifi cant management judg-
analysis are consistent with the business plans and estimates
ment including estimating the future success of product lines,
we use to manage our business operations. The use of differ-
future sales volumes, growth rates for selling prices and costs,
ent assumptions would increase or decrease the estimated fair
alternative uses for the assets and estimated proceeds from
value of the asset and would increase or decrease the impair-
disposal of the assets. Impairment testing is conducted at the
ment charge. Actual outcomes may differ from the estimates.
lowest level where cash fl ows can be measured and are indepen-
See “Results of Operations and Related Information –
dent of cash fl ows of other assets. An asset impairment would
Analysis of Operating Income (Loss) – Asset Impairment Loss”
be indicated if the sum of the expected future net pre-tax cash
for a summary of our asset impairment test on the Terrace Bay
fl ows from the use of the asset (undiscounted and without inter-
pulp facility, which resulted in net pre-tax impairment losses of
est charges) is less than the carrying amount of the asset. An
approximately $54.5 million and $112.8 million in 2005 and
impairment loss would be measured based on the difference
2004, respectively.
30
Quantitative and Qualitative
Disclosures About Market Risk
As a multinational enterprise, we are exposed to risks such as
calculated by multiplying our net monetary asset or liability
changes in commodity prices, foreign currency exchange rates,
position by a 10% change in the exchange rate of the Canadian
interest rates and environmental regulation. A variety of practices
dollar versus the U.S. dollar. The results of this sensitivity test
are employed to manage these risks, including operating and
are presented in the following paragraph.
fi nancing activities and, where deemed appropriate, the use of
As of December 31, 2005, a 10% unfavorable change in
derivative instruments. Derivative instruments are used only for
the exchange rate of the U.S. dollar against the Canadian dol-
risk management purposes and not for speculation or trading.
lar involving balance sheet transactional exposure would have
Credit risk with respect to the counterparties is considered
resulted in a net pre-tax loss of approximately $4 million.
minimal in view of the fi nancial strength of the counterparties.
Finally, the translation of the balance sheets of our Canadian
Presented below is a description of our most signifi cant risks.
operations from Canadian dollars into U.S. dollars also is sensitive
Foreign Currency Risk
Our results of operations and cash fl ows are affected by
changes in the Canadian dollar exchange rate relative to the
U.S. dollar. Exchange rate fl uctuations can have a material
impact on our fi nancial results because substantially all of our
pulp mills’ expenses are incurred in Canadian dollars and our
pulp revenues are denominated in U.S. dollars. In 2005, a
hypothetical $0.01 increase in the Canadian dollar relative
to the U.S. dollar, would have decreased our income before
income taxes by approximately $5 million, excluding additional
currency re-measurement losses.
We use hedging arrangements to reduce our exposure to
exchange rate fl uctuations, although these arrangements could
result in us incurring higher costs than we would incur without the
arrangements. In 2005, we entered into a series of foreign cur-
rency forward exchange contracts, designated as cash fl ow
hedges, of U.S. dollar denominated pulp sales. At December 31,
to changes in the exchange rate of the U.S. dollar against the
Canadian dollar. Consequently, we performed a sensitivity test to
determine if changes in the exchange rate would have a sig-
nifi cant effect on the translation of the balance sheets of our
Canadian operations into U.S. dollars. These translation gains
or losses are recorded as unrealized translation adjustments, or
UTA, within stockholders’ equity. The hypothetical change in
UTA is calculated by multiplying the net assets of our Canadian
operations by a 10% change in the U.S.$/Canadian$ exchange
rate. The results of this sensitivity test are presented in the fol-
lowing paragraph.
As of December 31, 2005, a 10% unfavorable change
in the exchange rate of the U.S. dollar against the Canadian
dollar would have decreased our stockholders’ equity by
approximately $18 million. The hypothetical increase in UTA
is based on the difference between the December 31, 2005
exchange rate and the assumed exchange rate.
2005 we had foreign currency contracts outstanding in a notional
Commodity Risk
amount of $213 million Canadian dollars. The fair value of the
Pulp. Our results of operations, cash fl ows and fi nancial position
contracts was $9.3 million U.S. dollars and was refl ected on the
are sensitive to the selling prices of wood pulp. Wood pulp
balance sheet as an asset. The weighted average exchange
is a commodity for which there are multiple other suppliers.
rate for the foreign currency contracts at December 31, 2005
Typically, commodities businesses compete primarily on the
was $0.820 U.S. dollars per Canadian dollar and the contracts
basis of price and availability. The revenues from producing a
extend through May 2007.
commodity tend to be cyclical, with periods of shortage and
Currency transactional exposures are also sensitive to
rapidly rising prices leading to increased production and
changes in the exchange rate of the U.S. dollar against the
increased industry investment until supply exceeds demand.
Canadian dollar. We performed a sensitivity test to quantify
Those periods are then typically followed by periods of reduced
the effects that possible changes in the exchange rate of the
prices and excess and idled capacity until the cycle is repeated.
U.S. dollar would have on our pre-tax income based on the
The markets and profi tability of pulp have been, and are
transactional exposure at December 31, 2005. The effect is
likely to continue to be, cyclical. Because our pulp business com-
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
31
petes primarily on the basis of price and availability, the fi nancial
we also obtain fi ber harvested from timberland areas licensed to
success of our pulp mills depends on their ability to produce
others by these governments. There can be no assurance that
pulp at a competitive cost. Accordingly, we must continuously
the amount of fi ber that we are allowed to harvest from these
and effectively manage our cost structure and production
licensed areas will not be decreased, or that our licenses will
capacity to be able to respond effectively to business cycles
continue to be renewed or extended by the governments on
in the pulp industry.
acceptable terms. In each of the areas where our Canadian pulp
We use hedging arrangements to reduce our exposure
mills are located, there is increasing competition for wood fi ber
to pulp price fl uctuations, although these arrangements could
from various other users. Changes in governmental practices and
result in us incurring higher costs than we would incur without
policies as they apply to us and to others from whom we obtain
the arrangements. In 2005, we entered into a series of pulp
fi ber may result in less fi ber being available, increased costs to
futures contracts to hedge fl uctuations in pulp prices through
obtain the fi ber and additional expense in meeting forestry stan-
December 2006. At December 31, 2005, we had future con-
dards. These results could have a material adverse effect upon
tracts for 144,000 metric tons of pulp with a notional amount
our fi nancial position, liquidity and results of operations.
of approximately $91 million. The fair value of the contracts
In 2005, two suppliers provided over 70% of the wood chips
was $1.2 million and was refl ected on the balance sheet as a
used by the Pictou mill and three suppliers provided approxi-
liability. The weighted average price for the pulp futures con-
mately 50% of the wood chips used by the Terrace Bay mill. While
tracts at December 31, 2005 was $631 per metric ton.
we believe that alternative sources of critical supplies, such as
Based on 2005 shipment volume, a $10 per metric ton
wood chips, would be available, disruption of our primary sources
unfavorable change in the market price for northern bleached
could create a temporary, adverse effect on product shipments.
softwood kraft pulp (excluding the impact of volume and
Also, an interruption in supply of single source specialty grade
other discounts) would reduce pre-tax income by approxi-
latex to our technical products business could disrupt and eventu-
mately $6 million.
ally cause a shutdown of production of certain technical products.
Raw Materials. We purchase a substantial portion of the
We generate substantially all of our electrical energy at the
raw materials and energy necessary to produce our products
Munising and Pictou mills and approximately one-half of the elec-
on the open market, and, as a result, the price and other
trical energy at the Terrace Bay mill. Availability of energy is not
terms of those purchases are subject to change based on fac-
expected to be a problem in the foreseeable future, but the pur-
tors such as worldwide supply and demand and government
chase price of such energy can and likely will fl uctuate signifi cantly
regulation. We do not have signifi cant infl uence over our raw
based on fl uctuations in demand and other factors. In addition,
material or energy prices and generally do not possess enough
we have forward purchase contracts for natural gas through June
power to pass increases in those prices along to purchasers of
2006. At December 31, 2005, we had future contracts for 373,000
our products, unless those increases coincide with increased
MMBTUs of natural gas with a notional amount of approximately
demand for the product. Therefore, an increase in raw material
$3 million. The weighted average price for the natural gas futures
or energy prices could occur at the same time that prices for
contracts at December 31, 2005 was $9.01 per MMBTU. In
our products are decreasing and have an adverse effect on
January 2006, we entered into an agreement to purchase 350
our results of operations, fi nancial position and cash fl ows.
million tons per year of “Green Steam” to supply energy at
We obtain most of the wood fi ber required for our Terrace
our Neenah paper mill. We anticipate that the agreement will
Bay pulp mill and a portion of the wood fi ber required for the
substantially reduce the mill’s annual consumption of natural gas.
Pictou pulp mill from timberland areas licensed by the Ontario
There is no assurance that we will be able to obtain electricity or
and Nova Scotia provincial governments, respectively. These
natural gas purchases on favorable terms in the future.
governments have granted us non-exclusive licenses for
Interest Rate Risk. We are exposed to interest rate risk on
substantial timberland areas from which we obtain fi ber, and
our fi xed rate long-term debt and our variable rate bank debt.
32
Quantitative and Qualitative
Disclosures About Market Risk
Our objective is to manage the impact of interest rate changes
Environmental Regulation. Our manufacturing operations
on earnings and cash fl ows from our variable rate debt and
are subject to extensive regulation by U.S. and Canadian authori-
on the market value of our fi xed rate debt. At December 31,
ties. The company has made signifi cant capital expenditures to
2005, we had $226.3 million of fi xed rate long-term debt out-
comply with environmental laws, rules and regulations. Due to
standing and no variable rate borrowings outstanding under
changes in environmental laws and regulations, the application
our revolving credit agreement. We are exposed to fl uctua-
of such regulations and changes in environmental control technol-
tions in the fair value of our fi xed rate long-term debt resulting
ogy, we are not able to predict with certainty the amount of future
from changes in market interest rates, but not to fl uctuations
capital spending to be incurred for environmental purposes.
in our earnings or cash fl ows. At December 31, 2005, the fair
Taking these uncertainties into account, we anticipate expendi-
market value of our long-term debt was $200.3 million based
tures for major environmental projects during the period 2006
upon the quoted market price of the senior notes. A 100 basis
through 2010 will include approximately $20 million to reconfi g-
point increase in interest rates would not affect our annual
ure the effl uent treatment system at the Pictou mill and between
interest expense because at December 31, 2005, we had no
$15 million and $25 million for equipment and engineering to
variable rate borrowings outstanding.
abate total sulphur emissions and for other environmental matters
We could, in the future, reduce our exposure to interest
at the Pictou and Terrace Bay mills, to remove and replace trans-
rate fl uctuations by entering into interest rate hedging arrange-
formers containing polychlorinated biphenyls at the Terrace Bay
ments, although those arrangements could result in us incurring
mill, and to improve stream crossings in the timberlands licensed
higher costs than we would incur without the arrangements.
from the Province of Ontario.
We believe that these risks can be managed and will not
have a material adverse effect on our business or our consoli-
dated fi nancial position, results of operations or cash fl ows.
Report of Management on Internal Control
33
Management of the Company is responsible for establishing and maintaining effective internal control over fi nancial reporting as
defi ned in Rules 13a -15(f) under the Securities Exchange Act of 1934. The Company’s internal control over fi nancial reporting is
designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair
presentation of published fi nancial statements.
Because of its inherent limitations, internal control over fi nancial reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to fi nancial statement prepara-
tion and presentation.
Management assessed the effectiveness of the Company’s internal control over fi nancial reporting as of December 31, 2005. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of December 31,
2005, the Company’s internal control over fi nancial reporting is effective based on those criteria.
Management’s assessment of the effectiveness of internal control over fi nancial reporting as of December 31, 2005, has been
audited by Deloitte & Touche, LLP, the independent registered public accounting fi rm who also audited the Company’s consolidated
fi nancial statements. Deloitte & Touche’s attestation report on management’s assessment of the Company’s internal control over
fi nancial reporting is included herein.
Neenah Paper, Inc.
March 13, 2006
34
Report of Independent Registered
Public Accounting Firm
T O T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E R S O F N E E N A H PA PE R , I N C . :
We have audited the accompanying consolidated balance sheets of Neenah Paper, Inc. and subsidiaries (the “Company”) as of
December 31, 2005 and 2004, and the related consolidated and combined statements of operations, cash fl ows and changes in
stockholders’ and invested equity, of the Company and the Pulp and Paper Business of Kimberly-Clark Corporation (“Pulp and Paper
Business”) for each of the three years in the period ended December 31, 2005. These consolidated and combined fi nancial state-
ments are the responsibility of the Company’s management. Our responsibility is to express an opinion on these fi nancial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards
Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the fi nancial state-
ments are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the fi nancial statements, assessing the accounting principles used and signifi cant estimates made by management, as
well as evaluating the overall fi nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined fi nancial statements were prepared to present the results of operations and cash fl ows of the
Pulp and Paper Business, which was spun off to Kimberly-Clark Corporation’s stockholders as described in Note 1 to the consolidated
and combined fi nancial statements, and may not necessarily be indicative of the conditions that would have existed or the results of
operations and cash fl ows if the Pulp and Paper Business had operated as a stand-alone company during the periods presented.
In our opinion, such consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of the
Company at December 31, 2005 and 2004, and the results of operations and cash fl ows of the Company and the Pulp and Paper
Business for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the effectiveness of the Company’s internal control over fi nancial reporting as of December 31, 2005, based on the criteria estab-
lished in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 13, 2006 expressed an unqualifi ed opinion on management’s assessment of the effectiveness of the
Company’s internal control over fi nancial reporting and an unqualifi ed opinion on the effectiveness of the Company’s internal
control over fi nancial reporting.
Atlanta, Georgia
March 13, 2006
Report of Independent Registered
Public Accounting Firm
35
T O T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E R S O F N E E N A H PA PE R , I N C . :
We have audited management’s assessment, included in the accompanying “Management’s Report on Internal Control Over Financial
Reporting,” that Neenah Paper, Inc. and subsidiaries (the “Company”) maintained effective internal control over fi nancial reporting
as of December 31, 2005, based on criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal
control over fi nancial reporting and for its assessment of the effectiveness of internal control over fi nancial reporting. Our responsibility
is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over
fi nancial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over fi nancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over fi nancial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over fi nancial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal fi nancial offi cers, or persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of fi nancial reporting and the prepara-
tion of fi nancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over fi nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reason-
able detail, accurately and fairly refl ect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of fi nancial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authori-
zations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the fi nancial statements.
Because of the inherent limitations of internal control over fi nancial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over fi nancial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the poli-
cies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over fi nancial reporting as of
December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over fi nancial reporting as of December 31, 2005, based on the criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated fi nancial statements as of and for the year ended December 31, 2005 of the Company and our report dated March 13,
2006 expressed an unqualifi ed opinion on those fi nancial statements.
Atlanta, Georgia
March 13, 2006
36
Consolidated and Combined
Statements of Operations
(in millions, except share and per share data)
Year Ended December 31,
Net Sales
Cost of products sold
Gross Profi t
Selling, general and administrative expenses
Restructuring costs and asset impairment loss (Note 12)
Other (income) and expense – net
Operating Income (Loss)
Interest expense
Income (Loss) Before Income Taxes
Provision (benefi t) for income taxes
Net Income (Loss)
Earnings (Loss) Per Common Share
Basic
Diluted
Weighted-average Common Shares Outstanding (in thousands)
Basic
Diluted
See Notes to Consolidated and Combined Financial Statements
2005
733.4
655.9
77.5
53.2
59.8
(4.7)
(30.8)
18.2
(49.0)
(19.3)
(29.7)
(2.02)
(2.02)
$
$
$
$
2004
772.1
647.9
124.2
45.8
112.8
5.5
(39.9)
1.4
(41.3)
(14.9)
(26.4)
(1.79)
(1.79)
$
$
$
$
2003
710.3
602.4
107.9
34.6
–
10.0
63.3
–
63.3
24.4
38.9
2.64
2.64
$
$
$
$
14,739
14,739
14,738
14,738
14,738
14,738
Consolidated Balance Sheets
37
(in millions, except share data)
December 31,
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Deferred income taxes
Prepaid and other current assets
Total Current Assets
Property, Plant and Equipment – net
Timberlands
Deferred Income Taxes
Prepaid and Intangible Pension Costs
Other Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Debt payable within one year
Accounts payable
Accrued expenses
Total Current Liabilities
Long-Term Debt
Noncurrent Employee Benefi ts and Other Obligations
Total Liabilities
Commitments and Contingencies (Notes 9 and 10)
Stockholders’ Equity
Common stock, par value $0.01 – authorized: 100,000,000 shares;
issued and outstanding: 14,766,203 shares and 14,763,319 shares
Additional paid-in capital
Treasury stock, at cost (2005 – 814 shares)
Retained defi cit
Accumulated other comprehensive income
Unearned compensation on restricted stock
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See Notes to Consolidated and Combined Financial Statements
2005
2004
$
$
$
$
12.6
79.1
87.1
1.7
23.8
204.3
213.0
4.9
27.6
71.7
15.5
537.0
1.2
40.4
38.8
80.4
226.3
65.0
371.7
0.1
219.4
–
(106.3)
53.9
(1.8)
165.3
537.0
$
$
$
$
19.1
92.4
79.5
1.2
11.4
203.6
257.6
5.2
–
72.9
18.0
557.3
–
50.6
36.6
87.2
225.0
48.0
360.2
0.1
218.3
–
(70.7)
51.6
(2.2)
197.1
557.3
38
Consolidated and Combined Statements of
Changes in Stockholders’ and Invested Equity
(in millions,
shares in thousands)
Balance, December 31, 2002
Net income
Other comprehensive income
Unrealized foreign
currency translation
Minimum pension liability
Other
Net cash transfers to
Kimberly-Clark
Non-cash transfers from
Kimberly-Clark
Balance, December 31, 2003
Net income (loss)
Other comprehensive income
Unrealized foreign
currency translation
Minimum pension liability
Other
Net cash transfers to
Kimberly-Clark
Adjustment to deferred
taxes at Spin-Off
Other non-cash transfers to
Kimberly-Clark
Spin-Off payment to
Kimberly-Clark
Transfer to additional
paid-in capital
Issuance of common stock
14,738
Restricted stock awards,
less amortization
Balance, December 31, 2004
Net loss
Other comprehensive income
Unrealized foreign
currency translation
Minimum pension liability
Deferred gain on cash
fl ow hedges
Dividends declared
Vesting restricted stock units
Stock-based compensation
awards, less amortization
Other (Note 6)
25
14,763
–
–
–
–
–
3
–
–
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Kimberly-
Clark’s Net
Investment
Unearned
Accumulated
Compensation
Other
Retained Comprehensive on Restricted
Income (Loss)
Defi cit
Stock
$ 446.5
$
38.9
–
–
–
(50.0)
1.4
436.8
–
–
–
–
–
–
–
–
44.3
(70.7)
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.1
–
0.1
–
–
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.3
218.3
–
–
–
–
–
–
0.4
0.7
–
–
–
(37.6)
(12.7)
(1.8)
(213.0)
–
–
–
–
–
–
–
–
–
–
–
–
216.0
(216.0)
Comprehensive
Income
$ 38.9
59.7
(9.4)
(0.6)
$ 88.6
$ (26.4)
24.8
30.0
(0.1)
$ 28.3
$
(29.7)
10.1
(12.5)
4.7
$
(27.4)
$
(52.8)
$
–
59.7
(9.4)
(0.6)
–
–
(3.1)
–
24.8
30.0
(0.1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(70.7)
(29.7)
51.6
–
–
–
–
(5.9)
–
–
–
10.1
(12.5)
4.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2.2)
(2.2)
–
–
–
–
–
–
0.4
–
Balance, December 31, 2005
14,766
$
0.1
$ 219.4
$
See Notes to Consolidated and Combined Financial Statements
$ (106.3)
$ 53.9
$
(1.8)
Consolidated and Combined
Statements of Cash Flows
39
(in millions, except share data)
Year Ended December 31,
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
Asset impairment loss
Deferred income tax benefi t
Loss on asset dispositions
Net cash provided by (used in) changes in operating working capital
Accounts receivable
Inventories
Prepaid and other current assets
Accounts payable
Accrued expenses
Foreign currency effects on working capital
Pension and other postretirement benefi ts
Other
Net Cash Provided by Operating Activities
INVESTING ACTIVITIES
Capital expenditures
Proceeds from dispositions of property
Other
Net Cash (Used in) Investing Activities
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt
Debt issuance costs
Repayments of long-term debt
Short-term borrowings
Repayments of short term borrowings
Cash dividends paid
Spin-Off payment to Kimberly-Clark
Net transfers to Kimberly-Clark
Net Cash (Used in) Financing Activities
Effect of Exchange Rate Changes on Cash and Cash Equivalents
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
Supplemental Disclosure of Cash Flow Information:
Cash paid during year for interest
Cash paid during year for income taxes
Non-cash transfers (to) from Kimberly-Clark (Note 6)
Non-cash investing activities:
Liability for equipment acquired
See Notes to Consolidated and Combined Financial Statements
2005
2004
2003
$ (29.7)
$ (26.4)
$ 38.9
29.8
54.5
(20.1)
0.5
13.3
(7.6)
(6.9)
(10.1)
(0.2)
1.4
(2.7)
0.6
22.8
(25.7)
–
(0.1)
(25.8)
3.6
(0.2)
(1.1)
2.5
(2.5)
(5.9)
–
–
(3.6)
0.1
(6.5)
19.1
$ 12.6
$ 15.8
$ 6.6
$ 0.7
36.0
112.8
(43.6)
3.1
(14.1)
(9.4)
2.4
11.3
5.6
5.7
(7.4)
–
76.0
(19.1)
0.1
(0.1)
(19.1)
225.0
(12.2)
–
10.0
(10.0)
–
(213.0)
(37.6)
(37.8)
–
19.1
–
$ 19.1
$
$
–
–
35.3
–
(8.2)
0.1
(3.6)
(5.8)
0.5
2.1
3.6
13.5
(1.3)
(1.5)
73.6
(24.4)
1.9
(1.1)
(23.6)
–
–
–
–
–
–
–
(50.0)
(50.0)
–
–
–
–
–
–
$
$
$
$ (14.5)
$ 1.4
$
(1.7)
$
–
$
–
40
Notes to Consolidated and Combined
Financial Statements
(dollars in millions, except as noted)
1.
B A C K G R O U N D A N D B A S I S O F P R E S E N TAT I O N
Background
Neenah Paper, Inc. (“Neenah” or the “Company”), a Delaware
Business which were operated as part of Kimberly-Clark prior
to the Spin-Off. The combined fi nancial statements for periods
through November 30, 2004 have been derived from the
consolidated fi nancial statements and accounting records of
Kimberly-Clark using the historical results of operations and
corporation, was incorporated in April 2004 in contemplation of
the historical basis of assets and liabilities of the Pulp and Paper
the spin-off by Kimberly-Clark Corporation (“Kimberly-Clark”)
of its Canadian pulp business and its fi ne paper and technical
Business. Management believes the assumptions underlying the
combined fi nancial statements for these periods are reasonable.
products businesses in the United States (collectively, the “Pulp
However, the combined fi nancial statements included herein for
and Paper Business”). The Canadian pulp business consists of
the Terrace Bay, Ontario pulp mill and the Pictou, Nova Scotia
periods through November 30, 2004 are not indicative of the
Pulp and Paper Business’ results of operations, fi nancial position
pulp mill and related timberlands. The fi ne paper business is a
and cash fl ows in the future or what its results of operations,
leading producer of premium writing, text, cover and specialty
fi nancial position and cash fl ows would have been had the
papers. The technical products business is a leading producer
of durable, saturated and coated base papers and fi lms for a
Pulp and Paper Business been a stand-alone company during
the periods presented. See Note 11 for a discussion of transac-
variety of end uses.
tions with Kimberly-Clark.
On November 30, 2004, Kimberly-Clark completed the
distribution of all of the shares of Neenah’s common stock to
the stockholders of Kimberly-Clark (the “Spin-Off”). Kimberly-
Clark stockholders received a dividend of one share of
Neenah’s common stock for every 33 shares of Kimberly-Clark
common stock held. Based on a private letter ruling received
Kimberly-Clark’s investment in the Pulp and Paper Business
is shown as “Kimberly-Clark’s net investment” in the combined
fi nancial statements through November 30, 2004 because
no direct ownership relationship existed among the entities
that comprised the Pulp and Paper Business. Inter-company
accounts between the Pulp and Paper Business and Kimberly-
by Kimberly-Clark from the Internal Revenue Service, receipt of
Clark are combined with “Kimberly-Clark’s net investment.”
the Neenah shares in the Spin-Off was tax-free for U.S. federal
As of November 30, 2004, the balance refl ected in “Kimberly-
income tax purposes. As a result of the Spin-Off, Kimberly-Clark
Clark’s net investment” was transferred to “Additional paid-in
transferred all of the assets and liabilities of the Pulp and Paper
capital” of Neenah. “Retained defi cit” refl ected in the consoli-
Business to Neenah. In addition, Kimberly-Clark transferred
dated fi nancial statements represents net losses beginning
certain assets and liabilities of Kimberly-Clark sponsored
December 1, 2004.
employee benefi t plans to the Company. Following the
Spin-Off, Neenah is an independent public company and
Kimberly-Clark has no continuing stock ownership.
Basis of Consolidation and Presentation
The consolidated and combined fi nancial statements include the
fi nancial statements of the Company, and its wholly owned and
majority owned subsidiaries. All signifi cant inter-company bal-
ances and transactions have been eliminated in consolidation.
The consolidated and combined fi nancial statements refl ect
the consolidated operations of Neenah and its subsidiaries as a
separate, stand-alone entity subsequent to November 30, 2004,
combined with the historical operations of the Pulp and Paper
Basic earnings (loss) per share (“EPS”) were computed by
dividing net income (loss) by the number of weighted-average
shares of common stock outstanding during 2005 and 2004.
Diluted earnings (loss) per share were calculated to give effect
to all potentially dilutive common shares applying the “Treasury
Stock” method. Outstanding stock options, restricted shares and
restricted stock units represent the only potentially dilutive effects
on the Company’s weighted-average shares. Approximately
789,000 and 875,000 potentially dilutive options in 2005 and
2004, respectively, that were “out-of-the-money” were excluded
from the computation of dilutive common shares. In addition, as
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
41
a result of net losses in 2005 and 2004, 48,000 and 61,000
Cash Payment to Kimberly-Clark
incremental shares resulting from the assumed exercises of “in-
On November 30, 2004, the Company made a Spin-Off payment
the-money” stock options and vesting of restricted stock and
of $213 million to a Kimberly-Clark subsidiary primarily from
restricted stock units were excluded from the diluted earnings
the proceeds of a $225 million principal amount senior note
per share calculation, as the effect would have been anti-dilutive.
offering (See Note 5).
For 2003, basic and diluted EPS were computed using
the number of shares of Neenah common stock outstanding
on November 30, 2004, the date on which Neenah common
stock was distributed to the stockholders of Kimberly-Clark.
Prior to the Spin-Off, certain corporate, general and
administrative expenses of Kimberly-Clark were allocated to
the Pulp and Paper Business, using a three-factor formula com-
prised of net sales, total assets and employee head count. In
the opinion of management, such an allocation is reasonable.
However, such expenses are not indicative of, nor is it practical
or meaningful for management to estimate for all historical peri-
ods presented, the actual level of expenses that might have been
incurred had the Pulp and Paper Business been operating as an
independent company. General corporate overhead primarily
Income Taxes
For periods prior to November 30, 2004, income tax provisions
and related deferred tax assets and liabilities of the Pulp and
Paper Business were calculated on a separate tax return basis.
However, Kimberly-Clark managed its tax position for the ben-
efi t of its entire portfolio of businesses, and its tax strategies are
not necessarily refl ective of the tax strategies that the Pulp and
Paper Business would have followed as a stand-alone entity.
2.
S U M M A RY O F S I G N I F I C A N T
A C C O U N T I N G P O L I C I E S
includes information technology, accounting, cash management,
Use of Estimates
legal, tax, insurance and public relations. These expenses
The preparation of fi nancial statements in conformity with
amounted to $0.5 million and $0.7 million in 2004 and 2003,
accounting principles generally accepted in the United States
respectively. Subsequent to November 30, 2004, the Company
requires management to make estimates and assumptions that
performed these functions using its own resources or purchased
affect the reported amounts of assets and liabilities at the date of
services, some of which were provided by Kimberly-Clark pursu-
the fi nancial statements and the reported amounts of net sales
ant to a Corporate Services Agreement (See Note 11).
and expenses during the reporting periods. Actual results could
Kimberly-Clark used a centralized approach to cash man-
differ from these estimates, and changes in these estimates are
agement and the fi nancing of its operations. Cash deposits from
recorded when known. Signifi cant management judgment is
the Pulp and Paper Business prior to the Spin-Off were trans-
required in determining the accounting for, among other things,
ferred to Kimberly-Clark on a regular basis and were netted
pension and postretirement benefi ts, retained insurable risks,
against Kimberly-Clark’s net investment account. Consequently,
allowances for doubtful accounts, useful lives for depreciation and
none of Kimberly-Clark’s cash, cash equivalents or debt was allo-
amortization, future cash fl ows associated with impairment testing
cated to the Pulp and Paper Business in the combined fi nancial
for long-lived assets, income taxes and contingencies.
statements for periods through November 30, 2004.
Changes in Kimberly-Clark’s net investment represent any
funding from Kimberly-Clark for working capital and capital
expenditures after giving effect to the Pulp and Paper Business’
transfers to Kimberly-Clark of its cash fl ows from operations.
Revenue Recognition
The Company recognizes sales revenue when all of the following
have occurred: (1) delivery has occurred, (2) persuasive evidence
of an agreement exists, (3) pricing is fi xed or determinable, and
(4) collection is reasonably assured. Delivery is not considered
to have occurred until the customer takes title and assumes
the risks and rewards of ownership. The timing of revenue
42
Notes to Consolidated and Combined
Financial Statements
recognition is largely dependent on shipping terms. Revenue
instruments are provided to the Company by banks known to be
is recorded at the time of shipment for terms designated free
high-volume participants in these markets. The Company docu-
on board (“FOB”) shipping point. With the exception of pulp
ments relationships between hedging instruments and hedged
sales to Kimberly-Clark and certain other customers, the
items, and link derivatives designated as cash fl ow hedges to
Company’s sales terms are FOB shipping point. For pulp sales
specifi c forecasted transactions. The Company also assesses and
to Kimberly-Clark and other customers that are designated
documents, both at the hedge’s inception and on an ongoing
FOB destination, revenue is recognized when the product is
basis, whether the derivatives that are used in hedging transac-
delivered to the customer’s delivery site. Sales are reported net
tions are highly effective in offsetting changes in cash fl ows
of allowable discounts and estimated returns. Reserves for cash
associated with the hedged items. Any hedge ineffectiveness is
discounts, trade allowances, credit losses and sales returns are
charged to expense in the period incurred.
estimated using historical experience.
Pursuant to the pulp supply agreement, sales terms to
Kimberly-Clark subsequent to the Spin-Off were changed to
FOB destination rather than FOB shipping point. As a result,
net sales in December 2004 were reduced by $12.9 million,
refl ecting the one-time effect of this change in terms.
Inventories
U.S. inventories are valued at the lower of cost, using the Last-
In, First-Out (“LIFO”) method for fi nancial reporting purposes,
or market. Canadian inventories are valued at the lower of
cost, using either the First-In, First-Out (“FIFO”) or a weighted-
average cost method, or market. Cost includes labor, materials
Shipping and Handling Costs
and production overhead. Inventories of the Canadian pulp
All amounts billed to customers in a sales transaction related
operations include both roundwood (logs) and wood chips.
to shipping and handling are recorded as revenue, and costs
These inventories are located both at the pulp mills and at
incurred by the Company for shipping and handling are
various timberlands locations. In accordance with industry
recorded as costs of products sold.
practice, physical inventory counts utilize “scaling’ techniques
Financial Instruments
Cash and cash equivalents include all cash balances and highly
liquid investments with an initial maturity of three months or
less. The Company places its temporary cash investments with
to estimate quantities of roundwood, as well as various elec-
tronic devices to calculate wood chip inventory amounts.
These techniques historically have provided reasonable esti-
mates of such inventories.
high credit quality fi nancial institutions.
Foreign Currency
The Company uses derivative instruments to manage
Balance sheet accounts of the Canadian pulp operations are
exposures to foreign currency and commodity price risks. The
translated from Canadian dollars into U.S. dollars at period-
Company principally uses foreign currency forward and pulp
end exchange rates, and income and expense are translated at
future contracts to hedge against these exposures. Derivative
average exchange rates during the period. Translation gains or
instruments are recorded on the balance sheet as assets or lia-
losses related to net assets located in Canada are shown as a
bilities and measured at fair market value. Derivative instruments
component of accumulated other comprehensive income (loss)
that have been designated as hedges of anticipated future cash
in stockholders’ and invested equity. Gains and losses resulting
fl ows are marked-to-market through accumulated other compre-
from foreign currency transactions (transactions denominated
hensive income (balance sheet adjustments) until such time as
in a currency other than the entity’s functional currency) are
the related forecasted transactions affect earnings. Derivatives
included in Other (income) and expense-net in the consoli-
that are not designated as hedges are adjusted to fair value
dated and combined statements of operations. Net foreign
through Other (income) and expense – net. Fair value estimates
currency transaction losses for 2005, 2004 and 2003 were
are based on relevant market information, including current
$0.6 million, $5.1 million and $10.0 million, respectively.
market rates and prices. The fair value estimates for derivative
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
43
Property and Depreciation
(principally herbicide and insecticide applications) during the
Property, plant and equipment is stated at cost, less accumulated
stand establishment period also are capitalized. The Company
depreciation. Certain costs of software developed or obtained for
charges capitalized costs, excluding land, to operations at the
internal use are capitalized. When property, plant and equipment
time the wood is harvested, based on periodically determined
is sold or retired, the costs and the related accumulated deprecia-
depletion rates.
tion are removed from the accounts, and the gains or losses are
Fertilization, control of competition and seedling protection
recorded in other (income) and expense – net. For fi nancial
activities following the stand establishment period are expensed
reporting purposes, depreciation is principally computed on
as incurred. The Company pays stumpage fees for wood har-
the straight-line method over the estimated useful asset lives.
vested under long-term licenses and charges such costs to
Weighted-average useful lives are approximately 40 years for build-
operations as incurred. Costs of administration, insurance,
ings, 10 years for land improvements and 18 years for machinery
property taxes and interest are expensed as incurred.
and equipment. The cost of permanent and secondary logging
The Company distinguishes between costs associated
roads is capitalized and amortized over the estimated useful lives of
with pre-merchantable timber and costs associated with mer-
the roads, generally 20 years. The cost of tertiary roads (which are
chantable timber. Costs of merchantable timber are currently
not permanent) is expensed as incurred. For income tax purposes,
depletable, whereas costs of pre-merchantable timber are not
accelerated methods of depreciation are used.
yet depletable. Timberland depletion rates for owned timber-
Estimated useful lives are periodically reviewed and, when
lands are calculated periodically, based on capitalized costs
warranted, changes are made to them. Long-lived assets are
and the total estimated volume of timber that is mature
reviewed for impairment whenever events or changes in cir-
enough to be harvested and processed. Timber inventory
cumstances indicate that their cost may not be recoverable.
volume is determined by adding an estimate of current-year
An impairment loss would be recognized when estimated
growth to the prior-year ending balance, less the current-year
undiscounted future pre-tax cash fl ows from the use of the
harvest. The volume and growth estimates are tested periodi-
asset are less than its carrying amount.
cally using statistical sampling techniques. The depletion rate
Measurement of an impairment loss is based on the excess
calculated at the end of the year is used to calculate the cost
of the carrying amount of the asset over its fair value. Fair value
of timber harvested in the subsequent year.
is generally measured using discounted cash fl ows. See Note 12
for a discussion of asset impairment losses recorded in 2005 and
2004 related to Terrace Bay’s long-lived assets.
The costs of major rebuilds and replacements of plant
and equipment are capitalized, and the cost of maintenance
performed on manufacturing facilities, composed of labor,
Research Expense
Research and development costs are charged to expense as
incurred and are recorded in “Selling, general and administra-
tive expenses” on the Consolidated and Combined Statement
of Operations.
materials and other incremental costs, is charged to opera-
Fair Value of Financial Instruments
tions as incurred. Start-up costs for new or expanded facilities
The carrying amounts refl ected in the Consolidated Balance
are expensed as incurred.
Timberlands
Timberlands are stated at cost, less the accumulated cost of
timber previously harvested. The Company’s owned timberlands
have long-rotation and growing cycles averaging over 40 years.
Capitalized costs for these timberlands include site preparation,
initial planting and seeding. The costs of fertilization, control
of competition (brush control) and seedling protection activities
Sheets for cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to their short
maturities. The fair value of long-term debt is estimated using
current market prices for the Company’s publicly traded debt.
The fair value of the Company’s long-term debt at December 31,
2005 was $200.3 million compared to the carrying value of
$226.3 million. The fair value of the Company’s long-term debt
at December 31, 2004 was $228.4 million compared to the
carrying value of $225.0 million.
Year Ended December 31,
Unrealized foreign
currency translation
44
Notes to Consolidated and Combined
Financial Statements
Other Comprehensive Income
Comprehensive income includes, in addition to net income, unrealized gains and losses recorded directly into a separate section of
stockholders’ equity on the consolidated balance sheet. These unrealized gains and losses are referred to as other comprehensive
income items. The accumulated other comprehensive income (loss) shown on the consolidated balance sheets consists of foreign cur-
rency translation, deferred gains and (losses) on cash fl ow hedges and minimum pension liability adjustments. The foreign currency
translation adjustments are not adjusted for income taxes since they relate to indefi nite investments in the Canadian pulp operations.
The changes in the components of other comprehensive income (loss) are as follows:
Pre-tax
Amount
2005
Tax
Effect
Net
Amount
Pre-tax
Amount
2004
Tax
Effect
Net
Amount
Pre-tax
Amount
2003
Tax
Effect
Net
Amount
Minimum pension liability
(20.5)
$ 10.1
$
–
8.0
$ 10.1
$ 24.8
$
–
$
24.8
$ 59.7
$
(12.5)
46.3
(16.3)
30.0
(14.5)
Deferred gain (loss) on
cash fl ow hedges
Other comprehensive
7.4
(2.7)
4.7
(0.2)
0.1
(0.1)
(0.9)
–
5.1
0.3
$ 59.7
(9.4)
(0.6)
income (loss)
$
(3.0)
$
5.3
$
2.3
$ 70.9
$
(16.2)
$
54.7
$ 44.3
$
5.4
$ 49.7
Accumulated balances of other comprehensive income
of grant. Had compensation expense been recorded under
(loss), net of applicable income taxes are as follows:
the provisions of SFAS 123, the impact on the Company’s net
December 31,
2005
2004
income (loss) and income (loss) per share would have been:
Unrealized foreign currency translation $ 68.0
Minimum pension liability (net of
income tax benefi ts of $11.6 million
and $3.6 million, respectively)
Deferred gain on cash fl ow hedges
(net of income taxes of $2.7 million)
Accumulated other comprehensive
income (loss)
$ 53.9
4.7
(18.8)
$ 57.9
(6.3)
–
$ 51.6
Stock-Based Employee Compensation
The Company’s stock-based employee compensation plan is
described in Note 7. As permitted by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), the Company continues to use the
intrinsic value method permitted by Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees (“APB
25”), and related interpretations to account for stock option
grants. No employee compensation related to stock option
grants has been charged to earnings because the exercise prices
of all stock options granted have been equal to the market value
of the Company’s or Kimberly-Clark’s common stock at the date
(dollars in millions,
except per share)
Year Ended December 31,
2005
2004
2003 (a)
Reported net income (loss) $ (29.7)
Pro forma compensation
(2.0)
expense, net of tax
Pro forma net income (loss) $ (31.7)
Reported net income (loss)
per share:
Basic
Diluted (b)
Pro forma net income (loss)
per share:
Basic
Diluted (b)
$ (2.15)
$ (2.15)
$ (2.02)
$ (2.02)
$ (26.4)
$ 38.9
(1.2)
$ (27.6)
–
$ 38.9
$ (1.79)
$ (1.79)
$ 2.64
$ 2.64
$ (1.87)
$ (1.87)
$ 2.64
$ 2.64
(a)
The pro forma effect of stock options on net income is only presented
for periods after November 30, 2004, the date on which Neenah com-
mon stock was distributed to stockholders of Kimberly-Clark.
(b) As a result of net losses in 2005 and 2004, 48,000 and 61,000 incremen-
tal shares, respectively, resulting from the assumed exercises of stock
options and the vesting of restricted stock and restricted stock units
were excluded from the diluted earnings per share calculation, as the
effect would have been anti-dilutive.
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
45
The weighted-average fair value at date of grant for
stock options. Accordingly, adoption of SFAS 123R’s fair value
options granted during 2005 was $12.46 per share and was
method will have an effect on results of operations, although
estimated using the Black-Scholes option valuation model with
it will have no impact on overall fi nancial position. The impact
the following weighted-average assumptions (See Note 7 for a
of adoption of SFAS 123R cannot be predicted at this time
discussion of the 2005 and 2004 option grants at a weighted-
because it will depend on levels of share-based payments
average exercise price of $32.52 per share and $31.81 per
granted in the future. However, had SFAS 123R been adopted
share, respectively):
Expected life in years
Interest rate
Volatility
Dividend yield
2005
2004
5.9
3.9 %
39.0 %
1.2 %
4.7
3.6 %
36.3 %
1.2 %
In December 2004, the Federal Accounting Standards
Board (“FASB”) issued SFAS 123 (revised 2004), Share-Based
Payment (“SFAS 123R”), which revises SFAS 123, Accounting
for Stock-Based Compensation. SFAS 123R also supersedes
APB 25 and amends SFAS 95, Statement of Cash Flows (See
Accounting Standards Changes below for a discussion of other
standards). In general, the accounting required by SFAS 123R
is similar to that of SFAS 123. However, SFAS 123 gave compa-
nies a choice to either recognize the fair value of stock options
in prior periods, the effect would have approximated the SFAS
123 pro forma net income (loss) and earnings (loss) per share
disclosures shown. At December 31, 2005, unearned compen-
sation for the fair value of outstanding employee stock options
was approximately $4.8 million and will be recognized as com-
pensation expense in future periods as stock options vest.
SFAS 123R also requires the benefi ts of tax deductions in
excess of recognized compensation cost to be reported as a
fi nancing cash fl ow, rather than as an operating cash fl ow as
currently required, thereby reducing net operating cash fl ows
and increasing net fi nancing cash fl ows in periods after adop-
tion. Such amounts cannot be estimated for future periods
because they depend on, among other things, when employ-
ees will exercise the stock options and the market price of the
Company’s stock at the time of exercise.
in their income statements or to disclose the pro forma income
Accounting Standards Changes
statement effect of the fair value of stock options in the
In November 2004, SFAS 151, Inventory Costs – an amendment
notes to the fi nancial statements. SFAS 123R eliminates that
of ARB No. 43, Chapter 4 (“SFAS 151”), was issued. SFAS
choice and requires the fair value of all share-based payments
151 clarifi es the accounting for abnormal amounts of facility
to employees, including the fair value of grants of employee
stock options, be recognized in the income statement, gener-
ally over the option vesting period.
expenses, freight, handling costs, and spoilage. It also requires
that allocation of fi xed production overheads to inventory be
based on the normal capacity of production facilities. SFAS
On April 14, 2005, the SEC announced the adoption of a
151 is effective for inventory costs incurred during fi scal years
new rule that amended the compliance dates for SFAS 123R.
beginning after June 15, 2005. Adoption of SFAS 151 is not
The new rule requires the Company to adopt SFAS 123R by
expected to have a material effect on the Company’s fi nancial
January 1, 2006. The Company will adopt SFAS 123R using a
position, results of operations or cash fl ows.
modifi ed prospective transition method in which compensation
In December 2004, SFAS 153, Exchange of Nonmonetary
cost is recognized beginning with the effective date (a) for all
Assets – an amendment of APB Opinion No. 29 (“SFAS 153”),
share-based payments granted after the effective date and (b)
was issued. SFAS 153 amends Opinion 29 to eliminate the
for all awards granted to employees prior to the effective date
exception for nonmonetary exchanges of similar productive
that remain unvested on the effective date.
assets and replaces it with a general exception for exchanges
The Company currently accounts for share-based payments
of nonmonetary assets that do not have commercial substance.
to employees using APB 25’s intrinsic value method and, as
such, has recognized no compensation cost for employee
A nonmonetary exchange has commercial substance if the
46
Notes to Consolidated and Combined
Financial Statements
future cash fl ows of the entity are expected to change signifi -
obligations) on the balance sheet at fair value. Changes in the
cantly as a result of the exchange. SFAS 153 is effective for
fair value of derivatives are either recorded in income or other
nonmonetary exchanges occurring in fi scal periods beginning
comprehensive income, as appropriate. The related unrealized
after June 15, 2005. Adoption of SFAS 153 did not have a
gain or loss from changes in the fair value of highly effective
material effect on the Company’s fi nancial position, results
derivatives designated as cash fl ow hedges is recorded in
of operations or cash fl ows.
Accumulated other comprehensive income (loss) in the period
In March 2005, FASB Interpretation No. 47 (“FIN 47”),
that changes in fair value occur and is reclassifi ed to income in
Accounting for Conditional Asset Retirement Obligations – an
the same period that the hedged item affects income.
interpretation of FASB Statement No. 143, was issued. FIN 47
clarifi es that the term “conditional asset retirement obligation”
as used in FASB Statement No. 143, Accounting for Asset
Retirement Obligations, refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not
be within the control of the entity. FIN 47 also clarifi es when an
entity would have suffi cient information to reasonably estimate
the fair value of an asset retirement obligation. FIN 47 is effec-
tive no later than the end of fi scal years ending after December
15, 2005 (December 31, 2005, for calendar-year enterprises).
The adoption of FIN 47 did not have a material effect on the
Company’s results of operations or fi nancial position.
3.
R I S K M A N A G E M E N T
The Company is exposed to risks such as changes in foreign
currency exchange rates and pulp prices. A variety of practices
is employed to manage these risks, including operating and
fi nancing activities and, where deemed appropriate, the use
of derivative instruments. Derivative instruments are used only for
risk management purposes and not for speculation or trading. All
Pulp Price and Foreign Currency Risk
The operating results, cash fl ows and fi nancial condition of the
Company are subject to pulp price risk. Because the price of
pulp is established in U.S. dollars and the Company’s cost of
producing pulp is incurred principally in Canadian dollars, the
profi tability of the Company’s pulp operations is subject to
foreign currency risk. The Company uses foreign currency for-
ward and pulp futures contracts to manage its foreign currency
and pulp price risk. The use of these instruments allows man-
agement of this transactional exposure to exchange rate and
pulp price fl uctuations because the gains or losses incurred on
the derivative instruments are intended to offset, in whole or in
part, losses or gains on the underlying transactional exposure
(See “Cash Flow Hedges” below). The Company’s translation
exposure related to its net investment in its Canadian subsid-
iaries is not hedged.
The Company is also subject to price risk for electricity
used in its manufacturing operations. At the Spin-Off,
Kimberly-Clark transferred to the Company a fi xed-price for-
ward purchase contract to hedge fl uctuations in the price of
electricity at the Terrace Bay mill through December 31, 2005.
The contract has matured and has not been replaced.
foreign currency and commodity derivative instruments are either
Cash Flow Hedges
exchange traded or entered into with major fi nancial institutions.
During 2005, the Company entered into a series of foreign
Credit risk with respect to the counterparties is considered mini-
currency forward exchange contracts, designated as cash fl ow
mal in view of the fi nancial strength of the counterparties.
hedges, of U.S. dollar denominated pulp sales. At
In accordance with SFAS 133, Accounting for Derivative
December 31, 2005, the Company had foreign currency con-
Instruments and Hedging Activities, as amended, the Company
tracts outstanding in a notional amount of $213 million
records all derivative instruments as assets (in Prepaid and other
Canadian dollars. The fair value of the contracts was $9.3 million
current assets and Other assets) or liabilities (in Accrued
U.S. dollars and was refl ected on the balance sheet as an asset
expenses or Noncurrent employee benefi ts and other
($7.2 million of which was current). The weighted-average
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
47
exchange rate for the foreign currency contracts at December
$(0.6) million and $0.5 million of after-tax gains (losses) from
31, 2005 was $0.820 U.S. dollars per Canadian dollar. The
accumulated other comprehensive income to earnings in 2005,
contracts extend through May 2007 with the highest value of
2004 and 2003, respectively. If future market rates are consistent
contracts maturing in January 2006. The Company recorded net
with the rates assumed at December 31, 2005, approximately
pre-tax gains of $4.3 million on foreign currency contracts as the
$6.1 million (or $3.9 million after-tax) of the $8.2 million (or
forecasted transactions occurred in 2005. All realized gains and
$5.2 million after-tax) unrealized gain included in accumulated
losses on currency derivatives are recorded in Other (income)
other comprehensive income is expected to be recognized in
expense – net on the consolidated and combined statements
earnings during the next 12 months.
of operations.
The notional amounts of the Company’s hedging instru-
During 2005, the Company also entered into a series
ments do not represent amounts exchanged by the parties
of pulp futures contracts to hedge fl uctuations in pulp
and, as such, are not a measure of exposure to credit loss.
prices through December 2006. At December 31, 2005, the
The amounts exchanged are determined by reference to
Company had future contracts for 144,000 metric tons of pulp
the notional amounts and the other terms of the contracts.
with a notional amount of approximately $91 million. The fair
value of the contracts was $1.2 million and was refl ected on
the balance sheet as a liability. The weighted-average price for
the pulp futures contracts at December 31, 2005 was $631 per
4.
I N C O M E TA X E S
metric ton. The contracts expire at the rate of 12,000 metric
Income tax expense in the Company’s consolidated and
tons per month in 2006. The Company recorded net pre-tax
combined fi nancial statements has been calculated on a sepa-
gains of $0.6 million on pulp futures contracts as the fore-
rate tax return basis. Income tax benefi ts represented 39.4%
casted transactions occurred in 2005. Substantially all realized
and 36.1% of pre-tax losses in 2005 and 2004, respectively. In
gains and losses on pulp derivatives are recorded in Net sales
2003, the income tax provision represented 38.5% of pre-tax
on the consolidated statements of operations.
income. The following table presents the principal reasons for
In addition, the Company had a fi xed-price forward pur-
the difference between the effective tax rate and the U.S. fed-
chase contract to hedge fl uctuations in the price of electricity
eral statutory income tax rate:
Year Ended December 31,
2005
2004
2003
U.S. federal statutory
income tax rate
State and local income
taxes, net of federal
income tax effect
Other differences – net
Effective income tax rate
(35.0)%
(35.0)%
35.0%
(3.9)
(0.5)
(39.4)%
(2.4)
1.3
(36.1)%
4.2
(0.7)
38.5%
at the Terrace Bay mill. The contract matured on December 31,
2005. The Company recorded net pre-tax gains of $0.9 million
on the forward purchase contract as the forecasted transac-
tions occurred in 2005. In addition, during 2005, the Company
recorded a pre-tax gain of approximately $0.5 million related
to discontinued cash fl ow hedges where occurrence of the
forecasted transaction was not probable. Realized gains and
losses on the electricity derivative and gains and losses on dis-
continued cash fl ow hedges are recorded in Cost of product
sold on the consolidated statements of operations.
During 2005 the Company’s cash fl ow hedges were effective,
and changes in the fair value of the derivative instruments were
refl ected in other comprehensive income. During the same
period in which the hedged forecasted transactions affected
earnings, the Company reclassifi ed approximately $(36,000),
48
Notes to Consolidated and Combined
Financial Statements
The following table presents the U.S. and Canadian
No valuation allowance has been provided on deferred
components of income before income taxes and the provision
income tax assets. In determining the need for valuation allow-
for income taxes:
Year Ended December 31,
2005
2004
2003
Income (loss) before
income taxes:
U.S.
Canada
Total
Provisions (benefi ts) for
income taxes:
Current:
Federal
State and local
Canadian
Subtotal
Deferred:
Federal
State and local
Canadian
Subtotal
Total
$ 44.2
(93.2)
$ (49.0)
$ 79.2
(120.5)
$ (41.3)
$ 81.5
(18.2)
$ 63.3
$ 1.2
(0.4)
–
0.8
(17.5)
(2.6)
–
(20.1)
$ (19.3)
$ 26.6
2.1
–
28.7
(37.9)
(3.3)
(2.4)
(43.6)
$ (14.9)
$ 28.5
4.5
(0.4)
32.6
(2.1)
(0.5)
(5.6)
(8.2)
$ 24.4
The asset and liability approach is used to recognize
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. The com-
ponents of deferred tax assets and liabilities are as follows:
ances, the Company considers many factors, including specifi c
taxing jurisdictions, sources of taxable income, income tax
strategies and forecasted earnings for the entities in each juris-
diction. A valuation allowance would be recognized if, based
on the weight of available evidence, the Company concludes
that it is more likely than not that some portion or all of the
deferred income tax asset will not be realized. As of December
31, 2005, the Company had $24.8 million of Canadian net
operating losses, substantially all of which may be carried for-
ward to 2015 to offset future taxable income. Due to the U.S.
Dual Consolidated Loss Recapture rules and provisions under
SFAS 109, the Company has recorded a corresponding
deferred tax liability to offset the deferred tax asset related to
the Canadian net operating losses. The Company has no for-
eign tax credits.
As part of the Spin-Off transaction, the Company made a
one-time Spin-Off payment of $213 million to Kimberly-Clark
to fund the purchase of the Canadian pulp assets and related
timberlands. In accordance with EITF 94-10, Accounting by a
Company for the Income Tax Effects of Transactions among
or with Its Shareholders under FASB Statement No. 109, the
tax effects of the resulting change in the tax bases of the assets
and liabilities were refl ected in stockholders’ and invested
December 31,
2005
2004
equity. The Company recorded a net credit to deferred income
Net current deferred
income tax assets:
$ 2.4
Accrued liabilities
0.5
Employee benefi ts
Other
(1.2)
Net current deferred income tax assets $ 1.7
Net noncurrent deferred
income tax assets:
Canadian timberlands
Employee benefi ts
Accumulated depreciation
Other
Net noncurrent deferred income
tax assets
$ 67.7
17.3
(57.4)
–
$ 27.6
$ 2.4
–
(1.2)
$ 1.2
$ 72.3
11.7
(81.3)
(2.7)
$
–
tax assets of approximately $12.7 million and an offsetting
charge to “Kimberly-Clark’s net investment” on the statement
of changes in stockholders’ and invested equity.
Prior to the Spin-Off, the operations of the Pulp and
Paper Business were included in the consolidated income tax
returns of Kimberly-Clark. Kimberly-Clark agreed to indemnify
the Company for all income tax liabilities and retain rights to all
tax refunds relating to the Pulp and Paper Business in its con-
solidated income tax returns for periods through the date of
the Spin-Off. Accordingly, the consolidated balance sheets do
not include current or prior period income tax receivables or
payables related to the Pulp and Paper Business.
The Company’s stock was distributed in a tax-free spin-off.
Under terms of the tax-sharing agreement between the
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
49
Company and Kimberly-Clark, the Company could be liable for
Secured Revolving Credit Facility
any income taxes if it commits a tainting event that destroys
On November 30, 2004, the Company entered into a Credit
the tax-free nature of the Spin-Off.
Agreement by and among Neenah, certain of its subsidiaries,
For periods subsequent to the Spin-Off, the Company has
the lenders listed in the Credit Agreement and JP Morgan
elected to treat its Canadian operations as a branch for U.S.
Chase Bank, N.A. as agent for the lenders (the “Credit
income tax purposes. Therefore, the amount of income (loss)
Agreement”). Under the Credit Agreement, the Company has a
before income taxes from Canadian operations, generated after
secured revolving credit facility (the “Revolver”) that provides for
the November 30, 2004 Spin-Off date, are included in the
borrowings of up to $150 million. No amounts were outstanding
Company’s consolidated U.S. income tax returns and such
under the Revolver as of December 31, 2005. Borrowing avail-
amounts are subject to U.S. income taxes. The previously
ability under the Revolver is reduced by outstanding letters of
reported deferred income tax liability of $8.4 million at December
credit (“LOCs”). At December 31, 2005, the Company had
31, 2004 has been reclassifi ed to net noncurrent deferred income
approximately $5.2 million of LOCs outstanding and $144.8
tax assets to conform to the current year presentation of deferred
million of borrowing availability under the Revolver. Amounts
tax assets and liabilities by tax jurisdiction. In addition, certain
outstanding under the Revolver may be repaid, in whole or in
amounts of the previously reported components of the current
part, at any time without premium or penalty except for speci-
and deferred provision (benefi t) for income taxes for the year
fi ed make-whole payments on LIBOR-based loans.
ended December 31, 2004 have been reclassifi ed to conform
The Credit Agreement is secured by substantially all of the
to the current year presentation by tax jurisdiction.
Company’s assets, including the capital stock of its subsidiaries
5.
D E B T
and is guaranteed by Neenah Paper Company of Canada,
a wholly owned subsidiary. The Credit Agreement will terminate
on November 30, 2008. Availability under the Credit Agreement
will fl uctuate over time depending on the value of the Company’s
The following debt was incurred either as a result of or since
inventory, receivables and various capital assets.
the Spin-Off. The Company did not have debt prior to
The interest rate applicable to borrowings under the
November 30, 2004.
Senior Unsecured Notes
On November 30, 2004, the Company completed an under-
written offering of 10-year senior unsecured notes (the “Senior
Notes”) at face amount of $225 million. The Senior Notes bear
interest at a rate of 7.375%, payable May 15 and November 15
of each year. Interest payments commenced on May 15, 2005,
and the Senior Notes mature on November 15, 2014. The
Senior Notes are fully and unconditionally guaranteed by sub-
stantially all of the Company’s subsidiaries. A registration rights
agreement relating to the Senior Notes required the Company
to exchange the Senior Notes for registered notes within 270
days from the original issuance of the notes. In August 2005,
the Company completed an offer to exchange the unregis-
tered Senior Notes for registered notes with similar terms.
Revolver will be either (1) the applicable base rate plus 0.25%
to 0.75% or (2) a LIBOR-based rate ranging from LIBOR plus
1.75% to LIBOR plus 2.25%. Interest is computed based on
actual days elapsed in a 360-day year, payable monthly in
arrears for base rate loans, or for LIBOR loans, payable monthly
in arrears and at the end of the applicable interest period. The
commitment is subject to an annual facility fee of 0.375% on
the average daily unused amount of the commitment.
The indenture governing the Senior Notes and the Credit
Agreement contain, among other provisions, covenants with
which the Company must comply during the term of the agree-
ments. Such covenants restrict the Company’s ability to, among
other things, incur certain additional debt, make specifi ed
restricted payments and capital expenditures, authorize or
issue capital stock, enter into transactions with affi liates, con-
solidate or merge with or acquire another business, sell certain
of its assets or liquidate, dissolve or wind-up. In addition, the
50
Notes to Consolidated and Combined
Financial Statements
terms of the Credit Agreement require the Company to
Kimberly-Clark. During 2005, hourly employees at the Pictou
achieve and maintain certain specifi ed fi nancial ratios. At
pulp mill, represented by Local 440 of the Communications,
December 31, 2005, the Company was in compliance with
Energy and Paperworkers Union of Canada and the Company
all such covenants.
executed a new collective bargaining agreement providing
The Company’s ability to pay cash dividends on its
for enhanced pension benefi ts. The amendment to the plan
Common Stock is limited under the terms of both the Credit
resulted in an increase of $6.9 million in the Company’s pro-
Agreement and the Senior Notes. At December 31, 2005
jected benefi t obligation and did not require a remeasurement
under the most restrictive terms of these agreements, the
of the plan.
Company’s ability to pay cash dividends on its common stock
Pension assets related to active employees of the U.S.
is limited to a total of $10.0 million in a 12-month period.
paper operations for which the Company assumed responsibil-
Other Notes
During the fi rst quarter of 2005, the Company obtained third-
party fi nancing to fund its purchase of enterprise resource
planning (“ERP”) software. At inception, the present value
of the fi nancing agreement was $3.6 million (discounted at
7.375%) payable in quarterly installments through January
2008. At December 31, 2005, $2.5 million of such third-party
fi nancing was outstanding. In the fi rst quarter of 2005, the
Company issued a short-term note for $2.3 million to fi nance
current year insurance premiums. The note was repaid in
monthly installments through October 2005 including interest
at the rate of 3.9% per annum. At December 31, 2005, the
Company had required debt payments under these fi nancing
arrangements of $1.2 million and $1.3 million in 2006 and
2007, respectively. The Company has no other required debt
payments during the next fi ve years.
6.
P O S T R E T I R E M E N T A N D O T H E R B E N E F I T S
Pension Plans
ity were transferred from a Kimberly-Clark pension trust to a
new trust for a pension plan established by the Company. The
new pension plan provides for substantially similar benefi ts and
credits such employees for service earned with Kimberly-Clark.
In the fourth quarter of 2005, the transfer of assets by Kimberly-
Clark to the new pension trust for obligations assumed by the
Company in the Spin-Off was fi nalized and resulted in a credit
of $0.7 million to Additional paid-in capital.
The Company’s funding policy for its qualifi ed defi ned
benefi t plans is to contribute assets to fully fund the accumu-
lated benefi t obligation (“ABO”). Subject to regulatory and
tax deductibility limits, any funding shortfall is to be eliminated
over a reasonable number of years. Nonqualifi ed plans provid-
ing pension benefi ts in excess of limitations imposed by the
taxing authorities are not funded.
The Company uses the fair value of pension plan assets
to determine pension expense, rather than averaging gains
and losses over a period of years. Investment gains or losses
represent the difference between the expected return calcu-
lated using the fair value of the assets and the actual return
based on the fair value of assets. The Company’s pension
and other postretirement obligations are measured as of
Substantially all active employees of the Pulp and Paper
December 31. As of December 31, 2005, the Company’s
Business participated in Kimberly-Clark’s defi ned benefi t
plans had cumulative unrecognized investment losses and
pension plans and defi ned contribution retirement plans.
other actuarial losses of approximately $147.8 million.
On November 30, 2004, the Company assumed responsibility
A minimum pension liability for underfunded plans
for pension and postretirement benefi t obligations for active
representing the excess of the unfunded ABO over previously
employees of the Pulp and Paper Business and former
recorded net pension liabilities has been refl ected on the con-
employees of the Canadian pulp operations. Pension and
solidated balance sheets. The minimum pension liability is
postretirement benefi t obligations related to former employ-
included in Noncurrent employee benefi ts and other obligations
ees of the U.S. paper operations were retained by
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
51
on the consolidated balance sheets. An offsetting amount is
Company’s accumulated postretirement benefi t obligation by
included as an intangible asset to the extent of unrecognized
approximately $6.8 million and resulted in an unrecognized actu-
prior service cost, and the balance is included in accumulated
arial gain of a similar amount and resulted in a $0.5 million and
other comprehensive income. In 2005, the additional minimum
$0.3 million reduction in postretirement benefi t costs for 2005
pension liability increased as the effect of a decrease in the dis-
and 2004, respectively. During 2005, the Company paid less than
count rate used to estimate the ABO more than offset the
$0.1 million for prescription drug benefi ts for retirees who were
increase in the fair value of pension plan assets.
eligible for Medicare Part D and has not been reimbursed for
The following is a summary of amounts related to the mini-
any such payments.
mum pension liability recorded in other comprehensive income:
Prior to 2004, the U.S. benefi t plans limited future annual
December 31,
Minimum pension liability
Less intangible asset
Accumulated other
comprehensive income
2005
2004
$ 42.4
12.0
$ 12.0
2.1
$ 30.4
$ 9.9
Other Postretirement Benefi t Plans
Prior to the Spin-Off, the employees of the Pulp and Paper
Business participated in Kimberly-Clark’s health care and life
insurance benefi t plans (the “Benefi t Plans”), which covered
per capita retiree medical benefi ts to no more than 200% of
the 1992 annual per capita cost. These plans reached this limi-
tation (the “Cap”) and were amended during 2003. Among
other things, the amendments index the Cap by 3% annually
beginning in 2005 for certain employees retiring on or before
April 1, 2004 and limit the future cost for retiree health care
benefi ts to a defi ned fi xed per capita cost for certain employ-
ees retiring after April 1, 2004. At December 31, 2005, the
assumed infl ationary pre-65 and post-65 health care cost trend
substantially all retirees and active employees. Certain benefi ts
rates used to determine year-end obligations was 9.8%,
were based on years of service and/or age at retirement. The
plans were principally noncontributory for employees who were
eligible to retire on or before December 31, 1992 and contribu-
tory for most employees who retire on or after January 1, 1993.
Kimberly-Clark provided no subsidized benefi ts to most employ-
ees hired after 2003. On November 30, 2004, the Company
assumed responsibility for obligations for the active employees of
the Company and former employees of the Canadian pulp opera-
tions and established new health care and life insurance benefi t
plans to provide substantially similar benefi ts and credit such
decreasing to 8.8% in 2007, and then gradually decreasing to
an ultimate rate of 4.8% in 2013. The assumed infl ationary pre-
65 health care cost trend rate used to determine obligations at
December 31, 2004 and cost for the year ended December 31,
2005 was 8.7% in 2005, decreasing to 7.8% in 2006, and grad-
ually decreasing to an ultimate rate of 5.0% in 2011. The
assumed infl ationary post-65 health care cost trend rate used
to determine obligations at December 31, 2004 and cost for
the year ended December 31, 2005 was 8.8% in 2005 decreas-
ing to 7.9% in 2006, and gradually decreasing to an ultimate
employees for service earned with Kimberly-Clark.
rate of 5.0% in 2011.
On December 8, 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the “Act”) became
law. Among other things, the Act provides a prescription drug
benefi t under Medicare (Medicare Part D) and a federal subsidy
In May 2005, the Company closed the No. 1 Mill at
the Terrace Bay facility (See Note 12). In conjunction with the
closure, the Company recognized a pre-tax charge of approxi-
mately $1.6 million related to a partial settlement of certain
to sponsors of retiree health care benefi t plans that provide a pre-
pension obligations.
scription drug benefi t that is at least actuarially equivalent to
Medicare Part D. On April 1, 2004, FASB Staff Position 106-2
(“FSP 106-2”), Accounting and Disclosure Requirements Related
An accrued benefi t obligation for other postretirement
benefi ts assumed by the Company is refl ected in Noncurrent
employee benefi ts and other obligations on the consolidated
to Medicare Prescription Drug, Improvement and Modernization
balance sheet.
Act of 2003, was adopted. Adoption of FSP 106-2 reduced the
52
Notes to Consolidated and Combined
Financial Statements
The following table reconciles the benefi t obligations, plan assets, funded status and net liability information of the Company’s
pension and other benefi t plans.
Year Ended December 31,
Change in Benefi t Obligation:
Benefi t obligation at beginning of year
Service cost
Interest cost
Currency
Actuarial loss (gain)
Benefi t payments from plans
Adjustment related to Spin-Off
Participant contributions
Special termination benefi ts
Plan amendments
Other
Benefi t obligation at end of year
Change in Plan Assets:
Fair value of plan assets at beginning of year
Actual gain on plan assets
Employer contributions
Special termination benefi t contributions
Currency
Benefi t payments
Participant contributions
Adjustment related to Spin-Off
Other
Fair value of plan assets at end of year
Funded Status:
Benefi t obligation in excess of plan assets
Unrecognized net actuarial loss
Unrecognized transition amount
Unrecognized prior service cost
Net amount recognized
Amounts Recognized in the Balance Sheets:
Prepaid benefi t cost
Intangible asset
Accrued benefi t cost
Accumulated other comprehensive income
Net amount recognized
Pension Benefi ts
Postretirement Benefi ts
Other than Pensions
2005
2004
2005
2004
$ 386.1
10.7
21.9
11.7
34.1
(23.9)
–
0.6
1.6
6.9
0.2
$ 449.9
$ 328.5
38.9
18.7
1.6
9.8
(23.9)
0.6
0.7
0.2
$ 375.1
$ (74.8)
147.8
(0.6)
12.4
$ 84.8
$ 84.8
12.0
(42.4)
30.4
$ 84.8
$ 328.7
9.1
24.2
23.2
19.5
(10.9)
(8.1)
0.5
–
–
(0.1)
$ 386.1
$ 275.3
35.1
16.6
–
19.6
(10.9)
0.5
(7.7)
–
$ 328.5
$ (57.6)
128.3
(0.7)
6.4
$ 76.4
$ 76.4
2.1
(12.0)
9.9
$ 76.4
$ 55.0
1.5
3.1
1.9
14.7
(1.3)
–
–
–
1.2
–
$ 76.1
$
$
–
–
1.3
–
–
(1.3)
–
–
–
–
$ (76.1)
31.3
–
(0.8)
$ (45.6)
$
–
–
(45.6)
–
$ (45.6)
$ 50.5
1.2
3.4
3.2
(1.8)
(1.1)
(0.4)
–
–
–
–
$ 55.0
$
$
–
–
1.1
–
–
(1.1)
–
–
–
–
$ (55.0)
14.2
–
0.3
$ (40.5)
$
–
–
(40.5)
–
$ (40.5)
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
53
Summary disaggregated information about the pension plans follows:
December 31,
Projected benefi t obligations
ABO
Fair value of plan assets
Components of Net Periodic Benefi t Cost
Assets
Exceed ABO
ABO
Exceeds Assets
Total
2005
$ 279.5
227.5
239.4
2004
2005
2004
$ 333.2
275.8
288.7
$ 170.4
153.0
135.7
$ 52.9
46.2
39.8
2005
$ 449.9
380.5
375.1
2004
$ 386.1
322.0
328.5
Pension Benefi ts
Postretirement Benefi ts
Other than Pensions
Year Ended December 31,
2005
2004
2003
2005
2004
Service cost
Interest cost
Expected return on plan assets (a)
Recognized net actuarial loss
Amortization of unrecognized transition asset
Amortization of prior service cost
Adjustment related to Spin-Off
Net periodic benefi t cost (credit)
$ 10.7
21.9
(27.7)
7.1
(0.2)
1.4
–
$ 13.2
$ 9.1
24.2
(27.7)
4.7
(0.2)
1.0
(0.4)
$ 10.7
$ 7.1
21.9
(22.4)
6.1
(0.2)
0.9
–
$ 13.4
$ 1.5
3.1
–
0.7
–
0.1
–
$ 5.4
$ 1.2
3.4
–
(4.6)
–
–
(0.4)
(0.4)
$
2003
$ 1.0
3.6
–
0.2
–
–
–
$ 4.8
(a) The expected return on plan assets is determined by multiplying the fair value of plan assets at the prior year-end (adjusted for estimated current year cash
benefi t payments and contributions) by the expected long-term rate of return.
Weighted-average Assumptions Used to Determine Benefi t Obligations at December 31
Discount rate
Rate of compensation increase
Pension Benefi ts
Postretirement Benefi ts
Other than Pensions
2005
2004
2005
2004
5.20%
3.24%
5.75%
3.75%
5.22%
5.75%
–
–
Weighted-average Assumptions Used to Determine Net Periodic Benefi t Cost for Years Ended December 31
Pension Benefi ts
Postretirement Benefi ts
Other than Pensions
2005
2004
2003
2005
2004
2003
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
5.75%
8.41%
3.75%
6.21%
8.50%
3.75%
6.95%
8.50%
3.90%
5.75%
6.17%
6.91%
–
–
–
–
–
–
54
Notes to Consolidated and Combined
Financial Statements
Expected Long-Term Rate of Return
Cash Flows
and Investment Strategies
Based on December 31, 2005 exchange rates, the Company
The expected long-term rate of return on pension fund assets
expects to contribute approximately $12.2 million to its pen-
held by the Company’s pension trusts was determined based
sion trusts in 2006.
on several factors, including input from pension investment
consultants and projected long-term returns of broad equity
and bond indices. Also considered were the plans’ historical
10-year and 15-year compounded annual returns. It is antici-
pated that on average the investment managers for each of
the plans will generate annual long-term rates of return of
8.5%. The expected long-term rate of return on the assets
in the plans was based on an asset allocation assumption of
about 60% with equity managers, with expected long-term
rates of return of approximately 10%, and 40% with fi xed
income managers, with an expected long-term rate of return
of about 6%. The actual asset allocation is regularly reviewed
Future Benefi t Payments
The following benefi t payments, which refl ect expected future
service, as appropriate, are expected to be paid:
Pension Plans
Other
Postretirement
Benefi ts
$ 18.4
19.8
21.2
22.8
24.6
158.1
$ 1.8
2.0
2.3
2.6
3.0
20.6
2006
2007
2008
2009
2010
Years 2011–2015
and periodically rebalanced to the targeted allocation when
Health Care Cost Trends
considered appropriate. Also, when deemed appropriate,
Assumed health care cost trend rates affect the amounts
hedging strategies are executed using index options and
reported for postretirement health care benefi t plans. A one-
futures to limit the downside exposure of certain investments
percentage point change in assumed health care cost trend
by trading off upside potential above an acceptable level. Such
rates would have the following effects:
hedging strategies were executed in 2005, 2004 and 2003.
Following the Spin-Off, the Company is following a similar
methodology for determining its long-term rate of return on
pension assets and investment strategy and is continuing to
evaluate its long-term rate of return assumptions.
Plan Assets
Pension plan asset allocations are as follows:
Percentage of Plan Assets
at December 31,
2005
2004
2003
Asset Category
Equity securities
Debt securities
Real estate
Cash and money
market funds
Total
68 %
24 %
– %
66 %
24 %
3 %
70 %
28 %
2 %
8 %
100 %
7 %
100 %
– %
100 %
Plan assets were not invested in Neenah securities for
periods subsequent to the Spin-Off or Kimberly-Clark securi-
ties prior to the Spin-Off.
Effect on total of service
and interest cost components
Effect on postretirement
benefi t obligation
One Percentage Point
Increase Decrease
$ 0.7
$ 0.5
9.9
7.9
Defi ned Contribution Retirement Plans
Kimberly-Clark’s contributions to its defi ned contribution
retirement plans were primarily based on the age and compen-
sation of covered employees. In connection with the Spin-Off,
Kimberly-Clark transferred the related assets and liabilities of
these plans to trusts established by the Company. In December
2004, the Company established defi ned contribution retirement
plans that provide substantially similar benefi ts. Contributions
to these plans, all of which were charged to expense, were $1.0
million in 2005 and $0.5 million in each of 2004 and 2003.
Investment Plans
The Company provides voluntary contribution investment plans
to substantially all employees. Under the plans, Kimberly-Clark
matched a portion of employee contributions. In connection
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
55
with the Spin-Off, Kimberly-Clark transferred the related
per share. In August 2005, the Company granted options to
assets and liabilities of these plans to trusts established by the
purchase 62,650 shares of common stock at $31.70 per share.
Company. In December 2004, the Company established invest-
The exercise price of the options was equal to the market price
ment plans that provide substantially similar benefi ts. Costs
of the Company’s common stock on the date of grant. The
charged to expense for company matching contributions under
options expire in 10 years and one-third vest on each of the
these plans were $1.2 million in each of 2005, 2004 and 2003.
fi rst three anniversaries of the date of grant. In June 2005, the
7.
S T O C K C O M P E N S AT I O N P L AN S
Company awarded options to purchase 11,250 shares of com-
mon stock at $33.32 per share to members of its Board of
Directors. The options vest one year from the date of grant
and expire 10 years from the date of grant.
On August 31, 2004, Kimberly-Clark, acting as the sole
In connection with the Spin-Off, options to acquire
shareholder of the Company, approved the Neenah Paper, Inc.
390,508 shares of Kimberly-Clark common stock that were out-
2004 Omnibus Stock and Incentive Plan (the “Omnibus Plan”).
standing immediately prior to the Spin-Off were converted into
The Company then adopted and established the Omnibus Plan
724,449 substitute options to purchase the Company’s com-
under unanimous written consent of the Neenah Board of
mon stock under the Omnibus Plan. The awards converted
Directors on December 1, 2004. With this approval, the Company
were adjusted to maintain both the pre-conversion aggregate
reserved 3,500,000 shares of the Common Stock for issuance
intrinsic value of each award and the ratio of the per share
under the Omnibus Plan. Pursuant to the terms of the Omnibus
exercise price to the market value per share. Vesting terms and
Plan, the compensation committee of the Company’s Board of
expiration dates were also preserved. The number of shares
Directors may grant various types of equity based compensation
and new exercise prices were established using a ratio conver-
awards, including incentive and nonqualifi ed stock options, stock
sion methodology approved under FASB Interpretation No. 44
appreciation rights, restricted stock, restricted stock units, perfor-
based on the fair market value of the Company’s common
mance shares and performance units, in addition to certain
stock on the date of grant.
cash-based awards. All grants and awards under the plan will be
On December 15, 2004, an award of nonqualifi ed stock
made at fair market value and no grant or award may be repriced
options to purchase 442,540 shares of Common Stock (the “Fresh
after its grant. In general, the options expire 10 years from the
Start Options”) was made to LTIP participants and directors of the
date of grant and vest over a three-year service period. At
Company. The exercise price of the Fresh Start Options was equal
December 31, 2005, a total of 2,154,995 shares of the Company’s
to the market value of the Company’s common stock on the
common stock were reserved for future issuance under the
date of grant. The Fresh Start Options expire 10 years from the
Omnibus Plan.
date of grant and vest 30%, 30% and 40% on the fi rst, second
During 2003 and in prior years, certain employees of
and third anniversaries of the date of grant, respectively.
the Pulp and Paper Business were granted stock options and
Stock options awarded by Kimberly-Clark to employees of
restricted stock under Kimberly-Clark’s stock compensation plans.
the Pulp and Paper Business prior to the Spin-Off were granted
Stock Options
In February 2005, the Company informed participants in its
Long-Term Incentive Plan (the “LTIP”) of its intention to award
nonqualifi ed stock options to purchase a total of 126,100
shares of common stock (subject to forfeitures due to termina-
tion of employment and other conditions) during 2005. In
February 2005, the Company granted to LTIP participants
options to purchase 63,050 shares of common stock at $33.19
with an exercise price equal to the market value of a share of
common stock on the date of grant and were accounted for
using APB 25. No compensation expense for stock options
awarded to employees was recognized in the combined state-
ments of operations for periods prior to the Spin-Off because
the exercise prices of all stock options granted was equal to
the market value of Kimberly-Clark’s common stock on the
date of grant.
56
Notes to Consolidated and Combined
Financial Statements
Data concerning stock option activity follows (a):
Outstanding – Beginning of year
Options granted
Conversion of Kimberly-Clark options
Options expired or cancelled
Outstanding – End of year
Exercisable – End of year
2005
2004
Number of
Options
1,166,989
136,950
–
(19,511)
1,284,428
740,284
Weighted-
Average
Exercise
Price
$
$
$
$
$
32.84
32.52
–
30.61
31.90
32.39
Number of
Options
–
442,540
724,449
–
1,166,989
532,554
Weighted-
Average
Exercise
Price
$
$
$
–
32.60
31.32
–
31.81
32.84
(a)
Information with respect to the stock option awards to acquire the Company’s Common Stock are presented for periods subsequent to November 30, 2004,
the date on which Neenah common stock was distributed to the stockholders of Kimberly-Clark.
Data concerning options at December 31, 2005 follows:
Options Outstanding
Options Exercisable
$24.01 – $26.04
$26.95 – $31.70
$32.60 – $37.59
Number of
Options
202,998
144,985
936,445
1,284,428
Weighted-
Average Exercise
Price
Weighted-Average
Remaining
Contractual Life (Years)
$
$
$
$
24.24
30.15
33.83
31.90
6.7
5.8
7.5
7.2
Number
of Options
114,496
82,335
543,453
740,284
Weighted-
Average
Price
$
$
$
$
24.41
28.97
34.60
32.39
Other Stock-Based Compensation
expense is recognized pro rata over the three-year vesting period.
In February 2005, the Company granted 38,300 performance
Upon adoption of SFAS 123R, the Company will be required to
shares (subject to forfeitures due to termination of employment
recognize compensation expense related to stock-based com-
and other conditions) to LTIP participants. Based on Company
pensation awards over the shorter of (i) the contractual vesting
performance compared to revenue growth and return on invested
period of the award or (ii) the period between the grant date for
capital targets, Restricted Stock Units (“RSUs”) equal to between
the award and the recipient reaching 55 years of age with fi ve
30% and 225% of the performance share award would be issued.
years of vesting service (retirement eligibility). In June 2005,
The measurement period for the performance shares was
the Company awarded 3,510 RSUs to members of its Board
January 1, 2005 through December 31, 2005. On December 31,
of Directors that vest on the fi rst anniversary of the date of grant.
2005, 11,430 RSUs (equal to 30% of the performance shares
In December 2004, Neenah awarded 40,800 and 3,450
granted) were awarded. In general, the RSUs become 100%
RSUs to LTIP participants and non-employee members of the
vested three years from the start of the performance period
Board of Directors of the Company, respectively. The RSUs
(December 31, 2007) and are subject to an additional two-year
carry a promise to pay out in Common Stock at a future date.
holding period before the award recipient can sell or transfer such
In general, the RSUs awarded to LTIP participants vest over a
shares. During the vesting period, but not the performance
fi ve year period, with one third vesting on the third anniversary
period, holders of the RSUs are entitled to dividends, but are not
of the date of grant, one-third vesting on the fourth anniver-
permitted to vote such shares, and the RSUs are forfeited in the
sary, and the balance vesting on the fi fth anniversary. The RSUs
event of termination of employment (as defi ned). Compensation
awarded to members of the Board of Directors vest on the fi rst
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
57
anniversary of the date of grant. Holders of RSUs are entitled
restricted period. The price of Kimberly-Clark’s common stock
to dividends but are not permitted to vote such awarded
at the date of grant determined the value of the restricted
shares and the sale or transfer of such shares is limited during
stock, and such value was recorded at the date of grant as
the restricted period.
unearned compensation.
At the time of the Spin-Off, the vesting schedule of
Stock-based compensation expense in the Consolidated
Kimberly-Clark restricted stock awards for employees of the
and Combined Statements of Operations (consisting primarily
Pulp and Paper Business were adjusted so that the awards
of amortization of unearned compensation relating to
vested on a prorated basis determined by the number of full
restricted stock and RSUs) was $0.8 million, $0.6 million and
years of employment with Kimberly-Clark during the restriction
$0.9 million in 2005, 2004 and 2003, respectively.
period. Unvested restricted shares of Kimberly-Clark common
stock were forfeited. In December 2004, the Company awarded
25,360 replacement restricted shares to employees whose
restricted shares of Kimberly-Clark common stock were for-
feited. The number of restricted shares was calculated using a
ratio conversion methodology approved under FASB
Interpretation No. 44 based on the fair market value of the
Company’s common stock on the date of grant. At December
31, 2005, 22,871 of such restricted shares were outstanding,
with 3,681 shares, 2,025 shares, 16,591 shares and 574 shares
vesting in 2006, 2007, 2008 and 2009, respectively.
The Company records unearned compensation for the fair
value of compensatory stock awards based on the price of the
Company’s stock on the measurement date (date of grant for
RSUs and completion of the measurement period for perfor-
mance shares). Performance shares, prior to completion of the
8.
S T O C K H O L D E R S ’ E Q U I T Y
Common Stock
The Company has authorized 100 million shares of $0.01
par value common stock (“Common Stock”). Holders of the
Company’s Common Stock are entitled to one vote per share.
In conjunction with the Spin-Off, 14,737,959 share of Common
Stock were issued to the stockholders of Kimberly-Clark as a divi-
dend in the ratio of one share of the Company’s Common Stock
for every 33 shares of Kimberly-Clark common stock outstanding.
During 2005, the Company acquired 814 shares of Common
Stock at a cost of approximately $25,000 for shares sold by
employees to pay taxes due on vested restricted stock awards.
measurement period, are accounted for as a variable award pur-
Preferred Stock
suant to APB 25. As such, the Company recognized unearned
The Company has authorized 20 million shares of $0.01 par
compensation for the expected number of shares to be awarded
value preferred stock. The preferred stock may be issued in
(but not less than 30%). In general, the Company amortizes
one or more series and with such designations and preferences
unearned compensation to expense over the service period
for each series as shall be stated in the resolutions providing
(generally the vesting period) for the award.
for the designation and issue of each such series adopted by
A number of employees of the Pulp and Paper Business
the Board of Directors of the Company. The board of directors
were granted Kimberly-Clark restricted stock awards in
is authorized by the Company’s articles of incorporation to
previous years. These awards generally vested and became
determine the voting, dividend, redemption and liquidation
unrestricted shares in three to fi ve years from the date of grant.
preferences pertaining to each such series. No shares of pre-
Holders of Kimberly-Clark restricted stock were entitled to divi-
ferred stock have been issued by the Company.
dends and were permitted to vote such awarded shares, but
the sale or transfer of such shares was limited during the
58
Notes to Consolidated and Combined
Financial Statements
9.
C O M M I T M E N T S
Leases
the outcome of these legal actions and claims cannot be pre-
dicted with certainty, it is the opinion of management that the
outcome of any claim which is pending or threatened, either
individually or on a combined basis, will not have a material
The future minimum obligations under operating leases having
adverse effect on the consolidated fi nancial condition, results
a noncancelable term in excess of one year as of December 31,
of operations or liquidity of the Company.
2005, are as follows:
Year Ending December 31:
2006
2007
2008
2009
2010
Thereafter
Future minimum obligations
$ 2.6
1.6
1.4
1.3
1.2
7.3
$ 15.4
Rental expense under operating leases was $4.6 million, $3.9
million and $2.7 million in 2005, 2004 and 2003, respectively.
Purchase Commitments
Indemnifi cations
Pursuant to the Distribution Agreement, the Pulp Supply
Agreement, the Employee Matters Agreement and the Tax-
sharing Agreement, the Company has agreed to indemnify
Kimberly-Clark for certain liabilities or risks related to the Spin-
Off (See Note 11). Many of the potential indemnifi cation
liabilities under these agreements are unknown, remote or
highly contingent, and most are unlikely to ever require an
indemnity payment. Furthermore, even in the event that an
indemnifi cation claim is asserted, liability for indemnifi cation
is subject to determination under the terms of the applicable
agreement. For these reasons, the Company is unable to esti-
The Company has entered into long-term contracts for the
mate the maximum potential amount of the potential future
purchase of sawmill wood chips. The minimum purchase com-
liability under the indemnity provisions of these agreements.
mitments extend beyond 2009. Commitments under these
However, the Company accrues for any potentially indemnifi able
contracts are approximately $26.9 million in 2006, $26.7 mil-
liability or risk under these agreements for which it believes a
lion in 2007, $26.8 million in 2008, $26.7 million in 2009 and
future payment is probable and a range of loss can be reason-
$9.6 million in 2010. Total commitments beyond 2010 are
ably estimated. As of December 31, 2005, we believe our
$28.9 million.
liability under such indemnifi cation obligations was not material.
Although the Company is primarily liable for payments on
the above mentioned leases and purchase commitments, man-
agement believes exposure to losses, if any, under these
arrangements is not material.
10.
C O N T I N G E N C I E S A N D L E G A L M AT T E R S
Litigation
Environmental, Health and Safety Matters
Neenah is subject to federal, state, provincial and local laws,
regulations and ordinances relating to various environmental,
health and safety matters. The Company is in compliance with,
or is taking actions designed to ensure compliance with, these
laws, regulations and ordinances. However, the nature of the
Company’s business exposes it to the risk of claims with respect
to environmental, health and safety matters, and there can be
no assurance that material costs or liabilities will not be incurred
During the third quarter of 2005, the Company settled a
in connection with such claims. Except for certain orders issued
previously disclosed lawsuit relating to a vehicle accident
by environmental, health and safety regulatory agencies, with
pending in the Ontario (Canada) Superior Court of Justice.
which management believes the Company is in compliance and
The settlement did not have a material effect on the
which management believes are immaterial to the results of
Company’s results of operations or liquidity.
operations of the Company’s business, Neenah is not currently
The Company is involved in certain other legal actions
named as a party in any judicial or administrative proceeding
and claims arising in the ordinary course of business. While
relating to environmental, health and safety matters.
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
59
While the Company has incurred in the past several years,
On June 1, 2005, hourly employees at the Pictou pulp
and will continue to incur, capital and operating expenditures
mill, represented by Local 440 of the Communications, Energy
in order to comply with environmental, health and safety laws,
and Paperworkers Union of Canada and the Company exe-
regulations and ordinances, management believes that the
cuted a new collective bargaining agreement expiring on May
Company’s future cost of compliance with environmental,
31, 2009. Hourly employees at the Terrace Bay pulp mill are
health and safety laws, regulations and ordinances, and its
represented by locals of the United Steelworkers (the “USW”)
exposure to liability for environmental, health and safety claims
and the International Brotherhood of Electrical Workers with
will not have a material adverse effect on its fi nancial condition,
each collective bargaining agreement expiring on May 1, 2007.
results of operations or liquidity. However, future events, such
The collective bargaining agreement covering 230 hourly
as changes in existing laws and regulations or contamination
employees at the Longlac, Ontario operations represented by
of sites owned, operated or used for waste disposal by the
Local 1-2693 of the USW expired on September 1, 2005. On
Company (including currently unknown contamination and
January 30, 2006, the hourly employees working in the Longlac
contamination caused by prior owners and operators of such
woodlands operations commenced a strike. In February 2006, the
sites or other waste generators) may give rise to additional
Company suspended pulp manufacturing activities at the Terrace
costs which could have a material adverse effect on the
Bay pulp mill as a result of a lack of wood fi ber for its operations.
Company’s fi nancial condition, results of operations or liquidity.
Most of the approximately 400 hourly and salaried workers
Neenah incurs capital expenditures necessary to meet
employed at the mill were laid off for an indefi nite period during
legal requirements and otherwise relating to the protection
the two weeks following the commencement of closure activities.
of the environment at its facilities in the United States and
Pursuant to the terms of the Company’s labor agreements and
Canada. For these purposes, the Company’s planned capital
Canadian laws, if the work stoppage continues through May
expenditures for major environmental projects during the
2006, the Company will be required to make payments to laid-off
period 2006 through 2010 include approximately $20 million
workers of approximately $8 million in the second quarter of
to reconfi gure the effl uent treatment system at the Pictou mill
2006. Additional payments of from one to three times that
and between $15 million and $25 million for equipment and
amount could be required dependent upon, among other things,
engineering to abate total sulphur emissions and for other
the duration of the work stoppage. An extended work stoppage
environmental matters at the Pictou and Terrace Bay mills, to
at the Terrace Bay mill could have a material impact on the liquid-
remove and replace transformers containing polychlorinated
ity and results of operations of the Company.
biphenyls at the Terrace Bay mill, to improve stream crossings
Hourly employees at the Munising, Neenah and Whiting
in the timberlands licensed from the Province of Ontario. The
paper mills are represented by locals of the USW. On December
timing and amount of such expenditures will depend on the
23, 2005, hourly employees at the Munising paper mill, repre-
outcome of negotiations with regulatory authorities, the results
sented by Locals 7-0087 and 7-0096 of the USW voted to
of engineering studies and the remediation methods ultimately
accept a new collective bargaining agreement expiring on July
selected. These capital expenditures are not expected to have
15, 2009. On January 8, 2006, hourly employees at the Whiting
a material adverse effect on our fi nancial condition, results of
paper mill, represented by Local 7-370 of the USW voted to
operations or liquidity.
Employees and Labor Relations
As of December 31, 2005, the Company had approximately
1,900 regular full time employees of whom 620 hourly and 280
salaried employees were located in the United States and 780
hourly and 220 salaried employees were located in Canada.
accept a new collective bargaining agreement expiring on
February 1, 2009. On February 21, 2006, hourly employees at
the Neenah paper mill, represented by Local 7-1170 of the USW
voted to accept a new collective bargaining agreement expiring
on July 1, 2009. Additionally, these mills have bargained jointly
with the union on pension matters. The agreements on pension
matters for these mills expire June 30, 2007.
60
Notes to Consolidated and Combined
Financial Statements
11.
T R A N S A C T I O N S W I T H K I M B E R LY- C L A R K
During all periods presented, the Company sold or transferred
softwood and hardwood pulp to Kimberly-Clark. For periods
prior to the Spin-Off, such intra-company transfers were made
pursuant to an advance transfer pricing agreement negotiated
among Kimberly-Clark and certain taxing authorities. Under the
advance transfer pricing agreement, pulp was transferred to
Kimberly-Clark at a transfer price equal to a published industry
index price less a discount. Net sales revenue for the pulp sold
or transferred to Kimberly-Clark were $309 million, $351 million
and $305 million for the years ended December 31, 2005, 2004
and 2003, respectively. For periods prior to the Spin-Off, settle-
ment of pulp transfers was effected through Kimberly-Clark’s
net investment account. In connection with the Spin-Off, the
Company and Kimberly-Clark entered into a new pulp supply
agreement (the “Pulp Supply Agreement”) as described below.
In connection with the Spin-Off, the Company and
Kimberly-Clark executed and delivered a distribution agree-
ment (the “Distribution Agreement”), and certain related
agreements, which are summarized below.
Distribution Agreement
Pulp Supply Agreement
The Company and Kimberly-Clark have entered into the Pulp
Supply Agreement pursuant to which the Company agreed to
supply and Kimberly-Clark agreed to purchase annually speci-
fi ed minimum tonnages of northern bleached softwood and
hardwood kraft pulp. For 2006, the minimum commitment for
northern bleached softwood kraft pulp is 440,000 air-dried
metric tons (“ADMT”), for 2007 the minimum commitment is
395,000 ADMT and for 2008 and any subsequent years the
minimum commitment is 345,000 ADMT. The amounts of
those minimum commitments represent approximately 80%,
70%, and 60%, respectively, of the Company’s total production
of northern bleached softwood kraft pulp in 2005.
The Company’s minimum commitment to supply northern
bleached hardwood kraft pulp for 2005, 2006, 2007 and 2008
was 80,000, 60,000, 40,000 and 20,000 ADMT, respectively. In
May 2005, the Company closed the smaller of the two single-
line pulp mills at the Terrace Bay facility (the “No. 1 Mill”) and
terminated, without penalty, its commitment to supply north-
ern bleached hardwood kraft pulp produced at that facility.
Under the terms of the Pulp Supply Agreement, the Company
was obligated to provide 40,000, 30,000, 20,000 and 10,000
metric tons of northern bleached hardwood kraft pulp pro-
The Distribution Agreement provided for, among other things,
duced at the Terrace Bay mill annually in 2005, 2006, 2007
the principal corporate transactions required to effect the sepa-
and 2008, respectively. The Company’s commitment to supply
ration of the Pulp and Paper Business from Kimberly-Clark, the
and Kimberly-Clark’s requirement to purchase, pursuant to the
distribution of the Company’s common stock to the holders of
terms of the Pulp Supply Agreement, northern bleached hard-
record of Kimberly-Clark common stock and other agreements
wood kraft pulp from the Pictou mill (in annual quantities which
governing the Company’s relationship with Kimberly-Clark after
are identical to those shown above) are unchanged. The
the Spin-Off. Pursuant to the Distribution Agreement, Kimberly-
amounts of those minimum commitments represent approxi-
Clark transferred to the Company assets used primarily in the
mately 100%, 75%, 50% and 25%, respectively; of the Pictou
Company’s business and in general the Company assumed and
mill’s production of northern bleached hardwood kraft pulp in
agreed to perform and fulfi ll all of the liabilities arising out of the
2005. During 2005, the Company fulfi lled its supply commit-
ownership or use of the transferred assets or the operation of
ments pursuant to the Pulp Supply Agreement.
the transferred business. The Distribution Agreement provides
Under the Pulp Supply Agreement, the prices for northern
for cross indemnities principally designed to place fi nancial
bleached softwood kraft pulp and northern bleached hardwood
responsibility for the obligations and liabilities of the Pulp and
kraft pulp will be based on published industry index prices for
Paper Business with the Company and fi nancial responsibility
the pulp (subject to minimum and maximum prices for north-
for the obligations and liabilities of Kimberly-Clark’s retained
ern bleached kraft softwood pulp shipped to North America
businesses with Kimberly-Clark except as may otherwise be
prior to December 31, 2007), less agreed-upon discounts. The
provided in the Distribution Agreement.
commitments are structured as supply-or-pay and take-or-pay
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
61
arrangements. Accordingly, if the Company does not supply
Either party can elect a two-year phase-down period for
the specifi ed minimums, the Company must pay Kimberly-Clark
the agreement, to begin no earlier than January 1, 2009, under
for the shortfall based on the difference between the contract
which the minimum commitments for northern bleached soft-
price and any higher price that Kimberly-Clark pays to purchase
wood kraft pulp in the fi rst and second years of the phase-down
the pulp, plus 10% of that difference. If Kimberly-Clark does not
period would be 277,500 and 185,000 ADMT, respectively. If the
purchase the specifi ed minimums, Kimberly-Clark must pay
Company were to choose to reduce its annual supply obligation
for the shortfall based on the difference between the contract
to Kimberly-Clark, the phase-down commitments in the fi rst and
price and any lower price the Company obtains for the pulp,
second years would be 165,000 and 101,000 ADMT, respectively.
plus 10% of the difference. The Company will incur the cost of
In addition, the Company has the right at any time to terminate
freight to delivery points specifi ed in the agreement.
its obligation to supply northern bleached hardwood kraft pulp
On January 17, 2006, the Company and Kimberly-Clark
upon three months’ notice to Kimberly-Clark. Either the
entered into an amendment (the “PSA Amendment”) to the
Company or Kimberly-Clark may terminate the pulp supply
Pulp Supply Agreement. The PSA Amendment provides the
agreement for certain events specifi ed in the agreement, includ-
Company with the option to reduce its annual softwood and
ing a material breach of the agreement by the other party that is
hardwood supply obligation to Kimberly-Clark to 235,000
not cured after 30 days’ notice, insolvency or bankruptcy of the
ADMT in 2006, 235,000 ADMT in 2007 and 215,000 ADMT in
other party, or a fundamental change in the nature of the busi-
2008. The Company can only exercise such option by giving
ness of the other party that may substantially affect its ability
Kimberly-Clark advance written notice of its election to do
to sell or to purchase or utilize pulp under the agreement. In
so prior to June 30, 2007. The Company’s right to give such
addition, Kimberly-Clark may terminate the agreement if the
notice is also subject to certain limitations that affect the timing
ownership or control of the Company or any of its pulp produc-
and the effective date of the notice.
tion facilities becomes vested in or is made subject to the
Additionally, the PSA Amendment provides Kimberly-Clark
control or direction of, any direct competitor of Kimberly-Clark
with the option to reduce its annual purchase obligation for North
or any governmental or regulatory authority or any other third
American northern bleached softwood kraft pulp during 2006 by
party, who in Kimberly-Clark’s reasonable judgment may not be
up to 50,000 ADMT. The PSA Amendment also permits Kimberly-
able to reliably perform the Company’s obligations under the
Clark to reduce its purchase obligation from the Company’s
agreement. Kimberly-Clark may also terminate the agreement
Terrace Bay, Ontario pulp operations (“Terrace Bay”), on
upon one year’s notice if, as a result of the Company’s forestry
one occasion only, by up to an additional 80,000 ADMT in the
activities, continued use of the Company’s pulp by Kimberly-
event that Terrace Bay resumes operations following a Terrace
Clark does or, in Kimberly-Clark’s reasonable judgment is likely
Bay Force Majeure Event (as defi ned in the PSA Amendment).
to, result in a substantial loss of sales of Kimberly-Clark’s prod-
During the continuance of a Terrace Bay Force Majeure Event, or
ucts or to otherwise materially and adversely affect the
a different Force Majeure Event (as defi ned in the Pulp Supply
reputation of Kimberly-Clark or its products. Kimberly-Clark may
Agreement), the Company is generally excused, without penalty,
also terminate the agreement upon 180 days notice that the
from its obligations to supply and Kimberly-Clark is excused, also
Company’s failure to comply with United States customs require-
without penalty, from its commitments to purchase pulp under
ments jeopardizes Kimberly-Clark customs certifi cation.
the Pulp Supply Agreement during the continuance, and to the
The preceding description is a summary of principal provi-
extent of, such event. A strike, labor disturbance and other events
sions of the Pulp Supply Agreement and the PSA Amendment
beyond the Company’s control are considered Force Majeure
and is qualifi ed in its entirety by the Pulp Supply Agreement
Events under the Pulp Supply Agreement if such events ultimately
and PSA Amendment.
prevent the Company from supplying contractually agreed upon
quantities of pulp to Kimberly-Clark.
62
Notes to Consolidated and Combined
Financial Statements
Corporate Services Agreement
In connection with the Spin-Off, outstanding options held
The Company and Kimberly-Clark entered into a Corporate
by transferring employees under Kimberly-Clark’s equity com-
Services Agreement whereby Kimberly-Clark provided the
pensation plans (other than the Kimberly-Clark Corporation
Company, on an interim, transitional basis, various corporate sup-
Global Stock Option Plan) were converted into substitute options
port services, including: certain employee benefi ts administration
to purchase Company common stock, or to the extent such
and payroll, management information, transportation, environ-
options were exercisable they could, at the election of the option
ment and energy, purchasing, treasury, accounting and other
holder on or before November 30, 2004, remain exercisable in
services, as well as transitional offi ce space for the Company’s
accordance with the terms of such plans as applicable to termi-
research team. Each service was made available to the Company
nated employees.
on an as-needed basis through December 31, 2005, or such
shorter or longer periods as may be provided in the Corporate
Services Agreement. The fees charged for the services were gen-
erally based upon the costs of providing the services. In January
2006, the Company terminated substantially all services provided
by Kimberly-Clark pursuant to the corporate services agreement.
Tax-Sharing Agreement
The Company and Kimberly-Clark have entered into a Tax-
sharing Agreement, which generally governs Kimberly-Clark’s
and the Company’s respective rights, responsibilities and obli-
gations after the Spin-Off with respect to taxes attributable to
the Company’s business, as well as any taxes incurred by
Employee Matters Agreement
Kimberly-Clark as a result of the failure of the Spin-Off to qual-
The Company and Kimberly-Clark entered into an Employee
ify for tax-free treatment under Section 355 of the Code.
Matters Agreement which provides for their respective obliga-
General Taxes. Under the Tax-sharing Agreement, Kimberly-
tions to employees and former employees who are or were
Clark is generally liable for all pre-Spin-Off, and the Company
associated with the Pulp and Paper Business and for other
is generally be liable for all post-Spin-Off, U.S. federal income
employment and employee benefi ts matters.
taxes, foreign taxes and certain state taxes attributable to the
Pursuant to the Employee Matters Agreement, the
Company’s business. The Tax-sharing Agreement sets forth rules
Company employed or offered to employ all employees of
for determining which taxes are attributable to pre-Spin-Off and
Kimberly-Clark with employment duties principally related to
post-Spin-Off periods and rules on the effect of subsequent
the Pulp and Paper Business on terms and conditions substan-
adjustments to those taxes due to tax audits or examinations.
tially similar to the terms and conditions of their employment
Distribution-Related Taxes. Under the Tax-sharing
with Kimberly-Clark. The Company maintained, subject to
Agreement the Company is liable for taxes incurred by Kimberly-
applicable laws, labor agreements with substantially the same
Clark that arise as a result of the Company taking or failing to
terms and conditions that existed with Kimberly-Clark.
take, as the case may be, certain actions that result in the Spin-Off
The Company also assumed, and indemnifi ed Kimberly-
failing to meet the requirements of a tax-free distribution under
Clark against, certain liabilities related to employees of the Pulp
Section 355 of the Code. The Company is also liable for taxes
and Paper Business who are employed by the Company or
incurred by Kimberly-Clark in connection with certain acquisitions
retired Canadian employees. The Company assumed responsibil-
or issuances of Company stock, even if such acquisitions or issu-
ity for the Kimberly-Clark retirement plans in which employees of
ances occurred after the Spin-Off, if such acquisitions or issuances
the Pulp and Paper Business participated. The Company granted
result in the Spin-Off failing to meet the requirements of a tax-free
credit for service recognized under the Kimberly-Clark plans
distribution pursuant to Section 355(e) of the Code.
for all purposes under its plans. Kimberly-Clark transferred the
Administrative Matters. The Tax-sharing Agreement also
assets and liabilities of the Kimberly-Clark retirement plans attrib-
sets forth Kimberly-Clark’s and the Company’s respective obliga-
utable to transferring active employees and retired Canadian
tions with respect to the fi ling of tax returns, the administration
employees of the Pulp and Paper Business to the Company.
of tax contests, assistance and cooperation and other matters.
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
63
12.
R E S T R U C T U R I N G C O S T S A N D
A S S E T I M PA I R M E N T L O S S
Restructuring Activities at Terrace Bay:
The Company closed the No. 1 Mill on May 1, 2005. The No. 1
(cid:129) continued high operating costs at this facility;
(cid:129) substantially higher discounts, under the pulp supply agree-
ment, for pulp sold to Kimberly-Clark than those at which
pulp was transferred to Kimberly-Clark prior to the Spin-Off;
(cid:129) anticipated lower market prices for pulp in the foresee-
able future as a result of an expected downturn in the
Mill was originally constructed in 1948 and had annual capacity
pulp cycle; and
of approximately 125,000 metric tons of bleached kraft pulp. In
(cid:129) continued strength of the Canadian dollar relative to the
conjunction with the closure, the Company offered early retire-
U.S. dollar.
ment and severance packages to approximately 150 employees.
An extended period of operating losses is an indicator of
During 2005, the Company recorded approximately $5.0
impairment under SFAS 144. The results of the impairment test
million for one-time termination benefi ts related to early retire-
indicated that the carrying amount of the Terrace Bay facility
ment, severance and defi ned benefi t pension plans in connection
would not be recoverable from estimated future undiscounted
with the closure of the No.1 Mill and approximately $0.3 million
cash fl ows. The Company’s estimate of the fair value of the
for other exit costs. As of December 31, 2005, termination
benefi ts of approximately $4.5 million had been paid to 139
employees and approximately $0.5 million was accrued but
unpaid. The Company expects the payment of termination
benefi ts to be substantially complete by March 31, 2006.
Terrace Bay facility was based on probability-weighted pre-tax
cash fl ows from operating the facility, discounted at a risk-free
interest rate. The signifi cant assumptions the Company used
to determine the estimate of fair value included its long-term
projections of the market price of pulp, the projected cost
During the fi rst quarter of 2005, the Company recorded a
structure of the facility and the long-term relationship of the
pre-tax, non-cash asset impairment loss of approximately $0.8
Canadian dollar and the U.S. dollar. The estimated fair value
million related to the remaining value of the long-lived assets
of the Terrace Bay facility also refl ected assumed improvements
of the No. 1 Mill. In addition, the Company recorded $0.4 mil-
to the facility’s cost structure resulting from the Company’s
lion of incremental training costs for employees in new
plans for future capital projects and a plan for a cogeneration
positions as a result of the closure in 2005. Such training costs
arrangement that would lower the cost of electricity.
were expensed as incurred. Costs associated with the closure,
In December 2004, the Company recorded a pre-tax, non-
excluding expenses related to employee training, are recorded
cash impairment loss of approximately $110.0 million to reduce
in Restructuring costs and asset impairment loss on the con-
solidated and combined statements of operations.
Asset Impairment Losses:
In December 2004, the Company performed an asset impair-
ment test on the Terrace Bay, Ontario pulp mill under the
guidance of SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS 144”). The facility had
incurred operating losses in each of 2002, 2003 and 2004. The
Company anticipated that the facility would continue to incur
operating losses in 2005, 2006 and 2007. The principal causes
of these projected losses were:
the carrying amount of the Terrace Bay facility to its estimated
fair value. In addition, in December 2004, in recognition of the
probability that the No. 1 mill would be closed, the Company
recorded an additional impairment loss of approximately $2.8
million related to the long-lived assets of the Terrace Bay facil-
ity. A deferred tax benefi t of approximately $40.8 million was
recorded as a result of the impairment losses, resulting in a net
after-tax charge of approximately $72.0 million.
In December 2005, due to continued large operating
losses at the Terrace Bay facility, a review of strategic alterna-
tives and anticipated continuing losses in 2006, the Company
performed another impairment test of the facility which indi-
cated that the carrying value of its long-lived assets was not
recoverable from estimated future cash fl ows. In estimating
64
Notes to Consolidated and Combined
Financial Statements
the impairment loss, the fair value of the facility was deter-
Business Segments
mined in a manner consistent with that applied in December
2004. While the signifi cant assumptions used to determine the
fair value of the facility were applied in a manner consistent
with the prior year, the Company’s probability-weighting of the
estimated future cash fl ows were different. The estimated fair
value for the facility indicated that its long-lived assets were
fully impaired. As a result, the Company recorded a pre-tax,
non-cash impairment loss of approximately $53.7 million to
reduce the carrying amount of the facility’s tangible long-lived
assets to zero. A deferred tax benefi t of approximately $20.6
million was recorded as a result of the impairment losses, result-
ing in a net after-tax charge of approximately $33.1 million.
Restructuring costs and asset impairment losses recognized
in 2005 and 2004 were recorded in the Pulp segment (See
Note 13).
13.
B U S I N E S S S E G M E N T A N D
G E O G R A P H I C I N F O R M AT I O N
The Company reports its operations in three segments: Fine
Paper, Technical Products and Pulp. The Fine Paper business is
a leading producer of premium writing, text, cover and specialty
December 31,
2005
2004
2003
Net Sales
Fine Paper
Technical Products
Pulp
Intersegment sales
Total
Operating Income (Loss)
Fine Paper
Technical Products
Pulp (a)
Unallocated corporate costs
Total
Depreciation and
Amortization
Fine Paper
Technical Products
Pulp
Unallocated corporate costs
Total
Capital Expenditures
Fine Paper
Technical Products
Pulp
Corporate
Total
$ 222.3
130.6
400.7
(20.2)
$ 733.4
$ 58.4
10.5
(93.2)
(6.5)
$ (30.8)
$ 9.5
4.0
13.5
2.8
$ 29.8
$ 5.5
2.4
9.8
8.0
$ 25.7
$ 220.8
132.3
448.6
(29.6)
$ 772.1
$ 67.0
21.9
(120.5)
(8.3)
$ (39.9)
$ 9.7
3.7
22.4
0.2
$ 36.0
$ 3.5
1.6
11.0
3.0
$ 19.1
$ 210.4
121.6
405.1
(26.8)
$ 710.3
$ 63.2
16.6
(16.5)
–
$ 63.3
$ 9.6
4.0
21.7
–
$ 35.3
$ 2.5
2.2
19.7
–
$ 24.4
papers. The Technical Products business is a leading producer
(a)
of durable, saturated and coated base papers and fi lms for a vari-
ety of end uses. The Pulp business consists of mills and related
timberlands, which produce northern bleached softwood and
hardwood kraft pulp. Each segment requires different technolo-
gies and marketing strategies. Disclosure of segment information
is on the same basis that management uses internally for evaluat-
ing segment performance and allocating resources.
Prior to the Spin-Off, Kimberly-Clark provided the Pulp and
Paper Business with certain centralized administrative functions
to realize economies of scale and effi cient use of resources. The
costs of shared services, and other administrative functions man-
Income before income taxes for the pulp business in 2005 and 2004
include restructuring costs and asset impairment losses of $59.8 million
($6.1 million of which represent costs related to the closure of the No. 1
Mill) and $112.8 million, respectively, for the Terrace Bay facility.
December 31,
2005
2004
Total Assets
Fine Paper
Technical Products
Pulp
Unallocated corporate and
intersegment items
Total
Geographic Information
$ 105.2
58.3
352.0
$ 140.9
49.8
361.4
21.5
$ 537.0
5.2
$ 557.3
aged on a common basis, are allocated to the segments based
December 31,
2005
2004
2003
on usage, where possible, or other factors based on the nature
of the activity. The accounting policies of the reportable operat-
ing segments are the same as those described in the Summary
of Signifi cant Accounting Policies (See Note 2).
Net Sales
United States
Canada
Intergeographic Items
Total
$ 352.9
400.7
(20.2)
$ 733.4
$ 354.0
448.2
(30.1)
$ 772.1
$ 332.8
404.6
(27.1)
$ 710.3
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
65
December 31,
Total Assets
United States
Canada
Total
2005
2004
$ 231.9
305.1
$ 537.0
$ 241.8
315.5
$ 557.3
14.
S U P P L E M E N TA L D ATA
Supplemental Statement of Operations Data
Year Ended December 31,
2005
2004
2003
Net sales are attributed to geographic areas based on the
physical location of the entities comprising the Pulp and Paper
Business and the Company for the respective years. Segment
identifi able assets are those that are directly used in the seg-
Summary of Advertising
and Research Expenses
Advertising expense
Research expense
$ 7.9
2.3
$ 7.7
1.7
$ 5.8
2.1
ments operations. Corporate assets are primarily cash, prepaid
Supplemental Balance Sheet Data
pension costs and deferred fi nancing costs.
Concentrations
For the years 2005, 2004 and 2003, the Company had pulp sales
to Kimberly-Clark of $309 million, $351 million and $305 million,
respectively. For the periods presented, other than Kimberly-
Clark, no single customer accounted for more than 10% of the
consolidated and combined revenue of the Company. Except for
wood chips used by the pulp mills and certain specialty latex
grades used by Technical Products, management is not aware of
any signifi cant concentration of business transacted with a par-
ticular supplier that could, if suddenly eliminated, have a material
adverse affect on its operations. In 2005, two suppliers provided
over 70% of the wood chips used by the Pictou mill and three
suppliers provided approximately 50% of the wood chips used
by the Terrace Bay mill. While management believes that alterna-
tive sources of critical supplies, such as wood chips, would be
available, disruption of its primary sources could create a tempo-
December 31,
2005
2004
Summary of Accounts Receivable, net
Accounts Receivable:
From customers
Other
Less allowance for doubtful
accounts and sales discounts
Total
$ 76.7
6.0
$ 84.9
11.8
(3.6)
$ 79.1
(4.3)
$ 92.4
December 31,
2005
2004
Summary of Inventories
Inventories by Major Class:
Raw materials
Work in process
Finished goods
Supplies and other
Excess of FIFO cost over LIFO cost
Total
$ 30.5
8.2
47.8
7.6
94.1
(7.0)
$ 87.1
$ 31.1
7.7
42.1
5.2
86.1
(6.6)
$ 79.5
rary, adverse effect on product shipments. In February 2006, the
The FIFO values of total inventories valued on the LIFO
Company suspended pulp manufacturing activities at the Terrace
method were $35.2 million and $33.5 million at December 31,
Bay pulp mill as a result of a lack of wood fi ber for its operations
2005 and 2004, respectively.
(See Note 10 – Employees and Labor Relations). An interruption
Certain prior year amounts of Supplies and others, related
in supply of a latex specialty grade could disrupt and eventually
to inventories of spare parts, have been reclassifi ed to Prepaid
cause a shutdown of production of certain technical products.
and other current assets in the consolidated balance sheet to
more closely conform with Accounting Research Bulletin 43,
Restatement and Revision of Accounting Research Bulletins,
defi nition of inventory as tangible personal property to be
currently consumed in the production of goods or services.
Accordingly, amounts refl ected at December 31, 2004 for
“Supplies and other” and “Total Inventories” have been
decreased and “Prepaid and other current assets” have been
increased from the amounts previously reported by $9.2 million.
66
Notes to Consolidated and Combined
Financial Statements
December 31,
2005
2004
Summary of Property,
Plant and Equipment – Net
Land and land improvements
Buildings
Machinery and equipment
Roads
Construction in progress
Less accumulated depreciation
Net Property, Plant and Equipment
$ 2.7
81.2
478.7
23.4
15.0
601.0
388.0
$ 213.0
$ 4.8
84.6
487.9
26.5
13.6
617.4
359.8
$ 257.6
Depreciation expense was $27.0 million, $35.8 million and
$35.3 million in 2005, 2004 and 2003, respectively. Interest
expense capitalized as part of the costs of capital projects was
$0.4 million in 2005. No amount of interest expense was capi-
talized for periods prior to the Spin-Off or in December 2004
following the Spin-Off.
December 31,
2005
2004
Summary of Accrued Expenses
Accrued salaries and employee benefi ts $ 25.8
–
Accrued income taxes
2.1
Accrued interest
10.9
Other
$ 38.8
Total
$ 27.2
0.5
1.4
7.5
$ 36.6
15.
C O N D E N S E D C O N S O L I D AT I N G
F I N A N C I A L I N F O R M AT I O N
Neenah Paper Company of Canada, Neenah Paper
Michigan, Inc. and Neenah Paper Sales, Inc. (the “Subsidiary
Guarantors”) guarantee the Company’s Senior Notes. The
Subsidiary Guarantors are 100% owned by the Company and
all guarantees are full and unconditional. The following con-
densed consolidating fi nancial information is presented in
lieu of consolidated fi nancial statements for the Subsidiary
Guarantors as of December 31, 2005 and 2004 and for the
year ended December 31, 2005. Condensed consolidating
fi nancial information is not included for the years ended
December 31, 2004 and 2003 because: (a) historical informa-
tion required to prepare the comparative consolidating
statements was not maintained on a discrete comparable basis
within Kimberly-Clark, (b) prior to the Spin-Off, the business
operations that now constitute Neenah were not part of sepa-
rate operating units or divisions of Kimberly-Clark for which
discrete fi nancial statements were prepared and (c) the func-
tions and operations of the assets and the related businesses
as currently structured are substantially different from that
which existed as a part of Kimberly-Clark.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in millions)
For the Year Ended December 31, 2005
Net sales
Cost of products sold
Gross profi t
Selling, general and administrative expenses
Restructuring costs and asset impairment loss
Equity in losses of subsidiaries
Other income – net
Operating income (loss)
Interest expense – net
Income (loss) before income taxes
Provision (benefi t) for income taxes
Net income (loss)
Neenah
Paper, Inc.
Subsidiary
Guarantors
Consolidating
Adjustments
Consolidated
Amounts
$
$
78.7
69.3
9.4
5.8
–
21.1
(0.2)
(17.3)
18.1
(35.4)
(5.7)
(29.7)
$ 800.8
732.7
68.1
47.4
59.8
–
(4.5)
(34.6)
0.1
(34.7)
(13.6)
(21.1)
$
$
$
(146.1)
(146.1)
–
–
–
(21.1)
–
21.1
–
21.1
–
21.1
$ 733.4
655.9
77.5
53.2
59.8
–
(4.7)
(30.8)
18.2
(49.0)
(19.3)
(29.7)
$
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
67
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
As of December 31, 2005
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable – net
Inventories
Intercompany amounts receivable
Other current assets
Total current assets
Property, plant and equipment, at cost
Less accumulated depreciation
Property, plant and equipment – net
Investments in subsidiaries
Prepaid and intangible pension costs
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Debt payable within one year
Accounts payable
Intercompany amounts payable
Accrued expenses
Total current liabilities
Long-term debt
Other noncurrent liabilities
Total Liabilities
Stockholders’ equity
Total Liabilities and Stockholders’ Equity
Neenah
Paper, Inc.
Subsidiary
Guarantors
Consolidating
Adjustments
Consolidated
Amounts
$
12.0
(5.9)
0.1
32.1
8.7
47.0
222.1
127.5
94.6
288.3
9.8
(10.9)
$ 428.8
$
1.2
10.1
–
10.1
21.4
226.3
15.8
263.5
165.3
$ 428.8
$
0.6
87.0
87.0
–
16.8
191.4
394.7
271.4
123.3
–
61.9
54.0
$ 430.6
$
–
32.3
32.1
28.7
93.1
–
49.2
142.3
288.3
$ 430.6
$
$
$
$
–
(2.0)
–
(32.1)
–
(34.1)
–
–
–
(288.3)
–
–
(322.4)
–
(2.0)
(32.1)
–
(34.1)
–
–
(34.1)
(288.3)
(322.4)
12.6
79.1
87.1
–
25.5
204.3
616.8
398.9
217.9
–
71.7
43.1
$ 537.0
$
1.2
40.4
–
38.8
80.4
226.3
65.0
371.7
165.3
$ 537.0
68
Notes to Consolidated and Combined
Financial Statements
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
As of December 31, 2004
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable–net
Inventories
Other current assets
Total current assets
Property, plant and equipment, at cost
Less accumulated depreciation
Property, plant and equipment–net
Investments in subsidiaries
Prepaid and intangible pension costs
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Accrued expenses
Total current liabilities
Long-term debt
Other noncurrent liabilities
Total Liabilities
Stockholders’ equity
Total Liabilities and Stockholders’ Equity
Neenah
Paper, Inc.
Subsidiary
Guarantors
Consolidating
Adjustments
Consolidated
Amounts
$
13.9
(2.5)
0.1
2.5
14.0
212.8
120.9
91.9
362.5
10.4
(20.1)
$ 458.7
$
15.1
8.5
23.6
225.0
13.0
261.6
197.1
$ 458.7
$
5.2
98.1
79.4
10.1
192.8
419.9
249.0
170.9
–
62.5
38.1
$ 464.3
$
38.7
28.1
66.8
–
35.0
101.8
362.5
$ 464.3
$
$
$
$
–
(3.2)
–
–
(3.2)
–
–
–
(362.5)
–
–
(365.7)
(3.2)
–
(3.2)
–
–
(3.2)
(362.5)
(365.7)
$
19.1
92.4
79.5
12.6
203.6
632.7
369.9
262.8
–
72.9
18.0
$ 557.3
$
50.6
36.6
87.2
225.0
48.0
360.2
197.1
$ 557.3
Neenah Paper, Inc.: UnFOLDING Annual Report 2005
69
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in millions)
As of December 31, 2005
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization
Asset impairment loss
Deferred income tax provision (benefi t)
Loss on asset dispositions
Decrease (increase) in working capital
Equity in earnings of subsidiaries
Pension and other postretirement benefi ts
Other
Net Cash Provided by (Used for) Operating Activities
INVESTING ACTIVITIES
Capital expenditures
Other
Net Cash Used in Investing Activities
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt
Repayments of long-term debt
Proceeds from issuance of short-term debt
Repayments of short-term debt
Cash dividends paid
Other
Net Cash Provided by (Used in) Financing Activities
Effect of Exchange Rate Changes on Cash and
Cash Equivalents
Net Decrease in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
Neenah
Paper, Inc.
Subsidiary
Guarantors
Consolidating
Adjustments
Consolidated
Amounts
$
(29.7)
$
(21.1)
$
21.1
$
(29.7)
13.3
–
(2.5)
0.1
(36.7)
21.1
2.5
0.2
(31.7)
(8.4)
(0.3)
(8.7)
3.4
(1.1)
2.5
(2.5)
(5.9)
42.1
38.5
–
(1.9)
13.9
12.0
$
16.5
54.5
(17.6)
0.4
26.6
–
(5.2)
0.4
54.5
(17.3)
0.2
(17.1)
–
–
–
–
–
(42.1)
(42.1)
0.1
(4.6)
5.2
0.6
$
–
–
–
–
–
(21.1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
29.8
54.5
(20.1)
0.5
(10.1)
–
(2.7)
0.6
22.8
(25.7)
(0.1)
(25.8)
3.4
(1.1)
2.5
(2.5)
(5.9)
–
(3.6)
0.1
(6.5)
19.1
12.6
$
70
Notes to Consolidated and Combined
Financial Statements
16.
UN AUDI TE D QU A R TERLY D ATA
Net Sales
Gross Profi t
Operating Income (Loss) (b)
Net Income (Loss) (b)
Earnings (Loss) Per Common Share:
Basic
Diluted
Net Sales (d)
Gross Profi t
Operating Income (Loss)
Net Income (Loss)
Earnings Per Common Share (e):
Earnings (Loss) Per Common Share (e):
Basic
Diluted
First
$ 196.6
25.3
8.9
2.7
$
$
0.18
0.18
First
$ 198.4
33.1
24.3
15.1
Second
$ 189.3
29.5
14.8
6.8
$
$
0.46
0.46
Second
$ 207.4
45.0
37.3
23.7
2005 Quarters (a)
Third
$ 167.7
15.4
1.5
(1.5)
$
$
(0.10)
(0.10)
2004 Quarters (a)
Third
$ 188.9
23.3
7.8
4.5
Fourth (c)
$ 179.8
7.3
(56.0)
(37.7)
$
$
(2.56)
(2.56)
Fourth (c)
$ 177.4
22.8
(109.3)
(69.7)
Year
$ 733.4
77.5
(30.8)
(29.7)
$
$
(2.02)
(2.02)
Year
$ 772.1
124.2
(39.9)
(26.4)
$
$
1.03
1.03
$
$
1.60
1.60
$
$
0.31
0.31
$
$
(4.73)
(4.73)
$
$
(1.79)
(1.79)
(a)
The annual maintenance shutdowns for the Company’s two pulp mills occurred during the third quarter and fourth quarters in 2005 compared to 2004 when
both occurred during the third quarter.
(b) Results for the fi rst, second and third quarters of 2005 and for the year include costs associated with the closure of the No. 1 Mill of $4.3 million, $1.7 million,
$0.1 million and $6.1 million, respectively.
(c)
Includes asset impairment losses of $53.7 million and $112.8 million in December 2005 and 2004, respectively.
(d) Net sales subsequent to the Spin-Off (in December 2004) were reduced by $12.9 million, refl ecting the one-time effect resulting from the new pulp supply
agreement with Kimberly-Clark which transfers title at product delivery rather than shipment date.
(e)
For 2004 prior to the Spin-Off, basic and diluted earnings per share were computed using the number of shares of Neenah common stock outstanding on
November 30, 2004, the date on which Neenah common stock was distributed to the stockholders of Kimberly-Clark.
Production Notes
71
Being one of the world’s most respected paper companies, we couldn’t limit the paper used in our annual report to just one
choice. So we’ve used a range of our most popular paper brands. For help in identifying them, use the simple key below.
POSTER:
Side 1:
CLASSIC CREST®,
Solar White,
80 lb. text
BOOK:
Side 2:
CLASSIC CREST®,
Solar White,
80 lb. text
Front Cover:
CLASSIC COLUMNS®,
Red Pepper /
CLASSIC CREST®,
Avalanche White,
120 lb. duplex cover
Page 1:
CLASSIC® Linen,
Solar White,
80 lb. text
Page 2:
CLASSIC® Linen,
Solar White,
80 lb. text
Page 3:
CLASSIC® Linen,
Monterey Sand,
80 lb. text
Page 4:
CLASSIC® Linen,
Monterey Sand,
80 lb. text
Fly Sheet Front:
EAMES™ Architecture,
Case Study Red,
50 lb. text
72
Production Notes
Fine Paper
Short Sheet Front:
CLASSIC CREST®,
Saw Grass,
80 lb. text
Fine Paper
Short Sheet Back:
CLASSIC CREST®,
Saw Grass,
80 lb. text
Page 5:
CLASSIC® Laid,
Recycled Natural White,
75 lb. text
Page 6:
CLASSIC® Laid,
Recycled Natural White,
75 lb. text
Fly Sheet Front:
EAMES™ Furniture,
Pacifi c Blue
80 lb. text
Technical Products
Short Sheet Front:
EAMES™ Painting,
Eames Natural White,
80 lb. text
Pulp
Short Sheet Front:
ENVIRONMENT®,
Desert Storm,
80 lb. text
Technical Products
Short Sheet Back:
EAMES™ Painting,
Eames Natural White,
80 lb. text
Pulp
Short Sheet Back:
ENVIRONMENT®,
Desert Storm,
80 lb. text
Page 7:
EAMES™ Painting,
Brushwork Beige,
80 lb. text
Page 8:
EAMES™ Painting,
Brushwork Beige,
80 lb. text
Pages 9–72:
CLASSIC CREST®,
Potomac Blue,
80 lb. text
Back Cover:
CLASSIC COLUMNS®,
Red Pepper /
CLASSIC CREST®,
Avalanche White,
120 lb. duplex cover
Design and production:
see see eye / Atlanta, Georgia
Principal photography:
Greg Neumaier
Copywriting:
Robert Roth
Printing:
Williamson Printing
Corporation
Executive photography:
Daemon Baizon
Jerry Burns
Additional photography:
Daemon Baizon
Image Studios
Illustrations:
Daniel Chang: Poster, Page 4,
Pulp Short Sheet
Stéphan Daigle: Fine Paper
Short Sheet
Harvey Chan : Technical
Products Short Sheet
Shareholder Information
Corporate Headquarters
Neenah Paper, Inc.
3460 Preston Ridge Road
Suite 600
Alpharetta, GA 30005
678.566.6500
www.neenah.com
Certifications
Neenah has included as exhibits to its Annual Report on Form
10-K for the fiscal year ended December 31, 2005 filed with
the SEC, certifications of Neenah’s Chief Executive Officer and
Chief Financial Officer certifying the quality of our public disclo-
sure. Further, Neenah’s Chief Executive Officer has certified to
the New York Stock Exchange (NYSE) that he is not aware of
any violations by Neenah of the NYSE corporate governance
Annual Meeting of Shareholders
The 2006 annual meeting of the shareholders of Neenah Paper,
listing standards.
Inc. will be held Thursday, May 4, 2006, at 10:00 a.m., Eastern
Trading and Dividend Information
time at Neenah’s headquarters in Alpharetta, Georgia.
Registrar and Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
www.computershare.com/equiserve
877.498.8847
Common Stock
Market Price
High
Low
Dividends
Declared
$ 30.52
$ 33.58
$ 33.90
$ 36.62
$ 26.25
$ 28.71
$ 29.19
$ 31.03
$ 0.10
$ 0.10
$ 0.10
$ 0.10
2005
Fourth quarter
Third quarter
Second quarter
First quarter
2004
Financial and Other Company Information
Our Annual Report on Form 10-K for the fiscal year
Fourth quarter*
$ 33.50
$ 30.50
None
* Neenah common stock began trading on the New York Stock Exchange
ended December 31, 2005 is available on our website at
on December 1, 2004.
www.neenah.com. In addition, financial reports, recent
filings with the Securities and Exchange Commission (SEC),
As of February 28, 2006, Neenah had approximately 12,400
news releases and other information are available on
holders of record of its common stock.
our website. For a printed copy of our Form 10-K, without
charge, please contact:
Neenah Paper, Inc.
Attn: Stockholder Services
3460 Preston Ridge Road
Suite 600
Alpharetta, GA 30005
866.548.6569
or via e-mail to investors@neenahpaper.com
Stock Exchange
Neenah Paper’s common stock is traded on the New York
Stock Exchange under the symbol NP.
Independent Accountants
Deloitte & Touche LLP
191 Peachtree Street
Suite 1500
Atlanta, GA 30303
Trademarks
The brand names mentioned in this report – CLASSIC CREST, CLASSIC COTTON,
CLASSIC, CLASSIC COLUMNS, NEENAH, UV/ULTRA II, ATLAS, ENVIRONMENT,
EAMES, OLD COUNCIL TREE, KIMDURA, EPIC II, DURAFORM, DURAFLEX,
BUCKSKIN, PREVAIL, TEXOPRINT, MUNISING LP, TECHNI-PRINT, KIMLON,
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Annual Report 2005